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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
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EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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Commission file number: 1-13248
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RIGHTCHOICE MANAGED CARE, INC.
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(Exact name of registrant as specified in its charter)
Missouri 43-1674052
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1831 Chestnut Street
St. Louis, Missouri 63103-2275
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 923-4444
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Securities registered pursuant to Section 12(b) of the Act:
Class A common stock, $0.01 par value New York Stock Exchange, Inc.
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(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 _____
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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.
[X]
The aggregate market value of class A common stock (voting) held by non-
affiliates of the Registrant as of March 8, 2000, was approximately $44,644,000
(based on last reported sale price of $12.25 per share on March 8, 2000, on the
New York Stock Exchange).
As of March 8, 2000, 3,710,880 shares of the Registrant's class A common stock,
par value $0.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
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General Description of Business
RightCHOICE Managed Care, Inc. is the largest provider of managed health care
benefits in Missouri in terms of number of members. As of December 31, 1999,
RightCHOICE served approximately 2.3 million members, a large proportion of whom
reside in metropolitan St. Louis, Missouri. RightCHOICE offers a comprehensive
array of managed health care products and services that it segregates into two
distinct segments: underwritten and self-funded. Note 14 "Segment information"
of Part II, Item 8, Financial Statements and Supplementary Data, contains
financial information relating to RightCHOICE's segments. RightCHOICE'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. RightCHOICE's self-
funded segment includes third-party administrator services, administrative
services only for self-insured organizations, network rental services for self-
insured organizations, insurance companies and other organizations, and life
insurance agency services. The types of benefits provided by the products and
services include:
. hospital care,
. ambulatory and outpatient care,
. physician services,
. pharmacy,
. dental care,
. vision care,
. behavioral health care,
. health education, and
. access to life insurance products through non-affiliated life insurance
carriers.
RightCHOICE's subsidiaries receive premium revenue in exchange for the
assumption of both medical and administrative risks for their PPO, POS, HMO,
Medicare supplement, specialty managed care and managed indemnity underwritten
benefit plans. With respect to the third-party administrator services,
administrative services only, and network rental services, RightCHOICE generally
assumes no responsibility for medical costs and receives compensation for
providing administrative services. For the year ended December 31, 1999,
approximately 62% of RightCHOICE's revenues were derived from sales by its
subsidiaries to insured employer groups, typically those with fewer than 100
employees; approximately 28% of RightCHOICE's revenues were derived from
underwritten sales by its subsidiaries to individuals; and approximately 10% of
RightCHOICE's revenues were from fees paid by self-funded employer groups,
typically those with more than 100 employees.
RightCHOICE was organized to own and operate all of the managed health care
business of Blue Cross and Blue Shield of Missouri. Blue Cross and Blue Shield
of Missouri is the sole holder of RightCHOICE's class B common stock. The
holders of class A common stock have one vote per share, and Blue Cross and Blue
Shield of Missouri, the only holder of class B common stock, has 10 votes per
share. Blue Cross and Blue Shield of Missouri and the holders of the class A
common stock have control over approximately 97.6% and 2.4%, respectively, of
the combined voting power of both classes of common stock.
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RightCHOICE is a licensee of the Blue Cross and Blue Shield Association, the
national trade association of Blue Cross and Blue Shield licensees. Each
licensee holds the exclusive right to use the Blue Cross and Blue Shield names
and service marks in specific geographic areas. Each licensee is an independent
legal organization and is not responsible for the obligations of other Blue
Cross and Blue Shield Association licensees.
Pursuant to affiliate licenses from the Blue Cross and Blue Shield Association,
RightCHOICE has the exclusive right to do business under the name Alliance Blue
Cross Blue Shield and to use the Blue Cross and Blue Shield names and service
marks for all of the managed health care products and services it offers in its
service area, which consists of 85 of the 115 counties in Missouri. This service
area has a population of approximately 4.0 million and includes four of the five
largest cities in Missouri, but does not include Kansas City. RightCHOICE cannot
use the Blue Cross or Blue Shield names or service marks outside its licensed
service area. RightCHOICE does business outside of its service area through its
subsidiaries HealthLink, Healthy Alliance Life Insurance Company and RightCHOICE
Insurance Company. If Blue Cross and Blue Shield of Missouri, as the primary
licensee, were to lose its right to use the Blue Cross and Blue Shield names and
service marks, RightCHOICE would also lose the use of these names and service
marks. Note 13 "Contingencies - Status of Blue Cross and Blue Shield licenses"
of Part II, Item 8, Financial Statements and Supplementary Data, contains
information describing litigation uncertainties with respect to RightCHOICE's
continued use of these names and service marks.
RightCHOICE's corporate offices are located at 1831 Chestnut Street, St. Louis,
Missouri, 63103-2275, and its telephone number is (314) 923-4444.
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Managed Care Products and Services
RightCHOICE's established provider networks, substantial membership base and
extensive administrative and processing capabilities enable RightCHOICE to offer
health care products and services tailored to meet the full spectrum of customer
needs and preferences for balancing cost and flexibility. The following chart
depicts the spectrum of products offered under the Blue Cross and Blue Shield
names and service marks.
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"Blue" Branded Product Portfolio
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HMO products Open access PPO products
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Coordinator of care model
BlueCHOICE HMO
Coordinator of care POS
BlueCHOICE POS
Open access PPO/POS
AllianceCHOICE POS
BlueCard(R) PPO
Standard PPO
Alliance PPO
BlueCard(R) PPO
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"Blue Horizons" products
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Medicare HMO Medicare Supplement
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Pharmacy/Dental/Vision/Behavioral Health/Health Education products
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Definitions
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HMO - a health maintenance organization (HMO) is an organized method of
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providing access to health care through a broad range of comprehensive health
services to a member population which is encouraged to seek their health care
through the members' chosen "coordinator of care" physician. Preventive health
care is stressed through the utilization of the coordinator of care.
POS - a point of service (POS) option in either an HMO or PPO environment
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provides health benefits to members who elect to seek health care from a
provider who is not necessarily a part of the health plan's provider network,
generally at higher costs to the member.
PPO - a preferred provider organization (PPO) is an organized method of
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providing access to health care through a broad range of comprehensive health
services to a member population. Members may elect to seek health care services
from any provider who is part of the health plan's broad network.
Blue Horizons Medicare HMO - an HMO designed specifically to meet the needs of
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those individuals eligible to enroll in Medicare. These plans are regulated by
the Health Care Financing Administration of the United States Department of
Health and Human Services.
Medicare Supplement - a health care plan which provides supplemental health care
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coverage to individuals eligible to enroll in Medicare for coverage of health
care expenses in excess of the coverage limitations of Medicare.
Coordinator of care - the physician in an HMO who usually offers basic health
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care services and is the initial point of contact for an HMO member to access
the health care system.
Underwritten Products
Preferred Provider Organization product group
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Alliance PPO
RightCHOICE's Alliance PPO is one of the largest PPOs in Missouri in terms of
number of members and offers services to approximately 173,400 members,
including approximately 42,700 members on a self-funded basis. RightCHOICE
believes that the Alliance PPO network also has the most extensive geographic
coverage in Missouri, servicing 85 of the 115 counties in the state with 8,200
physicians and 99 hospitals. In the St. Louis metropolitan area, the Alliance
PPO network includes approximately 97% of all hospital beds.
RightCHOICE's Alliance PPO products incorporate many managed care
characteristics, including per diem hospital rates, large case management, pre-
admission certification, concurrent review of hospital admissions and
retrospective claims review. Higher deductibles, coinsurance and out-of-pocket
maximums and other financial incentives encourage members to use network
provider services. Alliance benefit plans also include mental health and
chemical dependency programs, optional well-child care, optional physician
office copayments, pharmacy benefit options such as three-tier copayments and
vision services. This broad range of Alliance benefit plans enables the
subscriber or employer group to choose the mix of benefits that is suited to the
member's or employer's needs.
For several years, RightCHOICE offered to groups and individuals in southeast
Missouri a PPO product called HealthNet Blue. RightCHOICE is currently in the
process of transitioning the members enrolled in
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its HealthNet Blue PPO products to its standard Alliance PPO products. There
were approximately 4,900 members enrolled in RightCHOICE's HealthNet Blue PPO
products as of December 31, 1999.
Through a provider network access agreement and a financial reinsurance
agreement with Blue Cross and Blue Shield of Kansas City, RightCHOICE members
residing in the service area of Blue Cross and Blue Shield of Kansas City are
able to access its preferred provider network just as members of a Blue Cross
and Blue Shield of Kansas City subsidiary residing in RightCHOICE's service area
are able to 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 plan where they live. Through the financial reinsurance
agreement, RightCHOICE's subsidiary, Healthy Alliance Life Insurance Company,
and Blue Cross and Blue Shield of Kansas City share underwriting profits, losses
and risks on the affected members.
Illinois Preferred Provider Organization
RightCHOICE offers group and individual PPO coverage through its subsidiary,
RightCHOICE Insurance Company, in southern and central Illinois. RightCHOICE
utilizes the provider network of its subsidiary, HealthLink, to offer these
products to the approximately three million residents in this region. The
RightCHOICE Insurance Company PPO products accounted for approximately 14,200
members as of December 31, 1999.
AllianceCHOICE Point of Service
AllianceCHOICE POS offers a selective hospital and physician network in the St.
Louis metropolitan area. The AllianceCHOICE network serves approximately 131,800
members, including approximately 1,600 members on a self-funded basis.
AllianceCHOICE POS includes both group and individual members and includes
contractual arrangements with approximately 5,600 physicians and 17 hospitals.
BlueCard(R) PPO program
During 1998 and 1999, RightCHOICE and Blue Cross and Blue Shield of Missouri
achieved high member service performance ratings that made RightCHOICE eligible
for the Blue Cross and Blue Shield Association's BlueCard(R) PPO program. The
BlueCard(R) PPO program allows RightCHOICE's Alliance Blue Cross Blue Shield PPO
and POS members access to Blue Cross and Blue Shield plans' PPO providers
throughout the nation. As of December 31, 1999, there were approximately 260,000
Alliance and AllianceCHOICE members enrolled in the program. Members who need to
seek medical attention 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
provider network and accessing Blue Cross and Blue Shield plans' PPO providers.
Blue Cross and Blue Shield plans' PPO provider networks are offered in 48 states
across the United States.
Health Maintenance Organization product group
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BlueCHOICE Health Maintenance Organization and Point of Service products
RightCHOICE's subsidiary, HMO Missouri, Inc., doing business as BlueCHOICE, is a
federally qualified health maintenance organization 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. There
were approximately 118,000 BlueCHOICE HMO and POS members, including 6,000
members on a self-funded basis, as of December 31, 1999. BlueCHOICE is an
independent practice association model network, through which
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RightCHOICE contracts directly with local providers for plan members' health
care services. The BlueCHOICE network, which supports both HMO and POS products,
has contractual arrangements with approximately 4,200 physicians and 67
hospitals.
RightCHOICE offers its BlueCHOICE products in metropolitan St. Louis, southwest
Missouri, portions of southeast Missouri, and central Missouri through the
BlueCHOICE HMO network. BlueCHOICE provides members with comprehensive coverage
for network health care services with modest copayment requirements. When using
their primary care physician as a 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, a six-county area surrounding Joplin, Missouri, and
Jefferson City, Missouri.
In the metropolitan St. Louis and central Missouri regions, the Physician Group
Partners Program(R) provides primary care physicians in BlueCHOICE's commercial
HMO with the opportunity to earn additional compensation by improving patient
satisfaction and improving performance levels using nationally recognized health
care industry standards while effectively managing the trend of costs for health
care benefits. Currently, approximately 54% of the BlueCHOICE HMO network
primary care physicians in St. Louis and central Missouri are enrolled in the
program.
HealthNet Blue Point of Service
HealthNet Blue POS is 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 coverages for a minimal office visit copayment charge. As of December
31, 1999, there were approximately 16,200 group members enrolled in the
underwritten HealthNet Blue POS product. To the extent possible, RightCHOICE is
in the process of transitioning enrollment in the HealthNet Blue POS product to
its standard Alliance PPO products.
Blue Horizons Medicare HMO
Blue Horizons Medicare HMO 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 pays
a fixed capitation payment for coverage of each member at a rate approximating
95% of the Medicare area average per capita cost, subject to annual review and
adjustment by the Health Care Financing Administration. Effective January 1,
2000, the Health Care Financing Administration introduced an inpatient risk
adjustment program which will also be used to adjust the amounts paid to health
plans. The product is offered in three Missouri counties in the metropolitan St.
Louis area and has contractual agreements with approximately 1,230 physicians
and 8 hospitals. RightCHOICE's subsidiary, BlueCHOICE, shares risk with a large
St. Louis provider group for the majority of the membership that is enrolled in
this product. RightCHOICE changed the name of its BlueCHOICE Senior product to
Blue Horizons Medicare HMO effective January 1, 1999. The Blue Horizons Medicare
HMO is a Medicare+Choice plan as authorized by the Balanced Budget Act of 1997.
Medicare Supplement product group
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RightCHOICE's subsidiary, Healthy Alliance Life Insurance Company, currently
offers Medicare supplement coverage to individuals eligible to enroll in
Medicare for medical expenses in excess of the coverage limitations of Medicare.
The products are marketed under the Blue Horizons banner of
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Medicare products and include a 24-hour nurse assist line and value-added
services such as discount dental, vision, hearing, and pharmacy programs. As of
December 31, 1999, RightCHOICE had approximately 53,000 members enrolled in its
Medicare supplement products.
Managed Indemnity product group
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With the exception of a short-term medical product, RightCHOICE no longer sells
managed indemnity products but continues to renew coverage for those members who
are enrolled in the managed indemnity programs. RightCHOICE's managed indemnity
products include fee-for-service indemnity benefits that include review and
coordination of health care services used by members and other cost management
measures, but do not require use of network providers. These products include
certain cost-management features, such as the use of deductibles, coinsurance,
pre-admission certification, concurrent review, large case management and
retrospective review.
Specialty products
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RightCHOICE offers various products to supplement its medical coverage products.
These products include prescription benefits, dental care, vision care,
behavioral health care and health care education. Beginning January 1, 1999,
Magellan Behavioral Health was selected to handle the review, management and
coordination of behavioral health care for all of RightCHOICE's mental health
and substance abuse programs. RightCHOICE also has a contractual agreement with
a pharmacy benefits manager, Express Scripts, Inc. The contract covers
approximately 448,500 members as of December 31, 1999. The current contract is
in effect until April 2002. RightCHOICE continues its efforts to manage rising
prescription drug costs while offering members freedom of choice. RightCHOICE
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 RightCHOICE's
preferred drug list as compared to their generic equivalents. The program also
allows for the purchase of brand name drugs that are not included on
RightCHOICE's preferred drug list by requiring an even higher (third-tier)
member copayment. As of December 31, 1999, approximately 79% of RightCHOICE's
members with a drug benefit under a product underwritten by a subsidiary of
RightCHOICE participated in the three-tier copayment program.
Self-Funded Products
Administrative and network services
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As of December 31, 1999, RightCHOICE serviced self-funded health plans covering
approximately 1,818,000 members. These arrangements include third-party
administration services, administrative services, and contracts to access
provider networks. RightCHOICE assists self-funded employers in designing
benefit packages, claims processing, pricing and administration of claims,
review, management and coordination of health care services used by members,
production of management reports and other related matters. RightCHOICE also
enables employees with self-funded health plans to access RightCHOICE's PPO and
HMO provider networks and to realize savings through its favorable provider
arrangements, while allowing employers the ability to design health benefit
plans in accordance with their own requirements and objectives.
HealthLink, Inc.
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HealthLink is a regional managed health care organization that serves a seven-
state area in the Midwest providing provider network contracting services and
review, management and coordination of health care
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services used by members primarily to unions, commercial insurers and employers
that fund their own health plans. HealthLink is not an insurance company and
does not assume any underwriting risks. Its revenues are derived from fees for
providing access to its provider networks and administrative services.
HealthLink had 857,100 PPO administrative services members and 516,100 workers'
compensation members as of December 31, 1999. In addition, HealthLink owns
HealthLink HMO, Inc., a Missouri corporation with approximately 142,700 members
as of December 31, 1999, located primarily 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 for a
predetermined, prepaid periodic fee to enrolled subscriber groups and
individuals of selected insurance companies, and that also provides third-party
administrator services, administrative services only, network rental services,
and various health care services for a predetermined, prepaid periodic fee to
self-funded organizations.
HealthLink and HealthLink HMO also offer various products to supplement their
provider networks and administrative services. These products include a
prescription drug program, dental care, vision care, behavioral health care and
health care education. These products are offered through contracted
arrangements that HealthLink and HealthLink HMO have with various vendors, like
Express Scripts for the prescription drug program.
The EPOCH Group, L.C.
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The EPOCH Group, L.C., a limited liability company, is a joint venture between
RightCHOICE and Blue Cross and Blue Shield of Kansas City which was created in
1995 and combined most of their then existing third-party administrator
businesses. EPOCH is owned equally by RightCHOICE and a subsidiary of Blue Cross
and Blue Shield of Kansas City. EPOCH serves approximately 275 businesses
primarily in the Midwest as of December 31, 1999.
Diversified Life Insurance Agency of Missouri, Inc.
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RightCHOICE provides access to life insurance products through its life
insurance agency subsidiary, Diversified Life Insurance Agency of Missouri, Inc.
Diversified Life receives commission revenue in return for providing
RightCHOICE's customers with access to life insurance benefits that are
underwritten by non-affiliated life insurance carriers. For the year ended
December 31, 1999, Diversified Life earned $3.5 million of commission revenue
from various life insurance carriers for providing this service.
Risk Factors
RightCHOICE is subject to litigation risks if the reorganization is not
completed because judgments previously entered against Blue Cross and Blue
Shield of Missouri are no longer subject to appeal and may be enforced.
As described under Note 13 "Contingencies" of Part II, Item 8, Financial
Statements and Supplementary Data, RightCHOICE, Blue Cross and Blue Shield of
Missouri, the Missouri Attorney General and the Missouri Department of Insurance
have reached an agreement to settle litigation related to the operation of
RightCHOICE as a for-profit subsidiary of Blue Cross and Blue Shield of Missouri
since RightCHOICE was organized in 1994. RightCHOICE will be reorganized as part
of the settlement. If the reorganization is not completed by December 31, 2000,
and the deadline is not extended and the litigation is not otherwise settled,
judgments previously entered against Blue Cross and Blue Shield of Missouri may
be enforced by the Missouri Attorney General and the Missouri Department of
Insurance. These judgments are now final, without right of further appeal. If
successful, these enforcement actions
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could lead to the dissolution of Blue Cross and Blue Shield of Missouri, which
could materially adversely affect RightCHOICE.
On December 30, 1996, the circuit court of Cole County, Missouri entered
judgments in favor of the Missouri Department of Insurance and the Missouri
Attorney General. These judgments declared that Blue Cross and Blue Shield of
Missouri, a non-profit corporation, has violated the Missouri Health Services
Corporation Law and the Missouri Non-Profit Corporation Law by operating
RightCHOICE as a for-profit subsidiary.
As part of the amended and restated settlement agreement signed January 6, 2000,
and described in Note 13 "Contingencies" of Part II, Item 8, Financial
Statements and Supplementary Data, the Missouri Attorney General and the
Missouri Department of Insurance dismissed the remaining claims pending in this
litigation and agreed to take no further action to enforce the claims that were
raised in this litigation so long as the settlement agreement remains in effect
and the parties are proceeding, using their best efforts, to close the
reorganization.
If the reorganization is not closed by December 31, 2000, or if RightCHOICE or
Blue Cross and Blue Shield of Missouri breaches the settlement agreement by not
using its best efforts to close the reorganization, Blue Cross and Blue Shield
of Missouri and RightCHOICE will be subject to the risks of further litigation
to enforce those judgments. The Missouri Attorney General and the Missouri
Department of Insurance could seek further judicial relief, including the
possible dissolution of Blue Cross and Blue Shield of Missouri and the possible
termination of the certificate of authority of Blue Cross and Blue Shield of
Missouri to engage in the health insurance business. The Missouri Attorney
General and the Missouri Department of Insurance could also seek monetary relief
arising from the 1994 reorganization and the subsequent operations of Blue Cross
and Blue Shield of Missouri and RightCHOICE.
If these actions were taken, there could be material adverse effects on
RightCHOICE. The Missouri Attorney General and the Missouri Department of
Insurance would be free to assert claims directly against RightCHOICE arising
from the 1994 reorganization and the subsequent operations of RightCHOICE. In
addition, the Blue Cross and Blue Shield Association might take the position
that the assertion of these claims has caused the automatic termination of the
licenses of Blue Cross and Blue Shield of Missouri, RightCHOICE, and the
affiliates of RightCHOICE to use the Blue Cross and Blue Shield names and
service marks. See the risk factor "RightCHOICE's Blue Cross and Blue Shield
license agreements could terminate upon the occurrence of events specified in
the license agreements and termination would have a material adverse effect on
its business" for a discussion of the adverse effects resulting from any
termination of those license agreements.
The reorganization will not settle all litigation relating to the corporate
status of Blue Cross and Blue Shield of Missouri.
The reorganization will not settle all litigation relating to the corporate
status of Blue Cross and Blue Shield of Missouri. There remains pending in the
circuit court of Cole County, Missouri a certified subscriber class action in
which the subscriber class seeks a declaratory judgment that Blue Cross and Blue
Shield of Missouri is a mutual benefit corporation and that Blue Cross and Blue
Shield of Missouri may not transfer its assets to a public benefit foundation.
In this litigation, a class of present and past subscribers of Blue Cross and
Blue Shield of Missouri, RightCHOICE, and their affiliates has been certified
for purposes of declaratory relief. The representative of the class is Anthony
Sarkis. On behalf of himself and the class, Mr. Sarkis seeks a declaration that
Blue Cross and Blue Shield of Missouri is a mutual benefit non-profit
corporation -- that
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is, that Blue Cross and Blue Shield of Missouri holds its assets for the benefit
of a limited class of persons who were subscribers of Blue Cross and Blue Shield
of Missouri and RightCHOICE rather than for the benefit of the public as a
whole. Mr. Sarkis also seeks a declaration that it is unlawful for Blue Cross
and Blue Shield of Missouri to transfer its assets to a "charitable trust." For
a description of this litigation, see Note 13 "Contingencies" of Part II, Item
8, Financial Statements and Supplementary Data.
While Blue Cross and Blue Shield of Missouri contests these claims, the circuit
court of Cole County could award Mr. Sarkis and the subscriber class the relief
they seek. Blue Cross and Blue Shield of Missouri believes that it may engage
in the reorganization regardless of whether it is a public benefit corporation
or a mutual benefit corporation. The circuit court of Cole County might conclude
otherwise and hold that it is unlawful for Blue Cross and Blue Shield of
Missouri to engage in the reorganization. If such a judgment is entered before
completion of the reorganization, the reorganization might not be completed. If
a judgment is entered after the reorganization is completed, New RightCHOICE
could be obligated to pay substantial money damages. It is also possible,
although RightCHOICE believes unlikely, that a court could order that the
reorganization be rescinded. If an order like that was entered, it would have a
material adverse effect on New RightCHOICE.
A judgment in favor of Mr. Sarkis and the subscriber class might lead the Blue
Cross and Blue Shield Association to take action to terminate the RightCHOICE or
New RightCHOICE licenses to use the Blue Cross and Blue Shield names and service
marks.
An action may be brought seeking an injunction against consummation of the
reorganization.
An action may be brought seeking an injunction against consummation of the
reorganization. It is a condition to the reorganization that no temporary
restraining order or injunction against completing the reorganization have been
issued, and that no action be pending seeking a restraining order or injunction.
If an action is brought, or if a restraining order or injunction is entered, in
connection with any of the litigation or potential litigation described above or
in any other litigation, any party may choose not to complete the
reorganization. If this occurs, the parties will be subject to the risks
described in the risk factor captioned "RightCHOICE is subject to litigation
risks if the reorganization is not completed because judgments previously
entered against Blue Cross and Blue Shield of Missouri are no longer subject to
appeal and may be enforced."
RightCHOICE's Blue Cross and Blue Shield license agreements could terminate upon
the occurrence of events specified in the license agreements and termination
would have a material adverse effect on its business.
RightCHOICE's Blue Cross and Blue Shield license agreements could terminate upon
the occurrence of events specified in the license agreements. Termination of
RightCHOICE's licenses would have a material adverse effect on its business.
Under controlled affiliate license agreements with the Blue Cross and Blue
Shield Association, RightCHOICE has the right to use the Blue Cross and Blue
Shield names and service marks in the managed health care business in the 85 of
the 115 counties in Missouri that comprise the service area of Blue Cross and
Blue Shield of Missouri as the primary licensee.
RightCHOICE's license agreements could be terminated if financial and service
performance requirements of the Blue Cross and Blue Shield Association are not
satisfied or if other events described in the license agreements occur. A
judgment in favor of the subscribers as described above in the risk factors
captioned "RightCHOICE is subject to litigation risks if the reorganization is
not completed because judgments previously entered against Blue Cross and Blue
Shield of Missouri are no longer subject to appeal and may be enforced" and "The
reorganization will not settle all litigation relating to the
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corporate status of Blue Cross and Blue Shield of Missouri" also could result in
the loss of RightCHOICE's license agreements.
RightCHOICE believes that the exclusive right to use the Blue Cross and Blue
Shield names and service marks provides RightCHOICE with a marketing advantage
in its licensed operating area. Loss of licenses would adversely affect
RightCHOICE's ability to compete in its markets. RightCHOICE would be subject to
a significant monetary penalty to the Blue Cross and Blue Shield Association if
it loses the licenses, and the loss also would be a default under RightCHOICE's
major credit agreement.
RightCHOICE's profitability may be adversely affected by rising health care
costs and changes in the delivery of health care services.
RightCHOICE's profitability may be adversely affected by rising health care
costs and changes in the delivery of health care services. As a result,
RightCHOICE's future results will largely depend on its ability and the ability
of its subsidiaries to accurately predict and manage future health care costs.
Much of the premium revenue received by RightCHOICE's subsidiaries is based upon
rates set before services are delivered and the related costs are usually
incurred on a prospective annual basis. Although RightCHOICE and its
subsidiaries attempt to base the premiums charged on an estimate of future
health care costs over the fixed premium period, competition, regulations and
other circumstances may limit their ability to fully base premiums on these
estimated costs.
RightCHOICE and its subsidiaries use a large portion of their revenue to pay the
costs of health care services and supplies delivered to their members. As a
result, RightCHOICE's financial condition or results of operations could be
adversely affected because of rising costs and other changes in the delivery of
health care services. These changes could include:
. higher-than-expected utilization of services,
. an increase in the number of high-cost cases,
. changes in the population or demographic characteristics of members
served,
. inflation,
. periodic renegotiation of hospital, physician and other provider
contracts,
. continued consolidation of physician, hospital and other provider
groups,
. the aging of the population,
. advances in medical technology and pharmaceuticals,
. government-imposed limitations on Medicare reimbursement, and
. other regulatory changes.
RightCHOICE's profitability may be adversely affected by its subsidiaries'
inability to increase premium rates; competitive factors limit the ability to
increase rates.
RightCHOICE operates in a highly competitive environment which affects the
ability of its subsidiaries to increase premium rates. RightCHOICE and its
managed care subsidiaries face competition from other managed care companies,
hospitals, health care facilities and other health care providers, which have
substantially greater financial and other resources than RightCHOICE.
RightCHOICE and its subsidiaries compete with a number of established companies
that offer a variety of benefit plans. Because RightCHOICE's business
operations, excluding its HealthLink and HealthLink HMO subsidiaries, are
primarily confined to markets within or contiguous to the State of Missouri,
RightCHOICE is unable to subsidize losses in these markets with profits from
other markets. RightCHOICE believes that larger, national competitors are able
to subsidize losses in the Missouri
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market with profits from other markets in which they operate and may pursue that
strategy in RightCHOICE's markets in an effort to increase their market share.
RightCHOICE believes there are no significant impediments facing potential
competitors who wish to enter the markets RightCHOICE serves. As a result, the
addition of new competitors can occur relatively easily which affords consumers
significant flexibility in moving to new managed care providers. RightCHOICE's
managed care operations encounter competition from companies with broader
geographical markets or narrower geographical markets, which allows for greater
cost control and lower prices or greater market share. RightCHOICE's or its
subsidiaries' financial condition or results of operations may be adversely
affected by significant premium decreases by any major competitor or by any
other limitation on the ability of RightCHOICE's subsidiaries to increase or
maintain premium levels.
RightCHOICE conducts business in a heavily regulated industry; changes in
regulations or violations of regulations could materially adversely affect
RightCHOICE.
RightCHOICE's business is heavily regulated on federal, state and local levels.
The laws and rules governing RightCHOICE's business and the interpretations of
those laws and rules are subject to frequent change. Broad latitude is given to
the agencies administering those regulations. Legislation or other regulatory
reform that increases the regulatory requirements imposed on RightCHOICE and its
subsidiaries may have a material adverse effect on RightCHOICE's business or
results of operations now and in the future.
Changes in state and federal laws or regulations could adversely impact
RightCHOICE's revenues and profitability. Legislative or regulatory changes that
could materially affect RightCHOICE and its subsidiaries include:
. adoption of federal or state legislation that holds insurance
companies, health maintenance organizations or managed care companies
liable for medical malpractice,
. limitations on premium levels,
. increases in minimum capital, reserves, and other financial viability
requirements,
. prohibition or limitation of provider financial incentives and
provider risk-sharing arrangements,
. new benefit mandates, and
. limitations on the ability to manage care and utilization due to "any
willing provider" and direct access laws that limit or eliminate
product features that encourage members to seek services from
contracted providers or through referral by a primary care provider.
RightCHOICE and its subsidiaries need to obtain and maintain regulatory
approvals to market many of their products. Delays in obtaining or failure to
obtain or maintain these approvals could adversely affect RightCHOICE.
A portion of the revenues of RightCHOICE and its subsidiaries relate to Medicare
Supplement and Medicare Risk programs. Changes in these programs, particularly
changes affecting enrollment or changes in premium payment or reimbursement
levels could materially affect the business and profitability of RightCHOICE.
RightCHOICE and its subsidiaries are also subject to various governmental
reviews, audits and investigations. Any adverse investigation, audit results or
sanctions could result in:
. damage to the reputation of RightCHOICE and its subsidiaries in
various markets,
. increased difficulty in selling their products and services,
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. the loss of a RightCHOICE subsidiary's license to act as an insurer or
health maintenance organization or to otherwise provide a service,
. loss of the right to participate in various federal programs,
including the Medicare Supplement and Medicare Risk program, or
. the imposition of fines, penalties and other sanctions.
RightCHOICE's profitability is affected by its ability to maintain its current
provider agreements or to enter into other appropriate agreements.
RightCHOICE's profitability is dependent upon its ability and the ability of its
subsidiaries to contract on favorable terms with hospitals, physicians and other
health care providers. The failure to secure cost-effective health care provider
contracts may result in a loss in membership or higher medical costs. In
addition, RightCHOICE's and its subsidiaries' inability to contract with
providers, or the inability of providers to provide adequate care, could
materially affect RightCHOICE.
A reduction in the number of subscribers to RightCHOICE's health care programs
could have an adverse effect on the business and profitability of RightCHOICE.
A reduction in the number of subscribers to RightCHOICE's health care programs
could adversely affect RightCHOICE's financial position, results of operations
and cash flows. Factors that could contribute to the loss of membership include:
. failure to obtain new customers or retain existing customers,
. premium increases and benefit changes,
. RightCHOICE's exit from markets,
. reductions in work force by existing customers, or
. negative publicity and news coverage.
RightCHOICE is dependent upon key members of management.
RightCHOICE's success is dependent, to a significant extent, on key management
members, including those listed under "Executive Officers" of Part III, Item 10
of this Annual Report. Competition for highly skilled people with extensive
experience in the health care industry is intense. RightCHOICE believes that its
key management members have significant experience and competence in the managed
care industry that would be difficult to replace. All of RightCHOICE's key
management members may voluntarily terminate their employment with RightCHOICE
at any time. The loss of current key management may result in a material adverse
effect on RightCHOICE's results of operations, financial condition or business.
RightCHOICE needs to retain qualified employees.
RightCHOICE needs to retain qualified employees to meet its future needs. In
addition, RightCHOICE faces intense competition for qualified employees,
particularly during the present economic environment of low unemployment. The
unemployment rate in Missouri is among the lowest in the nation at about 3.1%.
RightCHOICE may not be able to attract and retain employees. Competition among
potential employers may result in increased salaries or an inability to retain
existing employees or attract additional employees. While RightCHOICE believes
its current employee relations are good, competitive factors still could cause
RightCHOICE to lose employees or have to pay more to retain them.
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The health care industry is subject to negative publicity, which can adversely
affect RightCHOICE's profitability.
The health care industry is subject to negative publicity. Negative publicity
may result in increased regulation and legislative review of industry practices
which may further increase RightCHOICE's costs of doing business and adversely
affect its profitability by:
. adversely affecting RightCHOICE's ability to market its products or
services,
. requiring RightCHOICE to change its products and services, or
. increasing the regulatory burdens under which RightCHOICE and its
subsidiaries operate.
In addition, as long as RightCHOICE uses the Blue Cross and Blue Shield names
and service marks in marketing its managed care products, any negative publicity
concerning the Blue Cross and Blue Shield Association or other Blue Cross and
Blue Shield Association licensees may adversely affect RightCHOICE and the sales
of its managed care products.
The health care industry, including RightCHOICE, is subject to stock price and
trading volume volatility.
From time to time, stock prices and the number of shares traded of companies in
the health care industry experience periods of significant volatility. Both
company specific issues and developments generally in the health care industry
may cause this volatility. RightCHOICE's stock price may experience significant
price and volume fluctuations in response to these and other factors.
The trading volume for RightCHOICE stock has historically been very low.
Significant changes in volume could result in significant price fluctuations.
For the one year period ended December 31, 1999, the trading price of
RightCHOICE class A common stock has ranged from a low of $9.50 per share to a
high of $13.00 per share, and the average daily trading volume was 7,356 shares.
RightCHOICE's business and operations may be adversely affected if its current
information systems and the integrity of its proprietary information are not
maintained.
RightCHOICE's business depends on its ability to maintain its information
systems and to ensure the continued integrity of its proprietary information.
RightCHOICE is committed to maintaining and enhancing existing information
systems and developing new systems in order to keep pace with continuing changes
in information processing technology, industry standards, and customer
preferences. Failure to maintain effective and efficient information systems
could cause the loss of existing customers, difficulty in attracting new
customers, customer and provider disputes, regulatory problems, increases in
administrative expenses or other adverse consequences.
If the information maintained by RightCHOICE is found or perceived to be
inaccurate, or if the information were generally perceived to be unreliable,
commercial acceptance of RightCHOICE's products would be adversely and
materially affected. Furthermore, the use by all of RightCHOICE's businesses of
patient data is regulated at federal, state, and local levels. These laws and
rules change frequently. These changes could adversely affect RightCHOICE's
business, financial condition and results of operations.
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RightCHOICE is subject to litigation in the ordinary course of its business,
including litigation based on new or evolving legal theories.
Due to the nature of their business, RightCHOICE and its subsidiaries are
subject to a variety of legal actions relating to their business operations
including claims relating to:
. the denial of health care benefits,
. claims of vicarious liability for providers' actions or medical
malpractice claims,
. provider disputes over compensation and termination of provider
contracts,
. disputes related to self-funded business, including actions alleging
breach of fiduciary duties, claim administration errors and the
failure to disclose network rate discounts and other fee and rebate
arrangements,
. disputes over copayment calculations, and
. claims relating to customer audits and contract performance.
In addition, plaintiffs continue to bring new types of purported legal claims
against managed care companies. The impact that these evolving theories of
recovery may have on the managed care industry in general, or RightCHOICE and
its subsidiaries in particular, cannot be determined with any degree of
certainty.
RightCHOICE and its subsidiaries may, in the ordinary course of their business,
be parties to a variety of legal actions such as:
. employment and employment discrimination-related suits,
. employee benefits claims,
. breach of contract actions,
. tort claims,
. anti-competitive claims, and
. shareholder suits, including those related to securities matters and
intellectual property litigation.
Recent court decisions and legislative activity increase the exposure of
RightCHOICE and its subsidiaries to these claims. In some cases, substantial
non-economic or punitive damages may be sought. The loss of even one of these
claims, if it were to result in a significant punitive damage award, could
adversely affect RightCHOICE's and its subsidiaries' financial condition or
results of operations. This risk of potential liability may make reasonable
settlements of claims more difficult to obtain.
RightCHOICE and its subsidiaries currently have, and anticipate that they will
in the future have, insurance coverage for some of these potential liabilities.
Other potential liabilities may not be covered by insurance, insurers may
dispute coverage, or the amount of insurance may not be enough to cover the
damages awarded. In addition, insurance coverage for all or some forms of
liability may become unavailable or prohibitively expensive in the future.
RightCHOICE's credit agreement contains restrictions on the business and
operations of RightCHOICE; failure to comply with these restrictions could
adversely impact RightCHOICE.
RightCHOICE's credit agreement contains restrictions on RightCHOICE and its
subsidiaries. RightCHOICE may not be able to achieve and maintain compliance
with the requirements of its credit agreement. If that occurs, RightCHOICE's
operations, financial condition or business may be adversely impacted. The
restrictions in the credit agreement include:
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. restrictions on additional indebtedness and liens,
. restrictions on payment of cash dividends or purchases of stock,
. restrictions on acquisitions, dispositions and mergers,
. limitations on indebtedness of RightCHOICE's subsidiaries,
. maintaining net worth and financial ratios, and
. maintaining the licenses to use the Blue Cross and Blue Shield names
and service marks.
Future losses related to the Missouri Consolidated Health Care Plan could
adversely affect RightCHOICE.
In 1997, BlueCHOICE, a subsidiary of RightCHOICE, recorded a $29.5 million pre-
tax charge related to a health maintenance organization contract with the
Missouri Consolidated Health Care Plan. The Missouri Consolidated Health Care
Plan is a Missouri public agency that purchases health care coverage for
employees of the State of Missouri and selected public entities. It is currently
the largest customer group served by BlueCHOICE. Continued losses related to the
Missouri Consolidated Health Care Plan could adversely affect RightCHOICE.
BlueCHOICE is contractually bound to serve the Missouri Consolidated Health Care
Plan members through the year 2000 at rates originally contracted for in 1995.
Under the current contract, even though a limited rate increase was made in
August 1999 for the 2000 contract year, annual rate increases are not adequate
to allow BlueCHOICE to recover its costs in serving those members.
The pre-tax charge of $29.5 million was based upon actuarial estimates,
including projected limited rate increases, and projected enrollment and medical
cost trends accounted for through the year 2000. Management of RightCHOICE
reviews the adequacy of this reserve on an ongoing basis. If the actual number
of BlueCHOICE's members participating through the Missouri Consolidated Health
Care Plan or medical cost trends differ materially from those assumed in
RightCHOICE's actuarial estimates, the amount of the reserve recorded to date
could be insufficient to cover all future losses that may be associated with the
Missouri Consolidated Health Care Plan contract. As a result, these losses could
have an adverse effect on RightCHOICE.
Blue Cross and Blue Shield of Missouri has voting control on all stockholder
actions.
Blue Cross and Blue Shield of Missouri has voting control on all stockholder
actions, including the sale or merger of RightCHOICE, a sale of substantially
all of its assets and the election of all of RightCHOICE's directors. Blue Cross
and Blue Shield of Missouri may have interests with respect to its ownership of
RightCHOICE that diverge from those of RightCHOICE's public shareholders.
RightCHOICE cannot provide any assurances that it will not be adversely impacted
by the control that Blue Cross and Blue Shield of Missouri has with respect to
matters affecting RightCHOICE.
There are other risks and uncertainties which may have an adverse effect on the
business and profitability of RightCHOICE.
Additional risks and uncertainties that may affect the future results of
operations, financial condition or business of RightCHOICE include, but are not
limited to:
. demand for, and market acceptance of, RightCHOICE's products and
services,
. the effect of economic and industry conditions on prices for
RightCHOICE's and its subsidiaries' products and services and their
cost structure,
. the ability to develop and deliver new products and services and adapt
existing products and services to meet customer needs and
expectations,
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. the ability to keep pace with technological change in order to provide
better service and remain competitive,
. the ability to attract and retain capital for growth and operations on
competitive terms, and
. changes in accounting policies and practices.
Forward-looking statements may prove inaccurate.
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. These statements include those preceded by, followed by
or that include the words "believes," "expects," "anticipates," "could,"
"plans," "projects," "may," "should" or similar expressions. These forward-
looking statements involve risks and uncertainties. Factors that may cause
actual results to differ materially from those contemplated by these forward-
looking statements include, among others, those risks discussed above. These
forward-looking statements may prove inaccurate and investors should not view
them as guarantees of future performance.
Strategies
Sales and marketing strategy
RightCHOICE's strategy includes growing underwritten member levels through
targeted marketing efforts. Reflecting the market's desire for increased choice
and access to a national provider network, emphasis will be placed on marketing
RightCHOICE's PPO products, which deliver a national network through the
BlueCard(R) program. RightCHOICE's marketing and sales efforts are targeted at
the following markets: individuals, small employer groups (which RightCHOICE
defines as groups from 2 to 25 employees), emerging markets (which RightCHOICE
defines as groups with 26 to 99 employees) and middle/strategic markets (which
RightCHOICE defines as groups of 100 employees or more). Sales efforts include
the use of a small group marketing unit that has been successful in supporting
sales to small employers in an efficient and timely manner. RightCHOICE's
independent broker networks and direct sales staff market the full range of
RightCHOICE'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.
RightCHOICE is focused on a pricing strategy which endeavors to appropriately
price its subsidiaries' health benefit plans in a manner which fully covers the
health care costs and operating costs, inclusive of targeted operating profits,
associated with the benefit plan or services purchased.
Medical management strategy
A major focus of RightCHOICE's service efforts has been to reduce the number of
rules and processes in order to simplify member access to health care.
RightCHOICE has eliminated precertification requirements on hundreds of medical
procedures. Currently, the 30 procedures that still require precertification
are generally those where experience suggests, based on recognized standards of
care, that members may be at risk for over- or under- utilization of such
procedures.
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RightCHOICE recognizes the physician's expertise in managing patient care and
wants to facilitate physicians' autonomy in the practice of medicine by offering
physician groups the information needed to manage the delivery of health care
services while achieving high levels of patient satisfaction. RightCHOICE's
philosophy is to manage provider networks rather than to manage members. It
designs benefit plans to encourage members to use network providers. The
Physician Group Partners Program(R) provides primary care physicians in
BlueCHOICE's commercial HMO with the opportunity to earn additional compensation
by improving patient satisfaction and improving performance levels using
nationally recognized health care industry standards while effectively managing
the trend of costs for health care benefits. Currently, approximately 54% of
the BlueCHOICE HMO network primary care physicians in St. Louis and central
Missouri are enrolled in the program.
Technology, information and operations strategy
In 1995, RightCHOICE implemented a comprehensive information and operations
strategy to assist in implementing its strategy of delivering access to managed
medical care. RightCHOICE believes that managing health care benefits 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. RightCHOICE's management receives capital expenditure authorizations
from RightCHOICE's Board of Directors to expend funds for the project, subject
to periodic review. In 1999, RightCHOICE incurred total expenditures of $6.6
million on this project, of which $4.3 million were capitalized. Cumulatively,
since 1995, RightCHOICE has incurred total expenditures of $62.1 million on this
project, of which $51.8 million were capitalized. In 2000, RightCHOICE
anticipates that it will expend approximately $8.6 million related to this
project, of which $6.5 million will be capitalized.
The primary transaction functions of RightCHOICE, including enrollment,
membership maintenance, billing, rating, medical management, provider payments
and customer service, are currently processed by a combination of legacy
applications and newer software packages. In 1999, RightCHOICE completed a
successful migration of its HMO product line to FACETS(R), a client server
software package. Significant efforts during 2000 will focus on providing
additional automated functionality supporting FACETS(R), which includes
increasing the stability and reliability of technical processes and establishing
large-scale processing capabilities in preparation for future product line
migrations. RightCHOICE augments its processing applications with other
technologies:
. electronic data interface for claim capture,
. imaging for claim storage and workflow,
. middleware for inter-platform communication and routing logic, and
. robust data network to support its personal computer based workstations.
RightCHOICE continues to improve access to key business data through the use of
its data warehouse. RightCHOICE's data warehouse usage has increased 43% in 1999
while the average query response time has decreased by 33%. Critical business
functions ranging from quarterly premium rating and reserve calculations to
disease management programs are supported by the data warehouse.
In 2000, RightCHOICE's technology strategy includes electronic commerce through
the internet. These efforts began in 1999 by completing the redesign of the
current internet web site as well as increasing links to other related internet
web pages. Overall the effort is focused on increasing access to standard
information, providing transaction functionality for high volume processes and
increasing connectivity with targeted clients. These capabilities support
RightCHOICE's goals of improving service and retaining members.
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The Health Insurance Portability and Accountability Act of 1996 is a compendium
of government regulations, a part of which focuses on the security and
confidentiality of a member's transactions with health care providers and
payers, as well as the standardization of certain electronic transaction code
sets and provider identifiers. During 2000, RightCHOICE will continue to assess
the standard code set requirements established by these regulations. The
implementation of security and encryption standards will require robust
safeguards to guard data integrity, confidentiality and availability of
information. RightCHOICE has not fully assessed the financial impact related to
full compliance with the Health Insurance Portability and Accountability Act of
1996; however, RightCHOICE believes the financial impact could be material. See
"Regulation - Health Insurance Portability and Accountability Act and other
federal legislation."
See "Year 2000 issue" of Part II, Item 7, Management's Discussion and Analysis,
for more information related to RightCHOICE's Year 2000 program.
General and administrative strategy
RightCHOICE will continue to pursue initiatives to streamline operations and
reduce general and administrative expenses, including expanded use of intranet
and internet technologies. During 1999, RightCHOICE completed the transition of
its HMO business from an older, transaction-based system to a state-of-the-art
client-server based system, FACETS. During 2000, RightCHOICE will focus on
enhancing processes in the FACETS(R) environment and plans to begin migrating
the bulk of the rest of its business operations to the FACETS(R) system toward
the end of the year 2000.
Competition
The managed care industry is highly competitive, both nationally and in
RightCHOICE's market area. Participants compete for members primarily on the
basis of price, scope and design of benefits, access to providers and reputation
of the plan sponsor and participants. RightCHOICE also competes with other
managed care organizations for contracts with hospitals, independent physicians,
physician groups and other providers.
In the metropolitan area of St. Louis 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 RightCHOICE competes with
traditional indemnity plans and smaller networks. RightCHOICE's major
competitors include commercial insurance carriers, other HMOs and PPOs as well
as provider service organizations, third-party administrators, 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 RightCHOICE.
Regulation
Government regulation of the products and services offered by RightCHOICE varies
from jurisdiction to jurisdiction and is subject to change. RightCHOICE 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 RightCHOICE 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
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businesses. This regulation is intended primarily for the benefit of the
policyholders of the insurance companies. RightCHOICE and its subsidiaries are
in litigation relating to their compliance with various federal and state
regulations as described in Note 13 "Contingencies" of Part II, Item 8,
Financial Statements and Supplementary Data.
Insurance holding company regulation
RightCHOICE 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 RightCHOICE's subsidiaries, Healthy Alliance Life Insurance
Company, BlueCHOICE, HealthLink HMO, and RightCHOICE Insurance Company, 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 their forms and policies used,
. the nature of, and limitation on, their investments,
. the periodic examination of their operations,
. the form and content of annual statements and other reports required to be
filed on their financial condition, and
. the establishment of their capital requirements.
The subsidiaries of RightCHOICE mentioned above 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 requirements for life and
health insurance companies. In 1998, Missouri adopted the risk-based capital
requirements for health maintenance organizations which the National Association
of Insurance Commissioners adopted the same year. The formula for calculating
such risk-based capital requirements, set forth in instructions adopted by the
National Association of Insurance Commissioners, 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 risk-based capital level as of the end of the
previous calendar year. In addition, the Blue Cross and Blue Shield Association
requires RightCHOICE to meet more stringent risk-based capital requirements than
that required under the National Association of Insurance Commissioners and
Missouri guidelines.
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Because the total adjusted capital of Healthy Alliance Life Insurance Company,
RightCHOICE Insurance Company, BlueCHOICE, and HealthLink HMO, determined in
accordance with the risk-based capital instructions adopted by the National
Association of Insurance Commissioners on a fully phased-in basis, exceed all
risk-based capital minimum requirements (including the requirements of the Blue
Cross and Blue Shield Association), RightCHOICE believes that the risk-based
capital requirements will not have any immediate impact upon Healthy Alliance
Life Insurance Company, RightCHOICE Insurance Company, BlueCHOICE, or HealthLink
HMO or their operations. If in the future the risk-based capital results were to
decline, the risk-based capital requirements could have a material effect upon
their operations and the amount of regulatory oversight to which they are
subject.
In addition to adopting the risk-based capital requirements in 1998, the
National Association of Insurance Commissioners adopted the Codification of
Statutory Accounting Principles, which provides interpretive guidance on
statutory accounting principles and will replace the current manual of
Accounting Practices and Procedures adopted by the National Association of
Insurance Commissioners. The National Association of Insurance Commissioners is
now considering amendments to the Codification of Statutory Accounting
Principles that would be effective on the recommended implementation date of
January 1, 2001. The Codification of Statutory Accounting Principles provides
new interpretive guidance for some existing statutory accounting principles,
changes current statutory accounting principles in some areas and requires the
filing of new insurance reports. RightCHOICE's management believes that it is
more likely than not that the Missouri and Illinois legislatures will enact the
Codification of Statutory Accounting Principles. RightCHOICE has not estimated
the potential effect of the Codification of Statutory Accounting Principles if
adopted.
Restrictions on dividends
Insurance laws and regulations restrict the payment of dividends by life
insurance companies and health maintenance organizations in a holding company
system. These laws generally limit the dividends that 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: (1) 10% of the insurance company's
surplus as regards policyholders as of the preceding December 31, or (2) the
insurance company's net gain from operations for the preceding calendar year.
For all other insurers (including HMOs), these 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 insurer during the immediately preceding
12 months, does not exceed the lesser of: (1) 10% of the insurer's surplus as
regards policyholders as of the preceding December 31, or (2) the net investment
income for the 12-month period ending as of the preceding December 31.
In addition, for all insurers, the amount of dividends that may be paid without
regulatory approval is limited by the amount of the insurer's earned surplus.
Earned surplus is the portion of surplus that represents the insurer's
cumulative earnings less dividends paid in prior periods. Any proposed dividend
in excess of the limitations described above is deemed to be an "extraordinary
dividend" and requires prior approval by the appropriate Director of Insurance.
At December 31, 1999, Healthy Alliance Life Insurance Company, BlueCHOICE,
RightCHOICE Insurance Company, and HealthLink HMO had surplus of approximately
$82 million, $17 million, $2 million, and $7 million, respectively. At December
31, 1999, RightCHOICE's insurance subsidiaries did not have a significant amount
of earned surplus available for dividend payment without the prior approval of
the appropriate Director of Insurance.
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HMO regulation
BlueCHOICE and HealthLink HMO are subject to health care related regulation by
both state and federal regulatory authorities. BlueCHOICE, as a federally
qualified HMO, is subject to regulation and review by the U.S. Department of
Health and Human Services and other federal authorities. In 1997, a
comprehensive managed care law, known as House Bill 335, became effective in
Missouri. This law, together with other state and federal laws, governs many
aspects of the operations of BlueCHOICE and HealthLink HMO, including:
. procedures for managing utilization of health care services,
. procedures for quality assurance,
. enrollment requirements,
. covered benefits,
. relationships between the HMO and its members and health care providers,
and
. financial condition, including reserves and cash flow requirements.
Third-party administrator regulation
RightCHOICE, HealthLink HMO, and EPOCH, RightCHOICE's 50%-owned subsidiary, are
required to obtain a certificate of authority from the Departments of Insurance
in the various states in which they operate 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
. notice and reporting requirements.
Third-party administrator activities are also subject to the provisions of the
Employee Retirement Income Security Act of 1974.
Preferred Provider Organization (PPO) regulation
In connection with its PPO services, HealthLink is required to obtain a
certificate of authority from the Departments of Insurance in the states in
which it operates in connection with its PPO services and is subject to various
statutory requirements, including provider and client contracting requirements
and notice and reporting requirements.
Utilization review regulation
RightCHOICE and HealthLink provide management, review and coordination of the
utilization of health care services. RightCHOICE and HealthLink are required to
be registered with, or obtain a certificate of authority from, the Departments
of Insurance in the various states in which they operate in connection with
their utilization review services and are subject to various statutory
requirements, including notice and reporting requirements.
24
<PAGE>
Health Insurance Portability and Accountability Act and other federal
legislation
The Health Insurance Portability and Accountability Act of 1996, originally
known in the Senate as the Kennedy-Kassebaum bill, was signed into law on August
21, 1996. The Health Insurance Portability and Accountability Act and the
implementing regulations that have since been adopted impose new obligations for
issuers of health insurance coverage and health benefit plan sponsors. This law
requires guaranteed issuance of health coverage for small employers having 50 or
fewer employees and for individuals who meet certain eligibility requirements.
It also requires guaranteed renewability of health coverage for most employers
and individuals. The law limits exclusions based on preexisting conditions for
individuals covered under group policies to the extent the individuals had prior
creditable coverage. This law also has numerous operational requirements that
are part of the administrative simplification section of the law.
RightCHOICE has not fully assessed the financial impact related to full
compliance with the Health Insurance Portability and Accountability Act of 1996
and its regulations; however, RightCHOICE believes such financial impact could
be material.
Recent health care reform legislation
The Balanced Budget Act of 1997, and the related regulations, established a new
Medicare+Choice program that was intended to significantly expand the health
care options to Medicare beneficiaries. The Balanced Budget Act of 1997 imposed
a number of new restrictions and requirements on health plans, such as
BlueCHOICE, that offer a Medicare+Choice plan. In addition, in 1999, the State
of Illinois passed legislation, known as the Managed Care Reform and Patient
Rights Act, that affects the activities of insurance companies, health
maintenance organizations, utilization review organizations and preferred
provider organizations, which now impose a number of new contracting
requirements, quality of care standards, grievance procedures, and access and
continuity of care requirements. Many of these requirements are similar to the
requirements of House Bill 335 that was enacted in Missouri in 1997.
Additionally, the Illinois legislation institutes small group reform in the
State of Illinois for employer groups of two to fifty employees. Although the
impact of the provisions of this recent legislation and any future legislation
cannot be fully predicted at this time, RightCHOICE believes that the ultimate
outcome will not have a material adverse effect on RightCHOICE. However,
RightCHOICE cannot provide any assurances that it or its subsidiaries 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 RightCHOICE and its subsidiaries will not have a material adverse
effect on their business or results of operations in the future.
Proposed health care reform legislation
The federal and state governments continue to enact and seriously consider many
legislative and regulatory proposals that have impacted, or would materially
impact, various aspects of the operations and business of RightCHOICE and its
subsidiaries. For example, the United States House of Representatives passed the
"Bipartisan Consensus Managed Care Improvement Act," also known as the Norwood-
Dingell bill, which would, if it became law, among other things, impose limits
on the methods of operation for group health plans and health insurance issuers,
limit the ability of group health plans and health insurance issuers to define
medical necessity for purposes of coverage, and permit group health plans and
health insurance issuers to be sued in state courts for coverage determinations.
This and other proposals, including those referred to generally as the "Patients
Bill of Rights," could impose additional restrictions or obligations on the
operations of RightCHOICE. In addition, the U.S. Department of Health and Human
Services has issued proposed rules, as contemplated by the Health Insurance
Portability and Accountability Act of 1996, which would, if the rules are
adopted, among other things, impose security
25
<PAGE>
and confidentiality requirements with respect to a member's transactions with
health care providers and payors, as well as requirements for the
standardization of certain electronic transaction code sets and provider
identifiers.
