UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission file number: 1-13248
RIGHTCHOICE MANAGED CARE, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1674052
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1831 Chestnut Street
St. Louis, Missouri 63103-2275
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 923-4444
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $.01 par value New York Stock Exchange, Inc.
(Title of each class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be 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 by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of Class A Common Stock (voting) held by
non-affiliates of the Registrant as of March 8, 1999, was
approximately $21,949,981* (based on last reported sale price of
$11.44 per share on March 8, 1999, on the New York Stock Exchange).
As of March 8, 1999, 3,710,426 shares of the Registrant's Class A
Common Stock, par value $.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting
of Shareholders of the Registrant to be held on May 11, 1999.
Certain information therein is incorporated by reference into Part
III hereof.
*Only shares of Class A Common Stock held beneficially by directors
and executive officers of the Registrant and persons or entities
filing Schedules 13G and received by the Registrant have been
excluded in determining this number. All shares of Class B Common
Stock have been excluded.
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
RightCHOICE Managed Care, Inc., (RightCHOICE, RIT or the company) is
the largest provider of managed health care benefits in Missouri, in
terms of members. As of December 31, 1998, RightCHOICE served
approximately 2.1 million members, a large proportion of whom reside
in metropolitan St. Louis, Missouri. The company offers a
comprehensive array of managed health care products and services
that the company segregates into two distinct segments. Note 14
entitled "Segment information" of Part II, Item 8, Financial
Statements and Supplementary Data, contains financial information
relating to the company's segments. The company's underwritten
segment includes preferred provider organization (PPO), point-of-
service (POS), health maintenance organization (HMO), Medicare
supplement, and specialty managed care, as well as managed indemnity
benefit plans. The company's self-funded segment includes third-
party administrator (TPA), administrative services only (ASO), and
network rental services for self-insured organizations. The types
of benefits provided by the products and services are comprised of
hospital care, ambulatory and outpatient care, physician services,
pharmacy, dental care, eye care, mental health care and health
education. The company receives premium revenue in exchange for the
assumption of both medical and administrative risks for its PPO,
POS, HMO, Medicare supplement, specialty managed care and managed
indemnity benefit plans. With respect to the TPA, ASO, and network
rental services, the company generally assumes no responsibility for
medical costs and receives compensation for the provision of
administrative services. For the year ended December 31, 1998,
approximately 63 percent of the company's revenues were from sales
to insured employer groups (typically those with fewer than 100
employees); approximately 30 percent of the company's revenues were
from underwritten sales to individuals; and approximately 7 percent
of the company's revenues were from fees paid by self-funded
employer groups (typically those with more than 100 employees).
The company was organized to own and operate all of the managed health
care business of Blue Cross and Blue Shield of Missouri (BCBSMo).
BCBSMo is the sole holder of the company's Class B Common Stock.
The holders of Class A Common Stock have one vote per share, and the
holders of Class B Common Stock have 10 votes per share. BCBSMo and
the holders of the Class A Common Stock have control over
approximately 97.6 percent and 2.4 percent, respectively, of the
combined voting power of both classes of common stock. The company
is a licensee of the Blue Cross and Blue Shield Association (BCBSA),
the national trade association of Blue Cross and Blue Shield
licensees, each of which holds exclusive right to use the Blue Cross
and/or Blue Shield names, trademarks and service marks in specific
geographic areas. Each licensee, including the company and BCBSMo,
is an independent legal organization and is not responsible for the
obligations of other BCBSA licensees. Pursuant to licenses from
BCBSA, the company has the exclusive right to do business under the
name Alliance Blue Cross Blue Shield and to use the Blue Cross
and/or Blue Shield names, trademarks and service marks for all of
the managed health care products and services it offers in 85 of the
115 counties in Missouri making up its service area. This service
area has a population of approximately 3.9 million and includes four
of the five largest cities in Missouri and excludes Kansas City. The
company cannot, however, use those trademarks or service marks
outside its licensed service area and therefore currently does
business in unlicensed areas under the names Healthy Alliance Life
Insurance Company (HALIC) and RightCHOICE Insurance Company (RIC).
The company believes that the widespread and positive recognition of
the Blue Cross and Blue Shield names, trademarks and service marks
will continue to provide a significant marketing advantage in its
service area, particularly as health care reform and competitive
pressures narrow price differences among health care benefit plans.
Additionally, the company believes that the importance of the
trademarks and service marks may lead to cooperative affiliations of
Blue Cross and Blue Shield licensees and may alleviate the need for
unbranded products. If BCBSMo were to lose its right to use the
names and trademarks, the company might also be at risk to lose the
use of these names and trademarks. Note 13 entitled "Contingencies
- - Status of Blue Cross and Blue Shield trademark licenses" of Part
II, Item 8, Financial Statements and Supplementary Data, contains
information describing litigation uncertainties with respect to the
company's continued use of these names, trademarks, and service
marks.
RightCHOICE Managed Care, Inc. is a Missouri corporation, incorporated
in April 1994, doing business under the name Alliance Blue Cross
Blue Shield. Unless the context otherwise requires, the terms
"RightCHOICE," "RIT" and "the company" refer to RightCHOICE Managed
Care, Inc. and its subsidiaries. The company's corporate offices
are located at 1831 Chestnut Street, St. Louis, Missouri, 63103-
2275; telephone number (314) 923-4444.
MANAGED CARE PRODUCTS AND SERVICES
The company's established provider networks, substantial membership
base and extensive administrative and processing capabilities enable
the company to offer health care products and services tailored to
meet the full spectrum of customer needs and preferences. The chart
below illustrates the cost/choice characteristics of various managed
care benefits offered by the company.
The chart included in the company's hardcopy 10-K displays the range
of the company's managed care products relative to the product's
flexibility and health care costs. Generally, products that are more
flexible in terms of access to providers are also more expensive in
terms of health care costs. This chart can be depicted by the following
table in which products are listed in order of flexibility (more
to less) and health care costs (higher to lower).
Product Type of Network
Traditional Managed Indemnity Open Network
Alliance Programs Broad Network PPO
AllianceChoice Non-Gatekeeper POS
BlueCHOICE POS Plus Gatekeeper POS
BlueCHOICE Gatekeeper HMO
UNDERWRITTEN PRODUCTS
PPO PRODUCT GROUP
ALLIANCE PPO
The company's Alliance PPO is one of the largest PPOs in Missouri in
terms of members and offers services to approximately 171,600
members (including approximately 41,500 members on a self-funded
basis). The company believes that the Alliance PPO network also has
the most extensive geographic coverage in Missouri, servicing 85 of
the 115 counties in the state. In the St. Louis metropolitan area,
the Alliance PPO network includes approximately 97 percent of all
hospital beds.
The company's Alliance products incorporate many of the managed care
characteristics of the company's POS and HMO products, including
physician incentives, per diem hospital rates, large case
management, pre-admission certification, concurrent review of
hospital admissions and retrospective claims review. Alliance
benefit plans also include mental health and chemical dependency
programs, optional well-child care, and vision services. This broad
range of Alliance benefit plans enables the subscriber to choose the
mix of benefits that is suited to the subscriber's needs. Higher
deductibles, coinsurance and out-of-pocket maximums and other
financial incentives encourage subscribers to use network provider
services.
The company's Alliance network is one of the largest in Missouri in
terms of geographic scope and number of providers. The company has
Alliance contracts with approximately 7,800 physicians and 96
hospitals. A HealthNet Blue PPO product is offered to both groups
and individuals in southeast Missouri. There were approximately
5,000 members enrolled in the company's HealthNet Blue PPO products
as of December 31, 1998.
Through a network access and financial reinsurance agreement with Blue
Cross and Blue Shield of Kansas City (BCBSKC), RightCHOICE has
members residing in the Kansas City plan's license area that are
able to access BCBSKC's preferred networks and likewise, members of
a BCBSKC subsidiary residing in RightCHOICE's Alliance trade area
can access the Alliance preferred provider networks in that area.
As a result of the agreements, members of either plan who are
enrolled through state-wide employers or associations are able to
use the provider network of the Blue Cross and Blue Shield company
where they live. Through the financial reinsurance transaction,
RightCHOICE now shares underwriting risks and profits on the
affected members.
ILLINOIS PPO
The company offers group and individual PPO coverage through its
RightCHOICE Insurance Company subsidiary in southern Illinois. The
company utilizes the HealthLink provider network to offer these
products to the approximately one million residents in this region.
HealthLink, Inc. is the company's network rental subsidiary. These
PPO products accounted for approximately 7,000 members as of
December 31, 1998.
ALLIANCECHOICE POS
AllianceChoice POS is RightCHOICE's non-gatekeeper model POS with a
selective hospital network comprised of cost-effective providers in
the St. Louis metropolitan area. AllianceChoice provides
flexibility in selecting a provider at a premium level that is
generally higher than HMO but less than PPO premiums. The
AllianceChoice network serves approximately 130,100 members,
including both group and individual members, and includes
contractual arrangements in the St. Louis metropolitan area with
approximately 5,400 physicians and 17 hospitals.
BLUECARD PPO PROGRAM
In the first half of 1998, the company and BCBSMo achieved high member
service performance ratings that made the company eligible for the
home plan portion of the Blue Cross and Blue Shield AssociationOs
BlueCard PPO program. The BlueCard PPO program allows Blue Cross
and Blue Shield PPO and POS members access to Blue Cross and Blue
Shield PPO providers throughout the nation. As of December 31,
1998, there were approximately 136,000 Alliance and AllianceChoice
members enrolled in the program. Members who need to see a doctor
or check into a hospital while living in or traveling to another
part of the country do not pay more out of pocket for being out of
the service area's network and accessing Blue Cross or Blue Shield
PPO providers. Blue Cross and Blue Shield PPO networks are
available to 95 percent of the U.S. population.
HMO PRODUCT GROUP
BLUECHOICE HMO AND POS PRODUCTS
The company's subsidiary, HMO Missouri, Inc. (BlueCHOICE), offers a
federally qualified HMO with a service area that currently includes
61 counties in Missouri and two counties in Illinois. BlueCHOICE's
operations are concentrated in the St. Louis metropolitan area,
where it currently is the third largest HMO based upon number of
members. BlueCHOICE is an independent practice association (IPA)
model network, through which the company contracts directly with
local providers for plan members' health services. The BlueCHOICE
network, which supports both HMO and POS products, has contractual
arrangements with approximately 4,000 physicians and 60 hospitals.
The company offers its BlueCHOICE POS products in metropolitan St.
Louis, southwest Missouri, and the central region of Missouri
through the BlueCHOICE HMO network. BlueCHOICE POS is a gatekeeper
model POS plan that provides members with comprehensive coverage for
network health care services with modest copayment requirements.
When using their primary care physician as coordinator of care,
members incur the lowest out-of-pocket costs for preventive care,
referred specialist services, and inpatient services.
In some areas, the BlueCHOICE HMO and POS products are supported by
risk arrangements with certain provider groups. These products are
available in Springfield, Missouri, for both individuals and groups
through an arrangement with Primrose Health Care Services, a
physician-hospital organization jointly owned by physicians and Cox
Hospitals, one of the leading tertiary care centers in the area.
These products are also offered in the six-county area surrounding
Joplin, Missouri, through an arrangement with Freeman Health System
and in the Jefferson City, Missouri, area through an arrangement
with Jefferson City Medical Group.
HEALTHNET BLUE POS
HealthNet Blue POS is a non-gatekeeper HMO product offered to employee
groups within a seven-county region in southeast Missouri that
provides members with comprehensive coverage for network health care
services, including preventive care, in-office physician care, and
maternity coverage for a minimal office visit copay charge. At
December 31, 1998, there were approximately 16,400 group members
enrolled in the underwritten HealthNet Blue POS product.
BLUECHOICE SENIOR
BlueCHOICE Senior provides medical benefits at least as comprehensive
as Medicare benefits for persons eligible to receive Medicare (parts
A and B) at no or minimal cost to the member. Under this program,
the Health Care Financing Administration of the United States
Department of Health and Human Services (HCFA) pays a fixed premium
for coverage of each member at a rate approximating 95 percent of
the Medicare area average per capita cost, subject to annual review
and adjustment by HCFA. Effective January 1, 1999, the company
changed the BlueCHOICE Senior product name to Blue Horizons Medicare
HMO.
On January 1, 1999, the Balanced Budget Act of 1997 established a new
program called Medicare+Choice that replaced the current Medicare
risk program. Effective January 1, 1999, HCFA awarded BlueCHOICE,
which had been operating under the previous risk contract, a
Medicare+Choice contract.
BLUECHOICE MEDICAID (MC+)
The company discontinued its Medicaid product in the central Missouri
region in March 1998. This determination was made due to what the
company believes were unacceptable terms proposed by the State of
Missouri.
MEDICARE SUPPLEMENT PRODUCT GROUP
The company currently offers Medicare supplement coverage to
individuals eligible to enroll in Medicare for medical expenses in
excess of the coverage limitations of Medicare.
MANAGED INDEMNITY PRODUCT GROUP
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. The company's managed indemnity products
include fee-for-service indemnity benefits that include utilization
management and other cost control measures, but do not require use
of network providers. These products include certain cost-
containment features, such as the use of deductibles, coinsurance,
pre-admission certification, concurrent review, large case
management and retrospective review.
SPECIALTY PRODUCTS
The company offers various products to supplement its medical coverage
products. These products include prescription benefits, dental
care, eye care, mental health care and health care education.
Beginning January 1, 1999, Magellan Behavioral Health was selected
to handle utilization management for all of the company's
underwritten mental health and substance abuse programs. In March
1997, the company entered into a three-year agreement with a
pharmacy benefits manager, Express Scripts, Inc. The contract
covers approximately 453,200 members as of December 31, 1998, under
most of the company's plans. The company continues its efforts to
control rising prescription drug costs while offering members
freedom of choice. The company provides a three-tier copayment
program that encourages physicians and members to use the most cost-
effective drugs within a drug class. The program includes a higher
member copayment for brand name drugs that are included on the
company's formulary as compared to their generic equivalents. The
program also allows for the purchase of brand name drugs that are
not included on the company's formulary by requiring an even higher
(third-tier) member copayment.
SELF-FUNDED PRODUCTS
ADMINISTRATIVE AND NETWORK SERVICES
As of December 31, 1998, the company serviced self-funded health plans
covering approximately 1,658,200 members. These arrangements
include TPA, ASO and network rental contracts of varying complexity.
The company assists self-funded employers in designing benefit
packages, claims processing, adjudication and administration,
utilization management, generation of management reports and other
related matters. The company also enables employees with self-
funded health plans to access the company's aforementioned PPO and
HMO provider networks and to realize savings through the company's
favorable provider arrangements, while allowing employers the
ability to design certain health benefit plans in accordance with
their own requirements and objectives.
HEALTHLINK, INC.
HealthLink, Inc. (HealthLink), a regional managed health care
organization, serves a seven-state area in the Midwest, providing
health care network rental and utilization review services primarily
to unions, commercial insurers and corporations that fund their own
health plans. HealthLink is not an insurance company and does not
assume any underwriting risks. Its revenues are derived from
network rentals and administrative services fees. HealthLink had
835,600 PPO administrative services members and 450,000 workers'
compensation members as of December 31, 1998. In addition,
HealthLink owns HealthLink HMO, Inc. (HealthLink HMO), a Missouri
HMO with approximately 68,500 members as of December 31, 1998,
primarily located in the greater St. Louis area. HealthLink HMO is
a state-qualified health maintenance organization, licensed in
Missouri, Illinois and Arkansas, that provides health care services
principally for a predetermined, prepaid periodic fee to enrolled
subscriber groups and individuals of selected insurance companies.
THE EPOCH GROUP, L.C.
The EPOCH Group, L.C. (Epoch), a limited liability company, is a joint
venture between the company and BCBSKC which combined their third-
party administrator (TPA) businesses to streamline operations,
develop new geographic markets, and provide new administrative
services to new types of businesses, such as health care provider
organizations. Epoch is owned equally by the company and a
subsidiary of BCBSKC. Three TPA companies were combined to form
Epoch -- Healthy Benefit Alliance, Inc. and Pension Associates
Incorporated (both formerly owned by the company) and LaHood &
Associates (20 percent owned by the company and 80 percent owned by
BCBSKC prior to the transaction). Epoch serves approximately 260
businesses primarily in the Midwest as of December 31, 1998.
"SAFE HARBOR" STATEMENT
Except for the historical information contained herein, this Annual
Report contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These
statements typically, but not exclusively, are identified by the
inclusion of phrases such as "the company anticipates," "the company
believes," "the company expects," "the company plans," "the company
intends," and other phrases of similar meaning. Such forward-
looking statements involve known and unknown risks, uncertainties,
contingencies and other factors that may cause the company's actual
results of operations, financial condition or business performance
to be materially different from the results of operations, financial
condition or business performance expressed or implied by such
forward-looking statements. Factors that could cause or contribute
to such differences include, but are not limited to: the possibility
that court approval of the final settlement agreement, as amended,
entered into with the Missouri Attorney General and Department of
Insurance (DOI), referenced elsewhere herein, would not be obtained,
or if obtained could include conditions that are not acceptable to
the parties; the possibility that all remaining contingencies and
conditions to the parties' obligations to effect the proposed
settlement transaction would not be met or otherwise satisfied; the
Office of Personnel Management audit of BlueCHOICE; pending
litigation, including the subscriber class action litigation;
potential loss of "Blue Cross" and "Blue Shield" licenses by BCBSMo,
the company and its controlled affiliates; government regulation and
health care reform; Missouri Consolidated Health Care Plan issues;
market competition and consolidation; escalating health care costs;
dependence on sales to individuals; recontracting efforts and
potential nonrenewal of subscriber and provider agreements; voting
control by BCBSMo; changes in key management; variability of
operating results and stock price; Credit Agreement restrictions;
the Year 2000 issue; and other factors discussed under the caption
entitled "Factors that May Affect Future Results of Operations,
Financial Condition or Business" of Part I, Item 1 of this Annual
Report, the caption in Note 13, entitled "Contingencies" of Part II,
Item 8 of this Annual Report, and elsewhere in the company's SEC
reports.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL
CONDITION OR BUSINESS
The statements included in this Annual 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
Annual Report. The company undertakes no obligation to release
publicly any revisions to the forward-looking statements after the
date of this Annual Report to reflect events or circumstances after
the date of this Annual Report or to reflect the occurrence of
unanticipated events.
CONTINGENCIES
Reference is made to the information detailed in Note 13 entitled,
"Contingencies" of Part II, Item 8, Financial Statements and
Supplementary Data, under the captions: OPM Audit, Subscriber
class action litigation, Agreement for settlement of certain
litigation matters and reorganization of the company, and Status of
Blue Cross and Blue Shield trademark licenses. The following
factors should be read in conjunction with such information, which
is incorporated by reference in its entirety in the following
sections.
OPM AUDIT
At this time, management is unable to determine the final dollar
amount that may be required to resolve the Office of Personnel
Management (OPM) audit findings. There can be no assurance that
the resolution of these findings will not have a material adverse
effect on the company and the market for its stock. The OPM audit
relates to the company's BlueCHOICE subsidiary and any additional
funding to BlueCHOICE as a result of audit findings associated with
the OPM audit, or otherwise, may require approval under the
company's Credit Agreement, and there can be no assurance that such
approvals could be obtained. See "Credit Agreement Restrictions"
below.
AGREEMENT FOR SETTLEMENT OF CERTAIN LITIGATION MATTERS AND
REORGANIZATION OF THE COMPANY
On September 20, 1998, the company and certain of its affiliates
entered into various settlement agreements with certain state
agencies, including the Missouri Attorney General and the DOI,
which, if consummated, would resolve the outstanding litigation and
regulatory disputes between the company and its affiliates and the
State of Missouri, and create an independent health care
foundation. On March 12, 1999, the company, BCBSMo, the Missouri
Attorney General and the DOI entered into an Amendment to
Settlement Agreement (the amendment) in response to the report of
the special master, described below. On March 15, 1999, Judge
Thomas J. Brown III of the Circuit Court of Cole County, Missouri
stated on the record during an informal status hearing that he has
continued concerns about the settlement agreements, as amended.
The settlement agreements, as amended, are described further in
Note 13, "Contingencies - Agreement for settlement of certain
litigation matters and reorganization of the company," of Part II,
Item 8, Financial Statements and Supplementary Data, and such
description is incorporated by reference in its entirety in this
section. On November 4, 1998, the Circuit Court of Cole County,
Missouri appointed a special master for the purpose of, among other
things, collecting and analyzing information related to the
proposed settlement. On February 10, 1999, the special master
recommended that the proposed settlement agreement "not be approved
in its present form" and recommended that the Circuit Court
"withhold a ruling on the settlement agreement to give the parties
and the amici curiae consumer groups an opportunity to meet and
confer, and engage in a good faith effort to address" concerns that
were noted by the special master in his report. The parties and
the amici curiae conferred about the concerns noted by the special
master in his report and entered into the amendment as a result of
such discussions. There can be no assurance that the transactions
contemplated by the settlement agreements, as amended, will receive
the necessary court approval as an acceptable alternative to
dissolution of BCBSMo, that all conditions and contingencies
included in the settlement agreements, as amended, will be
satisfied, or that the transactions set forth in the settlement
agreements, as amended, will be effected. The failure to
consummate the transactions contemplated by the settlement
agreements, as amended, could have a material adverse effect on the
company and the market for its stock.
The transactions contemplated by the proposed settlement agreements,
as amended, described elsewhere herein include the resolution and
dismissal of all of the current litigation with the DOI and the
Missouri Attorney General described elsewhere herein. If BCBSMo,
the company, the DOI, and the Missouri Attorney General do not
resolve these matters as provided in the settlement agreements, as
amended, or if, in the alternative, BCBSMo or the company does not
prevail in all of these matters, it is possible that BCBSMo could
be dissolved, the license of BCBSMo and the company to use the Blue
Cross and Blue Shield trade names and marks could be terminated, an
event of default could occur under the company's Credit Agreement,
BCBSMo could be required to dispose of some or all of the company's
shares of Class B Common Stock at times and in quantities that
could be detrimental to the market for the company's stock, and
other actions could be taken by BCBSMo, the Missouri Attorney
General, the DOI, the BCBSA or others, all of which could have a
material adverse impact on the company and the market for its
stock.
SUBSCRIBER CLASS ACTION LITIGATION
On March 15, 1996, a class action suit was filed against the company,
BCBSMo, HealthLink, and certain officers of the company. 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 plaintiffs' counsel appealed the St. Louis Circuit
Court's order. The obligations of the parties to consummate the
transactions contemplated by the settlement agreements, as amended,
described above under "Agreement for settlement of certain
litigation matters and reorganization of the company" are
conditioned upon, among other things, the satisfactory final
resolution of this litigation.
STATUS OF BLUE CROSS AND BLUE SHIELD TRADEMARK LICENSES
If BCBSMo's and the company's litigation with the DOI and the Missouri
Attorney General is not resolved in a manner that is in the best
interests of the BCBSA, the marks and the other licensees of the
BCBSA, then the company's licenses to use such names and marks may
be terminated. 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 loss of such licenses and the obligation of the company
to pay a $25 per enrollee termination fee and provide notice of
termination to enrollees and the resultant event of default under
the company's Credit Agreement would have a material adverse effect
on the company and the market for its stock.
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. As described under the caption in Note
13 entitled "Contingencies - Status of Blue Cross and Blue Shield
Trademark Licenses" of Part II, Item 8, Financial Statements and
Supplementary Data, the loss of the licenses would result in an
event of default under the Credit Agreement.
The company amended its Credit Agreement in the fourth quarter of 1997.
The failure to obtain any waivers or similar amendments that might
be needed in the future to remain in compliance with such
requirements would, 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.
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.
In 1995, the company, after bidding on certain Requests for
Proposal from MCHCP, was awarded a contract to furnish various
managed care products to employees of the State of Missouri and to
public entities. The contract was for an initial one-year term
with four one-year renewal terms. In a lawsuit that the company
filed against MCHCP on August 28, 1997, the company contended,
among other things, that under the language of the applicable
contract, MCHCP had express and implied duties to negotiate the
amount of any rate increase that might become effective for each
succeeding one-year renewal term. It was the company's position
that if no agreements to the negotiated rates could be reached,
MCHCP's sole remedy was to request bids from other insurers. The
Circuit Court of Cole County, Missouri, on March 19, 1998, ruled in
favor of MCHCP with respect to such claim and certain other claims.
The company determined not to appeal the decisions of March 19, and
on June 10, 1998, the company and MCHCP agreed to mutually dismiss
the lawsuits. The company will, therefore, be held contractually
bound to serve the MCHCP members if the contract is extended at the
option of the MCHCP through the year 2000 at the rate contracted
for in 1995, with annual rate increases, if any, which are far less
than necessary to permit the company to recover its costs in
serving those members.
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 $40 million. As the
aggregate principal amount of surplus notes issued by such
subsidiaries to the company currently approximates $40 million, any
additional funding 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.
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
such as President Clinton's Patient's Bill of Rights, the Balanced
Budget Act of 1997, the Health Insurance Portability and
Accountability Act of 1996 (HIPAA), Missouri House Bill 335 (HB335),
and mandatory benefits (e.g. mandatory maternity benefits), that
have all increased 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.
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.
DEPENDENCE ON SALES TO INDIVIDUALS
Sales of the company's health care benefit products to individuals
comprise a substantial portion of the company's business. The
medical loss ratio attributable to some components of the company's
individual business is significantly lower than that of the
company's insured group business. As a result, individual business
accounts for a proportionately greater percent of the company's
operating income. The company's overall margins would be adversely
impacted by a reduction in the relative percent of its business
represented by certain individual products or by an increase in the
medical loss ratio for individuals enrolled in those products. The
company believes that the success of the individual business is more
dependent than that of its group business on the management of
health care costs through product design, pricing decisions and the
application of appropriate underwriting standards. There can be no
assurance that the profitability of this business will be sustained
or that the company will not experience unanticipated increases in
claims.
POTENTIAL NONRENEWAL OF SUBSCRIBER AND PROVIDER AGREEMENTS
The company's profitability is dependent upon its ability to obtain and
maintain contracts with employee groups and individual consumers
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
"Outlook - Year 2000 issue," of Part II, Item 7, Management's
Discussion and Analysis, 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.
STRATEGIES
The company's 1999 plans involve an operating strategy intended to
improve the company's financial performance by (i) managing the
consolidated medical trend, including pharmacy, (ii) achieving and
sustaining superior levels of service, (iii) maintaining enrollment
while adjusting prices to attain profit targets, (iv) reducing core
overhead expenses, and (v) strengthening the public appreciation for
the Blue Cross and Blue Shield names and trademarks. In addition,
on an ongoing basis, the company plans to continue to evaluate and
consider potential combinations with other health care benefit
plans.
SALES AND MARKETING STRATEGY
The company's strategy includes retaining current underwritten member
levels through target marketing efforts. The company's marketing
operations vary depending upon the segment to which sales efforts
are directed; individuals (i.e. direct pay), small employer groups
(which the company defines as groups from 2 to 99 employees) and
large employer groups (which the company defines as groups of 100
employees or more). These efforts include the creation of a small
group marketing unit to improve the company's ability to support
sales in an efficient and timely manner. The company's independent
broker networks and direct sales staff market the full range of the
company's managed care products and services to new customers, and
manage existing accounts to ensure client satisfaction and
retention. Independent brokers are compensated pursuant to
commission arrangements that vary depending on the particular
company products and services sold.
Marketing efforts are supported by market research conducted internally
as well as public relations efforts and advertising programs that
utilize telemarketing, radio, television, direct mail and other
media.
MEDICAL MANAGEMENT
In general, the company controls medical costs by increasing financial
incentives to members to use network providers and partnering with
providers to ensure the cost-efficient delivery of quality health
care. The company believes that the development of common economic
incentives with certain hospitals, physician groups and other
selected health care providers will be a key element in gaining a
competitive advantage and future growth. The company continues to
pursue arrangements with providers that are intended to develop a
cooperative relationship through shared risk, financial incentives
and joint input into decision-making processes in order to manage
the medical and administrative costs of health care delivery more
efficiently.
The company recognizes the physician's expertise in managing patient
care and wants to ensure that physicians maintain autonomy in the
practice of medicine by offering physician groups incentives to
lower medical costs while achieving high levels of patient
satisfaction and quality care. The company's philosophy is to
manage provider networks rather than to manage members. The
company's BlueCHOICE HMO Physician Group Partners Program (PGPP)
provides incentives to primary care physicians to improve quality
and patient satisfaction while reducing costs and providing
physician-participants with an appealing incentive package.
Currently, approximately 44 percent of the BlueCHOICE Commercial
panel of primary care physicians in metropolitan St. Louis are
enrolled in the program.
GENERAL AND ADMINISTRATIVE COST REDUCTIONS
Throughout the past several years, the company has made significant
investments in technologies designed to re-engineer many customer
service and claims processes that are expected to result in
significant savings in administrative costs. See "Technology and
Information Systems" that follows for additional detail. The
company plans to continue to pursue initiatives to streamline
operations and reduce general and administrative expenses. In
addition, the company's management continually strives to find ways
to reduce its costs. In 1997, the company completed the relocation
of its St. Louis-based claims, customer service, billing and
provider services functions to the company's Springfield, Missouri,
facility and a new facility in Cape Girardeau, Missouri.
Approximately 200 jobs were relocated to Cape Girardeau with an
additional 100 relocated to Springfield. The move was expected to
result in annual salary and benefit cost savings of $3.0 million in
1998. The company incurred total charges to earnings of $7.8
million during 1996 and 1997 for costs associated with the
relocation. At the end of 1998, the company announced a strategic
realignment of business operations, including a reduction of
approximately 135 positions, or approximately 7.5 percent of the
company's work force. Half of this reduction was completed by the
end of 1998, with the remainder of the positions scheduled to be
eliminated by June 1999, primarily through attrition. Other
elements of the realignment plan include reductions in the use of
outside consultants, software costs, travel, entertainment and other
expenses, and changes in employee health care benefits. The company
took a $0.9 million non-recurring restructuring charge in the fourth
quarter of 1998 related to this strategic realignment plan.
COMPETITION
The managed care industry is highly competitive, both nationally and in
the company's market area. Participants compete for members
primarily on the basis of price (considering premium rates,
copayments, coinsurance and deductibles), scope and design of
benefits, access to providers and reputation of the plan sponsor and
participants. The company also competes with other managed care
organizations for contracts with hospitals, independent physicians,
physician groups and other providers.
In the metropolitan areas of St. Louis and Kansas City and other
regions in Missouri, the managed care market is highly competitive,
with a number of established competitors offering a variety of
benefit plans. The penetration of managed health care is
substantially less in other regions of Missouri where the company
competes more with traditional indemnity plans and smaller networks.
The company's major competitors include: commercial insurance
carriers, other HMOs, PPOs, POSs, TPAs, utilization review
companies, and others, many of which are operated as part of a
regional or national network. Many competitors that have regional
or national networks have broader geographic coverage, larger total
memberships, and in many instances have greater financial resources
than the company. The company also faces competition in its markets
from a trend among some health care providers to combine and form
their own networks in order to contract directly with employer
groups and other prospective customers for the delivery of health
care services.
The company expects to increase premium rates on a per member per month
basis by approximately 9 percent to 10 percent during 1999. The
company believes that these price increases will be accepted by the
market as indicated by the company's January 1999 underwritten
enrollment consisting of 468,800 members, compared to December 1998
underwritten enrollment of 464,700. Because approximately one-third
of the company's underwritten business historically renews during
the first month of each year, the company believes that the January
results are an early indication that the company's strategy of
maintaining membership at increased premium levels is working.
TECHNOLOGY AND INFORMATION SYSTEMS
Document imaging technology and re-engineering efforts are improving
the efficiency with which the company handles the massive volume of
claims it receives and processes each day. More than 71 percent of
all claims received by the company are currently electronic
transactions that are processed by the automated systems, requiring
little or no manual intervention.
The company believes that its management information systems represent
a key component of the company's medical and administrative cost
reduction operating strategy by providing the company with extensive
detailed information regarding customer and provider utilization.
These systems also facilitate quality service to members and
providers in connection with the company's claims and customer
service functions. In 1995, the company embarked on a multi-year
information and operations strategy (IOS) project that is designed
to further improve how the company delivers managed care to members.
See "Outlook - Information and operations strategy" of Part II, Item
7, Management's Discussion and Analysis, for more information on the
IOS project.
Currently, the primary business functions of the company are supported
by an integrated transaction processing system. This interactive
system supports the majority of the company's core processing
functions (claims processing, customer services, enrollment, member
billing and claim disbursements) through a set of integrated
databases. The company believes that this integrated approach helps
to assure product flexibility across a broad range of managed care
products and provides an integrated, consistent source of claim and
subscriber information. As IOS brings RightCHOICE new managed care
capabilities, it will replace the company's core processing systems,
and the company believes that IOS will generate savings in both
medical and administrative expenses.
The company's data warehouse initiative allows the company to turn
information about providers, members, and claims into a solid
foundation upon which to make strategic business decisions. This
initiative underscores the company's commitment to putting
information directly in the hands of the people who manage the
business. Company employees now have access to many levels of
detailed data focusing on medical expenses, revenues and membership.
In January 1996, the company began converting its computer systems to
be Year 2000 compliant - see "Outlook - Year 2000 issue" of Part II,
Item 7, Management's Discussion and Analysis, for more information
related to the company's Year 2000 compliance efforts.
REGULATION
Government regulation of the products and services offered by the
company varies from jurisdiction to jurisdiction and is subject to
change. The company and its subsidiaries are primarily subject to
the insurance laws and regulations of the States of Missouri and
Illinois, the insurance laws and regulations of the other
jurisdictions in which the company and its subsidiaries are licensed
or authorized to do business and certain federal laws and
regulations. These insurance laws and regulations generally give
state and federal regulatory authorities broad supervisory,
regulatory and administrative powers over insurance companies and
insurance holding companies with respect to most aspects of their
insurance businesses. This regulation is intended primarily for the
benefit of the policyholders of the insurance companies. The
company is in litigation relating to its compliance with various
federal and state regulations - see Note 13 entitled "Contingencies"
of Part II, Item 8, Financial Statements and Supplementary Data.
INSURANCE HOLDING COMPANY REGULATION
The company is subject to regulation as a member of an insurance
holding company. Missouri and Illinois insurance holding company
laws and regulations generally require members of insurance holding
companies to file with the respective Departments of Insurance
certain reports describing capital structure, ownership, financial
condition, certain intercompany transactions and general business
operations. Missouri insurance holding company laws and regulations
require prior regulatory approval or, in certain circumstances,
prior notice of, certain material intercompany transfers of assets
as well as certain transactions between insurance companies, their
parent holding companies and affiliates.
INSURANCE COMPANY REGULATION
The operations of the company's subsidiaries, HALIC, BlueCHOICE,
HealthLink HMO, Inc. (HealthLink HMO), and RIC, are subject to
regulation and supervision by regulatory authorities of the various
jurisdictions in which they are licensed to conduct business.
Regulatory authorities exercise extensive supervisory power over
insurance companies and health maintenance organizations in regard
to licensing; the amount of reserves that must be maintained; the
approval of forms and insurance policies used; the nature of, and
limitation on, an insurance company's investments; periodic
examination of the operations of insurance companies; the form and
content of annual statements and other reports required to be filed
on the financial condition of insurance companies; and the
establishment of capital requirements for insurance companies. The
aforementioned subsidiaries of the company are required to file
periodic statutory financial statements in each jurisdiction in
which they are licensed. Additionally, these subsidiaries are
periodically examined by the insurance departments of the
jurisdictions in which they are licensed to do business.
RISK-BASED CAPITAL REQUIREMENTS
In 1993, Missouri adopted statutory risk-based capital (RBC)
requirements for life and health insurance companies. In 1998,
Missouri adopted the RBC requirements for health maintenance
organizations which the National Association of Insurance
Commissioners (NAIC) adopted the same year. The formula for
calculating such RBC requirements, set forth in instructions adopted
by the NAIC, is designed to take into account asset risks, insurance
risks, interest rate risks and other relevant risks with respect to
the individual insurance company's business. Under these laws, life
and health insurance companies and health maintenance organizations
must submit a report of their RBC level as of the end of the
previous calendar year.
Because the total adjusted capital of HALIC, RIC, BlueCHOICE, and
HealthLink HMO, determined in accordance with the RBC instructions
adopted by the NAIC on a fully phased-in basis, exceed all RBC
minimum requirements, the company believes that the RBC requirements
will not have any immediate impact upon HALIC, RIC, BlueCHOICE, or
HealthLink HMO or their operations. If in the future the RBC
results were to decline, the RBC requirements could have a material
effect upon their operations and the amount of regulatory oversight
to which they are subject.
RESTRICTIONS ON DIVIDENDS
Insurance laws and regulations restrict the payment of dividends by
life insurance companies and health maintenance organizations in a
holding company structure. Such laws generally limit the dividends
which a life insurance company may pay to an amount which, together
with the amount of dividends and distributions paid by the insurance
company during the immediately preceding 12 months, does not exceed
the greater of (i) 10 percent of the insurance company's surplus as
regards policyholders as of the preceding December 31 or (ii) the
insurance company's net gain from operations for the preceding
calendar year. For all other insurers (including HMOs), such laws
generally limit the dividends that a company may pay to an amount
which, together with the amount of dividends and distributions paid
by the company during the immediately preceding 12 months, does not
exceed the lesser of (i) 10 percent of the insurer's surplus as
regards policyholders as of the preceding December 31 or (ii) the
net investment income for the 12-month period ending as of the
preceding December 31. Any proposed dividend in excess of these
amounts is deemed to be an "extraordinary dividend" and requires
prior approval by the Director of Insurance of the company's state
of domicile.
At December 31, 1998, HALIC, BlueCHOICE, RIC, and HealthLink HMO had
surplus of approximately $78.3 million, $15.0 million, $1.2 million,
and $4.6 million, respectively. At December 31, 1998, the company's
insurance subsidiaries did not have a significant amount of
dividends available for payment without the prior approval of the
appropriate Director of Insurance.
