UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 ON FORM 10-Q/A TO FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-13248
RIGHTCHOICE MANAGED CARE, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1674052
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1831 Chestnut Street, St. Louis, Missouri 63103-2275
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 923-4444
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date:
Title of each class Outstanding at May 1, 2000
Class A common stock, $0.01 par value 3,710,866 shares
Class B common stock, $0.01 par value 14,962,500 shares
RIGHTCHOICE MANAGED CARE, INC.
First Quarter 2000 Form 10-Q/A
Table of Contents
Explanatory Note
In April 1999, RightCHOICE Managed Care, Inc., a Delaware corporation
(New RightCHOICE), filed with the Securities and Exchange Commission
a registration statement on Form S-4 to register the shares of New
RightCHOICE common stock to be issued to the holders of RightCHOICE Managed
Care, Inc., a Missouri corporation (the registrant), class A common stock
in conjunction with the merger of the registrant with and into New
RightCHOICE as described in the registration statement. In connection with
the preparation and revision of the registration statement, the notes to the
registrant's financial statements and the management's discussion and
analysis of financial condition and results of operations of the registrant
included in the registration statement were revised to add more detailed
disclosure. The purpose of this Form 10-Q/A is to amend the registrant's
Form 10-Q for the quarterly period ended March 31, 2000 to include these
changes. None of the additions or modifications had any effect on net
income, total assets, total liabilities or total equity as previously
reported. No part of the Form 10-Q for the quarterly period ended
March 31, 2000 previously filed with the SEC other than Items 1 and 2
are affected by this amendment.
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 3
Consolidated Statements of Income for the three months
ended March 31, 2000 and 1999 4
Consolidated Statements of Changes in Shareholders'
Equity for the three months ended
March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
SIGNATURES 37
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
ASSETS March 31, 2000 December 31, 1999
(unaudited)
Current assets:
Cash and cash equivalents $34,061 $44,400
Investments available for sale 209,795 201,926
Receivables from members 90,027 78,947
Receivables from related parties 26,769 28,764
Deferred income taxes 8,562 8,629
Other assets 20,132 17,981
Total current assets 389,346 380,647
Property and equipment, net 54,331 55,470
Deferred income taxes 10,669 9,791
Investments in affiliates 6,108 5,905
Goodwill and intangible assets, net 67,565 71,400
Total assets $528,019 $523,213
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Medical claims payable $119,572 $124,428
Unearned premiums 64,857 62,824
Accounts payable and accrued
expenses 55,858 59,476
Current portion of long-term debt 8,000 8,000
Payables to related parties 32,686 27,009
Reserve for loss contract 6,944 7,259
Obligations for employee benefits 1,606 1,577
Income taxes payable 13,466 12,965
Obligations under capital leases 3,641 4,071
Total current liabilities 306,630 307,609
Long-term debt 24,063 26,063
Obligations for employee benefits 27,317 26,819
Obligations under capital leases 4,633 5,179
Total liabilities 362,643 365,670
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, 3,710,866
and 3,710,653 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 132,634 132,634
Retained earnings 36,991 29,529
Treasury stock, 26,634 and 26,847
class A shares, respectively,
at cost (377) (380)
Accumulated other comprehensive
loss (4,059) (4,427)
Total shareholders' equity 165,376 157,543
Total liabilities and
shareholders' equity $528,019 $523,213
See accompanying Notes to Consolidated Financial Statements.
