SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
October 30, 1998
Date of Report (Date of earliest event reported): (October 29, 1998)
RIGHTCHOICE MANAGED CARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
MISSOURI
(State or Other Jurisdiction of Incorporation)
1-13248 43-1674052
(Commission File Number) (I.R.S. Employer Identification No.)
1831 Chestnut Street, St. Louis, Missouri 63103-2275
(Address of principal executive offices) (Zip Code)
314-923-4444
(Registrant's telephone number, including area code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Items 1. Changes in Control of Registrant.
Not applicable.
Item 2. Acquisition or Disposition of Assets.
Not applicable.
Item 3. Bankruptcy or Receivership.
Not applicable.
Item 4. Changes in Registrant's Certifying Account.
Not applicable.
Item 5. Other Events.
The Registrant's press release, dated October 30, 1998,
relating to an Order issued by Judge Thomas J. Brown, III of
the Circuit Court of Cole County, Missouri in the case
styled Blue Cross and Blue Shield of Missouri, a Nonprofit
Corporation v. Jay Angoff, Director, Missouri Department of
Insurance, and Jeremiah W. (Jay) Nixon, Attorney General of
State of Missouri, Cause No. CV196-0619CC, on October 29,
1998 (the "Order"), is attached as Exhibit 99(a) hereto and
incorporated herein by reference.
The Order is attached as Exhibit 99(b) hereto and
incorporated herein by reference.
Item 6. Resignations of Registrant's Directors.
Not applicable.
Item 7. Financial Statements
Pro Forma Financial Statements and Exhibits.
(a) - (b) Not applicable.
(c) Exhibits Required by Item 601 of Regulation S-K:
99(a) Press release issued by RightCHOICE
Managed Care, Inc. on October 30, 1998.
99(b) Order issued by Judge Thomas J.
Brown, III of the Circuit Court of Cole County,
Missouri in the case styled Blue Cross and Blue
Shield of Missouri, a Nonprofit Corporation v. Jay
Angoff, Director, Missouri Department of
Insurance, and Jeremiah W. (Jay) Nixon, Attorney
General of State of Missouri, Cause No. CV196-
0619CC, on October 29, 1998.
Item 8. Change in Fiscal Year.
Not applicable.
Item 9. Sales of Equity Securities Pursuant to Regulation S.
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: October 30, 1998
RIGHTCHOICE MANAGED CARE, INC.
By: /s/ Sandra A. Van Trease
Sandra A. Van Trease
Chief Financial Officer,
Executive Vice President and
Chief Operating Officer
EXHIBIT INDEX
Exhibit No. Description
99(a) Press release issued by RightCHOICE Managed Care, Inc.
on October 30, 1998.
99(b) Order issued by Judge Thomas J. Brown, III of
the Circuit Court of Cole County Missouri in
the case styled Blue Cross and Blue Shield of
Department of Insurance, and Jeremiah W.
(Jay) Nixon, Attorney General of State of
Missouri, Cause No. CV196-0619CC, on October
29, 1998.
EXHIBIT 99(a)
RIGHTCHOICE MANAGED CARE, INC. LETTERHEAD
CONTACT: Clara Kinner
(314) 923-6268
(314) 923-4883
Blue Cross And Blue Shield Of Missouri And RightCHOICE
Managed Care to
Consider Legal Alternatives as a Result of Court Order
ST. LOUIS, OCTOBER 30, 1998 -- Blue Cross and Blue Shield of
Missouri, parent company of RightCHOICE Managed Care, Inc.,
(NYSE:RIT), today announced that the company is considering
legal alternatives in response to an order filed by Cole
County Circuit Court Judge Thomas Brown III that names a
temporary receiver/custodian for the shares of RightCHOICE
stock owned by Blue Cross and Blue Shield of Missouri, which
represent approximately 80 percent of the equity interest of
RightCHOICE. The court took the action "on its own motion"
in connection with the September 20 settlement agreement
reached by Blue Cross and Blue Shield of Missouri,
RightCHOICE, the Missouri Attorney General and the Missouri
Department of Insurance.
The order does not constitute the appointment of a
receiver/custodian over the operations of either of the
companies.
In the order, the court cited concerns about the
fairness of the settlement, alleged conflicts of interest
and the need for an independent examination of the proposed
settlement agreement and related issues, including issues
related to the value of the 80 percent stake in RightCHOICE
and inadequate exploration of alternatives to the settlement
agreement as proposed. The order also approved the
engagement of legal counsel and investment banker to advise
the receiver/custodian.