HMO REGULATION
Federally qualified HMOs, such as BlueCHOICE, are subject to health
care-related regulation by both state and federal regulatory
authorities. State-qualified HMOs, such as HealthLink HMO, Inc.,
are also subject to state regulatory authorities. As a federally
qualified HMO, BlueCHOICE must file periodic reports with, and is
subject to, regulation and review by the U.S. Department of Health
and Human Services and certain other federal authorities. Among the
areas regulated by federal and state law are procedures for quality
assurance, enrollment requirements, covered benefits, relationships
between the HMO and its health care providers, and the company's
financial condition, including reserves and cash flow requirements.
THIRD-PARTY ADMINISTRATOR (TPA) REGULATION
Under Missouri and Illinois laws and regulations, the company,
HealthLink HMO, and Epoch, the company's 50 percent-owned
subsidiary, are required to obtain a certificate of authority from
the appropriate Departments of Insurance in connection with certain
of their benefit administration services and are subject to various
statutory requirements, including record-keeping and retention;
fiduciary obligations with respect to premiums collected;
limitations on commissions and fees; and certain notice and
reporting requirements. Certain TPA activities are also subject to
the provisions of the Employee Retirement Income Security Act of
1974 (ERISA).
PREFERRED PROVIDER ORGANIZATION (PPO) REGULATION
Under Illinois and Indiana laws and regulations, HealthLink is required
to obtain a certificate of authority from the Departments of
Insurance in connection with its PPO services and is subject to
various statutory requirements, including certain provider and
client contracting requirements and notice and reporting
requirements.
UTILIZATION REVIEW REGULATION
Under Missouri laws and regulations, the company and HealthLink are
required to obtain a certificate of authority from the applicable
Department of Insurance in connection with their utilization review
services and are subject to various statutory requirements,
including certain notice and reporting requirements.
EMPLOYEES
The company employed approximately 1,800 full time employees (including
370 HealthLink employees) as of December 31, 1998, compared to 1,700
full time employees (including 300 HealthLink employees) as of
December 31, 1997, none of whom is subject to a collective
bargaining agreement. At the end of 1998, the company announced a
strategic realignment of business operations, including a reduction
of approximately 135 positions, or approximately 7.5 percent of the
company's work force. Half of this reduction was completed by the
end of 1998, with the remainder of the positions scheduled to be
eliminated by June 1999, primarily through attrition. The company
believes that its employee relations are good.
EXECUTIVE OFFICERS
Name Age Position
John A. O'Rourke 55 Chairman of the Board, President,
Chief Executive Officer and Director
Sandra Van Trease 38 Senior Executive Vice President and
Chief Operating Officer; Chief
Financial Officer
Angela F. Braly 37 Executive Vice President, General
Counsel and Corporate Secretary
Stuart K. Campbell 37 Senior Vice President, Client
Services
Michael Fulk 51 Senior Vice President and Chief
Marketing Executive
Herbert B. Schneiderman 53 Senior Vice President, Medical
Delivery Systems
Connie L. Van Fleet 46 Senior Vice President and
Chief Information Officer
David G. Williams, M.D. 42 Senior Vice President and
Chief Medical Officer
David T. Ott 44 President, Chief Executive Officer
and Director of HealthLink
Courtney B. Walter 43 Executive Vice President and
Chief Financial Officer of
HealthLink
Edward J. Tenholder 47 Executive Vice President and
Chief Operating Officer of Blue
Cross and Blue Shield of Missouri
John A. O'Rourke was named Chairman and Chief Executive Officer of
RightCHOICE in February 1997, and President in March 1997. Mr.
O'Rourke came to RightCHOICE from his position as President and CEO
of HealthLink. Mr. O'Rourke took the leadership of HealthLink in
1985, when the company was first incorporated. Earlier, Mr.
O'Rourke was Deputy Director of the Office of Health Maintenance
Organizations in the U.S. Department of Health and Human Services.
Sandra Van Trease was named Senior Executive Vice President, Chief
Operating Officer and Chief Financial Officer in December 1998. She
joined the company in June 1994 and was promoted to CFO in November
1995. Prior to joining the company, she was a Senior Manager with
Price Waterhouse LLP.
Angela F. Braly was named Executive Vice President, General Counsel and
Corporate Secretary of RightCHOICE in January 1999. Ms. Braly acted
as Interim General Counsel of RightCHOICE from September 1997
through December 1998 while a member of the St. Louis law firm of
Lewis, Rice & Fingersh, L.C. Ms. Braly joined Lewis, Rice &
Fingersh, L.C. in January 1987 and was involved there in the
corporate representation of HealthLink when it was acquired by
RightCHOICE in August 1995.
Stuart K. Campbell was named Senior Vice President, Client Services, in
August 1997. Mr. Campbell joined RightCHOICE as Chief Internal
Auditor in September 1994 and was named Corporate Compliance Officer
in 1996. Prior to joining the company, Mr. Campbell was a Senior
Manager with Price Waterhouse LLP.
Michael Fulk joined RightCHOICE as Senior Vice President and Chief
Marketing Executive in January 1998. Mr. Fulk joined RightCHOICE
from United HealthCare, Birmingham, Alabama, where he was Senior
Vice President of Sales and Marketing. Earlier, Mr. Fulk served as
the top sales and marketing executive for United HealthCare's HMO,
POS, and PPO operations in Texas, Alabama, Louisiana, Tennessee,
Arkansas, Mississippi and the Gulf Coast.
Herbert B. Schneiderman joined RightCHOICE as Senior Vice President,
Medical Delivery Systems, in June 1995. Mr. Schneiderman came to
RightCHOICE after 21 years at Saint Louis University Hospital/Saint
Louis University Health Sciences Center, the last seven as Chief
Executive Officer.
Connie L. Van Fleet was named Senior Vice President and Chief
Information Officer in November 1997. Ms. Van Fleet joined the
company in 1990 and most recently served as Vice President, Business
Analysis and Development. Prior to joining the company, Ms. Van
Fleet was with Metropolitan Life Insurance Co.
David G. Williams, M.D. was named Senior Vice President and Chief
Medical Officer of the company in August 1998. He came to
RightCHOICE from Blue Cross and Blue Shield of Tennessee (BCBST),
where he was Regional Medical Director. During his time with BCBST,
Dr. Williams also served as Medical Director for the plan's Medicare
and Medicaid HMO programs. He previously served as Medical Director
for the South Texas Healthcare Alliance and of the city of Corpus
Christi, Texas.
David T. Ott was named President and Chief Executive Officer of
HealthLink in March 1997. Mr. Ott had been Executive Vice President
of HealthLink since July 1990. Mr. Ott joined HealthLink in 1986 as
Director of Marketing and later was promoted to Vice President of
Sales and Marketing.
Courtney B. Walter was named Executive Vice President and Chief
Financial Officer of HealthLink in March 1997. Mr. Walter has been
with HealthLink since 1993. Prior to joining HealthLink, Mr. Walter
worked for Ernst & Young LLP, MetLife Health Care Management
Corporation and Spectrum Emergency Care.
Edward J. Tenholder was named Executive Vice President and Chief
Operating Officer of Blue Cross and Blue Shield of Missouri in
September 1997. Mr. Tenholder has been with the Blue Cross and Blue
Shield organization since 1979, most recently as Senior Vice
President of Client Services and Corporate Support of the company.
ITEM 2. PROPERTIES
As of December 31, 1998, the company owned or leased the following
facilities which the company considers material to its operations:
Square Owned or
Type of Facility Location Footage Leased
Corporate Headquarters St. Louis, MO 343,017 Leased
Document Storage Warehouse St. Louis, MO 73,702 Leased
HealthLink, Inc. Headquarters St. Louis, MO 61,829 Leased
Southwest Regional Office Springfield, MO 30,000 Owned
Southeast Claims Training Cape Girardeau, MO 3,230 Leased
Southeast Claims Office Cape Girardeau, MO 42,000 Leased
Central Marketing Office Columbia, MO 5,000 Leased
ITEM 3. LEGAL PROCEEDINGS
The company is a party to various material legal proceedings which are
detailed in Note 13 entitled "Contingencies" of Part II, Item 8,
Financial Statements and Supplementary Data.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders in the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The company's Class A Common Stock has been traded on the New York
Stock Exchange under the symbol "RIT" since August 1, 1994. There
were 246 common shareholders of record on March 8, 1999. As of
March 8, 1999, the reported closing bid price per share was $11.44.
The outstanding common shares listed below represent the total of
the outstanding Class A Common Stock and outstanding Class B Common
Stock as of each quarter end.
<TABLE>
SHAREHOLDERS' DATA
<CAPTION>
1998
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Outstanding common shares 18,672,900 18,672,900 18,671,500 18,671,500
Market price:
Quarter ending $11 1/2 $10 $12 11/16 $9 13/16
Range $8 9/16 - $12 $8 1/2 - $13 1/8 $8 3/8 - $12 11/16 $8 3/8 - $10 7/8
</TABLE>
<TABLE>
<CAPTION>
1997
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Outstanding common shares 18,671,500 18,671,500 18,671,500 18,671,500
Market price:
Quarter ending $9 5/8 $10 1/4 $13 9/16 $13 1/8
Range $9 3/8 - $11 1/8 $10 1/4 - $13 7/8 $10 3/8 - $13 9/16 $10 1/2 - $17
</TABLE>
DIVIDENDS
The company has not paid dividends on its Class A Common Stock or Class
B Common Stock and anticipates that no dividends will be paid on its
Class A Common Stock or Class B Common Stock in the foreseeable
future. Further, the company is currently restricted in its ability
to pay cash dividends as explained in Note 10 entitled, "Long-term
debt and commitments" in Part II, Item 8, Financial Statements and
Supplementary Data.
<TABLE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<CAPTION>
Year ended December 31,
Consolidated Statements of Income data 1998 1997 1996 1995 1994
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $767,512 $719,411 $653,375 $591,880 $583,580
Operating expenses 771,759 780,411 666,954 572,847 556,943
Operating (loss) income (4,247) (61,000) (13,579) 19,033 26,637
Investment income, net 18,669 33,184 17,532 18,344 15,764
Other, net (4,918) (5,739) (5,320) (3,327) (640)
Net income (loss) 5,660 (24,034) (2,027) 23,570 26,584 (c)
Basic and diluted earnings (loss)
per share $ 0.30 $ (1.29) $ (0.11) $ 1.26
Pro forma data: (a)
Pro forma operating income $23,712
Pro forma net income 24,683 (c)
Pro forma earnings per share (b) $ 1.49 (c)
</TABLE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet data December 31,
1998 1997 1996 1995 1994
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total assets $508,678 $506,363 $532,144 $516,388 $433,605
Long-term obligations 68,718 88,845 86,776 89,060 31,013
Shareholders' equity 145,874 140,865 172,954 173,221 135,425
Available cash and investments (d) 12,494 8,279 48,472 56,753 72,854
Book value per share $ 7.81 $ 7.54 $ 9.26 $ 9.27 $ 7.25
Tangible book value per share 3.82 3.36 4.76 4.93 7.10
</TABLE>
(a) Prior to its initial public offering in August 1994, the
company was not subject to premium taxes levied by the State of
Missouri. Pro forma data reflect the premium taxes that would have
been recorded, net of income tax, had the company been subject to
such premium taxes.
(b) Pro forma earnings per share (unaudited) for the year ended
December 31, 1994, is calculated based on the weighted average
number of Class A and Class B Common Stock assumed outstanding, with
14,962,500 shares of Class B Common Stock assumed outstanding at the
beginning of the year and giving effect to the issuance of 3,250,000
shares of Class A Common Stock on August 1, 1994, the issuance of
487,500 shares of Class A Common Stock on August 4, 1994, and the
repurchase of 10,000 shares of Class A Common Stock in November 1994.
(c) Reflects impact of cumulative effect of accounting changes
for postretirement benefits other than pensions and postemployment
benefits aggregating $10,437, net of income tax, or $.57 per share.
(d) Amounts represent cash and investments available for general
corporate use without regulatory approval.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying Consolidated Financial Statements and Notes thereto and
the information set forth under the captions "Safe Harbor Statement"
and "Factors that May Affect Future Results of Operations, Financial
Condition or Business" of Part I, Item I, Business, of this Annual
Report, and under the caption in Note 13 entitled, "Contingencies"
of Part II, Item 8, Financial Statements and Supplementary Data, of
this Annual Report.
RESULTS OF OPERATIONS
The company offers a comprehensive array of managed health care
products and services that the company segregates into two distinct
segments. The company's underwritten segment includes preferred
provider organization (PPO), point-of-service (POS), health
maintenance organization (HMO), Medicare supplement, specialty
managed care, and managed indemnity benefit plans. The company's
self-funded segment includes third-party administrator (TPA),
administrative services only (ASO), and network rental services for
self-insured organizations.
PREMIUM REVENUE
The following table sets forth premium revenue (in thousands) by
product group for the years ended December 31, 1998, 1997, and 1996:
For the year ended December 31,
Product Group 1998 1997 1996
PPO:
Alliance PPO $191,855 $197,329 $234,720
AllianceChoice POS 151,034 124,890 75,700
HMO (includes other POS) 206,292 183,485 139,457
Medicare supplement 94,951 97,157 98,038
Managed indemnity 7,627 12,531 16,425
Other specialty services 42,728 38,875 30,709
Total premium revenue 694,487 654,267 595,049
ASO/Self-funded and other income 73,025 65,144 58,326
Total revenues $767,512 $719,411 $653,375
OPERATING RATIOS
The following table sets forth selected operating ratios. The medical
loss ratio reflects health care services expense as a percentage of
premium revenue. All other ratios are shown as a percentage of
premium revenue and fees and other income combined:
For the year ended December 31,
1998 1997 1996
Operating revenues:
Premium revenue 90.5% 90.9% 91.1%
Fees and other income 9.5% 9.1% 8.9%
100.0% 100.0% 100.0%
Operating ratios:
Medical loss ratio 83.5% 84.8% 82.6%
Commission expense ratio 4.1% 4.1% 4.1%
General and administrative expense ratio 20.8% 22.7% 22.0%
Adjusted general and administrative
expense ratio (excludes depreciation
and amortization) 18.3% 19.5% 19.7%
MEMBERSHIP
The following table sets forth the number of members by product
category:
%
December 31, (Decrease)/
Product Group 1998 1997 Increase
Underwritten:
PPO:
Alliance PPO 141,225 149,339 (5.4)
AllianceChoice POS 127,907 131,924 (3.0)
HMO:
Commercial (includes other POS) 129,417 134,743 (4.0)
BlueCHOICE Senior 5,432 5,682 (4.4)
BlueCHOICE Medicaid (MC+) 5,146 n/a
Medicare supplement 57,966 62,311 (7.0)
Managed indemnity 2,777 7,022 (60.5)
464,724 496,167 (6.3)
Self-funded:
PPO 43,688 89,300 (51.1)
HMO 8,843 13,825 (36.0)
ASO (includes HealthLink):
Workers' Compensation 449,986 344,712 30.5
Other ASO* 1,155,658 1,013,303 14.0
Total membership 2,122,899 1,957,307 8.5
* does not include 455,006 and 497,538 additional third-party
administrator members as of December 31, 1998, and 1997, respectively,
that are part of The EPOCH Group, L.C., a joint venture with Blue Cross
and Blue Shield of Kansas City formed in December 1995.
COMPARISON OF RESULTS FOR 1998 TO THE RESULTS FOR 1997
REVENUES
UNDERWRITTEN
Premium revenue increased $40.2 million to $694.5 million in 1998 from
$654.3 million in 1997. 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 premium revenue increased $20.7 million in 1998 -- $36.3 million
due to an 11.0 percent increase in net premium rates, partially
offset by a $15.6 million decrease resulting from a 4.1 percent
decrease in member months. Net rates increased due in part to the
company's targeted general rate increases averaging 7 percent to 19
percent during 1998 enrollment periods. Net rate increases are at
the lower end of the targeted range due in part to changes in
deductibles, the timing of group renewals throughout the year and
product mix changes. Alliance PPO membership decreased by 8,114
members from December 31, 1997, to December 31, 1998, and
AllianceChoice POS membership decreased by 4,017 over the same time
period. Net membership decreases are due primarily to the company's
aforementioned pricing strategy during 1998. Included in the
Alliance PPO member count are 7,000 PPO Illinois members as of
December 31, 1998, an increase of 4,800 from December 31, 1997.
HMO premium revenue increased $22.8 million, or 12.4 percent -- $16.7
million due to an 8.0 percent increase in net premium rates and a
$6.1 million increase resulting from a 4.1 percent increase in
member months. Net premium rates increased in part due to the
company's targeted renewal rate increases of 7 percent to 19 percent
during 1998 enrollment periods. Net rate increases are lower than
the targeted general rate increases due to HMO competition in the
company's HMO service areas; shifts in chosen benefit levels;
changes in the geographic mix of the HMO business; product mix
shifts; and the status of one large group, Missouri Consolidated
Health Care Plan (MCHCP), comprised of 33,200 members as of December
31, 1998, with which the company has limited ability to increase
premium rates. Membership increases were driven primarily by an
enrollment increase of 6,000 members in MCHCP products from December
31, 1997, to December 31, 1998. The company's HMO membership in non-
MCHCP products (and excluding the company's Medicaid product)
decreased over the same period by 11,600 members or 10.2 percent,
due primarily to the company's aforementioned pricing strategy
during 1998. The company's future enrollment growth in its products
and geographic regions is dependent on network attractiveness,
continued cooperation with physician hospital organizations, future
pricing strategy and other factors. There can be no assurance that
these objectives will be realized. Future enrollment growth in the
company's products offered to MCHCP and revenues generated therefrom
are also dependent on these and other factors.
Effective March 1, 1998, the company discontinued its Medicaid product
in an 18-county central Missouri region. The decision to
discontinue was made due to what the company believes were
unacceptable terms proposed by the State of Missouri. As of
December 31, 1997, the company had approximately 5,100 members
enrolled in its Medicaid product.
Premium revenue from Medicare supplement decreased by $2.2 million in
1998. Member months decreased by 8.1 percent partially offset by a
6.4 percent increase in net premium rates. Membership declines are
partially attributable 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 $4.9 million due to a
44.3 percent decline in member months. Member month declines are
consistent with the company's strategy to move toward more highly
managed care products.
Revenue from other specialty services, which includes certain of the
company's drug and dental health care benefit plans, increased $3.9
million -- $6.3 million due to a 16.2 percent increase in net
premium rates partially offset by a $2.4 million decrease resulting
from a 5.4 percent decrease in member months. 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.
SELF-FUNDED
Fees and other income from administrative services only/self-funded and
network services increased in 1998 by $7.9 million. These increases
are primarily due to increased 1998 revenues of $14.4 million from
HealthLink, Inc. (HealthLink), the company's network rental and
managed care service subsidiary. HealthLink's revenues increased
due to a 21.1 percent increase in membership during 1998. This
increase arose from strong sales during the period, along with the
roll-out of new, open-access products. Sales during this period
included a 30,000 member group that enrolled in HealthLink's self-
funded ASO plan, transferring from the company's other self-funded
business. HealthLink's increases to fees and other income were
partially offset by decreases to revenue caused by the loss of
approximately 72,000 members in the company's other self-funded
business due to the nonrenewal of three large groups. HealthLink
also continues to expand its service area into contiguous states,
such as Arkansas, Iowa, Illinois, Indiana and Kentucky.
OPERATING EXPENSES
The overall medical loss ratio decreased by 1.3 percent to 83.5 percent
in 1998 from 84.8 percent in 1997. The medical loss ratio
experienced in 1998 is lower compared to that in 1997 due to the
company's pricing strategy, which resulted in an overall increase in
the company's premium per member per month of approximately 9.5
percent in 1998 as compared to 1997. The medical loss ratio in 1998
is slightly higher than the company previously anticipated in the
beginning of the year as a result of continued escalation of the
medical cost trend, driven by increased cost and utilization of both
outpatient services and drug therapies. The company's medical
expense on a per member per month basis increased by approximately
7.8 percent in 1998 as compared to 1997.
The company continues the efforts initiated in 1997 to modify its
pharmacy benefits management program and recontract with physicians
and ancillary service providers. The drug cost trend has increased
to the low 20 percent range, 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. One of the company's medical cost control strategies for
1998 was the introduction of a new three-tiered benefit design that
allows members to make choices, albeit with a higher member
copayment. Through the end of 1998, the company achieved 33 percent
penetration of its underwritten membership with respect to the three-
tier pharmacy benefit program. The company anticipates that a
majority of its underwritten members will be utilizing a three-tier
program by October 1999. In addition to continuing the conversion
to this new drug benefit program, the company intends to continue to
make other adjustments to copayments, quantity limits and exclusions
as well as to increase physician education, utilization and
prescribing pattern analysis.
The company also intends to continue its hospital, physician and
service recontracting strategy, using the more detailed data and
analysis available through the company's information and operating
strategy (IOS), which is comprised of projects being implemented to
improve business processes and systems. The company also intends to
further expand its Physician Group Partners Program (PGPP). This
program provides incentives to physicians to improve quality and
patient satisfaction, while reducing costs. Currently,
approximately 44 percent of the BlueCHOICE Commercial panel of
primary care physicians in metropolitan St. Louis are enrolled in
this program. The company is also working on a similar program for
specialists and plans to implement the program during 2000. 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 $2.1 million, or 7.1 percent, in 1998.
The commission expense ratio of 4.1 percent for 1998 remained
unchanged from 1997.
General and administrative expenses (excluding depreciation and
amortization) increased $0.2 million in 1998 compared to 1997. The
company managed to keep general and administrative expenses
relatively consistent from 1997 to 1998 despite the fact that
HealthLink's comparable expenses increased by $6.5 million in 1998
as compared to 1997. This increase is directly attributable to
HealthLink's geographic and member expansion efforts. The company's
1997 general and administrative expenses include a write-off of $1.7
million for amounts due to the company from MedAmerica HealthNet,
Inc. (MHI), a physician hospital organization that filed for
bankruptcy during the fourth quarter of 1997. The company's general
and administrative expense ratio (excluding depreciation and
amortization) decreased to 18.3 percent in 1998 compared to 19.5
percent in 1997. Excluding depreciation, amortization and the $1.7
million charge, the general and administrative expense ratio for
1997 was 19.2 percent.
Depreciation and amortization expenses decreased to $19.3 million in
1998 from $23.1 million in 1997. This reduction of depreciation and
amortization expenses primarily related to intangible assets that
became fully amortized during 1997. In 1997, the company recorded
$4.3 million of expense to complete the amortization of a prepaid
reinsurance asset associated with the company's reinsurance
agreements with Blue Cross and Blue Shield of Kansas City.
Amortization expenses for completed components of the company's IOS
project increased by $2.4 million in 1998 compared to 1997. See
"Outlook - Information and operation strategy" for more information
on this project.
A non-recurring charge of $900,000 was recognized in the fourth quarter
of 1998 for anticipated expenses relating to the company's strategic
realignment, including among other things, a planned reduction of
the company's work force and changes in health care benefits. In
1997, the company expensed $3.3 million related to costs associated
with the relocation of the company's St. Louis-based claims,
customer service, billing, and provider services functions to its
Springfield, Missouri, facility and a new facility in Cape
Girardeau, Missouri.
In the third quarter of 1997, the company recorded a $29.5 million loss
reserve for estimated losses relating to its contract with the
Missouri Consolidated Health Care Plan (MCHCP). The reserve is
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 principals. There can be no assurance that the
amount of this loss reserve will be sufficient to cover all future
losses that may be associated with the MCHCP contract.
OPERATING INCOME (LOSS)
The company's operating loss decreased from $61.0 million in 1997 to
$4.2 million in 1998. Excluding the non-recurring relocation and
restructuring charges and the charge for the MCHCP loss reserve, the
operating loss decreased from $28.2 million in 1997 to $3.3 million
in 1998.
The operating loss, excluding non-recurring relocation and
restructuring charges and the charge for the MCHCP loss reserve, for
the company's underwritten segment was $22.3 million in 1998
compared to an operating loss of $37.7 million in 1997. The
decrease in losses in 1998 is partially attributable to the increase
in the company's overall premium rates.
Excluding non-recurring relocation and restructuring charges, the
company's self-funded segment experienced operating income of $18.9
million in 1998 as compared to operating income of $9.5 million for
1997. The improvement in 1998 operating income is partially the
result of the continued positive performance of HealthLink, which
added an additional $7.9 million to this segment's operating income
in 1998 as compared to 1997. HealthLink's operating income is
inclusive of $2.8 million and $3.1 million in 1998 and 1997,
respectively, for amortization expenses related to goodwill and
other intangible assets that were acquired through the company's
HealthLink acquisition.
NET INVESTMENT INCOME
Net investment income includes investment income in the form of
interest and dividend income and net realized gains from the sale of
portfolio securities. Net investment income of $18.7 million in
1998 represents a decrease of $14.5 million from 1997, inclusive of
a $13.3 million decrease in realized gains, net. Realized gains in
1997 include a $5.7 million gain on the sale of company-owned life
insurance policies as well as additional 1997 net realized gains
from the liquidation of equity securities due to the company's
intent to increase its holdings of fixed income securities and the
company's decision to repay $15.0 million of its debt in the first
quarter of 1997.
PROVISION (BENEFIT) FOR INCOME TAXES
The company's effective income tax provision (benefit) rate was 40.4
percent and (28.4) percent for 1998 and 1997, respectively. The
company's effective tax provision (benefit) rates for 1998 and 1997
were affected by non-deductible goodwill amortization. The
company's effective income tax benefit rate for 1997 was also
affected by gains from the liquidation of company-owned life
insurance policies. Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," requires a valuation allowance
against deferred tax assets if, based on the weight of available
evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. The company believes that
uncertainty exists with respect to the future realization of the
undistributed losses of minority-owned subsidiary companies.
Therefore, the company maintained a valuation allowance relating to
such items of $0.1 million as of December 31, 1998, and 1997. Based
upon all the available evidence, management believes it is more
likely than not that the company will realize its remaining deferred
tax assets and, accordingly, no valuation allowance has been
provided against such remaining assets as of December 31, 1998, and
1997.
NET INCOME (LOSS)
The company's net income for 1998 was $5.7 million, or $0.30 per share,
compared to a net loss of $24.0 million, or $1.29 per share for
1997. Excluding the non-recurring restructuring and relocation
charges and the charge for the MCHCP loss reserve, the company had
net income of $6.2 million, or $0.33 per share, in 1998, compared to
a net loss of $2.7 million, or $0.14 per share, in 1997.
COMPARISON OF RESULTS FOR 1997 TO THE RESULTS FOR 1996
REVENUES
UNDERWRITTEN
Premium revenue increased $59.3 million to $654.3 million in 1997 from
$595.0 million in 1996. 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.
PPO premium revenue increased $11.8 million in 1997 -- $17.2 million
due to a 3.6 percent increase in net premium rates. This increase
was partially offset by a $5.4 million decrease resulting primarily
from product mix shifts within the PPO product family, such as the
shift in membership to AllianceChoice, a lower-cost, non-gatekeeper
point-of-service (POS) product. Alliance PPO member months
decreased by 539,300 in 1997 compared to 1996, while AllianceChoice
POS member months increased by 544,800 in 1997 as compared to 1996.
Net rates increased due in part to the company's targeted general
rate increases averaging 7 percent to 18 percent during 1997
enrollment periods. Net rate increases are lower than the targeted
range due in part to changes in deductibles, the timing of group
renewals throughout the year, and product mix changes. The company
also began offering its PPO product in Illinois at the end of the
first quarter of 1997. Included in the Alliance PPO member count in
the company's membership table were 2,200 PPO Illinois members at
December 31, 1997.
HMO premium revenue increased $44.0 million, or 31.6 percent -- $40.7
million due to a 31.4 percent increase in member months and a $3.3
million increase resulting from a marginal increase in premium
rates. Net premium rates have increased only slightly, despite the
company's targeted renewal rate increases of 7 percent to 18 percent
during 1997 enrollment periods, due to HMO competition in the
company's HMO service areas; the status of a large group (Missouri
Consolidated Health Care Plan) with which the company has limited
ability to increase premium rates; shifts in chosen benefit levels;
changes in the geographic mix of the HMO business; and product mix
shifts due to various new products. Membership increases were
driven primarily by the company's HealthNet Blue POS products as
well as the company's efforts to expand geographically within the
State of Missouri. HealthNet Blue POS gained 7,300 members, or 49.9
percent, in southeast Missouri from December 31, 1996, to December
31, 1997. As of December 31, 1997, there were approximately 14,900
members enrolled in BlueCHOICE HMO and POS products in the six-
county area surrounding Joplin, Missouri, representing an increase
of 7,200 members over December 31, 1996. In addition, as of
December 31, 1997, there were 11,000 members enrolled in BlueCHOICE
HMO and POS products in the southwest Missouri area surrounding
Springfield, an increase of 9,300 over December 31, 1996. Partially
included in the aforementioned HMO membership increases is an
increase in the company's MCHCP membership of 15,500 between
December 31, 1996, and December 31, 1997. In addition, the
company made a decision to discontinue its Medicaid product in the
18-county central Missouri region as of March 31, 1998. This
determination was made due to what the company believes were
unacceptable terms proposed by the State of Missouri. As of
December 31, 1997, the company had approximately 5,100 members
enrolled in its Medicaid product.
Premium revenue from Medicare supplement decreased by $0.9 million in
1997. Member months decreased by 8.6 percent partially offset by an
8.4 percent increase in net premium rates. Membership declines are
partially attributable to members shifting to BlueCHOICE Senior, a
Medicare-risk program, which provides medical benefits at least as
comprehensive as Medicare benefits for persons eligible to receive
Medicare (parts A and B) at no additional cost to the member.
Managed indemnity premium revenue decreased by $3.9 million due to a
27.8 percent decline in member months in keeping with the company's
strategy to move toward more highly managed products.
Revenue from other specialty services, which include certain of the
company's drug and dental health care benefit plans, increased $8.2
million due to a 12.6 percent increase in member months and a 12.4
percent increase in net premium rates. The company's drug product
revenues increased $7.4 million due primarily to a 13.7 percent
increase in member months in 1997 as compared to 1996.
SELF-FUNDED
Fees and other income from administrative services only/self-funded and
network services increased in 1997 by $6.8 million. ASO revenues
from HealthLink increased by $10.1 million in 1997 as compared to
1996. HealthLink's 1997 and 1996 revenues include $7.5 million and
$2.7 million of revenues, respectively, from HealthLink HMO, Inc.
(HealthLink HMO), which was only 50 percent owned by HealthLink (and
not consolidated with the company's operations) prior to its May 31,
1996, acquisition from a subsidiary of Blue Cross and Blue Shield of
Kansas City. HealthLink's revenues also increased due to membership
gains in its PPO products of approximately 10.7 percent or 71,900
members from December 31, 1996, to December 31, 1997. HealthLink's
increases in fees and other income were partially offset by two main
factors - decreases to revenue caused by a decline in the HMO self-
funded membership of 2,700 members from December 31, 1996, to
December 31, 1997, and a decline in the overall PPO self-funded
membership of 20,700 members over the same time period.
Three large self-funded group cancellations were effective as of
January 1, 1998. As of December 31, 1997, these three groups
encompassed approximately 72,000 members, approximately 30,000 of
which enrolled in HealthLink's self-funded ASO plans in 1998.
OPERATING EXPENSES
The overall medical loss ratio increased by 2.2 percent to 84.8 percent
in 1997 from 82.6 percent in 1996 primarily as a result of (1)
competitive pricing of managed care products, especially in the St.
Louis metropolitan market area, (2) higher medical expenses,
especially as driven by increased cost and utilization of both
outpatient services and drug therapies, (3) growth in regions
outside of the metropolitan St. Louis area that have less cost-
efficient networks, (4) an increase to claims reserves of $3.0
million in 1997 for the estimate of claims that had been incurred
but not reported in 1996, and (5) the poor performance of MCHCP that
resulted in large underwriting losses.
Commission expense increased by $2.5 million, or 9.3 percent in 1997.
The commission expense ratio of 4.1 percent for 1997 remained
unchanged from 1996.
General and administrative expenses (excluding depreciation and
amortization) increased $11.1 million, or 8.6 percent in 1997
compared to 1996. This increase is primarily due to a $6.7 million
increase in HealthLink general and administrative expenses
(excluding depreciation and amortization) in 1997, inclusive of a
$3.9 million increase in HealthLink HMO expenses. HealthLink's
expenses increased in order to appropriately manage its membership
growth as described elsewhere herein. The company's general and
administrative expense ratio (excluding depreciation and
amortization) improved to 19.5 percent for 1997 compared to 19.7
percent for 1996. Prior to December 31, 1997, the company offered
its HealthNet Blue products pursuant to a joint venture agreement
with MedAmerica HealthNet, Inc. (MHI), a physician hospital
organization. MHI filed for bankruptcy and voted to dissolve the
physician hospital organization. Consequently, the pertinent
provisions of the provider contracts between MHI and the southeast
Missouri doctors, hospitals and ancillary service providers were
selectively assigned to the company in early 1998. The company
recorded a $1.7 million charge related to a receivable from MHI that
was written off in the fourth quarter of 1997 after MHI declared
bankruptcy. Excluding this $1.7 million charge, the company's
general and administrative expense ratio for 1997 (excluding
depreciation and amortization) was 19.2 percent.
Depreciation and amortization expenses increased to $23.1 million in
1997 from $15.0 million in 1996. The primary cause for this $8.1
million increase is an additional $4.9 million of IOS amortization
expense incurred in 1997 as compared to 1996. See "Outlook -
Information and operations strategy" for more information related to
the IOS project. In addition, the company amortized an additional
$2.6 million in 1997 compared to 1996 for prepaid reinsurance
payments associated with the company's reinsurance agreements with
Blue Cross and Blue Shield of Kansas City.
Non-recurring relocation charges in 1997 and 1996 include $3.3 million
and $4.5 million, respectively, related to costs associated with the
relocation of the company's St. Louis-based claims, customer
service, billing and provider services functions to its Springfield,
Missouri, facility and a new facility in Cape Girardeau, Missouri.
On August 29, 1997, the company announced that it would create a loss
reserve for its contract with the Missouri Consolidated Health Care
Plan (MCHCP) in the range of $30 million to $40 million as discussed
elsewhere herein. The company reported in the third quarter of 1997
a $29.5 million loss reserve provision relating to the MCHCP
contract.
OPERATING INCOME (LOSS)
The company's operating loss increased from $13.6 million in 1996 to
$61.0 million in 1997. Excluding the non-recurring relocation
charges and the charge for the MCHCP loss reserve, the operating
loss increased from $9.0 million in 1996 to $28.2 million in 1997.
The operating loss, excluding non-recurring relocation charges and the
charge for the MCHCP loss reserve, for the company's underwritten
segment was $37.7 million in 1997 compared to a loss of $11.0
million in 1996. The increase in losses in 1997 is primarily
attributable to a combination of pricing and medical cost trends,
including higher outpatient utilization and drug costs.
Excluding non-recurring relocation charges, the company's self-funded
segment experienced an operating gain of $9.5 million in 1997 as
compared to operating income of $1.9 million for 1996. The
improvement in 1997 operating income is partially the result of the
continued positive performance of HealthLink, which added an
additional $3.5 million to this segment's operating income in 1997
as compared to 1996. HealthLink's operating income is inclusive of
$3.1 million and $3.3 million in 1997 and 1996, respectively, for
amortization expenses related to goodwill and other intangible
assets that were acquired through the HealthLink acquisition.
NET INVESTMENT INCOME
Net investment income of $33.2 million in 1997 represents an increase
of $15.7 million from 1996, inclusive of a $14.0 million increase in
realized gains, net. Realized gains in 1997 include a $5.7 million
gain on the sale of company-owned life insurance policies as well as
additional 1997 net realized gains from the liquidation of equity
securities due to the company's intent to increase its holdings of
fixed income securities and the company's decision to repay $15.0
million of its debt.
PROVISION (BENEFIT) FOR INCOME TAXES
The company's effective income tax (benefit) provision rate was (28.4)
percent and 48.2 percent for 1997 and 1996, respectively. The
company's effective income tax benefit rate for 1997 was affected by
gains from the liquidation of company-owned life insurance policies
as well as non-deductible goodwill amortization. The 1996 effective
provision rate was also affected by non-deductible goodwill
amortization.
NET INCOME (LOSS)
The company's net loss for 1997 was $24.0 million, or $1.29 per share,
compared to a net loss of $2.0 million, or $0.11 per share for 1996.
Excluding the non-recurring relocation charges and the charge for
loss reserves, the company had a net loss of $2.7 million, or $0.14
per share, for 1997, compared to net income of $0.9 million, or
$0.05 per share, for 1996.
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital as of December 31, 1998 was $64.5
million, a decrease of $5.2 million from December 31, 1997. The
decrease is partially attributable to $8.0 million of additional
debt from the company's reducing revolving credit facility that
became a current payable during 1998. The company also repaid $3.9
million of the debt during 1998 pursuant to the credit facility's
requirements. In addition, the company capitalized $12.5 million of
costs for property and equipment purchases, $8.4 million of which
relates to capitalized IOS development costs.
Net cash provided by operations totaled $11.0 million for the year
ended December 31, 1998. The company's net income was $5.7 million,
which included (on a before-tax basis) $3.9 million of realized
gains from the sale of investments, $9.1 million for the MCHCP loss
reserve amortization, and $19.3 million of depreciation and
amortization expenses. In addition, other assets, medical claims
payable, obligations for employee benefits, receivables from members
and net intercompany receivables were affected by the timing of
operating cash payments and receipts, intercompany tax settlements,
as well as changes in membership, utilization and claims payment
trends and actuarial estimates.
Net cash provided by investing activities was $7.7 million for the year
ended December 31, 1998. This amount was $20.5 million less than
the prior year primarily due to a decrease of $11.6 million in long-
term debt and capital lease obligation payments during 1998 as
compared to 1997.