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except shares and per share data)
Three months ended
March 31,
2000 1999
Revenues:
Premium $198,739 $179,218
Fees and other income 23,903 20,795
Total revenues 222,642 200,013
Operating expenses:
Health care services 160,069 146,748
Commissions 8,945 7,909
General and administrative (excludes
depreciation and amortization
and excludes net intercompany charges
of $3,265 and $3,040, respectively,
allocated to Blue Cross and
Blue Shield of Missouri) 39,467 36,560
Depreciation and amortization 4,333 4,194
Total operating expenses 212,814 195,411
Operating income 9,828 4,602
Investment income:
Interest and dividends 3,224 3,207
Realized gains, net 139 268
Total investment income, net 3,363 3,475
Other:
Interest expense (913) (1,068)
Other income, net 92 308
Total other, net (821) (760)
Income before provision for income
taxes 12,370 7,317
Provision for income taxes 4,908 2,640
Net income $7,462 $4,677
Weighted average common shares
outstanding 18,673,000 18,673,000
Basic earnings per share $0.40 $0.25
Diluted earnings per share $0.39 $0.25
See accompanying Notes to Consolidated Financial Statements
<TABLE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (UNAUDITED)
(in thousands, except shares)
<CAPTION>
Accumulated
Additional other
Common stock paid-in Retained Treasury comprehensive
Class A Class B capital earnings stock income Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $37 $150 $132,635 $12,313 $(383) $1,122 $145,874
Comprehensive income:
Net income 4,677 4,677
Change in unrealized
appreciation on
available-for-sale securities,
net of income tax benefit
of $1,068 (1,890) (1,890)
Comprehensive income 2,787
Balance at March 31, 1999 37 150 132,635 16,990 (383) (768) 148,661
Comprehensive income:
Net income 12,539 12,539
Change in unrealized
appreciation on
available-for-sale securities,
net of income tax benefit
of $2,130 (3,734) (3,734)
Minimum pension liability
adjustment, net of income tax
provision of $40 75 75
Comprehensive income 8,880
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
Comprehensive income:
Net income 7,462 7,462
Change in unrealized
appreciation on
available-for-sale securities,
net of income tax expense
of $237 368 368
Comprehensive income 7,830
213 shares issued
pursuant to the company's
deferred compensation
program for directors 3 3
Balance at March 31, 2000 $37 $150 $132,634 $36,991 $(377) $(4,059) $165,376
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the three months ended
March 31,
2000 1999
Cash flows from operating
activities:
Net income $7,462 $4,677
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Benefit for deferred income taxes (1,047) (825)
Depreciation and amortization 4,333 4,194
Undistributed earnings of affiliates (203) (106)
Gain on sale of investments (139) (268)
Amortization of premiums and
accretion of discounts, net 52 157
Loss (gain) on sale of property
and equipment 1 (231)
(Increase) decrease in certain assets:
Receivables from members (11,080) (4,591)
Receivables from related parties 1,995 (3,910)
Other assets 958 (6,355)
Increase (decrease) in certain liabilities:
Medical claims payable (4,856) 7,451
Unearned premiums 2,033 626
Accounts payable and accrued expenses (3,618) (4,247)
Payables to related parties 5,677 193
Reserve for loss contract (315) (2,263)
Obligations for employee benefits 527 367
Income taxes payable 501 663
Net cash provided by (used in) operating activities 2,281 (4,468)
Cash flows from investing activities:
Proceeds from matured investments:
Fixed maturities 1,685 1,700
Proceeds from investments sold:
Fixed maturities 7,408 67,560
Other 513 8
Investments purchased:
Fixed maturities (11,666) (70,059)
Equity securities (5,118)
Proceeds from property and equipment sold 11
Property and equipment purchased (2,200) (1,265)
Net cash used in investing activities (9,378) (2,045)
Cash flows from financing activities:
Issuance of class A treasury stock 3
Payments of long-term debt (2,000) (2,500)
Payments of capital lease obligations (1,245) (939)
Net cash used in financing activities (3,242) (3,439)
Net decrease in cash and cash equivalents (10,339) (9,952)
Cash and cash equivalents at beginning of period 44,400 39,409
Cash and cash equivalents at end of period $34,061 $29,457
Supplemental Disclosure of Cash Information
Interest paid $913 $1,058
Income taxes paid, net $5,455 $2,802
Supplemental Schedule of Noncash
Investing and Financing Activities:
Equipment acquired through capital leases $269 $3,098
Disposal of equipment under capital leases $1,881
See accompanying Notes to Consolidated Financial Statements.
RightCHOICE Managed Care, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Financial statement presentation
The interim consolidated financial statements included herein have
been prepared by RightCHOICE Managed Care, Inc. (the company or
RightCHOICE) without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the SEC). Certain
information and footnote disclosures, normally included in the
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to
such SEC rules and regulations; however, the management of the
company believes that the disclosures herein are adequate to make
the information presented not misleading. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the consolidated financial
position of the company with respect to the interim consolidated
financial statements, and the consolidated results of its operations
and its cash flows for the interim periods then ended, have been
included. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
2. Contingencies
Litigation of Blue Cross and Blue Shield of Missouri with the
Missouri Attorney General and 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
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.
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."
