As filed with the Securities and Exchange Commission on August 16, 2001 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- ANTHEM, INC. (Exact name of Registrant as specified in its charter) Indiana 6324 35-2145715 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification Number) incorporation or Classification Code organization) Number) 120 Monument Circle Indianapolis, Indiana 46204 (317) 488-6000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ---------------- David R. Frick Executive Vice President and Chief Legal and Administrative Officer Anthem, Inc. 120 Monument Circle Indianapolis, Indiana 46204 (317) 488-6000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- Copies to: Tibor D. Klopfer William D. Torchiana Baker & Daniels Sullivan & Cromwell Suite 2700 125 Broad Street 300 North Meridian Street New York, New York 10004 Indianapolis, Indiana 46204 (212) 558-4000 (317) 237-0300 ---------------- Approximate date of commencement of proposed sale to the public: As soon as is practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Proposed Maximum Title of Each Class of Aggregate Offering Amount of Securities to be Registered Price(1)(2) Registration Fee - ------------------------------------------------------------------------------- Common Stock, $.01 par value..................... $1,151,150,000 $287,788 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. (2) A portion of the shares to be registered represents shares that are to be offered outside of the United States but that may be resold from time to time in the United States. Such shares are not being registered for the purpose of sales outside the United States. ---------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this preliminary prospectus is not complete and may be + +changed. These securities may not be sold until the registration statement + +filed with the Securities and Exchange Commission is effective. This + +preliminary prospectus is not an offer to sell nor does it seek an offer to + +buy these securities in any jurisdiction where the offer or sale is not + +permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion. Dated , 2001. 28,600,000 Shares Anthem, Inc. Common Stock ----------- This is an initial public offering of shares of common stock of Anthem, Inc. The offering is being made in connection with the conversion of Anthem Insurance Companies, Inc. from a mutual insurance company to a stock insurance company in a process called demutualization. All of the shares of common stock are being sold by Anthem, Inc. In addition to these shares, an estimated 76,080,000 shares of our common stock will be issued to eligible statutory members of Anthem Insurance Companies, Inc. in the demutualization. Prior to this offering, there has been no public market for our common stock. It is currently estimated that the public offering price per share will be between $ and $ . Our common stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol "ATH". See "Risk Factors" beginning on page 8 to read about factors you should consider before buying shares of our common stock. ----------- Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. ----------- Per Share Total --------- ----------- Initial public offering price............................ $ $ Underwriting discount.................................... $ $ Proceeds, before expenses, to Anthem, Inc................ $ $ To the extent that the underwriters sell more than 28,600,000 shares of common stock, the underwriters have the option to purchase up to an additional 4,290,000 shares from Anthem, Inc. at the initial public offering price less the underwriting discount. ----------- The underwriters expect to deliver the shares against payment in New York, New York on , 2001. Goldman, Sachs & Co. Merrill Lynch & Co. Morgan Stanley JPMorgan Banc of America Securities LLC Credit Suisse First Boston Lehman Brothers Salomon Smith Barney UBS Warburg ABN AMRO Rothschild LLC Dresdner Kleinwort Wasserstein A.G. Edwards & Sons, Inc. McDonald Investments Inc. Utendahl Capital Partners, L.P. ----------- Prospectus dated , 2001.
UNDER INDIANA LAW, FOR A PERIOD OF FIVE YEARS FOLLOWING THE EFFECTIVE DATE OF THE DEMUTUALIZATION, NO PERSON MAY ACQUIRE BENEFICIAL OWNERSHIP OF MORE THAN 5% OF THE OUTSTANDING SHARES OF OUR COMMON STOCK WITHOUT THE PRIOR APPROVAL OF THE INDIANA INSURANCE COMMISSIONER AND OUR BOARD OF DIRECTORS. THIS RESTRICTION DOES NOT APPLY TO ACQUISITIONS MADE BY US OR MADE PURSUANT TO AN EMPLOYEE BENEFIT PLAN OR EMPLOYEE BENEFIT TRUST SPONSORED BY US. THE INDIANA INSURANCE COMMISSIONER HAS ADOPTED RULES UNDER WHICH PASSIVE INSTITUTIONAL INVESTORS COULD PURCHASE MORE THAN 5% BUT LESS THAN 10% OF OUR OUTSTANDING COMMON STOCK WITH THE PRIOR APPROVAL OF OUR BOARD OF DIRECTORS AND PRIOR NOTICE TO THE INDIANA INSURANCE COMMISSIONER. SEE "DESCRIPTION OF CAPITAL STOCK--CERTAIN PROVISIONS OF INDIANA LAW." FOR NORTH CAROLINA INVESTORS: THE COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR HAS SUCH COMMISSIONER RULED UPON THE ACCURACY OR THE ADEQUACY OF THE PROSPECTUS. i
[ALTERNATE PAGE FOR POSTING ON YAHOO! NET ROAD SHOW WEBSITE AND ANY PROSPECTUS DELIVERED ELECTRONICALLY] TABLE OF CONTENTS Page ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 8 Available Information.................................................... 19 Information Pertaining to Forward-Looking Statements..................... 19 The Plan of Conversion................................................... 21 Use of Proceeds.......................................................... 28 Dividend Policy.......................................................... 28 Capitalization........................................................... 29 Selected Consolidated Financial and Other Data........................... 30 Unaudited Pro Forma Consolidated Financial Information................... 33 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 37 Recent Developments...................................................... 79 The Business of Anthem................................................... 81 Investments.............................................................. 98 Financial Strength Ratings............................................... 101 Legal and Regulatory Matters............................................. 102 Management............................................................... 114 Description of Capital Stock............................................. 127 Common Stock Eligible for Future Sale.................................... 133 Ownership of Common Stock................................................ 135 Certain United States Tax Consequences to Non-U.S. Holders of Common Stock................................................................... 136 Underwriting............................................................. 139 Validity of Common Stock................................................. 141 Experts.................................................................. 141 Consolidated Financial Statements........................................ F-1 Actuarial Opinions....................................................... A-1
PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. As a result, it does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the "Risk Factors" section and the consolidated financial statements and the notes to those statements. References to the term "Anthem Insurance" refer to Anthem Insurance Companies, Inc., an Indiana insurance company. References to the term "Anthem" refer to Anthem Insurance and its direct and indirect subsidiaries before the demutualization, and to Anthem, Inc., a newly-formed Indiana holding company, and its direct and indirect subsidiaries, including Anthem Insurance, after the demutualization, as the context requires. References to the terms "we," "our," or "us," refer to Anthem, before and after the demutualization. Anthem We are one of the nation's largest health benefits companies, serving over seven million members, or customers, primarily in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado and Nevada. We hold the leading market position in seven of these eight states and own the exclusive right to market our products and services using the Blue Cross(R) Blue Shield(R), or BCBS, names and marks in all eight states under license agreements with the Blue Cross Blue Shield Association, or BCBSA, an association of independent BCBS plans. We seek to be a leader in our industry by offering a broad selection of flexible and competitively priced health benefits products. Our product portfolio includes a diversified mix of managed care products, including Health Maintenance Organizations or HMOs, Preferred Provider Organizations or PPOs, and Point of Service or POS plans, as well as traditional indemnity products. We also offer a broad range of administrative and managed care services and partially insured products for employer self- funded plans. These services and products include underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, claims processing and other administrative services. In addition, we offer our customers several specialty products including group life, disability, prescription management, workers compensation, dental and vision. Our products allow our customers to choose from a wide array of funding alternatives. For our insured products, we charge a premium and assume all or a majority of the health care risk. Under our self-funded and partially insured products, we charge a fee for services, and the employer or plan sponsor reimburses us for all or a majority of the health care costs. Our managed care plans and products are designed to encourage providers and members to select quality, cost-effective health care by utilizing the full range of our innovative medical management services, quality initiatives and financial incentives. Our leading market shares enable us to realize the long- term benefits of investing in preventive and early detection programs. We further improve our ability to provide cost-effective health benefits products and services through a disciplined approach to internal cost containment, prudent management of our risk exposure and successful integration of acquired businesses. These measures have allowed us to achieve significant growth in membership (78%), revenue (68%), and net income (135%) from 1996 through 2000. Our Operating Segments Our reportable segments are strategic business units delineated by geographic areas within which we offer similar products and services, but manage with a local focus to address each geographic region's unique market, regulatory and health care delivery characteristics. The regions are: . the Midwest, which includes Indiana, Kentucky and Ohio; . the East, which includes Connecticut, New Hampshire and Maine; and 1
. the West, which includes Colorado and Nevada. In addition to our three geographic regions, we have a Specialty segment and an Other segment. Our Specialty segment includes business units providing: . group life and disability insurance benefits; . pharmacy benefit management; . dental administration services; and . third party occupational health services. Various ancillary business units (reported with the Other segment) include: . AdminaStar Federal, a subsidiary which administers Medicare programs in Indiana, Illinois, Kentucky and Ohio; and . Anthem Alliance Health Insurance Company, a subsidiary which primarily provided health care benefits and administration in nine states for the Department of Defense's TRICARE program for military families. On May 31, 2001, the TRICARE operations were sold. The Other segment also includes intersegment revenue, expense eliminations and corporate expenses not allocated to reportable segments. Our Strategy and Operating Principles Our strategic objective is to be among the best and biggest in our industry with the size and scale to deliver the best product value with the best people. To achieve these goals, we offer a broad selection of flexible and competitively priced products and seek to establish leading market positions. We believe that increased scale in each of our regional markets will provide us competitive advantages, cost efficiencies and greater opportunities to sustain profitable growth. The key to our ability to deliver this growth is our commitment to work with providers to optimize the cost and quality of care while improving the health of our members and improving the quality of our service. The following are key elements to our strategy and operating principles: . Promote Quality Care: We believe that our ability to help our members receive quality, cost-effective health care will be key to our success. We promote the health of our members through education and through products that cover prevention and early detection programs that help our members and their providers manage illness before higher cost intervention is required. . Product Value: We aim to create products that offer value to our customers. By offering a wide spectrum of products supported by broad provider networks, we seek to meet the differing needs of our various customers. . Operational Excellence: To provide cost-effective products, we continuously strive to improve operational efficiency. We actively benchmark our performance against other leading health benefits companies to identify opportunities to drive continuous performance improvement. . Technology: We continuously review opportunities to improve our interactions with customers, brokers and providers. By utilizing technologies, we seek to make the interactions as simple, efficient and productive as possible. 2
. Growth: We believe that profitable growth, both organic and through acquisitions, is an important part of our business. Increased scale allows us to increase customer convenience and improve operating margins, while keeping our products competitively priced. Expansion into new geographic markets enables us to reduce exposure to economic cycles and regulatory changes and provides options for business expansion. The Demutualization This offering of our shares is made in connection with the conversion of Anthem Insurance from a mutual insurance company into a stock insurance company in a process called demutualization. Upon demutualization, all membership interests in Anthem Insurance will be extinguished, and Anthem Insurance's eligible statutory members will receive consideration in exchange for the extinguishment of their membership interests. Their consideration will be in the form of Anthem, Inc. common stock or cash. The terms of the demutualization are governed by the plan of conversion. The plan must be approved by Anthem Insurance's statutory members who are eligible to vote on the plan and by the Indiana Insurance Commissioner. Anthem Insurance has formed an Indiana subsidiary, Anthem, Inc., the issuer of the common stock offered by this prospectus. The demutualization of Anthem Insurance includes the following steps, all of which will occur on or promptly after the effective date of the demutualization: . Anthem Insurance will convert from a mutual insurance company into a stock insurance company; . all membership interests in Anthem Insurance will be extinguished; . the converted Anthem Insurance will become a wholly-owned subsidiary of Anthem, Inc.; . Anthem Insurance's eligible statutory members will be entitled to receive shares of common stock of Anthem, Inc. or cash, as consideration for the extinguishment of their membership interests in Anthem Insurance; . shares of Anthem, Inc. common stock will be sold to the public pursuant to this offering; and . a portion of the net proceeds from this offering will be paid to eligible statutory members of Anthem Insurance who receive cash instead of shares of Anthem, Inc. common stock in the demutualization, as set forth in "Use of Proceeds." If the demutualization is not completed for any reason, Anthem Insurance will remain a mutual insurance company and no shares of Anthem, Inc. common stock will be sold to the public pursuant to this offering. Our principal executive offices are located at 120 Monument Circle, Indianapolis, Indiana. Our telephone number is (317) 488-6000. 3
The Offering Common stock offered............... 28,600,000 shares Common stock outstanding after the offering and the demutualization.. 104,680,000 shares Use of proceeds.................... Our net proceeds from the offering will be approximately $924.0 million (or $1,067.4 million if the underwriters exercise their option to purchase additional shares in full), assuming an initial public offering price of $35.00 per share, which is the midpoint of the range of the assumed initial public offering price. We estimate that we will pay $837.2 million to those eligible statutory members of Anthem Insurance who receive cash instead of shares of common stock in connection with the demutualization. We will use the remaining proceeds for general corporate purposes. Dividend policy.................... We currently do not intend to pay cash dividends on our common stock. Future dividends will be subject to our financial condition, declaration by our board of directors and other factors described under "Dividend Policy." New York Stock Exchange symbol..... "ATH" Unless we specifically state otherwise, the information in this prospectus does not take into account the sale of up to 4,290,000 shares of our common stock, which the underwriters have the option to purchase from us to cover over-allotments. Our common stock outstanding after the offering also excludes 7,000,000 shares available for issuance pursuant to awards of options, restricted stock, stock appreciation rights, performance stock and performance awards under our 2001 Stock Incentive Plan. See "Management--Stock Incentive Plan." In addition, our common stock outstanding after the offering excludes shares issuable under our Employee Stock Purchase Plan. The Employee Stock Purchase Plan reserves for issuance and purchase by employees 3,000,000 shares of our common stock. See "Management--Employee Stock Purchase Plan." Recent Developments On May 30, 2001, we signed a definitive agreement with Blue Cross and Blue Shield of Kansas, Inc., or BCBS-KS, pursuant to which we have agreed to acquire BCBS-KS for $190.0 million in cash. The transaction is expected to close in late 2001, subject to the approval of BCBS-KS policyholders, the approval of the BCBSA, the approval of the Kansas Department of Insurance and other regulatory approvals. See "Risk Factors--Our proposed acquisition of Blue Cross and Blue Shield of Kansas involves risks which could cause our business to suffer" and "Recent Developments--Proposed Acquisition of Blue Cross and Blue Shield of Kansas." Prior to May 31, 2001, our subsidiary Anthem Alliance Health Insurance Company provided health care benefits and administration in nine states for the United States Department of Defense's TRICARE program for military families. On May 31, 2001, we sold the TRICARE operations to a subsidiary of Humana, Inc. for $45.0 million. 4
Summary Consolidated Financial and Other Data The following table summarizes financial information for Anthem. We prepared this information using our unaudited consolidated financial statements for the six-month periods ended June 30, 2001 and 2000 and our consolidated financial statements for each of the years in the five-year period ended December 31, 2000, which have been audited by Ernst & Young LLP. You should read this information with our audited consolidated financial statements and notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. In our opinion, the summary financial data for the six-month periods ended June 30, 2001 and 2000 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of that data. The summary consolidated financial and other data do not necessarily indicate the results to be expected in the future. As of and for the Six Months Ended June 30, As of and for the Year Ended December 31, ------------------ ----------------------------------------------- 2001(1) 2000(1) 2000(1) 1999(1) 1998 1997 1996 -------- -------- -------- -------- -------- -------- -------- (unaudited) ($ in Millions) Income Statement Data Revenues Premiums................ $4,542.8 $3,589.3 $7,737.3 $5,418.5 $4,739.5 $4,581.4 $4,445.9 Administrative fees..... 430.3 356.5 755.6 611.1 575.6 445.9 452.9 Other revenue........... 22.6 18.9 50.6 51.0 74.6 82.7 108.5 -------- -------- -------- -------- -------- -------- -------- Total operating revenue............... 4,995.7 3,964.7 8,543.5 6,080.6 5,389.7 5,110.0 5,007.3 Net investment income... 109.0 95.0 201.6 152.0 136.8 125.2 141.9 Net realized gains (losses) on investments............ (10.9) 6.5 25.9 37.5 155.9 97.0 73.3 Gain on sale of subsidiary operations.. 25.0 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- 5,118.8 4,066.2 8,771.0 6,270.1 5,682.4 5,332.2 5,222.5 -------- -------- -------- -------- -------- -------- -------- Expenses Benefit expense......... 3,870.8 3,080.6 6,551.0 4,582.7 3,934.2 3,833.3 3,715.1 Administrative expense(2)............. 991.6 817.5 1,808.4 1,469.4 1,420.1 1,358.9 1,268.7 Interest expense........ 28.0 27.0 54.7 30.4 27.9 23.7 19.5 Amortization of goodwill and other intangible assets................. 15.7 11.4 27.1 12.7 12.0 9.6 10.7 Demutualization expenses............... 3.0 -- -- -- -- -- -- Endowment of non-profit foundations(3)......... -- -- -- 114.1 -- -- -- -------- -------- -------- -------- -------- -------- -------- 4,909.1 3,936.5 8,441.2 6,209.3 5,394.2 5,225.5 5,014.0 -------- -------- -------- -------- -------- -------- -------- Income from continuing operations before income taxes and minority interest...... 209.7 129.7 329.8 60.8 288.2 106.7 208.5 Income taxes............ 68.6 38.9 102.2 10.2 110.9 24.1 53.0 Minority interest (credit)............... (1.9) 0.5 1.6 (0.3) (1.1) 3.5 15.0 -------- -------- -------- -------- -------- -------- -------- Income from continuing operations............. 143.0 90.3 226.0 50.9 178.4 79.1 140.5 Discontinued operations, net of income taxes Loss from discontinued operations prior to disposal............... -- -- -- -- (3.9) (125.1) (44.4) Loss on disposal of discontinued operations............. -- -- -- (6.0) (2.1) (113.0) -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)....... $ 143.0 $ 90.3 $ 226.0 $ 44.9 $ 172.4 $ (159.0) $ 96.1 ======== ======== ======== ======== ======== ======== ======== 5
As of and for the Six Months Ended June 30, As of and for the Year Ended December 31, ------------------ -------------------------------------------------- 2001(1) 2000(1) 2000(1) 1999(1) 1998 1997 1996 -------- -------- --------- -------- -------- -------- -------- (unaudited) ($ in Millions) Other Data--unaudited(4) Operating revenue and premium equivalents(5)......... $6,883.1 $5,559.0 $11,800.1 $8,691.6 $7,987.4 $7,269.3 $6,772.3 Benefit expense ratio... 85.2% 85.8% 84.7% 84.6% 83.0% 83.7% 83.6% Administrative expense ratio: Calculated using operating revenue..... 19.8% 20.6% 21.2% 24.2% 26.3% 26.6% 25.3% Calculated using operating revenue and premium equivalents... 14.4% 14.7% 15.3% 16.9% 17.8% 18.7% 18.7% Return on revenue....... 2.8% 2.2% 2.6% 0.7% 3.0% (3.0)% 1.8% Return on revenue-- continuing operations.. 2.8% 2.2% 2.6% 0.8% 3.1% 1.5% 2.7% Return on equity........ N/A N/A 12.6% 2.7% 10.7% (10.1)% 6.0% Members (000s).......... 7,779 7,030 7,270 6,265 5,167 5,261 4,078 Balance Sheet Data Cash and investments.... $4,029.6 $3,418.4 $ 3,714.6 $2,972.4 $2,805.1 $2,415.6 $2,123.4 Total assets............ 5,838.0 5,364.0 5,708.5 4,816.2 4,359.2 4,131.9 4,085.8 Policy liabilities...... 1,593.8 1,625.5 1,698.3 1,431.1 1,118.1 1,143.9 1,231.5 Debt.................... 597.7 597.5 597.7 522.2 302.1 305.9 245.9 Total policyholders' surplus(6)............. 2,063.9 1,756.3 1,919.8 1,660.9 1,702.5 1,524.7 1,625.2 - -------- (1) On October 27, 1999 and November 16, 1999 Anthem acquired New Hampshire- Vermont Health Service, formerly d/b/a Blue Cross Blue Shield of New Hampshire, and Rocky Mountain Hospital and Medical Service, Inc., formerly d/b/a Blue Cross and Blue Shield of Nevada/Colorado. On June 5, 2000, Anthem acquired Associated Hospital Service of Maine, formerly d/b/a Blue Cross and Blue Shield of Maine. These acquisitions were accounted for as purchases and the net assets and results of operations have been included in our consolidated financial statements from the respective purchase dates. Below is information for the six months ended June 30, 2001 and 2000 and for the years ended December 31, 2000 and 1999 that is included in Anthem's consolidated financial statements for the acquisitions that were completed in those periods: As of and for the Six Months Ended June 30, --------------------------------------------------------------------- 2001 2000 ----------------------------------- --------------------------------- Total Operating (000s) Total Operating (000s) Revenues Gain Assets Members Revenues Loss Assets Members -------- --------- -------- ------- -------- --------- ------ ------- BCBS-ME................. $ 457.6 $ 3.0 $ 326.4 496 $ 59.6 $(2.5) $264.8 468 ======== ===== ======== ===== ====== ===== ====== === As of and for the Year Ended December 31, --------------------------------------------------------------------- 2000 1999 ----------------------------------- --------------------------------- Total Operating (000s) Total Operating (000s) Revenues Gain Assets Members Revenues Loss Assets Members -------- --------- -------- ------- -------- --------- ------ ------- BCBS-NH................. $ 591.0 $11.6 $ 316.8 479 $ 77.9 $(0.3) $250.6 366 BCBS-CO/NV.............. 678.6 6.5 545.8 595 76.9 (3.4) 521.5 486 BCBS-ME................. 489.4 8.7 339.5 487 -- -- -- -- -------- ----- -------- ----- ------ ----- ------ --- Total................... $1,759.0 $26.8 $1,202.1 1,561 $154.8 $(3.7) $772.1 852 ======== ===== ======== ===== ====== ===== ====== === Operating gain (loss) consists of operating revenue less benefit expense and administrative expense. 6
(2) The 1999 administrative expense includes a non-recurring charge of $41.9 million related to the settlement agreement with the Office of Inspector General. See Note 14 to our audited consolidated financial statements. (3) During 1999, Anthem reached agreements with the states of Kentucky, Ohio and Connecticut to resolve any questions as to whether Anthem or the predecessor/successor entities were in possession of property that was impressed with a charitable trust. The endowment of non-profit foundations reflects contributions made for the benefit of charitable foundations in these states. See Note 3 to our audited consolidated financial statements. (4) The benefit expense ratio represents benefit expense as a percentage of premium revenue. The administrative expense ratio represents administrative expense as a percentage of operating revenue and has also been presented as a percentage of operating revenue and premium equivalents. Return on revenue represents net income (loss) as a percentage of total revenues. Return on revenue--continuing operations represents income from continuing operations as a percentage of total revenues. Return on equity, which is only presented for annual periods, represents net income (loss) as a percentage of the average of the sum of policyholders' surplus at the beginning and the end of the period. (5) Operating revenue and premium equivalents is a measure of the volume of business serviced by Anthem that is commonly used in the health benefits industry to allow for a comparison of operating efficiency among companies. It is calculated by adding to premiums, administrative fees and other revenue the amount of claims attributable to non-Medicare, self-funded health business where Anthem provides a complete array of customer service, claims administration and billing and enrollment services. The self-funded claims included for the six months ended June 30, 2001 and 2000 were $1,887.4 million and $1,594.3 million, respectively, and for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 were $3,256.6 million, $2,611.0 million, $2,597.7 million, $2,159.3 million and $1,765.0 million, respectively. (6) Policyholders' surplus represents shareholders' equity prior to demutualization. 7
RISK FACTORS An investment in our common stock involves a number of risks. The performance of our common stock will reflect the performance of our business related to, among other things, our competition and general economic, market and industry conditions. The price of our common stock may decline, and the value of your investment could decrease. You should consider carefully, in addition to the other information contained in this prospectus, the following factors before investing in shares of our common stock. In reviewing information contained in this prospectus, you should bear in mind that past experience is no indication of future performance. Our ability to contain health care costs and implement increases in premium rates affects our profitability. Our profitability depends in large part on accurately predicting health care costs and on our ability to manage future health care costs through underwriting criteria, utilization management, product design and negotiation of favorable provider contracts. The aging of the population and other demographic characteristics and advances in medical technology continue to contribute to rising health care costs. Government-imposed limitations on Medicare and Medicaid reimbursement have also caused the private sector to bear a greater share of increasing health care costs. Changes in health care practices, inflation, new technologies, the cost of prescription drugs, clusters of high cost cases, changes in the regulatory environment and numerous other factors affecting the cost of health care are beyond any health plan's control and may adversely affect our ability to predict and manage health care costs, as well as our business, financial condition and results of operations. In addition to the challenge of managing health care costs, we face pressure to contain premium prices. Our customer contracts may be subject to renegotiation as customers seek to contain their costs. Alternatively, our customers may move to a competitor to obtain more favorable premiums. Fiscal concerns regarding the continued viability of programs such as Medicare and Medicaid may cause decreasing reimbursement rates for government-sponsored programs. A limitation on our ability to increase or maintain our premium levels could adversely affect our business, financial condition and results of operations. Our reserves for policy benefits may prove inadequate. The reserves we establish for health insurance policy benefits and other contractual rights and benefits are based upon assumptions concerning a number of factors, including trends in health care costs, enrollment in our plans, expenses, general economic conditions and other factors. Actual experience will likely differ from assumed experience, and to the extent the actual claims experience is less favorable than estimated based on our underlying assumptions, our incurred losses would increase and future earnings could be adversely affected. Our profitability may be adversely affected if we are unable to maintain our current provider agreements and to enter into other appropriate agreements. Our profitability is dependent upon our ability to contract on favorable terms with hospitals, physicians and other health benefits providers. The failure to maintain or to secure new cost-effective health care provider contracts may result in a loss in membership or higher medical costs. In addition, our inability to contract with providers, or the inability of providers to provide adequate care, could adversely affect our business. 8
A reduction in the enrollment in our health benefits programs could have an adverse effect on our business and profitability. Although our same store membership (excluding acquisitions) increased by 518,000 members, or 8.3%, from 1999 to 2000, a reduction in the number of enrollees in our health benefits programs could adversely affect our business, financial condition and results of operations. Factors that could contribute to a reduction in enrollment include: . failure to obtain new customers or retain existing customers; . premium increases and benefit changes; . our exit from a specific market; . reductions in workforce by existing customers; . negative publicity and news coverage; . failure to attain or maintain nationally-recognized accreditations; and . general economic downturn that results in business failures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more detailed membership information for past years. The health benefits industry is subject to negative publicity, which can adversely affect our profitability. The health benefits industry is subject to negative publicity. Negative publicity may result in increased regulation and legislative review of industry practices, which may further increase our costs of doing business and adversely affect our profitability by: . adversely affecting our ability to market our products and services; . requiring us to change our products and services; or . increasing the regulatory burdens under which we operate. In addition, as long as we use the BCBS names and marks in marketing our health benefits products and services, any negative publicity concerning the BCBSA or other BCBSA licensees may adversely affect us and the sale of our health benefits products and services. Changes in state and federal regulations may affect our business, financial condition and results of operations. Anthem Insurance and our other insurance and HMO subsidiaries are subject to extensive regulation and supervision by the insurance regulatory authorities of each state in which they are licensed or authorized, as well as to regulation by federal and local agencies. See "Legal and Regulatory Matters." We cannot assure you that future regulatory action by state insurance authorities will not have a material adverse effect on the profitability or marketability of our health benefits or managed care products or on our business, financial condition and results of operations. In addition, because of our participation in government-sponsored programs such as Medicare and 9
Medicaid, changes in government regulations or policy with respect to, among other things, reimbursement levels, could also adversely affect our business, financial condition and results of operations. Moreover, state legislatures and Congress continue to focus on health care issues. Congress is considering various forms of Patients' Bill of Rights legislation which, if adopted, could fundamentally alter the treatment of coverage decisions under the Employee Retirement Income Security Act of 1974, or ERISA. Additionally, there recently have been legislative attempts to limit ERISA's preemptive effect on state laws. If adopted, such limitations could increase our liability exposure and could permit greater state regulation of our operations. Other proposed bills and regulations at state and federal levels may impact certain aspects of our business, including provider contracting, claims payments and processing and confidentiality of health information. While we cannot predict if any of these initiatives will ultimately become effective or, if enacted, what their terms will be, their enactment could increase our costs, expose us to expanded liability or require us to revise the ways in which we conduct business. Further, as we continue to implement our e-business initiatives, uncertainty surrounding the regulatory authority and requirements in this area may make it difficult to ensure compliance. We face risks related to litigation. We may be a party to a variety of legal actions that affect any business, such as employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, tort claims and intellectual property related litigation. In addition, because of the nature of our business, we are subject to a variety of legal actions relating to our business operations, including the design, management and offering of our products and services. These could include: . claims relating to the denial of health care benefits; . medical malpractice actions; . allegations of anti-competitive and unfair business activities; . provider disputes over compensation and termination of provider contracts; . disputes related to self-funded business; . disputes over co-payment calculations; . claims related to the failure to disclose certain business practices; and . claims relating to customer audits and contract performance. A number of class action lawsuits have been filed against us and certain of our competitors in the managed care business. The suits are purported class actions on behalf of certain of our managed care members and network providers for alleged breaches of various state and federal laws. For more information about these and other lawsuits filed against us, see "Legal and Regulatory Matters--Litigation." While we intend to defend these suits vigorously, we will incur expenses in the defense of these suits and we cannot predict their outcome. Recent court decisions and legislative activity may increase our exposure for any of these types of claims. In some cases, substantial non-economic, treble or punitive damages may be sought. We currently 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, certain types of damages, such as punitive damages, may not be covered by insurance and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future. We have also received subpoenas from the Office of Inspector General, or OIG, related to our Medicare fiscal intermediary Part A and Part B operations and our Federal Employee Program operations. See "Legal and Regulatory Matters--Other Contingencies." 10
We are using the Blue Cross and Blue Shield names and marks as identifiers for our products and services under licenses from the Blue Cross Blue Shield Association. The termination of these license agreements could adversely affect our business, financial condition and results of operations. We are a party to license agreements with the BCBSA that entitle us to the exclusive use of the BCBS names and marks in the states of Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado and Nevada. The license agreements contain certain requirements and restrictions regarding the operations of Anthem and our use of the BCBS names and marks, including: . minimum capital and liquidity requirements; . enrollment and customer service performance requirements; . participation in programs which provide portability of membership between plans; . disclosures to the BCBSA relating to enrollment and financial conditions; . disclosures as to the structure of the BCBS system in contracts with third parties and in public statements; . plan governance requirements; . a requirement that at least 80% of a licensee's annual combined net revenue attributable to health care plans within its service area must be sold, marketed, administered or underwritten under the BCBS names and marks; . a requirement that neither a plan nor any of its licensed affiliates may permit an entity other than a plan or a licensed affiliate to obtain control of the plan or the licensed affiliate or to acquire a substantial portion of its assets related to licensable services; . a requirement that we guarantee the contractual and financial obligations of our licensed affiliates; and . a requirement that we indemnify the BCBSA against any claims asserted against it resulting from the contractual and financial obligations of AdminaStar Federal, our subsidiary which serves as a fiscal intermediary providing administrative services for Medicare Parts A and B. We believe that we and our licensed affiliates are currently in compliance with these standards. Upon the occurrence of an event causing termination of the license agreements, we would no longer have the right to use the BCBS names and marks in one or more of Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado and Nevada. Furthermore, BCBSA would be free to issue a license to use the BCBS names and marks in these states to another entity. Events which could cause the termination of a license agreement with BCBSA include failure to comply with minimum capital requirements imposed by the BCBSA, a change of control or violation of the BCBSA ownership limitations on our capital stock, impending financial insolvency, the appointment of a trustee or receiver or the commencement of any action against Anthem Insurance seeking its dissolution. We believe that the BCBS names and marks are valuable identifiers of our products and services in the marketplace. Accordingly, termination of the license agreements could have a material adverse effect on our business, financial condition and results of operations. In addition, we need the consent of the BCBSA in order to continue our licenses following the demutualization. Although we do not have any reason to believe that we will not obtain BCBSA's consent, if we do not obtain it, the demutualization will not occur and no shares of common stock will be issued or sold in this offering. Our insurance and HMO subsidiaries are subject to risk-based capital requirements. Our failure to meet these standards could subject us to regulatory actions. Anthem Insurance and our other insurance and HMO subsidiaries are subject to risk-based capital, or RBC, standards, imposed by their states of domicile. These laws are based on the RBC 11
Model Act adopted by the National Association of Insurance Commissioners, or NAIC, and require our regulated subsidiaries to report their results of risk- based capital calculations to the departments of insurance and the NAIC. Failure to maintain the minimum RBC standards could subject our regulated subsidiaries to corrective action, including state supervision or liquidation. Anthem Insurance and our other insurance and HMO subsidiaries are currently in compliance with the risk-based capital requirements imposed by their respective states of domicile. Compliance with the requirements of the Health Insurance Portability and Accountability Act of 1996, or HIPAA, is expected to be costly. In December 2000, the Department of Health and Human Services, known as HHS, promulgated certain regulations under HIPAA related to the privacy of individually identifiable health information, or protected health information. The new regulations require health plans, clearinghouses and providers to: . comply with various requirements and restrictions related to the use, storage and disclosure of protected health information; . adopt rigorous internal procedures to protect protected health information; and . enter into specific written agreements with business associates to whom protected health information is disclosed. The regulations establish significant criminal penalties and civil sanctions for noncompliance. In addition, the regulations could expose us to additional liability for, among other things, violations by our business associates. We must comply with the new regulations by April 14, 2003. Although we have not quantified the costs required to comply with the regulations, we believe the costs could be material. Regional concentrations of our business may subject us to economic downturns in those states. Our operating segments include regional companies located in the Midwest, East and West, with most of our revenues generated in the states of Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado and Nevada. Due to this concentration of business in a small number of states, we are exposed to potential losses resulting from the risk of an economic downturn in these states. If economic conditions in these states deteriorate, we may experience a reduction in existing and new business, which may have a material adverse effect on our business, financial condition and results of operations. A downgrade in our ratings may adversely affect our business, financial condition and results of operations. Claims paying ability and financial strength ratings by recognized rating organizations have become an increasingly important factor in establishing the competitive position of insurance companies and health benefits companies. Rating organizations continue to review the financial performance and condition of insurers, including Anthem Insurance and our other regulated subsidiaries. Each of the rating agencies reviews its ratings periodically and there can be no assurance that current ratings will be maintained in the future. We believe our strong ratings are an important factor in marketing our products to our customers, since ratings information is broadly disseminated and generally used throughout the industry. If our ratings are downgraded or placed under surveillance or review, with possible negative implications, the downgrade, surveillance or review could adversely affect our business, financial condition and results of operations. Our ratings reflect each rating agency's opinion of our financial strength, operating performance and ability to meet our obligations to policyholders, and are not evaluations directed toward the protection of investors in our common stock and should not be relied upon when making a decision to purchase shares of the common stock offered hereby. 12
Our investment portfolio is subject to varying economic and market conditions, as well as regulation. Our investment portfolio consists primarily of fixed maturity securities, common and preferred stock, short-term investments, cash and other investments. The market value of our investments varies from time to time depending on economic and market conditions. For various reasons, we may sell certain of our investments at prices that are less than the carrying value of the investments. In addition, in periods of declining interest rates, bond calls and mortgage loan prepayments generally increase, resulting in the reinvestment of these funds at the then lower market rates. Although there have been adverse economic conditions over the last three quarters, Anthem's liquidity has not been impacted in a negative manner. Our portfolio, which is largely comprised of fixed maturity securities, has returned 2.43%, 1.15% and 1.31% over the last three quarters. The fixed maturity portfolio has an average credit rating of approximately double-A, and the equity securities portfolio is invested in the companies of the S&P 500 and S&P 400 indices, excluding in each case tobacco stocks. We cannot assure you that our investment portfolio will produce positive returns in future periods. Anthem Insurance and our other regulated subsidiaries are subject to state laws and regulations that require diversification of our investment portfolios and limit the amount of investments in certain investment categories, such as below-investment-grade fixed income securities, mortgage loans, real estate and equity investments. Failure to comply with these laws and regulations might cause investments exceeding regulatory limitations to be treated as non- admitted assets for purposes of measuring statutory surplus and risk-based capital, and, in some instances, require the sale of those investments. As a Medicare fiscal intermediary, we are subject to complex regulations. If we fail to comply with these regulations, we may be exposed to criminal sanctions and significant civil penalties. Anthem, like a number of other BCBS companies, serves as a fiscal intermediary for the Medicare program, which generally provides coverage for persons who are 65 or older and for persons with end-stage renal disease. Part A of the Medicare program provides coverage for services provided by hospitals, skilled nursing facilities and other health care facilities. Part B of the Medicare program provides coverage for services provided by physicians, physical and occupational therapists and other professional providers. Anthem serves as a fiscal intermediary for Medicare Part A for Indiana, Kentucky, Ohio, Illinois, New Hampshire, Maine, Vermont and Massachusetts and as a fiscal intermediary for Medicare Part B for Indiana and Kentucky. As a fiscal intermediary for these programs, we receive reimbursement for certain costs and expenditures, which is subject to adjustment upon audit by the federal Centers for Medicare and Medicaid Services, or CMS, formerly the Health Care Financing Administration, or HCFA. The laws and regulations governing fiscal intermediaries for the Medicare program are complex, subject to interpretation and can expose a fiscal intermediary to penalties for non-compliance. Fiscal intermediaries may be subject to criminal fines, civil penalties or other sanctions as a result of such audits or reviews. In the last five years, at least eight Medicare fiscal intermediaries have made payments to settle issues raised by such audits or reviews. These payments have ranged from $700,000 to $51.6 million, plus a payment by one company of $144 million. In the fourth quarter of 1999, one of our subsidiaries reached a settlement agreement with the federal government in the amount of $41.9 million to resolve an investigation into the Medicare fiscal intermediary operations of a predecessor of the subsidiary. The period investigated was before we acquired the subsidiary. While we believe that we are in compliance in all material respects with the regulations governing fiscal intermediaries, there are ongoing reviews by the federal government of our activities under certain of our Medicare fiscal intermediary contracts. Our affiliate, AdminaStar Federal, Inc., has received several subpoenas from the OIG, Health and Human Services, and from the U.S. Department of Justice seeking documents and information concerning its responsibilities as a Medicare Part B contractor in its Kentucky operations, and requesting certain financial records from AdminaStar Federal, Inc. and from us related to our Medicare fiscal intermediary Part A and Part B operations. For additional information, see "Legal and Regulatory Matters--Other Contingencies." 13
We face significant competition from other health benefits companies. As a health benefits company, we operate in a highly competitive environment and in an industry that is currently subject to significant changes from business consolidations, new strategic alliances, legislative reform, aggressive marketing practices by other health benefits organizations and market pressures brought about by an informed and organized customer base, particularly among large employers. This environment has produced and will likely continue to produce significant pressures on the profitability of health benefits companies. Many of our competitors are larger and have greater financial and other resources. In addition, the Gramm-Leach-Bliley Act, which gives banks and other financial institutions the ability to affiliate with insurance companies, could result in new competitors with significant financial resources entering our markets. As of December 31, 2000, we had the following approximate market share, based on number of members, in each of the eight core states in which we operate: Indiana, 29%; Kentucky, 38%; Ohio, 20%; Connecticut, 29%; New Hampshire, 31%; Maine, 40%; Colorado, 16%; and Nevada, 5%. We cannot assure you that we will be able to compete successfully against current and future competitors or that competitive pressures faced by us will not materially and adversely affect our business, financial condition and results of operations. For a more detailed discussion of our competition, please refer to "The Business of Anthem--Competition." Acquisitions we have made or may make in the future may not be successful, which could cause our business and future growth prospects to suffer. We have built a significant portion of our current business through mergers and acquisitions and we may pursue acquisitions in the future. The following are some of the risks associated with acquisitions that could have a material adverse effect on our business, financial condition and results of operations: . some of the acquired businesses may not achieve anticipated revenues, earnings or cash flow; . we may assume liabilities that were not disclosed to us; . we may be unable to integrate acquired businesses successfully and realize anticipated economic, operational and other benefits in a timely manner, which could result in substantial costs and delays or other operational, technical or financial problems; . acquisitions could disrupt our ongoing business, distract management, divert resources and make it difficult to maintain our current business standards, controls and procedures; . we may finance future acquisitions by issuing common stock for some or all of the purchase price, which could dilute the ownership interests of our shareholders; . we may also incur additional debt related to future acquisitions; and . we would be competing with other firms, many of which have greater financial and other resources, to acquire attractive companies. Our proposed acquisition of Blue Cross and Blue Shield of Kansas involves risks which could cause our business to suffer. We have signed a definitive agreement with BCBS-KS pursuant to which we have agreed to acquire BCBS-KS. Under the agreement, BCBS-KS will demutualize and become a subsidiary of ours. BCBS-KS policyholders eligible to receive consideration in its demutualization will be entitled to receive $190.0 million, which we will pay in cash to the escrow described below and which amount thereafter may be reduced as described below, and an additional amount, to be calculated based on the consolidated book value of BCBS-KS on the closing date of the acquisition, which is expected to 14
be paid as a special distribution by BCBS-KS to its eligible policyholders. The amount of this special distribution is currently estimated to be $180.0 million. The $190.0 million will be held in an escrow account to pay costs, expenses and liabilities relating to an investigation by the OIG of possible improper claims against Medicare by BCBS-KS, and to pay costs and expenses of the escrow, with any remaining amounts to be distributed to eligible BCBS-KS policyholders. The proposed acquisition is expected to close in late 2001, and must be approved by the policyholders of BCBS-KS, the BCBSA, the Commissioner of Insurance of the State of Kansas and other regulators, and is subject to other conditions. This proposed acquisition involves a number of risks, including: . if the amount of the purchase price that we will pay and place in escrow is not sufficient to pay in full the costs, expenses and liabilities relating to the OIG investigation and the escrow, those remaining costs, expenses and liabilities would reduce the value of BCBS-KS; . if the final resolution of the OIG investigation results in operational restrictions being placed upon BCBS-KS, which could include BCBS-KS being disqualified from performing under federal contracts for a period of up to five years, or if such restrictions and/or a disqualification were extended to other corporate affiliates of BCBS-KS (which after completion of the transaction would include Anthem), then the value of BCBS-KS would be reduced and the operations of Anthem could be negatively impacted; . there may be liabilities that we assume but that were not disclosed to us; . we may be unable to integrate the operations of BCBS-KS successfully and realize anticipated economic, operational and other benefits in a timely manner, which could result in substantial costs and delays or other operational, technical or financial problems; and . the acquisition could distract our management and divert resources. See "Recent Developments--Proposed Acquisition of Blue Cross and Blue Shield of Kansas" for a discussion of BCBS-KS and the proposed acquisition. The failure to effectively maintain and modernize our operations in an Internet environment could adversely affect our business. Our businesses depend significantly on effective information systems, and we have many different information systems for our various businesses. Our information systems require an ongoing commitment of significant resources to maintain and enhance existing systems and develop new systems in order to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards, and changing customer preferences. For example, HIPAA's administrative simplification provisions and the Department of Labor's claim processing regulations may ultimately require significant changes to current systems. In addition, we may from time to time obtain significant portions of our systems-related or other services or facilities from independent third parties, which may make our operations vulnerable to such third parties' failure to perform adequately. As a result of our merger and acquisition activities we have acquired additional systems. Our failure to maintain effective and efficient information systems, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications, could have a material adverse effect on our business, financial condition and results of operations. Also, like many of our competitors in the health benefits industry, our vision for the future includes becoming a premier e-business organization by modernizing interactions with customers, brokers, agents, employees and other stakeholders through web-enabling technology and re-designing internal operations. We are developing our e-business strategy with the goal of becoming widely regarded as an e-business leader in the health benefits industry. The strategy includes not only sales and 15
distribution of health products on the Internet, but also implementation of advanced self-service capabilities benefiting customers, agents, brokers, partners and employees. There can be no assurance that we will be able to successfully realize our e-business vision or integrate e-business operations with our current method of operations. The failure to develop successful e- business capabilities could result in competitive and cost disadvantages to us as compared to our competitors. A challenge to the plan of conversion or the Indiana Insurance Commissioner's approval may create uncertainty about the status of the demutualization and the issuance of our shares of common stock sold in this offering. The plan of conversion and Anthem Insurance's Amended and Restated Articles of Incorporation are subject to approval by the Indiana Insurance Commissioner. That approval is a condition of the effectiveness of the demutualization. The Indiana Insurance Commissioner must make her determination within 30 days after the conclusion of the public hearing on the plan of conversion. Section 27-15-15-2 of the Indiana demutualization law provides that any action challenging the validity of, or arising out of, acts taken or proposed to be taken under any order of the Indiana Insurance Commissioner in connection with a plan of conversion must be commenced within 30 days after the Indiana Insurance Commissioner issues the order or determination. We expect that the 30-day appeal period will not have expired prior to the effective date of the demutualization and this offering. We cannot predict whether any action challenging the plan of conversion or the approval thereof will be commenced or what aspects of the plan an action might challenge. In the event that the order of the Indiana Insurance Commissioner is challenged, a successful challenge could result in monetary damages, a modification of the plan or the Indiana Insurance Commissioner's approval of the plan being set aside. A successful challenge would likely result in substantial uncertainty relating to the terms and effectiveness of the plan, including the demutualization of Anthem Insurance, the issuance of the shares of our common stock sold in this offering, payment of consideration and the extinguishing of all membership interests. A substantial period of time might be required to reach a final determination. In addition, pursuant to the Indiana demutualization law, if certain claims have been asserted against Anthem Insurance and remain unresolved on the effective date of the demutualization, distribution of consideration to some or all eligible statutory members may be delayed by more than six months, by establishing one or more trusts for the purpose of holding assets on and following the effective date of the demutualization that are adequate to satisfy such claims. Any one or more of these outcomes could have a material adverse effect on the market price of our common stock. Our ability to meet our obligations may be affected by the limitation on dividends state insurance laws impose on our regulated subsidiaries. After the demutualization, we will be a holding company whose assets will include all of the outstanding shares of common stock of Anthem Insurance. As a holding company, we will depend on dividends from Anthem Insurance and its receipt of dividends from our other regulated subsidiaries. State insurance laws may restrict the ability of our regulated subsidiaries to pay dividends. For a discussion of these restrictions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Anthem, Inc." Our ability to pay dividends in the future to our shareholders and meet our obligations, including paying operating expenses and debt service, will depend upon the receipt of dividends from our subsidiaries. An inability of our subsidiaries to pay dividends in the future in an amount sufficient for us to meet our financial obligations may materially adversely affect our business, financial condition and results of operations and the value of our common stock. 16
The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering and our stock price could be highly volatile. The initial public offering price of our common stock will be based on numerous factors and may not be indicative of the market price of our common stock after this offering. Factors including: . variations in actual or anticipated operating results; . changes in or failure to meet earnings estimates of securities analysts; . market conditions in the health benefits industry; . regulatory actions and general economic and stock market conditions; and . the availability for sale, or sales, of a significant number of shares of our common stock in the public market, may have a significant effect on the market price of our common stock after this offering. Accordingly, the market price of our common stock may decline below the initial public offering price. Sales of shares by eligible statutory members who receive shares in the demutualization may reduce the market price of our common stock. Anthem Insurance's eligible statutory members who receive shares in the demutualization will not be required to pay any cash purchase price for those shares, and generally will be free to sell their shares in the public market after the demutualization. Only eligible statutory members who receive 30,000 or more shares of our common stock in the demutualization (estimated to be approximately 7.6% of our outstanding common stock after the offering) and continue to hold 30,000 or more shares will have volume and manner of sale restrictions on the sales of their shares in the public market. For a period of 180 days after the effective date of the demutualization, these large shareholders will be able to sell their shares only under a large holder sale program that we will establish. See "The Plan of Conversion--Large Holder Sale Program" for a description of the large holder sale program and its limitations. We anticipate that eligible statutory members receiving shares of our common stock in the demutualization will receive notices regarding the number of shares registered in their name approximately four to six weeks after the effective date of the demutualization. Sales of substantial amounts of common stock, or the perception that such sales could occur, could reduce the prevailing market price for our common stock. We believe the following facts may increase selling pressure on our common stock: . Some of Anthem Insurance's eligible statutory members, in particular holders of group policies who do not elect to receive common stock in the demutualization, are nevertheless likely to receive common stock instead of cash because the amount of cash available for payments to eligible statutory members will be limited. Those members may be especially likely to sell the shares of common stock they receive in the demutualization in order to realize cash proceeds. . Some eligible statutory members may be fiduciaries of benefit plans that are subject to ERISA or other legal or regulatory restrictions on their investments. Those members, particularly if they originally did not elect to receive common stock in the demutualization, may determine that the exercise of their fiduciary duties requires them to promptly sell the shares of common stock they receive in the demutualization. . We intend to provide a program for the public sale of our common stock, at prevailing market prices and without paying brokerage commissions or similar expenses, to allow each of our shareholders who owns 99 or fewer shares of our common stock to sell those shares or to purchase additional shares to round-up their holdings to 100 shares. This program would begin no sooner than the first business day after the 180th day following, and no later 17
than the last business day before the twelfth-month anniversary of, the effective date of the demutualization, and it would continue for at least three months. We estimate that when we complete the demutualization we will have approximately 775,000 eligible statutory members who will in total receive in excess of 25 million shares that we believe would be eligible to participate in this commission-free sales program. Applicable laws and our articles of incorporation and bylaws may prevent or discourage takeovers and business combinations that our shareholders might consider in their best interests. State laws and our articles of incorporation and bylaws may delay, defer, prevent or render more difficult a takeover attempt that our shareholders might consider in their best interests. For instance, they may prevent our shareholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future. Under the Indiana demutualization law, for a period of five years following the effective date of the demutualization, no person may acquire beneficial ownership of more than 5% of the outstanding shares of our common stock without the prior approval of the Indiana Insurance Commissioner and our board of directors. This restriction does not apply to acquisitions made by us or made pursuant to an employee benefit plan or employee benefit trust sponsored by us. The Indiana Insurance Commissioner has adopted rules under which passive institutional investors could purchase more than 5% but less than 10% of our outstanding common stock with the prior approval of our board of directors and prior notice to the Indiana Insurance Commissioner. Our license agreements with the BCBSA require that our articles of incorporation contain certain provisions, including ownership limitations. The BCBSA ownership limits restrict beneficial ownership of our voting capital stock to less than 10% for institutional investors and less than 5% for noninstitutional investors, both as defined in our articles of incorporation. In addition, no person may beneficially own shares of our common stock or other equity securities, or a combination thereof, representing a 20% or more ownership interest in our company. Our articles of incorporation prohibit ownership of our capital stock in excess of these BCBSA ownership limits without prior approval of a majority of our continuing directors (as defined in our articles of incorporation). Certain other provisions included in our articles of incorporation and bylaws may also have anti-takeover effects and may delay, defer or prevent a takeover attempt that our shareholders might consider in their best interests. In particular, our articles of incorporation and bylaws: . permit our board of directors to issue one or more series of preferred stock; . divide our board of directors into three classes serving staggered three-year terms; . restrict the maximum number of directors; . limit the ability of shareholders to remove directors; . impose restrictions on shareholders' ability to fill vacancies on our board of directors; . prohibit shareholders from calling special meetings of shareholders; . impose advance notice requirements for shareholder proposals and nominations of directors to be considered at meetings of shareholders; and . impose restrictions on shareholders' ability to amend our articles of incorporation and bylaws. 18