The companies have reviewed the order, issued late
yesterday, and are considering their alternatives in the
trial and appellate courts. In addition, the companies are
analyzing the various consequences of the order. These
include termination of the Blue Cross and Blue Shield
Association licenses and resultant event of default under
RightCHOICE's credit facility. These consequences may have a
material adverse effect on RightCHOICE.
The company intends to continue providing services to
its members and other clients as these issues are resolved.
"Judge Brown has agreed to meet with us next week to
address these issues. We intend to inform the court of the
consequences of the order. In the meantime, we are
considering all legal alternatives available to us," said
John O'Rourke, president and chief
- - more -
RightCHOICE - Add One -
executive officer of Blue Cross and Blue Shield of Missouri,
and chairman, president and chief executive officer of
RightCHOICE Managed Care. "We have always acknowledged that
the settlement agreement has to be approved by the court,
and these issues will still be dealt with in that setting.
The case has not been remanded to Judge Brown and we have
not moved for approval of the settlement by the court."
RightCHOICE has hired Salomon Smith Barney as its
financial and strategic advisor.
The settlement agreement calls for Blue Cross and Blue
Shield of Missouri to reorganize and be merged with
RightCHOICE Managed Care and the creation of a charitable
foundation, which would become the owner of approximately 80
percent of the stock of the new RightCHOICE. The foundation
would liquidate most of its shares over a period of time not
to exceed five years under a divestiture plan, and the
proceeds would be used for health care purposes. As a
result of the reorganization, RightCHOICE or its
subsidiaries would absorb the remaining assets and related
liabilities of Blue Cross and Blue Shield of Missouri and
would become a consolidated, fully for-profit company and
the direct licensee for the Blue Cross and Blue Shield names
and trademarks.
SAFE HARBOR STATEMENT
"Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995. Estimates and other
statements set forth herein that are not historical facts
are forward-looking statements that involve risks and
uncertainties. These risks and uncertainties include, but
are not limited to: the court's order appointing a
custodian/receiver is not vacated or modified, or the court
orders a permanent receiver/custodian over assets of Blue
Cross and Blue Shield of Missouri, including the stock of
RightCHOICE; as a result of the court's action the company's
license to use the Blue Cross and Blue Shield names,
trademarks and service marks is automatically terminated and
is not reinstated; the pursuit of remedies under the
company's credit facility due to the event of default
thereunder; the possibility that the court orders a
dissolution of Blue Cross and Blue Shield of Missouri or
does not approve the final settlement agreement, referenced
above, as an alternative to dissolution; or if court
approval of a settlement is obtained but includes conditions
that are not acceptable to the parties; the possibility that
all remaining contingencies and conditions to the parties'
obligations to effect the proposed settlement transaction
would not be met or otherwise satisfied; the effect of
governmental and regulatory action or legislation on the
receivership/custodianship or on the proposed settlement;
pending litigation involving RightCHOICE on the
receivership/custodianship or on the proposed settlement;
other actions by the Blue Cross and Blue Shield Association
relating to the license to use the Blue Cross and Blue
Shield names, trademarks and service marks by RightCHOICE
either as a result of the court's action or in connection
with the consummation of the settlement or by the new
RightCHOICE thereafter, and the additional factors and other
risks detailed in the filings by RightCHOICE with the
Securities and Exchange Commission.
RightCHOICE Managed Care, Inc. and its parent company,
Blue Cross and Blue Shield of Missouri, are the largest
providers of health care benefits in Missouri.
##
Exhibit 99(b)
IN THE CIRCUIT COURT OF COLE COUNTY, MISSOURI
BLUE CROSS AND BLUE SHIELD OF MISSOURI, )
a Nonprofit Corporation, )
)
Plaintiff, )
)
vs. ) Case No. CV196-0619CC
)
JAY ANGOFF, Director, )
Missouri Department of Insurance, and )
)
JEREMIAH W. (JAY) NIXON, Attorney General )
of State of Missouri, )
)
Defendants. )
ORDER
Now on this 29th day of October, 1998, the Court takes up,
on its own motion, the settlement agreement dated September 20,
1998, between the Attorney General, the Director of the Missouri
Department of Insurance, Blue Cross and Blue Shield of Missouri
("Blue Cross") and Right Choice Managed Care, Inc. ("Right
Choice").
The Court has several concerns.
A. Concerns About Apparent Conflicts of Interest
The fact that John A. O'Rourke signed the settlement
agreement both as President of Blue Cross and as Chief Executive
Officer of Right Choice is an indication of a deeper problem.
