UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-13248
RIGHTCHOICE MANAGED CARE, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1674052
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1831 Chestnut Street, St. Louis, Missouri 63103-2275
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 923-4444
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date:
Title of each class Outstanding at October 29, 1999
Class A Common Stock, $0.01 par value 3,710,653 shares
Class B Common Stock, $0.01 par value 14,962,500 shares
RIGHTCHOICE MANAGED CARE, INC.
Third Quarter 1999 Form 10-Q
Table of Contents
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 3
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 1999 and 1998 4
Consolidated Statements of Changes in Shareholders'
Equity for the Three and Nine Months Ended
September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risks 34
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 35
ITEM 2. Changes in Securities 35
ITEM 3. Defaults Upon Senior Securities 35
ITEM 4. Submission of Matters to a Vote of Security Holders 35
ITEM 5. Other Information 35
ITEM 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 37
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
ASSETS September 30, 1999 December 31, 1998
(unaudited)
Current assets:
Cash and cash equivalents $34,193 $39,409
Investments available for sale 198,036 208,281
Receivables from members 83,841 68,024
Receivables from related parties 25,756 18,294
Deferred income taxes 7,939 4,798
Other assets 17,003 19,818
Total current assets 366,768 358,624
Property and equipment, net 56,485 58,234
Deferred income taxes 12,123 11,583
Investments in affiliates 5,731 5,729
Goodwill and intangible assets, net 72,302 74,508
Total assets $513,409 $508,678
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims payable $116,445 $109,986
Unearned premiums 60,097 56,407
Accounts payable and accrued expenses 62,207 64,754
Current portion of long-term debt 8,000 10,000
Payables to related parties 24,070 26,194
Reserve for loss contract 7,707 9,052
Obligations for employee benefits 3,166 2,954
Income taxes payable 13,076 10,485
Obligations under capital leases 3,857 4,254
Total current liabilities 298,625 294,086
Reserve for loss contract 1,815 7,259
Long-term debt 28,063 33,063
Obligations for employee benefits 26,084 24,338
Obligations under capital leases 5,048 4,058
Total liabilities 359,635 362,804
Shareholders' Equity:
Preferred Stock, $.01 par,
25,000,000 shares authorized,
no shares issued and outstanding
Common Stock:
Class A, $.01 par, 125,000,000
shares authorized, 3,737,500
shares issued, 3,710,653 and
3,710,426 shares outstanding,
respectively 37 37
Class B, convertible, $.01 par,
100,000,000 shares authorized,
14,962,500 shares issued and
outstanding 150 150
Additional paid-in capital 132,634 132,635
Retained earnings 24,902 12,313
Treasury stock, 26,847 and 27,074
Class A shares, respectively, at cost (380) (383)
Accumulated other comprehensive
income (3,569) 1,122
Total shareholders' equity 153,774 145,874
Total liabilities and
shareholders' equity $513,409 $508,678
See accompanying Notes to Consolidated Financial Statements.
<TABLE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except shares and per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Premium $183,498 $172,212 $540,990 $519,571
Fees and other income 21,005 17,592 62,737 53,903
Total revenues 204,503 189,804 603,727 573,474
Operating expenses:
Health care services 149,777 146,209 443,762 435,037
Commissions 8,525 7,637 23,892 23,707
General and administrative
(excludes depreciation and
amortization and excludes
intercompany charges of
$2,644, $2,887, $8,898 and
$8,922, respectively,
allocated to Blue Cross and
Blue Shield of Missouri) 36,587 33,647 108,927 105,071
Depreciation and amortization 4,405 4,891 12,788 14,103
Total operating expenses 199,294 192,384 589,369 577,918
Operating income (loss) 5,209 (2,580) 14,358 (4,444)
Investment income:
Interest and dividends 3,139 3,174 9,850 10,831
Realized (losses) gains, net (63) 1,888 (512) 2,587
Total investment income, net 3,076 5,062 9,338 13,418
Other:
Interest expense (1,414) (1,100) (3,423) (3,376)
Other income (expense), net 198 (104) 754 (130)
Total other, net (1,216) (1,204) (2,669) (3,506)
Income before provision for income taxes 7,069 1,278 21,027 5,468
Provision for income taxes 3,064 763 8,438 2,783
Net income $4,005 $515 $12,589 $2,685
Weighted average
common shares outstanding 18,673,000 18,672,000 18,673,000 18,672,000
Basic and diluted earnings per share $0.21 $0.03 $0.67 $0.14
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (UNAUDITED)
(in thousands, except shares)
<CAPTION>
Accumulated
Additional Other
Common Stock Paid In Retained Treasury Comprehensive
Class A Class B Capital Earnings Stock Income Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $37 $150 $132,640 $6,653 $(404) $1,789 $140,865
Comprehensive income:
Net income 2,170 2,170
Change in unrealized appreciation
on available-for-sale securities, net 71 71
of income tax expense of $41
Comprehensive income 2,241
Balance at June 30, 1998 37 150 132,640 8,823 (404) 1,860 143,106
Comprehensive income:
Net income 515 515
Change in unrealized appreciation
on available-for-sale securities, net
of income tax expense of $686 1,207 1,207
Comprehensive income 1,722
1,426 shares issued under the
company's stock option plan (5) 21 16
Balance at September 30, 1998 37 150 132,635 9,338 (383) 3,067 144,844
Comprehensive income:
Net income 2,975 2,975
Change in unrealized appreciation
on available-for-sale securities, net
of income tax credit of $874 (1,575) (1,575)
Minimum pension liability
adjustment, net of income tax credit
of $199 (370) (370)
Comprehensive income 1,030
Balance at December 31, 1998 37 150 132,635 12,313 (383) 1,122 145,874
Comprehensive income:
Net income 8,584 8,584
Change in unrealized appreciation
on available-for-sale securities, net
of income tax credit of $2,188 (3,872) (3,872)
Comprehensive income 4,712
Balance at June 30, 1999 37 150 132,635 20,897 (383) (2,750) 150,586
Comprehensive income:
Net income 4,005 4,005
Change in unrealized appreciation
on available-for-sale securities, net
of income tax credit of $463 (819) (819)
Comprehensive income 3,186
227 shares issued under the
company's stock option plan (1) 3 2
Balance at September 30, 1999 $37 $150 $132,634 $24,902 $(380) $(3,569) $153,774
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the nine months ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $12,589 $2,685
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
(Credit) provision for deferred income taxes (1,030) 859
Depreciation and amortization 12,788 14,103
Undistributed earnings of affiliates (2) (28)
Loss (gain) on sale of investments 512 (2,587)
Amortization of premiums and
accretion of discounts, net 369 135
Gain on sale of property and equipment (231)
(Increase) decrease in certain assets:
Receivables from members (15,817) (4,517)
Receivables from related parties (7,462) (5,073)
Other assets 2,844 (4,580)
Increase (decrease) in certain liabilities:
Medical claims payable 6,459 6,278
Unearned premiums 3,690 (5,255)
Accounts payable and accrued expenses (2,547) (921)
Payables to related parties (2,124) 1,120
Reserve for loss contract (6,789) (6,789)
Obligations for employee benefits 1,958 2,098
Income taxes payable 2,591 1,012
Net cash provided by (used in)
operating activities 7,798 (1,460)
Cash flows from investing activities:
Proceeds from matured investments:
Fixed maturities 7,114 19,860
Proceeds from investments sold:
Fixed maturities 144,847 222,048
Equity securities 521
Other 101 4,482
Investments purchased:
Fixed maturities (142,795) (232,557)
Equity securities (7,534) (548)
Other (232) (399)
Proceeds from property and equipment sold 11 1,944
Property and equipment purchased (4,772) (10,606)
Net cash (used in) provided by
investing activities (2,739) 4,224
Cash flows from financing activities:
Sale of Class A Treasury stock 2 16
Payments of long-term debt (7,000) (2,687)
Payments of capital lease obligations (3,277) (4,175)
Net cash used in financing activities (10,275) (6,846)
Net decrease in cash and cash equivalents (5,216) (4,082)
Cash and cash equivalents at beginning of period 39,409 29,872
Cash and cash equivalents at end of period $34,193 $25,790
Supplemental Disclosure of Cash Information:
Interest paid $3,414 $3,560
Income taxes paid (refund received), net 6,877 (2,079)
Supplemental Schedule of Noncash
Investing and Financing Activities:
Equipment acquired through capital leases $6,093 $3,296
Disposal of equipment under capital leases 2,223
See accompanying Notes to Consolidated Financial Statements.
RightCHOICE Managed Care, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Financial Statement Presentation
The interim consolidated financial statements included herein have
been prepared by RightCHOICE Managed Care, Inc. (the company or
RightCHOICE) without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the SEC). Certain
information and footnote disclosures, normally included in the
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to
such SEC rules and regulations; however, the management of the
company believes that the disclosures herein are adequate to make
the information presented not misleading. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the consolidated financial
position of the company with respect to the interim consolidated
financial statements, and the consolidated results of its operations
and its cash flows for the interim periods then ended, have been
included. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
2. Contingencies
LITIGATION OF BLUE CROSS AND BLUE SHIELD OF MISSOURI WITH THE
MISSOURI ATTORNEY GENERAL AND DEPARTMENT OF INSURANCE AND RELATED
ACTIONS, SETTLEMENT EFFORTS AND PROPOSED REORGANIZATION
In August 1994, Blue Cross and Blue Shield of Missouri (BCBSMo)
created the company as a for-profit subsidiary. BCBSMo transferred
certain of its assets to the company, and offered to the public 20
percent of the common stock of the company (such events are referred
to collectively as the Reorganization and Public Offering).
Although the Missouri Department of Insurance (DOI) formally approved
the Reorganization and Public Offering on April 14, 1994, the 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 the stock of the company that it owned, to the
State of Missouri or a charity designated by the State of Missouri.
The DOI threatened to bring legal action, seek a receivership or
terminate BCBSMo's insurance license unless BCBSMo agreed to
surrender its assets.
BCBSMo's extensive efforts to resolve the dispute without litigation
were unsuccessful. On May 13, 1996, BCBSMo filed a declaratory
judgment action in the Circuit Court of Cole County Missouri (the
Circuit Court) against the DOI and the Missouri Attorney General
(the Missouri Attorney General was a necessary party due to his sole
authority to enforce nonprofit corporation laws). This litigation
is described more fully below under "Litigation relating to the
Reorganization and Public Offering."
AGREEMENT FOR SETTLEMENT OF CERTAIN LITIGATION MATTERS AND
REORGANIZATION OF THE COMPANY
Status of Proposed Settlement Agreements
Following many developments in the litigation described below, on
April 22, 1998, the company, BCBSMo, the Missouri Attorney General,
and the DOI announced a conceptual framework to resolve all
outstanding litigation and regulatory issues among the parties. The
definitive settlement agreements were entered into on September 20,
1998, and subsequently modified on March 12, 1999 (as amended, the
amended settlement agreements). The amended settlement agreements
would, if consummated, resolve all outstanding litigation and
regulatory issues between the company, BCBSMo and their affiliates
and the State of Missouri described below and create a charitable
independent health care foundation.
The amended settlement agreements include a number of significant
conditions and contingencies, including approval by the Circuit
Court. On October 29, 1999, Circuit Court Judge Thomas J. Brown,
III entered an order disapproving the settlement agreement.
Although the order provides that it is "interlocutory" and not final
for purposes of an appeal, on November 8, 1999, BCBSMo, together
with the Missouri Attorney General and the DOI, filed a notice of
appeal, and on November 9, 1999 asked for the transfer of the appeal
to the Missouri Supreme Court. In a separate filing, on November 9,
1999, BCBSMo and the Missouri Attorney General notified the Missouri
Supreme Court of the Circuit Court's disapproval of the amended
settlement agreement, and asked the Missouri Supreme Court to (1)
deem the Circuit Court's order final for purposes of appeal, (2)
conduct its own review of the settlement agreement, and (3) enter a
stay prohibiting Judge Brown and the Special Master from further
proceedings, including consideration of alternatives, pending the
appeal. The litigation underlying the settlement remains on appeal
to the Missouri Supreme Court and is described below. See
"Litigation relating to the Reorganization and Public Offering."
Pursuant to these filings, BCBSMo, the Missouri Attorney General,
the DOI and consumer groups representing over one million
Missourians expressed their continuing support for the amended
settlement agreements.
The principal terms of the amended settlement agreements include the
following:
* BCBSMo would, through a series of transactions, (i) transfer its
insurance-related assets, contracts and agreements and related
liabilities to a wholly owned subsidiary of the company; (ii)
convert to a for-profit corporation; (iii) reincorporate in
Delaware; and (iv) merge with the company. Approximately 20
percent of the outstanding common stock of the resulting entity
(referred to as new RightCHOICE) would be owned by the company's
current public shareholders and approximately 80 percent of the
outstanding shares of RightCHOICE would be owned by a charitable
independent health care foundation (which equals the current
aggregate ownership interests of the public shareholders and
BCBSMo, respectively, in the equity of the company).
* BCBSMo would pay approximately $12.78 million to the charitable
independent health care foundation (in addition to $175,000 paid by
RightCHOICE).
* The charitable independent health care foundation would be required
to liquidate its shares of new RightCHOICE stock over a prescribed
period of time not to exceed seven years under a divestiture plan.
The proceeds would be used for health care purposes. The charitable
independent health care foundation would be required to reduce its
ownership of new RightCHOICE stock to less than 50 percent of the
total outstanding stock of new RightCHOICE within three years of the
closing of the reorganization, subject to possible extension, and to
less than 20 percent of the total outstanding stock of new
RightCHOICE within five years of the closing of the reorganization,
subject to possible extension. The proceeds would be used for
health care purposes. All but up to 5 percent of the shares of new
RightCHOICE stock owned by the charitable independent health care
foundation would be subject to a voting trust that would, with
certain exceptions, effectively vest voting control of such shares
of new RightCHOICE stock owned by the charitable independent health
care foundation in the board of directors of new RightCHOICE.
* The charter documents of new RightCHOICE would include the "basic
protections" required by the Blue Cross and Blue Shield Association
(BCBSA) of all of its for-profit licensees to insure independence
from the direction, control and influence of the charitable
independent health care foundation or any other shareholder. The
"basic protections" would include limitations on the amount of new
RightCHOICE stock that may be owned by certain categories of
shareholders -- (i) no "institutional" shareholder may own 10
percent or more of the voting power of new RightCHOICE, (ii) no "non-
institutional" shareholder may own 5 percent or more of the voting
power of new RightCHOICE, and (iii) no shareholder may own 20
percent or more of the equity of new RightCHOICE (with certain
exceptions in the case of the charitable independent health care
foundation as described above). Any shares owned by a shareholder
in excess of the applicable ownership limits could be redistributed
by new RightCHOICE.
The transactions contemplated by the amended settlement agreements
are subject to a number of significant conditions and contingencies,
including approval by the appropriate court, various regulators and
the shareholders of the company, the receipt of rulings from the IRS
or tax opinions regarding the tax-free nature of the transactions,
and the satisfactory resolution of certain other litigation
involving the company and BCBSMo (including the Sarkis Litigation
described below, which was dismissed by the St. Louis Circuit Court
on November 4, 1998, but is on appeal). See "Litigation relating to
the Reorganization and Public Offering" below. The amended
settlement agreements provide that the company and BCBSMo, together
with the DOI and the Missouri Attorney General, shall move in an
appropriate court proceeding for approval of the amended settlement
agreements and the proposed reorganization described therein. See
"Litigation relating to the Reorganization and Public Offering"
below.
The summary of the amended settlement agreements is qualified in its
entirety by reference to the settlement agreements and the amended
settlement agreements and the related exhibits, which are included
as exhibits to the company's Current Reports on Form 8-K filed with
the SEC on September 23, 1998, and March 15, 1999, respectively.
