UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 (I.R.S. Employer Identification
incorporation or organization)
number)
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
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $.01 par value New York Stock Exchange, Inc.
(Title of Each Class) (Name of Each Exchange on which
Registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filled 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 by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K
The aggregate market value of Class A voting Common Stock held by
non-affiliates of the registrant as of March 17, 1997, was approximately
$29,158,228* (based on last reported sale price of $14.625 per share on
March 17, 1997, on the New York Stock Exchange).
As of March 17, 1997, 3,709,000 shares of the registrant's Class A Common
Stock, par value $.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1996, to the extent indicated in Parts I, II and IV.
Except as to information specifically incorporated, the 1996 Annual Report
to Shareholders is not to be deemed filed as part of this Form 10-K report.
Portions of the Registrant's Proxy Statement for the Annual Meeting
of Shareholders of Registrant to be held on May 13, 1997. Certain
information therein is incorporated by reference into Part III
hereof.
*Only shares of Class A Common Stock held beneficially by directors and
executive officers of the company and persons or entities filing Schedules
13G and received by the company have been excluded in determining this
number. All Class B Common Stock have been excluded.
PART I
ITEM 1. BUSINESS
General Description of Business
RightCHOICE Managed Care, Inc., (RightCHOICE, RIT or the company) is the
largest provider of managed health care benefits in Missouri, in terms of
members. As of December 31, 1996, RightCHOICE served approximately 1.85
million commercial members, a large proportion of which reside in
metropolitan St. Louis, Missouri. The company offers a comprehensive
array of managed health care products and services which the company
segregates into two distinct segments. Note 15 of the Notes to Consolidated
Financial Statements in the 1996 Annual Report to Shareholders contains
financial information relating to the company's segments and is incorporated
herein by reference. The company's underwritten segment includes preferred
provider organization (PPO), point of service (POS), health maintenance
organization (HMO), Medicare supplement, and specialty managed care, as well
as managed indemnity benefit plans. The company's self-funded segment includes
third party administrator (TPA), administrative services only (ASO), and
network rental services for self-insured organizations. The types of benefits
provided by the products and services are comprised of hospital care,
ambulatory and outpatient care, physician services, pharmacy, dental care, eye
care, mental health care and health education. The company receives premium
revenue in exchange for the assumption of both medical and administrative
risks for its PPO, POS, HMO, Medicare supplement, specialty managed care
and managed indemnity plans. With respect to the TPA, ASO, and network
rental services, the company generally assumes no responsibility for
medical costs and receives compensation for the provision of administrative
services. For the year ended December 31, 1996, approximately 60% of the
company's revenues were from sales to insured employer groups (typically
those with fewer than 100 employees); approximately 32% of the company's
revenues were from underwritten sales to individuals; and approximately 8%
of the company's revenues were from fees paid by self-funded employer
groups (typically those with more than 100 employees).
The company was organized to own and operate all of the managed
health care business of Blue Cross and Blue Shield of Missouri (BCBSMo),
the company's parent. The company is a licensee of the Blue Cross and Blue
Shield Association (BCBSA), a national trade association of Blue Cross and
Blue Shield licensees, each of which holds exclusive right to use the Blue
Cross and/or Blue Shield names, trademarks and service marks in specific
geographic areas. Each licensee, including the company and BCBSMo, is an
independent legal organization and is not responsible for the obligations
of other BCBSA licensees. Pursuant to licenses from BCBSA, the company has
the exclusive right to do business under the name Alliance Blue Cross Blue
Shield and to use the Blue Cross and/or Blue Shield names, trademarks and
service marks for all of the managed health care products and services it
offers in 85 of the 115 counties in Missouri making up its service area.
This service area has a population of approximately 3.9 million and
includes four of the five largest cities in Missouri and excludes Kansas
City. The company cannot, however, use those trademarks or service marks
outside its licensed service area and therefore currently does business in
unlicensed areas under the name Healthy Alliance Life Insurance Company
(HALIC) and RightCHOICE Insurance Company (RIC). The company believes that
the widespread and positive recognition of the Blue Cross and Blue Shield
names, trademarks and service marks will continue to provide a significant
marketing advantage in its service area, particularly as health care reform
and competitive pressures narrow price differences among health care benefit
plans. Additionally, the company believes that the importance of the
trademarks and service marks may lead to cooperative affiliations of Blue
Cross and Blue Shield licensees and may alleviate the need for unbranded
products. If BCBSMo were to lose its right to use the names and trademarks,
the company might also be at risk to lose the use of these names and
trademarks. Note 14 of the 1996 Annual Report to Shareholders entitled
"Contingencies - Status of Blue Cross and Blue Shield trademark licenses"
contains recent information describing litigation uncertainties with respect
to the company's continued use of these trademarks and service marks and is
incorporated herein by reference.
RightCHOICE Managed Care, Inc. is a Missouri corporation, incorporated in
April 1994, doing business under the name Alliance Blue Cross Blue Shield.
Unless the context otherwise requires, the terms "RightCHOICE", "RIT" and
"the company" refer to RightCHOICE Managed Care, Inc. and its subsidiaries.
The company's corporate offices are located at 1831 Chestnut Street, St.
Louis, Missouri, 63103-2275; telephone number (314) 923-4444.
Managed Care Products and Services
The company's established provider networks, substantial membership base
and extensive administrative and processing capabilities enable the company
to offer health care products and services tailored to meet the full
spectrum of customer needs and preferences. The chart below illustrates
the cost/choice characteristics of various managed care benefits offered by
the company.
The chart included in the company's hardcopy 10-K displays the range of
the company's managed care products relative to the product's flexibility
and health care costs. Generally, products that are more flexible in terms
of access to providers are also more expensive in terms of health care
costs. This chart can be depicted by the following table below in which
products are listed in order of flexibility (more to less) and health care
costs (higher to lower).
Product Type of Network
Traditional Managed Indemnity Open Network
Alliance Programs Broad Network PPO
AllianceChoice Non-Gatekeeper POS
BlueCHOICE POS Plus Gatekeeper POS
BlueCHOICE Gatekeeper HMO
Underwritten Products
PPO Product Group
Alliance PPO
The company's Alliance PPO is one of the largest PPOs in Missouri
in terms of members and offers services to approximately 300,000 members
(including approximately 110,000 members on a self-insured basis). The
company believes that the Alliance PPO also has the most extensive
geographic coverage in Missouri, servicing 100 of the 115 counties in the
state. In the St. Louis metropolitan area, the Alliance PPO network
includes approximately 90% of all hospital beds.
The company's Alliance products incorporate many of the managed care
characteristics of the company's POS and HMO products, including physician
incentives, per diem hospital rates, large case management, pre-admission
certification, concurrent review of hospital admissions and retrospective
claims review. Alliance benefit plans also offer members optional well-
child care, vision, and mental health and chemical dependency programs.
This broad range of Alliance benefit plans enables the subscriber to choose
the mix of benefits that is suited to the subscriber's needs. Higher
deductibles, coinsurance and out-of-pocket maximums and other financial
incentives encourage subscribers to use network provider services.
The company's Alliance network is one of the largest in Missouri in terms
of geographic scope and number of providers. The company has Alliance
contracts with approximately 6,500 physicians and 95
hospitals. Alliance benefit plans are offered in the central region of
Missouri through a joint venture with Preferred Health Plans of Missouri, a
PPO network owned 50% by the company and 50% by local physicians. A
HealthNet Blue PPO product is also offered to both groups and individuals
through MedAmerica HealthNet, Inc. in southeast Missouri.
On March 1, 1996, RightCHOICE announced that it had reached a network
access and financial reinsurance agreement with Blue Cross and Blue Shield
of Kansas City (BCBSKC) designed to make the two companies more competitive
in the Missouri market. RightCHOICE, through its subsidiary Healthy
Alliance Life Insurance Company, has members residing in the Kansas City
plan's license area that were unable to access the Kansas City plan's
preferred networks. Likewise, members of a BCBSKC subsidiary residing in
RightCHOICE's Alliance trade area previously could not access the Alliance
preferred provider networks in that area. As a result of the 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. Through the financial reinsurance
transaction, RightCHOICE now shares underwriting risks and profits on
the affected members, while reducing administrative costs.
AllianceChoice POS
In keeping with the company's efforts to extend its product line to
meet market demands, the company introduced its AllianceChoice POS product
in January 1995, a non-gatekeeper model POS with a selective hospital
network comprised of cost-effective providers in the St. Louis metropolitan
area and benefiting from a comprehensive physician incentive model.
AllianceChoice provides greater flexibility in selecting a provider than
BlueCHOICE POS Plus at a premium level that is generally higher than HMO
but less than PPO premiums. In addition, in August 1996, the company began
offering its AllianceChoice product to individuals. The AllianceChoice
network serves approximately 103,000 members including both group and
individual members and has contractual arrangements in the St. Louis
metropolitan area with 4,500 physicians and 17 hospitals.
HMO Product Group
BlueCHOICE HMO and POS Products
The company's BlueCHOICE HMO is a federally qualified HMO and currently
its service area includes 59 counties in Missouri and two counties in
Illinois. BlueCHOICE's operations are concentrated in the St. Louis
metropolitan area, where it currently is the third largest HMO based upon
number of members. BlueCHOICE is an independent practice association (IPA)
model network, through which the company contracts directly with local
providers to provide plan members' health services. The company may own and
operate staff facilities in markets in which the company determines it is
practicable. The BlueCHOICE network, which supports both HMO and POS
products, has contractual arrangements with approximately 3,518 physicians and
56 hospitals. BlueCHOICE HMO and POS commercial products served approximately
101,000 members (excluding HealthNet Blue POS and including approximately
11,000 members on a self-insured basis) as of December 31, 1996.
The company offers its BlueCHOICE POS Plus products in metropolitan
St. Louis, southwest Missouri, and the central region of Missouri through
the BlueCHOICE HMO network. BlueCHOICE POS Plus is a gatekeeper model POS
plan which provides members with comprehensive coverage for network health
care services with modest copayment requirements. BlueCHOICE POS Plus
members are required to use a primary care physician in order to receive
maximum financial benefits for preventive care, referred specialist
services, and inpatient services. As part of its strategy, the company
intends to continue to expand the BlueCHOICE network both within and
outside BlueCHOICE's current service areas to make BlueCHOICE POS Plus more
appealing to subscribers.
The BlueCHOICE and BlueCHOICE POS programs are now available in
Springfield, Missouri, for both individuals and groups through an
arrangement with Primrose Health Care Services, a physician hospital
organization jointly owned by physicians and Cox Hospitals, one of the
leading tertiary care centers in the area. As of December 31, 1996, there
were approximately 1,700 members enrolled in products sold through this
arrangement with Primrose.
Through an arrangement with Freeman Hospitals and Health System,
beginning in July 1995, BlueCHOICE HMO and POS products are offered in the
six-county area surrounding Joplin, Missouri. As of December 31,
1996, there were approximately 7,700 members enrolled in products sold
through this arrangement with Freeman.
HealthNet Blue POS
HealthNet Blue, a POS product offered through an affiliation with
MedAmerica HealthNet, Inc., is the first physician-hospital organization in
southeast Missouri. HealthNet Blue POS is a non-gatekeeper HMO product
offered to employee groups within the seven county region which provides
members with comprehensive coverage for network health care services
including preventive care, in-office physician care, and maternity coverage
for a minimal office visit copay charge. At December 31, 1996, there were
approximately 14,500 group members enrolled in the underwritten HealthNet
Blue HMO product. The company's provider partner in this venture includes
242 physicians (representing 90 percent of the region's physician
providers) and five area hospitals and medical centers.
BlueCHOICE Senior
The company began offering a Medicare risk HMO product in 1995 under the
name BlueCHOICE Senior. In February 1995, the company received approval
from the Health Care Financing Administration of the United States
Department of Health and Human Services (HCFA) to offer its BlueCHOICE
Senior products and began enrolling members in April 1995. Under the
BlueCHOICE Senior benefits plans, the company provides medical benefits at
least as comprehensive as Medicare benefits for persons eligible to receive
Medicare (parts A and B) at no or minimal cost to the member. Under this
program, HCFA pays a fixed premium for coverage of each member at a rate
approximating 95% of the Medicare area average per capita cost, subject to
annual review and adjustment by HCFA. In addition to the general Medicare
population, the company will continue to market its BlueCHOICE Senior
products to the company's current Medicare supplement customers
(approximately 68,500 members at December 31, 1996) as part of its strategy
to direct existing customers to more intensively managed health care
products.
BlueCHOICE Medicaid (MC+)
The company announced that BlueCHOICE was awarded a Medicaid managed care
contract for the 18-county central Missouri region. BlueCHOICE and two
other HMOs began providing health care benefits for approximately 30,000
Medicaid-eligible people beginning March 1, 1996. As of December 31, 1996,
BlueCHOICE's Medicaid program covered 5,063 members.
Medicare Supplement Product Group
The company currently offers Medicare supplement coverage to individuals
eligible to enroll in Medicare for medical expenses in excess of the
coverage limitations of Medicare. The company's marketing efforts with
respect to Medicare supplement products include targeted direct mail and
telemarketing operations directed at persons eligible or soon to become
eligible for Medicare coverage.
Managed Indemnity Product Group
The company also offers managed indemnity coverage where consumer
and market demands require the provision of indemnity coverage,
particularly to individuals in geographic areas where the penetration of
managed care has been low. The company's managed indemnity products include
fee-for-service indemnity benefits that include utilization management and
other cost control measures, but do not require use of network providers.
These products include certain cost-containment features, such as the use
of deductibles, coinsurance, pre-admission certification, concurrent
review, large case management and retrospective review. In addition, these
products provide a customer base from which to direct subscribers into the
company's more aggressively managed benefit plans.
Specialty Products
The company offers various products to supplement its medical coverage
products. These products include dental care, eye care, mental health care
and health care education. The company provides prescription benefits
through its AllianceRx managed care product. The company contracted with a
new pharmacy benefits manager, Express Scripts, Inc., in March 1997. The
company manages mental health and substance abuse services through its
Harmony program.
Self-funded Products
Administrative and Network Services
As of December 31, 1996, the company serviced self-funded health plans
covering approximately 1,363,000 members (including 1,000,000 HealthLink
members). These arrangements include TPA, ASO and network rental contracts
of varying complexity. The company assists self-funded employers in
designing benefit packages, claims processing, adjudication and
administration, utilization management, generation of management reports and
other related matters. The company also enables employees with self-funded
health plans to access the company's aforementioned PPO and HMO provider
networks and to realize savings through the company's favorable provider
arrangements, while allowing employers the ability to design certain health
benefit plans in accordance with their own requirements and objectives.
HealthLink, Inc.
The company completed its acquisition of HealthLink, Inc. (HealthLink), a
regional managed health care organization, on August 10, 1995. HealthLink,
which had 689,000 PPO and HMO administrative services members and 311,000
workers' compensation members on December 31, 1996, serves a multi-state
area in the mid-west, providing health care network rental and utilization
review services primarily to unions, commercial insurers and corporations
that fund their own health plans. HealthLink is not an insurance company
and does not assume any underwriting risks. Its revenues are derived from
network rentals and administrative services fees. HealthLink owns
HealthLink HMO, Inc., a Missouri HMO with approximately 14,500 members as
of December 31, 1996, all located in the greater St. Louis area.
The acquisition of HealthLink provides RightCHOICE with an effective and
flexible network rental vehicle, particularly for the large group segment;
established brand name and respected reputation; an HMO network that
includes a leading St. Louis provider network not previously included in
RightCHOICE's HMO product offerings and an established network in central
and southern Illinois, with a presence in Indiana, Kentucky and Virginia.
The company intends to utilize this network in central and southern
Illinois by selling PPO products to both groups and individuals beginning
in the first quarter of 1997.
The EPOCH Group, L.C.
In December 1995, the company and BCBSKC completed a plan to form a
joint venture to combine their third party administrator (TPA) businesses
and create a new entity called The EPOCH Group, L.C. (Epoch), a limited
liability company. Epoch is owned equally by the company and a subsidiary
of BCBSKC. Three TPA companies were combined to form Epoch--Healthy
Benefit Alliance, Inc., and Pension Associates Incorporated (both formerly
owned by the company) and LaHood & Associates (20% owned by the company and
80% owned by BCBSKC prior to the transaction). The company invested cash
and other net assets of $5.3 million in this joint venture. Management
believes that this joint venture will help streamline operations, develop new
geographic markets, and provide new administrative services to new types of
businesses, such as health care provider organizations. The combined annual
revenues of Epoch were $23.9 million in 1996, and $22.2 million in 1995 on a
pro forma basis (unaudited). Operating income was $1.2 million in 1996, and
$0.6 million in 1995 on a pro forma basis (unaudited). Epoch serves 260 major
businesses in the region, representing 776,000 members as of December 1996.
"Safe Harbor" Statement
Except for the historical information contained herein, this Annual
Report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements
typically, but not exclusively, are identified by the inclusion of phrases
such as "the company anticipates," "the company believes," "the company
expects" and other phrases of similar meaning. Such forward-looking
statements involve known and unknown risks, uncertainties, contingencies
and other factors that may cause the company's actual results of
operations, financial condition or business performance to be materially
different from the results of operation, financial condition or business
performance expressed or implied by such forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to litigation with Missouri Department of Insurance and
Missouri Attorney General, potential loss of "Blue Cross" and "Blue Shield"
licenses by BCBSMo, the company and its controlled affiliates, government
regulation and health care reform, competition and consolidation,
escalating health care costs, dependence on sales to individuals, potential
nonrenewal of subscriber and provider agreements, control by BCBSMo,
changes in key management, variability of quarterly operating results and
stock price, credit agreement restrictions, and other factors discussed
below 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.
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 with respect to the Reorganization
and Public Offering, as described under the same caption in Note 14
"Contingencies" of the 1996 Annual Report to Shareholders which is
incorporated herein by reference. While BCBSMo has prevailed on most
issues, the Court has ruled that BCBSMo has continued to exceed or abuse
its statutorily permissible purposes and is subject to judicial dissolution
proceedings or alternative remedies that are in the public interest and
consistent with the protection of its subsidiaries. This issue and the prior
rulings favorable to BCBSMo are on appeal and additional claims are pending at
the trial court.
While the company believes, after reviewing these matters with legal
counsel, that BCBSMo's legal position 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 the appellate court will
affirm all the rulings of the trial court favorable to BCBSMo and will
reverse the ruling of the trial court adverse to BCBSMo, that the DOI and
Attorney General 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 shareholders. 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.
Status of Blue Cross and Blue Shield Trademark Licenses
The company and certain of its subsidiaries have temporary licenses
to use the "Blue Cross" and "Blue Shield" names, trademarks and service
marks as described under the same caption in Note 14 "Contingencies" of the
1996 Annual Report to Shareholders, which is incorporated herein by
reference. The company believes that the right to use the Blue Cross and
Blue Shield names and marks provide it with a significant marketing advantage
in its licensed service area. As explained in Note 14, if BCBSMo's litigation
against the DOI and the Attorney General is not resolved in a manner that is
in the best interests of the BCBSA, the marks and the other Blue plans, then
the company's temporary license to use such names and marks may be terminated
(and a permanent license may not be issued). The loss of such licenses would
have a material adverse effect on the company and the market for the company's
stock. See "Factors that May Affect Future Results of Operations,
Financial Condition or Business Litigation with DOI and Attorney General."
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.
Strategies
The company has developed a growth strategy that involves (i)
aggressively introducing new products, (ii) entering into innovative shared
risk and financial incentive arrangements with providers and (iii) pursuing
acquisitions of and combinations with other health care benefit plans. The
company also has an operating strategy in place to improve the company's
financial performance and enhance service to members by (i) controlling
medical costs, (ii) increasing the level of managed care provided to
members and (iii) reducing administrative costs.
Growth Strategy
Offering New Products and Increasing Marketing Activities. The company
has introduced, and plans to introduce, new products designed to penetrate
new markets. The company's current plan includes offering both group and
individual coverage through a new subsidiary, RightCHOICE Insurance
Company, to the approximately 1 million residents located throughout 40
counties in the metropolitan area of Illinois near St. Louis and southern
Illinois by early 1997.
Developing Innovative Shared Risk and Financial Incentive
Arrangements. The company believes that the development of common economic
incentives with certain hospitals, physician groups and other selected
health care providers will be a key element in gaining a competitive
advantage and future growth. As evidenced with the introduction of
HealthNet Blue and AllianceChoice, the company is currently pursuing
arrangements with providers that are intended to develop a cooperative
relationship through shared risk, financial incentives and joint input into
decision-making processes in order to manage the medical and administrative
costs of health care delivery more efficiently. 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 30% of BlueCHOICE's panel of 566 primary care physicians in
metropolitan St. Louis are enrolled in the program. The company recognizes
the physician's expertise in managing patient care and wants to ensure that
physicians maintain autonomy in the practice of medicine. Physician groups
will have incentives to lower medical costs while achieving high levels of
patient satisfaction and quality care.
Expanding Through Combinations and Acquisitions. The company believes
that extensive consolidation will continue to take place in the next few
years among health care organizations as a result of health care reform and
marketplace demands. The company plans to pursue selective acquisitions and
combination opportunities in Missouri and contiguous Midwestern states.
On January 22, 1997, the company and BCBSMo announced that they would
pursue an in-depth analysis of a possible business combination or other
form of strategic alliance or affiliation with BJC Health System (BJC), the
largest health care provider in the St. Louis region. The organizations
agreed to conduct further analysis on an exclusive basis through March 18,
1997. On March 11, 1997, the company and BCBSMo announced that they had
ended discussions with BJC concerning a possible alliance or business
combination. Following extensive review with the Blue Cross and Blue Shield
Association (BCBSA) and BJC, the boards of the company and BCBSMo
determined that current BCBSA rules are not sufficiently flexible to allow
the creation of a vertically integrated structure that will achieve the
desired benefits for members and shareholders. In view of the great value
inherent in the Blue Cross and Blue Shield trade name and service marks, as
well as other factors, the boards determined that it would not be prudent
to further pursue a vertical alliance or combination at this time.
The boards voiced their confidence in top management and the future
for the company and believe the current focus should be on strengthening
core business, resolving regulatory issues, enhancing customer service and
competitiveness, and improving profitability. The boards determined that
they will pursue a policy of independence for the company and BCBSMo for
the foreseeable future. Nevertheless, the boards will continue to examine
acquisitions, mergers, joint ventures and other business opportunities when
they arise.
Operating Strategy
Controlling Medical Costs. The company controls medical costs by
increasing financial incentives to members to use network providers, and
partnering with providers to ensure the economic delivery of quality health
care.
Increasing the Level of Managed Care Provided to Members. The company
currently provides a comprehensive array of managed care products with
differing degrees of cost-containment, risk assumption, benefit design and
flexibility in selecting health care providers. The company strives,
through the use of financial incentives and aggressive marketing, to
facilitate the movement of its members along the continuum of its product
offerings toward the level of managed care which meets the needs of those
members.
Reducing Administrative Costs. Throughout 1996 and 1995, the company made
significant investments in technologies designed to re-engineer many
customer service and claims processes which are expected to result in
significant savings in administrative costs. See "Technology and
Information Systems" that follows for additional detail.
Beginning January 1997, the company began moving its St. Louis based
claims, customer service, billing and provider services functions to the
company's Springfield, Missouri, facility and a new facility 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 $3.0 million, with approximately $1.4 million expected in 1997.
The company will incur total charges to earnings estimated at $7.0 million
to $8.0 million, which began in the second quarter of 1996 and will
continue through 1997 for costs associated with the relocation.
In addition, the company closed its Jefferson City, Missouri, office in
March 1996. The regional claims and customer service operations at this
office were consolidated with the company's operations in Springfield,
Missouri. Management anticipates that this consolidation of operations
will improve the company's cost structure through economies of scale.
Projected annual cost savings total $0.4 million.
Marketing
The company's marketing operations vary depending upon the segment at
which sales efforts are directed; individuals (i.e., direct pay), small
employer groups (which the company defines as groups from 2 to 99
employees) and large employer groups (which the company defines as groups
of 100 employees or more). The company's independent broker networks and
direct sales staff market the full range of the company's managed care
products and services to new customers, and manage existing accounts to
ensure client satisfaction and retention. Independent brokers are
compensated pursuant to commission arrangements which vary depending on the
particular company product/service sold.
Marketing efforts are supported by market research conducted internally
as well as public relations efforts and advertising programs which utilize
telemarketing, radio, television, direct mail, and other media.
Competition
The managed care industry is highly competitive, both nationally and in
the company's current market area. Participants compete for members
primarily on the basis of price (considering premium rates, copayments,
coinsurance and deductibles), scope and design of benefits, access to
providers and reputation of the plan sponsor and participants. The company
also competes with other managed care organizations for contracts with
hospitals, independent physicians, physician groups and other providers.
In the metropolitan areas of St. Louis and Kansas City and other regions
in Missouri, the managed care market is highly competitive with a number of
established competitors offering a variety of benefit plans. The
penetration of managed health care is substantially less in other regions of
Missouri where the company competes more with traditional indemnity plans and
smaller networks. The company's major competitors include: commercial
insurance carriers, other HMOs, PPOs, POSs, TPAs, utilization review
companies, and others, many of which are operated as part of a regional or
national network. Many competitors who have regional or national networks
have broader geographic coverage, larger total memberships, and in many
instances have greater financial resources than the company. 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.
In issuing its approval of the HealthLink acquisition, the Missouri
Department of Insurance required that the company not restrict access by
qualified commercial insurers to the HealthLink network for a minimum of
two years; that employer fees not increase faster than the percentage
change in the non-medical consumer price index through December 31, 1996;
that rate changes for existing RightCHOICE HMO and PPO subscribers in the
St. Louis Metropolitan area be limited to 90% of the annual percentage
increase in the St. Louis medical consumer price index over a two year
period; that rates be guaranteed for new subscribers in that market for 18
months; and that the company not enter into new agreements with hospitals
which include clauses requiring the hospitals to give the company rates
lower (by a specified amount or percentage) than those rates such hospitals
provide to others. RightCHOICE management believes that those requirements
will not have a material adverse effect on the company's results of
operations.
Technology and Information Systems
The company believes that its management information systems
represent a key component of the company's medical and administrative cost
reduction operating strategy by providing the company with extensive
detailed information regarding customer and provider utilization. These
systems also facilitate quality service to members and providers in
connection with the company's claims and customer service functions. In 1995,
the company embarked on a five year Information and Operations Strategy (IOS)
project which is designed to further improve how RightCHOICE delivers managed
care to members. In the early stages of the project, the company studied the
information systems, the type of systems applications and the most appropriate
use of technology necessary for future managed care endeavors. In 1997, the
company plans to complete the design of the system of record for enrollment,
billing, and customer service; expand reporting and tools for advanced medical
cost control; and implement a distributed systems management.
The primary business functions of the company are currently supported by
an integrated transaction processing system. This interactive system
supports the company's core processing functions (claim processing,
customer services, enrollment, member billing and claim disbursements)
under a set of integrated databases. The company believes that this
integrated approach helps to assure product flexibility across a broad
range of managed care products and provides an integrated, consistent
source of claim and subscriber information. As IOS brings RightCHOICE new
managed care capabilities, it will replace the company's core processing
systems and the company believes that IOS will generate savings in both
medical and administrative expenses.
Document imaging technology and re-engineering efforts are improving the
efficiency with which the company handles the massive volume of paper
received and processed by it each day. More than 68% of all claims received
by the company are currently electronic transactions that are processed
by the automated systems, requiring little or no manual intervention. As a
result, the company maintained an inventory of unprocessed provider claims
as of December 31, 1996, of approximately five days.