RightCHOICE continues to work toward completing the proposed
settlement. On March 14, 2000, the definitive reorganization
agreement was signed and, on April 14, 2000, RightCHOICE made a
preliminary filing with the Securities and Exchange Commission (SEC)
relating to the reorganization. Additional steps that the parties
have completed in connection with the proposed settlement and the
reorganization include: the organization of New RightCHOICE; the
creation of The Missouri Foundation for Health; the receipt of
approvals from the lending banks under RightCHOICE's credit facility
agreement; the full reinstatement of the current licenses by the
Blue Cross and Blue Shield Association related to RightCHOICE's and
its parent's use of the Blue Cross and Blue Shield names and service
marks; and preliminary approval of the reorganization by the
Association's Board of Directors.
Consummation of the proposed settlement and the reorganization is
still subject to a number of significant conditions. These include
the receipt of shareholder approval, the receipt of regulatory
approvals, and the receipt of a private letter ruling from the
Internal Revenue Service, or a satisfactory tax opinion, as to the
tax-free nature of the reorganization transaction.
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
$175,000 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 shares owned by a
shareholder in excess of the applicable ownership limits could be
redistributed by New RightCHOICE.
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 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 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 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, June 17, September 17, and November 19, 1999 the BCBSA
Board of Directors extended the licenses until the next scheduled
meeting. On March 9, 2000, the BCBSA Board of Directors unanimously
voted to fully reinstate the licenses so that extension on a "board
to board" basis would no longer be required. 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
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. On
March 14, 2000, Blue Cross and Blue Shield of Missouri, RightCHOICE,
New RightCHOICE, and The Missouri Foundation for Health signed the
reorganization agreement providing for the reorganization
contemplated by the Amended and Restated Settlement Agreement.
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. This condition is now fully satisfied.
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) 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 a judgment is entered after the reorganization
is completed, the company resulting from the reorganization,
referred to herein as 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.
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 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 completed.
Status of Blue Cross and Blue Shield licenses
On March 9, 2000, after a period of "board to board" extensions
resulting from the pendency of the principal litigation with the
State of Missouri, the BCBSA Board of Directors voted to reinstate
the full licenses for RightCHOICE and its licensed affiliates. This
action followed the dismissal of the principal litigation pursuant
to the Amended and Restated Settlement Agreement described above
under "Agreement for Settlement of Certain Litigation Matters and
Reorganization of RightCHOICE." Important events that preceded this
reinstatement are described in the following paragraphs.
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). If, on or before such date, the BCBSA did not extend the
termination dates for the license agreements until the next
regularly scheduled meeting of the BCBSA Board of Directors after
such date, or otherwise modify the addenda, the license agreements
would have terminated. This "board-to-board" extension of the
license agreements has been adopted in conjunction with the issuance
of reinstated licenses granted to other BCBSA licensees following a
license termination. 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 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. The license fees have aggregated approximately
$0.7 million to $0.8 million per year for 1997 through 1999. The company
expects to continue to incur annual license fees of similar amounts; however,
the amounts may vary from year to year based on the company's total revenue
as compared to that of all Blue Cross and Blue Shield licensees as well as
changes adopted by BCBSA to its overall formulas for computing the
license fees.
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.
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, many of which involve claims
relating to the denial of health care benefits. In some cases, plaintiffs
may seek substantial punitive damages. The loss of even one of these claims,
if it resulted in a significant punitive damage award could adversely affect
RightCHOICE's financial condition or results of operations. The risk of
potential liability under punitive damage theories also may make reasonable
settlements of claims more difficult to obtain.
In addition, plaintiffs continue to bring new types of purported legal claims
against managed care companies such as RightCHOICE. RightCHOICE cannot
determine with any certainty the impact that these evolving theories of
recovery may have on the managed care industry in general or on RightCHOICE
or its subsidiaries in particular.
RightCHOICE anticipates that it will 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.
3. Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board (FASB)
released Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 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. The company
believes that the adoption of SFAS No. 133 will not have a material
impact on the company's financial position or results of operations.
4. Provision for income taxes
The company's effective income tax provision rates of 39.7 percent
and 36.1 percent for the first quarters of 2000 and 1999,
respectively, presented in the Consolidated Statements of Income
were affected by state income taxes and non-deductible goodwill
amortization, among other things. The 1999 provision was more
favorably impacted by a change in 1998 to the company's filing
status for the State of Missouri as compared to the 2000 provision.