AVAILABLE INFORMATION We have filed with the Securities and Exchange Commission in Washington, D.C., a registration statement on Form S-1 under the Securities Act of 1933 with respect to the common stock being offered by this prospectus. This prospectus which forms a part of the registration statement does not contain all the information set forth in the registration statement, certain parts of which are omitted in accordance with the rules and regulations of the Securities and Exchange Commission. For further information with respect to Anthem, Inc. and our common stock, we refer you to the registration statement and to the exhibits to the registration statement. Statements made in this prospectus describing the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to these contracts, agreements or other documents filed as an exhibit to the registration statement, we refer you to the exhibit for a more complete description of the matter involved, and each statement is qualified in its entirety by this reference. The registration statement and the exhibits to the registration statement may be inspected and copied at the Securities and Exchange Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1- 800-SEC-0330. The Securities and Exchange Commission maintains an Internet world wide web site at http://www.sec.gov that contains periodic and current reports, proxy and information statements, and other information regarding issuers that file electronically with the Securities and Exchange Commission. As a result of Anthem Insurance's conversion to a stock insurance company and this offering, we will become subject to the information reporting requirements of the Securities Exchange Act of 1934. We will fulfill our obligations with respect to such requirements by filing periodic and current reports, proxy statements and other information with the Securities and Exchange Commission. These reports, proxy statements and information may be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission referenced above. We intend to furnish holders of our common stock with annual reports that include our annual consolidated financial statements audited by an independent certified public accounting firm and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. Our common stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol "ATH". Upon notice of issuance, copies of the registration statement, including all exhibits thereto, and periodic reports, proxy statements and other information will be available for inspection at the offices of the New York Stock Exchange, Inc. located at 20 Broad Street, New York, New York 10005. INFORMATION PERTAINING TO FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that reflect our views about future events and financial performance. When used in this prospectus, the words "may," "will," "should," "anticipate," "estimate," "expect," "plan," "believe," "predict," "potential," "intend" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. You are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. You are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including the discussion under the caption "Risk Factors" as well as our reports filed with the Securities and Exchange Commission from time to time. 19
Health benefits companies operate in a highly competitive, constantly changing environment that is significantly influenced by very large organizations that have resulted from business combinations, aggressive marketing and pricing practices of competitors and regulatory oversight. The following is a summary of factors, the results of which, either individually or in combination, if markedly different from our planning assumptions, could cause our results to differ materially from those expressed in any forward- looking statements contained in this prospectus: . trends in health care costs and utilization rates; . ability to secure sufficient premium rate increases; . competitor pricing below market trends of increasing costs; . increased government regulation of health benefits and managed care; . significant acquisitions or divestitures by major competitors; . introduction and utilization of new prescription drugs and technology; . a downgrade in our financial strength ratings; . litigation targeted at health benefits companies; . ability to contract with providers consistent with past practice; and . general economic downturns. 20
THE PLAN OF CONVERSION The following summary discussion of the plan of conversion does not purport to be complete and is qualified in its entirety by reference to the complete text of the plan of conversion. A copy of the plan of conversion is filed as an exhibit to the registration statement of which this prospectus forms a part. Background of the Demutualization Mutual insurance companies, like Anthem Insurance, are not authorized to issue or sell capital stock and as a result are limited in their ability to raise capital. With increasing consolidation and competition in the health benefits industry, and the resulting need to develop new business opportunities, Anthem Insurance has examined alternative ways of raising capital. On January 29, 2001, Anthem Insurance's board of directors authorized management to prepare a plan of conversion, whereby Anthem Insurance will convert from a mutual insurance company to a stock insurance company under the Indiana demutualization law, Indiana Code Section 27-15-1-1 et seq., and on June 18, 2001, Anthem Insurance's board of directors unanimously approved the plan of conversion. The principal reason for the demutualization is to increase our financial flexibility through improved access to capital, which will enhance our ability to expand existing business, develop new business opportunities and enhance our competitive position in the health benefits industry, and continue to improve service to our customers. In addition, if the plan of conversion becomes effective, the eligible statutory members will receive consideration in the form of Anthem, Inc. common stock or cash in exchange for the extinguishing of their membership interests in Anthem Insurance. Exchange of Membership Interests In general, holders of policies or certificates, including guaranty policies or certificates thereunder, as applicable, issued by Anthem Insurance, have rights as statutory members of Anthem Insurance, which in the context of demutualization are called membership interests. Membership interests consist principally of the right to vote on matters submitted to a vote of statutory members, including the election of directors, and the right to participate in any distribution of cash, stock or other consideration in the event of a conversion of Anthem Insurance to a stock insurance company under the Indiana demutualization law or a dissolution of Anthem Insurance. If the plan becomes effective, the membership interests of all statutory members will be extinguished and Anthem Insurance's eligible statutory members will receive consideration in the form of our common stock or cash. Consideration Eligible Statutory Members If the plan becomes effective, Anthem Insurance's eligible statutory members will receive consideration in the form of our common stock or cash. Prior to the vote on the plan of conversion by Anthem Insurance's statutory members eligible to vote on the plan, they will be given the opportunity to elect to receive common stock in the demutualization. Those eligible statutory members who fail to make a common stock election may be paid in cash. However, the amount of cash available for distribution to eligible statutory members will be limited, and a significant portion of eligible statutory members will likely receive Anthem, Inc. common stock even if they did not elect to receive common stock in the demutualization. The number of eligible statutory members for which cash will be available will depend on a number of factors, including market conditions and the size of this offering. We have agreed in the plan of conversion to use our best commercially reasonable efforts, consistent with our capital and liquidity needs and projections, to assure that funds sufficient to pay cash to a substantial number of eligible statutory members will be made available and used for these cash payments. 21
In general, an eligible statutory member is an Anthem Insurance statutory member who was the holder on June 18, 2001, of an in-force policy or certificate issued by Anthem Insurance and continues to be the holder of an in- force policy or certificate on the effective date of the plan. Of Anthem's more than seven million members or customers, under applicable law and the articles of incorporation and by-laws of Anthem Insurance, approximately one million are statutory members. We have signed a definitive agreement with BCBS-KS, pursuant to which we will acquire BCBS-KS. See "Recent Developments--Proposed Acquisition of Blue Cross and Blue Shield of Kansas." Policyholders of BCBS-KS will not become statutory members of Anthem Insurance and will not be eligible to receive any consideration as a result of our demutualization. Allocation of Shares The aggregate consideration to be distributed to Anthem Insurance's eligible statutory members in exchange for membership interests will consist of shares of our common stock or cash equal to the fair value of Anthem Insurance as determined under Indiana law. The amount of an eligible statutory member's consideration will be based on an allocation to that member of a number of shares of Anthem, Inc. common stock. The aggregate consideration distributed to eligible statutory members will be shares of common stock and cash equal in value to 100 million shares of our common stock. The method of allocation among eligible statutory members provides to each eligible statutory member a "fixed component" equal in value to 21 shares of Anthem, Inc. common stock and a "variable component," which may be zero. The variable component in general is based on an estimate of any positive contribution made by such member to Anthem Insurance's statutory surplus relative to the sum of such positive contributions made by all eligible statutory members. We anticipate that approximately 20% of the aggregate consideration distributed to eligible statutory members will represent the fixed component, and the balance will represent the variable component. We retained Daniel J. McCarthy, FSA, MAAA, Dale S. Hagstrom, FSA, MAAA, and Robert H. Dobson, FSA, MAAA, independent consulting actuaries associated with Milliman USA, Inc., an independent actuarial consulting firm, to advise us in connection with the actuarial matters involved in the plan of conversion and the allocation of consideration to eligible statutory members. The opinion of Messrs. McCarthy, Hagstrom and Dobson, dated June 18, 2001, states, in reliance upon the matters described in the opinion, that the principles, assumptions, methodologies and formulas used to allocate consideration among eligible statutory members in exchange for their membership interests are reasonable and appropriate and that the resulting allocation of consideration to eligible statutory members is fair and equitable. A copy of the opinion is attached as Annex A to this prospectus. Cash Payment Amounts For those eligible statutory members who receive cash in the demutualization, the amount of cash payments will be based on the initial public offering price of our common stock in this offering. The formula for calculation of cash payments includes a "top up" provision. If the average closing price of Anthem, Inc.'s common stock over the 20 consecutive trading days commencing with the date on which the demutualization is completed is more than 110% of the initial public offering price, eligible statutory members receiving cash will receive an additional payment equal to the amount by which the average closing price exceeds 110% of the initial public offering price, up to 120% of the initial public offering price. Conditions to Effectiveness of the Plan In order for the plan of conversion to become effective, the following approvals and conditions must be obtained and/or satisfied: 22
Approval by Statutory Members One of the conditions for the plan of conversion and Anthem Insurance's Amended and Restated Articles of Incorporation to become effective is that they must be approved by a vote of Anthem Insurance's statutory members eligible to vote on the plan. On June 18, 2001, the board of directors of Anthem Insurance unanimously approved the plan of conversion and Amended and Restated Articles of Incorporation, and recommended the plan and Amended and Restated Articles of Incorporation to Anthem Insurance's statutory members. The special meeting at which Anthem Insurance's statutory members will vote on the plan and Amended and Restated Articles of Incorporation will be held on October 29, 2001. Approval by the Indiana Insurance Commissioner In order for the plan to become effective, the plan and Anthem Insurance's Amended and Restated Articles of Incorporation must be approved by the Indiana Insurance Commissioner. The Indiana demutualization law requires the Indiana Insurance Commissioner to approve the plan and Anthem Insurance's Amended and Restated Articles of Incorporation if she finds that: . the amount and form of consideration to be given to Anthem Insurance's eligible statutory members under the plan is fair in the aggregate and to each member class; . the plan complies with the Indiana demutualization law and other applicable laws, is fair, reasonable and equitable to the eligible statutory members and will not prejudice the interests of Anthem Insurance's other statutory members or policyholders; and . the total consideration provided to eligible statutory members under the plan is equal to or greater than Anthem Insurance's policyholders' surplus as determined in accordance with statutory accounting principles. A public hearing on the demutualization will be held at the Indiana Government Conference Center, Auditorium, 402 West Washington Street, Indianapolis, Indiana 46204 on October 2, 2001. The Indiana demutualization law requires the Indiana Insurance Commissioner to approve or disapprove the plan of conversion and the Amended and Restated Articles of Incorporation within 30 days after the conclusion of the public hearing. Tax Opinion Under the plan, an opinion of Anthem's tax advisor, Ernst & Young LLP, regarding certain federal income tax consequences of the plan must be received in order for the plan to become effective. ERISA Exemption Anthem Insurance will not cause or allow the demutualization to become effective unless, on or prior to the effective date of the plan: . the Department of Labor has granted an exemption from Section 406 of the Employee Retirement Income Security Act of 1974, or ERISA, and Section 4975 of the Internal Revenue Code of 1986, as amended, or the Code, with respect to the receipt of consideration pursuant to the plan by employee benefit plans subject to the provisions of such sections; or . Anthem has, upon advice of counsel, otherwise determined and reported to the Indiana Insurance Commissioner that the distribution of consideration will not have an adverse effect on eligible statutory members or on Anthem, or that the distribution of consideration will not constitute a prohibited transaction under ERISA or the Code; or . the consideration payable to such employee benefit plans is placed in trust for up to six months, pending the receipt of the required exemptions. 23
Neither Anthem Insurance nor Anthem, Inc. nor their or their subsidiaries' employees, officers or directors are, or will be, eligible statutory members under any benefit or welfare plan established or maintained by Anthem Insurance, Anthem, Inc. or any of their subsidiaries for the benefit of such employees, officers or directors. Initial Public Offering Consummation of this offering is a condition to the effectiveness of the plan of conversion. Other Approvals In connection with the demutualization, we will need to obtain various regulatory approvals and the consent of the BCBSA. Appeal Period Section 27-15-15-2 of the Indiana demutualization law provides that any action challenging the validity of or arising out of acts taken or proposed to be taken under any order of the Indiana Insurance Commissioner in connection with the plan must be commenced within 30 days after the Indiana Insurance Commissioner has issued the order or determination. We expect that the 30-day appeal period will not have expired prior to the effective date of the demutualization and this offering. In the event that the order of the Indiana Insurance Commissioner is challenged, a successful challenge could result in monetary damages, a modification of the plan or the Indiana Insurance Commissioner's approval of the plan being set aside. A successful challenge would likely result in substantial uncertainty relating to the terms and effectiveness of the plan, including the demutualization of Anthem Insurance, payment of consideration and the extinguishing of membership interests. A substantial period of time might be required to reach a final determination. However, in order to challenge successfully the Indiana Insurance Commissioner's approval of the plan, the petitioner would have to sustain the burden of showing that such approval was arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law, contrary to constitutional right, power, privilege or immunity, in excess of statutory jurisdiction, authority or limitations, or short of statutory right, without observance of procedure required by law or unsupported by substantial evidence. In addition, pursuant to the Indiana demutualization law, if certain claims have been asserted against Anthem Insurance and remain unresolved on the effective date of the demutualization, distribution of consideration to some or all eligible statutory members may be delayed by more than six months, by establishing one or more trusts for the purpose of holding assets on and following the effective date of the demutualization that are adequate to satisfy such claims. Amendment or Withdrawal of the Plan; Corrections The plan of conversion may be modified, amended, withdrawn or terminated only in a manner consistent with the provisions of the Indiana demutualization law and by action of a majority of Anthem Insurance's board of directors. Additionally, Anthem Insurance may make certain modifications, corrections of errors or omissions and clarifications to the plan as may be necessary under the plan, or as may be required by the Indiana Insurance Commissioner. Effectiveness of the Plan If the conditions to effectiveness of the plan are met, and upon Anthem Insurance's filing with the Indiana Department of Insurance and the Indiana Secretary of State the Amended and Restated Articles of Incorporation, the plan of conversion will go into effect. The plan provides that the effective date of the plan will occur upon the date and time of approval of Anthem Insurance's Amended and Restated Articles of Incorporation by the Indiana Secretary of State, unless a later date and time are 24
specified in the Amended and Restated Articles of Incorporation, in which case the plan and those Articles will become effective at that later date and time. We anticipate that the plan will become effective on the closing date of this offering. If the plan does not become effective for any reason, Anthem Insurance will remain a mutual insurance company, the interests of Anthem Insurance's statutory members will remain unchanged, no consideration will be paid to eligible statutory members, and no shares will be issued or sold in this offering. Tax Effect on Anthem The following sections are a summary of the material federal income tax consequences to Anthem in connection with the plan, based on the opinion of Ernst & Young LLP, Anthem's tax advisor. Demutualization of Anthem Insurance The demutualization of Anthem Insurance from a mutual insurance company to a stock insurance company will be tax-free under the Code, and the holding company formation whereby Anthem Insurance will become a wholly-owned subsidiary of Anthem, Inc. will be tax-free to both Anthem Insurance and Anthem, Inc. under the Code. Distribution of Cash to Eligible Statutory Members Neither Anthem Insurance nor Anthem, Inc. will recognize gain or loss on Anthem, Inc.'s issuance of cash to those eligible statutory members who are to receive cash in lieu of Anthem, Inc. common stock under the plan. Treatment of Anthem, Inc. Anthem, Inc. will not recognize gain or loss on its receipt of cash in this offering. Special Tax Rules Applicable to Blue Cross and Blue Shield Organizations Under current law, Anthem currently enjoys certain federal income tax benefits as described below, including special tax deductions, as a Blue Cross or Blue Shield organization that was in existence on August 16, 1986. These special tax benefits continue for as long as Anthem does not undergo a "material change" in operations or structure. Current law does not address whether a demutualization transaction will constitute a material change in the operations or structure of a Blue Cross or Blue Shield organization and, therefore, it is not clear what effect the plan will have on Anthem's ability to continue to qualify for such tax benefits. As an existing Blue Cross and Blue Shield organization, Anthem is entitled to take advantage of special tax provisions. These provisions include a deduction based on the amount by which 25% of our claims and expenses exceed our adjusted surplus (the "Section 833(b) Deduction") and a deduction for increases to our unearned premium reserve that is higher than the deduction allowable to most insurance companies. Because of the current level of adjusted surpluses, Anthem has only one subsidiary that anticipates having a Section 833(b) Deduction in calendar year 2001. If the plan is treated as effecting a "material change" to Anthem's structure or operations, Anthem would not be allowed the Section 833(b) Deduction. Anthem would also only be allowed to deduct 80% of our unearned premium reserve rather than 100%. This would have the impact of accelerating taxable income in the year in which the material change occurs. 25
In addition, as a Blue Cross or Blue Shield organization, Anthem was entitled to adjust the tax basis of assets that we owned on January 1, 1987 to their fair market value on that date. If we were deemed to undergo a material change as a result of the plan, it is possible that we would lose the remaining benefit of this special basis adjustment, which could cause an increase in our tax liability on any further disposition of certain assets owned on January 1, 1987. Status as an Insurance Company As long as Anthem does not undergo a material change, Anthem will be treated as an insurance company for federal income tax purposes. If Anthem were determined to have undergone a material change, Anthem's status as an insurance company would depend on whether its predominant business activities are considered to be those of an insurance company. Loss of insurance company status generally would preclude Anthem from taking into account deductions for additions to certain reserves that insurance companies are permitted to deduct for federal income tax purposes. The loss of these deductible reserves would, in general, cause acceleration of the payment of federal income tax on income derived from Anthem's operations. However, we believe that Anthem should continue to qualify as an insurance company regardless of whether the demutualization is viewed as a material change. ERISA Considerations Prohibited Transaction Exemption A significant percentage of the policies or certificates held by likely eligible statutory members are associated with welfare benefit plans subject to ERISA. The Department of Labor, or DOL, has taken the position that the stock or other consideration that is distributed in a demutualization with respect to ERISA plans generally is a "plan asset" under ERISA. Anthem may be considered to be a "party-in-interest" under ERISA with respect to these ERISA plans. Absent an exemption, the receipt of Anthem, Inc. common stock or cash by eligible statutory members whose policies or certificates are associated with ERISA plans could be viewed as a prohibited transaction under Section 406 of ERISA. Anthem Insurance has applied for an individual prohibited transaction exemption from the DOL. The individual prohibited transaction exemption would allow eligible statutory members with policies or certificates associated with ERISA plans to receive the Anthem, Inc. common stock or cash without application of the prohibited transaction rules. The DOL grants individual prohibited transaction exemptions if it determines that the exemption is administratively feasible, is in the interest of the ERISA plans and their participants and beneficiaries and is protective of the rights of participants and beneficiaries. Similar individual prohibited transaction exemptions have been granted by the DOL with respect to demutualizations of other insurance companies. Large Holder Sale Program Pursuant to the plan of conversion, shares of our common stock distributed to any of Anthem Insurance's eligible statutory members who receives and continues to hold 30,000 or more shares of our common stock may not be transferred or sold by such eligible statutory member until 180 days after the effective date of the demutualization, except for transfers that occur by operation of law, transfers with our written consent or sales in accordance with a large holder sale program that we will establish. After the 180 day period, these limitations will no longer apply. The large holder sale program will be administered by EquiServe Trust Company, N.A. as the program agent. Under the large holder sale program procedures, if the aggregate number of shares of our common stock to be sold on the open market on any day on behalf of all holders who hold more than 30,000 shares exceeds the lesser of (i) 1/10th of 1% of the number of shares of our 26
common stock outstanding or (ii) 25% of the average daily trading volume for the 20 consecutive trading days (or such shorter period, if fewer than 20 consecutive trading days have elapsed since the effective date of the demutualization) preceding such day, the designated broker-dealer will only process trades on the open market up to that limit for all holders who hold more than 30,000 shares. The designated broker-dealer will either defer the excess shares to the next trading day (which will be subject to the same volume limitations on that day) or sell the shares as principal through a block trade or through a nationally recognized brokerage firm that will sell the shares, as agent, at market clearing prices. The excess shares on any day may also be purchased by Anthem, subject to compliance with applicable regulatory requirements, but we have no obligation to purchase any excess shares. Commission-Free Sales Program Pursuant to the plan of conversion, we intend to establish a commission-free sales program that would commence no sooner than the first business day after the 180th day following, and no later than the last business day before the twelfth-month anniversary of, the effective date of the demutualization, and would continue for at least three months. Under this program, each of our shareholders who owns 99 or fewer shares of our common stock on the record date for the commission-free sales program would have the opportunity at any time during the term of the program to sell all, but not less than all, of those shares in one transaction at prevailing market prices without paying brokerage commissions or other similar expenses. We would also offer each shareholder eligible to participate in the commission-free sales program the opportunity to purchase shares of common stock as necessary to increase their holdings to 100 share round lots without paying brokerage commissions or other similar expenses. This stock purchase program would occur simultaneously and in conjunction with the commission-free sales program. The program may provide that we can repurchase shares of our common stock at prevailing market prices when, during any particular day of the program, the number of shares requested to be sold exceeds the number of shares requested to be purchased pursuant to round-up requests. 27
USE OF PROCEEDS Gross proceeds to us from the offering are estimated to be $1,001.0 million. This reflects the sale of 28,600,000 shares of common stock by us, at an assumed initial public offering price of $35.00 per share. From these gross proceeds, we estimate we will pay $837.2 million to Anthem Insurance's eligible statutory members who receive cash in lieu of shares of common stock in connection with the demutualization. We expect to pay from the gross proceeds an estimated $45.0 million for underwriting discounts and an estimated $32.0 million for other offering and additional demutualization expenses. We will use the estimated balance of approximately $86.8 million, plus an estimated additional $143.4 million of net proceeds if the underwriters exercise their over-allotment option in full, for general corporate purposes. DIVIDEND POLICY Our board of directors does not presently intend to declare cash dividends on our common stock. The declaration and payment of future dividends will be at the discretion of our board of directors and must comply with applicable law. Future dividend payments will depend upon our financial condition, results of operations, future liquidity needs, potential acquisitions, regulatory and capital requirements and other factors deemed relevant by our board of directors. In addition, following the effective date of the plan of conversion, we will be a holding company whose primary asset will be 100% of the capital stock of Anthem Insurance. Our ability to pay dividends to our shareholders will primarily depend upon the receipt of dividends from Anthem Insurance and its receipt of dividends from our other regulated insurance subsidiaries. 28
CAPITALIZATION The following table sets forth, as of June 30, 2001, Anthem's actual capitalization and Anthem, Inc.'s capitalization as adjusted to give effect to: . the demutualization; . the sale of 28,600,000 shares of common stock in this offering at an assumed initial public offering price of $35.00 per share, the midpoint of the range of the assumed initial public offering price; and . the application of estimated net proceeds from this offering as set forth under "Use of Proceeds." At June 30, 2001 ----------------------- Anthem Anthem, Inc. Historical Pro forma ---------- ------------ (In Millions, except share data) Debt: 9.00% surplus notes due 2027......................... $ 197.2 $ 197.2 9.125% surplus notes due 2010........................ 295.7 295.7 Other................................................ 104.8 104.8 -------- -------- Total debt......................................... 597.7 597.7 -------- -------- Shareholders' equity(1): Preferred stock, without par value, shares authorized--100,000,000 shares issued and outstanding--none................................... $ -- $ -- Common stock, par value $0.01, shares authorized-- 900,000,000, shares issued and outstanding--none historically and 104,680,000 pro forma.............. -- 1.0 Additional paid in capital........................... -- 2,077.4 Retained earnings.................................... 1,991.6 -- Accumulated other comprehensive income............... 72.3 72.3 -------- -------- Total shareholders' equity(1)...................... 2,063.9 2,150.7 -------- -------- Total capitalization................................... $2,661.6 $2,748.4 ======== ======== - -------- (1) Anthem historical amounts represent "Policyholders' surplus" prior to demutualization. 29
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA In the table below, we provide selected consolidated financial data of Anthem. We prepared this information using our unaudited consolidated financial statements for the six-month periods ended June 30, 2001 and 2000 and our consolidated financial statements for each of the years in the five-year period ended December 31, 2000, which have been audited by Ernst & Young LLP. You should read this selected consolidated financial data together with our audited consolidated financial statements and notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. In our opinion, the selected consolidated financial data for the six-month periods ended June 30, 2001 and 2000 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of that data. The selected consolidated financial and other data do not necessarily indicate the results to be expected in the future. As of and for the Six Months Ended June 30, As of and for the Year Ended December 31, ------------------ ----------------------------------------------- 2001(1) 2000(1) 2000(1) 1999(1) 1998 1997 1996 -------- -------- -------- -------- -------- -------- -------- (unaudited) ($ in Millions) Income Statement Data Revenues Premiums................ $4,542.8 $3,589.3 $7,737.3 $5,418.5 $4,739.5 $4,581.4 $4,445.9 Administrative fees..... 430.3 356.5 755.6 611.1 575.6 445.9 452.9 Other revenue........... 22.6 18.9 50.6 51.0 74.6 82.7 108.5 -------- -------- -------- -------- -------- -------- -------- Total operating revenue............... 4,995.7 3,964.7 8,543.5 6,080.6 5,389.7 5,110.0 5,007.3 Net investment income... 109.0 95.0 201.6 152.0 136.8 125.2 141.9 Net realized gains (losses) on investments............ (10.9) 6.5 25.9 37.5 155.9 97.0 73.3 Gain on sale of subsidiary operations.. 25.0 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- 5,118.8 4,066.2 8,771.0 6,270.1 5,682.4 5,332.2 5,222.5 -------- -------- -------- -------- -------- -------- -------- Expenses Benefit expense......... 3,870.8 3,080.6 6,551.0 4,582.7 3,934.2 3,833.3 3,715.1 Administrative expense(2)............. 991.6 817.5 1,808.4 1,469.4 1,420.1 1,358.9 1,268.7 Interest expense........ 28.0 27.0 54.7 30.4 27.9 23.7 19.5 Amortization of goodwill and other intangible assets................. 15.7 11.4 27.1 12.7 12.0 9.6 10.7 Demutualization expenses............... 3.0 -- -- -- -- -- -- Endowment of non-profit foundations(3)......... -- -- -- 114.1 -- -- -- -------- -------- -------- -------- -------- -------- -------- 4,909.1 3,936.5 8,441.2 6,209.3 5,394.2 5,225.5 5,014.0 -------- -------- -------- -------- -------- -------- -------- Income from continuing operations before income taxes and minority interest...... 209.7 129.7 329.8 60.8 288.2 106.7 208.5 Income taxes............ 68.6 38.9 102.2 10.2 110.9 24.1 53.0 Minority interest (credit)............... (1.9) 0.5 1.6 (0.3) (1.1) 3.5 15.0 -------- -------- -------- -------- -------- -------- -------- Income from continuing operations............. 143.0 90.3 226.0 50.9 178.4 79.1 140.5 Discontinued operations, net of income taxes Loss from discontinued operations prior to disposal............... -- -- -- -- (3.9) (125.1) (44.4) Loss on disposal of discontinued operations............. -- -- -- (6.0) (2.1) (113.0) -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)....... $ 143.0 $ 90.3 $ 226.0 $ 44.9 $ 172.4 $ (159.0) $ 96.1 ======== ======== ======== ======== ======== ======== ======== 30
As of and for the Six Months Ended June 30, As of and for the Year Ended December 31, ------------------ -------------------------------------------------- 2001(1) 2000(1) 2000(1) 1999(1) 1998 1997 1996 -------- -------- --------- -------- -------- -------- -------- (unaudited) ($ in Millions) Other Data-unaudited(4) Operating revenue and premium equivalents(5)......... $6,883.1 $5,559.0 $11,800.1 $8,691.6 $7,987.4 $7,269.3 $6,772.3 Benefit expense ratio... 85.2% 85.8% 84.7% 84.6% 83.0% 83.7% 83.6% Administrative expense ratio: Calculated using operating revenue..... 19.8% 20.6% 21.2% 24.2% 26.3% 26.6% 25.3% Calculated using operating revenue and premium equivalents... 14.4% 14.7% 15.3% 16.9% 17.8% 18.7% 18.7% Return on revenue....... 2.8% 2.2% 2.6% 0.7% 3.0% (3.0)% 1.8% Return on revenue-- continuing operations.. 2.8% 2.2% 2.6% 0.8% 3.1% 1.5% 2.7% Return on equity........ N/A N/A 12.6% 2.7% 10.7% (10.1)% 6.0% Members (000s).......... 7,779 7,030 7,270 6,265 5,167 5,261 4,078 Balance Sheet Data Cash and investments.... $4,029.6 $3,418.4 $ 3,714.6 $2,972.4 $2,805.1 $2,415.6 $2,123.4 Total assets............ 5,838.0 5,364.0 5,708.5 4,816.2 4,359.2 4,131.9 4,085.8 Policy liabilities...... 1,593.8 1,625.5 1,698.3 1,431.1 1,118.1 1,143.9 1,231.5 Debt.................... 597.7 597.5 597.7 522.2 302.1 305.9 245.9 Total policyholders' surplus(6)............. 2,063.9 1,756.3 1,919.8 1,660.9 1,702.5 1,524.7 1,625.2 - -------- (1) On October 27, 1999 and November 16, 1999 Anthem acquired New Hampshire- Vermont Health Service, formerly d/b/a Blue Cross Blue Shield of New Hampshire, and Rocky Mountain Hospital and Medical Service, Inc., formerly d/b/a Blue Cross and Blue Shield of Nevada/Colorado. On June 5, 2000, Anthem acquired Associated Hospital Service of Maine, formerly d/b/a Blue Cross and Blue Shield of Maine. These acquisitions were accounted for as purchases and the net assets and results of operations have been included in our consolidated financial statements from the respective purchase dates. Below is information for the six months ended June 30, 2001 and 2000 and for the years ended December 31, 2000 and 1999 that is included in Anthem's consolidated financial statements for the acquisitions that were completed in those periods: As of and for the Six Months Ended June 30, --------------------------------------------------------------------- 2001 2000 ----------------------------------- --------------------------------- Total Operating (000s) Total Operating (000s) Revenues Gain Assets Members Revenues Loss Assets Members -------- --------- -------- ------- -------- --------- ------ ------- BCBS-ME................. $ 457.6 $ 3.0 $ 326.4 496 $ 59.6 $(2.5) $264.8 468 ======== ===== ======== ===== ====== ====== ====== === As of and for the Year Ended December 31, --------------------------------------------------------------------- 2000 1999 ----------------------------------- --------------------------------- Total Operating (000s) Total Operating (000s) Revenues Gain Assets Members Revenues Loss Assets Members -------- --------- -------- ------- -------- --------- ------ ------- BCBS-NH................. $ 591.0 $11.6 $ 316.8 479 $ 77.9 $ (0.3) $250.6 366 BCBS-CO/NV.............. 678.6 6.5 545.8 595 76.9 (3.4) 521.5 486 BCBS-ME................. 489.4 8.7 339.5 487 -- -- -- -- -------- ----- -------- ----- ------ ------ ------ --- Total................... $1,759.0 $26.8 $1,202.1 1,561 $154.8 $ (3.7) $772.1 852 ======== ===== ======== ===== ====== ====== ====== === Operating gain (loss) consists of operating revenue less benefit expense and administrative expense. (2) The 1999 administrative expense includes a non-recurring charge of $41.9 million related to the settlement agreement with the Office of Inspector General. See Note 14 to our audited consolidated financial statements. 31
(3) During 1999, Anthem reached agreements with the states of Kentucky, Ohio and Connecticut to resolve any questions as to whether Anthem or the predecessor/successor entities were in possession of property that was impressed with a charitable trust. The endowment of non-profit foundations reflects contributions made for the benefit of charitable foundations in these states. See Note 3 to our audited consolidated financial statements. (4) The benefit expense ratio represents benefit expense as a percentage of premium revenue. The administrative expense ratio represents administrative expense as a percentage of operating revenue and has also been presented as a percentage of operating revenue and premium equivalents. Return on revenue represents net income (loss) as a percentage of total revenues. Return on revenue--continuing operations represents income from continuing operations as a percentage of total revenues. Return on equity, which is only presented for annual periods, represents net income (loss) as a percentage of the average of the sum of policyholders' surplus at the beginning and the end of the period. (5) Operating revenue and premium equivalents is a measure of the volume of business serviced by Anthem that is commonly used in the health benefits industry to allow for a comparison of operating efficiency among companies. It is calculated by adding to premiums, administrative fees and other revenue the amount of claims attributable to non-Medicare, self-funded health business where Anthem provides a complete array of customer service, claims administration and billing and enrollment services. The self-funded claims included for the six months ended June 30, 2001 and 2000 were $1,887.4 million and $1,594.3 million, respectively, and for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 were $3,256.6 million, $2,611.0 million, $2,597.7 million, $2,159.3 million and $1,765.0 million, respectively. (6) Policyholders' surplus represents shareholders' equity prior to demutualization. 32
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The unaudited pro forma consolidated financial information presented below gives effect to (i) the demutualization, including the issuance of 76,080,000 shares of common stock to Anthem Insurance's eligible statutory members (net of 23,920,000 shares for which eligible statutory members receive cash in lieu of shares), and (ii) the sale of 28,600,000 shares of Anthem, Inc. common stock at the assumed initial public offering price of $35.00 per share (before deducting the estimated underwriting discount and offering expenses payable by us), as if the demutualization had occurred as of June 30, 2001 for purposes of the unaudited pro forma consolidated balance sheet, and as of January 1, 2000 for purposes of the unaudited pro forma consolidated income statements for the year ended December 31, 2000 and the six months ended June 30, 2001. Prior to the demutualization, "shareholders' equity" represents consolidated policyholders' surplus of Anthem. The pro forma information does not take into account the sale of up to 4,290,000 shares of our common stock which the underwriters have the option to purchase from us to cover over-allotments. The pro forma information also assumes that no additional cash payments (which could be up to a maximum of $83.7 million, assuming an initial public offering price of $35.00 per share) will be made to eligible statutory members pursuant to the cash "top up" provisions of the plan of conversion. The pro forma information reflects estimated gross proceeds of $1,001.0 million and estimated net proceeds of $86.8 million that we expect to receive from this offering. From the gross proceeds, we estimate that we will pay $837.2 million to eligible statutory members in cash in lieu of shares that would otherwise be issued to such eligible statutory members in the demutualization, $45.0 million will be applied to underwriting discounts and $32.0 million as other offering and additional demutualization expenses. We will retain the balance of the net proceeds for general corporate purposes. See "Use of Proceeds." We will account for the demutualization using the historical carrying values of Anthem's assets and liabilities. We based the pro forma information on available information and on assumptions that management believes are reasonable and that reflect the effects of these transactions. We provide the pro forma information for informational purposes only and this information should not be construed to be indicative of our consolidated financial position or our consolidated results of operations had these transactions been consummated on the dates assumed. This information does not represent a projection or forecast of our consolidated financial position or consolidated results of operations for future dates or periods. You should read the pro forma information in conjunction with the historical consolidated financial statements of Anthem beginning on page F-1 and with the information set forth under "The Plan of Conversion," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "The Business of Anthem" included elsewhere in this prospectus. 33
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME ($ in Millions, except share data) Six Months Ended June 30, 2001 Year Ended December 31, 2000 -------------------------------------- -------------------------------------- The The Demutualization Demutualization Anthem and Public Anthem Pro Anthem and Public Anthem Pro Historical Offering Forma Historical Offering Forma ---------- --------------- ----------- ---------- --------------- ----------- Revenues Premiums................ $4,542.8 $-- $ 4,542.8 $7,737.3 $-- $ 7,737.3 Administrative fees..... 430.3 -- 430.3 755.6 -- 755.6 Other revenue........... 22.6 -- 22.6 50.6 -- 50.6 -------- ---- ----------- -------- ---- ----------- Total operating revenue................ 4,995.7 -- 4,995.7 8,543.5 -- 8,543.5 Net investment income... 109.0 -- (1) 109.0 201.6 -- 201.6 Net realized gains (losses) on investments............ (10.9) -- (10.9) 25.9 -- 25.9 Gain on sale of subsidiary operations.. 25.0 -- 25.0 -- -- -- -------- ---- ----------- -------- ---- ----------- 5,118.8 -- 5,118.8 8,771.0 -- 8,771.0 -------- ---- ----------- -------- ---- ----------- Expenses Benefit expense......... 3,870.8 -- 3,870.8 6,551.0 -- 6,551.0 Administrative expense.. 991.6 -- 991.6 1,808.4 -- 1,808.4 Interest expense........ 28.0 -- 28.0 54.7 -- 54.7 Amortization of goodwill and other intangible assets................. 15.7 -- 15.7 27.1 -- 27.1 Demutualization expenses............... 3.0 (3.0)(2) -- -- -- -- -------- ---- ----------- -------- ---- ----------- 4,909.1 (3.0) 4,906.1 8,441.2 -- 8,441.2 -------- ---- ----------- -------- ---- ----------- Income before income taxes and minority interest............... 209.7 3.0 212.7 329.8 -- 329.8 Income taxes............ 68.6 -- 68.6 102.2 -- 102.2 Minority interest (credit)............... (1.9) -- (1.9) 1.6 -- 1.6 -------- ---- ----------- -------- ---- ----------- Net income ............. $ 143.0 $3.0 $ 146.0 $ 226.0 $-- $ 226.0 ======== ==== =========== ======== ==== =========== Income per share........ $ 1.40 $ 2.16 =========== =========== Shares used in calculating per share amount................. 104,680,000(3) 104,680,000(3) =========== =========== See accompanying notes. 34
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ($ in Millions) June 30, 2001 ------------------------------------------------------------------ As Adjusted Anthem Anthem The for The The Public Pro Historical Demutualization Demutualization Offering Forma ---------- --------------- --------------- ---------- -------- Assets Current assets: Investments........... $3,790.7 $ -- $3,790.7 $ -- $3,790.7 Cash and cash equivalents.......... 238.9 (837.2)(4) (598.3) 946.0(5) 347.7 Premium and self funded receivables... 498.5 -- 498.5 -- 498.5 Reinsurance receivables.......... 78.9 -- 78.9 -- 78.9 Other receivables..... 194.5 -- 194.5 -- 194.5 Income tax receivables.......... 7.4 -- 7.4 -- 7.4 Other current assets.. 33.4 -- 33.4 -- 33.4 -------- -------- -------- ------ -------- Total current assets............. 4,842.3 (837.2) 4,005.1 946.0 4,951.1 Other noncurrent investments............ 13.1 -- 13.1 -- 13.1 Restricted cash and investments............ 51.1 -- 51.1 -- 51.1 Property and equipment.. 409.6 -- 409.6 -- 409.6 Goodwill and other intangible assets...... 480.4 -- 480.4 -- 480.4 Other noncurrent assets................. 41.5 -- 41.5 -- 41.5 -------- -------- -------- ------ -------- Total assets........ $5,838.0 $ (837.2) $5,000.8 $946.0 $5,946.8 ======== ======== ======== ====== ======== Liabilities and shareholders' equity Liabilities Current liabilities: Total policy liabilities.......... 1,593.8 -- 1,593.8 -- 1,593.8 Unearned income....... 321.2 -- 321.2 -- 321.2 Accounts payable and accrued expenses..... 269.0 22.0 (6) 291.0 -- 291.0 Bank overdrafts....... 281.6 -- 281.6 -- 281.6 Income taxes payable.. 34.6 -- 34.6 -- 34.6 Other current liabilities.......... 283.7 -- 283.7 -- 283.7 -------- -------- -------- ------ -------- Total current liabilities........ 2,783.9 22.0 2,805.9 -- 2,805.9 Long term debt, less current portion........ 597.5 -- 597.5 -- 597.5 Retirement benefits..... 187.5 -- 187.5 -- 187.5 Other noncurrent liabilities............ 205.2 -- 205.2 -- 205.2 -------- -------- -------- ------ -------- Total liabilities... 3,774.1 22.0 3,796.1 -- 3,796.1 Shareholders' equity Common stock............ -- 0.8 (7) 0.8 0.2(5) 1.0 Additional paid in capital................ -- 1,131.6 (7) 1,131.6 945.8(5) 2,077.4 Retained earnings....... 1,991.6 (1,991.6)(7) -- -- -- Accumulated other comprehensive income... 72.3 -- 72.3 -- 72.3 -------- -------- -------- ------ -------- Total shareholders' equity............. 2,063.9(8) (859.2) 1,204.7 946.0 2,150.7 -------- -------- -------- ------ -------- Total liabilities and shareholders' equity............. $5,838.0 $ (837.2) $5,000.8 $946.0 $5,946.8 ======== ======== ======== ====== ======== See accompanying notes. 35
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (1) Although such data is not reflected within the pro forma income statement, the initial public offering net proceeds of $86.8 million would have generated some level of net investment income during the income statement periods shown. (2) The demutualization expenses of $3.0 million incurred during the six months ended June 30, 2001 have been eliminated as they resulted directly from the demutualization. In addition, subsequent to the demutualization, we will incur additional expenses associated with servicing our shareholder base, including mailing and printing fees. As these expenses are not directly related to the transaction, they have not been reflected within the unaudited pro forma consolidated statements of income. (3) Estimated total shares of common stock outstanding after the initial public offering is calculated as follows: Number of Shares ----------- Shares allocated to eligible statutory members................. 100,000,000 Less: estimated shares allocated to eligible statutory members who receive cash in lieu of shares............................ 23,920,000 ----------- Shares issued to eligible statutory members.................... 76,080,000 Shares issued in the offering.................................. 28,600,000 ----------- Total shares of common stock outstanding....................... 104,680,000 =========== (4) Represents estimated $837.2 million cash paid to certain eligible statutory members who receive cash in lieu of shares of common stock. (5) Represents the gross proceeds of $1,001.0 million from the issuance of 28,600,000 shares of common stock in the offering at an assumed initial public offering price of $35.00 per share less an assumed underwriting discount of $45.0 million and estimated initial public offering expenses of $10.0 million. (6) Represents estimated additional nonrecurring expenses of $22.0 million for demutualization costs and expenses to be incurred at the date of the unaudited pro forma consolidated balance sheet. We have shown the additional nonrecurring expenses as a liability and a decrease to retained earnings within the unaudited pro forma consolidated balance sheet. The additional nonrecurring demutualization expenses have not been reflected within the unaudited pro forma statements of income as they will not have a continuing impact and will be recorded as expense from continuing operations when actually incurred. (7) Represents reclassification of retained earnings of the mutual insurance company to reflect the demutualization as follows (in millions): Historical retained earnings...................................... $1,991.6 Less cash used to fund payments to eligible statutory members in lieu of issuing shares........................................... 837.2 Less additional demutualization expenses--see Note 6.............. 22.0 -------- Retained earnings related to eligible statutory members receiving common stock..................................................... $1,132.4 ======== (8) Anthem historical amounts represent "Policyholders' Surplus" prior to demutualization. 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction We are one of the nation's largest health benefits companies and an independent licensee of the Blue Cross Blue Shield Association, or BCBSA. We offer Blue Cross Blue Shield, or BCBS, branded products to over seven million members throughout Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado and Nevada. Our reportable segments are strategic business units delineated by geographic areas within which we offer similar products and services. We manage our business units with a local focus to address each geographic region's unique market, regulatory and health care delivery characteristics. The regions are: Midwest, which includes Indiana, Kentucky and Ohio; East, which includes Connecticut, New Hampshire and Maine; and West, which includes Colorado and Nevada. In addition to our three geographic regions, we operate a Specialty segment and an Other segment. Our Specialty segment includes business units providing group life and disability insurance benefits, pharmacy benefit management, dental administration services and third party occupational health services. Our Other segment includes primarily AdminaStar Federal, a subsidiary which administers Medicare programs in Indiana, Illinois, Kentucky and Ohio. The Other segment also includes Anthem Alliance Health Insurance Company, a subsidiary which primarily provided health care benefits and administration in nine states for the Department of Defense's TRICARE program for military families prior to our sale of the TRICARE operations on May 31, 2001. Additionally, the Other segment includes intersegment revenue and expense eliminations and corporate expenses not allocated to reportable segments. We offer a diversified mix of managed care products, including Health Maintenance Organizations or HMOs, Preferred Provider Organizations or PPOs, and Point of Service or POS plans, as well as traditional indemnity products. We also offer a broad range of managed care services and partially insured products for self-funded employers, including underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, claims processing and other administrative services. Our operating revenue consists primarily of premiums from fully insured contracts, where we indemnify our policyholders against loss, and administrative fees from self- funded contracts, where our contract holders are wholly or partially self- insured. Fees received for administration of Medicare programs are also included in our administrative revenue. Other revenue consists primarily of fees generated by our pharmacy benefit management company. Our benefit expense consists primarily of outpatient and inpatient care costs, as well as pharmacy benefit costs. All three components are affected both by unit costs (for example, the cost of outpatient medical procedures and inpatient hospital stays, and prescription drug prices) and utilization rates, which vary due to the age and health of our members, as well as due to broader social and lifestyle factors in the population as a whole. Our results in 1999 and 2000 were significantly impacted by the acquisitions of Blue Cross and Blue Shield of New Hampshire, or BCBS-NH, which we completed on October 27, 1999, Blue Cross and Blue Shield of Colorado and Nevada, or BCBS-CO/NV, which we completed on November 16, 1999, and Blue Cross and Blue Shield of Maine, or BCBS-ME, which we completed on June 5, 2000. The acquisitions were accounted for as purchases and the net assets and results of operations have been included in our consolidated financial statements from the respective dates of purchase. The following represents the contribution to our total revenues, operating gain, assets and membership for the six months ended June 30, 2001 and 2000 and for the years ended December 31, 2000 and 1999 of the acquisitions that were completed in those periods. 37
As of and for the Six Months Ended June 30, ------------------------------------------------------------------- 2001 2000 --------------------------------- --------------------------------- Total Operating (000s) Total Operating (000s) Revenues Gain Assets Members Revenues Loss Assets Members -------- --------- ------ ------- -------- --------- ------ ------- ($ in Millions) ($ in Millions) BCBS-ME.... $457.6 $3.0 $326.4 496 $59.6 $(2.5) $264.8 468 ====== ==== ====== === ===== ===== ====== === As of and for the Year Ended December 31, --------------------------------------------------------------------- 2000 1999 ----------------------------------- --------------------------------- Total Operating (000s) Total Operating (000s) Revenues Gain Assets Members Revenues Loss Assets Members -------- --------- -------- ------- -------- --------- ------ ------- ($ in Millions) ($ in Millions) BCBS-NH................. $ 591.0 $11.6 $ 316.8 479 $ 77.9 $(0.3) $250.6 366 BCBS-CO/NV.............. 678.6 6.5 545.8 595 76.9 (3.4) 521.5 486 BCBS-ME................. 489.4 8.7 339.5 487 -- -- -- -- -------- ----- -------- ----- ------ ----- ------ --- Total................... $1,759.0 $26.8 $1,202.1 1,561 $154.8 $(3.7) $772.1 852 ======== ===== ======== ===== ====== ===== ====== === Operating gain (loss) consists of operating revenue less benefit expense and administrative expense. We sold our TRICARE operations to a subsidiary of Humana, Inc. on May 31, 2001. The results of our TRICARE operations are reported in our Other segment (for Anthem Alliance Health Insurance Company), and in our Midwest business segment, which assumed a portion of the TRICARE risk from May 1, 1998 to December 31, 2000. The operating results for our TRICARE operations for 2000, 1999, and 1998 were as follows and include both the Anthem Alliance Health Insurance Company and Midwest business segment results: Year Ended December 31, -------------------- 2000 1999 1998 ------ ------ ------ ($ in Millions) Operating revenue..................................... $353.9 $292.4 $240.7 Operating gain........................................ 3.9 5.1 5.4 On May 30, 2001, we signed a definitive agreement with BCBS-KS, pursuant to which BCBS-KS will become a subsidiary of ours. Subject to the approval of BCBS-KS policyholders, the approval of the BCBSA, the approval of the Kansas Department of Insurance and other regulatory approvals, the transaction is expected to close in late 2001. The operating results for BCBS-KS for 2000, 1999 and 1998 were as follows: Year Ended December 31, ----------------------- 2000 1999 1998 -------- ------ ------ ($ in Millions) Total revenues..................................... $1,026.0 $920.0 $851.0 Net income (loss).................................. 5.8 (7.0) 40.2 You should read this "Management's Discussion and Analysis of Financial Condition and Results of Operations" in conjunction with our audited consolidated financial statements and accompanying notes for the years ended December 31, 2000, 1999 and 1998 and our unaudited consolidated financial statements and accompanying notes for the periods ended June 30, 2001 and 2000, both included in this prospectus. MEMBERSHIP--Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 Our membership data presented below are unaudited and in certain instances include management's estimates of the number of members represented by each contract at the end of the period rounded to the nearest thousand. 38
Of our customer types listed below, "Large group" consists of those customers with 51 or more eligible employees, while "Small group" consists of those customers with one to 50 employees. Individual members include those in our under age 65 business and our Medicare Supplement (age 65 and over) business. Our National customers consist of employer groups which have multi- state locations and require partnering with other Blue Cross and Blue Shield plans for administration and/or access to non-Anthem provider networks. Included within the National business are our "Blue Card" customers who represent enrollees of health plans marketed by other Blue Cross and Blue Shield Plans who receive health care services in Anthem's Blue Cross and Blue Shield licensed markets. Under this arrangement, Anthem, as the "host plan," receives fees from the "home plan" for providing claims and other administrative services for these members. Medicare + Choice members have enrolled in coverages that are managed care alternatives for the Medicare program. The Federal Employee Program, or FEP, provides health insurance coverage to United States government employees and their dependents. Medicaid members have enrolled in coverages that are managed care alternatives for the Medicaid program. Our TRICARE program provided managed care services to active and retired military personnel and their dependents. The TRICARE business was sold to Humana, Inc. on May 31, 2001. At June 30, 2000, our TRICARE membership totaled 125,000, was fully insured and included in our Midwest region. Blue Card membership is calculated based on the amount of Blue Card administrative fees we receive from the Blue Card members' home plans. The administrative fees we receive are based on the number and type of claims processed and a portion of the network discount on those claims. The administrative fees are then divided by an assumed per member per month, or PMPM, factor in order to calculate the number of members. The assumed PMPM factor is based on an estimate of Anthem's experience and BCBSA guidelines. Self-funded products are offered to customers, generally larger employers, with the ability and desire to retain some or all of the risk associated with their employees' health care costs. The following table presents membership data by region, customer type and funding type as of June 30, 2001 and June 30, 2000. MEMBERSHIP Total Total June 30, June 30, Total Total 2001 2000 Change % Change -------- -------- ------ --------- (In Thousands) Region Midwest.............................. 4,826 4,496 330 7.3% East................................. 2,216 1,952 264 13.5 West................................. 737 582 155 26.6 ----- ----- ---- ------ Total.............................. 7,779 7,030 749 10.7% ===== ===== ==== ====== Customer Type Large group.......................... 2,786 2,547 239 9.4% Small group.......................... 807 731 76 10.4 Individual........................... 674 647 27 4.2 National............................. 2,877 2,367 510 21.5 Medicare + Choice.................... 101 91 10 11.0 Federal Employee Program............. 426 411 15 3.6 Medicaid............................. 108 111 (3) (2.7) TRICARE.............................. -- 125 (125) (100.0) ----- ----- ---- ------ Total.............................. 7,779 7,030 749 10.7% ===== ===== ==== ====== Funding Type Fully insured........................ 3,740 3,682 58 1.6% Self-funded.......................... 4,039 3,348 691 20.6 ----- ----- ---- ------ Total.............................. 7,779 7,030 749 10.7% ===== ===== ==== ====== 39
Membership increased 749,000, or 10.7%, primarily due to growth in National business, including a significant increase in enrollment in BlueCard programs. Excluding TRICARE, membership increased 12.7%. Large group membership increased 239,000, or 9.4%, with growth in all regions primarily reflecting the success of our PPO products, as more employer groups desire the additional choices our PPO product offers. The 76,000, or 10.4%, growth in Small group business from June 30, 2000 reflects management initiatives to increase Small group membership, including revised commission structures, product offerings, brand promotion and enhanced relationships with our brokers. Small group business generally has higher profit margins than Large group business. Medicare + Choice membership increased principally in Ohio, where many competitors have left the market and we are one of the few remaining companies offering this product. We withdrew from the Medicare + Choice program in Connecticut effective January 1, 2001 due to losses in this line of business in that market. At June 30, 2000 and December 31, 2000, membership in Medicare + Choice in Connecticut was 24,000 and 18,000, respectively. We decided to remain in selected markets for Medicare + Choice in Ohio because we believe that with a critical mass of membership in those selected markets in Ohio, we can achieve improved results. Individual membership increased primarily due to additional Medicare Supplement business in our East region and additional individual (under age 65) business in our Midwest region. Medicare Supplement sales increased as a result of approximately 6,000 members converting from our Medicare + Choice product, which was terminated effective January 1, 2001 in Connecticut, to one of our Medicare Supplement products in Connecticut. Self-funded membership increased primarily due to the increase in BlueCard utilization. Fully insured membership, excluding TRICARE, grew by 183,000 members, or 5.1%, due to growth in both Large and Small group businesses. Midwest membership, excluding TRICARE, grew 10.4% primarily from growth in BlueCard utilization, Large group and National account sales. East membership grew primarily due to increased sales of Small group and growth in BlueCard utilization. West's membership growth was primarily due to increased BlueCard utilization. 40
Results of Operations for the Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000 The following table presents our consolidated results of operations for the six months ended June 30, 2001 and 2000: Six Months Ended June 30, ------------------ 2001 2000 $ Change % Change -------- -------- -------- -------- ($ in Millions) Operating revenue and premium equivalents (1).................. $6,883.1 $5,559.0 $1,324.1 23.8% ======== ======== ======== ======= Premiums.......................... $4,542.8 $3,589.3 $ 953.5 26.6% Administrative fees............... 430.3 356.5 73.8 20.7% Other revenue..................... 22.6 18.9 3.7 19.6% -------- -------- -------- ------- Total operating revenue......... 4,995.7 3,964.7 1,031.0 26.0% Benefit expense................... 3,870.8 3,080.6 790.2 25.7% Administrative expense............ 991.6 817.5 174.1 21.3% -------- -------- -------- ------- Total operating expense......... 4,862.4 3,898.1 964.3 24.7% -------- -------- -------- ------- Operating gain.................... 133.3 66.6 66.7 100.2% Net investment income............. 109.0 95.0 14.0 14.7% Net realized gains (losses) on investments...................... (10.9) 6.5 (17.4) NM (2) Gain on sale of subsidiary operations (TRICARE)............. 25.0 -- 25.0 NM (2) Interest expense.................. 28.0 27.0 1.0 3.7% Amortization of intangibles....... 15.7 11.4 4.3 37.7% Demutualization expenses.......... 3.0 -- 3.0 NM (2) -------- -------- -------- ------- Income before taxes and minority interest......................... 209.7 129.7 80.0 61.7% Income taxes...................... 68.6 38.9 29.7 76.3% Minority interest (credit)........ (1.9) 0.5 (2.4) NM (2) -------- -------- -------- ------- Net income........................ $ 143.0 $ 90.3 $ 52.7 58.4% ======== ======== ======== ======= Benefit expense ratio (3)......... 85.2% 85.8% (60) bp(4) Administrative expense ratio: (5).............................. Calculated using operating revenue (6).................... 19.8% 20.6% (80) bp(4) Calculated using operating revenue and premium equivalents (7)............................ 14.4% 14.7% (30) bp(4) Operating margin (8).............. 2.7% 1.7% 100 bp(4) - -------- (1) Operating revenue and premium equivalents is a measure of the volume of business commonly used in the health insurance industry to allow for a comparison of operating efficiency among companies. It is calculated by adding to premiums, administrative fees and other revenue the amount of claims attributable to non-Medicare, self-funded health business where we provide a complete array of customer service, claims administration and billing and enrollment services. Self-funded claims included in operating revenue and premium equivalents for the six months ended June 30, 2001 were $1,887.4 million and for the six months ended June 30, 2000 were $1,594.3 million. (2) NM = Not meaningful. (3) Benefit expense ratio = Benefit expense / Premiums. (4) bp = basis point, one hundred basis points = 1%. (5) While we include two calculations of administrative expense ratio, we believe that administrative expense ratio including premium equivalents is a better measure of efficiency as it eliminates changes in the ratio caused by changes in our mix of insured and self-funded business. All discussions and explanations related to administrative expense ratio will be related to administrative expense ratio including premium equivalents. (6) Administrative expense / Operating revenue. (7) Administrative expense / Operating revenue and premium equivalents. (8) Operating margin = Operating gain / Total operating revenue. 41
Premiums increased $953.5 million, or 26.6%, to $4,542.8 million in 2001 in part due to the acquisition of BCBS-ME in June 2000 and the additional risk recaptured as of January 1, 2001 by Anthem Alliance Health Insurance Company for their TRICARE business. Prior to January 1, 2001, the TRICARE business had been partially reinsured with other insurance companies. On January 1, 2001 Anthem Alliance Health Insurance Company retained 90% of the total risk for the contract. The TRICARE business was sold on May 31, 2001. Excluding the acquisition of BCBS-ME and the sale of our TRICARE business, premiums increased $422.1 million, or 12.0%, primarily due to premium rate increases and higher membership in the Midwest and East regions. Midwest premiums increased $266.6 million, or 13.0%, while East premiums increased $119.2 million, or 10.6%. Midwest premiums increased primarily due to higher membership and premium rate increases in our group accounts (both Large group and Small group) and higher membership in Medicare + Choice. East premiums increased primarily due to premium rate increases and higher membership in group business. Administrative fees increased $73.8 million, or 20.7%, from $356.5 million in 2000 to $430.3 million in 2001, with $30.7 million of this increase from the acquisition of BCBS-ME. Excluding acquisitions and dispositions, administrative fees increased $47.1 million, or 16.9%, primarily from membership growth in National self-funded business. Excluding acquisitions and divestitures, other revenue increased $2.3 million, or 12.2%, primarily due to higher mail order revenues at Anthem Prescription Management, or APM. APM is our pharmacy benefit manager and provides its services to other Anthem affiliates. These services include contracting with retail pharmacies and providing mail order pharmacy services. Benefit expense increased $790.2 million, or 25.7%, in 2001 primarily due to the acquisition of BCBS-ME and the additional risk assumed by Anthem Alliance Health Insurance Company for TRICARE on January 1, 2001. Excluding acquisitions and dispositions, benefit expense increased $304.8 million, or 10.2%, due to higher average membership and increasing cost of care. Cost of care trends were driven primarily by higher utilization of outpatient services and higher prescription drug costs. Our benefit expense ratio decreased 60 basis points from 85.8% in 2000 to 85.2% in 2001 primarily because premium rates increased at a higher rate than benefit costs. Excluding acquisitions and dispositions, our benefit expense ratio decreased 140 basis points from 85.6% in 2000 to 84.2% in 2001. Outpatient cost increases have varied among regions and products and have generally ranged from 15% to 20% in the first six months of 2001 over the first six months of 2000. These increases have resulted from both increased utilization and higher unit costs. Increased utilization reflects an industry- wide trend towards a broader range of medical procedures being performed without overnight hospital stays, as well as an increasing customer awareness of, and demand for, diagnostic procedures such as magnetic resonance imagings, or MRI's. In addition, improved medical technology has allowed more complicated medical procedures to be performed on an outpatient basis rather than on an inpatient (hospitalized) basis, increasing both utilization rates and unit costs. Prescription drug cost increases have varied among regions and by product, but generally ranged from 10% to 15% in the first six months of 2001 over the first six months of 2000, primarily due to introduction of new, higher cost drugs as well as higher overall utilization as a result of increases in direct- to-consumer advertising by pharmaceutical companies. In response to increasing prescription drug costs, we have implemented a "three-tiered" drug program and expanded use of formularies for our members. "Three-tiered" drug programs reflect benefit designs that have three co-payment levels which depend on the drug selected. Generic drugs have the lowest co-payment, brand name drugs included in the drug formulary have a higher co-payment, and brand name drugs not included in the drug formulary have the highest co-payment. Drug formularies are a list of prescription drugs that have been reviewed and selected for their quality and efficacy by a committee of practicing physicians and clinical pharmacists. Through our pharmacy benefit design, we encourage use of these listed brand name and generic drugs to ensure members receive quality and cost-effective medication. 42