Regulation
Government regulation of the products and services offered by the company
varies from jurisdiction to jurisdiction and is subject to change. The
company and its subsidiaries are primarily subject to the insurance laws
and regulations of the state of Missouri, the insurance laws and
regulations of the other jurisdictions in which the company and its
subsidiaries are licensed or authorized to do business and certain federal
laws and regulations. These insurance laws and regulations generally give
state regulatory authorities broad supervisory, regulatory and
administrative powers over insurance companies and insurance holding
companies with respect to most aspects of their insurance businesses. This
regulation is intended primarily for the benefit of the policyholders of
the insurance companies. The company believes it is in compliance in all
material respects with the various federal and state regulations which
apply to its current operations. See Item 3 - "Legal Proceedings."
Insurance Holding Company Regulation
The company is subject to regulation as an insurance holding company.
Missouri insurance holding company laws and regulations generally require
insurance holding companies and their subsidiaries to register with the
Missouri Department of Insurance and to file with the Missouri Department
of Insurance certain reports describing capital structure, ownership,
financial condition, certain intercompany transactions and general business
operations. Missouri insurance holding company laws and regulations require
prior regulatory approval or, in certain circumstances, prior notice of,
certain material intercompany transfers of assets as well as certain
transactions between insurance companies, their parent holding companies
and affiliates.
Insurance Company Regulation
The operations of the company's subsidiaries, Healthy Alliance Life
Insurance company (HALIC), HMO Missouri, Inc. d/b/a BlueCHOICE,
(BlueCHOICE), HealthLink HMO, Inc., and newly acquired RightCHOICE
Insurance Company (RIC) are subject to regulation and supervision by
regulatory authorities of the various jurisdictions in which they are
licensed to conduct business. Regulatory authorities exercise extensive
supervisory power over insurance companies and health maintenance
organizations in regard to licensing; the amount of reserves which must be
maintained; the approval of forms and insurance policies used; the nature
of, and limitation on, an insurance company's investments; periodic
examination of the operations of insurance companies; the form and content
of annual statements and other reports required to be filed on the
financial condition of insurance companies; and the establishment of
capital requirements for insurance companies. The aforementioned
subsidiaries of the company are required to file periodic statutory
financial statements in each jurisdiction in which they are licensed.
Additionally, these subsidiaries are periodically examined by the insurance
departments of the jurisdictions in which they are licensed to do business.
Risk-Based Capital Requirements
In 1993, Missouri adopted statutory risk-based capital (RBC) requirements
for life and health insurance companies. The formula for calculating such
RBC requirements, set forth in instructions adopted by the National
Association of Insurance Commissioners (NAIC), is designed to take into
account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to the individual insurance company's business.
Under these laws, a life and health insurance company must submit a report
of its RBC level as of the end of the previous calendar year. The NAIC has
not currently extended the RBC requirements to HMOs.
Because the total adjusted capital of HALIC and RIC, determined in
accordance with the RBC instructions adopted by the NAIC on a fully phased-
in basis, exceed all RBC minimum requirements, the company believes that
the RBC requirements will not have any immediate impact upon HALIC or RIC
or their operations. If in the future the RBC results of HALIC or RIC were
to decline, the RBC requirements could have a material effect upon their
operations and the amount of regulatory oversight to which they are
subject.
Restrictions on Dividends
Missouri insurance laws and regulations restrict the payment of dividends
by life insurance companies and health maintenance organizations, such as
the company's subsidiaries, HALIC and BlueCHOICE, in a holding company
structure. Such laws generally limit the dividends which a life insurance
company may pay to an amount which, together with the amount of dividends
and distributions paid by the insurance company during the immediately
preceding 12 months, does not exceed the greater of (i) 10% of the
insurance company's surplus as regards policyholders as of the preceding
December 31 or (ii) the insurance company's net gain from operations for
the preceding calendar year. For all other insurers (including HMOs), such
laws generally limit the dividends which a company may pay to an amount
which, together with the amount of dividends and distributions paid by the
company during the immediately preceding 12 months, does not exceed the
lesser of (i) 10% of the insurer's surplus as regards policyholders as of
the preceding December 31 or (ii) the net investment income for the 12
month period ending as of the preceding December 31. Any proposed dividend
in excess of these amounts is deemed to be an ''extraordinary dividend''
and requires approval by the Missouri Director of Insurance.
At December 31, 1996, HALIC and BlueCHOICE had surplus of $84 million and
$6 million, respectively. The maximum amount available as of January 1,
1996, for payment of dividends to the company by HALIC and BlueCHOICE
without the prior approval of the Missouri Director of Insurance was $0.2
million and $0.6 million, respectively.
HMO Regulation
Federally qualified HMOs, such as BlueCHOICE, are subject to health care
related regulation by both state and federal regulatory authorities. State
qualified HMOs, such as HealthLink HMO, Inc., are also subject to state
regulatory authorities. As a federally qualified HMO, BlueCHOICE must file
periodic reports with, and is subject to, regulation and review by the U.S.
Department of Health and Human Services and certain other federal
authorities. Among the areas regulated by federal and state law are
procedures for quality assurance, enrollment requirements, covered
benefits, relationships between the HMO and its health care providers and
the company's financial condition, including reserves and cash flow
requirements.
Third-party Administrator (TPA) Regulation
Under Missouri laws and regulations, the company's TPA affiliates
are required to obtain a certificate of authority from the Department of
Insurance and are subject to various statutory requirements, including
record keeping and retention; fiduciary obligations with respect to
premiums collected; limitations on commissions and fees; and certain notice
and reporting requirements. Certifications of authority are also required
by certain other states in which Epoch conducts business. Certain TPA
activities are also subject to the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA).
Employees
The company employs approximately 1,700 full time employees (including
250 HealthLink employees) at December 31, 1996, compared to 1,600 full time
employees (including 220 HealthLink employees) at December 31, 1995, none
of whom is subject to a collective bargaining agreement. The company
believes that its employee relations are good.
Executive Officers
Name Age Position
John A. O'Rourke 53 Chairman of the Board, President, Chief
Executive Officer and Director
Kenneth M. Evelyn 39 Senior Vice President and Chief Marketing
Officer
Janice C. Forsyth 43 Senior Vice President, General Counsel &
Corporate Secretary
Joseph R. Huguenard, M.D. 49 Senior Vice President, Medical Management
and Corporate Medical Director
Joseph V. Marabito 38 Senior Vice President, Strategy
and Corporate Development
Herbert B. Schneiderman 51 Senior Vice President, Medical
Delivery Systems
Edward J. Tenholder 45 Senior Vice President, Client Services and
Corporate Support
Sandra A. Van Trease 36 Senior Vice President and Chief Financial
Officer
David T. Ott 42 Acting President, Chief Executive Officer
and Director of HealthLink
Courtney Walter 41 Acting Executive Vice President and
Director of HealthLink
John A. O'Rourke was named Chairman and CEO of RightCHOICE in February
1997, and President in March 1997. Mr. O'Rourke came to RightCHOICE from
his position as President and CEO of HealthLink, Inc. Mr. O'Rourke took the
leadership of HealthLink in 1985, when the company was first incorporated.
Earlier, Mr. O'Rourke was Deputy Director of the Office of Health Maintenance
Organizations in the U.S. Department of Health and Human Services.
Kenneth M. Evelyn joined RightCHOICE as Senior Vice President and Chief
Marketing Officer in May 1996. He came to RightCHOICE from Express
Scripts, Inc., where he was Senior Vice President/Sales and Marketing.
Previously he was Vice President/Major and National Accounts at Blue Cross
and Blue Shield of Texas. He also served in several sales and management
positions with the employee benefits division of Lincoln National Life
Insurance Company.
Janice C. Forsyth has served as Senior Vice President and General Counsel
of BCBSMo since April 1994. From 1989 to March 1994, Ms. Forsyth served as
Vice President and General Counsel of BCBSMo, and has been a member of
BCBSMo's legal department since 1982. Ms. Forsyth became Senior Vice
President, General Counsel and Corporate Secretary of the company in April
1994.
Joseph R. Huguenard, M.D., joined RightCHOICE as Senior Vice
President/Medical Management and Medical Director in October 1995. He came
to RightCHOICE from the Associated Group, Indianapolis, where he was Senior
Vice President/Managed Care and Medical Director for Anthem Benefit
Services, Inc., Anthem Life Insurance Company (Texas), Anthem Life
Insurance Company of Indiana and Anthem Life Insurance Company of
California.
Joseph V. Marabito, joined BCBSMo in November 1993 as Vice President,
Corporate Strategy, and became Senior Vice President, Strategy and
Corporate Development, of the company in November 1994. Prior to joining
BCBSMo, Mr. Marabito served as a Senior Manager in the Price Waterhouse
Strategic Consulting Group.
Herbert B. Schneiderman, joined RightCHOICE as Senior Vice President,
Medical Delivery Systems, in June 1995. He came to RightCHOICE after 21
years at Saint Louis University Hospital/Saint Louis University Health
Sciences Center, the last seven as Chief Executive Officer.
Edward J. Tenholder, Senior Vice President, Client Services and Corporate
Support, has served as a Senior Vice President of BCBSMo since 1989 and has
held various other positions since joining BCBSMo in 1975. Mr. Tenholder
became Senior Vice President, Client Services and Operations of the company
in April 1994.
Sandra Van Trease was named Senior Vice President and Chief Financial
Officer of the company in November 1995. She joined BCBSMo in June 1994 as
Vice President, Financial Reporting and Analysis. Prior to joining BCBSMo,
she was Senior Manager with the Price Waterhouse LLP middle market audit
division.
David T. Ott was named Acting President and Chief Executive Officer
of HealthLink, Inc., in March 1997. He had been Executive Vice President of
HealthLink since July 1990. He joined HealthLink in 1986 as Director of
Marketing and later was promoted to Vice President of Sales and Marketing.
Courtney Walter was named Acting Executive Vice President and Chief
Financial Officer of HealthLink, Inc., in March 1997. He has been with
HealthLink since 1993. Prior to joining HealthLink, he worked for Ernst &
Young, MetLife Health Care Management Corporation and Spectrum Emergency
Care.
ITEM 2. PROPERTIES
As of December 31, 1996, the company owned or leased the following
facilities which the company considers material to its operations:
Square Owned or
Type of Location Footage Leased
Facility
Corporate Headquarters St. Louis, MO 396,561 Leased
Document Storage Warehouse St. Louis, MO 62,300 Leased
HealthLink, Inc. Headquarters St. Louis, MO 20,550 Owned
HealthLink, Inc. Administrative Office St. Louis, MO 19,500 Leased
Southwest Regional Office Springfield, MO 30,000 Owned
Southwest Claims Office Expansion Springfield, MO 4,750 Leased
Southeast Claims Office Cape Girardeau, MO 42,000 Leased
ITEM 3. LEGAL PROCEEDINGS
The company is a party to various material legal proceedings which are
detailed in Note 14 of the Notes to Consolidated Financial Statements in
the 1996 Annual Report to Shareholders and is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The company's Common Stock has been traded on the New York Stock Exchange
under the symbol "RIT" since August 1, 1994. There were 146 common
shareholders of record on February 28, 1997. As of March 17, 1997, the
reported closing bid price per share was $14.625. Other information
required by Item 5 appears under the caption, "Shareholder Information", on
page 55 of the 1996 Annual Report to Shareholders and is incorporated
herein by reference.
Dividends
The company anticipates, for the foreseeable future, that no
dividends will be paid.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data appears on page 22 of
the 1996 Annual Report to Shareholders and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition
and Results of Operations on pages 23 through 31 of the 1996 Annual
Report to Shareholders is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing on pages 32 through 52 together with
the report thereon of Price Waterhouse LLP on page 53 of the 1996
Annual Report to Shareholders is hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the heading "Election of Directors"
(except the information set forth under the subcaptions thereunder,
"Compensation of Directors" and "Meetings of the Board and
Committees") and the information included under the heading
"Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the company's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held May 13, 1997, is incorporated
herein by reference.
Pursuant to General Instruction G(3) to Form 10-K, information as
to executive officers of the company is set forth in Part I of this
Form 10-K under separate caption.
ITEM 11. EXECUTIVE COMPENSATION
The information included under the headings "Executive Compensation
and Other Information" (except the information set forth under the
subcaptions thereunder, "Report of the Compensation Committee of the
Board of Directors" and "Company Performance") and "Election of
Directors - Compensation of Directors" in the company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held
May 13, 1997, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information included under the heading "Ownership of RightCHOICE
Capital Stock" in the company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 13, 1997, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Note 16 of the Notes to Consolidated Financial Statements in the
1996 Annual Report to Shareholders contains financial information
relating to the company's transactions with BCBSMo on page 51 and is
incorporated herein by reference.
The information included under the heading "Certain Transactions"
in the company's definitive Proxy Statement for the Annual Meeting
of the Shareholders to be held on May 13, 1997, is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
a) The following documents are filed as part of this report:
1) Financial Statements:
Index to Financial Statements:
Page in Annual Report*
Consolidated Balance Sheets, December 31, 1996 and 1995 32
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 33
Consolidated Statement of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994 34
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 35
Notes to Consolidated Financial Statements 36
Report of Independent Accountants 53
___________________
* Incorporated by reference from the indicated pages of the 1996
Annual Report to Shareholders.
2) Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedules 31
The schedules required to be filed as part of this report are as
follows:
I. Summary of Investments - Other than Investments in
Related Parties 32
III. Condensed Financial Information of Registrant 33
Schedules not included herein have been omitted because of the absence of
conditions under which they are required or because the required
information, where material, is shown in the consolidated financial
statements or related notes thereto.
3) Exhibits
2.1 Reorganization Agreement between the Registrant, Healthy
Alliance Life Insurance Company (HALIC)
and Blue Cross and Blue Shield of Missouri (BCBSMo)
Incorporated by reference - previously filed as
Exhibit 2.1 to the company's Form 10-K for the period ending
December 31, 1994.*
2.1.1 Supplement to the Reorganization Agreement between the
Registrant, Healthy Alliance Life
Insurance Company (HALIC) and Blue Cross and Blue Shield of
Missouri (BCBSMo) - Incorporated by reference - previously filed
as Exhibit 2.1.1 to the company's Form 10-K for the period ending
December 31, 1995.*
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.*
4.1 Specimen of Class A Common Stock Certificate of the Registrant
Incorporated by reference - previously
filed as Exhibit 4.1 to Registration Statement on Form S-1
under the Securities Act of 1933 filed by the
Registrant. Registration Statement No. 33-77798.*
4.2 Specimen of Class B Common Stock Certificate of Registrant
Incorporated by reference - previously filed
as Exhibit 4.2 to Registration Statement on Form S-1 under the
Securities Act of 1933 filed by the Registrant. Registration
Statement No. 33-77798.*
10.1 Registration Rights Agreement - Incorporated by reference
previously filed as Exhibit 10.1 to the
company's Form 10-K for the period ending December 31, 1994.*
10.2 Reinsurance Agreement between the Registrant and BCBSMo
Incorporated by reference - previously filed
as Exhibit 10.2 to the company's Form 10-K for the period
ending December 31, 1994.*
10.3 Network Rental Agreement between the Registrant and BCBSMo
Incorporated by reference - previously filed as Exhibit 10.3 to the
company's Form 10-K for the period ending December 31, 1994.*
10.4 Administrative Services Agreement between the Registrant and
BCBSMo - Incorporated by reference -
previously filed as Exhibit 10.4 to the company's Form 10-K for
the period ending December 31, 1994.*
10.5 Tax Allocation Agreement between the Registrant and BCBSMo
Incorporated by reference - previously
filed as Exhibit 10.5 to the company's Form 10-K for the period
ending December 31, 1994.*
10.6 Blue Cross License Agreement between Blue Cross and Blue Shield
Association (BCBSA) and
BCBSMo - Incorporated by reference - previously filed as
Exhibit 10.6 to Registration Statement on Form
S-1 under the Securities Act of 1933 filed by the Registrant.
Registration Statement No. 33-77798.*
10.6.1 Temporary Blue Cross License Agreement between BCBSA and
BCBSMo.
10.7 Blue Shield License Agreement between BCBSA and BCBSMo
Incorporated by reference - previously
filed as Exhibit 10.7 to Registration Statement on Form S-1
under the Securities Act of 1933 filed by the
Registrant. Registration Statement No. 33-77798.*
10.7.1 Temporary Blue Shield License Agreement between BCBSA and
BCBSMo.
10.8 Blue Cross Controlled Affiliate License Agreement among BCBSA,
HMO Missouri, Inc., and BCBSMo -
Incorporated by reference - previously filed as Exhibit 10.8 to
Registration Statement on Form S-1 under
the Securities Act of 1933 filed by the Registrant.
Registration Statement No. 33-77798.*
10.8.1 Temporary Blue Cross License Agreement among BCBSA, HMO
Missouri, Inc., and BCBSMo.
10.9 Blue Shield Controlled Affiliate License Agreement among BCBSA,
HMO Missouri, Inc., and BCBSMo -
Incorporated by reference - previously filed as Exhibit 10.9 to
Registration Statement on Form S-1 under
the Securities Act of 1933 filed by the Registrant.
Registration Statement No. 33-77798.*
10.9.1 Temporary Blue Shield License Agreement among BCBSA, HMO
Missouri, Inc., and BCBSMo.
10.10 Blue Cross Controlled Affiliate License Agreement among
BCBSA, BCBSMo and the Registrant -
Incorporated by reference - previously filed as Exhibit 10.10
to Registration Statement on Form S-1 under
the Securities Act of 1933 filed by the Registrant.
Registration Statement No. 33-77798.*
10.10.1 Temporary Blue Cross License Agreement among BCBSA, the
registrant, and BCBSMo.
10.11 Blue Shield Controlled Affiliate License Agreement among
BCBSA, BCBSMo and the Registrant -
Incorporated by reference - previously filed as Exhibit 10.11
to Registration Statement on Form S-1
under the Securities Act of 1933 filed by the Registrant.
Registration Statement No. 33-77798.*
10.11.1 Temporary Blue Shield License Agreement among BCBSA, the
registrant, and BCBSMo.
10.12 Blue Cross Controlled Affiliate License Agreement among
BCBSA, BCBSMo and HALIC - Incorporated
by reference - previously filed as Exhibit 10.12 to
Registration Statement on Form S-1 under the Securities
Act of 1933 filed by the Registrant. Registration Statement
No. 33-77798.*
10.12.1 Temporary Blue Cross License Agreement among BCBSA, HALIC,
and BCBSMo.
10.13 Blue Shield Controlled Affiliate License Agreement among
BCBSA, BCBSMo HALIC - Incorporated by
reference - previously filed as Exhibit 10.13 to Registration
Statement on Form S-1 under the Securities
Act of 1933 filed by the Registrant. Registration Statement
No. 33-77798.*
10.13.1 Temporary Blue Shield License Agreement among BCBSA,
HALIC, and BCBSMo.
10.14 Assignment of Lease from BCBSMo to the Registrant of Lease
for Corporate Headquarters, dated
February 1, 1993, between Forty-four Forty-four Forest Park
Redevelopment Corporation ("4444"), a
Missouri corporation, as lessor, and BCBSMo, as lessee, and
attached form of Consent and
Acknowledgment of assignment by 4444 - Incorporated by
reference - previously filed as Exhibit 10.14 to
the company's form 10-K for the period ending December 31,
1994.*
10.15 Sublease for a portion of Corporate Headquarters between
the Registrant and BCBSMo - Incorporated by
reference - previously filed as Exhibit 10.15 to the company's
Form 10-K for the period ending December 31, 1994.*
10.16 Assignment of Lease from BCBSMo to the Registrant of Lease
for BlueCHOICE Processing, dated May
4, 1990, between Heitman Properties of Missouri, Ltd.
("Heitman"), not personally but solely as trustee of
One City Center Trust, a Missouri common law trust, as lessor,
and BCBSMo, as lessee, and attached
form of Consent and Acknowledgment of assignment by Heitman -
Incorporated by reference - previously
filed as Exhibit 10.16 to the company's Form 10-K for the
period ending December 31, 1994.*
10.17 Deed to Springfield Regional Office Facility -
Incorporated by reference - previously filed as Exhibit 10.17
to the company's Form 10-K for the period ending December 31,
1994.*
10.18 Directors' Stock Option Plan of the Registrant -
Incorporated by reference - previously filed as Exhibit
10.18 to Registration Statement on Form S-1 under the
Securities Act of 1933 filed by the Registrant.
Registration Statement No. 33-77798.*
10.19 Equity Incentive Plan of the Registrant - Incorporated by
reference - previously filed as Exhibit 10.19 to
Registration Statement on Form S-1 under the Securities Act of
1933 filed by the Registrant. Registration
Statement No. 33-77798.*
10.19.1 Amendment to Equity Incentive Plan of the Registrant -
Incorporated by reference - previously filed as
Exhibit 10.19.1 to the company's Form 10-K for the period
ending December 31, 1994.*
10.20 Form of Executive Severance Agreement (and list of parties
who have executed officer severance
agreements) - Incorporated by reference - previously filed as
Exhibit 10.20 to the company's Form 10-K
for the period ending December 31, 1994.*
10.21 Form of Officer Severance Agreement (and list of parties
who have executed officer severance agreements)
- Incorporated by reference - previously filed as Exhibit 10.21
to the company's Form 10-K for the period
ending December 31, 1994.*
10.22 Form of Indemnification Agreement between the Registrant
and its Directors and Officers (and list of
parties who have executed indemnification agreements)
Incorporated by reference - previously filed as
Exhibit 10.22 to Registration Statement on Form S-1 under the
Securities Act of 1933 filed by the
Registrant. Registration Statement No. 33-77798.*
10.23 Agreement of Indemnification between BCBSMo and the
Registrant and its subsidiaries - Incorporated by
reference - previously filed as Exhibit 10.23 to the company's
Form 10-K for the period ending December 31, 1994.*
10.24 Registrant Supplemental Executive Retirement Plan -
Incorporated by reference - previously filed as
Exhibit 10.24 to Registration Statement on Form S-1 under the
Securities Act of 1933 filed by the
Registrant. Registration Statement No. 33-77798.*
10.25 Registrant Executive Deferred Compensation Plan -
Incorporated by reference - previously filed as Exhibit
10.24 to Registration Statement on Form S-1 under the
Securities Act of 1933 filed by the Registrant.
Registration Statement No. 33-77798.*
10.26 Amended Nonemployee Director Deferred Compensation Plan of
the Registrant - Incorporated by reference
- previously filed as Exhibit 10.26 to the company's Form 10-K
for the period ending December 31, 1994.*
10.27 Participation Agreement among Blue Cross and Blue Shield
of Kansas City, RightCHOICE Managed Care, Inc., TriLink Healthcare,
Inc., HealthLink, Inc., Healthy Alliance Life Insurance Company, The
Epoch Group, Inc., Pension Associates Incorporated, and LaHood
& Associates, Inc. in connection with the formation and capitalization
of TPACo., L.C. - Incorporated by reference - previously filed as
Exhibit 10.27 to the company's Form 10-K for the period ending
December 31, 1995.*
10.28 Certificate and Articles of Organization of TPACo., L.C. -
Incorporated by reference - previously filed as Exhibit 10.28 to
the company's Form 10-K for the period ending December 31, 1995.*
10.29 Certificate and Articles of Merger of The Epoch Group, Inc.
and TPACo., L.C. - Incorporated by reference - previously filed
as Exhibit 10.29 to the company's Form 10-K for the period ending
December 31, 1995.*
10.30 Amended and Restated Operating Agreement of The EPOCH Group,
L.C. - Incorporated by reference - previously filed as Exhibit
10.30 to the company's Form 10-K for the period ending December 31,
1995.*
10.31 Indemnification Agreement between RightCHOICE Managed Care,
Inc. and The EPOCH Group, L.C. - Incorporated by reference
previously filed as Exhibit 10.31 to the company's Form 10-K for the
period ending December 31, 1995.*
10.32 Indemnification Agreement among Blue Cross and Blue Shield
of Kansas City, TriLink Healthcare, Inc.,
and the EPOCH Group, L.C. - Incorporated by reference -
previously filed as Exhibit 10.32 to the company's Form 10-K for
the period ending December 31, 1995.*
10.33 Noncompete Agreement among Blue Cross and Blue Shield of
Missouri, Blue Cross and Blue Shield of
Kansas City, TriLink Healthcare, Inc., RightCHOICE Managed
Care, Inc., and The EPOCH Group, L.C. - Incorporated by reference
previously filed as Exhibit 10.33 to the company's Form 10-K for the
period ending December 31, 1995.*
10.34 Network Access Agreement among Blue Cross and Blue Shield
of Kansas City, TriLink Healthcare, Inc.,
and The EPOCH Group, L.C. - Incorporated by reference
previously filed as Exhibit 10.34 to the company's Form 10-K for
the period ending December 31, 1995.*
10.35 Network Access Agreement among RightCHOICE Managed Care,
Inc., Blue Cross and Blue Shield of
Missouri, HealthLink, Inc., and The EPOCH Group, L.C.