Appointment of Special Master
On April 22, 1998, the company, BCBSMo, the Missouri Attorney
General and the DOI announced the conceptual framework for the
proposed settlement. Following that announcement, Judge Brown of
the Circuit Court indicated that he had substantial reservations
about the settlement as proposed in the conceptual framework and
that any final settlement would be scrutinized very carefully.
On September 20, 1998, the settlement agreements were executed, and
courtesy copies were provided to the Circuit Court. BCBSMo and the
company together with the DOI and Missouri Attorney General had
intended to file a motion with the Circuit Court seeking approval of
the settlement agreements and the proposed reorganization described
therein, following the remand of the litigation to the Circuit
Court.
Notwithstanding the fact that the litigation had not yet been
remanded to the Circuit Court, on October 29, 1998, the Circuit
Court "acting on its own motion" issued an Order (the October 29
Order) in the litigation. The October 29 Order provided for, among
other things, the appointment of Robert G. Russell as
receiver/custodian pendente lite to, among other things, take
exclusive possession and control of all of the issued and
outstanding shares of the company's common stock owned by BCBSMo.
The October 29 Order cited concerns by the Circuit Court about the
fairness of the transactions set forth in the settlement agreements,
alleged conflicts of interest and the need for an independent
examination of the proposed settlement and related issues. The
October 29 Order also approved the engagement of legal counsel and
an investment banker to advise the receiver/custodian. Had the
October 29 Order not been void "from the beginning" as described
below, a number of significant and adverse consequences would have
resulted, including the automatic termination of the company's Blue
Cross and Blue Shield licenses and a resultant event of default
under the company's Credit Agreement. A copy of the October 29
Order is attached as an exhibit to the company's Current Report on
Form 8-K filed with the SEC on November 2, 1998.
On November 2, 1998, BCBSMo filed a motion to vacate the October 29
Order and supporting memorandum. BCBSMo alleged therein that (i)
the Circuit Court lacked jurisdiction to issue the October 29 Order
because the case was still pending before the Missouri Supreme
Court; (ii) the Circuit Court issued the order without notice and an
opportunity to be heard; (iii) there were no exigent circumstances
that would warrant the appointment of a receiver without due
process; and (iv) the appointment of the receiver had the effect of
frustrating the purpose for which the receiver was to be appointed,
namely, the preservation of the nonprofit assets of BCBSMo. Copies
of the motion and memorandum are attached as exhibits to the
company's Current Report on Form 8-K filed with the SEC on November
6, 1998.
On November 2, 1998, BCBSA filed a complaint against the company,
its subsidiaries and BCBSMo in the United States District Court for
the Northern District of Illinois alleging that the appointment of
the receiver/custodian pendente lite caused the automatic
termination of the licenses to use the Blue Cross and Blue Shield
service marks. The complaint alleged service mark infringement and
breach of license agreements as a result of the company's continued
use of the Blue Cross and Blue Shield service marks following the
issuance of the October 29 Order. The BCBSA later dismissed its
complaint (as described below under "Status of Blue Cross and Blue
Shield trademark licenses").
On November 4, 1998, the Circuit Court issued an Order (the November
4 Order) vacating the October 29 Order and declaring it to be void
ab initio (or "from the beginning"). The Circuit Court, in issuing
the November 4 Order, acknowledged that the significant and adverse
consequences that could have resulted from the October 29 Order were
unintended. On November 4, 1998, the Circuit Court also issued an
Order (the November 4 Special Master Order) appointing Robert G.
Russell as special master for the purpose of collecting and
analyzing information related to the proposed settlement. The
November 4 Special Master Order also approved the engagement of
legal counsel and such financial advisors as are approved by the
court to advise the special master. The effect of the November 4
Order was to void the October 29 Order as if it never existed. The
special master, at that time, had expressed his interest in
providing that the company would continue its business in the normal
course during his review. Copies of the November 4 Order and the
November 4 Special Master Order are attached as exhibits to the
company's Current Report on Form 8-K filed with the SEC on November
6, 1998.
On November 6, 1998, the Circuit Court entered an Order of Reference
(the November 6 Order), among other things, directing the special
master to collect and analyze information as to the options and
alternatives available to the Circuit Court for disposition of the
remaining issues in the litigation, including, but not limited to,
an examination of the settlement agreements. The special master was
also directed to address several concerns of the Circuit Court that
were originally outlined in the October 29 Order. The special
master was further directed to investigate issues concerning the
Blue Cross and Blue Shield licenses and trademarks and the company's
Credit Agreement. A copy of the November 6 Order is attached as an
exhibit to the company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
On November 19, 1998, the Blue Cross and Blue Shield license
agreements were reinstated with addenda that provided, among other
things, that the licenses would terminate on the date of the next
scheduled meeting of the BCBSA Board of Directors, then March 11,
1999, unless extended by the Board of Directors of the BCBSA. On
March 11, 1999, and at subsequent meetings on June 17, and September
17, 1999, the BCBSA Board of Directors extended the licenses until
the next scheduled meeting, the next of which is scheduled for
November 19, 1999. See "Status of Blue Cross and Blue Shield
trademark licenses" below.
As part of his investigation, the special master conducted a series
of public hearings on December 4, December 16, and December 22,
1998, and on February 4, 1999, where evidence related to the
proposed settlement and other subjects was presented. At the public
hearing on December 16, representatives of Blue Cross and Blue
Shield of Kansas City presented an "alternative" to the proposed
settlement agreement by suggesting that the Kansas City plan would
acquire the assets of BCBSMo, including the stock of the company
that it owns. The Kansas City plan's proposal provided for a
purchase price of $13.50 per share for the shares of the company
held by the public and $15.25 per share for the other shares held by
BCBSMo. The proposal included a number of conditions, such as a
financing contingency and an obligation that all litigation of
BCBSMo be resolved. This proposal was not made directly to the
company or BCBSMo.
Following the completion of the hearings and other investigation, on
February 10, 1999, the special master issued his 47-page report (the
first report of the special master) which recommended that the
settlement agreement "not be approved in its present form" and that
the Circuit Court "withhold a ruling on the settlement agreement to
give the parties and the amici curiae an opportunity to meet and
confer, and engage in a good faith effort to address" concerns that
were noted in the report of the special master. While the special
master stated that "there are many things to commend the Settlement
Agreement for the Court's approval," he indicated he had concerns
with its terms that prevented him from recommending approval. Among
the concerns he identified in his first report were:
* Whether the charitable independent health care foundation that
would be created if the settlement were implemented would receive
full value of the present assets of BCBSMo;
* Whether a contemplated method of divestiture of the new RightCHOICE
shares to be held by the charitable independent health care
foundation -- sale of the shares over time pursuant to a Voting
Trust and Divestiture Agreement and Registration Rights Agreement
-- would yield full value for the shares;
* Whether the proposed provisions for governance of the charitable
independent health care foundation were reasonable; and
* Whether the provisions for the purposes of the charitable
independent health care foundation were justified.
Following the first report of the special master, the parties and the
amici curiae discussed the concerns noted therein. On March 12,
1999, the company, BCBSMo, the Missouri Attorney General, and the
DOI entered into an Amendment to Settlement Agreement (the
amendment). The parties to the amended settlement agreements,
together with certain consumer groups that had participated in the
public hearings, filed with the Circuit Court a joint motion seeking
approval of the amended settlement agreements.
On March 12, 1999, the parties also filed with the Circuit Court
their respective objections and comments to the first report of the
special master. In its objections, BCBSMo asserted that the special
master made certain erroneous factual and unjustified legal
conclusions in the report and requested the Circuit Court to approve
the amended settlement agreements.
At an informal hearing on March 15, 1999, Judge Brown expressed
continued concern about the amended settlement agreements. In
response, BCBSMo and the Missouri Attorney General separately
petitioned the Missouri Supreme Court to enter an order and stay,
respectively, limiting the actions of the Circuit Court to the
consideration of the amended settlement agreements. On March 24,
1999, the counsel to the special master, on behalf of the Circuit
Court, responded to the applications of BCBSMo and the Missouri
Attorney General to the Missouri Supreme Court requesting additional
time to respond more fully to the application and indicating that
the requested writ was not necessary or appropriate. On March 24,
1999, the Missouri Supreme Court declined the request of BCBSMo and
the motion of the Missouri Attorney General.
Circuit Court's Order Disapproving Settlement and Appeal
As described below, the litigation underlying the amended settlement
agreements remained on appeal to the Missouri Supreme Court. Oral
arguments were heard in the case on September 8, 1999. On September
9, 1999, the Missouri Supreme Court ordered that the Circuit Court
"finally dispose" of the amended settlement agreements on or before
November 9, 1999. The special master conducted public hearings on
September 3, and October 4, 1999, and on October 8, 1999,
issued a second report (the second report of the special master).
The second report recommended that the settlement agreement be
disapproved because it failed to provide for the full value of the
BCBSMo assets for the public. The report also suggested that the
settlement should provide for the forced sale of the company or
provide that the foundation should have the right to cause the sale
of the company.
On October 28, 1999, the Circuit Court held a hearing on the
settlement and on October 29, 1999 entered an order disapproving the
amended settlement agreements. The Circuit Court's order provided
that it was "interlocutory" and therefore not final for purposes of
appeal and also provided that the special master continue to review
alternatives to the settlement on an expedited basis.
Although the Circuit Court's order provided that it was not subject
to appeal, on November 8, 1999, BCBSMo, the Missouri Attorney
General and DOI filed an appeal from the order and a motion to
transfer the appeal to the Missouri Supreme Court. On November 9,
1999, BCBSMo and the Missouri Attorney General also filed a notice
with the Missouri Supreme Court advising the court that the Circuit
Court had failed to comply with its September 8 order requiring the
Circuit Court to "finally dispose" of the amended settlement
agreement. The filing also requested that the Missouri Supreme
Court (1) deem the Circuit Court's order final for purposes of
appeal, (2) conduct a review of the amended settlement agreements,
and (3) stay the proceedings of the Circuit Court and the special
master, including considerations of alternatives to the settlement,
pending the appeal.
The summary of the Circuit Court's Order set forth herein is
qualified in its entirety by reference to the Order, which is
included as an exhibit hereto.
The litigation described below under the captions "Litigation
relating to the Reorganization and Public Offering," "Litigation
relating to corporate status of BCBSMo" and "Litigation relating to
the Market Conduct Study and Copayment Calculations" would be
settled in the event that the transactions contemplated by the
amended settlement agreements are consummated. There can be no
assurance, however, that the transactions contemplated by the
amended settlement agreements will receive the necessary court
approval, that all conditions and contingencies included in the
amended settlement agreements will be satisfied, or that the
transactions set forth in the amended settlement agreements will be
effected. Failure to do so or to otherwise resolve the litigation
described below in a manner satisfactory to the company could have a
material adverse effect on the company and the market for its stock.
Litigation relating to the Reorganization and Public Offering
As described above, in August 1994, BCBSMo effectuated the
Reorganization and Public Offering. Although the DOI formally
approved the Reorganization and Public Offering on April 14, 1994,
the DOI subsequently claimed that the Reorganization and Public
Offering violated Missouri state laws and that BCBSMo was
obligated to transfer all of its assets, including all of the
stock of the company that it owned, to the State of
Missouri or a charity designated by the State of Missouri. The
DOI threatened to bring legal action, seek a receivership, or
terminate BCBSMo's insurance license unless BCBSMo
surrendered its assets.
BCBSMo's extensive efforts to resolve the dispute without litigation
were unsuccessful. On May 13, 1996, BCBSMo filed a declaratory
judgment action in the Circuit Court against the DOI
and the Missouri Attorney General (the Missouri Attorney General was
a necessary party due to his sole authority to enforce nonprofit
corporation laws). The action sought a declaratory judgment that
BCBSMo followed all applicable laws and regulations in the
Reorganization and Public Offering resulting in the creation of the
company. It also sought a permanent injunction forbidding the DOI
from refusing to renew BCBSMo's license or taking other
administrative action against BCBSMo to pressure it into paying a
"toll charge" or "charitable asset assessment" or any other fee as a
result of the Reorganization and Public Offering.
On June 13, 1996, the DOI filed an answer and
counterclaims. The answer set 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 alleged
violations of certain health services corporation and nonprofit
corporation statutes. The 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.
On June 20, 1996, the Missouri Attorney General filed an answer and
counterclaim alleging that the Reorganization and Public Offering,
and its continued operations through the company and its
subsidiaries, exceeded BCBSMo's statutory purposes. The Missouri
Attorney General requested a declaration that BCBSMo exceeded its
lawful authority and sought such relief as the Circuit Court would
determine to be appropriate under the circumstances based on a
statute that authorizes judicial dissolution or less drastic
alternative relief in the Circuit Court's discretion.
On September 9, 1996, the Circuit Court granted BCBSMo's motion for
summary judgment against the DOI, rejected all of
the DOI's affirmative defenses (including
allegations of fraud), issued a permanent injunction against
the DOI and declared that: (i) under Missouri law the
DOI had no authority to demand that BCBSMo make a
payment as a result of the Reorganization and Public Offering; (ii)
under Missouri law the DOI had no jurisdiction to
take any action, the practical effect of which would be to amend,
modify or reverse the DOI's April 14, 1994 final administrative
approval of the Reorganization and Public Offering; (iii) under
Missouri law, the DOI had 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 or
BCBSMo's refusal to make payment as the DOI had
demanded; and (iv) (A) BCBSMo was 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 did not owe the State or any person or
entity a "toll charge," "charitable asset settlement" or any other
payment as a result of the Reorganization and Public Offering (the
September 9 Order). On December 30, 1996, the Circuit Court issued
orders (described more fully below) modifying the findings and
declarations set forth in (iv) above, on the grounds that it was
legally unnecessary to resolve such issues because the Circuit Court
had already ruled against the DOI for other reasons.
The September 9 Order permanently enjoined the DOI
from, among other things, (i) revoking, suspending or refusing to
renew BCBSMo's insurance license based in any part upon the
Reorganization and 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. Although the injunctive relief
described above remains in place, the Circuit Court's December 30
Orders (described below) clarify that the injunction does not
prohibit the DOI from asserting that the post-
Reorganization and Public Offering operations of BCBSMo may violate
the health services corporation laws (even though such operations
may have been affected by the Reorganization and Public Offering).
On August 28, 1996, the DOI filed an amended answer
asserting a new counterclaim that the Reorganization and Public
Offering were not reasonably designed to serve any of BCBSMo's
purposes as a health services corporation and sought a declaration
that BCBSMo had exceeded or abused the authority conferred upon it
by law. Under this counterclaim, the DOI sought an
order to rehabilitate BCBSMo or, in the alternative, injunctive
relief.
On October 18, 1996, the Missouri Attorney General filed a motion
for leave to file an amended counterclaim against BCBSMo that sought
a declaration that BCBSMo was a public benefit corporation, not a
mutual benefit corporation, and requested an order that BCBSMo amend
its Articles of Incorporation accordingly. The Circuit Court
granted the Missouri Attorney General's motion for leave to file the
amended counterclaim, which remains pending.
On December 30, 1996, the Circuit Court issued five orders (the
December 30 Orders): (i) denying BCBSMo's motion for summary
judgment against the Missouri Attorney General; (ii) granting the
Missouri Attorney General's motion for partial summary judgment
against BCBSMo; (iii) denying BCBSMo's supplemental motion for
summary judgment against the DOI on their amended
counterclaim; (iv) granting the DOI's motion for
summary judgment against BCBSMo on their amended counterclaim; and
(v) modifying, in part, the Circuit Court's previous September 9
Order. The December 30 Orders declared that (i) BCBSMo had
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 Circuit 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 Circuit 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 Missouri Attorney General's
counterclaim pending appeal; and (iii) stayed the legal effect of
the order granting the DOI summary judgment pending
the filing of an appeal bond (which BCBSMo promptly filed).
On August 4, 1998, the Missouri Court of Appeals entered its opinion
affirming the judgments entered December 30, 1996.