While growth in inpatient costs has been flat or in low single digits for several years, we cannot guarantee that this trend will continue. Hospitals have taken a more aggressive stance in their contracting with health insurance companies as a result of reduced hospital reimbursements from Medicare and pressure to recover the costs of additional investments in new medical technology and facilities. Administrative expense increased $174.1 million, or 21.3%, in 2001 primarily due to the acquisition of BCBS-ME. Excluding acquisitions and dispositions, administrative expense increased $111.7 million, or 15.3%, primarily due to higher commissions and premium taxes, which vary with premium, additional costs associated with higher membership and investments in technology. Our administrative expense ratio decreased 30 basis points primarily due to operating revenue increasing faster than administrative expense. Excluding acquisitions and dispositions, our administrative expense ratio would have increased 30 basis points largely due to increased mail order prescription volumes at APM in 2001 and the cost of temporary help to reduce health claim inventory in the West in the first quarter of 2001. Net investment income increased $14.0 million, or 14.7%, primarily due to higher overall investment portfolio balances. The higher portfolio balances included net cash generated from operations, as well as cash generated from improved balance sheet management, such as quicker collection of receivables and sales of non-core assets. Excluding acquisitions and dispositions, net investment income increased $9.1 million, or 9.8%. During 2001, our investment portfolio generated a net yield of 5.90% compared with a net yield of 5.96% in 2000. We define our net yield as earned income divided by the amortized cost of our investments. The decrease of six basis points was primarily due to lower returns on our fixed maturity securities portfolio, in line with overall market conditions. As returns on fixed maturity portfolios are dependent on market interest rates and changes in interest rates are not easily predictable, there is no certainty that past investment performance will be repeated in the future. Net realized capital gains (losses) changed from $6.5 million in 2000 to $(10.9) million in 2001 primarily due to $28.9 million in unrealized losses on equity securities being recognized as other than temporary impairment. These losses were partially offset by gains resulting from higher turnover in the fixed maturity portfolio, which benefited from lower interest rates in 2001. Net realized capital losses from sale and other than temporary loss recognition of equity securities were $22.3 million in 2001 versus net realized capital gains of $19.3 million in 2000. Net realized capital gains from sale of fixed maturity securities were $11.4 million in 2001 versus net realized capital losses of $12.8 million in 2000. Net gains or losses on investments are influenced by market conditions when an investment is sold, and will vary from year to year. We and our equity portfolio managers make decisions regarding equity investments to ensure that the portfolios mirror the S&P 400 and S&P 500 indices, excluding in each case tobacco stocks. Gain on sale of subsidiary operations of $25.0 million relates to the sale of our TRICARE business to Humana on May 31, 2001. Interest expense increased $1.0 million, or 3.7%, primarily reflecting increased net borrowings following our private placement of $300.0 million principal amount of surplus notes in January 2000. Amortization of intangibles increased $4.3 million, or 37.7%, primarily due to amortization expense associated with the acquisition of BCBS-ME. Demutualization expenses of $3.0 million were incurred in the first six months of 2001 in connection with our plan to demutualize. Income before taxes and minority interest increased $80.0 million, or 61.7%, as a result of improvement in operating results in all business segments. 43
Income tax expense increased $29.7 million, or 76.3%, due to higher income before taxes. Our effective income tax rate in 2001 was 32.7% versus 30.0% in 2000. The rate is lower than statutory effective tax rate in both periods primarily as a result of changes in our deferred tax valuation allowance. The effective tax rate increased in 2001 primarily due to the effect of higher income before taxes and slightly higher state income tax rates. As the amount of income before taxes increases, the effect of permanent tax differences on our income tax rate is reduced. Net income increased $52.7 million, or 58.4%, primarily due to the improvement in operating results, gain on sale of subsidiary operations, and higher investment income and was partially offset by net realized investment losses, all as described above. Excluding the gain on sale of subsidiary operations ($16.3 million after tax) and the acquisition of BCBS-ME, net income increased $30.0 million, or 32.6%. Midwest The following table presents the Midwest region's results of operations for the six months ended June 30, 2001 and 2000: Six Months Ended June 30, ------------------ 2001 2000 $ Change % Change -------- -------- -------- -------- ($ in Millions) Operating revenue and premium equivalents...................... $3,797.0 $3,360.9 $436.1 13.0% ======== ======== ====== ======== Premiums.......................... $2,313.0 $2,046.4 $266.6 13.0% Administrative fees............... 152.8 123.7 29.1 23.5% Other revenue..................... 0.9 1.3 (0.4) (30.8)% -------- -------- ------ -------- Total operating revenue........ 2,466.7 2,171.4 295.3 13.6% Benefit expense................... 1,952.8 1,748.7 204.1 11.7% Administrative expense............ 428.9 386.5 42.4 11.0% -------- -------- ------ -------- Total operating expense........ 2,381.7 2,135.2 246.5 11.5% -------- -------- ------ -------- Operating gain................. $ 85.0 $ 36.2 $ 48.8 134.8% ======== ======== ====== ======== Benefit expense ratio (1)......... 84.4% 85.5% (110) bp(2) Administrative expense ratio: Calculated using operating rev- enue (3)...................... 17.4% 17.8% (40) bp(2) Calculated using operating rev- enue and premium equivalents (4)....... 11.3% 11.5% (20) bp(2) Operating margin (5).............. 3.4% 1.7% 170 bp(2) Membership (in thousands)......... 4,826 4,496 7.3% - -------- (1) Benefit expense ratio = Benefit expense / Premiums. (2) bp = basis point, one hundred basis points = 1%. (3) Administrative expense / Operating revenue. (4) Administrative expense / Operating revenue and premium equivalents. (5) Operating margin = Operating gain / Total operating revenue. Our Midwest region assumed a portion of the risk for Anthem Alliance Health Insurance Company's TRICARE contract until December 31, 2000. Effective January 1, 2001, Anthem Alliance Health Insurance Company reassumed this risk. For the first six months of 2000, our Midwest region received $55.3 million of premium income, no administrative fees and other income, incurred $53.2 million of benefit expense and $3.8 million of administrative expense, resulting in a $1.7 million operating loss on the TRICARE contract. There were also 125,000 TRICARE members included in Midwest region's membership at June 30, 2000 and no members at June 30, 2001. 44
Premiums increased $266.6 million, or 13.0%, in 2001. Excluding TRICARE, premiums increased $321.9 million, or 16.2%, in 2001 primarily due to higher premiums PMPM that accounted for $209.9 million of the increase and the effect of higher average membership throughout the year. Excluding TRICARE, premiums PMPM increased from $166.29 in 2000 to $188.23 in 2001 primarily due to premium rate increases in group (both Large group and Small group) and Medicare + Choice businesses. Increases in group and Medicare + Choice premiums accounted for $258.2 million, or 80.2%, of the increase in premiums. Group PMPM premiums increased 13.9% from $153.58 in 2000 to $174.97 in 2001 primarily due to premium rate increases. Average insured group membership was essentially flat. Medicare + Choice PMPM premiums increased 8.3% from $458.66 in 2000 to $496.69 in 2001 due to the aging of our Medicare + Choice population, resulting in higher premiums. We received higher premiums starting in March 2001 as a result of the Benefit Improvement and Protection Act of 2000, or BIPA. BIPA increased the level of reimbursements from the government to payors that participate in the Medicare + Choice program. Average Medicare + Choice membership increased 41.5% to 90,000 due to reduced competition in the Ohio marketplace as a result of competitors discontinuing their participation in this product. Administrative fees increased 23.5% from $123.7 million in 2000 to $152.8 million in 2001, primarily due to increased membership in both our National and BlueCard business and our Large group Administrative Services Only, or ASO, business. National business benefited from higher sales while our Large group business benefited from growth in existing accounts. Benefit expense increased $204.1 million, or 11.7%, in 2001. Excluding TRICARE, benefit expense increased $257.3 million, or 15.2%, primarily due to higher benefit expense PMPM (12.2%) and the effect of higher average membership throughout the year. Excluding TRICARE, benefit expense PMPM increased from $141.61 in 2000 to $158.91 in 2001, primarily due to higher outpatient costs and higher prescription drug costs. Outpatient cost increases averaged approximately 15% in 2001 due to continued trends of shifting services to outpatient settings versus inpatient/facility based services. These cost increases have come from both increased utilization and higher unit costs. Improved medical technology has allowed more complicated medical procedures, such as cardiac catheterization and angioplasties, to be performed on an outpatient basis. Prescription drug costs increased approximately 13% in 2001 primarily due to introduction of new, higher cost drugs and increases in direct-to-consumer advertising by pharmaceutical companies. We believe that utilization of a three-tiered drug program for our members has helped contain the increase in prescription drug costs. While outpatient and prescription drug costs increased significantly in 2000, inpatient costs increased approximately 7%. Admissions per 1,000 members increased less than 2%, while average length of stay was generally unchanged. These factors were slightly offset by modest reimbursement increases under the terms of our hospital contracting agreements. Midwest's benefit expense ratio decreased 110 basis points from 85.5% in 2000 to 84.4% in 2001. Excluding TRICARE, the benefit expense ratio decreased 80 basis points as the growth in premium PMPM of 13.2% exceeded growth in benefit expense PMPM of 12.2% as discussed above. Administrative expense increased $42.4 million, or 11.0%, in 2001. Excluding TRICARE, administrative expense increased $46.2 million, or 12.1%, primarily due to higher commission and premium taxes related to higher premiums, as well as costs associated with higher membership and incentive compensation costs related to above target financial performance. The administrative expense ratio decreased 20 basis points primarily due to higher premiums as discussed above. 45
East The following table presents our East region's results of operations for the six months ended June 30, 2001 and 2000. BCBS-ME is included from its acquisition date of June 5, 2000. Six Months Ended June 30, ------------------ 2001 2000 $ Change % Change -------- -------- -------- -------- ($ in Millions) Operating revenue and premium equivalents....................... $2,285.0 $1,596.5 $688.5 43.1% ======== ======== ====== ======= Premiums........................... $1,658.3 $1,175.6 $482.7 41.1% Administrative fees................ 99.6 57.9 41.7 72.0% Other revenue...................... 0.8 2.5 (1.7) (68.0)% -------- -------- ------ ------- Total operating revenue.......... 1,758.7 1,236.0 522.7 42.3% Benefit expense.................... 1,418.1 1,012.2 405.9 40.1% Administrative expense............. 292.2 189.7 102.5 54.0% -------- -------- ------ ------- Total operating expense.......... 1,710.3 1,201.9 508.4 42.3% -------- -------- ------ ------- Operating gain................... $ 48.4 $ 34.1 $ 14.3 41.9% ======== ======== ====== ======= Benefit expense ratio (1).......... 85.5% 86.1% (60) bp(2) Administrative expense ratio: Calculated using operating revenue (3)..................... 16.6% 15.3% 130 bp(2) Calculated using operating revenue and premium equivalents (4)............................. 12.8% 11.9% 90 bp(2) Operating margin (5)............... 2.8% 2.8% -- Membership (in thousands).......... 2,216 1,952 13.5% - -------- (1) Benefit expense ratio = Benefit expense / Premiums. (2) bp = basis point, one hundred basis points = 1%. (3) Administrative expense / Operating revenue. (4) Administrative expense / Operating revenue and premium equivalents. (5) Operating margin = Operating gain / Total operating revenue. Premiums increased $482.7 million, or 41.1%, primarily due to the acquisition of BCBS-ME in June 2000 ($363.5 million). Excluding the effect of acquisitions and the exit from the Medicare + Choice business on December 31, 2000, premiums increased $204.9 million, or 19.8%, in 2001 due to premium rate increases in group business and higher average membership. Group PMPM premiums increased 12.1% from $203.93 in 2000 to $228.69 in 2001 primarily due to premium rate increases in Large group. Average insured group membership increased approximately 15% in 2001. Administrative fees increased $41.7 million, or 72.0%, from $57.9 million in 2000 to $99.6 million in 2001. The BCBS-ME acquisition contributed $29.1 million of this increase. Excluding the effect of acquisitions, administrative fees increased $12.6 million, or 23.7%, primarily due to higher ASO membership. Benefit expense increased $405.9 million, or 40.1%, primarily due to the acquisition of BCBS-ME. The BCBS-ME acquisition contributed $316.7 million of this increase. Excluding the effect of acquisitions and Medicare + Choice business, benefit expense increased $158.3 million, or 17.7%, in 2001 primarily due to higher average membership (12%) and to a lesser extent higher benefit expense PMPM. Benefit expense PMPM, excluding acquisitions and Medicare + Choice business, increased 5.3% from $168.21 in 2000 to $177.10 in 2001. Prescription drug costs and professional costs were the 46
biggest drivers of increased benefit expense PMPM. Prescription drug PMPM costs increased over 10% due to introduction of new, higher cost drugs and increases in direct to consumer advertising by pharmaceutical companies. We believe utilization of a three-tiered drug program for our members has helped contain prescription drug costs. Professional PMPM costs increased approximately 10% primarily due to increased utilization resulting from direct to consumer drug advertising which drives physician office visits and increased awareness of preventive medicine. Inpatient PMPM costs decreased approximately 1% due to lower admissions per 1,000 members and shorter average length of stay and the effect of hospital recontracting. Outpatient PMPM costs increased about 6% primarily due to higher utilization caused by the continuing shift of services from an inpatient basis to an outpatient setting. While a decrease in inpatient utilization helped contain increases in benefit expense PMPM, there is no guarantee that our East region will experience these favorable trends in the future. Hospitals have taken a more aggressive stance during contract negotiations to recover reduced hospital reimbursements from Medicare and the costs of additional investments in new medical technology and facilities. On an overall basis, the benefit expense ratio decreased 60 basis points from 86.1% in 2000 to 85.5% in 2001, however, excluding acquisitions and Medicare + Choice, the benefit expense ratio decreased 150 basis points. This decrease was primarily due to premium PMPM growth of 7.1% outpacing benefit expense PMPM growth of 5.3%, as discussed above. Administrative expense increased $102.5 million, or 54.0%, and the administrative expense ratio increased 90 basis points primarily due to the acquisition of BCBS-ME. Excluding acquisitions, administrative expense increased $31.5 million, or 17.7%, and the administrative expense ratio increased 40 basis points primarily due to higher commissions and premium taxes, systems consolidation costs, investments in technology and higher incentive compensation costs related to above target financial performance. West The following table presents our West region's results of operations for the six months ended June 30, 2001 and 2000: Six Months Ended June 30, -------------- 2001 2000 $ Change % Change ------ ------ -------- -------- ($ in Millions) Operating revenue and premium equivalents.......................... $384.7 $343.7 $41.0 11.9% ====== ====== ===== ======== Premiums.............................. $327.3 $278.1 $49.2 17.7% Administrative fees................... 29.6 24.9 4.7 18.9% Other revenue......................... -- 0.1 (0.1) (100.0)% ------ ------ ----- -------- Total operating revenue............. 356.9 303.1 53.8 17.7% Benefit expense....................... 275.3 240.2 35.1 14.6% Administrative expense................ 78.5 61.6 16.9 27.4% ------ ------ ----- -------- Total operating expense............. 353.8 301.8 52.0 17.2% ------ ------ ----- -------- Operating gain...................... $ 3.1 $ 1.3 $ 1.8 138.5% ====== ====== ===== ======== Benefit expense ratio (1)............. 84.1% 86.4% (230) bp(2) Administrative expense ratio: Calculated using operating revenue (3)................................ 22.0% 20.3% 170 bp(2) Calculated using operating revenue and premium equivalents (4)........ 20.4% 17.9% 250 bp(2) Operating margin (5).................. 0.9% 0.4% 50 bp(2) Membership (in thousands)............. 737 582 26.6% 47
- -------- (1) Benefit expense ratio = Benefit expense / Premiums. (2) bp = basis point, one hundred basis points = 1%. (3) Administrative expense / Operating revenue. (4) Administrative expense / Operating revenue and premium equivalents. (5) Operating margin = Operating gain / Total operating revenue. West entered into an agreement with Sloan's Lake HMO in Colorado for the conversion of Sloan's Lake HMO business effective January 1, 2001. The terms of the agreement include payment to Sloan's Lake for each member selecting Anthem's product at the group's renewal date and continuing as an Anthem member for a minimum of nine months. Through June 30, 2001, we added approximately 31,000 members from Sloan's Lake, most of which were added in May and June. Premiums and benefit expense associated with Sloan's Lake members were approximately $6.3 million and $5.3 million, respectively, for the first six months of 2001. Premiums increased $49.2 million, or 17.7%, primarily due to increased sales and premium rate increases in group business and membership from Sloan's Lake. Group premiums PMPM increased 29.8% from $124.99 in 2000 to $162.29 in 2001 primarily due to rate increases to offset increasing benefit expense. Average group insured membership increased 11.1%. Offsetting the group premium PMPM increase was a 4.3% decline in FEP premium PMPM from $216.69 in 2000 to $207.42 in 2001 primarily due to a decrease in FEP claims paid. FEP premiums vary with claim payment level. Also lowering the growth in West premiums PMPM was a change in the mix of business with lower Medicare + Choice membership, which has higher premium PMPM, and higher National business which has lower premium PMPM. Average insured membership increased 12.0% in 2001. Administrative fees increased $4.7 million, or 18.9%, from $24.9 million in 2000 to $29.6 million in 2001 primarily due to growth in BlueCard revenues. Benefit expense increased $35.1 million, or 14.6%, primarily due to higher membership and higher benefit expense PMPM in our group business. Benefit expense PMPM for group business increased 23.6% from $106.69 in 2000 to $131.91 in 2001 reflecting higher outpatient and professional costs. Overall benefit expense PMPM increased 2.4% as lower benefit expense for FEP business and better claims experience in Medicare + Choice offset the increase in group benefit expense PMPM. Outpatient costs increased over 33% primarily due to increased utilization and higher unit costs as medical services were moved from an inpatient to an outpatient setting. Outpatient utilization increased over 20%. In response to these escalating costs, we have implemented new contracts with providers, particularly in high cost areas such as radiology and oncology, to better contain the growth in outpatient costs. Professional costs have increased approximately 14% primarily due to increased utilization and new fee schedules reflecting higher reimbursement to physicians. Inpatient PMPM costs increased 2% reflecting shorter lengths of stay, offsetting an increase in hospital admissions. Pharmacy PMPM costs increased 3% reflecting the West's switch to APM from a third party pharmacy benefit manager early in 2001. Based on national pharmacy trends, we cannot guarantee that future pharmacy costs for West will not increase. Administrative expense increased $16.9 million, or 27.4%, and administrative expense ratio increased 250 basis points primarily due to higher membership, higher commission costs, higher temporary help costs and higher incentive compensation costs. Commission costs increased due to both higher membership and costs associated with implementation of a broker retention program. Temporary help costs were incurred in early 2001 in order to reduce claims inventory. Incentive compensation costs increased as West became fully integrated into Anthem's incentive compensation program as of January 1, 2001. 48
Specialty Our Specialty segment includes business units providing group life insurance benefits, pharmacy benefit management, third party occupational health and dental administration services. The following table presents our Specialty segment's results of operations for the six months ended June 30, 2001 and 2000: Six Months Ended June 30, -------------- 2001 2000 $ Change % Change ------ ------ -------- ----------- ($ in Millions) Operating revenue and premium equivalents....................... $188.4 $165.0 $ 23.4 14.2% ====== ====== ====== =========== Premiums from life and disability.. $ 47.4 $ 64.3 $(16.9) (26.3)% Administrative fees................ 18.0 14.8 3.2 21.6% Other revenue...................... 120.1 82.3 37.8 45.9% ------ ------ ------ ----------- Total operating revenue.......... 185.5 161.4 24.1 14.9% Benefit expense.................... 31.8 51.2 (19.4) (37.9)% Administrative expense............. 137.8 100.4 37.4 37.3% ------ ------ ------ ----------- Total operating expense.......... 169.6 151.6 18.0 11.9% ------ ------ ------ ----------- Operating gain................... $ 15.9 $ 9.8 $ 6.1 62.2% ====== ====== ====== =========== Benefit expense ratio (1).......... 67.1% 79.6% (1,250) bp (2) Administrative expense ratio: Calculated using operating reve- nue (3)......................... 74.3% 62.2% 1,210 bp (2) Calculated using operating revenue and premium equivalents (4)............................. 73.1% 60.8% 1,230 bp (2) Operating margin (5)............... 8.6% 6.1% 250 bp (2) - -------- (1) Benefit expense ratio = Benefit expense / Premiums. (2) bp = basis point, one hundred basis points = 1%. (3) Administrative expense / Operating revenue. (4) Administrative expense / Operating revenue and premium equivalents. (5) Operating margin = Operating gain / Total operating revenue. Life and disability premiums decreased $16.9 million, or 26.3%, primarily due to the termination of a large life group on December 31, 2000. This group accounted for $20.2 million of life and disability premiums for the first six months of 2000. Excluding this group, life and disability premiums would have increased $3.3 million, or 7.5%, primarily due to growth in new sales in our Midwest and West regions. Administrative fees increased $3.2 million, or 21.6%, primarily due to increased membership served by APM. Other revenue increased $37.8 million, or 45.9%, primarily from APM. In 2001, APM began to provide pharmacy benefit management services to BCBS-ME, BCBS-CO and BCBS-CT. Excluding these new agreements, other revenue increased primarily due to higher mail and retail volumes related to increased membership and utilization from existing Anthem customers. In total, mail service membership increased 47% while retail service membership increased 90%. Mail service prescription volume increased 36% and retail prescription volume increased 37%. Benefit expense decreased $19.4 million, or 37.9%, due to the termination of the large life group discussed above. This group accounted for $21.2 million of benefit expense for the first six months of 2000. Excluding this group, benefit expense would have increased $1.8 million, or 6.0%, primarily due to additional life membership. The benefit expense ratio was 67.1% in 2001, a significant 49
decrease from 2000 primarily due to the termination of the large life group. Excluding this group, the benefit expense ratio decreased 90 basis points from 68.0% in 2000 primarily due to improved underwriting results in our West life business. Administrative expense increased $37.4 million, or 37.3%, primarily due to increased membership serviced by APM. Administrative expense ratio increased significantly due to APM comprising a larger percentage of Anthem's specialty business segment. APM incurs a higher administrative expense ratio than our life and disability operations. Other Various ancillary business units (reported with the Other segment) include AdminaStar Federal which administers Medicare Parts A and B programs in Indiana, Illinois, Kentucky and Ohio, and Anthem Alliance Health Insurance Company which provided health care benefits and administration in nine states for the Department of Defense's TRICARE program for military families. The TRICARE operations were sold on May 31, 2001 and are included in the results below. The Other segment also includes intersegment revenue and expense eliminations plus corporate expenses not allocated to reportable segments. The following table presents the results of operations for the Other segment for the six months ended June 30, 2001 and 2000: Six Months Ended June 30, -------------- 2001 2000 $ Change % Change ------ ------ -------- -------- ($ in Millions) Operating revenue and premium equiva- lents.................................. $228.0 $ 92.9 $135.1 145.4% ====== ====== ====== ===== Premiums................................ $196.8 $ 24.9 $171.9 690.4% Administrative fees..................... 130.3 135.2 (4.9) (3.6)% Other revenue (expense)................. (99.2) (67.3) (31.9) 47.4% ------ ------ ------ ----- Total operating revenue............... 227.9 92.8 135.1 145.6% Benefit expense......................... 192.8 28.3 164.5 581.3% Administrative expense.................. 54.2 79.3 (25.1) (31.7)% ------ ------ ------ ----- Total operating expense............... 247.0 107.6 139.4 129.6% ------ ------ ------ ----- Operating loss.......................... $(19.1) $(14.8) $ (4.3) 29.1% ====== ====== ====== ===== Premiums increased $171.9 million, or 690%, due to higher premiums at Anthem Alliance Health Insurance Company. This increase was primarily related to our assumption of additional risk under our TRICARE contract with the Department of Defense. Also, we received additional premiums from the Department of Defense in connection with a global settlement related to a series of bid price adjustments, requests for equitable adjustments and change orders filed during the past two years under our TRICARE contract. Predominantly all premiums received in our Other segment relate to the TRICARE business which was sold on May 31, 2001 ($196.5 million in 2001 and $28.6 million in 2000). Administrative fees decreased $4.9 million, or 3.6%, primarily due to TRICARE business. Excluding the effect of TRICARE, administrative fees increased $1.2 million, or 1.9%, due to AdminaStar Federal performing additional customer service activities for Medicare beneficiaries. Excluding the elimination of intersegment revenues in 2001 and 2000 of $96.9 million and $67.9 million, respectively, other revenue decreased $2.9 million to a $2.3 million loss in 2001 from $0.6 million in 2000 primarily due to a write-off of $3.0 million of previously capitalized systems development costs. 50
Benefit expense increased $164.5 million, or 581%, primarily due to the assumption of additional risk under our TRICARE contract. Also, we incurred additional benefit expense related to the global settlement under our TRICARE contract as mentioned above. Benefit expense associated with the global settlement offset most of the increase in premiums associated with the global settlement and bid price adjustments. Excluding intersegment administrative expense eliminations in 2001 and 2000 of $92.8 million and $70.9 million, respectively, administrative expense decreased $3.2 million, or 2.1%, primarily due to TRICARE business being included for five months in 2001 and six months in 2000. Excluding TRICARE, administrative expense increased $9.8 million, or 12.9%, primarily due to increased unallocated corporate expenses in 2001. Certain corporate expenses are not allocated to our business segments. These unallocated expenses accounted for $23.6 million in 2001 and $9.5 million in 2000, and primarily included such items as unallocated incentive compensation. Excluding unallocated corporate expenses, operating gain was $4.5 million in 2001 versus a $5.3 million operating loss in 2000. Most of the improvement was related to additional revenues from the global settlement with the Department of Defense. 51
MEMBERSHIP--Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Our membership data presented below are unaudited and in certain instances include management's estimates of the number of members at the end of the period rounded to the nearest thousand. The following table presents membership data by region, customer type and funding type as of December 31, 2000 and 1999, comparing total and "same store" membership respectively. We define "same store" membership as our membership at a given year-end in a region or for a particular customer or funding type, after excluding the impact of members obtained through acquisitions or combinations during such year. As such, we believe that "same store" membership data best captures the rate of organic growth of our operations year over year. MEMBERSHIP Same Total Same Store Total BCBS-ME Store Total ------------ ----------- 2000 Acquisition 2000 1999 Change % Change % ----- ----------- ----- ----- ------ ---- ------ ---- (In Thousands) Region Midwest............... 4,582 -- 4,582 4,382 200 4.6% 200 4.6% East.................. 2,093 487 1,606 1,397 696 49.8 209 15.0 West.................. 595 -- 595 486 109 22.4 109 22.4 ----- --- ----- ----- ----- ---- --- ---- Total............... 7,270 487 6,783 6,265 1,005 16.0% 518 8.3% ===== === ===== ===== ===== ==== === ==== Customer Type Large group........... 2,542 278 2,264 2,249 293 13.0% 15 0.7% Small group........... 775 62 713 637 138 21.7 76 11.9 Individual............ 650 84 566 586 64 10.9 (20) (3.4) National.............. 2,560 32 2,528 2,106 454 21.6 422 20.0 Medicare + Choice..... 106 -- 106 96 10 10.4 10 10.4 Federal Employee Program.............. 407 31 376 362 45 12.4 14 3.9 TRICARE............... 128 -- 128 129 (1) (0.8) (1) (0.8) Medicaid.............. 102 -- 102 100 2 2.0 2 2.0 ----- --- ----- ----- ----- ---- --- ---- Total............... 7,270 487 6,783 6,265 1,005 16.0% 518 8.3% ===== === ===== ===== ===== ==== === ==== Funding Type Fully insured......... 3,869 360 3,509 3,354 515 15.4% 155 4.6% Self-funded........... 3,401 127 3,274 2,911 490 16.8 363 12.5 ----- --- ----- ----- ----- ---- --- ---- Total............... 7,270 487 6,783 6,265 1,005 16.0% 518 8.3% ===== === ===== ===== ===== ==== === ==== Same store membership increased 518,000, or 8.3%, from 1999 to 2000, primarily due to growth in National business, including a significant increase in enrollment in BlueCard programs. Small group business generally has higher profit margins than Large group business. The 76,000, or 11.9%, growth in Small group business in 2000 reflects management initiatives to increase Small group membership, including revised commission structures, product offerings, brand promotion and enhanced relationships with our brokers. Medicare + Choice membership increased mostly due to growth in Ohio, where many competitors have left the market and we are one of the few remaining companies offering this product. We decided to remain in selected markets for Medicare + Choice in Ohio because we believe that with a critical mass of membership in those markets in Ohio, we can achieve improved results. 52
Individual membership dropped primarily due to a reduction in Medicare Supplement business in our Midwest region. This block of business, which has traditionally generated high profit margins, is shrinking due to terminations of grandfathered policies, primarily mortality related, exceeding new sales. Effective on January 1, 1992, CMS, then known as HCFA, required that new sales of Medicare Supplement coverages be sold in the form of one of 10 standardized policies, while persons with existing Medicare Supplement coverages could retain their existing Medicare Supplement products, which generally had higher profit margins than the new products. Since that time, our Medicare Supplement membership has, through terminations of grandfathered policies and sales of new policies, reached the point where at December 31, 2000, approximately 50% of our Medicare Supplement membership in the Midwest was in the old plans and 50% in the new plans. During 2001, we are introducing a line of competitive Medicare Supplement policies in the Midwest in order to improve the growth of this business and have modified the premium rate structures to improve the attractiveness of these products in the marketplace. Self-funded membership increased primarily due to the increase in BlueCard utilization, while fully insured membership grew primarily as a result of the growth in Small group membership sales. Midwest membership grew in 2000 primarily from the growth in BlueCard utilization discussed above, Large group and National account sales. East membership grew primarily due to increased sales of Small group and growth in BlueCard. Small group sales in our East region increased primarily due to the withdrawal of two of our largest competitors from the New Hampshire market. West membership growth was primarily due to higher BlueCard utilization. We withdrew from the Medicare + Choice program in Connecticut effective January 1, 2001 due to losses in this line of business. At December 31, 2000, membership in the Medicare + Choice program in Connecticut was 18,000. 53
Results of Operations for the Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999 The following table presents our consolidated results of operations for the years ended December 31, 2000 and 1999: Year Ended December 31, ------------------- 2000 1999 $ Change % Change --------- -------- -------- -------- ($ in Millions) Operating revenue and premium equivalents(1).................. $11,800.1 $8,691.6 $3,108.5 35.8% ========= ======== ======== ======== Premiums......................... $ 7,737.3 $5,418.5 $2,318.8 42.8% Administrative fees.............. 755.6 611.1 144.5 23.6% Other revenue.................... 50.6 51.0 (0.4) (0.8)% --------- -------- -------- -------- Total operating revenue........ 8,543.5 6,080.6 2,462.9 40.5% --------- -------- -------- -------- Benefit expense.................. 6,551.0 4,582.7 1,968.3 43.0% Administrative expense........... 1,808.4 1,469.4 339.0 23.1% --------- -------- -------- -------- Total operating expense........ 8,359.4 6,052.1 2,307.3 38.1% --------- -------- -------- -------- Operating gain................... 184.1 28.5 155.6 NM(2) Net investment income............ 201.6 152.0 49.6 32.6% Net realized gains on investments..................... 25.9 37.5 (11.6) (30.9)% Interest expense................. 54.7 30.4 24.3 79.9% Amortization of intangibles...... 27.1 12.7 14.4 113.4% Endowment of non-profit foundations..................... -- 114.1 (114.1) (100.0)% --------- -------- -------- -------- Income from continuing operations before taxes and minority interest........................ 329.8 60.8 269.0 NM(2) Income taxes..................... 102.2 10.2 92.0 NM(2) Minority interest (credit)....... 1.6 (0.3) 1.9 NM(2) --------- -------- -------- -------- Income from continuing operations...................... 226.0 50.9 175.1 NM(2) Discontinued operations, net of income taxes Loss on disposal of discontinued operations...................... -- (6.0) 6.0 NM(2) --------- -------- -------- -------- Net income..................... $ 226.0 $ 44.9 $ 181.1 NM(2) ========= ======== ======== ======== Benefit expense ratio(3)......... 84.7% 84.6% 10 bp(4) Administrative expense ratio: Calculated using operating revenue(5).................... 21.2% 24.2% (300) bp(4) Calculated using operating revenue and premium equivalents(6)................ 15.3% 16.9% (160) bp(4) Operating margin(7)............ 2.2% 0.5% 170 bp(4) - -------- (1) Self-funded claims included in operating revenue and premium equivalents for the year ended December 31, 2000 were $3,256.6 million and for the year ended December 31, 1999 were $2,611.0 million. (2) NM = Not meaningful. (3) Benefit expense ratio = Benefit expense / Premiums. (4) bp =basis point; one hundred basis points = 1%. (5) Administrative expense /Operating revenue. (6) Administrative expense / Operating revenue and premium equivalents. (7) Operating margin = Operating gain / Total operating revenue. 54
Premiums increased by $2,318.8 million, or 42.8%, to $7,737.3 million in 2000 primarily due to the acquisitions of BCBS-NH and BCBS-CO/NV in the fourth quarter of 1999 and BCBS-ME in June 2000. Excluding these acquisitions, premiums increased by $870.5 million, or 16.5%, primarily due to premium rate increases and higher membership in the Midwest and East regions. Midwest premiums increased $473.8 million, or 12.7%, while East premiums increased $353.4 million, or 24.9%. Midwest premiums increased primarily due to higher membership and premium rate increases in our group accounts (both Large group and Small group) and higher membership in Medicare + Choice. East premiums increased primarily due to premium rate increases and higher membership in group business, as well as the conversion of the State of Connecticut account to fully insured from self-funded status in mid-1999. Administrative fees increased $144.5 million, or 23.6%, from $611.1 million in 1999 to $755.6 million in 2000, with $135.3 million of this increase resulting from acquisitions of BCBS-NH, BCBS-CO/NV and BCBS-ME. In July 1999, we sold two non-strategic businesses which combined had 1999 revenues of $12.8 million. Excluding acquisitions and divestitures, administrative fees increased $20.6 million, or 3.5%, primarily from membership growth in National business. Excluding acquisitions and divestitures, other revenue increased $6.0 million, or 14.0%, primarily due to Anthem Alliance Health Insurance Company assuming additional administrative functions under the TRICARE program. Benefit expense increased $1,968.3 million, or 43.0%, in 2000, primarily due to acquisitions. Excluding acquisitions, benefit expense increased $729.9 million, or 16.4%, due to increasing cost of care and the effect of higher average membership throughout the year. Cost of care trends were driven primarily by higher utilization of outpatient services and higher prescription drug costs. Our benefit expense ratio increased 10 basis points from 84.6% in 1999 to 84.7% in 2000 due to the acquisition of BCBS-ME in 2000, which had a higher benefit expense ratio than our other operations. Excluding acquisitions, our benefit expense ratio remained constant at 84.6% in 2000 and 1999. Outpatient cost increases ranged from 15% to 20% in 2000 over 1999. These increases have resulted from both increased utilization and higher unit costs. Increased utilization reflects an industry-wide trend towards a broader range of medical procedures being performed without overnight hospital stays, as well as an increasing customer awareness of and demand for diagnostic procedures such as MRI's. In addition, improved medical technology has allowed more complicated medical procedures to be performed on an outpatient basis rather than on an inpatient basis, increasing both utilization rates and unit costs. Prescription drug cost increases have varied among regions and by product, but generally ranged from 12% to 20% in 2000 over 1999, primarily due to introduction of new, higher cost drugs as well as higher overall utilization as a result of increases in direct-to-consumer advertising by pharmaceutical companies. In response to increasing prescription drug costs, we have implemented a "three-tiered" drug program and expanded use of formularies for our members. Administrative expense increased $339.0 million, or 23.1%, in 2000, primarily due to the acquisitions of BCBS-NH, BCBS-CO/NV and BCBS-ME. Administrative expense in 1999 included $41.9 million resulting from a settlement with the Office of Inspector General, or OIG, Health and Human Services to resolve an investigation into alleged misconduct in the Medicare fiscal intermediary operations in Connecticut during periods preceding BCBS- CT's merger with Anthem. Excluding acquisitions and the effect of the OIG settlement, administrative expense increased $75.6 million, or 5.4%, primarily due to higher commissions and premium taxes, which vary with premium and higher incentive compensation costs. Additionally, in December 2000, we made a $20.0 million contribution to the newly formed Anthem Foundation, Inc., which is a charitable and educational not-for-proft corporation. Excluding these costs, administrative expense would have been down slightly in 2000 due to productivity improvements resulting from ongoing efforts to identify and implement more efficient processes in our customer service and claims operations. 55
Our administrative expense ratio decreased 160 basis points primarily due to operating revenues increasing more than administrative expense. Excluding acquisitions and the effect of the OIG settlement, our administrative expense ratio would have decreased 120 basis points. Net investment income increased $49.6 million, or 32.6%, primarily due to higher rates of investment returns earned on our fixed income portfolio and higher overall portfolio balances. The higher portfolio balances included net cash resulting from acquisitions, net proceeds of $295.9 million from our surplus note issuance in January 2000, as well as cash generated from operations and from improved balance sheet management, such as more rapid collection of receivables and sales of non-core assets. Excluding acquisitions, net investment income increased $24.9 million, or 16.6%. During 2000, our investment portfolio generated a net yield of 5.91% compared with a net yield of 5.60% in 1999. We define our net yield as earned income divided by the amortized cost of our investments. The increase of 31 basis points was primarily due to higher returns on our fixed income security portfolio, in line with overall market conditions. Net realized capital gains decreased $11.6 million, or 30.9%, in 2000. Included in net realized capital gains in 1999 are capital losses of $20.5 million related to the sale of several non-core businesses. Excluding the effect of the capital losses on dispositions, net realized capital gains decreased $32.1 million, or 55.3%, primarily due to lower turnover in the portfolio resulting in fewer capital gains. Net realized capital gains from equities decreased 37.2% ($43.5 million in 2000 versus $69.3 million in 1999). Net realized capital losses from fixed income securities increased 55.8% ($17.6 million loss in 2000 versus $11.3 million loss in 1999). Acquisitions had no material effect on net realized capital gains. Net gains or losses on investments are influenced by market conditions when an investment is sold, and will vary from year to year as sales of investments are determined by cash flow needs, as well as portfolio allocation decisions. Interest expense increased $24.3 million, or 79.9%, primarily reflecting increased net borrowings following our private placement of $300.0 million principal amount of surplus notes in January 2000. The proceeds of our new surplus notes were used to retire short-term borrowings which had been incurred to finance the purchases of BCBS-NH and BCBS-CO/NV in late 1999 and to bolster liquidity as a part of our Year 2000 readiness effort. Amortization of intangibles increased $14.4 million, or 113.4%, primarily due to amortization of goodwill associated with the acquisitions of BCBS-NH, BCBS-CO/NV and BCBS-ME. The endowment of non-profit foundations of $114.1 million in 1999 represented the expense of settlement of charitable asset claims brought by the Attorneys General of the states of Ohio, Kentucky and Connecticut. Income before taxes and minority interest increased $269.0 million as a result of improvement in operating results in all business segments, and the non-recurring endowment of non-profit foundations during 1999. Income tax expense increased $92.0 million due to higher income before taxes. Our effective income tax rate in 2000 was 31.0% versus 16.7% in 1999. The rate is lower than the statutory effective tax rate in both periods primarily as a result of changes in our deferred tax valuation allowance. Excluding the after-tax endowment of non-profit foundations in 1999, net income increased $109.3 million, or 93.7%, primarily due to the improvement in operating results, acquisitions and higher investment income described above. 56
Midwest The following table presents our Midwest region's results of operations for the years ended December 31, 2000 and 1999: Year Ended December 31, ------------------ 2000 1999 $ Change % Change -------- -------- -------- -------- ($ in Millions) Operating revenue and premium equivalents....................... $6,816.9 $5,892.2 $924.7 15.7% ======== ======== ====== ======= Premiums........................... $4,203.1 $3,729.3 $473.8 12.7% Administrative fees................ 254.8 242.8 12.0 4.9% Other revenue...................... 2.6 3.4 (0.8) (23.5)% -------- -------- ------ ------- Total operating revenue.......... 4,460.5 3,975.5 485.0 12.2% Benefit expense.................... 3,555.4 3,162.2 393.2 12.4% Administrative expense............. 817.3 776.9 40.4 5.2% -------- -------- ------ ------- Total operating expense.......... 4,372.7 3,939.1 433.6 11.0% -------- -------- ------ ------- Operating gain................... $ 87.8 $ 36.4 $ 51.4 141.2% ======== ======== ====== ======= Benefit expense ratio(1)........... 84.6% 84.8% (20)bp(2) Administrative expense ratio: Calculated using operating revenue(3)...................... 18.3% 19.5% (120)bp(2) Calculated using operating revenue and premium equivalents(4).................. 12.0% 13.2% (120)bp(2) Operating margin(5)................ 2.0% 0.9% 110bp(2) Membership (in thousands).......... 4,582 4,382 4.6% - -------- (1) Benefit expense ratio = Benefit expense / Premiums. (2) bp = basis point; one hundred basis points = 1%. (3) Administrative expense / Operating revenue. (4) Administrative expense / Operating revenue and premium equivalents. (5) Operating margin = Operating gain / Total operating revenue. Premiums increased $473.8 million, or 12.7%, primarily due to higher premiums PMPM, which accounted for 12.2% of the increase, and the effect of higher average membership throughout the year. Premiums PMPM increased from $147.57 in 1999 to $165.08 in 2000 primarily due to premium rate increases in group (both Large group and Small group) and Medicare + Choice businesses. The increases in group and Medicare + Choice premiums accounted for $368.9 million, or 77.9%, of the increase in premiums. Group premiums PMPM increased 12.9% from $140.60 in 1999 to $158.76 in 2000 primarily due to premium rate increases. Average insured group membership was essentially flat. Medicare + Choice PMPM premiums increased 5.3% from $438.24 in 1999 to $461.58 in 2000 due to the aging of our insured Medicare + Choice population in 2000, resulting in higher premiums. We receive higher premiums from CMS as our Medicare + Choice population ages. In addition, we received a premium rate increase from CMS of approximately 3% at the beginning of 2000. Average Medicare + Choice membership increased 27.7% due to reduced competition in the Ohio marketplace as a result of competitors discontinuing their participation in the Medicare + Choice product. Administrative fees increased 4.9% from $242.8 million in 1999 to $254.8 million in 2000. In mid-1999, we sold our worker's compensation third party administration business and a physician's group practice. Most of this increase was from membership growth in National business. Excluding these dispositions in 1999, administrative fees would have increased $23.4 million or 10.1%. 57
Benefit expense increased $393.2 million, or 12.4%, in 2000 primarily due to higher benefit expense PMPM (11.9%) and the effect of higher average membership (0.5%) throughout the year. Benefit expense PMPM increased from $125.13 in 1999 to $140.06 in 2000 primarily due to higher outpatient costs and higher prescription drug costs. Outpatient cost increases averaged approximately 16% in 2000 due to continued trends of shifting services to outpatient settings versus inpatient/facility based services. These cost increases have come from both increased utilization and higher unit costs. Improved medical technology has allowed more complicated medical procedures, such as cardiac catheterization and angioplasties, to be performed on an outpatient basis. Prescription drug costs increased about 13% in 2000 primarily due to introduction of new, higher cost drugs and increases in direct to consumer advertising by pharmaceutical companies. Utilization of a three-tiered drug program for our members has helped contain the increase in prescription drug costs. While outpatient and prescription drug costs increased significantly in 2000, inpatient costs increased approximately 3%. Admissions per 1,000 members were generally unchanged, while average length of stay declined slightly in 2000. These factors were slightly offset by modest reimbursement increases under the terms of our hospital contracting agreements. Midwest's benefit expense ratio decreased 20 basis points from 84.8% in 1999 to 84.6% in 2000 as the growth in premium PMPM of 12.2% exceeded growth in benefit expense PMPM of 11.9% as discussed above. Administrative expense increased $40.4 million, or 5.2%, in 2000 primarily due to higher commission and premium taxes related to higher premiums, as well as incentive compensation costs related to above-target financial performance and a contribution of $15.0 million to create the Anthem Foundation. Excluding the additional incentive compensation and foundation contribution costs, administrative expense was flat in 2000. The administrative expense ratio decreased 120 basis points primarily due to higher premiums as discussed above. 58
East The following table presents our East region's results of operations for the years ended December 31, 2000 and 1999. BCBS-NH is included from its October 27, 1999 acquisition date and BCBS-ME is included from its June 5, 2000 acquisition date. Year Ended December 31, ------------------ 2000 1999 $ Change % Change -------- -------- -------- -------- ($ in Millions) Operating revenue and premium equivalents...................... $3,751.2 $2,272.8 $1,478.4 65.1% ======== ======== ======== ======== Premiums.......................... $2,768.9 $1,495.4 $1,273.5 85.2% Administrative fees............... 144.1 99.7 44.4 44.5% Other revenue..................... 8.9 3.8 5.1 134.2% -------- -------- -------- -------- Total operating revenue......... 2,921.9 1,598.9 1,323.0 82.7% Benefit expense................... 2,332.4 1,259.9 1,072.5 85.1% Administrative expense............ 485.7 339.9 145.8 42.9% -------- -------- -------- -------- Total operating expense......... 2,818.1 1,599.8 1,218.3 76.2% -------- -------- -------- -------- Operating gain (loss)........... $ 103.8 $ (0.9) $ 104.7 NM(1) ======== ======== ======== ======== Benefit expense ratio(2).......... 84.2% 84.3% (10) bp(3) Administrative expense ratio: Calculated using operating revenue(4)..................... 16.6% 21.3% (470) bp(3) Calculated using operating revenue and premium equivalents(5)................. 12.9% 15.0% (210) bp(3) Operating margin(6)............... 3.6% (0.1)% 370 bp(3) Membership (in thousands)......... 2,093 1,397 49.8% - -------- (1) NM = Not meaningful. (2) Benefit expense ratio = Benefit expense / Premiums. (3) bp = basis point; one hundred basis points = 1%. (4) Administrative expense / Operating revenue. (5) Administrative expense / Operating revenue and premium equivalents. (6) Operating margin = Operating gain / Total operating revenue. Premiums increased $1,273.5 million, or 85.2%, primarily due to the acquisitions of BCBS-NH in October 1999 ($474.6 million) and BCBS-ME in June 2000 ($445.4 million) and the conversion of the State of Connecticut account from self-funded to fully insured status in July 1999 ($197.8 million). Due to the State of Connecticut's conversion, 2000 included a full year of premiums versus six months of premiums (July through December) in 1999, since the new funding arrangement was changed effective July 1999. For the first six months of 1999, we recorded administrative fees for the State of Connecticut account, which is consistent with accounting practices for Self-funded business. Excluding the effect of acquisitions and the conversion of the State of Connecticut account, premiums increased $155.7 million, or 12.5%, in 2000 due to premium rate increases in group business and higher average membership. Administrative fees increased $44.4 million, or 44.5%, from $99.7 million in 1999 to $144.1 million in 2000. The BCBS-NH and BCBS-ME acquisitions contributed $66.6 million of this increase, while the conversion of the State of Connecticut account resulted in a decline in administrative fees of approximately $13.0 million. Excluding the effect of acquisitions and the conversion of the State of Connecticut account, administrative fees decreased $9.8 million, or 11.7%, primarily due to lower fees from Self-funded business and our decision to discontinue our contract as the Medicare Part A 59
processor in Connecticut as of January 1, 2000. Self-funded administrative fees fell $8.8 million, or 12.9%, primarily due to our focus on growing Fully insured business. Medicare Part A fees were $3.0 million in 1999. Benefit expense increased $1,072.5 million, or 85.1%, primarily due to the acquisitions of BCBS-NH and BCBS-ME and the conversion of the State of Connecticut account from self-funded to fully insured status in July 1999. Excluding the effect of these acquisitions, benefit expense increased $285.7 million, or 23.9%, in 2000 due to the conversion of the State of Connecticut account ($163.3 million) and higher average membership. Benefit expense PMPM, excluding acquisitions, increased 5.1% in 2000. Prescription drug PMPM costs increased over 8% due to the introduction of new, higher cost drugs and increases in direct to consumer advertising by pharmaceutical companies. Utilization of a three-tiered drug program for our members has helped contain prescription drug costs. Inpatient, outpatient and professional PMPM cost increases were 1.8%, 5.7% and 5.1%, respectively. Utilization in all of these areas increased due to higher respiratory and cardiology medical conditions, which resulted in both higher admissions and increased additional follow-up treatment visits. The increase in inpatient PMPM costs was also impacted by a slightly longer average length of stay, offset by a decline in the average cost per inpatient visit. On an overall basis, the benefit expense ratio decreased 10 basis points from 84.3% in 1999 to 84.2% in 2000; however, excluding acquisitions, the benefit expense ratio decreased 60 basis points. Excluding acquisitions, the decrease in benefit expense ratio was primarily due to the effect of the relatively modest trends discussed above. Administrative expense increased $145.8 million, or 42.9%, primarily due to the acquisitions of BCBS-NH and BCBS-ME. Excluding these acquisitions, administrative expense decreased $35.0 million, or 10.8%, primarily due to a one-time expense of $41.9 million in 1999 associated with the settlement of a claim with respect to Medicare Part A claims processing related to activities prior to Anthem's merger with BCBS-CT as discussed above. Excluding acquisitions and the Medicare settlement, administrative expense increased $6.9 million, or 2.4%, primarily due to higher commissions and premium taxes, investments in e-business technology development, higher incentive compensation costs related to above-target financial performance and a contribution to create the Anthem Foundation. The administrative expense ratio in 2000 decreased 210 basis points primarily due to the effect of the Medicare Part A settlement described above (184 basis points). Excluding acquisitions and the Medicare settlement, the administrative expense ratio decreased 80 basis points primarily due to higher premiums as discussed above and productivity improvements implemented in the last half of 1999. These productivity improvements are a result of ongoing efforts to identify and implement more efficient processes in customer service and claims operations. 60
West Our Anthem West region was established in November 1999 following the acquisition of BCBS-CO/NV. Results of this segment have been recorded in the consolidated results from that date forward. The 1999 results include approximately one and one-half months activity, while the 2000 results include twelve months of results. The following table presents our West region's results of operations for the years ended December 31, 2000 and 1999: Year Ended December 31, --------------- 2000 1999(1) $ Change ------ ------- -------- ($ in Millions) Operating revenue and premium equivalents........ $686.9 $86.9 $600.0 ====== ===== ====== Premiums......................................... $569.6 $64.2 $505.4 Administrative fees.............................. 52.8 1.7 51.1 Other revenue.................................... -- 6.8 (6.8) ------ ----- ------ Total operating revenue........................ 622.4 72.7 549.7 Benefit expense.................................. 491.7 55.0 436.7 Administrative expense......................... 128.2 21.2 107.0 ------ ----- ------ Total operating expense........................ 619.9 76.2 543.7 ------ ----- ------ Operating gain (loss).......................... $ 2.5 $(3.5) $ 6.0 ====== ===== ====== Benefit expense ratio(2)......................... 86.3% 85.7% Administrative expense ratio: Calculated using operating revenue(3).......... 20.6% 29.2% Calculated using operating revenue and premium equivalents(4)................................ 18.7% 24.4% Operating margin(5).............................. 0.4% (4.8)% Membership (in thousands)........................ 595 486 - -------- (1) Includes one and one-half months of activity in 1999. (2) Benefit expense ratio = Benefit expense / Premiums. (3) Administrative expense / Operating revenue. (4) Administrative expense / Operating revenue and premium equivalents. (5) Operating margin = Operating gain / Total operating revenue. Operating results in the West improved in 2000, primarily due to reduced administrative expense as a result of integration savings and cost reduction programs as well as higher membership. Membership increased 22.4% due to higher sales and better retention of business. These cost reduction programs included reducing levels of management and improving productivity in customer service and claims operations. The administrative expense ratio declined 570 basis points as a result of lower administrative expenses and higher membership. Benefit expense PMPM increased approximately 16% in 2000, primarily due to higher outpatient and inpatient costs, reflecting increased utilization and unit costs for both outpatient and inpatient services. In response to these trends, our West region is seeking to implement new contracts with providers. The improvement in the administrative expense ratio more than offset increased benefit expense, resulting in a $6.0 million increase in operating results. 61
Specialty The following table presents our Specialty segment's results of operations for the years ended December 31, 2000 and 1999: Year Ended December 31, -------------- 2000 1999 $ Change % Change ------ ------ -------- -------- ($ in Millions) Operating revenue and premium equivalents.......................... $338.7 $255.3 $83.4 32.7% ====== ====== ===== ======== Premiums from life and disability..... $123.7 $ 96.3 $27.4 28.5% Administrative fees................... 31.8 14.6 17.2 117.8% Other revenue......................... 176.8 138.2 38.6 27.9% ------ ------ ----- -------- Total operating revenue............. 332.3 249.1 83.2 33.4% Benefit expense....................... 92.6 73.8 18.8 25.5% Administrative expense................ 214.8 159.1 55.7 35.0% ------ ------ ----- -------- Total operating expense............. 307.4 232.9 74.5 32.0% ------ ------ ----- -------- Operating gain...................... $ 24.9 $ 16.2 $ 8.7 53.7% ====== ====== ===== ======== Benefit expense ratio(1).............. 74.9% 76.6% (170) bp(2) Administrative expense ratio: Calculated using operating revenue(3)......................... 64.6% 63.9% 70 bp(2) Calculated using operating revenue and premium equivalents(4)......... 63.4% 62.3% 110 bp(2) Operating margin(5)................... 7.5% 6.5% 100 bp(2) - -------- (1) Benefit expense ratio = Benefit expense / Premiums. (2) bp = basis point; one hundred basis points = 1%. (3) Administrative expense / Operating revenue. (4) Administrative expense / Operating revenue and premium equivalents. (5) Operating margin = Operating gain / Total operating revenue. Life and disability premiums increased $27.4 million, or 28.5%, primarily due to the acquisition of Rocky Mountain Life or RML, an affiliate of BCBS- CO/NV. Excluding the acquisition of RML, premiums increased $4.5 million, or 4.8%, due to higher life sales in our Midwest region. Administrative fees increased $17.2 million, or 117.8%, due to the acquisitions of Occupational Healthcare Management Services, Inc., a worker's compensation third party administration company, and Health Management Systems, Inc., a dental benefits third party administration company, both subsidiaries of BCBS-CO/NV. Excluding these acquisitions, administrative fees were essentially flat. Other revenue increased $38.6 million, or 27.9%, primarily from APM. In 2000, APM began to provide pharmacy benefit management services to both BCBS-NH and Anthem Alliance Health Insurance Company. These new markets for APM generated an additional $3.5 million of other revenue in 2000. Excluding new markets, other revenue increased primarily due to higher mail and retail volumes related to increased membership and utilization. Mail service membership increased 26% while retail service membership increased 80%. Mail service prescription volume increased 15% and retail prescription volume increased 39%. Benefit expense increased $18.8 million, or 25.5%, due to the acquisition of RML. Excluding the acquisition of RML, benefit expense increased $3.9 million, or 5.4%, in line with the increase in life and disability premiums. The benefit expense ratio was 74.9% in 2000, a 170 basis point decrease from 1999 primarily due to the acquisition of RML, which generates a lower benefit expense ratio than our other life business. Our other life business includes two large customers that generate 62
higher benefit expense ratios as these two customers are retrospectively experience rated. These higher benefit expense ratios are offset by a lower administrative expense ratio on these two customers. One of these customers terminated at the end of 1999, although this group had a small profit margin and its termination should not impact future results. Administrative expense increased $55.7 million, or 35.0%, as a result of the acquisitions mentioned above and APM. Excluding acquisitions, administrative expense increased $33.9 million, or 21.4%, primarily due to increased membership and volume at APM. Administrative expense ratio increased 110 basis points, primarily due to costs at APM associated with adding additional customers in 2001. Other The following table presents the results of operations for our Other segment for the years ended December 31, 2000 and 1999: Year Ended December 31, ---------------- 2000 1999 $ Change % Change ------- ------- -------- -------- ($ in Millions) Operating revenue and premium equivalents......................... $ 206.4 $ 184.4 $ 22.0 11.9% ======= ======= ====== ===== Premiums............................. $ 72.0 $ 33.3 $ 38.7 116.2% Administrative fees.................. 272.1 252.3 19.8 7.8% Other revenue (expense).............. (137.7) (101.2) (36.5) 36.1% ------- ------- ------ ----- Total operating revenue............ 206.4 184.4 22.0 11.9% Benefit expense...................... 78.9 31.8 47.1 148.1% Administrative expense............... 162.4 172.3 (9.9) (5.7)% ------- ------- ------ ----- Total operating expense............ 241.3 204.1 37.2 18.2% ------- ------- ------ ----- Operating loss..................... $ (34.9) $ (19.7) $(15.2) NM(1) ======= ======= ====== ===== - -------- (1) NM = Not meaningful Premiums increased $38.7 million, or 116.2%, primarily due to higher premiums at Anthem Alliance Health Insurance Company related to amounts received from the Department of Defense. These amounts were received in connection with a global settlement related to a series of bid price adjustments, requests for equitable adjustments and change orders filed during the past two years with the Department of Defense under the TRICARE program. Other administrative fees increased $19.8 million, or 7.8%, primarily due to increased revenues at AdminaStar Federal related to performing additional customer service activities for Medicare beneficiaries. Excluding intersegment revenues in 2000 of $145.7 million and in 1999 of $104.3 million, other revenue increased $4.9 million, or 158.1%, due to Anthem Alliance Health Insurance Company's assuming additional administrative services related to the TRICARE contract during 2000. Benefit expense increased $47.1 million, or 148.1%, primarily due to the services provided and risks assumed related to the global settlement received by Anthem Alliance Health Insurance Company. Benefit expense associated with the global settlement offset most of the increase in premiums associated with the global settlement and bid price adjustments. Excluding intersegment administrative expenses in 2000 of $154.1 million and in 1999 of $112.1 million, administrative expense increased $32.1 million, or 11.3%, primarily due to expenses associated with AdminaStar Federal's additional customer service activities and Anthem Alliance Health Insurance Company's assuming additional administrative services. Certain corporate expenses are not allocated to our business segments. These unallocated expenses account for $39.9 million in 2000 and $26.7 million in 1999, and primarily include such items as unallocated incentive compensation and other expenses associated with discontinued 63