Incorporated by reference - previously filed as Exhibit 10.35 to
the company's Form 10-K for the period ending December 31, 1995.*
10.36 Credit Agreement dated as of August 10, 1995 among
RightCHOICE Managed Care, Inc., as the Borrower, Bank of
America National Trust and Savings Association, as
Administrative Agent. The Boatmen's National Bank of St. Louis,
as Co-Agent and the other Financial Institutions Party Hereto
arranged by BA Securities, Inc. - Incorporated by reference -
previously filed as Exhibit 10.1 to the company's Form 10-Q for
the period ending June 30, 1995.*
10.36.1 First Amendment to the Credit Agreement. - Incorporated by
reference - previously filed as Exhibit 10.36.1 to the
company's Form 10-K for the period ending December 31, 1995.*
10.36.2 Consent and Second Amendment to the Credit Agreement -
Incorporated by reference - previously filed as Exhibit 10.36.2
to the company's Form 10-K for the period ending December 31,
1995.*
10.36.3 Third amendment to the Credit Agreement - Incorporated by
reference - previously filed as Exhibit 10.2 to the company's
Form 10-Q for the period ending June 30, 1996.*
10.36.4 Fourth amendment to the Credit Agreement.
10.36.5 Fifth amendment to the Credit Agreement.
10.37 Lease between Forty-Four Forty-Four Forest Park
Redevelopment Corporation (Landlord) and RightCHOICE Managed
Care, Inc. (Tenant) dated January 1, 1995 - Incorporated by
reference - previously filed as Exhibit 10.2 to the company's
Form 10-Q for the period ending June 30, 1995.*
10.38 Sublease between RightCHOICE Managed Care, Inc. and Blue
Cross and Blue Shield of Missouri dated January 1, 1995
Incorporated by reference - previously filed as Exhibit 10.3 to
the company's Form 10-Q for the period ending June 30, 1995.*
10.39 Building Services Agreement between Forty-Four Forty-Four
Forest Park Redevelopment Corporation and RightCHOICE Managed
Care, Inc. dated January 1, 1995 - Incorporated by reference
previously filed as Exhibit 10.4 to the company's Form 10-Q for
the period ending June 30, 1995.*
10.40 Master Reinsurance Agreement among RightCHOICE Managed Care,
Inc., Healthy Alliance Life Insurance Company (HALIC Insurance
Company), Blue Cross and Blue Shield of Kansas City, and
Missouri Valley Life and Health Insurance Company -
Incorporated by reference - previously filed as Exhibit 10.40
to the company's Form 10-K for the period ending December 31,
1995.*
10.41 BCBSKC Reinsurance Agreement by and between Healthy Alliance
Life Insurance Company (HALIC Insurance Company) and Blue Cross
and Blue Shield of Kansas City - Incorporated by reference
previously filed as Exhibit 10.41 to the company's Form 10-K
for the period ending December 31, 1995.*
10.42 BCBSKC Small Group Reinsurance Agreement by and between
Healthy Alliance Life Insurance Company (HALIC Insurance
Company) and Blue Cross and Blue Shield of Kansas City -
Incorporated by reference - previously filed as Exhibit 10.42
to the company's Form 10-K for the period ending December 31,
1995.*
10.43 HALIC Reinsurance Agreement by and between Missouri Valley
Life and Health Insurance Company and Healthy Alliance Life
Insurance Company (HALIC Insurance Company) - Incorporated by
reference - previously filed as Exhibit 10.43 to the company's
Form 10-K for the period ending December 31, 1995.*
10.44 HALIC Small Group Reinsurance Agreement by and between
Missouri Valley Life and Health Insurance Company and Healthy
Alliance Life Insurance Company (HALIC Insurance Company)
Incorporated by reference - previously filed as Exhibit 10.44 to
the company's Form 10-K for the period ending December 31, 1995.*
10.45 HALIC Farm Bureau Reinsurance Agreement by and between
Missouri Valley Life and Health Insurance Company and Healthy
Alliance Life Insurance Company (HALIC Insurance Company)
Incorporated by reference - previously filed as Exhibit 10.45
to the company's Form 10-K for the period ending December 31,
1995.*
10.46 Stock Purchase Agreement By and Between HealthLink, Inc. and
TriLink Healthcare, Inc. dated as of March 27, 1996
Incorporated by reference - previously filed as Exhibit 10.1 to
the company's Form 10-Q for the period ending March 31, 1996.*
10.47 Stock Purchase Agreement By and Between Blue Cross and Blue
Shield of Missouri and RightCHOICE Managed Care, Inc. dated as
of February 8, 1996 - Incorporated by reference - previously
filed as Exhibit 10.2 to the company's Form 10-Q for the period
ending March 31, 1996.*
10.48 Stock Purchase Agreement By and Between RightCHOICE Managed
Care, Inc. and LaSalle Bank, F.S.B. dated as of June 7, 1996
Incorporated by reference - previously filed as Exhibit 10.1 to
the company's Form 10-Q for the period ending June 30, 1996.*
10.49 Stock Purchase Agreement By and Between Blue Cross and Blue
Shield of Missouri and RightCHOICE Managed Care, Inc. dated as
of July 19, 1996 - Incorporated by reference - previously filed
as Exhibit 10.3 to the company's Form 10-Q for the period
ending June 30, 1996.*
10.50 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. - Incorporated by
reference - previously filed as Exhibit 10.1 to the company's
Form 10-Q for the period ending September 30, 1996.*
11.1 Pro forma Computation of Earnings Per Share - Incorporated by
reference - previously filed as Exhibit 11.1 to Registration
Statement on Form S-1 under the Securities Act of 1933 filed
by the Registrant. Registration Statement No. 33-77798.*
13.1 Annual Report to Shareholders for the year ended December 31,
1995. Except as to information specifically incorporated,
the 1995 Annual Report to Shareholders is not to be deemed
filed as part of this Form 10-K report - Incorporated by
reference previously filed as Exhibit 13.1 to the company's
Form 10-K for the period ending December 31, 1995.*
13.2 All information incorporated by reference in Parts I, II and
IV of this Annual Report on Form 10-K from the Annual Report
to Shareholders for the year ended December 31, 1996.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP with regard to the
Registrant's Registration Statement on Form S-8.
Registration Statement No. 33-90608.
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 December 31, 1996.
c) See Exhibits listed in Item 14 hereof and the Exhibits attached
as a separate section of this Form 10-K Annual Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated March 24, 1997 RightCHOICE Managed Care, Inc.
By:
/s/ John A. O'Rourke
John A. O'Rourke
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
/s/ John A. O'Rourke Chairman of the Board, March 24, 1997
John A. O'Rourke President and Chief
Executive Officer
/s/ Norman J. Tice Vice Chairman of the Board March 24, 1997
Norman J. Tice
/s/ Sandra A. Van Trease Chief Financial Officer March 24, 1997
Sandra A. Van Trease (Principal Financial Officer
and Principal Accounting Officer)
Director March 24, 1997
Frederic C. Brussee
/s/ William H. T. Bush Director March 24, 1997
William H. T. Bush
/s/ Ronald G. Evens, M.D. Director March 24, 1997
Ronald G. Evens, M.D.
/s/ Edward C. Gomes, Jr. Director March 24, 1997
Edward C. Gomes, Jr.
/s/ Earle H. Harbison, Jr. Director March 24, 1997
Earle H. Harbison, Jr.
/s/ Roger B. Porter, Ph.D. Director March 24, 1997
Roger B. Porter, Ph.D.
/s/ Gloria W. White Director March 24, 1997
Gloria W. White
/s/ Roy R. Heimburger Director March 24, 1997
Roy R. Heimburger
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
RightCHOICE Managed Care, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 14, 1997 appearing in the 1996 Annual Report to Shareholders
of RightCHOICE Managed Care, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedules listed in Item
14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules
present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
St. Louis, Missouri
February 14, 1997
Schedule I
RIGHTCHOICE MANAGED CARE, INC.
SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
(in thousands)
Amount at
which
shown in
the
consolidated
balance
Cost Value sheet
Type of Investment
Fixed maturities:
Bonds:
United States Government and
government agencies and
authorities..................... $118,960 $118,949 $118,949
All other corporate bonds....... 59,394 59,380 59,380
Life insurance contracts.......... 33,735 39,733 39,733
Certificates of deposit........... 121 121 121
Total fixed maturities......... 212,210 218,183 218,183
Equity securities:
Common stocks:
Public utilities.............. 3,139 3,341 3,341
Banks, trust, and insurance
companies................... 5,372 7,769 7,769
Industrial, miscellaneous
and all other............... 23,421 29,979 29,979
Total equity securities... 31,932 41,089 41,089
Short-term investments............ 2,944 2,944 2,944
Total investments......... $247,086 $262,216 $262,216
Schedule III
(Page 1 of 3)
RIGHTCHOICE MANAGED CARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed balance sheets of RightCHOICE Managed Care, Inc. (parent
company only) as of December 31, 1996 and 1995, and the condensed
statements of income and cash flows for the years ended December 31,
1996, 1995 and 1994 are as follows:
Balance Sheets
(in thousands, except shares and per share data)
December 31,
1996 1995
ASSETS
Cash............................................... $199 $ 66
Investments available for sale..................... 43,707 29,914
Investments in affiliates.......................... 175,515 193,277
Property and equipment, net........................ 11,320 17,703
Receivables from affiliates........................ 19,548 13,079
Other assets....................................... 1,870 2,291
Total assets............................. $252,159 $256,330
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses.............. $21,236 $22,536
Payables to affiliates............................. 14,782 13,262
Income taxes payable, net.......................... 13,956 13,920
Obligations for employee benefits.................. 24,512 24,741
Obligations under capital leases................... 4,719 8,650
Total liabilities........................ 79,205 83,109
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............................ 30,687 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......................... 9,766 7,946
Total shareholders' equity................... 172,954 173,221
Total liabilities and shareholders' equity... $252,159 $256,330
Schedule III
(Page 2 of 3)
RIGHTCHOICE MANAGED CARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Statements of Income
(in thousands)
Year ended December 31,
1996 1995 1994
Revenue
Reimbursement from affiliates............ 114,233 120,809 107,942
Dividends from affiliates................ 26,631 5,352 -
Total revenue................................. 140,864 126,161 107,942
Expense
General and administrative............... 119,292 125,448 109,140
Operating income (loss)....................... 21,572 713 (1,198)
Investment income and other................... 1,022 2,059 2,189
Income before equity in undistributed (loss)
income of subsidiaries and provision for
income taxes.................................. 22,594 2,772 991
Equity in undistributed (loss) income of
subsidiaries.................................. (25,618) 19,979 26,099
(Loss) income before income taxes............. (3,024) 22,751 27,090
Provision for income taxes.................... (997) (819) 506
Net (loss) income............................. (2,027) 23,570 26,584
Pro forma premium taxes less income
tax benefit (unaudited)....................... 1,901
Pro forma net income (unaudited).............. 24,683
Schedule III
(Page 3 of 3)
RIGHTCHOICE MANAGED CARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Statements of Cash Flows
(in thousands)
Year ended December 31,
1996 1995 1994
Cash flows from operating activities:
Net (loss) income............................. ($2,027) $23,570 $26,584
Adjustments to reconcile net (loss) income
to net cash provided by operating
activities:
Equity in undistributed loss (income)
of subsidiaries........................ 25,618 (19,979) (26,099)
Depreciation............................. 4,631 5,174 4,717
Loss on sale of property and
equipment.............................. 36 - 17
(Gain) Loss on sale of investments....... (6) 123 (1,318)
Accretion of discounts and
amortization of premiums............... (41) (65) 19
Decrease (increase) in:
Receivables from affiliates.............. (6,469) 4,367 (17,810)
Other assets............................. 421 1,918 5,447
Increase (decrease) in:
Accounts payable and accrued
expenses.............................. (1,300) 7,841 12,311
Payables to affiliates................... 1,520 (4,296) 17,558
Obligations for employee benefits........ (229) (2,560) (203)
Income taxes payable..................... (482) (3,577) 17,491
Net cash provided by operating activities..... 21,672 12,516 38,714
Cash flows from investing activities:
Investments purchased.................... (42,297) (86,615) (60,275)
Investments sold or matured.............. 29,846 111,134 29,553
Increase in investment in affiliates..... (6,813) (32,854) (29,953)
Property and equipment purchased,
transferred to affiliates, net........ 1,716 (3,129) (5,680)
Net cash used in investing activities......... (17,548) (11,464) (66,355)
Cash flows from financing activities:
Net proceeds from initial public
stock offering........................ 33,257
Additional expenses related to public
stock offering........................ (117)
Payments on capital lease obligations.... (3,931) (4,074) (2,145)
Purchase of Class A treasury stock....... (60) (128) (138)
Net cash (used in) provided by financing
activities.............................. (3,991) (4,319) 30,974
Net increase in cash and cash
equivalents........................... 133 (3,267) 3,333
Cash and cash equivalents, beginning of year.. 66 3,333 -
Cash and cash equivalents, end of year........ $199 $66 $ 3,333
Supplemental Schedule of Noncash Investing
and Financing Activities:
Equipment acquired through capital leases..... $1,236 $9,574
Disposal of equipment under capital leases.... 1,789 1,052
Exhibit 10.6.1
TEMPORARY BLUE CROSS LICENSE AGREEMENT
This agreement is by and between Blue Cross and
Blue Shield Association ("BCBSA") and the Blue Cross Plan,
known as Blue Cross and Blue Shield of Missouri (the "Plan").
Preamble
WHEREAS, BCBSA is the owner of the BLUE CROSS and
the BLUE CROSS Design service marks (collectively the
"Licensed Marks");
WHEREAS, the Plan had the right to use the Licensed
Marks as service marks for health care plans in its service
area and the right to use BLUE CROSS in its trade and/or
corporate name (the "Licensed Name");
WHEREAS, BCBSA informed the Plan that the Plan's
Blue Cross License Agreement automatically terminated as a
result of claims made in certain litigation pending among and
between the Plan; Jay Angoff, in his official capacity as
Director of the Missouri Department of Insurance; and
Jeremiah "Jay" Nixon, in his official capacity as the
Attorney General of the State of Missouri (the "Litigation");
WHEREAS, the Plan has told BCBSA that (i) the Plan
believes that the Litigation has not triggered the automatic
termination provisions of the Plan's Blue Cross License
Agreement and it contends that its Blue Cross License
Agreement remains in full force and effect; and (ii) to
clarify its right to continue to use the Licensed Marks and
Licensed Name, the Plan wishes to receive, and is willing to
accept benefits and rights under, this Temporary Blue Cross
License Agreement;
WHEREAS, BCBSA has determined that it is in the
best interest of the Licensed Marks, BCBSA, and its member
Plans to grant the Plan a temporary Blue Cross license;
NOW THEREFORE, in consideration of the foregoing
and the mutual agreements hereinafter set forth and for other
good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as
follows:
Agreement
1. BCBSA hereby grants the Plan, upon the terms
and conditions of this Temporary Blue Cross License Agreement
("Temporary License"), the temporary right to use the
Licensed Name in its trade and/or corporate name and the
temporary right to use the Licensed Marks in the sale,
marketing, and administration of health care plans and
related services in its licensed service area. This
Temporary License shall incorporate the terms, covenants,
conditions, and licensed service area of the Plan's Blue
Cross License Agreement (the "Full License"), a current copy
of which is attached as Exhibit A, provided that paragraphs
one through six of this Temporary License shall control to
the extent they conflict with any terms, conditions, or
covenants of the Full License. The terms "Agreement" and
"License Agreement" as used in the Full License shall be
construed to include this Temporary License.
2. The Plan agrees not to bring any claims,
causes of action, actions, suits, or any demands whatsoever
against BCBSA or any of its Member Plans, whether at law or
equity, whether in judicial, arbitral, or alternative fora,
and whether known or unknown, that the Plan now has or may
have had on behalf of itself or any other person or entity at
any time prior to and including the date of this Temporary
License, or hereafter can, shall, or may have or claim to
have, arising out of or in any way related to the
aforementioned automatic termination or any actions taken or
contemplated herein or related thereto, so long as the Plan
remains a licensee pursuant to any temporary Blue Cross
license or any then-effective Full License.
3. The Plan covenants and warrants that: (i)
apart from the Litigation, it is in compliance with all, and
has no plans to engage in conduct that would violate any,
BCBSA rules and regulations, including all provisions of this
Temporary License; and (ii) there is no imminent risk of
dissolution of the Plan or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the
Plan's business or property. If any of these covenants and
warranties is inaccurate or breached, BCBSA may terminate
this Temporary License pursuant to a vote of the BCBSA Board
of Directors.
4. The provisions of paragraph 15(d)(i) of the
Full License related to notice to customers, and the
provisions of paragraph 15(d)(iii) of the Full License
related to the reestablishment fee, shall not apply so long
as the Plan remains a licensee pursuant to any temporary Blue
Cross license or the then-effective Full License.
5. This Temporary License shall automatically
terminate upon earlier of (i) the expiration or termination
of the stay of proceedings entered on December 30, 1996, by
the Circuit Court of Cole County, Missouri, in the
Litigation; or (ii) the termination of the Litigation. All
provisions for termination of this Temporary License that
require a vote shall be by the vote of the BCBSA Board of
Directors prescribed in Article VI, Section 5 of the BCBSA
Bylaws in effect as of the effective date of this Temporary
License.
6. BCBSA shall award the then-effective Full
License to the Plan effective immediately upon the expiration
or termination of this Temporary License and the satisfaction
of the following conditions as determined by BCBSA: (i) the
Litigation has been addressed to eliminate the risk of
dissolution of the Plan or the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the
Plan's business or property, and in a manner that is in the
best interest of BCBSA, the Licensed Marks, and the Plans;
and (ii) the Plan is in compliance with, and has no plans to
engage in any conduct that would violate, the applicable
BCBSA rules and regulations, including the provisions of the
then-effective Full License.
IN WITNESS WHEREOF, the parties have caused this Temporary
Blue Cross License Agreement to be executed, effective as of
the date of the last signature written below:
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By: /s/ Mark A. Orloff
Title: Vice President and Assistant Secretary
Date: February 7, 1997
BLUE CROSS AND BLUE SHIELD OF MISSOURI
By: /s/ Roy R. Heimburger
Title: President and Chief Executive Officer
Date: January 24, 1997
Exhibit A
Previously Filed as Exhibit 10.6
Exhibit 10.7.1
TEMPORARY BLUE SHIELD LICENSE AGREEMENT
This agreement is by and between Blue Cross and
Blue Shield Association ("BCBSA") and the Blue Shield Plan,
known as Blue Cross and Blue Shield of Missouri (the "Plan").
Preamble
WHEREAS, BCBSA is the owner of the BLUE SHIELD and
the BLUE SHIELD Design service marks (collectively the
"Licensed Marks");
WHEREAS, the Plan had the right to use the Licensed
Marks as service marks for health care plans in its service
area and the right to use BLUE SHIELD in its trade and/or
corporate name (the "Licensed Name");
WHEREAS, BCBSA informed the Plan that the Plan's
Blue Shield License Agreement automatically terminated as a
result of claims made in certain litigation pending among and
between the Plan; Jay Angoff, in his official capacity as
Director of the Missouri Department of Insurance; and
Jeremiah "Jay" Nixon, in his official capacity as the
Attorney General of the State of Missouri (the "Litigation");
WHEREAS, the Plan has told BCBSA that (i) the Plan
believes that the Litigation has not triggered the automatic
termination provisions of the Plan's Blue Shield License
Agreement and it contends that its Blue Shield License
Agreement remains in full force and effect; and (ii) to
clarify its right to continue to use the Licensed Marks and
Licensed Name, the Plan wishes to receive, and is willing to
accept benefits and rights under, this Temporary Blue Shield
License Agreement;
WHEREAS, BCBSA has determined that it is in the
best interest of the Licensed Marks, BCBSA, and its member
Plans to grant the Plan a temporary Blue Shield license;
NOW THEREFORE, in consideration of the foregoing
and the mutual agreements hereinafter set forth and for other
good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as
follows:
Agreement
1. BCBSA hereby grants the Plan, upon the terms
and conditions of this Temporary Blue Shield License
Agreement ("Temporary License"), the temporary right to use
the Licensed Name in its trade and/or corporate name and the
temporary right to use the Licensed Marks in the sale,
marketing, and administration of health care plans and
related services in its licensed service area. This
Temporary License shall incorporate the terms, covenants,
conditions, and licensed service area of the Plan's Blue
Shield License Agreement (the "Full License"), a current copy
of which is attached as Exhibit A, provided that paragraphs
one through six of this Temporary License shall control to
the extent they conflict with any terms, conditions, or
covenants of the Full License. The terms "Agreement" and
"License Agreement" as used in the Full License shall be
construed to include this Temporary License.
2. The Plan agrees not to bring any claims,
causes of action, actions, suits, or any demands whatsoever
against BCBSA or any of its Member Plans, whether at law or
equity, whether in judicial, arbitral, or alternative fora,
and whether known or unknown, that the Plan now has or may
have had on behalf of itself or any other person or entity at
any time prior to and including the date of this Temporary
License, or hereafter can, shall, or may have or claim to
have, arising out of or in any way related to the
aforementioned automatic termination or any actions taken or
contemplated herein or related thereto, so long as the Plan
remains a licensee pursuant to any temporary Blue Shield
license or any then-effective Full License.
3. The Plan covenants and warrants that: (i)
apart from the Litigation, it is in compliance with all, and
has no plans to engage in conduct that would violate any,
BCBSA rules and regulations, including all provisions of this
Temporary License; and (ii) there is no imminent risk of
dissolution of the Plan or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the
Plan's business or property. If any of these covenants and
warranties is inaccurate or breached, BCBSA may terminate
this Temporary License pursuant to a vote of the BCBSA Board
of Directors.
4. The provisions of paragraph 15(d)(i) of the
Full License related to notice to customers, and the
provisions of paragraph 15(d)(iii) of the Full License
related to the reestablishment fee, shall not apply so long
as the Plan remains a licensee pursuant to any temporary Blue
Shield license or the then-effective Full License.
5. This Temporary License shall automatically
terminate upon earlier of (i) the expiration or termination
of the stay of proceedings entered on December 30, 1996, by
the Circuit Court of Cole County, Missouri, in the
Litigation; or (ii) the termination of the Litigation. All
provisions for termination of this Temporary License that
require a vote shall be by the vote of the BCBSA Board of
Directors prescribed in Article VI, Section 5 of the BCBSA
Bylaws in effect as of the effective date of this Temporary
License.
6. BCBSA shall award the then-effective Full
License to the Plan effective immediately upon the expiration
or termination of this Temporary License and the satisfaction
of the following conditions as determined by BCBSA: (i) the
Litigation has been addressed to eliminate the risk of
dissolution of the Plan or the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the
Plan's business or property, and in a manner that is in the
best interest of BCBSA, the Licensed Marks, and the Plans;
and (ii) the Plan is in compliance with, and has no plans to
engage in any conduct that would violate, the applicable
BCBSA rules and regulations, including the provisions of the
then-effective Full License.
IN WITNESS WHEREOF, the parties have caused this Temporary
Blue Shield License Agreement to be executed, effective as of
the date of the last signature written below:
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By: /s/ Mark A. Orloff
Title: Vice President and Assistant Secretary
Date: February 7, 1997
BLUE CROSS AND BLUE SHIELD OF MISSOURI
By: /s/ Roy R. Heimburger
Title: President and Chief Executive Officer
Date: January 24, 1997
Exhibit A
Previously Filed as Exhibit 10.7
Exhibit 10.8.1
TEMPORARY BLUE CROSS
AFFILIATE LICENSE AGREEMENT
This agreement is by and between Blue Cross and
Blue Shield Association ("BCBSA") and HMO Missouri, Inc.
(d/b/a BlueChoice) (the "Affiliate"), an affiliate of the
Blue Cross Plan known as Blue Cross and Blue Shield of
Missouri (the "Plan"), which is also a Party signatory
hereto.
Preamble
WHEREAS, BCBSA is the owner of the BLUE CROSS and
the BLUE CROSS Design service marks (collectively the
"Licensed Marks");
WHEREAS, the Affiliate had the right to use the
Licensed Marks as service marks and the name BLUE CROSS in a
trade name (the "Licensed Name");
WHEREAS, BCBSA informed the Plan and the Affiliate
that the Plan's Blue Cross License Agreement and the
Affiliate's Blue Cross Affiliate License Agreement
automatically terminated as a result of claims made in
certain litigation pending among and between the Plan; Jay
Angoff, in his official capacity as Director of the Missouri
Department of Insurance; and Jeremiah "Jay" Nixon, in his
official capacity as the Attorney General of the State of
Missouri (the "Litigation");
WHEREAS, the Plan has told BCBSA that (i) the Plan
believes that the Litigation has not triggered the automatic
termination provisions of the Plan's Blue Cross License
Agreement or the Affiliate's Blue Cross Affiliate License
Agreement and the Plan contends that its Blue Cross License
Agreement and the Affiliate's Blue Cross Affiliate License
Agreement remain in full force and effect; and (ii) to
clarify the Affiliate's rights to continue to use the
Licensed Marks and Licensed Name, the Plan and the Affiliate
wish to receive, and are willing to accept benefits and
rights under, this Temporary Blue Cross Affiliate License
Agreement;
WHEREAS, BCBSA has determined that it is in the
best interest of BCBSA, the Licensed Marks, and its member
Plans to grant the Plan and the Affiliate this temporary
license;
NOW THEREFORE, in consideration of the foregoing
and the mutual agreements hereinafter set forth and for other
good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as
follows:
Agreement
1. BCBSA hereby grants the Affiliate, upon the
terms and conditions of this Temporary Blue Cross Affiliate
License Agreement ("Temporary Affiliate License"), the
temporary right to use the Licensed Marks and Name in its
licensed service area in connection with, and only in
connection with: (i) health care plans and related services
and administering the non-health portion of workers'
compensation insurance, and (ii) underwriting the indemnity
portion of workers' compensation insurance, provided that
Affiliate's total premium revenue comprises less than 15
percent of the sponsoring Plan's net subscription revenue.
This grant of rights is non-exclusive and is limited to the
Service Area served by the Plan. The Affiliate may not use
the Licensed Marks and Name in its legal name and may use the
Licensed Marks in its Trade Name only with the prior consent
of BCBSA.
2. This Temporary Affiliate License shall
incorporate the terms, covenants, conditions, and licensed
service area of the Affiliate's Blue Cross Affiliate License
Agreement (the "Full Affiliate License"), a current copy of
which is attached as Exhibit A, provided that paragraphs one
through seven of this Temporary License shall control to the
extent they conflict with the terms, covenants, and
conditions of the Full Affiliate License. The terms
"Agreement," "License," and "License Agreement" as used in
the Full Affiliate License shall be construed to include this
Temporary Affiliate License, and the Affiliate shall be
considered a "Smaller Affiliate" as that term is used in the
Full Affiliate License.
3. The Affiliate agrees not to bring any claims,
causes of action, actions, suits, or any demands whatsoever
against BCBSA or any of its Member Plans, whether at law or
equity, whether in judicial, arbitral, or alternative fora,
and whether known or unknown, that the Affiliate now has or
may have had on behalf of itself or any other person or
entity at any time prior to and including the date of this
Temporary Affiliate License, or hereafter can, shall, or may
have or claim to have, arising out of or in any way related
to the aforementioned automatic terminations or any actions
taken or contemplated herein or related thereto, so long as
the Affiliate remains a licensee pursuant to any temporary
Blue Cross license or any then-effective Full Affiliate
License.
4. The Affiliate and the Plan covenant and
warrant that: (i) apart from the Litigation, they are in
compliance with all, and have no plans to engage in conduct
that would violate any, BCBSA rules and regulations,
including all provisions of this Temporary Affiliate License;
and (ii) there is no imminent risk of dissolution of the
Affiliate or the Plan or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the
Affiliate's or the Plan's business or property. If any of
these covenants and warranties is inaccurate or breached,
BCBSA may terminate this Temporary Affiliate License pursuant
to a vote of the BCBSA Board of Directors.
5. The provisions of paragraph 7(G) of the Full
Affiliate License related to notice to customers shall not
apply so long as the Affiliate remains a licensee pursuant to
any temporary Blue Cross license or any then-effective Full
Affiliate License.
6. This Temporary Affiliate License shall
automatically terminate upon the earlier of (i) the
expiration or termination of the stay of proceedings entered
on December 30, 1996, by the Circuit Court of Cole County,
Missouri, in the Litigation; or (ii) the termination of the
Litigation. All provisions for termination of this Temporary
Affiliate License that require a vote shall be by the vote of
the BCBSA Board of Directors prescribed in Article VI,
Section 5 of the BCBSA Bylaws in effect as of the effective
date of this Temporary Affiliate License.
7. BCBSA shall award the then-effective Full
Affiliate License to the Affiliate effective immediately upon
the expiration or termination of this Temporary Affiliate
License and the satisfaction of the following conditions as
determined by BCBSA: (i) the Litigation has been addressed
to eliminate the risk of dissolution of the Plan or the
appointment of a trustee, interim trustee, receiver, or other
custodian for any of the Plan's business or property, and in
a manner that is in the best interest of BCBSA, the Licensed
Marks, and the Plans; and (ii) the Affiliate is in compliance
with, and has no plans to engage in any conduct that would
violate, the applicable BCBSA rules and regulations,
including the provisions of the then-effective Full Affiliate
License.
IN WITNESS WHEREOF, the parties have caused this Temporary
Blue Cross Affiliate License Agreement to be executed,
effective as of the date of the last signature written below:
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By: /s/ Mark A. Orloff
Title: Vice President and Assistant Secretary
Date: February 7, 1997
HMO MISSOURI, INC. (D/B/A BLUECHOICE)
Affiliate
By: /s/ Frederic C. Brussee
Title: Chairman and Chief Executive Officer
Date: January 24, 1997
BLUE CROSS AND BLUE SHIELD OF MISSOURI
Plan
By: /s/ Roy R. Heimburger
Title: President and Chief Executive Officer
Date: January 24, 1997
Exhibit A
Previously Filed as Exhibit 10.8
Exhibit 10.9.1
TEMPORARY BLUE SHIELD
AFFILIATE LICENSE AGREEMENT
This agreement is by and between Blue Cross and
Blue Shield Association ("BCBSA") and HMO Missouri, Inc.