In the fourth quarter of 1997, the company amended 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 2.75 percent above the one-month floating London
Interbank Offered Rate (LIBOR), (2) certain financial covenant
calculations were modified and the financial covenant requirements
were adjusted, (3) the maximum commitment of the Credit Agreement
was reduced to $50 million as of October 1, 1997, with $1.25 million
quarterly reductions through 1998 and subsequent $2.5 million
quarterly reductions through June 30, 2000, with the remaining
commitment under the Credit Agreement terminating on August 10,
2000, (4) mandatory reductions to the commitment, together with
prepayments, are required upon the happening of certain
extraordinary events, (5) stricter limits were placed on the
company's ability to incur additional debt, and (6) stricter limits
were placed on capital expenditures as well as the company's ability
to make investments and acquisitions. The company's commitment
under the Credit Agreement was reduced by an additional $1.9 million
during 1998, pursuant to the Credit Agreement, due to the sale by
the company's HealthLink subsidiary of its former headquarters
building. HealthLink relocated to a leased facility.
The company primarily invests positive cash flow in fixed income
securities. The company's investment policies are designed to
preserve principal, maximize yield and provide liquidity to meet
anticipated obligations. The company's available-for-sale
securities primarily include fixed-rate government securities and
corporate bonds as well as mortgage-backed securities and other
asset-backed securities.
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. While management of the company believes the current
provision for losses is adequate, 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 the
company's stock.
In addition, the company's Credit Agreement described elsewhere herein
provides that the company's subsidiaries, including BlueCHOICE, may
not issue surplus notes to the company in an aggregate principal
amount in excess of $40 million. As the aggregate principal amount
of surplus notes issued by such subsidiaries to the company
currently approximates $40 million, any additional funding 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.
Under applicable state regulations, certain of the company's
subsidiaries are required to retain cash generated from their
operations. After giving effect to such restrictions and the
surplus notes issued to the company by BlueCHOICE as described in
the preceding paragraph, the company had approximately $12.5 million
in cash and investments available for general corporate purposes
without regulatory approval. The decline in this figure from $48.5
million as of December 31, 1996, is primarily due to the funding
requirements of the company's HMO subsidiary related to the MCHCP
loss reserve as described elsewhere herein.
Other than continued investment in information technology, investment
in new benefit programs and debt repayment, the company currently
has no definitive material commitments for future use of its current
or expected levels of available cash resources; however, management
continually evaluates opportunities to expand the company's
specialty managed care services and health plan operations. The
company's expansion options may include additional acquisitions and
internal development of new products and programs. The company's
available cash resources will remain in interest-bearing investments
until they are utilized for such purposes.
OUTLOOK
Except for the historical information contained herein, this Annual
Report contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These
statements typically, but not exclusively, are identified by the
inclusion of phrases such as "the company anticipates," "the company
believes," "the company expects," "the company plans," "the company
intends," and other phrases of similar meaning. Such forward-
looking statements involve known and unknown risks, uncertainties,
contingencies and other factors that may cause the company's actual
results of operations, financial condition or business performance
to be materially different from the results of operations, financial
condition or business performance expressed or implied by such
forward-looking statements. Factors that could cause or contribute
to such differences include, but are not limited to: the possibility
that court approval of the final settlement agreement, as amended,
entered into with the Missouri Attorney General and Department of
Insurance (DOI), referenced elsewhere herein, would not be obtained,
or if obtained could include conditions that are not acceptable to
the parties; the possibility that all remaining contingencies and
conditions to the parties' obligations to effect the proposed
settlement transaction would not be met or otherwise satisfied; the
Office of Personnel Management audit of BlueCHOICE; pending
litigation, including the subscriber class action litigation;
potential loss of "Blue Cross" and "Blue Shield" licenses by BCBSMo,
the company and its controlled affiliates; government regulation and
health care reform; Missouri Consolidated Health Care Plan issues;
market competition and consolidation; escalating health care costs;
dependence on sales to individuals; recontracting efforts and
potential nonrenewal of subscriber and provider agreements; voting
control by BCBSMo; changes in key management; variability of
operating results and stock price; Credit Agreement restrictions;
the Year 2000 issue; and other factors discussed under the caption
entitled "Factors that May Affect Future Results of Operations,
Financial Condition or Business" of Part I, Item 1 of this Annual
Report, the caption in Note 13 entitled, "Contingencies" of Part II,
Item 8 of this Annual Report, and elsewhere in the company's SEC
reports.
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 captions "Safe Harbor Statement" and "Factors that May Affect
Future Results of Operations, Financial Condition or Business" of
Part I, Item 1, of this Annual Report.
The company's performance targets for 1999 include: average premium
revenue growth per member per month in the 9 percent to 10 percent
range, reflecting price increases up to the high teens to low
twenties (in percentages) for some categories of members, consistent
with market trends; maintaining the medical loss ratio in the low to
mid-eighties (in percentages), with an anticipated net medical cost
increase per member per month of approximately 7 percent to 9
percent, inclusive of pharmacy benefits, medical services and the
cost of government-mandated benefits; continued control of core
overhead expenses, with amortization expense for corporate
initiatives, Year 2000 programming expenses and other initiatives
contributing to a general and administrative expense ratio in the
low twenties (in percentages).
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.
STRATEGIC REALIGNMENT
The company recently announced a strategic realignment of business
operations to control overall general and administrative expenses
for 1999. By reducing personnel and other administrative expenses,
the company's goal is to offset anticipated 1999 investments in new
products, further expansion of the HealthLink network in regions
outside of Missouri and other items. The realignment plan calls for
the reduction of approximately 135 positions, or approximately 7.5
percent of the company's workforce, by the middle of 1999. These
positions are expected to be eliminated through strategic reductions
and attrition and will be offset to a small degree by positions
added in other growing business areas. The company's goal also is
to control general and administrative costs by decreasing the use of
outside consultants, changing employee health care benefits, and
reducing software costs, travel, entertainment, and other expenses.
As a result of the company's strategic realignment, the company
recorded a charge of $0.9 million in the fourth quarter of 1998.
There can be no assurance that the goals of the company's strategic
realignment will be achieved.
INFORMATION AND OPERATIONS STRATEGY
In 1995, the company implemented a comprehensive information and
operations strategy (IOS) to assist the company in implementing its
managed care strategy of delivering access to cost-efficient medical
care consistent with quality outcomes. The company believes that
controlling medical costs in the future will be highly dependent on
readily accessing both member and provider medical information at a
detail level that provides real-time analytical support. The
company receives capital expenditure authorizations from the Board
of Directors to expend funds for the project subject to periodic
review by an ad-hoc committee of the board. In 1998, the company
incurred capitalized expenditures of $8.5 million on this project.
Cumulatively, since 1995, the company has incurred capitalized
expenditures of $47.5 million. The company anticipates that it will
expend approximately $8 million to $9 million for capitalized costs
related to this project in future years. While management believes
that the IOS project will initially be dilutive to earnings per
share, it is believed that opportunities exist for significant
medical and administrative savings, which are expected to provide a
payback and contribute to earnings per share over the long term.
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 December 31, 1998,
approximately 95 percent of these COBOL programs were Year 2000
ready. The remaining COBOL programs are expected to be Year 2000
ready by March 31, 1999. The balance of the company's other system
modifications is expected to be completed by September 30, 1999,
with the majority of these modifications currently under way. The
company's plan for completion of this project is partially dependent
upon the work of third parties. The company has limited internal
exposure to equipment with embedded technology and expects any
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 will continue through the end
of 1999 for existing systems, new releases and enhancements to
provide for continued readiness and to prevent reappearance of Year
2000 problems.
The total cost associated with the modifications required to become
Year 2000 ready is estimated to be approximately $12 million to $13
million. The increase from the $10 million to $12 million range
reported in the company's Form 10-Q for the period ended September
30, 1998, relates to recently identified incremental Year 2000
readiness costs associated with the company's data warehouse
applications and more complete cost estimates for integrated
testing. The company is expensing all costs associated with these
changes as they are incurred. From 1996 through December 31, 1998,
the company has cumulatively expensed $7.4 million on this project,
with $4.7 million expensed in 1998. 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 an
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 is currently preparing its contingency plan in the event
that full Year 2000 readiness for critical business functions is not
achieved. The company expects to have the plan substantially
defined on or before the end of the second quarter of 1999.
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 the company's 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 these estimates will be achieved, and actual results
could differ materially from expected results.
RECENT LEGISLATION
The Health Insurance Portability and Accountability Act of 1996
requires private health insurance coverage to be "portable" by
employees from job to job and eliminates coverage limitations for
pre-existing health conditions. The State of Missouri also has
recently passed legislation that mandates various lengths of stay
for maternity patients and imposes a number of new restrictions on
managed care organizations, which include, among others, health
maintenance organizations, health insurers and utilization review
organizations. In addition, the Balanced Budget Act of 1997, and
the regulations promulgated thereunder, establish a new
Medicare+Choice program that significantly expands the health care
options to Medicare beneficiaries and imposes a number of new
restrictions and requirements on health plans, such as BlueCHOICE,
that offer a Medicare+Choice plan. Finally, the State of Illinois
recently revised its regulations governing the activities of
preferred provider organizations, such as HealthLink, which now
impose a number of new provider and client contracting requirements.
Although the impact of the provisions of this recent legislation and
any future legislation cannot be fully predicted at this time,
management of the company believes that the ultimate outcome will
not have a material adverse effect on the company. However, 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 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.
INFLATION
Health care costs in the United States have increased more rapidly than
the national consumer price index in recent years, and that trend is
expected to continue. The company believes that it has reduced the
impact of such increases by expanding its provider networks,
establishing risk-sharing agreements and strengthening its
underwriting standards. However, there can be no assurance that the
company's efforts to reduce the impact of inflation will be
effective or that premium increases will equal or exceed increasing
health care costs.
RECENTLY ISSUED ACCOUNTING STANDARDS
See the description under the same caption in Note 2 of the Notes to
Consolidated Financial Statements of Part II, Item 8, of which is
incorporated herein by reference.
CONTINGENCIES
See description under the same caption in Note 13 of the Notes to
Consolidated Financial Statements of Part II, Item 8, of which is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INVESTMENTS AVAILABLE FOR SALE
The company's available-for-sale securities (See Note 4 of the Notes to
Consolidated Financial Statements for further breakdown of the
available-for-sale securities) are exposed to market risk from
changes in interest rates, as rate volatility will cause
fluctuations in the market value of held investments and the
earnings potential of future investments. The company's objective
in managing interest rate risk is to meet the strategic operating
needs of the company by safeguarding principal, providing sufficient
liquidity to meet business needs and realizing optimal real returns
within acceptable risk levels, while at all times adhering to the
restrictions of the Missouri and Illinois Departments of Insurance.
The company's management is responsible for recommending external
portfolio managers and the company's Finance and Investment
Committee (F&I Committee), comprised of certain members of the
company's Board of Directors, is responsible for approving the
selection of these external managers, including the specific
portfolio guidelines and restrictions to be included in the
management agreements. The company's investment guidelines are
generally conservative and are established with the expectation of
receiving reasonable rates of return at reasonable levels of risk.
The company's management is also responsible for recommending the
percentage distribution of the portfolio between short-term, fixed
income, and equity investments for the F&I Committee's approval.
The company's objective is to diversify to reduce volatility through
exposure to various investment styles. Managers of each external
portfolio are expected to exceed a specific index which is
comparable to its style of management.
The company classifies its investments as available-for-sale.
Accordingly, the company's investments are reported on the company's
Consolidated Balance Sheets at fair value. Changes in market
interest rates result in an unrealized gain or loss, which is
included in the reported fair value of the recorded securities, with
an offsetting amount (net of taxes) recorded in shareholders'
equity, and no related or immediate impact to the results of
operations. At December 31, 1998, the company recorded an
unrealized gain on these investments; however, the fair value of the
securities could potentially decrease to an unrealized loss
position, depending upon changes in market rates and other factors.
As of December 31, 1998, the company had $208.3 million invested in
available-for-sale securities at fair value. The analyses below are
based on $192.2 million of the company's available-for-sale
securities that are managed externally, with a weighted-average
yield to maturity of 5.69 percent. The company's available-for-sale
securities primarily include fixed-rate government securities and
corporate bonds as well as mortgage-backed securities and other
asset-backed securities. The remaining $16.1 million of the
company's available-for-sale securities were not included in the
analyses as the investments are primarily either internally managed
or represent short-term money market funds. The market risks
related to these internally managed and short-term investments are
not deemed to be material to the analyses presented below. A
breakdown of the effective maturity and effective duration of the
$192.2 million of externally managed fixed maturity investments is
as follows:
Effective Maturity % of Total Effective Duration % of Total
(in years) Held (in years) Held
0.00 - 0.99 5.80 0.00 - 0.99 7.49
1.00 - 2.99 23.74 1.00 - 2.99 36.28
3.00 - 4.99 23.96 3.00 - 3.99 18.22
5.00 - 9.99 36.89 4.00 - 5.99 17.99
10.00 - 19.99 4.73 6.00 - 7.99 12.84
20.00 + 4.88 8.00 + 7.19
The following table shows the effect of changes in interest rates on
the company's investment return, duration and market value. The
analysis below incorporates the prepayment risk associated with the
company's investments in callable securities as well as the
optionality of its mortgage-backed and asset-backed securities. The
analysis includes a twelve month projection of market values given
the applicable changes in yields from that which existed at year-end
1998 with the assumption that investment income is reinvested.
Return %
Yield Change Effective
(basis points) Total Income Price Duration Market Value
-300 17.47 5.16 12.31 4.16 $225,763
-250 15.29 5.22 10.07 4.06 221,579
-200 13.17 5.27 7.90 3.97 217,508
-150 11.16 5.34 5.82 3.88 213,651
-100 9.27 5.43 3.84 3.84 210,008
-50 7.49 5.56 1.92 3.87 206,583
0 5.69 5.69 0.00 3.95 203,132
50 3.80 5.78 -1.98 4.08 199,494
100 1.84 5.84 -4.00 4.20 195,731
150 -0.14 5.89 -6.02 4.28 191,932
200 -2.10 5.92 -8.02 4.32 188,166
250 -4.02 5.95 -9.97 4.34 184,469
300 -5.92 5.98 -11.90 4.34 180,813
To summarize, a decrease in effective interest rates would result in an
increase in the fair value of the company's portfolio with an
offsetting increase (net of taxes) recorded in shareholders' equity.
Alternatively, an increase in interest rates would result in a
decrease in the fair value of the company's portfolio with an
offsetting decrease (net of taxes) recorded in shareholders' equity.
There can be no assurance that actual changes in interest rates will
have the effects as presented above, as this analysis includes
various assumptions, and changes in these assumptions, as well as
various other factors causing market volatility, could result in
material differences from the figures presented above.
LONG-TERM DEBT
During 1998, the company was exposed to changes in interest rates
through the company's revolving credit facility (Credit Agreement)
with Bank of America National Trust and Savings Association (B of A)
and a syndicate of banks. This exposure was primarily linked to the
adjusted London Interbank Offered Rate (LIBOR). The company's debt
under the Credit Agreement was subject to interest at 2.75 percent
above LIBOR and was adjusted monthly accordingly. A hypothetical 10
percent increase in LIBOR would have increased the company's
interest expense by $0.4 million during 1998. At December 31, 1998,
the company had $43.1 million outstanding under the Credit Agreement
(see Note 10 of the Notes to Consolidated Financial Statements for
further information related to the company's Credit Agreement). The
company expects to continue to denominate the borrowings under the
Credit Agreement as an offshore rate loan bearing interest at LIBOR
plus 2.75 percent. However, as an alternative, the company may
denominate the borrowings as a base rate loan which bears interest
at 1.75 percent above the higher of the latest federal funds rate
plus 0.5 percent or B of A's reference rate, which approximates the
prime rate. In either case, the applicable interest rate is
expected to be adjusted on a monthly basis. The maximum commitment
of the Credit Agreement was reduced to $43.1 million as of December
31, 1998, with $2.5 million quarterly reductions scheduled through
June 30, 2000, and the remaining commitment terminating on August
10, 2000. In addition, mandatory reductions to the commitment,
together with prepayments, are required upon the happening of
certain extraordinary events such as the issuance of debt securities
or the sale of a subsidiary.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Financial Statements:
<S> <C>
Page
Consolidated Balance Sheets, December 31, 1998, and 1997 53
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 54
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996 55
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 56
Notes to Consolidated Financial Statements 57
Reports of Independent Accountants 87
Financial Statement Schedule - Condensed Financial Information of Registrant 89
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On June 23, 1997, the company dismissed Price Waterhouse LLP (PW) as
its independent accountants. The reports of PW on the financial
statements for the fiscal year ended December 31, 1996, contained no
adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle.
The company's Audit Committee participated in and approved the
decision to change independent accountants. In connection with its
audits for the 1996 fiscal year and through June 23, 1997, there
were no disagreements with PW on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction
of PW would have caused them to make reference thereto in their
report on the financial statements for such year. During the 1996
fiscal year and through June 23, 1997, there have been no reportable
events (as defined in Regulation S-K Item 304(a)(1)(v)). The
company requested that PW furnish it with a letter addressed to the
SEC stating whether or not it agreed with the above statements. A
copy of such letter, dated June 27, 1997, was filed as Exhibit 16 to
the company's report on Form 8-K filed with the Securities and
Exchange Commission on June 30, 1997.
The company engaged Coopers & Lybrand L.L.P. (C&L) as its new
independent accountants as of June 23, 1997. During the 1996 fiscal
year and through June 23, 1997, the company had not consulted with
C&L regarding either (i) the application of accounting principles to
a specified transaction, either completed or proposed; or the type
of audit opinion that might be rendered on the company's financial
statements, and either a written report was provided to the company
or oral advice was provided that C&L concluded was an important
factor considered by the company in reaching a decision as to the
accounting, auditing or financial reporting issue; or (ii) any
matter that was either the subject of a disagreement, as that term
is defined in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K, or a reportable event,
as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
During 1998, PW and C&L merged to form PricewaterhouseCoopers LLP,
which the company has retained as its independent accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the heading "Election of Directors"
(except the information set forth under the subcaptions thereunder,
"Compensation of Directors" and "Meetings of Board and Committees")
and the information included under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance" in the company's
definitive Proxy Statement for the Annual Meeting of Shareholders to
be held May 11, 1999, is incorporated herein by reference.
Pursuant to General Instruction G(3) to Form 10-K, information as to
executive officers of the company is set forth in Part I of this
Form 10-K under separate caption.
ITEM 11. EXECUTIVE COMPENSATION
The information included under the headings "Executive Compensation and
Other Information" (except the information set forth under the
subcaptions thereunder, "Report of the Compensation Committee of the
Board of Directors" and "Company Performance") and "Election of
Directors - Compensation of Directors" in the company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held
May 11, 1999, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information included under the heading "Ownership of RightCHOICE
Capital Stock" in the company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 11, 1999, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Note 15, entitled "Transactions with Blue Cross and Blue Shield of
Missouri" of Part II, Item 8, Financial Statements and Supplementary
Data, contains financial information relating to the company's
transactions with BCBSMo.
The information included under the heading "Certain Transactions" in
the company's definitive Proxy Statement for the Annual Meeting of
the Shareholders to be held on May 11, 1999, is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
a) The following documents are filed as part of this report:
1) Financial Statements:
The financial statements required to be filed as part of this
Form 10-K Annual Report are set forth in the index in Part II, Item
8 of this report.
2) Financial Statement Schedules:
Page
The schedule required to be filed as part of this report
is as follows:
I. Condensed Financial Information of Registrant 89
Schedules not included herein have been omitted because of the absence
of conditions under which they are required or because the required
information, where material, is shown in the consolidated financial
statements or related notes thereto.
3) Exhibits
2 Conceptual framework for agreement to resolve litigation and
regulatory issues with the Missouri Department of Insurance and the
Missouri Attorney General (portion omitted pursuant to request for
confidential treatment) - Incorporated by reference - previously
filed as Exhibit 2 to the company's Form 10-Q for the period ending
March 31, 1998.*
2.1 Reorganization Agreement between the Registrant, Healthy
Alliance Life Insurance Company (HALIC) and Blue Cross and Blue
Shield of Missouri (BCBSMo) - Incorporated by reference - previously
filed as Exhibit 2.1 to the company's Form 10-K for the period
ending December 31, 1994.*
2.1.1 Supplement to the Reorganization Agreement between the
Registrant, Healthy Alliance Life Insurance Company (HALIC) and Blue
Cross and Blue Shield of Missouri (BCBSMo) - Incorporated by
reference - previously filed as Exhibit 2.1.1 to the company's Form
10-K for the period ending December 31, 1995.*
3.1 Articles of Incorporation of the Registrant - Incorporated by
reference - previously filed as Exhibit 3.1 to Registration
Statement on Form S-1 under the Securities Act of 1933 filed by the
Registrant. Registration Statement No. 33-77798.*
3.1.1 Amendment to Articles of Incorporation of the Registrant -
Incorporated by reference - previously filed as Exhibit 3.1.1 to
Registration Statement on Form S-1 under the Securities Act of 1933
filed by the Registrant. Registration Statement No. 33-77798.*
3.2.1 Amended and Restated Bylaws of the Registrant dated
October 27, 1997 - Incorporated by reference - previously filed as
Exhibit 3.2 to the company's Form 10-Q for the period ending
September 30, 1997.*
4.1 Specimen of Class A Common Stock Certificate of the Registrant
- - Incorporated by reference - previously filed as Exhibit 4.1 to
Registration Statement on Form S-1 under the Securities Act of 1933
filed by the Registrant. Registration Statement No. 33-77798.*
4.2 Specimen of Class B Common Stock Certificate of Registrant -
Incorporated by reference - previously filed as Exhibit 4.2 to
Registration Statement on Form S-1 under the Securities Act of 1933
filed by the Registrant. Registration Statement No. 33-77798.*
10.2 Reinsurance Agreement between the Registrant and BCBSMo -
Incorporated by reference - previously filed as Exhibit 10.2 to the
company's Form 10-K for the period ending December 31, 1994.*
10.3 Network Rental Agreement between the Registrant and BCBSMo -
Incorporated by reference - previously filed as Exhibit 10.3 to the
company's Form 10-K for the period ending December 31, 1994.*
10.4.1 Amended and Restated Administrative Services Agreement
between the Registrant and BCBSMo - Incorporated by reference -
previously filed as Exhibit 10.4.1 to the company's Form 10-K for
the period ending December 31, 1997.*
10.5.1 Amended and Restated Tax Allocation Agreement -
Incorporated by reference - previously filed as Exhibit 10.5.1 to
the company's Form 10-K for the period ending December 31, 1997.*
10.6.3 Letter Agreement with BCBSA regarding the issuance of Blue
Cross and Blue Shield licenses - Incorporated by reference -
previously filed as Exhibit 10.6.3 to the company's Form 10-K for
the period ending December 31, 1997.*
10.6.4 Blue Cross License Agreement between Blue Cross and Blue
Shield Association (BCBSA) and BCBSMo - Incorporated by reference -
previously filed as Exhibit 10.6.4 to the company's Form 10-K for
the period ending December 31, 1997.*
10.6.5 Blue Cross License Agreement between BCBSA and BCBSMo -
Incorporated by reference - previously filed as Exhibit 10.6.5 to
the company's Form 8-K filed on November 25, 1998.*
10.6.6 Addendum to Blue Cross License Agreement between BCBSA and
BCBSMo - Incorporated by reference - previously filed as Exhibit
10.6.6 to the company's Form 8-K filed on November 25, 1998.*
10.6.7 Summary of Approved Changes to the Blue Cross Primary
License Agreement.
10.7.3 Blue Shield License Agreement between BCBSA and BCBSMo -
Incorporated by reference - previously filed as Exhibit 10.7.3 to
the company's Form 10-K for the period ending December 31, 1997.*
10.7.4 Blue Shield License Agreement between BCBSA and BCBSMo -
Incorporated by reference - previously filed as Exhibit 10.7.4 to
the company's Form 8-K filed on November 25, 1998.*
10.7.5 Addendum to Blue Shield License Agreement between BCBSA
and BCBSMo - Incorporated by reference - previously filed as Exhibit
10.7.5 to the company's Form 8-K filed on November 25, 1998.*
10.7.6 Summary of Approved Changes to the Blue Shield Primary
License Agreement.
10.8.2 Blue Cross Controlled Affiliate License Agreement among
BCBSA, HMO Missouri, Inc., and BCBSMo - Incorporated by reference -
previously filed as Exhibit 10.8.2 to the company's Form 10-K for
the period ending December 31, 1997.*
10.8.3 Blue Cross Controlled Affiliate License Agreement among
BCBSA, BCBSMo, and HMO Missouri, Inc. - Incorporated by reference -
previously filed as Exhibit 10.8.3 to the company's Form 8-K filed
on November 25, 1998.*
10.8.4 Addendum to Blue Cross Controlled Affiliate License
Agreement among BCBSA, BCBSMo, and HMO Missouri, Inc. - Incorporated
by reference - previously filed as Exhibit 10.8.4 to the company's
Form 8-K filed on November 25, 1998.*
10.9.2 Blue Shield Controlled Affiliate License Agreement among
BCBSA, HMO Missouri, Inc., and BCBSMo - Incorporated by reference -
previously filed as Exhibit 10.9.2 to the company's Form 10-K for
the period ending December 31, 1997.*
10.9.3 Blue Shield Controlled Affiliate License Agreement among
BCBSA, BCBSMo, and HMO Missouri, Inc. - Incorporated by reference -
previously filed as Exhibit 10.9.3 to the company's Form 8-K filed
on November 25, 1998.*
10.9.4 Addendum to Blue Shield Controlled Affiliate License
Agreement among BCBSA, BCBSMo, and HMO Missouri, Inc. - Incorporated
by reference - previously filed as Exhibit 10.9.4 to the company's
Form 8-K filed on November 25, 1998.*
10.10.2 Blue Cross Controlled Affiliate License Agreement among
BCBSA, BCBSMo and the Registrant - Incorporated by reference -
previously filed as Exhibit 10.10.2 to the company's Form 10-K for
the period ending December 31, 1997.*
10.10.3 Blue Cross Controlled Affiliate License Agreement among
BCBSA, BCBSMo, and the Registrant - Incorporated by reference -
previously filed as Exhibit 10.10.3 to the company's Form 8-K filed
on November 25, 1998.*
10.10.4 Addendum to Blue Cross Controlled Affiliate License
Agreement among BCBSA, BCBSMo, and the Registrant - Incorporated by
reference - previously filed as Exhibit 10.10.4 to the company's
Form 8-K filed on November 25, 1998.*
10.10.5 Summary of Approved Changes to the Blue Cross Controlled
Affiliate License Agreement.
10.11.2 Blue Shield Controlled Affiliate License Agreement among
BCBSA, BCBSMo and the Registrant - Incorporated by reference -
previously filed as Exhibit 10.11.2 to the company's Form 10-K for
the period ending December 31, 1997.*
10.11.3 Blue Shield Controlled Affiliate License Agreement among
BCBSA, BCBSMo, and the Registrant - Incorporated by reference -
previously filed as Exhibit 10.11.3 to the company's Form 8-K filed
on November 25, 1998.*
10.11.4 Addendum to Blue Shield Controlled Affiliate License
Agreement among BCBSA, BCBSMo, and the Registrant - Incorporated by
reference - previously filed as Exhibit 10.11.4 to the company's
Form 8-K filed on November 25, 1998.*
10.11.5 Summary of Approved Changes to the Blue Shield Controlled
Affiliate License Agreement.
10.12.2 Blue Cross Controlled Affiliate License Agreement among
BCBSA, BCBSMo and HALIC - Incorporated by reference - previously
filed as Exhibit 10.12.2 to the company's Form 10-K for the period
ending December 31, 1997.*
10.12.3 Blue Cross Controlled Affiliate License Agreement among
BCBSA, BCBSMo, and Healthy Alliance Life Insurance Company (HALIC) -
Incorporated by reference - previously filed as Exhibit 10.12.3 to
the company's Form 8-K filed on November 25, 1998.*
10.12.4 Addendum to Blue Cross Controlled Affiliate License
Agreement among BCBSA, BCBSMo, and HALIC - Incorporated by reference
- - previously filed as Exhibit 10.12.4 to the company's Form 8-K
filed on November 25, 1998.*
10.13.2 Blue Shield Controlled Affiliate License Agreement among
BCBSA, BCBSMo and HALIC - Incorporated by reference - previously
filed as Exhibit 10.13.2 to the company's Form 10-K for the period
ending December 31, 1997.*
10.13.3 Blue Shield Controlled Affiliate License Agreement among
BCBSA, BCBSMo, and HALIC - Incorporated by reference - previously
filed as Exhibit 10.13.3 to the company's Form 8-K filed on November
25, 1998.*
10.13.4 Addendum to Blue Shield Controlled Affiliate License
Agreement among BCBSA, BCBSMo, and HALIC - Incorporated by reference
- - previously filed as Exhibit 10.13.4 to the company's Form 8-K
filed on November 25, 1998.*
10.16 Directors' Stock Option Plan of the Registrant -
Incorporated by reference - previously filed as Exhibit 10.18 to
Registration Statement on Form S-1 under the Securities Act of 1933
filed by the Registrant. Registration Statement No. 33-77798.*
10.17 Equity Incentive Plan of the Registrant - Incorporated by
reference - previously filed as Exhibit 10.19 to Registration
Statement on Form S-1 under the Securities Act of 1933 filed by the
Registrant. Registration Statement No. 33-77798.*
10.17.1 Amendment to Equity Incentive Plan of the Registrant -
Incorporated by reference - previously filed as Exhibit 10.19.1 to
the company's Form 10-K for the period ending December 31, 1994.*
10.20 Form of Indemnification Agreement between the Registrant
and its Directors and Officers (and list of parties who have
executed indemnification agreements) - Incorporated by reference -
previously filed as Exhibit 10.22 to Registration Statement on Form
S-1 under the Securities Act of 1933 filed by the Registrant.
Registration Statement No. 33-77798.*
10.21 Agreement of Indemnification between BCBSMo and the
Registrant and its subsidiaries - Incorporated by reference -
previously filed as Exhibit 10.23 to the company's Form 10-K for the
period ending December 31, 1994.*
10.22 Registrant Supplemental Executive Retirement Plan -
Incorporated by reference - previously filed as Exhibit 10.24 to
Registration Statement on Form S-1 under the Securities Act of 1933
filed by the Registrant. Registration Statement No. 33-77798.*
10.23 Registrant Executive Deferred Compensation Plan -
Incorporated by reference - previously filed as Exhibit 10.24 to
Registration Statement on Form S-1 under the Securities Act of 1933
filed by the Registrant. Registration Statement No. 33-77798.*
10.24 Amended Nonemployee Director Deferred Compensation Plan of
the Registrant - Incorporated by reference - previously filed as
Exhibit 10.26 to the company's Form 10-K for the period ending
December 31, 1994.*
10.30 Credit Agreement dated as of August 10, 1995 among
RightCHOICE Managed Care, Inc., as the Borrower, Bank of America
National Trust and Savings Association, as Administrative Agent.
The Boatmen's National Bank of St. Louis, as Co-Agent and the other
Financial Institutions Party Hereto arranged by BA Securities, Inc.
- - Incorporated by reference - previously filed as Exhibit 10.1 to
the company's Form 10-Q for the period ending June 30, 1995.*
10.30.1 First Amendment to the Credit Agreement. - Incorporated by
reference - previously filed as Exhibit 10.36.1 to the company's
Form 10-K for the period ending December 31, 1995.*
10.30.2 Consent and Second Amendment to the Credit Agreement -
Incorporated by reference - previously filed as Exhibit 10.36.2 to
the company's Form 10-K for the period ending December 31, 1995.*
10.30.3 Third amendment to the Credit Agreement - Incorporated by
reference - previously filed as Exhibit 10.2 to the company's Form
10-Q for the period ending June 30, 1996.*
10.30.4 Fourth amendment to the Credit Agreement - Incorporated by
reference - previously filed as Exhibit 10.36.4 to the company's
Form 10-K for the period ending December 31, 1996.*
10.30.5 Fifth amendment to the Credit Agreement - Incorporated by
reference - previously filed as Exhibit 10.36.5 to the company's
Form 10-K for the period ending December 31, 1996.*
10.30.6 Sixth amendment to the Credit Agreement - Incorporated by
reference - previously filed as Exhibit 10.36.6 to the company's
Form 10-Q for the period ending September 30, 1997.*
10.31 Lease between Forty-Four Forty-Four Forest Park
Redevelopment Corporation (Landlord) and RightCHOICE Managed Care,
Inc. (Tenant) dated January 1, 1995 - Incorporated by reference -
previously filed as Exhibit 10.2 to the company's Form 10-Q for the
period ending June 30, 1995.*
10.32 Sublease between RightCHOICE Managed Care, Inc. and Blue
Cross and Blue Shield of Missouri dated January 1, 1995 -
Incorporated by reference - previously filed as Exhibit 10.3 to the
company's Form 10-Q for the period ending June 30, 1995.*
10.33 Building Services Agreement between Forty-Four Forty-Four
Forest Park Redevelopment Corporation and RightCHOICE Managed Care,
Inc. dated January 1, 1995 - Incorporated by reference - previously
filed as Exhibit 10.4 to the company's Form 10-Q for the period
ending June 30, 1995.*
10.45 Executive Employment Agreement of John A. O'Rourke dated
February 27, 1997 - Incorporated by reference - previously filed as
Exhibit 10.51 to the company's Form 10-Q for the period ending
September 30, 1997.*,**
10.46 Executive Severance Agreement between the Registrant and
Edward J. Tenholder - Incorporated by reference - previously filed
as Exhibit 10.46 to the company's Form 10-K for the period ending
December 31, 1997.*,**
10.47 Executive Severance Agreement between the Registrant and
Sandra Van Trease - Incorporated by reference - previously filed as
Exhibit 10.47 to the company's Form 10-K for the period ending
December 31, 1997.*,**
10.48 Executive Severance Agreement between the Registrant and
Herbert B. Schneiderman - Incorporated by reference - previously
filed as Exhibit 10.48 to the company's Form 10-K for the period
ending December 31, 1997.*,**
10.49 Officer Severance Agreement between the Registrant and
Edward J. Tenholder - Incorporated by reference - previously filed
as Exhibit 10.49 to the company's Form 10-K for the period ending
December 31, 1997.*,**
10.50 Officer Severance Agreement between the Registrant and
Sandra Van Trease - Incorporated by reference - previously filed as
Exhibit 10.50 to the company's Form 10-K for the period ending
December 31, 1997.*,**
10.51 Officer Severance Agreement between the Registrant and
Herbert B. Schneiderman - Incorporated by reference - previously
filed as Exhibit 10.51 to the company's Form 10-K for the period
ending December 31, 1997.*,**
10.52 Form of Executive Severance Agreement between the
Registrant and certain senior vice presidents of the company (and
list of parties who have executed executive severance agreements) -
Incorporated by reference - previously filed as Exhibit 10.52 to the
company's Form 10-K for the period ending December 31, 1997.*,**
10.52.1 Updated list of certain senior vice presidents who have
executed executive severance agreements.**
10.53 Form of Officer Severance Agreement between the Registrant
and certain senior vice presidents of the company (and list of
parties who have executed officer severance agreements) -
Incorporated by reference - previously filed as Exhibit 10.53 to the
company's Form 10-K for the period ending December 31, 1997.*,**
10.53.1 Updated list of certain senior vice presidents who have
executed officer severance agreements.**
10.54 Form of Officer Severance Agreement between the Registrant
and certain vice presidents of the company (and list of parties who
have executed officer severance agreements) - Incorporated by
reference - previously filed as Exhibit 10.54 to the company's Form
10-K for the period ending December 31, 1997.*,**
10.54.1 Updated list of certain vice presidents who have executed
officer severance agreements.**
10.59.1 1999 Alliance Blue Cross Blue Shield Incentive Plan
between the Registrant and Herb Schneiderman.**
10.60.1 1999 Alliance Blue Cross Blue Shield Incentive Plan
between the Registrant and Mike Fulk.**
10.61.1 1999 Alliance Blue Cross Blue Shield / Blue Cross Blue
Shield of Missouri Incentive Plan between the Registrant and John
O'Rourke.**
10.62.1 1999 Alliance Blue Cross Blue Shield Incentive Plan
between the Registrant and Sandra Van Trease.**
10.63.1 1999 Blue Cross Blue Shield of Missouri Management
Incentive Plan between BCBSMo and Ed Tenholder.**
10.64 Guarantor Agreement between HMO Missouri, Inc. and Blue
Cross and Blue Shield of Missouri - Incorporated by reference -
previously filed as Exhibit 10.64 to the company's Form 10-K for the
period ending December 31, 1997.*
10.65 Line of Credit Agreement between HMO Missouri, Inc. and
Blue Cross and Blue Shield of Missouri - Incorporated by reference -
previously filed as Exhibit 10.65 to the company's Form 10-K for the
period ending December 31, 1997.*
10.66 Subordination Agreement between HMO Missouri, Inc. and
Blue Cross and Blue Shield of Missouri - Incorporated by reference -
previously filed as Exhibit 10.66 to the company's Form 10-K for the
period ending December 31, 1997.*
10.67 Agreement of Indemnification between Registrant and Blue
Cross and Blue Shield of Missouri - Incorporated by reference -
previously filed as Exhibit 10.67 to the company's Form 10-K for the
period ending December 31, 1997.*
10.68 Order of Reference dated November 6, 1998 - Incorporated
by reference - previously filed as Exhibit 10 to the company's Form
10-Q for the period ending September 30, 1998.*
10.69 Executive Severance Agreement between the Registrant and
Michael Fulk.**
10.70 Officer Severance Agreement between the Registrant and
Michael Fulk.**
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP with regard to the
Registrant's Registration Statements on Form S-8 - Registration
Statement No. 33-90608, Registration Statement No. 333-33293, and
Registration Statement No. 333-33317.