It is uncertain whether RightCHOICE can recoup, through higher premiums or other
measures, the increased costs caused by any new legislation or regulation, or
any court or regulatory decision that expands or reduces the interpretation or
application of existing statutes and regulations (for example, decisions that
increase RightCHOICE's and its subsidiaries' responsibilities under the Employee
Retirement Income Security Act of 1974 or reduce the scope of this law's
preemption). While certain of these measures would adversely affect RightCHOICE
and its subsidiaries, at this time RightCHOICE cannot predict the extent of this
impact or which of (or in what form) the pending laws or rules will be enacted
or adopted.
Employees
RightCHOICE employed approximately 1,950 full time employees, including 510
HealthLink employees, as of December 31, 1999, compared to 1,800 full time
employees, including 370 HealthLink employees, as of December 31, 1998, none of
whom is subject to a collective bargaining agreement. RightCHOICE believes that
its employee relations are good.
ITEM 2. PROPERTIES
------------------
As of December 31, 1999, RightCHOICE owned or leased the following facilities
which it considers material to its operations:
<TABLE>
<CAPTION>
Square Owned or
Type of Facility Location Footage Leased
---------------- -------- ------- ------
<S> <C> <C> <C>
Corporate Headquarters St. Louis, MO 343,017 Leased
Document Storage Warehouse St. Louis, MO 91,119 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
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
-------------------------
RightCHOICE is a party to various material legal proceedings which are detailed
in Note 13 "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 1999.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
---------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
RightCHOICE's class A common stock has been traded on the New York Stock
Exchange under the symbol "RIT" since August 1, 1994. There were 230 common
shareholders of record on March 8, 2000. As of March 8, 2000, the reported
closing sale price per share was $12.25. 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.
Shareholders' data
<TABLE>
<CAPTION>
1999
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding common shares 18,673,200 18,673,200 18,672,900 18,672,900
Market price:
Quarter ending $11 1/2 $10 9/16 $11 7/16 $10 3/4
Range $9 1/2 - $12 $10 3/8 - $11 5/8 $10 3/4 - $12 1/8 $10 1/4 - $13
<CAPTION>
1998
4th Quarter 3rd Quarter 2nd Quarter 1st 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>
Dividends
RightCHOICE 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, RightCHOICE is
currently restricted in its ability to pay cash dividends as explained in Note
10 "Long-term debt and commitments" in Part II, Item 8, Financial Statements and
Supplementary Data.
27
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
--------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------
Consolidated Statements of Income data 1999 1998 1997 1996 1995
- -------------------------------------- ---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues................................. $816,912 $767,512 $719,411 $653,375 $591,880
Operating expenses....................... 797,245 771,759 780,411 666,954 572,847
Operating income (loss).................. 19,667 (4,247) (61,000) (13,579) 19,033
Investment income, net................... 12,851 18,669 33,184 17,532 18,344
Other, net............................... (4,125) (4,918) (5,739) (5,320) (3,327)
Net income (loss)........................ 17,216 5,660 (24,034) (2,027) 23,570
Basic and diluted earnings (loss)
per share............................ $ 0.92 $ 0.30 $ (1.29) $ (0.11) $ 1.26
<CAPTION>
December 31,
---------------------------------------------------------------
Consolidated Balance Sheet data 1999 1998 1997 1996 1995
- ------------------------------- ---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total assets............................. $523,213 $508,678 $506,363 $532,144 $516,388
Long-term obligations.................... 58,061 68,718 88,845 86,776 89,060
Shareholders' equity..................... 157,543 145,874 140,865 172,954 173,221
Available cash and investments (a)....... 9,085 12,494 8,279 48,472 56,753
Book value per share..................... $ 8.44 $ 7.81 $ 7.54 $ 9.26 $ 9.27
Tangible book value per share............ 4.61 3.82 3.36 4.76 4.93
</TABLE>
(a) Amounts represent cash and investments available for general corporate
use without regulatory approval.
28
<PAGE>
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 caption "Risk Factors" of Part I, Item I, General Business, of
this Annual Report, and under the caption in Note 13 "Contingencies" of Part II,
Item 8, Financial Statements and Supplementary Data, of this Annual Report.
Results of operations
RightCHOICE offers a comprehensive array of managed health care products and
services that it segregates into two distinct segments: underwritten and self-
funded. RightCHOICE'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. RightCHOICE's self-funded segment includes third-party
administrator services, administrative services only for self-insured
organizations, network rental services for self-insured organizations, insurance
companies and other organizations, and life insurance agency services.
Revenue
The following table sets forth revenue (in thousands) by product group for the
years ended December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
Product Group 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
PPO:
Alliance PPO..................... $209,487 $191,855 $197,329
AllianceCHOICE POS............... 167,392 151,034 124,890
HMO (includes other POS)............ 211,910 206,292 183,485
Medicare supplement................. 92,314 94,951 97,157
Managed indemnity................... 3,659 7,627 12,531
Other specialty services............ 47,389 42,728 38,875
-------- -------- --------
Total premium revenue.......... 732,151 694,487 654,267
ASO/Self-funded and other income.... 84,761 73,025 65,144
-------- -------- --------
Total revenues................. $816,912 $767,512 $719,411
======== ======== ========
</TABLE>
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:
29
<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating revenues:
Premium revenue............................ 89.6% 90.5% 90.9%
Fees and other income...................... 10.4% 9.5% 9.1%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
Operating ratios:
Medical loss ratio......................... 82.2% 83.5% 84.8%
------ ------ ------
Commission expense ratio................... 4.0% 4.1% 4.1%
------ ------ ------
General and administrative expense ratio... 20.0% 20.8% 22.7%
------ ------ ------
Adjusted general and administrative
expense ratio (excludes depreciation
and amortization)....................... 17.9% 18.3% 19.5%
------ ------ ------
</TABLE>
Membership
The following table sets forth the number of members by product category:
<TABLE>
<CAPTION> December 31,
------------ % Increase/
Product Group 1999 1998 (Decrease)
------------- ---- ---- ----------
<S> <C> <C> <C>
Underwritten:
PPO:
Alliance PPO............................. 149,769 141,225 6.0
AllianceCHOICE POS....................... 130,192 127,907 1.8
HMO:
Commercial (includes other POS).......... 128,215 129,417 (0.9)
Blue Horizons Medicare HMO............... 4,914 5,432 (9.5)
Medicare supplement........................ 53,460 57,966 (7.8)
Managed indemnity.......................... 1,752 2,777 (36.9)
--------- ---------
468,302 464,724 0.8
--------- ---------
Self-funded:
PPO........................................ 44,355 43,688 1.5
HMO........................................ 7,152 8,843 (19.1)
ASO (includes HealthLink):
Workers' compensation.................... 516,107 449,986 14.7
Other ASO*............................... 1,250,436 1,155,658 8.2
--------- ---------
Total membership............................. 2,286,352 2,122,899 7.7
========= =========
</TABLE>
* does not include 391,021 and 455,006 additional third-party
administrator members as of December 31, 1999, and 1998, 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 1999 to the results for 1998
Revenues
Underwritten
Premium revenue increased $37.7 million to $732.2 million in 1999 from $694.5
million in 1998. As described below, components of premium revenue were affected
by shifts in product mix, rate increases
30
<PAGE>
and other factors; and as a result, such increase in premium revenue may not be
indicative of future periods. RightCHOICE and its subsidiaries will continue to
strive to establish premium rates based on anticipated health care costs.
Depending on future competition, customer acceptance of premium increases,
future health care cost trends or other factors, RightCHOICE cannot provide any
assurances that it will be able to price the products of its subsidiaries
consistent with health care cost trends.
Recently, competitors of RightCHOICE have announced their intention to exit the
Missouri market, which is RightCHOICE's primary sales area. A reduction in the
number of competitors for the Missouri market share may have a positive impact
on RightCHOICE's ability to attract and maintain membership; however,
RightCHOICE cannot provide any assurances that it will attract or retain
membership as a result of the changing competitive landscape.
PPO premium revenue increased $34.0 million in 1999 -- $40.5 million increase
due to an 11.5% increase in net premium rates, partially offset by a $6.5
million decrease resulting from a slight decrease in member months. The term
member months refers to the cumulative number of members added together over a
specific time period. Thus, for a year, member months are determined by adding
together the membership counts for all twelve months. Net premium rates
increased due in part to overall premium renewal rate increases ranging from 7%
to 19% during 1999 enrollment periods. Net premium rate increases are at the
lower end of the overall premium increase range due in part to changes in
deductibles, the timing of group renewals throughout the year and product mix
changes. Alliance PPO membership increased by 8,544 members from December 31,
1998, to December 31, 1999, and AllianceCHOICE POS membership increased by 2,285
over the same time period. RightCHOICE began offering PPO products in Illinois
at the end of first quarter 1997. Included in the Alliance PPO member count are
14,248 PPO Illinois members as of December 31, 1999, an increase of 7,212 from
December 31, 1998.
HMO premium revenue increased $5.6 million in 1999, or 2.7% -- $22.4 million due
to a 10.0% increase in net premium rates, partially offset by a $16.8 million
decrease resulting from a 6.6% decrease in member months. Net premium rates
increased in part due to overall premium renewal rate increases of 7% to 19%
during 1999 enrollment periods. Net premium rate increases are lower than the
overall premium increase range because of:
. HMO competition in BlueCHOICE'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 a large group, the Missouri Consolidated Health Care Plan,
comprised of approximately 39,500 members as of December 31, 1999, with
which BlueCHOICE has historically had a limited ability to increase premium
rates.
Membership in the Missouri Consolidated Health Care Plan increased by 6,277
members from December 31, 1998 to December 31, 1999. Effective January 1, 2000,
the Missouri Consolidated Health Care Plan pricing increased by approximately
21% pursuant to a contract amendment. See "Liquidity and Capital Resources"
below. Excluding the Missouri Consolidated Health Care Plan, membership in
RightCHOICE's HMO products decreased over the same time period by 7,997 members,
primarily due to RightCHOICE's pricing strategy.
Premium revenue from Medicare supplement decreased by $2.6 million in 1999 --
$7.3 million decrease resulting from a 7.4% decrease in member months, partially
offset by a $4.7 million increase because of a 5.0% increase in net premium
rates. Membership in RightCHOICE's Medicare supplement products has decreased in
part due to subscribers opting for Medicare-risk programs, similar to
RightCHOICE's Blue
31
<PAGE>
Horizons Medicare HMO 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 $4.0 million primarily as a
result of a 58.5% decline in member months. Member month declines are consistent
with RightCHOICE's strategy to move toward more highly managed care products.
With the exception of a short-term medical product, RightCHOICE no longer sells
managed indemnity products, but continues to renew coverage for those members
who wish to remain in these managed indemnity programs.
Revenue from other specialty services, which includes certain of RightCHOICE's
drug and dental health care benefit plans, increased $4.7 million -- $7.3
million increase as a result of a 17.6% increase in net premium rates partially
offset by a $2.6 million decrease resulting from a 5.7% decrease in member
months. Specialty product membership related to RightCHOICE's drug products
increased slightly in 1999 as a result of growth in RightCHOICE's Alliance group
membership, growth in the RightCHOICE Insurance Company group membership, and an
increase in the AllianceCHOICE group membership. The increase in membership for
drug products was offset by larger decreases in RightCHOICE's dental product
member months, which decreased by 22.4% due to competition from dental products
that are priced below RightCHOICE's dental product. RightCHOICE intends to
design a more competitive dental product in 2000. The large net premium rate
increases primarily relate to RightCHOICE's drug products and correspond to the
high levels of prescription utilization and trends that RightCHOICE, as well as
the industry as a whole, have experienced in recent years.
Self-funded
Fees and other income from administrative services only, network services and
life insurance commission revenues increased in 1999 by $11.7 million. These
increases are primarily due to increased 1999 revenues of $14.2 million from
HealthLink, RightCHOICE's network rental and managed care service subsidiary.
HealthLink's revenues increased as a result of an 11.5% increase in membership
during 1999 which was partially due to expansion into new territories.
Additionally, HealthLink's membership increases during this period included a
transfer of approximately 10,000 members to HealthLink from RightCHOICE's other
self-funded plans.
Operating expenses
The overall medical loss ratio of RightCHOICE and its subsidiaries decreased to
82.2% in 1999 from 83.5% in 1998. The medical loss ratio experienced in 1999 is
lower compared to that in 1998 due in part to RightCHOICE's pricing strategy,
which resulted in an overall increase in the premium per member per month of
approximately 10.2% in 1999 as compared to 1998. The medical expense on a per
member per month basis increased by approximately 8.4% in 1999 as compared to
1998.
RightCHOICE continues the efforts initiated in 1998 to modify its pharmacy
benefits management program and recontract with physicians and ancillary service
providers. The drug cost trend increase ranged from approximately 10% to 20%,
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.
RightCHOICE is continuing its strategy for managing drug costs by utilizing a
three-tier drug benefit design that allows members to make choices among
generic, preferred drugs (drugs which are part of RightCHOICE's preferred drug
list), or other brand name drugs, albeit at different copayment levels.
32
<PAGE>
Approximately 79% of RightCHOICE's members with a drug benefit under a product
underwritten by a subsidiary of RightCHOICE were enrolled in the three-tiered
pharmacy benefit programs as of December 31, 1999. In 1999, RightCHOICE
recognized a 26% savings on the three-tier program as compared to the two-tier
drug program. Physician education, utilization and prescribing pattern analysis
will be increased through the assistance of an on-site pharmacist whose services
were negotiated through RightCHOICE's pharmacy benefit contract, which runs
through 2002. RightCHOICE will also continue its hospital, physician and service
recontracting strategy, using the more detailed data and analysis available
through RightCHOICE's information and operations strategy. RightCHOICE cannot
assure investors that its initiatives to manage future increases in medical and
pharmacy cost trends to improve the medical loss ratio will be effective.
Commission expense increased by $1.1 million, or 3.4%, in 1999. The commission
expense ratio of 4.0% for 1999 compares to 4.1% in 1998.
General and administrative expenses, excluding depreciation and amortization,
increased $5.7 million in 1999 compared to 1998. This increase is directly
attributable to HealthLink's geographic and member expansion efforts.
RightCHOICE's general and administrative expense ratio, excluding depreciation
and amortization, decreased to 17.9% in 1999 compared to 18.3% in 1998.
Depreciation and amortization expenses decreased to $17.2 million in 1999 from
$19.3 million in 1998. Amortization expenses for completed components of
RightCHOICE's information and operations strategy project decreased by $1.3
million in 1999 compared to 1998. The decrease in amortization for the
information and operations strategy project is due in part to RightCHOICE's
change in the estimated useful life of the capitalized software from five to
seven years.
Operating income (loss)
RightCHOICE's results from operations improved from an operating loss of $4.2
million in 1998 to an operating income of $19.7 million in 1999. Pricing
strategies, medical cost management, and controlled general administrative
expense contributed to the increase in operating income in 1999.
The operating loss for RightCHOICE's underwritten segment decreased to $4.4
million in 1999 from $23.1 million in 1998. The significant improvement is due
to RightCHOICE's aforementioned successful pricing strategies and cost
management efforts.
The operating income for RightCHOICE's self-funded segment increased to $24.1
million in 1999 from $18.8 million in 1998. This improvement is due primarily to
HealthLink's continued profit growth from increased membership and regional
expansion. HealthLink's operating income increased by $7.7 million in 1999 as
compared to 1998. HealthLink's operating income is inclusive of $2.8 million and
$2.8 million in 1999 and 1998, respectively, for amortization expenses related
to goodwill and other intangible assets that were acquired through RightCHOICE's
HealthLink acquisition.
Net investment income
Net investment income includes investment income in the form of interest and
dividend income and net realized gains or losses from the sale of portfolio
securities. Net investment income of $12.9 million represents a $5.8 million
decrease from 1998 primarily as a result of a $4.4 million decrease in net
realized gains.
33
<PAGE>
Provision for income taxes
RightCHOICE's effective income tax provision rate was 39.4% and 40.4% for 1999
and 1998, respectively. RightCHOICE's effective tax provision rates for 1999 and
1998 were affected by non-deductible goodwill amortization, among other things.
Due to a change in the filing status for the State of Missouri during 1998,
RightCHOICE's 1999 and 1998 state income tax provisions were favorably impacted.
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. As of December 31, 1998,
RightCHOICE maintained a valuation allowance of $0.1 million relating to items
in which uncertainty existed with respect to the future realization of the
undistributed losses of minority-owned subsidiary companies. During 1999,
RightCHOICE determined that this uncertainty no longer existed. Based upon all
the available evidence, management believes it is more likely than not that
RightCHOICE will realize its deferred tax assets as of December 31, 1999, and,
accordingly, no valuation allowance has been provided against such assets as of
December 31, 1999.
Net income
RightCHOICE's net income for 1999 increased to $17.2 million, or $0.92 per
share, as compared to net income of $5.7 million, or $0.30 per share for 1998,
as a result of the factors noted above.
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 increase in premium revenue may not be indicative of future periods.
PPO premium revenue increased $20.7 million in 1998 -- $36.3 million increase
due to an 11.0% increase in net premium rates, partially offset by a $15.6
million decrease resulting from a 4.1% decrease in member months. Net rates
increased due in part to overall premium renewal rate increases averaging 7% to
19% during 1998 enrollment periods. Net premium rate increases are at the lower
end of the overall premium increase 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 RightCHOICE'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% -- $16.7 million increase
due to an 8.0% increase in net premium rates and a $6.1 million increase
resulting from a 4.1% increase in member months. Net premium rates increased in
part due to overall premium renewal rate increases of 7% to 19% during 1998
enrollment periods. Net rate increases are lower than the overall premium
increase range because of:
. HMO competition in RightCHOICE's HMO service areas,
. shifts in chosen benefit levels,
34
<PAGE>
. changes in the geographic mix of the HMO business,
. product mix shifts, and
. status of one large group, the Missouri Consolidated Health Care Plan,
comprised of 33,200 members as of December 31, 1998, with which BlueCHOICE
has historically had limited ability to increase premium rates.
Membership increases were driven primarily by an enrollment increase of 6,000
members in the Missouri Consolidated Health Care Plan products from December 31,
1997, to December 31, 1998. HMO membership in non-Missouri Consolidated Health
Care Plan products (and excluding RightCHOICE's Medicaid product) decreased over
the same period by 11,600 members or 10.2%, due primarily to RightCHOICE's
aforementioned pricing strategy during 1998.
Effective March 1, 1998, RightCHOICE discontinued its Medicaid product in an
18-county central Missouri region. The decision to discontinue was made due to
what RightCHOICE believes were unacceptable contract terms proposed by the State
of Missouri. As of December 31, 1997, RightCHOICE 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% partially offset by a 6.4% increase in net
premium rates. Membership declines are partially attributable to subscribers
opting for Medicare-risk programs, similar to RightCHOICE's Blue Horizons
Medicare HMO 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 because of a 44.3%
decline in member months. Member month declines are consistent with
RightCHOICE's strategy to move toward more highly managed care products.
Revenue from other specialty services, which includes certain of RightCHOICE's
drug and dental health care benefit plans, increased $3.9 million -- $6.3
million increase as a result of a 16.2% increase in net premium rates partially
offset by a $2.4 million decrease resulting from a 5.4% decrease in member
months. The large rate increases relate to RightCHOICE's drug products and
correspond to the high levels of prescription utilization and trends that
RightCHOICE, as well as the industry as a whole, have experienced in recent
years.
Self-funded
Fees and other income from administrative services only, network services and
life insurance commission revenues increased in 1998 by $7.9 million. These
increases are primarily due to increased 1998 revenues of $14.4 million from
HealthLink, RightCHOICE's network rental and managed care service subsidiary.
HealthLink's revenues increased due to a 21.1% increase in membership during
1998. Sales during this period included a 30,000-member group that enrolled in
HealthLink's self-funded ASO plan, transferring from RightCHOICE'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 RightCHOICE's other self-funded business due to the nonrenewal
of three large groups.
Operating expenses
The overall medical loss ratio decreased to 83.5% in 1998 from 84.8% in 1997.
The medical loss ratio experienced in 1998 is lower compared to that in 1997 due
in part to RightCHOICE's pricing strategy, which resulted in an overall increase
in premium per member per month of approximately 9.5% in 1998 as compared to
1997. The medical loss ratio in 1998 is slightly higher than RightCHOICE
previously anticipated in the beginning of the year as a result of continued
escalation of the medical cost trend,
35
<PAGE>
driven by increased cost and utilization of both outpatient services and drug
therapies. RightCHOICE's medical expense on a per member per month basis
increased by approximately 7.8% in 1998 as compared to 1997.
Commission expense increased by $2.1 million, or 7.1%, in 1998. The commission
expense ratio of 4.1% for 1998 remained unchanged from 1997.
General and administrative expenses (excluding depreciation and amortization)
increased $0.2 million in 1998 compared to 1997. RightCHOICE 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. RightCHOICE's 1997 general
and administrative expenses include a write-off of $1.7 million for amounts due
to BlueCHOICE from MedAmerica HealthNet, Inc., a physician hospital organization
that filed for bankruptcy during the fourth quarter of 1997. RightCHOICE's
general and administrative expense ratio (excluding depreciation and
amortization) decreased to 18.3% in 1998 compared to 19.5% in 1997. Excluding
depreciation, amortization and the $1.7 million charge, the general and
administrative expense ratio for 1997 was 19.2%.
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, Healthy Alliance Life Insurance Company recorded $4.3 million of
expense to complete the amortization of a prepaid reinsurance asset associated
with RightCHOICE's reinsurance agreements with Blue Cross and Blue Shield of
Kansas City. Amortization expenses for completed components of RightCHOICE's
information and operations strategy project increased by $2.4 million in 1998
compared to 1997.
A non-recurring charge of $0.9 million was recognized in the fourth quarter of
1998 related to a planned reduction of RightCHOICE's work force and changes in
its employee health care benefits. In 1997, RightCHOICE expensed $3.3 million
related to costs associated with the relocation of RightCHOICE'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, BlueCHOICE recorded a $29.5 million contract loss
reserve for estimated losses relating to its contract with the Missouri
Consolidated Health Care Plan. 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. RightCHOICE cannot provide any
assurances that the amount of this loss reserve will be sufficient to cover all
future losses that may be associated with the Missouri Consolidated Health Care
Plan contract.
Operating loss
RightCHOICE'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 Missouri Consolidated Health Care Plan contract
loss reserve, the operating loss decreased from $28.2 million in 1997 to $3.3
million in 1998.
The operating loss for RightCHOICE's underwritten segment was $23.1 million in
1998 compared to an operating loss of $69.4 million in 1997. The decrease in
losses in 1998 is partially attributable to the aforementioned $29.5 million
contract loss reserve as well as an increase in RightCHOICE's overall premium
rates.
36
<PAGE>
RightCHOICE's self-funded segment experienced operating income of $18.8 million
in 1998 as compared to operating income of $8.4 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 RightCHOICE's HealthLink acquisition.
Net investment income
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 net realized gains.
Realized gains in 1997 included 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 RightCHOICE's intent to increase its
holdings of fixed income securities and decision to repay $15.0 million of its
debt in the first quarter of 1997.
Provision (benefit) for income taxes
RightCHOICE's effective income tax provision (benefit) rate was 40.4% and
(28.4)% for 1998 and 1997, respectively. RightCHOICE's effective tax provision
(benefit) rates for 1998 and 1997 were affected by non-deductible goodwill
amortization. RightCHOICE's 1998 state income tax provision was favorably
impacted by a change in the filing status of Missouri during 1998. RightCHOICE's
effective income tax benefit rate for 1997 was also affected by gains from the
liquidation of company-owned life insurance policies.
Net income (loss)
RightCHOICE'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
Missouri Consolidated Health Care Plan loss reserve, RightCHOICE's net income
increased to $6.2 million, or $0.33 per share, in 1998, as compared to a net
loss of $2.7 million, or $0.14 per share, in 1997, as a result of the factors
noted above.
Liquidity and capital resources
RightCHOICE's working capital as of December 31, 1999 was $73.0 million, an
increase of $8.5 million from December 31, 1998. The increase is partially
attributable to the net income of $17.2 million in 1999. Depreciation and
amortization expenses related to noncurrent assets was $17.2 million.
RightCHOICE capitalized $6.6 million of costs for property and equipment
purchases, $4.3 million of which relates to capitalized information and
operations strategy development costs. RightCHOICE's unrealized net appreciation
of investments available for sale decreased by $5.6 million in 1999. In
addition, RightCHOICE repaid $9.0 million of the debt from RightCHOICE's
reducing revolving credit facility as well as $4.6 million of debt related to
capital leases.
Net cash provided by operations totaled $28.7 million for the year ended
December 31, 1999 as compared to $11.0 million for the year ended December 31,
1998. RightCHOICE's net income was $17.2 million, which included (on a
before-tax basis) $0.5 million of net realized losses from the sale of
investments, $17.2 million of depreciation and amortization expenses, and $9.1
million related to the reduction in the Missouri Consolidated Health Care Plan
contract loss reserve. In addition, receivables from members, accounts payable
and accrued expenses, medical claims payable, and net intercompany payables were
affected by the timing of operating cash payments and receipts, intercompany tax
settlements, as well as
37
<PAGE>
changes in membership and utilization and claims payment trends. Receivables
from members increased by $10.9 million in part due to an increase of $9.1
million related to HealthLink receivables, rate increases related to
RightCHOICE's underwritten products, and other timing factors. Accounts payable
and accrued expenses decreased by $5.2 million due in part to a $6.0 million
settlement payment relating to a contingency that was previously reserved.
Medical claims payable increased by $14.4 million, approximately 13%, due to the
increase in the cost of health care services, the timing of claim payments, and
an increase in RightCHOICE's claims inventory. RightCHOICE's efforts to reduce
claims inventory during 2000 could reduce the level of operating cash flows in
future quarters of 2000. Net intercompany payables decreased by $9.7 million due
to the timing of operating cash receipts and payments and intercompany tax
settlements, among other things.
On August 29, 1997, RightCHOICE reported the commencement of the litigation with
the Missouri Consolidated Health Care Plan and estimated losses (giving effect
to all possible renewal terms of the Missouri Consolidated Health Care Plan
contract without requested rate increases) in the range of $30 million to $40
million. In the third quarter of 1997, RightCHOICE 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. RightCHOICE was advised by the Missouri Department of
Insurance in March 1998 that the entire amount of the reserve for the Missouri
Consolidated Health Care Plan contract recorded by RightCHOICE for projected
losses under the contract through the year 2000 must, for statutory accounting
purposes, be recorded by RightCHOICE's subsidiary BlueCHOICE on its statutory
filings with the Missouri Department of Insurance. With the prior regulatory
approval of the Missouri Department of Insurance, BlueCHOICE issued surplus
notes to RightCHOICE in the amount of $29 million to ensure the statutory
solvency of BlueCHOICE. On August 6, 1999, the Missouri Consolidated Health Care
Plan executed an amendment to the contract providing a rate increase that is
anticipated to be approximately 21% for public entities, modified rate factors
for state employees, and modification of the pharmacy benefit, effective January
1, 2000, for the 2000 contract year. While management of RightCHOICE believes
the current provision for losses is adequate, particularly in light of the rate
increases provided on August 6, 1999, if the actual public entity membership in
the Missouri Consolidated Health Care Plan 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 Missouri
Consolidated Health Care Plan contract, and such losses could have a material
adverse effect on RightCHOICE.
In the first quarter of 1999, RightCHOICE received regulatory approval of a
reinsurance arrangement between its subsidiaries, Healthy Alliance Life
Insurance Company and BlueCHOICE. Under this arrangement, Healthy Alliance Life
Insurance Company will reinsure the Missouri Consolidated Health Care Plan
losses that exceed certain thresholds over the remaining term of the current
Missouri Consolidated Health Care Plan contract. RightCHOICE anticipates that
this arrangement will assist in mitigating the risk that additional surplus
notes or other funding will need to be provided to BlueCHOICE.
RightCHOICE primarily invests positive cash flow in fixed income securities.
RightCHOICE's investment policies are designed to preserve principal, maximize
yield and provide liquidity to meet anticipated obligations. RightCHOICE'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. RightCHOICE also has approximately $10.9 million as of December 31,
1999, invested in a large capitalization equity index fund.
38
<PAGE>
During the third quarter of 1999, RightCHOICE completed negotiations to
favorably amend the terms of its revolving credit facility, the material terms
of which are as follows:
. the borrowings under the credit agreement are to be denominated at reduced
interest rates at either 2.5% above the one month floating London Interbank
Offered Rate, or at 1.5% above the higher of the latest federal funds rate
plus 0.5% or the bank's reference rate, which approximates the prime rate,
. several financial covenant calculations were favorably modified and the
financial covenant requirements were favorably adjusted,
. the maximum commitment of the credit agreement of $36 million as of October
1, 1999, will be reduced by $2.0 million quarterly through January 1, 2002,
the new termination date, and
. an additional $7 million of surplus notes will be permitted to be incurred
between RightCHOICE and its subsidiaries to provide for capital planning
flexibility.
In addition, if RightCHOICE meets specified criteria, it may denominate the
borrowings at further reduced interest rates at LIBOR plus 2.25%, or as a base
rate loan at 1.25% above the higher of the latest federal funds rate plus 0.5%
or the bank's reference rate, which approximates the prime rate.
Under applicable state regulations, some of RightCHOICE's subsidiaries are
required to retain cash generated from their operations. After giving effect to
these restrictions, RightCHOICE had approximately $9.1 million in cash and
investments available for general corporate purposes without regulatory
approval.
Other than continued investment in information technology and debt repayment,
RightCHOICE currently has no definitive material commitments for future use of
its current or expected levels of available cash resources. RightCHOICE
anticipates that in 2000 it will repay $8.0 million of its long-term debt
pursuant to the credit agreement's requirements, as described above. In
addition, in 2000, RightCHOICE anticipates that it will expend approximately
$8.6 million, of which $6.5 million will be capitalized, related to
RightCHOICE's information and operations strategy project. Management
continually evaluates opportunities to expand RightCHOICE's operations.
RightCHOICE's expansion options may include additional acquisitions and internal
development of new products and programs. RightCHOICE's available cash resources
will remain in interest-bearing investments until they are utilized for such
purposes.
Year 2000 issue
RightCHOICE executed 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).
RightCHOICE substantially completed its Year 2000 program in December 1999. This
included necessary remediation, implementation of new packages, testing of
critical components, testing of critical external interfaces and completion of
contingency plans for critical processes.
As of February 1, 2000, RightCHOICE had not experienced any significant problems
relating to the Year 2000 transition. While there are some applications that
have not had their first production use in 2000,
39
<PAGE>
management does not anticipate that any such problems would have a material
adverse effect on RightCHOICE. RightCHOICE will continue to monitor these and
other systems for continued processing. As of February 1, 2000, RightCHOICE was
not aware of significant Year 2000 problems encountered by its critical vendors,
suppliers and providers or in RightCHOICE's use of their services.
The total cost associated with modifications required to become Year 2000 ready
was approximately $12.9 million with $5.4 million expensed in 1999. RightCHOICE
expensed all costs associated with these changes as they were incurred. These
costs were funded internally through operating cash flows or investment sales
and represented less than 10% of RightCHOICE's information technology budget
over the life of the Year 2000 program.
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. In an effort to lessen the impact of health care cost inflation on its
premiums, RightCHOICE has implemented programs to strengthen its underwriting
standards. These programs include the three-tier copayment levels for drug
coverages and various deductible and copayment options for medical coverages, as
well as various provider networks and programs such as the Physician Group
Partners Program(R). However, RightCHOICE cannot provide any assurances that its
efforts to reduce the impact of inflation will be effective or that premium
increases will equal or exceed increasing health care costs.
Health Insurance Portability and Accountability Act of 1996
The United States Department of Health and Human Services has issued proposed
rules, as contemplated by the Health Insurance Portability and Accountability
Act of 1996, which would, if the rules are adopted, among other things, impose
security and confidentiality requirements with respect to a member's
transactions with health care providers and payors, as well as requirements for
the standardization of certain electronic transaction code sets and provider
identifiers. RightCHOICE has not fully assessed the financial impact related to
full compliance with the Health Insurance Portability and Accountability Act of
1996 and its regulations; however, RightCHOICE believes such financial impact
could be material.
Other proposed health care reform legislation
The United States House of Representatives has passed the "Bipartisan Consensus
Managed Care Improvement Act," also known as the Norwood-Dingell bill, which
would, if it became law, among other things, impose limits on the methods of
operation for group health plans and health insurance issuers, limit the ability
of group health plans and health insurance issuers to define medical necessity
for purposes of coverage, and permit group health plans and health insurance
issuers to be sued in state courts for coverage determinations. This law and
other proposals, including those referred to generally as the "Patients Bill of
Rights," could impose additional restrictions or obligations on the operations
of RightCHOICE.
It is uncertain whether RightCHOICE can recoup, through higher premiums or other
measures, the increased costs caused by the Bipartisan Consensus Managed Care
Improvement Act or any new legislation or regulation, or any court or regulatory
decision that expands or reduces the interpretation or application of existing
statutes and regulations. While certain of these measures would adversely affect
RightCHOICE and its subsidiaries, at this time RightCHOICE cannot predict the
extent of this impact or which of (or in what form) the pending laws or rules
will be enacted or adopted.
40
<PAGE>
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
RightCHOICE'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.
RightCHOICE's objective in managing interest rate risk is to meet the strategic
operating needs 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. RightCHOICE's management is responsible for
recommending external portfolio managers and RightCHOICE's Finance and
Investment Committee, comprised of certain members of RightCHOICE'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. RightCHOICE's investment guidelines are
generally conservative and are established with the expectation of receiving
reasonable rates of return at reasonable levels of risk. RightCHOICE's
management is also responsible for recommending the percentage distribution of
the portfolio between short-term, fixed income, and equity investments for the
Finance and Investment Committee's approval. RightCHOICE'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.
RightCHOICE classifies its investments as available-for-sale. Accordingly,
RightCHOICE's investments are reported on its Consolidated Balance Sheets at
fair value. Changes in market interest rates or prices 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, 1999, RightCHOICE recorded an unrealized loss on these investments
and the fair value of the securities could potentially decrease further,
depending upon changes in market rates and other factors. As of December 31,
1999, RightCHOICE had $201.9 million invested in available-for-sale securities
at fair value. The analyses below are based on $172.5 million of RightCHOICE's
available-for-sale securities that are managed externally, with a
weighted-average yield to maturity of 7.31%. RightCHOICE'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.
RightCHOICE also has $10.9 million invested in an equity index fund. This fund's
passive strategy is designed to track the performance of the Standard & Poor's
500 Composite Stock Price Index. The fund's total return may fluctuate, like
stock prices generally, within a wide range. The remaining $18.5 million of
RightCHOICE's available-for-sale securities were not included in the analyses as
the investments are primarily either internally managed or represent short-term
securities or 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 $172.5 million of externally managed fixed maturity investments is as
follows:
41
<PAGE>
<TABLE>
<CAPTION>
Effective Maturity % of Total Effective Duration % of Total
(in years) Held (in years) Held
------------------------------------------------------------------
<S> <C> <C> <C>
0.00 - 0.99 3.99 0.00 -0.99 4.73
1.00 - 2.99 22.22 1.00 -2.99 24.47
3.00 - 4.99 16.53 3.00 -3.99 19.06
5.00 - 9.99 41.33 4.00 -5.99 38.18
10.00 -19.99 11.58 6.00 -7.99 7.52
20.00 + 4.35 8.00 + 6.04
</TABLE>
The following table shows the effect of changes in interest rates on
RightCHOICE's investment return, duration and market value. The analysis below
incorporates the prepayment risk associated with RightCHOICE's investments in
callable securities as well as the optionality of its mortgage-backed and
asset-backed securities. The analysis includes a 12-month projection of market
values given the applicable changes in yields from that which existed at
year-end 1999 with the assumption that investment income is reinvested.
<TABLE>
<CAPTION>
Return %
------------------------------------
Yield Change Effective
(basis points) Total Income Price Duration Market Value
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-300 20.15 7.29 12.87 4.05 $207,223
-250 17.92 7.27 10.66 3.99 203,380
-200 15.71 7.23 8.48 3.98 199,559
-150 13.58 7.23 6.35 4.01 195,882
-100 11.49 7.25 4.24 4.07 192,276
-50 9.39 7.28 2.11 4.13 188,666
0 7.31 7.31 0.00 4.16 185,068
50 5.27 7.34 -2.07 4.16 181,554
100 3.29 7.37 -4.08 4.12 178,138
150 1.37 7.40 -6.03 4.08 174,834
200 -0.48 7.43 -7.91 4.03 171,644
250 -2.26 7.46 -9.73 4.00 168,561
300 -4.02 7.49 -11.51 3.98 165,535
</TABLE>
To summarize, a decrease in effective interest rates would result in an increase
in the fair value of RightCHOICE'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 RightCHOICE's portfolio
with an offsetting decrease (net of taxes) recorded in shareholders' equity.
RightCHOICE cannot provide any assurances 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 1999, RightCHOICE was exposed to changes in interest rates through
RightCHOICE's revolving credit facility with Bank of America National
Association, formerly known as Bank of America National Trust and Savings
Association, and a syndicate of banks. This exposure was primarily linked to the
adjusted London Interbank Offered Rate. RightCHOICE's debt under the credit
agreement was subject to interest at 2.75% above the adjusted London Interbank
Offered Rate, through September 30, 1999, and 2.5% above the adjusted London
Interbank Offered Rate, after September 30, 1999, and was adjusted
42
<PAGE>
monthly accordingly. A hypothetical 10% increase in the adjusted London
Interbank Offered Rate would have increased RightCHOICE's interest expense by
approximately $0.3 million during 1999. At December 31, 1999, RightCHOICE had
$34.1 million outstanding under the credit agreement (see Note 10 of the Notes
to Consolidated Financial Statements for further information related to
RightCHOICE's credit agreement). RightCHOICE expects to continue to denominate
the borrowings under the credit agreement as an offshore rate loan bearing
interest at the adjusted London Interbank Offered Rate plus 2.5%. However, as an
alternative, RightCHOICE may denominate the borrowings as a base rate loan which
bears interest at 1.5% above the higher of the latest federal funds rate plus
0.5% or the bank's reference rate, which approximates the prime rate. In either
case, the applicable interest rate is subject to adjustment on a monthly basis.
In addition, if RightCHOICE meets specified criteria, RightCHOICE may denominate
the borrowings at reduced rates, either as an offshore rate loan at the adjusted
London Interbank Offered Rate plus 2.25%, or as a base rate loan at 1.25% above
the higher of the latest federal funds rate plus 0.5% or the bank's reference
rate, which approximates the prime rate. The maximum commitment of the credit
agreement was reduced to $34.1 million as of December 31, 1999, with $2.0
million quarterly reductions scheduled through January 1, 2002, the termination
date. In addition, mandatory reductions to the commitment, together with
prepayments, are required upon the happening of extraordinary events, such as
the issuance of debt securities or the sale of a subsidiary.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------
Index to Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets, December 31, 1999, and 1998........................... 72
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.............................................. 73
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997.............................................. 74
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.............................................. 75
Notes to Consolidated Financial Statements......................................... 76
Report of Independent Accountants.................................................. 107
Report of Independent Accountants.................................................. 108
Financial Statement Schedule - Condensed Financial Information of Registrant....... 109
</TABLE>
43
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
The Board of Directors of RightCHOICE is divided into three classes of
directors, with the directors serving staggered terms of three years until their
respective successors are duly elected and qualified or until their respective
earlier resignation or removal. The directors are William H. T. Bush and Norman
J. Tice, the Class III directors whose terms expire in 2000; Earle H. Harbison,
Jr. and Gloria W. White, the Class I directors whose terms expire in 2001; and
John A. O'Rourke and Roger B. Porter, Ph.D., the Class II directors whose terms
expire in 2002. Ronald G. Evens, M.D., a Class II director, resigned in
October, 1999.
The following table sets forth certain information with respect to each director
of RightCHOICE.
<TABLE>
<CAPTION>
Present Position Director
Name Age With RightCHOICE Since
---- --- ---------------- --------
<S> <C> <C> <C>
Class III: Term to Expire in 2000
William H.T. Bush 61 Director 1994
Norman J. Tice 64 Director 1994
Class I: Term to Expire in 2001
Earle H. Harbison, Jr. 71 Director 1994
Gloria W. White 65 Director 1994
Class II: Term to Expire in 2002
John A. O'Rourke 56 Chairman, President and Chief 1997
Executive Officer
Roger B. Porter, Ph.D. 53 Director 1994
</TABLE>
The business experience of each of the directors of RightCHOICE is as follows:
William H. T. Bush has served as a director of RightCHOICE since April 1994.
Mr. Bush currently serves as Chairman of the audit committee, the finance and
investment committee and the nominating committee. He served on the Blue Cross
and Blue Shield of Missouri Board of Directors from 1989 to 1994 and as
Secretary of the Blue Cross and Blue Shield of Missouri Board of Directors from
1990 to 1994. Mr. Bush is the Chairman of Bush-O'Donnell & Company, Inc. of St.
Louis, an investment management and financial advisory firm he founded in 1986.
Prior to 1986, Mr. Bush served as President and director of The Boatmen's
National Bank of St. Louis. Mr. Bush currently is a director of Mississippi
Valley Bancshares, Inc., Maritz, Inc., D.T. Industries, Inc., the Lord-Abbett
Family of Mutual Funds and Engineered Support Systems, Inc.
Norman J. Tice has served as a director since April 1994. Mr. Tice served as
Vice Chairman of RightCHOICE from September 1995 to October 1997 and as Chairman
of RightCHOICE from April 1994 to August 1995. He also was a director of Blue
Cross and Blue Shield of Missouri from 1986 to July 1994 and has been a director
of Blue Cross and Blue Shield of Missouri since January 1996. Mr. Tice served
as Chairman of the Blue Cross and Blue Shield of Missouri Board of Directors
from
44
<PAGE>
1990 to 1994 and has served in that capacity since January 1996. Mr. Tice is a
consultant in the financial services industry. He retired from Boatmen's
Bancshares, Inc. in May 1996 where he had served in various senior management
positions. He is a member of the Mastercard International, Inc. Global Board of
Directors and serves as Chairman Emeritus. He is also a director of General
Credit Forms, Inc. and Intelidata and is an advisory director of First National
Bank of St. Louis and a commissioner of the Bi-State Development Agency.
Earle H. Harbison, Jr. has served as a director of RightCHOICE since April 1994.
Mr. Harbison currently serves as Chairman of the compensation committee. Since
September 1993, Mr. Harbison has served as Chairman of Harbison Corporation, a
manufacturing company located in St. Louis. From May 1986 until his retirement
in September 1993, he served as President, Chief Operating Officer and a
director of Monsanto Company. Mr. Harbison is a director of HealthLink, Inc.,
Angelica Corporation, National Life Insurance Co., Mutual of America, Washington
University, Barnes-Jewish Hospital, Automobile Club of Missouri and the National
Law Center, George Washington University.
Gloria W. White has served as a director of RightCHOICE since November 1994.
Mrs. White currently serves as Chair of the litigation committee. She served on
the Board of Directors of Blue Cross and Blue Shield of Missouri from 1986 to
1996 and as Chair of the Blue Cross and Blue Shield of Missouri Board of
Directors from August 1994 to January 1996. Mrs. White has been Vice Chancellor
Emerita of Washington University since June 1997 and has served in various other
capacities at Washington University since 1967. She currently serves as Chair
of the American Red Cross North Central Region. Mrs. White is also a director
of BlueCHOICE, Missouri Goodwill Industries, United Way of Greater St. Louis,
the St. Louis Symphony and the St. Louis Art Museum, a member of the Mercantile
Bank Trust Advisory Board, Chair of The Sheldon Foundation Board of Trustees and
a member of the Executive Committee of United Way of Greater St. Louis.
John A. O'Rourke has served as a director and as Chairman and Chief Executive
Officer of RightCHOICE since February 1997 and as President of RightCHOICE since
March 1997. Mr. O'Rourke also has served as President and Chief Executive
Officer of Blue Cross and Blue Shield of Missouri since March 1997. He served
as President and Chief Executive Officer of HealthLink from January 1985 to
February 1997. Prior to joining HealthLink, Mr. O'Rourke was a member of the
Federal Senior Executive Service and served for approximately 15 years in the
United States Department of Health and Human Services in several capacities,
including Deputy Director of the Office of Health Maintenance Organizations,
Deputy Director of the Office of Health Practice Assessment and Senior Policy
Analyst in the Office of the Surgeon General. Prior to serving in the
Department of Health and Human Services, Mr. O'Rourke was the Director of the
Department of Economic Research for the American Medical Association.
Roger B. Porter, Ph.D. has served as a director of RightCHOICE since April 1994.
Dr. Porter currently serves as Chairman of the business opportunities committee.
Since 1996, Dr. Porter has served as Director of Harvard University's Center for
Business and Government, and since 1993, Dr. Porter has served as IBM Professor
of Business and Government at the John F. Kennedy School of Government at
Harvard University. From 1989 to 1993, Dr. Porter served as Assistant to the
President of the United States for Economic and Domestic Policy. From 1985 to
1989, Dr. Porter was Professor of Business and Government at Harvard University
and Faculty Chairman of the Program for Senior Managers in Government. He is a
director of BlueCHOICE, Zions Bancorporation, National Life Insurance Company,
Tenneco Automotive, and PACTIV Corporation.
There is no arrangement or understanding between any director and any other
person pursuant to which such director was selected as a director. None of the
corporations or other organizations that employ or employed the directors of
RightCHOICE are parents, subsidiaries or affiliates of RightCHOICE.
45
<PAGE>
Executive Officers
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John A. O'Rourke 56 Chairman of the Board, President and Chief
Executive Officer
Sandra A. Van Trease 39 Senior Executive Vice President and Chief
Operating Officer; Chief Financial Officer
Angela F. Braly 38 Executive Vice President, General Counsel and
Corporate Secretary
Stuart K. Campbell 38 Senior Vice President, Client Services
Michael Fulk 52 Senior Vice President and Chief Marketing
Executive
Herbert B. Schneiderman 54 Senior Vice President, Medical Delivery Systems
John J. Seidenfeld, M.D. 53 Senior Vice President and Corporate Medical
Officer
Connie L. Van Fleet 47 Senior Vice President and Chief Information Officer
Kathleen M. Zorica 43 Senior Vice President, Business Analysis and
Product Management
David T. Ott 45 President, Chief Executive Officer and Director of
HealthLink
Courtney B. Walter 44 Executive Vice President and Chief Financial
Officer of HealthLink
Robin Theiss 45 Senior Vice President, Strategic Affairs of
HealthLink
</TABLE>
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 Chief Executive Officer of HealthLink.
O'Rourke was appointed President and Chief Executive Officer of HealthLink in
January 1985. Initially established by a consortium of St. Louis hospitals,
HealthLink became the largest preferred provider organization in Missouri under
Mr. O'Rourke's leadership. 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 A. Van Trease was named Senior Executive Vice President, Chief Operating
Officer and Chief Financial Officer in December 1998. She joined RightCHOICE in
June 1994, was promoted to Chief Financial Officer in November 1995 and was also
named Chief Operating Officer in October 1997. Prior to joining RightCHOICE,
she was a Senior Manager with Price Waterhouse LLP.
46
<PAGE>
Angela F. Braly was named Executive Vice President, General Counsel and
Corporate Secretary in January 1999. Ms. Braly acted as Interim General Counsel
from September 1997 through December 1998 while a member of the St. Louis law
firm of Lewis, Rice & Fingersh, L.C. where she had practiced law since 1987.
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
RightCHOICE, 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 region.
Herbert B. Schneiderman joined RightCHOICE as Senior Vice President, Medical
Delivery Systems, in July 1995. Mr. Schneiderman came to RightCHOICE after
spending 21 years at Saint Louis University Hospital, the last seven as its
Chief Executive Officer.
John J. Seidenfeld, M.D. was named Senior Vice President and Corporate Medical
Officer in June 1999. He came to RightCHOICE from CIGNA Health Care of Texas
where he was Vice President and Corporate Medical Director. Prior to joining
CIGNA, Dr. Seidenfeld was in private practice as a pulmonary and critical care
physician, the Executive Director and Medical Director at the Solomon Anthony
Clinic in San Antonio, a clinical professor at the University of Texas at San
Antonio and a consultant Medical Director of Humana Health Plan of Texas.
Connie L. Van Fleet was named Senior Vice President and Chief Information
Officer in November 1997. Ms. Van Fleet joined RightCHOICE in 1990 and
immediately prior to her current position served as Vice President, Business
Analysis and Development. Prior to joining RightCHOICE, Ms. Van Fleet was with
MetLife Health Care Management Corporation.
Kathleen M. Zorica was named Senior Vice President, Business Analysis and
Product Management in July 1999. She joined Blue Cross and Blue Shield of
Missouri in 1977. Ms. Zorica was named Vice President, Product Management in
November 1994 and has been Director, Product Development; Director, Account
Operations and Services, Director, Financial Analysis, and immediately prior to
her current position, Vice President, Business Analysis and Product Management.
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.
Robin Theiss was named Senior Vice President, Strategic Affairs of HealthLink in
September 1997. Ms. Theiss has been with HealthLink since 1990 and previously
held the position of Vice President, Operations. Prior to joining HealthLink,
Ms. Theiss held positions with General American, SANUS Health Plan and MetLife
Healthcare Network.
47
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To RightCHOICE's knowledge, based solely on review of the Forms 3, 4 and 5
furnished to RightCHOICE and written representations that no other reports were
required during the year ended December 31, 1999, its directors, executive
officers, greater than 10% shareholders and reporting trusts complied with
applicable Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Executive Compensation
The following table summarizes for the years ended December 31, 1999, 1998 and
1997, all of the compensation RightCHOICE paid to the five most highly
compensated executive officers of RightCHOICE, including its Chief Executive
Officer. The compensation paid by RightCHOICE includes amounts Blue Cross and
Blue Shield of Missouri fully reimbursed to RightCHOICE under an administrative
services agreement.
As a general matter, "salary" includes amounts each named executive electively
deferred under RightCHOICE's 401(k) plan, executive deferred compensation plan
and Section 125 plan. The 401(k) plan enables participants to voluntarily
reduce their salary up to the lesser of 15% of compensation or the maximum
dollar amount allowed under the Internal Revenue Code. RightCHOICE matches 60%
of these contributions up to 5% of a participant's compensation. The matching
contribution, which is included under the column entitled "All Other
Compensation," vests over a period of years and is 100% vested after 5 years of
service. The deferred compensation plan permits additional elective deferrals
and additional matching contributions and restores benefits that cannot be
contributed to and provided by RightCHOICE because of limits imposed by the
Internal Revenue Code. RightCHOICE has not granted any stock appreciation
rights.
48
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
------------------------------------- ----------------------------------------
Awards Payouts
-------------------------- ------------
Securities
Other Under-
Name and Annual Restricted Lying
Principal Compen- Stock Options/ LTIP All Other Compen-
Position Year Salary Bonus(1) Sation Award(s) SARs Payouts sation(2)
($) ($) ($) ($) (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John A. O'Rourke(3) 1999 $400,000 $284,460 $ 0 $ 0 26,558 $ 0 $145,583
Chairman, President, 1998 $375,000 $228,552 $ 0 $ 0 34,080 $ 0 $ 53,784
Chief Executive Officer 1997 $322,365 $114,309 $ 0 $ 0 24,010 $ 0 $583,046(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Sandra A. Van Trease 1999 $300,000 $209,930 $ 0 $ 0 21,246 $ 0 $ 27,384
Senior Executive Vice 1998 $258,333 $156,195 $ 0 $ 0 20,292 $ 0 $ 19,552
President, Chief 1997 $208,750 $ 0 $ 0 $ 0 12,926 $ 0 $ 13,397
Operating Officer and
Chief Financial Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Angela F. Braly(5) 1999 $250,000 $177,829 $ 0 $ 0 37,705 $ 0 $ 9,298
Executive Vice President,
General Counsel &
Corporate Secretary
- ------------------------------------------------------------------------------------------------------------------------------------
Michael Fulk(6) 1999 $217,300 $150,201 $ 0 $ 0 11,615 $ 0 $ 14,595
Senior Vice President and 1998 $205,000 $ 91,193 $30,000 $ 0 24,730 $ 0 $ 8,400
Chief Marketing Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Herbert B. Schneiderman 1999 $201,400 $121,514 $ 0 $ 0 9,419 $ 0 $ 13,698
Senior Vice President 1998 $190,000 $ 83,028 $ 0 $ 0 11,048 $ 0 $ 13,941
Medical Delivery 1997 $190,000 $ 0 $ 0 $ 0 12,215 $ 0 $ 13,892
Systems
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
__________________________
(1) The bonus reported in the table for Mr. O'Rourke includes compensation
paid under the Blue Cross and Blue Shield of Missouri Management Incentive
Plan based upon (1) Blue Cross and Blue Shield of Missouri's overall
corporate financial performance as measured by its operating profit/loss
excluding investment income, extraordinary income/expense and taxes on
income, and (2) the attainment of certain individual performance goals. Of
the amounts reported for Mr. O'Rourke the Blue Cross and Blue Shield of
Missouri Management Incentive Plan accounted for 50% of the amount paid for
1999, 61% of the amount paid for 1998 and 100% of the amount paid for 1997.
RightCHOICE initially paid these amounts but was fully reimbursed by Blue
Cross and Blue Shield of Missouri. Otherwise, for all other named
executives the bonus consists of compensation paid under the Alliance Blue
Cross Blue Shield Incentive Plan. Amounts are payable under the plan upon
the achievement of a pre-defined annual corporate operational target -- net
income less extraordinary charges. RightCHOICE met its pre-defined annual
corporate target in 1999 and 1998 but not in 1997 and therefore did not pay
a bonus under the plan in 1997.
(2) Includes (1) reimbursed matching contributions that accrued during the
year ended December 31, 1999, 1998 and 1997, respectively, for the accounts
of the named executives under the 401(k) plan and the deferred compensation
plan, (2) the value of term life insurance assigned to the named executives
under split dollar universal life insurance policies owned by RightCHOICE,
(3) earnings on amounts deferred under the deferred compensation plan for
the named executives, and (4) an automobile lease
49
<PAGE>
arrangement or car allowance for the named executives. In each case with
respect to Mr. O'Rourke, Blue Cross and Blue Cross and Blue Shield of
Missouri reimburses Right CHOICE for amounts attributable to Mr. O'Rourke's
service to Blue Cross and Blue Shield of Missouri. Matching contributions
that accrued under the 401(k) plan and the deferred compensation plan for
1999, 1998 and 1997 were $24,407, $17,968 and $6,681, respectively, for Mr.
O'Rourke, $13,686, $9,425 and $4,800, respectively, for Ms. Van Trease, $0
for 1999 for Ms. Braly, $4,800 and $0 for 1999 and 1998 for Mr. Fulk, and
$4,800, $4,800 and $4,800, respectively, for Mr. Schneiderman. The value of
the term life insurance attributable to RightCHOICE (and with respect to
Mr. O'Rourke, to Blue Cross and Blue Shield of Missouri) for 1999, 1998 and
1997 was $5,226, $1,662 and $1,144, respectively, for Mr. O'Rourke, $293,
$198 and $197, respectively, for Ms. Van Trease, $186 for 1999 for Ms.
Braly, $1,395 and $0 for 1999 and 1998 for Mr. Fulk, and $498, $741 and
$692, respectively, for Mr. Schneiderman. Earnings on amounts deferred
under the deferred compensation plan for 1999, 1998 and 1997 were $115,080,
$31,704 and $1,162, respectively, for Mr. O'Rourke, $5,005, $1,529 and $0,
respectively, for Ms. Van Trease, $712 for 1999 for Ms. Braly, $0 and $0
for 1999 and 1998 for Mr. Fulk, and $0, $0 and $0, respectively, for Mr.
Schneiderman. The value of the automobile lease arrangements or car
allowances for 1999, 1998 and 1997 was $870, $2,450 and $2,450,
respectively, for Mr. O'Rourke, $8,400, $8,400 and $8,400, respectively,
for Ms. Van Trease, $8,400 for 1999 for Ms. Braly, $8,400 and $8,400 for
1999 and 1998 for Mr. Fulk, and $8,400, $8,400 and $8,400, respectively,
for Mr. Schneiderman.