On September 20, 1998, the company and certain of its affiliates
entered into various settlement agreements with the Missouri
Attorney General and certain state agencies, including the DOI. The
settlement agreements, as amended, are described above under "Status
of Proposed Settlement Agreements." If consummated, the amended
settlement agreements would resolve the outstanding litigation and
regulatory disputes between the company and its affiliates and the
State of Missouri, including the litigation related to the
Reorganization and Public Offering, and create a charitable
independent health care foundation.
On November 4, 1998, the Circuit Court appointed the special master.
Matters with respect to the special master are described above under
"Appointment of Special Master."
On November 24, 1998, the Supreme Court of Missouri granted the
motion of BCBSMo to accept transfer of the litigation related to the
Reorganization and Public Offering and, as a result of this action,
the opinion of the Missouri Court of Appeals dated August 4, 1998,
(referred to above) has been vacated. The Missouri Supreme Court
will decide the appeals as if they were original appeals in that
Court.
During an informal status hearing of the Circuit Court on March 15,
1999, Judge Brown stated on the record that he has continued
concerns about the amended settlement agreements. In response to
those comments, on March 19, 1999, BCBSMo petitioned the Missouri
Supreme Court to enter an Order of Prohibition directed to Judge
Brown to limit his actions in the litigation to the consideration of
the amended settlement agreements while the case is on appeal to the
Missouri Supreme Court. The Missouri Attorney General filed a
similar motion to stay seeking to limit the actions of the Circuit
Court. On March 24, 1999, the Missouri Supreme Court declined the
request of BCBSMo to grant a writ of prohibition, and the request of
the Missouri Attorney General.
Although the Missouri Supreme Court initially had stayed the
briefing schedule for 120 days in the proceedings before it in order
to permit the proceedings in the Circuit Court concerning review of
the settlement agreements to go forward, that stay was lifted and
oral arguments were heard by the Missouri Supreme Court on September
8, 1999. As described above under the heading "Circuit Court's Order
Disapproving Settlement and Appeal," following the oral arguments,
on September 9, 1999, the Supreme Court entered an order that the
Circuit Court "finally dispose" of the settlement agreement. The
Circuit Court entered an order disapproving the amended settlement
agreements and instructing the special master to continue to
consider alternatives to the settlement on an expedited basis.
BCBSMo, the Missouri Attorney General, and the DOI filed an appeal
of the Circuit Court's order and a motion to transfer the appeal to
the Missouri Supreme Court. BCBSMo and the Missouri Attorney
General also filed a notice with the Missouri Supreme Court,
described above under the heading "Circuit Court's Order Disapproving
the Settlement and Appeal."
The summary of the Circuit Court's Orders set forth herein is
qualified in its entirety by reference to the Orders which are
included as an exhibit hereto and to the company's Current Report on
Form 8-K filed with the SEC on November 2, 1998, and November 6,
1998, and the company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
Subscriber class action litigation
On March 15, 1996, a suit (the Sarkis Litigation) was filed in the
Circuit Court of the City of St. Louis, Missouri (the St. Louis
Circuit Court), 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 Sarkis plaintiffs).
The petition named the company, BCBSMo, HealthLink, Inc.
(HealthLink, a subsidiary of the company), and certain officers of
the company as defendants. The named plaintiffs later abandoned
their claim to represent all persons or entities that benefited from
BCBSMo's tax-exempt status.
The Sarkis 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 petition
further alleges that certain amendments to BCBSMo's Articles of
Incorporation were improper. The petition 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 Sarkis plaintiffs sought restitution, compensatory
damages and punitive damages in unspecified amounts, as well as
injunctive and other equitable relief.
On November 4, 1998, the St. Louis Circuit Court issued its judgment
and order granting the motion of the defendants to dismiss the
action for lack of standing and entering judgment in favor of the
defendants. The Sarkis plaintiffs appealed the St. Louis Circuit
Court's order. Appellate briefing is complete and the case was
submitted to the Appellate Court in October, 1999.
The Sarkis plaintiffs have also filed a motion to intervene in the
actions described above under "Litigation relating to the
Reorganization and Public Offering" and below under "Litigation
relating to corporate status of BCBSMo."
The obligations of the parties to consummate the transactions
contemplated by the amended settlement agreements are conditioned
upon, among other things, satisfactory final resolution of the
Sarkis Litigation.
Litigation relating to corporate status of BCBSMo
On November 3, 1997, BCBSMo filed an action in the Circuit Court
against the Missouri Attorney General seeking declarations that (1)
BCBSMo is a mutual benefit type of nonprofit corporation under
Chapter 355 of the Missouri Revised Statutes; and (2) BCBSMo does
not hold its assets in constructive, charitable, or other trust for
the benefit of the public generally, but rather holds its assets for
the benefit of its subscribers. The action was filed in response to
continued public and private statements by the Missouri Attorney
General, the DOI and others that BCBSMo was a public benefit type of
nonprofit corporation that held its assets for the benefit of the
public generally. The Missouri Attorney General has filed an answer
and counterclaim seeking a declaration that BCBSMo is a public
benefit type of nonprofit corporation.
On June 10, 1998, Anthony Sarkis and James Hacking (plaintiffs in
the Sarkis Litigation described above under "Subscriber class action
litigation") moved to intervene in this action as plaintiffs.
Sarkis and Hacking are or have been subscribers of BCBSMo. They
sought to intervene, contending that the present parties to the
action would not adequately represent their interests in the
resolution of the question whether BCBSMo is a public benefit or a
mutual benefit corporation. Thereafter, BCBSMo moved to file an
amended petition adding Sarkis, Hacking and the DOI
as parties to the action. For its relief, BCBSMo sought a
declaration of its status as a public benefit or mutual benefit
corporation. The Circuit Court granted BCBSMo's motion to file the
amended petition on August 17, 1998.
On September 16, 1998, Sarkis and Hacking filed an application for
change of judge under Missouri civil court procedure. They
contended that they were entitled as a matter of right to disqualify
Judge Brown from further proceedings in the action. The Missouri
Attorney General resisted this application. On October 15, 1998,
Judge Brown denied the motion to disqualify himself. He directed
the parties to prepare a discovery schedule that would have had this
lawsuit prepared for trial by December 21, 1998, which was
subsequently extended.
On November 5, 1998, Sarkis and Hacking filed an application with
the Missouri Court of Appeals seeking to prohibit Judge Brown from
proceeding further in the case. The Missouri Court of Appeals
denied that application. Sarkis and Hacking then applied to the
Missouri Supreme Court, which also denied their application. This
litigation remains pending before Judge Brown and the parties have
filed Stipulations of Facts and the Missouri Attorney General has
filed a Motion for Summary Judgment.
If BCBSMo is declared to be a mutual benefit type of nonprofit
corporation that does not hold its assets for the benefit of the
public generally, BCBSMo would be required to exercise its ownership
interest in the company consistent with the best interests of
BCBSMo's subscribers, subject to any final rulings made in the
litigation described elsewhere herein. If BCBSMo is declared to be
a public benefit type of nonprofit corporation or if it is declared
that BCBSMo holds assets for the benefit of the public generally,
BCBSMo would be required to exercise its ownership interest in the
company consistent with the best interests of the public at large.
In either event, BCBSMo could be dissolved, or required to dispose
of some or all of the shares of the company's stock that it owns at
times and in quantities that could be detrimental to the market for
the company's stock. Also, either the DOI or the Missouri Attorney
General could take actions against BCBSMo based upon such
declarations (such as seeking the appointment of a receiver to
safeguard assets, which, like dissolution, could result in the
termination of the company's licenses to use the Blue Cross and Blue
Shield trade names and service marks and trigger a termination fee
and a notice to members thereunder) which, if successful, could have
a material adverse effect upon the company and the market for its
stock. See "Status of Blue Cross and Blue Shield trademark
licenses."
Litigation relating to the Market Conduct Study and Copayment
Calculations
In April 1996, the DOI issued a market conduct report to the
company. The report cited the company and BCBSMo for not complying
with certain insurance statutes and regulations, including those
that relate to the Small Employer Health Insurance Availability Act,
coordination of benefits and copayment calculations. The company
responded to the report in May 1996. The company and the DOI have
had discussions relating to the issues contained in the report from
May 1996 to February 1998. On February 11, 1998, the DOI filed a
Notice of Institution of Case requesting the DOI to issue a
cease and desist order, an order requiring the payment of a monetary
penalty, an order to cease marketing and/or an order suspending or
revoking the certificate of authority of the company and BCBSMo.
The company has alleged in the action described above under
"Litigation relating to the Reorganization and Public Offering" 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 in
connection with the litigation described above under "Litigation
relating to the Reorganization and Public Offering." The DOI has
stated that the company should refund excess premium payments to the
small groups, pay additional refunds to members for copayment
calculations made prior to January 1996, and take certain actions
relating to coordination of benefits. The issue relating to the
manner in which the company calculated copayment amounts prior to
January 1996 was the subject of a class action suit, titled Kelly v.
Blue Cross and Blue Shield of Missouri, and subsequent settlement.
BCBSMo settled the case in 1995 and paid the majority of the total
settlement amount of $5 million. The company believes it has
resolved this issue through the court-approved class action
settlement and intends to vigorously defend this action if required.
The DOI has issued a stay of the market conduct proceeding pending
approval of the amended settlement agreements described above.
On February 9, 1998, the Missouri Attorney General filed suit
against the company, BCBSMo, BlueCHOICE, Healthy Alliance Life
Insurance Company (HALIC, a subsidiary of the company), and
Preferred Health Plans of Missouri, Inc. (a subsidiary of the
company) in the Circuit Court seeking injunctive relief,
compensatory damages and civil penalties under Missouri's
Merchandising Practices Act for the way in which the company
disclosed and marketed copayment amounts prior to January 1996. The
factual allegations in the Missouri Attorney General's suit are the
same as the copayment issues in the DOI Market Conduct Study Action
and the same issue that was the subject of a court-approved class
action suit settlement in the Kelly v. Blue Cross and Blue Shield of
Missouri case. The company discontinued the copayment practices in
January 1996. The company believes it has already paid the
restitution damages requested in the settlement of the class action
suit. BCBSMo and the company believe the claims are without merit
and intend to vigorously defend the action if required. This action
was dismissed by the Missouri Attorney General without prejudice
pending the approval of the amended settlement agreements described
above.
Status of Blue Cross and Blue Shield trademark licenses
On March 11, June 17, and September 17, 1999, the Board of
Directors of the BCBSA unanimously voted to extend the company's
licenses to use the Blue Cross and Blue Shield service marks until
the next scheduled meeting of the BCBSA Board of Directors. The
next such meeting is scheduled for November 19, 1999.
These extensions on a "board to board" basis followed the
reinstatement by the BCBSA Board of Directors, effective as of
October 29, 1998, of the licenses to use the Blue Cross and Blue
Shield service marks, granted to the company, BCBSMo, and two wholly
owned subsidiaries of the company, HALIC and BlueCHOICE (the
licensed affiliates). The approval clarified the rights of the
company and its licensed affiliates to continue uninterrupted the
use of the service marks following actions taken by the BCBSA which
resulted from the October 29 Order.
The October 29 Order (as described above under "Appointment of
Special Master") provided for the appointment of Robert G. Russell
as receiver/custodian pendente lite to, among other things, take
exclusive possession and control of all of the issued and
outstanding shares of the company's Class B Common Stock, all of
which is owned by BCBSMo. On November 2, 1998, the BCBSA notified
the company and its licensed affiliates that their licenses to use
the Blue Cross and Blue Shield service marks had terminated
automatically pursuant to their terms on October 29, 1998, as a
result of the October 29 Order, and filed a Complaint against the
company and its licensed affiliates alleging inter alia service mark
infringement and breach of license agreements as a result of the
continued use of the service marks following the issuance of the
October 29 Order (the BCBSA Complaint). On November 4, 1998, after
BCBSMo filed a motion to vacate the October 29 Order and supporting
memorandum, the Circuit Court issued the November 4 Order and the
November 4 Special Master Order. The November 4 Order set aside the
October 29 Order and declared it to be void ab initio, or "void from
the beginning." The November 4 Special Master Order appointed
Robert G. Russell as special master for the purpose of collecting
and analyzing information related to the proposed settlement of the
litigation described above. On November 6, 1998, the Court issued
an Order of Reference for the special master. As a result of the
November 4 Order, the BCBSA agreed to dismiss the BCBSA Complaint.
Each of the reinstated license agreements approved by the BCBSA on
November 19, 1998 included an addendum that provided, among other
things, that the licenses granted under such license agreements
would be reviewed by the BCBSA at the next regularly scheduled
meeting of the BCBSA Board of Directors (originally, March 11, 1999,
and pursuant to extensions, November 19, 1999). If on or before
such date, the BCBSA did not extend the termination dates for the
license agreements until the next regularly scheduled meeting of the
BCBSA Board of Directors after such date, or otherwise modify the
addenda, the license agreements would have terminated. This "board-
to-board" extension of the license agreements has been adopted in
conjunction with the issuance of reinstated licenses granted to
other BCBSA licensees following a license termination. There can be
no assurances that the BCBSA will take the necessary and appropriate
action to extend the license agreements beyond November 19, 1999, or
any time thereafter
The licenses of the company and its licensed affiliates, and the
addenda thereto effective as of October 29, 1998, are attached as
Exhibits 10.6.5 - 10.13.4 to the company's Current Report on Form 8-
K filed with the SEC on November 24, 1998.
The licenses (which include the primary licenses granted to BCBSMo
and the controlled affiliate licenses to the company, HALIC and
BlueCHOICE) give these companies 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 licenses require BCBSMo, the company and the
licensed affiliates to pay license fees to BCBSA for the use of the
trademarks.
In January 1997, interim and temporary licenses were granted to
BCBSMo and its affiliates after notification by the BCBSA that the
prior licenses had automatically terminated in connection with the
litigation relating to the Reorganization and Public Offering
described above under "Litigation relating to the Reorganization and
Public Offering" (the Litigation). The interim and temporary
licenses were later replaced by reinstated full licenses granted in
March 1998.
Each of the licenses provides that it automatically terminates if,
among other things: (i) the DOI or another regulatory agency
assumes control of the licensee or delinquency proceedings are
instituted; (ii) a trustee, interim trustee, receiver or other
custodian for any of BCBSMo's or the BCBSA's property or business is
appointed, or (iii) an action is instituted by any governmental
entity or officer against the licensee seeking dissolution or
liquidation of its assets or seeking the appointment of a trustee,
interim trustee, receiver or custodian for any of its property or
business, which is consented or acquiesced to by the licensee or is
not dismissed within 130 days of the licensee being served with the
pleading or document commencing the action, provided that if the
action is stayed or its prosecution enjoined, the 130-day period is
tolled for the duration of the stay or injunction, and provided
further that the BCBSA's Board of Directors may toll or extend the
130-day period at any time prior to its expiration. Each trademark
license also provides that it may be terminated by BCBSA if, among
other things, the licensee fails to meet certain quality control
standards or minimum capital or liquidity requirements. Pursuant to
the Addendum, which became part of the reinstated license agreements
following the November 19, 1998 BCBSA Board meeting, an automatic
termination will also occur (i) if the BCBSA Board does not take
action to extend the licenses on or before September 17, 1999, the
date of the next regularly scheduled BCBSA Board meeting, and (ii)
upon any judicial act that (a) provides for or approves a
transaction pursuant to which a person, entity or group other than
the licensees of BCBSA, acquires the ability to select the majority
of the members of the Board of Directors of BCBSMo, the company or
certain of its affiliates or otherwise gains control of BCBSMo, the
company or such affiliates, or (b) changes the composition of, or
the voting rights of the members of the Board of Directors of
BCBSMo, the company or such affiliates. The foregoing provision
does not apply to a settlement or resolution of the Litigation that
complies with all BCBSA rules, regulations and standards and is
approved by or conditioned on the approval of the BCBSA. In
addition, the licenses may be terminated if BCBSMo, the company, or
certain subsidiaries of the company are unable to achieve certain
financial benchmarks as required by the BCBSA.
The affiliate licenses are derivative of the primary licenses and
automatically terminate if the primary licenses terminate.