Both entities are controlled by the same management. Yet, the
purposes of the two organizations are divergent and in some
respects in conflict. Blue Cross is a nonprofit corporation,
formed and operated for six decades for benevolent purposes.
Right Choice is a for-profit corporation, formed and operated to
make a profit. Evidence presented in earlier proceedings showed
that pursuant to a reorganization in 1994 Blue Cross transferred
the bulk of its business to Right Choice, in exchange for which
Blue Cross received 80% of Right Choice's stock. As a result,
management created a for-profit insurance enterprise using assets
and relationships built up during six decades of nonprofit
operations. These transfers were an abuse of Blue Cross's
authority as a nonprofit health services corporation and they
exposed Blue Cross to judicial proceedings under 355.726, RSMo
1994.
A looming issue is the divestiture of the nonprofit assets (1)
from the present for-profit Blue Cross/Right Choice enterprise.
The parties to the settlement agreement propose to accomplish
that task by transferring legal title to Right Choice shares to
"The Missouri Foundation for Health," which presently does not
exist. While the idea of a public health foundation serving
unmet health insurance needs of Missourians has some appeal, the
conditions under which the proposed Foundation is supposed to be
established and operated raise flags of concern. The parties
propose that the Right Choice stock be placed into a voting
trust. Voting rights are to exercised by a Trustee to be named
(and apparently controlled) by Right Choice. See Exhibit L to
the settlement agreement, Bates Nos. 303-317. The voting trust
would effectively eliminate any control by the Foundation.
Section 4.06 would prohibit the Trustee from following
instructions of the Foundation. Section 5.03 makes it clear that
the Foundation would have no control over Right Choice's Board of
Directors, in spite of the fact that the Foundation would own 80%
of the stock. Sections 5.04 and 5.05 would freeze the Foundation
out of any meaningful role in the sale of the stock.
All of this (and more) demonstrates that the settlement
agreement was not the result of arms-length negotiations between
a benevolent corporation and a for-profit corporation. The
interests of the for-profit corporation appear to have been given
precedence. Are the same people who diverted Blue Cross from its
nonprofit purposes seeking to preserve their power and position
from the inside while making it appear on the outside as if there
will be a substantial divestiture of control? How the Court will
ultimately answer that question remains to be seen. But there is
enough evidence that the proposed settlement agreement is so
infected with inside dealing that it should be closely
scrutinized by independent experts and weighed by persons with no
stake in the agreement.
B. Concerns About the Fairness of the Settlement
Prior to the reorganization in 1994, Blue Cross was the
largest provider of managed health care benefits in Missouri. In
1993, its last year of normal operations, it reported premium
revenues of approximately $842 million. Its net income was
$25.5 million. After most of its business was transferred to
Right Choice, its premium income dropped to $82 million and it
reported a loss of $1.4 million. Right Choice emerged with
830,000 members and 90% of Blue Cross's total premium business
(including all of the profitable business).
What did Blue Cross get in return for the lucrative
insurance business transferred to Right Choice? The settlement
agreement provides for a cash payment of $175,000. Section 3.16,
Bates No. 131. Considering what was transferred, $175,000 seems
to be nothing more than a nominal sum.
In addition to a nominal amount of cash, there is the
expectancy from the proceeds of the sale of Right Choice stock,
but the settlement agreement places so many restrictions on the
stock that the fair market value of the shares will likely never
be realized. What is an 80% interest in Right Choice worth on
the open market, without restrictions? The settlement agreement
does not provide any information about that. For the reasons set
forth under part C below, the Court does not expect the existing
parties to offer evidence of fair market value. What may be a
fair price or what constitutes fair terms cannot be decided now.
What can be said is that the terms of the settlement agreement,
as they relate to the consideration for the 80% interest in Right
Choice, appear to be so inadequate that the settlement agreement
should be subjected to outside review.
C. Concerns About the Absence of a Party Willing to Take
an Adversarial Role
One of the basic tenets of the American judicial system is
that there is an adversary for each side of an issue.
Propositions are exposed to the rigor of challenge. In this way,
weak propositions are exposed and discarded.
Unfortunately, none of the existing parties are willing to
take an adversarial role when it comes to the proposed settlement
agreement. In paragraph 7, all agree to jointly move for
approval of the settlement, and all agree to cooperate in the
presentation of evidence. As far as the parties are concerned,
the Court will be offered no evidence that would expose the
settlement agreement to the rigor of challenge. This situation
troubles the Court.