(3) The amount of salary reported in the table for 1997 for Mr. O'Rourke
includes $41,532 HealthLink paid to Mr. O'Rourke as salary for that portion
of 1997, January 1-February 18, in which he served as President and Chief
Executive Officer of HealthLink prior to becoming President and Chief
Executive Officer of RightCHOICE. Approximately 50% of the remaining
amount of salary reported in the table for Mr. O'Rourke in 1998 and 1997
was paid by RightCHOICE to Mr. O'Rourke for serving as Blue Cross and Blue
Shield of Missouri's President and Chief Executive Officer, and Blue Cross
and Blue Shield of Missouri reimbursed RightCHOICE for this amount under an
administrative services agreement.
(4) Included in this amount is a $571,610 retention bonus paid to Mr.
O'Rourke under an employment contract between Mr. O'Rourke, HealthLink and
RightCHOICE. The employment agreement, which was authorized and directed by
the HealthLink Board of Directors in connection with the sale of
HealthLink, provided for an escrow bonus arrangement paid over a two-year
term following the sale of HealthLink provided that Mr. O'Rourke was still
employed by RightCHOICE. This two-year bonus arrangement was created to
assure the purchaser of HealthLink (which was acquired by RightCHOICE in
August 1995) of the continued employment of Mr. O'Rourke and thereby assure
the full value of HealthLink upon its sale.
(5) Ms. Braly joined RightCHOICE on January 1, 1999.
(6) Mr. Fulk joined RightCHOICE on December 29, 1997 and received a
signing bonus of $30,000.
Option Grants
The following table sets forth information with respect to each of the
named executives concerning grants of stock options for the year ended
December 31, 1999.
RightCHOICE has not granted any stock appreciation rights. RightCHOICE
granted options reported in this table on January 1, 1999. In the event of
a change in control of RightCHOICE, the committee which administers the
option plan has the discretion to accelerate the vesting of options,
require the cash-out of options, adjust the options to reflect the change
in control, or deem the options to be exercisable for the
50
<PAGE>
consideration which would have been received had the options been exercised
prior to the change in control.
The dollar value of the stock options has been determined as of January 1,
1999 using the Black-Scholes option pricing model based on the assumptions
that (1) RightCHOICE granted the options on January 1, 1999, (2) the price
for the shares of class A common stock underlying the options on the grant
date was $11.50 per share, (3) the options are exercisable for 10 years
from the grant date, (4) the option exercise price is $11.50 per share, (5)
the dividend yield is 0%, (6) the "risk free" interest rate is 6.45%, the
yield on a United States government zero coupon bond having a 10-year
maturity from the grant date, (7) the price volatilities for the shares of
class A common stock underlying the options is 40.52%, and (8) the options
have an expected term of 10 years.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Individual Grants
- -------------------------------------------------------------------------------------------
Number of
Securities Percent of Total
underlying Options/ SARs Exercise or
options/SARs Granted To Employees Base Price Expiration Grant Date
Name Granted (#) in Fiscal Year ($/Sh) Date Present Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John A. O'Rourke 26,558 8.5% $11.50 January 1, 2009 $187,499
- --------------------------------------------------------------------------------------------------------------
Sandra A. Van Trease 21,246 6.8% $11.50 January 1, 2009 $149,997
- --------------------------------------------------------------------------------------------------------------
Angela F. Braly(1) 37,705 12.0% $11.50 January 1, 2009 $266,197
- --------------------------------------------------------------------------------------------------------------
Michael Fulk 11,615 3.7% $11.50 January 1, 2009 $ 82,002
- --------------------------------------------------------------------------------------------------------------
Herbert B. Schneiderman 9,419 3.0% $11.50 January 1, 2009 $ 66,498
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Ms. Braly joined RightCHOICE on January 1, 1999 and received a grant of
options for 20,000 shares at that time.
Option/SAR Exercises and Holdings
The following table sets forth information with respect to each named
executive concerning the exercise of options during 1999 and unexercised
options held as of December 31, 1999.
RightCHOICE has not granted any stock appreciation rights. The last
reported sale price of RightCHOICE's class A common stock reported on the
New York Stock Exchange on December 31, 1999 was $11.50 per share. In the
following table, value is calculated by determining the difference between
$11.50 and the option exercise price multiplied by the number of shares of
class A common stock underlying the options.
51
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND DECEMBER 31, 1999 OPTION/SAR VALUES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs Options/SARs
At December 31, 1999 (#) at December 31, 1999 ($)
---------------------------- -----------------------------
Shares Value
Acquired on Realized
Name Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John A. O'Rourke 0 $0 36,117 57,280 $26,049 $44,973
- ---------------------------------------------------------------------------------------------------------------
Sandra A. Van Trease 0 $0 39,884 39,082 $26,349 $29,134
- ---------------------------------------------------------------------------------------------------------------
Angela F. Braly 0 $0 16,000 21,705 $ 0 $ 0
- ---------------------------------------------------------------------------------------------------------------
Michael Fulk 0 $0 11,577 24,768 $22,123 $24,870
- ---------------------------------------------------------------------------------------------------------------
Herbert B. Schneiderman 0 $0 42,830 20,855 $18,906 $17,371
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
O'Rourke Employment Agreement
RightCHOICE and John A. O'Rourke are parties to an employment agreement
which provides that Mr. O'Rourke will serve as Chairman and Chief Executive
Officer of RightCHOICE until he is terminated by RightCHOICE or until he
resigns. Mr. O'Rourke also serves as President and Chief Executive Officer
of Blue Cross and Blue Shield of Missouri under the agreement. The
agreement provides Mr. O'Rourke with a base salary, eligibility in
RightCHOICE's and Blue Cross and Blue Shield of Missouri's employee benefit
plans and other benefits provided in the same manner and to the same extent
as RightCHOICE's and Blue Cross and Blue Shield of Missouri's other senior
executives.
Mr. O'Rourke's employment agreement also provides that he will receive
severance benefits if he is the subject of an involuntary termination for
any reason other than cause, disability or death or if he terminates his
employment for good reason as defined in the agreement. Severance payments
equal 3 times his annual base salary payable in 36 substantially equal
monthly installments plus an amount equal to 36 months of premiums
generally paid by RightCHOICE for health, dental, vision and life
insurance. Outplacement services are also provided. Mr. O'Rourke must
execute a complete waiver of all claims against RightCHOICE, except for
claims against RightCHOICE to enforce the agreement, prior to his receipt
of any severance benefits. Any severance benefits would be reduced to the
extent necessary to ensure that these payments, when added to other
benefits provided by RightCHOICE, would not constitute an excess parachute
payment under the Internal Revenue Code. The employment agreement also
contains a confidentiality agreement, a covenant not to compete and a
binding arbitration provision and provides for reimbursement of legal fees
and other fees and expenses incurred by Mr. O'Rourke to protect his
benefits under the agreement as well as payments for additional taxes
incurred with respect to the reimbursement of fees and expenses.
Executive Severance Agreements
RightCHOICE has entered into severance agreements with each of its senior
vice presidents and senior executives, including the following named
executives: Sandra A. Van Trease, Angela F. Braly, Michael Fulk and Herbert
B. Schneiderman. The agreements provide that an executive officer will
receive severance benefits from RightCHOICE or its successor (1) if the
executive officer is terminated without cause within two years after a
change in control of RightCHOICE or (2) if within two years following a
change in control of RightCHOICE, the executive officer terminates his or
her employment within three months of an event constituting good reason.
52
<PAGE>
The benefits include outplacement services and cash payments equal to the
greater of (1) three times the executive officer's base pay plus an amount equal
to the premiums for health, dental, vision and life insurance for 30 months, or
(2) two times the executive officer's annual compensation. If these amounts
become payable, the amount of these severance payments will be reduced to the
extent necessary so that they do not constitute "excess parachute payments"
under the Internal Revenue Code. In the event of the death or disability of an
officer, amounts payable under the officer severance agreement are reduced by
any benefits paid to the officer or the officer's representatives under the life
insurance program or long-term disability plan maintained by RightCHOICE.
Benefits under the executive severance agreements are payable in 24 monthly
installments or 36 monthly installments, depending on the applicable multiple of
base pay or annual compensation. If the officer finds other employment prior to
the payment of the last monthly installment, the remaining severance benefit may
be paid in a lump-sum and benefits for outplacement services and insurance
premiums will cease. Each executive severance agreement contains a
confidentiality agreement, a covenant not to compete and a binding arbitration
provision and provides for reimbursement of legal fees and other fees and
expenses incurred by an officer to protect his or her benefits under the
executive severance agreement as well as payments for additional taxes incurred
with respect to the reimbursement of fees and expenses.
Officers' Severance Agreements
RightCHOICE has entered into standard severance agreements with certain of its
officers, including Sandra A. Van Trease, Angela F. Braly, Michael Fulk and
Herbert B. Schneiderman. The agreements provide for severance benefits to
officers who are involuntarily terminated for reasons other than cause, death or
disability, or who voluntarily terminate their employment for proper reason, if
the executive severance agreement benefits are not payable.
Under the officer severance agreements, officers will receive a severance
benefit equal to either one year's base pay, payable in 12 monthly installments,
two year's base pay, payable in 24 monthly installments, or three years' base
pay, payable in 36 monthly installments, depending upon the specific terms of
each officer's agreement. If the officer finds other employment prior to the
payment of the last monthly installment, the remaining severance benefit may be
paid in a lump sum.
In addition, amounts equal to health, dental and life insurance premiums will be
provided by RightCHOICE for up to 12 months. Outplacement services are also
provided. Severance benefits would be reduced to the extent necessary to ensure
that these payments, when added to other benefits provided by RightCHOICE, or
Blue Cross and Blue Shield of Missouri, if applicable, would not constitute
excess parachute payments under the Internal Revenue Code. Each officer
severance agreement contains a covenant not to compete and a confidentiality
agreement. Officers are required to enter into a complete waiver of all claims
against RightCHOICE prior to their receipt of any benefits under the agreement.
In the event of the death or disability of an officer, amounts payable under the
officer's severance agreement are reduced by any benefits paid to the officer or
his or her representatives under the life insurance program or long-term
disability plan maintained by RightCHOICE.
Pension Plans
Eligible employees of RightCHOICE participate in a qualified defined benefit
pension plan. Employees become vested in the plan after accruing 5 years of
credited service. The pension plan provides for a normal retirement benefit
payable in the form of a life annuity equal to 1% of final average earnings up
to Social Security-covered compensation plus 1.5% of final average earnings in
excess of Social Security-covered compensation, multiplied by years of credited
service up to 30. Credited service for this purpose includes service with other
organizations licensed by the Blue Cross and Blue Shield Association, and
53
<PAGE>
pension benefits are offset by pension benefits payable by these other
organizations. Normal retirement benefits are payable upon reaching age 65.
The pension plan provides for subsidized early retirement benefits for employees
who terminate their employment with RightCHOICE after having obtained age 55 and
completion of five or more years of credited service. The subsidies are
increased for participants who retire on or after attaining age 62 with 20 years
or more of credited service. Employees with 20 or more years of service who
retire between the ages of 55 and 61 may draw an unreduced benefit if they defer
receipt of the payments until age 62. Those employees with 25 or more years of
service may draw a benefit reduced by 4% per year for each year that benefits
are drawn before age 62. Participants may elect to receive their pension
benefits in the form of a joint and survivor annuity, a single life annuity, a
10-year certain life annuity or other optional forms.
RightCHOICE also maintains a supplemental executive retirement plan for some of
its executives, including the named executives. The supplemental executive
retirement plan provides for an annual retirement benefit equal to 2.5% of final
average earnings, multiplied by years of service up to 20, offset by benefits
provided under the pension plan and various other qualifying pension plans and
annuities.
The table below shows, based on various levels of final average earnings and
years of credited service, the total estimated maximum annual benefits payable
in the form of a single life annuity to hypothetical participants at normal
retirement age (age 65) under the pension plan as supplemented by the
supplemental executive retirement plan. The amounts listed in the table below
are not subject to any reduction for Social Security benefits but are subject to
offset by any pensions payable under the pension plans of other organizations
licensed by the Blue Cross and Blue Shield Association.
<TABLE>
<CAPTION>
Estimated Annual Benefit for Representative
Years of Credited Service
-------------------------------------------------------------------------------------------
Final
Average
Earnings 5 10 15 20 25 30 35
- --------------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$125,000....... $15,625 $ 31,250 $ 46,875 $ 62,500 $ 62,500 $ 62,500 $ 62,500
$150,000....... $18,750 $ 37,500 $ 56,250 $ 75,000 $ 75,000 $ 75,000 $ 75,000
$175,000....... $21,875 $ 43,750 $ 65,625 $ 87,500 $ 87,500 $ 87,500 $ 87,500
$200,000....... $25,000 $ 50,000 $ 75,000 $100,000 $100,000 $100,000 $100,000
$225,000....... $28,125 $ 56,250 $ 84,375 $112,500 $112,500 $112,500 $112,500
$250,000....... $31,250 $ 62,500 $ 93,750 $125,000 $125,000 $125,000 $125,000
$300,000....... $37,500 $ 75,000 $112,500 $150,000 $150,000 $150,000 $150,000
$400,000....... $50,000 $100,000 $150,000 $200,000 $200,000 $200,000 $200,000
$450,000....... $56,250 $112,500 $168,750 $225,000 $225,000 $225,000 $225,000
$500,000....... $62,500 $125,000 $187,500 $250,000 $250,000 $250,000 $250,000
$550,000....... $68,750 $137,500 $206,250 $275,000 $275,000 $275,000 $275,000
$600,000....... $75,000 $150,000 $225,000 $300,000 $300,000 $300,000 $300,000
</TABLE>
As of December 31, 1999, the years of service recognized under the pension plan
and the supplemental executive retirement plan for each of the named executives
were as follows: Mr. O'Rourke, 4.5 years and 15 years (including Mr. O'Rourke's
prior service at HealthLink), respectively, Ms. Van Trease, 5.5 years and 5.5
years, respectively; Ms. Braly, 1 year and 1 year, respectively, Mr. Fulk, 2
years and 2 years, respectively, and Mr. Schneiderman, 4.5 years and 4.5 years,
respectively. Mr. O'Rourke and Ms. Van Trease each have a vested benefit in
both the pension plan and the supplemental executive retirement plan, and Mr.
Schneiderman has a vested benefit in the supplemental executive retirement plan.
Compensation recognized under the pension plan generally includes a
participant's base salary (including
54
<PAGE>
any portion deferred under RightCHOICE's qualified deferred benefit plans and
Section 125 plan), annual bonus compensation and payouts received under
RightCHOICE's long-term incentive plans, subject to maximum limits on
compensation imposed under the Internal Revenue Code. The same compensation,
plus amounts deferred under the non-qualified deferred compensation plan, is
recognized under the supplemental executive retirement plan, but without the
maximum limits. Retirement benefits are calculated based upon the average of a
participant's 5 highest consecutive years of compensation of the most recent 10
years of credited service. Under this formula, the final average earnings under
the supplemental executive retirement plan (before applying the maximum limits
under the Internal Revenue Code) for each of the named executives as of December
31, 1999 who has a vested benefit in the plan are as follows: John A. O'Rourke,
$455,285, Sandra A. Van Trease, $258,429 and Herbert B. Schneiderman, $224,826,
and the final average earnings under the plan (before applying the maximum
limits under the Internal Revenue Code) for each of the named executives as of
December 31, 1999 who does not have a vested benefit in the plan are as follows:
Angela F. Braly, $258,400 and Michael Fulk, $281,329. The estimated annual
benefit for representative years of credited service can be determined by
reference in the table to the level of final average earnings and the recognized
years of service for each of the named executives.
Compensation of Directors
Directors' Fees. In 1999, each director of RightCHOICE' who is not an employee
of RightCHOICE or its subsidiaries or of Blue Cross and Blue Shield of Missouri
received: (1) an annual retainer of $13,000, (2) $800 for each meeting attended
and (3) reimbursement of reasonable out-of-pocket expenses incurred in
conjunction with attending board and committee meetings. Each non-employee
director also received $700 for each committee meeting attended, except the
committee chair who received $900 for each committee meeting attended. Each
non-employee director is also entitled to receive additional fees for attending
lengthy meetings. No additional fees were paid to directors in 1999. Directors
serving on the business opportunities committee also receive $275 per hour for
any additional efforts expended on committee matters outside of the meetings.
In 2000, RightCHOICE's non-employee director compensation was increased so that
each non-employee director is paid: (1) an annual retainer of $26,500, (2)
$1,000 for each board meeting attended and (3) $1,000 for each committee meeting
attended, except the committee chair who is paid $1,200 for each committee
meeting attended.
Directors' Stock Option Plan. RightCHOICE has adopted a stock option plan for
non-employee directors to provide non-employee directors with stock options to
purchase shares of class A common stock. The purpose of the plan is to attract
and retain qualified outside directors and to provide additional incentive for
these directors to promote the success of RightCHOICE's business through sharing
in the future growth of the business. Only non-employee directors, currently
five individuals, are eligible to participate in the directors' stock option
plan.
Under the plan, each year RightCHOICE grants each non-employee director an
option to purchase 1,000 shares of class A common stock. Each person who is
elected for the first time as a non-employee director is granted an option to
purchase a pro-rated number of shares of class A common stock based upon the
number of months until the next annual grant. The aggregate number of shares of
class A common stock that may be issued under options granted under the
directors' stock option plan is limited to 60,000 shares, subject to adjustment
in the event of various changes in RightCHOICE's capital structure. The
directors' stock option plan is administered by a committee designated by the
board of directors and composed of directors who are not otherwise eligible to
be participants in the plan. In 1999, John A. O'Rourke was the only member of
this committee.
55
<PAGE>
The exercise price for an option is the closing price of the class A common
stock on the New York Stock Exchange on the date of grant. Each option expires
10 years from the date of grant. In the event of a change in control of
RightCHOICE, the committee which administers the option plan has the discretion
to accelerate the vesting of options, require the cash-out of options, adjust
the options to reflect the change in control, or deem the options to be
exercisable for the consideration which would have been received had the options
been exercised prior to the change in control.
Directors' Deferred Compensation Plan. Non-employee directors may also elect to
participate in a nonqualified deferred compensation plan. Under the plan, non-
employee directors may make an annual election to defer a portion or all of
their directors' fees. Directors may invest their deferred directors' fees in
various mutual funds or they may purchase shares of class A common stock.
Compensation Committee Interlocks And Insider Participation
The compensation committee has general responsibility for recommending to the
Board of Directors the compensation and benefits of RightCHOICE's executive
officers. In October, 1999, Dr. Evens resigned as a director of RightCHOICE and
as a member of the compensation committee and Mr. Bush and Dr. Porter joined the
committee. The members of the compensation committee, thereafter, were Mr.
Harbison, Jr., Chairman, Mrs. White, Mr. Bush and Dr. Porter. During 1999, no
member of the compensation committee was an officer or employee of RightCHOICE
or any of its subsidiaries, and no member of the compensation committee was
formerly an officer of RightCHOICE or any of its subsidiaries.
56
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
OWNERSHIP OF RIGHTCHOICE CAPITAL STOCK
Ownership of Management
The following table sets forth certain information as of December 31, 1999,
regarding the beneficial ownership of RightCHOICE class A common stock and
RightCHOICE class B common stock by each director of RightCHOICE, by each named
executive and by all directors and executive officers of RightCHOICE as a group.
All information with respect to beneficial ownership has been furnished by the
respective directors and officers, as the case may be.
Beneficial ownership is determined in accordance with SEC rules that generally
attribute beneficial ownership of securities to persons who possess sole or
shared voting power and/or investment power with respect to those securities and
includes, among other things, securities that an individual has the right to
acquire within 60 days. Unless otherwise indicated, the persons or entities
identified in this table have sole voting and investment power with respect to
all shares shown as beneficially owned by them. Percentage ownership
calculations are based on 3,710,653 shares of class A common stock outstanding
and 14,962,500 shares of class B common stock outstanding plus 471,390 shares of
class A common stock of which beneficial ownership may be acquired pursuant to
stock options that are exercisable or that will become exercisable within 60
days.
<TABLE>
<CAPTION>
Amount and Nature of Percentage of Shares
Name Beneficial Ownership Outstanding
---- -------------------- -----------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
William H. T. Bush(1).............. 6,000 0 * 0
Norman J. Tice(2).................. 10,150 0 * 0
Earle H. Harbison, Jr.(3).......... 6,500 0 * 0
Gloria W. White(4)................. 4,702 0 * 0
Roger B. Porter, Ph.D.(5).......... 5,000 0 * 0
John A. O'Rourke(6)................ 70,332 0 * 0
Sandra A. Van Trease(7)............ 61,703 0 * 0
Angela F. Braly(8)................. 25,902 0 * 0
Michael Fulk(9).................... 20,359 0 * 0
Herbert B. Schneiderman(10)........ 55,224 0 * 0
All directors and executive
officers as a group
(21 persons)(11)................... 501,143 0 8.4% 0
</TABLE>
___________________
* Less than 1%.
(1) Includes 5,000 shares that may be acquired pursuant to vested stock
options.
(2) Includes 2,150 shares owned of record by Mr. Tice's wife as trustee of a
trust established for her benefit for which Mr. Tice and his wife share voting
and investment power and 6,000 shares that may be acquired pursuant to vested
stock options.
(3) Includes 5,000 shares that may be acquired pursuant to vested stock
options.
(4) Includes 4,667 shares that may be acquired pursuant to vested stock
options.
57
<PAGE>
(5) Includes 5,000 shares that may be acquired pursuant to vested stock
options.
(6) Includes 36,117 shares that may be acquired pursuant to vested stock
options at December 31, 1999 and 28,215 shares that may be acquired pursuant to
stock options that vested on January 1, 2000.
(7) Includes 39,884 shares that may be acquired pursuant to vested stock
options at December 31, 1999, 18,154 shares that may be acquired pursuant to
stock options that vested on January 1, 2000 and 865 shares beneficially owned
through RightCHOICE's 401(k) plan.
(8) Includes 16,000 shares that may be acquired pursuant to vested stock
options at December 31, 1999 and 9,902 shares that may be acquired pursuant to
stock options that vested on January 1, 2000.
(9) Includes 11,577 shares that may be acquired pursuant to vested stock
options at December 31, 1999 and 8,782 shares that may be acquired pursuant to
stock options that vested on January 1, 2000.
(10) Includes 42,830 shares that may be acquired pursuant to vested stock
options at December 31, 1999 and 10,894 shares that may be acquired pursuant to
stock options that vested on January 1, 2000. All shares are held by a trust for
the benefit of Mr. Schneiderman.
(11) Includes 9,079 shares beneficially owned through the 401(k) plan by all
directors and executive officers as a group and 83,395 shares that Edward J.
Tenholder, who is Executive Vice President and Chief Operating Officer of Blue
Cross and Blue Shield of Missouri and an employee of RightCHOICE, owns or may
acquire pursuant to vested stock options.
Ownership of Certain Beneficial Owners
The following table sets forth certain information as of December 31, 1999,
regarding the beneficial ownership of RightCHOICE class A common stock and
RightCHOICE class B common stock by each person known by the Board of Directors
to own beneficially more than 5% of either class of RightCHOICE's capital stock.
Beneficial ownership is determined in accordance with SEC rules that generally
attribute beneficial ownership of securities to persons who possess sole or
shared voting power and/or investment power with respect to those securities and
includes, among other things, securities that an individual has the right to
acquire within 60 days. Unless otherwise indicated, the persons or entities
identified in this table have sole voting and investment power with respect to
all shares shown as beneficially owned by them. Percentage ownership
calculations are based on 3,710,653 shares of class A common stock outstanding
and 14,962,500 shares of class B common stock outstanding.
58
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percentage of
of Beneficial Owner of Beneficial Ownership Shares Outstanding
------------------- ----------------------- ------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Blue Cross and Blue Shield 36,740 14,962,500 * 100%
of Missouri (1)
1831 Chestnut Street
St. Louis, Missouri 63103-2775
Heartland Advisors, Inc. (2) 1,444,900 0 38.9% 0%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Health Care Service Corporation (3) 695,800 0 18.8% 0%
300 Randolph Street
Chicago, Illinois 60601
Dimensional Fund Advisors, Inc. (4) 211,700 0 5.71% 0%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
</TABLE>
- -------------------
* Less than 1%.
(1) According to information contained in a report on Schedule 13G, dated
February 16, 1996, the shares are beneficially owned by Blue Cross and Blue
Shield of Missouri. Blue Cross and Blue Shield of Missouri may, at its option,
convert each share of class B common stock that it owns into one share of class
A common stock. If Blue Cross and Blue Shield of Missouri converted all of the
shares of class B common stock that it owns into shares of class A common stock,
it would own 14,999,240 shares of class A common stock, representing 80.3% of
the outstanding shares of class A common stock, and no shares of class B common
stock would be outstanding.
(2) According to information contained in a report on Schedule 13G/A, dated
January 27, 2000 the shares are beneficially owned by one or more individual and
institutional investors, including Heartland Value Fund (which owned more than
5% of the outstanding shares), for which Heartland Advisors, Inc. serves as
investment advisor. Heartland Advisors, Inc. has sole voting power with respect
to 676,800 shares and sole dispositive power with respect to 1,444,900 shares.
(3) According to information contained in a report on Schedule 13D, dated
October 22, 1999, the shares are beneficially owned by Health Care Service
Corporation which operates the Blue Cross and Blue Shield Plans in Illinois and
Texas.
(4) According to information contained in a report on Schedule 13G, dated
February 4, 2000, the shares are owned by four registered investment companies
and certain other investment vehicles for which Dimensional Fund Advisors, Inc.
serves as an investment advisor. Dimensional Fund Advisors furnishes investment
advice to these investment companies and serves as investment manager to certain
other investment vehicles including commingled group trusts. In its role as
investment advisor and investment manager, Dimensional Fund Advisors possesses
both voting and investment power over 211,700 shares of RightCHOICE class A
common stock as of December 30, 1999. Dimensional Fund Advisors' investment
companies and investment vehicles own all of the shares, and Dimensional Fund
Advisors disclaims beneficial ownership of those shares.
59
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
Note 15 "Transactions with Blue Cross and Blue Shield of Missouri" of Part II,
Item 8, Financial Statements and Supplementary Data, contains financial
information relating to RightCHOICE's transactions with Blue Cross and Blue
Shield of Missouri.
CERTAIN TRANSACTIONS
RightCHOICE and Blue Cross and Blue Shield of Missouri have entered into an
administrative services agreement pursuant to which: (1) RightCHOICE will, upon
Blue Cross and Blue Shield of Missouri's request, perform functions necessary or
appropriate for Blue Cross and Blue Shield of Missouri to continue to offer its
products and conduct its other business, and (2) Blue Cross and Blue Shield of
Missouri will, upon RightCHOICE's request, perform functions as necessary or
appropriate to enable RightCHOICE to offer its products and conduct its other
business. In addition, under the administrative services agreement, RightCHOICE
and Blue Cross and Blue Shield of Missouri have granted to each other a
nonexclusive license to use certain software programs and procedures and have
agreed on a formula by which RightCHOICE and Blue Cross and Blue Shield of
Missouri will pay the cost of services rendered to the other.
The administrative services agreement also provides that: (1) the Chief
Executive Officer of Blue Cross and Blue Shield of Missouri is permitted to
serve RightCHOICE in that capacity, (2) RightCHOICE will pay the Chief Executive
Officer his total compensation, and (3) Blue Cross and Blue Shield of Missouri
will reimburse RightCHOICE for the portion of the Chief Executive Officer's
total compensation, as may be agreed, for time spent on Blue Cross and Blue
Shield of Missouri's affairs. Finally, under the administrative services
agreement, RightCHOICE and Blue Cross and Blue Shield of Missouri have agreed
that Blue Cross and Blue Shield of Missouri will reimburse RightCHOICE for
compensation paid to RightCHOICE employees for services rendered to Blue Cross
and Blue Shield of Missouri.
RightCHOICE and Blue Cross and Blue Shield of Missouri have also entered into a
tax allocation agreement pursuant to which RightCHOICE and Blue Cross and Blue
Shield of Missouri have elected to file consolidated federal income tax returns.
The tax allocation agreement provides that RightCHOICE will calculate the
federal income tax liability for itself and its subsidiaries as if it were a
single taxpayer for federal income tax purposes. If RightCHOICE is subject to
federal income tax liability as a result of such calculation, it will pay such
liability to Blue Cross and Blue Shield of Missouri, but if RightCHOICE is
entitled to a refund of federal income tax as a result of such calculation,
RightCHOICE will receive such refund from Blue Cross and Blue Shield of
Missouri. In January 1998, RightCHOICE and Blue Cross and Blue Shield of
Missouri amended the tax allocation agreement to provide for: (1) an allocation
of liability between RightCHOICE and Blue Cross and Blue Shield of Missouri for
adjustments in income tax liabilities of Blue Cross and Blue Shield of Missouri
for periods prior to August 2, 1994; (2) an allocation of liability between
RightCHOICE and Blue Cross and Blue Shield of Missouri for adjustments in
federal income tax liabilities arising out of consolidated federal income tax
returns filed by Blue Cross and Blue Shield of Missouri for periods after August
2, 1994, and (3) for the utilization of the tax reserve transferred by Blue
Cross and Blue Shield of Missouri to RightCHOICE in August 1994.
RightCHOICE and a subsidiary of Blue Cross and Blue Shield of Missouri are
parties to a lease agreement pursuant to which RightCHOICE leases office space
and parking. The lease is for a ten year term, although RightCHOICE has two
separate options to extend the lease for a period of five years each.
60
<PAGE>
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:
<TABLE>
<CAPTION>
Page
----
<S> <C>
The schedule required to be filed as part of this report is as follows:
I. Condensed Financial Information of Registrant 109
</TABLE>
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 Registrant'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 Registrant'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 Registrant's Form 10-K for the period ending December 31, 1995.*
2.2 Agreement and Plan of Reorganization, dated as of March 14, 2000, by and
among Blue Cross and Blue Shield of Missouri, RightCHOICE Managed Care, Inc., a
Missouri corporation, The Missouri Foundation for Health and RightCHOICE Managed
Care, Inc., a Delaware corporation.
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 Registrant's
Form 10-Q for the period ending September 30, 1997.*
61
<PAGE>
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 Registrant'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 Registrant'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 Registrant'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 Registrant's Form 10-K for
the period ending December 31, 1997.*
10.5.2 State Income Tax Allocation Agreement by and among Blue Cross and Blue
Shield of Missouri and RightCHOICE Managed Care, Inc., dated September 30, 1999
- - Incorporated by reference - previously filed as Exhibit 10.1 to the
Registrant's Form 10-Q for the period ending September 30, 1999.*
10.5.3 State Income Tax Allocation Agreement by and among RightCHOICE Managed
Care, Inc. and its subsidiaries, dated September 30, 1999 - Incorporated by
reference - previously filed as Exhibit 10.2 to the Registrant's Form 10-Q for
the period ending September 30, 1999.*
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 Registrant'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 Registrant'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 Registrant'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
Registrant's Form 8-K filed on November 25, 1998.*
10.6.7 Summary of Approved Changes to the Blue Cross Primary License Agreement
- - Incorporated by reference - previously filed as Exhibit 10.6.7 to the
Registrant's Form 10-K for the period ending December 31, 1998.*
10.6.8 Summary of Approved Changes to the Blue Cross Primary License Agreement
- - Incorporated by reference - previously filed as Exhibit 10.1 to the
Registrant's Form 10-Q for the period ending June 30, 1999.*
62
<PAGE>
10.6.9 Addendum to Blue Cross License Agreement between BCBSA and BCBSMo, dated
November 23, 1999.
10.7.3 Blue Shield License Agreement between BCBSA and BCBSMo - Incorporated by
reference - previously filed as Exhibit 10.7.3 to the Registrant'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 Registrant'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
Registrant's Form 8-K filed on November 25, 1998.*
10.7.6 Summary of Approved Changes to the Blue Shield Primary License Agreement
- - Incorporated by reference - previously filed as Exhibit 10.7.6 to the
Registrant's Form 10-K for the period ending December 31, 1998.*
10.7.7 Summary of Approved Changes to the Blue Shield Primary License Agreement
- - Incorporated by reference - previously filed as Exhibit 10.2 to the
Registrant's Form 10-Q for the period ending June 30, 1999.*
10.7.8 Addendum to Blue Shield License Agreement among BCBSA and BCBSMo, dated
November 23, 1999.
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 Registrant'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 Registrant'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 Registrant's Form 8-K filed on November 25,
1998.*
10.8.5 Addendum to Blue Cross Controlled Affiliate License Agreement among
BCBSA, BCBSMo and HMO Missouri, Inc., dated November 23, 1999.
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 Registrant'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 Registrant'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 Registrant's Form 8-K filed on November 25,
1998.*
63
<PAGE>
10.9.5 Addendum to Blue Shield Controlled Affiliate License Agreement among
BCBSA, BCBSMo and HMO Missouri, Inc., dated November 23, 1999.
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 Registrant'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 Registrant'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 Registrant's Form 8-K filed on November 25, 1998.*
10.10.5 Summary of Approved Changes to the Blue Cross Controlled Affiliate
License Agreement - Incorporated by reference - previously filed as Exhibit
10.10.5 to the Registrant's Form 10-K for the period ending December 31, 1998.*
10.10.6 Summary of Approved Changes to the Blue Cross Controlled Affiliate
License Agreement - Incorporated by reference - previously filed as Exhibit 10.3
to the Registrant's Form 10-Q for the period ending June 30, 1999.*
10.10.7 Addendum to Blue Cross Controlled Affiliate License Agreement among
BCBSA, BCBSMo and the Registrant, dated November 23, 1999.
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 Registrant'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 Registrant'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 Registrant's Form 8-K filed on November 25, 1998.*
10.11.5 Summary of Approved Changes to the Blue Shield Controlled Affiliate
License Agreement - Incorporated by reference - previously filed as Exhibit
10.11.5 to the Registrant's Form 10-K for the period ending December 31, 1998.*
10.11.6 Summary of Approved Changes to the Blue Shield Controlled Affiliate
License Agreement - Incorporated by reference - previously filed as Exhibit 10.4
to the Registrant's Form 10-Q for the period ending June 30, 1999.*
10.11.7 Addendum to Blue Shield Controlled Affiliate License Agreement among
BCBSA, BCBSMo and the Registrant, dated November 23, 1999.
64
<PAGE>
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 Registrant'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 Registrant'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 Registrant's Form 8-K filed on November 25, 1998.*
10.12.5 Addendum to Blue Cross Controlled Affiliate License Agreement among
BCBSA, BCBSMo and HALIC, dated November 23, 1999.
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 Registrant'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 Registrant'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 Registrant's Form 8-K filed on November 25, 1998.*
10.13.5 Addendum to Blue Shield Controlled Affiliate License Agreement among
BCBSA, BCBSMo and HALIC, dated November 23, 1999.
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 Registrant'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 Registrant's Form 10-K for the period ending December 31, 1994.*
65
<PAGE>
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.*
10.22.1 Registrant Supplemental Executive Retirement Plan as restated effective
September 24, 1999.
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.*
10.23.1 Amendment No. 1 to Registrant Executive Deferred Compensation Plan,
amended and restated as of February 1, 1998.
10.23.2 Basic Program Document of the Nonqualified Deferred Compensation
Program sponsored by INVESCO Retirement Plan Services - Incorporated by
reference - previously filed as Exhibit 10.5 to the Registrant's Form 10-Q for
the period ending June 30, 1999.*
10.23.3 Adoption Agreement for the Company's Executive Nonqualified Deferred
Compensation Program - Incorporate by reference - previously filed as Exhibit
10.6 to the Registrant's Form 10-Q for the period ending June 30, 1999.*
10.24 Amended Nonemployee Director Deferred Compensation Plan of the
Registrant- Incorporated by reference - previously filed as Exhibit 10.26 to the
Registrant's Form 10-K for the period ending December 31, 1994.*
10.24.1 Amendment No. 1 to February 1, 1998 Amended and Restated Nonemployee
Directors' Deferred Compensation Plan.
10.24.2 Adoption Agreement for the Company's Directors Nonqualified Deferred
Compensation Program - Incorporated herein by reference - previously filed as
Exhibit 10.7 to the Registrant's Form 10-Q for the period ending June 30, 1999.*
10.24.3 Adoption Agreement for the Blue Cross and Blue Shield of Missouri Board
of Trustees Nonqualified Deferred Compensation Program - Incorporated by
reference - previously filed as Exhibit 10.8 to the Registrant's Form 10-Q for
the period ending June 30, 1999.*
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 Registrant'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 Registrant'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 Registrant'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 Registrant's Form 10-Q for the period
ending June 30, 1996.*
66
<PAGE>
10.30.4 Fourth amendment to the Credit Agreement - Incorporated by reference -
previously filed as Exhibit 10.36.4 to the Registrant'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 Registrant'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 Registrant's Form 10-Q for the period
ending September 30, 1997.*
10.36.7 Seventh amendment to the Credit Agreement - Incorporated by reference -
previously filed as Exhibit 10.36.7 to the Registrant's Form 10-Q for the period
ending September 30, 1999.*
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
Registrant'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 Registrant'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
Registrant'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
Registrant's Form 10-Q for the period ending September 30, 1997.*,**
10.45.1 First Amendment to Executive Employment Agreement of John A. O'Rourke
dated December 28, 1999.**
10.47 Executive Severance Agreement between the Registrant and Sandra Van
Trease - Incorporated by reference - previously filed as Exhibit 10.47 to the
Registrant'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 Registrant'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
Registrant'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 Registrant'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 Registrant (and list of parties who have
executed executive severance agreements) -
67
<PAGE>
Incorporated by reference -previously filed as Exhibit 10.52 to the Registrant'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.**
10.52.2 Form of Amendment No. 1 to Executive Severance Agreement between the
Registrant and certain senior vice presidents of the Registrant (and list of
parties who have executed Amendment No. 1 to Executive Severance Agreement).**
10.53 Form of Officer Severance Agreement between the Registrant and certain
senior vice presidents of the Registrant (and list of parties who have executed
officer severance agreements) - Incorporated by reference - previously filed as
Exhibit 10.53 to the Registrant'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 Registrant (and list of parties who have executed officer
severance agreements) - Incorporated by reference - previously filed as Exhibit
10.54 to the Registrant'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 - Incorporated by reference - previously filed
as Exhibit 10.59.1 to the Registrant's Form 10-K for the period ending December
31, 1998.*,**
10.60.1 1999 Alliance Blue Cross Blue Shield Incentive Plan between the
Registrant and Mike Fulk - Incorporated by reference - previously filed as
Exhibit 10.60.1 to the Registrant's Form 10-K for the period ending December 31,
1998.*,**
10.61.1 1999 Alliance Blue Cross Blue Shield / Blue Cross Blue Shield of
Missouri Incentive Plan between the Registrant and John O'Rourke - Incorporated
by reference - previously filed as Exhibit 10.61.1 to the Registrant's 10-K for
the period ending December 31, 1998.*,**
10.62.1 1999 Alliance Blue Cross Blue Shield Incentive Plan between the
Registrant and Sandra Van Trease - Incorporated by reference - previously filed
as Exhibit 10.62.1 to the Registrant's 10-K for the period ending December 31,
1998.*,**
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 Registrant'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 Registrant'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 Registrant's Form 10-K for the period ending December 31,
1997.*
68
<PAGE>
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 Registrant'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 Registrant's Form 10-Q for the period
ending September 30, 1998.*
10.69 Executive Severance Agreement between the Registrant and Michael Fulk -
Incorporated by reference - previously filed as Exhibit 10.69 to the
Registrant's 10-K for the period ending December 31, 1998.*,**
10.70 Officer Severance Agreement between the Registrant and Michael Fulk -
Incorporated by reference - previously filed as Exhibit 10.69 to the
Registrant's 10-K for the period ending December 31, 1998.*,**
10.71 Executive Severance Agreement between the Registrant and Angela F.
Braly.**
10.72 Officer Severance Agreement between the Registrant and Angela F.
Braly.**
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 Order issued by the Missouri Supreme Court, dated December 9, 1999,
advising all parties to the proposed settlement agreement that court approval of
a proposed settlement agreement is not required - Incorporated by reference -
previously filed as Exhibit 99(b) to the Registrant's Form 8-K filed on December
15, 1999.*
99.2 Amended and Restated Settlement Agreement, dated January 6, 2000, by
and among RightCHOICE Managed Care, Inc., Blue Cross and Blue Shield of
Missouri, the Missouri Department of Insurance and Keith A. Wenzel, 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
Registrant's Form 8-K filed on January 11, 2000.*
99.3 Letter Agreement, dated January 5, 2000, amending the Settlement
Agreement, dated September 20, 1998, by and among the Director of the Department
of Insurance of the State of Missouri, Blue Cross and Blue Shield 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
Registrant's Form 8-K filed on January 11, 2000.*
99.4 Letter Agreement, dated January 4, 2000, amending the 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., HMO Missouri, 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
Registrant's Form 8-K filed on January 11, 2000.*
69
<PAGE>
99.5 Letter Agreement, dated January 5, 2000, amending the 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 Registrant's Form 8-K
filed on January 11, 2000.*
*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 Registrant filed a report with the SEC on Form 8-K on January 11, 2000,
regarding the Amended and Restated Settlement Agreement and certain related
amendments to other settlement agreements, with certain state agencies,
including the Department of Insurance of the State of Missouri and its Director,
Keith A. Wenzel, Attorney General of the State of Missouri, Jeremiah W. "Jay"
Nixon, and the Director of Revenue of the State of Missouri.
The Registrant filed a report with the SEC on Form 8-K on December 15, 1999,
relating to an Order issued by the Missouri Supreme Court on December 9, 1999,
that advised all parties to the proposed settlement agreement that court
approval of a proposed settlement agreement is not required.
The Registrant filed a report with the SEC on Form 8-K on November 18, 1999,
related to the Missouri Supreme Court ruling that it would hear the appeal of
the order of the Cole County Circuit Court Judge Thomas Brown III, disapproving
the settlement agreement and stayed further proceedings before Judge Brown and
disappointed Special Master, Robert G. Russell.
The Registrant filed a report with the SEC on Form 8-K on October 18, 1999,
relating to the recommendation made on October 8, 1999 by the Special Master
appointed by the County Circuit Court of Cole County, Missouri, that the March
1999 modification settlement agreement of litigation be disapproved.
c) See Exhibits listed in Item 14(a) hereof and the attached to this Form
10-K Annual Report.
70
<PAGE>
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 13, 2000 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John A. O'Rourke Chairman of the Board, March 13, 2000
- --------------------------------- President and Chief Executive
John A. O'Rourke Officer
/s/ Sandra A. Van Trease Senior Executive Vice President, Chief March 13, 2000
- --------------------------------- Operating Officer, Chief Financial
Sandra A. Van Trease Officer (Principal Financial Officer
and Principal Accounting Officer)
/s/ William H. T. Bush Director March 13, 2000
- ---------------------------------
William H. T. Bush
/s/ Earle H. Harbison, Jr. Director March 13, 2000
- ---------------------------------
Earle H. Harbison, Jr.
/s/ Roger B. Porter, Ph.D. Director March 13, 2000
- ---------------------------------
Roger B. Porter, Ph.D.
/s/ Norman J. Tice Director March 13, 2000
- ---------------------------------
Norman J. Tice
/s/ Gloria W. White Director March 13, 2000
- ---------------------------------
Gloria W. White
</TABLE>
71
<PAGE>
RightCHOICE Managed Care, Inc.
Consolidated Balance Sheets
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
December 31,
ASSETS 1999 1998
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 44,400 $ 39,409
Investments available for sale, at market value................ 201,926 208,281
Receivables from members....................................... 78,947 68,024
Receivables from related parties............................... 28,764 18,294
Deferred income taxes.......................................... 8,629 4,798
Other assets................................................... 17,981 19,818
-------- --------
Total current assets........................................ 380,647 358,624
Property and equipment, net...................................... 55,470 58,234
Deferred income taxes............................................ 9,791 11,583
Investments in affiliates........................................ 5,905 5,729
Goodwill and intangible assets, net.............................. 71,400 74,508
-------- --------
Total assets................................................ $523,213 $508,678
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Medical claims payable......................................... $124,428 $109,986
Unearned premiums.............................................. 62,824 56,407
Accounts payable and accrued expenses.......................... 59,476 64,754
Current portion of long-term debt.............................. 8,000 10,000
Payables to related parties.................................... 27,009 26,194
Reserve for loss contract...................................... 7,259 9,052
Obligations for employee benefits.............................. 1,577 2,954
Income taxes payable........................................... 12,965 10,485
Obligations under capital leases............................... 4,071 4,254
-------- --------
Total current liabilities................................... 307,609 294,086
Reserve for loss contract........................................ 7,259
Long-term debt................................................... 26,063 33,063
Obligations for employee benefits................................ 26,819 24,338
Obligations under capital leases................................. 5,179 4,058
-------- --------
Total liabilities........................................... 365,670 362,804
-------- --------
Shareholders' equity:
Preferred stock, $0.01 par, 25,000,000 shares authorized,
no shares issued and outstanding............................
Common stock:
Class A, $0.01 par, 125,000,000 shares authorized,
3,737,500 shares issued, 3,710,653 and 3,710,426 shares
outstanding, respectively.................................. 37 37
Class B, convertible, $0.01 par, 100,000,000 shares
authorized, 14,962,500 shares issued and outstanding....... 150 150
Additional paid-in capital..................................... 132,634 132,635
Retained earnings.............................................. 29,529 12,313
Treasury stock, 26,847 and 27,074 class A shares,
respectively, at cost......................................... (380) (383)
Accumulated other comprehensive (loss) income.................. (4,427) 1,122
-------- --------
Total shareholders' equity.................................. 157,543 145,874
-------- --------
Total liabilities and shareholders' equity.................. $523,213 $508,678
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
72
<PAGE>
RightCHOICE Managed Care, Inc.
Consolidated Statements of Income
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Premium............................................................ $ 732,151 $ 694,487 $ 654,267
Fees and other income.............................................. 84,761 73,025 65,144
----------- ----------- -----------
Total revenues.............................................. 816,912 767,512 719,411
----------- ----------- -----------
Operating expenses:
Health care services............................................... 601,532 579,827 555,126
Commissions........................................................ 32,462 31,394 29,302
General and administrative (excludes depreciation and amortization
and excludes net intercompany charges of $11,728, $11,231 and
$8,356, respectively, allocated to Blue Cross and Blue Shield of
Missouri)......................................................... 146,036 140,304 140,064
Depreciation and amortization...................................... 17,215 19,334 23,108
Charge for loss reserves........................................... 29,510
Other non-recurring charges........................................ 900 3,301
----------- ----------- -----------
Total operating expenses.................................... 797,245 771,759 780,411
----------- ----------- -----------
Operating income (loss)............................................. 19,667 (4,247) (61,000)
----------- ----------- -----------
Investment income:
Interest and dividends............................................. 13,367 14,737 15,916
Realized (losses) gains, net....................................... (516) 3,932 17,268
----------- ----------- -----------
Total investment income, net................................ 12,851 18,669 33,184
----------- ----------- -----------
Other:
Interest expense................................................... (4,344) (4,539) (4,681)
Other income (expense), net........................................ 219 (379) (1,058)
----------- ----------- -----------
Total other, net............................................ (4,125) (4,918) (5,739)
----------- ----------- -----------
Income (loss) before provision (benefit) for income taxes........... 28,393 9,504 (33,555)
Provision (benefit) for income taxes................................ 11,177 3,844 (9,521)
----------- ----------- -----------
Net income (loss)................................................... $ 17,216 $ 5,660 $ (24,034)
=========== =========== ===========
Weighted average common shares outstanding.......................... 18,673,000 18,672,100 18,672,600
----------- ----------- -----------
Basic and diluted earnings (loss) per share......................... $0.92 $0.30 $(1.29)
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
73
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
---------------- Paid In Retained Treasury Comprehensive
Class A Class B Capital Earnings Stock Income (Loss) Total
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
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 benefit 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 benefit of $147 (297) (297)
Minimum pension liability adjustment,
net of income tax benefit 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
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 17,216 17,216
Change in unrealized appreciation
on available-for-sale securities, net
of income tax benefit of $3,198 (5,624) (5,624)
Minimum pension liability adjustment,
net of income tax provision of $40 75 75
--------
Comprehensive income 11,667
227 shares issued under the
company's stock option plan (1) 3 2
Balance at December 31, 1999 $37 $150 $132,634 $29,529 $(380) $(4,427) $157,543
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
74
<PAGE>
RightCHOICE Managed Care, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................................... $ 17,216 $ 5,660 $ (24,034)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Provision (benefit) for deferred income taxes............................................... 1,118 1,697 (6,507)
Depreciation and amortization............................................................... 17,215 19,334 23,108
Loss (gain) on sale of property and equipment............................................... 514 53 (44)
Undistributed (earnings) losses of affiliates............................................... (176) 48 916
Loss (gain) on sale of investments.......................................................... 516 (3,932) (17,268)
Accretion of discounts and amortization of premiums, net.................................... 400 612 6
(Increase) decrease in certain assets, net of effects from investment in affiliates:
Receivables from members.................................................................... (10,923) (8,005) (5,182)
Receivables from related parties............................................................ (10,470) (2,164) 943
Other assets................................................................................ 2,232 (4,556) (2,859)
Increase (decrease) in certain liabilities, net of effects from investment in affiliates:
Medical claims payable...................................................................... 14,442 (2,353) 506
Unearned premiums........................................................................... 6,417 (1,249) 4,957
Accounts payable and accrued expenses....................................................... (5,163) 8,293 (13,065)
Payables to related parties................................................................. 815 5,981 3,064
Reserve for loss contract................................................................... (9,052) (9,052) 25,363
Obligations for employee benefits........................................................... 1,104 2,217 (33)
Income taxes payable........................................................................ 2,480 (1,566) (755)
--------- --------- ---------
Net cash provided by (used in) operating activities............................................ 28,685 11,018 (10,884)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from matured investments:
Fixed maturities........................................................................... 10,489 20,359 3,975
Proceeds from investments sold:
Fixed maturities........................................................................... 157,505 273,591 311,599
Equity securities.......................................................................... 521 40,734
Other...................................................................................... 101 4,482 32,469
Investments purchased:
Fixed maturities........................................................................... (161,665) (282,400) (340,366)
Equity securities.......................................................................... (10,034) (548) (230)
Other...................................................................................... (489) (796) (2,039)
Investment in other affiliates, net of cash acquired........................................ 24
Sale and redemption of affiliates........................................................... 3,444
Proceeds from property and equipment sold................................................... 24 2,051 561
Property and equipment purchased............................................................ (6,598) (12,496) (18,544)
--------- --------- ---------
Net cash (used in) provided by investing activities............................................ (10,146) 7,687 28,183
--------- --------- ---------
Cash flows from financing activities:
Sale (purchase) of class A treasury stock................................................... 2 16 (78)
Payments of long-term debt.................................................................. (9,000) (3,937) (15,000)
Payments of capital lease obligations....................................................... (4,550) (5,247) (5,767)
--------- --------- ---------
Net cash used in financing activities.......................................................... (13,548) (9,168) (20,845)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........................................... 4,991 9,537 (3,546)
Cash and cash equivalents at beginning of year................................................. 39,409 29,872 33,418
--------- --------- ---------
Cash and cash equivalents at end of year....................................................... $ 44,400 $ 39,409 $ 29,872
========= ========= =========
Supplemental disclosure of cash information:
Interest paid............................................................................... $ 4,344 $ 4,687 $ 5,036
Income taxes paid (refund received), net.................................................... 7,579 712 (2,262)
Supplemental schedule of noncash investing and financing activities:
Equipment acquired through capital leases................................................... $ 7,631 $ 4,325 $ 9,730
Disposal of equipment under capital leases.................................................. 2,143 675 2,810
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
75
<PAGE>
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 RightCHOICE's initial public offering
of class A common stock on August 1, 1994, 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, 1999, BCBSMo and all holders of class A
common stock have control over approximately 97.6% and 2.4%, respectively, of
the combined voting power of both classes of common stock. There are no
liquidation preferences between the two classes of common stock. RightCHOICE
has not issued shares of its authorized preferred stock. In addition,
RightCHOICE provides certain guarantees relating to the financial stability of
certain affiliates.
RightCHOICE offers a comprehensive array of managed health care products and
services, including preferred provider organizations (PPO), point of service
(POS), health maintenance organizations (HMO), Medicare supplement, specialty
managed care and managed indemnity benefit plans, third-party administrator
(TPA) services, administrative services only (ASO), network rental services and
life insurance agency services.
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 RightCHOICE and
its subsidiaries after elimination of all significant intercompany transactions.
These subsidiaries include Healthy Alliance Life Insurance Company (HALIC),
HealthLink HMO, Inc. (HealthLink HMO), HMO Missouri, Inc. (BlueCHOICE), and
Diversified Life Insurance Agency of Missouri, Inc., all Missouri corporations,
and HealthLink, Inc. (HealthLink) and RightCHOICE Insurance Company (RIC), both
Illinois corporations. 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.
76
<PAGE>
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 7 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.
RightCHOICE 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, 1999, and 1998 was
$31,715 and $33,852, respectively. Software amortization expense for the years
ended December 31, 1999, 1998, and 1997, was $6,407, $7,701, and $5,521,
respectively.
Change in estimate
Based upon management's periodic review of the useful lives of its various
assets, RightCHOICE's estimate of the useful life of various modules of its
capitalized software changed from 5 years to 7 years, effective with the
beginning of 1999. The change relates to the software capitalized as part of
the company's information and operations strategy (IOS). This IOS software will
continue to replace the company's core operating systems for enrollment,
billing, claims payment, and customer service. Management believes that this
change will more appropriately match the amortization expense of the software
with the periods in which the software will be utilized. This change in
estimate on an after-tax basis resulted in an increase to RightCHOICE's net
income for 1999 of approximately $2.4 million or $0.13 per share.
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 $85,770 and
$85,975 as of December 31, 1999, and 1998, 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, 1999, and 1998
was $14,370 and $11,467, respectively. Amortization expense of the goodwill and
other intangibles aggregated $2,903, $2,924, and $7,487 in 1999, 1998, and 1997,
respectively, including the amortization of the intangibles related to the
purchase of HealthLink in 1995 of $2,769, $2,769, and $3,061 in 1999, 1998, and
1997, respectively.
RightCHOICE 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.
77
<PAGE>
Medical claims payable
In addition to the liability for processed but unpaid claims at period-end,
RightCHOICE 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, RightCHOICE's subsidiaries cede insurance to
other unrelated insurance carriers on an excess loss or quota share basis.
RightCHOICE's subsidiaries engage in such reinsurance activity to limit losses
from large exposures and to permit recovery of a portion of direct losses. The
company expensed $1,060, $1,042, and $1,009 for the years ended December 31,
1999, 1998, and 1997, respectively, for costs related to this stop loss
coverage. Recoveries in these years were not significant. RightCHOICE and its
subsidiary, Healthy Alliance Life Insurance Company, also reached a network
access and financial reinsurance agreement with Blue Cross and Blue Shield of
Kansas City (BCBSKC). 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
RightCHOICE 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.
RightCHOICE, along with its subsidiaries, files consolidated federal and
Missouri state income tax returns with Blue Cross and Blue Shield of Missouri.
In accordance with the federal tax-sharing agreement of the consolidated group,
federal income tax expense is allocated to RightCHOICE and its subsidiaries
based upon the consolidated income generated by RightCHOICE and its
subsidiaries.
Dividend restrictions
Missouri and Illinois insurance laws and regulations provide certain
restrictions on the payment of dividends by insurance companies and health
maintenance organizations 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 insurer's statutory
surplus to be unreasonable or inadequate. At December 31, 1999, RightCHOICE's
insurance and HMO subsidiaries did not have a significant amount of earned
surplus available for dividend payments without the prior approval of the
Missouri or Illinois Directors of Insurance. HealthLink, which is not an
insurance company or HMO, is not subject to these restrictions.
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
78
<PAGE>
shares representing stock distributable under stock-based compensation plans
using the treasury stock method. There were 43,438 and 17,924 dilutive potential
common shares for 1999 and 1998, respectively. Because 1997 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 464,615, 439,508,
and 469,766 as of December 31, 1999, 1998, and 1997, respectively.