According to their terms, if a license is 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
licensed controlled affiliates, and must give written notice of such
termination to their enrollees. The termination fee is reduced in
accordance with a formula set forth in the primary licenses if
another plan is licensed by BCBSA in BCBSMo's exclusive service
area. In connection with the reinstatement described above, the
BCBSA waived the application of these provisions to the alleged
automatic termination resulting from the entry of the October 29
Order.
In March 1998, BCBSMo and BCBSA agreed that the primary licenses
were reinstated as if a suit seeking dissolution had been served on
BCBSMo but the 130-day period for automatic termination described
above was tolled. The tolling was to continue for as long as the
stay entered in the Litigation remained in full force and effect.
Under the Addendum that became part of the reinstated license
agreements at the November 19, 1998 BCBSA Board meeting, the
automatic termination provision relating to the stay would no longer
be controlling; rather, the licenses are on a "board-to-board"
basis, which means that on or before the next regularly scheduled
meeting of the BCBSA Board (scheduled to be held on November 19,
1999) the Board must take action to extend the licenses or else the
licenses will automatically terminate on November 19, 1999.
Although the licenses were previously extended at prior meetings,
there can be no assurances that the BCBSA Board will take the action
necessary to extend the licenses on or before the November 19, 1999
meeting as part of the "board-to-board" review.
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 its stock. In addition,
the loss of the licenses would be an event of default under the
company's Credit Agreement which, if not waived or otherwise
addressed, could result in a material adverse effect on the company
and the market for its stock.
In connection with the amended settlement agreements described above
under "Status of Proposed Settlement Agreements," BCBSMo and the
company have filed a request with the BCBSA to transfer its primary
license to new RightCHOICE as part of the transactions contemplated
by the amended settlement agreements. The BCBSA has conditionally
approved the transfer as proposed. There can be no assurance that
the transactions contemplated by the amended settlement agreements
will receive the necessary court approval, that all conditions and
contingencies included in the amended settlement agreements will be
satisfied, or that the transactions set forth in the amended
settlement agreements will be effected. The failure to consummate
the transactions contemplated by the amended settlement agreements
could have a material adverse effect on the company and the market
for its stock.
OTHER CONTINGENCIES
In addition to the matters described above, from time to time in the
ordinary course of business, the company and certain of its
subsidiaries are parties to various legal proceedings, including the
claims of its members arising from health plan benefit coverage
issues for certain services under evolving theories of liability.
The financial and operational impact that such evolving theories of
recovery will have on the managed care industry generally, or the
company in particular, is presently unknown.
3. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB)
released Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 is effective for all fiscal years beginning after June
15, 2000. Earlier application of SFAS No. 133 is encouraged but
should not be applied retroactively to financial statements of prior
periods. The company believes that the adoption of SFAS No. 133
will not have a material impact on the company's financial position
or results of operations.
In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1, "Accounting for Computer
Software Developed For or Obtained For Internal Use," which is
effective for fiscal years beginning after December 15, 1998. The
SOP requires preliminary stage project costs to be expensed as
incurred. Once a project is in the application development stage,
the SOP requires all external direct costs for materials and
services and payroll and related fringe benefit costs to be
capitalized, and subsequently amortized over the estimated useful
life of the project. The adoption of SOP 98-1 did not have a
material impact on the company's financial position or results of
operations.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-up Activities," which is effective for fiscal years beginning
after December 15, 1998. The SOP requires that certain costs of
start-up activities, including organization costs, should be
expensed as incurred. The company adopted SOP 98-5 in the first
quarter of 1999 and this adoption did not have a material impact on
the company's financial position or results of operations.
4.Changes in Long-Term Debt
During the third quarter of 1999, the company completed negotiations
to favorably amend the terms of its revolving credit facility (the
Credit Agreement), the material terms of which are as follows: (1)
the borrowings under the Credit Agreement will bear interest at the
reduced rate of 2.5 percent above the one month floating London
Interbank Offered Rate (LIBOR), (2) certain financial covenant
calculations were favorably modified and the financial covenant
requirements were favorably adjusted, (3) the maximum commitment of
the Credit Agreement of $36 million as of October 1, 1999 will be
reduced by $2.0 million quarterly through January 1, 2002, the new
termination date, and (4) an additional $7 million of surplus notes
will be permitted to be incurred between the company and its
subsidiaries to provide for capital planning flexibility.
5. Provision for Income Taxes
The company's effective income tax rates of 43.3 percent and 59.7
percent for the third quarter of 1999 and 1998, respectively, and
40.1 percent and 50.9 percent for the first three quarters of 1999
and 1998, respectively, presented in the Consolidated Statements of
Income were affected by non-deductible goodwill amortization, among
other things. Based upon all the available evidence, management
believes that it is more likely than not that the company will
realize all of its deferred tax assets, and accordingly, no
valuation allowance has been provided against such assets as of
September 30, 1999. In addition, for the third quarter and first
three quarters of 1999, the company's state income tax provision was
favorably impacted due to a change in the filing status for the
State of Missouri.
6. Earnings Per Share
Basic earnings per share are computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding during the year. Diluted earnings per share are
calculated by dividing net income by the number of weighted average
shares outstanding plus additional shares representing stock
distributable under stock-based compensation plans using the
treasury stock method. There were 35,001 and 46,138 dilutive
potential common shares for the third quarter of 1999 and 1998,
respectively and 49,284 and 25,155 dilutive potential common shares
for the first three quarters of 1999 and 1998, respectively, that
were added to the weighted average number of shares outstanding in
order to compute diluted earnings per share.
7. Comprehensive Income
The components of other comprehensive income for the three and nine
month periods ended September 30, 1999 and 1998 are as follows:
Three Nine
months ended months ended
September 30, September 30,
1999 1998 1999 1998
(in thousands) (in thousands)
Unrealized holding (losses) gains arising
during period, net of taxes $(860) $2,417 $(5,025) $2,942
Less: reclassification adjustment for
losses (gains) included in
net income, net of taxes 41 (1,210) 334 (1,664)
Net unrealized (losses) gains on
securities $(819) $1,207 $(4,691) $1,278
8. Segment information
The company operates in two segments which it defines as
underwritten and self-funded. The company's underwritten segment
includes a comprehensive array of products including PPO, POS, HMO,
Medicare supplement, managed indemnity and specialty managed care
coverages. The company's self-funded segment includes 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 percent 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 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 and general and administrative expenses
attributable to the segment. Expenses not directly traceable to an
industry segment are allocated on a consistent and reasonable basis
utilizing membership, groups, claims, and other key drivers.
Corporate identifiable assets by segment include only receivables
from members since the company does not produce more detailed
information by segment internally. Intersegment revenues are not
material. Financial information by segment is as follows (in
thousands):
Three months ended September 30, 1999
Underwritten Self-funded Consolidated
Revenues $183,496 $21,007 $204,503
Operating (loss) income (695) 5,904 5,209
Depreciation and
amortization expense 3,016 1,389 4,405
Identifiable assets 56,063 27,778 83,841
Nine months ended September 30, 1999
Underwritten Self-funded Consolidated
Revenues $541,436 $62,291 $603,727
Operating (loss) income (4,054) 18,412 14,358
Depreciation and
amortization expense 8,742 4,046 12,788
Three months ended September 30, 1998
Underwritten Self-funded Consolidated
Revenues $172,107 $17,697 $189,804
Operating (loss) income (7,638) 5,058 (2,580)
Depreciation and
amortization expense 3,467 1,424 4,891
Identifiable assets 41,474 23,062 64,536
Nine months ended September 30, 1998
Underwritten Self-funded Consolidated
Revenues $519,215 $54,259 $573,474
Operating (loss) income (18,844) 14,400 (4,444)
Depreciation and
amortization expense 10,050 4,053 14,103
9. Change in estimate
Based upon management's periodic review of the useful lives of its
various assets, the company's estimate of the useful life of various
modules of its capitalized software changed from 5 years to 7 years,
effective with the beginning of 1999. Management believes that this
change will more appropriately match the amortization expense of the
software with the periods in which the software is utilized. This
change in estimate on an after-tax basis resulted in an increase to
the company's net income for the third quarter and first three
quarters of 1999 of approximately $0.6 million, or $0.03 per share,
and $1.8 million or $0.10 per share, respectively.
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT
ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS, FINANCIAL
CONDITION OR BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL
RESULTS, FINANCIAL CONDITION OR BUSINESS, OR THE RESULTS OF
OPERATIONS, FINANCIAL CONDITION OR BUSINESS CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS, FINANCIAL CONDITION OR BUSINESS."
The following table sets forth premium revenue by product group for
the three and nine month periods ended September 30, 1999 and 1998
(unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
Product Group 1999 1998 1999 1998
(in thousands) (in thousands)
PPO:
Alliance PPO $53,453 $48,583 $154,500 $143,716
AllianceChoice POS 42,310 38,356 123,380 112,099
HMO (includes other POS) 51,814 49,604 156,207 153,750
Medicare supplement 22,915 23,568 69,778 71,816
Managed indemnity 955 1,669 2,806 6,335
Other specialty services 12,051 10,432 34,319 31,855
Total premium revenue 183,498 172,212 540,990 519,571
ASO/Self-funded and
other income 21,005 17,592 62,737 53,903
Total revenues $204,503 $189,804 $603,727 $573,474
The following table sets forth selected operating ratios. The
medical loss ratio is shown as a percentage of health care services
expense over premium revenue. All other ratios are shown as a
percentage of premium revenue and fees and other income combined:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Operating revenues:
Premium revenue 89.7% 90.7% 89.6% 90.6%
Fees and other income 10.3% 9.3% 10.4% 9.4%
100.0% 100.0% 100.0% 100.0%
Operating expenses:
Medical loss ratio 81.6% 84.9% 82.0% 83.7%
Commission expense 4.2% 4.0% 4.0% 4.1%
General and administrative expense
(includes depreciation
and amortization) 20.0% 20.3% 20.2% 20.8%
Adjusted general and administrative expense
(excludes depreciation
and amortization) 17.9% 17.7% 18.0% 18.3%
Membership
The following table sets forth membership data and the
percent change in membership:
September 30,
Product Group 1999 1998 %
Underwritten:
PPO:
Alliance PPO 145,826 141,297 3.2%
AllianceChoice POS 126,997 128,712 (1.3)
HMO:
Commercial (includes other POS) 125,501 133,288 (5.8)
BlueCHOICE Senior 5,025 5,448 (7.8)
Medicare supplement 54,187 58,752 (7.8)
Managed indemnity 1,965 3,499 (43.8)
459,501 470,996 (2.4)
Self-funded:
PPO 45,718 45,445 0.6
HMO 7,173 12,235 (41.4)
ASO (includes HealthLink):
Workers' Compensation 497,055 432,786 14.9
Other ASO* 1,225,234 1,130,068 8.4
Total Membership 2,234,681 2,091,530 6.8%
* does not include 384,885 and 453,797 as of September 30, 1999 and
1998, respectively, relating to additional third-party administrator
members that are part of The EPOCH Group, L.C. (Epoch), a joint
venture with Blue Cross and Blue Shield of Kansas City formed in
December 1995.
Comparison of 1999 Results to 1998 Results
Revenues
Premium revenue increased $11.3 million, or 6.6 percent, in the
third quarter of 1999 in comparison to the third quarter of 1998.
For the first three quarters of 1999, premium revenue increased
$21.4 million, or 4.1 percent, in comparison to the first three
quarters of 1998. As described below, components of premium revenue
were affected by shifts in product mix, rate increases, and other
factors, and as a result, such changes may not be indicative of
future periods. The company will continue to strive to establish
its commercial premium rates based on anticipated health care costs.
Depending on the level of future competition, customer acceptance of
the company's premium increases, future health care cost trends or
other factors, there can be no assurance that the company will be
able to price its products consistent with health care cost trends.
PPO revenues increased $8.8 million in the third quarter of 1999 as
compared to the third quarter of 1998 -- $9.5 million due to a 10.7
percent increase in net premium rates, partially offset by a $0.7
million decrease resulting from a slight decrease in member months.
For the first three quarters of 1999, PPO revenues increased $22.1
million as compared to the first three quarters of 1998 -- $30.7
million due to an 11.7 percent increase in net premium rates
partially offset by an $8.6 million decrease resulting from a 2.8
percent decrease in member months. Alliance PPO membership increased
by 4,529 members from September 30, 1998 to September 30, 1999 while
AllianceChoice POS membership decreased by 1,715 over the same time
period. The company began offering PPO products in Illinois at the
end of the first quarter of 1997. Included in the Alliance PPO
member count are 12,100 PPO Illinois members as of September 30,
1999, an increase of 6,000 from September 30, 1998.
HMO premium revenue increased $2.2 million or 4.5 percent in the
third quarter of 1999 as compared to the third quarter of 1998 --
$5.7 million increase due to an 11.0 percent increase in net premium
rates, partially offset by a $3.5 million decrease resulting from a
5.9 percent decrease in member months. For the first three quarters
of 1999, HMO revenues increased $2.5 million or 1.6 percent as
compared to the first three quarters of 1998 -- $14.9 million due to
a 10.2 percent increase in net premium rates partially offset by a
$12.4 million decrease resulting from a 7.8 percent decrease in
member months. Net rate increases are affected by the status of a
large group (the Missouri Consolidated Health Care Plan or MCHCP),
comprised of 38,558 members as of September 30, 1999, with which the
company historically had limited ability to increase premium rates.
Membership in MCHCP increased by 5,794 from September 30, 1998 to
September 30, 1999. The company's HMO membership in non-MCHCP
products decreased over the same time period by 14,004 members, or
13.2 percent. Membership decreases in non-MCHCP products were
driven primarily by the company's focused pricing strategy.
Premium revenue from Medicare supplement decreased by $0.7 million
in the third quarter of 1999 as compared to the third quarter of
1998 -- $1.9 million decrease resulting from a 7.8 percent decrease
in member months, partially offset by a $1.2 million increase due to
a 5.4 percent increase in net premium rates. For the first three
quarters of 1999, premium revenue decreased by $2.0 million as
compared to the first three quarters of 1998 -- $5.4 million
decrease resulting from a 7.3 percent decrease in member months,
partially offset by a $3.4 million increase due to a 4.8 percent
increase in net premium rates. Membership in the company's
Medicare supplement products has decreased in part due to
subscribers opting for Medicare-risk programs, similar to the
company's BlueCHOICE Senior product, in which medical benefits are
at least as comprehensive as Medicare benefits for persons eligible
to receive Medicare (parts A and B) at no additional cost to the
member.
Managed indemnity premium revenue decreased by $0.7 million in the
third quarter of 1999 as compared to the third quarter of 1998
primarily due to a 52.4 percent decline in member months. For the
first three quarters of 1999, premium revenue decreased by $3.5
million due to a 61.8 percent decline in member months. Member
month declines are consistent with the company's strategy to move
toward more highly managed care products. With the exception of a
short-term medical product, the company no longer sells managed
indemnity coverage, but continues to renew coverage for those
members who are enrolled in these managed indemnity programs.
Revenue from other specialty services increased $1.6 million or 15.5
percent in the third quarter of 1999 as compared to the third
quarter of 1998 due to a 13.3 percent increase in net premium rates
and a 2.0 percent increase in member months. For the first three
quarters of 1999, revenues increased $2.5 million as compared to the
first three quarters of 1998 due to a 17.1 percent increase in net
premium rates partially offset by an 8.0 percent decline in member
months. Specialty product member months for the first three quarters
of 1999 decreased as a result of decreases in the company's underwritten
medical products. The large rate increases relate to the company's
drug products, including AllianceRx, and correspond to the high
levels of prescription utilization and trends that the company, as
well as the industry as a whole, have experienced in recent years.
Fees and other income from administrative services only/self-funded
and network services increased by $3.4 million in the third quarter
of 1999 as compared to the third quarter of 1998. For the first
three quarters of 1999, fees and other income increased $8.8 million
as compared to the first three quarters of 1998. These increases
are primarily due to increased 1999 revenues from HealthLink, Inc.