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. Based upon all the available evidence, management
believes it is more likely than not that the company will realize
its deferred tax assets and, accordingly, no valuation allowance has
been provided against such assets as of March 31, 2000.
5. Earnings per share
Basic earnings per share are computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding during the year. Diluted earnings per share are
calculated by dividing net income by the number of weighted average
shares outstanding plus additional shares representing stock
distributable under stock-based compensation plans using the
treasury stock method. There were 236,528 and 62,653 dilutive
potential common shares for the first quarters of 2000 and 1999,
respectively.
6. Comprehensive income
The components of other comprehensive income for the three month
periods ended March 31, 2000 and 1999 are as follows:
Three months ended
March 31,
2000 1999
(in thousands)
Unrealized holding gains (losses) arising
during period, net of taxes $459 $(1,723)
Less: reclassification adjustment for gains
included in net income, net of taxes (91) (167)
Net unrealized gains (losses) on securities $368 $(1,890)
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 of investments was
$3,764 and $4,132 at March 31, 2000 and December 31, 1999,
respectively. The minimum pension liability increase was $295 and
$295 at March 31, 2000 and December 31, 1999, respectively.
7. Segment information
The company operates in two segments which it defines as
underwritten and self-funded. The company's underwritten segment
includes a comprehensive array of products including PPO, POS, HMO,
Medicare supplement, managed indemnity and specialty managed care
coverages. The company's self-funded segment includes TPA, ASO for
self-insured organizations, network rental services for self-insured
organizations, insurance companies and other organizations, and life
insurance agency services. All of the company's revenues, both
underwritten premiums and self-funded fees and other income, are
derived from domestic (United States) sources and no single customer
accounts for more than 10 percent of total revenues.
Operating income for the company's underwritten segment is
determined by deducting from premium revenue the health care service
costs, commissions, and general and administrative expenses that are
attributable to that segment's operations. Operating income for the
self-funded segment is determined by deducting the commissions and
general and administrative expenses attributable to the segment from
fees and other income. Expenses not directly traceable to an
industry segment are allocated on a consistent and reasonable basis
utilizing membership, groups, claims, and other key drivers.
Corporate identifiable assets by segment include only receivables
from members since the company does not produce more detailed
information by segment internally. Inter-segment revenues are not
material. Financial information by segment is as follows (in
thousands):
Three months ended March 31, 2000 Underwritten Self-funded Consolidated
Revenues $198,739 $23,903 $222,642
Operating income 1,864 7,964 9,828
Depreciation and
amortization expense 2,936 1,397 4,333
Identifiable assets 54,200 35,827 90,027
Three months ended March 31, 1999 Underwritten Self-funded Consolidated
Revenues $179,218 $20,795 $200,013
Operating (loss) income (2,185) 6,787 4,602
Depreciation and
amortization expense 2,871 1,323 4,194
Identifiable assets 48,552 24,063 72,615
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT
ON FORM 10-Q/A CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND ARE
SUBJECT TO UNCERTAINTY AND CHANGES IN CIRCUMSTANCES. ACTUAL RESULTS
MAY VARY MATERIALLY FROM THE EXPECTATIONS CONTAINED HEREIN. THE
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE DESCRIBED HEREIN INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED BELOW IN THE SECTION ENTITLED "FACTORS THAT MAY
AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR
BUSINESS." RIGHTCHOICE IS NOT UNDER ANY OBLIGATION, AND EXPRESSLY
DISCLAIMS ANY OBLIGATION, TO UPDATE OR ALTER ITS FORWARD-LOOKING
STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, FUTURE RESULTS,
OR OTHERWISE.