Concentration of credit risk
RightCHOICE primarily conducts business in the State of Missouri, and a
significant portion of its customer base is concentrated with companies that are
located in the metropolitan St. Louis area. No single customer generates in
excess of 10% of RightCHOICE's total revenue.
RightCHOICE 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,
1999, and 1998, 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. RightCHOICE's
TPA and ASO self-funded programs do not involve the assumption of significant
insurance or credit risks; therefore, revenue from these programs is reflected
in fees and other income. During the years ended December 31, 1999, 1998 and
1997, RightCHOICE received reimbursements for claims paid of $54,232, $50,558,
and $106,227, respectively, from TPA and ASO self-funded groups.
Non-recurring charges
During the fourth quarter of 1998, RightCHOICE recorded a $0.9 million charge
related to the reduction of its workforce. RightCHOICE also incurred charges to
earnings of $3.3 million in 1997, for costs associated with moving RightCHOICE'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, BlueCHOICE recorded a $29.5 million loss
reserve for estimated losses relating to its contract with the Missouri
Consolidated Health Care Plan. 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.
79
<PAGE>
Reclassifications
Certain reclassifications have been made to the Consolidated Financial
Statements for 1997 and 1998 to conform to the 1999 presentation.
Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board (FASB) released Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 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, 2000, as extended by
SFAS No. 137. Earlier application of SFAS No. 133 is encouraged but should not
be applied retroactively to financial statements of prior periods. RightCHOICE
believes that the adoption of SFAS No. 133 will not have a material impact on
RightCHOICE's financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 98-1, "Accounting for Computer Software Developed
For or Obtained For Internal Use," which is effective for fiscal years beginning
after December 15, 1998. The SOP requires preliminary stage project costs to be
expensed as incurred. Once a project is in the application development stage,
the SOP requires all external direct costs for materials and services and
payroll and related fringe benefit costs to be capitalized, and subsequently
amortized over the estimated useful life of the project. The adoption of SOP
98-1 did not have a material impact on RightCHOICE'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. RightCHOICE adopted SOP 98-
5 in the first quarter of 1999 and this adoption did not have a material impact
on RightCHOICE's financial position or results of operations.
3. Comprehensive income
The components of other comprehensive income related to the unrealized gains or
losses on RightCHOICE's available-for-sale securities for the years ended
December 31, 1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Unrealized holding (losses) gains arising during period, net of
taxes.............................................................. $(5,961) $ 1,671 $ 3,163
Less: reclassification adjustment for losses (gains) included in net
income (loss), net of taxes........................................ 337 (1,968) (11,140)
------- ------- --------
Net unrealized losses on securities..................................... $(5,624) $ (297) $ (7,977)
======= ======= ========
</TABLE>
The components of accumulated other comprehensive income on the Consolidated
Balance Sheets include unrealized net (depreciation) appreciation of investments
as well as a minimum pension liability adjustment. The unrealized net
(depreciation) appreciation of investments was $(4,132) and $1,492 at
December 31, 1999 and 1998, respectively. The minimum pension liability increase
was $295 and $370 at December 31, 1999 and 1998, respectively.
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<PAGE>
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, 1999
Fixed maturities:
U.S. government and agency securities............. $106,228 $ 36 $(4,214) $102,050
Corporate bonds and notes......................... 76,622 16 (3,437) 73,201
Short-term investments............................ 8,835 8,835
-------- -------- -------- --------
191,685 52 (7,651) 184,086
-------- -------- -------- --------
Equity securities................................. 10,149 925 11,074
-------- -------- -------- --------
Other invested assets............................. 6,766 6,766
-------- -------- -------- --------
$208,600 $977 $(7,651) $201,926
======== ======== ======== ========
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
======== ======== ======== ========
</TABLE>
Interest and dividend income comprises the following:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest on bonds................................................ $11,966 $13,152 $12,822
Dividends on stocks.............................................. 231 112 102
Accretion of discounts and amortization of premiums, net......... (400) (612) (6)
Interest on cash equivalents and other investment income......... 2,269 2,712 3,697
------- ------- -------
Gross investment income.......................................... 14,066 15,364 16,615
Investment expenses.............................................. (699) (627) (699)
------- ------- -------
$13,367 $14,737 $15,916
======= ======= =======
</TABLE>
Realized (losses) gains on investments available for sale are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net realized (losses) gains:
Fixed maturities............................................... $(530) $3,054 $ 6,930
Equity securities.............................................. 10,338
------ ------- -------
$(530) $3,054 $17,268
====== ======= =======
</TABLE>
81
<PAGE>
In addition, during 1999, RightCHOICE realized a $14 gain from the sale of other
assets. During 1998, RightCHOICE 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 $158,127, $278,073, and $384,802, during 1999, 1998, and 1997,
respectively. Gross realized gains on investments available for sale were $929,
$3,553, and $19,203, during 1999, 1998, and 1997, respectively. Gross realized
losses on investments available for sale were $1,459, $499, and $1,935, during
1999, 1998, and 1997, respectively. Contractual maturities of fixed maturity
investments, excluding other invested assets (primarily consisting of variable
life insurance contracts), held on December 31, 1999, are as presented below.
Actual maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
Estimated
Amortized market
cost value
---- -----
Due in one year or less........................ $ 17,869 $ 17,843
Due after one year through five years.......... 68,794 67,069
Due after five years through 10 years.......... 43,205 40,610
Due after 10 years............................. 61,817 58,564
-------- --------
$191,685 $184,086
======== ========
5. Receivables from members
Receivables from members consist of the following:
December 31,
------------
1999 1998
---- ----
Individual subscribers..................... $ 6,823 $ 6,202
Underwritten groups........................ 42,268 40,109
Self-funded/ASO groups..................... 29,856 21,713
------- -------
$78,947 $68,024
======= =======
Based on historical collection experience, RightCHOICE considers its receivables
from members to be fully collectible; accordingly, no significant allowance for
doubtful accounts is recorded.
6. Property and equipment, net
Property and equipment consist of the following:
82
<PAGE>
December 31,
------------
1999 1998
---- ----
Land and building.......................... $ 4,815 $ 4,338
Furniture and equipment, including
capitalized leases....................... 44,829 59,959
Capitalized software development costs..... 51,790 47,520
Leasehold improvements..................... 3,953 3,914
-------- --------
105,387 115,731
Less accumulated depreciation
and amortization......................... (49,917) (57,497)
-------- --------
$ 55,470 $ 58,234
======== ========
Depreciation and amortization expense was $14,312, $16,410, and $15,621, for the
years ended December 31, 1999, 1998, and 1997, respectively.
7. Investments in affiliates
RightCHOICE has a non-controlling, 50% interest in The EPOCH Group, L.C.
(EPOCH). EPOCH is a limited liability company that performs third-party
administrator (TPA) functions for self-insured organizations. EPOCH is not
consolidated with RightCHOICE's operations and is accounted for using the equity
method. The combined annual revenues of EPOCH were $23.7 million in 1999 and
$22.9 million in 1998. Operating income was $1.5 million and $1.1 million in
1999 and 1998, respectively. EPOCH distributed a $0.5 million dividend to
RightCHOICE during 1999. Undistributed earnings to RightCHOICE for 1999 and
1998 were $176 and $330, respectively. EPOCH serves approximately 275
businesses primarily in the Midwest as of December 31, 1999.
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
RightCHOICE and its subsidiaries, claims related to insured events that have
occurred but that have not been reported to RightCHOICE and its subsidiaries 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:
1999 1998
---- ----
Balance at January 1....................... $109,986 $112,339
-------- --------
Incurred related to:
Current year............................. 609,150 585,469
Prior years.............................. 1,434 3,410
-------- --------
Total incurred...................... 610,584 588,879
-------- --------
Paid related to:
Current year............................. 503,402 498,423
Prior years.............................. 92,740 92,809
-------- --------
Total paid.......................... 596,142 591,232
-------- --------
Net balance at December 31................. $124,428 $109,986
======== ========
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<PAGE>
The incurred amounts related to prior years represent the differences between
RightCHOICE's estimated claims payable for prior years' claims and the actual
amounts required to satisfy such claims. In addition, RightCHOICE's health care
services expense caption on the Consolidated Statements of Income has been
reduced by $9,052 and $9,052 for 1999 and 1998, respectively, related to the
beneficial effect of the premium deficiency that was recorded in 1997.
9. Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following:
December 31,
------------
1999 1998
---- ----
Accounts payable............................ $21,702 $23,470
Accrued salaries and other expenses......... 15,110 13,010
Other accrued expenses...................... 22,664 28,274
------- -------
$59,476 $64,754
======= =======
10. Long-term debt and commitments
RightCHOICE currently has a reducing revolving credit facility (the Credit
Agreement) with Bank of America National Association (B of A), Administrative
Agent, and Mercantile Bank National Association, co-agent. At December 31,
1999, RightCHOICE had a $34.1 million outstanding balance under the Credit
Agreement, which represented the maximum commitment. The maximum commitment
will be reduced by $2.0 million on a quarterly basis through January 1, 2002,
the termination date. 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
RightCHOICE, as base rate loans or offshore rate loans. Base rate loans bear
interest at B of A's base rate, which is 1.5% above the higher of the latest
federal funds rate plus 0.5% or B of A's reference rate, which approximates the
prime rate. Offshore rate loans bear interest at 2.5% above the adjusted London
Interbank Offered Rate (LIBOR). At December 31, 1999, all of RightCHOICE's
outstanding borrowings were in offshore rate loans. The weighted average
interest rate incurred by RightCHOICE was 8.01%, 8.38%, and 7.32% in 1999, 1998,
and 1997, respectively.
As a condition to providing the Credit Agreement, RightCHOICE 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 RightCHOICE's ability to incur additional indebtedness or pay cash
dividends; limit future capital contributions, investments, acquisitions, and
capital expenditures, and limitations on indebtedness of RightCHOICE's
subsidiaries; and require the maintenance of certain financial ratios as well as
a minimum consolidated tangible net worth. As of December 31, 1999, RightCHOICE
was in compliance with these covenants.
RightCHOICE has an agreement with Blue Cross and Blue Shield of Missouri to
lease certain office space, including an operating lease for its headquarters
facility (see Note 15 "Transactions with Blue Cross and Blue Shield of
Missouri"). RightCHOICE also leases certain electronic data processing
equipment under non-cancellable lease agreements classified as either capital or
operating leases.
84
<PAGE>
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, 1999:
Capital Operating
------- ---------
Year ending December 31,
2000.............................................. $ 4,747 $13,369
2001.............................................. 2,732 9,081
2002.............................................. 1,877 8,509
2003.............................................. 847 7,701
2004.............................................. 83 6,310
Thereafter........................................ ______ 2,537
-------
Total minimum lease payments................... $10,286 $47,507
=======
Less amount representing interest.............. (1,036)
-------
Present value of net minimum lease
payments, including
current portion of $4,071.................... $ 9,250
=======
Total rental expense for all operating leases, except those with terms of one
month or less that were not renewed, was $10,707, $10,133, and $9,900, for the
years ended December 31, 1999, 1998, and 1997, respectively.
11. Income taxes
The components of the provision (benefit) for income taxes are as follows:
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Current:
Federal....................... $ 9,684 $2,652 $(3,771)
State......................... 375 (505) 757
------- ------ -------
10,059 2,147 (3,014)
Deferred:
Federal....................... 1,118 1,697 (6,507)
------- ------ -------
$11,177 $3,844 $(9,521)
======= ====== =======
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,
-----------------------
1999 1998 1997
---- ---- ----
Tax provision (benefit) based on federal
statutory rate............................. 35.0% 35.0% (35.0)%
State income taxes, net of federal
provision (benefit)........................ 1.3 (5.3) 2.3
Goodwill amortization........................ 2.4 6.8 2.2
Other........................................ 0.7 3.9 2.1
---- ---- ------
Effective tax provision (benefit) rate....... 39.4% 40.4% (28.4)%
==== ==== ======
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<PAGE>
The primary temporary differences that gave rise to deferred income taxes were
as follows:
December 31,
------------
1999 1998
---- ----
Deferred tax assets:
Capitalized software........................ $ 6,223 $ 4,149
Medical claims payable discounting.......... 1,672 1,501
Employee benefits........................... 8,738 7,910
Unearned premiums........................... 4,065 3,767
Other capitalized expenses.................. 2,324 2,429
Reserve for loss contract................... 2,541 5,709
Unrealized depreciation of securities....... 2,366
Other....................................... 5,775 8,136
------- -------
Total deferred tax assets............... 33,704 33,601
------- -------
Deferred tax liabilities:
IOS expense................................. 8,081 8,983
Unrealized appreciation of securities....... 832
Other tax-deductible expenses............... 7,203 7,293
------- -------
Total deferred tax liabilities.......... 15,284 17,108
------- -------
Valuation allowance.......................... (112)
------- -------
Net deferred tax asset....................... $18,420 $16,381
======= =======
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. As of December 31, 1998, RightCHOICE maintained a valuation allowance
of $112 relating to items in which uncertainty existed with respect to the
future realization of the undistributed losses of minority-owned subsidiary
companies. During 1999, RightCHOICE determined that this uncertainty no longer
existed. Based upon all the available evidence, management believes it is more
likely than not that RightCHOICE will realize its deferred tax assets as of
December 31, 1999 and, accordingly, no valuation allowance has been provided
against such assets as of December 31, 1999.
12. Employee benefit programs
Pension plan
RightCHOICE 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 RightCHOICE includes the following components:
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Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Service cost.............................. $ 2,061 $ 1,834 $ 1,802
Interest cost............................. 3,273 2,989 2,814
Expected return on plan assets............ (3,587) (3,211) (2,770)
Amortization of transition asset.......... (304) (304) (304)
Amortization of prior service cost........ (230) (230) (230)
------- ------- -------
Net periodic pension cost................. $ 1,213 $ 1,078 $ 1,312
======= ======= =======
Other components (included in
non-recurring charges):
Curtailment gain.......................... $ (816)
=======
Special termination benefits.............. $ 198
=======
The following tables present the status of RightCHOICE's pension benefits:
December 31,
------------
1999 1998
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year....... $49,736 $43,122
Service cost.................................. 2,061 1,834
Interest cost................................. 3,273 2,989
Benefit payments.............................. (1,350) (1,324)
Actuarial (gains) losses...................... (9,296) 3,115
------- -------
Benefit obligation at end of year............. $44,424 $49,736
======= =======
December 31,
------------
1999 1998
---- ----
Change in plan assets:
Fair value of plan assets at beginning of year.. $44,980 $40,264
Actual return on assets......................... 7,171 6,040
Benefit payments................................ (1,350) (1,324)
------- -------
Fair value of plan assets at end of year........ $50,801 $44,980
======= =======
RightCHOICE did not make and was not required to make contributions to the plan
during 1999 and 1998.
The funded status of RightCHOICE's pension plan and the amount recorded as
accrued pension cost consist of the following:
December 31,
------------
1999 1998
---- ----
Unfunded status............................ $(6,377) $4,756
Unrecognized actuarial gain................ 16,704 3,825
Unrecognized transition asset.............. 284 588
Unrecognized prior service cost............ 53 282
------- ------
Accrued pension cost....................... $10,664 $9,451
======= ======
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Weighted average assumptions used in the development of pension data as of
December 31 are as follows:
1999 1998
---- ----
Discount rate.................................. 7.75% 6.75%
Expected long-term rate of return on assets.... 9.0 9.0
Rates of increase in compensation levels....... 3.0-6.5 3.0-6.5
HealthLink provides a defined contribution pension plan covering substantially
all HealthLink employees who meet the plan eligibility requirements as to age
and length of service. HealthLink contributes an amount equal to 4% of
participating employees' annual gross compensation levels. Additional amounts
can be contributed at HealthLink's discretion. HealthLink's pension expense
during 1999, 1998, and 1997, was $640, $377, and $368, respectively.
Postretirement benefits other than pensions
RightCHOICE provides certain health care and life insurance benefits for retired
and terminated employees (excluding HealthLink employees). Substantially all of
RightCHOICE's employees may become eligible for those benefits if they reach
normal retirement age while working for RightCHOICE. 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,
-----------------------
1999 1998 1997
---- ---- ----
Service cost......................... $ 629 $ 671 $ 522
Interest cost........................ 1,161 1,165 1,171
Amortization of prior service cost... (94) (25) (6)
Amortization of actuarial loss....... 183 130 82
------ ------ ------
Net periodic postretirement cost..... $1,879 $1,941 $1,769
====== ====== ======
The amortization of any prior service cost is determined using 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 7.75% and 6.75% for 1999 and 1998, respectively.
The rate of compensation increase is assumed to be 4.0% for 1999 and 1998. The
health care cost trend rate is assumed to be 6.0% for 1999, and 5.5% for 2000
and thereafter. A one percentage point change in the assumed trend rate would
have the following effects as of December 31, 1999:
One percent One percent
increase decrease
-------- --------
Effect on postretirement accumulated benefit
obligation........................................... $1,203 $(1,064)
Effect on total service and interest cost
components........................................... $ 144 $ (126)
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RightCHOICE's postretirement benefit plan is currently not funded. The
following table presents the status of RightCHOICE's postretirement benefits:
December 31,
------------
1999 1998
---- ----
Change in accumulated benefit obligation:
Accumulated benefit obligation at beginning of year... $18,370 $16,860
Service cost.......................................... 629 671
Interest cost......................................... 1,161 1,165
Plan amendments....................................... (814) (394)
Benefit payments...................................... (938) (1,214)
Actuarial (gains) losses.............................. (1,866) 1,282
------- -------
Accumulated benefit obligation at end of year......... $16,542 $18,370
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year........ $ 0 $ 0
Employer contributions................................ 938 1,214
Benefit payments...................................... (938) (1,214)
------- -------
Fair value of plan assets at end of year.............. $ 0 $ 0
======= =======
The funded status and accrued cost of RightCHOICE's postretirement plan consist
of the following:
December 31,
------------
1999 1998
---- ----
Unfunded status........................... $16,542 $18,370
Unrecognized actuarial loss............... (3,183) (5,233)
Unrecognized prior service cost........... 1,065 345
------- -------
Accrued postretirement benefit cost....... $14,424 $13,482
======= =======
Postemployment benefits
RightCHOICE 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.
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 $(132), $1,150,
and $688, for 1999, 1998, and 1997, respectively. The 1999 reduction to expense
was due to the increase in interest rates as well as the favorable claims
experience of the plan, among other factors.
Stock-based compensation plans
RightCHOICE 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. RightCHOICE 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 RightCHOICE's plans been determined consistent
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with SFAS No. 123, net income (loss) and earnings (loss) per share would have
been reduced or increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss)........................... As reported.... $17,216 $5,660 $(24,034)
Pro forma...... $16,582 $4,917 $(24,677)
Basic and diluted earnings (loss) per
share. ..................................... As reported.... $ 0.92 $ 0.30 $ (1.29)
Pro forma...... $ 0.89 $ 0.26 $ (1.32)
</TABLE>
As of December 31, 1999, the maximum number of shares subject to options and
grants under the Equity Incentive Plan and Directors' Stock Option Plan is 1.5
million and 60,000, respectively. The exercise price of each option equals the
market price of RightCHOICE'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 1999, 1998, and 1997, respectively:
expected volatility of 37%, 35%, and 34%; risk-free interest rates of
approximately 5%, 6%, and 6%; 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, 1999, 1998, and 1997 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, 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
Granted................................ 319,609 $11.50 $5.35
Exercised.............................. (227) $ 9.63
Forfeited.............................. (49,502) $11.60
--------
Outstanding at December 31, 1999....... 972,583 $11.22
========
</TABLE>
There were 469,112, 198,920 and 105,413 options exercisable at December 31,
1999, 1998, and 1997, respectively. There were no options exercised during
1997. 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, 1999:
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<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- -----------------------------------
Weighted
Range of Number Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9 to $12 817,269 7.9 years $10.71 320,572 $10.58
$13 to $18 155,314 6.0 years $13.92 148,540 $13.94
------- -------
$9 to $18 972,583 7.6 years $11.22 469,112 $11.64
======= =======
</TABLE>
Other benefit plans
RightCHOICE provides a pre-tax 401(k) plan covering substantially all company
employees. RightCHOICE recognized expenses of $1,221, $1,144, and $1,083, during
1999, 1998, and 1997, respectively, for costs related to this plan. RightCHOICE
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.
RightCHOICE recognized expenses of $7,225, $5,002, and $3,709, during 1999,
1998, and 1997, respectively, for costs related to these plans. RightCHOICE also
provides short-term disability and workers' compensation benefits; the cost of
providing these programs is not significant to RightCHOICE's overall results of
operations. At December 31, 1999 and 1998, RightCHOICE had a minimum pension
liability adjustment of $454 and $569, respectively, related to the SERP that is
included as a component of RightCHOICE's other comprehensive income on the
Consolidated Balance Sheet.
13. Contingencies
Litigation of Blue Cross and Blue Shield of Missouri with the Missouri Attorney
General and Missouri Department of Insurance and related actions, settlement
efforts and proposed reorganization
In August 1994, Blue Cross and Blue Shield of Missouri created RightCHOICE as a
for-profit subsidiary. Blue Cross and Blue Shield of Missouri transferred
certain of its assets to RightCHOICE, and offered to the public 20% of the
common stock of RightCHOICE (such events are referred to collectively as the
1994 Reorganization and Public Offering). Although the Missouri Department of
Insurance (DOI) formally approved the 1994 Reorganization and Public Offering on
April 14, 1994, the DOI subsequently claimed that the 1994 Reorganization and
Public Offering violated state laws and that Blue Cross and Blue Shield of
Missouri was obligated to transfer all of its assets, including all of the stock
of RightCHOICE that it owned, to the State of Missouri or a charity designated
by the State of Missouri.
On May 13, 1996, Blue Cross and Blue Shield of Missouri filed a declaratory
judgment action in the Circuit Court of Cole County Missouri (the Circuit Court)
against the DOI and the Missouri Attorney General (the Missouri Attorney General
was a necessary party due to his sole authority to enforce nonprofit corporation
laws). This litigation is described more fully below under "Litigation relating
to the 1994 Reorganization and Public Offering."
RightCHOICE, Blue Cross and Blue Shield of Missouri, the DOI and the Attorney
General reached agreement for settlement of this litigation. The settlement is
described below under the caption "Agreement for Settlement of Certain
Litigation Matters and Reorganization of RightCHOICE." The agreement provides
for the dismissal of the lawsuit and appeals in which the State officials
claimed Blue Cross and Blue Shield of Missouri violated state law. The
agreement provides for a corporate reorganization of Blue Cross and Blue Shield
of Missouri and RightCHOICE and the creation of an
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<PAGE>
independent public benefit health care foundation by December 31, 2000. There
are a number of contingencies that might affect the closing of that
reorganization. RightCHOICE cannot provide any assurances that those
contingencies will be fulfilled. The parties have agreed to use their best
efforts to effect the reorganization by December 31, 2000. If the settlement
does not go forward, the Attorney General and DOI will be free to further
prosecute their claims against Blue Cross and Blue Shield of Missouri arising
from the 1994 Reorganization and Public Offering which would have a material
adverse effect on RightCHOICE and its stock.
Agreement for Settlement of Certain Litigation Matters and Reorganization of
RightCHOICE
Status of Proposed Settlement Agreements
Following many developments in the litigation described below, on January 6,
2000, RightCHOICE, Blue Cross and Blue Shield of Missouri, the Missouri Attorney
General, and the DOI signed the Amended and Restated Settlement Agreement which
would, if consummated, resolve all outstanding litigation and regulatory issues
between RightCHOICE, Blue Cross and Blue Shield of Missouri and their affiliates
and the State of Missouri described below and would create an independent public
benefit health care foundation. This agreement modified the principal
settlement agreement first announced as a conceptual framework on April 22,
1998, which was reduced to definitive settlement agreements entered into on
September 20, 1998, and subsequently modified on March 12, 1999 (as amended, the
amended settlement agreement).
The amended settlement agreement included a number of significant conditions and
contingencies described further herein. Among those conditions were approval by
an appropriate court and a judicial determination by the Circuit Court of Cole
County, Missouri, that the reorganization contemplated by the amended settlement
agreement was lawful as to the subscribers of Blue Cross and Blue Shield of
Missouri, RightCHOICE, and their affiliates. In the Amended and Restated
Settlement Agreement that the parties signed on January 6, 2000, the parties
removed the court approval and determination of lawfulness contingencies from
their settlement agreement. That action was the result of the following events.
On October 29, 1999, the Cole County Circuit Court entered an order disapproving
the amended settlement agreements. Blue Cross and Blue Shield of Missouri,
together with the Missouri Attorney General and the DOI, filed a notice of
appeal from that order to the Missouri Court of Appeals for the Western
District, and asked for immediate transfer of that appeal to the Missouri
Supreme Court. Blue Cross and Blue Shield of Missouri and the Missouri Attorney
General also notified the Missouri Supreme Court of the Circuit Court's
disapproval of the amended settlement agreement, and asked the Missouri Supreme
Court to (1) deem the Circuit Court's order final for purposes of appeal, (2)
conduct its own review of the settlement agreement, and (3) enter a stay
prohibiting Judge Brown and the Special Master from further proceedings,
including consideration of alternatives, pending the appeal.
The Supreme Court of Missouri accepted the appeal and stayed further proceedings
in the Circuit Court. Counsel for the Special Master whose role in these
proceedings is described further herein appeared in the appeal as Amici
Respondents, charged with defending the order of the Circuit Court.
Following oral arguments before the Supreme Court of Missouri on December 8,
1999, on December 9, the Supreme Court entered an order which stated that the
parties had "failed to establish that court approval is required or authorized
by law or that any such determination would be other than advisory." The
Supreme Court stayed all proceedings until February 8, 2000, to permit the
parties to dismiss the underlying lawsuit and the appeals.
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<PAGE>
On January 6, 2000, the Amended and Restated Settlement Agreement was signed,
thereby removing the conditions requiring court approval and a determination of
lawfulness of the proposed reorganization. On January 6, 2000, the parties
filed a joint stipulation of dismissal in the Cole County Circuit Court,
dismissing all pending claims in that court in the principal litigation between
the parties. On February 8, 2000, the parties moved for dismissal of the appeal
pending in the Supreme Court of Missouri. The Supreme Court granted that motion
and dismissed the appeals on February 9, 2000.
The litigation underlying the settlement is described below. See "Litigation
relating to the 1994 Reorganization and Public Offering."
Terms of the Proposed Settlement Agreement
The principal terms of the Amended and Restated Settlement Agreement include the
following:
. Blue Cross and Blue Shield of Missouri would, through a series of
transactions, (i) transfer its insurance-related assets, contracts and
agreements and related liabilities to a wholly owned subsidiary of
RightCHOICE; (ii) convert to a for-profit corporation; (iii) reincorporate
in Delaware; and (iv) merge with RightCHOICE. Approximately 20% of the
outstanding common stock of the resulting entity (referred to as New
RightCHOICE) would be owned by RightCHOICE's current public shareholders
and approximately 80% of the outstanding shares of New RightCHOICE would be
owned by a charitable independent health care foundation (which equals the
current aggregate ownership interests of the public shareholders and Blue
Cross and Blue Shield of Missouri, respectively, in the equity of
RightCHOICE).
. Blue Cross and Blue Shield of Missouri would pay approximately $12.78
million to the Missouri Foundation For Health (in addition to $175 paid by
New RightCHOICE).
. The Missouri Foundation For Health would be required to liquidate its
shares of New RightCHOICE stock over a prescribed period of time not to
exceed seven years under a divestiture plan. The Foundation would be
required to reduce its ownership of New RightCHOICE stock to less than 50%
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% of the total outstanding stock of New RightCHOICE within five
years of the closing of the reorganization, subject to possible extension.
The proceeds would be used for health care purposes. All but up to 5% of
the shares of New RightCHOICE stock owned by the 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
Foundation in the board of directors of New RightCHOICE on all matters
except that the Foundation would have the right to vote as it deems
appropriate on a change of control transaction involving New RightCHOICE.
. The charter documents of New RightCHOICE would include the "basic
protections" required by the Blue Cross and Blue Shield Association (BCBSA)
of all of its for-profit licensees to provide for independence from the
direction, control and influence of the Missouri Foundation For Health or
any other shareholder. The "basic protections" would include limitations on
the amount of New RightCHOICE stock that may be owned by certain categories
of shareholders --(i) no "institutional" shareholder may own 10% or more of
the voting power of New RightCHOICE, (ii) no "non-institutional"
shareholder may own 5% or more of the voting power of New RightCHOICE, and
(iii) no shareholder may own 20% or more of the equity of New RightCHOICE
(with certain exceptions in the case of the Foundation as described above).
Any
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<PAGE>
shares owned by a shareholder in excess of the applicable ownership
limits could be redistributed by New RightCHOICE.
The transactions contemplated by the Amended and Restated Settlement Agreement
are subject to a number of significant conditions and contingencies, including
approval by various regulators and the shareholders of RightCHOICE, receipt of
certain legal opinions, the receipt of rulings from the Internal Revenue Service
or tax opinions regarding the tax-free nature of the transactions, and the
satisfactory resolution of the Sarkis Litigation, which is now over. The Sarkis
Litigation is described below under the caption Subscriber Class Action
Litigation.
Litigation relating to the 1994 Reorganization and Public Offering
In August 1994, Blue Cross and Blue Shield of Missouri effectuated the 1994
Reorganization and Public Offering. The DOI had formally approved the 1994
Reorganization and Public Offering on April 14, 1994. The DOI subsequently
claimed that the 1994 Reorganization and Public Offering violated Missouri state
laws and that Blue Cross and Blue Shield of Missouri was obligated to transfer
all of its assets, including all of the stock of RightCHOICE that it owned, to
the State of Missouri or a charity designated by the State of Missouri. The DOI
threatened to bring legal action, seek a receivership, or terminate Blue Cross
and Blue Shield of Missouri's insurance license unless Blue Cross and Blue
Shield of Missouri surrendered its assets.
Blue Cross and Blue Shield of Missouri's extensive efforts to resolve the
dispute without litigation were unsuccessful. On May 13, 1996, Blue Cross and
Blue Shield of Missouri filed a declaratory judgment action in the Circuit Court
against the DOI and the Missouri Attorney General (the Missouri Attorney General
was a necessary party due to his sole authority to enforce nonprofit corporation
laws). The action sought a declaratory judgment that Blue Cross and Blue Shield
of Missouri followed all applicable laws and regulations in the 1994
Reorganization and Public Offering resulting in the creation of RightCHOICE. It
also sought a permanent injunction forbidding the DOI from refusing to renew
Blue Cross and Blue Shield of Missouri's license or taking other administrative
action against Blue Cross and Blue Shield of Missouri to pressure it into paying
a "toll charge" or "charitable asset assessment" or any other fee as a result of
the 1994 Reorganization and Public Offering.
On June 13, 1996, the DOI filed an answer and counterclaims setting forth
several affirmative defenses, including alleged fraud and negligent
misrepresentation with respect to the application filed by Blue Cross and Blue
Shield of Missouri seeking approval of the 1994 Reorganization and Public
Offering. The counterclaims alleged violations of certain health services
corporation and nonprofit corporation statutes. The DOI's counterclaims sought,
among other things: (i) permanent injunctions against Blue Cross and Blue Shield
of Missouri; (ii) imposition of a trust on Blue Cross and Blue Shield of
Missouri'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 Blue Cross and Blue Shield of Missouri.
On June 20, 1996, the Missouri Attorney General filed an answer and counterclaim
alleging that the 1994 Reorganization and Public Offering, and its continued
operations through RightCHOICE and its subsidiaries, exceeded Blue Cross and
Blue Shield of Missouri's statutory purposes. The Missouri Attorney General
requested a declaration that Blue Cross and Blue Shield of Missouri 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 Blue Cross and Blue Shield of
Missouri's motion for summary judgment against the DOI, rejected all of the
DOI's affirmative defenses (including allegations
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<PAGE>
of fraud), issued a permanent injunction against the DOI and declared that: (i)
under Missouri law the DOI had no authority to demand that Blue Cross and Blue
Shield of Missouri make a payment as a result of the 1994 Reorganization and
Public Offering; (ii) under Missouri law the DOI had no jurisdiction to take any
action, the practical effect of which would be to amend, modify or reverse the
DOI's April 14, 1994 final administrative approval of the 1994 Reorganization
and Public Offering; (iii) under Missouri law, the DOI had no jurisdiction to
take any administrative action, including, but not limited to, revoking,
suspending or refusing to renew Blue Cross and Blue Shield of Missouri's
Certificate of Authority based in any way on the 1994 Reorganization and Public
Offering or Blue Cross and Blue Shield of Missouri's refusal to make payment as
the DOI had demanded; and (iv) (A) Blue Cross and Blue Shield of Missouri was a
mutual benefit type of nonprofit corporation rather than a public benefit type
of nonprofit corporation; (B) the 1994 Reorganization and Public Offering were
authorized under all laws applicable to nonprofit health services corporations;
and (C) Blue Cross and Blue Shield of Missouri 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 1994 Reorganization and Public Offering (the
September 9 Order). On December 30, 1996, the Circuit Court issued orders
(described more fully below) modifying the findings and declarations set forth
in (iv) above, on the grounds that it was legally unnecessary to resolve such
issues because the Circuit Court had already ruled against the DOI for other
reasons.
The September 9 Order permanently enjoined the DOI from, among other things, (i)
revoking, suspending or refusing to renew Blue Cross and Blue Shield of
Missouri's insurance license based in any part upon the 1994 Reorganization and
Public Offering; (ii) commencing a valuation of Blue Cross and Blue Shield of
Missouri's assets and demanding a payment as a result of the 1994 Reorganization
and Public Offering; (iii) commencing any administrative hearing or making any
administrative determination based in any part upon the 1994 Reorganization and
Public Offering; (iv) instituting any seizure, receivership, conservatorship or
similar action or proceeding against Blue Cross and Blue Shield of Missouri
based in any part upon the 1994 Reorganization and Public Offering; and (v)
taking any other action, however denominated, against Blue Cross and Blue Shield
of Missouri based in any part upon the 1994 Reorganization and Public Offering.
On August 28, 1996, the DOI filed an amended answer asserting a new counterclaim
that the 1994 Reorganization and Public Offering were not reasonably designed to
serve any of Blue Cross and Blue Shield of Missouri's purposes as a health
services corporation and sought a declaration that Blue Cross and Blue Shield of
Missouri had exceeded or abused the authority conferred upon it by law. Under
this counterclaim, the DOI sought an order to rehabilitate Blue Cross and Blue
Shield of Missouri 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 Blue Cross and Blue Shield of Missouri that
sought a declaration that Blue Cross and Blue Shield of Missouri was a public
benefit corporation, not a mutual benefit corporation, and requested an order
that Blue Cross and Blue Shield of Missouri amend its Articles of Incorporation
accordingly. The Circuit Court granted the Missouri Attorney General's motion
for leave to file the amended counterclaim.
On December 30, 1996, the Circuit Court issued five orders (the December 30
Orders): (i) denying Blue Cross and Blue Shield of Missouri's motion for
summary judgment against the Missouri Attorney General; (ii) granting the
Missouri Attorney General's motion for partial summary judgment against Blue
Cross and Blue Shield of Missouri; (iii) denying Blue Cross and Blue Shield of
Missouri's supplemental motion for summary judgment against the DOI on their
amended counterclaim; (iv) granting the DOI's motion for summary judgment
against Blue Cross and Blue Shield of Missouri on their amended counterclaim;
and (v) modifying, in part, the Circuit Court's previous September 9 Order. The
December 30 Orders declared that (i) Blue Cross and Blue Shield of Missouri had
continued to exceed or abuse its
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statutorily permissible purposes and the authority conferred on it by law; and
(ii) Blue Cross and Blue Shield of Missouri 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 Blue Cross and Blue
Shield of Missouri promptly filed).
On August 4, 1998, the Missouri Court of Appeals entered its opinion affirming
the judgments entered December 30, 1996.
On September 20, 1998, the company and certain of its affiliates entered into
various settlement agreements with the Missouri Attorney General and certain
state agencies, including the DOI. The settlement agreements, as most recently
amended on January 6, 2000, (principally, the Amended and Restated Settlement
Agreement) are described above under the caption "Terms of the Proposed
Settlement Agreements." If consummated, the Amended and Restated Settlement
Agreement would resolve the outstanding litigation and regulatory disputes
between Blue Cross and Blue Shield of Missouri and its affiliates and the State
of Missouri, including the litigation related to the 1994 Reorganization and
Public Offering, and create an independent public benefit health care
foundation.
Notwithstanding the fact that the litigation had not yet been remanded to the
Circuit Court, on October 29, 1998, the Circuit Court "acting on its own motion"
issued an Order (the October 29, 1998 Order) in the litigation. The October 29,
1998 Order provided for, among other things, the appointment of Robert G.
Russell as receiver/custodian 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 Blue Cross and Blue Shield of Missouri. The October 29, 1998
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, 1998 Order also approved the engagement of legal
counsel and an investment banker to advise the receiver/custodian. Had the
October 29, 1998 Order not been void "from the beginning" as described below, a
number of significant and adverse consequences would have resulted, including
the automatic termination of the company's Blue Cross and Blue Shield licenses
and a resultant event of default under RightCHOICE's Credit Agreement.
On November 2, 1998, Blue Cross and Blue Shield of Missouri filed a motion to
vacate the October 29, 1998 order and a supporting memorandum. Blue Cross and
Blue Shield of Missouri alleged therein that (i) the Circuit Court lacked
jurisdiction to issue the October 29, 1998 Order because the case was still
pending before the Missouri Supreme Court; (ii) the Circuit Court issued the
order without notice and an opportunity to be heard; (iii) there were no exigent
circumstances that would warrant the appointment of a receiver without due
process; and (iv) the appointment of the receiver had the effect of frustrating
the purpose for which the receiver was to be appointed, namely, the preservation
of the nonprofit assets of Blue Cross and Blue Shield of Missouri.
On November 2, 1998, BCBSA filed a complaint against the company, its
subsidiaries and Blue Cross and Blue Shield of Missouri in the United States
District Court for the Northern District of Illinois alleging that the
appointment of the receiver/custodian 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
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Shield service marks following the issuance of the October 29 Order. The BCBSA
later dismissed its complaint (as described below under "Status of Blue Cross
and Blue Shield licenses").
On November 4, 1998, the Circuit Court issued an Order (the November 4 Order)
vacating the October 29, 1998 Order and declaring it to be void "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, 1998 Order were unintended. On November 4, 1998, the Circuit Court
also issued an Order (the November 4 Special Master Order) appointing a 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, 1998 Order as if it never existed. The special master, at
that time, had expressed his interest in providing that RightCHOICE would
continue its business in the normal course during his review.
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, 1998 Order. The special
master was further directed to investigate issues concerning the Blue Cross and
Blue Shield licenses and marks and the company's Credit Agreement.
On November 19, 1998, the Blue Cross and Blue Shield license agreements were
reinstated with addenda that provided, among other things, that the licenses
would terminate on the date of the next scheduled meeting of the BCBSA Board of
Directors, then March 11, 1999, unless extended by the Board of Directors of the
BCBSA. On March 11, 1999, and at subsequent meetings on June 17, September 17,
1999, and November 19, 1999 the BCBSA Board of Directors extended the licenses
until the next scheduled meeting, the next of which is scheduled for March 9,
2000. See "Status of Blue Cross and Blue Shield licenses" below.
On November 24, 1998, the Supreme Court of Missouri granted the motion of Blue
Cross and Blue Shield of Missouri to accept transfer of the litigation related
to the 1994 Reorganization and Public Offering and, as a result of this action,
the opinion of the Missouri Court of Appeals dated August 4, 1998, (referred to
above) is of no effect. The Supreme Court, on application of the parties,
deferred briefing of the appeal pending review of the parties' settlement
agreement in the Circuit Court.
The special master conducted a series of public hearings on December 4, December
16, and December 22, 1998, and on February 4, 1999, where evidence related to
the proposed settlement and other subjects was presented.
At the public hearing on December 16, representatives of Blue Cross and Blue
Shield of Kansas City presented an "alternative" to the proposed settlement
agreement by suggesting that the Kansas City plan would acquire the assets of
Blue Cross and Blue Shield of Missouri, including the stock of RightCHOICE that
it owns. The Kansas City plan's proposal provided for a cash purchase price of
$13.50 per share for the shares of the company held by the public and $15.25 per
share for the other shares held by Blue Cross and Blue Shield of Missouri. The
proposal included a number of conditions, such as a financing contingency and an
obligation that all litigation of Blue Cross and Blue Shield of Missouri be
resolved. This proposal was not made directly to RightCHOICE or Blue Cross and
Blue Shield of Missouri.
Following the completion of the hearings and other investigation, on February
10, 1999, the special master issued his 47-page report (the first report of the
special master) which recommended that the
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settlement agreement "not be approved in its present form" and that the Circuit
Court "withhold a ruling on the settlement agreement to give the parties and the
public interest groups who had filed briefs and participated in the proceedings
as "friends of the court" an opportunity to meet and confer, and engage in a
good faith effort to address" concerns that were noted in the report of the
special master. While the special master stated that "there are many things to
commend the Settlement Agreement for the Court's approval," he indicated he had
concerns with its terms that prevented him from recommending approval. Among the
concerns he identified in his first report were: (1) whether the charitable
independent health care foundation that would be created if the settlement were
implemented would receive full value of the present assets of Blue Cross and
Blue Shield of Missouri; (2) whether a contemplated method of divestiture of the
New RightCHOICE shares to be held by the 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; (3) whether the
proposed provisions for governance of the foundation were reasonable; and (4)
whether the provisions for the purposes of the charitable independent health
care foundation were justified.
Following the first report of the special master, the parties and the public
interest groups discussed the concerns noted therein. On March 12, 1999,
RightCHOICE, Blue Cross and Blue Shield of Missouri, the Missouri Attorney
General, and the DOI entered into an Amendment to Settlement Agreement. The
parties to the amended settlement agreement, together with certain consumer
groups that had participated in the public hearings, filed with the Circuit
Court a joint motion seeking approval of the amended settlement agreement.
On March 12, 1999, the parties also filed with the Circuit Court their
respective objections and comments to the first report of the special master.
In its objections, Blue Cross and Blue Shield of Missouri asserted that the
special master made certain erroneous factual and unjustified legal conclusions
in the report and requested the Circuit Court to approve the amended settlement
agreement.
Although the Missouri Supreme Court initially had stayed the briefing schedule
for 120 days in the proceedings before it in order to permit the proceedings in
the Circuit Court concerning review of the settlement agreement to go forward,
that stay was lifted and oral arguments were heard by the Missouri Supreme Court
on September 8, 1999. Following the oral arguments, on September 9, 1999, the
Supreme Court entered an order that the Circuit Court "finally dispose" of the
amended settlement agreement.
The special master conducted public hearings on September 3, and October 4,
1999. On October 8, 1999, he issued a second report (the second report of the
special master). The second report recommended that the amended settlement
agreement be disapproved because it failed to provide for the full value of the
Blue Cross and Blue Shield of Missouri assets for the public. The report also
suggested that the settlement should provide for the forced sale of RightCHOICE
or provide that the foundation should have the right to cause the sale of
RightCHOICE.
On October 29, 1999 the Circuit Court issued an order in which it disapproved
the amended settlement agreement. Subsequent proceedings were then had as
described above under the caption "Status of Proposed Settlement Agreements."
On January 6, 2000, as a result of the Amended and Restated Settlement
Agreement, the parties filed a joint notice of dismissal without prejudice of
the pending claims in the lawsuit in the Circuit Court of Cole County in which
the Attorney General and the DOI contended that Blue Cross and Blue Shield of
Missouri were in violation of the Missouri health services corporation law and
non-profit corporation law. On February 8, 2000, Blue Cross and Blue Shield of
Missouri, the Attorney General and DOI moved in the Missouri Supreme Court to
dismiss their pending appeals in that litigation. Their motions were granted on
February 9, 2000.
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An effect of the dismissal of these appeals is to leave in place, without
further right of appeal, the December 30, 1996 Orders particularly the finding
that Blue Cross and Blue Shield of Missouri violated the non-profit law through
the continued operation of RightCHOICE. If the Settlement Agreement is not
consummated, the Attorney General and DOI remain free to seek further relief in
enforcement of those judgments, including seeking to terminate the Certificate
of Authority of Blue Cross and Blue Shield of Missouri and seeking to dissolve
Blue Cross and Blue Shield of Missouri under the Missouri non-profit corporation
law.
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 or RightCHOICE, and (ii) all persons
and/or entities who benefited from Blue Cross and Blue Shield of Missouri's tax-
exempt status (the Sarkis plaintiffs). The petition named RightCHOICE, Blue
Cross and Blue Shield of Missouri, HealthLink, Inc. (a subsidiary of
RightCHOICE), and certain officers of RightCHOICE as defendants. The named
plaintiffs later abandoned their claim to represent all persons or entities that
benefited from Blue Cross and Blue Shield of Missouri's tax-exempt status.
The Sarkis plaintiffs' claims related to an alleged conversion of Blue Cross and
Blue Shield of Missouri from a not-for-profit entity to a for-profit entity and
payment of excessive compensation to management. The petition further alleged
that certain amendments to Blue Cross and Blue Shield of Missouri's Articles of
Incorporation were improper. The petition also alleged that the purchase of
HealthLink was at an excessive price and that HealthLink operates under
contracts providing for illegal discounts by health care providers. The Sarkis
plaintiffs sought restitution, compensatory damages and punitive damages in
unspecified amounts, as well as injunctive and other equitable relief.
On November 4, 1998, the St. Louis Circuit Court issued its judgment and order
granting the motion of the defendants to dismiss the action for lack of standing
and entering judgment in favor of the defendants. The Sarkis plaintiffs
appealed the St. Louis Circuit Court's order. James Hacking later dismissed his
appeal, leaving Anthony Sarkis as the only appellant.
On February 1, 2000, the Missouri Court of Appeals entered an Order affirming
the judgment of dismissal entered in the Circuit Court of the City of St. Louis
on November 4, 1998. Appellant did not file a motion for rehearing or an
application for transfer of the appeal to the Missouri Supreme Court. As a
result, the Sarkis Litigation is now over.
The obligations of the parties to consummate the reorganization contemplated by
the Amended and Restated Settlement Agreement is conditioned upon, among other
things, satisfactory final resolution of the Sarkis Litigation.
Anthony Sarkis, as a representative of a subscriber class, is also a party in
the actions described below under "Litigation relating to corporate status of
Blue Cross and Blue Shield of Missouri."
Litigation relating to corporate status of Blue Cross and Blue Shield of
Missouri
On November 3, 1997, Blue Cross and Blue Shield of Missouri filed an action in
the Circuit Court against the Missouri Attorney General seeking declarations
that (1) Blue Cross and Blue Shield of Missouri is a mutual benefit type of
nonprofit corporation under Chapter 355 of the Missouri Revised Statutes; and
(2)
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Blue Cross and Blue Shield of Missouri 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 Blue Cross and Blue Shield of Missouri was a
public benefit type of nonprofit corporation that held its assets for the
benefit of the public generally. The Missouri Attorney General filed an answer
and counterclaim seeking a declaration that Blue Cross and Blue Shield of
Missouri 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 Blue Cross and Blue Shield of Missouri. 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
Blue Cross and Blue Shield of Missouri is a public benefit or a mutual benefit
corporation. Thereafter, Blue Cross and Blue Shield of Missouri moved to file
an amended petition adding Sarkis, Hacking and the DOI as parties to the action.
For its relief, Blue Cross and Blue Shield of Missouri sought, among other
things, a declaration of its status as a public benefit or mutual benefit
corporation. The Circuit Court granted Blue Cross and Blue Shield of Missouri's
motion to file the amended petition on August 17, 1998.
On June 17, 1999, the Circuit Court determined that this action would go forward
as a class action for declaratory relief. On that date, Sarkis and Hacking
dismissed all claims other than their claims for declaratory relief. On July 6,
1999, the Attorney General of Missouri filed a motion for a summary judgment
declaring that Blue Cross and Blue Shield of Missouri is a public benefit
corporation. On August 5, 1999, Blue Cross and Blue Shield of Missouri filed a
motion for summary judgment that the class representatives and the class lack
standing to assert the claims for declaratory relief that they are asserted.
Those motions for summary judgment are under submission to the Circuit Court.
If Blue Cross and Blue Shield of Missouri is declared to be a mutual benefit
type of nonprofit corporation that does not hold its assets for the benefit of
the public generally, Blue Cross and Blue Shield of Missouri would be required
to exercise its ownership interest in RightCHOICE consistent with the best
interests of Blue Cross and Blue Shield of Missouri's subscribers, subject to
any final rulings made in the litigation described elsewhere herein. If Blue
Cross and Blue Shield of Missouri is declared to be a public benefit type of
nonprofit corporation or if it is declared that Blue Cross and Blue Shield of
Missouri holds assets for the benefit of the public generally, Blue Cross and
Blue Shield of Missouri would be required to exercise its ownership interest in
RightCHOICE consistent with the best interests of the public at large. The
subscriber class in this action has requested a declaration that Blue Cross and
Blue Shield of Missouri may not lawfully transfer its assets to a charitable
trust. If such a judgment is entered, it might be followed by a claim seeking
an injunction against the closing of the reorganization, or money damages, or
both. It could also cause conditions to the closing of the reorganization not
to be fulfilled.
Litigation relating to the Market Conduct Study and Copayment Calculations
On February 11, 1998, the DOI filed a Notice of Institution of Case (the Market
Conduct Proceeding) relating to a market conduct examination of RightCHOICE and
its affiliates. On January 6, 2000, the settlement agreement relating to these
proceedings was consummated, and the Market Conduct Proceeding was dismissed.
On February 9, 1998, the Missouri Attorney General filed suit against
RightCHOICE, Blue Cross and Blue Shield of Missouri, BlueCHOICE, Healthy
Alliance Life Insurance Company (HALIC, a subsidiary of RightCHOICE), and
Preferred Health Plans of Missouri, Inc. (a subsidiary of RightCHOICE) in the
Circuit Court seeking injunctive relief, compensatory damages and civil
penalties under Missouri's
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Merchandising Practices Act for the way in which RightCHOICE disclosed and
marketed co-payment amounts prior to January 1996 (the Attorney General Co-
Payment Claim). RightCHOICE discontinued the challenged co-payment practices in
January 1996.
On September 20, 1998, RightCHOICE entered a settlement agreement with the
Attorney General for resolution of the Attorney General Co-Payment Claim
conditioned on court approval of the separate principal settlement agreement of
September 20, 1998 described above under the caption Terms of the Settlement
Agreement. The Attorney General Co-Payment Claim was dismissed by the Missouri
Attorney General without prejudice pending the approval of the amended
settlement agreement described above.
On January 6, 2000, the parties agreed to remove the court approval condition
precedent to consummating the settlement of the Attorney General Co-Payment
Claim. The settlement is now being implemented. RightCHOICE anticipates that
the settlement will be consummated.
Status of Blue Cross and Blue Shield licenses
On March 11, June 17, September 17, and November 19, 1999, the Board of
Directors of the BCBSA unanimously voted to extend RightCHOICE's licenses to use
the Blue Cross and Blue Shield service marks until the next scheduled meeting of
the BCBSA Board of Directors. The extensions on a "board to board" basis
followed the reinstatement by the BCBSA Board of Directors, effective as of
October 29, 1998, of the licenses to use the Blue Cross and Blue Shield service
marks, granted to RightCHOICE, Blue Cross and Blue Shield of Missouri, and two
wholly owned subsidiaries of RightCHOICE, HALIC and BlueCHOICE (the licensed
affiliates). The approval clarified the rights of RightCHOICE 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. On March
9, 2000, the Board of Directors of the BCBSA unanimously voted to fully
reinstate the licenses so that extensions on a "board to board" basis would no
longer be required.
The October 29 Order (as described above under "Litigation relating to the 1994
Reorganization and Public Offering") provided for the appointment of Robert G.
Russell as receiver/custodian to, among other things, take exclusive possession
and control of all of the issued and outstanding shares of RightCHOICE's class B
common stock, all of which is owned by Blue Cross and Blue Shield of Missouri.
On November 2, 1998, the BCBSA notified RightCHOICE 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 RightCHOICE and
its licensed affiliates alleging service mark infringement and breach of license
agreements as a result of the continued use of the service marks following the
issuance of the October 29 Order (the BCBSA Complaint). On November 4, 1998,
after Blue Cross and Blue Shield of Missouri filed a motion seeking a revocation
of the October 29 Order and supporting memorandum, the Circuit Court issued the
November 4 Order and the November 4 Special Master Order. The November 4 Order
set aside the October 29 Order and declared it to be "void from the beginning."
The November 4 Special Master Order appointed Robert G. Russell as special
master for the purpose of collecting and analyzing information related to the
proposed settlement of the litigation described above. On November 6, 1998, the
Court issued an Order of Reference for the special master. As a result of the
November 4 Order, the BCBSA agreed to dismiss the BCBSA Complaint.
Each of the reinstated license agreements approved by the BCBSA on November 19,
1998 included an addendum that provided, among other things, that the licenses
granted under such license agreements would be reviewed by the BCBSA at the next
regularly scheduled meeting of the BCBSA Board of Directors (originally, March
11, 1999, and pursuant to extensions, March 9, 2000). If, on or before such
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date, the BCBSA did not extend the termination dates for the license agreements
until the next regularly scheduled meeting of the BCBSA Board of Directors after
such date, or otherwise modify the addenda, the license agreements would have
terminated. This "board-to-board" extension of the license agreements has been
adopted in conjunction with the issuance of reinstated licenses granted to other
BCBSA licensees following a license termination. On March 9, 2000, the BCBSA
Board voted to reinstate the full license without board to board extensions as a
result of the dismissal of the principal litigation as contemplated by the
Amended and Restated Settlement Agreement described above under "Agreement for
Settlement of Certain Litigation Matters and Reorganization of RightCHOICE."
The licenses (which include the primary licenses granted to Blue Cross and Blue
Shield of Missouri and the controlled affiliate licenses to RightCHOICE, HALIC
and BlueCHOICE) give these companies the right to use the Blue Cross and Blue
Shield names and service marks in connection with health insurance products
marketed and sold in Blue Cross and Blue Shield of Missouri's licensed operating
area (consisting of 85 counties in eastern and central Missouri). The licenses
require Blue Cross and Blue Shield of Missouri, RightCHOICE, HALIC and
BlueCHOICE to pay license fees to BCBSA for the use of the marks.
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 Blue Cross and Blue Shield of
Missouri's or the BCBSA's property or business is appointed, or (iii) an action
is instituted by any governmental entity or officer against the licensee seeking
dissolution or liquidation of its assets or seeking the appointment of a
trustee, interim trustee, receiver or custodian for any of its property or
business, which is consented or acquiesced to by the licensee or is not
dismissed within 130 days of the licensee being served with the pleading or
document commencing the action, provided that if the action is stayed or its
prosecution enjoined, the 130-day period is tolled for the duration of the stay
or injunction, and provided further that the BCBSA's Board of Directors may toll
or extend the 130-day period at any time prior to its expiration. Each 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 the date of the next
regularly scheduled BCBSA Board meeting, and (ii) upon any judicial act that (a)
provides for or approves a transaction pursuant to which a person, entity or
group other than the licensees of BCBSA, acquires the ability to select the
majority of the members of the Board of Directors of Blue Cross and Blue Shield
of Missouri, RightCHOICE or certain of its affiliates or otherwise gains control
of Blue Cross and Blue Shield of Missouri, RightCHOICE or such affiliates, or
(b) changes the composition of, or the voting rights of the members of the Board
of Directors of Blue Cross and Blue Shield of Missouri, RightCHOICE or such
affiliates. The foregoing provision does not apply to a settlement or
resolution of the litigation described above 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 Blue Cross and Blue
Shield of Missouri, RightCHOICE, or certain subsidiaries of RightCHOICE 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, Blue Cross and Blue Shield of Missouri, RightCHOICE,
HALIC and BlueCHOICE are jointly liable to the 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. 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.
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RightCHOICE believes that the exclusive right to use the Blue Cross and Blue
Shield names and service marks provides it and its controlled affiliates with a
marketing advantage in Blue Cross and Blue Shield of Missouri's licensed
operating area, the loss of which would have a material adverse effect on
RightCHOICE and the market for its stock. In addition, the loss of the licenses
would be an event of default under RightCHOICE's Credit Agreement which, if not
waived or otherwise addressed, could result in a material adverse effect on
RightCHOICE and the market for its stock.