(HealthLink), the company's network rental and managed care service
subsidiary, of $3.4 million and $10.3 million for the third quarter
and first three quarters of 1999, respectively, as compared to the
same periods of 1998. HealthLink's revenues increased due to a 12.4
percent increase in members from September 30, 1998 to September 30,
1999. HealthLink's increases to fees and other income were
partially offset by decreases to revenue caused by the loss of
approximately 25,300 members, from September 30, 1998 to September
30, 1999, in the company's other self-funded business (excluding the
membership in the company's Epoch joint venture), a portion of which
enrolled in the HealthLink network.
Operating Expenses
The overall medical loss ratio decreased from 84.9 percent in the
third quarter of 1998 to 81.6 percent in the third quarter of 1999.
The overall medical loss ratio decreased from 83.7 percent in the
first three quarters of 1998 to 82.0 percent in the first three
quarters of 1999. The overall medical loss ratio has decreased, in
part, due to the company's pricing strategy. For the third quarter
and first three quarters of 1999, the premium revenue per member per
month increased by 10.3 percent and 10.1 percent, respectively, and
the net medical cost per member per month increased by 6.1 percent
and 7.9 percent, respectively, compared to the third quarter and
first three quarters of 1998.
The company continues its efforts to modify its pharmacy benefits
management program and recontract with physicians and ancillary
service providers. The drug cost trend was approximately ten to
twenty percent in the third quarter and first three quarters of
1999, driven by a combination of factors, including introduction of
new drug therapies; physicians' use of newer, more expensive drugs;
and physicians' decreased use of generic drugs in favor of specific
drugs promoted by pharmaceutical companies. The company is
continuing its effective strategy for controlling drug costs by
utilizing a three-tier drug benefit design that allows members to
make choices among generic, formulary, or other brand name drugs,
albeit at different member copayment levels. Approximately 71
percent of the company's underwritten members with a drug benefit
were enrolled in the three-tiered pharmacy benefit programs as of
September 30, 1999. In the third quarter and first three quarters
of 1999, the company has recognized 30 percent and 39 percent
savings, respectively, on the three-tier program as compared to the
two-tier drug program. Physician education, utilization and
prescribing pattern analysis will be increased through an on-site
nurse reviewer and expanded physician profiling services through the
company's new pharmacy benefit contract which runs through 2002.
The company will also continue its hospital, physician and service
recontracting strategy, using the more detailed data and analysis
available through the company's information and operations strategy
(IOS). There can be no assurance that the company's initiatives to
control future increases in medical cost trends to improve the
medical loss ratio will be effective.
Commission expense increased by $0.9 million, or 11.6 percent, in
the third quarter of 1999 as compared to the third quarter of 1998.
For the first three quarters of 1999, commission expense increased
by $0.2 million, or 0.8 percent, as compared to the first three
quarters of 1998. The commission expense ratio increased from 4.0
percent for the third quarter of 1998 to 4.2 percent for the third
quarter of 1999. The commission expense ratio decreased from 4.1
percent for the first three quarters of 1998 to 4.0 percent for the
first three quarters of 1999.
General and administrative expenses (excluding depreciation and
amortization) increased by $2.9 million, or 8.7 percent in the third
quarter of 1999 as compared to the third quarter of 1998. For the
first three quarters of 1999, these expenses increased by $3.9
million, or 3.7 percent, as compared to the first three quarters of
1998. This increase is partially due to increases of $1.7 million
and $5.4 million in HealthLink expenses in the third quarter and
first three quarters of 1999, respectively, as compared to the
comparable periods of 1998. HealthLink's increased expenses are
directly attributable to HealthLink's geographic and member
expansion efforts. HealthLink's increase in the first three
quarters is partially offset by the company's general and
administrative cost control efforts.
Depreciation and amortization expenses decreased by $0.5 million in
the third quarter of 1999 as compared to the third quarter of 1998.
For the first three quarters of 1999, depreciation and amortization
expenses of $12.8 million represented a decrease of $1.3 million as
compared to the first three quarters of 1998. Amortization expenses
for completed components of the company's information and operations
strategy (IOS) project decreased by $0.3 million and $0.6 million in
the third quarter and first three quarters of 1999, respectively, as
compared to the same periods in 1998, due in part to the company's
change in the estimated useful life of the capitalized software
costs from five to seven years. See Note 9 of the Notes to
Consolidated Financial Statements of Item I, which description is
incorporated herein by reference.
Operating Income
Operating income increased by $7.8 million in the third quarter of
1999 in comparison to the third quarter of 1998. For the first
three quarters of 1999, operating income increased by $18.8 million
as compared to the first three quarters of 1998.
Net Investment Income
The third quarter 1999 net investment income of $3.1 million
represents a $2.0 million decrease over the third quarter of 1998,
inclusive of a $2.0 million decrease in net realized gains. For the
first three quarters of 1999, net investment income decreased by
$4.1 million as compared to the first three quarters of 1998,
inclusive of a reduction in net realized gains of $3.1 million. The
remaining decrease in investment income for the first three quarters
of 1999 is due to a $14.5 million reduction in investments available
for sale as of September 30, 1999 as compared to September 30, 1998,
as well as lower investment yields due to lower market interest
rates in 1999 as compared to 1998.
Provision for Income Taxes
The company's effective income tax provision rates were 43.3 percent
and 59.7 percent for the third quarter of 1999 and 1998,
respectively. For the first three quarters of 1999 and 1998, the
effective income tax provision rates were 40.1 percent and 50.9
percent, respectively. The company's effective income tax rates for
1999 and 1998 were affected by non-deductible goodwill amortization,
among other things. In addition, for the third quarter and first
three quarters of 1999, the company's state income tax provision was
favorably impacted due to a change in the filing status for the
State of Missouri.
Net Income
The company's net income of $4.0 million, or $0.21 per share, for
the third quarter of 1999 represents an increase of $3.5 million
compared to third quarter 1998 net income of $0.5 million, or $0.03
per share. For the first three quarters of 1999, the company's net
income of $12.6 million, or $0.67 per share, represents a $9.9
million increase compared to net income of $2.7 million, or $0.14
per share, for the first three quarters of 1998.
Liquidity and Capital Resources
The company's working capital as of September 30, 1999 was $68.1
million, an increase of $3.6 million from December 31, 1998. The
increase is partially attributable to the $12.6 million of net
income for the first three quarters of 1999. Depreciation and
amortization expenses related to noncurrent assets was $12.8
million. The company capitalized $4.8 million of costs for property
and equipment purchases, $3.1 million of which relates to
capitalized IOS development costs. The company's unrealized net
appreciation of investments available for sale decreased by $4.7
million in the first three quarters of 1999. In addition, the
company repaid $7.0 million of the debt from the company's reducing
revolving credit facility as well as $3.3 million of debt related to
capital leases.
Net cash provided by operations totaled $7.8 million for the nine
months ended September 30, 1999. The company's net income was $12.6
million which included (on a before-tax basis) $0.5 million of net
realized losses from the sale of investments and $12.8 million of
depreciation and amortization expenses. In addition, receivables
from members, accounts payable and accrued expenses, medical claims
payable, and net intercompany payables were affected by the timing
of operating cash payments and receipts, intercompany tax
settlements, as well as changes in membership and utilization and
claims payment trends. Receivables from members increased by $15.8
million in part due to an increase of $6.3 million related to
HealthLink receivables, rate increases related to the company's
underwritten products, and other timing factors. Accounts payable
and accrued expenses decreased by $2.5 million due in part to
the timing of premium tax payments and reinsurance settlements,
among other things. Net intercompany payables decreased by $9.6
million due to the timing of operating cash receipts and payments
and intercompany tax settlements, among other things.
On August 29, 1997, the company reported the commencement of the
litigation with MCHCP and estimated losses (giving effect to all
possible renewal terms of the MCHCP contract without requested rate
increases) in the range of $30 million to $40 million. In the third
quarter of 1997, the company took a pre-tax charge of $29.5 million,
which was based on actuarial estimates, including projected limited
rate increases, and projected enrollment and medical cost trends
accounted for through the year 2000 in accordance with generally
accepted accounting principles. The company was advised by the
Missouri Department of Insurance (DOI) in March 1998, that the
entire amount of the reserve for the MCHCP contract recorded by the
company for projected losses under the contract through the year
2000, must, for statutory accounting purposes, be recorded by the
company's subsidiary, HMO Missouri, Inc. (BlueCHOICE), on its
statutory filings with the DOI. With the prior regulatory approval
of the DOI, BlueCHOICE issued surplus notes to the company in the
amount of $29 million to ensure the statutory solvency of
BlueCHOICE. On August 6, 1999, the MCHCP executed an amendment to
the contract providing a rate increase that is anticipated to be
approximately 21 percent for public entities, modified rate factors
for state employees, and modification of the pharmacy benefit,
effective January 1, 2000, for the 2000 contract year. While
management of the company believes the current provision for losses
is adequate, particularly in light of the rate increases provided on
August 6, 1999, if the actual public entity membership in MCHCP
grows at a rate in excess of the rate used in the actuarial
estimates, or if the projected limited rate increases and medical
cost trends should differ materially from those assumed in the
actuarial estimates, then the amount of the reserve recorded to date
could be insufficient to cover all future losses which may be
associated with the MCHCP contract, and such losses could have a
material adverse effect on the company and the market for its stock.
In the first quarter of 1999, the company completed a reinsurance
arrangement between its subsidiaries, Healthy Alliance Life
Insurance Company (HALIC) and BlueCHOICE, whereby HALIC will
reinsure MCHCP losses that exceed certain thresholds over the
remaining term of the current MCHCP contract. The company
anticipates that this arrangement will assist in mitigating the risk
that additional surplus notes or other funding will need to be
provided to the company's BlueCHOICE subsidiary.
During the third quarter of 1999, the company completed negotiations
to favorably amend the terms of its revolving credit facility (the
Credit Agreement), the material terms of which are as follows: (1)
the borrowings under the Credit Agreement will bear interest at the
reduced rate of 2.5 percent above the one month floating London
Interbank Offered Rate (LIBOR), (2) certain financial covenant
calculations were favorably modified and the financial covenant
requirements were favorably adjusted, (3) the maximum commitment of
the Credit Agreement of $36 million as of October 1, 1999 will be
reduced by $2.0 million quarterly through January 1, 2002, the new
termination date, and (4) an additional $7 million of surplus notes
will be permitted to be incurred between the company and its
subsidiaries to provide for capital planning flexibility.
In the first nine months of 1999, the company incurred capitalized
expenditures of $3.1 million on its information and operations
strategy (IOS) project. During the fourth quarter of 1999 and the year 2000,
the company anticipates that it will expend approximately $7 million to
$8 million for additional capitalized costs associated with the IOS project.
Recent Developments
Year 2000 issue
The company has a program to evaluate its major systems, processes
and equipment to minimize the possibility of a material disruption
to its business due to Year 2000 problems (e.g., the difficulties of
certain computers, computer programs and other equipment to
distinguish between the year 1900 and the year 2000). The program
was initiated in 1996 and includes an inventory of software,
hardware and related infrastructure components; assessments and
decisions to retire, replace or remediate these elements as well as
to establish how critical they are to continued operations; a
strategy to conduct integrated testing of critical applications and
technology infrastructure; and the development of contingency plans.
The inventory and assessment phases of the Year 2000 program are
substantially complete and include information technology such as
application software on various platforms (mainframe, midrange and
personal computer); system software and data/voice communication
networks; as well as facility equipment such as elevators, security
and building control systems. Although the company is increasing
its use of client server applications, the majority of its
application and system software uses a mainframe platform with COBOL
programming. The company believes that at September 30, 1999,
substantially all of these COBOL programs were Year 2000 ready. The
company has one remaining significant business application, the
claims imaging system, in the user acceptance testing and training
phase. This system is used to scan, route and retrieve information
about claims received in paper form. The company anticipates
placing this application in production in November. The company
believes that the balance of its other material system modification
is complete. The company has limited internal exposure to equipment
with embedded technology and expects any significant affected
equipment to be ready before January 1, 2000.
Integrated testing of purchased or internally developed
applications, hardware, operating systems and other support software
began in the fourth quarter of 1998. This integrated testing
(including the leap year test) includes advancing the hardware dates
forward to several key dates in the year 2000. Testing of this
nature is expected to continue through November 1999. In order to
decrease the company's risk, the company expects to restrict the
amount of software and hardware changes implemented in the fourth
quarter of 1999. For any changes required during that period, the
company will continue to conduct Year 2000 integrated testing.
The total cost associated with the modifications required to become
Year 2000 ready is estimated to be approximately $12 million to $13
million. The company is expensing all costs associated with these
changes as they are incurred. From 1996 through September 30, 1999,
the company has cumulatively expensed $11.9 million on this project,
with $4.5 million expensed in the first nine months of 1999. These
costs are being funded internally through operating cash flows or
investment sales and represent less than 10 percent of the company's
information technology budget over the life of the Year 2000
program.
In addition to internal Year 2000 implementation activities, some of
the company's computer systems and business operations are provided
by outside suppliers. As part of the program, the company is asking
for the readiness status of its critical vendors, providers and
suppliers. There can be no assurance that there will not be a
material adverse effect on the company if critical vendors,
suppliers and providers, such as major health care providers, third
parties performing delegated services or utility companies do not
convert their systems in a timely manner and in a way that is
compatible with the company's systems.
The company's operations would be significantly impacted by
incomplete or untimely resolution of Year 2000 issues, whether
caused by internal or external action. The company uses automated
systems to process claims, prepare invoices, collect and remit
payments, maintain membership data, perform utilization management
and many other processes. In the worst case, the company's
inability to perform these basic operating activities in an accurate
and timely manner would have a material adverse effect on the
company's revenues, liquidity and results of operations, although
the company is unable to estimate the total financial impact.
The company has completed contingency plans, in the event that full
Year 2000 readiness for critical business functions is not achieved.
However, there can be no assurance that the company or any third
party upon which the company depends will be able to achieve Year
2000 readiness or will have sufficient contingency plans, which
could have a material adverse effect on the company and the market
for its stock.
The projected cost of the Year 2000 program and the expected
completion dates are based on management's best estimates and may be
updated as additional information becomes available. These
estimates were derived using numerous assumptions of future events,
including the availability of certain resources and other factors.
There can be no guarantee that these estimates will be achieved, and
actual results could differ materially from expected results.
Recently issued accounting standards
See the description under the same caption in Note 3 of the Notes to
Consolidated Financial Statements of Item I, which description is
incorporated herein by reference.
Operating outlook
The following statements are based on short-term expectations. The
statements are forward-looking and actual results may differ
materially. Reference is made to the information set forth under
the caption "Factors that May Affect Future Results of Operations,
Financial Condition or Business" that follows.
If the company's financial targets are consistently met, the
marketplace improvement continues, and no unusual events occur, the
company expects to end 1999 with fourth quarter net income growth of
20 percent to 30 percent over the same quarter last year. Going into
2000, the company expects steady improvements in its fundamental
operations and will place greater focus on growing membership based
on this more effective and efficient business platform.
The company's ability to deliver these performance targets is
dependent on, among other things, achieving targeted sales to new
members and retention rates at higher prices, and realizing
projected medical and overhead cost savings.
Contingencies
See the description under the same caption in Note 2 of the Notes to
Consolidated Financial Statements of Item I, which description is
incorporated herein by reference.
Factors that May Affect Future Results of Operations, Financial
Condition or Business
The statements included in this Quarterly Report regarding future
financial performance and results and the other statements herein
that are not historical facts are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements may include, but are not limited to,
projections of earnings, revenues, income or loss, capital
expenditures, plans for future operations and financing needs,
matters relating to the proposed settlement agreements, as amended,
as well as assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties, some
of which cannot be predicted or quantified. Future events and
actual results, performance and achievements could differ materially
from those set forth in, contemplated by or underlying the forward-
looking statements. Factors that could cause actual results to
differ materially (the Cautionary Statements) include, but are not
limited to, those set forth below. Should one or more of the risks
or uncertainties set forth below materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially
from those indicated. Undue reliance should not be placed on the
Cautionary Statements, which speak only as of the date of this
Quarterly Report. The company undertakes no obligation to release
publicly any revisions to the forward-looking statements after the
date of this Quarterly Report to reflect events or circumstances
after the date of this Quarterly Report or to reflect the occurrence
of unanticipated events.