(d/b/a BlueChoice) (the "Affiliate"), an affiliate of the
Blue Shield Plan known as Blue Cross and Blue Shield of
Missouri (the "Plan"), which is also a Party signatory
hereto.
Preamble
WHEREAS, BCBSA is the owner of the BLUE SHIELD and
the BLUE SHIELD Design service marks (collectively the
"Licensed Marks");
WHEREAS, the Affiliate had the right to use the
Licensed Marks as service marks and the name BLUE SHIELD in a
trade name (the "Licensed Name");
WHEREAS, BCBSA informed the Plan and the Affiliate
that the Plan's Blue Shield License Agreement and the
Affiliate's Blue Shield Affiliate License Agreement
automatically terminated as a result of claims made in
certain litigation pending among and between the Plan; Jay
Angoff, in his official capacity as Director of the Missouri
Department of Insurance; and Jeremiah "Jay" Nixon, in his
official capacity as the Attorney General of the State of
Missouri (the "Litigation");
WHEREAS, the Plan has told BCBSA that (i) the Plan
believes that the Litigation has not triggered the automatic
termination provisions of the Plan's Blue Shield License
Agreement or the Affiliate's Blue Shield Affiliate License
Agreement and the Plan contends that its Blue Shield License
Agreement and the Affiliate's Blue Shield Affiliate License
Agreement remain in full force and effect; and (ii) to
clarify the Affiliate's rights to continue to use the
Licensed Marks and Licensed Name, the Plan and the Affiliate
wish to receive, and are willing to accept benefits and
rights under, this Temporary Blue Shield Affiliate License
Agreement;
WHEREAS, BCBSA has determined that it is in the
best interest of BCBSA, the Licensed Marks, and its member
Plans to grant the Plan and the Affiliate this temporary
license;
NOW THEREFORE, in consideration of the foregoing
and the mutual agreements hereinafter set forth and for other
good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as
follows:
Agreement
1. BCBSA hereby grants the Affiliate, upon the
terms and conditions of this Temporary Blue Shield Affiliate
License Agreement ("Temporary Affiliate License"), the
temporary right to use the Licensed Marks and Name in its
licensed service area in connection with, and only in
connection with: (i) health care plans and related services
and administering the non-health portion of workers'
compensation insurance, and (ii) underwriting the indemnity
portion of workers' compensation insurance, provided that
Affiliate's total premium revenue comprises less than 15
percent of the sponsoring Plan's net subscription revenue.
This grant of rights is non-exclusive and is limited to the
Service Area served by the Plan. The Affiliate may not use
the Licensed Marks and Name in its legal name and may use the
Licensed Marks in its Trade Name only with the prior consent
of BCBSA.
2. This Temporary Affiliate License shall
incorporate the terms, covenants, conditions, and licensed
service area of the Affiliate's Blue Shield Affiliate License
Agreement (the "Full Affiliate License"), a current copy of
which is attached as Exhibit A, provided that paragraphs one
through seven of this Temporary License shall control to the
extent they conflict with the terms, covenants, and
conditions of the Full Affiliate License. The terms
"Agreement," "License," and "License Agreement" as used in
the Full Affiliate License shall be construed to include this
Temporary Affiliate License, and the Affiliate shall be
considered a "Smaller Affiliate" as that term is used in the
Full Affiliate License.
3. The Affiliate agrees not to bring any claims,
causes of action, actions, suits, or any demands whatsoever
against BCBSA or any of its Member Plans, whether at law or
equity, whether in judicial, arbitral, or alternative fora,
and whether known or unknown, that the Affiliate now has or
may have had on behalf of itself or any other person or
entity at any time prior to and including the date of this
Temporary Affiliate License, or hereafter can, shall, or may
have or claim to have, arising out of or in any way related
to the aforementioned automatic terminations or any actions
taken or contemplated herein or related thereto, so long as
the Affiliate remains a licensee pursuant to any temporary
Blue Shield license or any then-effective Full Affiliate
License.
4. The Affiliate and the Plan covenant and
warrant that: (i) apart from the Litigation, they are in
compliance with all, and have no plans to engage in conduct
that would violate any, BCBSA rules and regulations,
including all provisions of this Temporary Affiliate License;
and (ii) there is no imminent risk of dissolution of the
Affiliate or the Plan or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the
Affiliate's or the Plan's business or property. If any of
these covenants and warranties is inaccurate or breached,
BCBSA may terminate this Temporary Affiliate License pursuant
to a vote of the BCBSA Board of Directors.
5. The provisions of paragraph 7(G) of the Full
Affiliate License related to notice to customers shall not
apply so long as the Affiliate remains a licensee pursuant to
any temporary Blue Shield license or any then-effective Full
Affiliate License.
6. This Temporary Affiliate License shall
automatically terminate upon the earlier of (i) the
expiration or termination of the stay of proceedings entered
on December 30, 1996, by the Circuit Court of Cole County,
Missouri, in the Litigation; or (ii) the termination of the
Litigation. All provisions for termination of this Temporary
Affiliate License that require a vote shall be by the vote of
the BCBSA Board of Directors prescribed in Article VI,
Section 5 of the BCBSA Bylaws in effect as of the effective
date of this Temporary Affiliate License.
7. BCBSA shall award the then-effective Full
Affiliate License to the Affiliate effective immediately upon
the expiration or termination of this Temporary Affiliate
License and the satisfaction of the following conditions as
determined by BCBSA: (i) the Litigation has been addressed
to eliminate the risk of dissolution of the Plan or the
appointment of a trustee, interim trustee, receiver, or other
custodian for any of the Plan's business or property, and in
a manner that is in the best interest of BCBSA, the Licensed
Marks, and the Plans; and (ii) the Affiliate is in compliance
with, and has no plans to engage in any conduct that would
violate, the applicable BCBSA rules and regulations,
including the provisions of the then-effective Full Affiliate
License.
IN WITNESS WHEREOF, the parties have caused this Temporary
Blue Shield Affiliate License Agreement to be executed,
effective as of the date of the last signature written below:
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By: /s/ Mark A. Orloff
Title: Vice President and Assistant Secretary
Date: February 7, 1997
HMO MISSOURI, INC. (D/B/A BLUECHOICE)
Affiliate
By: /s/ Frederic C. Brussee
Title: Chairman and Chief Executive Officer
Date: January 24, 1997
BLUE CROSS AND BLUE SHIELD OF MISSOURI
Plan
By: /s/ Roy R. Heimburger
Title: President and Chief Executive Officer
Date: January 24, 1997
Exhibit A
Previously Filed as Exhibit 10.9
Exhibit 10.10.1
TEMPORARY BLUE CROSS
AFFILIATE LICENSE AGREEMENT
This agreement is by and between Blue Cross and
Blue Shield Association ("BCBSA") and RightChoice Managed
Care, Inc. (the "Affiliate"), an affiliate of the Blue Cross
Plan known as Blue Cross and Blue Shield of Missouri (the
"Plan"), which is also a Party signatory hereto.
Preamble
WHEREAS, BCBSA is the owner of the BLUE CROSS and
the BLUE CROSS Design service marks (collectively the
"Licensed Marks");
WHEREAS, the Affiliate had the right to use the
Licensed Marks as service marks and the name BLUE CROSS in a
trade name (the "Licensed Name");
WHEREAS, BCBSA informed the Plan and the Affiliate
that the Plan's Blue Cross License Agreement and the
Affiliate's Blue Cross Affiliate License Agreement
automatically terminated as a result of claims made in
certain litigation pending among and between the Plan; Jay
Angoff, in his official capacity as Director of the Missouri
Department of Insurance; and Jeremiah "Jay" Nixon, in his
official capacity as the Attorney General of the State of
Missouri (the "Litigation");
WHEREAS, the Plan has told BCBSA that (i) the Plan
believes that the Litigation has not triggered the automatic
termination provisions of the Plan's Blue Cross License
Agreement or the Affiliate's Blue Cross Affiliate License
Agreement and the Plan contends that its Blue Cross License
Agreement and the Affiliate's Blue Cross Affiliate License
Agreement remain in full force and effect; and (ii) to
clarify the Affiliate's rights to continue to use the
Licensed Marks and Licensed Name, the Plan and the Affiliate
wish to receive, and are willing to accept benefits and
rights under, this Temporary Blue Cross Affiliate License
Agreement;
WHEREAS, BCBSA has determined that it is in the
best interest of BCBSA, the Licensed Marks, and its member
Plans to grant the Plan and the Affiliate this temporary
license;
NOW THEREFORE, in consideration of the foregoing
and the mutual agreements hereinafter set forth and for other
good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as
follows:
Agreement
1. BCBSA hereby grants the Affiliate, upon the
terms and conditions of this Temporary Blue Cross Affiliate
License Agreement ("Temporary Affiliate License"), the
temporary right to use the Licensed Marks and Name in its
licensed service area in connection with, and only in
connection with: (i) health care plans and related services
and administering the non-health portion of workers'
compensation insurance, and (ii) underwriting the indemnity
portion of workers' compensation insurance, provided that
Affiliate's total premium revenue comprises less than 15
percent of the sponsoring Plan's net subscription revenue.
This grant of rights is non-exclusive and is limited to the
Service Area served by the Plan. The Affiliate may not use
the Licensed Marks and Name in its legal name and may use the
Licensed Marks in its Trade Name only with the prior consent
of BCBSA.
2. This Temporary Affiliate License shall
incorporate the terms, covenants, conditions, and licensed
service area of the Affiliate's Blue Cross Affiliate License
Agreement (the "Full Affiliate License"), a current copy of
which is attached as Exhibit A, provided that paragraphs one
through seven of this Temporary License shall control to the
extent they conflict with the terms, covenants, and
conditions of the Full Affiliate License. The terms
"Agreement," "License," and "License Agreement" as used in
the Full Affiliate License shall be construed to include this
Temporary Affiliate License, and the Affiliate shall be
considered a "Larger Affiliate" as that term is used in the
Full Affiliate License.
3. The Affiliate agrees not to bring any claims,
causes of action, actions, suits, or any demands whatsoever
against BCBSA or any of its Member Plans, whether at law or
equity, whether in judicial, arbitral, or alternative fora,
and whether known or unknown, that the Affiliate now has or
may have had on behalf of itself or any other person or
entity at any time prior to and including the date of this
Temporary Affiliate License, or hereafter can, shall, or may
have or claim to have, arising out of or in any way related
to the aforementioned automatic terminations or any actions
taken or contemplated herein or related thereto, so long as
the Affiliate remains a licensee pursuant to any temporary
Blue Cross license or any then-effective Full Affiliate
License.
4. The Affiliate and the Plan covenant and
warrant that: (i) apart from the Litigation, they are in
compliance with all, and have no plans to engage in conduct
that would violate any, BCBSA rules and regulations,
including all provisions of this Temporary Affiliate License;
and (ii) there is no imminent risk of dissolution of the
Affiliate or the Plan or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the
Affiliate's or the Plan's business or property. If any of
these covenants and warranties is inaccurate or breached,
BCBSA may terminate this Temporary Affiliate License pursuant
to a vote of the BCBSA Board of Directors.
5. The provisions of paragraph 7(G) of the Full
Affiliate License related to notice to customers shall not
apply so long as the Affiliate remains a licensee pursuant to
any temporary Blue Cross license or any then-effective Full
Affiliate License.
6. This Temporary Affiliate License shall
automatically terminate upon the earlier of (i) the
expiration or termination of the stay of proceedings entered
on December 30, 1996, by the Circuit Court of Cole County,
Missouri, in the Litigation; or (ii) the termination of the
Litigation. All provisions for termination of this Temporary
Affiliate License that require a vote shall be by the vote of
the BCBSA Board of Directors prescribed in Article VI,
Section 5 of the BCBSA Bylaws in effect as of the effective
date of this Temporary Affiliate License.
7. BCBSA shall award the then-effective Full
Affiliate License to the Affiliate effective immediately upon
the expiration or termination of this Temporary Affiliate
License and the satisfaction of the following conditions as
determined by BCBSA: (i) the Litigation has been addressed
to eliminate the risk of dissolution of the Plan or the
appointment of a trustee, interim trustee, receiver, or other
custodian for any of the Plan's business or property, and in
a manner that is in the best interest of BCBSA, the Licensed
Marks, and the Plans; and (ii) the Affiliate is in compliance
with, and has no plans to engage in any conduct that would
violate, the applicable BCBSA rules and regulations,
including the provisions of the then-effective Full Affiliate
License.
IN WITNESS WHEREOF, the parties have caused this Temporary
Blue Cross Affiliate License Agreement to be executed,
effective as of the date of the last signature written below:
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By: /s/ Mark A. Orloff
Title: Vice President and Assistant Secretary
Date: February 7, 1997
RIGHTCHOICE MANAGED CARE, INC.
Affiliate
By: /s/ Roy R. Heimburger
Title: Chairman and Chief Executive Officer
Date: January 24, 1997
BLUE CROSS AND BLUE SHIELD OF MISSOURI
Plan
By: /s/ Roy R. Heimburger
Title: President and Chief Executive Officer
Date: January 24, 1997
Exhibit A
Previously Filed as Exhibit 10.10
Exhibit 10.11.1
TEMPORARY BLUE SHIELD
AFFILIATE LICENSE AGREEMENT
This agreement is by and between Blue Cross and
Blue Shield Association ("BCBSA") and RightChoice Managed
Care, Inc. (the "Affiliate"), an affiliate of the Blue Shield
Plan known as Blue Cross and Blue Shield of Missouri (the
"Plan"), which is also a Party signatory hereto.
Preamble
WHEREAS, BCBSA is the owner of the BLUE SHIELD and
the BLUE SHIELD Design service marks (collectively the
"Licensed Marks");
WHEREAS, the Affiliate had the right to use the
Licensed Marks as service marks and the name BLUE SHIELD in a
trade name (the "Licensed Name");
WHEREAS, BCBSA informed the Plan and the Affiliate
that the Plan's Blue Shield License Agreement and the
Affiliate's Blue Shield Affiliate License Agreement
automatically terminated as a result of claims made in
certain litigation pending among and between the Plan; Jay
Angoff, in his official capacity as Director of the Missouri
Department of Insurance; and Jeremiah "Jay" Nixon, in his
official capacity as the Attorney General of the State of
Missouri (the "Litigation");
WHEREAS, the Plan has told BCBSA that (i) the Plan
believes that the Litigation has not triggered the automatic
termination provisions of the Plan's Blue Shield License
Agreement or the Affiliate's Blue Shield Affiliate License
Agreement and the Plan contends that its Blue Shield License
Agreement and the Affiliate's Blue Shield Affiliate License
Agreement remain in full force and effect; and (ii) to
clarify the Affiliate's rights to continue to use the
Licensed Marks and Licensed Name, the Plan and the Affiliate
wish to receive, and are willing to accept benefits and
rights under, this Temporary Blue Shield Affiliate License
Agreement;
WHEREAS, BCBSA has determined that it is in the
best interest of BCBSA, the Licensed Marks, and its member
Plans to grant the Plan and the Affiliate this temporary
license;
NOW THEREFORE, in consideration of the foregoing
and the mutual agreements hereinafter set forth and for other
good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as
follows:
Agreement
1. BCBSA hereby grants the Affiliate, upon the
terms and conditions of this Temporary Blue Shield Affiliate
License Agreement ("Temporary Affiliate License"), the
temporary right to use the Licensed Marks and Name in its
licensed service area in connection with, and only in
connection with: (i) health care plans and related services
and administering the non-health portion of workers'
compensation insurance, and (ii) underwriting the indemnity
portion of workers' compensation insurance, provided that
Affiliate's total premium revenue comprises less than 15
percent of the sponsoring Plan's net subscription revenue.
This grant of rights is non-exclusive and is limited to the
Service Area served by the Plan. The Affiliate may not use
the Licensed Marks and Name in its legal name and may use the
Licensed Marks in its Trade Name only with the prior consent
of BCBSA.
2. This Temporary Affiliate License shall
incorporate the terms, covenants, conditions, and licensed
service area of the Affiliate's Blue Shield Affiliate License
Agreement (the "Full Affiliate License"), a current copy of
which is attached as Exhibit A, provided that paragraphs one
through seven of this Temporary License shall control to the
extent they conflict with the terms, covenants, and
conditions of the Full Affiliate License. The terms
"Agreement," "License," and "License Agreement" as used in
the Full Affiliate License shall be construed to include this
Temporary Affiliate License, and the Affiliate shall be
considered a "Larger Affiliate" as that term is used in the
Full Affiliate License.
3. The Affiliate agrees not to bring any claims,
causes of action, actions, suits, or any demands whatsoever
against BCBSA or any of its Member Plans, whether at law or
equity, whether in judicial, arbitral, or alternative fora,
and whether known or unknown, that the Affiliate now has or
may have had on behalf of itself or any other person or
entity at any time prior to and including the date of this
Temporary Affiliate License, or hereafter can, shall, or may
have or claim to have, arising out of or in any way related
to the aforementioned automatic terminations or any actions
taken or contemplated herein or related thereto, so long as
the Affiliate remains a licensee pursuant to any temporary
Blue Shield license or any then-effective Full Affiliate
License.
4. The Affiliate and the Plan covenant and
warrant that: (i) apart from the Litigation, they are in
compliance with all, and have no plans to engage in conduct
that would violate any, BCBSA rules and regulations,
including all provisions of this Temporary Affiliate License;
and (ii) there is no imminent risk of dissolution of the
Affiliate or the Plan or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the
Affiliate's or the Plan's business or property. If any of
these covenants and warranties is inaccurate or breached,
BCBSA may terminate this Temporary Affiliate License pursuant
to a vote of the BCBSA Board of Directors.
5. The provisions of paragraph 7(G) of the Full
Affiliate License related to notice to customers shall not
apply so long as the Affiliate remains a licensee pursuant to
any temporary Blue Shield license or any then-effective Full
Affiliate License.
6. This Temporary Affiliate License shall
automatically terminate upon the earlier of (i) the
expiration or termination of the stay of proceedings entered
on December 30, 1996, by the Circuit Court of Cole County,
Missouri, in the Litigation; or (ii) the termination of the
Litigation. All provisions for termination of this Temporary
Affiliate License that require a vote shall be by the vote of
the BCBSA Board of Directors prescribed in Article VI,
Section 5 of the BCBSA Bylaws in effect as of the effective
date of this Temporary Affiliate License.
7. BCBSA shall award the then-effective Full
Affiliate License to the Affiliate effective immediately upon
the expiration or termination of this Temporary Affiliate
License and the satisfaction of the following conditions as
determined by BCBSA: (i) the Litigation has been addressed
to eliminate the risk of dissolution of the Plan or the
appointment of a trustee, interim trustee, receiver, or other
custodian for any of the Plan's business or property, and in
a manner that is in the best interest of BCBSA, the Licensed
Marks, and the Plans; and (ii) the Affiliate is in compliance
with, and has no plans to engage in any conduct that would
violate, the applicable BCBSA rules and regulations,
including the provisions of the then-effective Full Affiliate
License.
IN WITNESS WHEREOF, the parties have caused this Temporary
Blue Shield Affiliate License Agreement to be executed,
effective as of the date of the last signature written below:
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By: /s/ Mark A. Orloff
Title: Vice President and Assistant Secretary
Date: February 7, 1997
RIGHTCHOICE MANAGED CARE, INC.
Affiliate
By: /s/ Roy R. Heimburger
Title: Chairman and Chief Executive Officer
Date: January 24, 1997
BLUE CROSS AND BLUE SHIELD OF MISSOURI
Plan
By: /s/ Roy R. Heimburger
Title: President and Chief Executive Officer
Date: January 24, 1997
Exhibit A
Previously Filed as Exhibit 10.11
Exhibit 10.12.1
TEMPORARY BLUE CROSS
AFFILIATE LICENSE AGREEMENT
This agreement is by and between Blue Cross and
Blue Shield Association ("BCBSA") and Healthy Alliance Life
Insurance Companies (the "Affiliate"), an affiliate of the
Blue Cross Plan known as Blue Cross and Blue Shield of
Missouri (the "Plan"), which is also a Party signatory
hereto.
Preamble
WHEREAS, BCBSA is the owner of the BLUE CROSS and
the BLUE CROSS Design service marks (collectively the
"Licensed Marks");
WHEREAS, the Affiliate had the right to use the
Licensed Marks as service marks and the name BLUE CROSS in a
trade name (the "Licensed Name");
WHEREAS, BCBSA informed the Plan and the Affiliate
that the Plan's Blue Cross License Agreement and the
Affiliate's Blue Cross Affiliate License Agreement
automatically terminated as a result of claims made in
certain litigation pending among and between the Plan; Jay
Angoff, in his official capacity as Director of the Missouri
Department of Insurance; and Jeremiah "Jay" Nixon, in his
official capacity as the Attorney General of the State of
Missouri (the "Litigation");
WHEREAS, the Plan has told BCBSA that (i) the Plan
believes that the Litigation has not triggered the automatic
termination provisions of the Plan's Blue Cross License
Agreement or the Affiliate's Blue Cross Affiliate License
Agreement and the Plan contends that its Blue Cross License
Agreement and the Affiliate's Blue Cross Affiliate License
Agreement remain in full force and effect; and (ii) to
clarify the Affiliate's rights to continue to use the
Licensed Marks and Licensed Name, the Plan and the Affiliate
wish to receive, and are willing to accept benefits and
rights under, this Temporary Blue Cross Affiliate License
Agreement;
WHEREAS, BCBSA has determined that it is in the
best interest of BCBSA, the Licensed Marks, and its member
Plans to grant the Plan and the Affiliate this temporary
license;
NOW THEREFORE, in consideration of the foregoing
and the mutual agreements hereinafter set forth and for other
good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as
follows:
Agreement
1. BCBSA hereby grants the Affiliate, upon the
terms and conditions of this Temporary Blue Cross Affiliate
License Agreement ("Temporary Affiliate License"), the
temporary right to use the Licensed Marks and Name in its
licensed service area in connection with, and only in
connection with: (i) health care plans and related services
and administering the non-health portion of workers'
compensation insurance, and (ii) underwriting the indemnity
portion of workers' compensation insurance, provided that
Affiliate's total premium revenue comprises less than 15
percent of the sponsoring Plan's net subscription revenue.
This grant of rights is non-exclusive and is limited to the
Service Area served by the Plan. The Affiliate may not use
the Licensed Marks and Name in its legal name and may use the
Licensed Marks in its Trade Name only with the prior consent
of BCBSA.
2. This Temporary Affiliate License shall
incorporate the terms, covenants, conditions, and licensed
service area of the Affiliate's Blue Cross Affiliate License
Agreement (the "Full Affiliate License"), a current copy of
which is attached as Exhibit A, provided that paragraphs one
through seven of this Temporary License shall control to the
extent they conflict with the terms, covenants, and
conditions of the Full Affiliate License. The terms
"Agreement," "License," and "License Agreement" as used in
the Full Affiliate License shall be construed to include this
Temporary Affiliate License, and the Affiliate shall be
considered a "Larger Affiliate" as that term is used in the
Full Affiliate License.
3. The Affiliate agrees not to bring any claims,
causes of action, actions, suits, or any demands whatsoever
against BCBSA or any of its Member Plans, whether at law or
equity, whether in judicial, arbitral, or alternative fora,
and whether known or unknown, that the Affiliate now has or
may have had on behalf of itself or any other person or
entity at any time prior to and including the date of this
Temporary Affiliate License, or hereafter can, shall, or may
have or claim to have, arising out of or in any way related
to the aforementioned automatic terminations or any actions
taken or contemplated herein or related thereto, so long as
the Affiliate remains a licensee pursuant to any temporary
Blue Cross license or any then-effective Full Affiliate
License.
4. The Affiliate and the Plan covenant and
warrant that: (i) apart from the Litigation, they are in
compliance with all, and have no plans to engage in conduct
that would violate any, BCBSA rules and regulations,
including all provisions of this Temporary Affiliate License;
and (ii) there is no imminent risk of dissolution of the
Affiliate or the Plan or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the
Affiliate's or the Plan's business or property. If any of
these covenants and warranties is inaccurate or breached,
BCBSA may terminate this Temporary Affiliate License pursuant
to a vote of the BCBSA Board of Directors.
5. The provisions of paragraph 7(G) of the Full
Affiliate License related to notice to customers shall not
apply so long as the Affiliate remains a licensee pursuant to
any temporary Blue Cross license or any then-effective Full
Affiliate License.
6. This Temporary Affiliate License shall
automatically terminate upon the earlier of (i) the
expiration or termination of the stay of proceedings entered
on December 30, 1996, by the Circuit Court of Cole County,
Missouri, in the Litigation; or (ii) the termination of the
Litigation. All provisions for termination of this Temporary
Affiliate License that require a vote shall be by the vote of
the BCBSA Board of Directors prescribed in Article VI,
Section 5 of the BCBSA Bylaws in effect as of the effective
date of this Temporary Affiliate License.
7. BCBSA shall award the then-effective Full
Affiliate License to the Affiliate effective immediately upon
the expiration or termination of this Temporary Affiliate
License and the satisfaction of the following conditions as
determined by BCBSA: (i) the Litigation has been addressed
to eliminate the risk of dissolution of the Plan or the
appointment of a trustee, interim trustee, receiver, or other
custodian for any of the Plan's business or property, and in
a manner that is in the best interest of BCBSA, the Licensed
Marks, and the Plans; and (ii) the Affiliate is in compliance
with, and has no plans to engage in any conduct that would
violate, the applicable BCBSA rules and regulations,
including the provisions of the then-effective Full Affiliate
License.
IN WITNESS WHEREOF, the parties have caused this Temporary
Blue Cross Affiliate License Agreement to be executed,
effective as of the date of the last signature written below:
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By: /s/ Mark A. Orloff
Title: Vice President and Assistant Secretary
Date: February 7, 1997
HEALTHY ALLIANCE LIFE INSURANCE COMPANIES
Affiliate
By: /s/ Frederic C. Brussee
Title: President
Date: January 24, 1997
BLUE CROSS AND BLUE SHIELD OF MISSOURI
Plan
By: /s/ Roy R. Heimburger
Title: President and Chief Executive Officer
Date: January 24, 1997
Exhibit A
Previously filed as Exhibit 10.12
Exhibit 10.13.1
TEMPORARY BLUE SHIELD
AFFILIATE LICENSE AGREEMENT
This agreement is by and between Blue Cross and
Blue Shield Association ("BCBSA") and Healthy Alliance Life
Insurance Companies (the "Affiliate"), an affiliate of the
Blue Shield Plan known as Blue Cross and Blue Shield of
Missouri (the "Plan"), which is also a Party signatory
hereto.