Results of operations
The following table contains revenue by product group for the three
month periods ended March 31, 2000 and 1999 (unaudited):
Three months ended
March 31,
Product group 2000 1999
(in thousands)
PPO:
Alliance PPO $58,163 $50,156
AllianceChoice POS 46,486 40,118
HMO (includes other POS) 56,320 53,502
Medicare supplement 22,796 23,588
Managed indemnity 585 951
Other specialty services 14,389 10,903
Total premium revenue 198,739 179,218
ASO/self-funded and other income 23,903 20,795
Total revenues $222,642 $200,013
The following table sets forth selected operating ratios. The
medical loss ratio is shown as a percentage of health care services
expense over premium revenue. All other ratios are shown as a
percentage of premium revenue and fees and other income combined:
Three months ended
March 31,
2000 1999
Operating revenues:
Premium revenue 89.3% 89.6%
Fees and other income 10.7% 10.4%
100.0% 100.0%
Operating expenses:
Medical loss ratio 80.5% 81.9%
Commission expense 4.0% 4.0%
General and administrative expense
(includes depreciation and amortization) 19.7% 20.4%
Adjusted general and administrative expense
(excludes depreciation and amortization) 17.7% 18.3%
Membership
The following table sets forth membership data and the
percent change in membership:
March 31, %
Product Group 2000 1999 increase (decrease)
Underwritten:
PPO:
Alliance PPO 159,424 143,196 11.3
AllianceChoice POS 134,051 124,746 7.5
HMO:
Commercial (includes other POS) 123,694 126,187 (2.0)
Blue Horizons Medicare HMO 4,880 5,283 (7.6)
Medicare supplement 51,863 56,436 (8.1)
Managed indemnity 1,325 2,078 (36.2)
475,237 457,926 3.8
Self-funded:
PPO 44,308 45,951 (3.6)
HMO 7,633 7,519 1.5
ASO (includes HealthLink):
Workers' compensation 639,765 457,000 40.0
Other ASO* 1,240,477 1,171,898 5.9
Total membership 2,407,420 2,140,294 12.5
* does not include 434,633 and 430,551 as of March 31, 2000 and
1999, respectively, relating to additional third-party administrator
members that are part of The EPOCH Group, L.C. (Epoch), a joint
venture with Blue Cross and Blue Shield of Kansas City formed in
December 1995.
Comparison of results for first quarter 2000 to first quarter 1999
Revenues - underwritten
Premium revenue increased $19.5 million, or 10.9 percent, in the
first quarter of 2000 in comparison to the first quarter of 1999.
As described below, components of premium revenue were affected by
shifts in product mix, rate increases, and other factors, and as a
result, such changes in premium revenue may not be indicative of
future periods. The company will continue to strive to establish
its 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, the company cannot
provide any assurances that it will be able to price its products
consistent with health care cost trends.
PPO revenues increased $14.4 million in the first quarter of 2000 as
compared to the first quarter of 1999 -- $7.1 million due to a 7.7
percent increase in net premium rates and a $7.2 million increase
resulting from a 7.6 percent increase in member months. The term
member months refers to the cumulative number of members added
together over a specific time period. Thus, for a quarter, member
months are determined by adding together the membership counts for
all three months. Net premium rates increased due in part to overall
premium renewal rate increases typically ranging from approximately 7 percent
to 19 percent during enrollment periods in the last three quarters of
1999 and the first quarter of 2000. 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
16,228 members from March 31, 1999 to March 31, 2000 while
AllianceChoice POS membership increased by 9,305 over the same time
period. These increases are partially due to the departure from the
Missouri market of several competitors in the recent past coupled
with strong retention of the company's existing members. The company
began offering PPO products in Illinois at the end of the first
quarter of 1997. Included in the Alliance PPO member count are
18,180 PPO Illinois members as of March 31, 2000, an increase of
9,719 from March 31, 1999.
HMO premium revenue increased $2.8 million or 5.3 percent -- $4.9
million increase due to an 8.3 percent increase in net premium
rates, partially offset by a $2.1 million decrease resulting from a
2.8 percent decrease in member months. Net premium rates increased
in part due to the company's premium renewal rate increases typically ranging
from approximately 7 percent to 19 percent during enrollment periods
in the last three quarters of 1999 and the first quarter of 2000.
Net premium rate increases are at the lower end of 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 (MCHCP), comprised of approximately 41,571 members as of March
31, 2000.
Membership in MCHCP increased by 2,362 from March 31, 1999 to March
31, 2000. The company's 1999 year-end annual report on Form 10-K
noted that a rate increase of approximately 21 percent would be
effective for the contract year beginning January 1, 2000. In March
2000, MCHCP notified the company that a risk adjustment factor
applied to the premiums MCHCP pays insurance carriers will result in
a reduction of that increase to approximately 12 percent. Although
the company is contesting this MCHCP action, it increased its loss
reserve at March 31, 2000, by $1.5 million. This charge is
reflected in health care services expense. See "Liquidity and
Capital Resources" below. Excluding the MCHCP, membership in the
company's HMO products decreased over the same time period by 5,258
members, primarily due to the company's pricing strategy.