Contingencies
Reference is made to the information detailed in Note 2 entitled,
"Contingencies" of Part I, Item 1, under the captions: LITIGATION
OF BLUE CROSS AND BLUE SHIELD OF MISSOURI WITH THE MISSOURI ATTORNEY
GENERAL AND DEPARTMENT OF INSURANCE AND RELATED ACTIONS, SETTLEMENT
EFFORTS AND PROPOSED REORGANIZATION; AGREEMENT FOR SETTLEMENT OF
CERTAIN LITIGATION MATTERS AND REORGANIZATION OF THE COMPANY; and
OTHER CONTINGENCIES. All information under these captions and all
subcaptions thereunder is incorporated by reference in its entirety
in this section. In addition, the risk factors that follow describe
various other contingencies that should be read in conjunction with
such information.
Credit Agreement Restrictions
The company's revolving Credit Agreement with its existing lenders
contains certain restrictions on the company and its subsidiaries,
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, restrictions on additional indebtedness and liens,
limitations on indebtedness of the company's subsidiaries,
maintenance of the licenses to use Blue Cross and Blue Shield names
and marks 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 in the future to remain in
compliance with such requirements could, among other things, reduce
the company's ability to respond to adverse industry conditions and
could have a material adverse effect on the company's operations,
financial condition or business. As described under the caption in
Note 2 entitled "Contingencies - AGREEMENT FOR SETTLEMENT OF CERTAIN
LITIGATION MATTERS AND REORGANIZATION OF THE COMPANY - Status of
Blue Cross and Blue Shield Trademark Licenses" of Part I, Item 1,
the loss of the licenses would result in an event of default under
the Credit Agreement. During the third quarter 1999, the company
completed negotiations to amend its revolving Credit Agreement,
described under the caption in Note 4 entitled, "Changes in Long-Term
Debt."
MCHCP issues
The Missouri Consolidated Health Care Plan (MCHCP), which is a
Missouri public agency that purchases health care coverage for
employees of the State of Missouri and of selected public entities
that have been admitted into the MCHCP, is currently the largest
customer group served by BlueCHOICE, a subsidiary of the company.
The company is contractually bound to serve the MCHCP members
through the year 2000 at rates originally contracted for in 1995,
with annual rate increases which are far less than necessary to
permit the company to recover its costs in serving those members,
even though on August 6, 1999, the MCHCP executed an amendment to
the contract providing a rate increase that is anticipated to be
approximately 21 percent for public entities, modified rate factors
for state employees, and modification of the pharmacy benefit,
effective January 1, 2000, for the 2000 contract year.
In the third quarter of 1997, the company took a pre-tax charge of
$29.5 million, which was based upon actuarial estimates, including
projected limited rate increases, and projected enrollment and
medical cost trends accounted for through the year 2000 in
accordance with generally accepted accounting principles.
Management of the company reviews the adequacy of this reserve on an
ongoing basis. If the actual number of the company's members
through MCHCP grows at a rate in excess of the rate used in the
company's actuarial estimates (whether due to the increase generally
in MCHCP members, decrease in the number of MCHCP contractors or
otherwise), or if the projected limited rate increases and medical
cost trends should differ materially from those assumed in the
company's actuarial estimates, then the amount of the reserve
recorded to date could be insufficient to cover all future losses
that may be associated with the MCHCP contract, and such losses
could have a material adverse effect on the company and the market
for its stock.
In addition, the company's revolving Credit Agreement (described
above) provides that the company's subsidiaries, including
BlueCHOICE, may not issue surplus notes to the company in an
aggregate principal amount in excess of $46 million. As the
aggregate principal amount of surplus notes issued by such
subsidiaries to the company currently approximates $39 million, any
additional funding, in excess of approximately $7 million, required
by any subsidiaries of the company, including BlueCHOICE, as a result
of additional losses or reserves associated with the MCHCP contract,
or otherwise, must, absent approval of the lenders under the Credit
Agreement, be funded from sources other than surplus notes. No
assurances can be given that such approval would be granted or that
additional sources of funding could be obtained. See "Credit Agreement
Restrictions" above. In the first quarter of 1999, the company completed
a reinsurance arrangement between its subsidiaries, HALIC and BlueCHOICE,
whereby HALIC will reinsure MCHCP losses that exceed certain thresholds over
the remaining term of the current MCHCP contract. The company
anticipates that this arrangement will assist in mitigating the risk
that additional surplus notes or other funding will need to be
provided to the company's BlueCHOICE subsidiary.
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 increasing cost
and utilization of prescription medications, 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, medical
and drug cost trends, and growth of business in regions with less
cost-efficient networks.
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. There can
be no assurance that the company will be able to obtain or maintain
required governmental approvals or licenses or that any current or
proposed federal and state legislation or other regulatory reform
that increase the regulatory requirements imposed on the company and
its subsidiaries 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 competitors in its PPO, POS and HMO operations, many of
which have substantially greater financial and other resources than
the company. Because the company's existing business operations
(excluding its HealthLink subsidiary) are primarily 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.
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
that 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 employee groups,
individual consumers, 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 that
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 that BCBSMo has with respect to matters affecting the
company.
Dependence on Key Management
The company depends to a significant extent on key management
members. There can be no assurance that the loss of current key
management would not result in a material adverse effect on the
company's results of operations, financial condition or business.
Variability of Operating Results and Stock Price
The company's 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 expense 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 that cause variations in its results of operations
and in the volatility of the stock markets generally.
Year 2000 Issue
Reference is made to the information included under the caption
"Recent Developments - Year 2000 issue," of Part I, Item 2, which
information is incorporated by reference in its entirety in this
section. There can be no assurance that the company or any third
party upon which the company depends will be able to achieve Year
2000 readiness or will have sufficient contingency plans, which
could have a material adverse effect on the company and the market
for its stock.
Additional Factors
Additional risks 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, or
negative reports by brokerage firms, industry and financial analysts
regarding the company, its parent or BCBSA or their products or
services that 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; the financial and
operational impact that evolving theories of recovery, including
punitive damage theories, related to coverage reimbursement
decisions for various treatments, may have on the managed care
industry generally, or the company in particular; and changes in
accounting policies and practices.
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risks
There have been no material changes in market risk exposures that
affect the quantitative and qualitative disclosures presented in the
company's annual report on Form 10-K for the year ended December 31,
1998.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Note 2, "Contingencies" of Part I, Item 1, contains a description of
various pending and threatened claims involving the company and its
affiliates, including a description of the subscriber class action
lawsuit filed on March 15, 1996, litigation with the Missouri
Department of Insurance (DOI) and the Missouri Attorney General, and
other legal proceedings, which descriptions are incorporated by
reference herein. Also, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors that May
Affect Future Results of Operations, Financial Condition or
Business."
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Exhibit
The following exhibits are submitted herewith:
10.1 State Income Tax Allocation Agreement by and among Blue Cross
and Blue Shield of Missouri and RightCHOICE Managed Care, Inc., dated
September 30, 1999.
10.2 State Income Tax Allocation Agreement by and among RightCHOICE
Managed Care, Inc. and its subsidiaries, dated September 30,
1999.
10.36.7 Seventh Amendment to the Credit Agreement dated as of
September 30, 1999.
27 Financial Data Schedule (Electronic Filing Only).
99.1 Press Release of Registrant dated October 28, 1999.
99.2 Press Release of Registrant dated November 1, 1999.
99.3 Press Release of Registrant dated November 2, 1999.
99.4 Press Release of Registrant dated November 10, 1999
99.5 Order of the Circuit Court of Cole County, Missouri, dated
October 29, 1999.
b) Reports on Form 8-K:
The company filed a report with the SEC on Form 8-K on September 17,
1999 relating to an order issued by the Missouri Supreme Court on
September 9, 1999 which ordered the Circuit Court of Cole County,
Missouri to rule on the proposed settlement of litigation (described
in the Registrant's prior SEC filings) on or before November 9,
1999.
The company filed a report with the SEC on Form 8-K on October 18,
1999 relating to the recommendation made on October 8, 1999, by the
Special Master, appointed by the Circuit Court of Cole County,
Missouri, that the March 1999 modified settlement agreement of
litigation (described in the Registrant's prior SEC filings) be disapproved.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
RIGHTCHOICE MANAGED CARE, INC.
Registrant
Date: November 15, 1999 By: [s] SANDRA VAN TREASE
Sandra Van Trease
Chief Financial Officer,
Senior Executive Vice President and
Chief Operating Officer
Date: November 15, 1999 By: [s] ANGELA F. BRALY
Angela F. Braly
Executive Vice President,
General Counsel and
Corporate Secretary
STATE INCOME
TAX ALLOCATION AGREEMENT
THIS AGREEMENT, is made and entered into as of the 30th
day of September, 1999, by and among BLUE CROSS AND BLUE
SHIELD OF MISSOURI, (hereinafter referred to as "Parent) and
RightChoice Managed Care, Inc., (hereinafter referred to as
"Subsidiary").
WITNESSETH:
WHEREAS, Parent and Subsidiary are members of an
affiliated group of corporations within the meaning of section
1504(a)(1) of the Internal Revenue Code of 1986 (the "Code")
for which Parent is the parent corporation;
WHEREAS, Parent and its eligible subsidiaries (the
"Consolidated Group") have elected and consented to file and
do file consolidated income tax returns; and
WHEREAS, Parent and its eligible subsidiaries ("the
Consolidated Group") have elected and consented to file and do
file consolidated state income tax returns; and
WHEREAS, the parties to this Agreement wish to agree on
the payment of tax liabilities between Parent and the
Subsidiary in a manner pursuant to which the Subsidiary pays
Parent an amount of state income tax based upon the amount of
state income taxes which would be payable by the Subsidiary if
it filed a separate state income tax return, which includes
the income, gain, loss and deductions of Subsidiary;
NOW, THEREFORE, Parent and Subsidiary hereby agrees as
follows:
I. Consolidated Return
Parent and its includible subsidiaries, including the
Subsidiary, have elected to file consolidated state
income tax returns for the taxable period ending December
31, 1997, and for any subsequent taxable period for which
the Consolidated Group is permitted to file a
consolidated state income tax return. Each of the
Subsidiaries agree to file such consents and other
documents and to take such action as may be necessary to
carry out the purposes and provisions of this paragraph.
II. Calculation of Separate Company State Income Tax
Liability
A. Beginning with the period ended December 31, 1997, and
for each tax year thereafter, Subsidiary will calculate the
state income tax liability for Subsidiary (for the period
during which such Subsidiary was a direct or indirect
subsidiary of Parent), as if Subsidiary were to file a
separate state income tax return for such period.
III. Liability for Tax Payments - State
A. If a Subsidiary would be subject to state income tax
liability resulting from the calculation required by Paragraph
II, above, such Subsidiary shall pay such liability to Parent.
B. If a Subsidiary has a net operating loss for the period,
such Subsidiary will be entitled to a refund from the Parent
at such time as the Subsidiary can utilize the net operating
loss if it filed a separate state income tax return.
C. Parent agrees to be the sole agent for Subsidiary and to
act in its own name in all matters relating to the corporation
state income tax liability, including payment of such
liability, for any year in which it elects or is required to
file a consolidated state income tax return.
IV. Method and Time of Payment
Any amount to be paid by a Subsidiary to Parent or by
Parent to a Subsidiary by reason of paragraph III shall
be paid quarterly based on Subsidiary's estimated tax
liability. The quarterly payment shall be made in time
to reasonably permit Parent to make required estimated
payments or final settlements with the state.
V. Adjustment of Tax Liability
In the event of any adjustment of the tax liability as to
the consolidated state income tax return of the
Consolidated Group, by reason of the filing of an amended
return, a tentative loss carryback refund application,
claim for refund, or arising out of an audit by the
state, the liability of the Parent and Subsidiary
hereunder shall be redetermined after fully giving effect
to any such adjustment as if such adjustment had been a
part of the original computation, including any interest
and penalties attributable to any such adjustment.
VI. Successors, Assigns
The provisions and terms of this Agreement shall be
binding on and inure to the benefit of any successor, by
merger, acquisition of assets or otherwise, to any of the
parties hereto.
VII. Duration
With respect to Subsidiary, unless earlier terminated by
mutual agreement of the parties, this Agreement shall
remain in effect with respect to all taxable years for
which consolidated state income tax return are filed by
the Consolidated Group and such Subsidiary is included as
a member of the Consolidated Group.
VIII. Earnings and Profits Adjustments
This agreement is not intended to establish the method by
which the earnings and profits of each member of the
Consolidated Group will be determined.
IX. Miscellaneous
This agreement contains the entire Agreement among the
parties hereto, and supersedes any prior written or oral
understanding or agreement among the parties with respect
to the settlement of state income taxes. No
modification, extension, renewal, recession, termination
or waiver of any of the provisions contained herein shall
be binding upon any party unless made in writing and
signed on its behalf by one of its officers.
X. GOVERNING LAW
THE PROVISIONS OF THIS AGREEMENT SHALL BE GOVERNED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF MISSOURI.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officer as
of the day and year first above written.
BLUE CROSS AND BLUE SHIELD OF
MISSOURI
By: /s/ Edward J. Tenholder
Name: EDWARD J. TENHOLDER
Title: Executive Vice President
and Chief Operating Officer
RIGHTCHOICE MANAGED CARE, INC.
By: /s/ Sandra A. Van Trease
Name: SANDRA VAN TREASE
Title: Senior Executive Vice President
and Chief Operating Officer
STATE INCOME
TAX ALLOCATION AGREEMENT
THIS AGREEMENT, is made and entered into as of the 30th
of September, 1999 by and among RIGHTCHOICE MANAGED CARE,
INC., (hereinafter referred to as "Parent") and DIVERSIFIED
LIFE INSURANCE AGENCY OF MISSOURI, INC. ("DLIAM"), HMO
MISSOURI, INC. ("HMO Missouri"), HEALTHLINK, INC.
("HEALTHLINK") and PREFERRED HEALTH PLANS OF MISSOURI, INC.
("PHPMo") (hereinafter referred to individually as
"Subsidiary" or collectively as "Subsidiaries").
WITNESSETH:
WHEREAS, Parent and Subsidiaries are members of an
affiliated group of corporations within the meaning of section
1504(a)(1) of the Internal Revenue Code of 1986 (the "Code")
for which Parent is the parent corporation;
WHEREAS, Parent and its eligible subsidiaries ("the
Consolidated Group") have elected and consented to file and do
file consolidated state income tax returns; and
WHEREAS, the parties to this Agreement wish to agree on
the payment of tax liabilities between Parent and the
Subsidiaries in a manner pursuant to which each Subsidiary
pays Parent an amount of state income tax based upon the
amount of state income taxes which would be payable by the
Subsidiary if it filed a separate state income tax return,
which includes the income, gain, loss and deductions of
Subsidiary;
NOW, THEREFORE, Parent and each Subsidiary hereby agrees
as follows:
I. Consolidated Return
Parent and its includible subsidiaries, including the
Subsidiaries, have elected to file consolidated state
income tax returns for the taxable period ending December
31, 1997, and for any subsequent taxable period for which
the Consolidated Group is permitted to file a
consolidated state income tax return. Each of the
Subsidiaries agree to file such consents and other
documents and to take such action as may be necessary to
carry out the purposes and provisions of this paragraph.
II. Calculation of Separate Company State Income Tax Liability
A. Beginning with the period ended December 31, 1997, and
for each tax year thereafter, each Subsidiary will calculate
the state income tax liability for each Subsidiary (for the
period during which such Subsidiary was a direct or indirect
subsidiary of Parent), as if such Subsidiary were to file a
separate state income tax return for such period.