In connection with the settlement agreements described above under "Status of
Proposed Settlement Agreements," Blue Cross and Blue Shield of Missouri and
RightCHOICE have filed a request with the BCBSA to transfer its primary license
to New RightCHOICE as part of the transactions contemplated by the Amended and
Restated Settlement Agreement. The BCBSA had conditionally approved the
transfer as proposed under the Amended and Restated Settlement Agreement.
RightCHOICE cannot provide any assurances that the transactions contemplated by
the Amended and Restated Settlement Agreement will be effected. The failure to
consummate the transactions contemplated by the Amended and Restated Settlement
Agreement could have a material adverse effect on RightCHOICE and the market for
its stock.
Other contingencies
In addition to the matters described above, from time to time in the ordinary
course of business, RightCHOICE and certain of its subsidiaries are parties to
various legal proceedings, including the claims of its members arising from
health plan benefit coverage issues for certain services under evolving theories
of liability. The financial and operational impact that such evolving theories
of recovery will have on the managed care industry generally, or RightCHOICE in
particular, is presently unknown.
14. Segment information
RightCHOICE operates in two segments which it defines as underwritten and self-
funded. RightCHOICE's underwritten segment includes a comprehensive array of
products including PPO, POS, HMO, Medicare supplement, managed indemnity and
specialty managed care coverages. RightCHOICE's self-funded segment includes
TPA, ASO for self-insured organizations, network rental services for self-
insured organizations, insurance companies and other organizations, and life
insurance agency services. All of RightCHOICE's revenues, both underwritten
premiums and self-funded fees and other income, are derived from domestic
(United States) sources and no single customer accounts for more than 10% of
total revenues.
Operating income for RightCHOICE'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 RightCHOICE does not produce more
detailed information by segment internally. Intersegment revenues are not
material. Financial information by segment is as follows (in thousands):
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<TABLE>
<CAPTION>
As of and for the year ended Underwritten Self-funded Consolidated
December 31, 1999 ------------ ----------- ------------
<S> <C> <C> <C>
Revenues................................ $732,595 $84,317 $816,912
Operating (loss) income................. (4,394) 24,061 19,667
Depreciation and amortization expense... 11,720 5,495 17,215
Identifiable assets..................... 49,091 29,856 78,947
<CAPTION>
As of and for the year ended Underwritten Self-funded Consolidated
December 31, 1998 ------------ ----------- ------------
<S> <C> <C> <C>
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
<CAPTION>
As of and for the year ended Underwritten Self-funded Consolidated
December 31, 1997 ------------ ----------- ------------
<S> <C> <C> <C>
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
</TABLE>
The following table sets forth revenue (in thousands) by product group for the
years ended December 31, 1999, 1998, and 1997. The ASO/self-funded and other
income category below includes $444, $191 and $48 of other income related to
RightCHOICE's underwritten segment for the years ended December 31, 1999, 1998
and 1997, respectively.
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------
Product Group 1999 1998 1997
- ------------- ---- ---- ----
<S> <C> <C> <C>
PPO:
Alliance PPO................................. $209,487 $191,855 $197,329
AllianceCHOICE POS........................... 167,392 151,034 124,890
HMO (includes other POS)...................... 211,910 206,292 183,485
Medicare supplement........................... 92,314 94,951 97,157
Managed indemnity............................. 3,659 7,627 12,531
Other specialty services...................... 47,389 42,728 38,875
-------- -------- --------
Total premium revenue...................... 732,151 694,487 654,267
ASO/Self-funded and other income.............. 84,761 73,025 65,144
-------- -------- --------
Total revenues............................. $816,912 $767,512 $719,411
======== ======== ========
</TABLE>
15. Transactions with Blue Cross and Blue Shield of Missouri
Pursuant to an administrative services agreement, RightCHOICE 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 Blue Cross and Blue
Shield of Missouri. These expenses are allocated to and paid by Blue Cross and
Blue Shield of Missouri in an amount equal to the direct and indirect costs and
expenses incurred in furnishing these services. In addition, RightCHOICE
provides services to Blue Cross and Blue Shield of Missouri, which include
health plan services, processing claims related to such plans, provider
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contracting, market research and advertising, to be reimbursed on a basis that
approximates cost. BCBSMo provides office space and parking to RightCHOICE
pursuant to lease agreements between the companies. The cost to RightCHOICE
associated with these leases comprises the majority of the expenses detailed
below beside the caption, "Services provided by BCBSMo." Management of
RightCHOICE and of Blue Cross and Blue Shield of Missouri consider the
allocation methodologies and cost approximations utilized to be reasonable and
appropriate.
General and administrative expense excludes net intercompany charges allocated
to Blue Cross and Blue Shield of Missouri by RightCHOICE for the respective
periods, as follows:
Year ended December 31,
----------------------
1999 1998 1997
---- ---- ----
Services provided to BCBSMo.............. $16,798 $15,642 $12,792
Services provided by BCBSMo.............. (5,070) (4,411) (4,436)
------- ------- -------
Net expense allocated to BCBSMo........ $11,728 $11,231 $ 8,356
======= ======= =======
RightCHOICE has intercompany receivables and payables between HALIC and BCBSMo,
which include $9.8 million of receivables and $3.4 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, settled on a quarterly basis. Additional amounts of receivables
and payables relate to RightCHOICE's cash management activity which is typically
settled on a monthly basis.
16. Statutory information
The operations of RightCHOICE'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 and health maintenance organizations; the amount of reserves that must
be maintained; the approval of forms and policies used; the nature of, and
limitation on, an insurance company's or a health maintenance organization's
investments; periodic examination of the operations of insurance companies and
health maintenance organizations; the form and content of annual statements and
other reports required to be filed on the financial condition of insurance
companies and health maintenance organizations; and the establishment of capital
requirements. 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.
RightCHOICE'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, as well as state laws, regulations, and general administrative
rules. Permitted statutory accounting practices encompass all accounting
practices not so prescribed.
In 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles guidance (the Codification),
which will replace the current Accounting Practices and Procedures manual as the
National Association of Insurance Commissioners' primary guidance on statutory
accounting. The National Association of Insurance Commissioners is now
considering
105
<PAGE>
amendments to the Codification guidance that would also be effective upon
implementation. The National Association of Insurance Commissioners 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. Management believes that it is more
likely than not that the Missouri and Illinois legislatures will enact the
Codification. RightCHOICE has not estimated the potential effect of the
Codification guidance if adopted.
17. Quarterly financial information (unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
------------------
1999 31-Mar 30-Jun 30-Sep 31-Dec
- ---- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Total revenues................................ $200,013 $199,211 $204,503 $213,185
Operating expenses............................ 195,411 194,664 199,294 207,876
Operating income.............................. 4,602 4,547 5,209 5,309
Investment income, net........................ 3,475 2,787 3,076 3,513
Other, net.................................... (760) (693) (1,216) (1,456)
Income before taxes........................... 7,317 6,641 7,069 7,366
Provision for income taxes.................... 2,640 2,734 3,064 2,739
Net income.................................... $ 4,677 $ 3,907 $ 4,005 $ 4,627
-------- -------- -------- --------
Basic and diluted earnings per share.......... $0.25 $0.21 $0.21 $0.25
-------- -------- -------- --------
Weighted average shares outstanding........... 18,673 18,673 18,673 18,673
-------- -------- -------- --------
Membership (in thousands)..................... 2,140 2,208 2,235 2,286
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Three months ended
------------------
1998 31-Mar 30-Jun 30-Sep 31-Dec
- ---- ------ ------ ------ ------
<S> <C> <C> <C> <C>
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
-------- -------- -------- --------
</TABLE>
106
<PAGE>
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 ("RightCHOICE") at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of RightCHOICE'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 in the United States, 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
St. Louis, Missouri
February 9, 2000, except for Note 13
for which the date is March 9, 2000
107
<PAGE>
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 107 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 43 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,
present fairly, in all material respects, the information required to be
included.
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 9, 2000, except for Note 13
for which the date is March 9, 2000
108
<PAGE>
Schedule I
(Page 1 of 3)
RIGHTCHOICE MANAGED CARE, INC.
CONDENSED FINANCIAL INFORMATION
Condensed balance sheets of RightCHOICE Managed Care, Inc. (parent company only)
as of December 31, 1999 and 1998, and the condensed statements of income and
cash flows for the years ended December 31, 1999, 1998 and 1997 are as follows
(certain reclassifications have been made to the condensed financial statements
for 1997 and 1998 to conform to the 1999 presentation):
Balance Sheets
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
------
Cash.............................................................. $ 4,877 $ 2,998
Investments available for sale, at market value................... 560 4,703
Investments in affiliates (2)..................................... 198,086 189,515
Property and equipment, net....................................... 3,683 5,941
Receivables from affiliates (1)................................... 147,931 136,042
Income taxes receivable, net...................................... 2,627 7,268
Other assets...................................................... 7,170 7,271
-------- --------
Total assets................................................... $364,934 $353,738
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses............................. $ 25,908 $ 23,707
Payables to affiliates (1)........................................ 117,980 111,431
Obligations for employee benefits................................. 28,396 27,292
Long-term debt, including current portion......................... 34,063 43,063
Obligations under capital leases.................................. 1,044 2,371
-------- --------
Total liabilities.............................................. 207,391 207,864
-------- --------
Shareholders' equity:
Preferred stock, $.01 par, 25,000,000 shares authorized,
no shares issued and outstanding...........................
Common stock:
Class A, $.01 par, 125,000,000 shares authorized,
3,737,500 shares issued, 3,710,653 and 3,710,426
shares outstanding, respectively.......................... 37 37
Class B, convertible, $.01 par, 100,000,000 shares
authorized, 14,962,500 shares issued and outstanding...... 150 150
Additional paid-in capital..................................... 132,634 132,635
Retained earnings.............................................. 29,529 12,313
Treasury stock, 26,847 and 27,074 class A shares,
respectively, at cost......................................... (380) (383)
Accumulated other comprehensive (loss) income.................. (4,427) 1,122
-------- --------
Total shareholders' equity..................................... 157,543 145,874
-------- --------
Total liabilities and shareholders' equity..................... $364,934 $353,738
======== ========
</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, 1999 and 1998, $192,181 and $183,786, respectively, is
eliminated in the Consolidated Financial Statements.
109
<PAGE>
Schedule I
(Page 2 of 3)
RIGHTCHOICE MANAGED CARE INC.
CONDENSED FINANCIAL INFORMATION
Statements of Income
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
--------------- -------------- ----------------
<S> <C> <C> <C>
Revenue
Reimbursement from affiliates (1)............... $107,642 $108,972 $ 116,380
Dividends from affiliates (1)................... 7,300 15,203 13,813
-------- -------- ---------
Total revenue..................................... 114,942 124,175 130,193
Expense
General and administrative...................... 113,762 111,828 118,920
-------- -------- ---------
Operating income.................................. 1,180 12,347 11,273
Investment income and other....................... 2,550 3,895 4,802
Interest expense.................................. (3,713) (4,223) (4,418)
-------- -------- ---------
Income before equity in undistributed income (loss)
of subsidiaries and income tax (benefit) provision 17 12,019 11,657
Equity in undistributed income (loss) of
subsidiaries (1).................................. 14,321 (6,221) (36,477)
-------- -------- ---------
Income (loss) before taxes........................ 14,338 5,798 (24,820)
Income tax (benefit) provision.................... (2,878) 138 (786)
-------- -------- ---------
Net income (loss)................................. $ 17,216 $ 5,660 ($24,034)
======== ======== =========
</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.
110
<PAGE>
Schedule I
(Page 3 of 3)
RIGHTCHOICE MANAGED CARE, INC.
CONDENSED FINANCIAL INFORMATION
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 17,216 $ 5,660 ($24,034)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Equity in undistributed (income) loss
of subsidiaries...................................... (14,321) 6,221 36,477
Depreciation.......................................... 1,851 2,505 4,264
Loss on sale of property and equipment................ 805
Gain on sale of investments........................... (794) (1,671)
Accretion of discounts and
amortization of premiums............................. 1 (19) (170)
(Increase) decrease in:
Receivables from affiliates........................... (11,889) (89,887) (30,444)
Income taxes receivable, net.......................... 4,532 (7,069)
Other assets.......................................... 277 (5,260) (141)
Increase (decrease) in:
Accounts payable and accrued
expenses............................................ 2,316 3,657 (1,755)
Payables to affiliates................................ 6,549 74,343 22,306
Obligations for employee benefits..................... 1,104 2,218 562
Income taxes payable, net............................. (14,425) 991
-------- -------- ---------
Net cash provided by (used in) operating activities...... 8,441 (22,850) 6,385
-------- -------- ---------
Cash flows from investing activities:
Investments purchased................................. (427) (4,845) (14,970)
Investments sold or matured........................... 425 5,661 35,940
Investments purchased, sold or transferred
from/to affiliates, net............................. 4,163 17,773
Decrease (increase) in investment in affiliates....... 3,256 (814)
Property and equipment purchased, sold or
transferred from/to affiliates, net................. (32) (427) 2,995
-------- -------- ---------
Net cash provided by investing activities................ 4,129 21,418 23,151
-------- -------- ---------
Cash flows from financing activities:
Payments of long-term debt............................ (9,000) (3,937) (15,000)
Payments on capital lease obligations................. (1,693) (2,797) (3,509)
Sale (purchase) of class A treasury stock............. 2 16 (78)
-------- -------- ---------
Net cash used in financing activities.................... (10,691) (6,718) (18,587)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents..... 1,879 (8,150) 10,949
Cash and cash equivalents, beginning of year............. 2,998 11,148 199
-------- -------- ---------
Cash and cash equivalents, end of year................... $ 4,877 $ 2,998 $ 11,148
======== ======== =========
Supplemental Schedule of Noncash Investing
And Financing Activities:
Equipment acquired through capital leases................ $ 582 $ 4,001
Disposal of equipment under capital leases............... 216 $ 43
</TABLE>
The condensed financial information should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
111
<PAGE>
Exhibit 2.2
================================================================================
AGREEMENT AND PLAN OF REORGANIZATION
by and among
BLUE CROSS AND BLUE SHIELD OF MISSOURI,
a Missouri nonprofit health services corporation
RIGHTCHOICE MANAGED CARE, INC.,
a Missouri corporation
THE MISSOURI FOUNDATION FOR HEALTH,
a Missouri nonprofit public benefit corporation
and
RIGHTCHOICE MANAGED CARE, INC.,
a Delaware corporation
DATED MARCH 14, 2000
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C> <C>
ARTICLE I TERMS OF REORGANIZATION; CLOSING........................................... 3
Section 1.01. Sequence of Transactions.................................. 3
Section 1.02. Transfer and Assumption Transaction....................... 3
(a) Assumption Reinsurance Agreement.................... 3
(b) Regulatory Approvals................................ 3
(c) Consummation of Transaction......................... 4
(d) Tax Consequences.................................... 4
Section 1.03. Charter Conversion Transaction............................ 4
(a) Filing of Articles of Incorporation; Bylaws......... 4
(b) Effective Time...................................... 4
(c) Issuance of Stock................................... 4
(d) Regulatory Approvals................................ 4
(e) Directors and Officers.............................. 4
(f) Consummation of Transaction......................... 5
(g) Tax Consequences.................................... 5
Section 1.04. Reincorporation Merger Transaction........................ 5
(a) Structure of Merger................................. 5
(b) Effective Time...................................... 5
(c) Conversion of Shares................................ 5
(d) Effects of Merger................................... 5
(e) Regulatory Approvals................................ 6
(f) Certificate of Incorporation and Bylaws............. 6
(g) Directors and Officers.............................. 6
(h) Consummation of Transaction......................... 6
(i) Tax Consequences.................................... 6
(j) Dissenters' Rights.................................. 6
Section 1.05. RIT/New RIT Merger Transaction............................ 6
(a) Structure of Merger................................. 6
(b) Effective Time...................................... 7
(c) Conversion of Shares................................ 7
(d) Treasury Shares..................................... 7
(e) Dissenters' Rights.................................. 7
(f) Effects of Merger................................... 7
(g) Regulatory Approvals................................ 8
(h) Certificate of Incorporation and Bylaws............. 8
(i) New RIT Directors and Officers...................... 8
(j) Exchange of Certificates............................ 8
(1) Exchange Agent................................ 8
(2) Exchange Procedure for Public Shareholders.... 8
(3) Exchange Procedure for Foundation............. 9
(4) Distributions With Respect to Unexchanged
Shares........................................ 9
(5) Transfers of Ownership........................ 9
(6) No Liability.................................. 9
(7) Lost, Stolen or Destroyed Certificates........ 9
(k) Stock Transfer Books................................10
(l) Tax Consequences....................................10
(m) Consummation of Transaction.........................10
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 1.06. Stock Options............................................10
Section 1.07. Closing; Closing Date....................................11
ARTICLE II REPRESENTATIONS AND WARRANTIES...........................................11
Section 2.01. Disclosure Schedule; Standard............................11
(a) Disclosure Schedule................................11
(b) Standard...........................................11
Section 2.02. Representations and Warranties of RIT....................12
(a) Corporate Existence and Power......................12
(b) Authorization; No Defaults.........................12
(c) Capitalization.....................................12
(d) Financial Information..............................13
(e) Reports............................................13
(f) Absence of Changes.................................13
(g) Undisclosed Liabilities............................14
Section 2.03. Representations and Warranties of BCBSMo.................14
(a) Authorization; No Defaults.........................14
(b) Capitalization.....................................14
(c) Financial Information..............................14
(d) Reports............................................15
(e) Absence of Changes.................................15
(f) Undisclosed Liabilities............................15
Section 2.04. Representations and Warranties of New RIT................15
(a) Corporate Existence and Power......................15
(b) Authorization; No Defaults.........................15
(c) Capitalization.....................................16
Section 2.05. Representations and Warranties of the Foundation.........16
(a) Corporate Existence and Power......................16
(b) Authorization; No Defaults.........................16
ARTICLE III COVENANTS................................................................17
Section 3.01. Pre-Closing Covenants of RIT.............................17
(a) Submission to Shareholders.........................17
(b) Consummation of Reorganization.....................17
(c) Consents and Approvals.............................17
Section 3.02. Pre-Closing Covenants of BCBSMo..........................17
(a) Agreement to Vote in Favor.........................17
(b) Consummation of Reorganization.....................17
(c) Consents and Approvals.............................18
Section 3.03. Pre-Closing Covenants of New RIT.........................18
(a) Other Actions......................................18
(b) Consummation of Reorganization.....................18
(c) Plans of Merger....................................18
Section 3.04. Pre-Closing Covenants of Foundation......................18
(a) No Sale or Transfer................................18
(b) Agreements to Vote in Favor........................18
(1) Reincorporation Merger Transaction...........18
(2) RIT/New RIT Merger Transaction...............19
(c) Consummation of Reorganization.....................19
(d) Tax Opinion........................................19
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 3.05. Proxy Statement/Prospectus; Registration Statement.......19
Section 3.06. Public Announcements.....................................19
Section 3.07. Registration Rights Agreement............................19
Section 3.08. Indemnification Agreement................................20
Section 3.09. Voting Trust and Divestiture Agreement...................20
Section 3.10. Public Offering..........................................20
Section 3.11. Indemnification and Insurance............................20
Section 3.12. Accountants' Letters.....................................20
Section 3.13. Foundation Governance....................................21
Section 3.14. Due Diligence............................................21
Section 3.15. Payment to Foundation....................................21
ARTICLE IV CONDITIONS PRECEDENT TO REORGANIZATION...................................21
Section 4.01. Conditions to Reorganization.............................21
(a) Injunction........................................21
(b) Regulatory and Shareholder Approval...............21
(c) Effective Registration Statement..................21
(d) Tax Determination.................................22
(e) NYSE Listing......................................22
(f) Resolution of Sarkis Litigation...................22
Section 4.02. Conditions to Obligations of BCBSMo......................22
(a) Representations and Warranties....................22
(b) Compliance with Agreements........................22
(c) Delivery of Documents.............................22
(d) Other Consents....................................22
(e) Comfort Letter....................................22
(f) Favorable Ruling..................................23
(g) Tax Opinions......................................23
(h) BCBSMo Board Legal Opinion........................23
(i) Resolution of Pending Litigation..................24
(j) Legal Opinions....................................24
(k) Confirmation From Attorney General and DOI........24
Section 4.03. Conditions to Obligations of RIT.........................24
(a) Representations and Warranties....................24
(b) Compliance with Agreements........................24
(c) Delivery of Documents.............................25
(d) Other Consents....................................25
(e) Comfort Letter....................................25
(f) Favorable Ruling..................................25
(g) Tax Opinions......................................25
(h) Association Approval..............................25
(i) Opinion of Financial Advisor to RIT...............26
(j) Confirmation From Attorney General and DOI........26
(k) Bank Approval.....................................26
(l) Legal Opinions....................................26
Section 4.04. Conditions to Obligations of New RIT.....................26
(a) Representations and Warranties....................26
(b) Compliance with Agreements........................26
(c) Delivery of Documents.............................26
(d) Comfort Letter....................................27
(e) Legal Opinions....................................27
Section 4.05. Conditions to Obligations of Foundation..................27
(a) Representations and Warranties....................27
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
(b) Compliance with Agreements.........................27
(c) Delivery of Documents..............................27
(d) Other Consents.....................................27
(e) Comfort Letter.....................................27
(f) Favorable Ruling...................................27
(g) Tax Opinions.......................................28
(h) Legal Opinions.....................................28
ARTICLE V TERMINATION..............................................................28
ARTICLE VI GENERAL PROVISIONS.......................................................29
Section 6.01. Fees and Expenses........................................29
Section 6.02. Nonsurvival of Representations, Warranties and
Agreements...............................................29
Section 6.03. Notices..................................................29
Section 6.04. Amendment................................................30
Section 6.05. Waiver...................................................30
Section 6.06. Entire Agreement.........................................30
Section 6.07. Parties in Interest......................................30
Section 6.08. Governing Law............................................30
Section 6.09. Counterparts.............................................30
Section 6.10. Recitals.................................................30
Section 6.11. Fair Construction........................................30
Section 6.12. Headings and Captions....................................30
Section 6.13. Assignment...............................................31
</TABLE>
iv
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit Description
- ------- -----------
A.....................................Amended and Restated Settlement
Agreement (without Exhibits thereto).
B.....................................Form of Assumption Reinsurance
Agreement.
C.....................................Form of Articles of Incorporation of
New BCBSMo.
D.....................................Form of Bylaws of New BCBSMo.
E.....................................Intercompany Liabilities.
F.....................................Certificate of Incorporation of New
RIT.
G.....................................Bylaws of New RIT.
H.....................................Form of Foundation Reincorporation
Merger Resolution.
I.....................................Form of Foundation RIT/New RIT Merger
Resolution.
J.....................................Form of Registration Rights Agreement.
K.....................................Form of Indemnification Agreement.
L.....................................Form of Voting Trust and Divestiture
Agreement.
v
<PAGE>
INDEX OF DEFINED TERMS
----------------------
DEFINED TERM LOCATION
- ------------ --------
Agreement.................................................Preamble
Ancillary Agreements......................................Section 2.02(b)
Association...............................................Recital A
Assumption Reinsurance Agreement..........................Section 1.02(a)
Attorney General..........................................Recital D
Bank Approvals............................................Section 4.03(k)
BCBSMo....................................................Preamble
BCBSMo Board..............................................Recital J
BCBSMo Disclosure Schedule................................Section 2.01(a)
BCBSMo Financial Statements...............................Section 2.03(c)
BCBSMo Independent Committee..............................Recital J
BCBSMo Legal Opinion......................................Section 4.03(l)
BCBSMo/RIT Stock Option...................................Section 1.06(a)
BCBSMo/RIT Stock Option Plans.............................Section 1.06(a)
Charter Conversion Effective Time.........................Section 1.03(b)
Charter Conversion Transaction............................Recital H(2)
Closing...................................................Section 1.07
Closing Date..............................................Section 1.07
Code......................................................Recital F
Delaware Corporate Law....................................Section 1.04(a)
DOI.......................................................Recital D
Exchange Act..............................................Section 2.02(f)
Exchange Agent............................................Section 1.05(j)(1)
Existing Licenses.........................................Section 4.03(h)
Favorable Ruling..........................................Section 4.02(f)
Favorable Ruling Matter...................................Section 4.02(f)
Foundation................................................Preamble
Foundation Legal Opinion..................................Section 4.02(j)
Foundation Litigation Legal Opinion.......................Section 4.02(j)
Foundation Reincorporation Merger Resolution..............Section 3.04(b)(1)
Foundation RIT/New RIT Merger Resolution..................Section 3.04(b)(2)
vi
<PAGE>
DEFINED TERM LOCATION
- ------------ --------
HALIC.....................................................Recital H(1)
Health Benefit Products...................................Section 3.13
Indemnification Agreement.................................Section 3.08
Indemnified Party.........................................Section 3.11(a)
Litigation................................................Recital D
Marks.....................................................Recital A
Material Adverse Effect...................................Section 2.01(b)
Missouri Corporate Law....................................Section 1.03(a)
New BCBSMo................................................Recital H(2)
New BCBSMo Articles.......................................Section 1.03(a)
New BCBSMo Board..........................................Section 1.03(a)
New BCBSMo Bylaws.........................................Section 1.03(a)
New BCBSMo Stock..........................................Recital H(2)
New RIT...................................................Preamble
New RIT Board.............................................Section 1.04(g)
New RIT Bylaws............................................Section 1.04(f)
New RIT Certificate of Incorporation......................Section 1.04(f)
New RIT Certificates......................................Section 1.05(j)(1)
New RIT Legal Opinion.....................................Section 4.02(j)
New RIT Stock.............................................Recital G
NYSE......................................................Recital C
Proxy Statement/Prospectus................................Section 3.05
Public Exchange Ratio.....................................Section 1.05(c)
Registration Rights Agreement.............................Section 3.07
Registration Statement....................................Section 3.05
Regulatory Authority......................................Section 2.02(e)
Reincorporation Merger Effective Time.....................Section 1.04(b)
Reincorporation Merger Transaction........................Recital H(3)
Reorganization............................................Recital I
RIT.......................................................Preamble
RIT Board.................................................Recital J
RIT Certificates..........................................Section 1.05(j)(2)
RIT Class A Stock.........................................Recital C
RIT Class B Stock.........................................Recital C
vii
<PAGE>
DEFINED TERM LOCATION
- ------------ --------
RIT Disclosure Schedule...................................Section 2.01(a)
RIT Financial Statements..................................Section 2.02(d)
RIT Independent Committee.................................Recital J
RIT Legal Opinion.........................................Section 4.02(j)
RIT Preferred Stock.......................................Section 2.02(c)
RIT Shareholders' Meeting.................................Section 3.01(a)
RIT Stock.................................................Recital C
RIT/New RIT Merger Effective Time.........................Section 1.05(b)
RIT/New RIT Merger Transaction............................Recital H(4)
SEC.......................................................Section 1.06(c)
Securities Act............................................Section 1.06(c)
Settlement Agreement......................................Recital E
Transfer and Assumption Transaction.......................Recital H(1)
Voting Trust and Divestiture Agreement....................Section 3.09
viii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
------------------------------------
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement"), dated as of
March 14, 2000, is made and entered into by and among BLUE CROSS AND BLUE SHIELD
OF MISSOURI, a Missouri non-profit health services corporation ("BCBSMo"),
RIGHTCHOICE MANAGED CARE, INC., a Missouri corporation ("RIT"), THE MISSOURI
FOUNDATION FOR HEALTH, a Missouri non-profit public benefit corporation (the
"Foundation"), and RIGHTCHOICE MANAGED CARE, INC., a Delaware corporation and
wholly-owned subsidiary of the Foundation ("New RIT").
RECITALS
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A. BCBSMo is a Missouri non-profit non-stock health services corporation
that offers health benefits and related products and services. BCBSMo holds a
license from the Blue Cross and Blue Shield Association (the "Association") to
use the Blue Cross and Blue Shield names and service marks (the "Marks").
B. RIT is a Missouri general business corporation, doing business under
the name "Alliance Blue Cross Blue Shield," that provides health care products
and services. RIT also holds a license from the Association to use the Marks.
C. RIT has outstanding 3,710,653 shares of Class A Common Stock (the "RIT
Class A Stock") and 14,962,500 shares of Class B Common Stock (the "RIT Class B
Stock;" together with the RIT Class A Stock, the "RIT Stock"). Each share of RIT
Class A Stock has one vote per share, and each share of RIT Class B Stock has
ten votes per share. The issued and outstanding shares of RIT Class B Stock,
representing approximately 80.1% of the issued and outstanding shares of RIT
Stock and approximately 97.6% of the voting power of the issued and outstanding
shares of RIT Stock, are owned by BCBSMo. The issued and outstanding shares of
RIT Class A Stock, representing approximately 19.9% of the issued and
outstanding shares of RIT Stock and approximately 2.4% of the voting power of
the issued and outstanding shares of RIT Stock, are listed for trading on the
New York Stock Exchange, Inc. (the "NYSE").
D. RIT and BCBSMo were involved in the following litigation with the
Missouri Attorney General, Jeremiah W. "Jay" Nixon (the "Attorney General"), the
Director of the Missouri Department of Insurance, Jay B. Angoff, and the
Missouri Department of Insurance (together, the "DOI"): Blue Cross Blue Shield
of Missouri, Plaintiff v. Jay Angoff, Director of the Missouri Department of
Insurance, the Missouri Department of Insurance and Jeremiah W. "Jay" Nixon, No.
CV196-619CC, in the Circuit Court of Cole County, Missouri; and Blue Cross Blue
Shield of Missouri v. Jay Angoff, Director of the Missouri Department of
Insurance and Jeremiah W. "Jay" Nixon, No. 81172, in the Supreme Court of
Missouri (on transfer from Appeal WD 53798, in the Missouri Court of Appeals,
Western District (collectively, the "Litigation").
E. BCBSMo, RIT, the Attorney General and the DOI have entered into an
Amended and Restated Settlement Agreement, dated January 6, 2000 (the
"Settlement Agreement"), to resolve the Litigation. The Settlement Agreement is
specifically contingent upon the consummation of the transactions set forth in
this Agreement. The Settlement Agreement is attached hereto as Exhibit A.
F. The Foundation was recently organized pursuant to the Settlement
Agreement as a Missouri non-profit public benefit corporation that will apply
for an exemption from federal income tax under Section 501(c)(4) of the Internal
Revenue Code of 1986, as amended (the "Code"). The Foundation was established to
serve the purposes set forth in its Articles of Incorporation and to, among
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other things, receive and hold for those purposes the New RIT Stock (as defined
in Recital G hereof) that it will receive upon consummation of the
Reorganization (as defined in Recital I hereof).
G. New RIT was recently organized pursuant to the Settlement Agreement as
a Delaware corporation solely to facilitate the Reorganization. The one (1)
share of common stock of New RIT, par value $.01 per share (the "New RIT
Stock"), issued and outstanding as of the date hereof is owned by the
Foundation.
H. The Reorganization shall be comprised of the following transactions,
which shall be consummated in the following order, and which shall be
conditioned upon the satisfaction (or, where permissible, waiver) of each of the
conditions set forth in Article IV of this Agreement:
(1) BCBSMo shall transfer certain assets, contracts and agreements,
including its existing contracts of insurance and certain other
assets required to satisfy policy liabilities and applicable
statutory reserve and Association capital requirements, to
Healthy Alliance Life Insurance Company ("HALIC"), a wholly-owned
subsidiary of RIT, and HALIC shall assume all liabilities related
thereto (such transaction is referred to herein as the "Transfer
and Assumption Transaction" and is described in Section 1.02
hereof);
(2) BCBSMo shall change from a Missouri non-profit non-stock
corporation to a Missouri for-profit stock corporation by, among
other things, amending and restating its Amended and Restated
Articles of Incorporation in accordance with applicable law (such
transaction is referred to herein as the "Charter Conversion
Transaction" and is described in Section 1.03 hereof). BCBSMo,
upon its conversion to a stock form corporation pursuant to the
Charter Conversion Transaction, is referred to herein as "New
BCBSMo." As part of the Charter Conversion Transaction, New
BCBSMo shall issue one (1) share of its common stock, par value
$.01 per share (the "New BCBSMo Stock"), to the Foundation (which
shall then be the sole shareholder of New BCBSMo);
(3) New BCBSMo shall be reincorporated under the corporate laws of
the State of Delaware by means of the merger of New BCBSMo (which
shall be wholly-owned by the Foundation), with and into New RIT
(which also shall be wholly-owned by the Foundation), and New RIT
shall be the surviving corporation (such transaction is referred
to herein as the "Reincorporation Merger Transaction" and is
described in Section 1.04 hereof). In the Reincorporation Merger
Transaction, (a) the one (1) issued and outstanding share of New
RIT Stock owned by the Foundation shall remain issued,
outstanding and unaffected, and (b) the one (1) issued and
outstanding share of New BCBSMo Stock owned by the Foundation
shall be cancelled; and
(4) RIT shall merge with and into New RIT (which immediately prior to
such merger shall be wholly-owned by the Foundation), and New RIT
shall be the surviving corporation (such transaction is referred
to herein as the "RIT/New RIT Merger Transaction" and is
described in Section 1.05 hereof). In the RIT/New RIT Merger
Transaction, (a) each issued and outstanding share of RIT Class A
Stock shall be converted into one (1) share of New RIT Stock, (b)
each issued and outstanding share of RIT Class B Stock (which
immediately prior to the RIT/New RIT Merger Transaction shall be
owned by New RIT) shall be cancelled, and (c) the one (1) issued
and outstanding share of New RIT Stock (which immediately prior
to the RIT/New RIT Merger Transaction shall be
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owned by the Foundation) shall be converted into a number of
shares of New RIT Stock equal to the number of shares of RIT
Class B Stock issued and outstanding immediately prior to the
consummation of the RIT/New RIT Merger Transaction.
I. The Transfer and Assumption Transaction, the Charter Conversion
Transaction, the Reincorporation Merger Transaction and the RIT/New RIT Merger
Transaction are referred to herein collectively as the "Reorganization." Upon
consummation of the Reorganization, (i) BCBSMo and RIT shall cease to exist as
separate entities, and (ii) the issued and outstanding shares of New RIT Stock
shall be owned (a) by the public in the same aggregate amount that the RIT Class
A Stock was owned by the public immediately prior to the Reorganization, and (b)
by the Foundation in the same aggregate amount that the RIT Class B Stock was
owned by BCBSMo immediately prior to the Reorganization.
J. The Board of Directors of BCBSMo (the "BCBSMo Board") and the
committee comprised of the five members of the BCBSMo Board who are not
employees or officers of BCBSMo or RIT or directors of RIT (the "BCBSMo
Independent Committee"), on the one hand, and the Board of Directors of RIT (the
"RIT Board") and the committee comprised of four members of the RIT Board who
are not employees or officers of RIT or BCBSMo or directors of BCBSMo (the "RIT
Independent Committee"), on the other hand, have each determined that it is
advisable and in the best interests of BCBSMo and RIT, respectively, to enter
into this Agreement and to consummate the Reorganization and the other
transactions contemplated by this Agreement.
AGREEMENT
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In consideration of the foregoing and the mutual covenants and agreements
contained in this Agreement, BCBSMo, RIT, the Foundation and New RIT agree as
follows:
ARTICLE I
TERMS OF REORGANIZATION; CLOSING
Section 1.01. Sequence of Transactions. The Reorganization shall be
accomplished by means of the Transfer and Assumption Transaction, the Charter
Conversion Transaction, the Reincorporation Merger Transaction and the RIT/New
RIT Merger Transaction, each of which shall be consummated in sequential order
on the Closing Date (as defined in Section 1.07 hereof).
Section 1.02. Transfer and Assumption Transaction. On the Closing Date,
BCBSMo shall consummate the Transfer and Assumption Transaction as provided
below in this Section 1.02.
(a) Assumption Reinsurance Agreement. BCBSMo shall, and RIT shall
cause HALIC to, sign on the date hereof the Assumption Reinsurance Agreement
(the "Assumption Reinsurance Agreement") in the form attached hereto as Exhibit
B and shall consummate the Transfer and Assumption Transaction in accordance
with the terms of the Assumption Reinsurance Agreement.
(b) Regulatory Approvals. BCBSMo and RIT shall file, or shall cause
to be filed, all necessary applications, notices, agreements and other documents
reasonably required to obtain the approval of the Association and all Regulatory
Authorities (as defined in Section 2.02(e) hereof) having jurisdiction with
respect to the Transfer and Assumption Transaction.
(c) Consummation of Transaction. BCBSMo and RIT shall take all
reasonable and lawful action and shall execute all documents, certificates and
other papers as may be necessary or
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appropriate in order to consummate the Transfer and Assumption Transaction in
accordance with this Agreement and the Assumption Reinsurance Agreement.
(d) Tax Consequences. It is intended by the parties hereto that the
Transfer and Assumption Transaction shall constitute a tax-free transfer to a
controlled corporation.
Section 1.03. Charter Conversion Transaction. On the Closing Date,
immediately upon consummation of the Transfer and Assumption Transaction, BCBSMo
and the Foundation shall consummate the Charter Conversion Transaction as
provided below in this Section 1.03.
(a) Filing of Articles of Incorporation; Bylaws. BCBSMo shall, in
accordance with Section 351.025.2 of The General and Business Corporation Law of
Missouri (the "Missouri Corporate Law") and Section 354.065 of the Missouri
Health Services Corporations law, take all action reasonably necessary to
convert to a for-profit corporation governed by the Missouri Corporate Law
including, without limitation, filing amended and restated Articles of
Incorporation with the Missouri Secretary of State in substantially the form of
that attached hereto as Exhibit C (the "New BCBSMo Articles"). The New BCBSMo
Articles shall be the Articles of Incorporation of New BCBSMo until thereafter
amended in accordance with applicable law. At the Charter Conversion Effective
Time (as defined in Section 1.03(b) hereof), the Board of Directors of New
BCBSMo, as designated in the New BCBSMo Articles (the "New BCBSMo Board"), shall
adopt the Bylaws in substantially the form of that attached hereto as Exhibit D
(the "New BCBSMo Bylaws"). The New BCBSMo Bylaws shall be the Bylaws of New
BCBSMo until thereafter amended in accordance with applicable law.
(b) Effective Time. The Charter Conversion Transaction shall become
effective (the "Charter Conversion Effective Time") upon approval of all
Regulatory Authorities having jurisdiction with respect to the Charter
Conversion Transaction and on the date and at the time that BCBSMo files a
certificate of acceptance of the Missouri Corporate Law with the Missouri
Secretary of State and the Missouri Secretary of State accepts the New BCBSMo
Articles for filing. BCBSMo shall use its best efforts to cause the Charter
Conversion Effective Time to occur immediately after consummation of the
Transfer and Assumption Transaction on the Closing Date.
(c) Issuance of Stock. At the Charter Conversion Effective Time, New
BCBSMo shall issue one (1) share of New BCBSMo Stock to the Foundation. The
Foundation shall be the sole shareholder of New BCBSMo immediately after and
following the Charter Conversion Effective Time.
(d) Regulatory Approvals. BCBSMo shall file, or shall cause to be
filed, all necessary applications, notices, agreements and other documents
reasonably required to obtain the approval of the Association and all Regulatory
Authorities having jurisdiction with respect to the Charter Conversion
Transaction.
(e) Directors and Officers. The persons who were serving as directors
and officers of BCBSMo immediately prior to the Charter Conversion Effective
Time shall resign as directors and officers of BCBSMo effective as of the
Charter Conversion Effective Time. The New BCBSMo Board shall appoint the
officers of New BCBSMo at the Charter Conversion Effective Time.
(f) Consummation of Transaction. BCBSMo and the Foundation shall take
all reasonable and lawful action and shall execute all documents, certificates
and other papers as may be necessary or appropriate in order to effectuate the
Charter Conversion Transaction in accordance with this Agreement and applicable
law.
(g) Tax Consequences. It is intended by the parties hereto that the
Charter Conversion Transaction shall constitute a tax-free reorganization within
the meaning of
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Section 368(a)(1)(E) of the Code. The parties hereto hereby adopt this Agreement
as a "plan of reorganization" within the meaning of Sections 1.368-2(g) and
1.368-3(a) of the United States Treasury Regulations.
Section 1.04. Reincorporation Merger Transaction. On the Closing Date,
immediately upon consummation of the Charter Conversion Transaction, New BCBSMo,
New RIT and the Foundation shall consummate the Reincorporation Merger
Transaction as provided below in this Section 1.04.
(a) Structure of Merger. Subject to the terms and conditions of this
Agreement, the Delaware General Corporation Law (the "Delaware Corporate Law")
and the Missouri Corporate Law, New BCBSMo shall merge with and into New RIT.
New BCBSMo shall be the merging corporation in the Reincorporation Merger
Transaction and its corporate identity and existence, separate and apart from
New RIT, shall cease to exist upon consummation of the Reincorporation Merger
Transaction. New RIT shall be the surviving corporation resulting from the
Reincorporation Merger Transaction and shall continue to be governed by the
Delaware Corporate Law.
(b) Effective Time. The Reincorporation Merger Transaction shall
become effective (the "Reincorporation Merger Effective Time") on the date and
time when the Certificate of Merger reflecting the Reincorporation Merger
Transaction becomes effective with the Delaware Secretary of State. New BCBSMo
and New RIT shall use their best efforts to cause the Reincorporation Merger
Effective Time to occur immediately after the Charter Conversion Effective Time
on the Closing Date.
(c) Conversion of Shares. At the Reincorporation Merger Effective
Time, by virtue of the Reincorporation Merger Transaction and without any action
on the part of New BCBSMo, New RIT or the shareholder of either New RIT and New
BCBSMo, (i) the one (1) share of New RIT Stock issued and outstanding
immediately prior to the Reincorporation Merger Effective Time shall remain
issued and outstanding and unaffected by the Reincorporation Merger Transaction;
and (ii) the one (1) share of New BCBSMo Stock issued and outstanding
immediately prior to the Reincorporation Merger Effective Time shall be
cancelled and retired and all rights with respect thereto shall cease to exist
without any conversion thereof.
(d) Effects of Merger. The Reincorporation Merger Transaction shall
have all of the effects provided for in this Agreement and under the Delaware
Corporate Law and the Missouri Corporate Law. Without limiting the generality of
the foregoing, and subject thereto, at the Reincorporation Merger Effective
Time, all property, rights and powers and franchises of New BCBSMo and New RIT
shall vest in New RIT, and all debts, liabilities and duties of New BCBSMo and
New RIT shall become the debts, liabilities and duties of New RIT.
(e) Regulatory Approvals. BCBSMo and New RIT shall file, or shall
cause to be filed, all necessary applications, notices, agreements and other
documents reasonably required to obtain the approval of the Association and all
Regulatory Authorities having jurisdiction with respect to the Reincorporation
Merger Transaction.
(f) Certificate of Incorporation and Bylaws. No changes in the
Certificate of Incorporation of New RIT, attached hereto as Exhibit F (the "New
RIT Certificate of Incorporation"), or Bylaws of New RIT, attached hereto as
Exhibit G (the "New RIT Bylaws"), shall be effected by the Reincorporation
Merger Transaction.
(g) Directors and Officers. At the Reincorporation Merger Effective
Time, the of Directors of New RIT (the "New RIT Board") and the officers of New
RIT shall be identical to the Board of Directors and officers of New RIT
immediately prior to the Reincorporation Merger Effective Time, and each such
director and officer shall hold his or her position until his or her
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resignation or removal or the election or appointment of his or her successor in
the manner provided by the New RIT Certificate of Incorporation and the New RIT
Bylaws and applicable law. The persons who were serving as directors and
officers of New BCBSMo immediately prior to the Reincorporation Merger Effective
Time shall resign as directors and officers of the New BCBSMo effective as of
the Reincorporation Merger Effective Time.
(h) Consummation of Transaction. Each of New BCBSMo, New RIT and the
Foundation shall take all reasonable and lawful action and shall execute all
documents, certificates and other papers as may be necessary or appropriate in
order to effectuate the Reincorporation Merger Transaction in accordance with
this Agreement. If, at any time after the Reincorporation Merger Transaction,
any such further action is necessary or desirable to carry out the purposes of
this Agreement and to vest New RIT with full right and title to and possession
of all assets, property, rights, privileges, powers, liabilities, obligations
and franchises of New BCBSMo, the responsible officers and directors of New RIT
and New BCBSMo are fully authorized to take, and shall take, all such lawful and
necessary action.
(i) Tax Consequences. It is intended by the parties hereto that the
Reincorporation Merger Transaction shall constitute a tax-free reorganization
within the meaning of Section 368(a)(1)(F) of the Code. The parties hereto
hereby adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.
(j) Dissenters' Rights'. The Foundation, as the sole holder of New
BCBSMo Stock and New RIT Stock immediately prior to the Reincorporation Merger
Effective Time, shall not be entitled to dissent, and hereby waives any right it
may have to dissent, from the Reincorporation Merger Transaction.
Section 1.05. RIT/New RIT Merger Transaction. On the Closing Date,
immediately upon consummation of the Reincorporation Merger Transaction, RIT,
New RIT and the Foundation shall consummate the RIT/New RIT Merger Transaction
as provided below in this Section 1.05.
(a) Structure of Merger. Subject to the terms and conditions of this
Agreement, the Delaware Corporate Law and the Missouri Corporate Law, RIT shall
merge with and into New RIT. RIT shall be the merging corporation in the RIT/New
RIT Merger Transaction and its corporate identity and existence, separate and
apart from New RIT, shall cease to exist upon consummation of the RIT/New RIT
Merger Transaction. New RIT shall be the surviving corporation resulting from
the RIT/New RIT Merger Transaction and shall continue to be governed by the
Delaware Corporate Law.
(b) Effective Time. The RIT/New RIT Merger Transaction shall become
effective (the "RIT/New RIT Merger Effective Time") on the date and time when
the Certificate of Merger reflecting the RIT/New RIT Merger Transaction becomes
effective with the Delaware Secretary of State. RIT and New RIT shall use their
best efforts to cause the RIT/New RIT Merger Effective Time to occur immediately
after the Reincorporation Merger Effective Time on the Closing Date.
(c) Conversion of Shares. At the RIT/New RIT Merger Effective Time,
by virtue of the RIT/New RIT Merger Transaction and without any action on the
part of RIT, New RIT or the shareholders of either of RIT or New RIT, (i) each
share of RIT Class A Stock issued and outstanding immediately prior to the
RIT/New RIT Merger Effective Time (other than shares of RIT Class A Stock held
in the treasury of RIT or by any direct or indirect subsidiary of RIT (as
provided in Section 1.05(d) hereof) or shares the holders of which have duly
exercised and perfected their dissenters' rights under the Missouri Corporate
Law (as provided in Section 1.05(e) hereof) shall cease to be outstanding and
shall be converted into the right to receive one (1) share of New RIT Stock (the
"Public Exchange Ratio"); (ii) each share of RIT Class B Stock issued and
outstanding immediately prior to the RIT/New RIT Merger
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Effective Time shall cease to be outstanding and shall be cancelled and retired
and all rights with respect thereto shall cease to exist without any conversion
thereof; and (iii) the one (1) share of New RIT Stock issued and outstanding
immediately prior to the RIT/New RIT Merger Effective Time shall cease to be
outstanding and shall be converted into the right to receive a number of shares
of New RIT Stock equal to the number of shares of RIT Class B Stock issued and
outstanding immediately prior to the RIT/New RIT Merger Effective Time.
(d) Treasury Shares. Each share, if any, of RIT Stock that is held as
treasury stock of RIT or held by any direct or indirect subsidiary of RIT
immediately prior to the RIT/New RIT Merger Effective Time shall, by virtue of
the RIT/New RIT Merger and without any action on the part of the holder thereof,
cease to be outstanding and shall be cancelled and retired without payment of
any consideration therefor and shall cease to exist.
(e) Dissenters' Rights'. Holders of RIT Class A Stock shall be
entitled to dissent from the RIT/New RIT Merger Transaction pursuant to the
procedures set forth in the Missouri Corporate Law. Any shares of RIT Class A
Stock held by a dissenting holder shall not be converted as described in Section
1.05(c) hereof but, from and after the RIT/New RIT Merger Effective Time, shall
represent only the right to receive such consideration as may be determined to
be due such dissenting holder pursuant to the Missouri Corporate Law. New RIT,
as the holder of the RIT Class B Stock immediately prior to the RIT/New RIT
Merger Effective Time, shall not be entitled to dissent, and hereby waives any
rights it may have to dissent, from the RIT/New RIT Merger Agreement.
(f) Effects of Merger. The RIT/New RIT Merger Transaction shall have
all of the effects provided for in this Agreement and under the Delaware
Corporate Law and the Missouri Corporate Law. Without limiting the generality of
the foregoing, and subject thereto, at the RIT/New RIT Merger Effective Time,
all of the property, rights, privileges, powers and franchises of RIT and New
RIT shall vest in New RIT, and all debts, liabilities and duties of RIT and New
RIT shall become the debts, liabilities and duties of New RIT and all debts,
liabilities and duties owed by New RIT to RIT and by RIT to New RIT (including,
without limitation, certain agreements listed in Exhibit E attached hereto,
which shall be updated by RIT as of the Closing Date) shall terminate and be of
no effect.
(g) Regulatory Approvals. RIT and New RIT shall file, or shall cause
to be filed, all necessary applications, notices, agreements and other documents
reasonably required to obtain the approval of the Association and all Regulatory
Authorities having jurisdiction with respect to the RIT/New RIT Merger
Transaction.
(h) Certificate of Incorporation and Bylaws. No changes in the New
RIT Certificate of Incorporation or the New RIT Bylaws shall be affected by the
RIT/New RIT Merger Transaction.
(i) New RIT Directors and Officers. The directors of New RIT
immediately upon consummation of the RIT/New RIT Merger Transaction shall be
those persons designated by RIT and included on a list to be delivered by RIT to
New RIT and the Foundation on or before the date that the Proxy
Statement/Prospectus (as defined in Section 3.05 hereof) shall be mailed to the
shareholders of RIT in connection with the RIT Shareholders' Meeting (as defined
in Section 3.01(a) hereof), and such persons shall serve in such capacities for
New RIT after the RIT/New RIT Merger Effective Time and until their resignation
or removal or the election or appointment of their successors in the manner
provided in the New RIT Certificate of Incorporation, the New RIT Bylaws and
applicable law. The persons who were serving as officers of RIT immediately
prior to the Reincorporation Merger Transaction shall serve in such capacities
(retaining their respective positions and terms of office) for New RIT after the
RIT/New RIT Effective Time and until their resignation or removal or the
election or appointment of their successors in the manner provided in the New
RIT Bylaws and applicable law. New
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RIT shall have such additional officers as may be determined by the Board of
Directors of New RIT after the RIT/New RIT Merger Effective Time. The persons
who were serving as directors and officers of RIT and New RIT, respectively,
immediately prior to the RIT/New RIT Merger Effective Time shall resign as
directors and officers of RIT and New RIT, respectively, effective as of the
RIT/New RIT Merger Effective Time.
(j) Exchange of Certificates.
(1) Exchange Agent. As of the RIT/New RIT Merger Effective Time,
New RIT shall supply, or shall cause to be supplied, to or for the account of a
bank or trust company designated by RIT (the "Exchange Agent"), in trust for the
benefit of the holders of shares of RIT Class A Stock to be exchanged through
the Exchange Agent in accordance with this Section 1.05, certificates (the "New
RIT Certificates") evidencing the shares of New RIT Stock issuable in exchange
for outstanding shares of RIT Class A Stock pursuant to Section 1.05(c) hereof.
(2) Exchange Procedure for Public Shareholders. As soon as
reasonably practicable after the RIT/New RIT Merger Effective Time, New RIT
shall instruct the Exchange Agent to mail to each holder of record of a
certificate or certificates which immediately prior to the RIT/New RIT Merger
Effective Time evidenced outstanding shares of RIT Class A Stock (the "RIT
Certificates") (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the RIT Certificates shall
pass, only upon proper delivery of the RIT Certificates to the Exchange Agent
and shall be in such form and have such other provisions as RIT may reasonably
specify), and (ii) instructions to effect the surrender of the RIT Certificates
in exchange for New RIT Certificates. Upon surrender of a RIT Certificate for
cancellation to the Exchange Agent together with such letter of transmittal,
duly executed, and such other customary documents as may be required pursuant to
such instructions, the holder of such RIT Certificate shall be entitled to
receive in exchange therefor New RIT Certificate(s) evidencing that number of
shares of New RIT Stock which such holder has the right to receive in accordance
with the Public Exchange Ratio in respect of the shares of RIT Class A Stock
formerly evidenced by such RIT Certificate and the RIT Certificate so
surrendered shall forthwith be cancelled. In the event of a transfer of
ownership of shares of RIT Class A Stock to a person who is not registered in
the transfer records of RIT as of the RIT/New RIT Merger Effective Time, New RIT
Stock may be issued and paid in accordance with this Section 1.05(j) to a
transferee of the registered shares if the RIT Certificate evidencing such
shares of RIT Class A Stock is presented to the Exchange Agent, accompanied by
all documents required to evidence and effect such transfer pursuant to this
Section 1.05(j) and by evidence that any applicable stock transfer taxes have
been paid. Until surrendered, each RIT Certificate that, prior to the RIT/New
RIT Merger Effective Time, represented outstanding shares of RIT Class A Stock
shall be deemed from and after the RIT/New RIT Merger Effective Time, for all
corporate purposes, other than the payment of dividends, to evidence the
ownership of the number of shares of New RIT Stock into which such shares shall
have been so converted.
(3) Exchange Procedure for Foundation. The Foundation authorizes
and directs New RIT to issue directly to the trustee designated by the Voting
Trust and Divestiture Agreement (as defined in Section 3.09 hereof) that number
of shares of New RIT Stock issuable in exchange for the outstanding share of New
RIT Stock pursuant to Section 1.05(c) hereof as is necessary to comply with
Section 2.01 of the Voting Trust and Divestiture Agreement, to be held in the
voting trust established by the Voting Trust and Divestiture Agreement. New RIT
shall issue to the Foundation a certificate or certificates representing the
remaining shares of New RIT Stock issuable in exchange for the outstanding
shares of New RIT Stock pursuant to Section 1.05(c) hereof.
(4) Distributions With Respect to Unexchanged Shares. No
dividends or other distributions, if any, declared or made after the RIT/New RIT
Merger Effective Time with respect to New RIT Stock with a record date after the
RIT/New RIT Merger Effective Time shall be paid to the
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holder of any unsurrendered RIT Certificate with respect to the shares of New
RIT Stock such holder is entitled to receive pursuant to Section 1.05(c) hereof
until the holder of such RIT Certificate shall surrender such RIT Certificate.
Subject to applicable law, following surrender of any such RIT Certificate,
there shall be paid to the record holder of New RIT Certificates representing
shares of New RIT Stock issued in exchange therefor, without interest, at the
time of such surrender, the amount of dividends or other distributions with a
record date after the RIT/New RIT Merger Effective Time theretofore paid with
respect to such shares of New RIT Stock.
(5) Transfers of Ownership. If any New RIT Certificate is to be
issued in a name other than that in which the RIT Certificate surrendered in
exchange therefor is registered, it will be a condition of the issuance thereof
that the RIT Certificate so surrendered shall have been properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange shall have paid to New RIT, or any agent designated by it, any transfer
or other taxes required by reason of the issuance of the New RIT Certificate in
any name other than that of the registered holder of the RIT Certificate
surrendered, or established to the satisfaction of New RIT, or any agent
designated by it, that such tax has been paid or is not payable.
(6) No Liability. Neither RIT nor New RIT shall be liable to any
holder of shares of RIT Class A Stock or New RIT Stock for any RIT/New RIT
Merger Transaction consideration (or dividends or distributions with respect
thereto) delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(7) Lost, Stolen or Destroyed Certificates. In the event that
any RIT Certificates shall have been lost, stolen or destroyed, the Exchange
Agent shall issue in exchange for such lost, stolen or destroyed RIT
Certificate, upon the making of an affidavit of the fact by the holder thereof,
such shares of New RIT Stock as may be required pursuant to Section 1.05(c);
provided, however, that New RIT may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed RIT Certificate to deliver a bond in such sum as it may reasonably
direct as indemnity against any claim that may be made against New RIT or the
Exchange Agent with respect to the RIT Certificate alleged to have been lost,
stolen or destroyed.