27 Financial Data Schedule (Electronic Filing Only).
99.1 Settlement Agreement, dated September 20, 1998, by and among
RightCHOICE Managed Care, Inc., Blue Cross and Blue Shield of
Missouri, the Missouri Department of Insurance and Jay B. Angoff,
its Director, and Jeremiah W. "Jay" Nixon, Attorney General of the
State of Missouri - Incorporated by reference - previously filed as
Exhibit 99(a) to the company's Form 8-K filed on September 23,
1998.*
99.2 Settlement Agreement, dated September 20, 1998, by and among
Jay B. Angoff, Director of the Department of Insurance of the State
of Missouri, HMO Missouri, Inc., d/b/a BlueChoice, and Healthy
Alliance Life Insurance Company - Incorporated by reference -
previously filed as Exhibit 99(b) to the company's Form 8-K filed on
September 23, 1998.*
99.3 Settlement Agreement, dated September 20, 1998, by and among
Jeremiah W. (Jay) Nixon, Attorney General, on behalf of the State of
Missouri, Blue Cross Blue Shield of Missouri, RightCHOICE Managed
Care, Inc., d/b/a BlueChoice, Healthy Alliance Life Insurance
Company and Preferred Health Plans of Missouri, Inc. - Incorporated
by reference - previously filed as Exhibit 99(c) to the company's
Form 8-K filed on September 23, 1998.*
99.4 Settlement Agreement, dated September 20, 1998, by and among
Healthy Alliance Life Insurance Company, the Director of Revenue of
the State of Missouri and the Director of the Department of
Insurance of the State of Missouri - Incorporated by reference -
previously filed as Exhibit 99(d) to the company's Form 8-K filed on
September 23, 1998.*
99.5 Amendment to Settlement Agreement, dated as of March 12, 1999,
by and among Jeremiah W. "Jay" Nixon, Attorney General of the State
of Missouri; the Missouri Department of Insurance and A. W.
McPherson, its acting director; Blue Cross and Blue Shield of
Missouri; and RightCHOICE Managed Care, Inc. - Incorporated by
reference - previously filed as Exhibit 99(a) to the company's Form
8-K filed on March 15, 1999.*
99.6 Order issued by Judge Thomas J. Brown, III of the Circuit Court
of Cole County, Missouri, in the case styled Blue Cross and Blue
Shield of Missouri, a Nonprofit Corporation v. Jay Angoff, Director,
Missouri Department of Insurance, and Jeremiah W. (Jay) Nixon,
Attorney General of State of Missouri, Cause No. CV196-0619CC, on
October 29, 1998 - Incorporated by reference - previously filed as
Exhibit 99(b) to the company's Form 8-K filed on November 2, 1998.*
99.7 Motion to Vacate Order - Incorporated by reference - previously
filed as Exhibit 99(a) to the company's Form 8-K filed on November
6, 1998.*
99.8 Memorandum in Support of Motion to Vacate - Incorporated by
reference - previously filed as Exhibit 99(b) to the company's Form
8-K filed on November 6, 1998.*
99.9 Complaint of Blue Cross and Blue Shield Association -
Incorporated by reference - previously filed as Exhibit 99(c) to the
company's Form 8-K filed on November 6, 1998.*
99.10 Order of the Circuit Court of Cole County, Missouri, dated
November 4, 1998 - Incorporated by reference - previously filed as
Exhibit 99(d) to the company's Form 8-K filed on November 6, 1998.*
99.11 Order of the Circuit Court of Cole County, Missouri, dated
November 4, 1998 - Incorporated by reference - previously filed as
Exhibit 99(e) to the company's Form 8-K filed on November 6, 1998.*
99.12 Order of Missouri Supreme Court dated November 24, 1998 -
Incorporated by reference - previously filed as Exhibit 99(a) to the
company's Form 8-K filed on November 25, 1998.*
*Document has previously been filed with the Securities and Exchange
Commission and is incorporated by reference and made a part hereof.
**Documents identified herein constitute all management contracts
and compensatory plans and arrangements required to be filed as an
exhibit pursuant to Item 14(c) of this Form.
b) Reports on Form 8-K:
The company filed a report with the SEC on Form 8-K on November 2,
1998, relating to an Order issued by Judge Thomas J. Brown, III of
the Circuit Court of Cole County, Missouri, in the case styled Blue
Cross and Blue Shield of Missouri, a Nonprofit Corporation v. Jay
Angoff, Director, Missouri Department of Insurance, and Jeremiah W.
(Jay) Nixon, Attorney General of State of Missouri, Cause No. CV196-
0619CC, on October 29, 1998 (the October 29 Order).
The company filed a report with the SEC on Form 8-K on November 6,
1998, relating to an Order issued by Judge Thomas J. Brown, III on
November 4, 1998, that set aside the October 29 Order and declared
it to be void ab initio.
The company filed a report with the SEC on Form 8-K on November 25,
1998, relating to the reinstatement of the company's licenses to use
the Blue Cross and Blue Shield service marks effective as of October
29, 1998.
The company filed a report with the SEC on Form 8-K on December 17,
1998, related to a suggested combination proposal announced at a
public hearing by Blue Cross and Blue Shield of Kansas City.
The company filed a report with the SEC on Form 8-K on February 12,
1999, relating to the recommendation made by the Special Master,
appointed by the Circuit Court of Cole County, Missouri, that the
Settlement Agreement "not be approved in its present form."
The company filed a report with the SEC on Form 8-K on March 15,
1999, relating to the Amendment to the Settlement Agreement and the
Joint Motion By All Parties and the Amici Curiae to Approve
Settlement Agreement.
The company filed a report with the SEC on Form 8-K on March 17,
1999, relating to Judge Thomas J. Brown III's statement that he has
continued concerns with the Settlement Agreement, as amended.
c) See Exhibits listed in Item 14 hereof and the Exhibits attached
as a separate section of this Form 10-K Annual Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated March 18, 1999 RightCHOICE Managed Care, Inc.
By: /s/ John A. O'Rourke
John A. O'Rourke
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ John A. O'Rourke Chairman of the Board, March 18, 1999
John A. O'Rourke President and Chief Executive
Officer
/s/ Sandra Van Trease Senior Executive Vice President, March 18, 1999
Sandra Van Trease Chief Operating Officer, Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
/s/ William H. T. Bush Director March 18, 1999
William H. T. Bush
/s/ Ronald G. Evens, M.D. Director March 18, 1999
Ronald G. Evens, M.D.
/s/ Earle H. Harbison, Jr. Director March 18, 1999
Earle H. Harbison, Jr.
/s/ Roger B. Porter, Ph.D. Director March 18, 1999
Roger B. Porter, Ph.D.
/s/ Norman J. Tice Director March 18, 1999
Norman J. Tice
/s/ Gloria W. White Director March 18, 1999
Gloria W. White
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
December 31,
ASSETS 1998 1997
Current assets:
Cash and cash equivalents $ 39,409 $ 29,872
Investments available for sale, at market value 208,281 220,972
Receivables from members 68,024 60,019
Receivables from related parties 18,294 16,130
Deferred income taxes 4,798 4,994
Other assets 19,818 14,410
Total current assets 358,624 346,397
Property and equipment, net 58,234 60,602
Deferred income taxes 11,583 12,737
Investments in affiliates 5,729 8,427
Goodwill and intangible assets, net 74,508 78,200
Total assets $508,678 $506,363
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims payable $109,986 $112,339
Unearned premiums 56,407 57,656
Accounts payable and accrued expenses 64,754 55,892
Current portion of long-term debt 10,000 2,000
Payables to related parties 26,194 20,213
Reserve for loss contract 9,052 9,052
Obligations for employee benefits 2,954 2,935
Income taxes payable 10,485 12,051
Obligations under capital leases 4,254 4,515
Total current liabilities 294,086 276,653
Reserve for loss contract 7,259 16,311
Long-term debt 33,063 45,000
Obligations for employee benefits 24,338 22,140
Obligations under capital leases 4,058 5,394
Total liabilities 362,804 365,498
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,
3,710,426 and 3,709,000 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 132,635 132,640
Retained earnings 12,313 6,653
Treasury stock, 27,074 and 28,500 Class A shares,
respectively, at cost (383) (404)
Accumulated other comprehensive income 1,122 1,789
Total shareholders' equity 145,874 140,865
Total liabilities and shareholders' equity $508,678 $506,363
See accompanying Notes to Consolidated Financial Statements.
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except shares and per share data)
For the year ended December 31,
1998 1997 1996
Revenues:
Premium $694,487 $654,267 $595,049
Fees and other income 73,025 65,144 58,326
Total revenues 767,512 719,411 653,375
Operating expenses:
Health care services 579,827 555,126 491,662
Commissions 31,394 29,302 26,808
General and administrative (excludes
depreciation and amortization and
excludes net intercompany charges of
$11,231, $8,356 and $11,731
respectively, allocated to
Blue Cross and Blue Shield of
Missouri) 140,304 140,064 128,990
Depreciation and amortization 19,334 23,108 14,960
Charge for loss reserves 29,510
Other non-recurring charges 900 3,301 4,534
Total operating expenses 771,759 780,411 666,954
Operating loss (4,247) (61,000) (13,579)
Investment income:
Interest and dividends 14,737 15,916 14,241
Realized gains, net 3,932 17,268 3,291
Total investment income, net 18,669 33,184 17,532
Other:
Interest expense (4,539) (4,681) (5,434)
Other (expense) income, net (379) (1,058) 114
Total other, net (4,918) (5,739) (5,320)
Income (loss) before provision
(benefit) for income taxes 9,504 (33,555) (1,367)
Provision (benefit) for income taxes 3,844 (9,521) 660
Net income (loss) $ 5,660 $(24,034) $(2,027)
Weighted average common shares
outstanding 18,672,100 18,672,600 18,678,700
Basic and diluted earnings
(loss) per share $ 0.30 $(1.29) $(0.11)
See accompanying Notes to Consolidated Financial Statements.
<TABLE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(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, 1995 $37 $150 $132,640 $32,714 $(266) $7,946 $173,221
Comprehensive loss:
Net loss (2,027) (2,027)
Change in unrealized appreciation
on available-for-sale securities, net
of income tax provision of $1,048 1,820 1,820
Comprehensive loss (207)
Purchase of 4,300 shares of
Class A Common Stock, at cost (60) (60)
Balance at December 31, 1996 37 150 132,640 30,687 (326) 9,766 172,954
Comprehensive loss:
Net loss (24,034) (24,034)
Change in unrealized appreciation
on available-for-sale securities, net
of income tax credit of $4,386 (7,977) (7,977)
Comprehensive loss (32,011)
Purchase of 5,400 shares of
Class A Common Stock, at cost (78) (78)
Balance at December 31, 1997 37 150 132,640 6,653 (404) 1,789 140,865
Comprehensive income:
Net income 5,660 5,660
Change in unrealized appreciation
on available-for-sale securities, net
of income tax credit of $147 (297) (297)
Minimum pension liability adjustment,
net of income tax credit of $199 (370) (370)
Comprehensive income 4,993
1,426 shares issued under the
company's stock option plan (5) 21 16
Balance at December 31, 1998 $37 $150 $132,635 $12,313 $(383) $1,122 $145,874
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31,
1998 1997 1996
Cash flows from operating activities:
Net income (loss) $ 5,660 $(24,034) $ (2,027)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Provision (credit) for deferred income
taxes 1,697 (6,507) 4,218
Depreciation and amortization 19,334 23,108 14,960
Loss (gain) on sale of property and
equipment 53 (44) 51
Undistributed losses (earnings) of
affiliates 48 916 (42)
Gain on sale of investments (3,932) (17,268) (3,291)
Accretion of discounts and amortization
of premiums, net 612 6 426
(Increase) decrease in certain assets, net
of effects from investment in affiliates:
Receivables from members (8,005) (5,182) 2,722
Receivables from related parties (2,164) 943 7,007
Other assets (4,556) (2,859) (9,148)
(Decrease) increase in certain
liabilities, net of effects from
investment in affiliates:
Medical claims payable (2,353) 506 25,986
Unearned premiums (1,249) 4,957 1,267
Accounts payable and accrued expenses 8,293 (13,065) 2,547
Payables to related parties 5,981 3,064 (5,025)
Reserve for loss contract (9,052) 25,363
Obligations for employee benefits 2,217 (33) (229)
Income taxes payable (1,566) (755) (10,301)
Net cash provided by (used in) operating
activities 11,018 (10,884) 29,121
Cash flows from investing activities:
Proceeds from matured investments:
Fixed maturities 20,359 3,975 9,187
Proceeds from investments sold:
Fixed maturities 273,591 311,599 246,728
Equity securities 40,734 20,535
Other 4,482 32,469
Investments purchased:
Fixed maturities (282,400) (340,366) (240,648)
Equity securities (548) (230) (22,542)
Other (796) (2,039) (2,275)
Investment in other affiliates, net of
cash acquired 24 (5,312)
Sale and redemption of affiliates 3,444 500
Proceeds from property and equipment sold 2,051 561 31
Property and equipment purchased (12,496) (18,544) (18,113)
Net cash provided by (used in) investing
activities 7,687 28,183 (11,909)
Cash flows from financing activities:
Sale (purchase) of Class A Treasury stock 16 (78) (60)
Payments of long-term debt (3,937) (15,000)
Payments of capital lease obligations (5,247) (5,767) (4,866)
Net cash used in financing activities (9,168) (20,845) (4,926)
Net increase (decrease) in cash and cash
equivalents 9,537 (3,546) 12,286
Cash and cash equivalents at beginning of
year 29,872 33,418 21,132
Cash and cash equivalents at end of year $ 39,409 $ 29,872 $ 33,418
Supplemental disclosure of cash information:
Interest paid $ 4,687 $ 5,036 $ 5,420
Income taxes paid (refund received), net 712 (2,262) 6,742
Supplemental schedule of noncash investing
and financing activities:
Equipment acquired through capital leases $ 4,325 $ 9,730 $ 2,738
Disposal of equipment under capital leases 675 2,810
See accompanying Notes to Consolidated Financial Statements.
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
1. ORGANIZATION
RightCHOICE Managed Care, Inc. (RightCHOICE or the company) is a
majority owned subsidiary of Blue Cross and Blue Shield of Missouri
(BCBSMo) incorporated in the State of Missouri. In connection with
the RightCHOICE August 1, 1994, initial public offering of Class A
Common Stock, BCBSMo transferred its managed health care business to
RightCHOICE. The holders of Class A Common Stock have one vote per
share and the holders of Class B Common Stock have 10 votes per share.
BCBSMo is the sole holder of Class B Common Stock. Each share of
Class B Common Stock is convertible into one share of Class A Common
Stock at the option of the holder at any time. At December 31, 1998,
BCBSMo and all holders of Class A Common Stock have control over
approximately 97.6 percent and 2.4 percent, respectively, of the
combined voting power of both classes of common stock. There are no
liquidation preferences between the two classes of common stock. The
company has not issued shares of its authorized Preferred Stock. In
addition, the company provides certain guarantees relating to the
financial stability of certain affiliates.
The company offers a comprehensive array of managed health care
products and services, including preferred provider organizations
(PPO), point-of-service networks (POS), health maintenance
organizations (HMO), Medicare supplement, specialty managed care
networks, selected comprehensive indemnity health coverage, third-
party administrator (TPA) services, and administrative services only
(ASO) for self-funded organizations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies used in
the preparation of the accompanying Consolidated Financial Statements.
Such policies are in accordance with generally accepted accounting
principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the
company and its subsidiaries, including Healthy Alliance Life
Insurance Company (HALIC), HealthLink, Inc. (HealthLink), HMO
Missouri, Inc. (BlueCHOICE), and RightCHOICE Insurance Company (RIC),
after elimination of all significant intercompany transactions.
Investments in other companies in which less than a majority interest
is held are accounted for under the equity or cost method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with an
original maturity of three months or less when purchased.
INVESTMENTS AVAILABLE FOR SALE
Unaffiliated investments with readily determinable fair values have
been classified as available-for-sale. Unrealized gains and losses
are computed on the basis of specific identification and are included
as other comprehensive income in the shareholders' equity section of
the balance sheet, net of applicable deferred income taxes. Realized
gains and losses on the disposition of investments are included in
investment income. The specific identification method is used in
computing the cost of debt and equity securities sold.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are
provided on the straight-line basis over the estimated useful life of
the respective assets, ranging from 30 years for buildings, 3 to 10
years for furniture and equipment, 3 to 5 years for capitalized
software development costs, and 5 to 10 years for leasehold
improvements.
Improvements are capitalized while expenditures for maintenance and
repairs are charged to expense as incurred. Realized gains and losses
are recognized upon disposal or retirement of the related assets and
are reflected in earnings. The company also capitalizes purchased and
internally developed software costs to the extent they are expected to
benefit future operations. Software amortization of such costs
commences when specific components are operational. Unamortized
software development cost as of December 31, 1998, and 1997 was
$33,853 and $33,029, respectively. Software amortization expense for
the years ended December 31, 1998, 1997, and 1996, was $7,701, $5,521,
and $671, respectively.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets represent the excess of cost over the
fair market value of net assets acquired in purchase transactions.
Gross goodwill and intangible assets (excluding related accumulated
amortization) was $85,975 and $86,744 as of December 31, 1998, and
1997, respectively, and is amortized on a straight-line basis over
periods not exceeding 40 years. Accumulated amortization on goodwill
and intangible assets as of December 31, 1998, and 1997 was $11,467
and $8,544, respectively. Amortization expense of the goodwill and
other intangibles aggregated $2,924, $7,487, and $5,045 in 1998, 1997,
and 1996, respectively, including the amortization of the intangibles
related to the purchase of HealthLink in 1995 of $2,769, $3,061, and
$3,279 in 1998, 1997, and 1996, respectively.
The company reviews the carrying value of goodwill, intangibles and
other long-lived assets for impairment when events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable. This review is performed by comparing estimated
undiscounted future cash flows from use of the asset to the recorded
value of the asset.
MEDICAL CLAIMS PAYABLE
In addition to the liability for processed but unpaid claims at period-
end, the company provides for the estimated amount of liability
arising from medical care provided to members, net of coordination of
benefit refunds, for claims still in process, as well as undischarged
and unreported claims. This estimate is based on current membership
statistics, claim run-off patterns and certain actuarial formulas.
The liability includes estimated processing expenses relating to such
claims. Such estimates are subject to revision; however, management
believes these estimates reasonably approximate actual costs.
REINSURANCE
In the normal course of business, the company cedes insurance to other
unrelated insurance carriers on an excess loss or quota share basis.
The company engages in such reinsurance activity to limit losses from
large exposures and to permit recovery of a portion of direct losses.
The company also reached a network access and financial reinsurance
agreement with Blue Cross and Blue Shield of Kansas City (BCBSKC)
designed to make the two companies more competitive in the Missouri
market. As a result of the agreements, members of either plan who are
enrolled through statewide employers or associations are able to use
the provider network of the Blue Cross and Blue Shield company where
they live. The impact of these reinsurance activities is not
significant to the Consolidated Financial Statements.
INCOME TAXES
The company utilizes the asset and liability method of accounting for
income taxes. This approach requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases
of assets and liabilities.
The company, along with its subsidiaries, files consolidated federal
and Missouri state income tax returns with BCBSMo. In accordance with
the federal tax-sharing agreement of the consolidated group, federal
income tax expense is allocated to the company and its subsidiaries
based upon the consolidated income generated by the company and its
subsidiaries.
DIVIDEND RESTRICTIONS
Missouri and Illinois insurance laws and regulations provide certain
restrictions on the payment of dividends by insurance companies in a
holding company structure. The Missouri and Illinois Directors of
Insurance may bring an action to enjoin or rescind the payment of any
dividend or distribution that would cause the insurance company's
statutory surplus to be unreasonable or inadequate. At December 31,
1998, the company's insurance subsidiaries (excludes HealthLink) did
not have a significant amount of dividends available for payment
without the prior approval of the Missouri or Illinois Directors of
Insurance.
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 17,924 dilutive potential common shares for
1998. Because 1997 and 1996 results reflect a net loss, basic and
diluted earnings per share are calculated based on the same weighted
average number of shares outstanding. The antidilutive potential
common shares that could dilute earnings per share in the future were
439,508, 469,766, and 573,428 as of December 31, 1998, 1997, and 1996,
respectively.
CONCENTRATION OF CREDIT RISK
The company primarily conducts business in the State of Missouri, and
a significant portion of its customer base is concentrated with
companies that are located in the metropolitan St. Louis area. No
single customer generates in excess of 10 percent of the company's
total revenue.
The company invests its excess cash in interest-bearing deposits with
major banks, commercial paper and money market funds. Although a
majority of the cash accounts exceed the federally insured deposit
amount, management does not anticipate non-performance by the other
parties. Management reviews the stability of these institutions on a
periodic basis.
Investments principally include U.S. Treasury and agency bonds and
fixed maturity bonds in a variety of companies A rated or better by
nationally recognized rating services. Investments in life insurance
contracts consist primarily of flexible premium variable life
products, invested in managed bond and equity funds, purchased from an
insurance company that has an A.M. Best rating of A+. Such credit
ratings are routinely reviewed by management.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for cash and cash equivalents, receivables, and
accounts payable approximates fair value because of the short maturity
of those instruments. The fair value of investments available for
sale at December 31, 1998, and 1997, determined based upon quoted
market prices, is disclosed in Note 4.
REVENUE RECOGNITION AND UNEARNED PREMIUMS
For most members, premiums are billed in advance of coverage periods
and are recorded as revenue over the period to which health care
coverage relates. Amounts billed but unearned are recorded as
unearned premiums. The company's TPA and ASO self-funded programs do
not involve the assumption of insurance or significant credit risks;
therefore, revenue from these programs is reflected in fees and other
income. During the years ended December 31, 1998, 1997 and 1996, the
company received reimbursements for claims paid of $50,558, $106,227,
and $132,449, respectively, from TPA and ASO self-funded groups.
NON-RECURRING CHARGES
During the fourth quarter of 1998, the company recorded a $0.9 million
charge related to the planned reduction of approximately 7.5 percent
of the company's workforce by June 1999. The company incurred charges
to earnings of $3.3 million and $4.5 million in 1997 and 1996,
respectively, for costs associated with moving the company's claims,
customer service, billing, and provider services functions from St.
Louis to Springfield, Missouri, and Cape Girardeau, Missouri. In
addition, during the third quarter of 1997, the company recorded a
$29.5 million loss reserve for estimated losses relating to its
contract with the Missouri Consolidated Health Care Plan (MCHCP). The
reserve is 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the Consolidated Financial
Statements for 1996 and 1997 to conform with the 1998 presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) released Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information," SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits," and SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 131 establishes standards for the
way public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. The new rules are effective
for the 1998 fiscal year. Abbreviated quarterly disclosure will be
required beginning the first quarter of 1999, with both 1999 and 1998
information. The new segment reporting requirements are reflected in
Note 14, "Segment information." SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates
certain disclosures that are no longer considered useful. The new
rules are effective for the 1998 fiscal year. The new reporting
requirements for pension and other postretirement benefit plans are
reflected in Note 12, "Employee benefit programs." SFAS No. 133
establishes standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position
and measures those instruments at fair value. SFAS No. 133 is
effective for all fiscal years beginning after June 15, 1999. Earlier
application of SFAS No. 133 is encouraged but should not be applied
retroactively to financial statements of prior periods. The company's
management has not yet assessed what the impact of SFAS No. 133 will
be on the company's future results of operations or financial
position.
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 company believes that the adoption of SOP 98-1 will 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's management has not yet assessed what the
impact of SOP 98-5 will be on the company's future results of
operations or financial position.
3. COMPREHENSIVE INCOME
As of January 1, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components.
SFAS No. 130 requires unrealized gains or losses on the company's
available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
The components of other comprehensive income related to the unrealized
gains or losses on the company's available-for-sale securities for the
years ended December 31, 1998, 1997, and 1996 are as follows:
Year ended December 31,
1998 1997 1996
Unrealized holding gains arising during
period, net of taxes $ 1,671 $ 3,163 $ 3,702
Less: reclassification adjustment for
gains included in net income, net of taxes (1,968) (11,140) (1,882)
Net unrealized (losses) gains on securities $ (297) $(7,977) $ 1,820
4. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale are summarized below:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
Cost gains losses value
<S> <C> <C> <C> <C>
December 31, 1998
Fixed maturities:
U.S. government and agency securities $ 92,281 $1,083 $(149) $ 93,215
Corporate bonds and notes 100,927 2,039 (587) 102,379
Short-term investments 5,249 5,249
198,457 3,122 (736) 200,843
Other invested assets 7,501 (63) 7,438
$205,958 $3,122 $(799) $208,281
December 31, 1997
Fixed maturities:
U.S. government and agency securities $ 89,582 $1,227 $ (29) $ 90,780
Corporate bonds and notes 105,128 1,724 (155) 106,697
Short-term investments 12,856 12,856
207,566 2,951 (184) 210,333
Other invested assets 10,639 10,639
$218,205 $2,951 $(184) $220,972
</TABLE>
Interest and dividend income comprises the following:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Interest on bonds $13,152 $12,822 $11,847
Dividends on stocks 112 102 1,295
Accretion of discounts and amortization of premiums, net (612) (6) (426)
Interest on cash equivalents and other investment income 2,712 3,697 2,353
Gross investment income 15,364 16,615 15,069
Investment expenses (627) (699) (828)
$14,737 $15,916 $14,241
</TABLE>
Realized gains on investments available for sale are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net realized gains:
Fixed maturities $ 3,054 $ 6,930 $ 516
Equity securities 10,338 2,380
$ 3,054 $17,268 $ 2,896
</TABLE>
In addition, during 1998, the company realized a $794 gain from the
sale of a subsidiary that was accounted for under the equity method
and an $84 gain from the sale of other assets. Proceeds from sales of
available-for-sale securities were $278,073, $384,802, and $267,263
during 1998, 1997, and 1996, respectively. Gross realized gains on
investments available for sale were $3,553, $19,203, and $3,819 during
1998, 1997, and 1996, respectively. Gross realized losses on
investments available for sale were $499, $1,935, and $923 during
1998, 1997, and 1996, respectively. Contractual maturities of fixed
maturity investments, excluding other invested assets (primarily
consisting of variable life insurance contracts), held on December 31,
1998, are as presented below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations.
Amortized Estimated
cost market value
Due in one year or less $ 21,458 $ 21,442
Due after one year through five years 63,903 64,198
Due after five years through 10 years 46,438 47,313
Due after 10 years 66,658 67,890
$198,457 $200,843
5. RECEIVABLES FROM MEMBERS
Receivables from members consist of the following:
December 31,
1998 1997
Individual subscribers $ 6,202 $ 9,394
Underwritten groups 40,109 35,369
Self-funded/ASO groups 21,713 15,256
$68,024 $60,019
Based on historical collection experience, the company considers its
receivables from members to be fully collectible; accordingly, no
allowance for doubtful accounts is recorded. If receivables become
uncollectible, they are charged against income using the direct write-
off method when that determination is made.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
December 31,
1998 1997
Land and building $ 4,338 $ 5,595
Furniture and equipment, including
capitalized leases 59,959 58,186
Capitalized software development costs 47,520 38,995
Leasehold improvements 3,914 3,607
115,731 106,383
Less accumulated depreciation
and amortization (57,497) (45,781)
$58,234 $60,602
Depreciation and amortization expense was $16,410, $15,621, and
$9,915, for the years ended December 31, 1998, 1997, and 1996,
respectively.
7. INVESTMENTS IN AFFILIATES
The company has a non-controlling, 50 percent interest in The EPOCH
Group, L.C. (Epoch). Epoch, a limited liability company, is not
consolidated with the company's operations and is accounted for using
the equity method. The combined annual revenues of Epoch were $22.9
million in 1998 and $21.1 million in 1997. Operating income (loss)
was $1.1 million and $(1.3) million in 1998 and 1997, respectively.
Undistributed earnings (losses) to the company for 1998 and 1997 were
$330 and $(664), respectively. Epoch serves approximately 260
businesses primarily in the Midwest as of December 31, 1998.
8. MEDICAL CLAIMS PAYABLE
Medical claims payable represents the amounts needed to provide for
the estimated ultimate cost of settling claims related to insured
events that have occurred on or before December 31. The payable is
estimated to include the amounts required for future payment of
medical claims that have been reported to the company, claims related
to insured events that have occurred but that have not been reported
to the company as of December 31, and claims adjustment expenses.
Claims adjustment expenses include costs incurred in the claim
settlement process such as costs to record, process and adjust claims.
Activity in medical claims payable is summarized as follows:
1998 1997
Balance at January 1 $112,339 $111,833
Incurred related to:
Current year 585,469 558,208
Prior years 3,410 1,065
Total incurred 588,879 559,273
Paid related to:
Current year 498,423 473,515
Prior years 92,809 85,252
Total paid 591,232 558,767
Net balance at December 31 $109,986 $112,339
The incurred amounts related to prior years represent the variations
between the company's estimated claims payable for prior years' claims
and the actual amounts required to satisfy such claims. In addition,
the company's health care services expense caption on the Consolidated
Statements of Income includes $9,052 and $4,147 for the amortization
of the company's loss reserve during 1998 and 1997, respectively.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31,
1998 1997
Accounts payable $23,470 $16,987
Accrued salaries and other expenses 13,010 10,355
Other accrued expenses 28,274 28,550
$64,754 $55,892
10. LONG-TERM DEBT AND COMMITMENTS
In August 1995, the company established a $125.0 million, five-year,
reducing revolving credit facility (the Credit Agreement) with Bank of
America National Trust and Savings Association (B of A) and a
syndicate of banks. At December 31, 1998, the company had $43.1
million outstanding under the Credit Agreement. The maximum
commitment of the Credit Agreement was reduced to $43.1 million as of
December 31, 1998, with $2.5 million quarterly reductions through June
30, 2000, and the remaining commitment under the Credit Agreement
terminating on August 10, 2000. In addition, mandatory reductions to
the commitment, together with prepayments, are required upon the
occurrence of certain extraordinary events such as the issuance of
debt securities or the sale of a subsidiary.
Borrowings under the Credit Agreement may be denominated, at the
option of the company, as base rate loans or offshore rate loans.
Base rate loans bear interest at B of A's base rate, which is 1.75
percent above the higher of the latest federal funds rate plus 0.5
percent or B of A's reference rate, which approximates the prime rate.
Offshore rate loans bear interest at 2.75 percent above the adjusted
London Interbank Offered Rate (LIBOR). At December 31, 1998, all of
the company's outstanding borrowings were in offshore rate loans. The
weighted average interest rate incurred by the company was 8.38
percent, 7.32 percent, and 6.69 percent in 1998, 1997, and 1996,
respectively.
As a condition to providing the Credit Agreement, the company pledged
the stock of its direct subsidiaries and a guaranty of repayment was
provided by HealthLink. In addition, the Credit Agreement establishes
certain covenants that restrict the company's ability to incur
additional indebtedness or pay cash dividends; limit future capital
contributions, investments, acquisitions, and capital expenditures,
and limitations on indebtedness of the company's subsidiaries; and
require the maintenance of certain financial ratios as well as a
minimum consolidated tangible net worth. As of the date of this
report, the company was in compliance with these covenants, as amended
by the company and the banking syndicate.
The company has an agreement with BCBSMo to lease certain office
space, including an operating lease for its headquarters facility (see
Note 15 entitled "Transactions with Blue Cross and Blue Shield of
Missouri"). The company also leases certain electronic data
processing equipment under noncancellable lease agreements, and these
leases are reflected in the Consolidated Financial Statements as
capital and operating leases.
The following is a schedule of future minimum rental payments required
under capital leases and under non-cancellable operating leases that
have initial or remaining terms in excess of one year together with
the present value of net minimum lease payments under capital leases
at December 31, 1998:
Capital Operating
Year ending December 31,
1999 $5,057 $9,906
2000 2,593 8,237
2001 900 7,369
2002 647 7,169
2003 269 6,441
Thereafter 8,123
Total minimum lease payments $9,466 $47,245
Less amount representing interest (1,154)
Present value of net minimum lease payments,
including current portion of $4,254 $8,312
Total rental expense for all operating leases, except those with terms
of one month or less that were not renewed, was $10,133, $9,900, and
$8,999, for the years ended December 31, 1998, 1997, and 1996,
respectively.
11. INCOME TAXES
The components of the provision (benefit) for income taxes are as
follows:
Year ended December 31,
1998 1997 1996
Current
Federal $ 2,652 $(3,771) $(3,965)
State (505) 757 407
2,147 (3,014) (3,558)
Deferred:
Federal 1,697 (6,507) 4,218
$ 3,844 $(9,521) $ 660
The effective tax rate, expressed as a percentage of pre-tax income
(loss), differs from the federal statutory rate as follows:
Year ended December 31,
1998 1997 1996
Tax provision (benefit) based on federal
statutory rate 35.0% (35.0)% (35.0)%
State income taxes, net of federal
provision (benefit) (5.3) 2.3 29.7
Goodwill amortization 6.8 2.2 51.0
Other 3.9 2.1 2.5
Effective tax provision (benefit) rate 40.4% (28.4)% 48.2%
The primary temporary differences that gave rise to deferred income taxes
were as follows:
December 31,
1998 1997
Deferred tax assets:
Capitalized software $ 4,149 $ 3,936
Medical claims payable discounting 1,501 1,527
Employee benefits 9,036 8,633
Unearned premiums 3,767 3,980
Other capitalized expenses 2,429 2,534
Loss reserve accrual 5,709 8,877
Depreciation and amortization 69
Other 8,067 6,124
Total deferred tax assets 34,727 35,611
Deferred tax liabilities:
Depreciation and amortization 2,855
Pension 1,126 1,126
IOS expense 8,983 8,755
Unrealized appreciation of securities 832 979
Other tax-deductible expenses 7,293 4,053
Total deferred tax liabilities 18,234 17,768
Valuation allowance (112) (112)
Net deferred tax asset $16,381 $17,731
SFAS No. 109, "Accounting for Income Taxes," requires a valuation
allowance against deferred tax assets if, based on the weight of
available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. The company believes that
uncertainty exists with respect to the future realization of the
undistributed losses of minority-owned subsidiary companies.
Therefore, the company maintained a valuation allowance relating to
such items of $112 as of December 31, 1998, and 1997. Based upon all
the available evidence, management believes it is more likely than not
that the company will realize its remaining deferred tax assets and,
accordingly, no valuation allowance has been provided against such
remaining assets as of December 31, 1998, and 1997.
12. EMPLOYEE BENEFIT PROGRAMS
PENSION PLAN
The company and its subsidiaries participate in a defined benefit
pension plan covering substantially all company employees (excluding
HealthLink employees) who meet the plan eligibility requirements as to
age and length of service. The national Blue Cross and Blue Shield
Association (BCBSA) is responsible for administration of this defined
benefit pension plan. The benefits are based on years of service and
average annual compensation for the employee's highest consecutive
five of the last 10 years.
Net periodic pension cost for the company includes the following components:
Year ended December 31,
1998 1997 1996
Service cost $1,834 $1,802 $1,812
Interest cost 2,989 2,814 2,472
Expected return on plan assets (3,211) (2,770) (4,657)
Amortization of transition asset (304) (304) (304)
Amortization of prior service cost (230) (230) (300)
Amortization of actuarial loss 2,209
Net periodic pension cost $1,078 $1,312 $1,232
Other components (included in
non-recurring charges):
Curtailment gain $(816)
Special termination benefits $ 198
The following tables present the status of the company's pension
benefits:
December 31,
1998 1997
Change in benefit obligation:
Benefit obligation at beginning of year $43,122 $36,805
Service cost 1,834 1,802
Interest cost 2,989 2,814
Benefit payments (1,324) (1,166)
Actuarial losses 3,115 2,669
Special termination benefits 198
Benefit obligation at end of year $49,736 $43,122
December 31,
1998 1997
Change in plan assets:
Fair value of plan assets at beginning of year $40,264 $33,869
Actual return on assets 6,040 6,841
Employer contributions 720
Benefit payments (1,324) (1,166)
Fair value of plan assets at end of year $44,980 $40,264
The funded status of the company's pension plan and the amount
recorded as accrued pension cost consist of the following:
December 31,
1998 1997
Unfunded status $ 4,756 $ 2,858
Unrecognized actuarial gain 3,825 4,177
Unrecognized transition asset 588 892
Unrecognized prior service cost 282 446
Accrued pension cost $ 9,451 $ 8,373
Weighted average assumptions used in the development of pension data as
of December 31 are as follows:
1998 1997
Discount rate 6.75% 7.25%
Expected long-term rate of return on assets 9.0 9.0
Rates of increase in compensation levels 3.0-6.5 3.5-7.0
HealthLink provides a defined contribution pension plan covering
substantially all HealthLink employees who meet the plan eligibility
requirements as to age and length of service. HealthLink contributes
an amount equal to 4 percent of participating employees' annual base
compensation levels. Additional amounts can be contributed at the
company's discretion. HealthLink's pension expense during 1998, 1997,
and 1996, was $377, $368, and $245, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The company provides certain health care and life insurance benefits
for retired and terminated employees (excluding HealthLink employees).
Substantially all of the company's employees may become eligible for
those benefits if they reach normal retirement age while working for
the company. The health care and life insurance benefits for retired
employees are provided through insurance companies whose premiums are
based on the benefits paid during the year. The estimated cost of
retiree benefit payments other than pensions is accrued over the
period such benefits are earned.
The net periodic cost for postretirement benefits includes the
following components:
Year ended December 31,
1998 1997 1996
Service cost $ 671 $ 522 $ 457
Interest cost 1,165 1,171 1,088
Amortization of prior service cost (25) (6) (6)
Amortization of actuarial loss 130 82 85
Net periodic postretirement cost $1,941 $1,769 $1,624
The amortization of any prior service cost is determined using a
straight-line amortization over the average remaining service period
of employees expected to receive benefits under the plan as permitted
by SFAS No. 106.
The assumed discount rate is 6.75 and 7.25 percent for 1998 and 1997,
respectively. The rate of compensation increase is assumed to be 4.0
percent for 1998 and 1997. The health care cost trend rate is assumed
to be 6.5 percent for 1998, 6.0 percent for 1999, and 5.5 percent for
2000 and thereafter. A one percentage point change in the assumed
trend rate would have the following effects as of December 31, 1998:
One One
percent percent
increase decrease
Effect on postretirement accumulated benefit obligation $1,123 $(966)
Effect on total service and interest cost components $152 $(129)
The company's postretirement benefit plan is currently not funded.