Premium revenue from Medicare supplement decreased by $0.8 million
in the first quarter of 2000 as compared to the first quarter of
1999. Membership in the company's Medicare supplement products has
decreased in part due to subscribers opting for Medicare-risk
programs, similar to the company's 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 $0.4 million in the
first quarter of 2000 as compared to the first quarter of 1999 due
to a 34.0 percent decline in member months. Member month declines
are consistent with the company's strategy to move toward more
highly managed care products. With the exception of a short-term
medical product, the company no longer sells managed indemnity
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 the
company's drug and dental health care benefits plans, increased $3.5
million or 32.0 percent -- $2.2 million due to a 20.9 percent
increase in net premium rates and a $1.3 million increase resulting
from a 9.2 percent increase in member months. Specialty product
membership related to the company's drug products increased
during this period as a result of growth in the company'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 in part by
decreases in the company's dental product member months, which
decreased by 3.4 percent due to competition from dental products
that are priced below the company's dental product. The company
intends to design a more competitive dental product during 2000.
The large net premium rate increases primarily relate to the
company's drug products and correspond to the high levels of
prescription utilization and trends that the company, as well as the
industry as a whole, have experienced in recent years.
Revenues - self-funded
Fees and other income from administrative services only, network
services and life insurance commission revenues increased $3.1
million in the first quarter of 2000 as compared to the first
quarter of 1999. These increases are primarily due to increased
revenues of $3.7 million from HealthLink, Inc. (HealthLink), the
company's network rental and managed care service subsidiary.
HealthLink's revenues increased as a result of a 19.9 percent
increase in membership from March 31, 1999 to March 31, 2000 which
was partially due to expansion into new territories as well as
membership growth in HealthLink's workers' compensation program,
which increased 40.0 percent to 639,765 at March 31, 2000 compared
to 457,000 at March 31, 1999.
Operating expenses
The overall medical loss ratio decreased from 81.9 percent in the
first quarter of 1999 to 80.5 percent in the first quarter of 2000.
The medical loss ratio has decreased, in part, due to the company's
pricing strategy, which resulted in an overall increase in the
premium per member per month of approximately 8.2 percent. The
medical expense on a per member per month basis increased by
approximately 6.4 percent in the same period.
The company continues its 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 9 to 15 percent for the twelve month
period ended March 31, 2000, 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.
This trend has been reduced somewhat by the company's continuing
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 the company's preferred
drug list), or other brand name drugs, albeit at different copayment
levels. Approximately 86 percent and 45 percent of the company's
underwritten members with a drug benefit were covered under the
three-tier pharmacy benefit program as of March 31, 2000 and March
31, 1999, respectively. In the first quarter of 2000, the company
has recognized 28 percent 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 the company's pharmacy benefit contract, which
runs through 2002. The company will also continue its hospital,
physician and service recontracting strategy, using the more
detailed data and analysis available through the company's
information and operations strategy (IOS). The company 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 $1.0 million, or 13.1 percent, in
the first quarter of 2000 as compared to the first quarter of 1999
primarily due to an increase in overall premium. The commission
expense ratio remained unchanged at 4.0 percent for the first
quarters of 2000 and 1999.
General and administrative expenses, excluding depreciation and
amortization, increased $2.9 million, or 8.0 percent in the first
quarter of 2000 as compared to the first quarter of 1999. This
increase is partially attributable to HealthLink's geographic and
member expansion efforts which resulted in an increase of $1.7
million in general and administrative expenses in the first quarter
of 2000 as compared to the first quarter of 1999. The company's
general and administrative expense ratio, excluding depreciation and
amortization, decreased to 17.7 percent in the first quarter of 2000
as compared to 18.3 percent in the first quarter of 1999.
Depreciation and amortization expenses increased slightly from $4.2
million in the first quarter of 1999 to $4.3 million in the first
quarter of 2000.
Operating expenses for the company's underwritten segment include health
care service costs, commissions, and general and administrative expenses.
Operating expenses for the company's self-funded segment include commissions
and general and administrative expenses. Operating expenses for the
underwritten segment increased by $15.5 million to $196.9 million in the
first quarter of 2000 from $181.4 million in the first quarter of 1999
primarily due to an increase in health care service costs of $13.3 million.