Preamble
WHEREAS, BCBSA is the owner of the BLUE SHIELD and
the BLUE SHIELD Design service marks (collectively the
"Licensed Marks");
WHEREAS, the Affiliate had the right to use the
Licensed Marks as service marks and the name BLUE SHIELD in a
trade name (the "Licensed Name");
WHEREAS, BCBSA informed the Plan and the Affiliate
that the Plan's Blue Shield License Agreement and the
Affiliate's Blue Shield Affiliate License Agreement
automatically terminated as a result of claims made in
certain litigation pending among and between the Plan; Jay
Angoff, in his official capacity as Director of the Missouri
Department of Insurance; and Jeremiah "Jay" Nixon, in his
official capacity as the Attorney General of the State of
Missouri (the "Litigation");
WHEREAS, the Plan has told BCBSA that (i) the Plan
believes that the Litigation has not triggered the automatic
termination provisions of the Plan's Blue Shield License
Agreement or the Affiliate's Blue Shield Affiliate License
Agreement and the Plan contends that its Blue Shield License
Agreement and the Affiliate's Blue Shield Affiliate License
Agreement remain in full force and effect; and (ii) to
clarify the Affiliate's rights to continue to use the
Licensed Marks and Licensed Name, the Plan and the Affiliate
wish to receive, and are willing to accept benefits and
rights under, this Temporary Blue Shield Affiliate License
Agreement;
WHEREAS, BCBSA has determined that it is in the
best interest of BCBSA, the Licensed Marks, and its member
Plans to grant the Plan and the Affiliate this temporary
license;
NOW THEREFORE, in consideration of the foregoing
and the mutual agreements hereinafter set forth and for other
good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as
follows:
Agreement
1. BCBSA hereby grants the Affiliate, upon the
terms and conditions of this Temporary Blue Shield Affiliate
License Agreement ("Temporary Affiliate License"), the
temporary right to use the Licensed Marks and Name in its
licensed service area in connection with, and only in
connection with: (i) health care plans and related services
and administering the non-health portion of workers'
compensation insurance, and (ii) underwriting the indemnity
portion of workers' compensation insurance, provided that
Affiliate's total premium revenue comprises less than 15
percent of the sponsoring Plan's net subscription revenue.
This grant of rights is non-exclusive and is limited to the
Service Area served by the Plan. The Affiliate may not use
the Licensed Marks and Name in its legal name and may use the
Licensed Marks in its Trade Name only with the prior consent
of BCBSA.
2. This Temporary Affiliate License shall
incorporate the terms, covenants, conditions, and licensed
service area of the Affiliate's Blue Shield Affiliate License
Agreement (the "Full Affiliate License"), a current copy of
which is attached as Exhibit A, provided that paragraphs one
through seven of this Temporary License shall control to the
extent they conflict with the terms, covenants, and
conditions of the Full Affiliate License. The terms
"Agreement," "License," and "License Agreement" as used in
the Full Affiliate License shall be construed to include this
Temporary Affiliate License, and the Affiliate shall be
considered a "Larger Affiliate" as that term is used in the
Full Affiliate License.
3. The Affiliate agrees not to bring any claims,
causes of action, actions, suits, or any demands whatsoever
against BCBSA or any of its Member Plans, whether at law or
equity, whether in judicial, arbitral, or alternative fora,
and whether known or unknown, that the Affiliate now has or
may have had on behalf of itself or any other person or
entity at any time prior to and including the date of this
Temporary Affiliate License, or hereafter can, shall, or may
have or claim to have, arising out of or in any way related
to the aforementioned automatic terminations or any actions
taken or contemplated herein or related thereto, so long as
the Affiliate remains a licensee pursuant to any temporary
Blue Shield license or any then-effective Full Affiliate
License.
4. The Affiliate and the Plan covenant and
warrant that: (i) apart from the Litigation, they are in
compliance with all, and have no plans to engage in conduct
that would violate any, BCBSA rules and regulations,
including all provisions of this Temporary Affiliate License;
and (ii) there is no imminent risk of dissolution of the
Affiliate or the Plan or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the
Affiliate's or the Plan's business or property. If any of
these covenants and warranties is inaccurate or breached,
BCBSA may terminate this Temporary Affiliate License pursuant
to a vote of the BCBSA Board of Directors.
5. The provisions of paragraph 7(G) of the Full
Affiliate License related to notice to customers shall not
apply so long as the Affiliate remains a licensee pursuant to
any temporary Blue Shield license or any then-effective Full
Affiliate License.
6. This Temporary Affiliate License shall
automatically terminate upon the earlier of (i) the
expiration or termination of the stay of proceedings entered
on December 30, 1996, by the Circuit Court of Cole County,
Missouri, in the Litigation; or (ii) the termination of the
Litigation. All provisions for termination of this Temporary
Affiliate License that require a vote shall be by the vote of
the BCBSA Board of Directors prescribed in Article VI,
Section 5 of the BCBSA Bylaws in effect as of the effective
date of this Temporary Affiliate License.
7. BCBSA shall award the then-effective Full
Affiliate License to the Affiliate effective immediately upon
the expiration or termination of this Temporary Affiliate
License and the satisfaction of the following conditions as
determined by BCBSA: (i) the Litigation has been addressed
to eliminate the risk of dissolution of the Plan or the
appointment of a trustee, interim trustee, receiver, or other
custodian for any of the Plan's business or property, and in
a manner that is in the best interest of BCBSA, the Licensed
Marks, and the Plans; and (ii) the Affiliate is in compliance
with, and has no plans to engage in any conduct that would
violate, the applicable BCBSA rules and regulations,
including the provisions of the then-effective Full Affiliate
License.
IN WITNESS WHEREOF, the parties have caused this Temporary
Blue Shield Affiliate License Agreement to be executed,
effective as of the date of the last signature written below:
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By: /s/ Mark A. Orloff
Title: Vice President and Assistant Secretary
Date: February 7, 1997
HEALTHY ALLIANCE LIFE INSURANCE COMPANIES
Affiliate
By: /s/ Frederic C. Brussee
Title: President
Date: January 24, 1997
BLUE CROSS AND BLUE SHIELD OF MISSOURI
Plan
By: /s/ Roy R. Heimburger
Title: President and Chief Executive Officer
Date: January 24, 1997
Exhibit A
Previously Filed as Exhibit 10.13
Exhibit 10.36.4
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT
(this "Amendment"), dated as of November 13, 1996, is
entered into by and among RIGHTCHOICE MANAGED CARE,
INC. (the "Company"), the several financial institutions
party to the Credit Agreement (as defined below) (the
foregoing financial institutions collectively, the
"Banks"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as administrative agent for itself and the
Banks (the "Administrative Agent") and THE BOATMEN'S
NATIONAL BANK OF ST. LOUIS, as co-agent for the Banks (the
"Co-Agent").
RECITALS
A. The Company, Banks, the Co-Agent and the
Administrative Agent are parties to a Credit Agreement
dated as of August 10, 1995 (as amended, the "Credit
Agreement") pursuant to which the Administrative Agent,
the Co-Agent and the Banks have extended certain credit
facilities to the Company.
B. The Company has requested that the Credit
Agreement be amended to (i) revise the definition of
Applicable Margin, (ii) revise the commitment fees
rate, (iii) provide for a limited waiver of the Debt
to EBITDA ratio, (iv) provide for a limited waiver of the
Fixed Charge Coverage Ratio, and (v) suspend the
Company's rights to make any further borrowings under the
Credit Agreement.
C. The Banks are willing to amend the Credit
Agreement, subject to the terms and conditions of this
Amendment.
NOW, THEREFORE, for valuable consideration, the
receipt and adequacy of which are hereby acknowledged,
the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined
herein, capitalized terms used herein shall have the
meanings, if any, assigned to them in the Credit
Agreement.
2. Amendments to Credit Agreement.
(a) Section 1.1 is amended so that the
definition of "Applicable Margin" shall read in its
entirety as follows: "Applicable Margin" means 1.125%
(or 112.5 basis points) per annum.
(b) Notwithstanding any
provision to the contrary in Section
2.10(b) of the Credit Agreement,
commencing on November 13, 1996 the
Commitment Fee under Section 2.10(b)
shall be payable at a rate equal to
0.30% (30 basis points) per annum.
(c) The Majority Banks hereby
waive compliance by the Company with
the financial covenant in Section
7.1(c) of the Credit Agreement, it
being understood that (i) such
waiver is limited to the period
commencing September 30, 1996 and
ending on the close of business on
February 15, 1997, and (ii) upon
termination of such period, the
Company shall be obligated to comply
with Section 7.1(c).
(d) The Majority Banks
hereby waive compliance as of
September 30, 1996 by the Company with
the financial covenant in Section
7.1(d) of the Credit Agreement, it
being understood that such waiver is
limited to the fiscal quarter ending
September 30, 1996.
(e) Notwithstanding
Section 2.1 and Section 2.3 of the Credit
Agreement, from the date hereof
through February 15, 1997, the Banks
shall not be obligated to make any
loan under the Credit Agreement, nor
shall the Company be entitled to
borrow under the Credit Agreement, if
after giving effect thereto the
aggregate principal amount of loans
outstanding under the Credit Agreement
would exceed the aggregate principal
amount of loans outstanding as of
November 13, 1996. The foregoing shall
not prohibit the Company from
conversions or continuations pursuant
to Section 2.4 of the Credit
Agreement.
3. Representations and
Warranties.
The Company hereby represents and
warrants to the Administrative Agent
and the Banks as follows:
(a) Subject to the
effectiveness of the amendments
contemplated hereby, no Default or
Event of Default has occurred and is
continuing.
(b) The execution,
delivery and performance by the
Company of this Amendment have been
duly authorized by all necessary
corporate and other action and do not
and will not require any registration
with, consent or approval of, notice
to or action by, any Person
(including any Governmental Authority)
in order to be effective and
enforceable. The Credit Agreement as
amended by this Amendment constitutes
the legal, valid and binding
obligation of the Company,
enforceable against it in accordance
with its respective terms, without
defense, counterclaim or offset.
(c) Subject to the
effectiveness of the amendments
contemplated hereby, all
representations and warranties of the
Company contained in the Credit
Agreement are true and correct.
(d) The Company is
entering into this Amendment on the
basis of its own investigation and
for its own reasons, without reliance
upon the Administrative Agent and the
Banks or any other Person.
4. Effective Date. This
Amendment will become effective on
the date the Administrative Agent has
received (a) from the Company and the
Majority Banks a duly executed
original (or, if elected by the
Administrative Agent, an executed
facsimile copy) of this Amendment, and
(b) from the Company, an opinion of
the Company's counsel to the effect
that this Amendment has been duly
authorized, executed and delivered by
the Company and is the legal, valid
and binding obligation of the Company.
5. Reservation of Rights. The
Company acknowledges and agrees that the
execution and delivery by the
Administrative Agent and the Banks of
this Amendment, shall not be deemed
to create a course of dealing or
otherwise obligate the
Administrative Agent or the Banks to
forbear or execute similar amendments
under the same or similar
circumstances in the future.
6. Miscellaneous.
(a) Except as herein
expressly amended, all terms,
covenants and provisions of the Credit
Agreement are and shall remain in
full force and effect and all
references therein to such Credit
Agreement shall henceforth refer to
the Credit Agreement as amended by
this Amendment. This Amendment shall
be deemed incorporated into, and a
part of, the Credit Agreement.
(b) This Amendment
shall be binding upon and inure to the
benefit of the parties hereto and
thereto and their respective
successors and assigns. No third
party beneficiaries are intended in
connection with this Amendment.
(c) THIS AMENDMENT
SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE
OF ILLINOIS; PROVIDED THAT THE
ADMINISTRATIVE AGENT AND THE BANKS
SHALL RETAIN ALL RIGHTS ARISING UNDER
FEDERAL
LAW.
(d) This Amendment may
be executed in any number of
counterparts, each of which shall be
deemed an original, but all such
counterparts together shall constitute
but one and the same instrument. Each
of the parties hereto understands and
agrees that this document (and any
other document required herein) may be
delivered by any party thereto either
in the form of an executed original
or an executed original sent by
facsimile transmission to be followed
promptly by mailing of a hard copy
original, and that receipt by the
Administrative Agent of a facsimile
transmitted document purportedly
bearing the signature of a Bank or the Company
shall bind such Bank or the Company,
respectively, with the same force and
effect as the delivery of a hard copy
original. Any failure by the
Administrative Agent to receive the
hard copy executed original of such
document shall not diminish the
binding effect of receipt of the
facsimile transmitted executed
original of such document of the party
whose hard copy page was not received
by the Administrative Agent.
(e) This Amendment,
together with the Credit Agreement,
contains the entire and exclusive
agreement of the parties hereto with
reference to the matters discussed
herein and therein. This Amendment
supersedes all prior drafts and
communications with respect thereto.
This Amendment may not be amended
except in accordance with the
provisions of Section 10.1 of the
Credit Agreement.
(f) If any term or
provision of this Amendment shall be
deemed prohibited by or invalid under
any applicable law, such provision
shall be invalidated without affecting
the remaining provisions of this
Amendment or the Credit Agreement,
respectively.
(g) The Company covenants to pay to or
reimburse the Administrative Agent and
the Banks, upon demand, for all
costs and expenses (including
allocated costs of in-house counsel)
incurred in connection with the
development, preparation, negotiation,
execution and delivery of this
Amendment, including without
limitation appraisal, audit, search
and filing fees incurred in
connection therewith.
IN WITNESS WHEREOF, the
parties hereto have executed and
delivered this Amendment as of the
date first above written.
RIGHTCHOICE MANAGED CARE, INC.
By: /s/ Sandra Van Trease
Title: Senior Vice President and
Chief Finance Officer
By: /s/ Janice C. Forsyth
Title: Senior Vice President and
General Counsel
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as
Administrative Agent
By: /s/ Wyatt R. Ritchie
Title: Managing Director
BANK OF AMERICA NATIONAL TRUST. AND
SAVINGS ASSOCIATION, as a Bank
By: /s/ Wyatt R. Ritchie
Title: Managing Director
THE BOATMEN'S NATIONAL BANK OF ST.
LOUIS, as Co-Agent and as a Bank
By: /s/ Stephen Sainz
Title: Corporate Banking Officer
THE BANK OF NOVA SCOTIA
By:
Title:
MERCANTILE BANK OF ST. LOUIS, N.A.
By: /s/ Ann L. Vazquez
Title: Vice President
BANK OF MONTREAL
By:
Title:
Exhibit 10.36.5
FIFTH AMENDMENT TO CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this
"Fifth Amendment"), dated as of February 11, 1997, is
entered into by and among RIGHTCHOICE MANAGED CARE, INC.
(the "Company"), the several financial institutions party
hereto (the "Banks"), BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as administrative agent for itself
and the Banks (the "Administrative Agent") and THE BOATMEN'S
NATIONAL BANK OF ST. LOUIS, as co-agent for the Banks (the
"Co-Agent"), and amends the Credit Agreement dated as of
August 10, 1995 among the Company, the Banks, the
Administrative Agent and the Co-Agent, as amended by a First
Amendment to Credit Agreement dated as of November 14, 1995,
a Consent and Second Amendment to Credit Agreement dated as
of December 29, 1995, a Third Amendment to Credit Agreement
dated as of August 9, 1996 and a Fourth Amendment to Credit
Agreement dated as of November 13, 1996 (as so amended, the
"Agreement").
RECITAL
The Company has requested that the Agreement be
amended on the terms and conditions set forth herein, and
the Banks, the Administrative Agent and the Co-Agent are
willing to do so.
NOW, THEREFORE, for valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Terms. All terms used herein shall have the
same meaning as in the Agreement unless otherwise defined
herein. All references to the Agreement shall mean the
Agreement as hereby amended.
2. Amendatory Provisions to Agreement. The
parties hereto agree that the Agreement is hereby amended as
follows:
2.1 The definition of "Applicable Margin" in
Section 1.1 of the Agreement is amended and restated in its
entirety as follows:
"'Applicable Margin' means, for any period,
the interest rate set forth below under Applicable
Margin opposite the Debt to EBITDA Ratio as set
forth in the most recent Compliance Certificate
furnished to the Administrative Agent pursuant to
subsection 6.2(b):
Debt to EBITDA Ratio Applicable Margin
(in basis points.
per annum)
<1.00:1 50.00
>=1.00:1 but <1.50:1 75.00
>=1.50:1 but <2.00:1 92.50
>=2.00:1 but <2.50:1 125.00
>=2.50:1 150.00
"provided that if the Company fails to deliver a
Compliance Certificate in accordance with subsection
6.2(b), the Applicable Margin shall be 150 basis points
per annum until such Compliance Certificate is received
by the Administrative Agent. (Used in Section 2.9)
Any change in the "Applicable Margin" shall be
effective upon receipt by the Administrative Agent from
the Company of such Compliance Certificate
demonstrating such fact; provided that, with respect to
the Loans other than Base Rate Loans, the new
Applicable Margin with respect to each such Loan shall
be effective upon the earlier of (i) the termination of
the then existing Interest Period with respect thereto
and (ii) the next Interest Payment Date for such Loan;
and with respect to Base Rate Loans, such change in the
Applicable Margin shall be effective immediately."
2.2 Section 2.10(b) of the Agreement is amended
by deleting "or" at the end of subsection (ii) and amending
and restating subsection (iii) and inserting the following
new subsections as follows:
"(iii) greater than or equal to 1.5:1.0 but
less than 2.0:1.0, 0.30% per annum,
"(iv) greater than or equal to 2.0:1.0 but
less than 2.5:1.0, 0.35% per annum, or
"(v) greater than or equal to 2.5:1.0, 0.45%
per annum."
2.3 Section 2.10(b) of the Agreement is further
amended by deleting "0.30% per annum" at the end of clause
(C) and inserting "0.45% per annum" in lieu thereof.
2.4 Section 6.1 of the Agreement is amended by
deleting "and" at the end of subsection (b), deleting the
period at the end of subsection (c) and inserting "; and" in
lieu thereof and inserting a new subsection (d) as follows:
"(d) as soon as possible, but not later than
30 days after the end of each calendar month, a
copy of the unaudited consolidated balance sheet
of the Company and its Subsidiaries as of the end
of such month and the related consolidated
statement of income for the period commencing on
the first day and ending on the last day of such
month, and certified by a Responsible Officer as
fairly presenting in accordance with GAAP (subject
to ordinary, good faith year-end audit
adjustments), the consolidated balance sheet and
consolidated income of the Company and the
Subsidiaries."
2.5 Section 7.1(c) of the Agreement is amended
and restated in its entirety as follows:
"(c) At any time during the following
periods, its Debt to EBITDA Ratio to exceed the
ratio set forth below opposite such period:
Maximum
Period Permitted Ratio
2/16/97 - 6/29/97 4.95 to 1.00
6/30/97 - 9/29/97 6.25 to 1.00
9/30/97 - 12/30/97 3.10 to 1.00
12/31/97 - 3/30/98 2.15 to 1.00
3/31/98 and thereafter 2.00 to 1.00
2.6 Section 7.1(d) of the Agreement is amended
and restated in its entirety as follows:
"(d) As of the end of any fiscal quarter of
the Company, its Fixed Charge Coverage Ratio to be
less than the ratio set forth below opposite such
quarter:
Fiscal Minimum
Quarter Ended Permitted Ratio
12/31/96 1.30 to 1.00
3/31/97 1.10 to 1.00
6/30/97 0.90 to 1.00
9/30/97 1.45 to 1.00
12/31/97 1.90 to 1.00
3/31/98 and thereafter 2.50 to 1.00
2.7 Section 7.12 of the Agreement is amended by
deleting "and" at the end of subsection (c) and inserting a
period in lieu thereof and deleting subsection (d) in its
entirety.
3. Representations and Warranties. The Company
represents and warrants to the Banks, the Administrative
Agent and the Co-Agent:
3.1 Authorization. The execution, delivery and
performance of this Fifth Amendment by the Company has been
duly authorized by all necessary corporate action by the
Company and has been duly executed and delivered by the
Company.
3.2 Binding Obligation. This Fifth Amendment and
the Agreement are legal, valid and binding agreements of the
Company, enforceable in accordance with their respective
terms, except to the extent enforceability thereof may be
limited by applicable law relating to bankruptcy,
insolvency, reorganization, moratorium or other similar laws
relating to or limiting creditors' rights generally or by
the application of general principles of equity.
3.3 No Legal Obstacle to Agreements. Neither the
execution of this Fifth Amendment, the making by the Company
of any borrowings under the Agreement, nor the performance
of the Agreement by the Company has constituted or resulted
in or will constitute or result in a breach of the
provisions of any material agreement, or the violation of
any Requirement of Law, or result in the creation under any
material agreement of any security interest, lien, charge,
or encumbrance upon any of the assets of the Company, except
as contemplated by the Agreement. No approval or
authorization of any Governmental Person is required to be
obtained by the Company to permit the execution, delivery or
performance by the Company of this Fifth Amendment, the
Agreement as amended hereby, or the transactions
contemplated hereby or thereby, or the making of any
borrowing by the Company under the Agreement, except as set
forth on Schedule 5.3 to the Agreement.
3.4 Incorporation of Certain Representations.
The representations and warranties set forth in Article V of
the Agreement are true and correct in all material respects
on and as of the date hereof as though made on and as of the
date hereof except to the extent such representations and
warranties expressly relate to an earlier date, in which
case such representations and warranties were true and
correct in all material respects on and as of such earlier
date.
3.5 Default. No Default or Event of Default
under the Agreement has occurred and is continuing.
4. Conditions, Effectiveness. The effectiveness
of this Fifth Amendment shall be subject to the compliance
by the Company with its agreements herein contained, and to
the delivery of the following to Administrative Agent in
form and substance satisfactory to Administrative Agent:
4.1 Authorized Signatories. A certificate,
signed by the Secretary or an Assistant Secretary of the
Company and dated the date of this Fifth Amendment, as to
the incumbency of the person or persons authorized to
execute and deliver this Fifth Amendment and any instrument
or agreement required hereunder on behalf of the Company.
4.2 Amendment Fee. Payment to the Administrative
Agent, for the benefit of each Bank approving this Fifth
Amendment, of an amendment fee equal to 10 basis points of
each such Bank's Commitment.
4.3 Other Evidence. Such other evidence with
respect to the Company or any other person as the
Administrative Agent or any Bank may reasonably request to
establish the consummation of the transactions contemplated
hereby, the taking of all corporate action in connection
with this Fifth Amendment and the Agreement and the
compliance with the conditions set forth herein.
5. Miscellaneous.
5.1 Section 2(b) of Fourth Amendment. Section
2(b) of the Fourth Amendment to Credit Agreement is of no
further force or effect.
5.2 Effectiveness of the Agreements. Except as
hereby amended, the Agreement shall remain in full force and
effect.
5.3 Waivers. This Fifth Amendment is specific in
time and in intent and does not constitute, nor should it be
construed as, a waiver of any other right, power or
privilege under the Agreement, or under any agreement,
contract, indenture, document or instrument mentioned in the
Agreement; nor does it preclude any exercise thereof or the
exercise of any other right, power or privilege, nor shall
any future waiver of any right, power, privilege or default
hereunder, or under any agreement, contract, indenture,
document or instrument mentioned in the Agreement,
constitute a waiver of any other default of the same or of
any other term or provision.
5.4 Counterparts. This Fifth Amendment may be
executed in any number of counterparts and all of such
counterparts taken together shall be deemed to constitute
one and the same instrument. This Fifth Amendment shall not
become effective until the Company, the Banks, the
Administrative Agent and the Co-Agent shall have signed a
copy hereof, and HealthLink shall have consented hereto,
whether the same or counterparts, and the same shall have
been delivered to the Administrative Agent.
5.5 GOVERNING LAW. THIS FIFTH AMENDMENT, AND ANY
INSTRUMENT OR AGREEMENT REQUIRED HEREUNDER, SHALL BE
GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF
ILLINOIS; PROVIDED THAT THE ADMINISTRATIVE AGENT AND THE
BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
IN WITNESS WHEREOF, the parties hereto have caused
this Fifth Amendment to be duly executed and delivered by
their proper and duly authorized officers as of the day and
year first above written.
RIGHTCHOICE MANAGED CARE, INC.
By: /s/ Sandra Van Trease
Title: Senior Vice President and
Chief Financial Officer
By: /s/ Janice C. Forsyth
Title: Senior Vice President and
General Counsel
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as
Administrative Agent
By: /s/ Janice Hammond
Title: Vice President, Agency Specialist
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as a
Bank
By: /s/ Ruth Z. Edwards
Title: Vice President
THE BOATMEN'S NATIONAL BANK OF
ST. LOUIS, as Co-Agent and as
a Bank
By: /s/ Stephen Sainz
Title: Corporate Banking Officer
THE BANK OF NOVA SCOTIA
By:
Title:
MERCANTILE BANK OF ST. LOUIS,
N.A.
By: /s/ Ann L. Vazquez
Title: Vice President
BANK OF MONTREAL
By:
Title:
Exhibit 13.2
Selected Consolidated Financial Data
Year ended December 31,
1996 1995 1994 1993 1992
(in thousands, except per share data)
Revenues $653,375 $591,880 $583,580 $575,615 $541,163
Operating expenses 666,954 572,847 556,943 550,501 518,187
Operating (loss)
income (13,579) 19,033 26,637 25,114 22,976
Investment income, net 17,532 18,344 15,764 23,288 15,940
Other, net (5,320) (3,327) (640) (859) (200)
Net (loss) income (2,027) 23,570 26,584 19,998(c) 25,320
(Loss) earnings
per share $ (0.11) $ 1.26
Pro forma data: (a)
Pro forma operating income $ 23,712 $ 20,747 $ 18,862
Pro forma net income 24,683 17,159(c) 22,605
Pro forma earnings per share (b) $ 1.49 $ .94(c)
Consolidated balance sheet data
December 31,
1996 1995 1994 1993 1992
(in thousands, except per share data)
Total assets $532,144 $516,388 $433,605 $354,491 $307,311
Long-term obligations 86,776 89,060 31,013 25,136 12,805
Shareholders' equity 172,954 173,221 135,425 82,247 62,249
Available cash and
investments (d) 48,472 56,753 72,854
Book value per share $ 9.26 $ 9.27 $ 7.25
Tangible book
value per share 4.76 4.93 7.10
(a) Prior to its initial public offering in August 1994, the company was
not subject to premium taxes levied by the State of Missouri. Pro forma
data reflect the premium taxes that would have been recorded, net of
income tax, had the company been subject to such premium taxes.
(b) Pro forma earnings per share were calculated as explained in Note 2 of
the Notes to Consolidated Financial Statements.
(c) Reflects impact of cumulative effect of accounting changes for
postretirement benefits other than pensions and postemployment benefits
aggregating $10,437, net of income tax, or $.57 per share.
(d) Amounts represent cash and investments available for general corporate
use without regulatory approval.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with
the accompanying Consolidated Financial Statements and
Notes thereto.