The following table presents the status of the company's
postretirement benefits:
December 31,
1998 1997
Change in accumulated benefit obligation:
Accumulated benefit obligation at beginning of year $16,860 $15,069
Service cost 671 522
Interest cost 1,165 1,171
Plan amendments (394)
Curtailment gain (169)
Benefit payments (1,214) (1,292)
Actuarial losses 1,282 1,559
Accumulated benefit obligation at end of year $18,370 $16,860
Change in plan assets:
Fair value of plan assets at beginning of year $ 0 $ 0
Employer contributions 1,214 1,292
Benefit payments (1,214) (1,292)
Fair value of plan assets at end of year $ 0 $ 0
The funded status and (accrued)/prepaid cost of the company's
postretirement plan consist of the following:
December 31,
1998 1997
Unfunded status $18,370 $16,860
Unrecognized actuarial gain 345 (23)
Unrecognized prior service cost (5,233) (4,081)
Accrued postretirement benefit cost $13,482 $12,756
POSTEMPLOYMENT BENEFITS
The company also provides certain severance benefits for employees who
involuntarily terminate their employment and long-term disability
benefits for employees who are disabled. Severance benefits include
salary continuation, medical benefits and career transition benefits.
Disability benefits include life insurance, medical coverage and
salary continuation. Disability coverage for salary continuation is
provided under the National Trust of Blue Cross and Blue Shield, which
is administered by the BCBSA.
Postemployment benefits are accrued if attributable to service already
rendered, if the benefits accumulate or vest, if payment is probable
and if the amounts can be reasonably estimated. Postemployment
benefit expense was $1,150, $688, and $940 for 1998, 1997, and 1996,
respectively.
STOCK-BASED COMPENSATION PLANS
The company provides an Equity Incentive Plan and a Directors' Stock
Option Plan (the plans), which allow for the annual grant of stock
options in the form of incentive stock options, non-qualified stock
options and restricted stock grants, and are further described below.
The company applies APB Opinion 25 and related interpretations in
accounting for these plans. Accordingly, no compensation cost has
been recognized for these plans. Had compensation cost for the
company's plans been determined consistent with SFAS No. 123, the
company's net income (loss) and earnings (loss) per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year 1998 1997 1996
<S> <C> <C> <C> <C>
Net income (loss) As reported $5,660 $(24,034) $(2,027)
Pro forma $4,917 $(24,677) $(2,346)
Basic and diluted earnings (loss) per share As reported $0.30 $(1.29) $(0.11)
Pro forma $0.26 $(1.32) $(0.13)
</TABLE>
As of December 31, 1998, the maximum number of shares subject to
options and grants under the Equity Incentive Plan and Directors'
Stock Option Plan is 1 million and 60,000, respectively. A proposal
to increase the number of options available under the Equity Incentive
Plan to 1.5 million will be voted upon by the shareholders at the
company's annual meeting to be held on May 11, 1999. The exercise
price of each option equals the market price of the company's stock on
the date of grant and an option's maximum term is 10 years. Options
vest by the end of the third year.
The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for option grants in 1998, 1997, and
1996, respectively: expected volatility of 35, 34, and 34 percent;
risk-free interest rates of approximately 6 percent; and expected
lives of 6.5 years. In addition, for all three years, no dividend
yield was assumed.
A summary of the status of the plans as of December 31, 1998, 1997,
and 1996 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
Number of Weighted-average Weighted-average
shares exercise price fair value
<S> <C> <C> <C>
Outstanding at December 31, 1995 229,839 $12.80
Granted 408,708 $12.37 $5.70
Forfeited (65,119) $13.20
Outstanding at December 31, 1996 573,428 $12.45
Granted 310,787 $10.91 $5.18
Forfeited (414,449) $11.77
Outstanding at December 31, 1997 469,766 $12.03
Granted 292,366 $9.68 $4.59
Exercised (1,426) $10.81
Forfeited (58,003) $11.17
Outstanding at December 31, 1998 702,703 $11.13
</TABLE>
There were 198,920 and 105,413 options exercisable at December 31,
1998, and December 31, 1997, respectively. There were no options
exercisable at December 31, 1996. There were no options exercised
during 1997 and 1996. The pro forma disclosures included above may
not be representative of the effects on reported net income or loss
for future years.
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
/------------ Options Outstanding --------------/ /------Options Exercisable-----/
Weighted
Range of Number Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
<S> <C> <C> <C> <C> <C>
$9 to $12 538,026 9.2 years $10.26 153,429 $10.95
$13 to $18 164,677 8.0 years $13.94 45,491 $16.25
$9 to $18 702,703 9.0 years $11.13 198,920 $12.16
</TABLE>
OTHER BENEFIT PLANS
The company provides a pre-tax 401(k) plan covering substantially all
company employees. The company recognized expenses of $1,144, $1,083,
and $1,123 during 1998, 1997, and 1996, respectively, for costs
related to this plan. The company also provides an incentive program
to key management personnel for the achievement of corporate and
individual goals, a sales incentive program to encourage exceptional
performance in marketing to and servicing clients, and a supplemental
executive retirement plan (SERP) for certain executives. The cost of
providing these programs is not significant to the company's overall
results of operations. At December 31, 1998, the company had a
minimum pension liability adjustment of $569 related to the SERP that
is included as a component of the company's other comprehensive income
on the Consolidated Balance Sheet.
13. CONTINGENCIES
OPM AUDIT
The company, through its subsidiary, HMO Missouri, Inc. (BlueCHOICE),
contracts with the Office of Personnel Management (OPM) to provide or
arrange for health services to federal employees under the Federal
Employees Health Benefits Program (FEHBP). FEHBP is the second
largest customer group of BlueCHOICE after the Missouri Consolidated
Health Care Plan (MCHCP). OPM conducts periodic audits to, among
other things, verify that the premiums established under the OPM
contract were established in compliance with the community rating or
experience rating and other requirements under the FEHBP.
On August 8, 1995, the company received a draft audit report from the
OPM regarding the audit, conducted in 1994, of the FEHBP operations of
BlueCHOICE for the years 1989 through 1994. The audit dealt primarily
with a comparison of premium rates charged to the FEHBP to rates
charged by BlueCHOICE to other similarly sized groups. The OPM draft
audit report indicates that BlueCHOICE has a potential liability of
$7.5 million to the FEHBP. The company responded to the draft report
in November of 1995 following an in-depth analysis of the issues. In
March 1998, BlueCHOICE received correspondence from the U.S.
Department of Justice requesting a meeting with BlueCHOICE regarding
in excess of $6.5 million in payments (alleged overcharges) received
during the reconciliation process for the years 1990 through 1994,
plus interest thereon. If it is found that BlueCHOICE knowingly
received overpayments, it could be subject to civil penalties of up to
ten thousand dollars per certified reconciliation statement, treble
damages for the amount of such overcharges and interest. Although
management has met with the OPM and Department of Justice with respect
to this matter, at this time, management is unable to determine the
final dollar amount that may be required to resolve the audit
findings. There can be no assurance that the resolution of these
findings will not have a material adverse effect on the company and
the market for the company's stock.
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 Blue Cross
and Blue Shield of Missouri (BCBSMo, the class B shareholder of the
company) 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 who 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 seek 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.
The obligations of the parties to consummate the transactions
contemplated by the settlement agreements, as amended, described below
under "Agreement for settlement of certain litigation matters and
reorganization of the company" are conditioned upon, among other
things, satisfactory final resolution of the Sarkis Litigation.
The Sarkis plaintiffs have also filed a motion to intervene in the
actions described below under "Agreement for settlement of certain
litigation matters and reorganization of the company."
AGREEMENT FOR SETTLEMENT OF CERTAIN LITIGATION MATTERS AND
REORGANIZATION OF THE COMPANY
Status of Proposed Settlement Agreements
On September 20, 1998, the company and certain of its affiliates
entered into various settlement agreements with certain state
agencies, including the Missouri Department of Insurance (DOI), the
Director of the DOI, and the Missouri Attorney General. On March 12,
1999, the company, BCBSMo, the Missouri Attorney General and the DOI
entered into an Amendment to Settlement Agreement (the amendment) in
an effort to address the concerns of the special master (see
"Appointment of special master" below). On March 15, 1999, Judge
Thomas J. Brown III of the Circuit Court of Cole County, Missouri
stated on the record during an informal status hearing that he has
continued concerns about the settlement agreements, as amended. The
settlement agreements, as amended, which are based upon a conceptual
framework announced by the company and BCBSMo on April 22, 1998,
would, if consummated, resolve all outstanding litigation and
regulatory issues between the company and its affiliates and the State
of Missouri, including the DOI and the Missouri Attorney General, and
create a charitable health care foundation that would be managed by an
independent board of directors. The litigation between the company
and its affiliates and the State of Missouri is described below.
The principal terms of the settlement agreements, as amended, include
the following:
o BCBSMo would, through a series of transactions set forth in the
settlement agreements, as amended, and the related exhibits, (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. The outstanding common stock of the
resulting entity (referred to herein as new RightCHOICE) would be
owned approximately 20 percent by the company's current public
shareholders and approximately 80 percent by the charitable foundation
(which equals the current aggregate ownership interests of the public
shareholders and BCBSMo, respectively, in the equity of the company).
o BCBSMo would pay $12.78 million to the charitable foundation.
o The charitable foundation would be required to liquidate its
shares of new RightCHOICE stock over a prescribed period of time and
use the proceeds for health care purposes. The charitable 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. All but up to 5
percent of the shares of new RightCHOICE stock owned by the charitable
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 foundation in the board of
directors of new RightCHOICE.
o As a for-profit direct licensee for the Blue Cross and Blue
Shield names and trademarks, new RightCHOICE would be required to
include certain "basic protections" in its charter documents and it
would be required to be independent from the direction, control and
influence of the charitable foundation. 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
foundation as described above). The charter documents of new
RightCHOICE would include certain provisions whereby any shares owned
by a shareholder in excess of the applicable ownership limits could be
redistributed by new RightCHOICE.
The consummation of the transactions contemplated by the settlement
agreements, as amended, is subject to a number of significant
conditions and contingencies, including approval by the Circuit Court
of Cole County, Missouri (the Circuit 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 above,
which was dismissed by the St. Louis Circuit Court on November 4,
1998, but is on appeal).
The settlement agreements, as amended, 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 settlement
agreements, as amended, and the proposed reorganization described
therein. See "-Litigation relating to the Reorganization and Public
Offering" below.
BCBSMo, the Missouri Attorney General, the DOI and the amici curiae
filed with the Circuit Court on March 12, 1999, a Joint Motion By All
Parties and the Amici Curiae to Approve Settlement Agreement
acknowledging their approval of the terms of the settlement
agreements, as amended, and requesting the Circuit Court to approve
the settlement agreements, as amended.
The summary of the settlement agreements, as amended, set forth herein
is qualified in its entirety by reference to the settlement agreements
and the exhibits thereto, which are included as exhibits to the
company's Current Report on Form 8-K filed with the SEC on September
23, 1998, and the amendment to the settlement agreements, which is
included as exhibit 99(a) to the company's Current Report on Form 8-K
filed with the SEC on March 15, 1999.
Appointment of Special Master
Following the announcement by the company and BCBSMo on April 22, 1998
of the conceptual framework for the proposed settlement with the State
of Missouri, Judge Thomas J. Brown III 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 described above were
executed, and courtesy copies were provided to the Circuit Court. The
company and BCBSMo had intended that following the remand to the
Circuit Court of the litigation relating to the Reorganization and
Public Offering described below, the company and BCBSMo together with
the DOI and Missouri Attorney General would file a motion with the
Circuit Court seeking approval of the settlement agreements and the
proposed reorganization described therein.
On October 29, 1998, notwithstanding the fact that the litigation
relating to the Reorganization and Public Offering had not yet been
remanded to the Circuit Court, the Circuit Court, "acting on its own
motion" issued an Order (the October 29 Order) providing 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. Although the October 29 Order did not
constitute the appointment of a receiver/custodian over the operations
of either the company or BCBSMo, had it not been void from the
beginning as alleged by BCBSMo and as declared by the Circuit Court as
described below, the October 29 Order could have had several
significant and adverse consequences, 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 its Motion to Vacate Order and its
Memorandum in Support of Motion to Vacate in response to the October
29 Order. BCBSMo alleged that (i) the Circuit Court lacked
jurisdiction to issue the October 29 Order because the case was still
pending before the Missouri Supreme Court, which had not then ruled on
the application of BCBSMo to transfer to 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) that 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 to Vacate Order and Memorandum in Support of Motion to
Vacate 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, the Blue Cross and Blue Shield Association (the
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 under "Status of
Blue Cross and Blue Shield trademark licenses" below).
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 has
expressed his interest in ensuring that the company continues 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 was 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 March 11, 1999, unless
extended by the Board of Directors of the BCBSA. On March 11, 1999,
the BCBSA Board of Directors extended the licenses until June 17,
1999. See "Status of Blue Cross and Blue Shield trademark licenses"
below.
The special master conducted hearings on December 4, December 16, and
December 22, 1998, and on February 4, 1999, at which evidence related
to the proposed settlement and other subjects was presented.
On February 10, 1999, the special master recommended that the proposed
settlement agreement "not be approved in its present form" and
recommended 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 by the special master in a 47-page
report (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 has concerns with its terms
that prevent him from recommending approval. Among the concerns he
identified in his report are:
o Whether the public health foundation that would be created if the
settlement were implemented would receive full value of the present
assets of BCBSMo;
o Whether a contemplated method of divestiture of the new RightCHOICE
shares to be held by the public health 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;
o Whether the proposed provisions for governance of the public health
foundation are reasonable; and
o Whether the provisions for the purposes of the public health
foundation are justified.
Following the 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). BCBSMo,
the Missouri Attorney General, the DOI, and the amici curiae filed
with the Circuit Court on March 12, 1999 a Joint Motion by All Parties
and the Amici Curiae to Approve Settlement Agreement acknowledging
their approval of the terms of the settlement agreements, as amended,
and requesting the Circuit Court to approve the settlement agreements,
as amended.
On March 12, 1999, BCBSMo also filed with the Circuit Court Objections
of Plaintiff Blue Cross and Blue Shield of Missouri to Report of the
Special Master asserting that the special master made certain
erroneous factual and unjustified legal conclusions in the Report of
the Special Master and requesting the Circuit Court to approve the
settlement agreements, as amended.
On March 15, 1999, Circuit Court Judge Thomas J. Brown III expressed
continued concern about the settlement agreements, as amended, during
an informal status hearing.
There can be no assurance that the transactions contemplated by the
settlement agreements, as amended, will receive the necessary court
approval as an acceptable alternative to dissolution of BCBSMo, that
all conditions and contingencies included in the settlement
agreements, as amended, will be satisfied, or that the transactions
set forth in the settlement agreements, as amended, will be effected.
The failure to consummate the transactions contemplated by the
settlement agreements, as amended, could have a material adverse
effect on the company and the market for its stock.
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 exhibits 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.
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 settlement agreements,
as amended, are consummated. There can be no assurance that such
transactions will be consummated. 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
In August 1994, BCBSMo transferred certain assets to the company in
connection with an offering to the public of 20 percent of the common
stock of the company (such events are referred to collectively as the
Reorganization and Public Offering). Although the Director of the DOI
(the Director) formally approved the Reorganization and Public
Offering on April 14, 1994, the Director and 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, to the State of Missouri or
a charity designated by the State of Missouri. The Director and the
DOI threatened to bring legal action, seek a receivership or terminate
BCBSMo's insurance license unless BCBSMo gave up its assets.
BCBSMo's extensive efforts to resolve the dispute without litigation
were unsuccessful. On May 13, 1996, BCBSMo filed a declaratory
judgment action in the Circuit Court against the Director, 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).
On June 13, 1996, the Director and 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 Director's and 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
the 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 Director and the DOI, rejected all of the
Director's and the DOI's affirmative defenses (including allegations
of fraud), issued a permanent injunction against the Director and the
DOI and declared that: (i) under Missouri law the Director and 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
Director and the DOI had no jurisdiction to take any action, the
practical effect of which would be to amend, modify or reverse the
Director's April 14, 1994, final administrative approval of the
Reorganization and Public Offering; (iii) under Missouri law, the
Director and the DOI 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 and the consequences thereof or
BCBSMo's refusal to make payment as the Director and 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 August 1994 Reorganization and Public
Offering (the September 9 Order). On December 30, 1996, the Circuit
Court issued orders (the December 30 Orders) modifying the findings
and declarations set forth in (iv) above, on the grounds that it was
legally unnecessary to resolve such issues since the Circuit Court had
already ruled against the Director and the DOI for other reasons.
The September 9 Order permanently enjoined the Director and 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 Director and 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 Director and the DOI filed an amended answer
asserting a new counterclaim that the Reorganization and Public
Offering were not reasonably designed to serve any of BCBSMo's
purposes as a health services corporation and sought a declaration
that BCBSMo had exceeded or abused the authority conferred upon it by
law. Under this counterclaim, the Director and 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 Director and the DOI on their amended counterclaim; (iv)
granting the Director's and 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 as described
above. 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 Director and the DOI summary judgment pending the
filing of an appeal bond (which BCBSMo promptly filed).
On January 9, 1997, BCBSMo filed a notice of appeal of the December 30
Orders. On January 21, 1997, the Director and the DOI filed a notice
of appeal of the September 9 Order, as modified. Oral arguments were
heard by the Missouri Court of Appeals on February 24, 1998. 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 certain state
agencies, including the Missouri Attorney General and the DOI,
described above under "Status of Proposed Settlement Agreements,"
which, if consummated, 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 the Public Offering, and create an independent
health care foundation.
On September 22, 1998, the application of BCBSMo in the Missouri Court
of Appeals for rehearing and alternatively for transfer of the case to
the Supreme Court of Missouri was denied. On October 7, 1998, BCBSMo
requested that the Supreme Court of Missouri accept transfer of the
case.
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,
(described above) has been vacated. The Missouri Supreme Court will
now decide the appeals as if they were original appeals in that Court.
If the Missouri Supreme Court had denied the request for transfer, the
opinion of the Missouri Court of Appeals dated August 4, 1998, would
have become final without modification, and the case would have been
remanded to the Circuit Court for further proceedings to determine the
remedy for the violation of BCBSMo statutory purposes that, as
described above, the Circuit Court previously found to have occurred.
The Supreme Court of Missouri subsequently stayed the briefing
schedule in the proceedings before it in order to permit the
proceedings in the Circuit Court concerning review of the settlement
agreements to go forward.
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 Director of 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 procedure. They contended that they
were entitled as of right to disqualify the Hon. Thomas J. Brown, III
from further proceedings in the action. The 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.
On November 5, 1998, Sarkis and Hacking gave notice of their intent to
file an original proceeding in the Missouri Court of Appeals
prohibiting Judge Brown from proceeding further in the case. The
Missouri Court of Appeals denied that application. Sarkis and Hacking
then applied to the Supreme Court of Missouri, which also denied their
application. This litigation remains pending before Judge Brown and
discovery is underway.
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 in this section "Agreement for settlement of
certain litigation matters and reorganization of the company." 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 company's
shares of Class B Common Stock 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 findings 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 Director 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 into making the payments as
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 new action if
required. The DOI has issued a stay of the market conduct proceeding
pending approval of the settlement agreements, as amended, described
herein.
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 settlement agreements, as
amended, described herein.
STATUS OF BLUE CROSS AND BLUE SHIELD TRADEMARK LICENSES
On March 11, 1999, the Board of Directors of the Blue Cross and Blue
Shield Association (the BCBSA) unanimously voted to extend the
company's licenses to use the Blue Cross and Blue Shield service marks
until June 17, 1999. Previously, at a meeting held on November 19,
1998, the Board of Directors of BCBSA approved the reinstatement,
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, Healthy Alliance
Life Insurance Company and HMO Missouri, Inc. (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 (as described above under "Appointment of Special
Master").
The October 29 Order 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 BCBSMo Complaint).
On November 4, 1998, after BCBSMo filed its Motion to Vacate Order and
its Memorandum in Support of Motion to Vacate in response to the
October 29 Order, the Circuit Court issued two orders (the November 4
Orders). The first order set aside the October 29 Order and declared
it to be void ab initio, or "void from the beginning." The second
order appointed Robert G. Russell as special master for the purpose of
collecting and analyzing information related to the proposed
settlement of the litigation cited above. On November 6, 1998, the
Court issued an Order of Reference for the special master. The BCBSA
agreed to dismiss the BCBSA Complaint.
Each of the reinstated license agreements approved by the BCBSA
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 on March 11, 1999. If on or before March 11, 1999, 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 March 11, 1999, or otherwise modify the addenda, the
license agreements would have terminated on March 11, 1999.
On March 11, 1999, the Board of Directors of the BCBSA modified the
addenda to provide that the licenses granted under such license
agreements will be reviewed by the BCBSA at the next regularly
scheduled meeting of the BCBSA Board of Directors on June 17, 1999.
If on or before June 17, 1999, the BCBSA does not extend the
termination dates for the license agreements until the next regularly
scheduled meeting of the BCBSA Board of Directors after June 17, 1999,
or otherwise modify the addenda, the license agreements will terminate
on June 17, 1999. 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 June 17, 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 of 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 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 to
or acquiesced in 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
June 17, 1999, the date of the next regularly scheduled BCBSA Board
meeting, and (ii) upon any judicial act that (a) provides that 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 thereunder 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 (expected to be held on June 17, 1999), the Board must
take action to extend the licenses or else they will automatically
terminate on June 17, 1999. There can be no assurances that the BCBSA
Board will take the action necessary to extend the licenses on or
before the June 17, 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 proposed settlement agreements, as amended,
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
settlement agreements, as amended. The BCBSA has conditionally approved the
transfer as proposed. There can be no assurance that the transactions
contemplated by the settlement agreements, as amended will receive the
necessary court approval as an acceptable alternative to dissolution of
BCBSMo, that all conditions and contingencies included in the settlement
agreements, as amended, will be satisfied, or that the transactions set
forth in the settlement agreements, as amended, will be effected. The
failure to consummate the transactions contemplated by the settlement
agreements, as amended, 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, the
company and certain of its subsidiaries are parties to various legal
proceedings, many of which involve claims for coverage encountered in
the ordinary course of business. The company, like health insurers
and HMOs generally, excludes certain health care services from
coverage under its PPO, HMO and other products. The company is, in
its ordinary course of business, subject to the claims of its members
arising out of decisions to restrict treatment or reimbursement for
certain services. The loss of even one such claim, if it results in a
significant punitive damage award, could have a material adverse
effect on the company.
In addition, the risk of potential liability under punitive damage
theories may increase significantly the difficulty of obtaining
reasonable settlements of coverage claims. However, 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 at present unknown.
14. 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, as well as any
non-recurring charges, that are attributable to that segment's
operations. Operating income for the self-funded segment is
determined by deducting from fees and other income the commissions,
general and administrative expenses and non-recurring charges
attributable to the segment. Expenses not directly traceable to an
industry segment are allocated on a consistent and reasonable basis
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:
Year ended December 31, 1998 Underwritten Self-funded Consolidated
Revenues $694,678 $ 72,834 $767,512
Operating (loss) income (23,056) 18,809 (4,247)
Depreciation and amortization expense 13,779 5,555 19,334
Non-recurring operating charges 777 123 900
Identifiable assets 46,311 21,713 68,024
Year ended December 31, 1997 Underwritten Self-funded Consolidated
Revenues $654,315 $ 65,096 $719,411
Operating (loss) income (69,437) 8,437 (61,000)
Depreciation and amortization expense 16,821 6,287 23,108
Charge for loss reserves 29,510 29,510
Other non-recurring operating charges 2,190 1,111 3,301
Identifiable assets 44,763 15,256 60,019
Year ended December 31,1996 Underwritten Self-funded Consolidated
Revenues $595,661 $ 57,714 $653,375
Operating (loss) income (13,741) 162 (13,579)
Depreciation and amortization expense 8,099 6,861 14,960
Non-recurring operating charges 2,791 1,743 4,534
Identifiable assets 45,055 9,712 54,767
15. TRANSACTIONS WITH BLUE CROSS AND BLUE SHIELD OF MISSOURI
Pursuant to an administrative services agreement, the company provides
certain administrative and support services, including computerized
data processing and management information systems, telecommunication
systems and accounting, finance, legal, actuarial and other management
services to BCBSMo. These expenses are allocated to and paid by
BCBSMo in an amount equal to the direct and indirect costs and
expenses incurred in furnishing these services. In addition, the
company provides services to BCBSMo, which include health plan
services, processing claims related to such plans, provider
contracting, market research and advertising, to be reimbursed on a
basis that approximates cost. Management of the company and of BCBSMo
consider such allocation methodologies and cost approximations
reasonable and appropriate.
General and administrative expense excludes net intercompany charges
allocated to BCBSMo by the company for the respective periods, as
follows:
Year ended December 31,
1998 1997 1996
Services provided to BCBSMo $ 15,642 $12,792 $15,968
Services provided by BCBSMo (4,411) (4,436) (4,237)
Net expense allocated to BCBSMo $ 11,231 $ 8,356 $11,731
The company has intercompany receivables and payables between the
company and BCBSMo, which include $9.9 million of receivables and $3.2
million of payables related to the BCBSMo transfer of all economic
risks and rewards on certain insurance policies originally issued by
BCBSMo, pursuant to a reinsurance agreement. In addition, the
intercompany receivables and payables include net intercompany
transactions for general and administrative expenses as well as
intercompany tax settlements. Additional amounts of receivables and
payables relate to the company's cash management activity which is
typically settled on a monthly basis.
16. STATUTORY INFORMATION
The operations of the company's subsidiaries, HALIC, BlueCHOICE,
HealthLink, HealthLink HMO, and RightCHOICE Insurance Company (RIC)
are subject to regulation and supervision by regulatory authorities of
the various jurisdictions in which they are licensed to conduct
business. Regulatory authorities exercise extensive supervisory power
over the licensing of insurance companies; the amount of reserves that
must be maintained; the approval of forms and insurance policies used;
the nature of, and limitation on, an insurance company's investments;
periodic examination of the operations of insurance companies; the
form and content of annual statements and other reports required to be
filed on the financial condition of insurance companies; and the
establishment of capital requirements for insurance companies. HALIC,
BlueCHOICE, HealthLink HMO, and RIC are required to file periodic
statutory financial statements in each jurisdiction in which they are
licensed. Additionally, these companies are also periodically
examined by the insurance departments of the jurisdictions in which
they are licensed to do business.
The company's subsidiaries prepare their statutory financial
statements in accordance with accounting practices prescribed or
permitted by the Missouri and Illinois Departments of Insurance.
Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners
(NAIC), as well as state laws, regulations, and general administrative
rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance (the Codification), which will replace the current
Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. The NAIC is now considering
amendments to the Codification guidance that would also be effective
upon implementation. The NAIC has recommended an effective date of
January 1, 2001. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory
accounting in some areas. It is not known whether the Missouri and
Illinois legislatures will pass the necessary legislation to enact the
Codification or if such passed legislation would be approved by the
governors. The company has not estimated the potential effect of the
Codification guidance if adopted.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share data)
Three months ended
1998 31-Mar 30-Jun 30-Sep 31-Dec
Total revenues $191,852 $191,818 $189,804 $194,038
Operating expenses 193,101 192,433 192,384 193,841
Operating (loss) income (1,249) (615) (2,580) 197
Investment income, net 4,372 3,984 5,062 5,251
Other, net (1,065) (1,237) (1,204) (1,412)
Income before taxes 2,058 2,132 1,278 4,036
Provision for income taxes 1,090 930 763 1,061
Net income 968 1,202 515 2,975
Basic and diluted earnings per share $ 0.05 $ 0.06 $ 0.03 $ 0.16
Weighted average shares outstanding 18,672 18,672 18,672 18,673
Membership (in thousands) 1,998 2,013 2,092 2,123
Three months ended
1997 31-Mar 30-Jun 30-Sep 31-Dec
Total revenues $176,314 $176,149 $180,492 $186,456
Operating expenses 178,468 187,195 218,559 196,189
Operating loss (2,154) (11,046) (38,067) (9,733)
Investment income, net 13,510 10,296 4,786 4,592
Other, net (1,253) (1,372) (1,241) (1,873)
Income (loss) before taxes 10,103 (2,122) (34,522) (7,014)
Provision (benefit) for income taxes 3,909 189 (11,766) (1,853)
Net income (loss) 6,194 (2,311) (22,756) (5,161)
Basic and diluted earnings (loss)
per share $ 0.33 $ (0.12) $ (1.22) $ (0.28)
Weighted average shares outstanding 18,676 18,672 18,672 18,672
Membership (in thousands) 1,864 1,898 1,923 1,957
PricewaterhouseCoopers LLP Letterhead
PricewaterhouseCoopers LLP
One Metropolitan Square
Suite 2200
St. Louis, MO 63102-2737
Telephone (314) 436 3200
Facsimile (314) 241 3371
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of RightCHOICE Managed Care, Inc.
In our opinion, the accompanying consolidated balance
sheets and the related consolidated statements of income,
of changes in shareholders' equity and of cash flows
present fairly, in all material respects, the financial
position of RightCHOICE Managed Care, Inc., and its
subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting
principles. These financial statements are the
responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted
auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating
the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
February 9, 1999, except for Note 13
for which the date is March 15, 1999
PricewaterhouseCoopers LLP Letterhead
PricewaterhouseCoopers LLP
One Metropolitan Square
Suite 2200
St. Louis, MO 63102-2737
Telephone (314) 436 3200
Facsimile (314) 241 3371
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of RightCHOICE Managed Care, Inc.
Our report on the consolidated financial statements of RightCHOICE
Managed Care, Inc. is included on page 87 of this form 10-K. In
connection with our audit of such financial statements, we have also
audited the related financial statement schedules listed in Item 8 on
page 41 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to
be included therein.
PricewaterhouseCoopers LLP
February 9, 1999, except for Note 13
for which the date is March 15, 1999
Schedule I
(Page 1 of 3)
RIGHTCHOICE MANAGED CARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed balance sheets of RightCHOICE Managed Care, Inc. (parent company only)
as of December 31, 1998 and 1997, and the condensed statements of income and
cash flows for the years ended December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Balance Sheets
(in thousands, except shares and per share data)
<S> <C> <C>
December 31,
1998 1997
ASSETS
Cash $ 2,998 $ 11,148
Investments available for sale, at market value 4,703 23,273
Investments in affiliates (2) 118,782 130,282
Property and equipment, net 5,941 8,062
Receivables from affiliates (1) 163,712 67,368
Income taxes receivable, net 7,268
Other assets 7,271 2,011
Total assets $310,675 $242,144
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 23,707 $ 19,481
Payables to affiliates (1) 111,431 37,088
Income taxes payable, net 14,425
Obligations for employee benefits 27,292 25,074
Obligations under capital leases 2,371 5,211
Total liabilities 164,801 101,279
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, 3,710,426 and 3,709,000
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 132,635 132,640
Retained earnings 12,313 6,653
Treasury stock, 27,074 and 28,500 Class A shares,
respectively, at cost (383) (404)
Accumulated other comprehensive income 1,122 1,789
Total shareholders' equity 145,874 140,865
Total liabilities and shareholders' equity $310,675 $242,144
</TABLE>
The condensed financial information should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
(1) The majority of these intercompany amounts are eliminated in the
Consolidated Financial Statements with the remaining amounts explained
in Note 15 of the Notes to Consolidated Financial Statements.
(2) As of December 31, 1998 and 1997, $113,053 and $121,855, respectively,
is eliminated in the Consolidated Financial Statements.
Schedule I
(Page 2 of 3)
<TABLE>
RIGHTCHOICE MANAGED CARE INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Statements of Income
(in thousands)
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Revenue
Reimbursement from affiliates (1) $108,972 $116,380 $114,233
Dividends from affiliates (1) 15,203 13,813 26,631
Total revenue 124,175 130,193 140,864
Expense
General and administrative 111,828 118,920 119,292
Operating income 12,347 11,273 21,572
Investment income and other 3,549 4,040 1,022
Income before equity in undistributed loss
of subsidiaries and income tax provision (benefit) 15,896 15,313 22,594
Equity in undistributed loss of subsidiaries (1) (8,741) (38,853) (25,618)
Income (loss) before taxes 7,155 (23,540) (3,024)
Income tax provision (benefit) 1,495 494 (997)
Net income (loss) $ 5,660 ($24,034) ($2,027)
</TABLE>
The condensed financial information should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
(1) Substantially all of the balances related to these intercompany items
are eliminated in the Consolidated Financial Statements.
Schedule I
(Page 3 of 3)
RIGHTCHOICE MANAGED CARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
<TABLE>
Statements of Cash Flows
(in thousands)
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,660 ($24,034) ($2,027)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating
activities:
Equity in undistributed loss (income)
of subsidiaries 8,741 38,853 25,618
Depreciation 2,505 4,264 4,631
Loss on sale of property and equipment 36
Gain on sale of investments (794) (1,671) (6)
Accretion of discounts and
amortization of premiums (19) (170) (41)
(Increase) decrease in:
Receivables from affiliates (96,344) (47,820) (6,469)
Income taxes receivable, net (7,069)
Other assets (5,260) (141) 421
Increase (decrease) in:
Accounts payable and accrued
expenses 3,657 (1,755) (1,300)
Payables to affiliates 74,343 22,306 1,520
Obligations for employee benefits 2,218 562 (229)
Income taxes payable, net (14,425) 991 (482)
Net cash (used in) provided by operating activities (26,787) (8,615) 21,672
Cash flows from investing activities:
Investments purchased (4,845) (14,970) (42,297)
Investments sold or matured 5,661 35,940 29,846
Investments purchased, sold or transferred
from/to affiliates, net 17,773
Decrease (increase) in investment in affiliates 3,256 (814) (6,813)
Property and equipment purchased, sold or
transferred from/to affiliates, net (427) 2,995 1,716
Net cash provided by (used in) investing activities 21,418 23,151 (17,548)
Cash flows from financing activities:
Payments on capital lease obligations (2,797) (3,509) (3,931)
Sale (purchase) of Class A treasury stock 16 (78) (60)
Net cash used in financing activities (2,781) (3,587) (3,991)
Net (decrease) increase in cash and cash
equivalents (8,150) 10,949 133
Cash and cash equivalents, beginning of year 11,148 199 66
Cash and cash equivalents, end of year $ 2,998 $11,148 $ 199
Supplemental Schedule of Noncash Investing
and Financing Activities:
Equipment acquired through capital leases $ 4,001
Disposal of equipment under capital leases $ 43
</TABLE>
The condensed financial information should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
Exhibit 10.6.7
<TABLE>
SUMMARY OF APPROVED CHANGES TO THE
BLUE CROSS PRIMARY LICENSE AGREEMENT
<CAPTION>
ACTION EFFECTIVE DATE EXPLANATION
<C> <C> <C>
Replace the June 11, 1998 Amendments to Paragraph 2 - makes conforming changes to
entire License Agreement relating to Plan ownership and control of
document Controlled Affiliate Licensees.
(except
signature
page).
Replace the March 12, 1998 Amendment to Paragraph 9 (b) - provides a more detailed
entire requirements for a Plan to receive notice and an opportunity to be
document heard before any discretionary terminations (requiring a vote of
(except the Plans) take place
signature
page).
Replace the March 12, 1998 Amendment to Paragraph 15(a) - provides that liquidation and
entire dissolution of a Controlled Affiliate is a basis for automatic
document termination under the Controlled Affiliate License Agreement.
(except
signature
page).
Replace the June 11, 1998 Amendments to Paragraph 15(d)(iii) - indicates that the
entire termination fee is not to be paid in connection with transactions
document exclusively by or among Plans where the Association's Board of
(except Directors determines that there has been no material diminution in
signature the number of customers serviced under the Marks.
page).
Replace the Various Amendments to Exhibit 1 (Controlled Affiliate License
entire Agreement) - conforming changes have been made to this Exhibit 1
document (see specific revisions identified on Attachment C).
(except
signature
page).
Replace the June 11, 1998 Amendment to Exhibit 2 - Added the new Quarterly Year 2000
entire report as a required BCBSA report under Standard 2.
document
(except
signature
page).
Replace the June 11, 1998 Amendments to Exhibit 5 - allows BCBSA and/or Plans to
entire recover attorneys' fees and expenses in certain circumstances when
document Plans initiate court actions in violation of the License
(except Agreements.
signature
page).
Replace the December 31, 1999 Amendments to Paragraph 15(d)(iii) -. Amend termination fee
entire language to allow for an equivalent threshold under a successor
document formula by the affirmative vote of three-fourths of the Plans and
(except three-fourths on the then total current weighted vote of all the
signature Plans. Note: The Member Plans adopted 425% of MCO-RBC as the
page). "equivalent" commencing 12/31/99.
Replace the Various Amendments to Exhibit 2:
entire
document - Add definition of a "Shell Holding Company" and a "Hybrid
(except Holding Company."
signature
page). - Eliminate the Quarterly Capital Benchmark worksheet as a
BCBSA required report after 6/30/99. (Exempt a Shell Holding
Company from furnishing a Quarterly Capital Benchmark as of
1/1/99.);
- Add the semi-annual MCO-RBC report as a BCBSA required report
starting 12/31/98 and thereafter (Require a Shell Holding Company
to furnish only a calendar year-end MCO-RBC Report as of 12/31/98
and thereafter).
- Eliminate the Quarterly Utilization Report as a BCBSA
required report after 12/31/99;
- Eliminate the Annual Cost Containment Report as a BCBSA
required report effective immediately;
- Add the Semi-Annual Benefit Cost Management Report as a BCBSA
required report starting 6/30/00 and thereafter;
- Exempt a Shell Holding Company from filing a Quarterly
Utilization Report, Quarterly Enrollment Report, Benefit Cost
Management Report, NMIS Quarterly Report and Year 2000 Readiness
Report to BCBSA effective immediately.
- Eliminate IPDR Program as a required National Program after
1/1/99;
</TABLE>
Exhibit 10.7.6
<TABLE>
SUMMARY OF APPROVED CHANGES TO THE
BLUE SHIELD PRIMARY LICENSE AGREEMENT
<CAPTION>
ACTION EFFECTIVE DATE EXPLANATION
<C> <C> <C>
Replace the June 11, 1998 Amendments to Paragraph 2 - makes conforming changes to
entire License Agreement relating to Plan ownership and control of
document Controlled Affiliate Licensees.