In addition, commission expense and general and administrative expenses
increased by $1.1 million and $1.0 million, respectively, during the first
quarter of 2000 as compared to the first quarter of 1999. Increases to
commission expense and general and administrative expenses are partially
attributable to an increase in RightCHOICE's underwritten membership of
approximately 4 percent from March 31, 1999 to March 31, 2000. Operating
expenses for the self-funded segment increased $1.9 million to $15.9 million
in the first quarter of 2000 from $14.0 million in the first quarter of 1999,
primarily due to an increase in HealthLink's general and administrative
expenses of $1.7 million, as previously described.
Operating income
Operating income increased by $5.2 million in the first quarter of
2000 in comparison to the first quarter of 1999.
Operating income for the company's underwritten segment increased to
$1.9 million in the first quarter of 2000 as compared to an operating loss
of $2.2 million in the first quarter of 1999. Operating income increased
primarily due to an improved pricing environment for the company's
underwritten products.
Operating income for the company's self-funded segment increased to
$8.0 million in the first quarter of 2000 as compared to $6.8 million in
the first quarter of 1999. Operating income increased due to HealthLink's
continued growth from increased membership and regional expansion, as
previously described. HealthLink's operating income increased by $2.0 million
in the first quarter of 2000 as compared to the first quarter of 1999.
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 $3.4
million in the first quarter of 2000 represents a $0.1 million
decrease over the first quarter of 1999.
Provision for income taxes
The company's effective income tax provision rates were 39.7 percent
and 36.1 percent for the first quarters of 2000 and 1999,
respectively. The company's effective income tax rates for 2000 and
1999 were affected by state income taxes and non-deductible goodwill
amortization, among other things. The 1999 provision was more
favorably impacted by a change in 1998 to the company's filing
status for the State of Missouri as compared to the 2000 provision.
Net income
The company's net income of $7.5 million for the first quarter of
2000 represents an increase of $2.8 million compared to $4.7 million
for the first quarter of 1999, as a result of the factors noted
above. Basic and diluted earnings per share for the first quarter
of 2000 were $0.40 and $0.39, respectively, compared to basic and
diluted earnings per share of $0.25 and $0.25, respectively, for the
first quarter of 1999.
Liquidity and capital resources
RightCHOICE's working capital as of March 31, 2000 was $82.7
million, an increase of $9.7 million from December 31, 1999. A
majority of the increase is attributable to the net income of $7.5
million in the first quarter of 2000. Depreciation and amortization
expenses related to noncurrent assets were $4.3 million. The
company's unrealized net depreciation of investments available for
sale decreased (improved) by $0.4 million in the first quarter of
2000. In addition, RightCHOICE repaid $2.0 million of the debt from
its reducing revolving credit facility as well as $1.2 million of
debt related to capital leases. The company capitalized $2.2
million of costs for property and equipment purchases, $1.1 million
of which relates to capitalized information and operations strategy
(IOS) development costs. In the first quarter of 2000, the company
incurred expenditures of $1.3 million on its IOS project, of which
$1.1 million were capitalized. During the remainder of the year
2000, the company anticipates that it will expend approximately $7
million to $8 million on its IOS project of which approximately $5
million to $6 million will be capitalized.
Net cash provided by operations totaled $2.3 million for the first
quarter ended March 31, 2000 as compared to net cash used in
operations of $4.5 million for the first quarter ended March 31,
1999. The company's net income was $7.5 million, which included
$4.3 million of depreciation and amortization expenses, and $0.3
million related to the net reduction in the MCHCP contract loss
reserve. In addition, receivables from members, accounts payable
and accrued expenses, medical claims payable, and net intercompany
payables were effected by the timing of operating cash payments and
receipts, intercompany tax settlements, as well as changes in
membership and utilization and claims payment trends. Receivables
from members increased by $11.1 million in part due to an increase
of $5.1 million related to HealthLink receivables, increased sales
activity and rate increases related to the company's underwritten
products, and other timing factors. Accounts payable and accrued
expenses decreased by $3.6 million due in large part to annual
broker bonuses that are paid in the first quarter of each year as
well as payments made to company employees pursuant to the company's
annual incentive programs. Medical claims payable decreased by $4.9
million, due in part to the company's efforts to reduce its claims
inventory. The company's continued efforts to further reduce claims
inventory during 2000 could reduce the level of operating cash flows
in future quarters of 2000. Net intercompany payables increased by
$7.7 million due to intercompany tax settlements and the timing of
operating cash receipts and payments, among other things.