There are many unanswered questions, not the least of which
is what is the fair market value of the 80% interest in Right
Choice. The management of Right Choice has an interest in not
having the shares sold on the open market to the highest bidder,
because that could result in a change of control and the
replacement of management. One would have expected the Attorney
General and Director to have insisted on a process that would
have realized the most money for the Foundation. But they appear
to have failed to do so.
Other questions abound. What are the stock options referred
to in Section 1.06(a) at Bates No. 120 that are proposed to pass
through and survive the settlement? Why is management released
from all liability, including liability for the ill-fated Blue
Cross reorganization of 1994? See paragraph 9 at Bates No. 14.
Is it fair to let management profit from stock options while at
the same time releasing management from any and all liability,
even liability for any self-dealing relating to stock options?
And why are the Attorney General and Department of Insurance
being released? See paragraph 10, Bates Nos. 15-16. What, if
anything, have they done wrong that they want released? Are
potential claims against Blue Cross/Right Choice management or
against state of officials potential claims that would have value
to Blue Cross, in its nonprofit form and not as part of a for-
profit enterprise?
The Court has concerns other than the monetary issues. What
are the various ways to apply the nonprofit assets to provide
health insurance for those Blue Cross was designed to serve? The
parties are proposing the Foundation, managed by persons
appointed by political office holders. Is that the best for all
concerned? Without evidence of alternatives, how will the Court
know whether the parties have made the right choice?
The Court should not have to raise all these questions and
issues. In the usual case, adversaries raise the questions and
issues. But having entered into a settlement agreement that
tolerates no challenge, the existing parties are no longer
willing to be adversaries. The Court is compelled to remedy that
problem.
The Court finds that the appointment of a Receiver/Custodian (2)
is necessary, in order to have an independent examination of the
proposed settlement agreement and related issues. The Court
finds that it is not in the public interest to have the Blue
Cross/Right Choice management controlling the nonprofit assets
while the settlement agreement is under review. The Court
further finds that because it has jurisdiction over the nonprofit
assets, is has a duty to protect such assets and see that they
reach the rightful custodian and are applied to the proper
purpose.
In order to preserve the nonprofit assets for either the
public's benefit, if Blue Cross is found to be a public benefit
corporation, or for the members' benefit, if Blue Cross is found
to be a mutual benefit corporation, control of the Right Choice
stock should be immediately transferred to the
Receiver/Custodian. Further, the Receiver/Custodian should be
granted the power to employ attorneys to represent him or her and
to employ such other persons or organizations which the
Receiver/Custodian believes are necessary to render advice on
matters affecting the nonprofit assets and the alternatives to
dissolution, if any, including, but not limited to, advice in the
areas of investment banking and taxation.
The Court further finds that there is a need for immediate
action and the appointment of a Receiver/Custodian pendente lite
is necessary for this purpose.
IT IS THEREFORE, ORDERED that Robert G. Russell is appointed
Receiver/Custodian pendente lite, with the power to take
exclusive possession and control of the Right Choice stock now
held by Blue Cross and to preserve and conserve such assets and
to submit to the Court such proposals relating to the stock as
the Receiver/Custodian pendente lite believes to be in the best
interests of the public or the members, as the case may be, and
to take control of any other property which the Court directs
shall be subject to the receivership or custodianship in the
future. The Receiver/Custodian pendente lite shall serve until a
hearing can be scheduled on the matter of the appointment of a
permanent Receiver/Custodian.
IT IS FURTHER ORDERED that to assist the Receiver/Custodian
pendente lite, the Court does hereby approve his employment of
James W. Gallaher and Dale C. Doerhoff as attorneys to represent
the Receiver/Custodian pendente lite in all proceedings before
this Court or any other court.
IT IS FURTHER ORDERED that in order to assist the
Receiver/Custodian pendente lite and in order to preserve the
value of the nonprofit assets, the Court does hereby approve the
employment of the Investment Banking Department of A.G. Edwards,
Inc., and, specifically, Jon Gilstrap, Pat Doherty and Daniel
Schad, employees of A.G. Edwards, as advisers. The
Receiver/Custodian pendente lite shall also have the power upon
court approval to employ such other experts as he deems necessary
to protect nonprofit assets for the benefit of either the public
or its members, as the case may be.
IT IS FURTHER ORDERED that within five days of the date of
this order, Blue Cross shall deliver physical possession of all
stock certificates it owns in Right Choice to the
Receiver/Custodian pendente lite. Upon receipt by the
Receiver/Custodian pendente lite of those stock certificates, he
is directed to deposit those certificates in the registry of this
Court by delivering them to the Clerk of the Circuit Court of
Cole County, Missouri.