Results of operations
Premium revenue
The following table sets forth premium revenue (in thousands) by product
group for the years ended December 31, 1996, 1995, and 1994:
For the year ended December 31,
Product Group 1996 1995 1994
PPO:
Alliance PPO $234,720 $272,769 $314,050
AllianceChoice POS 75,700 22,560
HMO (includes other POS) 139,457 95,927 86,312
Medicare supplement 98,038 104,396 106,852
Managed indemnity 16,425 23,045 27,233
Other specialty services 30,709 19,725 11,759
Total premium revenue 595,049 538,422 546,206
ASO/Self-funded and
other income 58,326 53,458 37,374
Total revenues $653,375 $591,880 $583,580
Operating ratios
The following table sets forth selected operating ratios. The medical loss
ratio reflects health care services expense as a percentage of premium
revenue. All other ratios are shown as a percentage of premium revenue and
fees and other income combined:
For the year ended December 31,
1996 1995 1994
Operating revenues:
Premium revenue 91.1% 91.0% 93.6%
Fees and other income 8.9% 9.0% 6.4%
100.0% 100.0% 100.0%
Operating ratios:
Medical loss ratio 82.6% 76.1% 74.8%
Commission expense 4.1% 3.3% 3.5%
General and administrative
expense 22.0% 23.7% 22.2%*
*includes pro forma premium taxes
Membership
The following table sets forth the number of members by product category:
December 31, % Increase/
Product Group 1996 1995 (Decrease)
Underwritten:
PPO:
Alliance PPO 193,349 226,007 (14.4)%
AllianceChoice POS 102,707 48,664 111.1
HMO:
Commercial (includes other POS) 103,786 70,846 46.5
BlueCHOICE Senior 5,452 3,954 37.9
BlueCHOICE Medicaid (MC+) 5,063
Medicare supplement 68,528 75,088 (8.7)
Managed indemnity 10,979 13,431 (18.3)
489,864 437,990 11.8
Self-funded:
PPO 110,001 126,008 (12.7)
HMO 16,551 14,396 15.0
ASO (includes HealthLink):
Workers' Compensation 310,891 161,580 92.4
Other ASO* 925,941 843,383 9.8
Total membership 1,853,248 1,583,357 17.0
*1996 does not include 643,311 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 1996 to the results for 1995 Revenues
Underwritten
Premium revenue increased $56.6 million to $595.0 million in 1996
from $538.4 million in 1995. As described below, components of premium
revenue were affected by product mix shifts, new product introductions,
and other factors as the company continued the positioning of its managed
care product portfolio; and, as a result, such changes may not be
indicative of future periods.
PPO premium revenues increased $15.1 million - $21.8 million due to a
9.8% increase in member months and a $6.7 million decrease in revenue
resulting from a 4.2% net decrease in premium rates. Rates decreased
slightly due to two main factors. First, in November 1994, the company
introduced a new managed care drug product, AllianceRx, which 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 in 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. As evidence of this shift, Alliance PPO membership
decreased by 32,700 members in 1996 while AllianceChoice POS membership
increased by 54,000 over the same time period. The company intends to expand
its PPO offering into Illinois in the first quarter of 1997.
HMO premium revenue increased $43.5 million, or 45.4% -- $50.5
million due to a 50.3% increase in member months partially offset by a $7.0
million decrease due to a 3.3% 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 34,900
underwritten members at December 31, 1996, which is an increase of 19,900
over December 31, 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 December 31, 1996, there were
approximately 7,700 members enrolled in products sold through this
arrangement with Freeman, representing an increase of 5,200 members over
December 31, 1995. The company expects future enrollment growth in these
relatively new products.
Premium revenue from Medicare supplement decreased by $6.4 million in
1996, due to a 10.3% decrease in member months, partially offset by a 4.7%
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 $6.6 million due
primarily to a 33.3% decline in member months, consistent with the company's
strategy to focus membership growth in more intensely managed products.
Revenue from other specialty services, which include certain of the company's
drug and dental health care benefit plans, increased $11.0 million due
primarily to a 52.1% 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 73.6% in 1996 as compared to 1995.
Self-funded
Fees and other income from administrative services only/self-funded and
network services increased in 1996 by $4.9 million. This increase is due to
three main factors: (1) a net 1996 increase in HealthLink revenues of $20.3
million, offset by (2) a decrease of $6.7 million in net self-funded PPO
revenues, due in part to an 8.4% decrease in member months in 1996, and (3)
the loss of revenues from the company's third-party administrator (TPA)
subsidiaries, which were $9.4 million in 1995. These TPA subsidiaries were
combined with another TPA company to form The EPOCH Group, L.C. (Epoch) in
December 1995. The company owns 50% of Epoch and utilizes the equity method
of accounting for this entity. The company's share of the undistributed
earnings of Epoch was $0.6 million in 1996.
Operating expenses
The overall medical loss ratio increased by 6.5% to 82.6% in 1996 from
76.1% in 1995 primarily as a result of 1) the company's lower margin
BlueCHOICE Senior, Medicaid and AllianceChoice products, 2) competitive
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 new PBM contractor to
control both utilization and drug costs. 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 30% of BlueCHOICE's
panel of 566 primary care physicians in metropolitan St. Louis are enrolled
in the program. In addition, the company has targeted premium levels to
increase on average from 6% to 8% in the first quarter of 1997. The company
believes that the aforementioned initiatives and premium increases will help
to improve its medical loss ratio; however, there can be no assurance that
either of these strategies will be effective in controlling future medical
costs.
Commission expense increased by $7.4 million, or 38.1% in 1996, which
represents an overall increase in the commission ratio to 4.1% of total
revenue as compared to 3.3% of total revenue for 1995. These increases are
due to increased membership growth and more aggressive commission schedules
to enhance member growth and persistency.
General and administrative expenses increased $3.5 million, or 2.5% in
1996. Excluding the effects of HealthLink, Epoch, and a third-party accrual,
discussed below, comparable 1996 general and administrative expenses
decreased by $1.1 million. HealthLink accounted for $20.9 million of general
and administrative expenses in 1996. HealthLink expenses incurred in 1995
subsequent to its August acquisition were $6.6 million. Thus, HealthLink
accounts for a net 1996 increase of $14.3 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. General and administrative expenses in 1995 include
$11.1 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 1996 include $4.5 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 new facility in Cape Girardeau,
Missouri. See "Outlook - Transfer of service functions" for more information
related to this relocation. Non-recurring charges in 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 from $19.0 million in 1995 to a loss of $13.6
million in 1996. Excluding non-recurring charges, operating income was $22.5
million in 1995 compared to a loss of $9.0 million in 1996.
Operating income, excluding non-recurring operating charges, for the
company's underwritten segment was $25.0 million in 1995 compared to a loss
of $11.0 million in 1996. The losses in 1996 are primarily attributable to
softer pricing in a competitive environment and higher outpatient utilization
trends and drug costs.
Excluding non-recurring operating charges, the company's self-funded
segment experienced an operating loss of $2.5 million in 1995 as compared to
operating income of $1.9 million for 1996. The improvement in 1996 operating
income is a direct result of the positive impact of HealthLink, which added
$9.1 million to this segment's operating income in 1996 as compared to $3.2
million in 1995 subsequent to HealthLink's acquisition in August 1995. In
addition, these HealthLink operating figures are inclusive of $3.3 million
and $1.4 million in 1996 and 1995, respectively, for amortization expenses
related to goodwill and other intangible assets that were acquired through
the HealthLink acquisition.
Net investment income
Net investment income includes investment income in the form of interest
and dividend income and net realized gains from the sale of portfolio
securities. Net investment income of $17.5 million in 1996 represents a 4.4%
decrease from $18.3 million in 1995 inclusive of a $0.2 million decrease in
realized gains, net.
Provision for income taxes
The company's effective income tax rate was (48.2)% and 30.8% for 1996
and 1995, respectively. The 1996 rate was negatively affected primarily by
the impact of non deductible goodwill amortization. The 1995 rate was
positively affected by a $2.1 million final tax audit settlement with the
Internal Revenue Service relating to pension, software amortization expenses,
and other items. Excluding such settlement, the company's 1995 effective
income tax rate was 37.1%.
Net income
The company's net income for 1995 was $23.6 million as compared to a net
loss of $2.0 million for 1996. Excluding non-recurring charges on an after-
tax basis, net income for 1995 was $25.8 million as compared to net income of
$0.9 million for 1996.
Comparison of results for 1995 to the pro forma results for 1994
Revenues
Underwritten
Premium revenue decreased $7.8 million to $538.4 million in
1995 from $546.2 million in 1994. As described below, components of
premium revenue were affected by product mix shifts as the company
continued the positioning of its managed care product portfolio, and,
as a result, such changes may not be indicative of future periods.
PPO revenues decreased $18.7 million - $18.1 million due to a 3.8%
decrease in member months and a $0.6 million decrease in revenue resulting
from a 2.3% net decrease in premium rates. Rates decreased slightly due to
the shift in membership to AllianceChoice, a lower cost, nongatekeeper point-
of-service (POS) product and the aforementioned introduction of AllianceRx, a
managed care drug product that is sold to members on a separate product
basis. In 1994, the drug benefit was typically included as part of the basic
PPO medical program. This resulted in a shift in revenue from the PPO
products to other specialty services. Membership declines are due to the
company's lower persistency rates for certain PPO products which have been
offset by enrollment gains in AllianceChoice. Total PPO membership increased
4.0% from September 1995 and 5.6% from yearend 1994.
HMO premium revenue increased $9.6 million, or 11.1% - $13.6 million due
to an 11.9% increase in member months partially offset by a $4.0 million
decrease due to a 0.7% net reduction in premium rates. Net premium rates have
declined due to HMO competition in the company's HMO service areas.
Membership increased despite the company's decision not to participate in the
health insurance program of the City of St. Louis, which reduced HMO
enrollment by approximately 4,800 members. Membership increases are due to
enrollment gains in the BlueCHOICE HMO Individual, BlueCHOICE HMO Senior, and
HealthNet Blue POS products.
Premium revenue from Medicare supplement decreased by $2.5 million in
1995, due to a 6.7% decrease in member months, partially offset by a 4.7%
increase in premium rates. This decrease in member months was partially due
to the company's planned shift of members from traditional Medicare
supplement products to BlueCHOICE Senior, the Medicare-risk program, which is
more intensely managed.
Managed indemnity premium revenue decreased by $4.2 million due
primarily to a 23.3% decline in member months, consistent with the company's
strategy to focus membership growth in more intensely managed products.
Revenue from other specialty services, which include certain of the
company's drug and dental health care benefit plans, increased $8.0 million
due primarily to a 91.4% increase in member months. These increases are
primarily attributable to the aforementioned selling of the company's drug
product separate from PPO major medical products.
Self-funded
Fees and other income from administrative services only (ASO)/self-
funded and network services increased in 1995 by $16.1 million due in large
part to the $9.8 million of ASO revenue generated for the year by HealthLink,
which was acquired in August 1995. In addition, excluding the addition of
HealthLink's members, total ASO/self-funded member months increased 1.8% year-
to-date in 1995 compared to 1994, despite the loss of one employer group with
approximately 15,800 members in April 1995.
Operating expenses
The overall medical loss ratio increased by 1.3% to 76.1% in 1995 from
74.8% in 1994 primarily as a result of 1) increased outpatient encounters and
costs coupled with an increase in medical cost trends, 2) competitive pricing
in the new PPO products and the HMO to enhance enrollment growth, and 3) the
introduction of BlueCHOICE HMO Senior, a Medicare risk HMO. The company's
extensive PPO provider recontracting and ongoing medical management efforts
have resulted in medical cost savings, as evidenced by lower medical costs
(adjusted for inflation and excluding BlueCHOICE HMO Senior), fewer hospital
days/1000 members, and lower admissions/1,000 members.
Commission expense decreased by $0.8 million, or 3.9% in 1995, which
represents an overall decrease in the commission ratio to 3.3% of total
revenue as compared to 3.5% of total revenue for 1994.
General and administrative expenses increased $10.8 million, or 8.3% in
1995, of which $6.6 million represents operating expenses incurred by
HealthLink after the August 1995 acquisition, including $0.8 million of
goodwill amortization expense. In addition, the company incurred $3.9 million
more in expenses related to corporate investments in 1995 than in 1994,
primarily related to the introduction of several of the company's new
products and the establishment of feasibility for the company's IOS project.
Excluding HealthLink and these additional initiative expenses, total 1995
general and administrative expenses were essentially flat with 1994.
Non-recurring charges in 1995 include $2.0 million of onetime
integration charges related to the company's acquisition of HealthLink in
August 1995 and $1.5 million relating to the aforementioned settlement of a
class action lawsuit. In 1994, the company expensed $1.6 million in
restructuring costs for headcount reductions of management personnel, which
were incurred in connection with the realignment of the
organization as a for-profit managed care company.
Operating income
Operating income decreased 19.7%, or $4.7 million to $19.0 million in
1995 from $23.7 million in 1994. Excluding non-recurring charges, operating
income decreased $2.8 million from $25.3 million for 1994 to $22.5 million
for 1995.
Operating income, excluding non-recurring operating charges, for the
company's underwritten segment was $25.0 million in 1995 compared to $27.6
million in 1994. The decrease in 1995 is attributable to increased price
competition in the company's service areas and greater corporate investments
that are included as a part of general and administrative expenses.
Operating loss, excluding non-recurring operating charges, for the
company's self-funded segment was $2.5 million in 1995 compared with $2.3
million in 1994. The 1995 operating loss includes $1.4 million of
amortization expenses related to goodwill and other intangible assets that
were acquired through the HealthLink acquisition in August 1995. Management
expects HealthLink to bolster this segment's performance in future periods.
Net investment income
Net investment income includes investment income in the form of interest
and dividend income and net realized gains from the sale of portfolio
securities. Certain of the company's investments are held in its life
insurance company subsidiary, Healthy Alliance Life Insurance Company
(HALIC). HALIC is subject to regulatory investment portfolio limitations with
respect to equity securities. Net investment income of $18.3 million in 1995
represents a 16.4% increase from $15.8 million in 1994 inclusive of a $3.9
million increase in interest and dividends. Interest and dividends increased
due to the invested initial public stock offering proceeds and a higher
proportion of investments in fixed income portfolios in 1995 as compared with
1994. Realized gains were $1.3 million greater in 1994 than 1995 as a portion
of the investment gains realized in 1994 were generated pursuant to the
restructuring of the portfolio to be weighted more heavily in fixed income
securities to comply with the regulatory limitations.
Provision for income taxes
The company's effective income tax rate was 30.8% and 36.4% for 1995 and
1994, respectively. The 1995 rate was positively affected by a $2.1 million
final tax audit settlement with the Internal Revenue Service relating to
pension, software amortization expenses, and other items. Excluding such
adjustment, the company's 1995 tax rate was 37.1%.
Net income
The company's net income for 1995 was $23.6 million as compared to $24.7
million for 1994. Excluding non-recurring charges on an after-tax basis, net
income for 1995 was $25.8 million as compared to $25.7 million for 1994.
Liquidity and capital resources
The company's working capital as of December 31, 1996, was $108.8 million,
a decrease of $16.0 million from December 31, 1995. The decrease is partially
attributable to the company's $3.1 million cash purchase of a 44% interest in
Healthcare InterChange, Inc., a provider of electronic health data network
services, 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 $18.1 million of property and
equipment purchases primarily for development costs related to the company's
Information and Operations Strategy (IOS). See "Outlook - Information
strategies" for more information related to IOS. These working capital
decreases are partially offset by a $1.8 million unrealized net appreciation
of investments available for sale during 1996 and $12.9 million of 1996
earnings before depreciation and amortization.
The company's cash flow is derived primarily from the receipt of
premium and fee revenues and investment income, and is utilized in the
payment of health care services, commissions and administrative expenses.
Historically, the company has generated positive cash flow from operations.
Net cash provided by operating activities amounted to $29.1 million in 1996.
The company's net loss of $2.0 million for 1996 was offset by depreciation
and amortization of $15.0 million. The company's net related party receivable
decreased by $2.0 million. Medical claims payable increased by $26.0 million
due to higher utilization and medical cost trends in 1996. In addition, the
company recognized a $4.2 million provision for deferred income taxes, which
is primarily due to timing differences related to the company's IOS
development costs. These increases to operating cash flows were partially
offset by an increase in other assets of $9.1 million, a decrease in accounts
payable and accrued expenses of $2.5 million, and a decrease in income taxes
payable of $10.3 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 "Outlook Transfer of service functions."
The decrease in income taxes payable is primarily due to $6.7 million of tax
payments during 1996.
In mid-February 1997, the company requested and received an amendment to
its reducing revolving credit facility agreement (the Credit Facility), which
reduces two financial covenant requirements in exchange for an increase to
the applicable margin that is added to LIBOR in determining the total
applicable interest rate. The amended Credit Facility rescinded the third
amendment related to the purchase of the company's stock from BCBSMo 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." At this time, the company does not intend to pursue this
repurchase of its shares from BCBSMo.
The company invests positive cash flow in fixed income and equity
securities. The company's investment policies are designed to preserve
principal, maximize yield and provide liquidity to meet anticipated
obligations. The company's investment portfolio consists primarily of U.S.
government and agency securities, corporate bonds and notes, and equity
securities.
Transactions involving equity securities in 1996 and 1995 significantly
decreased from 1994 levels due to the company's policy to maintain a higher
percentage of its investments in fixed income securities.
Under applicable state regulations, certain of the company's
subsidiaries are required to retain cash generated from their operations. At
December 31, 1996, and after giving effect to these restrictions, the company
had approximately $48 million in cash and investments available for general
corporate use without regulatory approval.
Other than continued investment in information technology and debt
repayment, the company currently has no definitive material commitments for
future use of its current or expected increased levels of available cash
resources; however, management continually evaluates opportunities to expand
the company's specialty managed care services and health plan operations. The
company's expansion options may include additional acquisitions and internal
development of new products and programs. The company's available cash
resources will remain in interest-bearing investments until they are utilized
for such purposes.
Outlook
Except for the historical information contained herein, this Annual
Report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements typically,
but not exclusively, are identified by the inclusion of phrases such as "the
company anticipates," "the company believes," "the company expects" and other
phrases of similar meaning. Such forward-looking statements involve known and
unknown risks, uncertainties, contingencies and other factors that may cause
the company's actual results of operations, financial condition or business
performance to be materially different from the results of operation,
financial condition or business performance expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to litigation with Missouri
Department of Insurance and Missouri Attorney General, potential loss of
"Blue Cross" and "Blue Shield" licenses by BCBSMo, the company and its
controlled affiliates, government regulation and health care reform,
competition and consolidation, escalating health care costs, dependence on
sales to individuals, potential nonrenewal of subscriber and provider
agreements, control by BCBSMo, changes in key management, variability of
quarterly operating results and stock price, Credit Facility restrictions,
and other factors discussed in the section entitled "Factors that May Affect
Future Results of Operations, Financial Condition or Business" included in
the company's SEC Report on Form 10-K for the fiscal year ended December 31,
1996, as well as those discussed elsewhere in the company's SEC reports.
Alliance with BJC Health System
On January 22, 1997, the company and BCBSMo announced that they would
pursue an in-depth analysis of a possible business combination or other form
of strategic alliance or affiliation with BJC Health System (BJC), the
largest health care provider in the St. Louis region. The organizations
agreed to conduct further analysis on an exclusive basis through March 18,
1997. On March 11, 1997, the company and BCBSMo announced that they had
ended discussions with BJC concerning a possible alliance or business
combination. Following extensive review with the Blue Cross and Blue Shield
Association (BCBSA) and BJC, the boards of the company and BCBSMo determined
that current BCBSA rules are not sufficiently flexible to allow the creation
of a vertically integrated structure that will achieve the desired benefits
for members and shareholders. In view of the great value inherent in the Blue
Cross and Blue Shield trade name and service marks, as well as other factors,
the boards determined that it would not be prudent to further pursue a
vertical alliance or combination at this time.
The boards voiced their confidence in top management and the future for
the company and believe the current focus should be on strengthening core
business, resolving regulatory issues, enhancing customer service and
competitiveness, and improving profitability. The boards determined that
they will pursue a policy of independence for the company and BCBSMo for the
foreseeable future. Nevertheless, the boards will continue to examine
acquisitions, mergers, joint ventures and other business opportunities when
they arise.
Information strategies
On May 8, 1995, the Board of Directors of the company approved the
implementation of the first of three possible phases of a comprehensive
Information and Operations Strategy (IOS), which will assist the company in
implementing its managed care strategy of delivering the lowest cost medical
care consistent with quality outcomes. The company believes that controlling
medical costs in the future will be highly dependent on readily accessing
both member and provider medical information at a detail level that provides
real-time analytical support. The company receives capital expenditure
authorizations from the Board of Directors to expend funds for the project
subject to periodic review by an adhoc committee of the board. The company
has expended approximately $17.2 million and $8.5 million (including $14.9
million and $6.9 million in capitalized costs) during 1996 and 1995,
respectively. While management believes that the IOS project will initially
be dilutive to earnings per share, it is believed that opportunities exist
for significant medical and administrative savings, which will provide a
payback and contribute to earnings per share over the long term.
Transfer of service functions
Beginning January 1997, the company began moving its St. Louis-based
claims, customer service, billing and provider services functions to its
Springfield, Missouri, facility and a new facility 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 $3.0 million, with
approximately $1.4 million expected in 1997. The company will incur total
charges to earnings estimated at $7.0 million to $8.0 million, which began in
the second quarter of 1996 and will continue through 1997 for costs
associated with the relocation. The 1996 charges for this relocation of $4.5
million are reflected in the nonrecurring charges caption on the 1996
Consolidated Statement of Income.
Southern Illinois expansion
The company completed its acquisition of Cragin American Assurance Company
(Cragin), a dormant Illinois company chartered to underwrite health and life
insurance, on November 1, 1996. Cragin was later renamed RightCHOICE
Insurance Company (RIC). The acquisition of RIC 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 RIC 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 through RIC
to the approximately 1 million residents in this region by early 1997. The
company received approval for group and individual products from the Illinois
Division of Insurance in January 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 preexisting health conditions.
Additionally, the State of Missouri has recently passed legislation that
mandates various lengths of stay for maternity patients. Although the impact
of the provisions of this recent legislation and any future 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.
Inflation
Health care costs in the United States have increased more rapidly than
the national consumer price index in recent years, and that trend is expected
to continue. The company believes that it has reduced the impact of such
increases by expanding its provider networks, establishing risk-sharing
agreements and enhancing its underwriting standards. The company has
negotiated favorable rates, terms and incentives with its provider network of
hospitals and physicians. However, there can be no assurance that the
company's efforts to reduce the impact of inflation will be as effective as
in the past or that premium increases will equal or exceed increasing health
care costs.
Operating outlook
The company's results in the fourth quarter of 1996 indicate a return to
more rational pricing in the company's market and the initial positive
results of medical management activities. With January 1997 premium price
increases averaging 6% to 8%, successful overhead expense control and a new
pharmacy benefits management program, the company believes it is positioned
to return to operational profitability late in 1997.
Contingencies
See the description under the same caption in Note 14 of the
Notes to Consolidated Financial Statements, which description is incorporated
herein by reference.
RightCHOICE Managed Care, Inc.
Consolidated Balance Sheets
(in thousands, except shares and per share data)
December 31,
1996 1995
Assets
Current assets:
Cash and cash equivalents $ 33,418 $ 21,132
Investments available for sale 262,216 263,383
Receivables from members 54,767 55,695
Receivables from related parties 17,073 24,079
Deferred income taxes 591 2,475
Other assets 13,193 12,144
Total current assets 381,258 378,908
Property and equipment, net 51,248 40,305
Deferred income taxes 6,247 9,311
Investments in affiliates 9,370 6,752
Goodwill and intangible assets, net 84,021 81,112
Total assets $532,144 $516,388
Liabilities and shareholders' equity
Current liabilities:
Medical claims payable $111,833 $83,793
Unearned premiums 52,699 51,432
Accounts payable and accrued expenses 68,844 64,445
Payables to related parties 17,149 22,174
Obligations for employee benefits 3,864 4,414
Income taxes payable 12,801 23,102
Obligations under capital leases 5,224 4,747
Total current liabilities 272,414 254,107
Long- term debt 62,000 62,000
Obligations under capital leases 3,532 6,137
Obligations for employee benefits 21,244 20,923
Total liabilities 359,190 343,167
Commitments and contingencies (see Notes 11 and 14)
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 30,687 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 9,766 7,946
Total shareholders' equity 172,954 173,221
Total liabilities and
shareholders' equity $532,144 $516,388
See accompanying Notes to Consolidated Financial Statements.
RightCHOICE Managed Care, Inc.
Consolidated Statements of Income
(in thousands, except shares and per share data)
For the year ended December 31,
1996 1995 1994
Revenues:
Premium $595,049 $538,422 $546,206
Fees and other income 58,326 53,458 37,374
Total revenues 653,375 591,880 583,580
Operating expenses:
Health care services 491,662 409,495 408,409
Commissions 26,808 19,405 20,184
General and administrative
(excludes net intercompany
charges allocated to Blue
Cross and Blue Shield
of Missouri of $11,731,
$15,230, and $17,934,
respectively) 143,950 140,473 126,766
Non-recurring charges 4,534 3,474 1,584
Total operating expenses 66,954 572,847 556,943
Operating (loss) income (13,579) 19,033 26,637
Investment income:
Interest and dividends 14,241 14,832 10,913
Realized gains, net 3,291 3,512 4,851
Total investment income, net 17,532 18,344 15,764
Other:
Interest expense (5,434) (2,930) (1,397)
Other income (expense), net 114 (397) 757
Total other, net (5,320) (3,327) (640)
(Loss) income before provision
for income taxes (1,367) 34,050 41,761
Provision for income taxes 660 10,480 15,177
Net (loss) income $ (2,027) $ 23,570 $ 26,584
Weighted average common
shares outstanding 18,678,700 18,687,800
(Loss) earnings per share $ (0.11) $ 1.26
Pro forma data (unaudited):
Income before cumulative effect
of accounting changes as reported $ 26,584
Pro forma premium taxes (2,925)
Pro forma income tax benefit 1,024
Pro forma net income $ 24,683
Pro forma common shares 16,514,000
Pro forma net income per share $ 1.49
See accompanying Notes to Consolidated Financial Statements.
<TABLE>
RightCHOICE Managed Care, Inc.
Consolidated Statements of Changes
in Shareholders' Equity
(in thousands, except shares)
<CAPTION>
Unrealized Net
Common Stock Additional Investment by Retained Treasury Appreciation
Class A Class B Paid In BCBSMo Earnings Stock (Depreciation) Total
Capital In Investments
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 $ 82,247 $ 82,247
Adoption of new
accounting
standard for debt
and equity
securities,
January 1, 1994 $8,873 8,873
Net income for
the seven-month
period ended
July 31, 1994 17,440 17,440
Issuance of
3,737,500 shares
of Class A
Common Stock,
net of costs
associated with
issuance
of $5,000 $37 $ 33,220 33,257
Issuance of
14,962,500
shares
of Class B
Common Stock $150 99,537 (99,687) 0
Net income for
the five-month
period ended
December 31, 1994 $9,144 9,144
Purchase of 10,000
shares of Class A
Common Stock, at
cost $(138) (138)
Unrealized net
depreciation of
investments
available for
sale (15,398) (15,398)
Balance at
December 31, 1994 37 150 132,757 0 9,144 (138) (6,525) 135,425
Net income for
the year ended
December 31, 1995 23,570 23,570
Additional expenses
related to initial
public stock offering (117) (117)
Purchase of 8,800
shares of Class A
Common Stock, at
cost (128) (128)
Unrealized net
appreciation of
investments
available for sale 14,471 14,471
Balance at
December 31, 1995 37 150 132,640 0 32,714 (266) 7,946 173,221
Net loss for the
year ended
December 31, 1996 (2,027) (2,027)
Purchase of 4,300
shares of Class A
Common Stock, at cost (60) (60)
Unrealized net
appreciation of
investments available
for sale 1,820 1,820
Balance at
December 31, 1996 $37 $150 $132,640 $ 0 $30,687 $(326) $9,766 $172,954
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
RightCHOICE Managed Care, Inc.