operations. Excluding unallocated corporate expenses, operating gain was $5.0 million in 2000, $2.0 million, or 28.6%, less than in 1999. Most of the decrease is due to higher non-reimbursable administrative expense at AdminaStar Federal. MEMBERSHIP--Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Our membership data presented below are unaudited and include estimates based upon the number of contracts in place at the period-end date and an actuarial estimate of the number of members represented by each contract. The following table presents membership by region, customer type and funding type as of December 31, 1999 and 1998, comparing total and "same store" (after removing the impact of acquisitions) membership, respectively: MEMBERSHIP Same Total Same Store Total Store Total ------------- ------------ 1999 Acquisitions* 1999 1998 Change % Change % ----- ------------- ----- ----- ------ ----- ------ ----- (In Thousands) Region Midwest............... 4,382 -- 4,382 4,199 183 4.4% 183 4.4% East.................. 1,397 366 1,031 968 429 44.3 63 6.5 West.................. 486 486 -- -- 486 -- -- -- ----- --- ----- ----- ----- ----- --- ----- Total............... 6,265 852 5,413 5,167 1,098 21.3% 246 4.8% ===== === ===== ===== ===== ===== === ===== Customer Type Large group........... 2,249 349 1,900 1,852 397 21.4% 48 2.6% Small group........... 637 76 561 559 78 14.0 2 0.4 Individual............ 586 108 478 478 108 22.6 0 0.0 National.............. 2,106 213 1,893 1,696 410 24.2 197 11.6 Medicare + Choice..... 96 13 83 81 15 18.5 2 2.5 Federal Employee Program.............. 362 89 273 268 94 35.1 5 1.9 TRICARE............... 129 -- 129 153 (24) (15.7) (24) (15.7) Medicaid.............. 100 4 96 80 20 25.0 16 20.0 ----- --- ----- ----- ----- ----- --- ----- Total............... 6,265 852 5,413 5,167 1,098 21.3% 246 4.8% ===== === ===== ===== ===== ===== === ===== Funding Type Fully insured......... 3,354 552 2,802 2,791 563 20.2% 11 0.4% Self-funded........... 2,911 300 2,611 2,376 535 22.5 235 9.9 ----- --- ----- ----- ----- ----- --- ----- Total............... 6,265 852 5,413 5,167 1,098 21.3% 246 4.8% ===== === ===== ===== ===== ===== === ===== - -------- * Represents acquisitions of BCBS-NH and BCBS-CO/NV. Most of our membership growth in 1999 was due to the acquisitions of BCBS-NH and BCBS-CO/NV. Same store membership increased 246,000, or 4.8%, primarily due to a significant increase in National BlueCard activity and growth in Large group and Medicaid membership, which more than offset a decline in TRICARE membership. Membership growth in group businesses was 50,000, or 2.1%, and reflects the impact of both significant premium rate increases implemented to improve profitability and severe price competition in several of our key markets. TRICARE membership fell primarily due to more military personnel selecting military primary care providers instead of civilian primary care providers. Only those military personnel selecting civilian primary care providers from Anthem's network are included in our membership data. 64
Self-funded membership increased primarily due to an increase in BlueCard utilization. Fully insured membership decreased primarily due to lower retention of Large group insured business following our January 1999 renewals and lower TRICARE membership. Midwest membership grew in 1999 primarily from growth in BlueCard utilization, reflecting greater overall membership in the BCBS systems nationwide, as well as higher claims activity by BlueCard members in Anthem's "host" territories. East membership showed strong growth primarily due to higher BlueCard membership and Small group sales in Connecticut. Results of Operations for the Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 The following table presents our consolidated results of operations for the years ended December 31, 1999 and 1998: Year Ended December 31, ------------------ 1999 1998 $ Change % Change -------- -------- -------- -------- ($ in Millions) Operating revenue and premium equivalents(1).................. $8,691.6 $7,987.4 $ 704.2 8.8% ======== ======== ======= ======== Premiums......................... $5,418.5 $4,739.5 $ 679.0 14.3% Administrative fees.............. 611.1 575.6 35.5 6.2% Other revenue.................... 51.0 74.6 (23.6) (31.6)% -------- -------- ------- -------- Total operating revenue........ 6,080.6 5,389.7 690.9 12.8% Benefit expense.................. 4,582.7 3,934.2 648.5 16.5% Administrative expense........... 1,469.4 1,420.1 49.3 3.5% -------- -------- ------- -------- Total operating expense........ 6,052.1 5,354.3 697.8 13.0% -------- -------- ------- -------- Operating gain................... 28.5 35.4 (6.9) (19.5)% Net investment income............ 152.0 136.8 15.2 11.1% Net realized gains on investments..................... 37.5 155.9 (118.4) (75.9)% Interest expense................. 30.4 27.9 2.5 9.0% Amortization of intangibles...... 12.7 12.0 0.7 5.8% Endowment of non-profit foundations..................... 114.1 -- 114.1 NM(2) -------- -------- ------- -------- Income from continuing operations before taxes and minority interest........................ 60.8 288.2 (227.4) (78.9)% Income taxes..................... 10.2 110.9 (100.7) (90.8)% Minority interest (credit)....... (0.3) (1.1) 0.8 NM(2) -------- -------- ------- -------- Income from continuing operations...................... 50.9 178.4 (127.5) (71.5)% Discontinued operations, net of income taxes Loss from discontinued operations prior to disposal.. -- (3.9) 3.9 NM(2) Loss on disposal of discontinued operations....... (6.0) (2.1) (3.9) NM(2) -------- -------- ------- -------- Net income....................... $ 44.9 $ 172.4 $(127.5) (74.0)% ======== ======== ======= ======== Benefit expense ratio(3)......... 84.6% 83.0% 160 bp(4) Administrative expense ratio: Calculated using operating revenue(5).................... 24.2% 26.3% (210) bp(4) Calculated using operating revenue and premium equivalents(6)................ 16.9% 17.8% (90) bp(4) Operating margin(7).............. 0.5% 0.7% (20) bp(4) 65
- -------- (1) The self-funded claims included in Operating revenue and premium equivalents for the years ended December 31, 1999 and 1998 were $2,611.0 and $2,597.7, respectively. (2) NM = Not meaningful. (3) Benefit expense ratio = Benefit expense / Premiums. (4) bp = basis point; one hundred basis points = 1%. (5) Administrative expense / Operating revenue. (6) Administrative expense / Operating revenue and premium equivalents. (7) Operating margin = Operating gain / Total operating revenue. Premiums increased $679.0 million, or 14.3%, in 1999. The acquisitions of BCBS-NH and BCBS-CO/NV, which were both accounted for using the purchase accounting method during the last quarter of 1999, accounted for $140.7 million of the overall increase. Midwest and East, excluding the impact of the BCBS-NH acquisition, accounted for $196.0 million and $333.6 million of the increase, respectively. The increase in the Midwest was a result of both rate increases and increased enrollment. East's increase was attributable to the conversion of the State of Connecticut account to a fully insured arrangement in July 1999 from a self-insured status for all of 1998, as well as rate increases and enrollment growth. These increases are explained more fully in the Midwest and East discussions that follow. Administrative fees increased 6.2% from $575.6 million in 1998 to $611.1 million in 1999. Most of this increase was from higher BlueCard membership and revenues. The acquisitions of BCBS-NH and BCBS-CO/NV had relatively little effect ($5.5 million) on the increase in administrative fees. Other revenue decreased $23.6 million, or 31.6%, primarily due to the sale of two non-core businesses during 1998. Excluding the sale of these businesses and the acquisitions of BCBS-NH and BCBS-CO/NV, other revenue decreased $8.1 million, or 15.5%, primarily due to a one-time fee received in 1998 related to the termination of a large block of group life business. Benefit expense increased $648.5 million, or 16.5%, in 1999 due to increases in costs of care, growth in membership and the acquisitions of BCBS-NH and BCBS-CO/NV. Midwest accounted for $239.3 million of the increase, resulting from both enrollment growth and increased costs. East, excluding the impact of the BCBS-NH acquisition, increased by $296.0 million. Conversion of the State of Connecticut account to fully insured from self-insured status and increased outpatient and prescription drug costs contributed to these increases. These factors are discussed more fully in the Midwest and East discussions that follow. Administrative expense increased $49.3 million, or 3.5%, in 1999 primarily due to acquisitions and a $41.9 million expense resulting from a settlement agreement with the OIG to resolve an investigation into alleged misconduct in the Medicare fiscal intermediary operations of BCBS-CT. The events giving rise to this investigation occurred prior to the merger of BCBS-CT with Anthem. After taking the acquisitions and OIG settlement increases into account, overall administrative expense decreased by $30.1 million, or 2.1%, from 1998. Simultaneously, same store membership increased by 4.8%. Midwest expenses decreased by $20.8 million, or 2.6%, primarily as a result of divestiture of two small non-core businesses in 1999 (1998 included a full year of expenses associated with these businesses while 1999 included only a partial year). East expenses, excluding the impact of BCBS-NH and the OIG settlement, decreased by $12.1 million, or 4.1%. This decrease was primarily as a result of various cost control initiatives being implemented in late 1998 and early 1999, primarily related to installation of more efficient processes in our customer service and claims operations. Net investment income increased by $15.2 million, or 11.1%, to $152.0 million in 1999 from $136.8 million in 1998. During the first half of 1998, we completed a portfolio restructuring that resulted in increasing the allocation of our investment in fixed income securities in our portfolio and reducing the amount of equity securities. Equities with a market value of $437.3 million were sold as part of this restructuring and reinvested in fixed income securities, reducing the equity allocation in 66
the portfolio from 33% to 18%. This, coupled with rising interest rates, resulted in higher investment income in 1999, as we had a higher portion of the investment portfolio in fixed income securities for a full year in 1999 compared to only three quarters in 1998. Net realized gains on investments were $37.5 million in 1999, a decrease of $118.4 million, or 75.9%, from net gains of $155.9 million in 1998. As discussed above, we executed a restructuring of the portfolio in 1998 to allocate a higher portion of our investments to fixed income securities. This restructuring generated approximately $80.0 million of realized capital gains during the year ended December 31, 1998. The remaining $38.4 million of the 1999 decrease resulted from gains realized through normal trading during robust market conditions in 1998. Interest expense increased $2.5 million, or 9.0%, in 1999 as we borrowed $220.0 million in the fourth quarter of 1999 to partially fund the acquisitions of BCBS-NH and BCBS-CO/NV in the fourth quarter of 1999. Amortization of intangibles increased $0.7 million, or 5.8%, in 1999. The increase in amortization was primarily due to goodwill created from the acquisitions of BCBS-NH and BCBS-CO/NV in late 1999. The endowment of non-profit foundations of $114.1 million in 1999 arose from the settlements of charitable asset claims brought by Attorneys General of the states of Kentucky, Ohio and Connecticut. In 1999, contributions of $45.0 million, $28.0 million and $41.1 million were made for the benefit of charitable foundations in Kentucky, Ohio and Connecticut, respectively. Income tax expense was $10.2 million in 1999, compared to $110.9 million in 1998. The higher tax expense in 1998 reflected the higher pre-tax income recognized in that period. Also, the effective tax rate for the year ended December 31, 1999 was 16.7%, while the rate for the same period in 1998 was 38.5%. The decrease in our effective tax rate was primarily due to a reduction in the valuation allowance on deferred tax assets. The effective rate for the year ended December 31, 1998 was higher than the combined statutory rates primarily due to state and local taxes. A reconciliation to the statutory rate for both years is included in Note 10 to our audited consolidated financial statements. Net income in 1999 was $44.9 million, a $127.5 million, or 74%, decrease from $172.4 million for the prior year. As discussed above, the primary reasons for the lower net income were reduced realized capital gains, the endowment of non-profit foundations and the OIG settlement, offset in part by lower income taxes and improved administrative expense ratios. 67
Midwest The following table presents our Midwest region's results of operations for the years ended December 31, 1999 and 1998: Year Ended December 31, ------------------ 1999 1998 $ Change % Change -------- -------- -------- -------- ($ in Millions) Operating revenue and premium equivalents.................... $5,892.2 $5,681.8 $210.4 3.7% ======== ======== ====== ===== Premiums........................ $3,729.3 $3,533.3 $196.0 5.5% Administrative fees............. 242.8 234.8 8.0 3.4% Other revenue................... 3.4 3.0 0.4 13.3% -------- -------- ------ ----- Total operating revenue....... 3,975.5 3,771.1 204.4 5.4% Benefit expense................. 3,162.2 2,922.9 239.3 8.2% Administrative expense.......... 776.9 797.7 (20.8) (2.6)% -------- -------- ------ ----- Total operating expense....... 3,939.1 3,720.6 218.5 5.9% -------- -------- ------ ----- Operating gain................ $ 36.4 $ 50.5 $(14.1) (27.9)% ======== ======== ====== ===== Benefit expense ratio(1)........ 84.8% 82.7% 210 bp(2) Administrative expense ratio: Calculated using operating revenue(3)................... 19.5% 21.2% (170) bp(2) Calculated using operating revenue and premium equivalents(4)............... 13.2% 14.0% (80) bp(2) Operating margin(5)............. 0.9% 1.3% (40) bp(2) Membership (in thousands)....... 4,382 4,199 4.4% - -------- (1) Benefit expense ratio = Benefit expense /Premiums. (2) bp = basis point; one hundred basis points = 1%. (3) Administrative expense / Operating revenue. (4) Administrative expense / Operating revenue and premium equivalents. (5) Operating margin = Operating gain / Total operating revenue. Premiums increased $196.0 million, or 5.5%, primarily due to higher premiums PMPM, which more than offset the effect of lower average membership throughout the year. Premiums PMPM increased 10.7% from $133.32 in 1998 to $147.57 in 1999, primarily due to rate increases in group and National businesses. Group premiums PMPM increased 10.2% from $127.54 in 1998 to $140.60 in 1999, reflecting premium rate increases averaging 15% in response to increasing claim trends. Average insured group membership fell 4.6%, primarily due to competitive pressures in Kentucky and Ohio. National PMPM premiums increased 14.6% from $137.99 in 1998 to $158.15 in 1999, due to rate increases implemented in response to increasing claim trends. Average National insured membership decreased 9.1% or 9,600 members, primarily due to non-renewals at the beginning of 1999. Administrative fees increased 3.4% from $234.8 million in 1998 to $242.8 million in 1999. Most of this increase was from membership growth in National self-funded business which more than offset reductions arising from the sale of our worker's compensation third party administration subsidiary and a physician's group practice during 1999. Excluding the administrative fees from the divested businesses, administrative fees increased $20.1 million, or 9.5%, to $231.4 million in 1999 due to membership growth in National self-funded business. Benefit expense increased $239.3 million, or 8.2%, in 1999 primarily due to higher benefit expense PMPM, which was offset by the effect of lower average membership throughout the year. 68
Benefit expense PMPM increased 13.0% from $110.69 in 1998 to $125.13 in 1999 primarily due to higher outpatient costs and higher prescription drug costs. Increases in outpatient costs were primarily due to continued shifting of services to outpatient settings versus inpatient service, which has increased both utilization and unit costs. Improved medical technology has also allowed more complicated medical procedures to be performed on an outpatient basis, thus increasing unit costs. Prescription drug cost increases accelerated in 1999 primarily due to introduction of new, higher cost drugs and increases in direct-to-consumer advertising by pharmaceutical companies. Midwest utilized several strategies to optimize prescription drug benefits, including expanded use of drug formularies and expansion of a three-tiered drug program for our members. The benefit expense ratio increased 210 basis points from 82.7% in 1998 to 84.8% in 1999, as the growth in premium PMPM of 10.7% was not sufficient to cover the growth in benefit expense PMPM of 13.0% as discussed above. Ohio group, National business and Medicare + Choice were the primary drivers of the deterioration in benefit expense ratio. Ohio group and National were impacted by increasing outpatient and prescription drug costs, while Medicare + Choice was impacted by provider risk share write-offs and claim reserve increases. Provider risk share agreements were used in Medicare + Choice business in Ohio in order to share the risk of claim costs with providers. Midwest implemented corrective pricing actions late in 1999 that were targeted at improving underwriting results. Administrative expense decreased $20.8 million, or 2.6%, in 1999, primarily due to the sale of a worker's compensation third party administration company and physicians' group practice in July 1999, and the effect of expense reduction programs initiated in 1998. Most of the benefit of these programs occurred in 1999. These expense reduction programs included process improvements in claims and customer service operations and reduction in the number of levels of management. The administrative expense ratio decreased 80 basis points from 14.0% in 1998 to 13.2% in 1999 primarily due to higher premiums and the reduced administrative expense discussed above. 69
East The following table presents our East region's results of operations for the years ended December 31, 1999 and 1998. BCBS-NH results are included from October 27, 1999: Year Ended December 31, ------------------- 1999 1998 $ Change % Change -------- -------- -------- -------- ($ in Millions) Operating revenue and premium equivalents................. $2,272.8 $1,871.5 $401.3 21.4% ======== ======== ====== ======= Premiums..................... $1,495.4 $1,088.3 $407.1 37.4% Administrative fees.......... 99.7 91.4 8.3 9.1% Other revenue................ 3.8 11.2 (7.4) (66.1)% -------- -------- ------ ------- Total operating revenue.... 1,598.9 1,190.9 408.0 34.3% Benefit expense.............. 1,259.9 901.9 358.0 39.7% Administrative expense....... 339.9 294.6 45.3 15.4% -------- -------- ------ ------- Total operating expense.... 1,599.8 1,196.5 403.3 33.7% -------- -------- ------ ------- Operating loss............. $ (0.9) $ (5.6) $ 4.7 NM(1) ======== ======== ====== ======= Benefit expense ratio(2)..... 84.3% 82.9% 140 bp(3) Administrative expense ratio: Calculated using operating revenue(4)................ 21.3% 24.7% (340) bp(3) Calculated using operating revenue and premium equivalents(5)............ 15.0% 15.7% (70) bp(3) Operating margin(6).......... (0.1)% (0.5)% 40 bp(3) Membership (in thousands).... 1,397 968 44.3% - -------- (1) NM = Not meaningful. (2) Benefit expense ratio = Benefit expense / Premiums. (3) bp = basis point; one hundred basis points = 1%. (4) Administrative expense / Operating revenue. (5) Administrative expense / Operating revenue and premium equivalents. (6) Operating margin = Operating gain / Total operating revenue. Premiums increased $407.1 million, or 37.4%, primarily due to the conversion of the State of Connecticut account from self-funded to fully insured in July 1999 and the acquisition of BCBS-NH in October 1999. Excluding the effect of $73.5 million in premiums from the acquisition, premiums increased 30.7%. The State of Connecticut account accounted for $175.0 million, or 52.5%, of the increase. Excluding the effect of the acquisition and the conversion of the State of Connecticut account, premiums increased $158.6 million, or 14.6%, primarily due to premium rate increases in group business and higher average membership. Administrative fees increased $8.3 million, or 9.1%, from $91.4 million in 1998 to $99.7 million in 1999. The acquisition of BCBS-NH accounted for $3.8 million of the increase. Conversion of the State of Connecticut account from self-funded to fully insured caused a $10.6 million reduction in administrative fees in 1999. Excluding the effect of the acquisition of BCBS-NH and the conversion of the State of Connecticut account, administrative fees increased $15.1 million, or 22.1%, to $83.5 million in 1999. This increase in administrative fees was primarily due to higher sales of self-funded business in Connecticut. Other revenue decreased $7.4 million, or 66.1%, in 1999 primarily due to the sale of a small real estate subsidiary at the end of 1998. Benefit expense increased $358.0 million, or 39.7%, primarily due to the conversion of the State of Connecticut account from self-funded to fully insured in July 1999 and the acquisition of BCBS-NH 70
in October 1999. Excluding the effect of $62.0 million of benefit expense from BCBS-NH, benefit expense increased $296.0 million, or 32.8%, in 1999 primarily due to the conversion of the State of Connecticut account, which accounted for $154.1 million, or 52.1%, of the increase. Excluding the effect of the acquisition and the conversion of the State of Connecticut account, benefit expense increased $141.9 million, or 15.7%, due to increasing cost of care trends and higher average membership. The benefit expense ratio increased 140 basis points from 82.9% in 1998 to 84.3% in 1999. However, excluding the effect of the conversion of the State of Connecticut account, benefit expense ratio increased 80 basis points to 83.7%. The acquisition of BCBS-NH had no effect on the benefit expense ratio in 1999. Administrative expense increased $45.3 million, or 15.4%, primarily due to a one-time expense of $41.9 million in 1999 associated with a settlement of claims brought by the OIG, alleging overpayment for Medicare Part A claims prior to Anthem's merger with BCBS-CT. Excluding this settlement and the acquisition of BCBS-NH, administrative expense decreased $12.1 million, or 4.1%, as a result of the implementation of cost savings initiatives in Connecticut designed to identify duplication of administrative services and improve efficiency in the services we provide our customers. Excluding acquisitions and the Medicare settlement, the administrative expense ratio improved 270 basis points to 13.0% in 1999. West The following table presents our West region's results of operations for the period ended December 31, 1999: Period Ended December 31, 1999 ----------------- ($ in Millions) Operating revenue and premium equivalents................ $86.9 ===== Premiums................................................. $64.2 Administrative fees...................................... 1.7 Other revenue............................................ 6.8 ----- Total operating revenue................................ 72.7 Benefit expense.......................................... 55.0 Administrative expense................................... 21.2 ----- Total operating expense................................ 76.2 ----- Operating loss......................................... $(3.5) ===== Benefit expense ratio(1)................................. 85.7% Administrative expense ratio: Calculated using operating revenue(2).................. 29.2% Calculated using operating revenue and premium equivalents(3)........................................ 24.4% Operating margin(4)...................................... (4.8)% Membership (in thousands)................................ 486 - -------- (1) Benefit expense ratio = Benefit expense / Premiums. (2) Administrative expense / Operating revenue. (3) Administrative expense / Operating revenue and premium equivalents. (4) Operating margin = Operating gain / Total operating revenue. Anthem West was established with the acquisition of BCBS-CO/NV on November 16, 1999. Results of operations for this segment have been included in our consolidated financial statements 71
since the purchase date. This transaction was accounted for as a purchase and, accordingly, 1999 includes only a partial year with no results reported for 1998. At the time of the acquisition, we began to fully implement our turnaround strategy for West. We implemented cost reduction programs, including reducing layers of management, integrating certain administrative functions into existing Anthem operations and instituting appropriate pricing discipline and customer service standards. Specialty The following table presents our Specialty segment's results of operations for the years ended December 31, 1999 and 1998: Year Ended December 31, -------------- 1999 1998 $ Change % Change ------ ------ -------- -------- ($ in Millions) Operating revenue and premium equivalents........................ $255.3 $248.0 $ 7.3 2.9% ====== ====== ===== ===== Premiums from life and disability... $ 96.3 $ 90.3 $ 6.0 6.6% Administrative fees................. 14.6 21.1 (6.5) (30.8)% Other revenue....................... 138.2 130.2 8.0 6.1% ------ ------ ----- ----- Total operating revenue........... 249.1 241.6 7.5 3.1% Benefit expense..................... 73.8 76.1 (2.3) (3.0)% Administrative expense.............. 159.1 142.3 16.8 11.8% ------ ------ ----- ----- Total operating expense........... 232.9 218.4 14.5 6.6% ------ ------ ----- ----- Operating gain.................... $ 16.2 $ 23.2 $(7.0) (30.2)% ====== ====== ===== ===== Benefit expense ratio (1)........... 76.6% 84.3% (770) bp(2) Administrative expense ratio: Calculated using operating revenue (3).............................. 63.9% 58.9% 500 bp(2) Calculated using operating revenue and premium equivalents (4)...... 62.3% 57.4% 490 bp(2) Operating margin (5)................ 6.5% 9.6% (310) bp(2) - -------- (1) Benefit expense ratio = Benefit expense / Premiums. (2) bp = basis point; one hundred basis points = 1%. (3) Administrative expense / Operating revenue. (4) Administrative expense / Operating revenue and premium equivalents. (5) Operating margin = Operating gain / Total operating revenue. Premiums increased $6.0 million, or 6.6%, primarily due to higher group life sales that offset the sale of a small block of unprofitable non-core health business. Administrative fees decreased $6.5 million, or 30.8%, primarily due to loss of third party business at APM. Other revenue increased $8.0 million, or 6.1%, primarily due to growth in business with other Anthem companies. Benefit expense decreased $2.3 million, or 3.0%, primarily due to the sale of the non-core block of group life and health business in California. The effect of this sale on the benefit expense ratio in 1999 was a reduction of 490 basis points. The benefit expense ratio fell an additional 280 basis points primarily due to a change in the funding arrangement with a major group in California. Until October 1998, we held the assets of this group's retirement funding account and utilized investment income from these assets to subsidize the group's life insurance premiums. In October 1998, the retirement funding account was returned to the group. Since investment income was no longer available to subsidize the life insurance premiums, the premiums paid by the group increased, resulting in a lower benefit expense ratio. 72
Administrative expense increased primarily at APM due to higher mail order volume, costs associated with switching third party claims processing vendors, as well as costs incurred in anticipation of adding the business of BCBS-NH and BCBS-CO/NV. Operating gain decreased $7.0 million, or 30.2%, primarily due to the loss of a large customer in 1999 and an increase in drug rebates shared with our Midwest region. Other The following table presents our Other segment's results of operations for the years ended December 31, 1999 and 1998: Year Ended December 31, --------------- 1999 1998 $ Change % Change ------- ------ -------- -------- ($ in Millions) Operating revenue and premium equivalents...... $ 184.4 $186.1 $ (1.7) (0.9)% ======= ====== ====== ==== Premiums.................. $ 33.3 $ 27.6 $ 5.7 20.7% Administrative fees....... 252.3 228.3 24.0 10.5% Other revenue (expense)... (101.2) (69.8) (31.4) 45.0% ------- ------ ------ ---- Total operating revenue................ 184.4 186.1 (1.7) (0.9)% Benefit expense........... 31.8 33.3 (1.5) (4.5)% Administrative expense.... 172.3 185.5 (13.2) (7.1)% ------- ------ ------ ---- Total operating expense................ 204.1 218.8 (14.7) (6.7)% ------- ------ ------ ---- Operating loss............ $ (19.7) $(32.7) $ 13.0 NM(1) ======= ====== ====== ==== - -------- (1) NM = Not meaningful. Premiums increased $5.7 million, or 20.7%, primarily due to additional premiums from non-core business that was subsequently disposed of in 1999. The business that was sold generated $11.4 million of premiums in 1999 versus $2.2 million in 1998. Excluding this business, premiums decreased $3.5 million, or 13.8%, due to lower membership at Anthem Alliance Health Insurance Company, as more military personnel opted to use military primary care physicians instead of civilian primary care physicians. Administrative fees increased $24.0 million, or 10.5%, primarily due to increased business at AdminaStar Federal. Excluding intersegment other revenue of $104.3 million and $105.8 million in 1999 and 1998, respectively, other revenue decreased $32.9 million, or 91.4%, to $3.1 million in 1999 primarily due to the transfer of document management operations to our Midwest region at the beginning of 1999 and the sale of non- core businesses. Benefit expense decreased $1.5 million, or 4.5%, primarily due to lower membership at Anthem Alliance Health Insurance Company as discussed above. Excluding intersegment administrative expense of $112.1 million and $116.3 million in 1999 and 1998 respectively, administrative expense decreased $17.4 million, or 5.8%, primarily due to sale of non-core businesses during 1998, transfer of document management operations and lower unallocated corporate expenses. Excluding the sale of non-core businesses, administrative expense decreased $1.1 million, or 0.4%, to $284.4 million in 1999. Almost all of our operating loss reported in our Other segment relates to unallocated corporate expenses. In 1999, unallocated corporate expenses were $26.7 million versus $32.1 million in 1998, primarily due to higher employee benefit cost allocations in 1999. 73
Income Taxes Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires, among other things, the separate recognition, measured at currently enacted tax rates, of deferred tax assets and deferred tax liabilities for the tax effect of temporary differences between the financial reporting and tax reporting. A valuation allowance must be established for deferred tax assets if it is "more likely than not" that all or a portion may not be realized. See Note 10 to the audited consolidated financial statements for additional information. We believe we will be able to realize the benefit of the net deferred tax asset of $2.7 million as of June 30, 2001. This net deferred tax asset is comprised of a gross tax asset of $484.5 million, less a valuation allowance of $262.2 million and a deferred tax liability of $219.6 million. We believe that the allowance is sufficient and at each quarterly financial reporting date, we evaluate each of our gross deferred tax assets based on each of the five key elements that follow: . the types of temporary differences making up our gross deferred tax asset; . the anticipated reversal periods of those temporary differences; . the amount of taxes paid in prior periods and available for a carry-back claim; . the forecasted near term future taxable income; and . any significant other issues impacting the likely realization of the benefit of the temporary differences. As an entity taxed under Internal Revenue Code Section 833, at June 30, 2001, we have tax temporary differences of approximately $206.6 million for net operating loss carry-forwards and alternative minimum tax credits. Due to uncertainty of the realization of these deferred tax assets, we have provided a valuation allowance included above of $188.1 million for these amounts. This amount is part of the total valuation allowance of $262.2 million at June 30, 2001. Liquidity and Capital Resources Anthem Cash Flow Our cash collections consist primarily of premiums and administrative fees, investment income and proceeds from the sale or maturity of our investment securities. Cash disbursements result mainly from policyholder benefit payments, administrative expenses and taxes. We also use cash for purchases of investment securities, capital expenditures and acquisitions. Cash outflows can fluctuate because of uncertainties regarding the amount and timing of settlement of our liabilities for unpaid benefit claims and the timing of payments of operating expenses. Our investment strategy is to make prudent investments, consistent with insurance statutes and other regulatory requirements, with the main objective of preserving our asset base. Management believes that cash flow from operations, together with the portfolio, will continue to provide sufficient liquidity to meet general operations needs, special needs arising from changes in financial position and changes in financial markets. We also maintain a bank line of credit and a commercial paper program to provide additional liquidity. Six Months Ended June 30, 2001 and 2000 Net cash flow provided by operating activities was $261.1 million in 2001, as compared to $365.4 million in 2000. Net cash flow provided by operating activities decreased as the 2000 period included the initial results of improved balance sheet management in which we converted certain operating assets, such as receivables and investments in non-strategic assets, to cash. These activities contributed additional operating cash above levels in 2000. Also, in 2001, higher payments were made related to incentive compensation that had been accrued in previous years. These items 74
offset significant growth in the amount of net income, increased depreciation and amortization expense related to acquisitions. Net cash used in investing activities was $225.5 million in 2001 compared to cash used in investing activities of $320.9 million in 2000. The net cash received from the sale of our TRICARE business and other purchase price adjustments paid in respect of prior acquisitions in 2001 resulted in a decrease of approximately $105.5 million in cash used in investing activities as compared to 2000 when we purchased BCBS-ME. There were no financing activities in the first six months of 2001. Net cash provided by financing activities was $75.3 million for 2000, which constituted the net proceeds received from the issuance of $295.3 million of surplus notes on a discounted basis less $220.0 million repayment of bank debt. Twelve Months Ended December 31, 2000 and 1999 Net cash flow provided by operating activities was $684.5 million in 2000, as compared to $219.8 million in 1999. Significant growth occurred in the amount of net income, increased depreciation and amortization expense related to acquisitions, amortization of a new claims and administration system in our Midwest region and better balance sheet management. The 1999 period included non-recurring disbursements of $156.0 million related to payments for the settlement of charitable asset claims in the states of Ohio, Kentucky and Connecticut and the $41.9 million settlement with the OIG with respect to BCBS- CT. Additionally, during 2000, through improved balance sheet management, we converted certain operating assets, such as receivables and investments in non- strategic assets, to cash. These activities contributed $256.4 million of additional operating cash in 2000. Net cash used in investing activities was $761.1 million in 2000 compared to cash used in investing activities of $356.8 million in 1999. As a result of the increased operating cash flow discussed above and the increased cash from financing activities discussed below, we purchased significantly more investment securities in 2000 accounting for $596.8 million of the total increase in cash used in investing activities. Additionally, the net cash paid to acquire BCBS-ME and other purchase price adjustments paid in respect of prior acquisitions in 2000 resulted in a decrease of approximately $161.7 million in cash used for investing activities, as compared to 1999 when we purchased BCBS-NH and BCBS-CO/NV. Offsetting these increases was a decrease of $23.4 million in capital expenditures from the prior year. Capital expenditures decreased in 2000 primarily due to lower capitalization of software costs related to the new Midwest claims and administration system and lower purchases of computer equipment. Net cash provided by financing activities was $75.5 million for 2000, as compared to $220.1 million for 1999. The cash provided in 2000 was the net proceeds received from the issuance of $295.9 million of surplus notes on a discounted basis less $220.4 million repayment of bank debt. Twelve Months Ended December 31, 1999 and 1998 Net cash provided by operating activities was $219.8 million in 1999 and $119.9 million in 1998, an increase of $99.9 million, or 83.3%. The 1999 period included non-recurring disbursements of $156.0 million relating to payments for the settlement of charitable asset claims in the states of Ohio, Connecticut and Kentucky and the $41.9 million settlement with the OIG with respect to BCBS-CT. After eliminating the effect of these one-time disbursements, the increase in 1999 operating cash flow from 1998 was $255.9 million. This increase was primarily attributable to improved operating cash flow resulted from a net increase in policy liabilities of $145.9 million. Additionally, during 1999 through balance sheet management, we converted certain operating assets such as receivables to cash. Finally, net cash used in discontinued operations declined between the two years as obligations related to the sales of these operations were nearing completion. Net cash used in investing activities increased $248.0 million, to $356.8 million during 1999 from $108.8 million in 1998. Anthem acquired BCBS-NH and BCBS-CO/NV in the fourth quarter of 1999, which accounted for most of the increased usage. During 1999, we had fewer net investment 75
purchases than in 1998, primarily due to the restructuring of the investment portfolio in 1998 described earlier. Net investment sales and purchases tend to fluctuate from year to year as other sources and uses of cash, such as financing or acquisitions, affect changes in the portfolio. Capital expenditures increased $7.5 million to $96.7 million primarily due to purchases of personal computers as part of our desktop standardization program. Net cash provided by financing activities was $220.1 million in 1999, a $223.9 million increase from the $3.8 million cash used in financing activities during 1998. During 1999, we utilized our revolving credit lines to partially finance the acquisition of BCBS-NH and BCBS-CO/NV, while no such borrowings occurred in 1998. Anthem, Inc. Following this offering and the effective date of the plan to convert from a mutual to stock insurance company, Anthem Insurance will become a wholly owned subsidiary and the primary asset of Anthem, Inc. From the net proceeds of this offering, it is estimated that $837.2 million will be paid to certain of Anthem Insurance's eligible statutory members in lieu of shares that would otherwise be issued to such members in the demutualization. Our future liquidity needs may include acquisitions, operating expenses, capital contributions to our subsidiaries or dividend payments. On an ongoing basis, we will rely upon dividends from our subsidiary, Anthem Insurance, to meet liquidity needs. Although Anthem Insurance and its insurance subsidiaries are subject to capitalization requirements, as well as restrictions and limitations on the amounts of dividends or distributions that can be made, we believe, based on historical results of Anthem Insurance and its subsidiaries, that we will have the liquidity needed. The ability of our licensed insurance company subsidiaries to pay dividends is limited by the departments of insurance in their respective states of domicile. Generally, dividends in any 12-month period are limited to the greater or lesser (depending on state statute) of the prior year's statutory net income or 10% of statutory surplus. Dividends in excess of this amount are classified as extraordinary and require prior approval of the respective departments of insurance. Further, an insurance company may not pay a dividend unless, after such payment, its surplus to policyholders is reasonable in relation to its outstanding liabilities and adequate to meet its financial needs, as determined by the department of insurance. The maximum dividend payable by Anthem Insurance's licensed insurance company subsidiaries without prior approval in 2001 is $185.0 million. The dividends paid by such regulated subsidiaries in 2000 was $71.3 million. The amount of dividends that could be paid by Anthem Insurance to Anthem, Inc. in 2001, based upon the foregoing standards, is $190.7 million. Anthem Insurance currently has a $300 million commercial paper program available for general corporate purposes. Commercial paper notes are short term in nature, with a maturity not to exceed 270 days from date of issuance. The notes bear interest at then available market rates. The commercial paper program is supported by the revolving credit agreement discussed below. Anthem Insurance had no commercial paper outstanding at June 30, 2001. Anthem Insurance has a $300 million multi-year revolving credit agreement with a syndicate of banks. The facility is available for general corporate purposes and support of the commercial paper program. Borrowings under the credit facility bear interest at rates determined by reference to the banks' base rate or to the London Interbank Offered Rate, or LIBOR, plus a margin determined by reference to Anthem Insurance's then current claims paying ability ratings issued by certain specified rating agencies. The agreement requires payment of quarterly facility fees, again determined by the then current claims paying ability ratings of Anthem Insurance. The agreement contains certain financial covenants, including limits on minimum net worth, maximum consolidated debt and 76
maximum asset dispositions annually. We are currently in compliance with all such covenants. The facility matures on October 22, 2002. No borrowings were outstanding as of June 30, 2001. Anthem Insurance intends to replace its current $300 million credit facility. Anthem Insurance has entered into a commitment letter with respect to senior unsecured revolving credit facilities in the aggregate principal amount of $750 million, which Anthem Insurance may request be increased to up to $1.0 billion in the event of oversubscription by the syndicate of banks. The commitment letter also provides that the facilities would consist of one 364- day facility and one five-year facility. Subject to final documentation and other conditions, we expect the new facilities to be in place prior to this offering. Following the effectiveness of the demutualization, Anthem, Inc. will become a co-borrower and will be jointly and severally responsible for all obligations under the facilities. We will pay for the BCBS-KS acquisition with currently available funds. We plan to utilize our investment portfolio, current capacity of existing borrowing facilities, new bank borrowings, equity or debt offerings or operating cash flow to fund any future acquisitions. The source of financing would be determined at the time of any future transaction, based on market conditions at that time. Any proceeds from previously issued debt, not used for acquisitions, are currently invested as part of our investment portfolio. See Note 4 of our audited consolidated financial statements for information related to our investment portfolio. Risk-Based Capital Our subsidiaries' states of domicile have statutory risk-based capital or RBC requirements for health and other insurance companies based on the RBC Model Act. These RBC requirements are intended to assess the capital adequacy of life and health insurers, taking into account the risk characteristics of an insurer's investments and products. The RBC Model Act sets forth the formula for calculating the RBC requirements which are designed to take into account asset risks, insurance risks, interest rate risks and other relevant risks with respect to an individual insurance company's business. In general, under these laws, an insurance company must submit a report of its RBC level to the state insurance department or insurance commissioner, as appropriate, as of the end of the previous calendar year. Risk-based capital standards will be used by regulators to set in motion appropriate regulatory actions relating to insurers that show indications of weak or deteriorating conditions. It also provides an additional standard for minimum capital requirements that companies should meet to avoid being placed in rehabilitation or liquidation. Anthem's risk based capital as of June 30, 2001 continues to be substantially in excess of all mandatory RBC thresholds. Quantitative and Qualitative Disclosure About Market Risk As a result of our investing and borrowing activities, we are exposed to financial market risks, including those resulting from changes in interest rates and changes in equity market valuations. Potential impacts discussed below are based upon sensitivity analyses performed on Anthem's financial positions as of June 30, 2001. Actual results could vary significantly from these estimates. Our primary objective is the preservation of the asset base and the maximization of total return given an acceptable level of risk. Our portfolio is exposed to three primary sources of risk: (1) interest rate risk, (2) credit risk, and (3) market valuation risk for equity holdings. As of June 30, 2001, the fair value of fixed income securities and equity securities represented approximately 88% and 12% of the securities available for sale, respectively. Our goal is to increase the percentage of fixed income securities to 90% and decrease equity securities to 10% of the securities available for sale by the end of 2001. 77
The primary risks associated with our fixed maturity securities are credit quality risk and interest rate risk. Credit quality risk is defined as the risk of a credit downgrade to an individual fixed income security and the potential loss attributable to that downgrade. We manage this risk through our investment policy, which establishes credit quality limitations on the overall portfolio as well as dollar limits for individual issuers. Since we are advised immediately of circumstances surrounding credit rating downgrades, we are able to promptly avoid or minimize exposure to losses by selling the subject security. The result is a well-diversified portfolio of fixed income securities, with an average credit rating of approximately double-A. Interest rate risk is defined as the potential for economic losses on fixed-rate securities, due to an adverse change in market interest rates. Our fixed maturity portfolio consists exclusively of U.S. dollar-denominated assets, invested primarily in U.S. government securities, corporate bonds, asset-backed bonds and mortgage-related securities, all of which represent an exposure to changes in the level of market interest rates. We manage interest rate risk by maintaining a duration commensurate with our insurance liabilities and policyholders' surplus. Additionally, we have the capability of holding any security to maturity, which would allow us to realize full par value. Further, we do not engage in the use of derivatives to manage interest rate risk, as they are prohibited in our investment policy. Our portfolio consists of corporate securities (approximately 34% of the total fixed income portfolio) which are subject to credit/default risk. In a declining economic environment, corporate yields will usually increase prompted by concern over the ability of corporations to make interest payments, thus causing a decrease in the price of corporate securities, and the decline in value of the corporate fixed income portfolio. This risk is managed externally by our money managers--through fundamental credit analysis, diversification of issuers and industries, and an average credit rating of the corporate fixed income portfolio of approximately double-A. The equity portfolio is exposed to the volatility inherent in the stock market, driven by concerns over economic conditions, earnings and sales growth, inflation and consumer confidence. These systematic risks cannot be managed through diversification. However, unsystematic risks, such as stock/industry specific risks, are managed by indexing the equity portfolio to the S&P 500 and S&P 400 indices (78% and 22% respectively), excluding in each case tobacco stocks, resulting in a diversified portfolio. All of our investments are classified as available-for-sale. Approximately 88% of these are fixed maturity securities. Market risk is addressed by actively managing the duration, allocation and diversification of the investment portfolio. We have evaluated the impact on the fixed income portfolio's fair value considering a 100 basis point change in interest rates over the next twelve-month period. A 100 basis point increase in interest rates would result in an approximate $166.8 million decrease in fair value, whereas a 100 basis point decrease in interest rates would result in an approximate $164.9 million increase in fair value. This analysis includes the assumption that the 100 basis point change occurs evenly throughout the 12-month period. The analysis also assumes investment income earned is reinvested into the portfolio thus mitigating the effects of change in fair value. As of June 30, 2001, no portion of our fixed income portfolio was invested in non-US dollar denominated investments. We also maintain a diverse portfolio of large capitalization equity securities. An immediate 10% decrease in each equity investment's value, arising from market movement, would result in a fair value decrease of $43.9 million. Alternatively, an immediate 10% increase in each equity investment's value, attributable to the same factor, would result in a fair value increase of $43.9 million. No portion of our equity portfolio was invested in non-US dollar denominated investments as of June 30, 2001. As of June 30, 2001, we held no derivative financial or commodity-based instruments. During the six months ended June 30, 2001, $28.9 million of unrealized investment losses were charged to income as equity securities declines in value were determined to be other than temporary. 78
RECENT DEVELOPMENTS Proposed Acquisition of Blue Cross and Blue Shield of Kansas General On May 30, 2001, we signed a definitive agreement with Blue Cross and Blue Shield of Kansas, Inc., or BCBS-KS, pursuant to which we have agreed to acquire BCBS-KS, which will become a wholly owned subsidiary of ours. Under the proposed transaction, BCBS-KS will convert from a mutual insurance company to a stock insurance company through a process known as a sponsored demutualization. Under the agreement, BCBS-KS policyholders eligible to receive consideration in its demutualization will be entitled to receive $190.0 million, which we will pay in cash to the escrow described below at the closing of the transaction and which amount thereafter may be reduced as described below. In addition, at or prior to the closing, BCBS-KS will declare a special distribution payable after the closing to its eligible policyholders in an amount equal to the excess of BCBS-KS' consolidated closing book value over $155.0 million. The amount of this excess is currently estimated to be approximately $180.0 million. The $190.0 million purchase price will be held in an escrow account pending the resolution of a matter involving a subpoena dated February 28, 2001, received by BCBS-KS from the OIG. The subpoena seeks documents related to an investigation of possible improper claims against Medicare. The amounts held in escrow will be used to pay costs, expenses and liabilities related to the OIG investigation, and to pay costs and expenses of the escrow, with any remaining amounts to be distributed to eligible BCBS-KS members following final resolution of the matter. The transaction is expected to close in late 2001, subject to the approval of BCBS-KS policyholders, the approval of the BCBSA, the approval of the Kansas Department of Insurance and other regulatory approvals. Once the transaction is completed, we will market our health benefits products in Kansas under the Anthem Blue Cross and Blue Shield name. The acquisition will be accounted for as a purchase and the net assets and results of operations will be included in our consolidated financial statements from the purchase date. Policyholders of BCBS-KS will not become statutory members of Anthem Insurance and will not be eligible to receive any consideration as a result of Anthem Insurance's demutualization. BCBS-KS BCBS-KS is the largest health insurer in Kansas. BCBS-KS provides insurance coverage or self-insured administration services to more than 715,000 individuals in all Kansas counties except Johnson and Wyandotte, two counties near Kansas City. BCBS-KS also administers Medicare and Medicaid government programs. BCBS-KS offers a wide range of health benefit products including traditional indemnity products and HMO, POS and PPO managed care products. BCBS-KS also offers claims administration and stop-loss coverage for employer self-funded plans, as well as underwriting, actuarial services, provider network access, and medical cost management. Additionally, BCBS-KS offers several specialty insurance products, including group life, disability, dental and long-term care. BCBS-KS provides its products to a diverse customer base, including non- group, small group, large group national accounts, federal employees and government programs. BCBS-KS markets its products primarily through its captive sales force and contracts with independent agents and brokers on only a limited basis. 79
BCBS-KS has various subsidiaries, including a majority-owned HMO operated in partnership with two hospitals and a majority-owned company licensed to sell life insurance in 38 states. For the year ended December 31, 2000, BCBS-KS had revenue of $1,026.0 million and net income of $5.8 million and, at December 31, 2000, assets of $730.8 million and surplus of $328.5 million. Escrow of Funds; Certain Liabilities Pursuant to the definitive agreement, we will place the $190.0 million purchase price in an escrow account, to be held pending resolution of all matters relating to the subpoena received from the OIG seeking documents related to an investigation of possible improper claims against Medicare. The amount held in escrow will be used to pay fees and costs attributable to the OIG investigation, certain related tax costs and other related costs, expenses and liabilities of the escrow. Any amounts remaining in the escrow account, including any interest on the escrow funds, following the final resolution of the matter and the payment of such costs, expenses and liabilities will be distributed to eligible BCBS-KS policyholders. However, if the amount that we have paid and placed in escrow is not enough to cover the costs, expenses and liabilities relating to the OIG investigation and the escrow, then those remaining costs, expenses and liabilities would reduce the value of BCBS-KS. Disposition of TRICARE Operations Under a contract between our subsidiary, Anthem Alliance Health Insurance Company, or Alliance, and the United States Department of Defense, Alliance managed and administered the TRICARE Managed Care Support Program for military families from May 1, 1998 through May 31, 2001. TRICARE administration is outside of our focus on core Blue Cross and Blue Shield health benefits business and on those specialty businesses that enable us to offer a broad line of products to health plan customers. Accordingly, a decision was made to sell the TRICARE operations. On April 18, 2001, along with Alliance, we entered into an Agreement and Plan of Merger to sell the TRICARE operations of Alliance to a subsidiary of Humana, Inc. for $45.0 million. The transaction, which closed on May 31, 2001, resulted in a gain on sale of subsidiary operations of $25.0 million, net of selling expenses. 80
THE BUSINESS OF ANTHEM General Business Description We are one of the nation's largest health benefits companies, serving over seven million members, or customers, primarily in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado and Nevada. We hold the leading market position in seven of these eight states and own the exclusive right to market our products and services using the Blue Cross Blue Shield, or BCBS, names and marks in all eight states under license agreements with the Blue Cross Blue Shield Association, or BCBSA, an association of independent BCBS plans. We seek to be a leader in our industry by offering a broad selection of flexible and competitively priced health benefits products. Our product portfolio includes a diversified mix of managed care products, including HMO, PPO, and POS plans, as well as traditional indemnity products. We also offer a broad range of administrative and managed care services and partially insured products for employer self-funded plans. These services and products include underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, claims processing and other administrative services. In addition, we offer our customers several specialty products including group life, disability, prescription management, workers compensation, dental and vision. Our products allow our customers to choose from a wide array of funding alternatives. For our insured products, we charge a premium and assume all or a majority of the health care risk. Under our self- funded and partially insured products, we charge a fee for services, and the employer or plan sponsor reimburses us for all or a majority of the health care costs. Of our 2000 operating revenue, 90.6% was derived from fully insured products, while 9.4% was derived from administrative services and other revenues. Our customer base primarily includes large groups (contracts with 51 or more eligible employees), individuals and small groups (one to 50 employees), each of which accounted for 36.8%, 19.0% and 17.0% of our 2000 operating revenue, respectively. Other major customer categories include National accounts, Medicare recipients, federal employees and other federally funded programs. We principally market our products through an extensive network of independent agents and brokers who are compensated on a commission basis for new sales and retention of existing business. Our managed care plans and products are designed to encourage providers and members to select quality, cost-effective health care by utilizing the full range of our innovative medical management services, quality initiatives and financial incentives. Our leading market shares enable us to realize the long- term benefits of investing in preventive and early detection programs. We further improve our ability to provide cost-effective health benefits products and services through a disciplined approach to internal cost containment, prudent management of our risk exposure and successful integration of acquired businesses. These measures have allowed us to achieve significant growth in membership (78%), revenue (68%), and net income (135%) from 1996 through 2000. We intend to continue to expand through a combination of organic growth and strategic acquisitions in both existing and new markets. Our growth strategy is designed to enable us to take advantage of the additional economies of scale provided by increased overall membership. In addition, we believe geographic diversity reduces our exposure to local or regional economic, regulatory and competitive pressures and provides us with increased opportunities for expansion. While the majority of our growth has been the result of strategic mergers and acquisitions, we have also achieved growth in our existing markets by providing excellent service, offering competitively priced products and effectively capturing the brand strength of the Blue Cross and Blue Shield names and marks. 81
Industry Overview The health benefits industry has experienced significant change in recent years. The increasing focus on health care costs by employers, the government and consumers has led to the growth of alternatives to traditional indemnity health insurance. HMO, PPO and hybrid plans, such as POS plans, incorporating features of each, are among the various forms of managed care products that have developed in recent years. Through these types of products, the cost of health care is contained by negotiating contracts with hospitals, physicians and other providers to deliver health care at favorable rates. These products also can feature medical management and other quality and cost containment measures such as pre-admission review and approval for non-emergency hospital services, pre-authorization of outpatient surgical procedures, and network credentialing to determine that network doctors and hospitals have the required certifications and expertise. In addition, providers may share medical cost risk or have other incentives to deliver quality medical services in a cost- effective manner. HMO, PPO and POS enrollees generally are charged periodic, pre-paid premiums, and pay co-payments or deductibles when they receive services. PPO and POS plans allow out-of-network usage, typically at higher out-of-pocket costs to members. HMO members generally select one of the network's primary care physicians who then assumes responsibility for coordinating their health care services. Typically, there is no out-of-network benefit for HMO members. PPOs and other open access plans generally allow members to select non-network providers without coordination through a primary care physician, but at a higher out-of-pocket cost. Hybrid plans, such as POS plans, typically involve the selection of primary care physicians similar to HMOs, but allow members to self refer or to choose non-network providers at higher out-of-pocket costs similar to those of PPOs. Recently, economic factors and greater consumer awareness have resulted in the increasing popularity of products that offer larger, more extensive networks, more member choice related to coverage and the ability to self refer within those networks. There is also a growing preference for greater flexibility to assume larger deductibles and co-payments in exchange for lower premiums. We believe we are well positioned in each of our regions to respond to these market preferences. Our PPO products, which contain most or all of the features noted above, have experienced significant growth over the past few years. The Blue Cross Blue Shield Association, or BCBSA, has also undergone significant change in recent years. Historically, most states had at least one Blue Cross (hospital coverage) and a separate Blue Shield (physician coverage) company. Prior to the mid 1980s there were more than 125 separate Blue Cross or Blue Shield companies. Many of these organizations have merged, reducing the number of independent licensees to under 50 as of December 2000. We expect this trend to continue, with plans merging or affiliating to address capital needs and other competitive pressures. Each of the BCBS plans work cooperatively in a number of ways that create significant market advantages, especially when competing for very large multi- state employer groups. As a result of this cooperation, each plan is able to take advantage of other member plans' substantial provider networks and discounts when any member from one state works or travels outside of the state in which the policy is written. We receive a substantial and growing source of revenue under this "BlueCard" program for providing member services in our states for individuals who are customers of other BCBS plans. Our Strategy Our strategic objective is to be among the best and biggest in our industry with the size and scale to deliver the best product value with the best people. 82
To achieve these goals, we offer a broad selection of flexible and competitively priced products and seek to establish leading market positions. We believe that increased scale in each of our regional markets will provide us competitive advantages, cost efficiencies and greater opportunities to sustain profitable growth. The key to our ability to deliver this growth is our commitment to work with providers to optimize the cost and quality of care while improving the health of our members and improving the quality of our service. Promote Quality Care We believe that our ability to help our members receive quality, cost- effective health care will be key to our success. We promote the health of our members through education and through products that cover prevention and early detection programs that help our members and their providers manage illness before higher cost intervention is required. To help develop those programs, we collaborate with the providers in our networks to promote improved quality of care for our members. The following policies and programs are key to improving the quality of care that our members receive: . Selection and continued assessment of provider networks: We select for our networks providers who meet and maintain our standards of medical education, training and professional experience. . Disease management: We develop disease management programs that educate members on actions they can take to help monitor and better control their illnesses and to manage diseases such as diabetes, asthma and congestive heart failure. . Prevention measures: We work with providers and members to promote preventive measures such as childhood and adult immunizations, as well as breast cancer screening. . Education: We help our members prevent disease and illness or minimize their impact by promoting lifestyle modification through education. For example, our nationally recognized smoking cessation program in Maine has helped to reduce the number of our members in Maine who smoke by 49% over four years. . Technology: We also utilize technology to evaluate the medical care provided to our customers. For example, our Anthem Prescription Management decision support system helps to identify potentially harmful drug interactions and helps prevent members from receiving potentially dangerous combinations of drugs. Product Value We aim to create products that offer value to our customers. By offering a wide spectrum of products supported by broad provider networks, we seek to meet the differing needs of our various customers. The breadth and flexibility of our benefit plan options, coupled with quality care initiatives, are designed to appeal to a broad base of employer groups and individuals with differing product and service preferences. We use innovative product design, such as a three-tiered prescription program that provides customer selection among generic, brand and formulary drugs at various out-of-pocket costs. Innovative product design helps us to contain costs, which allows our products to be competitively priced in the market. Formulary drugs are prescription drugs that have been reviewed and selected by a committee of practicing doctors and clinical pharmacists for their quality and cost effectiveness. Use of medications from the formulary, which includes hundreds of brand name and generic medications, is encouraged through pharmacy benefit design. A three-tier pharmacy benefit and the use of formulary drugs allow members access to highly useful prescription medications, while also helping to control the cost of pharmacy benefits to employers. Members have the same access to medications but share a greater 83