(except
signature
page).
Replace the March 12, 1998 Amendment to Paragraph 9 (b) - provides a more detailed
entire requirements for a Plan to receive notice and an opportunity to be
document heard before any discretionary terminations (requiring a vote of
(except the Plans) take place
signature
page).
Replace the March 12, 1998 Amendment to Paragraph 15(a) - provides that liquidation and
entire dissolution of a Controlled Affiliate is a basis for automatic
document termination under the Controlled Affiliate License Agreement.
(except
signature
page).
Replace the June 11, 1998 Amendments to Paragraph 15(d)(iii) - indicates that the
entire termination fee is not to be paid in connection with transactions
document exclusively by or among Plans where the Association's Board of
(except Directors determines that there has been no material diminution in
signature the number of customers serviced under the Marks.
page).
Replace the Various Amendments to Exhibit 1 (Controlled Affiliate License
entire Agreement) -. conforming changes have been made to this Exhibit 1
document (see specific revisions identified on Attachment C).
(except
signature
page).
Replace the June 11, 1998 Amendment to Exhibit 2 - Added the new Quarterly Year 2000
entire report as a required BCBSA report under Standard 2.
document
(except
signature
page).
Replace the June 11, 1998 Amendments to Exhibit 5 - allows BCBSA and/or Plans to
entire recover attorneys' fees and expenses in certain circumstances when
document Plans initiate court actions in violation of the License
(except Agreements.
signature
page).
Replace the December 31, 1999 Amendments to Paragraph 15(d)(iii) -. Amend termination fee
entire language to allow for an equivalent threshold under a successor
document formula by the affirmative vote of three-fourths of the Plans and
(except three-fourths on the then total current weighted vote of all the
signature Plans. Note: The Member Plans adopted 425% of MCO-RBC as the
page). "equivalent" commencing 12/31/99.
Replace the Various Amendments to Exhibit 2:
entire
document - Add definition of a "Shell Holding Company" and a "Hybrid
(except Holding Company."
signature
page). - Eliminate the Quarterly Capital Benchmark worksheet as a
BCBSA required report after 6/30/99. (Exempt a Shell Holding
Company from furnishing a Quarterly Capital Benchmark as of
1/1/99.);
- Add the semi-annual MCO-RBC report as a BCBSA required report
starting 12/31/98 and thereafter (Require a Shell Holding Company
to furnish only a calendar year-end MCO-RBC Report as of 12/31/98
and thereafter).
- Eliminate the Quarterly Utilization Report as a BCBSA
required report after 12/31/99;
- Eliminate the Annual Cost Containment Report as a BCBSA
required report effective immediately;
- Add the Semi-Annual Benefit Cost Management Report as a BCBSA
required report starting 6/30/00 and thereafter;
- Exempt a Shell Holding Company from filing a Quarterly
Utilization Report, Quarterly Enrollment Report, Benefit Cost
Management Report, NMIS Quarterly Report and Year 2000 Readiness
Report to BCBSA effective immediately.
- Eliminate IPDR Program as a required National Program after
1/1/99;
</TABLE>
Exhibit 10.10.5
<TABLE>
SUMMARY OF APPROVED CHANGES TO THE
BLUE CROSS CONTROLLED AFFILIATE LICENSE AGREEMENT
<CAPTION>
ACTION EFFECTIVE DATE EXPLANATION
<C> <C> <C>
Replace the December 31, 1999 Amendments to Paragraph 7(h)(3) -. Amend termination fee
entire language to allow for an equivalent threshold under a successor
document formula by the affirmative vote of three-fourths of the Plans and
(except three-fourths on the then total current weighted vote of all the
signature Plans. Adopt 425% of MCO-RBC as the "equivalent" commencing
page). 12/31/99.
Replace the Various Amendments to Exhibit A -
entire
document - Eliminate the Quarterly Capital Benchmark worksheet as a
(except BCBSA required report after 6/30/99;
signature
page). - Add the semi-annual MCO-RBC report as a BCBSA required report
starting 12/31/98 and thereafter;
- Eliminate the Quarterly Utilization Report as a BCBSA
required report after 12/31/99;
- Eliminate the Annual Cost Containment Report as a BCBSA
required report effective immediately'
- Add the Semi-Annual Benefit Cost Management Report as a BCBSA
required report starting 6/30/00 and thereafter;
- Eliminate IPDR Program as a required National Program after
1/1/99;
</TABLE>
Exhibit 10.11.5
<TABLE>
SUMMARY OF APPROVED CHANGES TO THE
BLUE SHIELD CONTROLLED AFFILIATE LICENSE AGREEMENT
<CAPTION>
ACTION EFFECTIVE DATE EXPLANATION
<C> <C> <C>
Replace the December 31, 1999 Amendments to Paragraph 7(h)(3) -. Amend termination fee
entire language to allow for an equivalent threshold under a successor
document formula by the affirmative vote of three-fourths of the Plans and
(except three-fourths on the then total current weighted vote of all the
signature Plans. Note: Member Plans adopted 425% of MCO-RBC as the
page). "equivalent" commencing 12/31/99.
Replace the Various Amendments to Exhibit A -
entire
document - Eliminate the Quarterly Capital Benchmark worksheet as a
(except BCBSA required report after 6/30/99;
signature
page). - Add the semi-annual MCO-RBC report as a BCBSA required report
starting 12/31/98 and thereafter;
- Eliminate the Quarterly Utilization Report as a BCBSA
required report after 12/31/99;
- Eliminate the Annual Cost Containment Report as a BCBSA
required report effective immediately'
- Add the Semi-Annual Benefit Cost Management Report as a BCBSA
required report starting 6/30/00 and thereafter;
- Eliminate IPDR Program as a required National Program after
1/1/99;
</TABLE>
Exhibit 10.52.1
List of Senior Vice Presidents who have executed executive severance agreements:
Stuart K. Campbell Senior VP, Client Services
Michael Fulk Senior VP, Sales and Marketing
Herb Schneiderman Senior VP, Medical Delivery Systems
Richard Smith Senior VP, Diversified Life Insurance Co.
Connie L. Van Fleet Senior VP, Chief Information Officer
David Williams, M.D. Senior VP, Chief Medical Officer
Exhibit 10.53.1
List of Senior Vice Presidents who have executed officer severance agreements:
Stuart K. Campbell Senior VP, Client Services
Michael Fulk Senior VP, Sales and Marketing
Herb Schneiderman Senior VP, Medical Delivery Systems
Richard Smith Senior VP, Diversified Life Insurance Co.
Connie L. Van Fleet Senior VP, Chief Information Officer
David Williams, M.D. Senior VP, Chief Medical Officer
Exhibit 10.54.1
List of Vice Presidents who have executed officer severance agreements:
Morris L. Berger VP, Human Resources
Julia Bietsch VP, Provider Affairs
Ron Ekstrandt VP, Strategy
Roger R. Fischer VP, Information Services
Larry Glascott VP, Controller
Ruth Meyer Hollenback VP, Network Management
Clara Kinner VP, Corporate Communications
Gary Maienschein VP, Government Affairs
Thomas P. Ogden VP, Information Services
Michael F. Patton VP, Marketing
Jane I. Potter VP, Medical Delivery Systems
Mary Lou Redshaw VP, Custom Accounts
Randy D. Ressel VP, Outstate Sales
Dennis J. Sullivan VP, Operations/Services
Gary Whitworth VP, BCBSMo Operations
Kathleen M. Zorica VP, Product Management
Exhibit 10.59.1
1999
ABCBS
Incentive
Plan
Senior Vice President
Herb Schneiderman
The ABCBS Incentive Plan
ELIGIBILITY
The 1999 ABCBS Incentive Plan (AIP) is a short-term incentive
program designed to reward the key management team for the
achievement of financial and individual goals. This booklet
contains specific incentive plan guidelines designed exclusively
for Senior Vice Presidents of ABCBS.
ABCBS reserves the right to update, modify or repeal this program,
permanently or temporarily, if it is in the best interest of ABCBS
to do so. The description of this program contained in this
booklet should not be construed to imply that it is an employment
contract for any period of time.
ELEMENTS
There are two elements that determine a participant's incentive
payment:
- - Achievement of the corporate financial goal as defined by the
company's net income.
- - Achievement of pre-determined individual goals (discretionary
and budget goals).
INCENTIVE POOL & INCENTIVE PAYMENT
The key element in determining the size of each participant's
incentive pool is the overall corporate financial performance as
measured by the company's 1999 net income. Your maximum incentive
opportunity will be determined by the company's financial
performance according to the incentive pool chart below. The
actual amount paid will ultimately depend on the accomplishment of
the corporate financial goal (net income) and individual goals.
The incentive pool size is expressed as a percentage of each
participant's base salary as of December 31, 1999.
INCENTIVE POOL FUNDING
Threshold Target Maximum
Net Income:* $ million $ million $ million
Pool Size as a % of
base salary: 13% 38% 58%
*Net income is ABCBS total income, excluding one time charges.
Source: Corporate Financial Statements
Note: Performance results for the pool will be interpolated.
CORPORATE FINANCIAL INCENTIVE AND INDIVIDUAL INCENTIVE
Corporate Financial Incentive - of your incentive payment (from
the available pool described on the previous page) is based solely
on the accomplishment of the corporate financial goal, i.e., you
will receive 75% of the incentive payment as shown in the incentive
pool table on page 2.
Individual Incentive - Additionally, 25% of your incentive payment
is based on the accomplishment of individual goals. The corporate
financial goal result (ABCBS net income) will determine the
incentive pool available for individual goal accomplishment. The
corporate financial goal threshold must be met before any payout
for individual goals will occur.
Individual goals will be comprised of two components: discretionary
and budget. The discretionary and budget goals will be weighted
80% and 20%, respectively.
Each participant will have specific, and in many cases, unique
discretionary goals that will be tied to and support ABCBS's
overall corporate goals. These goals may be individual or team
goals that focus on key projects, productivity, quality, process
improvement, or organizational effectiveness, to which all
participants contribute. All discretionary goals must be approved
by the Compensation Committee of the Board.
Achievement of all individual goal targets will result in a payout
equal to 100% of your potential payout for individual goals. (The
potential payout is based on the available pool created by
corporate financial performance.) The maximum payout for
individual goal performance, 150% of your potential payout for
individual goals, may be achieved based on exceptional performance
against individual goals.
The types and weighting of discretionary goals will vary, but the
sum of their target weights will equal 80%. Goals should be
weighted according to the importance of ABCBS business and
operating objectives, and should include such areas as management
development, organizational effectiveness, process improvement of
division/department operations, and/or major projects.
Target payout percentages for discretionary goals should be equal
to the goal's weight; and, the maximum payout percentage should be
150% of the target payout percentage.
Goal worksheets may be found in "HR Forms" in the Shared/Public
Folders.
ADMINISTRATION OF THE PROGRAM
Year-end corporate financial results for 1999 are expected to be
available by March 2000. Overall performance against the corporate
General and Administrative expenses budget goal, as well as the
results of specific group/division General and Administrative
expense budget goals will be forwarded to Human Resources by the
Finance Division. Participants will summarize their performance
against their individual discretionary goals and forward these to
the Executive Vice President of ABCBS, President/CEO, and the
Compensation Committee of the Board for approval.
After receiving all necessary information, Human Resources will
calculate the incentive payments with payout expected to occur in
March 2000, following acceptance and approval by the Board of
Directors or their designee.
The size of the Financial Performance Component and the Individual
Performance Component is expressed as a percentage of each
participant's base salary as of December 31, 1999.
Incentives for those who are promoted into a management position,
move from one management level to another, or move out of a
management position and into another position within the company,
will be prorated according to the number of full months spent in
the eligible position(s). Incentives for those newly hired into
positions eligible for the AIP will be calculated using the
participant's hire date.
If the participant moves into or out of an eligible position, or
moves from one AIP level to another, (ex. Vice President to Senior
Vice President), the incentive pool will be based on the
participant's base salary for the time spent in that position or at
that level. The actual amount paid will ultimately depend on the
accomplishment of financial and individual goals.
If an eligible participant receives a performance rating of DNM
(Does Not Meet Standards) at his or her annual performance review,
he or she will become ineligible to receive an incentive payment
for that year.
A participant whose employment is terminated for any reason prior
to March 15, 2000 will be ineligible to receive a payment under
this plan. The only exceptions relate to death or disability while
employed. In these cases, the incentive payment will be prorated
according to the number of full months the participant spent in the
position(s). In the case of death, payment will be made to the
participant's beneficiary, as specified in the company provided
life insurance policy.
Exhibit 10.60.1
1999
ABCBS
Incentive
Plan
Senior Vice President
Mike Fulk
The ABCBS Incentive Plan
ELIGIBILITY
The 1999 ABCBS Incentive Plan (AIP) is a short-term incentive
program designed to reward the key management team for the
achievement of financial and individual goals. This booklet
contains specific incentive plan guidelines designed exclusively
for Senior Vice Presidents of ABCBS.
ABCBS reserves the right to update, modify or repeal this program,
permanently or temporarily, if it is in the best interest of ABCBS
to do so. The description of this program contained in this
booklet should not be construed to imply that it is an employment
contract for any period of time.
ELEMENTS
There are two elements that determine a participant's incentive
payment:
- - Achievement of the corporate financial goal as defined by the
company's net income.
- - Achievement of pre-determined individual goals (discretionary
and budget goals).
INCENTIVE POOL & INCENTIVE PAYMENT
The key element in determining the size of each participant's
incentive pool is the overall corporate financial performance as
measured by the company's 1999 net income. Your maximum incentive
opportunity will be determined by the company's financial
performance according to the incentive pool chart below. The
actual amount paid will ultimately depend on the accomplishment of
the corporate financial goal (net income) and individual goals.
There will be no incentive payment for performance below the
threshold level.
The incentive pool size is expressed as a percentage of each
participant's base salary as of December 31, 1999.
INCENTIVE POOL FUNDING
Threshold Target Maximum
Net Income:* $ million $ million $ million
Pool Size as a % of 13% 38% 58%
base salary:
*Net income is ABCBS total income, excluding one time charges.
Source: Corporate Financial Statements
Note: Performance results for the pool will be interpolated.
CORPORATE FINANCIAL INCENTIVE AND INDIVIDUAL INCENTIVE
Corporate Financial Incentive - 50% of your incentive payment (from
the available pool described on the previous page) is based solely
on the accomplishment of the corporate financial goal, i.e., you
will receive 50% of the incentive payment as shown in the incentive
pool table on page 2.
Individual Incentive - Additionally, 50% of your incentive payment
is based on the accomplishment of individual goals. The corporate
financial goal result (ABCBS net income) will determine the
incentive pool available for individual goal accomplishment. The
corporate financial goal threshold must be met before any payout
for individual goals will occur.
Individual goals will be comprised of two components: discretionary
and budget. The discretionary and budget goals will be weighted
80% and 20%, respectively.
Each participant will have specific, and in many cases, unique
discretionary goals that will be tied to and support ABCBS's
overall corporate goals. These goals may be individual or team
goals that focus on key projects, productivity, quality, process
improvement, or organizational effectiveness, to which all
participants contribute. All discretionary goals must be approved
by the Compensation Committee of the Board.
Achievement of all individual goal targets will result in a payout
equal to 100% of your potential payout for individual goals. (The
potential payout is based on the available pool created by
corporate financial performance.) The maximum payout for
individual goal performance, 150% of your potential payout for
individual goals, may be achieved based on exceptional performance
against individual goals.
The types and weighting of discretionary goals will vary, but the
sum of their target weights will equal 80%. Goals should be
weighted according to the importance of ABCBS business and
operating objectives, and should include such areas as management
development, organizational effectiveness, process improvement of
division/department operations, and/or major projects.
Target payout percentages for discretionary goals should be equal
to the goal's weight; and, the maximum payout percentage should be
150% of the target payout percentage.
Goal worksheets may be found in "HR Forms" in the Shared/Public
Folders.
ADMINISTRATION OF THE PROGRAM
Year-end corporate financial results for 1999 are expected to be
available by March 2000. Overall performance against the corporate
General and Administrative expenses budget goal, as well as the
results of specific group/division General and Administrative
expense budget goals will be forwarded to Human Resources by the
Finance Division. Participants will summarize their performance
against their individual discretionary goals and forward these to
the Executive Vice President of ABCBS, President/CEO, and the
Compensation Committee of the Board for approval.
After receiving all necessary information, Human Resources will
calculate the incentive payments with payout expected to occur in
March 2000, following acceptance and approval by the Board of
Directors or their designee.
The size of the Financial Performance Component and the Individual
Performance Component is expressed as a percentage of each
participant's base salary as of December 31, 1999.
Incentives for those who are promoted into a management position,
move from one management level to another, or move out of a
management position and into another position within the company,
will be prorated according to the number of full months spent in
the eligible position(s). Incentives for those newly hired into
positions eligible for the AIP will be calculated using the
participant's hire date.
If the participant moves into or out of an eligible position, or
moves from one AIP level to another, (ex. Vice President to Senior
Vice President), the incentive pool will be based on the
participant's base salary for the time spent in that position or at
that level. The actual amount paid will ultimately depend on the
accomplishment of financial and individual goals.
If an eligible participant receives a performance rating of DNM
(Does Not Meet Standards) at his or her annual performance review,
he or she will become ineligible to receive an incentive payment
for that year.
A participant whose employment is terminated for any reason prior
to March 15, 2000 will be ineligible to receive a payment under
this plan. The only exceptions relate to death or disability while
employed. In these cases, the incentive payment will be prorated
according to the number of full months the participant spent in the
position(s). In the case of death, payment will be made to the
participant's beneficiary, as specified in the company provided
life insurance policy.
Exhibit 10.61.1
1999
ABCBS/BCBSMo
Incentive
Plan
President/CEO
John O'Rourke
The ABCBS/BCBSMo Incentive Plan
ELIGIBILITY
The 1999 ABCBS Incentive Plan (AIP) and the 1999 BCBSMo
Management Incentive Plan (MIP) are short-term incentive
programs designed to reward the key management team for the
achievement of financial and individual goals. As this
program is designed exclusively for the President/CEO of
both companies, it is a combination of the ABCBS's and
BCBSMo's incentive plans.
ABCBS and BCBSMo reserve the right to update, modify or
repeal this program, permanently or temporarily, if it is in
the best interest of the companies to do so. The
description of this program contained in this booklet should
not be construed to imply that it is an employment contract
for any period of time.
OVERALL PROGRAM DESCRIPTION
For 1999, 50% of your annual incentive opportunity will be
based upon ABCBS corporate financial performance, and 50%
will be based on BCBSMo corporate financial performance.
Two incentive pools, one for each company's performance,
have been established to determine your total incentive
opportunity.
The key element in determining the size of your incentive
pools are: the overall corporate financial performance as
measured by ABCBS's 1999 net income and by BCBSMo's 1999 net
income.
Your total target incentive pool is 43% of your base salary.
The target pools attributed to ABCBS and BCBSMo are 21.5%
and 21.5%, respectively.
ABCBS's incentive payment and BCBSMo's incentive payment
will be calculated separately, and then combined into your
total incentive payout.
ABCBS Incentive Component
ABCBS Incentive Pool
The key element in determining the size of your ABCBS
incentive pool is the overall corporate financial
performance as measured by the company's 1999 net income.
Your maximum incentive payment will be determined by the
company's financial performance according to the incentive
pool chart below. The actual amount paid will ultimately
depend on the accomplishment of the corporate financial goal
(net income) and individual goals.
There will be no incentive payment for performance below the
threshold level.
The incentive pool size is expressed as a percentage of your
base salary as of December 31.
ABCBS Incentive Pool Funding
Threshold Target Maximum
Net Income:* $ $ $
million million million
Pool Size as a % of
base salary: 7% 21.5% 33%
*Net income is ABCBS total income, excluding one time
charges.
Note: Performance results for the pool will be
interpolated.
BCBSMo Incentive Component
BCBSMo Incentive Pool
The key element in determining the size of your BCBSMo
incentive pool is the overall corporate financial
performance as measured by the company's 1999 net income.
Your maximum incentive payment will be determined by the
company's financial performance according to the incentive
pool chart below. The actual amount paid will ultimately
depend on the accomplishment of the corporate financial goal
and individual goals.
There will be no incentive payment for performance below the
threshold level.
The incentive pool size is expressed as a percentage of your
base salary as of December 31, 1999.
BCBSMo Incentive Pool Funding
Threshold Target Maximum
Net Income:* $ $ $
million million million
Pool Size as a % of
base salary: 7% 21.5% 33%
*Net Income (after taxes) excluding one-time charges, such
as expenses associated with the settlement with the State.
Note: Performance results for the pool will be interpolated.
Corporate and Individual Incentives
The following description applies to both the ABCBS and
BCBSMo components of the incentive plan. This describes the
split between corporate and individual incentives.
Corporate Financial Incentive - 75% of your incentive
payment is based solely on the accomplishment of the
corporate financial goal, i.e., you receive 75% of the
incentive payment based on the Incentive Pool charts for
ABCBS and BCBSMo.
Individual Incentive - Additionally, 25% of your incentive
payment is based on the accomplishment of individual goals.
Corporate financial goal results (ABCBS net income and
BCBSMo operating income) will determine the incentive pools
available for individual goal accomplishment. Corporate
financial goal thresholds must be met before any payout for
individual goals will occur.
Your individual goals will be specific and/or unique
discretionary goals that will be tied to and support the
overall corporate goals. These goals may be individual or
team goals that focus on key projects, productivity,
quality, process improvement, or organizational
effectiveness, to which all participants contribute. All
discretionary goals must be approved by the Compensation
Committee of the Board.
Achievement of all individual goal targets will result in a
payout equal to 100% of your potential payout for individual
goals. (The potential payout is based on the available pool
created by corporate financial performance.) The maximum
payout for individual goal performance, 150% of your
potential payout for individual goals, may be achieved based
on exceptional performance against individual goals.
Minimum Incentive Payout -- There is no minimum incentive.
Administration of the Program
Year-end corporate financial results for 1999 are expected
to be available by March 2000. Once known, your performance
results as measured against your individual discretionary
goals should be forwarded to the Compensation Committee of
the Board for approval. After receiving all necessary
information, Human Resources will calculate the incentive
payments with payout expected to occur in March 2000,
following acceptance and approval by the Board of Directors
or their designee.
Incentives for those who are promoted into a management
position, move from one management level to another, or move
out of a management position and into another position
within the company, will be prorated according to the number
of full months spent in the eligible position(s).
Incentives for those newly hired into positions eligible for
the AIP/MIP will be calculated using the participant's hire
date.
Administration of the Program (continued)
The size of the financial and individual performance
components is expressed as a percentage of your base salary
as of December 31, 1999. If the participant moves into or
out of an eligible position, or moves from one AIP/MIP level
to another, (ex. Vice President to Senior Vice President),
the incentive pool will be based on the participant's base
salary for the time spent in that position or at that level.
The actual amount paid will ultimately depend on the
accomplishment of financial and individual goals.
If an eligible participant receives a performance rating of
DNM (Does Not Meet Standards) at his or her annual
performance review, he or she will become ineligible to
receive an incentive payment for that year.
A participant whose employment is terminated for any reason
prior to March 15, 2000 will be ineligible to receive a
payment under this plan. The only exceptions relate to
death or disability while employed. In these cases, the
incentive payment will be prorated according to the number
of full months the participant spent in the position(s). In
the case of death, payment will be made to the participant's
beneficiary, as specified in the company provided life
insurance policy.
Exhibit 10.62.1
1999
ABCBS
Incentive
Plan
Senior Executive Vice President
Sandra Van Trease
The ABCBS Incentive Plan
Eligibility
The 1999 ABCBS Incentive Plan (AIP) is a short-term
incentive program designed to reward the key management team
for the achievement of financial and individual goals. This
booklet contains specific incentive plan guidelines designed
exclusively for the Executive Vice President of ABCBS.
ABCBS reserves the right to update, modify or repeal this
program, permanently or temporarily, if it is in the best
interest of the company to do so. The description of this
program contained in this booklet should not be construed to
imply that it is an employment contract for any period of time.
Overall Program Description
The key element in determining your AIP incentive
opportunity is overall corporate financial performance as
measured by ABCBS's 1999 net income. Your incentive
opportunity is based on ABCBS's accomplishment of specific
and previously determined net income goals. An incentive
pool will be created as long as ABCBS meets a threshold
level of net income shown on page 2. As net income rises
above this threshold, so will your incentive opportunity.
For 1999, your target incentive is 43% of your base salary.
This target percentage is aligned with ABCBS's target net
income objective as shown in the incentive pool table on
page 2.
Incentive Pool
The key element in determining the size of your incentive
pool is the overall corporate financial performance as
measured by the company's 1999 net income. Your maximum
incentive payment will be determined by the company's
financial performance according to the incentive pool chart
below. The actual amount paid will ultimately depend on the
accomplishment of the corporate financial goal (net income)
and individual goals.
Net income of $ million must be achieved for any payout
to occur. There will be no incentive payment for
performance below the threshold level.
The incentive pool size is expressed as a percentage of your
base salary as of December 31, 1999.
Incentive Pool Funding
Threshold Target Maximum
Net Income:* $ $ $
million million million
Pool Size as a % of
base salary: 14% 43% 66%
*Net income is ABCBS total income, excluding one time
charges.
Source: Corporate Financial Statements
Note: Performance results for the pool will be
interpolated.
Corporate and Individual Incentives
Corporate Financial Incentive - 75% of your incentive
payment is based solely on the accomplishment of the
corporate financial goal, i.e., you receive 75% of the
incentive payment as shown in the incentive pool table on
page 2.
Individual Incentive - Additionally, 25% of your incentive
payment is based on the accomplishment of individual goals.
The corporate financial goal result (ABCBS net income) will
determine the incentive pool available for individual goal
accomplishment. The corporate financial goal threshold must
be met before any payout for individual goals will occur.
Your individual goals will be specific and/or unique
discretionary goals that will be tied to and support the
overall corporate goals. These goals may be individual or
team goals that focus on key projects, productivity,
quality, process improvement, or organizational
effectiveness, to which all participants contribute. All
discretionary goals must be approved by the President/CEO
and the Compensation Committee of the Board.
Achievement of all individual goal targets will result in a
payout equal to 100% of your potential payout for individual
goals. (The potential payout is based on the available pool
created by corporate financial performance.) The maximum
payout for individual goal performance, 150% of your
potential payout for individual goals, may be achieved based
on exceptional performance against individual goals.
Minimum Incentive Payout -- There is no minimum incentive.
Administration of the Program
Year-end corporate financial results for 1999 are expected
to be available by March 2000. Once known, your performance
results as measured against your individual discretionary
goals should be forwarded to the President/CEO and the
Compensation Committee of the Board for approval. After
receiving all necessary information, Human Resources will
calculate the incentive payments with payout expected to
occur in March 2000, following acceptance and approval by
the Board of Directors or their designee.
Incentives for those who are promoted into a management
position, move from one management level to another, or move
out of a management position and into another position
within the company, will be prorated according to the number
of full months spent in the eligible position(s).
Incentives for those newly hired into positions eligible for
the AIP will be calculated using the participant's hire
date.
Administration of the Program (continued)
The size of the financial and individual performance
components is expressed as a percentage of your base salary
as of December 31, 1999. If the participant moves into or
out of an eligible position, or moves from one AIP level to
another, (ex. Vice President to Senior Vice President), the
incentive pool will be based on the participant's base
salary for the time spent in that position or at that level.
The actual amount paid will ultimately depend on the
accomplishment of financial and individual goals.
If an eligible participant receives a performance rating of
DNM (Does Not Meet Standards) at his or her annual
performance review, he or she will become ineligible to
receive an incentive payment for that year.
A participant whose employment is terminated for any reason
prior to March 15, 2000 will be ineligible to receive a
payment under this plan. The only exceptions relate to
death or disability while employed. In these cases, the
incentive payment will be prorated according to the number
of full months the participant spent in the position(s). In
the case of death, payment will be made to the participant's
beneficiary, as specified in the company provided life
insurance policy.
Exhibit 10.63.1
1999
BCBSMo
Management
Incentive
Plan
Executive Vice President
Ed Tenholder
The BCBSMo Management Incentive Plan
Eligibility
The 1999 BCBSMo Management Incentive Plan (MIP) is a short-
term incentive program designed to reward the key management
team for the achievement of financial and individual goals.
This booklet contains specific incentive plan guidelines
designed exclusively for the Executive Vice President of
BCBSMo.
BCBSMo reserves the right to update, modify or repeal this
program, permanently or temporarily, if it is in the best
interest of the company to do so. The description of this
program contained in this booklet should not be construed to
imply that it is an employment contract for any period of
time.
Overall Program Description
The key element in determining your MIP incentive
opportunity is overall corporate financial performance as
measured by BCBSMo's 1999 net income. Your incentive
opportunity is based on BCBSMo's accomplishment of specific
and previously determined net income goals. An incentive
pool will be created as long as BCBSMo meets a threshold
level of net income shown on page 2. As net income rises
above this threshold, so will your incentive opportunity.
For 1999, your target incentive is 43% of your base salary.
This target percentage is aligned with BCBSMo's target net
income objective as shown in the incentive pool table on the
following page.
Incentive Pool
The key element in determining the size of your incentive
pool is the overall corporate financial performance as
measured by the company's 1999 net income. Your maximum
incentive payment will be determined by the company's
financial performance according to the incentive pool chart
below. The actual amount paid will ultimately depend on the
accomplishment of the corporate financial goal and
individual goals.
There will be no incentive payment for performance below the
threshold level.
The incentive pool size is expressed as a percentage of your
base salary as of December 31, 1999.
Incentive Pool Funding
Threshold Target Maximum
Net Income:* $ $ $
million million million
Pool Size as a % of
base salary: 14% 43% 66%
*Net Income (after taxes) excluding one-time charges, such
as expenses associated with the settlement with the State.
Note: Performance results for the pool will be interpolated.
Corporate and Individual Incentives
Corporate Financial Incentive - 75% of your incentive
payment is based solely on the accomplishment of the
corporate financial goal, i.e., you receive 75% of the
incentive payment as shown in the incentive pool table on
page 2.
Individual Incentive - Additionally, 25% of your incentive
payment is based on the accomplishment of individual goals.
The corporate financial goal result will determine the
incentive pool available for individual goal accomplishment.
The corporate financial goal threshold must be met before
any payout for individual goals will occur.
Your individual goals will be specific and/or unique
discretionary goals that will be tied to and support the
overall corporate goals. These goals may be individual or
team goals that focus on key projects, productivity,
quality, process improvement, or organizational
effectiveness, to which all participants contribute. All
discretionary goals must be approved by the President/CEO
and the Compensation Committee of the Board.
Achievement of all individual goal targets will result in a
payout equal to 100% of your potential payout for individual
goals. (The potential payout is based on the available pool
created by corporate financial performance.) The maximum
payout for individual goal performance, 150% of your
potential payout for individual goals, may be achieved based
on exceptional performance against individual goals.
Minimum Incentive Payout -- There is no minimum incentive
for 1999.
Administration of the Program
Year-end corporate financial results for 1999 are expected
to be available by March 2000. Once known, your performance
results as measured against your individual discretionary
goals should be forwarded to the President/CEO and the
Compensation Committee of the Board for approval. After
receiving all necessary information, Human Resources will
calculate the incentive payments with payout expected to
occur in March 2000, following acceptance and approval by
the Board of Directors or their designee.
Incentives for those who are promoted into a management
position, move from one management level to another, or move
out of a management position and into another position
within the company, will be prorated according to the number
of full months spent in the eligible position(s).
Incentives for those newly hired into positions eligible for
the MIP will be calculated using the participant's hire
date.
Administration of the Program (continued)
The size of the financial and individual performance
components is expressed as a percentage of your base salary
as of December 31, 1999. If the participant moves into or
out of an eligible position, or moves from one MIP level to
another, (ex. Vice President to Senior Vice President), the
incentive pool will be based on the participant's base
salary for the time spent in that position or at that level.
The actual amount paid will ultimately depend on the
accomplishment of financial and individual goals.
If an eligible participant receives a performance rating of
DNM (Does Not Meet Standards) at his or her annual
performance review, he or she will become ineligible to
receive an incentive payment for that year.
A participant whose employment is terminated for any reason
prior to March 15, 2000 will be ineligible to receive a
payment under this plan. The only exceptions relate to
death or disability while employed. In these cases, the
incentive payment will be prorated according to the number
of full months the participant spent in the position(s). In
the case of death, payment will be made to the participant's
beneficiary, as specified in the company provided life
insurance policy.
Exhibit 10.69
EXECUTIVE SEVERANCE AGREEMENT
THIS EXECUTIVE SEVERANCE AGREEMENT (the "Agreement") is
entered into as of the 5th day of January, 1998, by and between
RightCHOICE Managed Care, Inc., a Missouri corporation
("RightCHOICE"), and Michael Fulk (the "Executive").
W I T N E S S E T H:
WHEREAS, RightCHOICE has engaged the services of Executive
as an "at-will" employee of RightCHOICE; and
WHEREAS, RightCHOICE and Executive have entered into an
Officer Severance Agreement dated January 5, 1998 (the "Officer
Agreement") under which, as a condition of Executive's
employment, Executive has agreed to be bound by certain covenants
set forth in the Officer Agreement and RightCHOICE has agreed to
provide Executive certain severance benefits upon the terms and
conditions set forth in the Officer Agreement;
WHEREAS, the Compensation Committee of RightCHOICE's Board
of Directors believes that the concerns applicable to senior
executives when certain corporate events occur are such that, in
order to facilitate senior executives' focusing on management
issues in a manner that best serves the interests of all
stakeholders, such executives of RightCHOICE should have the
protections set forth herein in the event that a Change in
Control, as defined herein, occurs;
NOW, THEREFORE, in consideration of the mutual promises
herein contained, and intending to be legally bound, the parties
hereto do hereby agree as follows:
SECTION 1
TERM OF AGREEMENT
The Agreement shall be effective as of the date first
written above and shall continue in effect until terminated in
accordance with the provisions of Section 5 hereof.
SECTION 2
DEFINITIONS
The following definitions shall apply for purposes of the
Agreement:
A. Affiliate. "Affiliate" shall have the same meaning as
it is given in the Officer Agreement.
B. Annual Compensation. "Annual Compensation" shall mean
the highest aggregate amount of the following items of
compensation paid in cash (or which would have been paid in cash
if they were not deferred pursuant to any qualified or
nonqualified deferred compensation arrangement or contributed to
a welfare benefit plan pursuant to an election under a cafeteria
plan) to Executive by the Company during a calendar year which is
in the most recent five-consecutive-calendar-year period (or such
shorter period of consecutive calendar years during which
Executive has been employed by the Company) ending on or before
the date of a Change in Control:
(i) base salary; and
(ii) payments under any of the following incentive programs:
- Supplemental Income Plan;
- Short Term Public Offering Bonus;
- Management Incentive Plan (MIP);
- ABCBS Incentive Plan (AIP);
- Long Term Incentive Program;
- Sign-On Bonus;
- Equity 2000;
- Cost Reduction Incentive Plan;
- Sales Incentive Plan; and
- payments under any other incentive programs to the extent
that the Compensation Committee of the RightCHOICE Managed Care,
Inc. Board of Directors specifically approves payments under such
incentive programs for inclusion in Annual Compensation for
purposes of this Agreement.
For purposes of clarity and without limiting the generality of
the foregoing definition, no amounts paid to Executive pursuant
to any qualified or nonqualified deferred compensation
arrangement, any cafeteria plan or any other benefit plan qualify
for inclusion in Annual Compensation, regardless of the source of
any such amounts and no award of stock options, restricted stock
or other rights under the Equity Incentive Plan, nor any amounts
received or income recognized in connection with receipt of any
such award or exercise of any rights under any such award, shall
be included in Annual Compensation.
C. Base Pay. "Base Pay" shall have the same meaning as
that term is given under the Officer Agreement.
D. Cause. "Cause" shall have the same meaning as that
term is given under the Officer Agreement.
E. Change in Control. "Change in Control" shall mean the
occurrence, while Executive is employed by Company and this
Agreement is in effect, of any one or more of the following
events:
(i) the merger, consolidation or other
reorganization of Company in which any class of the
outstanding common stock of Company is converted into or
exchanged for a different class of securities of the
Company, a class of securities of any other issuer, except
an Affiliate, cash or other property (provided, however,
that, regardless of anything to the contrary in this
Agreement, the conversion or exchange of the outstanding
Class B common stock of RightCHOICE Managed Care, Inc. into
or for Class A common stock of RightCHOICE Managed Care,
Inc. shall not be deemed to be a Change in Control);
(ii) the sale, lease or exchange of all or
substantially all of the assets of Company or Parent to any
other corporation or entity (except an Affiliate);
(iii) the final adoption, in a manner making
such plan legally effective without any higher level of
approval or action, of a plan of complete liquidation and
dissolution of the Company or Parent;
(iv) the acquisition (other than acquisition
pursuant to any other clause of this definition) by any
person or entity (including without limitation a
partnership, limited partnership, syndicate or other group),
of more than fifty (50) percent (based on total voting
power) of any class of Company's or Parent's outstanding
stock (or other equity ownership interests); provided,
however, that nothing in this Section 2(E)(iv) shall be
construed as deeming a Change in Control to have occurred if
any such person or entity that is considered to own more
than fifty (50) percent (based on total voting power) of
such class of Company's or Parent's outstanding stock (or
other equity ownership interests) prior to such acquisition,
acquires additional shares of such class of stock (or other
equity ownership). Where an entity does not have
outstanding stock (such as the Parent), the above will be
deemed to have occurred if a transaction occurs in which the
entity becomes subject to the direction or oversight by a
person that is not an Affiliate, and such direction or
oversight includes the ability of the person to set policy
for the entity, and/or govern the operations of the Parent,
and/or control the entity's assets or the stock the entity
owns in RightCHOICE Managed Care, Inc.