IT IS FURTHER ORDERED that from the date of this order,
without prior court approval, Blue Cross is enjoined from
transferring or contracting to transfer any of its assets, except
in the regular course of business and is also enjoined from
entering into contractual arrangements with third parties which
create options affecting the corporation's property or which
would place restrictions on that property or which would create
in third parties rights in its property or create liens or
encumbrances against that property. From the date of this order,
Blue Cross is required to notify the Court and the
Receiver/Custodian pendente lite of any transfer or sale of any
assets pursuant to contracts entered into prior to the date of
this order and to notify the Court of any exercise of stock
rights which any third party exercises or attempts to exercise.
IT IS FURTHER ORDERED that within thirty days of the date of
this order Blue Cross deliver to the Court an accounting which
shall include a balance sheet and statement of operations as the
end of its most receive fiscal year and all interim periods for
Blue Cross and all of its affiliates and subsidiaries. The
financial statements shall include any accountant's reports
accompanying the statements. Blue Cross shall also state whether
or not the financial statements submitted have been prepared on
the basis of Generally Accepted Accounting Principles
consistently applied or if not so prepared, in what manner they
deviate from that standard.
IT IS FURTHER ORDERED that within thirty days from the date
of this order Blue Cross shall deliver to this Court an
accounting setting forth all assets transferred directly or
indirectly by Blue Cross or any of its affiliates and
subsidiaries to Right Choice or to any other for-profit affiliate
or subsidiary or related or unrelated entity or person since
March 1, 1994; an accounting of all assets transferred by Blue
Cross or its affiliates and subsidiaries to any officer or
director, past or present, or their families, since March 1,
1994; the balance sheets of Blue Cross and its affiliates and
subsidiaries, which reflect the assets of those entitles
immediately prior to the transfer of any asset to Right Choice
and balance sheets for those entities reflecting the assets and
liabilities of Blue Cross and its affiliates and subsidiaries
immediately following completion of such transfers.
IT IS FURTHER ORDERED that within thirty days of the date of
this order Blue Cross shall produce all written leases and
agreements between Blue Cross and its subsidiaries or affiliates
and Right Choice and shall produce a narrative description
setting forth the terms of any oral agreements between those
entities and Right Choice.
Should Blue Cross contend that any information it is
required to produce by this order is private, proprietary
information, it may file such information under seal along with a
request that the information not be made public. Any information
set out in such a request shall be held by the Court in camera
and shall not be available for public inspection until after
hearing. Copies of documents containing confidential information
shall be given to the Receiver/Custodian pendente lite and his
counsel and experts, who shall likewise maintain the
confidentiality of the information. However, the obligation of
Blue Cross, its affiliates and subsidiaries, to furnish financial
information to its members or others pursuant to Chapter 355,
RSMo 1994, shall remain unaffected by this order.
The Receiver/Custodian pendente lite shall promptly file an
oath of Receiver/Custodian with this Court whereby the
Receiver/Custodian pendente lite agrees to undertake and to fully
and faithfully perform the duties as Receiver/Custodian pendente
lite.
The Receiver/Custodian pendente lite shall have the power
and is hereby given all the usual necessary and incidental powers
of receiver/custodian for the purpose of dealing with and
maintaining the nonprofit assets. Specifically, without
limitation, the Receiver/Custodian pendente lite shall be and is
hereby authorized to collect income, dividends, stock dividends,
revenue, profits and proceeds received from assets taken into his
custody, which accrue on or after the date of his appointment and
to receive additional assets the Court orders in the future to
become a part of the Receivership/Custodianship, if any.
The Receiver/Custodian pendente lite shall have the right,
during the pendency of this action, to apply for this Court for
further instructions or directions.
Pursuant to the discretion given to the Court under section
355.736.2, RSMo 1994, it is ordered that Receiver/Custodian
pendente lite post no bond at this time.
SO ORDERED
October 29, 1998 /s/ Thomas J. Brown III
THOMAS J. BROWN III, JUDGE
cc: Counsel of Record
_______________________________
(1) The term "nonprofit assets" as used in this Order
describes the assets or their equivalent accumulated by Blue
Cross during sixty years of nonprofit operations, prior to the
1994 reorganization. At the present time, the nonprofit assets
appear to be 80% of the outstanding stock of Right Choice plus
the cash payment of $175,000. Other or different assets may be
identified as "nonprofit assets" as this case progresses.
(2) Whether the appointee is denominated a receiver or a
custodian depends on whether there will be a winding up and
liquidation (receivership) or a management of affairs
(custodianship). The title Receiver/Custodian will be used until
the Court decides the matter.