Consolidated Statements of Cash Flows
(in thousands)
For the year ended December 31,
1996 1995 1994
Cash flows from operating activities:
Net (loss) income $ (2,027) $23,570 $26,584
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Provision (credit) for deferred
income tax benefits 4,218 (1,355) 1,437
Depreciation and amortization 14,960 11,284 6,269
Loss (gain) on sale of property
and equipment 51 (66) 28
Undistributed (earnings) losses
of affiliates (42) 317 (47)
Gain on sale of investments (3,291) (3,512) (4,851)
Accretion of discounts and amortization
of premiums, net 426 (32) (1,146)
Decrease (increase) in certain assets, net of
effects from investment in affiliates:
Receivables from members 2,722 (4,500) (3,565)
Receivables from related parties 7,007 26,763 (50,842)
Other assets (9,148) (1,770) (5,028)
Increase (decrease) in certain liabilities,
net of effects from investment in affiliates:
Medical claims payable 25,986 (6,427) (8,459)
Unearned premiums 1,267 1,956 (2,354)
Accounts payable and accrued expenses 2,547 24,098 (12,818)
Payables to related parties (5,025) (28,987) 51,161
Obligations for employee benefits (229) (2,560) 162
Income taxes payable (10,301) (5,251) 8,392
Net cash provided by operating activities 29,121 33,528 4,923
Cash flows from investing activities:
Proceeds from matured investments:
Fixed maturities 9,187 8,900 44,095
Proceeds from investments sold:
Fixed maturities 246,728 303,412 249,739
Equity securities 20,535 33,415 142,584
Other 69
Investments purchased:
Fixed maturities (240,648) (318,755) (337,293)
Equity securities (22,542) (20,454) (107,056)
Other (2,275) (3,635) (7,161)
Payment for purchase of HealthLink, net of
cash acquired (88,918)
Investment in other affiliates, net of
cash acquired (5,312) (3,294)
Sale and redemption of affiliates 500 3,427 37
Proceeds from property and equipment sold 31 470
Property and equipment purchased (18,113) (10,208) (7,227)
Net cash used in investing activities (11,909) (95,640) (22,213)
Cash flows from financing activities:
Net proceeds from initial public
stock offering 33,257
Additional expenses related to
public stock offering (117)
Purchase of Class A Treasury stock (60) (128) (138)
Borrowings under revolving credit facility 62,000
Decrease in borrowings under reverse
repurchase agreements (4,302) (16,525)
Payments of long-term debt (1,111)
Payments of capital lease obligations (4,866) (4,183) (2,145)
Net cash (used in) provided by
financing activities (4,926) 52,159 14,449
Net increase (decrease) in cash and
cash equivalents 12,286 (9,953) (2,841)
Cash and cash equivalents at
beginning of year 21,132 31,085 33,926
Cash and cash equivalents at end of year $33,418 $21,132 $31,085
Supplemental disclosure of cash information:
Interest paid $ 5,420 $ 2,439 $ 1,677
Income taxes paid 6,742 17,043 5,348
Supplemental schedule of noncash investing
and financing activities:
Equipment acquired through capital leases $ 2,738 $ 3,579 $ 9,574
Disposal of equipment under capital leases 1,789 1,052
Details of business acquired in purchase
transactions:
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
(dollars in thousands, except share data)
1. Organization
RightCHOICE Managed Care, Inc. (RightCHOICE) is a majority owned
subsidiary of Blue Cross and Blue Shield of Missouri (BCBSMo) incorporated in
the State of Missouri. In connection with the RightCHOICE August 1, 1994,
initial public offering of Class A Common Stock, BCBSMo transferred its
managed health care business to RightCHOICE (the company). The holders of
Class A Common Stock have one vote per share and the holders of Class B
Common Stock have 10 votes per share. BCBSMo is the sole holder of Class B
Common Stock. Each share of Class B Common Stock is convertible into a share
of Class A Common Stock at the option of the holder at any time. At December
31, 1996, BCBSMo and the holders of Class A Common Stock have control over
approximately 97.6% and 2.4%, respectively, of the combined voting power of
both classes of common stock.
The company offers a comprehensive array of managed health care products
and services, including preferred provider organizations (PPOs), point-
of-service networks (POS), a health maintenance organization (HMO), Medicare
supplement, specialty managed care networks, selected comprehensive indemnity
health coverage, third-party administrator (TPA) services and administrative
services only (ASO) for self-funded organizations.
2. Summary of significant accounting policies
The following is a summary of significant accounting policies used in
the preparation of the accompanying Consolidated Financial Statements. Such
policies are in accordance with generally accepted accounting principles. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of consolidation
The Consolidated Financial Statements include the accounts of the company
and its subsidiaries including Healthy Alliance Life Insurance Company
(HALIC), HealthLink, Inc. (HealthLink), giving effect to its acquisition by
the company on August 10, 1995, and HMO Missouri, Inc., d/b/a BlueCHOICE
(BlueCHOICE) after elimination of all significant intercompany transactions.
Investments in other companies in which less than a majority interest is held
are accounted for under the equity or cost method.
Revenue recognition and unearned premiums
For most members, premiums are billed in advance of coverage periods and are
recorded as income in the period to which health care coverage relates.
Amounts billed but unearned are recorded as unearned premiums. The company's
TPA and ASO self-funded programs do not involve the assumption of insurance or
significant credit risks; therefore, revenue from these programs is reflected
in fees and other income. During the years ended December 31, 1996, 1995, and
1994, the company received reimbursements for claims paid of $132,449,
$157,597, and $174,240, respectively, from TPA and ASO self-funded groups.
Cash and cash equivalents
Cash and cash equivalents are highly liquid investments with an original
maturity of three months or less when purchased.
Investments available for sale
Unaffiliated investments with readily determinable fair values have been
classified as available for sale. Available for sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a
separate component of shareholders' equity unless a decline in value is judged
other than temporary. When this is the case, unrealized losses are reflected
in income.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which addresses the
accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
The company adopted this statement in the first quarter of 1994 and
approximately $8,873 of unrealized gains and losses, net of deferred income
taxes, was included as a separate component of equity as of January 1, 1994.
Property and equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are provided on
the straight-line basis over the estimated useful life of the respective
assets, ranging from 3 to 30 years.
Improvements are capitalized while expenditures for maintenance and
repairs are charged to expense as incurred. Realized gains and losses are
recognized upon disposal or retirement of the related assets and are reflected
in earnings. The company also capitalizes purchased and internally developed
software costs to the extent they are expected to benefit future operations.
Software amortization of such costs commences when specific components are
operational and such costs are amortized over 3-5 years. Software amortization
expense for the years ended December 31, 1996, 1995, and 1994, was $671, $495
and $74, respectively.
Goodwill and intangible assets
Goodwill represents the excess of cost over the fair market value of net
assets of acquired subsidiaries. Unamortized goodwill, which is included in
goodwill and intangible assets, net, was $71,754, $72,603, and $1,799, as of
December 31, 1996, 1995, and 1994, respectively, and is amortized on a
straight-line basis over periods not exceeding 40 years.
The company reviews the carrying value of goodwill, intangibles and other
long-lived assets for impairment when events or changes in circumstances
indicate that the carrying value of the asset may not be recoverable. This
review is performed by comparing estimated undiscounted future cash flows from
use of the asset to the recorded value of the asset.
Medical claims payable
In addition to the liability for processed but unpaid claims at period end,
the company provides for the estimated amount of liability arising from
medical care provided to members, net of coordination of benefit refunds, for
claims still in process, as well as undischarged and unreported claims. This
estimate is based on current membership statistics, claim run-off patterns and
certain actuarial formulas. The liability includes estimated processing
expenses relating to such claims. Such estimates are subject to revision;
however, management believes these estimates reasonably approximate actual
costs.
Reinsurance
In the normal course of business, the company cedes insurance to other
unrelated insurance carriers on an excess loss or quota share basis. The
company engages in such reinsurance activity to limit losses from large
exposures and to permit recovery of a portion of direct losses. The company
also reached a network access and financial reinsurance agreement with Blue
Cross and Blue Shield of Kansas City (BCBSKC) designed to make the two
companies more competitive in the Missouri market. 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. The impact of these reinsurance
activities is not significant to the Consolidated Financial Statements.
Income taxes
The company utilizes the asset and liability method of accounting for income
taxes. The asset and liability approach requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities.
The company, along with its subsidiaries, files a consolidated federal
income tax return with BCBSMo. The company's provision for income taxes has
been calculated on a separate return basis assuming regular statutory tax
rates. In accordance with the tax sharing agreement of the consolidated group,
income tax expense is allocated to the company and its subsidiaries based upon
the consolidated income generated by the company and its subsidiaries.
Dividend restrictions
Missouri insurance laws and regulations provide certain restrictions on
the payment of dividends by insurance companies in a holding company
structure. The Missouri Director of Insurance may bring an action to enjoin or
rescind the payment of any dividend or distribution that would cause the
insurance company's statutory surplus to be unreasonable or inadequate. The
maximum amount available as of December 31, 1996, for the payment of dividends
to the company by HALIC and BlueChoice without the prior approval of the
Missouri Director of Insurance was $0.2 million and $0.6 million,
respectively. In 1996, the company received a $16.1 million and $1.1 million
dividend from HALIC and BlueCHOICE, respectively.
Earnings per share
Earnings per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares represent the potential dilutive impact of
stock options. The effect of shares issuable under stock plans is not
significant.
Pro forma earnings per share (unaudited) for the year ended December 31,
1994, were computed based on the following for 1994: (i) the weighted average
number of Class A and Class B Common Stock assumed outstanding, with
14,962,500 shares of Class B Common Stock assumed outstanding at the beginning
of the year and (ii) giving effect to the issuance of 3,250,000 shares of
Class A Common Stock on August 1, 1994, the issuance of 487,500 shares of
Class A Common Stock on August 4, 1994, and the repurchase of 10,000 shares of
Class A Common Stock in November 1994. Earnings per share in 1996 and 1995 are
calculated based on actual earnings and actual weighted average shares
outstanding during the year.
Concentration of credit risk
The company primarily conducts business in the State of Missouri, and a
significant portion of its customer base is concentrated with companies that
are located in the metropolitan St. Louis area. No single customer generates
in excess of 10% of the company's total revenue.
The company invests its excess cash in interest-bearing deposits with major
banks, commercial paper and money market funds. Although a majority of the
cash accounts exceed the federally insured deposit amount, management does not
anticipate nonperformance by the other parties. Management reviews the
stability of these institutions on a periodic basis.
Investments principally include U.S. Treasury and agency bonds and fixed
maturity bonds in a variety of companies A rated or better by nationally
recognized rating services. Investments in life insurance contracts consist
primarily of flexible premium variable life products, invested in managed bond
and equity funds, purchased from an insurance company which has an A.M. Best
rating of A+. Such credit ratings are routinely reviewed by management.
Fair value of financial instruments
The carrying amount for cash and cash equivalents, receivables, and
accounts payable approximates fair value because of the short maturity of
those instruments. The fair value of investments available for sale at
December 31, 1996 and 1995, determined based upon quoted market prices, is
disclosed in Note 5.
Reclassifications
Certain reclassifications have been made to the Consolidated Financial
Statements for 1994 and 1995 to conform with the 1996 presentation.
3. HealthLink acquisition
The company completed its acquisition of HealthLink, a privately held
regional managed health care organization, on August 10, 1995. The acquisition
included cash payments of approximately $92 million and was financed, in part,
by the $62 million of funds from RightCHOICE's five-year reducing revolving
credit facility. Transaction costs related to the transaction were $2.5
million.
The company expensed a one-time integration charge related to this
transaction of $2.0 million in the third quarter of 1995. This integration
charge is reflected as a nonrecurring charge on the 1995 Consolidated
Statement of Income. The acquisition has been accounted for under the
purchase method of accounting, and, accordingly, the net assets and results
of operations of HealthLink have been included in the Consolidated Financial
Statements as of the date of acquisition. An excess purchase price of
approximately $74 million has been determined based on the fair values of
assets and liabilities assumed. In addition, the company recorded intangible
assets of $5.9 million relating to postacquisition agreements with the former
HealthLink shareholders. These agreements are being amortized over periods of
between two and six years. Amortization expense of the goodwill and other
intangible assets related to HealthLink aggregated $3.3 million and $1.4
million in 1996 and 1995, respectively.
The following table summarizes the unaudited pro forma consolidated
results of the company as though the HealthLink acquisition occurred at the
beginning of the periods presented 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 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 the period and is
not intended to be indicative of results that may occur in the
future. Actual results for 1996 are included for comparative
purposes.
(unaudited) For the year ended December 31,
1996 1995* 1994*
Total revenues $653,375 $607,220 $604,143
Operating (loss) income (13,579) 24,144 28,961
Net (loss) income (2,027) 23,976 22,775
(Loss) earnings
per share $ (0.11) $ 1.28 $ 1.38*
* 1995 includes non-recurring operating charges of $2.0 million ($0.07
per share) for integration charges related to HealthLink and $1.5 million
($0.05 per share) for the class action lawsuit settlement and a non-
operating benefit relating to the resolution of a tax audit issue of
$2.1 million ($0.11 per share). 1994 includes non-recurring charges of
$1.6 million ($0.06 per share) for restructuring costs.
4. Transfer of service functions
Beginning January 1997, the company began moving its St. Louis-based
claims, customer service, billing and provider services functions to the
Springfield, Missouri, facility and a new facility 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 $3.0 million, with
approximately $1.4 million expected in 1997. The company will incur total
charges to earnings estimated at $7.0 million to $8.0 million, which began in
the second quarter of 1996 and will continue through 1997 for costs
associated with the relocation. The 1996 charges for this relocation of $4.5
million are reflected in the nonrecurring charges caption on the 1996
Consolidated Statement of Income.
As of December 31, 1996, activity related to the transfer of these service
functions is summarized as follows:
Provision recorded in 1996 $4,534
Termination benefits paid (151)
Other cash relocation costs paid (2,595)
Reserve balance at December 31, 1996 $1,788
5. Investments available for sale
Investments available for sale are summarized below:
Cost Gross Gross Estimated
unrealized unrealized market
gains losses value
December 31, 1996
Fixed maturities:
U.S. government and
agency securities $118,960 $ 1,145 $(1,156) $118,949
Corporate bonds and notes 59,515 323 (337) 59,501
Short-term investments 2,944 2,944
Investment in variable
life insurance contracts 33,735 5,998 39,733
215,154 7,466 (1,493) 221,127
Equity securities:
Common stocks 31,932 9,901 (744) 41,089
$247,086 $17,367 $(2,237) $262,216
December 31, 1995
Fixed maturities:
U.S. government and
agency securities $146,204 $ 3,960 $ (40) $150,124
Corporate bonds and notes 41,826 781 (34) 42,573
Short-term investments 4,120 4,120
Investment in variable
life insurance contracts 31,942 2,478 34,420
224,092 7,219 (74) 231,237
Equity securities:
Common stocks 27,028 5,550 (432) 32,146
$251,120 $12,769 $ (506) $263,383
Interest and dividend income comprises the following:
Year ended December 31,
1996 1995 1994
Interest on bonds $11,847 $11,540 $8,484
Dividends on stocks 1,295 785 1,622
Accretion of discounts and amortization
of premiums, net (426) 32 1,146
Interest on cash equivalents and
other investment income 2,353 3,389 931
Gross investment income 15,069 15,746 12,183
Investment expenses (828) (914) (1,270)
$14,241 $14,832 $10,913
Realized and unrealized gains (losses) on investments are as
follows:
Year ended
December 31,
1996 1995 1994
Net realized gains (losses):
Fixed maturities $ 516 $ 786 $(849)
Equity securities 2,380 2,726 5,700
$ 2,896 $ 3,512 $ 4,851
Unrealized gains (losses):
Gross unrealized gains
Fixed maturities $ 7,466 $ 7,219 $ 26
Equity securities 9,901 5,550 2,248
Gross unrealized losses
Fixed maturities (1,493) (74) (9,748)
Equity securities (744) (432) (2,832)
$15,130 $12,263 $(10,306)
Proceeds from sales of fixed maturities were $246,728, $303,412, and
$249,739 during 1996, 1995, and 1994, respectively. Contractual maturities
of fixed maturity investments, excluding variable life insurance contracts,
held on December 31, 1996, are as presented below. Actual maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations.
Estimated
Cost market value
Due in one year or less $ 31,605 $ 31,566
Due after one year through five years 68,360 68,103
Due after five years through 10 years 37,873 37,192
Due after 10 years 43,581 44,533
$181,419 $181,394
The company has limited involvement with derivative financial instruments
and does not use them for trading purposes. The company holds derivatives to
diversify its overall asset allocation, which account for less than 10% of
the company's total investment portfolio. The company does not hold futures,
forwards, swaps, option contracts or interest rate collars for speculative
purposes. All portfolio holdings and credit ratings related thereto are
routinely reviewed by management. The table below summarizes the company's
position in derivative holdings at December 31, 1996 and 1995:
December 31, 1996 December 31, 1995
Market value Cost Market value Cost
U.S. government and agency
floating interest rate and
stripped securities $ 1,571 $ 1,577 $ 2,185 $ 2,187
Corporate variable rate
bonds and notes and asset-
backed securities 13,576 13,549 11,834 11,969
$15,147 $15,126 $14,019 $14,156
6. Receivables from members
Receivables from members consist of the following:
December 31,
1996 1995
Individual subscribers $11,335 $14,616
Local groups 33,720 31,343
Self-funded/ASO groups 9,712 9,736
$54,767 $55,695
Based on historical collection experience, the company considers its
receivables from members to be fully collectible; accordingly, no allowance
for doubtful accounts is recorded. If receivables become uncollectible, they
are charged against income using the direct write-off method when that
determination is made.
7. Property and equipment, net
Property and equipment consist of the following:
December 31,
1996 1995
Land and building $ 5,575 $ 5,424
Furniture and equipment, including
capitalized leases 50,652 45,202
Capitalized software development costs 21,817 6,871
Leasehold improvements 3,628 2,815
81,672 60,312
Less accumulated depreciation
and amortization (30,424) (20,007)
$51,248 $40,305
Depreciation and amortization expense was $9,915, $9,482, and $5,786, for
the years ended December 31, 1996, 1995, and 1994, respectively.
8. Investments in affiliates
The company has non-controlling investments in certain companies that are
not consolidated with the company's operations and are carried at cost or
accounted for using the equity method. The largest of such investments is the
company's 50% ownership interest in The EPOCH Group, L.C. (Epoch). Epoch, a
limited liability company, was formed in December 1995 by the company and
BCBSKC to combine their third-party-administrator (TPA) businesses. The company
invested cash and other net assets of $5.3 million in this joint venture. The
combined annual revenues of Epoch were $23.9 million in 1996, and $22.2
million in 1995 on a pro forma basis (unaudited). Operating income was $1.2
million in 1996, and $0.6 million in 1995 on a pro forma basis (unaudited).
Epoch is accounted for using the equity method and resulted in undistributed
earnings to the company of $563 in 1996. Epoch serves 260 major businesses
in the region, representing 776,000 members as of December 1996.
9. Medical claims payable
Medical claims payable represents the amounts needed to provide for the
estimated ultimate cost of settling claims related to insured events that have
occurred on or before December 31. The payable is estimated to include the
amounts required for future payment of a) medical claims that have been
reported to the company, b) claims related to insured events that have
occurred but that have not been reported to the company as of December 31, and
c) claims adjustment expenses. Claims adjustment expenses include costs
incurred in the claim settlement process such as costs to record, process and
adjust claims.
Activity in medical claims payable is summarized as follows:
1996 1995
Balance at January 1 $ 83,793 $ 90,220
Incurred related to:
Current year 493,438 410,494
Prior year (1,776) (999)
Total incurred 491,662 409,495
Paid related to:
Current year 394,217 340,972
Prior year 69,405 74,950
Total paid 463,622 415,922
Net balance at December 31 $111,833 $ 83,793
10. Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following:
December 31,
1996 1995
Accounts payable $29,893 $31,115
Accrued salaries and other expenses 8,975 9,124
Other accrued expenses 29,976 24,206
$68,844 $64,445
11. Long-term debt and commitments
In August 1995, the company established a $125 million, five-year,
reducing revolving credit facility (the Credit Facility) with Bank of America
National Trust and Savings Association (B of A) and a syndicate of banks. At
December 31, 1996, the company had $62 million outstanding under the Credit
Facility. Scheduled semi-annual commitment reductions of $10 million will
begin on March 31, 1997, with a final $10 million reduction on September 30,
1999.
Borrowings under the Credit Facility may be denominated, at the option
of the company, as base rate loans or offshore rate loans. Base rate loans
bear interest at B of A's base rate, which is the higher of the latest
federal funds rate plus 0.5% or B of A's reference rate, which approximates
the prime rate. Offshore rate loans bear interest from 0.5% to 1.5% above the
adjusted London Interbank Offered Rate (LIBOR). At December 31, 1996, all of
the company's outstanding borrowings were in offshore rate loans. The
weighted average interest rate incurred by the company was 6.69% and 7.39% in
1996 and 1995, respectively. In addition, the company pays a quarterly fee on
the unused portion of the Credit Facility at a rate of 0.1875% to 0.45%. The
unused portion of the Credit Facility at December 31, 1996, was $63 million.
As a condition to providing the Credit Facility, the company pledged the
stock of its direct subsidiaries and a guaranty of repayment was provided by
HealthLink. In addition, the Credit Facility establishes certain covenants
that restrict the company's ability to incur additional indebtedness, limit
future cash dividends and capital contributions, and require the maintenance
of certain financial ratios as well as a minimum consolidated tangible net
worth. As of the date of this report, the company was in compliance with
these covenants, as amended by the company and a majority of the banks in the
syndicate.
The company has an agreement with BCBSMo to lease certain office space,
including an operating lease for its headquarters facility (see Note 16).
The company also leases certain electronic data processing equipment under
noncancellable lease agreements, and these leases are reflected in the
Consolidated Financial Statements as operating and capitalized leases.
The following is a schedule of future minimum rental payments required
under capital leases and under non-cancellable operating leases that have
initial or remaining terms in excess of one year together with the present
value of net minimum lease payments under capital leases at December 31, 1996:
Leases
Capital Operating
Year ending December 31,
1997 $5,568 $ 7,984
1998 2,738 7,194
1999 891 6,563
2000 6,329
2001 6,227
Thereafter 20,403
Total minimum lease payments $9,197 $54,700
Less amount representing interest (441)
Present value of net minimum lease
payments, including current
portion of $5,224 $8,756
Total rental expense for all operating leases, except those with
terms of one month or less that were not renewed, was $8,999, $9,365, and
$12,788, for the years ended December 31, 1996, 1995, and 1994,
respectively.
12. Income taxes
The components of the provision for income taxes are as follows:
Year ended December 31,
1996 1995 1994
Current:
Federal $(3,965) $11,664 $12,850
State 407 171 890
(3,558) 11,835 13,740
Deferred:
Federal 4,218 (1,355) 1,437
$ 660 $10,480 $15,177
The effective tax rate, expressed as a percentage of pre-tax (loss)
income, differs from the federal statutory rate as follows:
Year ended December 31,
1996 1995 1994
Tax provision based on federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit (29.7) 0.5 2.1
Goodwill amortization (51.0) 0.9
Tax audit settlement (6.3)
Other (2.5) 0.7 (0.8)
(48.2)% 30.8% 36.3%
The effective rate for 1995 was positively affected by a $2.1 million
final tax audit settlement with the Internal Revenue Service relating to
pension, software amortization expenses and other items.
The primary temporary differences that gave rise to deferred income taxes
were as follows:
December 31,
1996 1995
Deferred tax assets:
Capitalized software $ 4,555 $ 3,529
Medical claims payable discounting 1,425 1,295
Employee benefits 7,830 7,528
Unearned premiums 3,601 3,491
Other capitalized expenses 2,989 3,447
Other 5,800 6,872
Total deferred tax assets 26,200 26,162
Deferred tax liabilities:
Depreciation 3,197 3,656
Pension and other 4,120 4,133
Unrealized appreciation of securities 5,365 4,317
Other tax-deductible expenses 6,568 1,840
Total deferred tax liabilities 19,250 13,946
Valuation allowance (112) (430)
Net deferred tax asset $ 6,838 $11,786
The company has recorded a valuation allowance for the realization of
a tax asset associated with the undistributed losses of minority-owned
subsidiary companies that were acquired through the HealthLink acquisition.
13. Employee benefit programs Pension plan
The company and its subsidiaries participate in a defined benefit pension
plan covering substantially all company employees (excluding HealthLink
employees). The national Blue Cross and Blue Shield Association (BCBSA) is
responsible for administration of this defined benefit pension plan. The
benefits are based on years of service and average annual compensation for
the employee's highest consecutive five of the last 10 years. Plan assets
are invested primarily in publicly traded equity securities and bonds. The
company's funding policy is to contribute amounts needed to meet the
minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974 (ERISA).
Net periodic pension cost for the company includes the following
components:
Year ended December 31,
1996 1995 1994
Service cost $1,812 $1,597 $2,138
Interest cost 2,472 2,282 2,295
Actual return on plan assets (4,746) (5,321) (1,837)
Net amortization and deferral 1,694 2,582 (484)
Net periodic pension cost $1,232 $1,140 $2,112
Assumptions used in the development of pension data follow:
1996 1995 1994
Discount rate 7.75% 7.5% 8.5%
Expected long-term rate of
return on assets 9.0 9.0 9.0
Rates of increase in
compensation levels 3.5-7.0 3.5-7.0 3.5-7.0
The funded status of the company's pension plan and the amount recorded
as accrued pension cost consist of the following:
December 31,
1996 1995
Accumulated benefit obligation:
Vested benefits $25,347 $21,927
Non-vested benefits 5,719 2,214
31,066 24,141
Effect of projected compensation increases 6,681 12,389
Actuarial present value of projected
benefit obligation 37,747 36,530
Fair value of plan assets (34,175) (28,141)
Unfunded status 3,572 8,389
Unrecognized transition asset 1,874 1,500
Unrecognized net gain (loss) 1,196 (2,939)
Unrecognized prior service cost 1,756 2,056
Accrued pension cost $ 8,398 $ 9,006
HealthLink provides a defined contribution pension plan covering
substantially all HealthLink employees who meet the plan eligibility
requirements as to age and length of service. HealthLink contributes an
amount equal to 4% of participating employees' annual base compensation
levels. Additional amounts can be contributed at the company's discretion.
Pension expense during 1996 and 1995, subsequent to the company's purchase
of HealthLink on August 10, 1995, was $245 and $94, respectively.
Postretirement benefits other than pensions
The company provides certain health care and life insurance benefits for
retired and terminated employees (excluding HealthLink employees).
Substantially all of the company's employees may become eligible for those
benefits if they reach normal retirement age while working for the company.
The health care and life insurance benefits for retired employees are
provided through insurance companies whose premiums are based on
the benefits paid during the year. The estimated cost of retiree benefit
payments other than pensions is accrued over the period such benefits are
earned.
The net periodic cost for postretirement benefits includes the
following components:
Year ended December 31,
1996 1995 1994
Service cost $ 457 $ 363 $ 439
Interest cost 1,088 1,015 964
Amortization of:
Prior service cost (6) (28) (28)
Actuarial loss 85 20 82
Net periodic postretirement cost $1,624 $1,370 $1,457
The company's postretirement benefit plan is currently not funded. The
following table presents the status of the company's postretirement benefits:
December 31,
1996 1995
Accumulated benefit obligation:
Retirees $ 8,939 $ 8,951
Fully eligible plan participants 1,628 613
Other active plan participants 4,502 4,822
15,069 14,386
Unrecognized prior service cost (19) 450
Unrecognized experience loss (2,772) (3,115)
Accrued postretirement benefit cost $12,278 $11,721
The assumed discount rate is 7.75% for 1996 and 7.5% for 1995. The
increase in the per capita costs of covered health care benefits is assumed
to be 8% as of December 31, 1996, decreasing gradually (1% per year) to 6.5%
by 1998. Increasing the assumed health cost trend rate by one percentage
point would increase the accumulated benefit obligation as of December 31,
1996, by approximately $1,315 and increase net periodic postretirement cost
by $168.