III. Liability for Tax Payments - State
A. If a Subsidiary would be subject to state income tax
liability resulting from the calculation required by Paragraph
II, above, such Subsidiary shall pay such liability to Parent.
B. If a Subsidiary has a net operating loss for the period,
such Subsidiary will be entitled to a refund from the Parent
at such time as the Subsidiary can utilize the net operating
loss if it filed a separate state income tax return.
C. Parent agrees to be the sole agent for Subsidiary and to
act in its own name in all matters relating to the corporation
state income tax liability, including payment of such
liability, for any year in which it elects or is required to
file a consolidated state income tax return.
IV. Method and Time of Payment
Any amount to be paid by a Subsidiary to Parent or by
Parent to a Subsidiary by reason of paragraph III shall
be paid quarterly based on Subsidiary's estimated tax
liability. The quarterly payment shall be made in time
to reasonably permit Parent to make required estimated
payments or final settlements with the state.
V. Adjustment of Tax Liability
In the event of any adjustment of the tax liability as to
the consolidated state income tax return of the
Consolidated Group, by reason of the filing of an amended
return, a tentative loss carryback refund application,
claim for refund, or arising out of an audit by the
state, the liability of the Parent and Subsidiary
hereunder shall be redetermined after fully giving effect
to any such adjustment as if such adjustment had been a
part of the original computation, including any interest
and penalties attributable to any such adjustment.
VI. Successors, Assigns
The provisions and terms of this Agreement shall be
binding on and inure to the benefit of any successor, by
merger, acquisition of assets or otherwise, to any of the
parties hereto.
VII. Duration
With respect to each Subsidiary, unless earlier
terminated by mutual agreement of the parties, this
Agreement shall remain in effect with respect to all
taxable years for which consolidated state income tax
return are filed by the Consolidated Group and such
Subsidiary is included as a member of the Consolidated
Group.
VIII. Earnings and Profits Adjustments
This agreement is not intended to establish the method by
which the earnings and profits of each member of the
Consolidate Group will be determined.
IX. Miscellaneous
This agreement contains the entire Agreement among the
parties hereto, and supersedes any prior written or oral
understanding or agreement among the parties with respect
to the settlement of state income taxes. No
modification, extension, renewal, recession, termination
or waiver of any of the provisions contained herein shall
be binding upon any party unless made in writing and
signed on its behalf by one of its officers.
X. GOVERNING LAW
THE PROVISIONS OF THIS AGREEMENT SHALL BE GOVERNED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF MISSOURI.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officer as
of the day and year first above written.
PREFERRED HEALTH PLANS OF RIGHTCHOICE MANAGED CARE, INC.
MISSOURI
By: /s/ Sandra Van Trease By: /s/ John O'Rourke
Name: Sandra A. Van Trease Name: John A. O'Rourke
Title: Sr. Executive Vice Title: President
President
DIVERSIFIED LIFE INSURANCY AGENCY
OF MISSOURI, INC.
By: /s/ Sandra Van Trease
Name: Sandra A. Van Trease
Title: Sr. Executive Vice President
HMO MISSOURI, INC.
By: /s/ Sandra Van Trease
Name: Sandra A. Van Trease
Title: Sr. Executive Vice President
HEALTHLINK, INC.
By: /s/ David T. Ott
Name: David Ott
Title: President
SEVENTH AMENDMENT TO CREDIT AGREEMENT
THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT (this
"Seventh Amendment"), dated as of September 30, 1999, is
entered into by and among RIGHTCHOICE MANAGED CARE, INC.
(the "Company"), the several financial institutions party
hereto (the "Banks"), BANK OF AMERICA, NATIONAL ASSOCIATION,
as administrative agent for itself and the Banks (the
"Administrative Agent") and MERCANTILE BANK NATIONAL
ASSOCIATION, 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 and the Administrative 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, a
Fourth Amendment to Credit Agreement dated as of November
13, 1996, a Fifth Amendment to Credit Agreement dated as of
February 11, 1997 and a Sixth Amendment to Credit Agreement
dated as of September 30, 1997 (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:
(a) All references in the Agreement to "Bank of
America National Trust and Savings Association" are hereby
deleted and replaced with "Bank of America, National
Association".
(b) All references in the Agreement to
"Nationsbank, N.A., as co-agent" or "The Boatman's National
Bank of St. Louis, as co-agent" are hereby deleted and
replaced with "Mercantile Bank National Association as co-
agent".
(c) The definition of the term "Applicable
Margin" in Section 1.1 of the Agreement is amended and
restated in its entirety to read as follows:
"Applicable Margin" means, (i) prior to the Margin
Reduction Date, in the case of Loans bearing interest
at the Offshore Rate, 2.50% (or 250 basis points) and,
in the case of Loans bearing interest at the Base Rate,
1.50% (or 150 basis points) and (ii) after the Margin
Reduction Date, in the case of Loans bearing interest
at the Offshore Rate, 2.25% (or 225 basis points) and,
in the case of Loans bearing interest at the Base Rate,
1.25% (or 125 basis points).
(d) There shall be added to Section 1.1 of the
Agreement, in appropriate alphabetical sequence, a new
definition reading in its entirety as follows:
"Margin Reduction Date" means the date upon which
the Company shall have certified to the Agent that the
Debt to EBITDA Ratio as of the last day of the
immediately preceding fiscal quarter of the Company was
less than 1.0 to 1.0.
(e) The definition of the term "Interest Period"
in Section 1.1 of the Agreement is hereby amended by
deleting the date "August 10, 2000" in clause (iii) thereof
and replacing it with "the Termination Date".
(f) The definition of the term "Termination Date"
in Section 1.1 of the Agreement is hereby amended by
deleting the date "August 10, 2000" and replacing it with
"January 2, 2002".
(g) Schedule 2.1 of the Agreement is amended and
restated in its entirety to read as set forth on Schedule
2.1 hereto.
(h) The chart appearing in Section 2.7(a) of the
Agreement is amended and restated in its entirety to read as
follows:
Date Maximum Commitment
September 30, 1999 $36,063,000
December 31, 1999 $34,063,000
March 31, 2000 $32,063,000
June 30, 2000 $30,063,000
September 30, 2000 $28,063,000
December 31, 2000 $26,063,000
March 31, 2001 $24,063,000
June 30, 2001 $22,063,000
September 30, 2001 $20,063,000
January 2, 2002 $0
(i) There shall be added to the Credit Agreement
a new Section 6.16 reading in its entirety as follows:
6.16. Year 2000 Compliance. The Company is (i)
developing a review and assessment of all areas within
its and each of its Subsidiaries' business and
operations that could be adversely affected by the
"Year 2000 Problem" (that is, the inability of certain
computer applications to recognize correctly and
perform date-sensitive functions involving certain
dates prior to and any date after December 31, 1999),
(ii) developing a plan and timeline for addressing the
Year 2000 Problem on a timely basis, and (iii) to date,
implementing that plan in accordance with that
timetable. The Company reasonably believes that all
computer applications that are material to its or any
of its Subsidiaries' business and operations will on a
timely basis be able to perform properly date-sensitive
functions for all dates before and after January 1,
2000 (that is, be "Year 2000 Compliant").
(j) Clause (f) of Section 7.6 of the Agreement is
hereby amended and restated in its entirety to read as
follows:
(f) (i) indebtedness of any Subsidiary to the
Company outstanding as of June 30, 1999 and (ii) up to
$7,000,000 of additional indebtedness of the Company's
Subsidiaries to the Company or other Subsidiaries
incurred at any time thereafter; provided, however,
that no indebtedness permitted by clause (ii) shall be
incurred by a Subsidiary except to the extent necessary
to meet regulatory capital requirements or capital
requirements of Blue Cross and Blue Shield; and
(k) Section 7.1(a) of the Agreement is hereby
amended and restated in its entirety to read as follows:
(a) At any time, the ratio of (i) cash and
Marketable Securities held by it and its Subsidiaries
to (ii) medical claims payable and unearned premiums of
the Company and its Subsidiaries to be less than
1.25:1.0.
(l) From and after the date hereof, the
Commitments of The Bank of Nova Scotia and Foothill Capital
Corporation (collectively, the "Exiting Banks") shall be
terminated.
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 Seventh 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 Seventh 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 Obstacles to Agreements. Neither
the execution of this Seventh 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 Authority is
required to be obtained by the Company to permit the
execution, delivery or performance by the Company of this
Seventh 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 Seventh 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 Seventh Amendment, as to
the incumbency of the person or persons authorized to
execute and deliver this Seventh Amendment and any
instrument or agreement required hereunder on behalf of the
Company.
4.2. Authorizing Resolutions. A certificate,
signed by the Secretary or an Assistant Secretary of the
Company and dated the date of the Seventh Amendment,
certifying the board resolutions authorizing the
transactions contemplated by this Seventh Amendment.
4.3. Notes. New Notes, dated as of the date
hereof, payable to each of the Banks against the return and
cancellation of the outstanding notes.
4.4. Amendment Fee. Payment to the Administrative
Agent, for the pro rata benefit of each Bank approving this
Seventh Amendment, of an amendment fee in the amount of
$285,472.50 (representing 75 basis points on the aggregate
Commitments).
4.5. Termination of Commitments of Exiting Banks.
Evidence of the repayment of all Obligations of the Company
to the Exiting Banks and the termination of their
Commitments under the Agreement.
4.6. 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 Seventh Amendment and the Agreement and the
compliance with the conditions set forth herein.
5. Miscellaneous.
5.1. Effectiveness of the Agreements. Except as
hereby amended, the Agreement shall remain in full force and
effect.
5.2. Waivers. This Seventh 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.
5.3. Counterparts. This Seventh 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 Seventh 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.
5.4. GOVERNING LAW. THIS Seventh 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
Seventh 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/ John O'Rourke
Title: President and CEO
By: /s/ Sandra Van Trease
Title: Sr. EVP, COO and CFO
BANK OF AMERICA, NATIONAL
ASSOCIATION, as Administrative
Agent
By: /s/ Charles Graber
Title: Vice President
BANK OF AMERICA, NATIONAL
ASSOCIATION, as a Bank
By: /s/ Beth Filipponi
Title: Vice President
MERCANTILE BANK NATIONAL
ASSOCIATION, as Co-Agent and
as a Bank
By: /s/ Ann L. Vazquez
Title: Vice President
CONSENT OF GUARANTOR
The undersigned, as guarantor of the obligations of
RightChoice Managed Care Inc. (the "Company") under the
HealthLink Guaranty dated as of August 10, 1995, hereby
consents to the foregoing Seventh Amendment to Credit
Agreement dated as of even date herewith and confirms that
the HealthLink Guaranty remains in full force and effect
after giving effect thereto and represents and warrants that
there is no defense, counterclaim or offset of any type or
nature thereunder. Capitalized terms used herein have the
meanings specified in the foregoing Seventh Amendment.
Dated as of September 30, 1999
HEALTHLINK, INC.
By: /s/ John O'Rourke
Title: Chairman
SCHEDULE 2.1
COMMITMENTS AND PRO RATA SHARES
Bank Commitment Pro Rata Share
Bank of America, National
Association $ 19,031,500 50%
Mercantile Bank National
Association $ 19,031,500 50%
TOTAL $ 38,063,000 100%
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements in the RightCHOICE Managed Care, Inc. Form 10-Q for the
quarterly period ended September 30, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 34,193
<SECURITIES> 198,036
<RECEIVABLES> 83,841
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 366,768
<PP&E> 114,083
<DEPRECIATION> 57,598
<TOTAL-ASSETS> 513,409
<CURRENT-LIABILITIES> 298,625
<BONDS> 44,968
0
0
<COMMON> 187
<OTHER-SE> 153,587
<TOTAL-LIABILITY-AND-EQUITY> 513,409
<SALES> 0
<TOTAL-REVENUES> 603,727
<CGS> 0
<TOTAL-COSTS> 589,369
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,423
<INCOME-PRETAX> 21,027
<INCOME-TAX> 8,438
<INCOME-CONTINUING> 12,589
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,589
<EPS-BASIC> .67
<EPS-DILUTED> .67
</TABLE>
Contact: Deb Wiethop (314) 923-4767
Mary Barber (314) 290-2013
Blue Cross Blue Shield of Missouri Provides Update on
Settlement Agreement
ST. LOUIS, October 28, 1999-Blue Cross and Blue Shield of
Missouri, the Missouri Department of Insurance and the Missouri
Attorney General, representing the state as well as the interests
of over 90 consumer groups, presented their support today of the
proposed settlement agreement at a public hearing before Cole
County Circuit Judge Thomas Brown. Blue Cross and Blue Shield of
Missouri is parent company of RightCHOICE Managed Care, Inc.
(NYSE:RIT).
The settlement agreement is intended to resolve outstanding
litigation on regulatory issues and would create Missouri's
largest health care foundation, the Missouri Foundation for
Health, and result in RightCHOICE's reorganization as a fully for-
profit Blue Cross and Blue Shield licensee.
At today's proceedings, Judge Brown suggested that the
settlement agreement does not produce full value for the public.
The judge also indicated that the Special Master has not had
adequate time to review all alternatives to the settlement
agreement and indicated that the Special Master should continue
to do so on an expedited basis.
On November 4, 1998, Judge Brown appointed Robert Russell, a
Sedalia, Missouri, trial attorney, to act as a Special Master and
review the settlement agreement. The Special Master issued two
reports, the second dated October 8, 1999, which recommended
disapproval of the settlement agreement because it did not give
the foundation the right to force the sale of RightCHOICE.
"The independence of the Missouri Foundation for Health and
RightCHOICE is fundamental to delivering value through this
settlement, because it protects the Blue Cross and Blue Shield
trademarks and provides the foundation with the opportunity to
achieve up to
$70 million in savings through a tax-free transaction," stated
John O'Rourke, President and
Chief Executive Officer of Blue Cross and Blue Shield of
Missouri. "Forcing the sale of RightCHOICE would not offer the
best opportunity to maximize value and is not in the best
interest of our members, our shareholders or the community."
Although the judge refused to allow testimony at the
hearing, the parties did briefly state their support. Among the
points presented by the proponents of the settlement during
today's hearing were:
* The terms of this agreement are fair, reasonable and in the
public interest of all Missourians. The settlement reflects a
broad consensus of Blue Cross and Blue Shield of Missouri, the
Attorney General, the Department of Insurance and over 90
organizations representing more than 1 million Missourians who
agree that it offers full value to the public for the assets now
held by Blue Cross and Blue Shield Missouri.
* The means for the foundation to sell its RightCHOICE stock
as established within the settlement agreement will afford the
best opportunity to realize full value for the Missouri
Foundation for Health.
* The settlement agreement provides the means to maximize
value of the RightCHOICE stock once the settlement is
consummated, through the orderly divestiture of RightCHOICE stock
by the Missouri Foundation for Health over time or through the
sale of all of the stock in a single transaction by the action of
the Board of Directors of RightCHOICE with the counsel and
approval of the foundation. The contrary position expressed by
the Special Master in his second report is not supported by the
evidence.
* The proposed settlement agreement provides for the
independence of the Missouri Foundation for Health from the
RightCHOICE entity, which will be a fully for-profit Blue Cross
and Blue Shield licensee. The Missouri Foundation for Health
would be a not-for-profit entity that would serve the health care
needs of the underserved and uninsured in Missouri.
* This settlement agreement should be judged on its merits and
approved.
The case underlying the settlement continues on appeal
in the Missouri Supreme Court, which has ordered Judge Brown to
finally dispose of the settlement agreement, either by approving
it or disapproving it, by Nov. 9, 1999.
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: an adverse ruling
on the litigation including the possibility that court approval
of the settlement agreement, referenced above, would not be
obtained, or if obtained, could include terms or 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; governmental and regulatory
action or legislation; pending litigation; 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; and other risks detailed in the company's Securities and
Exchange Commission filings.