portion of the cost for brand name drugs through the co-payment structure. Under a three-tier program, the customer pays the lowest price for generic drugs, a higher price for formulary brand name drugs and the highest price for brand name drugs not included in the formulary. Operational Excellence To provide cost-effective products, we continuously strive to improve operational efficiency. We actively benchmark our performance against other leading health benefits companies to identify opportunities to drive continuous performance improvement. Important performance measures we use include operating margin, administrative expense ratio, administrative expense PMPM and return on equity. Current initiatives to drive operational efficiency include: . consolidating and eliminating information systems; . standardizing operations and processes; . implementing e-business strategies; and . integrating acquired businesses. Technology We continuously review opportunities to improve our interactions with customers, brokers and providers. By utilizing technologies, we seek to make the interactions as simple, efficient and productive as possible. We monitor ourselves using industry standard customer service metrics, which measure, among other things, call center efficiency, claims paying accuracy and speed of enrollment. We ease the administrative burden of enrolling new accounts, processing claims and updating records for our brokers and providers by automating many of these processes. We also collect information that enables us to further improve customer service, product design and underwriting decisions. Growth We believe that profitable growth, both organic and through acquisitions, is an important part of our business. Increased scale allows us to increase customer convenience and improve operating margins, while keeping our products competitively priced. Expansion into new geographic markets enables us to reduce exposure to economic cycles and regulatory changes and provides options for business expansion. We plan to generate earnings growth first by increasing revenues through new enrollment, while maintaining pricing discipline. In addition, we plan to increase the penetration of specialty products to existing health members through cross selling and expansion into non-Anthem markets. These specialty products include prescription management, vision, dental, group life and disability insurance. While enjoying a leading market share in seven of our eight markets, we have a market share ranging from 16% to 40% and believe there is remaining opportunity to grow profitably in each market. We also intend to make strategic acquisitions to augment our internal growth. Our History We were formed in 1944 under the name of Mutual Hospital Insurance, Inc., commonly known as Blue Cross of Indiana. In 1946, Mutual Medical Insurance Inc., also known as Blue Shield of Indiana, was incorporated as an Indiana mutual insurance company. In 1985, these two companies merged under the name Associated Insurance Companies, Inc. In 1993, Southeastern Mutual Insurance Company, a Kentucky-domiciled mutual insurance company doing business as Blue Cross and Blue Shield of Kentucky, was merged into us. In 1995, Community Mutual Insurance Company, an Ohio-domiciled mutual insurance company doing business as Community Mutual Blue Cross and Blue Shield, was merged into us. We changed our name to Anthem Insurance Companies, Inc. in 84
1996. In 1997, Blue Cross & Blue Shield of Connecticut, Inc., a Connecticut- domiciled mutual insurance company, was merged into Anthem Insurance. We completed our purchases of New Hampshire-Vermont Health Service, which did business as Blue Cross and Blue Shield of New Hampshire, and Rocky Mountain Hospital and Medical Service, which did business as Blue Cross and Blue Shield of Colorado and Nevada, during 1999. In 2000, we completed our purchase of Associated Hospital Service of Maine, which did business as Blue Cross and Blue Shield of Maine. Mergers and Acquisitions Much of our recent growth in membership has resulted from strategic mergers and acquisitions, primarily with other Blue Cross and Blue Shield licensees. These combinations, coupled with growth in existing markets, have enabled us to establish multi-regional centers of focus with a significant share of each region's health benefits market. The following table sets forth our membership by state in the years indicated: MEMBERSHIP At December 31, ---------------------------------- 2000 1999 1998 1997 1996 ----- ----- ----- ----- ----- (In Thousands) Midwest Ohio.................................. 2,118 1,987 2,096 1,990 1,868 Indiana............................... 1,410 1,358 1,175 1,226 1,151 Kentucky.............................. 1,054 1,037 928 1,129 1,059 ----- ----- ----- ----- ----- Subtotal............................ 4,582 4,382 4,199 4,345 4,078 East Connecticut........................... 1,127 1,031 968 916 -- New Hampshire......................... 479 366 -- -- -- Maine................................. 487 -- -- -- -- ----- ----- ----- ----- ----- Subtotal............................ 2,093 1,397 968 916 -- West Colorado.............................. 463 395 -- -- -- Nevada................................ 132 91 -- -- -- ----- ----- ----- ----- ----- Subtotal............................ 595 486 -- -- -- ----- ----- ----- ----- ----- Total............................. 7,270 6,265 5,167 5,261 4,078 ===== ===== ===== ===== ===== Percentage increase (decrease) from previous year end........... 16% 21% (2)% 29% -- During the last three years, we have completed the following acquisitions: . On June 5, 2000, we purchased substantially all of the assets and liabilities of BCBS-ME. The cash purchase price was $95.4 million (including direct costs of acquisition). . On November 16, 1999, we purchased the stock of BCBS-CO/NV. The cash purchase price was $160.7 million (including direct costs of acquisition). . On October 27, 1999, we purchased the assets and liabilities of BCBS-NH. The cash purchase price was $125.4 million (including direct costs of acquisition). In addition, we have signed a definitive agreement pursuant to which we have agreed to acquire BCBS-KS. See "Recent Developments--Proposed Acquisition of Blue Cross and Blue Shield of Kansas." 85
When integrating new operations, we focus on improving customer service, underwriting, medical management and administrative operations. We improve operations by centralizing certain management and support functions, sharing best practices and consolidating information systems. We also improve underwriting practices by establishing discipline in our data analysis and product design. The following table illustrates the success we have had in improving the operating performance of BCBS-CT, BCBS-NH and BCBS-CO/NV. The table includes operating gain (loss) of the year prior to the merger or acquisition, the year of the merger or acquisition and the year or years following the merger or acquisition: Operating Gain(1) Date of Acquisition 2000 1999 1998 1997 1996 ------------- ----- ------ ------ ------ ----- (In Millions) BCBS-CT................ August 1997 $86.6 $ 41.3(2) $ (5.6) $(15.6) $(1.7) BCBS-NH................ October 1999 $11.6 $ 1.3 $(21.6) -- -- BCBS-CO/NV............. November 1999 $ 6.5 $(30.2) $(62.2) -- -- - -------- (1) Operating gain consists of operating revenue minus benefit expense and administrative expense. Results are shown on a stand alone basis including the year prior to affiliating with Anthem. (2) Excludes one time $41.9 million expense related to settlement of claims pertaining to pre-merger operations. See "Legal and Regulatory Matters-- Other Contingencies." Core Health Benefits Products and Services We offer a diversified mix of managed care products, including HMO, PPO and POS plans, as well as traditional indemnity products. Our managed care products incorporate a broad range of options and financial incentives for both members and participating providers, including co-payments and provider risk pools. We also offer a broad range of administrative and managed care services and partially insured products for employer self-funded plans. These services and products include underwriting, stop loss insurance, actuarial services, network access, medical cost management, claims processing and other administrative services. We charge a premium for insured plans and typically assume all or a majority of the health care risk. For self-funded or partially-insured products, we charge a fee for services while the employer assumes all or a majority of the risks. The fee is based upon the customer's selection from our portfolio of services. We also provide specialty products including group life, disability, prescription management, dental and vision care. Our principal health products, offered both on an insured and employer-funded basis, are described below. Some managed care and medical cost containment features may be included in each of these products, such as inpatient pre-certification, benefits for preventive services and reimbursement at reasonable and customary charges with no additional billing to members. Preferred Provider Organization, or PPO. PPO products offer the member an option to select any health care provider, with benefits paid at a higher level when care is received from a participating network provider. Coverage is subject to co-payments or deductibles and coinsurance, with member cost sharing limited by out-of-pocket maximums. Traditional Indemnity. Indemnity products offer the member an option to select any health care provider for covered services. Coverage is subject to deductibles and coinsurance, with member cost sharing limited by out-of-pocket maximums. Health Maintenance Organization, or HMO. HMO products include comprehensive managed care benefits, generally through a participating network of physicians, hospitals and other providers. 86
A member in one of our HMOs must typically select a primary care physician, or PCP, from our network. PCPs generally are family practitioners, internists or pediatricians who provide necessary preventive and primary medical care, and are generally responsible for coordinating other necessary health care. Preventive care services are emphasized in these plans. We offer HMO plans with varying levels of co-payments, which result in different levels of premium rates. Point-of-Service, or POS. POS products blend the characteristics of HMO and indemnity plans. Members can have comprehensive HMO-style benefits through participating network providers with minimum out-of-pocket expense (co- payments) and also can go directly, without a referral, to any provider they choose, subject to, among other things, certain deductibles and coinsurance. Member cost sharing is limited by out-of-pocket maximums. BlueCard Plan. BCBS plans across the United States share their local provider networks in a unique arrangement, where one plan's enrolled members travel or live in another plan's service area. The local or "host" plan is paid an administrative fee by the "home" or selling plan in exchange for providing claims and member services to home plan customers in the host plan's service area. All claims are reimbursed by the home plan, which may have an insured or self-funded relationship with the member's employer under any of the product designs discussed above. BlueCard membership is calculated based on the amount of BlueCard administrative fees we receive from the BlueCard members' home plans. The administrative fees we receive are based on the number and type of claims processed and a portion of the network discount on those claims. The administrative fees are then divided by an assumed PMPM factor in order to calculate the number of members. The assumed PMPM factor is based on an estimate of Anthem's experience and BCBSA guidelines. The following table sets forth our health benefits membership data by product: At December 31, ----------------- 2000 1999 1998 ----- ----- ----- (In Thousands) PPO........................................................ 2,835 2,540 2,322 Traditional Indemnity...................................... 1,155 1,048 1,075 HMO........................................................ 1,147 980 697 POS........................................................ 813 723 543 ----- ----- ----- Directly Contracted Membership............................. 5,950 5,291 4,637 BlueCard (Anthem Host)..................................... 1,320 974 530 ----- ----- ----- Total.................................................... 7,270 6,265 5,167 ===== ===== ===== Specialty Products and Services Prescription Management Services. We provide pharmacy network management, pharmacy benefits and mail order prescription services through our subsidiary, Anthem Prescription Management, or APM, our pharmacy benefit manager. APM administers its programs primarily to customers who are also Anthem health plan members. Anthem Rx, our retail pharmacy network, provides members access to more than 53,000 chain and independent pharmacies across the United States, and Anthem Rx Direct, our mail service pharmacy, provides long-term therapy medications through convenient home delivery. Group Life and Disability. We offer an array of competitive group life insurance and disability benefit products to both large and small group customers. We have over $27.7 billion of life insurance in force, insuring over 31,000 groups with more than 800,000 employees. Our traditional group insurance products include term life, accidental death and dismemberment, short-term disability income and long-term disability income. In addition, we offer voluntary group life and disability products through employers which payroll- deduct premiums from their participating employees. 87
Vision and Dental Care Programs. These programs are primarily for customers enrolled in our Blue Cross and Blue Shield health plans. Vision and dental products available include both fully insured and self-insured products. In addition, we provide dental third-party administration services through Health Management Systems, Inc., our wholly owned subsidiary. Other Products and Services In addition to the above-described products and services, we provide services as a fiscal intermediary for the Medicare Part A and Part B program in certain states. Marketing We market our managed care and specialty products through three regional business units. Our health plans are generally marketed under the Blue Cross and Blue Shield brand, except for certain government programs. We organize our marketing efforts by customer segment and by region in order to maximize our ability to meet the specific needs of our customers. Marketing programs are developed by a cross-functional team including the actuarial, underwriting, sales, operations and finance departments to evaluate risk and pricing and to ensure adherence to established underwriting guidelines. We believe our reputation, financial stability, high quality customer service and exclusive BCBS license provide us with competitive advantages and allow us to gain share in our markets. We strive to develop solutions for our customers. Our keys to success include developing long-term relationships and providing stable pricing of our products. Most contracts are for one year, although we occasionally enter into multi-year arrangements. We maintain the quality of our sales staff and independent brokers through regularly held training seminars and advisory groups, which familiarize them with evolving consumer preferences, as well as our products and current marketing strategies. In addition, we structure sales commissions to provide incentives to our sales staff and brokers to promote the full value of our products. Each region is responsible for enrolling, underwriting and servicing its respective businesses. We pursue product standardization where practical to gain efficiencies resulting from the simplification of the marketing and sales process. Customers In each region, we balance the need to customize products with the efficiencies of product standardization. Overall, we seek to establish pricing and product designs to achieve an appropriate level of profitability for each of our customer categories. Our customers include several distinguishable categories: . Large groups, defined as contracts with 51 or more eligible employees (but excluding "National business", described below), accounted for 36.8% of our operating revenue and 35.0% of our members in 2000. These groups are generally sold through brokers or consultants working with industry specialists from our in-house sales force. Large group cases are usually experience rated or sold on a self-insured basis. The customer's buying decision is typically based upon the size and breadth of our networks, the quality of our medical management services, the administrative cost included in our quoted price, our financial stability and our ability to effectively service large complex accounts. . Small groups, defined as contracts with one to 50 employees, accounted for 17.0% of our operating revenue and 10.6% of our members in 2000. These groups are sold exclusively through independent agents and brokers. Small group cases are sold on a fully insured basis. Underwriting and pricing is done on a community rated basis, with individual state insurance departments approving the rates. See "Legal and Regulatory Matters--Small 88
Group Reform." Small group customers are generally more sensitive to product pricing and, to a lesser extent, the configuration of the network and the efficiency of administration. Account turnover is generally higher with small groups. . Individual policies (under age 65) accounted for 4.9% of our operating revenue and 3.5% of our members in 2000. These policies are generally sold through independent agents and brokers. In some cases an in-house telemarketing unit is used to generate leads. This business is usually medically underwritten at the point of initial issuance. Rates are filed with and approved by state insurance departments. In several of our markets, there is much less competition for individual business than group contracts. . Medicare Supplement business accounted for 7.1% of our operating revenue and 5.4% of our members in 2000. These standardized policies are sold to Medicare recipients as supplements to the benefits they receive from the Medicare program. New policyholders come from independent agents or brokers or through the conversion of existing member groups or individual policies when they retire and reach age 65. . The Federal Employee Program accounted for 10.5% of our operating revenue and 5.6% of our members in 2000. As a BCBSA licensee, we participate in a nationwide contract with the Federal government whereby we cover Federal employees and their dependents in our eight-state service area. Under a complex formula, we are reimbursed for our costs plus a fee. We also participate in the overall medical risk on a pooled basis with the other participating BCBS plans. . Medicare+Choice accounted for 7.0% of our operating revenue and 1.5% of our members in 2000. This program is the managed care alternative to the federally funded Medicare program. Most of the premium is paid directly by the Federal government on behalf of the participant who may also be charged a small premium. Medicare+Choice is marketed in the same manner as Medicare Supplement products. . National business (including BlueCard) accounted for 6.3% of our operating revenue, but 35.2% of our members for 2000, because much of our National business is self-insured. These groups are generally sold through brokers or consultants working with our in-house sales force. We have a significant competitive advantage when competing for very large National accounts due to our ability to access the national network of BCBS plans and take advantage of their provider discounts in their local markets. The following chart shows our membership by customer segment: MEMBERSHIP Customer Segment 2000 1999 1998 ---------------- ----- ----- ----- (In Thousands) Large group................................................ 2,542 2,249 1,852 Small group................................................ 775 637 559 Individual (under age 65).................................. 260 215 159 Medicare Supplement (age 65 and over)...................... 390 371 319 Federal Employee Program................................... 407 362 268 Medicare + Choice.......................................... 106 96 81 National................................................... 2,560 2,106 1,696 Other (TRICARE and Medicaid)............................... 230 229 233 ----- ----- ----- Total.................................................... 7,270 6,265 5,167 ===== ===== ===== 89
The Blue Cross Blue Shield License We have the exclusive right to use the Blue Cross and Blue Shield names and marks for all of our health benefits products in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado and Nevada. We believe that the BCBS names and marks are valuable identifiers of our products and services in the marketplace. The license agreements, which have a perpetual term, contain certain requirements and restrictions regarding our operations and our use of the BCBS names and marks. Upon termination of the license agreements, we would cease to have the right to use the BCBS names and marks in one or more of Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado and Nevada, and the BCBSA could thereafter issue a license to use the BCBS names and marks in these states to another entity. Events that could cause the termination of a license agreement with the BCBSA include: . failure to comply with minimum capital requirements imposed by the BCBSA; . impending financial insolvency; . the appointment of a trustee or receiver; . a change of control or violation of the BCBSA ownership limitations on our capital stock; and . the commencement of any action against Anthem Insurance seeking its dissolution. Pursuant to the rules and license standards of the BCBSA, we have certified to the BCBSA that we guarantee the contractual and financial obligations to respective customers of our subsidiaries that hold controlled affiliate licenses from the BCBSA. Those subsidiaries are Anthem Health Plans of Kentucky, Inc., Anthem Life Insurance Company, Anthem Health Plans, Inc., Community Insurance Company, Anthem Health Plans of New Hampshire, Inc., Rocky Mountain Hospital and Medical Service, Inc., Anthem Health Plans of Maine, Inc., HMO Colorado, Inc., Matthew Thornton Health Plan, Inc., Maine Partners Health Plan, Inc. and Health Management Systems, Inc. In addition, pursuant to the rules and license standards of the BCBSA, we have agreed to indemnify BCBSA against any claims asserted against it resulting from the contractual and financial obligations of AdminaStar Federal, our subsidiary which serves as a fiscal intermediary providing administrative services for Medicare Part A and B. Each license requires an annual fee to be paid to the Blue Cross Blue Shield Association. The fee is based upon enrollment and premium. BCBSA is a national trade association of Blue Cross and Blue Shield licensees, the primary function of which is to promote and preserve the integrity of the Blue Cross and Blue Shield names and marks, as well as provide certain coordination among the member plans. Each BCBSA licensee is an independent legal organization and is not responsible for obligations of other BCBSA member organizations. We have no right to market products and services using the Blue Cross and Blue Shield names and marks outside of our eight core states. We need the consent of the BCBSA in order to continue our licenses following our conversion to a publicly traded stock company. The BCBSA license agreements and membership standards specifically permit a licensee to operate as a for- profit, publicly traded stock company. In recent years, other Blue Cross Blue Shield licensees have converted to stock insurance companies and have retained their licenses. Based on our discussions and meetings with the BCBSA and our understanding of the BCBSA standards, we expect to receive the required BCBSA approval. No shares of common stock will be issued or sold in this offering unless we receive such approval. BCBS-KS is a licensee of the BCBSA. We will need to obtain the consent of the BCBSA to continue that license following our acquisition of BCBS-KS. Information Systems Information systems have played and will continue to play a key role in our ongoing efforts to continuously improve quality, lower costs and increase benefit flexibility for our customers. Our analytical technologies are designed to support increasingly sophisticated methods of managing 90
costs and monitoring quality of care, and we believe that our information systems are sufficient to meet current needs and future expansion plans. We use a combination of custom developed and licensed systems throughout our regions. An overall systems architecture is maintained to promote consistency of data and reduce duplicative platforms. This architecture assumes single separate core systems supporting each of our operating regions with centralized systems for key company-wide functions such as financial services, human resources and servicing National accounts. Focus is placed on identifying and eliminating redundant or obsolete applications with an emphasis on increasing our capability to operate in an Internet-enabled environment. Regional administration systems serving unique products and markets feed data to a combination of regional and corporate decision support systems. These systems provide sources of information for all of our data reporting and analysis needs. Our architecture calls for significant standardization of software, hardware and networking products. Enhancements are undertaken based on a defined information systems plan. This plan, which is developed collaboratively by our technical and operating leadership, is revalidated regularly and maps out business-driven technology requirements for the upcoming three-to-five year period. We recognize consumer demand will cause an increasing need for more of our business to be conducted electronically. Toward that end we have developed several Internet-enabled initiatives focused on improving interactions with our customers, members, providers, brokers and associates. We also are improving communication and data collection through compliance with the provisions of the Federal Health Insurance Portability and Accountability Act or HIPAA. See "Legal and Regulatory Matters--Regulation." We are also engaged in a series of pilot programs that will result in web- enabled services such as on-line membership enrollment and on-line price quoting for brokers. Brokers will also receive on-line quoting capabilities for life, dental and vision related products. For our members, we will have on-line access to health information using carefully chosen content providers for consumer health information. All of our members currently have on-line access to physician and hospital network directories for their specific health plan. Collaborations In addition to internal efforts to leverage technology, we are actively involved as investors and leaders in several collaborative technology initiatives. As an example, we are one of seven major national health benefits companies that are initial investors in MedUnite, Inc., an e-business company. MedUnite is designing Internet-based technology that will permit real-time transactions between providers and insurance companies. MedUnite's solutions will address claims filing, eligibility determination and specialist referrals. These programs will make these transactions more convenient for members while improving efficiencies among doctors, hospitals and health insurers. Additionally, we are a founding member of the Coalition for Affordable Healthcare. This group, formed by 24 of the nation's largest health benefits companies and associations, develops programs to improve access to quality health care coverage and to simplify plan administration. Pricing and Underwriting We price our products based on our assessment of underwriting risk and competitive factors. We continually review our underwriting and pricing guidelines on a national and regional basis so that our products remain competitive and consistent with our marketing strategies and profitability goals. 91
We have focused our efforts to maintain consistent, competitive and strict underwriting standards. Our individual and group underwriting targets have been based on our proprietary accumulated actuarial data. Subject to applicable legal constraints, we have traditionally employed case specific underwriting procedures for small group products and traditional group underwriting procedures with respect to large group products. Also, we employ credit underwriting procedures with respect to our self-funded products. In most circumstances, our pricing and underwriting decisions follow a prospective rating process. A fixed premium rate is determined at the beginning of the policy period. Unanticipated increases in medical costs may not be able to be recovered in that current policy year. However, prior experience, in the aggregate, is considered in determining premium rates for future periods. For larger groups (over 300 lives) with PPO, POS or traditional benefit designs, we often employ retrospective rating reviews. In retrospective rating, a premium rate is determined at the beginning of the policy period. Once the policy period has ended, the actual experience is reviewed. If the experience is positive (i.e., actual claim costs and other expenses are less than those expected), then a refund may be credited to the policy. If the experience is negative, then the resulting deficit may either be recovered through contractual provisions or the deficit may be considered in setting future premium levels for the group. If a customer elects to terminate coverage, deficits generally are not recovered. We have contracts with CMS to provide HMO Medicare+Choice coverage to Medicare beneficiaries who choose health care coverage through one of our HMO programs. Under these annual contracts, CMS pays us a set rate based on membership that is adjusted for demographic factors. These rates are subject to annual unilateral revision by CMS. In addition to premiums received from CMS, most of the Medicare products offered by us require a supplemental premium to be paid by the member. See "Legal and Regulatory Matters--Small Group Reform" for a discussion of certain regulatory restrictions on our underwriting and pricing. Reserves We establish and report liabilities or reserves on our balance sheet for unpaid health care costs by estimating the ultimate cost of incurred claims that have not yet been reported to us by members or providers and reported claims that we have not yet paid. Since these reserves represent our estimates, the process requires a degree of judgment. Reserves are established according to Actuarial Standards of Practice and generally accepted actuarial principles and are based on a number of factors. These factors include experience derived from historical claims payments and actuarial assumptions to arrive at loss development factors. Such assumptions and other factors include healthcare cost trends, the incidence of incurred claims, the extent to which all claims have been reported and internal claims processing charges. Due to the variability inherent in these estimates, reserves are sensitive to changes in medical claims payment patterns and changes in medical cost trends. A worsening (or improvement) of the medical cost trend or changes in claims payment patterns from the trends and patterns assumed in estimating reserves would trigger a change. See Note 8 to our audited consolidated financial statements for quantitative information on our reserves, including a progression of reserve balances for each of the last three years. Medical Management Our medical management programs include a broad array of activities that are intended to improve the quality and cost-effectiveness of care provided to our members. One of the goals of these benefit features is to assure that the care delivered to our members is supported by appropriate medical and scientific evidence. 92
Precertification. A traditional medical management program that we use involves assessment of the appropriateness of certain hospitalizations and other medical services. For example, precertification is used to determine whether a set of hospital and medical services is being appropriately applied to the member's clinical condition. Concurrent review. Another traditional medical management strategy we use is concurrent review, which is based on nationally recognized criteria developed for the industry. With concurrent review, the requirements and intensity of services during a patient's hospital stay are reviewed, often by an onsite skilled nurse professional in coordination with the hospital's medical and nursing staff. Disease management. More and more, health plans, including ours, are moving away from traditional medical management approaches to more sophisticated models built around disease management and advanced care management. These programs focus on those members who require the greatest amount of medical services. We provide important information to our providers and members to help them optimally manage the care of their specific conditions. For example, certain therapies and interventions for patients with diabetes help prevent some of the serious, long-term medical consequences of diabetes and reduce the risks of kidney, eye and heart disease. Our information systems can provide feedback to our physicians to enable them to improve the quality of care. For other prevalent medical conditions such as heart disease or asthma, our ability to correlate pharmacy data and medical management data allows us to provide important information to our members and providers which enables them to more effectively manage these conditions. Formulary management. APM develops a formulary, a selection of drugs based on clinical quality and effectiveness, which is used across all of our regions. A pharmacy and therapeutics committee consisting of 20 physicians, 16 of whom are academic and community physicians practicing in our markets, make pharmacy medical decisions about the clinical quality and efficacy of drugs. In the last two years, pharmacy costs have increased by 15% to 18% nationally. We have, through our focused activities in this area, been able to perform better than the national trend by 3% to 5%. Our three-tiered co-pay strategy enables members to have access to all drugs that are not covered on formulary for an additional co-pay. This has been our primary tool to contain pharmacy costs. Medical policy. A medical policy group comprised of physician leaders from all Anthem regions, working in close cooperation with national organizations such as the Centers for Disease Control, the American Cancer Society and community physician leaders, determines Anthem's national policy for best approaches to the application of new technologies. Patient outcomes. A significant amount of health care expenditures are used by a small percent of our members who suffer from complex or chronic illnesses. We have developed a series of programs aimed at helping our providers better manage and improve the health of these members. Often, these programs provide benefits for home care services and other support to reduce the need for repeated, expensive hospitalizations. Increasingly, we are providing information to our hospital networks to enable them to improve medical and surgical care and outcomes to our members. We endorse, encourage and incentivize hospitals to support national initiatives to improve patient outcomes and reduce medication errors. We have been recognized as a national leader in developing hospital quality programs. External Review Procedures (Patients' Bill of Rights). In light of increasing public concerns about health plans denying coverage of medical services, we work with outside experts through a process of external review to help provide our members with timely medical care. When we receive member concerns, we have formal appeals procedures that ultimately allow coverage disputes to be settled by independent expert physicians. 93
Service management. In HMO and POS networks, primary care physicians serve as the overall coordinators of members' health care needs by providing an array of preventive health services and overseeing referrals to specialists for appropriate medical care. In PPO networks, patients have greater access to network physicians without a primary care physician serving as the coordinator of care. Health Care Quality Initiatives Increasingly, the health care industry is able to define quality health care based on preventive health measurements and outcomes of care. A key to our success has been our ability to work with our network providers to improve the quality and outcomes of the health care services provided to our members. Our ability to provide high quality service has been recognized by the National Committee on Quality Assurance, or NCQA, the largest and most respected national accreditation program for managed care health plans. All of our HMO plans in the East region hold the highest NCQA rating. Our HMO plan for Colorado has received a three-year accreditation. In our Midwest region, health plans in Ohio and Kentucky held NCQA accreditation into 1999. We decided not to seek re-accreditation in 1999 for our Midwest plans, but rather focused on consolidating provider networks, products and systems. We will again seek NCQA accreditation for our Midwest HMO and POS health plans in 2001. A range of quality health care measures have been adopted by the Health Plan Employer Data and Information Set, or HEDIS, which has been incorporated into the oversight certification by NCQA. These HEDIS measures range from preventive services, such as screening mammography and pediatric immunization, to elements of care, including decreasing the complications of diabetes and improving treatment for heart patients. While our results on specific measures have varied over time, we are seeing continuous improvement overall in our HEDIS measurements, and a number of our state plans are among the best performers in the nation with respect to certain HEDIS standards. In addition, we have initiated a broad array of quality programs, including those built around smoking cessation and transplant management, and an array of other programs specifically tailored to local markets. Many of these programs have been developed in conjunction with organizations such as the Arthritis Foundation and regional diabetes associations. Provider Arrangements Our relationships with health care providers, physicians, hospitals and those professionals that provide ancillary health care services are guided by regional and national standards for network development, reimbursement and contract methodologies. In contrast to some health benefits companies, it is generally our philosophy not to delegate full financial responsibility to our providers in the form of capitation-based reimbursement. While capitation can be a useful method to lower costs and reduce underwriting risk, we have observed that, in general, providers do not positively accept the burden of maintaining the necessary financial reserves to meet the risks related to capitation contracts. We attempt to provide fair, market-based hospital reimbursement along industry standards. We also seek to ensure physicians in our network are paid in a timely manner at appropriate rates. We use multi-year contracting strategies, including case or fixed rates, to limit trend exposure and increase cost predictability. In all regions, we seek to maintain broad provider networks to ensure member choice while implementing effective management programs designed to improve the quality of care received by our members. Depending on the consolidation and integration of physician groups and hospitals, reimbursement strategies vary substantially across markets. Fee for service is our predominant reimbursement methodology for physicians. We generally use a resource-based relative value system fee schedule to determine fee for service reimbursement. This structure was developed and 94
is maintained by CMS and is used by the Medicare system and other major payers. This system is independent of submitted fees and therefore is not as vulnerable to inflation. In addition, physician incentive contracting is used to reward physician quality and performance. Like our physician contracts, our hospital contracts provide for a variety of reimbursement arrangements depending on the network. Our hospital contracts recognize the size of the facility and the volume of care performed for our members. Many hospitals are reimbursed on a fixed allowance per day for covered services (per diem) or a case rate basis similar to Medicare (Diagnosis Related Groups). Other hospitals are reimbursed on a discount from approved charge basis for covered services. Hospital outpatient services are reimbursed based on fixed case rates, fee schedules or percent of charges. To improve predictability of expected cost, we frequently use a multi-year contracting approach which provides stability in our competitive position versus other health benefit plans in the market. We believe our market share enables us to negotiate favorable provider reimbursement rates. In some markets, we have a "modified favored rate" provision in our hospital and ancillary contracts that guarantees contracted rates at least as favorable as those given to our competitors with an equal or smaller volume of business. Behavioral Health and Other Provider Arrangements We have a series of contracts with third party behavioral health networks and care managers who organize and provide for a continuum of behavioral health services focusing on access to appropriate providers and settings for behavioral health care. These contracts are generally multi-year capitation based arrangements. Substance abuse and alcohol dependency treatment programs are an integral part of these behavioral health programs. In addition, a number of other ancillary service providers, including laboratory service providers, home health agency providers and intermediate and long term care providers, are contracted on a region-by-region basis to provide access to a wide range of services. These providers are normally paid on either a fee schedule, fixed-per-day or per case basis. Competition The managed care industry is highly competitive, both nationally and in our regional markets. Competition has intensified in recent years due to more aggressive marketing and pricing, a proliferation of new products and increased quality awareness and price sensitivity among customers. Significant consolidation within the industry has also added to competition. In addition, with the 1999 enactment of the Gramm-Leach-Bliley Act, banks and other financial institutions have the ability to affiliate with insurance companies, which may lead to new competitors in the insurance and health benefits fields. Industry participants compete for customers mainly on the following factors: . price; . quality of service; . access to provider networks; . flexibility of benefit designs; . reputation (including NCQA accreditation status); . brand recognition; and . financial stability. 95
We believe our exclusive right to market products under the Blue Cross Blue Shield brand in our markets provides us with an advantage over our competition. In addition, our strong market share and existing provider networks in both our Midwest and East regions enable us to achieve cost-efficiencies and service levels that allow us to offer a broad range of health benefits to our customers on a more cost-effective basis than many of our competitors. In our West region, the marketplace is highly fragmented with no single player having a dominant market share. There, as in all regions, we strive to distinguish our products through excellent service, product value and brand recognition. Competitors in our markets include local and regional managed care plans, and national health benefits companies. In our Midwest region, our largest competitors include UnitedHealthcare, Humana Inc., Aetna U.S. Healthcare and Medical Mutual of Ohio. In our East region, our main competitors are Aetna U.S. Healthcare, Health Net, Inc., CIGNA HealthCare, ConnectiCare, Inc. and Harvard Pilgrim Health Care. In our West region, our principal competitors include Sierra Health Services, Inc., PacifiCare Health Systems, Inc., UnitedHealthcare, Kaiser Permanente, Aetna U.S. Healthcare and Hometown Health Plan, Inc. To build our provider networks, we also compete with other health benefits plans for contracts with hospitals, physicians and other providers. We believe that physicians and other providers primarily consider member volume, reimbursement rates, timeliness of reimbursement and administrative service capabilities along with the "non-hassle" factor or reduction of non-value added administrative tasks when deciding whether to contract with a health benefits plan. At the distribution level, we compete for qualified agents and brokers to distribute our products. Strong competition exists among insurance companies and health benefits plans for agents and brokers with demonstrated ability to secure new business and maintain existing accounts. The basis of competition for the services of such agents and brokers are: . commission structure; . support services; . reputation and prior relationships; and . quality of the products. We believe that we have good relationships with our agents and brokers, and that our products, support services and commission structure compare favorably to our competitors in all of our regions. Employees As of June 30, 2001, we had approximately 14,800 full-time equivalent employees primarily located in Cincinnati and Columbus, Ohio; Indianapolis, Indiana; Louisville, Kentucky; North Haven, Connecticut; Denver, Colorado; Portland, Maine; and Manchester, New Hampshire. Employees were also located in various other cities within our regions, as well as in Illinois, Nevada and New York. Our employees are an important asset, and we seek to develop them to their full potential. We believe that our relationships with our employees are good. No employees are subject to collective bargaining agreements. Properties Our principal executive offices are located at 120 Monument Circle, Indianapolis, Indiana. In addition to this property, our principal operating facilities are located in Denver, Colorado; North Haven, Connecticut; Indianapolis, Indiana; Cincinnati, Ohio; Columbus, Ohio; Manchester, New Hampshire; and Portland, Maine. In total, we own approximately 15 facilities and lease approximately 65 facilities, totaling 4.6 million square feet in 19 states. Many of the facilities are connected to our government businesses, which extend well beyond our eight core states. We believe that our properties are adequate and suitable for our business as presently conducted. 96
Regulation We are subject to extensive regulation and supervision by authorities of each state in which we operate. We are also subject to regulation by federal and local agencies. The extent of state regulation varies, but most jurisdictions have laws and regulations requiring the licensing of insurers and HMOs and their agents and standards of solvency and business conduct for insurance companies and HMOs. State laws may also regulate withdrawal from certain markets. In addition, statutes and regulations usually require the approval of policy forms and, for certain products, the approval of premium rates. The statutes and regulations also prescribe types and concentration of investments. We are required to file detailed annual financial statements with supervisory agencies in each of the jurisdictions in which we do business. Our operations and accounts are also subject to examination by those agencies at regular intervals. We are also subject to federal and state laws and regulations affecting the conduct of our business. In addition, assessments are levied against us as a result of our mandatory participation in funds that guarantee the viability of insurance companies which assume risk in each of our states. For more information, see "Legal and Regulatory Matters--Regulation of Insurance Company and HMO Business Activities." 97
INVESTMENTS Our investment objective is to preserve our asset base and to achieve rates of return which are consistent with our defined risk parameters, mix of products, liabilities and surplus. Our portfolio is structured to provide sufficient liquidity to meet general operating needs, special needs arising from changes in our financial position and changes in the financial market. In accordance with these objectives, our investment policy authorizes investments in U.S. dollar-denominated fixed income securities and publicly traded equity securities, both domestic and international, or mutual funds whose focus is investing in such securities. As of June 30, 2001 and December 31, 2000, our cash and investment portfolio was comprised of the following (at fair value): Percent Percent June 30, of December 31, of 2001 Total 2000 Total -------- ------- ------------ ------- ($ in Millions) Cash and cash equivalents................ $ 238.9 5.9% $ 203.3 5.5% Fixed maturity securities: United States Government securities.... 729.7 18.1 746.5 20.1 Obligations of states and political subdivisions.......................... 3.8 0.1 0.8 -- Corporate securities................... 1,140.6 28.3 1,040.7 28.0 Mortgaged-backed securities............ 1,477.2 36.7 1,258.4 33.9 Preferred stocks....................... -- -- 1.8 -- -------- ----- -------- ----- Total fixed maturity securities...... 3,351.3 83.2 3,048.2 82.0 Equity securities........................ 439.4 10.9 463.1 12.5 -------- ----- -------- ----- Total cash and investments........... $4,029.6 100.0% $3,714.6 100.0% ======== ===== ======== ===== Our fixed maturity and equity securities are subject to the risk of potential losses from adverse market conditions. To manage the potential for economic losses, we regularly evaluate certain risks, as well as the appropriateness of the investments, to be certain the portfolio is managed within its risk guidelines. The result is a portfolio that is well diversified, both across and within asset classes. Our primary risk exposures are (1) changes in market interest rates, (2) credit quality and (3) changes in equity prices. Interest Rate Risk Interest rate risk is defined as the potential for economic losses on fixed- rate securities, due to an adverse change in market interest rates. Our fixed maturity portfolio consists exclusively of U.S. dollar-denominated assets, invested primarily in U.S. government securities, corporate bonds, asset-backed bonds and mortgage-related securities, all of which represent an exposure to changes in the level of market interest rates. We manage interest rate risk by maintaining a duration commensurate with our insurance liabilities and policyholders' surplus. Further, we do not engage in the use of derivatives to manage interest rate risk, as they are prohibited in our investment policy. We believe that a hypothetical increase in interest rates of 100 basis points would result in an estimated decrease in the fair value of the fixed income portfolio of $166.8 million. Credit Quality Risk Credit quality risk is defined as the risk of a credit downgrade to an individual fixed income security and the potential loss attributable to that downgrade. We manage this risk through our investment policy, which establishes credit quality limitations on the overall portfolio as well as dollar limits for individual issuers. The result is a well-diversified portfolio of fixed income securities, with an average credit rating of approximately double-A. 98
Equity Price Risk Equity price risk for stocks is defined as the potential for economic losses due to an adverse change in equity prices. Equity risk exposure is managed through our commitment of replicating the S&P 500 and S&P 400 indices, excluding in each case tobacco stocks, resulting in a passively managed, well- diversified and liquid portfolio of domestic stocks. We estimate our equity price risk from a hypothetical 10% decline in the S&P 500 and 400 indices and the relative effect of that decline in the value of our portfolio to be a decrease in fair value of $43.9 million. Fixed Maturity Securities Our fixed income strategy is to employ external money managers who will construct and manage a high quality, diversified portfolio of securities. External money managers are selected based on consistent performance and experience in insurance asset management. Additionally, our investment policy establishes minimum quality and diversification requirements resulting in an average credit rating of approximately double-A. The duration of our portfolio is 4.6 years as of December 31, 2000, and is managed to within +/- 20% of the Lehman Aggregate Bond Index. Fixed Maturity Securities Quality Distribution The following chart shows the quality distribution of our fixed maturity securities portfolio as of June 30, 2001 and December 31, 2000 (at fair value): Percent Percent June 30, of December 31, of Credit quality(1) 2001 Total 2000 Total ----------------- -------- ------- ------------ ------- ($ in Millions) Aaa................................... $2,399.3 71.6% $2,267.9 74.4% Aa.................................... 86.5 2.6 72.4 2.4 A..................................... 481.5 14.4 391.6 12.8 Baa................................... 338.6 10.1 245.9 8.1 Ba.................................... 45.4 1.4 70.4 2.3 -------- ----- -------- ----- Total fixed maturity securities....... $3,351.3 100.0% $3,048.2 100.0% ======== ===== ======== ===== - -------- (1) Ratings are primarily assigned by Standard & Poor's Corporation and Moody's Investor Service. Corporate fixed maturity securities consist primarily of investment grade bonds (securities rated triple-B or higher). Further, our investment policy prohibits investing in below double-B rated credit securities. Our corporate securities portfolio is diversified by industry and issuer, with no significant exposure to any single corporation. At June 30, 2001, our 10 largest investments in corporate securities totaled $166.9 million, or 5.0% of total fixed maturity securities. Corporate Fixed Maturity Securities Sector Distribution The following chart shows the sector distribution of our corporate fixed maturity securities portfolio as of June 30, 2001 and December 31, 2000 (at fair value): Percent Percent June 30, of December 31, of 2001 Total 2000 Total -------- ------- ------------ ------- ($ in Millions) Industrial........................... $ 726.0 63.7% $ 375.9 36.1% Finance.............................. 198.0 17.4 350.8 33.7 Utility.............................. 33.1 2.9 78.5 7.6 Asset-backed securities.............. 160.1 14.0 218.4 21.0 Other................................ 23.4 2.1 17.1 1.6 -------- ----- -------- ----- Total fixed maturity corporate securities........................ $1,140.6 100.0% $1,040.7 100.0% ======== ===== ======== ===== 99
Mortgage-backed securities represent 44.1% of the fixed maturity securities portfolio. A majority of this amount is agency-issued pass-through certificates and collateralized mortgage obligation securities, issued by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Government National Mortgage Association. Fixed mortgage-backed securities, as of June 30, 2001 and December 31, 2000, was comprised of the following (at fair value): Percent Percent June 30, of December 31, of 2001 Total 2000 Total -------- ------- ------------ ------- ($ in Millions) Mortgage pass through certificates... $1,092.1 73.9% $ 911.1 72.4% Collateralized mortgage obligations.. 284.8 19.3 260.9 20.7 Commercial mortgage-backed securities.......................... 100.3 6.8 86.4 6.9 -------- ----- -------- ----- Total mortgage-related securities.. $1,477.2 100.0% $1,258.4 100.0% ======== ===== ======== ===== Equity Securities Our equity portfolio contains readily marketable domestic investment securities that are indexed to the S&P 500 and S&P 400 by an external money manager. At June 30, 2001, there were no international equity exposures in our portfolio. Our strategy also relies on the employment of independent, experienced managers. As of June 30, 2001, $342.3 million, or 77.9%, of the total equity allocation was invested to mirror the S&P 500 Index, and $97.1 million, or 22.1%, to mirror the S&P 400 Index, excluding in each case tobacco stocks. Overall Investment Return The table below shows the overall return of the fixed maturity and equity security portfolios for the six months ended June 30, 2001 and years ended December 31, 2000, 1999 and 1998. The overall return includes gross investment income earned, net realized gains or losses incurred, and the change in unrealized gains or losses on these securities. Fixed Maturity Equity Securities Securities Total -------------- ---------- ------- ($ in Millions) June 30, 2001 Gross investment income...................... $ 104.7 $ 3.3 $ 108.0 Net realized gains/(losses).................. 11.4 (22.3) (10.9) Change in unrealized gains/(losses).......... 1.3 (0.3) (1.0) ------- ------ ------- Total........................................ $ 117.4 $(19.3) $ 98.1 ======= ====== ======= December 31, 2000 Gross investment income...................... $ 178.8 $ 6.1 $ 184.9 Net realized gains/(losses).................. (17.5) 43.4 25.9 Change in unrealized gains/(losses).......... 128.4 (71.2) 57.2 ------- ------ ------- Total........................................ $ 289.7 $(21.7) $ 268.0 ======= ====== ======= December 31, 1999 Gross investment income...................... $ 137.0 $ 6.3 $ 143.3 Net realized gains/(losses).................. (13.8) 51.3 37.5 Change in unrealized gains/(losses).......... (145.0) 8.3 (136.7) ------- ------ ------- Total........................................ $ (21.8) $ 65.9 $ 44.1 ======= ====== ======= December 31, 1998 Gross investment income...................... $ 121.1 $ 7.4 $ 128.5 Net realized gains........................... 33.9 122.0 155.9 Change in unrealized gains................... 10.9 18.8 29.7 ------- ------ ------- Total........................................ $ 165.9 $148.2 $ 314.1 ======= ====== ======= 100
FINANCIAL STRENGTH RATINGS Financial strength ratings are the opinions of the rating agencies regarding the financial ability of an insurance company to meet its obligations to its policyholders. Ratings provide both industry participants and insurance consumers with meaningful information on specific insurance companies and have become an increasingly important factor in establishing the competitive position of insurance companies. Rating agencies continually review the financial performance and condition of insurers and higher ratings generally indicate financial stability and a strong ability to pay claims. Our current financial strength ratings are as follows: Financial Strength Rating Agency Rating Rating Description ------------- ------------- ------------------ AM Best Company, Inc. ("Best") A- Second highest of nine ("Excellent") ratings categories and second highest within the category based on modifiers (i.e., A and A- are "Excellent") Standard & Poor's Rating Services A Third highest of nine ratings ("S&P") ("Strong") categories and mid-range within the category based on modifiers (i.e., A+, A and A- are "Strong") Moody's Investor Service, Inc. A3 Third highest of nine ratings ("Moody's") ("Good") categories and lowest within the category based on modifiers (i.e., A1, A2 and A3 are "Good") Fitch, Inc. ("Fitch") A+ Third highest of eight ("Strong") ratings categories and highest within the category based on modifiers (i.e., A+, A and A- are "Strong") These financial strength ratings reflect each rating agency's opinion as to our financial strength, operating performance and ability to meet our claim obligations to our policyholders, not shareholders. In January 2001, S&P reaffirmed our A rating and revised its outlook to positive. In April 2001, Fitch reaffirmed our A+ rating, and revised its outlook to positive. Each of the rating agencies reviews its ratings periodically and there can be no assurance that current ratings will be maintained in the future. We believe our strong ratings are an important factor in marketing our products to our customers, since ratings information is broadly disseminated and generally used throughout the industry. Our ratings reflect each rating agency's opinion of our financial strength, operating performance and ability to meet our obligations to policyholders, and are not evaluations directed toward the protection of investors in our common stock and should not be relied upon when making a decision to purchase shares of the common stock offered hereby. 101
LEGAL AND REGULATORY MATTERS General Our operations are subject to comprehensive and detailed state and federal regulation throughout the United States in the jurisdictions in which we do business. Supervisory agencies, including state health, insurance and corporation departments, have broad authority to: . grant, suspend and revoke licenses to transact business; . regulate many aspects of our products and services; . monitor our solvency and reserve adequacy; and . scrutinize our investment activities on the basis of quality, diversification and other quantitative criteria. To carry out these tasks, these regulators periodically examine our operations and accounts. Regulation of Insurance Company and HMO Business Activities The federal government as well as the governments of the states in which we conduct our operations have adopted laws and regulations that govern our business activities in various ways. These laws and regulations may restrict how we conduct our businesses and may result in additional burdens and costs to us. Areas of governmental regulation include: . licensure; . premium rates; . benefits; . service areas; . market conduct; . utilization review activities; . prompt payment of claims; . member rights and responsibilities; . sales and marketing activities; . quality assurance procedures; . plan design and disclosures; . disclosure of medical information; . eligibility requirements; . provider rates of payment; . surcharges on provider payments; . provider contract forms; . underwriting and pricing; . financial arrangements; . financial condition (including reserves); and . corporate governance. These laws and regulations are subject to amendments and changing interpretations in each jurisdiction. 102
States generally require health insurers and HMOs to obtain a certificate of authority prior to commencing operations. If we were to establish a health insurance company or an HMO in any state where we do not presently operate, we generally would have to obtain such a certificate. The time necessary to obtain such a certificate varies from state to state. Each health insurer and HMO must file periodic financial and operating reports with the states in which it does business. In addition, health insurers and HMOs are subject to state examination and periodic license renewal. There has been a recent trend of increased health care regulation at the federal and state levels. Legislation, regulation and initiatives relating to this trend include, among other things, the following: . eliminating or reducing the scope of ERISA pre-emption of state medical and bad faith claims under state law, thereby exposing health benefits companies to expanded liability for punitive and other extra-contractual damages; . extending malpractice and other liability for medical and other decisions from providers to health plans; . imposing liability for negligent denials or delays in coverage; . requiring . coverage of experimental procedures and drugs, . direct access to specialists for patients with chronic conditions, . direct access to specialists (including OB/GYNs) and chiropractors, . expanded consumer disclosures and notices and expanded coverage for emergency services, . liberalized definitions of medical necessity, . liberalized internal and external grievance and appeal procedures (including expedited decision making), . maternity and other lengths of hospital inpatient stay, and . point-of-service benefits for HMO plans; . prohibiting . so-called "gag" and similar clauses in physician agreements, . incentives based on utilization, and . limitation of arrangements designed to manage medical costs such as capitated arrangements with providers or provider financial incentives; . regulating and restricting the use of utilization management and review; . regulating and monitoring the composition of provider networks, such as "any willing provider" and pharmacy laws (which generally provide that providers and pharmacies cannot be denied participation in a managed care plan where the providers and pharmacies are willing to abide by the terms and conditions of that plan); . imposing . payment levels for out-of-network care, and . requirements to apply lifetime limits to mental health benefits with parity; . exempting physicians from the antitrust laws that prohibit price fixing, group boycotts and other horizontal restraints on competition; . restricting the use of health plan claims information; 103
. regulating procedures that protect the confidentiality of health and financial information; . imposing third-party review of denials of benefits (including denials based on a lack of medical necessity); and . restricting or eliminating the use of formularies for prescription drugs. On August 8, 2001, the House of Representatives passed a version of the Patients' Bill of Rights legislation (an amended version of the Ganske-Dingell bill) which would permit health plans to be sued in state court for coverage determinations. The current administration has indicated a willingness to pass some form of patient protection legislation which could adversely affect the health benefits business, and, in fact, the bill adopted by the House was the result of a compromise reached by President Bush and Representative Charles Norwood (R-GA). Under the bill a claim would be permitted for a wrongful coverage denial which is the proximate cause of personal injury to, or the death of, a patient. Medically reviewable claims against health insurers would be tried in state court but under federal law. Patients would be required to exhaust external review before filing suit. Patients who lose an external review decision would have to overcome a rebuttable presumption that the insurer made the correct decision. The bill caps non-economic damages at $1.5 million. Punitive damages would be available only if insurers do not follow an external review decision and would be capped at an additional $1.5 million. The bill also limits class action lawsuits (both future suits and pending suits where a class has not yet been certified) against health insurers under both ERISA and the Racketeer Influenced and Corrupt Organizations Act to group health plans established by a single plan sponsor. The Senate version of the Patients' Bill of Rights legislation (the McCain- Edwards bill) was passed on June 29, 2001 and contains broader liability provisions than the House bill. The Senate bill would permit patients to sue health plans in state court over medical judgments or in federal court over contractual issues, and it would not cap damages in state courts. In federal court, punitive damages would be allowed, up to $5 million, and there would be no limit on economic and non-economic damages. President Bush has stated that he will veto any Patients' Bill of Rights legislation that contains liability provisions similar to the Senate bill. The House and Senate versions of the bill are expected to be reconciled in the Conference Committee. We cannot predict the provisions of the Patients' Bill of Rights legislation that may emerge from the Conference Committee, if any, and whether any Patients' Bill of Rights legislation would be enacted into law. We also cannot predict what impact any Patients' Bill of Rights legislation would have on our business, financial condition and results of operations. The health benefits business also may be adversely impacted by court and regulatory decisions that expand the interpretations of existing statutes and regulations. It is uncertain whether we can recoup, through higher premiums or other measures, the increased costs of mandated benefits or other increased costs caused by potential legislation or regulation. Small Group Reform All of the principal states in which Anthem does business have enacted statutes that limit the flexibility of Anthem and other health insurers relative to their small group underwriting and rating practices. Commonly referred to as "small group reform" statutes, these laws are generally consistent with model laws originally adopted by the NAIC. In 1991, the NAIC adopted the Small Group Health Insurance Availability Model Act. This model law limits the differentials in rates carriers could charge between new business and health insurance renewal business, and with respect to small groups with similar demographic characteristics (commonly referred to as a "rating law"). It also requires that insurers disclose to customers the basis on which the insurer establishes new business and renewal rates, restricts the applicability of pre-existing condition exclusions and prohibits an insurer from terminating coverage of an employer 104