(k) Stock Transfer Books. At the RIT/New RIT Merger Effective Time,
the stock transfer books of RIT shall be closed, and there shall be no further
registration of transfers of shares of RIT Stock on the records of RIT.
(l) Tax Consequences. It is intended by the parties hereto that the
RIT/New RIT Merger Transaction shall constitute both (i) a tax free liquidation
of a subsidiary under Sections 332 and 337 of the Code as to New RIT and RIT,
and (ii) a tax-free reorganization within the meaning of Section 368(a)(1)(A) of
the Code. The parties hereto hereby adopt this Agreement as (i) a plan of
liquidation within the meaning of Section 332(b)(2) of the Code and Sections
1.332-2(a) and 1.332-6 of the United States Treasury Regulations, and (ii) a
"plan of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-
3(a) of the United States Treasury Regulations.
(m) Consummation of Transaction. Each of RIT and New RIT shall take
all reasonable and lawful action and shall execute all documents, certificates
and other papers as may be necessary or appropriate in order to effectuate the
RIT/New RIT Merger Transaction in accordance with this Agreement. If, at any
time after the RIT/New RIT Merger Effective Time, any such further action is
necessary or desirable to carry out the purposes of this Agreement and to vest
New RIT with full right and title to and possession of all assets, property,
rights, privileges, powers, liabilities, obligations and franchises of RIT, the
responsible officers and directors of New RIT and RIT are fully authorized to
take, and shall take, all such lawful and necessary action.
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Section 1.06. Stock Options.
(a) At the RIT/New RIT Merger Effective Time, each outstanding option
(a "BCBSMo/RIT Stock Option") to purchase shares of RIT Class A Stock issued,
granted or awarded pursuant to the RightCHOICE Managed Care, Inc. 1994 Incentive
Plan, the RightCHOICE Managed Care, Inc. Nonemployee Directors' Stock Option
Plan or the Blue Cross and Blue Shield of Missouri Stock Option Agreements, as
the case may be (collectively, the "BCBSMo/RIT Stock Option Plans"), whether or
not exercisable or vested, shall cease to represent a right to acquire shares of
RIT Class A Stock and shall be converted automatically into an option to
acquire, from and after the RIT/New RIT Effective Time, on the same terms and
conditions as were applicable under such BCBSMo/RIT Stock Option, the number of
shares of New RIT Stock as the holder of such BCBSMo/RIT Stock Option would have
been entitled to receive pursuant to the RIT/New RIT Merger Transaction had such
holder exercised such option in full immediately prior to the RIT/New RIT Merger
Effective Time (determined by multiplying the aggregate number of shares of RIT
Class A Stock covered by such BCBSMo/RIT Stock Option by the Public Exchange
Ratio), at a price per share equal to the price per share under the BCBSMo/RIT
Stock Option. New RIT shall acknowledge and assume, from and after the RIT/New
RIT Merger Effective Time, all obligations of RIT and BCBSMo under the
BCBSMo/RIT Stock Option Plans as provided in this Section 1.06.
(b) As soon as practicable after the RIT/New RIT Merger Effective
Time, New RIT shall deliver to each holder of a BCBSMo/RIT Stock Option
appropriate notices setting forth such holders' rights with respect to such
BCBSMo/RIT Stock Option, and the BCBSMo/RIT Stock Option Plans shall continue in
effect on the same terms and conditions (subject to the conversion required by
this Section 1.06 after giving effect to the RIT/New RIT Merger Transaction and
the assumption by New RIT as provided herein). To the extent necessary to
effectuate the provisions of this Section 1.06, New RIT shall deliver new or
amended agreements reflecting the terms of each BCBSMo/RIT Stock Option assumed
by New RIT and amend the BCBSMo/RIT Stock Option Plans to reflect the terms
hereof.
(c) As soon as practicable after the RIT/New RIT Merger Effective
Time, New RIT shall file with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), a
registration statement on an appropriate form with respect to the shares of New
RIT Stock subject to such BCBSMo/RIT Stock Options and shall use its best
efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectus or
prospectuses with respect thereto) for so long as such BCBSMo/RIT Stock Options
remain outstanding.
Section 1.07. Closing; Closing Date. The closing (the "Closing") of the
Reorganization shall take place at the offices of Lewis, Rice & Fingersh, L.C.,
500 North Broadway, Suite 2000, St. Louis, Missouri as promptly as practicable
(but in any event within five (5) days) after the last day upon which each of
the conditions described in Article IV is satisfied or waived by the appropriate
party (the "Closing Date").
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.01. Disclosure Schedule; Standard.
(a) Disclosure Schedule. BCBSMo has delivered to RIT, New RIT and the
Foundation a confidential schedule (the "BCBSMo Disclosure Schedule"), executed
by the parties hereto concurrently with the delivery and execution hereof, and
RIT has delivered to BCBSMo, New RIT and the Foundation a confidential schedule
(the "RIT Disclosure Schedule"), executed by the parties hereto concurrently
with the delivery and execution hereof. The BCBSMo Disclosure Schedule and the
RIT
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Disclosure Schedule set forth, among other things, items the disclosure of which
shall be necessary or appropriate either in response to an express disclosure
requirement contained in a provision hereof or as an exception to one or more
representations or warranties contained in this Article II; provided, that (a)
no such item shall be required to be set forth in the BCBSMo Disclosure Schedule
or the RIT Disclosure Schedule, as the case may be, as an exception to a
representation or warranty if its absence would not be reasonably likely to
result in the related representation or warranty being deemed untrue or
incorrect under the standard established by Section 2.01(b) hereof, (b) the mere
inclusion of an item in the BCBSMo Disclosure Schedule or the RIT Disclosure
Schedule, as the case may be, as an exception to a representation or warranty
shall not be deemed an admission by BCBSMo or RIT, as the case may be, that such
item represents a material exception or fact, event or circumstance or that such
item is reasonably likely to result in a Material Adverse Effect (as defined in
Section 2.01(b) hereof), (c) any matter described in the public filings made by
RIT with the SEC, the DOI or the Attorney General shall be deemed incorporated
by reference in the RIT Disclosure Schedule, and (d) any matter described in the
public filings made by BCBSMo with the DOI or the Attorney General shall be
deemed incorporated by reference in the BCBSMo Disclosure Schedule.
(b) Standard. No representation or warranty of BCBSMo or RIT
contained in this Article II shall be deemed untrue or incorrect, and BCBSMo and
RIT, as the case may be, shall not be deemed to have breached a representation
or warranty, as a consequence of the existence of any fact, event or
circumstance unless such fact, circumstance or event, individually or taken
together with all other facts, events or circumstances inconsistent with any
representation or warranty contained in this Article II has had or is reasonably
likely to have a Material Adverse Effect on the party making such representation
or warranty. The term "Material Adverse Effect," as used herein, means, with
respect to BCBSMo or RIT, any effect that is, or is reasonably expected to be,
material and adverse to the financial position, results of operations or
business of BCBSMo and its subsidiaries taken as a whole, or RIT and its
subsidiaries taken as a whole, respectively; provided, however, that Material
Adverse Effect shall not be deemed to include the impact of (i) changes in laws,
regulations and rules of the United States and of the various states governing
insurance company holding systems, health maintenance organizations, health care
service plans, third party administrators, utilization review agents, preferred
provider organizations and managed healthcare organizations and similar laws of
general applicability or interpretations thereof by courts or Regulatory
Authorities, and (ii) changes in generally accepted accounting principles or
regulatory accounting requirements applicable to BCBSMo, RIT and their
respective subsidiaries, and (iii) the Litigation and the other matters covered
by the Settlement Agreement, and (iv) the litigation styled Blue Cross Blue
Shield of Missouri v. Jeremiah W. "Jay" Nixon, No. CV197-1558CC, pending in the
Circuit Court of Cole County, Missouri.
Section 2.02. Representations and Warranties of RIT. Subject to Section
2.01 hereof and except as disclosed in any portion of the RIT Disclosure
Schedule, RIT hereby makes the following representations and warranties with
respect to itself and its subsidiaries:
(a) Corporate Existence and Power. RIT is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Missouri and has the corporate power to own all of its property and assets,
incur all of its liabilities and to carry on its business as now being conducted
and to consummate the transactions contemplated hereby.
(b) Authorization; No Defaults. The RIT Board and the RIT Independent
Committee each have, by all appropriate action, approved this Agreement and each
of the other agreements contemplated hereby, described herein or attached hereto
(collectively, the "Ancillary Agreements") to which RIT is or will be a party
and authorized the execution hereof and thereof on RIT's behalf by its duly
authorized officers and the performance by RIT of its obligations hereunder and
thereunder. Except for the adoption and approval of this Agreement and the
transactions contemplated herein by RIT's shareholders to the extent required by
applicable law, NYSE rules and regulations and as
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described herein, no other corporate proceedings on the part of RIT are
necessary to approve this Agreement and the Ancillary Agreements to which it is
a party and to consummate the transactions contemplated hereby and thereby.
Nothing contained in the Articles of Incorporation, as amended, or Bylaws, as
amended, of RIT or any other agreement, instrument, decree, proceeding, law or
regulation (except as specifically referred to in or contemplated by this
Agreement) by or to which it or any of its subsidiaries are bound or subject
would prohibit or inhibit RIT from consummating this Agreement and the Ancillary
Agreements to which it is or will be a party and the transactions contemplated
herein and therein on the terms and conditions contained herein and therein.
This Agreement has been duly and validly executed and delivered by RIT and,
assuming the due authorization, execution and delivery hereof by the other
parties hereto, constitutes a legal, valid and binding obligation of RIT,
enforceable against RIT in accordance with its terms, except that such
enforceability may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to or
affecting creditors' rights generally, and general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law).
(c) Capitalization. The authorized capital stock of RIT consists of
125,000,000 shares of RIT Class A Stock, 100,000,000 shares of RIT Class B Stock
and 25,000,000 shares of preferred stock, par value $.01 per share (the "RIT
Preferred Stock"). As of December 31, 1999, there were outstanding: (i)
3,710,653 shares of RIT Class A Stock; (ii) 14,962,500 shares of RIT Class B
Stock; and (iii) no shares of RIT Preferred Stock. All outstanding shares of RIT
Class A Stock and all outstanding shares of RIT Class B Stock have been duly
authorized and validly issued and are fully paid and nonassessable and free from
any preemptive rights. As of December 31, 1999, RIT has outstanding stock
options representing the right to acquire not more than 972,583 shares of RIT
Class A Stock. Except for such stock options, there are no shares of capital
stock or other equity securities of RIT outstanding and no outstanding options,
warrants, rights to subscribe for, calls, or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for, shares of RIT Stock or RIT Preferred Stock or contracts, commitments,
understandings or arrangements by which RIT is or may be obligated to issue
additional shares of its RIT Stock or RIT Preferred Stock, and there are no
outstanding stock appreciation, phantom stock or similar rights. All of the
outstanding capital stock of, or other ownership interests in, each subsidiary
of RIT is owned by RIT, directly or indirectly, free and clear of any material
lien and free of any other material limitation or restriction on its rights as
owner thereof (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other ownership interests), other than those
imposed by applicable law. There are no existing options, calls or commitments
of any character relating to the issued or unissued capital stock or other
securities or equity interests of any subsidiaries of RIT.
(d) Financial Information. The consolidated balance sheets of RIT and
its subsidiaries as of December 31, 1998 and 1997, and related consolidated
statements of income, changes in shareholders' equity and cash flows for the
three (3) years ended December 31, 1998, together with the notes thereto,
included in RIT's Annual Report on Form 10-K for the year ended December 31,
1998, as currently on file with the SEC, and the unaudited consolidated balance
sheets of RIT and its subsidiaries as of March 31, 1999, June 30, 1999 and
September 30, 1999, and the related unaudited consolidated income statements and
statements of changes in shareholders' equity and cash flows for the three (3)
months, six (6) months and nine (9) months, respectively, then ended included in
RIT's Quarterly Reports on Form 10-Q for the quarters then ended, as currently
on file with the SEC (the "RIT Financial Statements"), have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as may be disclosed therein) and fairly present in all material
respects the consolidated financial position and the consolidated results of
operations, changes in shareholders' equity and cash flows of RIT and its
consolidated subsidiaries as of the dates and for the periods indicated
(subject, in the case of interim financial statements, to normal recurring year-
end adjustments, none of which shall be material).
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(e) Reports. Since January 1, 1996, RIT and each of its subsidiaries
have filed all reports and statements, together with any amendments required to
be made with respect thereto, if any, that it was required to file with the SEC,
the NYSE and any other Regulatory Authority with jurisdiction over RIT or any of
its subsidiaries, and have paid all fees and assessments due and payable in
connection therewith. As of their respective dates, each of such reports and
documents, as amended, including any financial statements, exhibits and
schedules thereto, complied with the relevant statutes, rules and regulations
enforced or promulgated by the regulatory authority with which they were filed,
and did not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The term "Regulatory Authority," as used herein, means any
federal or state agency charged with the supervision or regulation of insurance
companies, health maintenance organizations, healthcare services plans, third
party administrators or managed health care organizations and any other court,
administrative agency or commission or other governmental agency, authority or
instrumentality having supervisory or regulatory authority with respect to
BCBSMo, RIT or any of their respective subsidiaries.
(f) Absence of Changes. Since December 31, 1998, there has not been
any change in the financial condition, the results of operations or the business
of RIT and its subsidiaries which would have a Material Adverse Effect on RIT,
except as disclosed by RIT since December 31, 1998, in its periodic reports
filed with the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
(g) Undisclosed Liabilities. RIT and its subsidiaries do not have any
liability, whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due, including any liability for
taxes (and there is no past or present fact, situation, circumstance, condition
or other basis for any present or future action, suit or proceeding, hearing,
charge, complaint, claim or demand against RIT or its subsidiaries giving rise
to any such liability), except (i) for liabilities set forth in the RIT
Financial Statements, and (ii) normal fluctuation in the amount of the
liabilities referred to in clause (i) above occurring in the ordinary course of
business of RIT and its subsidiaries since the date of the September 30, 1999
balance sheet included in the RIT Financial Statements.
Section 2.03. Representations and Warranties of BCBSMo. Subject to Section
2.01 hereof and except as disclosed in any portion of the BCBSMo Disclosure
Schedule, BCBSMo hereby makes the following representations and warranties with
respect to itself and its subsidiaries (other than RIT and its subsidiaries):
(a) Authorization; No Defaults. The BCBSMo Board and the BCBSMo
Independent Committee each have, by all appropriate action, approved this
Agreement and each of the Ancillary Agreements to which BCBSMo is or will be a
party and authorized the execution hereof and thereof on its behalf by its duly
authorized officers and the performance by BCBSMo of its obligations hereunder
and thereunder. No other corporate proceedings on the part of BCBSMo is
necessary to approve this Agreement and the Ancillary Agreements to which it is
or will be a party and to consummate the transactions contemplated hereby and
thereby. Nothing contained in the Amended and Restated Articles of Incorporation
or Bylaws, as amended, of BCBSMo or any other agreement, instrument, decree,
proceeding, law or regulation (except as specifically referred to in or
contemplated by this Agreement) by or to which it or any of its subsidiaries are
bound or subject would prohibit or inhibit BCBSMo from consummating this
Agreement and the Ancillary Agreements to which it is or will be a party and the
transactions contemplated herein on the terms and conditions contained herein
and therein. This Agreement has been duly and validly executed and delivered by
BCBSMo and, assuming the due authorization, execution and delivery hereof by the
other parties hereto, constitutes a legal, valid and binding obligation of
BCBSMo, enforceable against BCBSMo in accordance with its terms, except that
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such enforceability may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to or
affecting creditors' rights generally, and general principles of equity
(regardless of whether enforcement is sough in a proceeding in equity or at
law).
(b) Capitalization. BCBSMo has no authorized capital stock, and no
shares of BCBSMo capital stock are outstanding (until such time as the Charter
Conversion Transaction shall have been consummated as provided herein).
(c) Financial Information. The consolidated balance sheets of BCBSMo
and its subsidiaries as of December 31, 1998 and 1997, and related consolidated
statements of income for the three (3) years ended December 31, 1998, together
with the notes thereto, as currently on file with the DOI, and the unaudited
consolidated balance sheets of BCBSMo and its subsidiaries as of March 31, 1999,
June 30, 1999, and September 30, 1999, and the related unaudited consolidated
income statements for the three (3) months, six (6) months and nine (9) months,
respectively, then ended, as currently on file with the DOI (together, the
"BCBSMo Financial Statements"), have been prepared in accordance with regulatory
accounting principles applied on a consistent basis (except as may be disclosed
therein) and fairly present in all material respects the consolidated financial
position and the consolidated results of operations of BCBSMo and its
consolidated subsidiaries as of the dates and for the periods indicated
(subject, in the case of interim financial statements, to normal recurring year-
end adjustments, none of which shall be material).
(d) Reports. Since January 1, 1996, BCBSMo and each of its
subsidiaries have filed all reports and statements, together with any amendments
required to be made with respect thereto, if any, that it was required to file
with any Regulatory Authority with jurisdiction over BCBSMo or any of its
subsidiaries, and have paid all fees and assessments due and payable in
connection therewith. As of their respective dates, each of such reports and
documents, as amended, including any financial statements, exhibits and
schedules thereto, complied with the relevant statutes, rules and regulations
enforced or promulgated by the Regulatory Authority with which they were filed,
and did not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(e) Absence of Changes. Since December 31, 1998, there has not been
any change in the financial condition, the results of operations or the business
of BCBSMo and its subsidiaries which would have a Material Adverse Effect on
BCBSMo, except as disclosed by BCBSMo since December 31, 1998 in its periodic
reports filed with the DOI.
(f) Undisclosed Liabilities. BCBSMo and its subsidiaries do not have
any liability, whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due, including any liability for
taxes (and there is no past or present fact, situation, circumstance, condition
or other basis for any present or future action, suit or proceeding, hearing,
charge, complaint, claim or demand against BCBSMo or its subsidiaries giving
rise to any such liability), except (i) for liabilities set forth in the BCBSMo
Financial Statements, and (ii) normal fluctuation in the amount of the
liabilities referred to in clause (i) above occurring in the ordinary course of
business of BCBSMo and its subsidiaries since the date of the September 30, 1999
balance sheet included in the BCBSMo Financial Statements.
Section 2.04. Representations and Warranties of New RIT. New RIT hereby
makes the following representations and warranties:
(a) Corporate Existence and Power. New RIT is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power
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to own all of its property and assets, incur all of its liabilities and to carry
on its business as now being conducted and to consummate the transactions
contemplated hereby.
(b) Authorization; No Defaults. The Board of Directors of New RIT
has, by all appropriate action, approved this Agreement and each of the
Ancillary Agreements to which New RIT is or will be a party and authorized the
execution hereof and thereof on New RIT's behalf by its duly authorized officers
and the performance by New RIT of its obligations hereunder and thereunder.
Except for the adoption and approval of this Agreement and the transactions
contemplated herein by the shareholders of New RIT (which the Foundation, as the
sole shareholder, shall do pursuant to Section 3.04(b)), no other corporate
proceedings on the part of New RIT are necessary to approve this Agreement and
the Ancillary Agreements to which it is or will be a party and to consummate the
transactions contemplated hereby and thereby. Nothing contained in the New RIT
Certificate of Incorporation or the New RIT Bylaws, or any other agreement,
instrument, decree, proceeding, law or regulation (except as specifically
referred to in or contemplated by this Agreement) by or to which it is bound or
subject would prohibit or inhibit New RIT from consummating this Agreement and
the Ancillary Agreements to which it is or will be a party and the transactions
contemplated herein on the terms and conditions contained herein and therein.
This Agreement has been duly and validly executed and delivered by New RIT and,
assuming the due authorization, execution and delivery hereof by the other
parties hereto, constitutes a legal, valid and binding obligation of New RIT,
enforceable against New RIT in accordance with its respective terms, except that
such enforceability may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to or
affecting creditors' rights generally, and general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law).
(c) Capitalization. The authorized capital stock of New RIT consists
of 225,000,000 shares of New RIT Stock and 25,000,000 shares of preferred stock,
par value $.01 per share. As of the date hereof, one (1) share of New RIT Stock
is issued and outstanding and owned beneficially and of record by the
Foundation. The outstanding share of New RIT Stock has been duly authorized and
validly issued and is fully paid and nonassessable and free from any preemptive
rights. There are no shares of capital stock or other equity securities of New
RIT outstanding and no outstanding options, warrants, rights to subscribe for,
calls, or commitments or any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of New RIT Stock and, except
as set forth herein, no contracts, commitments, understandings or arrangements
by which New RIT is or may be obligated to issue additional shares of its New
RIT Stock, and there are no outstanding stock appreciation, phantom stock or
similar rights.
Section 2.05. Representations and Warranties of the Foundation. The
Foundation hereby makes the following representations and warranties:
(a) Corporate Existence and Power. The Foundation is a non-profit
public benefit corporation duly organized, validly existing and in good standing
under the laws of the State of Missouri and has the corporate power to own all
of its property and assets, incur all of its liabilities and to carry on its
business as now conducted, and as contemplated by this Agreement, and to
consummate the transactions contemplated hereby.
(b) Authorization; No Defaults. The Board of Directors of the
Foundation has, by all appropriate action, approved this Agreement and each of
the Ancillary Agreements to which the Foundation is or will be a party and
authorized the execution hereof and thereof on the Foundation's behalf by its
duly authorized officers and the performance by the Foundation of its
obligations hereunder. No other corporate proceedings on the part of the
Foundation are necessary to approve this Agreement and the Ancillary Agreements
to which it is or will be a party and to consummate the transactions
contemplated hereby and thereby. Nothing contained in the Articles of
Incorporation or Bylaws of the
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Foundation, or any other agreement, instrument, decree, proceeding, law or
regulation (except as specifically referred to in or contemplated by this
Agreement) by or to which it is bound or subject would prohibit or inhibit the
Foundation from consummating this Agreement and the Ancillary Agreements to
which it is or will be a party and the transactions contemplated herein and
therein on the terms and conditions contained herein and therein. This Agreement
has been duly and validly executed and delivered by the Foundation and, assuming
the due authorization, execution and delivery hereof by the other parties
hereto, constitutes a legal, valid and binding obligation of the Foundation,
enforceable against the Foundation in accordance with its respective terms,
except that such enforceability may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to or affecting creditors' rights generally, and general principles of
equity (regardless of whether enforcement is sought in a proceeding in equity or
at law).
ARTICLE III
COVENANTS
Section 3.01. Pre-Closing Covenants of RIT. From the date hereof until the
earlier to occur of the RIT/New RIT Merger Effective Time or the termination of
this Agreement, RIT hereby agrees as follows:
(a) Submission to Shareholders. RIT shall cause to be duly called and
held, on a date selected by RIT as soon as reasonably practicable after the date
hereof, a special meeting of its shareholders (the "RIT Shareholders' Meeting")
for submission of this Agreement and the RIT/New RIT Merger Transaction for
approval of such RIT shareholders as required by the Missouri Corporate Law;
provided, however, that anything in the Missouri Corporate Law or the Articles
of Incorporation, as amended, of RIT to the contrary notwithstanding, the
adoption and approval of this Agreement and the RIT/New RIT Merger Transaction
shall require (i) the affirmative vote of the holders of two-thirds of the
issued and outstanding shares of the RIT Stock and (ii) the affirmative vote of
the holders of a majority of the issued and outstanding shares of the RIT Class
A Stock (excluding for these purposes any shares of RIT Class A Stock owned by
BCBSMo or by any executive officer or director of BCBSMo or RIT), voting as a
class separate and apart from the RIT Class B Stock. In connection with the RIT
Shareholders' Meeting, RIT shall prepare and file a Proxy Statement/Prospectus
with the SEC and mail it to its shareholders, and the RIT Board (subject to
compliance with its fiduciary duties as advised by counsel) and the RIT
Independent Committee (subject to compliance with its fiduciary duties as
advised by counsel) shall recommend to the RIT shareholders the approval of this
Agreement and the RIT/New RIT Merger Transaction contemplated by this Agreement
and use their best efforts to obtain such shareholder approval.
(b) Consummation of Reorganization. RIT shall use its best efforts to
perform and fulfill all conditions and obligations on its part to be performed
or fulfilled hereunder and shall use its best efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, all other things necessary,
proper or advisable to effect the Reorganization and the other transactions
contemplated hereby in accordance with the terms and provisions hereof. RIT
shall not take any action that would prevent consummation of the Reorganization.
(c) Consents and Approvals. RIT shall use its best efforts to obtain
all necessary consents, waivers, approvals, authorizations and orders with
respect to all interests of RIT and its subsidiaries in the Marks and in any
other material agreements, leases, licenses, contracts, instruments and rights
which require the consent of another person (including, without limitation, the
Association and the Bank Approvals (as defined in Section 4.03(k) hereof)) for
their transfer or assumption pursuant to the Reorganization.
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Section 3.02. Pre-Closing Covenants of BCBSMo. From the date hereof until
the earlier to occur of the RIT/New RIT Merger Effective Time or the termination
of this Agreement, BCBSMo hereby agrees as follows:
(a) Agreement to Vote in Favor. BCBSMo shall vote all of the shares
of RIT Stock that it owns of record and beneficially in favor of this Agreement
and the RIT/New RIT Merger Transaction at the RIT Shareholders' Meeting (and any
postponements, adjournments or continuations thereof) and against approval of
any proposal made in opposition to, or in competition with or contravention of,
such transactions.
(b) Consummation of Reorganization. BCBSMo shall use its best efforts
to perform and fulfill all conditions and obligations on its part to be
performed or fulfilled hereunder and shall use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all other things
necessary, proper or advisable to effect the Reorganization and the other
transactions contemplated hereby in accordance with the terms and provisions
hereof. BCBSMo shall not take any action that would prevent consummation of the
Reorganization.
(c) Consents and Approvals. BCBSMo shall use its best efforts to
obtain all necessary consents, waivers, approvals, authorizations and orders
with respect to all interests of BCBSMo and its subsidiaries in the Marks and in
any other material agreements, leases, licenses, contracts, instruments and
rights which require the consent of another person (including, without
limitation, the Association) for their transfer or assumption pursuant to the
Reorganization.
Section 3.03. Pre-Closing Covenants of New RIT. From the date hereof until
the earlier to occur of the RIT/New RIT Merger Effective Time or the termination
of this Agreement, New RIT hereby agrees as follows:
(a) Other Actions. New RIT shall not take any action unless such
action is expressly permitted by this Agreement.
(b) Consummation of Reorganization. New RIT shall use its best
efforts to perform and fulfill all conditions and obligations on its part to be
performed or fulfilled hereunder and shall use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all other things
necessary, proper or advisable to effect the Reorganization and the other
transactions contemplated hereby in accordance with the terms and provisions
hereof. New RIT shall not take any action that would prevent consummation of the
Reorganization.
(c) Plans of Merger. At the request of BCBSMo, New RIT shall enter
into a separate plan of merger reflecting the terms of the Reincorporation
Merger Transaction, and, at the request of RIT, New RIT shall enter into a
separate plan of merger reflecting the terms of the RIT/New RIT Merger
Transaction, for purposes of satisfying any requirement of the Missouri
Corporate Law or the Delaware Corporate Law.
Section 3.04. Pre-Closing Covenants of Foundation. From the date hereof
until the earlier to occur of the RIT/New RIT Merger Effective Time or the
termination of this Agreement, the Foundation hereby agrees as follows:
(a) No Sale or Transfer. Except as contemplated hereby, the
Foundation shall not sell, transfer, pledge, encumber, or otherwise affect its
ownership in, or rights with respect to, the New BCBSMo Stock to be received by
it upon consummation of the Charter Conversion Transaction or the New RIT Stock.
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(b) Agreements to Vote in Favor.
(1) Reincorporation Merger Transaction. The Foundation, as the
sole shareholder of New BCBSMo upon consummation of the Charter Conversion
Transaction and the sole shareholder of New RIT, shall take all actions
necessary under applicable law to approve this Agreement and the Reincorporation
Merger Transaction by, among other things, adopting the stockholder resolutions
substantially in the form attached hereto as Exhibit H (together, the
"Foundation Reincorporation Merger Resolution") and shall vote against approval
of any proposal made in opposition to, or in competition with or contravention
of, such transaction.
(2) RIT/New RIT Merger Transaction. The Foundation, as the sole
stockholder of New RIT upon consummation of the Reincorporation Merger
Transaction, shall take all actions necessary under applicable law to approve
this Agreement and the RIT/New RIT Merger Transaction by, among other things,
adopting the stockholder resolution substantially in the form attached hereto as
Exhibit I (the "Foundation RIT/New RIT Merger Resolution") and shall vote
against approval of any proposal made in opposition to, or in competition with
or contravention of, such transaction.
(c) Consummation of Reorganization. The Foundation shall use its best
efforts to perform and fulfill all conditions and obligations on its part to be
performed or fulfilled hereunder and shall use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all other things
necessary, proper or advisable to effect the Reorganization and the other
transactions contemplated hereby in accordance with the terms and provisions
hereof. The Foundation shall not take any action that would prevent consummation
of the Reorganization.
(d) Tax Opinion. In the event that the Foundation shall not receive
the opinions of PricewaterhouseCoopers LLP as provided in Section 4.05(g)
hereof, the Foundation shall use its best efforts to obtain the opinion of such
other tax professionals as are selected by the Foundation and reasonably
acceptable to RIT with respect to the matters described in Section 4.05(g)
hereof.
Section 3.05. Proxy Statement/Prospectus; Registration Statement. As soon
as reasonably practicable after the date hereof, RIT, BCBSMo and New RIT shall
prepare and file with the SEC preliminary proxy materials which shall constitute
the Proxy Statement of RIT and the Prospectus of New RIT with respect to the
shares of New RIT Stock to be issued in connection with the RIT/New RIT Merger
Transaction (the "Proxy Statement/Prospectus"). As soon as practicable after
comments are received from the SEC thereon, New RIT shall file (with the
assistance of RIT and BCBSMo) with the SEC a Registration Statement on Form S-4
(or on such other form as shall be appropriate) (the "Registration Statement")
which shall include the Proxy Statement/Prospectus as a part thereof, and New
RIT, RIT and BCBSMo shall use all reasonable efforts to cause the Registration
Statement to become effective as soon thereafter as practicable. RIT and BCBSMo
shall each furnish all information about it required to be included in the Proxy
Statement/Prospectus and the Registration Statement. New RIT also shall file any
other documents or registration statements necessary under the Securities Act,
the Exchange Act, state securities and "blue sky" statutes and the rules of the
NYSE to consummate the transactions contemplated hereby and cause the New RIT
Stock to be listed for trading on the NYSE as of the RIT/New RIT Merger
Effective Time.
Section 3.06. Public Announcements. RIT, BCBSMo, New RIT and the Foundation
shall consult with each other before issuing any press release or other public
statement or announcement with respect to this Agreement or the Reorganization
and shall not issue any such press release or make any such public statement or
announcement without the prior consent of the others as to the content thereof,
which consent shall not be unreasonably withheld; provided, however, that any
one of such parties may, without the prior consent of the others, issue such
press release or make such public statement as may
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upon the advice of counsel be required by law or the NYSE if it has used all
reasonable efforts to consult with the others.
Section 3.07. Registration Rights Agreement. On or before the Closing Date,
each of New RIT and the Foundation shall execute and deliver to the other that
certain Registration Rights Agreement substantially in the form of that attached
hereto as Exhibit J (the "Registration Rights Agreement"). The Registration
Rights Agreement shall become effective at the RIT/New RIT Merger Effective
Time.
Section 3.08. Indemnification Agreement. On or before the Closing Date,
each of New RIT and the Foundation shall execute and deliver to the other that
certain Indemnification Agreement substantially in the form of that attached
hereto as Exhibit K (the "Indemnification Agreement"). The Indemnification
Agreement shall become effective at the RIT/New RIT Merger Effective Time.
Section 3.09. Voting Trust and Divestiture Agreement. On or before the
Closing Date, each of New RIT and the Foundation shall execute and deliver that
certain Voting Trust and Divestiture Agreement substantially in the form of that
attached hereto as Exhibit L (the "Voting Trust and Divestiture Agreement"). The
Voting Trust and Divestiture Agreement shall become effective at the RIT/New RIT
Merger Effective Time.
Section 3.10. Public Offering. The Foundation shall, at the request of RIT,
take all actions necessary to consummate, pursuant to the terms and conditions
of a Demand Registration (as such term is defined in the Registration Rights
Agreement), an underwritten public offering of New RIT Stock owned by the
Foundation on such date on or within six (6) months following the Closing Date
as the parties shall mutually select. The number of shares of New RIT Stock to
be included in such offering, and the other terms and provisions of such
offering, shall be as mutually agreed upon by RIT and the Foundation.
Section 3.11. Indemnification and Insurance.
(a) For the applicable statute of limitations period, New RIT shall
indemnify, defend and hold harmless the present and former officers, directors,
employees and agents of RIT and BCBSMo and their respective subsidiaries (each,
an "Indemnified Party") against all losses, expenses, claims, damages or
liabilities arising out of actions or omissions occurring on or prior to the
RIT/New RIT Merger Effective Time (including, without limitation, the
transactions contemplated by this Agreement and the Ancillary Agreements) to the
full extent provided under the articles of incorporation, bylaws and
indemnification agreements of RIT and BCBSMo, including provisions relating to
advancement of expenses incurred in the defense of any action or suit; provided,
however, that new RIT shall have no obligation to indemnify, defend or hold
harmless any present or former officer, director, employee or agent of BCBSMo
against any losses, expenses, claims, damages or liabilities against which the
Foundation has agreed to provide indemnity pursuant to the Indemnification
Agreement.
(b) For a period of six (6) years after the RIT/New RIT Merger
Effective Time, New RIT shall cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by BCBSMo
and RIT (provided that New RIT may substitute therefor policies of comparable
coverage from companies reasonably acceptable to the Foundation with respect to
claims arising from facts or events which occurred before the RIT/New RIT Merger
Effective Time). All such policies shall require the insurer to provide the
Foundation with thirty (30) days prior written notice of cancellation, and the
Foundation shall have the right, but not the obligation, to pay the premiums on
such policies if New RIT should fail to pay such premiums.
(c) This Section 3.11 shall survive any termination of this Agreement
and the consummation of the RIT/New RIT Merger Transaction at the RIT/New RIT
Merger Effective Time, and
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is intended to benefit the Indemnified Parties, and shall be binding on all
successors and assigns of New RIT and shall be enforceable by the Indemnified
Parties.
Section 3.12. Accountants' Letters'. Each of RIT and BCBSMo shall use its
reasonable best efforts to cause to be delivered to the other party, and to the
directors and officers who sign the Registration Statement, a letter of the
independent auditors for each, dated (i) the date on which the Registration
Statement shall become effective, and (ii) a date shortly prior to the Closing
Date, and addressed to such other party, and such directors and officers, in
form and substance customary for "comfort" letters delivered by independent
accountants in accordance with Statement of Accounting Standards No. 72.
Section 3.13. Foundation Governance. For so long as the Voting Trust and
Divestiture Agreement shall be in effect, the Foundation shall not take any
action to change, amend, repeal or replace any provision of the Articles of
Incorporation, Bylaws or other charter documents of the Foundation pertaining to
the governance of the Foundation if such change would increase the influence or
control of any governmental authority or its agents over the governance of the
Foundation over the level of influence and control provided in the Articles of
Incorporation and Bylaws of the Foundation on the date hereof.
Section 3.14. Due Diligence. The Foundation shall be entitled during the
period beginning on the date that this Agreement is signed by all parties hereto
and ending fifteen (15) days prior to the Closing Date to conduct a reasonable
due diligence investigation of BCBSMo and RIT for the purpose of verifying the
accuracy of the representations and warranties of BCBSMo and RIT set forth
herein provided that such due diligence shall be conducted during normal
business hours with minimal disruption to the business operations of BCBSMo and
RIT.
Section 3.15. Payment to Foundation. Immediately following the Closing, New
RIT shall pay One Hundred Seventy-Five Thousand Dollars ($175,000) to the
Foundation in partial satisfaction of any obligation of BCBSMo under Section
355.621 of The General and Business Corporation Law of Missouri resulting from
the Charter Conversion Transaction.
ARTICLE IV
CONDITIONS PRECEDENT TO REORGANIZATION
Section 4.01. Conditions to Reorganization. The respective obligations of
the parties hereto to effect the Reorganization shall be subject to the
satisfaction (or, where permissible, waiver) of each of the following
conditions:
(a) Injunction. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the consummation
of the Reorganization shall be in effect, nor shall any proceeding by any
Regulatory Authority or other person seeking any of the foregoing be pending.
There shall not be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the Reorganization which
makes the consummation of the Reorganization illegal;
(b) Regulatory and Shareholder Approvals. All necessary regulatory
approvals, consents, authorizations and other approvals, including any approval
required under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, and the
requisite approval of this Agreement and the Reorganization by the shareholders
of New BCBSMo, New RIT and RIT (including the shareholders of RIT pursuant to
Section 3.01(a) and the Foundation pursuant to the Foundation Reincorporation
Merger Resolution and the Foundation RIT/New RIT Merger Resolution), required by
law or the NYSE for consummation of the Reorganization shall have been obtained
and all waiting periods required by law
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shall have expired; provided, however, that nothing in this Section 4.01(b)
shall affect the obligations of the Foundation to vote in favor of and approve
the Reincorporation Merger Transaction and the RIT/New RIT Merger Transaction as
required under Section 3.04(b) hereof;
(c) Effective Registration Statement. The Registration Statement
shall be effective under the Securities Act, and no stop orders suspending the
effectiveness of the Registration Statement shall be in effect or proceedings
for such purpose pending before or threatened by the SEC or any state securities
agency;
(d) Tax Determination. The Foundation shall have received a
determination letter from the Internal Revenue Service that it is a tax exempt
entity under Section 501(c)(4) of the Code;
(e) NYSE Listing. The shares of New RIT Stock issuable pursuant to
the RIT/New RIT Merger Transaction shall have been approved for listing on the
NYSE, subject to official notice of issuance; and
(f) Resolution of Sarkis Litigation. Each party hereto shall be
satisfied, in its sole and absolute discretion, with the final resolution of the
lawsuit styled Anthony Sarkis and James Hacking on behalf of themselves and all
others similarly situated v. Roy R. Heimburger, et al., No. 962-00938 in the
Circuit Court of the City of St. Louis, Missouri, currently pending in the
Circuit Court for the City of St. Louis, Missouri.
Section 4.02. Conditions to Obligations of BCBSMo. The obligation of BCBSMo
to effect the Reorganization shall be subject to the satisfaction or waiver by
BCBSMo of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties made by RIT, New RIT and the Foundation in this Agreement shall be
true and correct (subject to the standard in Section 2.01 hereof) on and as of
the Closing Date with the same effect as though such representations and
warranties had been made or given on and as of the Closing Date (except for any
such representations and warranties made only as of a specified date which shall
be true and correct (subject to the standard in Section 2.01 hereof) as of such
date);
(b) Compliance with Agreements. RIT, New RIT and the Foundation shall
have performed and complied in all material respects with all of their
respective obligations and agreements required to be performed on or prior to
the Closing Date under this Agreement;
(c) Delivery of Documents. BCBSMo shall have received all documents
required to be received from RIT, New RIT and the Foundation on or prior to the
Closing Date (including, without limitation, the Ancillary Agreements), all in
form and substance reasonably satisfactory to BCBSMo;
(d) Other Consents. There shall have been obtained all other consents
and approvals of governmental authorities and private parties required under law
or contract except where the failure to have obtained such consents and
approvals would not have a Material Adverse Effect on RIT or would not be
material and adverse to the financial position, results of operations or
business of New RIT or the Foundation;
(e) Comfort Letter. BCBSMo shall have received the letter referred to
in Section 3.12 hereof from its independent auditor;
(f) Favorable Ruling. BCBSMo (or the appropriate party) shall have
received a private letter ruling (the "Favorable Ruling") from the Internal
Revenue Service that (i) gain or loss will
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not be recognized by BCBSMo, RIT, HALIC, New RIT, the Foundation or the public
shareholders of both RIT and New RIT for federal income tax purposes pursuant to
the Transfer and Assumption Transaction; (ii) the Charter Conversion Transaction
will constitute a reorganization under Section 368(a) of the Code and will not
result in the recognition of gain or loss by BCBSMo, New BCBSMo or the
Foundation for federal income tax purposes, (iii) the Reincorporation Merger
Transaction will qualify as a reorganization under Section 368(a)(1)(F) of the
Code and no gain or loss will be recognized by New BCBSMo or New RIT for federal
income tax purposes, (iv) the RIT/New RIT Merger Transaction will be both a
liquidation under Sections 332 and 337 of the Code and a reorganization under
Section 368(a)(1)(A) of the Code and no gain or loss will be recognized by RIT,
New RIT, the shareholders of both RIT and New RIT, or the Foundation for federal
income tax purposes, and (v) no gain will be recognized by BCBSMo, New BCBSMo,
RIT, New RIT, the shareholders of any of the foregoing entities, or the
Foundation under Section 337(b)(2) or (d) of the Code ((i)-(v), each a
"Favorable Ruling Matter"), and the Favorable Ruling shall not have been
revoked, withdrawn, amended or modified (in whole or in part) and there shall
have been no change in applicable law (including, without limitation, the Code,
judicial decisions, administrative regulations and published rulings) with
regard to matters covered by the Favorable Ruling; provided, however, that in
the event that the Internal Revenue Service shall fail to include in the
Favorable Ruling any or all Favorable Ruling Matters for any reason (including
but not limited to no request for a private letter ruling is made or, if made,
the request is withdrawn in whole or in part, or the Internal Revenue Service
refuses to rule with respect to any Favorable Ruling Matter), the Favorable
Ruling Matter(s) not so included shall nonetheless be deemed to be included in a
Favorable Ruling for purposes of satisfying this condition provided that BCBSMo
shall have received the opinions provided in Section 4.02(g) hereof on such
excluded Favorable Ruling Matter(s) in form and substance reasonably acceptable
to BCBSMo;
(g) Tax Opinions. BCBSMo shall have received opinions of
PricewaterhouseCoopers LLP that (i) gain or loss will not be recognized by
BCBSMo, RIT, HALIC, New RIT, the Foundation or the public shareholders of both
RIT and New RIT for federal income tax purposes pursuant to the Transfer and
Assumption Transaction, except that BCBSMo could recognize gain to the extent
its basis in any assets transferred differs from the fair market value; (ii) the
Charter Conversion Transaction should be treated as a recapitalization under
Section 368(a)(1)(E) of the Code, should not result in the recognition of gain
or loss by the Foundation, and will not result in the recognition of gain or
loss by BCBSMo or New BCBSMo for federal income tax purposes, (iii) the
Reincorporation Merger Transaction will qualify as a reorganization under
Section 368(a) of the Code and no gain or loss will be recognized by New BCBSMo,
New RIT or the Foundation for federal income tax purposes, (iv) the RIT/New RIT
Merger transaction will be both a liquidation under Sections 332 and 337 of the
Code and a reorganization under Section 368(a) of the Code and no gain or loss
will be recognized by RIT, New RIT, the shareholders of both RIT and New RIT or
the Foundation for federal income tax purposes, and (v) no gain will be
recognized by BCBSMo, New BCBSMo, RIT, New RIT, the shareholders of any of the
foregoing entities, or the Foundation under Section 337(b)(2) or (d) of the
Code. Such opinions shall be in form and substance reasonably satisfactory to
BCBSMo and may be based upon reasonable assumptions and standard
representations;
(h) BCBSMo Board Legal Opinion . The Board of Directors of BCBSMo
shall have received, on or before the Closing Date, in form and substance
reasonably satisfactory to such Board, the reaffirmation of the opinion of
Greensfelder, Hemker & Gale, P.C. dated January 6, 2000, to the effect that (i)
authorization and approval of the Reorganization by the Board of Directors of
BCBSMo is consistent with its fiduciary duties, (ii) the Reorganization complies
with the General Not For Profit Corporation Act of Missouri, and (iii) the
Indemnification Agreement, when duly executed and delivered by the Foundation
and New RIT, will be the valid and binding obligation of the Foundation
enforceable against the Foundation in accordance with its terms;
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(i) Resolution of Pending Litigation. All of the pending litigation
described in paragraph 2 of the Settlement Agreement shall have been disposed of
by all parties thereto as required under paragraph 7 thereof; and
(j) Legal Opinions. BCBSMo shall have received, addressed to BCBSMo
and in form and substance reasonably satisfactory to BCBSMo (with such
qualifications and assumptions as are customary and reasonable), (i) the opinion
of counsel for RIT, dated as of the Closing Date, to the effect that all
corporate acts and proceedings required to be taken by RIT to authorize the
execution, delivery and performance of this Agreement, and the Ancillary
Agreements to which RIT is a party, and the consummation of the transactions
contemplated hereby and thereby, have been duly and properly taken and performed
(the "RIT Legal Opinion"); (ii) the opinion of counsel for New RIT, dated as of
the Closing Date, to the effect that (a) all corporate acts and proceedings
required to be taken by New RIT to authorize the execution, delivery and
performance of this Agreement, and the Ancillary Agreements to which New RIT is
a party, and the consummation of the transactions contemplated hereby and
thereby, have been duly and properly taken and performed, and (b) the shares of
New RIT Stock to be issued in the RIT/New RIT Merger Transaction, when issued in
exchange for RIT Stock as provided herein, will be duly and validly authorized
and issued and will be fully paid and nonassessable (the "New RIT Legal
Opinion"); (iii) the opinion of counsel for the Foundation, dated as of the
Closing Date, to the effect that all corporate acts and proceedings required to
be taken by the Foundation to authorize the execution, delivery and performance
of this Agreement, and the Ancillary Agreements to which the Foundation is a
party, and the consummation of the transaction contemplated hereby and thereby,
have been duly and properly taken and performed (the "Foundation Legal
Opinion"); and (iv) the opinion of counsel for the Foundation to the effect that
the Foundation will receive the shares of New RIT Stock to be issued in the
RIT/New RIT Merger Transaction free and clear of claims that have been asserted
or may in the future be asserted arising out of or relating to the
Reorganization and arising out of or relating to either the status of BCBSMo as
a mutual or public benefit corporation under Missouri law or the ownership,
beneficial ownership, or rights to the assets, surplus or equity of BCBSMo or
any subsidiary or affiliate of BCBSMo (the "Foundation Litigation Legal
Opinion"); and
(k) Confirmation From Attorney General and DOI. BCBSMo shall have
received written notice from the Attorney General and DOI that the Sarkis
litigation condition precedent in Section 4.01(f) and the legal opinion
condition precedent in Section 4.05(h)(iii) have both either been satisfied or
waived.
Section 4.03. Conditions to Obligations of RIT. The obligations of RIT to
effect the Reorganization shall be subject to the satisfaction or waiver by RIT
of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties made by BCBSMo, New RIT and the Foundation in this Agreement shall be
true and correct (subject to the standard in Section 2.01 hereof) on and as of
the Closing Date with the same effect as though such representations and
warranties had been made or given on and as of the Closing Date (except for any
such representations and warranties made only as of a specified date which shall
be true and correct (subject to the standard in Section 2.01 hereof) as of such
date);
(b) Compliance with Agreements. BCBSMo, New RIT and the Foundation
shall have performed and complied in all material respects with all of their
respective obligations and agreements required to be performed on or prior to
the Closing Date under this Agreement;
(c) Delivery of Documents. RIT shall have received all documents
required to be received from BCBSMo, New RIT and the Foundation on or prior to
the Closing Date (including, without limitation, the Ancillary Agreements), all
in form and substance reasonably satisfactory to RIT;
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(d) Other Consents. There shall have been obtained all other consents
and approvals of governmental authorities and private parties required under law
or contract except where the failure to have obtained such consents and
approvals would not have a Material Adverse Effect on RIT or would not be
material and adverse to the financial position, results of operations or
business of New RIT or the Foundation;
(e) Comfort Letter. RIT shall have received the letter referred to in
Section 3.12 from its independent auditor;
(f) Favorable Ruling. RIT shall have received a copy of the Favorable
Ruling obtained pursuant to Section 4.02(f) hereof, and the Favorable Ruling
shall not have been revoked, withdrawn, amended or modified (in whole or in
part) and there shall have been no change in applicable law (including, without
limitation, the Code, judicial decisions, administrative regulations and
published rulings) with regard to matters covered by the Favorable Ruling;
provided, however, that in the event that the Internal Revenue Service shall
fail to include in the Favorable Ruling any or all Favorable Ruling Matters for
any reason (including but not limited to no request for a private letter ruling
is made or, if made, the request is withdrawn in whole or in part, or the
Internal revenue Service refuses to rule with respect to any Favorable Ruling
Matter), the Favorable Ruling Matter(s) not so included shall nonetheless be
deemed to be included in the Favorable Ruling for purposes of satisfying this
condition provided that RIT shall have received the opinions provided in Section
4.03(g) hereof on such excluded Favorable Ruling Matter(s) in form and substance
reasonably acceptable to RIT;
(g) Tax Opinions. RIT shall have received opinions of
PricewaterhouseCoopers LLP that (i) gain or loss will not be recognized by
BCBSMo, RIT, HALIC, New RIT, the Foundation or the public shareholders of both
RIT and New RIT for federal income tax purposes, pursuant to the Transfer and
Assumption Transaction, except that BCBSMo could recognize gain to the extent
its basis in any assets transferred differs from the fair market value; (ii) the
Charter Conversion Transaction should be treated as a recapitalization under
Section 368(a)(1)(E) of the Code, should not result in the recognition of gain
or loss by the Foundation, and will not result in the recognition of gain or
loss by BCBSMo or New BCBSMo for federal income tax purposes, (iii) the
Reincorporation Merger Transaction will qualify as a reorganization under
Section 368(a) of the Code and no gain or loss will be recognized by New BCBSMo,
New RIT or the Foundation for federal income tax purposes, (iv) the RIT/New RIT
Merger transaction will be both a liquidation under Sections 332 and 337 of the
Code and a reorganization under Section 368(a) of the Code and no gain or loss
will be recognized by RIT, New RIT, the shareholders of both RIT and New RIT or
the Foundation for federal income tax purposes, and (v) no gain will be
recognized by BCBSMo, New BCBSMo, RIT, New RIT, the shareholders of any of the
foregoing entities, or the Foundation under Section 337(b)(2) or (d) of the
Code. Such opinions shall be in form and substance reasonably satisfactory to
RIT and may be based upon reasonable assumptions and standard representations;
(h) Association Approval. RIT and all of its controlled affiliates
that presently have license agreements with the Association shall have entered
into new license agreements with the Association, acceptable to RIT, in its sole
discretion, providing for the use by New RIT and the same controlled affiliates
of the Marks on terms no less favorable to New RIT and such controlled
affiliates (including terms relating to termination and the payment of
royalties, other than terms arising out of the for-profit status of New RIT,
which status does not affect the rate of dues or royalties payable) than the
license agreements in effect on the date hereof (the "Existing Licenses"), and
only subject to the conditions to which the Existing Licenses are subject (other
than conditions arising out of the for-profit status of New RIT acceptable to
RIT);
(i) Opinion of Financial Advisor to RIT. RIT shall have received the
opinion of RIT's financial advisor, dated the date of this Agreement, as to the
fairness, from a financial point of
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view, of the Public Exchange Ratio to the holders of RIT Class A Stock, and such
opinion shall not have been withdrawn or adversely modified in any material
respect as of the date of the mailing of the Proxy Statement/Prospectus to the
shareholders of RIT in connection with the RIT Shareholders' Meeting;
(j) Confirmation From Attorney General and DOI. RIT shall have
received written notice from the Attorney General and DOI that the Sarkis
litigation condition precedent in Section 4.01(f) and the legal opinion
condition precedent in Section 4.05(h)(iii) have both either been satisfied or
waived.
(k) Bank Approval. RIT shall have received all necessary consents or
approvals of any financial institution under any credit facility or other
financing agreement between such financial institution and RIT to the extent
that the transactions contemplated by this Agreement require the consent or
approval of such financial institution (the "Bank Approvals"); and
(l) Legal Opinions. RIT shall have received, addressed to RIT and in
form and substance reasonably satisfactory to RIT (with such qualifications and
assumptions as are customary and reasonable), (i) the opinion of counsel for
BCBSMo, dated as of the Closing Date, to the effect that all corporate acts and
proceedings required to be taken by BCBSMo to authorize the execution, delivery
and performance of this Agreement, and the Ancillary Agreements to which BCBSMo
is a party, and the consummation of the transactions contemplated hereby and
thereby, have been duly and properly taken and performed (the "BCBSMo Legal
Opinion"); (ii) the New RIT Legal Opinion; (iii) the Foundation Legal Opinion;
and (iv) the Foundation Litigation Legal Opinion.
Section 4.04. Conditions to Obligations of New RIT . The respective
obligations of New RIT to effect the Reorganization shall be subject to the
satisfaction or waiver by New RIT of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties made by RIT, BCBSMo and the Foundation in this Agreement shall be
true and correct (subject to the standard in Section 2.01 hereof) on and as of
the Closing Date with the same effect as though such representations and
warranties had been made or given on and as of the Closing Date (except for any
such representations and warranties made only as of a specified date which shall
be true and correct (subject to the standard in Section 2.01 hereof) as of such
date);
(b) Compliance with Agreements. RIT, BCBSMo and the Foundation shall
have performed and complied in all material respects with all of their
respective obligations and agreements required to be performed on or prior to
the Closing Date under this Agreement;
(c) Delivery of Documents. New RIT shall have received all documents
required to be received from BCBSMo, RIT and the Foundation on or prior to the
Closing Date (including, without limitation, the Ancillary Agreements), all in
form and substance reasonably satisfactory to New RIT; and
(d) Comfort Letter. New RIT shall have received copies of the letters
referred to in Section 3.12.
(e) Legal Opinions. New RIT shall have received, addressed to New RIT
and in form and substance reasonably satisfactory to New RIT (with such
qualifications and assumptions as are customary and reasonable) (i) the RIT
Legal Opinion; and (ii) the BCBSMo Legal Opinion.