Postemployment benefits
The company also provides certain severance benefits for employees who
involuntarily terminate their employment and long-term disability benefits
for employees who are disabled. Severance benefits include salary
continuation, medical benefits and career transition benefits. Disability
benefits include life insurance, medical coverage and salary continuation.
Disability coverage for salary continuation is provided under the National
Trust of Blue Cross and Blue Shield, which is administered by the BCBSA.
Postemployment benefits are accrued if attributable to service already
rendered, if the benefits accumulate or vest, if payment is probable and if
the amounts can be reasonably estimated. Postemployment benefit expense was
$940, $938, and $929 for 1996, 1995, and 1994, respectively.
Stock-based compensation plans
The company provides an Equity Incentive Plan and a Directors' Stock
Option Plan (the plans), which allow for the annual grant of stock options in
the form of incentive stock options, non-qualified stock options and
restricted stock grants, and are further described below. The company applies
APB Opinion 25 and related interpretations in accounting for these plans.
Accordingly, no compensation cost has been recognized for these plans. Had
compensation cost for the company's plans (for options granted in 1995 and
1996) been determined consistent with FASB Statement No. 123, the company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
Year 1996 1995
Net income As reported $(2,027) $23,570
Pro forma $(2,346) $23,504
Earnings per share As reported $ (0.11) $ 1.26
Pro forma $ (0.13) $ 1.26
The maximum number of shares subject to options and grants under the Equity
Incentive Plan and Directors' Stock Option Plan is 1 million and 60,000,
respectively. The exercise price of each option equals the market price of the
company's stock on the date of grant and an option's maximum term is 10 years.
Options vest by the end of the third year.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for option grants in 1996, 1995, and 1994,
respectively: expected volatility of 29, 29, and 34 percent; risk-free interest
rates of 7, 7, and 6 percent; and expected lives of 6.5 years. In addition,
for all three years, no dividend yield was assumed.
A summary of the status of the plans as of December 31, 1996, 1995, and
1994 and changes during the years ended on those dates is presented below:
Number of Weighted-average Weighted-average
shares exercise price fair value
Granted 217,446 $11.00 $5.05
Forfeited (3,221) $11.00
Outstanding at December 31, 1994 214,225 $11.00
Granted 77,316 $17.57 $8.07
Forfeited (61,702) $12.52
Outstanding at December 31, 1995 229,839 $12.80
Granted 408,708 $12.37 $5.70
Forfeited (65,119) $13.20
Outstanding at December 31, 1996 573,428 $12.45
There were no options exercisable at December 31, 1996, 1995, and
1994. In addition, the pro forma disclosures included above may not be
representative of the effects on reported net income for future years.
Other benefit plans
The company provides a pretax 401(k) plan covering substantially all
company employees, an incentive program to key management personnel for the
achievement of corporate and individual goals, and a sales incentive program
to encourage exceptional performance in marketing to and servicing of
clients. The cost of providing these programs is not significant to the
company's overall results of operations.
14. 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 under way. BCBSMo
and the company believe the claims are without merit and intend to vigorously
defend the action.
Litigation with DOI and Attorney General
In August 1994, BCBSMo transferred certain assets to the company in
connection with an offering to the public of 20% 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) formally approved the Reorganization and Public Offering on
April 14, 1994, the Director and DOI subsequently claimed that the
Reorganization and Public Offering violated state laws and that BCBSMo was
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. The Director and DOI threatened to bring legal action, seek a
receivership or terminate BCBSMo's insurance license unless BCBSMo gave up
its assets.
BCBSMo's extensive efforts to settle this dispute were unsuccessful. On
May 13, 1996, BCBSMo filed a declaratory judgment action in the Circuit Court
of Cole County, Missouri (the Court) against the Director, DOI and the
Missouri Attorney General (the Attorney General was a necessary party due to
his sole authority to enforce nonprofit corporation laws).
The Director and 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
counterclaims allege violations of certain health service corporation and
nonprofit corporation statutes. The Director and DOI's counterclaims sought
among other things: (i) permanent injunctions against BCBSMo; (ii)
imposition of a trust on BCBSMo's assets for public benefit purposes;
(iii) return of profits from Medigap policies reinsured with a subsidiary;
and (iv) an accounting of all assets transferred by BCBSMo.
The Attorney General filed an answer and counterclaim on June 20, 1996
alleging that the Reorganization and Public Offering, and the continued
operations through the company and its subsidiaries, exceed BCBSMo's
statutory purposes. The Attorney General requested a declaration that BCBSMo
has exceeded its lawful authority and seeks such relief as the Court
determines to be appropriate under the circumstances based on a statute which
authorizes judicial dissolution or less drastic alternative relief in the
Court's discretion.
On September 9, 1996 (the September 9 Order), the Court granted BCBSMo's
motion for summary judgment against the Director and DOI, rejected all of the
Director and DOI's affirmative defenses (including allegations of fraud),
issued a permanent injunction against the Director and DOI and declared that:
(i) under Missouri law the Director and DOI have no authority to demand that
BCBSMo make a payment as a result of the Reorganization and Public Offering;
(ii) under Missouri law the Director and 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 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 DOI have demanded; and (iv) (A) BCBSMo is a mutual benefit type of
nonprofit corporation rather than a public benefit type of nonprofit
corporation; (B) the Reorganization and Public Offering were authorized under
all laws applicable to nonprofit health services corporations; and (C) 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. On December 30, 1996, the Court issued
orders modifying the findings and declarations set forth in (iv) above, on
the grounds that it was legally unnecessary to resolve such issues since the
Court had already ruled against the Director and DOI for other reasons.
The September 9 Order permanently enjoined the Director and DOI from,
among other things, (i) revoking, suspending or refusing to renew BCBSMo's
insurance license based in any part upon the Reorganization or Public
Offering; (ii) commencing a valuation of BCBSMo's assets and demanding a
payment as a result of the Reorganization and Public Offering; (iii)
commencing any administrative hearing or making any administrative
determination based in any part upon the Reorganization and Public Offering;
(iv) instituting any seizure, receivership, conservatorship or similar
action or proceeding against BCBSMo based in any part upon the
Reorganization and Public Offering; and (v) taking any other action however
denominated, against BCBSMo based in any part upon the Reorganization and
Public Offering. This injunctive relief remains in place, but the Court's
December 30 orders clarify that the injunction does not prohibit the
Director and DOI from asserting that the post-Reorganization operations of
BCBSMo may violate the health services corporation laws (even though such
operations may have been affected by the Reorganization).
On August 28, 1996, the Director and 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 October 18, 1996, the Attorney General filed a motion for leave to file
an amended counterclaim against BCBSMo seeking a declaration that BCBSMo is
a public benefit corporation, not a mutual benefit corporation, and
requesting an order that BCBSMo amend its Articles of Incorporation
accordingly. The Court granted the Attorney General's motion for leave to
file the amended counterclaim, which remains pending.
On December 30, 1996, the court issued three orders (the December 30
Orders): (i) denying BCBSMo's motion for summary judgment against the
Attorney General; (ii) granting the Attorney General's motion for partial
summary judgment against BCBSMo; (iii) denying BCBSMo's supplemental motion
for summary judgment against the Director and DOI on their amended
counterclaim; (iv) granting the Director and DOI's motion for summary
judgment against BCBSMo on their amended counterclaim; and (v) modifying, in
part, the Court's previous September 9 Order as described above. The
December 30 Orders declared that (i) BCBSMo has continued to exceed or abuse
its statutorily permissible purposes and the authority conferred on it by
law; and (ii) BCBSMo is subject to judicial dissolution proceedings, but
that prior to ordering dissolution, the Court is required to consider
whether there are alternatives to dissolution and whether dissolution is in
the public interest or is the best way of protecting the interests of its
members.
The Court also (i) certified the December 30 Orders and the September 9
Order, as modified, for immediate appeal; (ii) held in abeyance further
proceedings on the Attorney General's counterclaim pending appeal; and (iii)
stayed the legal effect of the order granting the Director and DOI summary
judgment pending the filing of an appeal bond (which BCBSMo promptly filed).
On January 9, 1997, BCBSMo filed a notice of appeal of the
December 30 Orders. On January 21, 1997, the Director and DOI filed a notice
of appeal of the September 9 Order, as modified. Both appeals are pending;
briefing will continue through the summer and an appellate hearing is not
likely to be scheduled before August.
Notwithstanding the December 30 Orders, the company still believes that
the counterclaims of the Director, DOI and the Attorney General are without
merit and that BCBSMo's legal position is strong. If, however, BCBSMo does
not prevail on appeal in overturning the summary judgment in favor of the
Attorney General, it may be subject to dissolution proceedings if the Court
determines that no reasonable alternatives to dissolution exist. Likewise,
BCBSMo could be unsuccessful on the appeal of the relief already granted
against the Director and DOI or in its defense of the Attorney General's
amended counterclaim. Any of the foregoing could have a material adverse
effect on the company and the market for the company's stock. See
"Contingencies - Status of Blue Cross and Blue Shield trademark licenses."
Status of Blue Cross and Blue Shield trademark licenses
BCBSMo has an exclusive trademark license (the Primary License), and the
company, HALIC and BlueCHOICE have exclusive controlled affiliate licenses
(the Affiliate Licenses), with the national Blue Cross and Blue Shield
Association (BCBSA) giving them the right to use the "Blue Cross" and "Blue
Shield" names, trademarks and service marks in connection with health
insurance products marketed and sold in BCBSMo's licensed operating area
(consisting of 85 counties in eastern and central Missouri). The trademark
licenses require BCBSMo, the company and its controlled affiliates to pay
license fees to BCBSA for the use of the trademarks. The company believes
that the exclusive right to use the "Blue Cross" and "Blue Shield" trademarks
provides it and its controlled affiliates with a significant marketing
advantage in BCBSMo's licensed operating area, the loss of which would have a
material adverse effect on the company and the market for the company's
stock.
The Affiliate Licenses are derivative of the Primary License and
automatically terminate if the Primary License is terminated. According to
their terms, the trademark licenses also automatically terminate if, among
other things: (i) BCBSMo controls less than 51% of the total voting power of
the company; (ii) BCBSMo, the company or its controlled affiliates do not
maintain certain quality control standards; (iii) DOI assumes control of
BCBSMo, the company or its controlled affiliates; or (iv) an action is
instituted against BCBSMo, the company or its controlled affiliates seeking
dissolution or liquidation or seeking the appointment of a trustee, receiver
or custodian, which is not dismissed within 60 days of being instituted.
According to their terms, if the trademark licenses are terminated, BCBSMo,
the company and its controlled affiliates are jointly liable to BCBSA for
payment of a termination fee in an amount equal to $25 times the number of
licensed enrollees of the terminated entity and its controlled affiliates,
and must give written notice of such termination to their enrollees.
Although the 60-day period contemplated by (iv) in the immediately
preceding paragraph would have expired on August 20, 1996, ongoing discussion
with BCBSA did not give any indication that BCBSMo's pending litigation
against the Attorney General, the Director and DOI described above (the
Litigation) would have any impact on the retention of the licenses. On or
about January 9, 1997, however, BCBSA notified BCBSMo that the Primary
License and the Affiliate Licenses had automatically terminated because a
counterclaim in the Litigation seeking dissolution of BCBSMo had been pending
for 60 days. BCBSMo believes that the Litigation did not trigger the
automatic termination provisions of the licenses and that such licenses
remain in full force and effect, and has strongly stated this position to
BCBSA. BCBSMo based its legal position upon, among other things: (i) the fact
that the Attorney General's claim against BCBSMo seeks alternatives to
dissolution, not the dissolution of BCBSMo; (ii) the fact that the trial
court stayed the legal effect of the rulings adverse to BCBSMo in the
Litigation pending their appeal and that there is no threat of the type
contemplated by the licenses until the appeal is decided; (iii) Missouri
franchise laws that mandate 90 days prior written notice of termination of
the trademark licenses; and (iv) based upon the prior statements, actions and
inaction of BCBSA, equitable principles of waiver, estoppel and laches
prevent termination of the licenses. BCBSA decided to resolve the issue
without litigation and to give BCBSMo, the company and its controlled
affiliates the uninterrupted right to use the "Blue Cross" and "Blue Shield"
names, trademarks and service marks by granting them new interim and
temporary licenses, (thereby placing them in substantially the same position
as if no termination had taken place). BCBSMo, the company and its
controlled affiliates agreed to accept the benefits and rights under such new
licenses, while reserving and in no manner waiving their rights under the
Primary License and the Affiliate Licenses.
The interim licenses gave BCBSMo, the company and its previously
licensed controlled affiliates the right to continue to use the trademarks
from the effective date of the purported automatic termination of the Primary
License and the Affiliate Licenses until the date the temporary licenses were
approved by the board of BCBSA. On January 20, 1997, the board of BCBSA
granted new temporary licenses to BCBSMo, the company and its previously
licensed controlled affiliates to continue to use the "Blue Cross" and "Blue
Shield" names, trademarks and service marks. The temporary licenses will
automatically terminate upon the expiration or termination of the stay of the
Litigation entered on December 30, 1996. Pursuant to the temporary licenses,
BCBSMo agreed not to bring any action against BCBSA arising out of the
purported automatic termination or the granting of the interim and temporary
licenses for so long as BCBSMo remains a licensee, whether temporary or
permanent, of BCBSA. BCBSA also agreed that the provisions of the Primary
License and the Affiliate Licenses requiring payment of the $25 per enrollee
termination fee and notice of termination to each enrollee shall not apply so
long as BCBSMo remains a licensee, whether temporary or permanent, of BCBSA.
BCBSA agreed to grant to BCBSMo, the company and its previously licensed
controlled affiliates full trademark licenses if and when (i) the Litigation
is resolved in a manner that is in the best interests of BCBSA, the
trademarks and the other Blue plans, and (ii) BCBSMo, the company and its
previously licensed controlled affiliates are then in compliance with the
terms of such full licenses and with BCBSA rules and regulations.
As a result of the issuance of the temporary licenses, BCBSMo, the
company, HALIC and BlueCHOICE currently have the right to continue to use the
"Blue Cross" and "Blue Shield" names, trademarks and service marks pending
the appeal of the Litigation. However, if BCBSMo is not successful in its
appeal of the December 30 Orders issued in the Litigation, the company may
lose the right to use such names, trademarks and service marks, which would
have a material adverse effect on the company and the market for the
company's stock. See "Contingencies - 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."
The company is in the process of discussing outstanding issues on the market
conduct report. 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.
15. Segment information
The company offers a comprehensive array of underwritten products
including PPO, POS, HMO, Medicare supplement and managed indemnity coverages.
The company also provides TPA and ASO services for self-insured
organizations. All of the company's revenues, both underwritten premiums and
self-funded fees and other income, are derived from domestic (United States)
sources and no single customer accounts for more than 10% of total revenues.
Operating income for the company's underwritten segment is determined by
deducting from premium revenue the health care service costs, commissions,
and general and administrative expenses, as well as any nonrecurring charges,
that are attributable to that segment's operations. Operating income for the
self-funded segment is determined by deducting from fees and other income the
commissions, general and administrative expenses and non-recurring charges
attributable to the segment. Expenses not directly traceable to an industry
segment are allocated on a consistent and reasonable basis. Identifiable
assets include assets used jointly by the two segments and are
allocated among the segments based on a consistent and reasonable basis.
Corporate identifiable assets include cash and investments that are
maintained for general corporate purposes. Capital expenditures include
additions to property, plant and equipment, including property acquired
through capital leases. Financial information by segment is as follows:
Year ended December 31,
1996 Underwritten Self-funded Corporate Consolidated
Revenues $595,661 $57,714 $653,375
Operating income (loss) (13,741) 162 (13,579)
Capital expenditures 12,610 8,241 20,851
Depreciation and
amortization expense 8,099 6,861 14,960
General and administrative
expenses 88,687 55,263 143,950
Non-recurring operating
charges 2,791 1,743 4,534
Identifiable assets 358,081 130,660 $43,403 532,144
1995
Revenues $538,422 $ 53,458 $591,880
Operating income (loss) 23,461 (4,428) 19,033
Capital expenditures 8,126 5,661 13,787
Depreciation and
amortization expense 5,473 5,811 11,284
General and administrative
expenses 85,026 55,447 140,473
Non-recurring operating
charges 1,500 1,974 3,474
Identifiable assets 349,156 137,207 $30,025 516,388
1994*
Revenues $546,206 $ 37,374 $583,580
Operating income (loss) 26,399 (2,687) 23,712
Capital expenditures 9,709 7,092 16,801
Depreciation and
amortization expense 3,389 2,880 6,269
General and administrative
expenses 87,612 39,154 126,766
Non-recurring operating
charges 1,191 393 1,584
Identifiable assets 334,482 41,000 $58,123 433,605
*pro forma
16. Transactions with Blue Cross and Blue Shield of Missouri
Pursuant to an administrative services agreement, the company provides
certain administrative and support services, including computerized data
processing and management information systems, telecommunication systems
and accounting, finance, legal, actuarial and other management services
to BCBSMo. These expenses are allocated to and paid by BCBSMo in an
amount equal to the direct and indirect costs and expenses incurred in
furnishing these services. In addition, the company provides services to
BCBSMo, which include health plan services, processing of claims related
to such plans, provider contracting, market research and advertising, to
be reimbursed on a basis that approximates cost. Management of the
company and of BCBSMo consider such allocation methodologies and cost
approximations reasonable and appropriate. The agreement has an initial
three-year term and may be mutually extended by either party after the
initial term with six months' written notice.
General and administrative expense excludes net intercompany charges
allocated to BCBSMo by the company for the respective periods, as
follows:
Year ended December 31,
1996 1995 1994
Services provided to BCBSMo $15,968 $18,204 $20,906
Services provided by BCBSMo (4,237) (2,974) (2,972)
Net expenses allocated to BCBSMo $11,731 $15,230 $17,934
The company has intercompany receivables and payables between the company
and BCBSMo, which include $15.8 million of receivables and $16.7 million of
payables related to the BCBSMo transfer of all economic risks and rewards on
certain insurance policies originally issued by BCBSMo, pursuant to a
reinsurance agreement. In addition, the intercompany receivables and
payables include net intercompany transactions for general and
administrative expenses.
17. Statutory information
The operations of the company's subsidiaries, HALIC and BlueCHOICE, are
subject to regulation and supervision by regulatory authorities of the
various jurisdictions in which they are licensed to conduct business.
Regulatory authorities exercise extensive supervisory power over the
licensing of insurance companies; the amount of reserves that must be
maintained; the approval of forms and insurance policies used; the nature
of, and limitation on, an insurance company's investments; periodic
examination of the operations of insurance companies; the form and content
of annual statements and other reports required to be filed on the financial
condition of insurance companies; and the establishment of capital
requirements for insurance companies. HALIC and BlueCHOICE are required to
file periodic statutory financial statements in each jurisdiction in which
they are licensed. Additionally, HALIC and BlueCHOICE are periodically
examined by the insurance departments of the jurisdictions in which they are
licensed to do business.
The company's subsidiaries, HALIC and BlueCHOICE, prepare their
statutory financial statements in accordance with accounting practices
prescribed or permitted by the Missouri Department of Insurance. Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissioners, as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The company's
subsidiaries' statutory accounting practices do not encompass any permitted
practices that differ materially from the prescribed statutory accounting
practices.
18. Quarterly financial information (unaudited)
(In thousands, except share data)
Three months ended
1996 31-Mar 30-Jun 30-Sep 31-Dec
Total revenues $157,968 $161,380 $163,788 $170,239
Operating expenses 147,593 163,655 177,565 178,141
Operating income (loss) 10,375 (2,275) (13,777) (7,902)
Investment income, net 4,519 5,567 3,551 3,895
Other, net (1,393) (1,123) (1,544) (1,260)
Income (loss) before taxes 13,501 2,169 (11,770) (5,267)
Provision (benefit) for
income taxes 5,276 885 (3,914) (1,587)
Net income (loss) 8,225 1,284 (7,856) (3,680)
Earnings (loss) per share $ 0.44 $ $0.07 $ (0.42) (0.20)
Weighted average shares
outstanding 18,681 18,680 18,677 18,677
Membership (in thousands) 1,669 1,732 1,774 1,853
1995
Total revenues $146,496 $144,118 $146,661 $154,605
Operating expenses 137,882 136,280 145,787 152,898
Operating income 8,614 7,838 874 1,707
Investment income, net 3,843 4,563 3,869 6,069
Other, net (685) (292) (865) (1,485)
Income before taxes 11,772 12,109 3,878 6,291
Provision for income taxes 4,203 4,665 238 1,374
Net income 7,569 7,444 3,640 4,917
Earnings per share $ 0.40 $ .40 $ 0.19 $ 0.26
Weighted average
shares outstanding 18,690 18,690 18,690 18,681
Membership (in thousands) 824 801 1,541 1,583
Report of Independent Accountants
To the Board of Directors
of RightCHOICE Managed Care, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, of changes in
shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of RightCHOICE
Managed Care, Inc., and its subsidiaries at December 31, 1996
and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted
auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the Consolidated Financial
Statements, the company changed its method of accounting for
certain investments in debt and equity securities in 1994.
Price Waterhouse LLP
St. Louis, Missouri
February 14, 1997
Board of Directors
RightCHOICE Managed Care, Inc.
John A. O'Rourke (Chairman)
Chairman, President, and Chief Executive Officer
RightCHOICE Managed Care, Inc.
President and Chief Executive Officer
Blue Cross and Blue Shield of Missouri
Chairman and Chief Executive Officer
HMO Missouri, Inc. (d/b/a BlueCHOICE)
Chairman, HealthLink, Inc.
Chairman, HealthLink HMO, Inc.
St. Louis, Missouri
Norman J. Tice (Vice-Chairman) (d)
Retired
St. Louis, Missouri
Frederic C. Brussee (Director)
St. Louis, Missouri
William H.T. Bush (Director) (a) (b) (d)
Chairman
Bush-O'Donnell & Company, Inc.
St. Louis, Missouri
Ronald G. Evens, M.D. (Director) (b) (c) (d)
Director
Mallinckrodt Institute of Radiology, Inc.
Washington University Medical Center
St. Louis, Missouri
Edward C. Gomes, Jr. (Director) (a) (c)
President and Chief Executive Officer
Lionmark Construction Companies
St. Louis, Missouri
Earle H. Harbison, Jr. (Director) (b) (c) (d)
Chairman
Harbison Corporation
St. Louis, Missouri
Roy Heimburger (Director)
St. Louis, Missouri
Roger B. Porter, Ph.D. (Director) (a) (c)
Professor of Business & Government
Kennedy School of Government
Harvard University
Cambridge, Massachusetts
Gloria W. White (Director) (a) (b)
Vice Chancellor for Human Resources
Washington University
St. Louis, Missouri
(a) Member, Audit Committee
(b) Member, Compensation Committee
(c) Member, Finance and Investment Committee
(d) Member, IOS Project Oversight Committee
Executive Officers
John A. O'Rourke
Chairman, President, and Chief Executive Officer
RightCHOICE Managed Care, Inc.
Kenneth M. Evelyn
Senior Vice President and
Chief Marketing Officer
President and Chief Operating Officer,
HMO Missouri, Inc. (d/b/a BlueCHOICE)
Janice C. Forsyth
Senior Vice President
General Counsel and Corporate Secretary
Joseph R. Huguenard, M.D.
Senior Vice President
Medical Management and
Corporate Medical Director
Joseph V. Marabito
Senior Vice President
Strategy and Corporate Development
Herbert B. Schneiderman
Senior Vice President
Medical Delivery Systems
Edward J. Tenholder
Senior Vice President
Client Services and Corporate Support
Sandra A. Van Trease
Senior Vice President and
Chief Financial Officer
David T. Ott
Acting President and Chief Executive Officer
HealthLink, Inc.
Courtney Walter
Acting Executive Vice President
HealthLink, Inc.
Shareholder Information
Annual Meeting
The annual meeting of shareholders will be held at 10 a.m.,
CDT, May 13, 1997, at Blue Cross and Blue Shield Plaza, Room
508, 1831 Chestnut Street, St. Louis, MO.
Independent Public Accountant
Price Waterhouse LLP
St. Louis, MO
Corporate Counsel
Stinson, Mag & Fizzell
Kansas City, MO
Trustee, Transfer Agent and Registrant
Boatmen's Trust Company
St. Louis, MO
Shareholders' Data
1996
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Outstanding
common shares 18,676,900 18,676,900 18,676,900 18,680,600
Market price:
Quarter ending $10 5/8 $12 1/4 $12 3/8 $16 1/4
Range $8 7/8-$12 5/8 $11-$13 3/8 $12 1/4-$17 5/8 $12 7/8-$17 1/8
1995
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Outstanding
common shares 18,681,200 18,681,900 18,690,000 18,690,000
Market price:
Quarter ending $13 $14 7/8 $12 $18
Range $11 3/4-$15 1/8 $11 1/2-$15 1/8 $11 1/2-$18 1/8 $14-$18 7/8
Annual Report Form 10-K
The company has filed an annual report with the Securities and
Exchange Commission on Form 10-K. Shareholders may obtain a copy
of the Form 10-K without charge, by writing:
Investor Relations
RightChoice Managed Care, Inc.
1831 Chestnut Street, Mail Route FRR-4073
St. Louis, MO 63103
RightCHOICE Managed Care, Inc. is traded on the New York
Stock Exchange (NYSE) under the symbol "RIT." There were 146
shareholders of record on February 28, 1997.
Note: RightCHOICE Managed Care, Inc. is an insurance holding
company. Coverage offered through RightCHOICE is
underwritten by Healthy Alliance Life Insurance Company, HMO
Missouri, Inc. (d/b/a BlueCHOICE), and RightCHOICE Insurance
Company.
Exhibit 21.1
SUBSIDIARIES OF REGISTRANT
The following are subsidiaries of RightCHOICE Managed Care, Inc.
as of December 31, 1996:
State of
Incorporation
Name or Organization
HMO Missouri, Inc. (d/b/a BlueCHOICE) Missouri
Diversified Life Insurance Agency of Missouri, Inc. Missouri
Healthy Alliance Life Insurance Company Missouri
HealthLink, Inc. Illinois
HeatlhLink HMO, Inc. Missouri
The EPOCH Group, L.C. Missouri
RightCHOICE Insurance Company Illinois
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-90608) of RightCHOICE Managed Care, Inc. of
our report dated February 14, 1997 appearing in the 1996 Annual Report to
Shareholders which is incorporated in this Annual Report on Form 10-K. We
also consent to the incorporation by reference of our report on the Financial
Statement Schedules, which appears in this Form 10-K.
PRICE WATERHOUSE LLP
St. Louis, Missouri
March 28, 1997
<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-K for the
annual period ended December 31, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 33,418
<SECURITIES> 262,216
<RECEIVABLES> 54,767
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 381,258
<PP&E> 81,672
<DEPRECIATION> 30,424
<TOTAL-ASSETS> 532,144
<CURRENT-LIABILITIES> 272,414
<BONDS> 70,756
0
0
<COMMON> 187
<OTHER-SE> 172,767
<TOTAL-LIABILITY-AND-EQUITY> 532,144
<SALES> 0
<TOTAL-REVENUES> 653,375
<CGS> 0
<TOTAL-COSTS> 666,954
<OTHER-EXPENSES> 0
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