Blue Cross and Blue Shield of Missouri and its for-profit
subsidiary, RightCHOICE Managed Care, Inc., are the largest
providers of health care benefits in Missouri. The company's web
site addresses are www.ritusa.com and www.abcbs.com.
###
Contact: Kevin Aandahl (314) 923-6268
Deb Wiethop (314) 923-4767
Judge Fails to Approve Blue Cross Settlement
ST. LOUIS, MO, November 1, 1999-Blue Cross and Blue Shield
of Missouri, parent company of RightCHOICE Managed Care,
Inc. (NYSE: RIT), today announced that Circuit Court Judge
Thomas Brown III disapproved the March 1999 modified
settlement agreement, ruling that it fails to provide the
full value of Blue Cross for the public. The settlement
agreement is intended to resolve outstanding litigation and
regulatory issues, create Missouri's largest health care
foundation, the Missouri Foundation for Health, and result
in RightCHOICE's reorganization as a fully for-profit Blue
Cross and Blue Shield licensee.
"It is unfortunate that Judge Brown does not see the
merits of the proposed settlement agreement. This decision
further delays the benefits the foundation will provide to
underserved and uninsured Missourians," said John A.
O'Rourke, president and chief executive officer of Blue
Cross and Blue Shield of Missouri and chairman, president
and chief executive officer of RightCHOICE. "This ruling is
contrary to the evidence presented and fails to recognize
the value of the agreement between Blue Cross and Blue
Shield of Missouri, the Missouri Attorney General, the
Missouri Department of Insurance and consumer groups
representing over 1 million Missourians."
The settlement agreement provides the best means of
obtaining the maximum value of the Blue Cross assets,
primarily the RightCHOICE stock. Value will be attained
through the orderly divestiture of RightCHOICE stock over
time by the Missouri Foundation for Health, or through the
sale of all of the RightCHOICE stock in a single transaction
directed by the RightCHOICE board of directors, with the
counsel and approval of the foundation.
"The case remains on appeal in the Missouri Supreme
Court, and we are considering all of our legal options,"
O'Rourke said. "We continue to believe that this settlement
agreement is the right thing to do because it is fair,
reasonable and in the public interest."
(more)
The settlement agreement calls for Blue Cross and Blue
Shield of Missouri to reorganize and be merged with
RightCHOICE Managed Care and for the creation of the state's
largest health care foundation. In addition to the
RightCHOICE stock owned by Blue Cross and Blue Shield of
Missouri, the foundation would receive an additional $12.78
million in cash from Blue Cross.
The Missouri Supreme Court ordered that Judge Brown
rule on the proposed settlement agreement by November 9.
The judge had stated that the Special Master had not had
adequate time to review all alternatives to the settlement
agreement and ordered that he continue to do so on an
expedited basis.
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: an adverse ruling on the litigation
including the possibility that court approval of the
modified settlement agreement, referenced above, would not
be obtained, or if obtained, could include terms or
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; governmental and regulatory action or
legislation; pending litigation; 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; and other risks detailed in the company's Securities
and Exchange Commission filings.
Blue Cross and Blue Shield of Missouri and its for-
profit subsidiary, RightCHOICE Managed Care, Inc., are the
largest providers of health care benefits in Missouri. The
company's web site addresses are www.ritusa.com and
www.abcbs.com.
# # #
Contact: Kevin Aandahl
(314) 923-6268
Deb Wiethop
(314) 923-4767
RightCHOICE Reports that Health Care Service Corporation Seeks
Alliance
ST. LOUIS, NOVEMBER 2, 1999 -- RightCHOICE Managed Care, Inc.
(NYSE:RIT) reported today that Health Care Service Corporation
(HCSC), which operates the Blue Cross and Blue Shield plans in
Illinois and Texas, filed a form 13D with the Securities and
Exchange Commission disclosing its purchase of 695,800 shares of
Class A common stock of RightCHOICE.
In its filing, HCSC stated that it intends to seek some form of
alliance or combination with RightCHOICE and its parent company,
Blue Cross and Blue Shield of Missouri. HCSC further stated that
it believes that any combination or alliance with the companies
may be effected only with the approval of the boards of directors
of the companies and applicable regulatory and judicial
authorities. RightCHOICE stated that there is no formal offer
from HCSC.
While the HCSC purchase represents 18.8 percent of Class A common
shares of RightCHOICE, it is 3.7 percent of the total shares
outstanding and less than .5 percent of the voting rights.
RightCHOICE's Class B shares have 10 votes each compared with one
vote for each of its Class A shares. All of the Class B common
shares are owned by Blue Cross and Blue Shield of Missouri.
"It has been and continues to be our stated business objective to
explore strategic affiliations that could maximize value for our
members and shareholders," stated John A. O'Rourke, chairman of
the board and chief executive officer of RightCHOICE.
"RightCHOICE will be better positioned to consider potential
combinations which could maximize shareholder value after the
resolution of pending litigation."
The proposed settlement agreement among the companies, the
Missouri Attorney General, the Missouri Department of Insurance
and consumer groups representing over 1 million Missourians, is
intended to resolve outstanding litigation and regulatory issues,
create Missouri's largest health care foundation and result in
RightCHOICE's reorganization as a fully for-profit Blue Cross and
Blue Shield licensee. On October 29, 1999, Circuit Court Judge
Thomas Brown III disapproved the settlement agreement.
"The case remains on appeal in the Missouri Supreme Court, and
we are considering all of our legal options," O'Rourke said. "We
continue to believe that this settlement agreement is the right
thing to do because it is fair, reasonable and in the public
interest."
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: an adverse ruling
on the litigation or other judicial action; governmental and
regulatory action or legislation; pending litigation; 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; and other risks detailed in the company's
Securities and Exchange Commission filings.
Blue Cross and Blue Shield of Missouri and its for-profit
subsidiary, RightCHOICE Managed Care, Inc., are the largest
providers of health care benefits in Missouri. The company's web
site addresses are www.ritusa.com and www.abcbs.com.
# # #
Contact: Kevin Aandahl (314) 923-6268
Deb Wiethop (314) 923-4767
Blue Cross and Blue Shield of Missouri and the Attorney
General Seek Review of Settlement Agreement by Missouri
Supreme Court
ST. LOUIS, MO, Nov. 10, 1999 - Blue Cross and Blue Shield of
Missouri, parent company of RightCHOICE Managed Care, Inc.
(NYSE: RIT) and the Missouri Attorney General today took a
number of steps seeking review by the Missouri Supreme Court
of the settlement agreement that Cole County Circuit Court
Judge Thomas Brown III disapproved on Oct. 29, 1999. The
settlement agreement is designed to create the Missouri
Foundation for Health, the largest health care foundation in
the state.
In a joint filing, the parties notified the Supreme Court of
the action taken by the Cole County Circuit Court in
disapproving the settlement. The Supreme Court had earlier
directed the parties to inform it of the Cole County Circuit
Court's decision. In that same filing, the parties asked
the Supreme Court to deem the Circuit Court's order final
for purposes of appeal, to conduct its own review of the
settlement agreement, and to stay further proceedings before
Judge Brown and Special Master Robert G. Russell until the
Supreme Court acts on the case. Judge Brown had directed
Special Master Russell to conduct further hearings to
formulate alternatives for resolution of the case while
appeals are pending.
Blue Cross, the Attorney General and the Missouri Department
of Insurance have filed an appeal of the Cole County Circuit
Court's order disapproving the settlement agreement with the
Missouri Court of Appeals for the Western District. In a
separate filing in the Supreme Court today, the parties are
asking the Court to allow them to move for immediate
transfer of that appeal to the Supreme Court.
Representatives of several public interest groups also have
made a filing in the Missouri Supreme Court reaffirming
their support of the settlement agreement.
"This unprecedented consensus among Blue Cross and Blue
Shield, state officials and consumer groups representing
more than one million Missourians reinforces that this
settlement agreement is fair, reasonable and in the public
interest," stated John O'Rourke, president and chief
executive officer of Blue Cross and Blue Shield of Missouri
and chairman, president and chief executive officer of
RightCHOICE Managed Care, Inc.
The litigation underlying the settlement is pending before
the Missouri Supreme Court, which ordered that the trial
court "finally dispose" of the proposed settlement agreement
on, or before, Nov. 9. Judge Brown entered an order
disapproving the settlement agreement, but stated that the
order was not yet subject to appeal. In addition, the judge
stated that the special master he had appointed on Nov. 4,
1998, to review the settlement had not had adequate time to
review all alternatives, and ordered that the special master
continue to do so on an expedited basis.
The settlement agreement calls for Blue Cross and Blue
Shield of Missouri to reorganize and be merged with
RightCHOICE and for the creation of the state's largest
health care foundation. In addition to the RightCHOICE
stock owned by Blue Cross and Blue Shield of Missouri, the
foundation would receive $12.78 million in cash from Blue
Cross. In so doing, it would resolve outstanding
litigation and regulatory issues, create the Missouri
Foundation for Health, and result in RightCHOICE's
reorganization as a fully for-profit Blue Cross and Blue
Shield licensee.
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: an adverse ruling on the litigation or
other judicial action; governmental and regulatory action or
legislation; pending litigation; 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; and other risks detailed in the company's Securities
and Exchange Commission filings.
Blue Cross and Blue Shield of Missouri and its for-
profit subsidiary, RightCHOICE Managed Care, Inc., are the
largest providers of health care benefits in Missouri. The
company's web site addresses are www.ritusa.com and
www.abcbs.com.
# # #
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 28th day of October, 1999. the Court takes up for hearing
the Joint Motion by All Parties and the Amici Curiae to Approve Settlement
Agreement as Amended, dated and filed March 12, 1999. The Court also takes up
the Second Report of the Special Master, dated and filed October 8,
1999(1), along with the objections thereto.
The Court finds that before proceeding to hear any testimony, the
Special Master took and subscribed an oath faithfully to hear and examine
the matters at issue and to make a just, impartial and true report,
in compliance with Rule 68.01 (d). The Court further finds that the
Special Master has filed transcripts, evidence and exhibits from all
proceedings before him, that being from hearings on December 4th, 16th and 22nd
1998, and February 4th and October 4rh, 1999, as well as from the hearing
on September 3, 1999 (the transcript for which was filed by the Special
Master on October 28, 1999), in compliance with Rule 68.OI(g)(l).
Plaintiff offers two letters marked as Exhibit Numbers 117 and 118.
Without objection, those exhibits are admitted. Plaintiff offers an affidavit
marked as Exhibit Number 119, which exhibit is not admitted. Plaintiff tenders
a witness. The Court finds that the proffered testimony is on matters that
were the subject of hearings before the Special Master. There being no
good cause shown for reopening the record under the present circumstances,
that tender is denied. Plaintiff makes an offer of proof regarding the
testimony of the witness. The Court adheres to its prior ruling. Thereafter,
plaintiff presents argument, followed by arguments in behalf of the
defendants. The Court takes the matters under advisement.
Now on this 29th day of October, 1999, having considered the evidence
and the record before the Special Master, having considered his Second Report,
and having considered the objections, suggestions and arguments of the
parties, the Court overrules the objections and adopts the Second Report of
the Special Master, pursuant to Rule 68.01 (g)(3).
As to the Settlement
Agreement as Amended, the parties unanimously agree in their joint motion
that a review of the settlement properly begins with the question of
whether the conversion envisioned by the Settlement Agreement as Amended
produces full and fair value for the non-profit assets of Blue Cross
and Blue Shield of Missouri ("Blue Cross") that are being
converted.(2) The Court agrees that if the proposed settlement fails to
produce full and fair value for the citizens of Missouri, it cannot
be approved. Review of the settlement on any other issue at
this time would be pointless if it fails this threshold test.(3)
The Court finds that the value of Blue Cross is now at least $3OO million
and may be worth upwards of $500 million. But that much value will not be
obtained if the most valuable asset of Blue Cross, its 80.1% interest in
RightCHOICE Managed Care, Inc., is sold in the manner required by the
proposed settlement. The essential framework requires a forced, piecemeal
divestiture of the stock on the open market over a period of several years.
The control premium that normally enhances the value of an 80.1% interest
would be lost. The stock is thinly traded and is selling on the market below
the intrinsic value of the company. The manner of disposition required by
the proposed settlement, which is to sell dispersed shares on the market, will
drastically reduce the value of the 80.1% interest by at least 50%, and the
loss may be as high as 70%.
The proposed settlement fails to meet the legal test
under any standard suggested by the parties. The Attorney General argues that
the settlement should be approved unless it is found to be unreasonable,
unfair and inadequate. The Court finds that the proposed settlement is
unreasonable, unfair and inadequate. The Court finds it is also unconscionable.
Blue Cross argues that the legal standard appropriate in determining the
sufficiency of value is that of section 355.621, RSMo 1994. Section 355.621
requires that before a not-for-profit, public benefit corporation can convert
to a for-profit corporation, the corporation must transfer out to a
not-for-profit entity "assets with a value equal to the greater of the fair
market value of the net tangible and intangible assets, including goodwill, of
the public benefit corporation or the fair market value of the public benefit
corporation if it were to be operated as a business concern. . . ." The
proposed settlement fails this test, too.
Section 355.726.2(1) requires that the Court consider reasonable
alternatives to dissolution where a corporation has continued to exceed or
abuse the authority conferred upon it by law. The Court finds that the
transactions contemplated by the Settlement Agreement as Amended are not a
reasonable alternative to dissolution.
IT IS, THEREFORE, ORDERED that the Joint Motion by All Parties and
the Amici Curiae to Approve Settlement Agreement as Amended should be
and the same is hereby denied.
IT IS FURTHER ORDERED that the Settlement Agreement as Amended,
dated March 12, 1999, is disapproved.
IT IS FURTHER ORDERED that the Special Master and his
counsel shall continue with their unfinished assignments under the Second
Order of Reference and report to the Court not later than 45 days after
the Missouri Supreme Court issues its mandate on the pending appeal.
IT IS FURTHER ORDERED that this order is interlocutory, that it does not
make final disposition of this case or any part of this case,
that it makes no disposition subject to appeal, and that the Court retains
jurisdiction over all matters not presently on appeal.
IT IS FURTHER ORDERED that the Cleric shall promptly
transmit a copy of this Order to the Missouri Supreme Court and to the parties.
/s/ Thomas J. Brown, III
THOMAS J. BROWN III, CIRCUIT JUDGE
_______________________________
(1) The Second Report of the Special Master is
not and
clearly was not intended as a full and final
response to Second Order of Reference. The Special
Master's recommendations on
the limited question of the lawfulness of the
Settlement Agreement as Amended took on some urgency
when the Supreme Court of Missouri ordered this
Court to reject or approve the
amended settlement agreement on or before November
9. 1999.
The Special Master's interim report which is the
subject of this Order does not preclude his further
inquiries as hereinafter directed and a final report
fully responsive to the Second
Order of Reference.
(2) Page 3 of Joint Motion by All Parties and the
Amici
Curiae to Approve Settlement Agreement as Amended.
The Court acknowledges and appreciates the position
of the Department of Insurance articulated at
hearing that its concern in this matter is limited
to whether a viable insurance company would result
from the Settlement Agreement as Amended. While the
Settlement Agreement as Amended may well satisfy the
more-circumscribed concerns of the Department of
Insurance, the overriding issue is whether the
Settlement Agreement as Amended delivers full and fair
value for the non-profit assets of
Blue Cross.
(3) In their Objections, Blue Cross and the
Attorney
General insinuate that the Special Master's recommended
rejection of the proposed settlement for its failure to
transfer full value is a mere pretext for some hidden
agenda tied to court control
of the non-profit assets. The parties do the Special
Master a great disservice. He is a former circuit judge
whose reputation on both sides of the bench over thirty
years is beyond reproach. His conclusions on the issue
of value are not only supported by the evidence - they
are compelled by the evidence. Blue Cross and the
Attorney General would be well-advised to address the
value
problem and desist from unfounded, irresponsible
attacks on the Special Master's motives.