(v) as a result of, or in connection with, a
contested election of directors of the Company, the persons
who were directors of Company before such election cease to
constitute a majority of the directors of Company;
(vi) as a result of, or in connection with, an
election of directors of Parent, the persons who were
directors of Parent before such election cease to constitute
a majority of the directors of Parent; or
(vii) RightCHOICE Managed Care, Inc. ceasing
to have a class of its stock listed and actively traded on a
nationally recognized stock exchange.
In the event that no single transaction or event has occurred
that qualifies as a Change in Control under the foregoing
definition, in determining whether a Change in Control has
occurred, a series of transactions and/or events may be
considered to be a single transaction or event; provided,
however, that elections occurring during no more than eighteen
(18) months shall be aggregated for purposes of determining
whether a series of transactions or events qualifies as a Change
in Control under Section 2(E)(v) or 2(E)(vi). If a series of
transactions and/or events is deemed to constitute a single
transaction or event constituting a Change in Control under the
preceding sentence, such Change in Control will be deemed to
occur on the date of completion of the last transaction or event
included in the series of transactions and/or events constituting
such Change in Control or such earlier date after the beginning
of such series or transactions and/or events as Executive elects.
Any person or entity that is regularly in the business of lending
money may, under the terms of an agreement executed in connection
with extending financing, be granted the right to enforce
covenants requiring certain financial ratios or business
practices to be maintained, so long as such requirements are
typical of the covenants required by lenders generally in
connection with financing similar to that provided in connection
with such agreement, without a Change in Control being deemed to
have occured. For purposes of this definition only, no entity
shall be considered a Parent or an Affiliate unless such entity
had that status prior to the transaction or event (or the first
in a series of transactions and/or events aggregated as a single
transaction or event pursuant to this paragraph) that would have
constituted a Change in Control.
F. Code. "Code" shall have the same meaning as that term
is given under the Officer Agreement.
G. Company. "Company" shall mean RightCHOICE, except
that, if any person or entity other than RightCHOICE employs
Executive and is obligated by agreement, operation of law or
otherwise to abide by and be bound by the provisions of this
Agreement, then "Company" shall mean that person or entity;
provided, however, that the substitution of another person or
entity as "Company" under this Agreement shall not be construed
as removing from, or eliminating with respect to, RightCHOICE or
any other person or entity that subsequently employs Executive
and becomes bound by the provisions of this Agreement, any of the
protections, rights and remedies accruing to the "Company" under
the provisions of Section 4 of this Agreement.
H. Date of Termination. "Date of Termination" shall mean
the effective date of Executive's termination of employment. If
Executive delivers a Notice of Termination hereunder to Company,
then the Date of Termination shall be thirty (30) days following
the date such Notice of Termination is delivered or mailed to
Company in accordance with Section 6(B) hereof; provided,
however, that in such event Company shall have the right to
accelerate such Date of Termination by written notice of such
acceleration delivered or mailed to Executive in accordance with
Section 6(B) hereof. If Company delivers or mails a Notice of
Termination hereunder to Executive in accordance with Section
6(B) hereof, then the Date of Termination shall be the date
specified by Company in such Notice of Termination.
I. Designated Beneficiary. "Designated Beneficiary" shall
mean the beneficiary designated by Executive in accordance with
the Officer Agreement.
J. Disabled. "Disabled" shall have the same meaning as
that term is given under the Officer Agreement.
K. Employee Statement. "Employee Statement" shall have
the same meaning as that term is given under the Officer
Agreement.
L. Executive Severance Benefits. "Executive Severance
Benefits" shall mean the benefits described in Section 3(B)
hereof.
M. Good Reason. "Good Reason" shall mean the occurrence,
without the written consent of Executive and within twenty-four
(24) months following a Change in Control, of any one or more of
the following events (provided, however, that none of the
following events shall constitute Good Reason if at the time of
the occurrence of such event, or during the three-month period
prior to such occurrence, there is Cause):
(i) the assignment to Executive of any
duties or responsibilities inconsistent with
Executive's status as a senior executive (that is, an
executive holding the position of Senior Vice President
or above) of Company or a substantial adverse
alteration in the nature or status of Executive's
responsibilities, job title or position from those in
effect immediately prior to the Change in Control;
(ii) a reduction by Company in the annual
base salary that was applicable to Executive
immediately prior to the Change in Control, a change to
the short-term bonus formula that was applicable to
Executive immediately prior to the Change in Control
that reduces the amount payable at target level of
performance, or a change to the long-term incentive
formula that was applicable to Executive immediately
prior to the Change in Control that reduces the stock
options (or other award) at target level of
performance;
(iii) the relocation of Executive's
principal place of performing his duties as an employee
of the Company to a location in excess of seventy-five
(75) miles from the location that was, immediately
prior to the Change in Control, Executive's principal
place of performing his duties as an employee of
Company;
(iv) a material reduction in the
benefits and perquisites provided to Executive by
Company or which Executive was eligible to receive from
Company immediately prior to the Change in Control; or
(v) Company's terminating the Agreement in
violation of Section 5 hereof.
N. Good Reason Termination. "Good Reason Termination"
shall mean Executive's terminating employment with the Company
following the occurrence of an event constituting Good Reason,
but only if:
(i) Executive, within sixty (60) days after being
notified of or becoming aware of such event, objects to such
event by delivering Notice of Termination to Company in
accordance with Section 6(B) hereof;
(ii) Company, having received Notice of
Termination pursuant to Section 2(N)(i), does not reverse
the action or otherwise remedy the situation cited in the
Notice of Termination as constituting Good Reason within ten
(10) days after receiving such Notice of Termination; and
(iii) Executive terminates employment within
three (3) months after being notified of or becoming aware
of the occurrence of the event cited as constituting Good
Reason in the Notice of Termination.
O. Involuntary Termination. "Involuntary Termination"
shall mean the termination of Executive's employment by action of
Company within twenty-four (24) months following a Change in
Control for any reason other than Cause; provided, however, that
the termination of Executive's employment by Company shall not be
an Involuntary Termination if, immediately following such
termination of employment, Executive is employed by another
employer that is to abide by the provisions of this Agreement as
described in Section 2(G) hereof.
P. Notice of Termination. "Notice of Termination" shall
mean:
(i) a notice from Executive to Company advising
Company of Executive's decision to terminate Executive's
employment; or
(ii) a notice from Company to Executive
advising Executive of Company's decision to terminate
Executive's employment.
A Notice of Termination shall be delivered or mailed in
accordance with Section 6(B) hereof. If a Notice of Termination
is from Executive to Company and if Executive believes such
termination is for Good Reason, then such Notice of Termination
shall specify that such termination is a termination for Good
Reason, the event(s) which Executive believes constitute Good
Reason and the facts and circumstances supporting such belief of
Executive. If a Notice of Termination is from Company to
Executive and if Company believes such termination is for Cause,
then such Notice of Termination shall specify that such
termination is for Cause and shall set forth in reasonable detail
the facts and circumstances supporting such belief of Company.
Q. Parent. "Parent" shall mean any entity owning,
directly or indirectly, fifty percent (50%) or more (based on
voting power) of the Company's outstanding stock or other equity
ownership interests.
R. Standard Severance Benefits. "Standard Severance
Benefits" shall mean the benefits described in Section 3(A) of
the Officer Agreement.
SECTION 3
SEVERANCE BENEFITS
A. Standard Severance Benefits. No benefits shall be
payable to Executive under this Agreement unless and until all
conditions specified herein are met, including, without
limitation, the occurrence of a Change in Control with the
necessary subsequent effect on Executive's employment. Prior to
the occurrence of a Change in Control, any severance benefits due
to Executive upon termination of employment with Company will be
determined solely under the Officer Agreement. Executive agrees
that, if at any time Executive qualifies for benefits under this
Agreement, the Officer Agreement will terminate automatically and
the terms of the Officer Agreement will be given no further
effect whatsoever (except to the extent such terms are
incorporated herein or items in this Agreement are determined
with reference to such terms), Executive will have no rights
whatsoever arising under or in connection with the Officer
Agreement, no payment of any benefits provided for in the Officer
Agreement will be made to Executive and this Agreement will
constitute the sole and exclusive authority for payment of
severance benefits to Executive. Regardless of anything to the
contrary in the preceding sentence, if at any time Executive
begins receiving Standard Severance Benefits, this Agreement will
terminate automatically and its terms will be given no further
effect whatsoever, Executive will have no rights whatsoever
arising under or in connection with this Agreement, no payment of
any benefits provided for herein will be made to Executive and
the Officer Agreement will constitute the sole and exclusive
authority of payment of severance benefits to Executive.
B. Executive Severance Benefits. Subject to Sections
3(C), 3(D), 3(E) and 4(D)(ii) hereof, in the event of Executive's
Involuntary Termination or Good Reason Termination, Company shall
pay for outplacement services for Executive of the type
customarily provided by Company to senior execuitves at the time
of Executive's Involuntary Termination or Good Reason Termination
and shall pay Executive an amount equal to the greater of:
(i) two (2) times Executive's Annual Compensation; or
(ii) an amount equal to:
(a) three (3) times Executive's Base Pay plus,
(b) for a period of twelve (12) months
starting on the Date of Termination, an amount
equal to the portion of the premiums (to the
extent such premiums are due) for Executive's
health, dental, vision and life insurance that is
equivalent to the portion of the premiums for such
coverages that the Company pays on behalf of
similarly situated executives employed by Company
during such twelve (12) month period.
Such Executive Severance Benefits will commence as soon as
practicable following the Date of Termination, and will be paid
in twenty-four (24) substantially equal monthly installments, in
the case of Executive Severance Benefits under Section 3(B)(i)
above, or in thirty-six (36) monthly installments, in the case of
Executive Severance Benefits under Section 3(B)(ii) above, with
the first 12 such installments equaling 1/36th of the amount
determined under Section 3(B)(ii)(a) plus 1/12th of the amount
determined under Section 3(B)(ii)(b) above and the remaining such
installments equaling 1/36th of the amount determined under
Section 3(B)(ii)(a). Company's obligation to pay the amounts
specified in Section 3(B)(ii)(b) above shall be reduced by any
and all amounts Company pays toward Executive's health, dental,
vision and life insurance with respect to periods after the Date
of Termination.
C. Suspension or Termination of Severance Benefits:
Nonentitlement.
(i) Dispute. If at any time a party to this
Agreement notifies the other party pursuant to Section 6(B)
hereof that one party disputes the position of the other
party with respect to any provision of this Agreement, then
Company may at any time elect to suspend some or all
payments hereunder with respect to Executive (or elect not
to commence such payments if payments have not yet
commenced) until such dispute is finally resolved either by
mutual written agreement of the parties or a binding
arbitration award pursuant to Section 6(H) hereof. If
pursuant to such resolution of the dispute, retroactive
payments are to be made to Executive or payments
representing reimbursements are to be made to Company, then
unless otherwise provided under such resolution, such
payments shall bear interest at the rate provided in Section
1274(d)(2)(B) of the Code commencing at the time such
payments would have been made absent dispute (in the case of
retroactive payments) or commencing at the time such
payments were made (in the case of reimbursements).
(ii) Subsequent Employment. If at any time
while Executive is entitled to Executive Severance Benefits
hereunder, Executive is employed (including employment by
the Company or an Affiliate, employment by any other
employer or any form of self-employment) then (a) Company
may in its discretion at any time following the date of
commencement of such employment, pay to Executive the
aggregate remaining amounts to be paid to Executive under
Section 3(B)(i) or 3(B)(ii)(a) hereof in a lump sum; and (b)
payments for outplacement services and payments under
Section 3(B)(ii)(b) hereof shall cease as of the date of
commencement of such employment, but if payments for
outplacement services and/or under Section 3(B)(ii)(b) are
made by Company subsequent to such date then Company may
withhold the amount of any such payments from the amount
otherwise to be paid pursuant to Section 3(B)(ii)(a) hereof,
and Executive shall pay to Company on demand any such excess
amount not so withheld, with such excess amount to bear
interest at the rate provided in Section 1274(d)(2)(B) of
the Code commencing thirty (30) days after such demand.
(iii) Disability. If Executive is Disabled
during any period while Executive is entitled to Executive
Severance Benefits hereunder, then, during any such period
that Executive is Disabled, any amounts payable under
Section 3(B) hereof during such period shall be reduced (but
not to less than zero) by the amounts paid or to be paid
with respect to such period to Executive pursuant to any
long-term disability plan maintained by Company.
(iv) Death. If Executive dies during any
period while Executive is entitled to Executive Severance
Benefits hereunder, then a lump sum amount equal to the
total remaining amounts payable to Executive at the time of
Executive's death under Section 3(B) hereof shall be paid to
Executive's Designated Beneficiary; provided, however, that
such lump sum amount shall be reduced, but not to less than
zero, by any amounts payable on account of Executive's death
to any beneficiary designated by Executive other than
Company under any Company life insurance program.
(v) Criminal Charges. If at any time after
Executive Severance Benefits become payable hereunder and
prior to the completion of the payment of such benefits
Executive is charged with a felony, or other crime involving
moral turpitude, which crime relates to activities of
Executive occurring during the period Executive was employed
by Company or its predecessor(s) under this Agreement, then
Company may suspend such payments until such criminal charge
is resolved. Company shall resume payments and make any
retroactive payments (with interest on such retroactive
payments at the rate provided in Section 1274(d)(2)(B) of
the Code) commencing at the time such payments would have
been made absent suspension under this Section 3(C)(v) after
such criminal charge is resolved; provided, however, that
such payments shall cease and no further payments shall be
made at any time Executive is convicted of, or enters a
guilty plea to, such crime by or before a court of competent
jurisdiction.
D. Limitations on Benefits.
(i) Code Limitations. In the event that the
aggregate of any amounts payable to or on behalf of
Executive under the Agreement and under any other plan,
agreement or policy of Company or any Affiliate would
otherwise result in the imposition of tax under Section 4999
of the Code due to an excess parachute payment, as
determined by Company's independent auditors, then the
amounts payable to or on behalf of Executive under the
Agreement shall be reduced to the extent necessary (but not
below zero) so that such aggregate amounts shall not be a
parachute payment. For purposes of determining any
limitation under this Section 3(D)(ii): (a) no portion of
any benefit the receipt or enjoyment of which Executive
shall have effectively waived in writing shall be taken into
account, and (b) the value of any non-cash benefit or any
deferred payment or benefit shall be determined by the
Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code. If
the Company's independent auditors determine that payment
that would be a parachute payment has been made to Executive
hereunder, then the excess of (a) the amount of such payment
actually made hereunder over (b) the amount that could be
paid hereunder without any amount payable hereunder being a
parachute payment, shall constitute a loan by Company to
Executive, payable to Company upon demand with interest at
the rate provided in Section 1274(d)(2)(B) of the Code
commencing as of the date or dates of payment by Company of
such excess amount.
E. General Waiver and Release. Notwithstanding any
provision to the contrary in the Agreement, Executive
acknowledges that in addition to other conditions set forth in
the Agreement, Executive Severance Benefits shall be conditioned
upon the prior execution by Executive of a general waiver and
release (hereinafter referred to as "Waiver") as described in
this Section 3(E), and Executive shall not be eligible for
Executive Severance Benefits unless and until Executive has
executed the Waiver within ninety (90) days following the later
of Executive's termination of employment. The Waiver shall be
substantially in the form attached hereto as Exhibit A and shall
generally waive all claims Executive has or may have against
Company or an Affiliate, and any successors or predecessors
thereto, and shall release Company and all Affiliates, and any
successors and predecessors thereto, from all liability with
respect to any such claims; provided, however, that Executive
shall not waive, and there shall be no release with respect to,
any claim (other than a claim disputing the validity of this
Section 3(E) or the Waiver) of Executive to enforce any one or
more of the provisions of the Agreement.
SECTION 4
EXECUTIVE'S COVENANTS
A. Employee Statement. Executive agrees to abide by the
Employee Statement (including, but not limited to, the Company
Statement of Corporate Ethics).
B. Covenant Not To Disclose. Executive acknowledges that
during the course of Executive's employment with Company,
Executive has or will have access to and knowledge of certain
information and data which Company considers confidential, and
that the release of such information or data to unauthorized
persons could be detrimental to Company or an Affiliate. As a
consequence, Executive hereby agrees and acknowledges that
Executive owes a duty to Company not to disclose, and agrees
that, during and after the term of Executive's employment,
Executive will not communicate, publish or disclose to any person
anywhere or use any Confidential Information (as defined below)
for any purpose except in accordance with the prior written
consent of Company, where necessary or appropriate to carry out
Executive's duties as an employee of Company, or as required by
law or legal process. Executive will use Executive's best efforts
at all times to hold in confidence and to safeguard any
Confidential Information from becoming known by any unauthorized
person and, in particular, will not permit any Confidential
Information to be read, duplicated or copied except in accordance
with the prior written consent of the Company, where necessary or
appropriate to carry out Executive's duties as an employee of
Company, or as may be required by law or legal process. Executive
will return to Company all Confidential Information in
Executive's possession or under Executive's control when the
duties of Executive as an employee of the Company no longer
require Executive's possession thereof, or whenever Company shall
so request, and, in any event, will promptly return all such
Confidential Information if Executive's employment with Company
terminates and will not retain any copies thereof. For the
purpose of this Agreement, "Confidential Information" shall mean
any information or data used by or belonging or relating to
Company or an Affiliate which, if disclosed, could be detrimental
to Company or an Affiliate, including, but not limited to, any
such information relating to Company's, or an Affiliate's,
members or insureds, trade secrets, proprietary data and
information relating to Company's, or an Affiliate's, past,
present or future business, price lists, client lists, processes,
procedures or standards, know-how, manuals, business strategies,
records, drawings, specifications, designs, financial
information, whether or not reduced to writing, or any other
information or data which Company advises Executive is
Confidential Information.
C. Covenant Not to Compete.
(i) Executive agrees that during the term of
Executive s employment by Company and for a period
consisting of the greater of: (i) the period over which any
Executive Severance Benefits are to be paid under this
Agreement (whether or not payment is accelerated hereunder),
or (ii) one year from and after the termination of
Executive's employment (such term of employment and
applicable subsequent period are referred to collectively
herein as the "Noncompetition Period"), Executive will not
directly or indirectly, without the express prior written
consent of Company:
(a) own or have any interest in or act
as an officer, director, partner, principal, employee,
agent, representative, consultant to or independent
contractor of, any person, firm, corporation,
partnership, business trust, limited liability company
or any other entity or business located in or doing
business in Company's geographic market which during
the Noncompetition Period is engaged in competition in
any substantial manner with Company or an Affiliate,
provided Executive in any such capacity directly or
indirectly performs services in an aspect of such
business which is competitive with Company or an
Affiliate;
(b) divert or attempt to divert
clients, customers or accounts of Company which are
clients, customers or accounts during the
Noncompetition Period; or
(c) hire, or attempt to solicit to
hire, for any other person, firm, company, corporation,
partnership, business trust, limited liability company
or any other entity, whether or not owned (in whole or
in part) by Executive, any current employee of Company
as of the time of such hire or attempt to solicit to
hire or former employee of Company who has been
employed by Company within the twelve-month period
immediately preceding the date of such hire or attempt
to solicit to hire.
(ii) With respect to Executive's obligations
under this Section 4(C), Executive acknowledges that
Company's geographic market is: (a) the State of Missouri;
and (b) a seventy-five (75) mile radius surrounding each of
St. Louis, Missouri and Kansas City, Missouri.
(iii) The restrictions contained in this
Section 4(C) are considered by the parties hereto to be
fair, reasonable and necessary for the protection of the
legitimate business interests of Company.
(iv) Executive acknowledges that Executive's
experience and capabilities are such that, notwithstanding
the restrictions imposed in this Section 4(C), he believes
that he can obtain employment reasonably equivalent to his
position with Company, and an injunction against any
violation of the provisions of this Section 4(C) will not
prevent Executive from earning a livelihood reasonably
equivalent to that provided through his position with
Company.
D. Certain Remedies.
(i) Recognizing that irreparable injury will
result to Company in the event of the breach or threatened
breach of any of the foregoing covenants and assurances by
Executive contained in this Section 4, and that Company's
remedies at law for any such breach or threatened breach
will be inadequate, if after written notice of breach
delivered or mailed to Executive in accordance with Section
6(B) hereof Executive takes no satisfactory action to remedy
such breach and abide by this Agreement, or absent such
notice in the event such breach cannot be remedied, then
Company, in addition to such other rights or remedies which
may be available to it (including, without limitation,
recovery of monetary damages from Executive), shall be
entitled to an injunction, including a mandatory injunction,
to be issued by any court of competent jurisdiction ordering
compliance with this Agreement or enjoining and restraining
Executive, and each and every person, firm or company acting
in concert or participation with Executive, from the
continuation of such breach and, in addition thereto,
Executive shall pay to Company all ascertainable damages,
including costs and reasonable attorneys' fees, sustained by
Company by reason of the breach or threatened breach of said
covenants and assurances.
(ii) In addition to the remedies described in
Section 4(D)(i), in the event of a material breach of this
Agreement by Executive Company shall no longer be obligated
to pay any benefits to Executive under this Agreement.
(iii) The covenants and obligations of
Executive under this Section 4 are each independent
covenants and are in addition to and not in lieu of or
exclusive of any other obligations and duties of Executive
to the Company, whether express or implied in fact or in
law.
SECTION 5
AMENDMENT OR TERMINATION OF AGREEMENT
Company may terminate this Agreement effective as of any
date by giving Executive, in accordance with Section 6(B) hereof,
at least one hundred eighty (180) days' prior written notice of
such termination of this Agreement, specifying the effective date
of such termination; provided, however, that Company may not
terminate this Agreement within twenty-four (24) months following
a Change in Control, even if notice of termination of this
Agreement was given prior to such Change in Control. No notice of
termination of this Agreement shall be given any effect
whatsoever, and Executive's and Company's obligations under this
Agreement shall continue as if such notice of termination had not
been given, in the event that, while this Agreement remains in
effect during the notice period, a Change in Control occurs
and/or Executive incurs termination for Cause, Involuntary
Termination or Proper Reason Termination. Regardless of anything
to the contrary in this Agreement, no termination of this
Agreement shall terminate Executive's obligations under Sections
4(A) and (B) of this Agreement. Company and Executive may amend
this Agreement at any time by written instrument signed by
Company and Executive.
SECTION 6
MISCELLANEOUS
A. Employment. This Agreement does not, and shall not be
construed to, give Executive any right to be retained in the
employ of Company, and no rights granted under this Agreement
shall be construed as creating a contract of employment. The
right and power of Company to dismiss or discharge Executive "at
will" is expressly reserved.
B. Notice. For the purpose of this Agreement, notices and
all other communications provided for in the Agreement shall be
in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Company:
Human Resources Department
Attention: Vice President of Human Resources
1831 Chestnut Street
St. Louis, MO 63I03-2275
If to Executive:
Last known address shown on records of Company
or to such other address as either party may have furnished to
the other in writing, except that notice of change of address
shall be effective only upon receipt.
C. Entire Agreement. This Agreement cancels and
supersedes all previous and contemporaneous agreements (other
than the Officer Agreement) relating to the subject matter of
this Agreement, written or oral, between the parties hereto and
contains the entire understanding of the parties hereto and shall
not be amended, modified or supplemented in any manner whatsoever
except as otherwise provided herein.
D. Captions. The headings of the sections of this
Agreement have been inserted for convenience of reference only
and shall in no way restrict or otherwise modify any of the terms
or provisions hereof.
E. Governing Law. This Agreement and all rights and
obligations of the parties hereunder shall be governed by, and
construed and interpreted in accordance with, the laws of the
State of Missouri without regard to that state's choice of law
provisions.
F. Assignment. This Agreement is personal and not
assignable by Executive, but it may be assigned by Company,
without notice to or consent of Executive, to any assignee
provided such assignee agrees to abide by and be bound by the
provisions of the Agreement and the Agreement shall thereafter be
enforceable by such assignee. During Executive's lifetime the
Agreement and all rights and obligations of Executive hereunder
shall be enforceable by and binding upon Executive's guardian or
other legal representative in the event Executive is unable to
act on his own behalf for any reason whatsoever, and upon
Executive's death the Agreement and all rights and obligations of
Executive hereunder shall inure to the benefit of and be
enforceable by and binding upon Executive's Designated
Beneficiary.
G. Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the
same instrument.
H. Binding Arbitration. Any dispute or controversy
arising under or in connection with this Agreement shall be
settled exclusively by binding arbitration in St. Louis,
Missouri, in accordance with the rules of the American
Arbitration Association then in effect; provided, however, that,
regardless of anything to the contrary in the rules of the
American Arbitration Association, the arbitrator shall have
authority to review all findings of fact, determinations of
benefits and interpretations of this Agreement made by the
Company and to overturn same, and substitute a different finding
of fact, determination of benefits or interpretation of this
Agreement therefor, if the arbitrator determines, based on the
record in such arbitration and such other factors as he
determines are relevant, that he would have made a different
finding of fact, determination of benefits or interpretation of
this Agreement than the Company made in any particular instance.
Judgment may be entered on the arbitrator's award in any court
having jurisdiction.
I. Invalidity of Provisions. In the event that any
provision of the Agreement is adjudicated to be invalid or
unenforceable under applicable law, the validity or
enforceability of the remaining provisions shall be unaffected.
To the extent that any provision of the Agreement is adjudicated
to be invalid or unenforceable because it is overbroad, that
provision shall not be void but rather shall be limited only to
the extent required by applicable law and shall be enforced as so
limited.
J. Waiver of Breach. Failure of Company to demand strict
compliance with any of the terms, covenants or conditions hereof
shall not be deemed a waiver of that term, covenant or condition,
nor shall any waiver or relinquishment by Company of any right or
power hereunder at any one time or more times be deemed a waiver
or relinquishment of that right or power at any other time or
times.
K. Pronouns. Pronouns in this Agreement used in the
masculine gender shall also include the feminine gender.
L. Withholding of Taxes. Company shall cause taxes to be
withheld from amounts paid pursuant to the Agreement as required
by law, and to the extent deemed necessary by Company may
withhold from amounts payable to Executive by Company outside of
the Agreement amounts equal to any taxes required to be withheld
from payments made pursuant to the Agreement, unless Executive
has previously remitted the amount of such taxes to Company.
M. Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of any successors and/or
assigns of the Company.
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY
BE ENFORCED BY THE PARTIES.
IN WITNESS WHEREOF, Company has caused this Agreement to be duly
executed in duplicate, and Executive has hereunto set his hand,
on the day and year first above written.
RIGHTCHOICE MANAGED CARE, INC.
By /s/ Sandra Van Trease
Title EVP & COO
Subscribed and sworn to before me, a Notary Public, this
20th day of Jan., 1998.
/s/ Michelle L. Toenjes
Notary Public
My Commission Expires: August 29, 1999
/s/ Michael Fulk
Executive
Subscribed and sworn to before me, a Notary Public, this 5th
day of Jan. , 1998.
/s/ Michelle L. Toenjes
Notary Public
My Commission Expires: August, 29, 1999
EXHIBIT A
GENERAL WAIVER AND RELEASE
This General Waiver and Release ("Waiver") is made and
entered into by and among __________________ ("Officer") and
RightCHOICE Managed Care, Inc. including its affiliates,
officers, directors, agents and employees (the "Company").
WHEREAS, Officer's active employment ended on
_______________, 19___ and Officer wants to begin receiving
benefits under the Officer Severance Agreement ("Severance
Agreement"), previously entered into between Officer and Company; and
WHEREAS, among other conditions, the Severance Agreement
specifically requires Officer to execute this Waiver in order to
receive such severance benefits;
NOW THEREFORE, for and in consideration of the covenants and
undertakings herein set forth, and for other good and valuable
consideration, which each party hereby acknowledges, it is agreed
as follows:
1. Officer represents and warrants that, as of the date of
this Waiver, to the best of his knowledge, no circumstances exist
or have existed which could result in Officer's termination for
Cause or a suspension or termination of benefits under the
Severance Agreement as provided in the Severance Agreement.
Regardless as to the reason for termination, Officer agrees not
to apply for rehire at the Company, it's subsidaries, affiliates
or parent.
2. Based on the representations and warranties provided by
Officer in clause No. 1 above, Company hereby acknowledges that
Officer's termination of employment with Company qualifies as
either an Involuntary Termination or a Proper Reason Termination
within the meaning of the Severance Agreement.
3. Officer agrees that he will not in any way disparage
the Company or its parent, subsidiary or other affiliated
entities, or their respective current or former officers,
directors and/or employees. Officer further agrees that he will
not make or solicit any comments, statements or the like to the
media or to others that may be considered to be derogatory or
detrimental to the good name or business reputation of any of the
aforementioned parties or entities. Company specifically
reserves the right to suspend or terminate benefits under the
Severance Agreement, if, subsequent to the execution of this
Waiver, Company becomes aware of information, or an event occurs,
which indicates noncompliance with this section or which would
otherwise result in a suspension or termination of such benefits
in accordance with the provisions of the Severance Agreement.
4. Officer agrees to, and does hereby, remise, release,
and forever discharge Company, and each and every one of its
parent, subsidiary and other affiliated entities, and their
respective agents, officers, executives, employees, successors,
predecessors, attorneys, trustees, directors, and assigns
(hereafter in this Section 4, all of the foregoing shall be
included in the term "Company"), from and with respect to all
matters, claims, charges, demands, damages, causes of action,
debts, liabilities, controversies, judgments, and suits of every
kind and nature whatsoever, foreseen or unforeseen, known or
unknown, which have arisen or may arise between Officer and
Company including, but not limited to, those in any way related
to Officer's employment and/or termination.
Officer further agrees that he will not file suit or
otherwise submit any other charge, claim, complaint, or action to
any agency, court, organization, or judicial forum (nor will he
permit any person, group of persons, or organization to take such
action on his behalf) against Company arising out of any actions
or non-actions that have occurred on the part of Company. Such
claims, complaints, and actions include, but are not limited to,
any based on alleged breach of an actual or implied contract of
employment between Officer and Company, or any claim based on
alleged unjust or tortious discharge (including any claim of
fraud, negligence, or intentional infliction of emotional
distress, any claim of discrimination and/or harassment based on
race, age, disability, taking a leave protected under the Family
and Medical Leave Act of 1993, and/or any other basis, any claim
of retaliation, any allegations of metal pain and suffering, loss
of reputation, humiliation or deprivation of Officer's legal
rights and any claim for lost salary, damages of any type or
description (including, without limitation, punitive,
compensatory or statutory), expenses of any type or description
(including, without limitation, attorney's fees)), any arising
under the Civil Rights Act of 1964, 42 U.S.C. Section 2000e et seq.,
the Age Discrimination in Employment Act, 29 U.S.C. Section 621 et
seq., the Fair Labor Standards Act of 1938, 29 U.S.C. Section 201 et
seq., the Rehabilitation Act of 1973, 29 U.S.C. Section 701 et seq.,
the Americans with Disabilities Act, 42 U.S.C. Section 2101, the Civil
Rights Act of 1871, 42 U.S.C. Section 1981, the Family and Medical
Leave Act of 1993, 19 U.S.C. Section 2601 et seq., the Missouri Human
Rights Act, Section 213.010 RSMo et seq., the Missouri Workers
Compensation law, Section 287 RSMo et seq., the Missouri Service Letter
Statute, Section 290.140 RSMo, or any other federal, state, or local
statutes or ordinances. Officer further agrees that in the event
that any person or entity should bring such a charge, claim,
complaint, or action on his behalf, he hereby waives and forfeits
any right to recovery under said claim and will exercise every
good faith effort to have such claim dismissed. Officer affirms
that he has no charge, claim, complaint or action against Company
pending in any government agency or court.
Notwithstanding the above, Officer shall not waive, and
there shall be no release with respect to, any claim (other than
a claim disputing the validity of section 3(D) of the Severance
Agreement or the provisions of this Waiver) of Officer to enforce
any one or more of the provisions of the Severance Agreement.
5. Pending Lawsuit. Officer agrees to make himself
available upon three days notice from Company, or its attorneys,
to be deposed, to testify at a hearing or trial or to accede to
any other reasonable request by Company in connection with any
lawsuit either currently pending against Company or any lawsuit
filed after Officer's separation that involves issues relating to
Officer's job responsibilities or to decisions made by him during
his employment with Company.
6. Injunctive Relief. In the event of a breach or
threatened breach of any of Officer's duties and obligations
under this Waiver, Company shall be entitled, in addition to any
other legal or equitable remedies Company may have in connection
therewith (including any right to damages that Company may
suffer), to a temporary, preliminary and/or permanent injunction
restraining such breach or threatened breach.
7. Invalidity of Provisions. In the event that any
provision of this Waiver is adjudicated to be invalid or
unenforceable under applicable law, the validity or
enforceability of the remaining provisions shall be unaffected.
To the extent that any provision of this Waiver is adjudicated to
be invalid or unenforceable because it is overbroad, that
provision shall not be void but rather shall be limited only to
the extent required by applicable law and enforced as so limited.
8. Knowing and Voluntary Waiver. Officer hereby
acknowledges that he is entering into this Waiver knowingly and
voluntarily and understands that he is waiving valuable rights he
may otherwise be entitled to.
9. Governing Law. This Waiver shall be construed and
governed by the laws of the State of Missouri, excluding its
choice of law provisions.
10. Gender. Provisions in this Waiver used in the
masculine gender shall also include the feminine gender, as
appropriate.
11. Successors and Assigns. This Waiver shall be binding
upon and inure to the benefit of any successors or assigns of
Officer or Company.
12. Defined Terms. Unless otherwise defined herein,
capitalized terms used herein shall have the meanings assigned to
them in the Severance Agreement.
13. Miscellaneous. The foregoing Waiver constitutes the
entire agreement among the parties and there are no other
understandings or agreements, written or oral, among them on this
subject. Separate copies of the document shall constitute
original documents which may be signed separately but which
together will constitute one single agreement. This Waiver will
not be binding on any party, however, until signed by all parties
or their representatives.
IN WITNESS WHEREOF, the undersigned have executed this
General Waiver and Release.
I HAVE READ THIS GENERAL WAIVER AND RELEASE, UNDERSTANDING
ALL ITS TERMS, AND SIGN IT AS MY FREE ACT AND DEED.
Date: ___________________________,__________________________________
Officer
Subscribed and sworn to before me, a Notary Public, this _____ day of
______________,_________.
_______________________________________
Notary Public
My Commission Expires:
I HAVE READ THIS GENERAL WAIVER AND RELEASE, UNDERSTANDING
ALL ITS TERMS, AND SIGN IT ON BEHALF OF COMPANY AS THE FREE ACT
AND DEED OF COMPANY.
Date: ________________________
COMPANY
By: _________________________
Name: _________________________
Title: __________________________
Subscribed and sworn to before me, a Notary Public, this _____ day of
______________,_________.
_______________________________________
Notary Public
My Commission Expires:
Exhibit 10.70
OFFICER SEVERANCE AGREEMENT
THIS OFFICER SEVERANCE AGREEMENT (the "Agreement") is
entered into as of the 5th day of January, 1998, by and between
RightCHOICE Managed Care, Inc., a Missouri corporation
("RightCHOICE"), and Michael Fulk (the "Officer").
W I T N E S S E T H:
WHEREAS, RightCHOICE has engaged the services of Officer as
an "at-will" employee of RightCHOICE; and
WHEREAS, as a condition of Officer's employment, Officer
agrees to be bound by certain covenants set forth herein and
RightCHOICE agrees to provide Officer certain severance benefits
upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises
herein contained, and intending to be legally bound, RightCHOICE
and Officer do hereby agree as follows:
SECTION 1
TERM OF AGREEMENT
The Agreement shall be effective as of the day first written
above and shall continue in effect until terminated in accordance
with the provisions of Section 5 hereof.
SECTION 2
DEFINITIONS
The following definitions shall apply for purposes of the
Agreement:
A. Affiliate. "Affiliate" shall mean any corporation or
other legal entity (other than Company) that is part of a group
of corporations and/or other legal entities under common control,
which group includes the Company and in which group each
corporation (or other legal entity) is deemed to be under common
control with the others if:
(i) it is in an unbroken chain of organizations
each of which is connected to a common parent corporation
(or other legal entity) by having at least 50% (based on
voting power) of its outstanding stock or other outstanding
equity ownership interest owned directly or indirectly by
that common parent corporation (or other legal entity); or
(ii) its board of directors (or, in the case of an
entity other than a corporation, other management authority
which, under the terms of its organizational documents,
serves a similar policy setting and governance function),
pursuant to the terms of a formal written agreement, is
subject to the direction or oversight by a person that is
not an Affiliate, such oversight includes setting policy
and/or governance of operations;
provided, however, that no corporation or entity shall be
considered an Affiliate solely because of its direct or indirect
ownership of an interest in The Epoch Group, L.C. and provided
further that no person or entity that is regularly in the
business of lending money shall be deemed to be an Affiliate
solely because, under the terms of an agreement executed in
connection with extending financing, the lender has the right to
enforce covenants requiring certain financial ratios or business
practices to be maintained, so long as such requirements are
typical of the covenants required by lenders generally in
connection with financing similar to that provided in connection
with such agreement. For purposes of clarity only (and without
limiting the generality of the foregoing definition), it is noted
that the common parent corporation referred to in the foregoing
definition qualifies as an Affiliate.
B. Base Pay. "Base Pay" shall mean the dollar amount
equal to the highest annual base salary rate applicable to
Officer during the two (2) years immediately prior to Officer's
Date of Termination.
C. Cause. "Cause" shall mean any one or more of the
following:
(i) Company's becoming aware of, or being
notified of, Officer's conviction of, or Officer's entry of
a guilty plea to, a felony or any other crime involving
moral turpitude by or before a court of competent
jurisdiction;
(ii) gross failure by Officer to perform
Officer's expected duties with Company (other than any such
failure resulting from Officer's incapacity due to physical
or mental illness or any such actual or anticipated failure
occurring after, and not before, the issuance of a Notice of
Termination by Officer for Proper Reason which is not
thereafter successfully disputed by Company) which gross
failure occurs or continues after: (a) the Company delivers
to Officer a written demand for substantial performance that
specifically identifies the expected duties of Officer, the
manner in which Company believes that Officer has not
substantially performed Officer's duties, and the time by
which Officer must demonstrate that he is performing or has
resumed performance of such duties in order to avoid a
determination that a gross failure by Officer to perform
such duties has occurred, and (b) the Officer has failed to
demonstrate that he is performing or has resumed performance
of the duties specified in such notice by the time specified
in such notice;
(iii) Company's becoming aware of, or being
notified of, Officer's willfully engaging in conduct which
Company determines is likely to be materially damaging or
detrimental to Company or to an Affiliate; or
(iv) Company's becoming aware of, or being
notified of, Officer's willfully engaging in conduct which
Company determines constitutes a material violation by
Officer of the Employee Statement.