group because of the adverse claims experience of that group. The model law requires that all small group insurers accept for coverage any employer group applying for a basic and standard plan of benefits (commonly known as a "guarantee issue law"), and provides for a voluntary reinsurance mechanism to spread the risk of high risk employees among all small group carriers participating in the reinsurance mechanism. Representatives of Anthem actively participated in the committees of the NAIC, which drafted and proposed this model law. NAIC model laws are not applicable to the industry until adopted by individual states, and there is significant variation in the degree to which states adopt and/or alter NAIC model laws. Some, if not all, of these rating and underwriting limitations are present in small group reform statutes currently adopted in all of the principal states in which Anthem does business. Underwriting Limitations In the past, insurance companies were free to select and reject risks based on a number of factors, including the medical condition of the person seeking to become insured. Small group health insurers were free to accept some employees and reject other employees for coverage within one employer group. An insurance company was also free to exclude from coverage medical conditions existing within a group which the insurance company believed represented an unacceptable risk level. Also, for the most part, insurance companies were free to cancel coverage of a group due to the medical conditions which were present in that group. Additionally, a new employee seeking medical coverage under an existing group plan could be either accepted or rejected for coverage, or could have coverage excluded or delayed for existing medical conditions. The small group health insurance reform laws limit or abolish a number of these commonly utilized practices to address a societal need to extend availability of insurance coverage more broadly to those who were previously not eligible for coverage. Reform laws have been adopted which at a minimum generally require that a group either be accepted or rejected for coverage as one unit. The law in all of the states in which Anthem does business now prohibits the practice of terminating the coverage of an employer group based on the medical conditions existing within that group. (Insurers may still cancel business for a limited number of reasons.) These states also generally require "portability" of coverage, which means that an insurer cannot exclude coverage for a pre-existing condition of a new employee of an existing employer group if that person had previously satisfied a pre-existing condition limitation period with the prior insurer, and if that person maintained continuous coverage. Most state small group reform statutes also prohibit insurers from denying coverage to employer groups based upon industry classification. All states in which Anthem does business require the "guarantee issue" of small group policies, either through specific state law or the states' requirement to enforce HIPAA. These laws require an insurer to issue coverage to any group that applies for coverage under any of the small group policies marketed by the insurer in that state, regardless of the medical risks presented by that group. Rating Limitations Prior to the adoption of state rate reform laws, there was very limited regulation of the rating practices utilized in the small group health insurance market. There was virtually no regulation of the amount by which one group's rate could vary from that of a demographically similar group with different claims experience, and there was no statutorily placed limit on the extent and frequency of rate increases that could be applied to any one employer group. Over the last nine years, all of the principal states in which Anthem does business have enacted rating laws. These laws are designed to reduce the variation in rates charged to insured groups who have favorable and unfavorable claims experience. They also limit the extent and frequency of rate 105
increases. They do not, however, establish an appropriate base or "manual" rate level for an insurer. The most stringent rate reform regulation would be a pure community rating requirement, pursuant to which all persons in a geographic region would receive the same rate for the same coverage as any other person, without consideration of demographic factors such as age, gender, geographic location, medical risk or occupation. Most existing rating laws also impose a limit on the extent and frequency of a group's rate increases. Small Group Statutory Reinsurance Mechanisms At this time, the Connecticut, New Hampshire and Nevada (HMO only) Anthem plans are subject to involuntary assessments from state small group reinsurance mechanisms. These mechanisms are designed to provide risk-spreading mechanisms for insurers doing business in jurisdictions that mandate that health insurance be issued on a guarantee issue basis. Guarantee issue requirements increase underwriting risk for insurers by forcing them to accept higher-risk business than they would normally accept. This reinsurance mechanism allows the insurer to cede this high-risk business to the reinsurance facility, thus sharing the underwriting experience with all insurers in the state. Each of Connecticut and New Hampshire subject insurance companies doing business in that jurisdiction to assessments to fund losses from the reinsurance mechanisms. Each of Indiana, Ohio and Nevada provide voluntary reinsurance mechanisms in which the assessment is against only those carriers electing to participate in the reinsurance mechanism. Anthem has elected not to participate in these voluntary reinsurance mechanisms. Neither Kentucky nor Maine has a small group reinsurance mechanism. Recent Medicare Changes In 1997, the federal government passed legislation related to Medicare that changed the method for determining premiums that the government pays to HMOs for Medicare members. In general, the new method has reduced the premiums payable to us compared to the old method, although the level and extent of the reductions varies by geographic market and depends on other factors. The legislation also requires us to pay a "user fee." The changes began to be phased in on January 1, 1998 and will continue over five years. The federal government also announced in 1999 that it planned to begin to phase in risk adjustments to its premium payments over a five-year period commencing January 1, 2000. While we cannot predict exactly what effect these Medicare reforms will have on our results of operations, we anticipate that the net impact of the risk adjustments will be to reduce the premiums payable to us. HIPAA and Gramm-Leach-Bliley Act The Health Insurance Portability and Accountability Act of 1996, known as HIPAA, and its regulations impose obligations for issuers of health insurance coverage and health benefit plan sponsors. This law requires guaranteed health care coverage for small employers having 50 or fewer employees and for individuals who meet certain eligibility requirements. It also requires guaranteed renewability of health care coverage for most employers and individuals. The law limits exclusions based on preexisting conditions for individuals covered under group policies to the extent the individuals had prior creditable coverage, and the gap between the prior coverage and the new coverage cannot exceed certain time frames. In addition, HIPAA authorized the Secretary of the United States Department of Health and Human Services, known as HHS, to issue standards for administrative simplification, as well as privacy and security of medical records and other individually identifiable patient data. HIPAA requirements apply to plan sponsors, health plans, health care providers and health care clearinghouses that transmit health information electronically. Regulations adopted to implement HIPAA also require that business associates acting for or on behalf of these HIPAA-covered entities be contractually obligated to meet HIPAA standards. 106
Although HIPAA was intended ultimately to reduce administrative expenses and burdens faced within the health care industry, we believe the law will initially bring about significant and, in some cases, costly changes. HHS has released two rules to date mandating the use of new standards with respect to certain health care transactions, including health information. The first rule requires the use of uniform standards for common health care transactions, including health care claims information, plan eligibility, referral certification and authorization, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments and coordination of benefits, and it establishes standards for the use of electronic signatures. The new transaction standards became effective in October 2000, and we will be required to comply with them by October 16, 2002. Second, HHS has developed new standards relating to the privacy of individually identifiable health information. In general, these regulations restrict the use and disclosure of medical records and other individually identifiable health information held or disclosed by health plans and other affected entities in any form, whether communicated electronically, on paper or orally, subject only to limited exceptions. In addition, the regulations provide patients with significant new rights to understand and control how their health information is used. These regulations do not preempt more stringent state laws and regulations that may apply to us. The privacy standards became effective on April 14, 2001. We must comply with these privacy standards by April 14, 2003. One more regulation integral to administration and privacy under HIPAA has yet to be published. It will address security requirements to be met regarding accessibility of personal health information. We have not quantified the cost of complying with these new standards; however, the cost of such compliance could be material. Other recent federal legislation includes the Gramm-Leach-Bliley Act, which generally requires insurers to provide affected customers with notice regarding how their personal health and financial information is used and the opportunity to "opt out" of certain disclosures before the insurer shares non-public personal information with a non-affiliated third party. These requirements are to be implemented on a state-by-state basis by July 1, 2001. The Gramm-Leach- Bliley Act also gives banks and other financial institutions the ability to affiliate with insurance companies, which may lead to new competitors in the insurance and health benefits fields. Investment and Retirement Products and Services We are subject to regulation by various government agencies where we conduct business, including the insurance departments of Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado and Nevada. Among other matters, these agencies may regulate premium rates, trade practices, agent licensing, policy forms, underwriting and claims practices, the maximum interest rates that can be charged on life insurance policy loans, and the minimum rates that must be provided for accumulation of surrender value. ERISA The provision of services to certain employee health benefit plans is subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), a complex set of laws and regulations subject to interpretation and enforcement by the Internal Revenue Service and the Department of Labor ("DOL"). ERISA regulates certain aspects of the relationships between us and employers who maintain employee benefit plans subject to ERISA. Some of our administrative services and other activities may also be subject to regulation under ERISA. In addition, some states require licensure or registration of companies providing third party claims administration services for benefit plans. We provide a variety of products and services to employee benefit plans that are covered by ERISA. In December 1993, in a case involving an employee benefit plan and an insurance company, the United States Supreme Court ruled that assets in the insurance company's general account that were attributable to a portion of a group pension contract issued to the plan that was not a "guaranteed benefit policy" were "plan assets" for purposes of ERISA and that the insurance 107
company had fiduciary responsibility with respect to those assets. In reaching its decision, the Supreme Court declined to follow a 1975 DOL interpretive bulletin that had suggested that insurance company general account assets were not plan assets. The Small Business Job Protection Act (the "Act") was signed into law in 1996. The Act created a framework for resolving potential issues raised by the Supreme Court decision. The Act provides that, absent criminal conduct, insurers generally will not have liability with respect to general account assets held under contracts that are not guaranteed benefit policies based on claims that those assets are plan assets. The relief afforded extends to conduct that occurs before the date that is 18 months after the DOL issues final regulations required by the Act, except as provided in the anti-avoidance portion of the regulations. The regulations, which were issued on January 5, 2000, address ERISA's application to the general account assets of insurers attributable to contracts issued on or before December 31, 1998 that are not guaranteed benefit policies. The conference report relating to the Act states that policies issued after December 31, 1998 that are not guaranteed benefit policies will be subject to ERISA's fiduciary obligations. We are not currently able to predict how these matters may ultimately affect our businesses. HMO and Insurance Holding Company Laws After the demutualization, we will be regulated as an insurance holding company and will be subject to the insurance holding company acts of the states in which our subsidiaries are domiciled. These acts contain certain reporting requirements as well as restrictions on transactions between an insurer or HMO and its affiliates. These holding company laws and regulations generally require insurance companies and HMOs within an insurance holding company system to register with the insurance department of each state where they are domiciled and to file with those states' insurance departments certain reports describing capital structure, ownership, financial condition, certain intercompany transactions and general business operations. In addition, various notice and reporting requirements generally apply to transactions between insurance companies and HMOs and their affiliates within an insurance holding company system, depending on the size and nature of the transactions. Some insurance holding company laws and regulations require prior regulatory approval or, in certain circumstances, prior notice of certain material intercompany transfers of assets as well as certain transactions between insurance companies, HMOs, their parent holding companies and affiliates. Additionally, the holding company acts for the states of domicile of Anthem and its subsidiaries restrict the ability of any person to obtain control of an insurance company or HMO without prior regulatory approval. Under those statutes, without such approval (or an exemption), no person may acquire any voting security of an insurance holding company which controls an insurance company or HMO, or merge with such a holding company, if as a result of such transaction such person would "control" the insurance holding company. "Control" is generally defined as the direct or indirect power to direct or cause the direction of the management and policies of a person and is presumed to exist if a person directly or indirectly owns or controls 10% or more of the voting securities of another person. Guaranty Fund Assessments Under insolvency or guaranty association laws in most states, insurance companies can be assessed for amounts paid by guaranty funds for policyholder losses incurred when an insurance company becomes insolvent. Most state insolvency or guaranty association laws currently provide for assessments based upon the amount of premiums received on insurance underwritten within such state (with a minimum amount payable even if no premium is received). Substantially all of our premiums are currently derived from insurance underwritten in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado and Nevada. 108
Under many of these guaranty association laws, assessments against insurance companies that issue policies of accident or sickness insurance, such as Anthem, are made retrospectively and are based (up to prescribed limits) upon the ratio of (i) the insurance company's premiums received in the applicable state over the previous three calendar years on accident and sickness insurance to (ii) the aggregate amount of premiums received by all assessed member insurance companies over such three calendar years on accident and sickness insurance. The guaranty fund assessments made under these acts are administered by the state's Guaranty Association, which has its own board of directors selected by member insurers with the approval of the State Insurance Department. In general, an assessment may be abated or deferred by the Guaranty Association if, in the opinion of the board, payment would endanger the ability of the member to fulfill its contractual obligations. The other member insurers, however, may be assessed for the amount of such abatement or deferral. Any such assessment paid by a member insurance company may be offset against its premium tax liability to the state in question over a multiple year period (generally five to 10 years) following the year in which the assessment was paid. The amount and timing of any future assessments, however, cannot be reasonably estimated and are beyond our control. The life/health guaranty association assessments, prior to available premium tax offsets, paid by us totaled $5.0 million in 2000, $1.4 million in 1999, and there were none in 1998. While the amount of any assessments applicable to life and health guaranty funds cannot be predicted with certainty, we believe that future guaranty association assessments for insurer insolvencies will not have a material adverse effect on our liquidity and capital resources. Risk-Based Capital Requirements The states of domicile of our subsidiaries have statutory risk-based capital, or RBC, requirements for health and other insurance companies based on the RBC Model Act. These RBC requirements are intended to assess the capital adequacy of life and health insurers, taking into account the risk characteristics of an insurer's investments and products. The RBC Model Act sets forth the formula for calculating the RBC requirements which are designed to take into account asset risks, insurance risks, interest rate risks and other relevant risks with respect to an individual insurance company's business. In general, under these laws, an insurance company must submit a report of its RBC level to the Insurance Department or Insurance Commissioner, as appropriate, of its state of domicile as of the end of the previous calendar year. The RBC Model Act provides for four different levels of regulatory attention depending on the ratio of a company's total adjusted capital (defined as the total of its statutory capital, surplus and asset valuation reserve) to its risk-based capital. The "Company Action Level" is triggered if a company's total adjusted capital is less than 200 percent but greater than or equal to 150 percent of its risk-based capital. At the "Company Action Level", a company must submit a comprehensive plan to the regulatory authority which discusses proposed corrective actions to improve its capital position. A company whose total adjusted capital is between 250 percent and 200 percent of its risk-based capital is subject to a trend test. The trend test calculates the greater of any decrease in the margin (i.e., the amount in dollars by which a company's adjusted capital exceeds its risk-based capital) between the current year and the prior year and between the current year and the average of the past three years, and assumes that the decrease could occur again in the coming year. If a similar decrease in margin in the coming year would result in a risk-based capital ratio of less than 190 percent, then "Company Action Level" regulatory action would be triggered. The "Regulatory Action Level" is triggered if a company's total adjusted capital is less than 150 percent but greater than or equal to 100 percent of its risk-based capital. At the "Regulatory Action Level", the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. The "Authorized Control Level" is triggered if a company's total adjusted capital is less than 100 percent but greater than or equal to 70 percent of its risk-based capital, at which level the regulatory authority may take any action it deems necessary, including 109
placing the company under regulatory control. The "Mandatory Control Level" is triggered if a company's total adjusted capital is less than 70 percent of its risk-based capital, at which level the regulatory authority is mandated to place the company under its control. The law requires increasing degrees of regulatory oversight and intervention as an insurance company's RBC declines. The level of regulatory oversight ranges from requiring the insurance company to inform and obtain approval from the domiciliary Insurance Commissioner of a comprehensive financial plan for increasing its RBC to mandatory regulatory intervention requiring an insurance company to be placed under regulatory control in a rehabilitation or liquidation proceeding. As of December 31, 2000, the RBC levels of Anthem and our insurance subsidiaries exceeded all RBC thresholds. NAIC IRIS Ratios In the 1970's, the NAIC developed a set of financial relationships or "tests" called the Insurance Regulatory Information System, or IRIS, that were designed for early identification of companies that may require special attention by insurance regulatory authorities. Insurance companies submit statutory financial data on an annual basis to the NAIC, which in turn analyzes the data using ratios covering eleven categories of data with defined "usual ranges" for each category. An insurance company may fall out of the usual range for one or more ratios because of specific transactions or events that are, in and of themselves, immaterial. Generally, an insurance company will become subject to regulatory scrutiny if its IRIS results fall outside of the usual ranges on four or more of the ratios. If a company is outside the ranges on four or more of the ratios, a written explanation is prepared and sent to regulators. Neither Anthem nor its subsidiaries is currently subject to regulatory scrutiny based on IRIS ratios. Litigation A number of managed care organizations have recently been sued in class action lawsuits asserting various causes of action under federal and state law. These lawsuits typically allege that the defendant managed care organizations employ policies and procedures for providing health care benefits that are inconsistent with the terms of the coverage documents and other information provided to their members, and because of these misrepresentations and practices, a class of members has been injured in that they received benefits of lesser value than the benefits represented to and paid for by such members. Two such proceedings which allege various violations of the Employee Retirement Income Security Act of 1974 ("ERISA") have been filed in Connecticut against Anthem or our Connecticut affiliate. One proceeding, The State of Connecticut v. Anthem Blue Cross and Blue Shield of Connecticut, Anthem Health Plans, Inc., et al., No. 3:00 CV 1716 (AWT), filed on September 7, 2000 in the United States District Court, District of Connecticut, was brought by the Connecticut Attorney General on behalf of a purported class of HMO and Point of Service members in Connecticut. No monetary damages are sought, although the suit does seek injunctive relief from the court to preclude us from allegedly utilizing arbitrary coverage guidelines, making late payments to providers or members, denying coverage for medically necessary prescription drugs and misrepresenting or failing to disclose essential information to enrollees. The complaint contends that these alleged policies and practices are a violation of ERISA. A second proceeding, William Strand v. Anthem Blue Cross and Blue Shield of Connecticut, Anthem Health Plans, Inc., et al., No. 3:00 CV 2037 (SRU), filed on October 20, 2000 in the United States District Court, District of Connecticut, was brought on behalf of a purported class of HMO and Point of Service members in Connecticut and elsewhere, and seeks injunctive relief to preclude us from allegedly making coverage decisions relating to medical necessity without complying with the express terms of the policy documents, and unspecified monetary damages (both compensatory and punitive). 110
In addition, our Connecticut affiliate is a defendant in three class action lawsuits brought on behalf of professional providers in Connecticut. Edward Collins, M.D., et al. v. Anthem Health Plans, Inc., No. CV-99 0156198 S, was filed on December 14, 1999, in the Superior Court Judicial District of Waterbury, Connecticut. Stephen R. Levinson, M.D., Karen Laugel, M.D. and J. Kevin Lynch, M.D. v. Anthem Health Plans, Inc. d/b/a Anthem Blue Cross and Blue Shield of Connecticut, No. 3:01 CV 426 (JBA), was filed on February 14, 2001 in the Superior Court Judicial District of New Haven, Connecticut. Connecticut State Medical Society v. Anthem Health Plans, Inc., No. 3:01 CV 428 (JBA) was filed on February 14, 2001 in the Superior Court Judicial District of New Haven, Connecticut. The suits allege that the Connecticut affiliate has breached its contracts by, among other things, allegedly failing to pay for services in accordance with the terms of the contracts. The suits also allege violations of the Connecticut Unfair Trade Practices Act, breach of the implied duty of good faith and fair dealing, negligent misrepresentation and unjust enrichment. The Collins and Levinson suits seek injunctive relief. Collins seeks an accounting under the terms of the provider agreements and injunctive relief prohibiting us from continuing the unfair actions alleged in the complaint and violating its agreements. Levinson seeks permanent injunctive relief prohibiting us from, among other things, utilizing methods to reduce reimbursement of claims, paying claims in an untimely fashion and providing inadequate communication with regards to denials and appeals. Both of the suits seek unspecified monetary damages (both compensatory and punitive). The third suit, brought by the Connecticut State Medical Society, seeks the same injunctive relief as the Levinson case, but no monetary damages. On July 19, 2001, the court in the Collins suit certified a class as to three of the plaintiff's fifteen allegations. The class is defined as those physicians who practice in Connecticut or group practices which are located in Connecticut that were parties to either a Participating Physician Agreement or a Participating Physicians Group Agreement with Anthem and/or its Connecticut affiliate during the period from 1993 to the present, excluding risk-sharing arrangements and certain other contracts. The claims which were certified as class claims are: Anthem's alleged failure to provide plaintiffs and other similarly situated physicians with consistent medical utilization/quality management and administration of covered services by paying financial incentive and performance bonuses to providers and Anthem staff members involved in making utilization management decisions; an alleged failure to maintain accurate books and records whereby improper payments to the plaintiffs were made based on claim codes submitted; and an alleged failure to provide senior personnel to work with plaintiffs and other similarly situated physicians. We intend to vigorously defend these proceedings. Anthem denies all the allegations set forth in the complaints and has asserted defenses, including improper standing to sue, failure to state a claim and failure to exhaust administrative remedies. All of the proceedings are in the early stages of litigation, and their ultimate outcomes cannot presently be determined. Following our purchase of BCBS-ME, the Attorney General of Maine and Consumers for Affordable Health Care filed appeals challenging the Superintendent of Insurance's (the "Superintendent") decision approving the conversion of BCBS-ME to a stock insurer, which was a required step before the acquisition. Both the Attorney General and the consumers group filed a petition for review seeking, among other things, a determination that the decision of the Superintendent in regard to the application of BCBS-ME to convert to a stock insurer was in violation of statute or unsupported by substantial evidence on the record. Consumers for Affordable Health Care, et al. v. Superintendent of Insurance, et al, Nos. AP-00-37, AP-00-42 (Consolidated). In addition, the Attorney General filed an independent claim for relief, requesting the court to modify the Superintendent's decision by requiring BCBS- ME to submit an update to the statutorily mandated appraisal of its fair market value and to deposit into the charitable foundation the difference between the net proceeds that have been transferred to the foundation and the final value of BCBS-ME, if greater. On May 18, 2001, the court dismissed the Attorney General's request for an updated 111
appraisal, ruling that the claim was an impermissible collateral challenge to a state agency's determination. Anthem intends to vigorously defend these proceedings. Anthem denies all the allegations set forth in the petitions for review and has asserted defenses, including waiver, estoppel and mootness. While the appeals are still pending, we do not believe that the appeals will have a material adverse effect on our consolidated financial position or results of operations. On March 11, 1998, Anthem and its Ohio subsidiary, Community Insurance Company ("CIC") were named as defendants in a lawsuit, Robert Lee Dardinger, Executor of the Estate of Esther Louise Dardinger v. Anthem Blue Cross and Blue Shield, et al., filed in the Licking County Court of Common Pleas in Newark, Ohio. The plaintiff sought compensatory damages and unspecified punitive damages in connection with claims alleging wrongful death, bad faith and negligence arising out of our denial of certain claims for medical treatment for Ms. Dardinger. On September 24, 1999, the jury returned a verdict for the plaintiff, awarding $1,350 for compensatory damages, $2.5 million for bad faith in claims handling and appeals processing, $49.0 million for punitive damages and unspecified attorneys' fees in an amount to be determined by the court. The court later granted attorneys' fees of $0.8 million. Both companies filed an appeal of the verdict on November 19, 1999, and as part of the appeal, a bond in the amount of $60.0 million was posted to secure the judgment and interest and attorneys' fees. On May 22, 2001, the Ohio Court of Appeals (Fifth District) affirmed the jury award of $1,350 for breach of contract against CIC, affirmed the award of $2.5 million compensatory damages for bad faith in claims handling and appeals processing against CIC, but dismissed the claims and judgments against Anthem. The court also reversed the award of $49.0 million in punitive damages against both Anthem and CIC, and remanded the question of punitive damages against CIC to the trial court for a new trial. The ultimate outcome of this matter cannot be determined at this time. In addition to the lawsuits described above, we are involved in other pending and threatened litigation of the character incidental to our business or arising out of our insurance and investment operations, and are from time to time involved as a party in various governmental and administrative proceedings. We believe that any liability that may result from any one of these actions is unlikely to have a material adverse effect on our financial position or results of operations. Other Contingencies Anthem, like a number of other Blue Cross and Blue Shield companies, serves as a fiscal intermediary providing administrative services for Medicare Parts A and B. The fiscal intermediaries for these programs receive reimbursement for certain costs and expenditures, which are subject to adjustment upon audit by CMS. The laws and regulations governing fiscal intermediaries for the Medicare program are complex, subject to interpretation and can expose an intermediary to penalties for non-compliance. Fiscal intermediaries may be subject to criminal fines, civil penalties or other sanctions as a result of such audits or reviews. In the last five years, at least eight Medicare fiscal intermediaries have made payments to settle issues raised by such audits and reviews. These payments have ranged from $0.7 million to $51.6 million, plus a payment by one company of $144.0 million. While we believe we are currently in compliance in all material respects with the regulations governing fiscal intermediaries, there are ongoing reviews by the federal government of Anthem's activities under certain of its Medicare fiscal intermediary contracts. On December 8, 1999, Anthem Health Plans, Inc., or AHP, one of our subsidiaries, reached a settlement agreement with the Office of Inspector General, or OIG, Health and Human Services, in the amount of $41.9 million, to resolve an investigation into misconduct in the Medicare fiscal intermediary operations of BCBS-CT, AHP's predecessor. The period investigated was before Anthem's merger with BCBS-CT. The resolution of this case involved no criminal penalties against Anthem as successor-in-interest nor any suspension or exclusion from federal programs. This expense was included in administrative expense in our statement of consolidated income for the year ended December 31, 1999. 112
AdminaStar Federal, Inc., one of our affiliates, has received several subpoenas from the OIG and the U.S. Department of Justice, seeking documents and information concerning its responsibilities as a Medicare Part B contractor in its Kentucky office, and requesting certain financial records from AdminaStar Federal, Inc. and from us related to our Medicare fiscal intermediary Part A and Part B operations. We have made certain disclosures to the government relating to our Medicare Part B work in Kentucky. The government, however, has not notified us of any non-compliance. We are not in a position to predict either the ultimate outcome of this review or the extent of any potential exposure should claims be made against us. However, we believe any fines or penalties that may arise from this review would not have a material adverse effect on our consolidated financial condition. As a BCBSA licensee, we participate in a nationwide contract with the federal Office of Personnel Management to provide coverage to federal employees and their dependents in our core eight-state area. The program is called the Federal Employee Program, or FEP. On July 11, 2001, we received a subpoena from the OIG, Office of Personnel Management, seeking certain financial documents and information, including information concerning intercompany transactions, related to our operations in Ohio, Indiana and Kentucky under the FEP contract. We are currently evaluating the subpoena and we intend to cooperate with the OIG's review. We are not in a position to predict either the ultimate outcome of this review or the extent of any potential exposure should claims be made against us. Accordingly, we cannot assure you that the ultimate outcome of this review will not have a material adverse effect on our consolidated results of operations or financial condition. We guaranteed certain financial contingencies of our subsidiary, Anthem Alliance Health Insurance Company, under a contract between Anthem Alliance and the United States Department of Defense. Under that contract, Anthem Alliance managed and administered the TRICARE Managed Care Support Program for military families from May 1, 1998 through May 31, 2001. The contract required Anthem Alliance, as the prime contractor, to assume certain risks in the event, and to the extent, the actual cost of delivering health care services exceeded the health care cost proposal submitted by Anthem Alliance ("the Health Care Risk"). The contract has a five-year term, but was transferred to a third party, effective May 31, 2001. We guaranteed Anthem Alliance's assumption of the Health Care Risk, which is capped by the contract at $20.0 million annually and $75.0 million cumulatively over the contract period. Through December 31, 2000, Anthem Alliance had subcontracts with two other BCBS companies not affiliated with us by which the subcontractors agreed to provide certain services under the contract and to assume approximately 50% of the Health Care Risk. Effective January 1, 2001, one of those subcontracts terminated by mutual agreement of the parties, which increased Anthem Alliance's portion of the Health Care Risk to 90%. Effective May 1, 2001, the other subcontract was amended to eliminate the Health Care Risk sharing provision, which resulted in Anthem Alliance assuming 100% of the Health Care Risk for the period from May 1, 2001 to May 31, 2001. There was no call on the guarantee for the period from May 1, 1998 to April 30, 1999 (which period is now "closed"), and we do not anticipate a call on the guarantee for the periods beginning May 1, 1999 through May 31, 2001 (which periods remain "open" for possible review by the Department of Defense). 113
MANAGEMENT Directors and Executive Officers The following table shows information as of July 31, 2001 concerning our directors and executive officers. Name Age Position ---- --- -------- L. Ben Lytle.................... 54 Chairman of the Board of Directors Larry C. Glasscock.............. 53 President and Chief Executive Officer and Director Susan B. Bayh................... 41 Director William B. Hart................. 57 Director Allan B. Hubbard................ 53 Director Victor S. Liss.................. 64 Director William G. Mays................. 55 Director James W. McDowell, Jr. ......... 59 Director B. LaRae Orullian............... 68 Director Senator Donald W. Riegle, Jr. .. 63 Director William J. Ryan................. 57 Director George A. Schaefer, Jr. ........ 56 Director Dennis J. Sullivan, Jr. ........ 69 Director David R. Frick.................. 57 Executive Vice President and Chief Legal and Administrative Officer Samuel R. Nussbaum, M.D. ....... 53 Executive Vice President and Chief Medical Officer Michael L. Smith................ 53 Executive Vice President and Chief Financial and Accounting Officer Marjorie W. Dorr................ 39 President, Anthem East Keith R. Faller................. 53 President, Anthem Midwest Michael D. Houk................. 57 Vice President and General Manager, National Accounts Caroline S. Matthews............ 41 Chief Operating Officer, Anthem Blue Cross and Blue Shield in Colorado and Nevada John M. Murphy.................. 49 President, Specialty Business Division of Anthem Jane E. Niederberger............ 41 Chief Information Officer The following is biographical information for our directors and executive officers: L. Ben Lytle has been a director of Anthem Insurance since 1987 and Chairman of the Board of Anthem Insurance since 1997. Mr. Lytle served as President and Chief Executive Officer from March 1989 to October 1999, when he retired. He is an Executive-in-Residence at the University of Arizona School of Business, Adjunct Fellow at the American Enterprise Institute and Senior Fellow at the Hudson Institute. He is a director of CID Equity Partners (venture capital firm); Duke Realty Corporation (real estate investment firm); and Healthx.com (privately held company providing internet services to small insurance companies). Larry C. Glasscock has served as President and Chief Executive Officer and as a director of Anthem Insurance since October 1999. He joined Anthem Insurance in April 1998 as Senior Executive Vice President and Chief Operating Officer. He was named President and Chief Operating Officer in April 1999 and succeeded L. Ben Lytle as Chief Executive Officer upon Mr. Lytle's retirement in October 1999. Mr. Glasscock was President and Chief Executive Officer of Blue Cross Blue Shield of the National Capital Area from 1993 to 1998 and oversaw its affiliation with Blue Cross Blue Shield of Maryland. Prior to moving to the health insurance industry, he served as President and Chief Operating Officer and a director of First American Bank, N.A. (Washington, DC) from 1991 until 1993 when the bank was sold. During 1991, Mr. Glasscock was President and Chief Executive 114
Officer of Essex Holdings, Inc. (an Ohio-based capital investment firm). He also held various executive positions during his twenty-year tenure with Ameritrust Corporation, a Cleveland, Ohio bank holding company. Mr. Glasscock is a director of Zimmer Holdings, Inc. (orthopaedic industry). Susan B. Bayh has been a director of Anthem Insurance since 1998. Mrs. Bayh has been a Distinguished Visiting Professor in the College of Business Administration at Butler University since 1994. She was a member of the International Joint Commission between the United States and Canada from 1994 to 2001. Mrs. Bayh is a director of Corvas International, Inc. (biotechnology), Cubist Pharmaceuticals, Inc. (biotechnology), Curis, Inc. (biomedical) and Emmis Communications Corporation (telecommunications). She is also a member of the Board of Trustees of Butler University. William B. Hart has been a director of Anthem Insurance since 2000. He was President of The Dunfey Group (capital consulting firm) from 1986 to 1998. Since 1999, he has been Chairman of the National Trust for Historic Preservation. He served as Chairman of the Board of the former Blue Cross Blue Shield of New Hampshire. Allan B. Hubbard has been a director of Anthem Insurance since 1999. He has been President of E & A Industries (holding company for various industrial companies) since 1993. From 1991 to 1992, Mr. Hubbard served as Deputy Chief of Staff to the Vice President of the United States, and from 1998 to 2000 he was a director of the U.S. Chamber of Commerce. Mr. Hubbard is a director of The Hudson Institute, Maxon Corporation (manufacturer) and Medical Savings Insurance Company. Victor S. Liss has been a director of Anthem Insurance since 1997. He has been President, Vice Chairman and Chief Executive Officer of Trans-Lux Corporation (electronics) since 1993. He is a trustee of Norwalk Hospital in Norwalk, Connecticut. William G. Mays has been a director of Anthem Insurance since 1993. He has been President and Chief Executive Officer of Mays Chemical Company, Inc. (chemical distribution) since 1980. Mr. Mays is a director of Vectren Corporation (gas and electric utility), the Indiana University Foundation and the National Urban League. James W. McDowell, Jr. has been a director of Anthem Insurance since 1993. He founded McDowell Associates (business management consulting) in 1992 after serving as Chief Executive Officer of Dairymen, Inc. from 1980 to 1992. He is a director of Fifth Third Bank, Kentucky. Mr. McDowell was Chairman of the Board of the former Blue Cross Blue Shield of Kentucky. B. LaRae Orullian has been a director of Anthem Insurance since 2000. She has been Vice Chair of Guaranty Bank and a Director of the Guaranty Corporation in Denver, Colorado since 1997. From 1977 to 1997, Ms. Orullian held various executive positions with the Women's Bank of Denver. Ms. Orullian also serves as Chair of the Board of Frontier Airlines, Inc. She served as Chair of the Board of the former Blue Cross Blue Shield of Colorado and Nevada. Senator Donald W. Riegle, Jr., has been a director of Anthem Insurance since 1999. In March 2001, he joined APCO Worldwide as Chairman of APCO Government Affairs. From 1995 to 2001, he was Deputy Chairman of Shandwick International. He served in the U.S. Senate from 1976 through 1994 and in the U.S. House of Representatives from 1967 through 1975. He is a director of Rx Optical, Cyberian Outpost (Internet fulfillment company), E. Team (Internet emergency management company) and Tri-Union Development Corp. (oil and gas development company). William J. Ryan has been a director of Anthem Insurance since 2000. He has served as Chairman, President and Chief Executive Officer of Banknorth Financial Group since 1990. He is a director of the University of New England. Mr. Ryan is also a trustee of Colby College and the Portland Museum of Art. He served as Chairman of the Board of the former Blue Cross Blue Shield of Maine. 115
George A. Schaefer, Jr. has been a director of Anthem Insurance since 1995. He has been President and Chief Executive Officer of Fifth Third Bancorp since 1990. Mr. Schaefer is Vice Chairman of the Board of the University of Cincinnati. He is a trustee of the Children's Hospital in Cincinnati, Ohio. Dennis J. Sullivan, Jr., has been a director of Anthem Insurance since 1995. He is an Executive Counselor for Dan Pinger Public Relations, a position he also held from April 1993 to September 2000. Mr. Sullivan served as interim President and Chief Executive Officer of Gaylord Entertainment Company from September 2000 to May 2001. He is a director of Fifth Third Bancorp. David R. Frick joined Anthem Insurance in 1995 as Executive Vice President and Chief Legal and Administrative Officer. Prior to joining Anthem Insurance, he served as a member of its board of directors. Mr. Frick was a partner at the law firm of Baker & Daniels from 1982 to 1995, and he was managing partner from 1987 to 1992. He was Deputy Mayor of the City of Indianapolis from 1977 to 1982. He is a director of Artistic Media Partners, Inc. (radio stations) and The National Bank of Indianapolis Corporation (bank holding company). Samuel R. Nussbaum, M.D. joined Anthem Insurance in January 2001 as Executive Vice President and Chief Medical Officer. From 1996 to 2000, Dr. Nussbaum served both as Executive Vice President for Medical Affairs and System Integration at BJC Health System of St. Louis and as Chairman and Chief Executive Officer of Health Partners of the Midwest. Prior to that, Dr. Nussbaum was President and Chief Executive Officer of Physician Partners of New England, Senior Vice President for Health Care Delivery at Blue Cross Blue Shield of Massachusetts and a professor at Harvard Medical School. Michael L. Smith has been Executive Vice President and Chief Financial Officer of Anthem Insurance since 1999. From 1996 to 1998, Mr. Smith served as Chief Operating Officer and Chief Financial Officer of American Health Network, Inc., a former Anthem subsidiary. He was Chairman, President and Chief Executive Officer of Mayflower Group, Inc. (transport company) from 1989 to 1995. He is a director of First Indiana Corporation (bank holding company) and Finishmaster, Inc. (auto paint distribution). Marjorie W. Dorr became President of Anthem East in July 2000. She has held numerous executive positions since joining Anthem Insurance in 1991, including Vice President of Corporate Finance; Chief Financial Officer of Anthem Casualty Insurance Group; President of Anthem Prescription Management, LLC; and Chief Operating Officer of Anthem Health Plans, Inc. in Connecticut. Keith R. Faller has been President of Anthem Midwest since 1997. He has held numerous executive positions since joining Anthem Insurance in 1970, including Senior Vice President for Customer Administration; President of Acordia of the South; Executive Vice President, Health Operations; Chief Executive Officer, Anthem Life Insurance Companies, Inc.; and President and Chief Executive Officer, Acordia Small Business Benefits, Inc. Michael D. Houk has been Vice President and General Manager of National Accounts for Anthem Insurance since 1999. He has held various executive positions since joining Anthem Insurance in 1979, including Vice President of Sales and President and Chief Executive Officer of Acordia of Central Indiana. Caroline S. Matthews became Chief Operating Officer of Anthem Blue Cross and Blue Shield in Colorado and Nevada in 2000. She has held various executive positions since joining Anthem Insurance in 1988, including Vice President of Corporate Finance; Vice President of Planning and Administration for Information Technology; and Chief Operating Officer and Chief Financial Officer of Acordia of the South. 116
John M. Murphy became President, Specialty Business Division of Anthem in 2000. He has held various executive positions since joining Anthem Insurance in 1988, including Vice President of Operations of Anthem Insurance; President and Chief Executive Officer of Anthem Life Insurance Company; and President and Chief Executive Officer of Acordia Senior Benefits, Inc. Jane E. Niederberger joined Anthem Insurance in 1997 and has been Chief Information Officer since 1999. From 1983 to 1996, she held various executive positions with Harvard Pilgrim Health Care. None of these executive officers and directors has family relationships with any other executive officer or director. The directors and executive officers of each of Anthem, Inc. and Anthem Insurance are initially the same. Information about the Board of Directors of Anthem, Inc. Composition of the Board of Directors The business of Anthem, Inc. is managed under the direction of the board of directors. The board of directors consists of 13 directors, all of whom are non-employee directors, except Mr. Glasscock. The directors are divided into three classes, each serving three-year terms with the terms staggered so that only one class will be elected each year: Class I, consisting of Mrs. Bayh, Mr. Hubbard, Mr. Mays, Senator Riegle, and Mr. Ryan, whose term will expire at the 2002 annual meeting; Class II, consisting of Mr. Glasscock, Mr. Hart, Mr. Lytle and Ms. Orullian, whose term will expire at the 2003 annual meeting; and Class III, consisting of Mr. Liss, Mr. McDowell, Mr. Schaefer, and Mr. Sullivan, whose term will expire at the 2004 annual meeting. Committees of the Board of Directors There are five standing committees of our board of directors. From time to time, the board of directors, in its discretion, may form other committees. Set forth below are the primary responsibilities and membership of each of the committees. The Executive Committee Between meetings of the board of directors, the Executive Committee has and may exercise the powers and authority of the board. Members of the Executive Committee are: L. Ben Lytle (Chairman), Larry C. Glasscock (Vice Chairman), Victor S. Liss, William G. Mays, and James W. McDowell, Jr. The Audit Committee The Audit Committee, composed entirely of non-employee directors, advises the board of directors in the selection of independent auditors, reviews with internal and independent auditors the scope and results of their audits, reviews financial statements and other financial disclosures, monitors developments in accounting principles and practices used in presenting financial results, and monitors our ethics and corporate compliance program. Members of the Audit Committee are: Victor S. Liss (Chairman), George A. Schaefer, Jr. (Vice Chairman), Allan B. Hubbard, James W. McDowell, Jr., B. LaRae Orullian, and Senator Donald W. Riegle, Jr. 117
The Compensation Committee The Compensation Committee, composed entirely of non-employee directors, reviews and recommends to the board of directors our overall compensation policy, reviews and approves the compensation of executive officers and administers our stock plans. Members of the Compensation Committee are: William G. Mays (Chairman), William J. Ryan (Vice Chairman), Victor S. Liss, B. LaRae Orullian, and Dennis J. Sullivan, Jr. The Planning Committee The Planning Committee reviews and monitors the annual operating plan, recommends strategies to achieve the strategic plan, and reviews integration plans for mergers, acquisitions and other corporate transactions. Members of the Planning Committee are: James W. McDowell, Jr. (Chairman), Senator Donald W. Riegle, Jr. (Vice Chairman), Susan B. Bayh, William B. Hart, L. Ben Lytle, and William J. Ryan. The Board Governance and Executive Development Committee The Board Governance and Executive Development Committee reviews the qualifications of potential board members, makes recommendations with respect to electing directors and filling vacancies on the board, reviews the operation and organization of the board, assists in the design and implementation of executive training and development programs, and provides counsel on executive succession planning. Members of the Board Governance and Executive Development Committee are: L. Ben Lytle (Chairman), Susan B. Bayh (Vice Chairman), William B. Hart, William G. Mays, George A. Schaefer, Jr., and Dennis J. Sullivan, Jr. Compensation of Directors The compensation of non-employee directors of Anthem, Inc. will initially be the same as the compensation currently provided by Anthem Insurance to its non- employee directors. Each non-employee director will receive an annual retainer fee of $40,000, paid in equal quarterly installments, for board membership, a meeting fee of $1,500 for attendance at each board meeting and a meeting fee of $1,200 for attendance at each standing or special committee meeting, with an additional $3,000 annual retainer for the chairperson. Employee directors are not paid a fee for their service as a director. Fees paid to directors may be deferred under the Board of Directors' Deferred Compensation Plan, which provides a method of deferring payment until a date selected by the director. Fees deferred accrue interest at the same rate as in effect from time to time under the Deferred Compensation Plan for employees. Under the 2001 Stock Incentive Plan, the Board of Directors may elect to pay non-employee directors all or a part of their retainer fees in Anthem, Inc. common stock, and non- employee directors may elect to receive all or a part of their other fees in Anthem, Inc. common stock. In addition, after six months following the effective date of the demutualization, the Board of Directors may grant non- qualified stock options to non-employee directors to purchase shares of Anthem, Inc. common stock at a price no less than the fair market value of a share of stock on the grant date of the stock option. Compensation of Executive Officers Since the formation of Anthem, Inc., none of the executive officers or other personnel has received any compensation from Anthem, Inc. All compensation has been paid by Anthem Insurance or one of its subsidiaries. We expect that after the demutualization, the executive officers of Anthem, Inc. will continue to be paid by Anthem Insurance or one of its subsidiaries. 118
The following table sets forth the compensation paid by Anthem Insurance or one of its subsidiaries to our Chief Executive Officer and our other four most highly compensated executive officers for the year ended December 31, 2000. Summary Compensation Table Long Term Annual Compensation Compensation -------------------------- ------------ Name and Principal Other Annual LTIP All Other Position Year Salary Bonus(1) Compensation(2) Payouts(3) Compensation(4) ------------------ ---- -------- ---------- --------------- ------------ --------------- Larry C. Glasscock...... 2000 $800,000 $1,027,298 $65,675 $ 0 $51,467 President and Chief Executive Officer David R. Frick.......... 2000 $410,000 $ 520,369 $16,968 $297,049 $24,523 Executive Vice President and Chief Legal and Administrative Officer Michael L. Smith........ 2000 $375,000 $ 368,122 $ 437 $ 44,557 $18,750 Executive Vice President and Chief Financial Officer Keith R. Faller......... 2000 $350,000 $ 196,219 $30,202 $178,229 $12,779 President, Anthem Midwest Marjorie W. Dorr........ 2000 $306,731 $ 257,175 $25,406 $ 80,202 $13,456 President, Anthem East(5) - -------- (1) The amount in this column represents the Annual Incentive Plan award paid in 2000 for the prior performance year of 1999. (2) Mr. Glasscock received $42,000 in cash and $20,812 in reimbursements as part of the Directed Executive Compensation Program including financial counseling fees for $8,892. None of the other named individuals received perquisites or other personal benefits in excess of the lesser of $50,000 or 10% of the total of their salary and bonus. Amounts include the above- market portion of interest paid on the deferred compensation for Mr. Glasscock ($2,863), Mr. Frick ($4,897), Mr. Smith ($437), Mr. Faller ($3,072) and Ms. Dorr ($1,421) and the above market portion of interest paid on the deferred long-term incentive payments for Mr. Frick ($12,070) and Mr. Faller ($27,130). Ms. Dorr's amount also includes $23,985 for reimbursement of relocation expenses. (3) The amounts in this column represent Long-Term Incentive Plan awards received or deferred in 2000 for prior performance cycles. (4) The amounts in this column represent matching contributions under our 401(k) and Deferred Compensation Plans. (5) Ms. Dorr was appointed President of Anthem East, effective July 29, 2000. Annual Incentive Plan Under the Annual Incentive Plan (the "AIP"), employees are eligible to receive cash awards based upon the achievement of performance measures established by the Compensation Committee. Such cash awards are stated as a percentage of salary payable to the eligible employees, with the range of targets from 5% to 100%. Actual amounts payable are adjusted up or down for performance at or above targeted levels of performance, with a threshold award of 50% of target if minimum results are achieved and a maximum award of 200% of target if maximum results are achieved. Amounts payable under the AIP are paid during the year immediately following the performance year and are payable only upon approval of the Compensation Committee. An employee must be employed before October 1 of the plan year in order to receive a payment under the AIP in respect 119
of such fiscal year. Also, employees must be actively employed by Anthem on the last business day of the plan year to receive an award. In the event of a death, disability or an approved retirement of an employee, a prorated amount may be payable in accordance with administrative guidelines. Long-Term Incentive Plan Senior executives, as may be recommended by the Chief Executive Officer and approved by the Compensation Committee, are participants in the Long-Term Incentive Plan (the "LTIP"). The LTIP operates during successive three-year periods. Employees must be actively employed by us on the last business day of the period to receive an award. Under the LTIP, the Compensation Committee establishes performance goals for Anthem Insurance at the beginning of each three-year performance period which include specific objectives for growth in net income, operating margin, comparison of performance against peer companies and increase in the valuation of the enterprise. At the end of the period, the Compensation Committee judges the performance of Anthem Insurance against the established goals. For each participant, a target award is established as a percentage of base salary with the payouts for executives ranging from 30% to 150% of the annual base salary for each year of the three-year period. Actual amounts payable are adjusted up or down for performance above or below targeted levels of performance with a threshold award of 50% of target if minimum results are achieved. Awards under the LTIP in each three-year period become payable upon approval of the Compensation Committee and are paid in the year immediately following the end of the period, with the executive having the option to defer payment. In the event of the death, disability or approved retirement of an employee, or a change of control of Anthem, an amount may be payable at the discretion of the Compensation Committee. The table below provides information concerning estimated target awards during the period 2001-2003 depending upon achievement of the performance goals. Long-Term Incentive Plan (2001-2003) Targeted Future Payouts under Non- Stock Price-Based Plan (1)(2) Performance --------------------- Name Period Threshold Target ---- ----------- ---------- ---------- Larry C. Glasscock............................ 2001-2003 $2,025,000 $4,050,000 David R. Frick................................ 2001-2003 $ 738,000 $1,476,000 Michael L. Smith.............................. 2001-2003 $ 738,000 $1,476,000 Keith R. Faller............................... 2001-2003 $ 540,000 $1,080,000 Marjorie W. Dorr.............................. 2001-2003 $ 420,000 $ 840,000 - -------- (1) Payout scheduled to occur in 2004. (2) Under the Plan, there is no maximum limitation. Stock Incentive Plan We have a 2001 Stock Incentive Plan (the "Stock Plan"), the purposes of which are to promote the interests of Anthem, Inc. and its shareholders and to further align the interests of our employees with our shareholders. Directors, executives and employees, as selected by the Compensation Committee, will participate in the Stock Plan. The Compensation Committee will administer the Stock Plan and will have complete discretion to determine whether to grant incentive awards, the types of incentive awards to grant and any requirements and restrictions relating to incentive awards. The Stock Plan is an omnibus plan, which allows for the grant of stock options, restricted stock, stock appreciation rights, performance stock and performance awards. 120
The Stock Plan reserves for issuance 5,000,000 shares of our common stock for incentive awards to employees and non-employee directors, plus an additional 2,000,000 shares solely for issuance under grants of stock options that may be made to substantially all of our employees (and for issuance under similar grants that may be made to new employees). If any grant is for any reason canceled, terminated or otherwise settled without the issuance of some or all of the shares of common stock subject to the grant, such shares will be available for future grants. For a period of six months following the effective date of the demutualization, we may not make any grants under the Stock Plan to our directors or any executive who participates in the LTIP. If not sooner terminated by the board of directors, the Stock Plan shall terminate at the close of business on July 29, 2011. The board of directors may amend the Stock Plan in such respects as it deems advisable provided that the shareholders must approve certain amendments. A termination or amendment of the Stock Plan shall not, without the participant's consent or unless made to ensure compliance with applicable law, adversely affect a participant's rights under an incentive award previously granted to the participant. Options to purchase shares of stock granted under the Stock Plan to employees may be incentive stock options, as described in Internal Revenue Code (S)422, or nonstatutory stock options. Options to purchase shares of stock granted under the Stock Plan to non-employee directors must be nonstatutory stock options. The exercise price per share subject to either an incentive stock option or a nonstatutory stock option will not be less than 100% (or, in the case of an incentive stock option granted to a 10% shareholder, 110%) of the fair market value of stock on the date of the grant of such option. In addition, no more than $100,000 of incentive stock options, based on the exercise price, may be initially exercisable in any calendar year. An option shall not be exercisable more than ten years after the date of grant. The Compensation Committee intends to grant stock options to purchase 100 shares of Anthem, Inc. common stock under the Stock Plan to each of our approximately 15,000 employees, other than our approximately top 50 executives, effective on the first day that Anthem, Inc. common stock trades on the New York Stock Exchange. None of our executive officers will receive stock options under these grants. Each of such options will have an exercise price per share equal to the initial public offering price set forth on the cover page of this prospectus and will have a term of ten years. The options will generally become fully exercisable two years after their effective date. The Compensation Committee may grant similar stock options under the Stock Plan to new employees. The exercise price of any such options would not be less than 100% of the fair market value of a share of our common stock on the date of the grant of such option and any such options would have a term of ten years. The Compensation Committee may issue restricted stock to employees. None of the shares of restricted stock may be transferred or encumbered until the restrictions on such shares lapse or are removed. The Compensation Committee may award stock appreciation rights to employees either with or without related stock options. When the stock appreciation right is exercisable, the holder may surrender all or a portion of the unexercised stock appreciation right to Anthem and receive in exchange an amount equal to the difference between (i) the fair market value on the date of exercise of the stock covered by the surrendered portion of the stock appreciation right, and (ii) the exercise price of the stock on the date the stock appreciation right was awarded. The Compensation Committee may grant performance awards to employees. For each plan year, the Compensation Committee will select the performance criteria to be used for that plan year in granting performance awards, which criteria may include asset growth, combined net worth, debt 121
to equity ratio, earnings per share, revenues, investment performance, operating income (with or without investment income or income taxes), operating cash flow, operating margins, net income before or after taxes, earnings before interest, taxes, depreciation and/or amortization, return on total capital, equity, revenue or assets, medical loss ratio or number of policyholders or insureds. Performance awards will be paid in cash, Anthem, Inc. common stock or both, at such time or times as are provided in the award agreement between us and the employee. The award agreement may provide that the employee may make a prior election to defer the payment under the performance award as the Compensation Committee may determine. All options granted under the Stock Plan to non-employee directors will become exercisable in full upon the occurrence of a change in control of Anthem, Inc. Except as otherwise provided by the Compensation Committee, upon the occurrence of a change in control of Anthem, Inc., all other options granted under the Stock Plan will become exercisable in full. Federal Income Tax Consequences The following is a brief summary of the federal income tax consequences of awards under the Stock Plan based on the federal income tax laws in effect on the date hereof. This summary is not intended to be exhaustive and does not describe state or local tax consequences. No taxable income is realized by the grantee upon the grant or exercise of an incentive stock option. The difference between the fair market value of the option shares on the date an incentive stock option is exercised and their exercise price will constitute a tax preference for purposes of the individual alternative minimum tax. If a grantee does not sell the stock received for at least two years from the date of grant and one year from the date of exercise, when the shares are sold any gain or loss realized will be treated as long-term capital gain or loss. In such circumstances, no deduction will be allowed to Anthem for federal income tax purposes. If incentive stock option shares are disposed of prior to the expiration of the holding periods described above, the grantee generally will recognize ordinary income at that time equal to the lesser of the excess of the fair market value of the shares at exercise over the price paid for such shares or the actual gain on the disposition. Anthem will generally be entitled to deduct any such recognized amount. Any further gain or loss realized by the grantee will be taxed as short-term or long-term capital gain or loss. Subject to certain exceptions for disability or death, if an incentive stock option is exercised more than three months following the termination of the grantee's employment, the incentive stock option will generally be taxed as a nonstatutory stock option. No income is realized by the grantee at the time a nonstatutory stock option is granted. Generally upon exercise of a nonstatutory stock option, the grantee will realize ordinary income in an amount equal to the difference between the price paid for the shares and the fair market value of the shares on the date of exercise. Anthem will generally be entitled to a deduction for federal income tax purposes in the same amount and at the same time as the grantee recognizes ordinary income. Any appreciation or depreciation after the date of exercise will be treated as either short-term or long-term capital gain or loss, depending upon the length of time that the grantee has held the shares. No deduction will be available to Anthem by reason of such gain or loss. Employee Stock Purchase Plan The Employee Stock Purchase Plan (the "Stock Purchase Plan") is intended to comply with Internal Revenue Code (S)423 and to provide a means by which to encourage and assist employees in acquiring a stock ownership interest in Anthem, Inc. We anticipate implementing the Stock Purchase Plan by mid 2002. The Stock Purchase Plan is administered by the Compensation Committee, and the Compensation Committee will have complete discretion to interpret and administer the Stock Purchase Plan and the rights granted under it. Any employee of Anthem is 122