Section 4.05. Conditions to Obligations of Foundation. The respective
obligations of the Foundation to effect the Reorganization shall be subject to
the satisfaction or waiver by the Foundation of each of the following
conditions:
25
<PAGE>
(a) Representations and Warranties. The representations and
warranties made by RIT, BCBSMo and New RIT in this Agreement shall be true and
correct (subject to the standard in Section 2.01 hereof) on and as of the
Closing Date with the same effect as though such representations and warranties
had been made or given on and as of the Closing Date (except for any such
representations and warranties made only as of a specified date which shall be
true and correct (subject to the standard in Section 2.01 hereof) as of such
date);
(b) Compliance with Agreements. RIT, BCBSMo and New RIT shall have
performed and complied in all material respects with all of their respective
obligations and agreements hereunder required to be performed on or prior to the
Closing Date under this Agreement;
(c) Delivery of Documents. The Foundation shall have received all
documents required to be received from BCBSMo, RIT and New RIT on or prior to
the Closing Date (including, without limitation, the Ancillary Agreements), all
in form and substance reasonably satisfactory to the Foundation;
(d) Other Consents. There shall have been obtained all other consents
and approvals of governmental authorities and private parties required under law
or contract except where the failure to have obtained such consents and
approvals would not be material and adverse to the financial position, results
of operations or business of New RIT or the Foundation;
(e) Comfort Letter. The Foundation shall have received copies of the
letters referred to in Section 3.12;
(f) Favorable Ruling. The Foundation shall have received a copy of
the Favorable Ruling obtained pursuant to Section 4.02(f) hereof, and the
Favorable Ruling shall not have been revoked, withdrawn, amended or modified (in
whole or in part) and there shall have been no change in applicable law
(including, without limitation, the Code, judicial decisions, administrative
regulations and published rulings) with regard to matters covered by the
Favorable Ruling; provided, however, that in the event that the Internal Revenue
Service shall fail to include in the Favorable Ruling any or all Favorable
Ruling Matters for any reason (including but not limited to no request for a
private letter ruling is made or, if made, the request is withdrawn in whole or
in part, or the Internal Revenue Service refuses to rule with respect to any
Favorable Ruling Matter), the Favorable Ruling Matter(s) not so included shall
nonetheless be deemed to be included in the Favorable Ruling for purposes of
satisfying this condition provided that the Foundation shall have received the
opinions provided in Section 4.05(g) hereof on such excluded Favorable Ruling
Matter(s) in form and substance reasonably acceptable to the Foundation; and
(g) Tax Opinions. The Foundation shall have received a copy of
opinions of PricewaterhouseCoopers LLP, or if PricewaterhouseCoopers LLP shall
not address the opinions identified in Section 4.03(g) hereof to the Foundation,
the Foundation shall have received the opinion of such other tax professionals
as are selected by the Foundation in accordance with Section 3.04(d) hereof that
(i) gain or loss will not be recognized by BCBSMo, RIT, HALIC, New RIT, the
Foundation or the public shareholders of both RIT and New RIT for federal income
tax purposes, pursuant to the Transfer and Assumption Transaction, except that
BCBSMo could recognize gain to the extent its basis in any assets transferred
differs from the fair market value; (ii) the Charter Conversion Transaction
should be treated as a recapitalization under Section 368(a)(1)(E) of the Code,
should not result in the recognition of gain or loss by the Foundation, and will
not result in the recognition of gain or loss by BCBSMo or New BCBSMo for
federal income tax purposes; (iii) the Reincorporation Merger Transaction will
qualify as a reorganization under Section 368(a) of the Code and no gain or loss
will be recognized by New BCBSMo, New RIT or the Foundation for federal income
tax purposes; (iv) the RIT/New RIT Merger transaction will be both a liquidation
under Sections 332 and 337 of the Code and a reorganization under Section 368(a)
of the Code and no gain or loss will be recognized by RIT, New RIT, the
shareholders of
26
<PAGE>
both RIT and New RIT or the Foundation for federal income tax purposes; and (v)
no gain will be recognized by BCBSMo, New BCBSMo, RIT, New RIT, the shareholders
of any of the foregoing entities, or the Foundation under Section 337(b)(2) or
(d) of the Code. Such opinions shall be in form and substance reasonably
satisfactory to the Foundation and may be based upon reasonable assumptions and
standard representations; and
(h) Legal Opinions. The Foundation shall have received, addressed to
the Foundation and in form and substance reasonably satisfactory to the
Foundation , and the Attorney General and Department of Insurance in the case of
the Foundation Litigation Legal Opinion (with such qualifications and
assumptions as are customary and reasonable), (i) the RIT Legal Opinion; (ii)
the BCBSMo Legal Opinion; and (iii) the Foundation Litigation Legal Opinion.
ARTICLE V
TERMINATION
This Agreement and the obligations of the parties hereunder may be
terminated at any time prior to the RIT/New RIT Merger Effective Time,
notwithstanding approval hereof by the shareholders of RIT as provided herein:
(a) by mutual written consent duly authorized by all parties
(including the RIT Independent Committee); or
(b) by any party, by giving notice to all other parties, if a court
of competent jurisdiction or any other Regulatory Authority shall have issued a
nonappealable final order, decree or ruling or taken any other action, in each
case having the effect of permanently restraining, enjoining or otherwise
prohibiting any one or more of the Transfer and Assumption Transaction, the
Charter Conversion Transaction, the Reincorporation Merger Transaction and the
RIT/New RIT Merger Transaction; or
(c) by any party, by giving notice to all other parties, if any of
the conditions to such party's obligations hereunder set forth in Article IV
hereof shall have not been satisfied (or waived, where permissible, by the party
entitled to the benefit thereof) on or before December 31, 2000; or
(d) by RIT, by giving notice to all other parties, if termination of
this Agreement shall be necessary to satisfy the fiduciary duties of the RIT
Board or the RIT Independent Committee as advised by legal counsel.
In the event that this Agreement shall be terminated pursuant to the
provisions of this Article V, no party hereto shall have any liability to any
other party hereto for costs, expenses, damages or otherwise, except as provided
in Section 6.01 hereof or as may be agreed to in writing by the party that shall
be obligated to pay such costs, expenses or damages.
ARTICLE VI
GENERAL PROVISIONS
Section 6.01. Fees and Expenses. Each party shall each bear their own
expenses, including the fees and expenses of their own advisors, incurred in
connection with this Agreement and the transactions contemplated hereby,
provided, however, that RIT shall pay all SEC filing fees, NYSE listing fees,
and printing and mailing expenses incurred in connection with the Proxy
Statement/Prospectus and Registration Statement.
27
<PAGE>
Section 6.02. Nonsurvival of Representations, Warranties and Agreements.
Except for and as provided in this Section 6.02, no representation, warranty,
covenant or agreement contained herein shall survive the RIT/New RIT Effective
Time or the earlier termination of this Agreement; provided, however, that no
such representation, warranty, covenant or agreement shall be deemed to be
terminated or extinguished so as to deprive any party hereto (or any director,
officer or controlling person thereof) of any defense in law or equity which
otherwise would be available against the claims of any person, including,
without limitation, any shareholder or former shareholder of any party hereto;
the aforesaid representations, warranties, covenants and agreements being
material inducements to the consummation by the parties hereto of the
transactions contemplated hereby. Notwithstanding the foregoing, the covenants
and agreements set forth in Sections 1.06, 3.10, 3.11, 3.13, 3.14 and 3.15
hereof and the agreements set forth in the Ancillary Agreements shall survive
the RIT/New RIT Merger Effective Time and shall be enforceable as provided
therein.
Section 6.03. Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered or mailed if delivered personally or mailed by
registered or certified mail (postage prepaid, return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by the like changes of address which shall be effective upon
receipt) or sent by electronic transmission, with confirmation received, to the
telecopy number specified below (a) if to the Foundation: Paul C. Wilson, Esq.,
Assistant Attorney General, 221 West High Street, Jefferson City, Missouri
65101, with a copy to: Eric Martin, Esq., General Counsel, Missouri Department
of Insurance, 301 West High Street, Suite 630, Jefferson City, Missouri 65101;
(b) if to New RIT: John A. O'Rourke, Chairman, 1831 Chestnut Street, St. Louis,
Missouri 63103-2275, Fax (314) 923-8958; with a copy to: Angela Fick Braly,
Esq., Secretary, 1831 Chestnut Street, St. Louis, Missouri 63103-2275, Fax (314)
923-6607; (c) if to BCBSMo: John A. O'Rourke, President and Chief Executive
Officer, Blue Cross and Blue Shield of Missouri, 1831 Chestnut Street, St.
Louis, Missouri 63103-2275, Fax: (314) 923-8958; with a copy to: Marvin O.
Young, Esq., Gallop Johnson & Neuman L.C., 101 South Hanley, St. Louis, Missouri
63105, Fax: (314) 862-1219; (d) if to RIT: John A. O'Rourke, Chairman, President
and Chief Executive Officer, RightCHOICE Managed Care, Inc., 1831 Chestnut
Street, St. Louis, Missouri 63103-2275, Fax: (314) 923-8958; with a copy to:
Lewis, Rice & Fingersh, L.C., 500 North Broadway, Suite 2000, St. Louis,
Missouri 63102, Attn: John J. Riffle, Esq., Fax: (314) 444-7788.
Section 6.04. Amendment. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of Directors
(or where such authority shall have been delegated to a special committee, by
that special committee) at any time prior to the Closing Date; provided,
however, that, after approval of the RIT/New RIT Merger Transaction by the
requisite shareholders of RIT as provided in Section 3.01(b) hereof, no
amendment may be made which by law requires further approval by such
shareholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto.
Section 6.05. Waiver. At any time prior to the RIT/New RIT Merger Effective
Time, any party hereto may with respect to any other party hereto (a) extend the
time for the performance of any of the obligations or other acts, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, and (c) waive compliance with any of the
agreements or conditions contained herein. Any such extension or waiver shall be
valid if set forth in an instrument in writing signed by the party or parties to
be bound thereby.
Section 6.06. Entire Agreement. This Agreement, and the other agreements
and instruments referenced herein, including the Ancillary Agreements,
constitute the entire understanding and agreements of the parties with respect
to the subject matter hereof and supersede all prior and contemporaneous
agreements and understandings, both written and oral, among the parties with
respect
28
<PAGE>
thereto or any of them, with respect to the subject matter hereof and, except as
otherwise expressly provided herein, are not intended to confer upon any other
person any rights or remedies hereunder.
Section 6.07. Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement, other than Section 3.11 hereof (which is intended to be for the
benefit of the Indemnified Parties and may be enforced by such Indemnified
Parties).
Section 6.08. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Missouri, without regard
to the principles and conflicts of laws thereof.
Section 6.09. Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
Section 6.10. Recitals. The Recitals to this Agreement shall be deemed to
be part of this Agreement and incorporated herein.
Section 6.11. Fair Construction. This Agreement is the product of
negotiations and shall be deemed to have been drafted by all of the parties. It
shall be construed in accordance with the fair meaning of its terms and its
language shall not be strictly construed against, nor shall ambiguities be
resolved against, any particular party.
Section 6.12. Headings and Captions. The captions of Articles and Sections
hereof are for convenience only and shall not control or affect the meaning or
construction of any provisions of this Agreement.
Section 6.13. Assignment. This Agreement may not be assigned by any of the
parties hereto.
[signature page appears on next page]
29
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth above.
BLUE CROSS AND BLUE SHIELD OF MISSOURI, a Missouri
nonprofit health services corporation
/s/ John A. O'Rourke
-------------------------------------------------
John A. O'Rourke, President
RIGHTCHOICE MANAGED CARE, INC.,
a Missouri corporation
/s/ John A. O'Rourke
-------------------------------------------------
John A. O'Rourke, President and Chief Executive
Officer
THE MISSOURI FOUNDATION FOR HEALTH, a Missouri
nonprofit public benefit corporation
/s/ Paul C. Wilson
-------------------------------------------------
Name: Paul C. Wilson
--------------------------------------------
Title: Chairman
-------------------------------------------
RIGHTCHOICE MANAGED CARE, INC.,
a Delaware corporation
/s/ John A. O'Rourke
-------------------------------------------------
John A. O'Rourke, Chairman
30
<PAGE>
EXHIBIT 10.6.9
ADDENDUM TO BLUE CROSS LICENSE AGREEMENT
----------------------------------------
This Blue Cross License Agreement is made by and between Blue Cross
and Blue Shield Association ("BCBSA") and the Blue Cross Plan known as Blue
Cross and Blue Shield of Missouri (the "Plan").
Preamble
--------
WHEREAS, BCBSA is the owner of the BLUE CROSS and the BLUE CROSS
Design service marks (collectively the "Licensed Marks");
WHEREAS the Plan was given the right to use the Licensed Marks as
service marks for health care plans in its service area and the right to use
BLUE CROSS in its trade and/or corporate name (the "Licensed Name");
WHEREAS, BCBSA has informed the Plan that the Plan's Blue Cross
License Agreement automatically terminated pursuant to paragraph 15(a)(viii) of
that License Agreement as a result of an order entered by the Circuit Court of
Cole, County, Missouri dated October 29, 1998 (the "Missouri Order") in certain
litigation pending among and between the Plan, the Missouri Department of
Insurance, and the Attorney General of the State of Missouri (the "Litigation");
WHEREAS, the Plan has informed BCBSA that: (i) the Plan believes that
because the Missouri Order was void and was vacated as void ab initio six days
-- ------
after it was entered, it was not effective and did not result in the automatic
termination of the Plan's Blue Cross License Agreement; (ii) the Plan contends
its Blue Cross License Agreement remains in effect; and (iii) to avoid the
expense and delay of litigation and to clarify its right to continue to use the
Licensed Marks and Licensed Name, the Plan is willing to accept benefits and
rights under, this Addendum to Blue Cross License Agreement;
WHEREAS, BCBSA has determined that it is in the best interest of the
Licensed Marks, BCBSA, and its member Plans to grant the Plan a Blue Cross
license pursuant to the terms of the Blue Cross License Agreement as amended by
this Addendum to Blue Cross License Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
<PAGE>
Addendum
--------
1. BCBSA hereby grants the Plan, upon the terms, covenants, and
conditions of the Blue Cross License Agreement attached hereto (the "Full
License") as amended by this Addendum to Blue Cross License Agreement
("Addendum"), the right to use the Licensed Name in its trade and/or corporate
name and the right to use the Licensed Marks in the sale, marketing, and
administration of health care plans and related services in its licensed service
area. Notwithstanding any provision to the contrary in the Full License,
paragraphs 1 through 8 of this Addendum shall control to the extent they
conflict with any terms, conditions, or covenants of the Full License. The term
"Agreement" as used in the Full License shall be construed to include this
Addendum.
2. The Plan releases any and all claims, causes of action, actions,
suits, or any demands whatsoever against BCBSA or any of its Member Plans,
whether at law or equity, whether in judicial, arbitral, or alternative fora,
and whether known or unknown, that the Plan now has or may have had on behalf of
itself or any other person or entity at any time prior to and including the date
hereof, or hereafter can, shall, or may have or claim to have, arising out of or
in any way related to the aforementioned alleged automatic termination.
3. BCBSA releases any and all claims, causes of action, actions,
suits, or any demands whatsoever against the Plan, whether at law or equity,
whether in judicial, arbital, or alternative fora, and whether known or unknown,
that BCBSA now has or may have had on behalf of itself or any other person or
entity at any time prior to and including the date hereof, or hereafter can,
shall, or may have or claim to have, arising out of or in any way related to the
aforementioned alleged automatic termination.
4. The Plan warrants that, apart from the Litigation, it is in
compliance with all, and has no plans to engage in conduct that would violate
any, BCBSA rules and regulations, including all provisions of this Addendum. The
Plan warrants that there is no imminent risk of dissolution of the Plan or of
the appointment of a trustee, interim trustee, receiver, or other custodian for
any of the Plan's business or property. The Plan shall immediately provide
BCBSA's General Counsel with copies of all pleadings and orders in the
Litigation upon receipt and shall regularly update BCBSA's General Counsel on
the Litigation. If at any time after the effective date of this Addendum the
Plan becomes aware of any event that indicates that the Plan or any of its
licensed Controlled Affiliates is in imminent danger of dissolution, the Plan
shall immediately notify BCBSA's General Counsel in writing.
<PAGE>
5. All disputes related to the termination of the Plan's licenses
shall be adjudicated exclusively in a United States District Court, or if that
Court does not have subject matter jurisdiction, in a Court with competent
jurisdiction in Illinois. The Plan shall not claim that a Court in Illinois
lacks personal jurisdiction over the Plan concerning any such dispute, nor that
a Court in Illinois is an improper or inconvenient venue for any such dispute.
6. The provisions of paragraph 15(d)(i) of the Full License related
to notice to customers, and the provisions of paragraph 15(d)(iii) of the Full
License related to the reestablishment fee, shall not apply to the alleged
automatic termination triggered by the Missouri Order. The BCBSA Board of
Directors' March 12, 1998 resolution relating to the Plan's licenses is
superseded by the terms of the Full License as amended by this Addendum,
provided, however, that paragraph 15(a)(vii) of the Full License shall not apply
with respect to the Litigation and is superseded by paragraph 8 of this
Addendum.
7. The Full License as amended by this Addendum shall automatically
terminate upon any judicial act which: (i) provides that, or approves a
transaction pursuant to which, a person, entity or group other than licensees of
BCBSA, acquires the ability to select the majority of the members of the Board
of Directors of the Plan or any of its Larger Controlled Affiliates or otherwise
gains control of the Plan or Larger Controlled Affiliates; or (ii) changes the
composition, or the voting rights of the members, of the Board of Directors of
the Plan or any of its Larger Controlled Affiliates. This paragraph shall 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 BCBSA.
8. The Full License as amended by this Addendum shall automatically
terminate on March 10, 2000, unless the BCBSA Board of Directors takes
affirmative action to extend the license on or before the scheduled Board
meeting on March 10, 2000.
9. The Full License as amended by this Addendum shall be deemed
effective as of October 29, 1998.
<PAGE>
IN WITNESS HEREOF, the parties have caused the Full License as amended by this
Addendum to Blue Cross License Agreement to be executed, effective October 29,
1998:
BLUE CROSS AND BLUE SHIELD ASSOCIATION:
By: /s/ Scott P. Seroto
------------------------------------
Title: ______EVP-COO_______________________
Date: ______11-23-99______________________
BLUE CROSS AND BLUE SHIELD OF MISSOURI
By: _____/s/ John O'Rourke______________
Title: _____President______________________
Date: _____November 23, 1999______________
<PAGE>
EXHIBIT 10.7.8
ADDENDUM TO BLUE SHIELD LICENSE AGREEMENT
-----------------------------------------
This Blue Shield License Agreement is made by and between Blue Shield
and Blue Shield Association ("BCBSA") and the Blue Shield Plan known as Blue
Cross and Blue Shield of Missouri (the "Plan").
Preamble
--------
WHEREAS, BCBSA is the owner of the BLUE SHIELD and the BLUE SHIELD
Design service marks (collectively the "Licensed Marks");
WHEREAS the Plan was given the right to use the Licensed Marks as
service marks for health care plans in its service area and the right to use
BLUE SHIELD in its trade and/or corporate name (the "Licensed Name");
WHEREAS, BCBSA has informed the Plan that the Plan's Blue Shield
License Agreement automatically terminated pursuant to paragraph 15(a)(viii) of
that License Agreement as a result of an order entered by the Circuit Court of
Cole, County, Missouri dated October 29, 1998 (the "Missouri Order") in certain
litigation pending among and between the Plan, the Missouri Department of
Insurance, and the Attorney General of the State of Missouri (the "Litigation");
WHEREAS, the Plan has informed BCBSA that: (i) the Plan believes that
because the Missouri Order was void and was vacated as void ab initio six days
-- ------
after it was entered, it was not effective and did not result in the automatic
termination of the Plan's Blue Shield License Agreement; (ii) the Plan contends
its Blue Shield License Agreement remains in effect; and (iii) to avoid the
expense and delay of litigation and to clarify its right to continue to use the
Licensed Marks and Licensed Name, the Plan is willing to accept benefits and
rights under, this Addendum to Blue Shield License Agreement;
WHEREAS, BCBSA has determined that it is in the best interest of the
Licensed Marks, BCBSA, and its member Plans to grant the Plan a Blue Shield
license pursuant to the terms of the Blue Shield License Agreement as amended by
this Addendum to Blue Shield License Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
<PAGE>
Addendum
--------
1. BCBSA hereby grants the Plan, upon the terms, covenants, and
conditions of the Blue Shield License Agreement attached hereto (the "Full
License") as amended by this Addendum to Blue Shield License Agreement
("Addendum"), the right to use the Licensed Name in its trade and/or corporate
name and the right to use the Licensed Marks in the sale, marketing, and
administration of health care plans and related services in its licensed service
area. Notwithstanding any provision to the contrary in the Full License,
paragraphs 1 through 8 of this Addendum shall control to the extent they
conflict with any terms, conditions, or covenants of the Full License. The term
"Agreement" as used in the Full License shall be construed to include this
Addendum.
2. The Plan releases any and all claims, causes of action, actions,
suits, or any demands whatsoever against BCBSA or any of its Member Plans,
whether at law or equity, whether in judicial, arbitral, or alternative fora,
and whether known or unknown, that the Plan now has or may have had on behalf of
itself or any other person or entity at any time prior to and including the date
hereof, or hereafter can, shall, or may have or claim to have, arising out of or
in any way related to the aforementioned alleged automatic termination.
3. BCBSA releases any and all claims, causes of action, actions,
suits, or any demands whatsoever against the Plan, whether at law or equity,
whether in judicial, arbital, or alternative fora, and whether known or unknown,
that BCBSA now has or may have had on behalf of itself or any other person or
entity at any time prior to and including the date hereof, or hereafter can,
shall, or may have or claim to have, arising out of or in any way related to the
aforementioned alleged automatic termination.
4. The Plan warrants that, apart from the Litigation, it is in
compliance with all, and has no plans to engage in conduct that would violate
any, BCBSA rules and regulations, including all provisions of this Addendum. The
Plan warrants that there is no imminent risk of dissolution of the Plan or of
the appointment of a trustee, interim trustee, receiver, or other custodian for
any of the Plan's business or property. The Plan shall immediately provide
BCBSA's General Counsel with copies of all pleadings and orders in the
Litigation upon receipt and shall regularly update BCBSA's General Counsel on
the Litigation. If at any time after the effective date of this Addendum the
Plan becomes aware of any event that indicates that the Plan or any of its
licensed Controlled Affiliates is in imminent danger of dissolution, the Plan
shall immediately notify BCBSA's General Counsel in writing.
<PAGE>
5. All disputes related to the termination of the Plan's licenses
shall be adjudicated exclusively in a United States District Court, or if that
Court does not have subject matter jurisdiction, in a Court with competent
jurisdiction in Illinois. The Plan shall not claim that a Court in Illinois
lacks personal jurisdiction over the Plan concerning any such dispute, nor that
a Court in Illinois is an improper or inconvenient venue for any such dispute.
6. The provisions of paragraph 15(d)(i) of the Full License related
to notice to customers, and the provisions of paragraph 15(d)(iii) of the Full
License related to the reestablishment fee, shall not apply to the alleged
automatic termination triggered by the Missouri Order. The BCBSA Board of
Directors' March 12, 1998 resolution relating to the Plan's licenses is
superseded by the terms of the Full License as amended by this Addendum,
provided, however, that paragraph 15(a)(vii) of the Full License shall not apply
with respect to the Litigation and is superseded by paragraph 8 of this
Addendum.
7. The Full License as amended by this Addendum shall automatically
terminate upon any judicial act which: (i) provides that, or approves a
transaction pursuant to which, a person, entity or group other than licensees of
BCBSA, acquires the ability to select the majority of the members of the Board
of Directors of the Plan or any of its Larger Controlled Affiliates or otherwise
gains control of the Plan or Larger Controlled Affiliates; or (ii) changes the
composition, or the voting rights of the members, of the Board of Directors of
the Plan or any of its Larger Controlled Affiliates. This paragraph shall 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 BCBSA.
8. The Full License as amended by this Addendum shall automatically
terminate on March 10, 2000, unless the BCBSA Board of Directors takes
affirmative action to extend the license on or before the scheduled Board
meeting on March 10, 2000.
9. The Full License as amended by this Addendum shall be deemed
effective as of October 29, 1998.
<PAGE>
IN WITNESS HEREOF, the parties have caused the Full License as amended by this
Addendum to Blue Shield License Agreement to be executed, effective October 29,
1998:
BLUE CROSS AND BLUE SHIELD ASSOCIATION:
By: ____/s/ Scott P. Seroto______________________
Title: ____EVP-COO__________________________________
Date: ____11-23-99_________________________________
BLUE CROSS AND BLUE SHIELD OF MISSOURI
By: ____/s/ John O'Rourke________________________
Title: ____President________________________________
Date: ____November 23, 1999________________________
<PAGE>
EXHIBIT 10.8.5
ADDENDUM TO BLUE CROSS CONTROLLED AFFILIATE LICENSE AGREEMENT
-------------------------------------------------------------
This Blue Cross Controlled Affiliate License Agreement is made by and
among Blue Cross and Blue Shield Association ("BCBSA") and HMO Missouri, Inc.
(the "Controlled Affiliate"), a Controlled Affiliate of the Blue Cross Plan(s)
known as Blue Cross and Blue Shield of Missouri (the "Plan"), which is also a
Party signatory hereto.
Preamble
--------
WHEREAS, BCBSA is the owner of the BLUE CROSS and the BLUE CROSS
Design service marks (collectively the "Licensed Marks");
WHEREAS the Controlled Affiliate was given the right to use the
Licensed Marks as service marks for health care plans in its service area and
the right to use BLUE CROSS in its trade name (the "Licensed Name");
WHEREAS, BCBSA has informed the Controlled Affiliate that the
Controlled Affiliate's Blue Cross Controlled Affiliate License Agreement
automatically terminated pursuant to paragraph 7.B. of that Controlled Affiliate
License Agreement, as a result of an order entered by the Circuit Court of Cole,
County, Missouri dated October 29, 1998 (the "Missouri Order") in certain
litigation pending among and between the Plan, the Missouri Department of
Insurance, and the Attorney General of the State of Missouri (the "Litigation");
WHEREAS, the Controlled Affiliate has informed BCBSA that: (i) the
Controlled Affiliate believes that because the Missouri Order was void and was
vacated as void ab initio six days after it was entered, it was not effective
-- ------
and did not result in the automatic termination of the Controlled Affiliate's
Blue Cross Controlled Affiliate License Agreement; (ii) the Controlled Affiliate
contends that its Blue Cross Controlled Affiliate License Agreement remains in
effect; and (iii) to avoid the expense and delay of litigation and to clarify
its right to continue to use the Licensed Marks and Licensed Name, the
Controlled Affiliate is willing to accept benefits and rights under this
Addendum to Blue Cross Controlled Affiliate License Agreement;
WHEREAS, BCBSA has determined that it is in the best interest of the
Licensed Marks, BCBSA, and its member Plans to grant the Controlled Affiliate a
Blue Cross Controlled Affiliate license pursuant to the terms of the Blue Cross
Controlled Affiliate License Agreement as amended by this Addendum to Blue Cross
Controlled Affiliate License Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
<PAGE>
Addendum
--------
1. BCBSA hereby grants the Controlled Affiliate, upon the terms,
covenants, and conditions of the Blue Cross Controlled Affiliate License
Agreement attached hereto (the "Full Affiliate License") as amended by this
Addendum to Blue Cross Controlled Affiliate License Agreement ("Addendum"), the
right to use the Licensed Name in its trade name and the right to use the
Licensed Marks in the sale, marketing, and administration of health care plans
and related services in its licensed service area. Notwithstanding any provision
to the contrary in the Full Affiliate License, paragraphs 1 through 8 of this
Addendum shall control to the extent they conflict with any terms, conditions,
or covenants of the Full Affiliate License. The term "Agreement" as used in the
Full Affiliate License shall be construed to include this Addendum.
2. The Controlled Affiliate releases any and all claims, causes of
action, actions, suits, or any demands whatsoever against BCBSA or any of its
Member Plans, whether at law or equity, whether in judicial, arbitral, or
alternative fora, and whether known or unknown, that the Controlled Affiliate
now has or may have had on behalf of itself or any other person or entity at any
time prior to and including the date hereof, or hereafter can, shall, or may
have or claim to have, arising out of or in any way related to the
aforementioned alleged automatic termination.
3. BCBSA releases any and all claims, causes of action, actions,
suits, or any demands whatsoever against the Controlled Affiliate, whether at
law or equity, whether in judicial, arbitral, or alternative fora, and whether
known or unknown, that BCBSA now has or may have had on behalf of itself or any
other person or entity at any time prior to and including the date hereof, or
hereafter can, shall, or may have or claim to have, arising out of or in any way
related to the aforementioned alleged automatic termination.
4. The Controlled Affiliate warrants that, apart from the
Litigation, it is in compliance with all, and has no plans to engage in conduct
that would violate any, BCBSA rules and regulations, including all provisions of
this Addendum. The Controlled Affiliate warrants that there is no imminent risk
of dissolution of the Controlled Affiliate or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the Controlled
Affiliate's business or property. The Controlled Affiliate shall immediately
provide BCBSA's General Counsel with copies of all pleadings and orders in the
Litigation upon receipt and shall regularly update BCBSA's General Counsel on
the Litigation. If at any time after the effective date of this Addendum the
Controlled Affiliate becomes aware of any event that indicates that the
Controlled Affiliate is in imminent danger of dissolution, the Controlled
Affiliate shall immediately notify BCBSA's General Counsel in writing.
5. All disputes related to the termination of the Controlled
Affiliate's licenses shall be adjudicated exclusively in a United States
District Court, or if that Court does not have subject matter jurisdiction, in a
Court with competent jurisdiction in Illinois. The Controlled Affiliate shall
not claim that a Court in Illinois lacks personal
<PAGE>
jurisdiction over the Controlled Affiliate concerning any such dispute, nor that
a Court in Illinois is an improper or inconvenient venue for any such dispute.
6. The provisions of paragraphs 7.G. and 7.H.(1) of the Full
Affiliate License related to notice to customers, and the provisions of
paragraph 7.H.(3) of the Full Affiliate License related to the reestablishment
fee, shall not apply to the alleged automatic termination triggered by the
Missouri Order. The BCBSA Board of Directors' March 12, 1998 resolution relating
to the Controlled Affiliate's licenses is superseded by the terms of the Full
Affiliate License as amended by this Addendum, provided, however, that paragraph
7.E.(3)(vii) of the Full Affiliate License shall not apply with respect to the
Litigation and is superseded by paragraph 8 of this Addendum.
7. The Full Affiliate License as amended by this Addendum shall
automatically terminate upon any judicial act which: (i) provides that, or
approves a transaction pursuant to which, a person, entity or group other than
licensees of BCBSA, acquires the ability to select the majority of the members
of the Board of Directors of the Controlled Affiliate or otherwise gains control
of the Controlled Affiliate; or (ii) changes the composition, or the voting
rights of the members, of the Board of Directors of the Controlled Affiliate.
This paragraph shall 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 BCBSA.
8. The Full Affiliate License as amended by this Addendum shall
automatically terminate on March 10, 2000, unless the BCBSA Board of Directors
takes affirmative action to extend the license on or before the scheduled Board
meeting on March 10, 2000.
9. The Full Affiliate License as amended by this Addendum shall be
deemed effective as of October 29, 1998.
<PAGE>
IN WITNESS HEREOF, the parties have caused the Full Affiliate License as amended
by this Addendum to Blue Cross Controlled Affiliate License Agreement to be
executed, effective October 29, 1998:
BLUE CROSS AND BLUE SHIELD ASSOCIATION:
By: ____/s/ Scott P. Seroto______________________
Title: ____EVP-COO__________________________________
Date: ____11-23-99_________________________________
HMO MISSOURI, INC.
By: _____/s/ John O'Rourke_______________________
Title: _____President_______________________________
Date: _____November 23, 1999_______________________
BLUE CROSS AND BLUE SHIELD OF MISSOURI
By: ____/s/ John O'Rourke________________________
Title: ____President________________________________
Date: ____November 23, 1999________________________
<PAGE>
EXHIBIT 10.9.5
ADDENDUM TO BLUE SHIELD CONTROLLED AFFILIATE LICENSE AGREEMENT
--------------------------------------------------------------
This Blue Shield Controlled Affiliate License Agreement is made by and
among Blue Cross and Blue Shield Association ("BCBSA") and HMO Missouri, Inc.
(the "Controlled Affiliate"), a Controlled Affiliate of the Blue Shield Plan(s)
known as Blue Cross and Blue Shield of Missouri (the "Plan"), which is also a
Party signatory hereto.
Preamble
--------
WHEREAS, BCBSA is the owner of the BLUE SHIELD and the BLUE SHIELD
Design service marks (collectively the "Licensed Marks");
WHEREAS the Controlled Affiliate was given the right to use the
Licensed Marks as service marks for health care plans in its service area and
the right to use BLUE SHIELD in its trade name (the "Licensed Name");
WHEREAS, BCBSA has informed the Controlled Affiliate that the
Controlled Affiliate's Blue Shield Controlled Affiliate License Agreement
automatically terminated pursuant to paragraph 7.B. of that Controlled Affiliate
License Agreement, as a result of an order entered by the Circuit Court of Cole,
County, Missouri dated October 29, 1998 (the "Missouri Order") in certain
litigation pending among and between the Plan, the Missouri Department of
Insurance, and the Attorney General of the State of Missouri (the "Litigation");
WHEREAS, the Controlled Affiliate has informed BCBSA that: (i) the
Controlled Affiliate believes that because the Missouri Order was void and was
vacated as void ab initio six days after it was entered, it was not effective
-- ------
and did not result in the automatic termination of the Controlled Affiliate's
Blue Shield Controlled Affiliate License Agreement; (ii) the Controlled
Affiliate contends that its Blue Shield Controlled Affiliate License Agreement
remains in effect; and (iii) to avoid the expense and delay of litigation and to
clarify its right to continue to use the Licensed Marks and Licensed Name, the
Controlled Affiliate is willing to accept benefits and rights under this
Addendum to Blue Shield Controlled Affiliate License Agreement;
WHEREAS, BCBSA has determined that it is in the best interest of the
Licensed Marks, BCBSA, and its member Plans to grant the Controlled Affiliate a
Blue Shield Controlled Affiliate license pursuant to the terms of the Blue
Shield Controlled Affiliate License Agreement as amended by this Addendum to
Blue Shield Controlled Affiliate License Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
<PAGE>
Addendum
--------
1. BCBSA hereby grants the Controlled Affiliate, upon the terms,
covenants, and conditions of the Blue Shield Controlled Affiliate License
Agreement attached hereto (the "Full Affiliate License") as amended by this
Addendum to Blue Shield Controlled Affiliate License Agreement ("Addendum"), the
right to use the Licensed Name in its trade name and the right to use the
Licensed Marks in the sale, marketing, and administration of health care plans
and related services in its licensed service area. Notwithstanding any provision
to the contrary in the Full Affiliate License, paragraphs 1 through 8 of this
Addendum shall control to the extent they conflict with any terms, conditions,
or covenants of the Full Affiliate License. The term "Agreement" as used in the
Full Affiliate License shall be construed to include this Addendum.
2. The Controlled Affiliate releases any and all claims, causes of
action, actions, suits, or any demands whatsoever against BCBSA or any of its
Member Plans, whether at law or equity, whether in judicial, arbitral, or
alternative fora, and whether known or unknown, that the Controlled Affiliate
now has or may have had on behalf of itself or any other person or entity at any
time prior to and including the date hereof, or hereafter can, shall, or may
have or claim to have, arising out of or in any way related to the
aforementioned alleged automatic termination.
3. BCBSA releases any and all claims, causes of action, actions,
suits, or any demands whatsoever against the Controlled Affiliate, whether at
law or equity, whether in judicial, arbitral, or alternative fora, and whether
known or unknown, that BCBSA now has or may have had on behalf of itself or any
other person or entity at any time prior to and including the date hereof, or
hereafter can, shall, or may have or claim to have, arising out of or in any way
related to the aforementioned alleged automatic termination.
4. The Controlled Affiliate warrants that, apart from the
Litigation, it is in compliance with all, and has no plans to engage in conduct
that would violate any, BCBSA rules and regulations, including all provisions of
this Addendum. The Controlled Affiliate warrants that there is no imminent risk
of dissolution of the Controlled Affiliate or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the Controlled
Affiliate's business or property. The Controlled Affiliate shall immediately
provide BCBSA's General Counsel with copies of all pleadings and orders in the
Litigation upon receipt and shall regularly update BCBSA's General Counsel on
the Litigation. If at any time after the effective date of this Addendum the
Controlled Affiliate becomes aware of any event that indicates that the
Controlled Affiliate is in imminent danger of dissolution, the Controlled
Affiliate shall immediately notify BCBSA's General Counsel in writing.
5. All disputes related to the termination of the Controlled
Affiliate's licenses shall be adjudicated exclusively in a United States
District Court, or if that Court does not have subject matter jurisdiction, in a
Court with competent jurisdiction in Illinois. The Controlled Affiliate shall
not claim that a Court in Illinois lacks personal
<PAGE>
jurisdiction over the Controlled Affiliate concerning any such dispute, nor that
a Court in Illinois is an improper or inconvenient venue for any such dispute.
6. The provisions of paragraphs 7.G. and 7.H.(1) of the Full
Affiliate License related to notice to customers, and the provisions of
paragraph 7.H.(3) of the Full Affiliate License related to the reestablishment
fee, shall not apply to the alleged automatic termination triggered by the
Missouri Order. The BCBSA Board of Directors' March 12, 1998 resolution relating
to the Controlled Affiliate's licenses is superseded by the terms of the Full
Affiliate License as amended by this Addendum, provided, however, that paragraph
7.E.(3)(vii) of the Full Affiliate License shall not apply with respect to the
Litigation and is superseded by paragraph 8 of this Addendum.
7. The Full Affiliate License as amended by this Addendum shall
automatically terminate upon any judicial act which: (i) provides that, or
approves a transaction pursuant to which, a person, entity or group other than
licensees of BCBSA, acquires the ability to select the majority of the members
of the Board of Directors of the Controlled Affiliate or otherwise gains control
of the Controlled Affiliate; or (ii) changes the composition, or the voting
rights of the members, of the Board of Directors of the Controlled Affiliate.
This paragraph shall 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 BCBSA.
8. The Full Affiliate License as amended by this Addendum shall
automatically terminate on March 10, 2000, unless the BCBSA Board of Directors
takes affirmative action to extend the license on or before the scheduled Board
meeting on March 10, 2000.
9. The Full Affiliate License as amended by this Addendum shall be
deemed effective as of October 29, 1998.
<PAGE>
IN WITNESS HEREOF, the parties have caused the Full Affiliate License as amended
by this Addendum to Blue Shield Controlled Affiliate License Agreement to be
executed, effective October 29, 1998:
BLUE CROSS AND BLUE SHIELD ASSOCIATION:
By: ____/s/ Scott P. Seroto________________________
Title: ____EVP-COO____________________________________
Date: ____11-23-99___________________________________
HMO MISSOURI, INC.
By: _____/s/ John O'Rourke_________________________
Title: _____President_________________________________
Date: _____November 23, 1999_________________________
BLUE CROSS AND BLUE SHIELD OF MISSOURI
By: ____/s/ John O'Rourke__________________________
Title: ____President__________________________________
Date: ____November 23, 1999__________________________
<PAGE>
EXHIBIT 10.10.7
ADDENDUM TO BLUE CROSS CONTROLLED AFFILIATE LICENSE AGREEMENT
-------------------------------------------------------------
This Blue Cross Controlled Affiliate License Agreement is made by and
among Blue Cross and Blue Shield Association ("BCBSA") and RightCHOICE Managed
Care, Inc. (the "Controlled Affiliate"), a Controlled Affiliate of the Blue
Cross Plan(s) known as Blue Cross and Blue Shield of Missouri (the "Plan"),
which is also a Party signatory hereto.
Preamble
--------
WHEREAS, BCBSA is the owner of the BLUE CROSS and the BLUE CROSS
Design service marks (collectively the "Licensed Marks");
WHEREAS the Controlled Affiliate was given the right to use the
Licensed Marks as service marks for health care plans in its service area and
the right to use BLUE CROSS in its trade name (the "Licensed Name");
WHEREAS, BCBSA has informed the Controlled Affiliate that the
Controlled Affiliate's Blue Cross Controlled Affiliate License Agreement
automatically terminated pursuant to paragraph 7.B. of that Controlled Affiliate
License Agreement, as a result of an order entered by the Circuit Court of Cole,
County, Missouri dated October 29, 1998 (the "Missouri Order") in certain
litigation pending among and between the Plan, the Missouri Department of
Insurance, and the Attorney General of the State of Missouri (the "Litigation");
WHEREAS, the Controlled Affiliate has informed BCBSA that: (i) the
Controlled Affiliate believes that because the Missouri Order was void and was
vacated as void ab initio six days after it was entered, it was not effective
-- ------
and did not result in the automatic termination of the Controlled Affiliate's
Blue Cross Controlled Affiliate License Agreement; (ii) the Controlled Affiliate
contends that its Blue Cross Controlled Affiliate License Agreement remains in
effect; and (iii) to avoid the expense and delay of litigation and to clarify
its right to continue to use the Licensed Marks and Licensed Name, the
Controlled Affiliate is willing to accept benefits and rights under this
Addendum to Blue Cross Controlled Affiliate License Agreement;
WHEREAS, BCBSA has determined that it is in the best interest of the
Licensed Marks, BCBSA, and its member Plans to grant the Controlled Affiliate a
Blue Cross Controlled Affiliate license pursuant to the terms of the Blue Cross
Controlled Affiliate License Agreement as amended by this Addendum to Blue Cross
Controlled Affiliate License Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
<PAGE>
Addendum
--------
1. BCBSA hereby grants the Controlled Affiliate, upon the terms,
covenants, and conditions of the Blue Cross Controlled Affiliate License
Agreement attached hereto (the "Full Affiliate License") as amended by this
Addendum to Blue Cross Controlled Affiliate License Agreement ("Addendum"), the
right to use the Licensed Name in its trade name and the right to use the
Licensed Marks in the sale, marketing, and administration of health care plans
and related services in its licensed service area. Notwithstanding any provision
to the contrary in the Full Affiliate License, paragraphs 1 through 8 of this
Addendum shall control to the extent they conflict with any terms, conditions,
or covenants of the Full Affiliate License. The term "Agreement" as used in the
Full Affiliate License shall be construed to include this Addendum.
2. The Controlled Affiliate releases any and all claims, causes of
action, actions, suits, or any demands whatsoever against BCBSA or any of its
Member Plans, whether at law or equity, whether in judicial, arbitral, or
alternative fora, and whether known or unknown, that the Controlled Affiliate
now has or may have had on behalf of itself or any other person or entity at any
time prior to and including the date hereof, or hereafter can, shall, or may
have or claim to have, arising out of or in any way related to the
aforementioned alleged automatic termination.
3. BCBSA releases any and all claims, causes of action, actions,
suits, or any demands whatsoever against the Controlled Affiliate, whether at
law or equity, whether in judicial, arbitral, or alternative fora, and whether
known or unknown, that BCBSA now has or may have had on behalf of itself or any
other person or entity at any time prior to and including the date hereof, or
hereafter can, shall, or may have or claim to have, arising out of or in any way
related to the aforementioned alleged automatic termination.
4. The Controlled Affiliate warrants that, apart from the
Litigation, it is in compliance with all, and has no plans to engage in conduct
that would violate any, BCBSA rules and regulations, including all provisions of
this Addendum. The Controlled Affiliate warrants that there is no imminent risk
of dissolution of the Controlled Affiliate or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the Controlled
Affiliate's business or property. The Controlled Affiliate shall immediately
provide BCBSA's General Counsel with copies of all pleadings and orders in the
Litigation upon receipt and shall regularly update BCBSA's General Counsel on
the Litigation. If at any time after the effective date of this Addendum the
Controlled Affiliate becomes aware of any event that indicates that the
Controlled Affiliate is in imminent danger of dissolution, the Controlled
Affiliate shall immediately notify BCBSA's General Counsel in writing.
5. All disputes related to the termination of the Controlled
Affiliate's licenses shall be adjudicated exclusively in a United States
District Court, or if that Court does not have subject matter jurisdiction, in a
Court with competent jurisdiction in Illinois. The Controlled Affiliate shall
not claim that a Court in Illinois lacks personal
<PAGE>
jurisdiction over the Controlled Affiliate concerning any such dispute, nor that
a Court in Illinois is an improper or inconvenient venue for any such dispute.
6. The provisions of paragraphs 7.G. and 7.H.(1) of the Full
Affiliate License related to notice to customers, and the provisions of
paragraph 7.H.(3) of the Full Affiliate License related to the reestablishment
fee, shall not apply to the alleged automatic termination triggered by the
Missouri Order. The BCBSA Board of Directors' March 12, 1998 resolution relating
to the Controlled Affiliate's licenses is superseded by the terms of the Full
Affiliate License as amended by this Addendum, provided, however, that paragraph
7.E.(3)(vii) of the Full Affiliate License shall not apply with respect to the
Litigation and is superseded by paragraph 8 of this Addendum.
7. The Full Affiliate License as amended by this Addendum shall
automatically terminate upon any judicial act which: (i) provides that, or
approves a transaction pursuant to which, a person, entity or group other than
licensees of BCBSA, acquires the ability to select the majority of the members
of the Board of Directors of the Controlled Affiliate or otherwise gains control
of the Controlled Affiliate; or (ii) changes the composition, or the voting
rights of the members, of the Board of Directors of the Controlled Affiliate.
This paragraph shall 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 BCBSA.
8. The Full Affiliate License as amended by this Addendum shall
automatically terminate on March 10, 2000, unless the BCBSA Board of Directors
takes affirmative action to extend the license on or before the scheduled Board
meeting on March 10, 2000.
9. The Full Affiliate License as amended by this Addendum shall be
deemed effective as of October 29, 1998.
<PAGE>
IN WITNESS HEREOF, the parties have caused the Full Affiliate License as amended
by this Addendum to Blue Cross Controlled Affiliate License Agreement to be
executed, effective October 29, 1998:
BLUE CROSS AND BLUE SHIELD ASSOCIATION:
By: ____/s/ Scott P. Seroto________________________
Title: ____EVP-COO____________________________________
Date: ____11-23-99___________________________________
RIGHTCHOICE MANAGED CARE, INC.
By: ___/s/ John O'Rourke___________________________
Title: ___President___________________________________
Date: ___November 23, 1999___________________________
BLUE CROSS AND BLUE SHIELD OF MISSOURI
By: ____/s/ John O'Rourke__________________________
Title: ____President__________________________________
Date: ____November 23, 1999__________________________
<PAGE>
EXHIBIT 10.11.7
ADDENDUM TO BLUE SHIELD CONTROLLED AFFILIATE LICENSE AGREEMENT
--------------------------------------------------------------
This Blue Shield Controlled Affiliate License Agreement is made by and
among Blue Cross and Blue Shield Association ("BCBSA") and RightCHOICE Managed
Care, Inc. (the "Controlled Affiliate"), a Controlled Affiliate of the Blue
Shield Plan(s) known as Blue Cross and Blue Shield of Missouri (the "Plan"),
which is also a Party signatory hereto.
Preamble
--------
WHEREAS, BCBSA is the owner of the BLUE SHIELD and the BLUE SHIELD
Design service marks (collectively the "Licensed Marks");
WHEREAS the Controlled Affiliate was given the right to use the
Licensed Marks as service marks for health care plans in its service area and
the right to use BLUE SHIELD in its trade name (the "Licensed Name");
WHEREAS, BCBSA has informed the Controlled Affiliate that the
Controlled Affiliate's Blue Shield Controlled Affiliate License Agreement
automatically terminated pursuant to paragraph 7.B. of that Controlled Affiliate
License Agreement, as a result of an order entered by the Circuit Court of Cole,
County, Missouri dated October 29, 1998 (the "Missouri Order") in certain
litigation pending among and between the Plan, the Missouri Department of
Insurance, and the Attorney General of the State of Missouri (the "Litigation");
WHEREAS, the Controlled Affiliate has informed BCBSA that: (i) the
Controlled Affiliate believes that because the Missouri Order was void and was
vacated as void ab initio six days after it was entered, it was not effective
-- ------
and did not result in the automatic termination of the Controlled Affiliate's
Blue Shield Controlled Affiliate License Agreement; (ii) the Controlled
Affiliate contends that its Blue Shield Controlled Affiliate License Agreement
remains in effect; and (iii) to avoid the expense and delay of litigation and to
clarify its right to continue to use the Licensed Marks and Licensed Name, the
Controlled Affiliate is willing to accept benefits and rights under this
Addendum to Blue Shield Controlled Affiliate License Agreement;
WHEREAS, BCBSA has determined that it is in the best interest of the
Licensed Marks, BCBSA, and its member Plans to grant the Controlled Affiliate a
Blue Shield Controlled Affiliate license pursuant to the terms of the Blue
Shield Controlled Affiliate License Agreement as amended by this Addendum to
Blue Shield Controlled Affiliate License Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
<PAGE>
Addendum
--------
1. BCBSA hereby grants the Controlled Affiliate, upon the terms,
covenants, and conditions of the Blue Shield Controlled Affiliate License
Agreement attached hereto (the "Full Affiliate License") as amended by this
Addendum to Blue Shield Controlled Affiliate License Agreement ("Addendum"), the
right to use the Licensed Name in its trade name and the right to use the
Licensed Marks in the sale, marketing, and administration of health care plans
and related services in its licensed service area. Notwithstanding any provision
to the contrary in the Full Affiliate License, paragraphs 1 through 8 of this
Addendum shall control to the extent they conflict with any terms, conditions,
or covenants of the Full Affiliate License. The term "Agreement" as used in the
Full Affiliate License shall be construed to include this Addendum.
2. The Controlled Affiliate releases any and all claims, causes of
action, actions, suits, or any demands whatsoever against BCBSA or any of its
Member Plans, whether at law or equity, whether in judicial, arbitral, or
alternative fora, and whether known or unknown, that the Controlled Affiliate
now has or may have had on behalf of itself or any other person or entity at any
time prior to and including the date hereof, or hereafter can, shall, or may
have or claim to have, arising out of or in any way related to the
aforementioned alleged automatic termination.
3. BCBSA releases any and all claims, causes of action, actions,
suits, or any demands whatsoever against the Controlled Affiliate, whether at
law or equity, whether in judicial, arbitral, or alternative fora, and whether
known or unknown, that BCBSA now has or may have had on behalf of itself or any
other person or entity at any time prior to and including the date hereof, or
hereafter can, shall, or may have or claim to have, arising out of or in any way
related to the aforementioned alleged automatic termination.
4. The Controlled Affiliate warrants that, apart from the
Litigation, it is in compliance with all, and has no plans to engage in conduct
that would violate any, BCBSA rules and regulations, including all provisions of
this Addendum. The Controlled Affiliate warrants that there is no imminent risk
of dissolution of the Controlled Affiliate or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the Controlled
Affiliate's business or property. The Controlled Affiliate shall immediately
provide BCBSA's General Counsel with copies of all pleadings and orders in the
Litigation upon receipt and shall regularly update BCBSA's General Counsel on
the Litigation. If at any time after the effective date of this Addendum the
Controlled Affiliate becomes aware of any event that indicates that the
Controlled Affiliate is in imminent danger of dissolution, the Controlled
Affiliate shall immediately notify BCBSA's General Counsel in writing.
5. All disputes related to the termination of the Controlled
Affiliate's licenses shall be adjudicated exclusively in a United States
District Court, or if that Court does not have subject matter jurisdiction, in a
Court with competent jurisdiction in Illinois. The Controlled Affiliate shall
not claim that a Court in Illinois lacks personal
<PAGE>
jurisdiction over the Controlled Affiliate concerning any such dispute, nor that
a Court in Illinois is an improper or inconvenient venue for any such dispute.
6. The provisions of paragraphs 7.G. and 7.H.(1) of the Full
Affiliate License related to notice to customers, and the provisions of
paragraph 7.H.(3) of the Full Affiliate License related to the reestablishment
fee, shall not apply to the alleged automatic termination triggered by the
Missouri Order. The BCBSA Board of Directors' March 12, 1998 resolution relating
to the Controlled Affiliate's licenses is superseded by the terms of the Full
Affiliate License as amended by this Addendum, provided, however, that paragraph
7.E.(3)(vii) of the Full Affiliate License shall not apply with respect to the
Litigation and is superseded by paragraph 8 of this Addendum.
7. The Full Affiliate License as amended by this Addendum shall
automatically terminate upon any judicial act which: (i) provides that, or
approves a transaction pursuant to which, a person, entity or group other than
licensees of BCBSA, acquires the ability to select the majority of the members
of the Board of Directors of the Controlled Affiliate or otherwise gains control
of the Controlled Affiliate; or (ii) changes the composition, or the voting
rights of the members, of the Board of Directors of the Controlled Affiliate.
This paragraph shall 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 BCBSA.
8. The Full Affiliate License as amended by this Addendum shall
automatically terminate on March 10, 2000, unless the BCBSA Board of Directors
takes affirmative action to extend the license on or before the scheduled Board
meeting on March 10, 2000.
9. The Full Affiliate License as amended by this Addendum shall be
deemed effective as of October 29, 1998.
<PAGE>
IN WITNESS HEREOF, the parties have caused the Full Affiliate License as amended
by this Addendum to Blue Shield Controlled Affiliate License Agreement to be
executed, effective October 29, 1998:
BLUE CROSS AND BLUE SHIELD ASSOCIATION:
By: ____/s/ Scott P. Seroto________________________
Title: ____EVP-COO____________________________________
Date: ____11-23-99___________________________________
RIGHTCHOICE MANAGED CARE, INC.
By: ___/s/ John O'Rourke___________________________
Title: ___President___________________________________
Date: ___November 23, 1999___________________________
BLUE CROSS AND BLUE SHIELD OF MISSOURI
By: ____/s/ John O'Rourke__________________________
Title: ____President__________________________________
Date: ____November 23, 1999__________________________
<PAGE>
EXHIBIT 10.12.5
ADDENDUM TO BLUE CROSS CONTROLLED AFFILIATE LICENSE AGREEMENT
-------------------------------------------------------------
This Blue Cross Controlled Affiliate License Agreement is made by and
among Blue Cross and Blue Shield Association ("BCBSA") and Healthy Alliance Life
Insurance Company (the "Controlled Affiliate"), a Controlled Affiliate of the
Blue Cross Plan(s) known as Blue Cross and Blue Shield of Missouri (the "Plan"),
which is also a Party signatory hereto.
Preamble
--------
WHEREAS, BCBSA is the owner of the BLUE CROSS and the BLUE CROSS
Design service marks (collectively the "Licensed Marks");
WHEREAS the Controlled Affiliate was given the right to use the
Licensed Marks as service marks for health care plans in its service area and
the right to use BLUE CROSS in its trade name (the "Licensed Name");
WHEREAS, BCBSA has informed the Controlled Affiliate that the
Controlled Affiliate's Blue Cross Controlled Affiliate License Agreement
automatically terminated pursuant to paragraph 7.B. of that Controlled Affiliate
License Agreement, as a result of an order entered by the Circuit Court of Cole,
County, Missouri dated October 29, 1998 (the "Missouri Order") in certain
litigation pending among and between the Plan, the Missouri Department of
Insurance, and the Attorney General of the State of Missouri (the "Litigation");
WHEREAS, the Controlled Affiliate has informed BCBSA that: (i) the
Controlled Affiliate believes that because the Missouri Order was void and was
vacated as void ab initio six days after it was entered, it was not effective
-- ------
and did not result in the automatic termination of the Controlled Affiliate's
Blue Cross Controlled Affiliate License Agreement; (ii) the Controlled Affiliate
contends that its Blue Cross Controlled Affiliate License Agreement remains in
effect; and (iii) to avoid the expense and delay of litigation and to clarify
its right to continue to use the Licensed Marks and Licensed Name, the
Controlled Affiliate is willing to accept benefits and rights under this
Addendum to Blue Cross Controlled Affiliate License Agreement;
WHEREAS, BCBSA has determined that it is in the best interest of the
Licensed Marks, BCBSA, and its member Plans to grant the Controlled Affiliate a
Blue Cross Controlled Affiliate license pursuant to the terms of the Blue Cross
Controlled Affiliate License Agreement as amended by this Addendum to Blue Cross
Controlled Affiliate License Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
<PAGE>
Addendum
--------
1. BCBSA hereby grants the Controlled Affiliate, upon the terms,
covenants, and conditions of the Blue Cross Controlled Affiliate License
Agreement attached hereto (the "Full Affiliate License") as amended by this
Addendum to Blue Cross Controlled Affiliate License Agreement ("Addendum"), the
right to use the Licensed Name in its trade name and the right to use the
Licensed Marks in the sale, marketing, and administration of health care plans
and related services in its licensed service area. Notwithstanding any provision
to the contrary in the Full Affiliate License, paragraphs 1 through 8 of this
Addendum shall control to the extent they conflict with any terms, conditions,
or covenants of the Full Affiliate License. The term "Agreement" as used in the
Full Affiliate License shall be construed to include this Addendum.
2. The Controlled Affiliate releases any and all claims, causes of
action, actions, suits, or any demands whatsoever against BCBSA or any of its
Member Plans, whether at law or equity, whether in judicial, arbitral, or
alternative fora, and whether known or unknown, that the Controlled Affiliate
now has or may have had on behalf of itself or any other person or entity at any
time prior to and including the date hereof, or hereafter can, shall, or may
have or claim to have, arising out of or in any way related to the
aforementioned alleged automatic termination.
3. BCBSA releases any and all claims, causes of action, actions,
suits, or any demands whatsoever against the Controlled Affiliate, whether at
law or equity, whether in judicial, arbitral, or alternative fora, and whether
known or unknown, that BCBSA now has or may have had on behalf of itself or any
other person or entity at any time prior to and including the date hereof, or
hereafter can, shall, or may have or claim to have, arising out of or in any way
related to the aforementioned alleged automatic termination.