On August 29, 1997, RightCHOICE reported the commencement of the
litigation with the MCHCP and estimated losses (giving effect to all
possible renewal terms of the MCHCP contract without requested rate
increases) in the range of $30 million to $40 million. As a result of
management's assessment of the profitability of its contract for providing
health care services to members of the MCHCP, the company recorded a pre-tax
charge for probable losses of $29.5 million during the third quarter of 1997.
The charge resulted from inadequate rate increases that were contractually
limited for the remainder of the MCHCP contract, which extended through the
year 2000. The pre-tax charge 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 MCHCP 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 MCHCP executed an
amendment to the contract providing a rate increase that was
anticipated to be approximately 21 percent for public entities,
modified rate factors for state employees, and modification of the
pharmacy benefit, effective January 1, 2000, for the 2000 contract
year. In March 2000, MCHCP notified the company that a risk
adjustment factor applied to the premiums MCHCP pays insurance
carriers will result in a reduction of that increase to
approximately 12 percent. Although the company is contesting this
MCHCP action, it increased its loss reserve at March 31, 2000, by
$1.5 million. This charge is reflected in the health care services
expense caption of the Consolidated Statement of Income in Item 1, Financial
Statements. While management of the company believes the current
provision for losses is adequate, if the actual public entity
membership in the MCHCP grows at a rate in excess of the rate used
in the actuarial estimates, or if the projected limited rate
increases and medical cost trends should differ materially from
those assumed in the actuarial estimates, then the amount of the
reserve recorded to date could be insufficient to cover all future
losses which may be associated with the MCHCP contract, and such
losses could have a material adverse effect on RightCHOICE.
RightCHOICE's participation in the MCHCP program is currently
scheduled to terminate on December 31, 2000.
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 MCHCP losses that exceed certain thresholds over the remaining
term of the current MCHCP 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.
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 a result of those planning and implementation efforts, the
company experienced no significant problems relating to the Year
2000 transition. The company will continue to monitor its systems
for continued processing. In addition, as of May 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 $13.0 million with $0.1 million
expensed in the first quarter of 2000. 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 percent of
RightCHOICE's information technology budget over the life of the
Year 2000 program.
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.
Recently issued accounting standards
See the description under the same caption in Note 3 of the Notes to
Consolidated Financial Statements of Item I, which is incorporated
herein by reference.
Contingencies
See the description under the same caption in Note 2 of the Notes to
Consolidated Financial Statements of Item I, which description is
incorporated herein by reference.
Factors that May Affect Future Results of Operations, Financial
Condition or Business
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 2 "Contingencies" of Part I, Item 1,
Financial Statements, 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 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 2 "Contingencies" of Part I,
Item 1, Financial Statements, 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 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 2 "Contingencies" of Part I, Item 1, Financial Statements under
the heading "Litigation relating to corporate status of Blue Cross
and Blue Shield of Missouri." Anthony Sarkis was also a party to
the lawsuit discussed in Note 2 "Contingencies" of Part I, Item 1,
Financial Statements under the heading "Subscriber class action
litigation".
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, the company resulting from
the reorganization, referred to herein as 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 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 adverse to RightCHOICE or
Blue Cross and Blue Shield of Missouri 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 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 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,
--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. 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 percent. 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.
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.
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:
--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. RightCHOICE's 1999 year-
end financial report noted that a rate increase of approximately 21
percent would be effective for the contract year beginning January
1, 2000. In March 2000, MCHCP notified RightCHOICE that a risk
adjustment factor applied to the premiums MCHCP pays insurance
carriers will result in a reduction of that increase to
approximately 12 percent. Although RightCHOICE is contesting this
MCHCP action, it increased its loss reserve at March 31, 2000, by
$1.5 million.
The pre-tax charge and additional reserves were 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,
--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 Quarterly Report regarding future
financial performance and results and the other statements herein
that are not historical facts are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to be signed on
its behalf by the undersigned thereunto duly authorized.
RIGHTCHOICE MANAGED CARE, INC.
Registrant
Date: September 25, 2000 By: /s/ Sandra Van Trease
Sandra Van Trease
Chief Financial Officer,
Senior Executive Vice President and
Chief Operating Officer
Date: September 25, 2000 By: /s/ Angela F. Braly
Angela F. Braly
Executive Vice President,
General Counsel and
Corporate Secretary