eligible to participate, as long as such employee's customary employment is more than 20 hours per week, more than five months in a calendar year, and the employee does not own stock totaling 5% or more of the voting power or value of Anthem, Inc. No employee will be permitted to purchase more than $25,000 worth of stock in any calendar year. The Stock Purchase Plan reserves for issuance and purchase by employees 3,000,000 shares of stock. Employees become participants by electing payroll deductions from 1% to 15% of gross compensation. Payroll deductions are accumulated during each quarter and applied toward the purchase of stock on the last trading day of each quarter. Once purchased, the stock is accumulated in the employee's investment account. The purchase price per share equals the lower of (i) 85% of the fair market value of a share of our common stock on the first trading day of the quarter, or (ii) 85% of the fair market value of a share of our common stock on the last trading day of the quarter. The board of directors may amend the Stock Purchase Plan in such respects as it deems advisable provided that the shareholders must approve certain amendments. Rights under the Stock Purchase Plan are not transferable, except by will or the law of descent and distribution. In the event of a participant's retirement, termination or death, the amount in the participant's payroll deduction account shall be refunded. Deferred Compensation Highly compensated employees, as defined in the Internal Revenue Code, are eligible to participate in an unfunded non-qualified deferred compensation plan. There are three types of deferral options in the plan. The Restoration Option allows deferral amounts that are limited under our 401(k) Plan and restores company match that would otherwise be contributed in our 401(k) Plan. The Supplemental Option allows an additional deferral of base salary and commissions, up to 80%, above the Restoration Option and these deferrals are not matched by us. The Annual Incentive Deferral Option allows an additional deferral of annual incentive compensation above the Restoration Option and is matched at a rate of 3%. The declared interest rate on deferred amounts is the average of the 10-year U.S. Treasury Note monthly average rates for the 12-month period ending on September 30 of the previous year, plus 150 basis points. Interest is accrued daily, posted monthly and compounded annually. The retirement rate is credited at 125% of the declared interest rate. Distributions are made at the end of the quarter of termination or retirement based on the participant's filed distribution election or as otherwise specified in the plan document. Limited in-service withdrawals are available in the event of unforeseeable financial emergencies. Retirement Plan We sponsor a non-contributory pension plan for certain employees that is qualified under Internal Revenue Code (S)401(a) and subject to the Employee Retirement Income Security Act (the "Qualified Plan"). We also sponsor the Anthem Supplemental Executive Retirement Plan ( the "SERP") which provides additional benefits payable out of our general assets to certain participants. The benefits under the SERP are equal to the benefits those participants cannot receive under the Qualified Plan because of Internal Revenue Code limits on benefits and restrictions on participation by highly compensated employees, as defined in the Internal Revenue Code. On January 1, 1997, we converted the Qualified Plan from a final average compensation pension plan into a cash balance pension plan. The Qualified Plan covers substantially all full-time, 123
part-time and temporary employees, including executive officers, and provides a set benefit at age 65, the normal retirement age under the Qualified Plan. Under the Qualified Plan, at the end of each calendar quarter, a bookkeeping account for each participant is credited with (1) an amount based on the participant's compensation and years of service (the "Pay Credit"), and (2) interest based on the average of the monthly yields for 10-year U.S. Treasury Security Constant Maturities for the twelve month period ending on September 30 of the preceding plan year. The Pay Credit equals a percentage of the participant's compensation for the plan year and is determined according to the following schedule: Years of Service Pay Credit ---------------- ---------- Up to and including 4......................................... 3% 5-9........................................................ 4% 10-19....................................................... 5% 20+......................................................... 6% The definition of compensation in the Qualified Plan is the participant's total earned income, including base salary, commissions, overtime pay, and cash bonuses, before it is reduced by any before-tax contributions the participant makes to the 401(k) plan and flexible benefit plan. Compensation does not include imputed income, car allowances, non-qualified deferred compensation, severance payments, payment of accrued paid time off days, payments under the Directed Executive Compensation Program, or similar items. The SERP continues the calculation of the retirement benefits on a uniform basis. Any excess benefit accrued to a participant under the SERP will be payable according to one of five payment options available under the SERP at termination or retirement. Messrs. Glasscock, Frick, Smith and Faller and Ms. Dorr receive benefits under both the Qualified Plan and the SERP. The estimated benefits, under both the Qualified Plan and the SERP, payable in a lump sum upon retirement at normal retirement age are as follows: Mr. Glasscock ($1,787,981), Mr. Frick ($650,913), Mr. Smith ($774,339), Mr. Faller ($3,879,546), and Ms. Dorr ($2,581,168). Mr. Faller's benefit is calculated under a different formula through 2001 as a result of transition benefits in the Qualified Plan. These estimates use 2000 base pay and annual bonus for all future years and assume that the named executive officers remain actively employed until normal retirement age. In addition, the employment agreements for Messrs. Glasscock, Frick and Smith set forth a Replacement Ratio SERP benefit, calculated as a retirement at age 62 or the date of termination, if later than age 62, in an amount equal to 50% of the executive's average annual pay during the three highest consecutive calendar years of his final five calendar years of employment. The benefit will be offset by the amount payable under the Qualified Plan and the SERP. The estimated replacement ratio SERP benefit payable upon retirement at age 65 is as follows: Mr. Glasscock ($738,852 annually), Mr. Frick ($401,880 annually), and Mr. Smith ($295,008 annually). These estimates use 2000 base salary and annual bonus for all future years and assume that the named executive officers remain actively employed until normal retirement age. Employment Agreements Anthem Insurance has entered into employment agreements with certain of our executive officers, including Messrs. Glasscock, Frick, Smith, Faller and Ms. Dorr, that provide for each executive's continued employment with us. The current terms of the employment agreements are effective through December 31, 2005 for Mr. Glasscock, December 31, 2004 for Messrs. Frick and Smith, December 31, 2003 for Mr. Faller and December 31, 2002 for Ms. Dorr. 124
Under these agreements, each eligible executive's terms and conditions of employment, including rate of base salary, incentive compensation opportunities, participation in employee benefit plans and perquisites are addressed. The employment agreements provide that Anthem Insurance will have the right at any time to terminate an executive's employment and that any executive will have the right to terminate his or her employment at Anthem Insurance. Under the employment agreements with Messrs. Glasscock, Frick and Smith, Anthem Insurance will provide them for the remainder of the term with the following benefits in the event of termination by us other than for cause, in the event of an approved retirement or in the event of termination by the executive for good reason (as those terms are defined in the employment agreements): . salary; . all unvested prior long-term incentive awards; . annual incentive and long-term incentive awards for the year of termination based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the executive was employed; . an amount equal to 80% of any target annual incentive and target long- term incentive opportunities; . an amount equal to 20% of any target annual incentive and target long- term incentive opportunities if the executive is available for consultation up to a maximum of eight days each quarter of the year; . medical and dental plan benefits and directed executive compensation for which the executive would otherwise have been eligible to receive; and . the Replacement Ratio SERP Benefit described under "--Retirement Plan." Section 280G and Section 4999 of the Code limit deductions for compensation paid to certain senior executives if the payment is contingent on a change of ownership or effective control of a corporation. This deduction is limited to the average taxable compensation of the affected executive for the five years prior to the year that the change of control occurred. If the payments to the executive equal or exceed three times such average taxable compensation, the deduction is limited pursuant to Code Section 280G and these payments are referred to as "golden parachute" payments. In addition, Code Section 4999 imposes a 20% nondeductible excise tax on the executive on all nondeductible payments. Pursuant to their employment agreements, in the event Messrs. Glasscock, Frick or Smith is a recipient of a "golden parachute" payment, we will make an additional gross-up payment to the executive in order to put him in the same after-tax position that he would have been in had no excise tax been imposed. The gross-up will result in Anthem paying not only the excise tax payable by the executive but also the income and excise taxes on the additional payments. Under the employment agreements for Ms. Dorr and Mr. Faller, Anthem Insurance will provide them with the following benefits in the event of termination by us other than for cause: . salary; . all unvested prior long-term incentive awards; . annual incentive and long-term incentive awards for the year of termination based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the executive was employed; 125
. an amount equal to 50% of any target annual incentive and target long- term incentive opportunities; and . medical and dental plan benefits for which the executive would otherwise have been eligible to receive. The employment agreements for Ms. Dorr and Mr. Faller also state that the foregoing benefits are limited to either the greater of one year or the remainder of the term. Under these agreements, Messrs. Glasscock, Frick and Smith agree not to compete as an equity owner or employee with us or our subsidiaries for the greater of (i) two years after the executive's termination for any reason or (ii) the remainder of the term after their termination by us other than for cause, after an approved retirement or after termination by the executive for good reason. Mr. Faller and Ms. Dorr are subject to the same limitation but for the greater of one year or the remainder of the term after their termination other than for cause. Ownership of Common Stock No directors or executive officers own any stock in Anthem, Inc. and no directors or executive officers will receive any stock in connection with the demutualization. Under the plan of conversion, we cannot make any grants of our common stock or options to purchase our common stock to any of our directors or our approximately top 50 executives until six months after the effective date of the demutualization. Certain Relationships and Related Transactions In the ordinary course of business, we from time to time may engage in transactions with other corporations or financial institutions whose officers or directors are also directors of Anthem. Transactions with such corporations and financial institutions are conducted on an arm's length basis and may not come to the attention of the directors of Anthem or of the other corporations or financial institutions involved. Mr. Lytle, Chairman of the board of directors, retired as Chief Executive Officer in October 1999. Pursuant to his employment agreement and retirement agreement, Anthem pays Mr. Lytle $400,000 annually until December 31, 2002 for his consultation services up to a maximum of eight days per quarter. In addition, in any quarter in which Anthem has requested Mr. Lytle to provide more than eight days of consultation, he is to be paid five hundred dollars ($500) per hour, up to a maximum of five thousand dollars ($5,000) per day. Compensation Committee Interlocks and Insider Participation The Compensation Committee, among other things, approves compensation for Anthem's executive officers. The Compensation Committee members during 2000 were Victor S. Liss, William G. Mays, B. LaRae Orullian, William J. Ryan, Allan B. Hubbard and Dennis J. Sullivan, Jr. None of the Compensation Committee members were involved in a relationship requiring disclosure as an interlocking director, or under Item 404 of Regulation S-K, or as a former officer or employee of Anthem. 126
DESCRIPTION OF CAPITAL STOCK The following description of our capital stock does not purport to be complete and is subject in all respects to applicable Indiana law and to the provisions of our articles of incorporation and by-laws, copies of which are included as exhibits to the registration statement of which this prospectus forms a part. Our authorized capital stock consists of 900,000,000 shares of common stock, $.01 par value per share, and 100,000,000 shares of preferred stock, without par value. After giving effect to (a) the issuance of an estimated 76,080,000 shares of common stock in the demutualization and (b) the issuance of 28,600,000 shares of common stock in this offering, and assuming that the underwriters do not exercise their over-allotment option, we would have 104,680,000 shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding. An additional 10,000,000 shares of common stock are reserved for issuance under our Stock Plan and under our Stock Purchase Plan. Common Stock Each holder of common stock is entitled to one vote per share of record on all matters to be voted upon by the shareholders. Holders do not have cumulative voting rights in the election of directors or any other matter. Subject to the preferential rights of the holders of any preferred stock that may at the time be outstanding, each share of common stock will entitle the holder of that share to an equal and ratable right to receive dividends when, if and as declared from time to time by the board of directors and paid out of legally available funds. We do not anticipate paying cash dividends. See "Dividend Policy." In the event of our liquidation, dissolution or winding up, the holders of common stock will be entitled to share ratably in all assets remaining after payments to creditors and after satisfaction of the liquidation preference, if any, of the holders of any preferred stock that may at the time be outstanding. Holders of common stock have no preemptive or redemption rights and will not be subject to further calls or assessments by us. All of the shares of common stock to be issued and sold in this offering will be, immediately upon consummation of this offering, validly issued, fully paid and non-assessable. Preferred Stock The authorized preferred stock is available for issuance from time to time at the discretion of the board of directors without shareholder approval. The board of directors has the authority to prescribe for each series of preferred stock it establishes the number of shares in that series, the number of votes, if any, to which the shares in that series are entitled, the consideration for the shares in that series, and the designations, powers, preferences and other rights, qualifications, limitations or restrictions of the shares in that series. Depending upon the rights prescribed for a series of preferred stock, the issuance of preferred stock could have an adverse effect on the voting power of the holders of common stock and could adversely affect holders of common stock by delaying or preventing a change in control of us, making removal of our present management more difficult or imposing restrictions upon the payment of dividends and other distributions to the holders of common stock. Authorized But Unissued Shares Indiana law does not require shareholder approval for any issuance of authorized shares. Authorized but unissued shares may be used for a variety of corporate purposes, including future public or private offerings to raise additional capital or to facilitate corporate acquisitions. One of the effects of the existence of authorized but unissued shares may be to enable the board of directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or 127
otherwise, and thereby protect the continuity of current management and possibly deprive the shareholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices. Limitations on Ownership of Common Stock in Articles of Incorporation Our license agreements with the BCBSA require as a condition to our retention of the licenses that our articles of incorporation contain certain provisions, including limitations on the ownership of our common stock. Our articles of incorporation provide that after the demutualization no person may beneficially own shares of our voting capital stock in excess of the specified BCBSA ownership limit, except with the prior approval of a majority of the continuing directors (as defined in our articles of incorporation). The BCBSA ownership limit, which may not be exceeded without the prior approval of the BCBSA, is the following: . for any "Institutional Investor," one share less than 10% of our outstanding voting securities; . for any "Noninstitutional Investor," one share less than 5% of our outstanding voting securities; and . for any person, one share less than the number of shares of our common stock or other equity securities (or a combination thereof) representing a 20% or more ownership interest in our company. "Institutional Investor" means any person if (but only if) such person is: . a broker or dealer registered under Section 15 of the Exchange Act; . a bank as defined in Section 3(a)(6) of the Exchange Act; . an insurance company as defined in Section 3(a)(19) of the Exchange Act; . an investment company registered under Section 8 of the Investment Company Act of 1940; . an investment adviser registered under Section 203 of the Investment Advisers Act of 1940; . an employee benefit plan, or pension fund which is subject to the provisions of ERISA or an endowment fund; . a parent holding company, provided the aggregate amount held directly by the parent, and directly and indirectly by its subsidiaries which are not persons specified in the six bullet points listed above, does not exceed one percent of the securities of the subject class such as common stock; or . a group, provided that all the members are persons specified in the seven bullet points listed above. In addition, every filing made by such person with the SEC under Regulations 13D-G (or any successor regulations) under the Exchange Act with respect to that person's beneficial ownership must contain a certification substantially to the effect that our common stock acquired by that person was acquired in the ordinary course of business and was not acquired for the purpose of and does not have the effect of changing or influencing the control of our company and was not acquired in connection with or as a participant in any transaction having such purpose or effect. "Noninstitutional Investor" means any person that is not an Institutional Investor. Any transfer of stock that would result in any person beneficially owning shares of capital stock in excess of the ownership limit will result in the intended transferee acquiring no rights in such shares (with certain exceptions) and the person's shares will be deemed transferred to an escrow 128
agent to be held until the shares are transferred to a person whose ownership of the shares will not violate the ownership limit. These provisions prevent a third party from obtaining control of our company without obtaining the prior approval of our continuing directors or the 75% supermajority vote required to amend these provisions of our articles of incorporation and may have the effect of discouraging or even preventing a merger or business combination, a tender offer or similar extraordinary transaction involving us. Certain Other Provisions of Articles of Incorporation and By-Laws Certain other provisions of our articles of incorporation and by-laws may delay or make more difficult unsolicited acquisitions or changes of control of us. These provisions could have the effect of discouraging third parties from making proposals involving an unsolicited acquisition or change in control of us, although these proposals, if made, might be considered desirable by a majority of our shareholders. These provisions may also have the effect of making it more difficult for third parties to cause the replacement of the current management without the concurrence of the board of directors. These provisions include: . the division of the board of directors into three classes serving staggered terms of office of three years (see "Management--Directors and Executive Officers"); . provisions allowing the removal of directors only upon a 66 2/3% shareholder vote or upon the affirmative vote of both a majority of all directors and a majority of continuing directors (as defined in our articles of incorporation); . provisions limiting the maximum number of directors to 19, and requiring that any increase in the number of directors then in effect must be approved by a majority of continuing directors; . permitting only the board of directors, the Chairman, the Chief Executive Officer or the President to call a special meeting of shareholders; . requirements for a 75% supermajority vote to amend certain provisions of our articles of incorporation, including those provisions discussed in this section; and . requirements for advance notice for raising business or making nominations at shareholders' meetings. Our by-laws establish an advance notice procedure with regard to business to be brought before an annual or special meeting of shareholders and with regard to the nomination of candidates for election as directors, other than by or at the direction of the board of directors. Although our by-laws do not give the board of directors any power to approve or disapprove shareholder nominations for the election of directors or proposals for action, they may have the effect of precluding a contest for the election of directors or the consideration of shareholder proposals if the established procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its proposal without regard to whether consideration of those nominees or proposals might be harmful or beneficial to us and our shareholders. Our articles of incorporation provide that, in the case of a merger, sale or purchase of assets, issuance of securities or reclassification, each a "business combination," involving a beneficial owner of 10% or more of the voting power of our capital stock (a "related person"), or any affiliate or associate of a related person, such business combination must be approved by (i) 66 2/3% of the voting power of our outstanding voting stock and (ii) a majority of the then outstanding voting power of the voting stock held by shareholders other than the related person. However, these shareholder approval requirements do not apply if the business combination is approved in advance by at least 129
two-thirds of the continuing directors (as defined in our articles of incorporation) or the consideration to be received by shareholders in the business combination is at least equal to the highest price paid by the related person in acquiring its interest in our company, with specified adjustments, and some other requirements are met. Certain Provisions of Indiana Law Under the Indiana demutualization law, for a period of five years following the effective date of the demutualization, no person may acquire beneficial ownership of more than 5% of the outstanding shares of our common stock without the prior approval of the Indiana Insurance Commissioner and our board of directors. This restriction does not apply to acquisitions made by us or made pursuant to an employee benefit plan or employee benefit trust sponsored by us. The Indiana Insurance Commissioner has adopted rules under which passive institutional investors could purchase more than 5% but less than 10% of any outstanding common stock with the approval of our board of directors and prior notice to the Indiana Insurance Commissioner. The Indiana Business Corporation Law, or IBCL, applies to us as an Indiana corporation. Under specified circumstances, the following provisions of the IBCL may delay, prevent or make more difficult unsolicited acquisition or changes of control of us. These provisions also may have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions which shareholders may otherwise deem to be in their best interests. Control Share Acquisitions. Under Sections 23-1-42-1 to 23-1-42-11 of the IBCL, an acquiring person or group who makes a "control share acquisition" in an "issuing public corporation" may not exercise voting rights on any "control shares" unless these voting rights are conferred by a majority vote of the disinterested shareholders of the issuing corporation at a special meeting of those shareholders held upon the request and at the expense of the acquiring person. If control shares acquired in a control share acquisition are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of all voting power, all shareholders of the issuing corporation have dissenters' rights to receive the fair value of their shares pursuant to Section 23-1-44 of the IBCL. Under the IBCL, "control shares" means shares acquired by a person that, when added to all other shares of the issuing public corporation owned by that person or in respect to which that person may exercise or direct the exercise of voting power, would otherwise entitle that person to exercise voting power of the issuing public corporation in the election of directors within any of the following ranges: . one-fifth or more but less than one-third; . one-third or more but less than a majority; or . a majority or more. "Control share acquisition" means, subject to specified exceptions, the acquisition, directly or indirectly, by any person of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding control shares. Shares acquired within 90 days or under a plan to make a control share acquisition are considered to have been acquired in the same acquisition. "Issuing public corporation" means a corporation which is organized in Indiana and has (i) 100 or more shareholders, (ii) its principal place of business, its principal office or substantial assets within Indiana and (iii) either: . more than 10% of its shareholders resident in Indiana; 130
. more than 10% of its shares owned by Indiana residents; or . 10,000 shareholders resident in Indiana. The above provisions do not apply if, before a control share acquisition is made, the corporation's articles of incorporation or by-laws, including a board adopted by-law, provide that they do not apply. Our articles of incorporation and by-laws do not currently exclude us from the restrictions imposed by the above provisions. Certain Business Combinations. Sections 23-1-43-1 to 23-1-43-23 of the IBCL restrict the ability of a "resident domestic corporation" to engage in any combinations with an "interested shareholder" for five years after the interested shareholder's date of acquiring shares unless the combination or the purchase of shares by the interested shareholder on the interested shareholder's date of acquiring shares is approved by the board of directors of the resident domestic corporation before that date. If the combination was not previously approved, the interested shareholder may effect a combination after the five-year period only if that shareholder receives approval from a majority of the disinterested shares or the offer meets specified fair price criteria. For purposes of the above provisions, "resident domestic corporation" means an Indiana corporation that has 100 or more shareholders. "Interested shareholder" means any person, other than the resident domestic corporation or its subsidiaries, who is (1) the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the resident domestic corporation or (2) an affiliate or associate of the resident domestic corporation, which at any time within the five-year period immediately before the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding shares of the resident domestic corporation. The above provisions do not apply to corporations that so elect in an amendment to their articles of incorporation approved by a majority of the disinterested shares. That amendment, however, cannot become effective until 18 months after its passage and would apply only to share acquisitions occurring after its effective date. Our articles of incorporation do not exclude us from the restrictions imposed by the above provisions. Directors' Duties and Liability. Under Section 23-1-35-1 of the IBCL, directors are required to discharge their duties: . in good faith; . with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and . in a manner the directors reasonably believe to be in the best interests of the corporation. However, the IBCL also provides that a director is not liable for any action taken as a director, or any failure to act, unless the director has breached or failed to perform the duties of the director's office and the action or failure to act constitutes willful misconduct or recklessness. The exoneration from liability under the IBCL does not affect the liability of directors for violations of the federal securities laws. Section 23-1-35-1 of the IBCL also provides that a board of directors, in discharging its duties, may consider, in its discretion, both the long-term and short-term best interests of the corporation, taking into account, and weighing as the directors deem appropriate, the effects of an action on the corporation's shareholders, employees, suppliers and customers and the communities in which offices or other facilities of the corporation are located and any other factors the directors consider pertinent. If a determination is made with the approval of a majority of the disinterested directors of the board, that determination is conclusively presumed to be valid unless it can be demonstrated that the determination was not made in good faith after reasonable investigation. Once the board, in exercising its business judgment, has determined that a proposed action is not in the best interests 131
of the corporation, it has no duty to remove any barriers to the success of the action, including a shareholder rights plan. Section 23-1-35-1 specifically provides that specified judicial decisions in Delaware and other jurisdictions, which might be looked upon for guidance in interpreting Indiana law, including decisions that propose a higher or different degree of scrutiny in response to a proposed acquisition of the corporation, are inconsistent with the proper application of the business judgment rule under that section. Transfer Agent and Registrar The transfer agent and registrar for the common stock is EquiServe Trust Company, N.A. 132
COMMON STOCK ELIGIBLE FOR FUTURE SALE All of the estimated 28,600,000 shares of our common stock sold to investors in the public market in this offering (32,890,000 shares if the underwriters exercise their over-allotment option in full) will be eligible for immediate resale in the public market without restriction, except for any of those shares that are beneficially owned at any time by our affiliates, as defined in Rule 144 of the Securities Act, which sales will be subject to the timing, volume and manner of sale limitations of Rule 144. Anthem Insurance's eligible statutory members who receive fewer than 30,000 shares of our common stock in exchange for their membership interests (estimated to be approximately 65.1% of our outstanding common stock after the offering) may sell their shares of our common stock in the public market without restriction, except for any shares owned by our affiliates, which must be sold in compliance with Rule 144. Anthem Insurance's eligible statutory members who receive 30,000 or more shares of our common stock in exchange for their membership interests (estimated to be approximately 7.6% of our outstanding common stock after the offering) and continue to hold 30,000 or more shares will be restricted from selling their shares in the public market for 180 days following the effective date of the demutualization, except for sales in accordance with a large holder sale program we will establish, a transfer that occurs by operation of law or transfers with our written consent. After the expiration of this period, those eligible statutory members may sell their shares of our common stock in the public market without restriction, except for any shares owned by our affiliates, which must be sold in compliance with Rule 144. See "The Plan of Conversion--Large Holder Sale Program" for a description of the large holder sale program and its limitations. We anticipate that eligible statutory members receiving shares of our common stock in the demutualization will receive notices regarding the number of shares registered in their name approximately four to six weeks after the effective date of the demutualization. In general, under Rule 144 as currently in effect, (a) a person, or persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year or (b) an affiliate who holds non-restricted shares, will be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding shares of our common stock, or the average weekly trading volume of our common stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain provisions regarding the manner of sale, notice requirements and the availability of current public information about us. If two years have elapsed since the date of acquisition of restricted shares of our common stock from us or any of our affiliates and the holder is not deemed to have been an affiliate of ours for at least three months prior to a proposed transaction, such person would be entitled to sell such shares under Rule 144 without regard to the limitations described above. There are 7,000,000 shares of common stock available for grant of options, restricted stock, stock appreciation rights, performance stock and performance awards under our Stock Plan. We intend to grant options to purchase 100 shares of common stock to each of our approximately 15,000 employees (other than our approximately top 50 executives), pursuant to our Stock Plan, effective on the first day that our common stock trades on the New York Stock Exchange. See "Management--Stock Incentive Plan." We intend to file a registration statement on Form S-8 to register the shares of common stock that are issuable upon the exercise of stock options outstanding or available for grant pursuant to our Stock Plan. Under our Stock Purchase Plan, we have reserved for issuance and purchase by employees 3,000,000 shares of common stock. See "Management-- Employee Stock Purchase Plan." We intend to file a registration statement on Form S-8 to register the shares of common stock that are issuable under the Stock Purchase Plan. Following effectiveness of each Form S-8, shares covered by that Form S-8 will be eligible for sale in the public markets, subject to Rule 144 limitations applicable to affiliates as well as to the limitations on sale and vesting described above. 133
In addition, in accordance with the plan of conversion, we intend, for not less than a three month period commencing no earlier than the first business day after the 180th day following, and no later than the last business day before the twelfth-month anniversary of, the effective date of the demutualization, to provide for the public sale, at prevailing market prices and without brokerage commissions or similar fees to shareholders, of all shares of our common stock held by shareholders who own 99 shares or fewer of our common stock. We estimate that when we complete the demutualization we will have approximately 775,000 eligible statutory members who will in total receive in excess of 25 million shares that we believe would be eligible to participate in this commission-free sales program. We would also, simultaneously and in conjunction with the commission-free sales program, offer to each shareholder entitled to participate in the commission-free sales program the opportunity to purchase that number of shares of our common stock necessary to increase such shareholder's holdings to 100 shares without paying brokerage commissions or other similar expenses. The program may provide that we can repurchase shares of our common stock at prevailing market prices when, during any particular day of the program, the number of shares requested to be sold exceeds the number of shares requested to be purchased pursuant to round-up requests. We have agreed with the Underwriters not to dispose of or hedge any of our common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the representatives. This agreement does not apply to any existing employee benefit plans. 134
OWNERSHIP OF COMMON STOCK The following table sets forth certain information regarding the beneficial ownership of our common stock as of the effective date of the demutualization by: . each of our directors and Named Executive Officers; and . all of our directors and executive officers as a group. We believe that no person will beneficially own more than 5% of our outstanding shares of common stock as a result of the shares distributed pursuant to the plan of conversion and shares sold in this offering. None of our directors or executive officers will receive any stock in connection with the demutualization. Number of Shares to Be Name Beneficially Owned (1) ---- ---------------------- L. Ben Lytle........................................... 0 Susan B. Bayh.......................................... 0 Larry C. Glasscock..................................... 0 William B. Hart........................................ 0 Allan B. Hubbard....................................... 0 Victor S. Liss......................................... 0 William G. Mays........................................ 0 James W. McDowell, Jr.................................. 0 B. LaRae Orullian...................................... 0 Senator Donald W. Riegle, Jr. ......................... 0 William J. Ryan........................................ 0 George A. Schaefer, Jr. ............................... 0 Dennis J. Sullivan, Jr................................. 0 David R. Frick......................................... 0 Michael L. Smith....................................... 0 Keith R. Faller........................................ 0 Marjorie W. Dorr....................................... 0 All directors and executive officers as a group (22 persons).............................................. 0 - -------- (1) Based on an estimated allocation of shares based upon statutory membership ownership records as of June 18, 2001. 135
CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON STOCK This section summarizes certain United States federal income and estate tax consequences of the ownership and disposition of common stock by a non-U.S. holder. You are a non-U.S. holder if you are, for United States federal income tax purposes: . a nonresident alien individual; . a foreign corporation; . a foreign partnership; or . an estate or trust that in either case is not subject to United States federal income tax on a net income basis on income or gain from common stock. This section does not consider the specific facts and circumstances that may be relevant to a particular non-U.S. holder and does not address the treatment of a non-U.S. holder under the laws of any state, local or foreign taxing jurisdiction. This section is based on the tax laws of the United States, including the Internal Revenue Code of 1986, as amended, existing and proposed regulations, and administrative and judicial interpretations, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. You should consult a tax advisor regarding the United States federal tax consequences of acquiring, holding and disposing of common stock in your particular circumstances, as well as any tax consequences that may arise under the laws of any state, local or foreign taxing jurisdiction. Dividends Except as described below, if you are a non-U.S. holder of common stock, dividends paid to you are subject to withholding of United States federal income tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate. Even if you are eligible for a lower treaty rate, we and other payors will generally be required to withhold at a 30% rate (rather than the lower treaty rate) on dividend payments to you, unless you have furnished to us or another payor: . a valid Internal Revenue Service Form W-8BEN or an acceptable substitute form upon which you certify, under penalties of perjury, your status as a non-United States person and your entitlement to the lower treaty rate with respect to such payments; or . in the case of payments made outside the United States to an offshore account (generally, an account maintained by you at an office or branch of a bank or other financial institution at any location outside the United States), other documentary evidence establishing your entitlement to the lower treaty rate in accordance with U.S. Treasury regulations. If you are eligible for a reduced rate of United States withholding tax under a tax treaty, you may obtain a refund of any amounts withheld in excess of that rate by filing a refund claim with the United States Internal Revenue Service. If dividends paid to you are "effectively connected" with your conduct of a trade or business within the United States, and, if required by a tax treaty, the dividends are attributable to a permanent establishment that you maintain in the United States, we and other payors generally are not required 136
to withhold tax from the dividends, provided that you have furnished to us or another payor a valid Internal Revenue Service Form W-8ECI or an acceptable substitute form upon which you represent, under penalties of perjury, that: . you are a non-United States person; and . the dividends are effectively connected with your conduct of a trade or business within the United States and are includible in your gross income. "Effectively connected" dividends are taxed at rates applicable to United States citizens, resident aliens and domestic United States corporations. If you are a corporate non-U.S. holder, "effectively connected" dividends that you receive may, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate. Gain on Disposition of Anthem, Inc. Common Stock If you are a non-U.S. holder, you generally will not be subject to United States federal income tax on gain that you recognize on a disposition of common stock unless: . the gain is "effectively connected" with your conduct of a trade or business in the United States, and the gain is attributable to a permanent establishment that you maintain in the United States, if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net income basis; . you are an individual, you hold the common stock as a capital asset, you are present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist; or . we are or have been a United States real property holding corporation for federal income tax purposes and you held, directly or indirectly, at any time during the five-year period ending on the date of disposition, more than 5% of the common stock and you are not eligible for any treaty exemption. If you are a corporate non-U.S. holder, "effectively connected" gains that you recognize may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate. We have not been, are not and do not anticipate becoming a United States real property holding corporation for United States federal income tax purposes. Federal Estate Taxes Common stock held by a non-U.S. holder at the time of death will be included in the holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Backup Withholding and Information Reporting If you are a non-U.S. holder, you are generally exempt from backup withholding and information reporting requirements with respect to: . dividend payments; and . the payment of the proceeds from the sale of common stock effected at a United States office of a broker, 137
as long as the income associated with such payments is otherwise exempt from United States federal income tax, and: . the payor or broker does not have actual knowledge or reason to know that you are a United States person and you have furnished to the payor or broker: . a valid Internal Revenue Service Form W-8BEN or an acceptable substitute form upon which you certify, under penalties of perjury, that you are a non-United States person, or . other documentation upon which it may rely to treat the payments as made to a non-United States person in accordance with U.S. Treasury regulations; or . you otherwise establish an exemption. Payment of the proceeds from the sale of common stock effected at a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, a sale of common stock that is effected at a foreign office of a broker will be subject to information reporting and backup withholding if: . the proceeds are transferred to an account maintained by you in the United States; . the payment of proceeds or the confirmation of the sale is mailed to you at a United States address; or . the sale has some other specified connection with the United States as provided in U.S. Treasury regulations, unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption. In addition, a sale of common stock will be subject to information reporting (but not backup withholding) if it is effected at a foreign office of a broker that is: . a United States person; . a controlled foreign corporation for United States tax purposes; . a foreign person 50% or more of whose gross income is effectively connected with the conduct of a United States trade or business for a specified three-year period; or . a foreign partnership, if at any time during its tax year: . one or more of its partners are "U.S. persons", as defined in U.S. Treasury regulations, who in the aggregate hold more than 50% of the income or capital interest in the partnership, or . such foreign partnership is engaged in the conduct of a United States trade or business, unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption. Backup withholding will apply if the sale is subject to information reporting and the broker has actual knowledge that you are a United States person. You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the Internal Revenue Service. 138
UNDERWRITING Anthem, Inc., Anthem Insurance and the underwriters named below (the "Underwriters") have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each Underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc., Banc of America Securities LLC, Credit Suisse First Boston Corporation, Lehman Brothers Inc., Salomon Smith Barney Inc., UBS Warburg LLC, ABN AMRO Rothschild LLC, Dresdner Kleinwort Wasserstein Securities LLC, A.G. Edwards & Sons, Inc., McDonald Investments Inc. and Utendahl Capital Partners, L.P. are the representatives of the Underwriters. Underwriters Number of Shares ------------ ---------------- Goldman, Sachs & Co. ....................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated.................................... Morgan Stanley & Co. Incorporated........................... J.P. Morgan Securities Inc. ................................ Banc of America Securities LLC.............................. Credit Suisse First Boston Corporation...................... Lehman Brothers Inc. ....................................... Salomon Smith Barney Inc. .................................. UBS Warburg LLC............................................. ABN AMRO Rothschild LLC..................................... Dresdner Kleinwort Wasserstein Securities LLC............... A.G. Edwards & Sons, Inc. .................................. McDonald Investments Inc. .................................. Utendahl Capital Partners, L.P. ............................ --- Total..................................................... === If the Underwriters sell more shares than the total number set forth in the table above, the Underwriters have an option to buy, at the initial public offering price less the underwriting discount, up to an additional shares from Anthem, Inc. to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the Underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions to be paid to the Underwriters by Anthem, Inc. Such amounts are shown assuming both no exercise and full exercise of the Underwriters' option to purchase additional shares. Paid by Anthem, Inc. No Exercise Full Exercise -------------------- ----------- ------------- Per Share.......................................... $ $ Total.............................................. $ $ A prospectus in electronic format may be made available on the web sites maintained by one or more Underwriters or by third parties with whom one or more Underwriters have arrangements in place to host the prospectus. The Underwriters may agree to allocate a number of shares to Underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the lead managers to Underwriters that may make Internet distributions on the same basis as other allocations. Shares sold by the Underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the Underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. 139
Any such securities dealers may resell any shares purchased from the Underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. Anthem, Inc. has agreed with the Underwriters not to dispose of or hedge any of its common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the representatives. This agreement does not apply to any existing employee benefit plans. See "Common Stock Eligible for Future Sale" for a discussion of certain transfer restrictions. Prior to the demutualization and this offering, there has been no public market for the shares. The initial public offering price has been negotiated among Anthem, Inc. and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be Anthem's historical performance, estimates of our business potential and earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses. The common stock has been approved for listing, upon official notice of issuance, on the New York Stock Exchange under the symbol "ATH". In order to meet one of the requirements for listing the common stock on the NYSE, the Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders. In connection with the offering, the Underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Shorts sales involve the sale by the Underwriters of a greater number of shares than they are required to purchase in the offering. "Covered" short sales are sales made in an amount not greater than the Underwriters' option to purchase additional shares from Anthem, Inc. in the offering. The Underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. "Naked" short sales are any sales in excess of such option. The Underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the Underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the Underwriters in the open market prior to the completion of the offering. The Underwriters may also impose a penalty bid. This occurs when a particular Underwriter repays to the Underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. Purchases to cover a short position and stabilizing transactions may have the effect of preventing or retarding a decline in the market price of Anthem, Inc.'s common stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the NYSE, in the over-the-counter market or otherwise. 140
The Underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. Anthem, Inc. estimates that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . Anthem, Inc. and Anthem Insurance have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. Certain of the Underwriters or their affiliates have provided from time to time, and expect to provide in the future, investment banking and financial advisory services to us and our affiliates in the ordinary course of business, for which they have received and may continue to receive customary fees and commissions. The lead managing underwriter, Goldman, Sachs & Co., is currently acting as financial advisor to us in connection with the demutualization. VALIDITY OF COMMON STOCK The validity of the shares of our common stock that are being offered by this prospectus will be passed upon for Anthem, Inc. by Baker & Daniels, Indianapolis, Indiana, and for the Underwriters by Sullivan & Cromwell, New York, New York. Sullivan & Cromwell will rely on the opinion of Baker & Daniels as to all matters of Indiana law. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements at December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, as set forth in their report. We have included our consolidated financial statements in this prospectus and in the registration statement in reliance on the report of Ernst & Young LLP, given on their authority as experts in accounting and auditing. Daniel J. McCarthy, FSA, MAAA, Dale S. Hagstrom, FSA, MAAA, and Robert H. Dobson, FSA, MAAA, consulting actuaries associated with Milliman USA, Inc., have rendered an opinion, dated June 18, 2001, to our board of directors that is included as Annex A to this prospectus. Such opinion is included herein in reliance upon the authority of such actuaries as experts in actuarial matters generally and in the application of actuarial concepts to insurance matters. 141
ANTHEM INSURANCE COMPANIES, INC. CONSOLIDATED FINANCIAL STATEMENTS CONTENTS Page ----- Audited Consolidated Financial Statements Report of Independent Auditors......................................... F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999........... F-3 Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998................................................... F-4 Consolidated Statements of Policyholders' Surplus for the Years Ended December 31, 2000, 1999 and 1998...................................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998................................................... F-6 Notes to Consolidated Financial Statements............................. F-7 Selected Quarterly Financial Data (Unaudited).......................... F-28 Unaudited Consolidated Financial Statements Consolidated Balance Sheet as of June 30, 2001......................... F-29 Consolidated Statements of Income for the Six Months Ended June 30, 2001 and 2000......................................................... F-30 Consolidated Statements of Policyholders' Surplus for the Six Months Ended June 30, 2001 and 2000.......................................... F-31 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000......................................................... F-32 Notes to Consolidated Financial Statements............................. F-33 F-1
REPORT OF INDEPENDENT AUDITORS Board of Directors Anthem Insurance Companies, Inc. We have audited the accompanying consolidated balance sheets of Anthem Insurance Companies, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of income, policyholders' surplus and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Anthem Insurance Companies, Inc. at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Indianapolis, Indiana January 29, 2001, except for Note 17, as to which the date is June 18, 2001 F-2
ANTHEM INSURANCE COMPANIES, INC. CONSOLIDATED BALANCE SHEETS December 31 ----------------- 2000 1999 -------- -------- (In Millions) Assets Current assets: Investments available-for-sale, at fair value: Fixed maturity securities................................ $3,048.2 $2,280.3 Equity securities........................................ 463.1 487.7 -------- -------- 3,511.3 2,768.0 Cash and cash equivalents.................................. 203.3 204.4 Premium and self funded receivables........................ 477.5 388.1 Reinsurance receivables.................................... 105.1 179.7 Other receivables.......................................... 272.4 168.1 Income tax receivables..................................... 11.0 37.6 Other current assets....................................... 32.2 59.5 -------- -------- Total current assets......................................... 4,612.8 3,805.4 Other noncurrent investments................................. 18.0 15.8 Restricted cash and investments.............................. 89.6 99.6 Property and equipment....................................... 428.8 408.5 Goodwill and other intangible assets......................... 498.9 398.5 Other noncurrent assets...................................... 60.4 88.4 -------- -------- Total assets................................................. $5,708.5 $4,816.2 ======== ======== Liabilities and policyholders' surplus Liabilities Current liabilities: Policy liabilities: Unpaid life, accident and health claims.................. $1,393.0 $1,145.5 Future policy benefits................................... 186.5 172.4 Other policyholder liabilities........................... 118.8 113.2 -------- -------- Total policy liabilities................................... 1,698.3 1,431.1 Unearned income............................................ 262.8 226.3 Accounts payable and accrued expenses...................... 262.7 178.6 Bank overdrafts............................................ 250.5 146.7 Income taxes payable....................................... 25.7 4.7 Other current liabilities.................................. 307.5 249.6 -------- -------- Total current liabilities.................................... 2,807.5 2,237.0 Long term debt, less current portion......................... 597.5 522.0 Retirement benefits.......................................... 175.1 181.2 Other noncurrent liabilities................................. 208.6 215.1 -------- -------- Total liabilities............................................ 3,788.7 3,155.3 Policyholders' surplus Surplus...................................................... 1,848.6 1,622.6 Accumulated other comprehensive income....................... 71.2 38.3 -------- -------- Total policyholders' surplus................................. 1,919.8 1,660.9 -------- -------- Total liabilities and policyholders' surplus................. $5,708.5 $4,816.2 ======== ======== See accompanying notes. F-3
ANTHEM INSURANCE COMPANIES, INC. CONSOLIDATED STATEMENTS OF INCOME Year ended December 31, --------------------------- 2000 1999 1998 -------- -------- -------- (In Millions) Revenues Premiums......................................... $7,737.3 $5,418.5 $4,739.5 Administrative fees.............................. 755.6 611.1 575.6 Other revenue.................................... 50.6 51.0 74.6 -------- -------- -------- Total operating revenue........................ 8,543.5 6,080.6 5,389.7 Net investment income............................ 201.6 152.0 136.8 Net realized gains on investments................ 25.9 37.5 155.9 -------- -------- -------- 8,771.0 6,270.1 5,682.4 -------- -------- -------- Expenses Benefit expense.................................. 6,551.0 4,582.7 3,934.2 Administrative expense........................... 1,808.4 1,469.4 1,420.1 Interest expense................................. 54.7 30.4 27.9 Amortization of goodwill and other intangible assets.......................................... 27.1 12.7 12.0 Endowment of non-profit foundations.............. -- 114.1 -- -------- -------- -------- 8,441.2 6,209.3 5,394.2 -------- -------- -------- Income from continuing operations before income taxes and minority interest..................... 329.8 60.8 288.2 Income taxes..................................... 102.2 10.2 110.9 Minority interest (credit)....................... 1.6 (0.3) (1.1) -------- -------- -------- Income from continuing operations................ 226.0 50.9 178.4 Discontinued operations, net of income taxes Loss from discontinued operations prior to disposal........................................ -- -- (3.9) Loss on disposal of discontinued operations...... -- (6.0) (2.1) -------- -------- -------- Net income....................................... $ 226.0 $ 44.9 $ 172.4 ======== ======== ======== See accompanying notes. F-4
ANTHEM INSURANCE COMPANIES, INC. CONSOLIDATED STATEMENTS OF POLICYHOLDERS' SURPLUS Accumulated Other Total Comprehensive Policyholders' Surplus Income Surplus -------- ------------- -------------- (In Millions) Balance at December 31, 1997............ $1,405.3 $119.4 $1,524.7 Net income.............................. 172.4 -- 172.4 Change in net unrealized gains on securities............................. -- 5.4 5.4 -------- Comprehensive income.................... 177.8 -------- ------ -------- Balance at December 31, 1998............ 1,577.7 124.8 1,702.5 Net income.............................. 44.9 -- 44.9 Change in net unrealized gains on securities............................. -- (88.5) (88.5) Change in additional minimum pension liability.............................. -- 2.0 2.0 -------- Comprehensive loss...................... (41.6) -------- ------ -------- Balance at December 31, 1999............ 1,622.6 38.3 1,660.9 Net income.............................. 226.0 -- 226.0 Change in net unrealized gains on securities............................. -- 36.8 36.8 Change in additional minimum pension liability.............................. -- (3.9) (3.9) -------- Comprehensive income.................... 258.9 -------- ------ -------- Balance at December 31, 2000............ $1,848.6 $ 71.2 $1,919.8 ======== ====== ======== See accompanying notes. F-5
ANTHEM INSURANCE COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 ------------------------------- 2000 1999 1998 --------- --------- --------- (In Millions) Operating activities Net income.................................... $ 226.0 $ 44.9 $ 172.4 Adjustments to reconcile net income to net cash provided by operating activities: Realized gains on investments............... (25.9) (37.5) (155.9) Depreciation, amortization and accretion.... 102.1 61.8 58.3 Deferred income taxes....................... 36.6 23.0 32.0 Loss from discontinued operations........... -- 6.0 6.0 Loss on sale of assets...................... 0.5 0.2 2.6 Changes in operating assets and liabilities, net of effect of purchases and divestitures: Restricted cash and investments........... 10.0 (2.1) 93.7 Receivables............................... (70.7) 6.0 (76.8) Other assets.............................. 25.3 80.7 (31.4) Policy liabilities........................ 124.1 105.6 (40.3) Unearned income........................... 22.3 15.9 22.8 Accounts payable and accrued expenses..... 69.9 (7.5) 27.2 Other liabilities......................... 119.0 (40.1) 23.3 Income taxes.............................. 47.5 (20.4) 10.1 --------- --------- --------- Net cash provided by continuing operations.. 686.7 236.5 144.0 Net cash used in discontinued operations ... (2.2) (16.7) (24.1) --------- --------- --------- Cash provided by operating activities......... 684.5 219.8 119.9 Investing activities Purchases of investments...................... (3,544.8) (2,331.1) (3,286.8) Sales or maturities of investments............ 2,925.2 2,308.3 3,217.2 Purchases of subsidiaries, net of cash acquired..................................... (85.1) (246.8) (35.2) Sales of subsidiaries, net of cash sold....... 5.4 2.3 79.3 Proceeds from sale of property and equipment.. 11.5 7.2 5.9 Purchases of property and equipment........... (73.3) (96.7) (89.2) --------- --------- --------- Cash used in investing activities............. (761.1) (356.8) (108.8) Financing activities Proceeds from borrowings...................... 295.9 220.1 0.4 Payments on borrowings........................ (220.4) -- (4.2) --------- --------- --------- Cash provided by (used in) financing activities................................... 75.5 220.1 (3.8) --------- --------- --------- Change in cash and cash equivalents........... (1.1) 83.1 7.3 Cash and cash equivalents at beginning of year......................................... 204.4 121.3 114.0 --------- --------- --------- Cash and cash equivalents at end of year...... $ 203.3 $ 204.4 $ 121.3 ========= ========= ========= See accompanying notes. F-6
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 (Dollars in Millions) 1. Basis of Presentation and Significant Accounting Policies Basis of Presentation: The accompanying consolidated financial statements of Anthem Insurance Companies, Inc. ("Anthem"), a mutual insurance company, and its subsidiaries (collectively, the "Company") have been prepared in conformity with generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated in consolidation. Anthem or its subsidiary insurance companies are licensed in all states and are Blue Cross Blue Shield Association licensees in Indiana, Kentucky, Ohio, Connecticut, Maine, New Hampshire, Colorado and Nevada. Products include health and group life insurance, managed health care, and government health program administration. Minority interest represents other shareholders' interests in subsidiaries, which are majority-owned by Anthem, or its subsidiaries. Use of Estimates: Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Investments: All fixed maturity and equity securities are classified as "available-for-sale" securities and investments in equity securities that have readily determinable fair values and all fixed maturity securities are reported at fair value. The Company has determined that all investments in its portfolio are available to support current operations and, accordingly, has classified such investment securities as current assets. The unrealized gains or losses on these securities are included in accumulated other comprehensive income as a separate component of policyholders' surplus unless the decline in value is deemed to be other than temporary, in which case the loss is charged to income. Realized gains or losses, determined by specific identification of investments sold, are included in income. Cash Equivalents: All highly liquid investments with maturities of three months or less when purchased are classified as cash equivalents. Premium and Self Funded Receivables: Premium and self funded receivables include the uncollected amounts for insured and self funded groups, less an allowance for doubtful accounts of $35.1 and $38.7 as of December 31, 2000 and 1999, respectively. Reinsurance Receivables: Reinsurance receivables represent amounts recoverable on claims paid or incurred, and amounts paid to the reinsurer for premiums collected but not yet earned, and are estimated in a manner consistent with the liabilities associated with the reinsured policies. These receivables have been reduced by an allowance for uncollectible amounts of $0.0 and $1.7 as of December 31, 2000 and 1999, respectively. Other Receivables: Other receivables include amounts for interest earned on investments, government programs, pharmacy sales and other miscellaneous amounts due to the Company. These receivables have been reduced by an allowance for uncollectible amounts of $33.4 and $29.4 as of December 31, 2000 and 1999, respectively. F-7
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Restricted Cash and Investments: Restricted cash and investments represent fiduciary amounts held under an insurance contract and other agreements. Property and Equipment: Property and equipment is recorded at cost. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Goodwill and Other Intangible Assets: Goodwill represents the excess of cost of acquisition over the fair value of net assets acquired. Other intangible assets represent the values assigned to non-compete agreements, and licenses and agreements. Goodwill and other intangible assets are amortized using the straight-line method over periods ranging from two to 20 years. Accumulated amortization of goodwill and other intangible assets at December 31, 2000 and 1999 was $58.4 and $27.3, respectively. The carrying value of goodwill and other intangible assets is reviewed annually to determine if the facts and circumstances indicate that they may be impaired. The carrying value of these assets is reduced to its fair value if this review, which includes comparison of asset carrying amounts to expected cash flows, indicates that such amounts will not be recoverable. Policy Liabilities: Liabilities for unpaid claims include estimated provisions for both reported and unreported claims incurred on an undiscounted basis. The liabilities are adjusted regularly based on historical experience and include estimates of trends in claim severity and frequency and other factors, which could vary as the claims are ultimately settled. Although it is not possible to measure the degree of variability inherent in such estimates, management believes these liabilities are adequate. The life future policy benefit liabilities represent primarily group term benefits determined using standard industry mortality tables with interest rates ranging from 3.0% to 5.5%. Premium deficiency losses are recognized when it is probable that expected claims expenses will exceed future premiums on existing health and other insurance contracts without consideration of investment income. For purposes of premium deficiency losses, contracts are grouped in a manner consistent with the Company's method of acquiring, servicing and measuring the profitability of such contracts. Retirement Benefits: Retirement benefits represent outstanding obligations for retiree health, life and dental benefits and any unfunded liability related to defined benefit pension plans. Comprehensive Income: Comprehensive income includes net income, the change in unrealized gains (losses) on investments and the change in the additional minimum pension liability. Revenue Recognition: Gross premiums for fully insured contracts are prorated over the term of the contracts, with the unearned premium representing the unexpired term of policies. For insurance contracts with retrospective rated premiums, the estimated ultimate premium is recognized as revenue over the period of the contract. Actual experience is reviewed once the policy period is completed and adjustments are recorded when determined. Premium rates for certain lines of business are subject to approval by the Department of Insurance of each respective state. Administrative fees include revenue from certain groups contracts that provide for the group to be at risk for all, or with supplemental insurance arrangements, a portion of their claims experience. The Company charges self- funded groups an administrative fee which is based on the number of F-8