4. The Controlled Affiliate warrants that, apart from the
Litigation, it is in compliance with all, and has no plans to engage in conduct
that would violate any, BCBSA rules and regulations, including all provisions of
this Addendum. The Controlled Affiliate warrants that there is no imminent risk
of dissolution of the Controlled Affiliate or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the Controlled
Affiliate's business or property. The Controlled Affiliate shall immediately
provide BCBSA's General Counsel with copies of all pleadings and orders in the
Litigation upon receipt and shall regularly update BCBSA's General Counsel on
the Litigation. If at any time after the effective date of this Addendum the
Controlled Affiliate becomes aware of any event that indicates that the
Controlled Affiliate is in imminent danger of dissolution, the Controlled
Affiliate shall immediately notify BCBSA's General Counsel in writing.
5. All disputes related to the termination of the Controlled
Affiliate's licenses shall be adjudicated exclusively in a United States
District Court, or if that Court does not have subject matter jurisdiction, in a
Court with competent jurisdiction in Illinois. The Controlled Affiliate shall
not claim that a Court in Illinois lacks personal
<PAGE>
jurisdiction over the Controlled Affiliate concerning any such dispute, nor that
a Court in Illinois is an improper or inconvenient venue for any such dispute.
6. The provisions of paragraphs 7.G. and 7.H.(1) of the Full
Affiliate License related to notice to customers, and the provisions of
paragraph 7.H.(3) of the Full Affiliate License related to the reestablishment
fee, shall not apply to the alleged automatic termination triggered by the
Missouri Order. The BCBSA Board of Directors' March 12, 1998 resolution relating
to the Controlled Affiliate's licenses is superseded by the terms of the Full
Affiliate License as amended by this Addendum, provided, however, that paragraph
7.E.(3)(vii) of the Full Affiliate License shall not apply with respect to the
Litigation and is superseded by paragraph 8 of this Addendum.
7. The Full Affiliate License as amended by this Addendum shall
automatically terminate upon any judicial act which: (i) provides that, or
approves a transaction pursuant to which, a person, entity or group other than
licensees of BCBSA, acquires the ability to select the majority of the members
of the Board of Directors of the Controlled Affiliate or otherwise gains control
of the Controlled Affiliate; or (ii) changes the composition, or the voting
rights of the members, of the Board of Directors of the Controlled Affiliate.
This paragraph shall 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 BCBSA.
8. The Full Affiliate License as amended by this Addendum shall
automatically terminate on March 10, 2000 unless the BCBSA Board of Directors
takes affirmative action to extend the license on or before the scheduled Board
meeting on March 10, 2000.
9. The Full Affiliate License as amended by this Addendum shall be
deemed effective as of October 29, 1998.
<PAGE>
IN WITNESS HEREOF, the parties have caused the Full Affiliate License as amended
by this Addendum to Blue Cross Controlled Affiliate License Agreement to be
executed, effective October 29, 1998:
BLUE CROSS AND BLUE SHIELD ASSOCIATION:
By: ____/s/ Scott P. Seroto________________________
Title: ____EVP-COO____________________________________
Date: ____11-23-99___________________________________
HEALTHY ALLIANCE LIFE INSURANCE COMPANY
By: ___/s/ John O'Rourke___________________________
Title: __President____________________________________
Date: ___November 23, 1999___________________________
BLUE CROSS AND BLUE SHIELD OF MISSOURI
By: ____/s/ John O'Rourke__________________________
Title: ____President__________________________________
Date: ____November 23, 1999__________________________
<PAGE>
EXHIBIT 10.13.5
ADDENDUM TO BLUE SHIELD CONTROLLED AFFILIATE LICENSE AGREEMENT
--------------------------------------------------------------
This Blue Shield Controlled Affiliate License Agreement is made by and
among Blue Cross and Blue Shield Association ("BCBSA") and Healthy Alliance Life
Insurance Company (the "Controlled Affiliate"), a Controlled Affiliate of the
Blue Shield Plan(s) known as Blue Cross and Blue Shield of Missouri (the
"Plan"), which is also a Party signatory hereto.
Preamble
--------
WHEREAS, BCBSA is the owner of the BLUE SHIELD and the BLUE SHIELD
Design service marks (collectively the "Licensed Marks");
WHEREAS the Controlled Affiliate was given the right to use the
Licensed Marks as service marks for health care plans in its service area and
the right to use BLUE SHIELD in its trade name (the "Licensed Name");
WHEREAS, BCBSA has informed the Controlled Affiliate that the
Controlled Affiliate's Blue Shield Controlled Affiliate License Agreement
automatically terminated pursuant to paragraph 7.B. of that Controlled Affiliate
License Agreement, as a result of an order entered by the Circuit Court of Cole,
County, Missouri dated October 29, 1998 (the "Missouri Order") in certain
litigation pending among and between the Plan, the Missouri Department of
Insurance, and the Attorney General of the State of Missouri (the "Litigation");
WHEREAS, the Controlled Affiliate has informed BCBSA that: (i) the
Controlled Affiliate believes that because the Missouri Order was void and was
vacated as void ab initio six days after it was entered, it was not effective
-- ------
and did not result in the automatic termination of the Controlled Affiliate's
Blue Shield Controlled Affiliate License Agreement; (ii) the Controlled
Affiliate contends that its Blue Shield Controlled Affiliate License Agreement
remains in effect; and (iii) to avoid the expense and delay of litigation and to
clarify its right to continue to use the Licensed Marks and Licensed Name, the
Controlled Affiliate is willing to accept benefits and rights under this
Addendum to Blue Shield Controlled Affiliate License Agreement;
WHEREAS, BCBSA has determined that it is in the best interest of the
Licensed Marks, BCBSA, and its member Plans to grant the Controlled Affiliate a
Blue Shield Controlled Affiliate license pursuant to the terms of the Blue
Shield Controlled Affiliate License Agreement as amended by this Addendum to
Blue Shield Controlled Affiliate License Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
<PAGE>
Addendum
--------
1. BCBSA hereby grants the Controlled Affiliate, upon the terms,
covenants, and conditions of the Blue Shield Controlled Affiliate License
Agreement attached hereto (the "Full Affiliate License") as amended by this
Addendum to Blue Shield Controlled Affiliate License Agreement ("Addendum"), the
right to use the Licensed Name in its trade name and the right to use the
Licensed Marks in the sale, marketing, and administration of health care plans
and related services in its licensed service area. Notwithstanding any provision
to the contrary in the Full Affiliate License, paragraphs 1 through 8 of this
Addendum shall control to the extent they conflict with any terms, conditions,
or covenants of the Full Affiliate License. The term "Agreement" as used in the
Full Affiliate License shall be construed to include this Addendum.
2. The Controlled Affiliate releases any and all claims, causes of
action, actions, suits, or any demands whatsoever against BCBSA or any of its
Member Plans, whether at law or equity, whether in judicial, arbitral, or
alternative fora, and whether known or unknown, that the Controlled Affiliate
now has or may have had on behalf of itself or any other person or entity at any
time prior to and including the date hereof, or hereafter can, shall, or may
have or claim to have, arising out of or in any way related to the
aforementioned alleged automatic termination.
3. BCBSA releases any and all claims, causes of action, actions,
suits, or any demands whatsoever against the Controlled Affiliate, whether at
law or equity, whether in judicial, arbitral, or alternative fora, and whether
known or unknown, that BCBSA now has or may have had on behalf of itself or any
other person or entity at any time prior to and including the date hereof, or
hereafter can, shall, or may have or claim to have, arising out of or in any way
related to the aforementioned alleged automatic termination.
4. The Controlled Affiliate warrants that, apart from the
Litigation, it is in compliance with all, and has no plans to engage in conduct
that would violate any, BCBSA rules and regulations, including all provisions of
this Addendum. The Controlled Affiliate warrants that there is no imminent risk
of dissolution of the Controlled Affiliate or of the appointment of a trustee,
interim trustee, receiver, or other custodian for any of the Controlled
Affiliate's business or property. The Controlled Affiliate shall immediately
provide BCBSA's General Counsel with copies of all pleadings and orders in the
Litigation upon receipt and shall regularly update BCBSA's General Counsel on
the Litigation. If at any time after the effective date of this Addendum the
Controlled Affiliate becomes aware of any event that indicates that the
Controlled Affiliate is in imminent danger of dissolution, the Controlled
Affiliate shall immediately notify BCBSA's General Counsel in writing.
5. All disputes related to the termination of the Controlled
Affiliate's licenses shall be adjudicated exclusively in a United States
District Court, or if that Court does not have subject matter jurisdiction, in a
Court with competent jurisdiction in Illinois. The Controlled Affiliate shall
not claim that a Court in Illinois lacks personal
<PAGE>
jurisdiction over the Controlled Affiliate concerning any such dispute, nor that
a Court in Illinois is an improper or inconvenient venue for any such dispute.
6. The provisions of paragraphs 7.G. and 7.H.(1) of the Full
Affiliate License related to notice to customers, and the provisions of
paragraph 7.H.(3) of the Full Affiliate License related to the reestablishment
fee, shall not apply to the alleged automatic termination triggered by the
Missouri Order. The BCBSA Board of Directors' March 12, 1998 resolution relating
to the Controlled Affiliate's licenses is superseded by the terms of the Full
Affiliate License as amended by this Addendum, provided, however, that paragraph
7.E.(3)(vii) of the Full Affiliate License shall not apply with respect to the
Litigation and is superseded by paragraph 8 of this Addendum.
7. The Full Affiliate License as amended by this Addendum shall
automatically terminate upon any judicial act which: (i) provides that, or
approves a transaction pursuant to which, a person, entity or group other than
licensees of BCBSA, acquires the ability to select the majority of the members
of the Board of Directors of the Controlled Affiliate or otherwise gains control
of the Controlled Affiliate; or (ii) changes the composition, or the voting
rights of the members, of the Board of Directors of the Controlled Affiliate.
This paragraph shall 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 BCBSA.
8. The Full Affiliate License as amended by this Addendum shall
automatically terminate on March 10, 2000, unless the BCBSA Board of Directors
takes affirmative action to extend the license on or before the scheduled Board
meeting on March 10, 2000.
9. The Full Affiliate License as amended by this Addendum shall be
deemed effective as of October 29, 1998.
<PAGE>
IN WITNESS HEREOF, the parties have caused the Full Affiliate License as amended
by this Addendum to Blue Shield Controlled Affiliate License Agreement to be
executed, effective October 29, 1998:
BLUE CROSS AND BLUE SHIELD ASSOCIATION:
By: ____/s/ Scott P. Seroto________________________
Title: ____EVP-COO____________________________________
Date: ____11-23-99___________________________________
HEALTHY ALLIANCE LIFE INSURANCE COMPANY
By: ___/s/ John O'Rourke___________________________
Title: __President____________________________________
Date: ___November 23, 1999___________________________
BLUE CROSS AND BLUE SHIELD OF MISSOURI
By: ____/s/ John O'Rourke__________________________
Title: ____President__________________________________
Date: ____November 23, 1999__________________________
<PAGE>
EXHIBIT 10.22.1
RightCHOICE MANAGED CARE, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
As Restated Effective September 24, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Name and Purpose of the Plan 1
2. Definitions 1
3. Administration of the Plan 5
4. Participation 6
5. Benefits 7
6. Determination of the Company's Obligations 9
7. Conditions and Other Matters 10
8. Amendment and Termination 12
9. Arbitration 12
10. Effective Date 12
</TABLE>
<PAGE>
RightCHOICE MANAGED CARE, INC.
------------------------------
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
--------------------------------------
As Restated September 24, 1999
WHEREAS, RightCHOICE Managed Care, Inc. (the "Company") maintains the
RightCHOICE Managed Care, Inc. Supplemental Executive Retirement Plan; and
WHREAS, the Company has amended the Plan from time to time and wishes to
incorporate all such amendments into a single Plan document;
NOW, THEREFORE, the Company does hereby restate the Plan in its entirety,
effective as of September 24, 1999, so that it will read as follows:
1. Name and Purpose of the Plan
----------------------------
The purpose of the Plan is to assist the Company in attracting and retaining key
employees in order to further the long-term growth and enhance the performance
of the Company by providing them with retirement benefits which they may not be
able to receive from the Pension Plan, or because of the limitations provided in
Sections 401(a)(17) and 415(b), (d) and (e) of the Internal Revenue Code of
1986, as amended from time to time (the "Code"), or because the individual does
not have 20 years of service in the Pension Plan.
2. Definitions
-----------
(a) "Affiliate" means any corporation which together with the Company is a
member of a "controlled group" of corporations within the meaning of
Sections 414(b) and (c) of the Code and which has adopted this Plan
pursuant to the written consent of the Board.
(b) "Actuarial Equivalent" means a benefit having the same value as the
benefit which it replaces, using the following factors:
(i) for purpose of determining the single life annuity under Section
2(u) below, the interest rate and the mortality table shall be
determined by the actuary selected by the Committee;
(ii) for purpose of determining the single sum payment under Section
5(a), 5(b) (i) and 5(c)(iii), the interest rate and the
mortality table shall be determined by the actuary selected by
the Committee; and
(iii) for all other purposes, the actuarial factors shall be those as
provided in the Pension Plan.
<PAGE>
(c) "Beneficiary" means the person or persons designated by a Participant
as his surviving beneficiary(ies) on a beneficiary designation form in
effect at the time of the Participant's death, if any, or if no
beneficiary designation form is in effect at the time of the
Participant's death, the Participant's estate. A beneficiary
designation form shall be in effect when it is completed and executed
by the Participant and received by the Committee. Thereafter a
Participant may change a Beneficiary by completing and executing a new
Beneficiary designation form and submitting it to the Committee.
(d) "Board" means the Board of Trustees or Directors, as applicable, of
the Company as it may be constituted from time to time.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(f) "Committee" or "Retirement Committee" means the committee appointed
pursuant to Section 3(a) of the Plan.
(g) "Company" means RightCHOICE Managed Care, Inc., a Missouri
corporation, or any other company that hereafter adopts this Plan and
agrees to become obligated to provide benefits hereunder.
(h) "Employee" means any person employed by the Company or an Affiliate
who is in a select group of management or highly compensated employees
within the meaning of ERISA.
(i) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
(j) "Executive Deferred Compensation Plan" means the Company's Executive
Deferred Compensation Plan, as amended from time to time.
(k) "Final Average Earnings" means a Participant's Final Average Earnings
as defined in the Pension Plan disregarding any limitation thereto
under Code Section 401(a)(17) and including any amounts that were
contributed by such Participant to the Executive Deferred Compensation
Plan.
(l) "Joint and Contingent Benefit" shall mean the Actuarial Equivalent of
the Supplemental Benefit and shall be payable in the form of a life
annuity to the Participant with a death benefit in the form of a lump
sum payment payable to the participant's Beneficiary upon the
Participant's death. The death benefit shall be equal to the Actuarial
Equivalent of a monthly payment of 50% of the monthly payment being
paid to the Participant during his life (or if the Participant death
occurred before payment began, the monthly payment the Participant
would have been entitled to if he had retired and began receiving
benefits hereunder on the day before his death) for the life of a
beneficiary the same age and the opposite
2
<PAGE>
sex as the Participant. The Actuarial Equivalent of such amount shall
be payable in the form of a lump sum payment to the Participant's
Beneficiary, as soon as practicable following the Participant's death.
(m) "Normal Retirement Age" means Normal Retirement Age as defined in the
Pension Plan.
(n) "Participant" means an Employee who has qualified for participation in
the Plan in accordance with Section 4, hereof, and whose active
participation has not been terminated.
(o) "Pension Plan" means the Non-Contributory Retirement Program for
Certain Employees of Blue Cross and Blue Shield of Missouri and
RightCHOICE Managed Care, Inc., as amended from time to time.
(p) "Plan" means this Supplemental Executive Retirement Plan, as amended
from time to time.
(q) "Plan Year" or "Plan Years" means the calendar year beginning on
January 1, 1994 and each calendar year thereafter.
(r) "Prior Pension Programs" means any qualified retirement program, other
than the Pension Plan, that a Participant or former Participant has
participated in and for which such participation is included as Years
of Prior Service under this Plan.
(s) "Savings Program" means the Tax-Favored Savings Program (which is
named The CARE Program) adopted by the Company and any of its
Affiliates, as amended from time to time.
(t) "Secretary" means the secretary of the Committee as selected in
accordance with Section 3(c).
(u) "Supplemental Benefit" means an annual amount, payable in monthly
installments to the Participant over his life commencing on the first
day of the first month coincident with or next following the day the
Participant attains Normal Retirement Age, equal to (i) minus (ii),
where:
(i) is equal to the product of 2.5% multiplied by the Participant's
Final Average Earnings multiplied by the Participant's Years of
Credited Service (up to a maximum of 20 Years of Credited
Service), and
(ii) is equal to the sum of (A), (B) and (C) where:
(A) is equal to the Participant's normal retirement benefit
under the Pension Plan and any employer paid benefits
accrued by or payable
3
<PAGE>
to or on behalf of the Participant under a Prior Pension
Program which relate to service with any employer by the
Participant that is included in such Participant's Years of
Prior Service, hereunder, payable in the form of a single
life annuity, determined without regard to any early
retirement factors or benefit options elected;
(B) is equal to the annual amount, payable in the form of a
single life annuity, which is payable at Normal Retirement
Age and is the Actuarial Equivalent of the balance
(increased by the amount of any prior distribution) in the
Participant's deferral account under the Executive Deferred
Compensation Plan attributable to Company contributions
(plus interest) made pursuant to the Executive Deferred
Compensation Plan and the Prior Plan (as defined in the
Executive Deferred Compensation Plan), and
(C) is equal to the annual amount, payable in the form of a
single life annuity, which is the Actuarial Equivalent of
any prior amounts (not included in Subsection (A), above)
received under this Plan or the Pension Plan or any employer
paid benefits received under any Prior Pension Programs
which relate to service by the Participant that is included
in such Participant's Years of Prior Service, hereunder.
Notwithstanding the foregoing, in no event shall a Participant's
benefit be less than the benefit that would have been provided under
the terms of this Plan in effect an July 31, 1994, determined as if
the Participant had a termination of employment an such date.
(v) "Trust" or "Trust Agreement" means the Irrevocable Trust Agreement,
dated February 1, 1998, as amended from time to time.
(w) "Years of Credited Service" means the sum of (i) the aggregate number
of the Participant's Years of Nor Vested Service; and (ii) the
aggregate number of the Participant's Years of Plan Service as
determined by the Committee.
(x) "Years of Plan Service" shall mean "Years of Plans and Association
Service" as such term is defined and credited under the Pension Plan
for Plan Years beginning on or after the later of the Participant's
employment with the Company or January 1, 1994.
(y) "Years of Prior Service" shall mean the years of service, including,
in some situations, service with other employers, credited by the
Committee to a Participant for service before the later of the
Participant's employment by the Company or January 1, 1994 for benefit
accrual purposes, as set forth on Appendix B, attached hereto.
4
<PAGE>
(z) "Years of Prior Vested Service" shall mean for a Participant, as of
December 31, 1993, the greater of (i) or (ii), where:
(i) is equal to 50% of the Participant's Years of Prior Service as
of December 31, 1993, and
(ii) is equal to the lesser of (A) the Participant's Years of Prior
Service as of December 31, 1993; or (B) 5 Years of Prior
Service.
Notwithstanding the above, if a Participant meets one of the following
while a Participant in the Plan, then, the Participant's Years of
Prior Vested Service shall be equal to the Participant's Years of
Prior Service:
(iii) the Participant is a Senior Vice-President or higher of the
Company, has attained the age of 55, and has a combination of
Years of Prior Service and Years of Plan Service equal to or
greater than 20;
(iv) the Participant has attained the age of 62 and has a combination
of Years of Prior Service and Years of Plan Service equal to or
greater than 20; or
(v) the Participant attains the age of 65.
3. Administration of the Plan
--------------------------
(a) Committee. The Committee shall consist of at least three (3) persons
---------
who shall serve at the pleasure of the Board. Any individual member of
the Committee may, but need not, be: (i) a member of the Board or of
any committee of the Board having responsibility for the compensation
of any Employee; and/or (ii) an Employee. Vacancies in the membership
of the Committee shall be filled only by action of the Board. A member
of the Committee may be eligible for participation in the Plan while
serving as such member but shall not vote on, or otherwise participate
in the consideration of, any matter specifically relating to the
benefits of such member under the Plan.
(b) Committee Advisors. The Committee, in its sole discretion, may select
------------------
and appoint not more than rive (5) individuals to be Committee
Advisors. Any Committee Advisor shall be an Employee and may, but need
not, be a Participant and/or a member of the Board or of any committee
of the Board having responsibility for the compensation of any
Employee. A Committee Advisor may attend Committee meetings,
participate in Committee business, and otherwise advise and assist the
Committee but shall not be entitled to vote and shall not be a member
of the Committee.
5
<PAGE>
(c) Administration by Committee. The Plan shall be administered by the
---------------------------
Committee. Subject to the provisions of the Plan, the Committee shall
have sole discretionary authority to:
(i) Interpret the Plan,
(ii) Determine eligibility and level of participation,
(iii) Create and revise rules and procedures for the administration of
the Plan,
(iv) Employ or retain such persons (including independent
accountants, attorneys and actuaries) as it may deem necessary
or appropriate to assist it in the proper administration of the
Plan,
(v) Take any other actions and make other determinations as it may
deem necessary and proper for the administration of the Plan,
provided that no such action or determination shall adversely
affect the rights of any Participant that have accrued, or may
in the future accrue, under this Plan, and
(vi) Direct the trustee of the Trust to distribute the Participants'
benefits pursuant to the Trust Agreement.
Decisions and determinations by the Committee shall be final and
binding upon all persons and shall be made by majority vote of the
Committee. All decisions and determinations of the Committee shall be
reflected in permanent records of Committee actions recorded and
maintained by the Secretary of the Committee. The Secretary shall be a
member of the Committee, or a Committee Advisor, who is designated as
such by vote of the Committee. Determinations and decisions by the
Committee shall be made at meetings at which a majority of the members
are present or, in the alternative, by unanimous written consent.
Notwithstanding anything to the contrary in the Plan, the Board shall
also have all power and authority to perform any act granted to the
Committee pursuant to the Plan.
4. Participation
-------------
(a) Appendix A Participants. Effective August 1, 1994, the Participants in
-----------------------
the Plan shall be those individuals listed in Appendix A. The
Committee in its sole discretion may amend Appendix A at any time to
add an individual's name to or to delete an individual's name,
provided, however, no deletion of an individual's name from Appendix A
shall, without the consent of a Participant, adversely affect the
rights of that Participant to the benefits that have accrued under
this Plan before such deletion. Notice of any addition or deletion
shall be given in writing to the affected Participant. Each
Participant listed in Appendix A shall be entitled to benefits as
provided in Section 5(b) of the Plan.
6
<PAGE>
(b) Appendix C Participants. In lieu of adding an Employee's name to
-----------------------
Appendix A, the Board in its sole discretion may add such Employee's
name to Appendix C. The Committee in its sole discretion may amend
Appendix C at any time to add other Employees' names or to delete an
individual's name; provided, however, no deletion of a Participant's
name from Appendix C shall, without the consent of such Participant,
adversely affect the rights of that Participant to the benefits that
have accrued under this Plan before such deletion. Notice of any
addition or deletion shall be given in writing to the affected
Participant. Each Participant listed in Appendix C shall not be
entitled to benefits as provided in Section 5(b) of the Plan and shall
be entitled to benefits as provided in Section 5(c) of the Plan.
(c) Notwithstanding any other provision of the Plan, the Committee, by
means of resolution, may agree to vary the terms of the Plan as to any
Participant in the Plan; provided, however, that in no event may any
Committee action have the effect of depriving Participants of rights
accrued under the Plan as of the date of such action.
5. Benefits
--------
(a) Former Participants. Individuals who were Participants or former
-------------------
Participants in the Plan on July 31, 1994, but who were not listed on
Appendix A or Appendix C as of August 1, 1994, shall no longer be
eligible to participate in the Plan. Within 90 days of the execution
of this Plan document, the Committee may, in its discretion pay, or
direct the trustee of the Trust to pay, to each such former
Participant, in a single sum payment, the Actuarial Equivalent of the
benefit the individual would have been entitled to under the terms of
the Plan as in effect on July 31, 1994, determined as if the
individual terminated employment on such date (or such earlier date,
if the former Participant previously terminated employment), provided,
however, that solely for purposes of determining such single sum
amount, any individual who has less than five (5) Years of Credited
Service shall be entitled to a nonforfeitable benefit under this
Section 5(a). Otherwise, such accrued benefits will be paid to such
former Participant in accordance with the distribution method
specified in Section 5(c).
Notwithstanding the above, if a former Participant entitled to benefits
hereunder, is hereafter employed by Blue Cross and Blue Shield of Missouri
("BCBSMo") and such former Participant is eligible to participate in a
supplemental executive retirement plan sponsored by BCBSMo, then, if BCBSMo
and the Participant agree, the Committee may, but does not have to,
transfer any liability accrued hereunder to the plan sponsored by BCBSMo
and any benefits relating thereto to an account or bust sponsored or
adopted by BCBSMo. Thereafter, no further liability shall be due to the
Participant or his Beneficiary, hereunder.
7
<PAGE>
(b) Appendix A Participants. If a Participant is eligible to participate
-----------------------
in the Plan under Section 4(a) of the Plan and such Participant has at
least five (5) Years of Credited Service, then the Participant shall
be entitled to a Supplemental Benefit. A Participant's Supplemental
Benefit shall be paid at the same time and subject to the same
actuarial reductions for early payout as the Participant's benefit
under the Pension Plan, except in the following circumstances:
(i) if upon termination of employment with the Company or
participation in the Plan, the Actuarial Equivalent single sum
present value of the Participant's Supplemental Benefit does not
exceed $25,000, then the Participant's Supplemental Benefit
shall be distributed in a single sum to the Participant, as soon
as reasonably practicable following such termination,
(ii) if the Participant's Supplemental Benefit is not payable
pursuant to paragraph (i) above, then the Actuarial Equivalent
of his Supplemental Benefit shall be paid in the form of a Joint
and Contingent Benefit, or
(iii) the Committee, in its discretion, at any time may determine that
the Actuarial Equivalent of the Participant's Supplemental
Benefit (or if benefits have commenced hereunder, the remaining
portions thereof) shall be paid in a single sum to the
Participant.
In the event a Participant terminates employment with the Company or
an Affiliate prior to completing five (5) Years of Credited Service,
the Participant shall forfeit his Supplemental Benefit.
(c) Appendix C Participants. If a Participant is eligible to participate
-----------------------
in the Plan under Section 4(b) of the Plan and such Participant has at
least five (5) Years of Credited Service, then the Participant shall
be entitled to the benefit described in this Section 5(c). The benefit
provided under this Section 5(c) shall be an annual amount, payable in
monthly installments to the Participant over his life commencing on
the first day of the first month coincident with or next following the
day the Participant attains Normal Retirement Age, equal to (i) minus
(ii), where:
(i) is equal to the Participant's normal retirement benefit under the
Pension Plan and any employer-paid benefits accrued by or payable
to or on behalf of the Participant under a Prior Pension Program
which relate to service with any employer by the Participant that
is included in such participant's Years of Prior Service,
hereunder, payable in the form of a single life annuity, and
determined: (A) without regard to any early retirement factors or
benefit option elected, and (B) without regard to the limitations
provided in Sections 401(a)(17) and 415(b) and (e) of the Code
with respect to such normal retirement benefit, and (c) taking
into account
8
<PAGE>
amounts that were contributed by such Participant to the
Executive Deferred Compensation Plan.
(ii) is equal to the normal retirement benefit computed in (i) above,
but: (A) taking into account the limitations provided in
Sections 401 (a)(17) and 415(b) and (e) of the Code with respect
to such benefit, and (B) without regard to amounts contributed
by such Participant to the Executive Deferred Compensation Plan.
A Participant's benefit under this Section 5(c) shall be paid at the same
time and subject to the same actuarial reductions for early payout as the
Participant's benefit under the Pension Plan, except in the following
circumstances:
(iii) if upon termination of employment with the Company or
participation in the Plan, the Actuarial Equivalent single sum
present value of the Participants benefit under this Section
5(c) does not exceed $25,000, then the Participant's benefit
shall be distributed in a single sum to the Participant, as soon
as reasonably practicable following such termination,
(iv) if the Participant's benefit under this. Section 5(c) is not
payable pursuant to paragraph (iii) above, then the Actuarial
Equivalent of his benefit shall be paid in the form of Joint and
Contingent Benefit (determined by substituting the phrase
"benefit under Section 5(c)" for "Supplemental Benefit" each
place it appears in Section 2(l) of the Plan) or,
(v) the Committee, in its discretion, at any time may determine that
the Actuarial Equivalent of the Participant's benefit under this
Section 5(c) (or if benefits have commenced, the remaining
portions thereof) shall be paid in a single sum to the
Participant.
In the event a Participant terminates employment with the Company or an
Affiliate prior to completing rive (5) Years of Credited Service, the
Participant shall forfeit his benefit under this Section 5(c).
6. Determination of the Company's Obligations
------------------------------------------
The Company or Affiliate may, but is not required to, pay to the Trust
established pursuant to Section 7(c), within a reasonable time, those amounts
necessary to fund the benefits under Section 5 of this Plan. Those amounts
attributable to Section 5(b) and 5(c) of the Plan shall be determined according
to the actuarial assumptions computed and maintained in accordance with this
Plan and the Pension Plan, as designated hereunder. Notwithstanding any
distributions from the Trust to general creditors of the Company or Affiliate
(not including the Participant), the Participant shall have a contract right to
benefits provided under Section 5 of the Plan.
9
<PAGE>
All benefits may be paid from the Trust assets; provided, however, that the
liability of the Company or Affiliate to pay the benefits provided under this
Plan shall not be relieved to the extent the application of Trust assets fails
to satisfy such liability.
7. Conditions and Other Matters
----------------------------
(a) Any amounts payable under the Plan shall not be subject in any way to
alienation, sale, transfer, assignment, pledge, attachment,
garnishment, execution or encumbrance of any kind; and any attempt to
accomplish same shall be void, except as provided for in subsection
(c) below.
(b) Participation in the Plan does not give any person any reason to be
retained in the service of the Company or Affiliate. The right and
power of the Company or Affiliate to terminate any Employee "at will"
is expressly reserved.
(c) The Company has established an irrevocable trust fund (the Trust)
through which assets to satisfy its obligations under this Plan may be
set aside to aid in providing for benefit payments to the
Participants. Any assets or property held by the Trust shall continue
to be subject to the claims of the general creditors of the Company or
Affiliate only upon the insolvency or bankruptcy of the Company or
Affiliate as provided therein. No person other than the Company or
Affiliate shall, by virtue of the provisions of this Plan, have any
interest in such funds except to the extent that any person, including
the Participant, acquires the right to receive payments from the Plan,
such right being no greater than the right of any unsecured general
creditor of the Company or Affiliate.
(d) Any amount deferred and/or payable under this Plan shall not be deemed
salary or other compensation to the Participant for the purpose of
computing benefits to which such Participant may be entitled under any
other plan or other arrangement of the Company or Affiliate for the
benefit of Employees, except as may be otherwise specified in such
plan or arrangement.
(e) No Employee or other person shall have any claim or right to become a
Participant under the Plan; nor shall any Participant have a right to
receive payment of any amount under the Plan in any form or manner
other than as stated herein.
(f) The Company or Affiliate shall have the right to deduct from payment
of any amount under the Plan any taxes required by law to be withheld
from a Participant or Beneficiary with respect to such payment.
(g) Whenever possible, each provision of this Plan shall be interpreted in
such manner as to be effective and valid under applicable law
(including the Code), but if any provision of this Plan shall be held
to be prohibited by or invalid under applicable law, then (i) such
provision shall be deemed amended to, and to have
10
<PAGE>
contained from the outset such language as shall be necessary to,
accomplish the objectives of the provision as originally written to
the fullest extent permitted by law, and (ii) any other provisions of
this Plan shall remain in full force and effect.
(h) No rule of strict construction shall be applied against the Company,
an Affiliate, the Committee, the Board or any other person in the
interpretation of any terms of this Plan or any rule or procedure
established by the Committee.
(i) Whenever, in the Committee's opinion, any person entitled to receive
any payment is under a legal disability, or is incapacitated in any
way, so as to be unable to manage his financial affairs, the Company
or Affiliate, at its discretion, may make such payment for the benefit
of such person to his legal representative, or to a relative or friend
of such person for his benefit, or it may apply the payment for the
benefit of such person in any manner it deems advisable. When the
Company or Affiliate makes any payment pursuant to this subsection, it
shall be considered as a complete discharge of any liability for the
making of such payments under the Plan.
(j) The Plan shall be construed according to the laws of the State of
Missouri, except to the extent superseded by applicable federal laws.
(k) All notices to the Company or the Committee hereunder shall be
delivered to the attention of the Secretary of the Committee. Any
notice or filing required or permitted to be given to the Committee or
the Company under this Plan shall be sufficient if in writing and hand
delivered, or sent by registered or certified mail, to the Company or
the Committee, as appropriate, at the principal office of the Company.
Such notice shall be deemed given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark or the
receipt for registration or certification.
(l) Where the context admits, words in the masculine gender shall include
the feminine and neuter genders, the plural shall include the
singular, and the singular shall include the plural.
(m) The captions of Sections and paragraphs of this Plan are for
convenience only and shall not control or affect the meaning or
construction of any of its provisions.
(n) Any action required or permitted by the Company under the Plan shall
be by resolution of its Board or any person or persons authorized by
resolution of its Board.
(o) The provisions of the Plan shall bind and inure to the benefit of the
Company and Affiliates and their successors and assigns. The term
"successors" as used herein shall include any corporation or other
business entity which shall, by merger, consolidation, purchase or
otherwise, acquire all or substantially all of the
11
<PAGE>
business and assets of the Company or Affiliate and successors of any
such corporation or other business entity.
(p) Any and all payments made to the Trust pursuant to the Plan shall be
made only from the general assets of the Company. Any accounts
maintained under the Plan shall be for bookkeeping purposes only and
shall not represent a claim against specific assets of the Company.
Except as specifically provided with respect to the Trust, nothing
contained in this Plan shall be deemed to create a trust of any kind
or create any fiduciary relationship.
(q) It is the intention of the Company that the Plan be unfunded for tax
purposes and for purposes of Title I of ERISA.
8. Amendment and Termination
-------------------------
The Committee retains the right to modify or amend the Plan by means of a
resolution duly adopted. The Company retains the right to terminate the Plan
upon a resolution approved by the Board. No modification, amendment or
termination shall, without the consent of the Participant, adversely affect the
rights of that Participant to the benefits that have accrued under this Plan
before such modification, amendment or termination. Notice of every such
modification, amendment or termination shall be given in writing to each
Participant.
9. Arbitration
-----------
Any dispute between a Participant and the Company as to the interpretation or
application of the provisions of this Plan and the amounts payable hereunder
shall be determined by binding arbitration before a single arbitrator in St.
Louis, Missouri in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court of competent jurisdiction.
10. Effective Date
--------------
This restated Plan is effective as of September 24, 1999. The Plan was
originally effective as of June 1, 1987. To record the adoption of the restated
Plan, the Company has caused this document to be executed by its duly authorized
officer this 24/th/ day of September, 1999.
THIS PLAN CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE
PARTIES.
RightCHOICE MANAGED CARE, INC.
Attest:
By /s/ Angela F. Braly By /s/ John A. O'Rourke
-------------------------- --------------------------
Its President and CEO
12
<PAGE>
Exhibit 10.23.1
AMENDMENT NO. 1
TO
RIGHTCHOICE MANAGED CARE, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
WHEREAS, RightCHOICE Managed Care, Inc. (hereinafter called "RightCHOICE")
maintains the RightCHOICE Managed Care, Inc. Executive Deferred Compensation
Plan (hereinafter called "Plan") which Plan was been amended and restated
effective as of February 1, 1998; and
WHEREAS, RightCHOICE desires to amend said Plan effective as of September
27, 1999;
NOW, THEREFORE, RightCHOICE does hereby amend the Plan effective as of
September 27, 1999, so that it will read as follows:
I.
Paragraph (b) of Section II of the Adoption Agreement for the Plan is
deleted in its entirety and the following is substituted in lieu thereof:
"(b) Distributable Event
Paragraph 6.2 of the Basic Program Document is modified as follows:
[X] A "Change of Control" will not constitute a Distributable Event.
[X] A "Distributable Event" will include a distribution year elected
by the Participant which is not earlier than the fifth year after
the year of the deferral; provided, however, that the same
distribution year shall apply for all types of contributions for
which this option is selected on the Participant's election for
the applicable calendar year.
[X] A "Distributable Event" will include an unforeseeable financial
emergency arising from an illness, casualty loss, sudden
financial reversal or other such unforeseeable occurrence. The
amount of the benefit distributed shall be limited to the amount
necessary to meet the emergency not in
<PAGE>
excess of the termination benefit which the Participant would
have been entitled to if he had a termination of employment on
the date of the determination."
II.
Section 1.7 of the Basic Program Document is deleted in its entirety and
the following is substituted in lieu thereof:
"1.7 Change of Control The execution of an agreement for the purchase or
other acquisition by any person, entity or group of persons within the
meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934
("Act"), (or any comparable successor provisions, of beneficial ownership
within the meaning of Rule 13d-3 promulgated under the Act) of 30% or more
of either the outstanding shares of common stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally, or the approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, with respect to
which persons who were stockholders of the Company immediately prior to
such reorganization, merger or consolidation do not, immediately
thereafter, own more than 50% of the combined voting power entitled to vote
generally in the election of directors of the reorganized, merged or
consolidated Company's then outstanding securities, or a liquidation or
dissolution of the Company or of the sale of all or substantially all of
the Company's assets."
III.
Section 10.2 of the Plan is deleted in its entirety and the following is
substituted in lieu thereof:
"10.2 Termination Although the Company has established this Program with
a bona fide intention and expectation to maintain the Program indefinitely,
the Company may terminate or discontinue the Program in whole or in part on
the earlier of the date on which there is a Change in Control, or as of the
first business day in the Program Year following the date on which the
Company elects to terminate the Program. Termination of the Program must be
approved by a majority of the members of the Board of Directors. Upon
Program termination, no further Deferrals or Company contributions shall be
made except that the Company shall be responsible to pay any benefit
attributable to Deferrals and Company contributions accrued as of the day
preceding the effective date of termination plus investment earnings and
less investment losses, taxes and expenses chargeable to the Participant's
account up to the date benefits are distributed. The Administrator shall
make distribution of the Participant's benefit as soon as practicable but
no later than seven (7) days after the effective date of the termination of
the Plan.
2
<PAGE>
IN WITNESS WHEREOF, RightCHOICE has caused this Amendment No.1 to be
executed by its duly authorized officer this 1/st/ day of October, 1999.
RIGHTCHOICE MANAGED CARE, INC.
By: /s/ John A. O'Rourke
--------------------------
John A. O'Rourke
President and CEO
3
<PAGE>
Exhibit 10.24.1
AMENDMENT NO. 1
TO
RIGHTCHOICE MANAGED CARE, INC.
FEBRUARY 1, 1998 AMENDED AND RESTATED NON-EMPLOYEE DIRECTORS'
NONQUALIFIED DEFERRED COMPENSATION PLAN
WHEREAS, RightCHOICE Managed Care, Inc., (hereinafter called "the
RightCHOICE"), established in July 1994, the RightCHOICE Managed Care, Inc. Non-
Employee Directors' Nonqualified Deferred Compensation Plan (hereinafter called
"Plan") which Plan has been amended and restated on several occasions, the most
recent of which was effective as of February 1, 1998; and
WHEREAS, RightCHOICE desires to amend said Plan effective as of September
27, 1999;
NOW, THEREFORE, RightCHOICE does hereby amend the Plan effective as of
September 27, 1999, so that it will read as follows:
I.
Paragraph (d) of Section II of the Adoption Agreement for the Plan is
deleted in its entirety and the following is substituted in lieu thereof:
(d) Change of Control:
The following will apply in lieu of the definition in Section 1.7 of
the Basic Program Document.
[X] Execution of an agreement providing for a "change in ownership"
of RightCHOICE, a "change in the effective control" of
RightCHOICE, or a "change in the ownership of a substantial
portion of the assets" of RightCHOICE, as such terms are defined
in the Proposed Regulations under Code Section 280G.
<PAGE>
II.
Paragraph (f) of Section II of the Adoption Agreement for the Plan is
deleted in its entirety and the following is substituted in lieu thereof:
"(f) Distributable Event
Paragraph 6.2 of the Basic Program Document is modified as follows:
[X] A "Change of Control" will not constitute a Distributable Event.
[X] A "Distributable Event" will include a date specified by a
Participant in an election in effect on or before January 1,
1999."
III.
Section 10.2 of the Plan is deleted in its entirety and the following is
substituted in lieu thereof:
"10.2 Termination Although the Company has established this Program with a
bona fide intention and expectation to maintain the Program indefinitely,
the Company may terminate or discontinue the Program in whole or in part on
the earlier of the date on which there is a Change of Control, or as of the
first business day in the Program Year following the date on which the
Company elects to terminate the Program. Termination of the Program must be
approved by 2/3 of the members of the Board of Directors. Upon Program
termination, no further Deferrals or Company contributions shall be made
except that the Company shall be responsible to pay any benefit
attributable to Deferrals and Company contributions accrued as of the day
preceding the effective date of termination plus investment earnings and
less investment losses, taxes and expenses chargeable to the Participant's
account up to the date benefits are distributed. The Administrator shall
make distribution of the Participant's benefit as soon as practicable but
no later than seven (7) days after the effective date of the termination of
the Plan.
IN WITNESS WHEREOF, RightCHOICE has caused this Amendment No.1 to be
executed by its duly authorized officer this 25/th/ day of October, 1999.
RIGHTCHOICE MANAGED CARE, INC.
By: /s/ John A. O'Rourke
-----------------------------
John A. O'Rourke
President and CEO
2
<PAGE>
EXHIBIT 10.45.1
FIRST AMENDMENT
TO
EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "First Amendment") is
made and entered into as of the 28/th/ day of December, 1999, by and between
RIGHTCHOICE MANAGED CARE, INC., a Missouri corporation (hereinafter
"RightCHOICE") and JOHN A. O'ROURKE (hereinafter "O'ROURKE").
WHEREAS, RightCHOICE and O'ROURKE are parties to that certain Employment
Contract dated February 27, 1997 (the "Employment Agreement"); and
WHEREAS, the parties desire to amend certain provisions of the Employment
Agreement, effective as of December 6, 1999;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties do hereby agree to
amend the Employment Agreement, effective as of December 6, 1999, as follows:
I.
The second paragraph of Section 5.3.A is hereby deleted in its entirety
and the following is substituted in lieu thereof:
"In the event that O'ROURKE becomes entitled to Severance Benefits,
subject to Sections 5.3(B), 5.3(C), 5.3(D) and 5.3(H)(ii) hereof,
RightCHOICE will: (i) pay to O'ROURKE an amount equal to three (3) times
O'ROURKE's annual base salary in effect immediately prior to such
Involuntary Termination or termination for Good Reason, payable in thirty-
six (36) substantially equal monthly installments commencing as soon as
practicable following the Date of Termination; (ii) pay to O'ROURKE for
thirty-six (36) 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 O'ROURKE's health, dental, vision, and life insurance that is
equivalent to the portion of the monthly premium for such coverage that
RightCHOICE pays on behalf of senior executives employed by RightCHOICE
during such thirty-six month period; and (iii) pay for outplacement
<PAGE>
services for O'ROURKE of the type customarily provided by RightCHOICE to
senior executives at the time of such Involuntary Termination or
termination for Good Reason."
II.
The following new Section 8.8 is hereby added after Section 8.7 of the
Employment Agreement:
"8.8. Legal Expenses.
--------------
RightCHOICE shall reimburse O'ROURKE for all reasonable legal and
other fees and expenses incurred to secure, preserve or establish
entitlement to benefits under this Employment Agreement. RightCHOICE shall
reimburse O'ROURKE for such fees and expenses on a monthly basis within ten
(10) days after O'ROURKE's request for reimbursement accompanied by
evidence that the fees and expenses were incurred. RightCHOICE's
reimbursement shall include a tax gross-up payment in respect of the
federal, state and local taxes incurred by O'ROURKE with respect to the
reimbursement of fees and expenses received under this Section 8.8."
IN WITNESS WHEREOF, the parties have executed this First Amendment this
28/th/ day of December, 1999.
RIGHTCHOICE MANAGED CARE, INC.
By: /s/ Norman J. Tice
-----------------------------
Norman J. Tice, Director
O'ROURKE
/s/ John A. O'Rourke
--------------------------------
John A. O'Rourke
2
<PAGE>
Exhibit 10.52.1
List of Senior Vice Presidents who have executed executive severance agreements:
Angela F. Braly Senior VP/General Counsel/Corp. Secr.
Stuart K. Campbell Senior VP, Client Services
Michael Fulk Senior VP, Sales and Marketing
Herb Schneiderman Senior VP, Medical Delivery Systems
John J. Seidenfeld, MD Senior VP & Chief Medical Officer
Richard Smith Senior VP, Diversified Life Insurance Co.
Edward J. Tenholder Senior VP, BCBSMo Chief Operating Officer
Connie L. Van Fleet Senior VP, Chief Information Officer
Sandra A. Van Trease Senior Vp, Chief Operating Officer, Chief
Financial Officer
Kathleen M. Zorica Senior VP, Business Analysis & Product Development
<PAGE>
EXHIBIT 10.52.2
AMENDMENT NO. 1
TO
EXECUTIVE SEVERANCE AGREEMENT
WHEREAS, RightCHOICE Managed Care, Inc. ("Company") and _______________
("Executive") entered into an Executive Severance Agreement, dated January 1,
1998 (the "Agreement"); and
WHEREAS, the Compensation Committee of Company's Board of Directors, having
been advised of the competitiveness of existing severance and change in control
practices of Company, believes that the Agreement should be amended to provide
additional protections to Executive in the event that a Change in Control
occurs; and
WHEREAS, Company and Executive desire to amend the Agreement, effective as
of December 6, 1999, to provide additional protections to Executive in the event
of a Change in Control;
NOW, THEREFORE, Company and Executive do hereby amend the Agreement,
effective as of December 6, 1999, so that it will read as follows:
I.
Section 3(B) is hereby deleted in its entirety and the following is
substituted in lieu thereof:
"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 executives
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 thirty (30) months starting on the Date
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
Company pays on behalf of similarly situated executives
employed by Company during such thirty (30) 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
<PAGE>
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
thirty (30) such installments equaling 1/36th of the amount determined
under Section 3(B)(ii)(a) plus 1/30th 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."
II.
The following new paragraph N. is hereby added after paragraph M. of
Section 6 of the Agreement:
"N. Legal Expenses. Company shall reimburse Executive for all reasonable
--------------
legal and other fees and expenses incurred to secure, preserve or establish
entitlement to severance benefits under this Agreement. Company shall
reimburse Executive for such fees and expenses on a monthly basis within
ten (10) days after Executive's request for reimbursement accompanied by
evidence that the fees and expenses were incurred. Company's reimbursement
shall include a tax gross-up payment in respect of the federal, state and
local taxes incurred by Executive with respect to the reimbursement of fees
and expenses received under this Section 6(N)."
2
<PAGE>
IN WITNESS WHEREOF, Company and Executive have caused this Amendment No. 1
to be executed this ____ day of ___________, ______.
RIGHTCHOICE MANAGED CARE, INC.
By:________________________________________
John A. O'Rourke
President and Chief Executive Officer
______________________________________
List of Executives who have executed Amendment No. 1 to the Executive Severance
Agreement:
Angela F. Braly Senior VP/General Counsel/Corp. Secr.
Stuart K. Campbell Senior VP, Client Services
Michael Fulk Senior VP, Sales and Marketing
Herb Schneiderman Senior VP, Medical Delivery Systems
John J. Seidenfeld, MD Senior VP & Chief Medical Officer
Richard Smith Senior VP, Diversified Life Insurance Co.
Connie L. Van Fleet Senior VP, Chief Information Officer
Sandra A. Van Trease Senior VP, Chief Operating Officer,
Chief Financial Officer
Kathleen M. Zorica Senior VP, Business Analysis & Product
Management
3
<PAGE>
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
John J. Seidenfeld, MD Senior VP & Chief Medical Officer
Richard Smith Senior VP, Diversified Life Insurance Co.
Connie L. Van Fleet Senior VP, Chief Information Officer
Kathleen M. Zorica Senior VP, Business Analysis & Product Management
<PAGE>
Exhibit 10.54.1
List of Vice Presidents who have executed officer severance agreements:
Kevin G. Aandahl VP, Corporate and Public Affairs
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
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
Thomas Stoiber VP, Actuarial/Underwriting Services
Dennis J. Sullivan VP, Operations/Services
Gary Whitworth VP, BCBSMo Operations
<PAGE>
Exhibit 10.71
EXECUTIVE SEVERANCE AGREEMENT
THIS EXECUTIVE SEVERANCE AGREEMENT (the "Agreement") is entered into as of
the 1st day of January, 1999, by and between RightCHOICE Managed Care, Inc., a
Missouri corporation ("RightCHOICE"), and Angela Braly (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 as of Jan. 1, 1999 (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.
<PAGE>
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.
2
<PAGE>
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.
3
<PAGE>
(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
4
<PAGE>
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
5
<PAGE>
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.
6
<PAGE>
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
7
<PAGE>
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 executives 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
8
<PAGE>
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.
9
<PAGE>
(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
10
<PAGE>
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
11
<PAGE>
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.
12
<PAGE>
(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
-------------------------------------
13
<PAGE>
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.
14
<PAGE>
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.
15
<PAGE>
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/ John O'Rourke
---------------------------
Title President
------------------------
Subscribed and sworn to before me, a Notary Public, this 4/th/ day of
January, 1999.
16
<PAGE>
/s/ Deborah R. Staples [Notary Seal]
----------------------------------------
Notary Public
My Commission Expires: 08/06/2002
---------------
/s/ Angela F. Braly
----------------------------------------
Executive
Subscribed and sworn to before me, a Notary Public, this 4/th/ day of
January, 1999.
/s/ Deborah R. Staples [Notary Seal]
----------------------------------------
Notary Public
My Commission Expires: 08/06/2002
---------------
17
<PAGE>
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
<PAGE>
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.
2
<PAGE>
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. (S) 2000e et seq., the Age
------
Discrimination in Employment Act, 29 U.S.C. (S) 621 et seq., the Fair Labor
------
Standards Act of 1938, 29 U.S.C. (S) 201 et seq., the Rehabilitation Act of
------
1973, 29 U.S.C. (s) 701 et seq., the Americans with Disabilities Act, 42 U.S.C.
------
(s) 2101, the Civil Rights Act of 1871, 42 U.S.C. (S) 1981, the Family and
Medical Leave Act of 1993, 19 U.S.C. (S) 2601 et seq., the Missouri Human Rights
--
Act, (S) 213.010 RSMo et seq., the Missouri Workers Compensation law, (S) 287
------
RSMo et seq., the Missouri Service Letter Statute, (S) 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,
3
<PAGE>
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
4
<PAGE>
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.
5
<PAGE>
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:
6
<PAGE>
Exhibit 10.72
OFFICER SEVERANCE AGREEMENT
THIS OFFICER SEVERANCE AGREEMENT (the "Agreement") is entered into as of
the 1/st/ day of January, 1999, by and between RightCHOICE Managed Care, Inc., a
Missouri corporation ("RightCHOICE"), and Angela Braly (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
<PAGE>
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
2
<PAGE>
(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
3
<PAGE>
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
4
<PAGE>
(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 empl oyment 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
5
<PAGE>
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.
6
<PAGE>
(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
7
<PAGE>
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
8
<PAGE>
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.
9
<PAGE>
(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.
10
<PAGE>
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
11
<PAGE>
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
12
<PAGE>
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.
13
<PAGE>
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
14
<PAGE>
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/ John O'Rourke
--------------------------------
Title: President
-----------------------------
Subscribed and sworn to before me, a Notary Public, this 4/th/ day of
January, 1999.
/s/ Deborah R. Staples
-----------------------------------
Notary Public
DEBORAH R. STAPLES
Notary Public - Notary Seal
State of Missouri
County of St. Louis
My Commission Expires: 08/06/2002
-------------------------------
OFFICER
/s/ Angela F. Braly
-----------------------------------
(Signature)
ANGELA F. BRALY
-----------------------------------
(Print Name)
15
<PAGE>
Subscribed and sworn to before me, a Notary Public, this 4/th/ day of
January, 1999.
/s/ Deborah R. Staples
-------------------------------
Notary Public
DEBORAH R. STAPLES
Notary Public - Notary Seal
State of Missouri
County of St. Louis
My Commission Expires: 08/06/2002
---------------------------
16
<PAGE>
EXHIBIT A
---------
DESIGNATION OF BENEFICIARY
--------------------------
PURSUANT TO OFFICER SEVERANCE AGREEMENT
---------------------------------------
Name of Officer_________________________________________________________________
Original Date of Agreement______________________________________________________
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
______________________ __________________ ____________________
______________________ __________________ ____________________
______________________ __________________ ____________________
______________________ __________________ ____________________
Date_____________ Officer's Signature____________________
Receipt acknowledged on behalf of Company.
Date_____________ RIGHTCHOICE MANAGED CARE, INC.
By_____________________________________
<PAGE>
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 Three. If the benefit determined by application of
-----
such multiple becomes payable to Officer, such benefit shall be payable in
thirty-six substantially equal monthly installments, as provided in this
- ----------
Agreement.
<PAGE>
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
1
<PAGE>
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.
2
<PAGE>
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. (S) 2000e et seq., the Age
-- ---
Discrimination in Employment Act, 29 U.S.C. (S) 621 et seq., the Fair Labor
-- ---
Standards Act of 1938, 29 U.S.C. (S) 201 et seq., the Rehabilitation Act of
-- ---
1973, 29 U.S.C. (S) 701 et seq., the Americans with Disabilities Act, 42 U.S.C.
-- ---
(S) 2101, the Civil Rights Act of 1871, 42 U.S.C. (S) 1981, the Family and
Medical Leave Act of 1993, 19 U.S.C. (S) 2601 et seq., the Missouri Human Rights
-- ---
Act, (S) 213.010 RSMo et seq., the Missouri Workers Compensation law, (S) 287
-- ---
RSMo et seq., the Missouri Service Letter Statute, (S) N290.140 RSMo, or any
-- ---
other federal, state, or local statutes or ordinances. Officer further agrees
that in the event that any person or entity should
3
<PAGE>
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
4
<PAGE>
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.
5
<PAGE>
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
6
<PAGE>
My Commission Expires:
7
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF REGISTRANT
--------------------------
The following are subsidiaries of RightCHOICE Managed Care Inc. as of December
31, 1999:
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
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the registration statement of
RightCHOICE Managed Care, Inc.on Form S-8 (File No. 33-90608, 333-33293 & 333-
33317) of our reports dated February 9, except for Note 13 for which date is
March 9, 2000, relating to the financial statements and financial statement
schedules of RightCHOICE Managed Care, Inc., which reports are included in this
Annual Report on Form 10-K
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 9, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the financial statements in the RightCHOICE Managed Care, Inc. Form 10-K for the
annual period ending December 31, 1999 and is qualified in its entirety by
reference to such financial statements.</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 44,400
<SECURITIES> 201,926
<RECEIVABLES> 78,947
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 380,647
<PP&E> 105,387
<DEPRECIATION> 49,917
<TOTAL-ASSETS> 523,213
<CURRENT-LIABILITIES> 307,609
<BONDS> 43,313
0
0
<COMMON> 187
<OTHER-SE> 157,356
<TOTAL-LIABILITY-AND-EQUITY> 523,213
<SALES> 0
<TOTAL-REVENUES> 816,912
<CGS> 0
<TOTAL-COSTS> 797,245
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,344
<INCOME-PRETAX> 28,393
<INCOME-TAX> 11,177
<INCOME-CONTINUING> 17,216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,216
<EPS-BASIC> 0.92
<EPS-DILUTED> 0.92
</TABLE>