D. Code. "Code" shall mean the Internal Revenue Code of
1986 as from time to time amended.
E. Company. "Company" shall mean RightCHOICE, except
that, if any person or entity other than RightCHOICE employs
Officer and is obligated by agreement, operation of law or
otherwise to abide by and be bound by the provisions of this
Agreement, then "Company" shall mean that person or entity;
provided, however, that the substitution of another person or
entity as "Company" under this Agreement shall not be construed
as removing from, or eliminating with respect to, RightCHOICE or
any other person or entity that subsequently employs Officer and
becomes bound by the provisions of this Agreement, any of the
protections, rights and remedies accruing to the "Company" under
the provisions of Section 4 of this Agreement.
F. Date of Termination. "Date of Termination" shall mean
the effective date of Officer's termination of employment with
Company. If Officer delivers a Notice of Termination hereunder
to Company, then the Date of Termination shall be thirty (30)
days following the date such Notice of Termination is delivered
or mailed to Company in accordance with Section 6(B) hereof;
provided, however, that in such event Company shall have the
right to accelerate such Date of Termination by written notice of
such acceleration delivered or mailed to Officer in accordance
with Section 6(B) hereof. If Company delivers or mails a Notice
of Termination hereunder to Officer in accordance with Section
6(B) hereof, then the Date of Termination shall be the date
specified by Company in such Notice of Termination.
G. Designated Beneficiary. "Designated Beneficiary" shall
mean one or more individuals or legal entities designated by
Officer on Exhibit A to this Agreement, but if there is no such
effective beneficiary designation at the time of Officer's death,
then Designated Beneficiary shall mean the legal representative
of Officer's estate. Exhibit A to this Agreement may be revoked
by Officer at any time by written instrument delivered to
Company, in which event a new Exhibit A may be completed and
executed by Officer and shall be effective upon receipt by
Company prior to the date of Officer's death.
H. Disabled. "Disabled" shall mean Officer is receiving,
or is currently entitled to receive pursuant to a determination
made by the Company, benefits under Company's long-term
disability plan, if any.
I. Employee Statement. "Employee Statement" shall mean
the Company's Code of Business Conduct, or, with respect to any
periods during which such Code of Business Conduct is not
applicable, any predecessor or successor thereto, or any other
set of rules and guidelines serving a similar purpose that may
become applicable, as each may be amended from time to time.
J. Involuntary Termination. "Involuntary Termination"
shall mean the termination of Officer's employment by action of
Company for any reason other than Cause; provided, however, that
the termination of Officer's employment by Company shall not be
an Involuntary Termination if immediately following such
termination of employment Officer is employed by another employer
that is to abide by the provisions of this Agreement as described
in Section 2(E) hereof.
K. Notice of Termination. "Notice of Termination" shall
mean:
(i) a notice from Officer to Company advising
Company of Officer's decision to terminate Officer's
employment; or
(ii) a notice from Company to Officer
advising Officer of Company's decision to terminate
Officer's employment.
A Notice of Termination shall be delivered or mailed in
accordance with Section 6(B) hereof. If a Notice of Termination
is from Officer to Company and if Officer believes such
termination is a Proper Reason Termination, then such Notice of
Termination shall specify that such termination is a Proper
Reason Termination, the event(s) which Officer believes
constitute Proper Reason and the facts and circumstances
supporting such belief of Officer. If a Notice of Termination is
from Company to Officer and if Company believes such termination
is for Cause, then such Notice of Termination shall specify that
such termination is for Cause and shall set forth in reasonable
detail the facts and circumstances supporting such belief of
Company.
L. Proper Reason. "Proper Reason" shall mean (i) the
reduction of Officer's normal base salary rate by twenty percent
(20%) or more, or (ii) a change in a short-term or long-term
incentive formula (e.g., a change in the percentage of base
salary to be awarded at target level of achievement) which
directly results in a reduction of twenty percent (20%) or more
in the overall target compensation which applies to Officer in a
given period compared to the overall target compensation which
would have applied to Officer during that period without such
change in bonus formula, or (iii) a change in Officer's primary
work location of more than seventy-five (75) miles from the
Officer's former primary work location; provided, however, that
no base salary rate reduction or bonus formula change or change
in primary work location shall constitute Proper Reason if:
(i) Officer consents in writing to such reduction
or change; or
(ii) at the time of such reduction or change,
or during the three-month period prior to the effective date
of such reduction or change, there is Cause; or
(iii) such reduction or change similarly
affects all officers of Company.
M. Proper Reason Termination. "Proper Reason Termination"
shall mean Officer's termination of his employment with the
Company following the occurrence of an event constituting Proper
Reason, but only if:
(i) Officer, within sixty (60) days after being
notified of or becoming aware of, whichever is earlier, such
event, objects to such event by delivering Notice of
Termination to Company in accordance with Section 6(B)
hereof;
(ii) Company, having received Notice of
Termination pursuant to Section 2(M)(i), does not reverse
the action or otherwise remedy the situation cited in the
Notice of Termination as constituting Proper Reason within
ten (10) days after receiving such Notice of Termination;
and
(iii) Officer terminates employment within
three (3) months after being notified of or becoming aware
of, whichever is earlier, the occurrence of the event cited
as constituting Proper Reason in the Notice of Termination.
N. Severance Benefits. "Severance Benefits" shall mean
the benefits described in Section 3(A) hereof.
SECTION 3
SEVERANCE BENEFITS
A. Severance Benefits. Subject to Sections 3(B), 3(C),
3(D) and 4(D)(ii) hereof, in the event of Officer's Involuntary
Termination or Officer's Proper Reason Termination, Company will:
(i) pay to Officer an amount equal to the
multiple of Officer's Base Pay specified in Exhibit B
hereto, payable in the number of substantially equal monthly
installments specified in Exhibit B, and commencing as soon
as practicable following the Date of Termination;
(ii) pay to Officer, for a period of twelve
(12) months starting on the Date of Termination, an amount
equal to the portion of the monthly premiums (to the extent
such premiums are due) for Officer's health, dental, vision
and life insurance that is equivalent to the portion of the
monthly premiums for such coverages that the Company pays on
behalf of similarly situated Officers employed by Company
during such twelve (12) month period; and
(iii) pay for outplacement services for
Officer of the type customarily provided by Company to
officers at the time of Officer's Involuntary Termination or
Proper Reason Termination.
Company's obligation to pay the amounts specified in Section
3(A)(ii) above shall be reduced by any and all amounts Company
pays toward Officer's health, dental, vision and life insurance
with respect to periods after the Date of Termination.
B. Suspension or Termination of Severance Benefits:
Nonentitlement.
(i) Dispute. If at any time a party to this Agreement
notifies the other party pursuant to Section 6(B) hereof
that one party disputes the position of the other party with
respect to any provision of this Agreement, then Company may
at any time elect to suspend some or all payments hereunder
with respect to Officer (or elect not to commence such
payments if payments have not yet commenced) until such
dispute is finally resolved either by mutual written
agreement of the parties or a binding arbitration award
pursuant to Section 6(H) hereof. If pursuant to such
resolution of the dispute, retroactive payments are to be
made to Officer or payments representing reimbursements are
to be made to Company, then unless otherwise provided under
such resolution, such payments shall bear interest at the
rate provided in Section 1274(d)(2)(B) of the Code
commencing at the time such payments would have been made
absent dispute (in the case of retroactive payments) or
commencing at the time such payments were made (in the case
of reimbursements).
(ii) Subsequent Employment. If at any time
while Officer is entitled to Severance Benefits hereunder
Officer is employed (including employment by Company,
employment by any other employer or any form of
self-employment) then (a) Company may in its discretion at
any time following the date of commencement of such
employment, pay to Officer the aggregate remaining amounts
to be paid to Officer under Section 3(A)(i) hereof in a lump
sum; and (b) payments under Sections 3(A)(ii) and 3(A)(iii)
hereof shall cease as of the date of commencement of such
employment, but if payments under Sections 3(A)(ii) and
3(A)(iii) are made by Company subsequent to such date then
Company may withhold the amount of any such payments from
the amount otherwise to be paid pursuant to Section 3(A)(i)
hereof, and Officer shall pay to Company on demand any such
excess amount not so withheld, with such excess amount to
bear interest at the rate provided in Section 1274(d)(2)(B)
of the Code commencing thirty (30) days after such demand.
(iii) Disability. If Officer is Disabled
during any period while Officer is entitled to Severance
Benefits hereunder, then during any such period that Officer
is Disabled, any amounts payable under Section 3(A)(i)
hereof during such period shall be reduced (but not to less
than zero) by the amounts paid or to be paid with respect to
such period to Officer pursuant to any long-term disability
plan maintained by Company.
(iv) Death. If Officer dies during any
period while Officer is entitled to Severance Benefits
hereunder, then a lump sum amount equal to the total
remaining amounts payable to Officer at the time of
Officer's death under Section 3(A)(i) hereof shall be paid
to Officer's Designated Beneficiary; provided, however, that
such lump sum amount shall be reduced, but not to less than
zero, by any amounts payable on account of Officer's death
to any beneficiary other than Company under any Company life
insurance program.
(v) Criminal Charges. If at any time after
Severance Benefits become payable hereunder and prior to the
completion of the payment of such benefits Officer is
charged with a felony, or other crime involving moral
turpitude, which crime relates to activities of Officer
occurring during the period Officer was employed by Company
or its predecessor(s) under this Agreement, then Company may
suspend such payments until such criminal charge is
resolved. Company shall resume payments and make any
retroactive payments (with interest on such retroactive
payments at the rate provided in Section 1274(d)(2)(B) of
the Code) commencing at the time such payments would have
been made absent suspension under this Section (3)(B)(v)
after such criminal charge is resolved; provided, however,
that such payments shall cease and no further payments shall
be made at any time Officer is convicted of, or enters a
guilty plea to, such crime by or before a court of competent
jurisdiction.
C. Code Limitations. In the event that the aggregate of
any amounts payable to or on behalf of Officer under the
Agreement and under any other plan, agreement or policy of
Company or any Affiliate would otherwise result in the imposition
of tax under Section 4999 of the Code due to an excess parachute
payment, as determined by Company's independent auditors, then
the amounts payable to or on behalf of Officer under the
Agreement shall be reduced to the extent necessary (but not below
zero) so that such aggregate amounts shall not be a parachute
payment. For purposes of determining any limitation under this
Section 3(C): (a) no portion of any benefit the receipt or
enjoyment of which Officer shall have effectively waived in
writing shall be taken into account, and (b) the value of any
non-cash benefit or any deferred payment or benefit shall be
determined by the Company's independent auditors in accordance
with the principles of Sections 280G(d)(3) and (4) of the Code.
If the Company's independent auditors determine that payment that
would be a parachute payment has been made to Officer hereunder,
then the excess of (a) the amount of such payment actually made
hereunder over (b) the amount that could be paid hereunder
without any amount payable hereunder being a parachute payment,
shall constitute a loan by Company to Officer, payable to Company
upon demand with interest at the rate provided in Section
1274(d)(2)(B) of the Code commencing as of the date or dates of
payment by Company of such excess amount.
D. General Waiver and Release. Notwithstanding any
provision to the contrary in the Agreement, Officer acknowledges
that in addition to other conditions set forth in the Agreement,
Severance Benefits shall be conditioned upon the prior execution
by Officer of a general waiver and release (hereinafter "Waiver")
as described in this Section 3(D), and Officer shall not be
eligible for Severance Benefits unless and until Officer has
executed the Waiver within ninety (90) days following Officer's
termination of employment.. The Waiver shall be substantially in
the form attached hereto as Exhibit C and shall generally waive
all claims Officer has or may have against Company, any
Affiliate, and any successors or predecessors thereto, and shall
release Company and all Affiliates, and any successors and
predecessors thereto, from all liability with respect to any such
claims; provided, however, that Officer shall not waive, and
there shall be no release with respect to, any claim (other than
a claim disputing the validity of this Section 3(D) or the
Waiver) of Officer to enforce any one or more of the provisions
of the Agreement.
SECTION 4
OFFICER'S COVENANTS
A. Employee Statement. Officer agrees to abide by the
Employee Statement (including, but not limited to, the Company
Statement of Corporate Ethics).
B. Covenant Not To Disclose. Officer acknowledges that
during the course of Officer's employment with Company, Officer
has or will have access to and knowledge of certain information
and data which Company considers confidential, and that the
release of such information or data to unauthorized persons could
be detrimental to Company or an Affiliate. As a consequence,
Officer hereby agrees and acknowledges that Officer owes a duty
to Company not to disclose, and agrees that, during and after the
term of Officer's employment, Officer will not communicate,
publish or disclose to any person anywhere or use any
Confidential Information (as defined below) for any purpose
except in accordance with the prior written consent of Company,
where necessary or appropriate to carry out Officer's duties as
an employee of Company, or as required by law or legal process.
Officer will use Officer's best efforts at all times to hold in
confidence and to safeguard any Confidential Information from
becoming known by any unauthorized person and, in particular,
will not permit any Confidential Information to be read,
duplicated or copied except in accordance with the prior written
consent of the Company, where necessary or appropriate to carry
out Officer's duties as an employee of the Company, or as may be
required by law or legal process. Officer will return to Company
all Confidential Information in Officer's possession or under
Officer's control when the duties of Officer as an employee of
the Company no longer require Officer's possession thereof, or
whenever Company shall so request, and in any event will promptly
return all such Confidential Information if Officer's employment
with Company terminates and will not retain any copies thereof.
For the purpose of this Agreement, "Confidential Information"
shall mean any information or data used by or belonging or
relating to Company or an Affiliate which, if disclosed, could be
detrimental to Company or an Affiliate, including, but not
limited to any such information relating to Company's, or an
Affiliate's, members or insureds, trade secrets, proprietary data
and information relating to Company's, or an Affiliate's past,
present or future business, price lists, client lists, processes,
procedures or standards, know-how, manuals, business strategies,
records, drawings, specifications, designs, financial
information, whether or not reduced to writing, or any other
information or data which Company advises Officer is Confidential
Information.
C. Covenant Not to Compete.
(i) Officer agrees that during the term of
Officer's employment by Company and for a period consisting
of the greater of: (a) the period over which any Severance
Benefits are to be paid under this Agreement (whether or not
payment is accelerated hereunder), or (b) one year from and
after the termination of Officer's employment (such term of
employment and applicable subsequent period are referred to
collectively herein as the "Noncompetition Period"), Officer
will not directly or indirectly, without the express prior
written consent of Company:
(a) own or have any interest in or act
as an officer, director, partner, principal, employee,
agent, representative, consultant to or independent
contractor of, any person, firm, corporation,
partnership, business trust, limited liability company
or any other entity or business located in or doing
business in Company's geographic market which during
the Noncompetition Period is engaged in competition in
any substantial manner with Company or an Affiliate,
provided Officer in any such capacity directly or
indirectly performs services in an aspect of such
business which is competitive with Company or an
Affiliate; or
(b) divert or attempt to divert
clients, customers or accounts of Company which are
clients, customers or accounts during the
Noncompetition Period; or
(c) hire, or attempt to solicit to
hire, for any other person, firm, company, corporation,
partnership, business trust, limited liability company
or any other entity, whether or not owned (in whole or
in part) by Officer, any current employee of Company as
of the time of such hire or attempt to solicit to hire
or former employee of Company who has been employed by
Company within the twelve-month period immediately
preceding the date of such hire or attempt to solicit
to hire.
(ii) With respect to Officer's obligations
under this Section 4(C), Officer acknowledges that Company's
geographic market is: (a) the State of Missouri; and (b) a
seventy-five (75) mile radius surrounding each of St. Louis,
Missouri and Kansas City, Missouri.
(iii) The restrictions contained in this
Section 4(C) are considered by the parties hereto to be
fair, reasonable and necessary for the protection of the
legitimate business interests of Company.
(iv) Officer acknowledges that Officer's
experience and capabilities are such that, notwithstanding
the restrictions imposed in this Section 4(C), he believes
that he can obtain employment reasonably equivalent to his
position with Company, and an injunction against any
violation of the provisions of this Section 4(C) will not
prevent the Officer from earning a livelihood reasonably
equivalent to that provided through his position with
Company.
D. Certain Remedies.
(i) Recognizing that irreparable injury will
result to Company in the event of the breach or threatened
breach of any of the foregoing covenants and assurances by
Officer contained in this Section 4, and that Company's
remedies at law for any such breach or threatened breach
will be inadequate, if, after written notice of breach
delivered or mailed to Officer in accordance with Section
6(B) hereof Officer takes no satisfactory action to remedy
such breach and abide by this Agreement, or absent such
notice in the event such breach cannot be remedied, then
Company, in addition to such other rights or remedies which
may be available to it (including, without limitation,
recovery of monetary damages from Officer), shall be
entitled to an injunction, including a mandatory injunction,
to be issued by any court of competent jurisdiction ordering
compliance with this Agreement or enjoining and restraining
Officer, and each and every person, firm or company acting
in concert or participation with Officer, from the
continuation of such breach and, in addition thereto,
Officer shall pay to Company all ascertainable damages,
including costs and reasonable attorneys' fees, sustained by
Company by reason of the breach or threatened breach of said
covenants and assurances.
(ii) In addition to the remedies described in
Section 4(D)(i), in the event of a material breach of this
Agreement by Officer, Company shall no longer be obligated
to pay any benefits to Officer under this Agreement.
(iii) The covenants and obligations of Officer
under this Section 4 are each independent covenants and are
in addition to and not in lieu of or exclusive of any other
obligations and duties of Officer to the Company, whether
express or implied in fact or in law.
SECTION 5
AMENDMENT OR TERMINATION OF AGREEMENT
A. Termination and Amendment Procedures. Company may
terminate this Agreement effective as of any date by giving
Officer, in accordance with Section 6(B) hereof, at least one
hundred eighty (180) days' prior written notice of such
termination of this Agreement, specifying the effective date of
such termination; provided, however, that Company may not
terminate this Agreement within twenty-four (24) months following
a Change in Control, even if notice of termination of this
Agreement was given prior to such Change in Control. No notice of
termination of this Agreement shall be given any effect
whatsoever, and Officer's and Company's obligations under this
Agreement shall continue as if such notice of termination had not
been given, in the event that, while this Agreement remains in
effect during the notice period, a Change in Control occurs
and/or Officer incurs termination for Cause, Involuntary
Termination or Proper Reason Termination. Regardless of anything
to the contrary in this Agreement, no termination of this
Agreement shall terminate Officer's obligations under Sections
4(A) and (B) of this Agreement. Company and Officer may amend
this Agreement at any time by written instrument signed by
Company and Officer.
B. Definition of Change in Control. For purposes of this
Section 5, "Change in Control" shall mean the occurrence, while
Officer is employed by Company and this Agreement is in effect,
of any one or more of the following events:
(i) the merger, consolidation or other
reorganization of Company in which any class of the
outstanding common stock of Company is converted into or
exchanged for a different class of securities of the
Company, a class of securities of any other issuer, except
an Affiliate, cash or other property (provided, however,
that, regardless of anything to the contrary in this
Agreement, the conversion or exchange of the outstanding
Class B common stock of RightCHOICE Managed Care, Inc. into
or for Class A common stock of RightCHOICE Managed Care,
Inc. shall not be deemed to be a Change in Control);
(ii) the sale, lease or exchange of all or
substantially all of the assets of Company or Parent to any
other corporation or entity (except an Affiliate);
(iii) the final adoption, in a manner making
such plan legally effective without any higher level of
approval or action, of a plan of complete liquidation and
dissolution of the Company or Parent;
(iv) the acquisition (other than acquisition
pursuant to any other clause of this definition) by any
person or entity (including without limitation a
partnership, limited partnership, syndicate or other group),
of more than fifty (50) percent (based on total voting
power) of any class of Company's or Parent's outstanding
stock (or other equity ownership interests); provided,
however, that nothing in this Section 5(B)(iv) shall be
construed as deeming a Change in Control to have occurred if
any such person or entity that is considered to own more
than fifty (50) percent (based on total voting power) of
such class of Company's or Parent's outstanding stock (or
other equity ownership interests) prior to such acquisition,
acquires additional shares of such class of stock (or other
equity ownership). Where an entity does not have
outstanding stock (such as the Parent), the above will be
deemed to have occurred if a transaction occurs in which the
entity becomes subject to the direction or oversight by a
person that is not an Affiliate, and such direction or
oversight includes the ability of the person to set policy
for the entity, and/or govern the operations of the Parent,
and/or control the entity's assets or the stock the entity
owns in RightCHOICE Managed Care, Inc.
(v) as a result of, or in connection with, a
contested election of directors of the Company, the persons
who were directors of Company before such election cease to
constitute a majority of the directors of Company;
(vi) as a result of, or in connection with, an
election of directors of Parent, the persons who were
directors of Parent before such election cease to constitute
a majority of the directors of Parent; or
(vii) RightCHOICE Managed Care, Inc. ceasing
to have a class of its stock listed and actively traded on a
nationally recognized stock exchange.
For purposes of this Section 5(B), "Parent" shall mean any entity
owning, directly or indirectly, fifty percent (50%) or more
(based on voting power) of the Company's outstanding stock or
other equity ownership interests. In the event that no single
transaction or event has occurred that qualifies as a Change in
Control under the foregoing definition, in determining whether a
Change in Control has occurred, a series of transactions and/or
events may be considered to be a single transaction or event;
provided, however, that elections occurring during no more than
eighteen (18) months shall be aggregated for purposes of
determining whether a series of transactions or events qualifies
as a Change in Control under Section 5(B)(v) or 5(B)(vi). If a
series of transactions and/or events is deemed to constitute a
single transaction or event constituting a Change in Control
under the preceding sentence, such Change in Control will be
deemed to occur on the date of completion of the last transaction
or event included in the series of transactions and/or events
constituting such Change in Control or such earlier date after
the beginning of such series or transactions and/or events as
Officer elects. Any person or entity that is regularly in the
business of lending money may, under the terms of an agreement
executed in connection with extending financing, be granted the
right to enforce covenants requiring certain financial ratios or
business practices to be maintained, so long as such requirements
are typical of the covenants required by lenders generally in
connection with financing similar to that provided in connection
with such agreement, without a Change in Control related to (iv)
above being deemed to have occured. For purposes of this
definition only, no entity shall be considered a Parent or an
Affiliate unless such entity had that status prior to the
transaction or event (or the first in a series of transactions
and/or events aggregated as a single transaction or event
pursuant to this paragraph) that would have constituted a Change
in Control.
SECTION 6
MISCELLANEOUS
A. Employment. This Agreement does not, and shall not be
construed to, give Officer any right to be retained in the employ
of Company, and no rights granted under this Agreement shall be
construed as creating a contract of employment. The right and
power of Company to dismiss or discharge Officer at will is
expressly reserved.
B. Notice. For the purpose of this Agreement, notices and
all other communications provided for in the Agreement shall be
in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return
receipt requested postage prepaid addressed as follows:
If to the Company:
Human Resources Department
Attention: Vice President of Human Resources
1831 Chestnut Street
St. Louis, MO 63I03-2275
If to Officer:
Last known address shown on records of Company
or to such other address as either party may have furnished to
the other in writing, except that notice of change of address
shall be effective only upon receipt.
C. Entire Agreement. This Agreement cancels and
supersedes all previous and contemporaneous agreements (other
than any Executive Severance Agreement between RightCHOICE and
Executive dated January __, 1997 or later) relating to the
subject matter of this Agreement, written or oral, between the
parties hereto and contains the entire understanding of the
parties hereto and shall not be amended, modified or supplemented
in any manner whatsoever except as otherwise provided herein.
D. Captions. The headings of the sections of this
Agreement have been inserted for convenience of reference only
and shall in no way restrict or otherwise modify any of the terms
or provisions hereof.
E. Governing Law. This Agreement and all rights and
obligations of the parties hereunder shall be governed by, and
construed and interpreted in accordance with, the laws of the
State of Missouri without regard to that state's choice of law
provisions.
F. Assignment. This Agreement is personal and not
assignable by Officer, but it may be assigned by Company, without
notice to or consent of Officer, to any assignee provided such
assignee agrees to abide by and be bound by the provisions of the
Agreement and the Agreement shall thereafter be enforceable by
such assignee. During Officer's lifetime, the Agreement and all
rights and obligations of Officer hereunder shall be enforceable
by and binding upon Officer's guardian or other legal
representative in the event Officer is unable to act on his own
behalf for any reason whatsoever, and, upon Officer's death, the
Agreement and all rights and obligations of Officer hereunder
shall inure to the benefit of and be enforceable by and binding
upon Officer's Designated Beneficiary.
G. Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the
same instrument.
H. Binding Arbitration. Any dispute or controversy
arising under or in connection with this Agreement shall be
settled exclusively by binding arbitration in St. Louis,
Missouri, in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered
on the arbitrator's award in any court having jurisdiction.
I. Invalidity of Provisions. In the event that any
provision of the Agreement is adjudicated to be invalid or
unenforceable under applicable law, the validity or
enforceability of the remaining provisions shall be unaffected.
To the extent that any provision of the Agreement is adjudicated
to be invalid or unenforceable because it is overbroad, that
provision shall not be void but rather shall be limited only to
the extent required by applicable law and shall be enforced as so
limited.
J. Waiver of Breach. Failure of Company to demand strict
compliance with any of the terms, covenants or conditions hereof
shall not be deemed a waiver of that term, covenant or condition,
nor shall any waiver or relinquishment by Company of any right or
power hereunder at any one time or more times be deemed a waiver
or relinquishment of that right or power at any other time or
times.
K. Pronouns. Pronouns in this Agreement used in the
masculine gender shall also include the feminine gender.
L. Withholding of Taxes. Company shall cause taxes to be
withheld from amounts paid pursuant to the Agreement as required
by law, and to the extent deemed necessary by Company may
withhold from amounts payable to Officer by Company outside of
the Agreement amounts equal to any taxes required to be withheld
from payments made pursuant to the Agreement, unless Officer has
previously remitted the amount of such taxes to Company.
M. Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of any successors and/or
assigns of the Company.
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY
BE ENFORCED BY THE PARTIES.
IN WITNESS WHEREOF, Company has caused this Agreement to be duly
executed in duplicate, and Officer has hereunto set his hand, on
the day and year first above written.
RIGHTCHOICE MANAGED CARE, INC.
By: /s/ Sandra Van Trease
Title: EVP & COO
Subscribed and sworn to before me, a Notary Public, this 20th day
of Jan. , 1998.
/s/ Michelle L. Toenjes
Notary Public
My Commission Expires: Aug. 29, 1999
OFFICER
/s/ Michael Fulk
(Signature)
Michael Fulk
(Print Name)
Subscribed and sworn to before me, a Notary Public, this 5th day
of January, 1998.
/s/ Michelle L. Toenjes
Notary Public
My Commission Expires: Aug. 29, 1999
EXHIBIT A
DESIGNATION OF BENEFICIARY
PURSUANT TO OFFICER SEVERANCE AGREEMENT
Name of Officer Michael Fulk
Original Date of Agreement January 5, 1998
I hereby designate the following as my Designated Beneficiary. I
agree that unless instructed differently by me in writing below,
if I designate multiple beneficiaries they shall receive equal
shares of the total benefits payable upon my death. I
ACKNOWLEDGE THAT THIS BENEFICIARY DESIGNATION WILL APPLY ONLY TO
PAYMENT OF ANY SALARY CONTINUATION AMOUNTS THAT MAY BE PAYABLE
FOLLOWING MY DEATH AND DOES NOT AFFECT ANY BENEFICIARY
DESIGNATION I HAVE OR WILL MAKE WITH RESPECT TO ANY LIFE
INSURANCE OR OTHER BENEFITS I MAY OBTAIN THROUGH THE COMPANY OR
OTHERWISE.
NAME OF BENEFICIARY RELATIONSHIP ADDRESS
Marie Crist-Fulk Spouse 3721 Montrose Road
Birmingham, AL 35213
Date 1/5/98 Officer's Signature /s/ Michael Fulk
Receipt acknowledged on behalf of Company.
Date RIGHTCHOICE MANAGED CARE, INC.
By /s/ Sandra Van Trease
EXHIBIT B
SEVERANCE BENEFITS
The multiple of Officer's Base Pay which is specified for
purposes of Section 3(A)(i) of this Agreement is _Two_. If the
benefit determined by application of such multiple becomes
payable to Officer, such benefit shall be payable in _twenty-
four_ substantially equal monthly installments, as provided in
this Agreement.
EXHIBIT C
GENERAL WAIVER AND RELEASE
This General Waiver and Release ("Waiver") is made and
entered into by and among __________________ ("Officer") and
RightCHOICE Managed Care, Inc. including its affiliates,
officers, directors, agents and employees (the "Company").
WHEREAS, Officer's active employment ended on
_______________, 19 and Officer wants to begin receiving
benefits under the Officer Severance Agreement ("Severance
Agreement"), previously entered into between Officer and Company;
and
WHEREAS, among other conditions, the Severance Agreement
specifically requires Officer to execute this Waiver in order to
receive such severance benefits;
NOW THEREFORE, for and in consideration of the covenants and
undertakings herein set forth, and for other good and valuable
consideration, which each party hereby acknowledges, it is agreed
as follows:
1. Officer represents and warrants that, as of the date of
this Waiver, to the best of his knowledge, no circumstances exist
or have existed which could result in Officer's termination for
Cause or a suspension or termination of benefits under the
Severance Agreement as provided in the Severance Agreement.
Regardless as to the reason for termination, Officer agrees not
to apply for rehire at the Company, it's subsidaries, affiliates
or parent.
2. Based on the representations and warranties provided by
Officer in clause No. 1 above, Company hereby acknowledges that
Officer's termination of employment with Company qualifies as
either an Involuntary Termination or a Proper Reason Termination
within the meaning of the Severance Agreement.
3. Officer agrees that he will not in any way disparage
the Company or its parent, subsidiary or other affiliated
entities, or their respective current or former officers,
directors and/or employees. Officer further agrees that he will
not make or solicit any comments, statements or the like to the
media or to others that may be considered to be derogatory or
detrimental to the good name or business reputation of any of the
aforementioned parties or entities. Company specifically
reserves the right to suspend or terminate benefits under the
Severance Agreement, if, subsequent to the execution of this
Waiver, Company becomes aware of information, or an event occurs,
which indicates noncompliance with this section or which would
otherwise result in a suspension or termination of such benefits
in accordance with the provisions of the Severance Agreement.
4. Officer agrees to, and does hereby, remise, release,
and forever discharge Company, and each and every one of its
parent, subsidiary and other affiliated entities, and their
respective agents, officers, executives, employees, successors,
predecessors, attorneys, trustees, directors, and assigns
(hereafter in this Section 4, all of the foregoing shall be
included in the term "Company"), from and with respect to all
matters, claims, charges, demands, damages, causes of action,
debts, liabilities, controversies, judgments, and suits of every
kind and nature whatsoever, foreseen or unforeseen, known or
unknown, which have arisen or may arise between Officer and
Company including, but not limited to, those in any way related
to Officer's employment and/or termination.
Officer further agrees that he will not file suit or
otherwise submit any other charge, claim, complaint, or action to
any agency, court, organization, or judicial forum (nor will he
permit any person, group of persons, or organization to take such
action on his behalf) against Company arising out of any actions
or non-actions that have occurred on the part of Company. Such
claims, complaints, and actions include, but are not limited to,
any based on alleged breach of an actual or implied contract of
employment between Officer and Company, or any claim based on
alleged unjust or tortious discharge (including any claim of
fraud, negligence, or intentional infliction of emotional
distress, any claim of discrimination and/or harassment based on
race, age, disability, taking a leave protected under the Family
and Medical Leave Act of 1993, and/or any other basis, any claim
of retaliation, any allegations of metal pain and suffering, loss
of reputation, humiliation or deprivation of Officer's legal
rights and any claim for lost salary, damages of any type or
description (including, without limitation, punitive,
compensatory or statutory), expenses of any type or description
(including, without limitation, attorney's fees)), any arising
under the Civil Rights Act of 1964, 42 U.S.C. Section 2000e et seq.,
the Age Discrimination in Employment Act, 29 U.S.C. Section 621 et
seq., the Fair Labor Standards Act of 1938, 29 U.S.C. Section 201 et
seq., the Rehabilitation Act of 1973, 29 U.S.C. Section 701 et seq.,
the Americans with Disabilities Act, 42 U.S.C. Section 2101, the Civil
Rights Act of 1871, 42 U.S.C. Section 1981, the Family and Medical
Leave Act of 1993, 19 U.S.C. Section 2601 et seq., the Missouri Human
Rights Act, Section 213.010 RSMo et seq., the Missouri Workers
Compensation law, Section 287 RSMo et seq., the Missouri Service Letter
Statute, Section 290.140 RSMo, or any other federal, state, or local
statutes or ordinances. Officer further agrees that in the event
that any person or entity should bring such a charge, claim,
complaint, or action on his behalf, he hereby waives and forfeits
any right to recovery under said claim and will exercise every
good faith effort to have such claim dismissed. Officer affirms
that he has no charge, claim, complaint or action against Company
pending in any government agency or court.
Notwithstanding the above, Officer shall not waive, and
there shall be no release with respect to, any claim (other than
a claim disputing the validity of section 3(D) of the Severance
Agreement or the provisions of this Waiver) of Officer to enforce
any one or more of the provisions of the Severance Agreement.
5. Pending Lawsuit. Officer agrees to make himself
available upon three days notice from Company, or its attorneys,
to be deposed, to testify at a hearing or trial or to accede to
any other reasonable request by Company in connection with any
lawsuit either currently pending against Company or any lawsuit
filed after Officer's separation that involves issues relating to
Officer's job responsibilities or to decisions made by him during
his employment with Company.
6. Injunctive Relief. In the event of a breach or
threatened breach of any of Officer's duties and obligations
under this Waiver, Company shall be entitled, in addition to any
other legal or equitable remedies Company may have in connection
therewith (including any right to damages that Company may
suffer), to a temporary, preliminary and/or permanent injunction
restraining such breach or threatened breach.
7. Invalidity of Provisions. In the event that any
provision of this Waiver is adjudicated to be invalid or
unenforceable under applicable law, the validity or
enforceability of the remaining provisions shall be unaffected.
To the extent that any provision of this Waiver is adjudicated to
be invalid or unenforceable because it is overbroad, that
provision shall not be void but rather shall be limited only to
the extent required by applicable law and enforced as so limited.
8. Knowing and Voluntary Waiver. Officer hereby
acknowledges that he is entering into this Waiver knowingly and
voluntarily and understands that he is waiving valuable rights he
may otherwise be entitled to.
9. Governing Law. This Waiver shall be construed and
governed by the laws of the State of Missouri, excluding its
choice of law provisions.
10. Gender. Provisions in this Waiver used in the
masculine gender shall also include the feminine gender, as
appropriate.
11. Successors and Assigns. This Waiver shall be binding
upon and inure to the benefit of any successors or assigns of
Officer or Company.
12. Defined Terms. Unless otherwise defined herein,
capitalized terms used herein shall have the meanings assigned to
them in the Severance Agreement.
13. Miscellaneous. The foregoing Waiver constitutes the
entire agreement among the parties and there are no other
understandings or agreements, written or oral, among them on this
subject. Separate copies of the document shall constitute
original documents which may be signed separately but which
together will constitute one single agreement. This Waiver will
not be binding on any party, however, until signed by all parties
or their representatives.
IN WITNESS WHEREOF, the undersigned have executed this
General Waiver and Release.
I HAVE READ THIS GENERAL WAIVER AND RELEASE, UNDERSTANDING
ALL ITS TERMS, AND SIGN IT AS MY FREE ACT AND DEED.
Date: _______________________,____________________________
Officer
Subscribed and sworn to before me, a Notary Public, this _______day of
_______________,________.
_____________________
Notary Public
My Commission Expires:
I HAVE READ THIS GENERAL WAIVER AND RELEASE, UNDERSTANDING
ALL ITS TERMS, AND SIGN IT ON BEHALF OF COMPANY AS THE FREE ACT
AND DEED OF COMPANY.
Date:
COMPANY
By:
Name:
Title:
Subscribed and sworn to before me, a Notary Public, this _______day of
_______________,________.
_____________________
Notary Public
My Commission Expires:
Exhibit 21.1
SUBSIDIARIES OF REGISTRANT
The following are subsidiaries of RightCHOICE Managed Care, Inc. as of
December 31, 1998:
STATE OF
INCORPORATION
NAME OR ORGANIZATION
HMO Missouri, Inc. (BlueCHOICE) Missouri
Diversified Life Insurance Agency of Missouri, Inc. Missouri
Healthy Alliance Life Insurance Company Missouri
HealthLink, Inc. Illinois
HeatlhLink HMO, Inc. Missouri
The EPOCH Group, L.C. Missouri
RightCHOICE Insurance Company Illinois
Preferred Health Plans of Missouri, Inc. Missouri
Exhibit 23.1
PricewaterhouseCoopers LLP Letterhead
PricewaterhouseCoopers LLP
One Metropolitan Square
Suite 2200
St. Louis MO 63102-2737
Telephone (314) 436-3200
Facsimile (314) 241-3371
Consent of Independent Accountants
We consent to the incorporation by reference in the
registration statements of RightCHOICE Managed Care, Inc. on
Form S-8 (File No. 33-90608, 333-33293 & 333-33317) of our
report dated February 9, 1999, except for Note 13 for which
the date is March 15, 1999, on our audits of the
consolidated financial statements and financial statement
schedules of RightCHOICE Managed Care, Inc., which report is
included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
March 15, 1999
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from the
financial statements in the RightCHOICE Managed Care, Inc. Form 10-K for the
annual period ended December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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<S> <C>
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0
0
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</TABLE>