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) members in a group or the group's claim experience. Under the Company's self- funded arrangements, amounts due are recognized based on incurred claims paid plus administrative and other fees. In addition, administrative fees include amounts received for the administration of Medicare or certain other government programs. Administrative fees are recognized in accordance with the terms of the contractual relationship between the Company and the customer. Such fees are based on a percentage of the claim amounts processed or a combination of a fixed fee per claim plus a percentage of the claim amounts processed. All benefit payments under these programs are excluded from benefit expenses. Other revenue principally includes amounts from the sales of prescription drugs and revenues are recognized as prescription drug orders are delivered or shipped. Federal Income Taxes: Anthem files a consolidated return with its subsidiaries that qualify as defined by the Internal Revenue Code. Reclassifications: Certain prior year balances have been reclassified to conform to the current year presentation. 2. Acquisitions, Divestitures and Discontinued Operations Acquisitions: 2000 On June 5, 2000, the Company completed its purchase of substantially all of the assets and liabilities of Associated Hospital Service of Maine, formerly d/b/a Blue Cross and Blue Shield of Maine ("BCBS-ME"), in accordance with the Asset Purchase Agreement dated July 13, 1999. The purchase price was $95.4 (including direct costs of acquisition) and resulted in $92.6 of goodwill and other intangible assets which are being amortized over periods which range from ten to 20 years. The application of purchase accounting for this acquisition is subject to further refinement based on final valuation studies and post-closing adjustments in certain circumstances. This acquisition was accounted for as a purchase and the net assets and results of operations have been included in the Company's consolidated financial statements from the purchase date. The pro forma effects of the BCBS-ME acquisition would not be material to the Company's consolidated results of operations for periods preceding the purchase date. 1999 On October 27, 1999, the Company completed its purchase of the assets and liabilities of New Hampshire-Vermont Health Services, formerly d/b/a Blue Cross Blue Shield of New Hampshire ("BCBS-NH"), in accordance with the Asset Purchase Agreement entered into on February 19, 1999. The purchase price was $125.4 (including direct costs of acquisition), which resulted in $107.9 of goodwill and other intangible assets which are being amortized over periods which range from two to 20 years. On November 16, 1999, the Company completed its purchase of the stock of Rocky Mountain Hospital and Medical Service, formerly d/b/a Blue Cross and Blue Shield of Colorado and Blue Cross and Blue Shield of Nevada ("BCBS-CO/NV"). The purchase price was $160.7 (including direct costs of acquisition) and resulted in $152.1 of goodwill and other intangible assets which are being amortized over periods which range from five to 20 years. F-9
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) These acquisitions were accounted for as purchases and the net assets and results of operations have been included in the Company's consolidated financial statements from the respective purchase dates. During 2000, purchase price allocations for these acquisitions were refined based on final valuation studies resulting in increases to goodwill and other intangible assets of $33.8. Unaudited pro forma results of operations assuming the 1999 acquisitions occurred on January 1, 1999 would have resulted in total revenues of $7,186.4, income from continuing operations of $83.3 and net income of $5.5 for 1999, respectively. 1998 During 1998, the Company made acquisitions with purchase prices aggregating $35.2. All acquisitions were accounted for as purchases and the purchase prices were allocated to the assets and liabilities of the acquired entities based upon their estimated fair values. The total purchase price for these acquisitions exceeded the fair value of the net tangible assets acquired by approximately $28.3, which was assigned to goodwill and other intangible assets and are being amortized over periods not to exceed 20 years. The pro forma effects of these acquisitions are insignificant to the Company's consolidated results of operations. Divestitures: 1999 During 1999, the Company divested of several small business operations, which were no longer deemed strategically aligned with the Company's core business. The Company recognized a loss of $14.2 (net of income tax benefit of $6.1) on these disposals. The pro forma effects of these divestitures are insignificant to the consolidated results of operations. Discontinued Operations: 1999 During 1999, the Company recognized additional losses of $6.0, net of income tax benefit of $6.2, resulting from sales agreement contingency adjustments relating to the discontinued operations sold in prior years. 1998 In March 1998, the Company made the decision to exit principally all of its non-Blue Cross and Blue Shield health businesses as follows: In May 1998 the Company principally completed its exit from its non-health insurance related businesses through the sale of its durable medical equipment business for $23.3, resulting in a gain of $12.9 (net of income tax expense of $8.4). In June 1998, the Company completed the sale of two of its HMO businesses for $10.1 resulting in a gain of $3.3 (net of income tax expense of $1.8). Further, in July 1998, the Company completed the sale of Anthem Health and Life Insurance Company for $77.5 resulting in a gain of $1.1 (including income tax benefit of $14.1). In September 1998, the Company made a provision of $10.4 F-10
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (net of income tax benefit of $3.4) for the estimated loss on the disposal of its one remaining non-Blue Cross and Blue Shield health business. During 1998, the Company disposed of its health finance and management operations and its integrated health delivery operations resulting in a net loss of $7.9 (including income tax expense of $2.7) greater than the reserve of $43.2 (net of income tax benefit of $23.3) which was reported as discontinued operations in 1997. Additionally, during 1998 the Company recognized a loss of $1.1, with no income tax benefit, relating to all other operations discontinued in 1997. Operating results from discontinued operations prior to disposal in 1998 (none in 2000 or 1999), exclusive of the aforementioned provisions, were as follows: operating revenues $190.8, loss before provision for income taxes $(5.6) and loss from discontinued operations net of income taxes $(3.9). 3. Endowment of Non-Profit Foundations During 1999, Anthem reached agreements with the states of Kentucky, Ohio and Connecticut to resolve any questions as to whether Anthem or the predecessor/successor entities were in possession of property that was impressed with a charitable trust. In 1999, contributions of $45.0, $28.0 and $41.1, respectively, were made for the benefit of charitable foundations in Kentucky, Ohio, and Connecticut, respectively, from Anthem's subsidiaries, Anthem Health Plans of Kentucky, Inc., Community Insurance Company and Anthem Health Plans, Inc., respectively. 4. Investments The following is a summary of available-for-sale securities: Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value --------- ---------- ---------- -------- December 31, 2000 Fixed maturity securities: United States Government securities......................... $ 723.4 $ 25.6 $ (2.5) $ 746.5 Obligations of states and Political subdivisions....................... 0.8 -- -- 0.8 Corporate securities................ 1,041.4 19.4 (20.1) 1,040.7 Mortgage-backed securities.......... 1,250.3 21.1 (13.0) 1,258.4 Preferred stocks.................... 1.9 -- (0.1) 1.8 -------- ------ ------- -------- Total fixed maturity securities....... 3,017.8 66.1 (35.7) 3,048.2 Equity securities..................... 376.2 162.0 (75.1) 463.1 -------- ------ ------- -------- $3,394.0 $228.1 $(110.8) $3,511.3 ======== ====== ======= ======== F-11
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value --------- ---------- ---------- -------- December 31, 1999 Fixed maturity securities: United States Government securities......................... $ 550.1 $ 0.2 $ (29.3) $ 521.0 Obligations of states and political subdivisions....................... 34.2 -- (2.1) 32.1 Corporate securities................ 816.8 0.4 (35.6) 781.6 Mortgage-backed securities.......... 975.3 0.9 (32.1) 944.1 Preferred stocks.................... 1.9 -- (0.4) 1.5 -------- ------ ------- -------- Total fixed maturity securities....... 2,378.3 1.5 (99.5) 2,280.3 Equity securities..................... 329.6 186.0 (27.9) 487.7 -------- ------ ------- -------- $2,707.9 $187.5 $(127.4) $2,768.0 ======== ====== ======= ======== The amortized cost and fair value of fixed maturity securities at December 31, 2000, by contractual maturity, are shown below. Expected maturities may be less than contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Amortized Fair Cost Value --------- -------- Due in one year or less.................................. $ 48.2 $ 48.4 Due after one year through five years.................... 611.7 618.1 Due after five years through ten years................... 439.3 451.9 Due after ten years...................................... 666.4 669.6 -------- -------- 1,765.6 1,788.0 Mortgage-backed securities............................... 1,250.3 1,258.4 Preferred stocks......................................... 1.9 1.8 -------- -------- $3,017.8 $3,048.2 ======== ======== The major categories of net investment income are as follows: Year ended December 31 ---------------------- 2000 1999 1998 ------ ------ ------ Fixed maturity securities............................ $178.8 $137.0 $121.1 Equity securities.................................... 6.1 6.3 7.4 Cash, cash equivalents and other..................... 21.5 12.8 11.9 ------ ------ ------ Investment revenue................................... 206.4 156.1 140.4 Investment expense................................... (4.8) (4.1) (3.6) ------ ------ ------ Net investment income................................ $201.6 $152.0 $136.8 ====== ====== ====== Proceeds from sales of fixed maturity and equity securities during 2000, 1999 and 1998 were $2,911.8, $2,336.8 and $3,162.8, respectively. Gross gains of $71.3, $86.8 and $175.3 and gross losses of $45.4, $49.3 and $19.4 were realized in 2000, 1999 and 1998, respectively, on those sales. F-12
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Long Term Debt and Commitments Debt consists of the following at December 31: 2000 1999 ------ ------ Surplus notes at 9.00% due 2027.............................. $197.2 $197.0 Surplus notes at 9.125% due 2010............................. 295.5 -- Senior guaranteed notes at 6.75% due 2003.................... 99.5 99.3 Bank credit agreements....................................... -- 220.0 Other........................................................ 5.5 5.9 ------ ------ Long term debt............................................... $597.7 $522.2 Current portion of long-term debt............................ (0.2) (0.2) ------ ------ Long-term debt, less current portion......................... $597.5 $522.0 ====== ====== On January 28, 2000, Anthem issued $300.0 principal amount of 9.125% surplus notes due April 1, 2010. On February 3, 2000, a portion of the proceeds was used for repayment of the $220.0 outstanding under the revolving bank credit agreement discussed below. The remainder of the proceeds was used for general corporate purposes including the acquisition of BCBS-ME (see Note 2). The Company has a $300.0 revolving credit agreement with a syndicate of banks which is available for general corporate purposes and to support the Company's commercial paper program. The facility matures in 2002. In 1999, the Company borrowed $220.0 to facilitate the acquisitions of BCBS-NH and BCBS- CO/NV as described in Note 2. No additional borrowings were made under this credit agreement during 2000 and 1999 borrowings were paid in February 2000. Availability under this facility is reduced by the amount of any commercial paper outstanding. The Company has a $300.0 commercial paper program available for general corporate purposes. Commercial paper is sold through a dealer, in denominations greater than $150 thousand dollars with a maturity not to exceed 270 days from date of issuance, at then available market rates. Availability under the commercial paper program is reduced by the amount of any borrowings outstanding under the Company's revolving credit agreement. There were no commercial paper notes outstanding at December 31, 2000 or 1999. The Company must maintain certain financial covenants including limits on minimum net worth, maximum consolidated debt, and maximum asset dispositions annually. Any payment of interest or principal on the surplus notes may be made only with the prior approval of the Indiana Department of Insurance ("DOI"), and only out of policyholders' surplus funds that the DOI determines to be available for the payment under Indiana insurance laws. For statutory accounting purposes, the surplus notes are considered a part of policyholders' surplus. Interest paid during 2000, 1999 and 1998 was $54.7, $28.2 and $28.0, respectively. Future maturities of debt are as follows: 2001, $0.2; 2002, $0.3; 2003, $99.9; 2004, $1.4; 2005, $0.5 and thereafter $495.4. F-13
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Fair Value of Financial Instruments Considerable judgment is required to develop estimates of fair value for financial instruments. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one time, current market exchange of all of the financial instruments. The carrying values and estimated fair values of certain financial instruments are as follows at December 31: 2000 1999 ----------------- ----------------- Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- Fixed maturity securities............... $3,048.2 $3,048.2 $2,280.3 $2,280.3 Equity securities....................... 463.1 463.1 487.7 487.7 Restricted investments.................. 42.7 42.7 38.8 38.8 Debt.................................... 597.7 562.2 522.2 507.0 The carrying value of all other financial instruments approximates fair value because of the relatively short period of time between the origination of the instruments and their expected realization. Fair values for securities and restricted investments are based on quoted market prices, where available. For securities not actively traded, fair values are estimated using values obtained from independent pricing services. The fair value of debt is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. 7. Property and Equipment Property and equipment includes the following at December 31: 2000 1999 ------ ------ Land and improvements......................................... $ 21.0 $ 17.2 Building and components....................................... 251.3 222.2 Data processing equipment, furniture and other equipment...... 407.6 425.2 Leasehold improvements........................................ 37.2 39.2 ------ ------ 717.1 703.8 Less accumulated depreciation and amortization................ 288.3 295.3 ------ ------ $428.8 $408.5 ====== ====== Property and equipment includes non-cancelable capital leases of $7.4 and $8.7 at December 31, 2000 and 1999, respectively. Total accumulated amortization on these leases at December 31, 2000 and 1999 was $3.7 and $4.5, respectively. The related lease amortization expense is included in depreciation and amortization expense. Depreciation and leasehold improvement amortization expense for 2000, 1999 and 1998 was $75.3, $47.1, and $43.7, respectively. F-14
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Unpaid Life, Accident and Health Claims The following table provides a reconciliation of the beginning and ending balances for unpaid life, accident and health claims: 2000 1999 1998 -------- -------- -------- Balances at January 1, net of reinsurance....... $1,036.3 $ 734.6 $ 707.8 Business combinations........................... 113.9 190.4 -- Incurred related to: Current year.................................. 6,611.1 4,608.9 3,960.0 Prior years................................... (60.1) (30.9) (32.8) -------- -------- -------- Total incurred.................................. 6,551.0 4,578.0 3,927.2 -------- -------- -------- Paid related to: Current year.................................. 5,381.2 3,785.1 3,245.4 Prior years................................... 956.0 681.6 655.0 -------- -------- -------- Total paid...................................... 6,337.2 4,466.7 3,900.4 -------- -------- -------- Balances at December 31, net of reinsurance..... 1,364.0 1,036.3 734.6 Reinsurance recoverables at December 31......... 29.0 109.2 92.2 -------- -------- -------- Reserve gross of reinsurance recoverables on unpaid claims at December 31................... $1,393.0 $1,145.5 $ 826.8 ======== ======== ======== Amounts incurred related to prior years vary from previously estimated liabilities as the claims are ultimately settled. Negative amounts reported for incurred related to prior years resulted from claims being settled for amounts less than originally estimated. 9. Reinsurance The Company reinsures certain of its risks with other companies and assumes risk from other companies and such reinsurance is accounted for as a transfer of risk. The Company is contingently liable for amounts recoverable from the reinsurer in the event that it does not meet its contractual obligations. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The details of net premiums written and earned are as follows for the years ended December 31: 2000 1999 1998 ------------------ ------------------ ------------------ Written Earned Written Earned Written Earned -------- -------- -------- -------- -------- -------- Consolidated: Direct........... $7,993.0 $7,961.5 $5,674.8 $5,693.7 $4,956.8 $4,945.6 Assumed.......... 0.7 1.9 23.9 26.9 12.4 11.6 Ceded............ (229.2) (226.1) (305.6) (302.1) (218.6) (217.7) -------- -------- -------- -------- -------- -------- Net Premiums..... $7,764.5 $7,737.3 $5,393.1 $5,418.5 $4,750.6 $4,739.5 ======== ======== ======== ======== ======== ======== F-15
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2000 1999 1998 ----------------- ----------------- ----------------- Written Earned Written Earned Written Earned -------- -------- -------- -------- -------- -------- Reportable segments: Midwest................ $4,240.4 $4,203.1 $3,708.6 $3,729.3 $3,554.4 $3,533.3 East................... 2,753.0 2,768.9 1,490.3 1,495.4 1,076.2 1,088.3 West................... 571.1 569.6 64.5 64.2 -- -- Specialty.............. 123.7 123.7 96.3 96.3 90.3 90.3 Other.................. 76.3 72.0 33.4 33.3 29.7 27.6 -------- -------- -------- -------- -------- -------- Total.................. $7,764.5 $7,737.3 $5,393.1 $5,418.5 $4,750.6 $4,739.5 ======== ======== ======== ======== ======== ======== The effect of reinsurance on policyholder benefits is as follows for the years ended December 31: 2000 1999 1998 ------ ------ ------ Benefits assumed--increase in policyholder benefits expense............................................. $ 8.6 $ 27.4 $ 2.5 Benefits ceded--decrease in policyholder benefits expense............................................. 233.0 299.8 208.3 The effect of reinsurance on certain assets and liabilities is as follows at December 31: 2000 1999 ----- ----- Policy liabilities assumed...................................... $28.6 $30.6 Unearned premiums assumed....................................... 0.2 0.2 Premiums payable ceded.......................................... 8.5 36.3 Premiums receivable assumed..................................... 0.3 0.7 10. Income Taxes The components of deferred income taxes are as follows: December 31 ---------------- 2000 1999 ------- ------- Deferred tax assets: Pension and postretirement benefits..................... $ 84.7 $ 87.9 Accrued expenses........................................ 85.2 69.5 Alternative minimum tax and other credits............... 83.7 35.4 Insurance reserves...................................... 33.0 32.3 Net operating loss carryforwards........................ 174.5 57.4 Bad debt reserves....................................... 35.1 30.1 Other................................................... 31.5 24.1 ------- ------- Total deferred tax assets............................. 527.7 336.7 Valuation allowance................................... (338.7) (148.2) ------- ------- Total deferred tax assets, net of valuation allowance... 189.0 188.5 Deferred tax liabilities: Unrealized gains on securities.......................... 41.4 21.0 Goodwill and other tax intangibles...................... 55.1 57.7 Other................................................... 72.4 52.2 ------- ------- Total deferred tax liabilities.......................... 168.9 130.9 ------- ------- Net deferred tax asset.................................... $ 20.1 $ 57.6 ======= ======= F-16
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The resolution of an Internal Revenue Service examination during 2000 resulted in certain subsidiaries having an increase in alternative minimum tax credits and net operating loss carryforwards. Due to the uncertainty of the realization of these deferred tax assets, the Company increased its valuation allowance accordingly. The net change in the valuation allowance for 2000, 1999 and 1998 totaled $190.5, $(14.4) and $1.1, respectively. Deferred tax assets and liabilities reported with other current assets and other noncurrent assets on the accompanying consolidated balance sheets are as follows: December 31 ----------- 2000 1999 ----- ----- Deferred tax assets--current.................................... $10.5 $29.4 Deferred tax assets--noncurrent................................. 9.6 28.2 ----- ----- Net deferred tax assets......................................... $20.1 $57.6 ===== ===== Significant components of the provision for income taxes consist of the following: Year ended December 31 -------------------- 2000 1999 1998 ------ ----- ------ Current tax expense (benefit): Federal.............................................. $ 53.9 $(2.6) $ 63.0 State and local...................................... 3.9 (7.0) 9.8 ------ ----- ------ Total current tax expense (benefit).................... 57.8 (9.6) 72.8 Deferred tax expense................................... 44.4 19.8 38.1 ------ ----- ------ Total income tax expense............................... $102.2 $10.2 $110.9 ====== ===== ====== Current federal income taxes consisted of amounts due for alternative minimum tax and tax obligations of subsidiaries not included in the consolidated return of Anthem. During 2000, 1999 and 1998 federal income taxes paid totaled $26.3, $0.0 and $23.7, respectively. A reconciliation between actual income tax expense and the amount computed at the statutory rate is as follows: Year ended December 31 ----------------------------------------- 2000 1999 1998 ------------ ------------- ------------ Amount % Amount % Amount % ------ ---- ------ ----- ------ ---- Amount at statutory rate............. $115.4 35.0 $21.3 35.0 $100.9 35.0 State and local income taxes (benefit) net of federal tax benefit............................. 2.6 0.8 (4.8) (7.9) 7.0 2.4 Amortization of goodwill............. 5.6 1.7 3.1 5.1 3.0 1.1 Dividends received deduction......... (1.2) (0.4) (1.3) (2.1) (1.7) (0.6) Deferred tax valuation allowance change, net of net operating loss carryforwards and other tax credits............................. (20.0) (6.0) (14.4) (23.7) 1.1 0.4 Other, net........................... (0.2) (0.1) 6.3 10.4 0.6 0.2 ------ ---- ----- ----- ------ ---- $102.2 31.0 $10.2 16.8 $110.9 38.5 ====== ==== ===== ===== ====== ==== At December 31, 2000, the Company had unused federal tax net operating loss carryforwards of approximately $498.7 to offset future taxable income. The loss carryforwards expire in the years 2001 through 2019. F-17
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Accumulated Other Comprehensive Income The following is a reconciliation of the components of accumulated other comprehensive income at December 31: 2000 1999 ------- ------- Gross unrealized gains on securities....................... $ 228.1 $ 187.5 Gross unrealized losses on securities...................... (110.8) (127.4) ------- ------- Total pretax net unrealized gains on securities............ 117.3 60.1 Deferred tax liability..................................... (41.4) (21.0) ------- ------- Net unrealized gains on securities......................... 75.9 39.1 ------- ------- Additional minimum pension liability....................... (7.2) (1.2) Deferred tax asset......................................... 2.5 0.4 ------- ------- Net additional minimum pension liability................... (4.7) (0.8) ------- ------- Accumulated other comprehensive income..................... $ 71.2 $ 38.3 ======= ======= A reconciliation of the change in unrealized and realized gains (losses) on securities included in accumulated other comprehensive income follows: 2000 1999 1998 ------ ------ ------ Change in pretax net unrealized gains on securities......................................... $ 83.1 $(99.2) $185.6 Less change in deferred taxes....................... (28.4) 36.9 (64.0) Less net realized gains on securities, net of income taxes (2000, $8.0; 1999, $11.3; 1998, $54.6), included in net income............................. (17.9) (26.2) (101.3) Change in net unrealized gains of discontinued operations......................................... -- -- (14.9) ------ ------ ------ Change in net unrealized gains on securities........ $ 36.8 $(88.5) $ 5.4 ====== ====== ====== 12. Leases The Company leases office space and certain computer equipment using noncancelable operating leases. Related lease expense for 2000, 1999 and 1998 was $64.0, $60.9, and $42.9, respectively. At December 31, 1999, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consisted of the following: 2001, $48.7; 2002, $38.6; 2003, $31.7; 2004, $25.1; 2005, $22.9; and thereafter $136.7. 13. Retirement Benefits Anthem and its subsidiaries, Anthem Health Plans of New Hampshire, Inc. (which acquired the business of BCBS-NH), Rocky Mountain Hospital and Medical Service, Inc. ("RMHMS") (formerly known as BCBS-CO/NV) and Anthem Health Plans of Maine, Inc. (which acquired the business of BCBS-ME), all sponsor defined benefit pension plans. These plans generally cover all full-time employees who have completed one year of continuous service and attained the age of twenty- one. The Company plan, which includes all affiliates except for Anthem Health Plans of New Hampshire, Inc., RMHMS, and Anthem Health Plans of Maine, Inc., is a cash balance arrangement where participants have an individual account balance and will earn a pay credit equal to three to six F-18
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) percent of compensation, depending on years of service. In addition to the pay credit, participant accounts earn interest at a rate based on the 10-year Treasury notes. Anthem Health Plans of New Hampshire, Inc. sponsors a plan that is also a cash balance arrangement where participants have an individual account balance and will earn a pay credit equal to five percent of compensation. The participant accounts earn interest at a rate based on the lesser of the 1-year Treasury note or 7%. RMHMS sponsors a pension equity plan where the participant earns retirement credit percentages based on their age and service when the credit was earned. A lump sum benefit is calculated for each participant based on this formula. Effective December 31, 2000, the RMHMS plan was frozen and its participants became participants of the Company's plan on January 1, 2001. Anthem Health Plans of Maine, Inc. sponsors a final average pay defined benefit plan with contributions made at a rate intended to fund the cost of benefits earned. The plan's benefits are based on years of service and the participant's highest five year average compensation during the last ten years of employment. Effective December 31, 2000, the Anthem Health Plans of Maine, Inc. plan was merged into the Company's plan and its participants became participants of the Company's plan on January 1, 2001. All of the plans' assets consist primarily of common and preferred stocks, bonds, notes, government securities, investment funds and short-term investments. The funding policies for all plans are to contribute amounts at least sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act plus such additional amounts as are necessary to provide assets sufficient to meet the benefits to be paid to plan members. The effect of the above acquisitions on the consolidated benefit obligation and plan assets is reflected through the business combination lines of the tables below. In addition to the Company's defined benefit and defined contribution plans, the Company offers most active and retired employees certain life, health, vision and dental benefits upon retirement. There are several plans that differ in amounts of coverage, deductibles, retiree contributions, years of service and retirement age. The Company funds certain benefit costs through contributions to a Voluntary Employees' Beneficiary Association ("VEBA") trust and others are accrued, with the retiree paying a portion of the costs. Postretirement plan assets held in the VEBA trust consist primarily of bonds and equity securities. The reconciliation of the benefit obligation for the years ended December 31 is as follows: Pension Other Benefits Benefits -------------- -------------- 2000 1999 2000 1999 ------ ------ ------ ------ Benefit obligation at beginning of year......... $471.8 $473.3 $117.1 $ 91.8 Service cost.................................... 27.3 26.6 1.3 2.1 Interest cost................................... 36.6 31.4 8.4 6.2 Plan amendments................................. (1.2) -- (5.2) (13.5) Actuarial (gain) loss........................... 35.4 (47.9) (11.0) 9.1 Business combinations........................... 50.8 73.2 9.0 28.9 Benefits paid................................... (53.1) (84.8) (8.0) (7.5) ------ ------ ------ ------ Benefit obligation at end of year............... $567.6 $471.8 $111.6 $117.1 ====== ====== ====== ====== F-19
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The changes in plan assets were as follows: Pension Other Benefits Benefits -------------- ------------ 2000 1999 2000 1999 ------ ------ ----- ----- Fair value of plan assets at beginning of year... $557.5 $445.4 $23.2 $21.2 Actual return on plan assets..................... 75.3 80.5 3.1 8.3 Employer contributions........................... 30.0 37.0 1.2 1.2 Business combinations............................ 40.9 79.4 4.6 -- Benefits paid.................................... (53.1) (84.8) (3.7) (7.5) ------ ------ ----- ----- Fair value of plan assets at end of year......... $650.6 $557.5 $28.4 $23.2 ====== ====== ===== ===== The reconciliation of the funded status to the net benefit cost accrued is as follows: Pension Benefits Other Benefits -------------- ---------------- 2000 1999 2000 1999 ------ ------ ------- ------- Funded status................................ $ 83.0 $ 85.7 $ (83.2) $ (93.9) Unrecognized net gain........................ (61.5) (68.7) (44.1) (33.1) Unrecognized prior service cost.............. (22.8) (24.9) (41.9) (43.3) Unrecognized transition asset................ (1.0) (2.8) -- -- Additional minimum liability................. (7.2) (1.2) -- -- ------ ------ ------- ------- Accrued benefit cost at September 30......... (9.5) (11.9) (169.2) (170.3) Payments made after the measurement date..... 1.0 0.5 2.6 0.5 ------ ------ ------- ------- Accrued benefit cost at December 31........ $ (8.5) $(11.4) $(166.6) $(169.8) ====== ====== ======= ======= The weighted average assumptions used in calculating the accrued liabilities for all plans are as follows: Pension Benefits Other Benefits ----------------- ----------------- 2000 1999 1998 2000 1999 1998 ----- ----- ----- ----- ----- ----- Discount rate.............................. 7.50% 7.50% 6.75% 7.50% 7.50% 6.75% Rate of compensation increase.............. 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% Expected rate of return on plan assets..... 9.00% 9.00% 9.55% 6.27% 6.50% 6.50% The assumed health care cost trend rate used in measuring the other benefit obligations is generally 6% in 2000 and is assumed to decrease to 5% in 2001, and remain level thereafter. For 1999, the rates were generally 7% decreasing by 1% per year, to 5% in 2001. The health care cost trend rate assumption can have a significant effect on the amounts reported. A one-percentage point change in assumed health care cost trend rates would have the following effects: 1-Percentage 1-Percentage Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components................................. $0.4 $(0.4) Effect on the postretirement benefit obligation................................. 5.2 (4.3) F-20
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Below are the components of net periodic benefit cost: Pension Benefits Other Benefits ---------------------- ------------------- 2000 1999 1998 2000 1999 1998 ------ ------ ------ ----- ----- ----- Service cost..................... $ 27.3 $ 26.6 $ 27.5 $ 1.3 $ 2.1 $ 2.5 Interest cost.................... 36.6 31.4 32.2 8.4 6.2 6.9 Expected return on assets........ (49.9) (39.6) (42.2) (1.4) (1.2) (1.2) Recognized actuarial (gain) loss............................ 2.8 1.2 0.3 (1.7) (2.4) (2.1) Amortization of prior service cost............................ (3.3) (3.3) (3.6) (6.5) (5.4) (5.6) Amortization of transition asset........................... (1.7) (2.0) (2.1) -- -- -- ------ ------ ------ ----- ----- ----- Net periodic benefit cost before curtailments.................... 11.8 14.3 12.1 0.1 (0.7) 0.5 Net settlement/curtailment credit.......................... -- (7.9) (3.3) -- -- (5.4) ------ ------ ------ ----- ----- ----- Net periodic benefit cost (credit)........................ $ 11.8 $ 6.4 $ 8.8 $ 0.1 $(0.7) $(4.9) ====== ====== ====== ===== ===== ===== The net settlement/curtailment credits in 1999 and 1998 result from the divestitures of several non-core businesses as previously discussed in Note 2. The Company has several qualified defined contribution plans covering substantially all employees. Eligible employees may only participate in one plan. Voluntary employee contributions are matched at the rate of 40% to 50% depending upon the plan subject to certain limitations. Contributions made by the Company totaled $10.3, $8.7 and $10.0 during 2000, 1999 and 1998, respectively. 14. Contingencies Litigation: A number of managed care organizations have recently been sued in class action lawsuits asserting various causes of action under federal and state law. These lawsuits typically allege that the defendant managed care organizations employ policies and procedures for providing health care benefits that are inconsistent with the terms of the coverage documents and other information provided to their members, and because of these misrepresentations and practices, a class of members has been injured in that they received benefits of lesser value than the benefits represented to and paid for by such members. Two such proceedings which allege various violations of the Employee Retirement Income Security Act of 1974 ("ERISA") have been filed in Connecticut against the Company or its Connecticut affiliate. One proceeding, brought by the Connecticut Attorney General on behalf of a purported class of HMO and Point of Service members in Connecticut, seeks to enjoin the policies and practices that are alleged to violate ERISA. No monetary damages are sought. A second proceeding, brought on behalf of a purported class of HMO and Point of Service members in Connecticut and elsewhere, seeks injunctive relief and monetary damages (both compensatory and punitive). In addition, the Company's Connecticut affiliate is a defendant in three class action lawsuits brought on behalf of professional providers in Connecticut. The suits allege that the Connecticut affiliate has breached its contracts by, among other things, failing to pay for services in accordance with the terms of the contracts. The suits also allege violations of the Connecticut Unfair Trade Practices Act, breach of the implied duty of good faith and fair dealing, negligent misrepresentation and unjust enrichment. Two of the suits seek injunctive relief and monetary damages (both F-21
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) compensatory and punitive). The third suit, brought by the Connecticut State Medical Society, seeks injunctive relief only. The Company intends to vigorously defend these proceedings. All of the proceedings are in the early stages of litigation, and their ultimate outcomes cannot presently be determined. Accordingly, no provision has been made in the accompanying consolidated financial statements for liability, if any, that may result from these proceedings. Following the purchase of BCBS-ME, appeals have been filed by two parties that intervened in the administrative proceeding before Maine's Superintendent of Insurance (the "Superintendent"), challenging the Superintendent's decision approving the conversion of BCBS-ME to a stock insurer, which was a required step before the acquisition. In one appeal, Maine's Attorney General is requesting the Court to modify the Superintendent's decision, by requiring BCBS-ME to submit an update to the statutorily mandated appraisal of its fair market value and to deposit into the charitable foundation the difference between the net proceeds that have been transferred to the foundation and the final value of BCBS-ME, if greater. In the other appeal, a consumers' group is also challenging that portion of the Superintendent's decision regarding the value of BCBS-ME. While the appeals are still pending, Anthem does not believe that the appeals will have a material adverse effect on its consolidated financial position or results of operations. On March 11, 1998, Anthem and a subsidiary were named as defendants in a lawsuit, Robert Lee Dardinger, Executor of the Estate of Esther Louise Dardinger v. Anthem Blue Cross and Blue Shield, et al., filed in the Licking County Court of Common Pleas in Newark, Ohio. The plaintiff sought compensatory damages and unspecified punitive damages in connection with claims alleging wrongful death, bad faith and negligence arising out of the Company's denial of certain claims for medical treatment for Ms. Dardinger. On September 24, 1999, the jury returned a verdict for the plaintiff, awarding $1,350 (actual dollars) for compensatory damages, $2.5 for bad faith in claims handling and appeals processing, $49.0 for punitive damages and unspecified attorneys' fees in an amount to be determined by the court. The court later granted attorneys' fees of $0.8. An appeal of the verdict was filed by the defendants on November 19, 1999, and as part of the appeal, a bond in the amount of $60.0 was posted to secure the judgement and interest and attorneys' fees. The ultimate outcome of this appeal cannot be determined at this time. (See Note 17, fourth paragraph.) In addition to the lawsuits described above, the Company is involved in other pending and threatened litigation of the character incidental to the business transacted, arising out of its insurance and investment operations and is from time to time involved as a party in various governmental and administrative proceedings. The Company believes that any liability that may result from any one of these actions is unlikely to have a material adverse effect on its financial position or results of operations. Other Contingencies: The Company, like a number of other Blue Cross and Blue Shield companies, serves as a fiscal intermediary for Medicare Part A and B. The fiscal intermediaries for these programs receive reimbursement for certain costs and expenditures, which are subject to adjustment upon audit by the Health Care Finance Administration. The laws and regulations governing fiscal intermediaries for the Medicare program are complex, subject to interpretation and can expose an intermediary to penalties for non-compliance. Fiscal intermediaries may be subject to criminal fines, civil penalties or other sanctions as a result of such audits or reviews. In the last five years, at least eight Medicare fiscal intermediaries have made payments to settle issues raised by such audits and reviews. These F-22
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) payments have ranged from $0.7 to $51.6, plus a payment by one company of $144.0. While the Company believes it is currently in compliance in all material respects with the regulations governing fiscal intermediaries, there are ongoing reviews by the federal government of the Company's activities under certain of its Medicare fiscal intermediary contracts. On December 8, 1999, Anthem Health Plans, Inc. ("AHP"), a subsidiary of Anthem, reached a settlement agreement with the Office of Inspector General, Department of Health and Human Services ("OIG"), in the amount of $41.9, to resolve an investigation into misconduct in the Medicare fiscal intermediary operations of Blue Cross and Blue Shield of Connecticut, Inc. ("BCBS-CT"), AHP's predecessor. The period investigated was before Anthem merged with BCBS- CT. The resolution of this case involved no criminal penalties against the Company nor any suspension or exclusion from federal programs. This expense was included in administrative expenses in the statement of consolidated income for the year ended December 31, 1999. AdminaStar Federal, Inc., an affiliate of Anthem, has received two subpoenas from the OIG, one seeking documents and information concerning its responsibilities as a Medicare Part B contractor in its Kentucky office, and the other requesting certain financial records of AdminaStar Federal, Inc. and Anthem related to the Company's Medicare fiscal intermediary (Part A) and carrier (Part B) operations. The Company has made certain disclosures to the government of issues relating to its Medicare Part B work in Kentucky. The Company is not in a position to predict either the ultimate outcome of this review or the extent of any potential exposure should claims be made against the Company. However, the Company believes any fines or penalties that may arise from this review would not have a material adverse effect on the consolidated financial condition of the Company. Anthem guarantees certain financial contingencies of its subsidiary, Anthem Alliance Health Insurance Company (Anthem Alliance), under a contract between Anthem Alliance and the United States Department of Defense. Under that contract, Anthem Alliance manages and administers the TRICARE Managed Care Support Program for military families. The contract requires Anthem Alliance, as the prime contractor, to assume certain risks in the event, and to the extent, the actual cost of delivering health care services during the five-year contract period exceeds the health care cost proposal submitted by Anthem Alliance ("the Health Care Risk"). Anthem has guaranteed Anthem Alliance's assumption of the Health Care Risk, which is capped by the contract at $20.0 annually and $75.0 cumulatively over the five-year contract period. Anthem Alliance has subcontracts with two other Blue Cross and Blue Shield companies not affiliated with the Company by which the subcontractors have agreed to provide certain services under the contract and to assume approximately 50% of the Health Care Risk. Effective January 1, 2001, one of those subcontracts will terminate by mutual agreement of the parties. As a result, Anthem Alliance would then have one Blue Cross and Blue Shield subcontractor assuming 10% of the Health Care Risk. Vulnerability from Concentrations: Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of investment securities and premiums receivable. All investment securities are managed by professional investment managers within guidelines authorized by the board of directors. Such policies limit the amounts that may be invested in any one issuer and prescribe certain investee company criteria. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of employer groups that constitute the Company's customer base in the geographic regions in which we conduct business. As of December 31, 2000, there were no significant concentrations of financial instruments in a single investee, industry or geographic location. F-23
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. Segment Information The Company's principal reportable segments are strategic business units primarily delineated by geographic areas that essentially offer similar insurance products and services. They are managed separately because each geographic region has unique market, regulatory and healthcare delivery characteristics. The geographic regions are: the Midwest region, which operates primarily in Indiana, Kentucky and Ohio; the East region, which operates primarily in Connecticut, New Hampshire and Maine; and the West region, which operates in Colorado and Nevada. BCBS-NH was added to the East region effective with its October 27, 1999 acquisition, while the West region was established following the acquisition of BCBS-CO/NV on November 16, 1999. BCBS-ME is included in the East segment since its acquisition date of June 5, 2000. In addition to its three principal reportable geographic segments, the Company operates a Specialty segment which includes business units providing group life insurance benefits, pharmacy benefit management and third party occupational health and dental administration services. Various ancillary business units (reported with the Other segment) consist primarily of AdminaStar Federal which administers Medicare programs in Indiana, Illinois, Kentucky and Ohio and Anthem Alliance which provides health care benefits and administration in nine states for the Department of Defense's TRICARE Program for military families. The Other segment also includes intersegment revenue and expense eliminations and corporate expenses not allocated to reportable segments. Through its participation in the Federal Employee Program ("FEP"), Medicare, Medicare at Risk, and TRICARE Program, the Company generated approximately 22%, 23%, and 22% of its total consolidated revenues from agencies of the U.S. government for the years ended December 31, 2000, 1999, and 1998, respectively. The Company defines operating revenues to include premium income, administrative fees and other revenues. Operating revenues are derived from premiums and fees received primarily from the sale and administration of health benefit products. Operating expenses are comprised of benefit and administrative expenses. The Company calculates operating gain or loss as operating revenue less operating expenses. The accounting policies of the segments are the same as those described in the summary of significant accounting policies except that pension and postretirement benefit costs for each segment are recognized on a per associate per month charge, which in aggregate approximates the consolidated expense. Any difference between the per associate per month charge and actual consolidated expense is included in corporate expenses not allocated to reportable segments. Intersegment sales and expenses are recorded at cost, and eliminated in the consolidated financial statements. The Company evaluates performance of the reportable segments based on operating gain or loss as defined above. The Company evaluates investment income, interest expense, amortization expense, income taxes, and asset and liability details on a consolidated basis as these items are managed in a corporate shared service environment and are not the responsibility of segment operating management. F-24
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following tables present operating gain (loss) by reportable segment for each of the years ended December 31, 2000, 1999 and 1998: Reportable Segments ------------------------------------------------------ Midwest East West Specialty Other Total -------- -------- ------ --------- ------- -------- 2000 Premiums................ $4,203.1 $2,768.9 $569.6 $123.7 $ 72.0 $7,737.3 Administrative fees..... 254.8 144.1 52.8 31.8 272.1 755.6 Other revenues.......... 2.6 8.9 -- 176.8 (137.7) 50.6 -------- -------- ------ ------ ------- -------- Operating revenue(1).... 4,460.5 2,921.9 622.4 332.3 206.4 8,543.5 Benefit expense......... 3,555.4 2,332.4 491.7 92.6 78.9 6,551.0 Administrative expense(2)............. 817.3 485.7 128.2 214.8 162.4 1,808.4 -------- -------- ------ ------ ------- -------- Operating expense....... 4,372.7 2,818.1 619.9 307.4 241.3 8,359.4 -------- -------- ------ ------ ------- -------- Operating gain (loss)... $ 87.8 $ 103.8 $ 2.5 $ 24.9 $ (34.9) $ 184.1 ======== ======== ====== ====== ======= ======== (1) Includes intersegment revenues.. $ 8.2 $ -- $ -- $143.5 $(151.7) $ -- (2) Includes depreciation and amortization......... 16.9 17.1 8.7 2.1 30.5 75.3 Reportable Segments ------------------------------------------------------ Midwest East West Specialty Other Total -------- -------- ------ --------- ------- -------- 1999 Premiums................ $3,729.3 $1,495.4 $ 64.2 $ 96.3 $ 33.3 $5,418.5 Administrative fees..... 242.8 99.7 1.7 14.6 252.3 611.1 Other revenues.......... 3.4 3.8 6.8 138.2 (101.2) 51.0 -------- -------- ------ ------ ------- -------- Operating revenue(1).... 3,975.5 1,598.9 72.7 249.1 184.4 6,080.6 Benefit expense......... 3,162.2 1,259.9 55.0 73.8 31.8 4,582.7 Administrative expense(2)............. 776.9 339.9 21.2 159.1 172.3 1,469.4 -------- -------- ------ ------ ------- -------- Operating expense....... 3,939.1 1,599.8 76.2 232.9 204.1 6,052.1 -------- -------- ------ ------ ------- -------- Operating gain (loss)... $ 36.4 $ (0.9) $ (3.5) $ 16.2 $ (19.7) $ 28.5 ======== ======== ====== ====== ======= ======== (1) Includes intersegment revenues.. $ 7.5 $ -- $ -- $103.7 $(111.2) $ -- (2) Includes depreciation and amortization......... 16.6 8.5 0.5 1.4 20.1 47.1 F-25
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Reportable Segments ---------------------------------------------------- Midwest East West Specialty Other Total -------- -------- ----- --------- ------- -------- 1998 Premiums................. $3,533.3 $1,088.3 $ -- $ 90.3 $ 27.6 $4,739.5 Administrative fees...... 234.8 91.4 -- 21.1 228.3 575.6 Other revenues........... 3.0 11.2 -- 130.2 (69.8) 74.6 -------- -------- ----- ------ ------- -------- Operating revenue(1)..... 3,771.1 1,190.9 -- 241.6 186.1 5,389.7 Benefit expense.......... 2,922.9 901.9 -- 76.1 33.3 3,934.2 Administrative expense(2).............. 797.7 294.6 -- 142.3 185.5 1,420.1 -------- -------- ----- ------ ------- -------- Operating expense........ 3,720.6 1,196.5 -- 218.4 218.8 5,354.3 -------- -------- ----- ------ ------- -------- Operating gain (loss).... $ 50.5 $ (5.6) $ -- $ 23.2 $ (32.7) $ 35.4 ======== ======== ===== ====== ======= ======== (1) Includes intersegment revenues................ $ 9.4 $ -- $ -- $104.3 $(113.7) $ -- (2) Includes depreciation and amortization...... 16.2 9.3 -- 1.1 17.1 43.7 Asset and equity details by reportable segment have not been disclosed, as they are not reported internally by the Company. A reconciliation of reportable segment operating revenues to the amounts of total revenues included in the consolidated statements of income for 2000, 1999 and 1998 is as follows: 2000 1999 1998 -------- -------- -------- Reportable segments operating revenues........... $8,543.5 $6,080.6 $5,389.7 Net investment income............................ 201.6 152.0 136.8 Net realized gains on investments................ 25.9 37.5 155.9 -------- -------- -------- Total revenues................................. $8,771.0 $6,270.1 $5,682.4 ======== ======== ======== A reconciliation of reportable segment operating gain to income from continuing operations before income taxes and minority interest included in the consolidated statements of income for 2000, 1999 and 1998 is as follows: 2000 1999 1998 ------ ------- ------ Reportable segments operating gain................ $184.1 $ 28.5 $ 35.4 Net investment income............................. 201.6 152.0 136.8 Net realized gains on investments................. 25.9 37.5 155.9 Interest expense.................................. (54.7) (30.4) (27.9) Amortization of goodwill and other intangible assets........................................... (27.1) (12.7) (12.0) Endowment of non-profit foundations............... -- (114.1) -- ------ ------- ------ Income from continuing operations before income taxes and minority interest...................... $329.8 $ 60.8 $288.2 ====== ======= ====== F-26
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. Statutory Information Statutory policyholders' surplus of Anthem amounted to $1,907.5 and $1,444.2 at December 31, 2000 and 1999, respectively. Statutory net income of Anthem was $91.7, $201.7 and $80.6 for 2000, 1999 and 1998, respectively. Surplus of insurance subsidiaries of Anthem is subject to regulatory restrictions with respect to amounts available for dividends to Anthem. In 1998, the National Association of Insurance Commissioners adopted codified statutory accounting principles ("Codification") which will be effective January 1, 2001. Codification will result in changes to certain accounting practices that Anthem and it's insurance subsidiaries use to prepare statutory-basis financial statements. Management believes the impact of these changes will not be significant. 17. Subsequent Events On January 29, 2001 Anthem's board of directors appointed a special committee to work with management to develop a plan for demutualization and conversion to a publicly traded stock company (the "Plan") for the board's further review. On June 18, 2001, the Plan was approved by Anthem's board of directors and management believes that the demutualization and conversion process could be completed before the end of 2001. Anthem's members will see no increase in premiums or changes to the terms of their health care benefits as a result of the demutualization. On April 18, 2001, Anthem and its subsidiary Anthem Alliance Health Insurance Company ("Alliance"), entered into an Agreement and Plan of Merger to sell the TRICARE operations of Alliance to a subsidiary of Humana, Inc. The transaction closed on May 31, 2001. On May 30, 2001, Anthem and Blue Cross and Blue Shield of Kansas ("BCBS-KS") signed a definitive agreement pursuant to which BCBS-KS will become a wholly owned subsidiary of Anthem. Under the proposed transaction, BCBS-KS will demutualize and convert to a stock insurance company. The agreement calls for Anthem to pay $190.0 in exchange for all of the shares of BCBS-KS. Subject to the approval of BCBS-KS policyholders and the approval of the Kansas Department of Insurance, the transaction is expected to close in late 2001. On May 22, 2001, the Ohio Court of Appeals (Fifth District) affirmed the jury award of $1,350 (actual dollars) for breach of contract against Community Insurance Company ("CIC"), a subsidiary of the Company, affirmed the award of $2.5 compensatory damages for bad faith in claims handling and appeals processing against CIC, but dismissed the claims and judgments against Anthem. The court also reversed the award of $49.0 in punitive damages against both the Company and CIC, and remanded the question of punitive damages against CIC to the trial court for a new trial. (See Note 14, fifth paragraph.) F-27
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) For the Quarter Ended ------------------------------------------- March 31 June 30 September 30 December 31 -------- -------- ------------ ----------- ($ in Millions) 2000 Data Total revenues.................... $1,962.1 $2,104.1 $2,320.0 $2,384.8 Operating gain.................... 32.4 34.2 53.3 64.2 Net income........................ 40.4 49.9 63.5 72.2 1999 Data Total revenues.................... $1,450.3 $1,465.3 $1,571.8 $1,782.7 Operating gain (loss)(1).......... (0.4) 6.5 27.9 (5.5) Income (loss) from continuing operations(2).................... 11.9 24.4 17.8 (3.2) Discontinued operations, net of income taxes(3).................. -- -- -- (6.0) Net income (loss)................. 11.9 24.4 17.8 (9.2) - -------- (1) The operating loss of $(5.5 million) for the quarter ended December 31, 1999 includes a non recurring charge of $41.9 million related to the settlement agreement with the OIG. See Note 14 to our audited consolidated financial statements. (2) During 1999, we reached agreements with the states of Kentucky, Ohio and Connecticut to resolve any questions as to whether we or our predecessor/successor entities were in possession of property that was impressed with a charitable trust. Income (loss) from continuing operations for the quarters ended March 31, September 30 and December 31, 1999 includes the non-recurring after-tax endowment of non-profit foundations of $18.2 million, $26.8 million and $26.8 million, respectively. See Note 3 to our audited consolidated financial statements. (3) Loss on discontinued operations for the quarter ended December 31, 1999 resulted when we recognized additional losses resulting from sales agreement contingency adjustments relating to discontinued operations sold in prior years. See Note 2 to our audited consolidated financial statements. F-28
ANTHEM INSURANCE COMPANIES, INC. CONSOLIDATED BALANCE SHEET (Unaudited) June 30, 2001 ------------- (In Millions) Assets Current assets: Investments available-for-sale, at fair value: Fixed maturity securities..................................... $3,351.3 Equity securities............................................. 439.4 -------- 3,790.7 Cash and cash equivalents....................................... 238.9 Premium and self funded receivables............................. 498.5 Reinsurance receivables......................................... 78.9 Other receivables............................................... 194.5 Income tax receivables.......................................... 7.4 Other current assets............................................ 33.4 -------- Total current assets.............................................. 4,842.3 Other noncurrent investments...................................... 13.1 Restricted cash and investments................................... 51.1 Property and equipment............................................ 409.6 Goodwill and other intangible assets.............................. 480.4 Other noncurrent assets........................................... 41.5 -------- Total assets...................................................... $5,838.0 ======== Liabilities and policyholders' surplus Liabilities Current liabilities: Policy liabilities: Unpaid life, accident and health claims....................... $1,295.1 Future policy benefits........................................ 237.5 Other policyholder liabilities................................ 61.2 -------- Total policy liabilities........................................ 1,593.8 Unearned income................................................. 321.2 Accounts payable and accrued expenses........................... 269.0 Bank overdrafts................................................. 281.6 Income taxes payable............................................ 34.6 Other current liabilities....................................... 283.7 -------- Total current liabilities......................................... 2,783.9 Long term debt, less current portion.............................. 597.5 Retirement benefits............................................... 187.5 Other noncurrent liabilities...................................... 205.2 -------- Total liabilities................................................. 3,774.1 Policyholders' surplus Surplus........................................................... 1,991.6 Accumulated other comprehensive income............................ 72.3 -------- Total policyholders' surplus...................................... 2,063.9 -------- Total liabilities and policyholders' surplus...................... $5,838.0 ======== See accompanying notes. F-29
ANTHEM INSURANCE COMPANIES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six Months Ended June 30 ------------------ 2001 2000 -------- -------- (In Millions) Revenues Premiums.................................................... $4,542.8 $3,589.3 Administrative fees......................................... 430.3 356.5 Other revenue............................................... 22.6 18.9 -------- -------- Total operating revenue................................. 4,995.7 3,964.7 Net investment income....................................... 109.0 95.0 Net realized gains (losses) on investments.................. (10.9) 6.5 Gain on sale of subsidiary operations....................... 25.0 -- -------- -------- 5,118.8 4,066.2 -------- -------- Expenses Benefit expense............................................. 3,870.8 3,080.6 Administrative expense...................................... 991.6 817.5 Interest expense............................................ 28.0 27.0 Amortization of goodwill and other intangible assets........ 15.7 11.4 Demutualization expenses.................................... 3.0 -- -------- -------- 4,909.1 3,936.5 -------- -------- Income before income taxes and minority interest............ 209.7 129.7 Income taxes................................................ 68.6 38.9 Minority interest (credit).................................. (1.9) 0.5 -------- -------- Net income.................................................. $ 143.0 $ 90.3 ======== ======== See accompanying notes. F-30
ANTHEM INSURANCE COMPANIES, INC. CONSOLIDATED STATEMENTS OF POLICYHOLDERS' SURPLUS (Unaudited) Accumulated Other Total Comprehensive Policyholders' Surplus Income Surplus -------- ------------- -------------- (In Millions) Balance at December 31, 2000............ $1,848.6 $71.2 $1,919.8 Net income.............................. 143.0 -- 143.0 Change in net unrealized gains on securities............................. -- 1.1 1.1 -------- Comprehensive income.................... 144.1 -------- ----- -------- Balance at June 30, 2001................ $1,991.6 $72.3 $2,063.9 ======== ===== ======== Balance at December 31, 1999............ $1,622.6 $38.3 $1,660.9 Net income.............................. 90.3 -- 90.3 Change in net unrealized gains on securities............................. -- 5.1 5.1 -------- Comprehensive income.................... 95.4 -------- ----- -------- Balance at June 30, 2000................ $1,712.9 $43.4 $1,756.3 ======== ===== ======== See accompanying notes. F-31
ANTHEM INSURANCE COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30 -------------------------- 2001 2000 ------------ ------------ (In Millions) Operating activities Net income......................................... $ 143.0 $ 90.3 Adjustments to reconcile net income to net cash provided by operating activities: Realized (gains) losses on investments........... 10.9 (6.5) Gain on sale of subsidiary operations............ (25.0) -- Depreciation, amortization and accretion......... 61.2 47.2 Deferred income taxes............................ 16.9 3.4 Loss on sale of assets........................... 2.9 0.6 Changes in operating assets and liabilities, net of effect of purchases and divestitures: Restricted cash and investments................ (3.3) 5.1 Receivables.................................... 12.2 21.9 Other assets................................... (3.7) (8.9) Policy liabilities............................. 27.0 91.6 Unearned income................................ 64.7 27.9 Accounts payable and accrued expenses.......... 6.7 (18.3) Other liabilities.............................. (63.4) 75.7 Income taxes................................... 12.5 36.7 ------------ ------------ Net cash provided by continuing operations....... 262.6 366.7 Net cash used in discontinued operations......... (1.5) (1.3) ------------ ------------ Cash provided by operating activities.............. 261.1 365.4 Investing activities Purchases of investments........................... (1,957.9) (1,685.2) Sales or maturities of investments................. 1,721.4 1,458.3 Purchases of subsidiaries, net of cash acquired.... (2.7) (69.2) Sales of subsidiaries, net of cash sold............ 45.0 6.0 Proceeds from sale of property and equipment....... 0.9 4.4 Purchases of property and equipment................ (32.2) (35.2) ------------ ------------ Cash used in investing activities.................. (225.5) (320.9) Financing activities Proceeds from borrowings........................... -- 295.3 Payments on borrowings............................. -- (220.0) ------------ ------------ Cash provided by financing activities.............. -- 75.3 ------------ ------------ Change in cash and cash equivalents................ 35.6 119.8 Cash and cash equivalents at beginning of period... 203.3 204.4 ------------ ------------ Cash and cash equivalents at end of period......... $ 238.9 $ 324.2 ============ ============ See accompanying notes. F-32
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2001 (Dollars in Millions) 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Anthem Insurance Companies, Inc. ("Anthem") and its subsidiaries (collectively, the "Company") have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation have been included. The results of operations for the six month period ended June 30, 2001 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2001. These unaudited consolidated interim financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2000. 2. Demutualization On January 29, 2001 Anthem's board of directors appointed a special committee to work with management to develop a plan for demutualization and conversion to a publicly traded stock company (the "Plan") for the board's further review. On June 18, 2001, the Plan was approved by Anthem's board of directors and management believes that the demutualization and conversion process could be completed before the end of 2001. Anthem's members will see no increase in premiums or change to the terms of their health care benefits as a result of the demutualization. 3. Disposition and Pending Acquisition On April 18, 2001, Anthem and its subsidiary Anthem Alliance Health Insurance Company ("Alliance"), entered into an Agreement and Plan of Merger to sell the TRICARE operations of Alliance to a subsidiary of Humana, Inc. for $45.0. The transaction, which closed on May 31, 2001 resulted in a gain on sale of subsidiary operations of $25.0, net of selling expenses. On May 30, 2001, Anthem and Blue Cross and Blue Shield of Kansas ("BCBS-KS") signed a definitive agreement pursuant to which BCBS-KS will become a wholly owned subsidiary of Anthem. Under the proposed transaction, BCBS-KS will demutualize and convert to a stock insurance company. The agreement calls for Anthem to pay $190.0 in exchange for all of the shares of BCBS-KS. Subject to the approval of BCBS-KS policyholders and the approval of the Kansas Department of Insurance, the transaction is expected to close in late 2001. 4. Pending Adoption of Accounting Standard On June 29, 2001, members of the Financial Accounting Standards Board voted unanimously in favor of FAS 141, Business Combinations, and FAS 142, Goodwill and Other Intangible Assets. Both FAS 141 and FAS 142 will be issued in July 2001. FAS 141 will require business combinations completed after June 30, 2001 to be accounted for using the purchase method of accounting. Under FAS 142 goodwill will not be amortized but will be tested for impairment at least annually. The Company will be required to adopt FAS 142 on January 1, 2002 and early adoption is not permitted. The Company has not yet completed the analysis necessary to provide a precise estimate of the effect of the adoption of FAS 142, however the elimination of goodwill expense from the consolidated statements of income is expected to be material. F-33
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) 5. Contingencies Litigation A number of managed care organizations have recently been sued in class action lawsuits asserting various causes of action under federal and state law. These lawsuits typically allege that the defendant managed care organizations employ policies and procedures for providing health care benefits that are inconsistent with the terms of the coverage documents and other information provided to their members, and because of these misrepresentations and practices, a class of members has been injured in that they received benefits of lesser value than the benefits represented to and paid for by such members. Two such proceedings which allege various violations of the Employee Retirement Income Security Act of 1974 ("ERISA") have been filed in Connecticut against the Company or its Connecticut affiliate. One proceeding was brought by the Connecticut Attorney General on behalf of a purported class of HMO and Point of Service members in Connecticut. No monetary damages are sought, although the suit does seek injunctive relief from the court to preclude the Company from allegedly utilizing arbitrary coverage guidelines, making late payments to providers or members, denying coverage for medically necessary prescription drugs and misrepresenting or failing to disclose essential information to enrollees. The complaint contends that these alleged policies and practices are a violation of ERISA. A second proceeding, brought on behalf of a purported class of HMO and Point of Service members in Connecticut and elsewhere, seeks injunctive relief to preclude the Company from allegedly making coverage decisions relating to medical necessity without complying with the express terms of the policy documents, and unspecified monetary damages (both compensatory and punitive). In addition, the Company's Connecticut affiliate is a defendant in three class action lawsuits brought on behalf of professional providers in Connecticut. The suits allege that the Connecticut affiliate has breached its contracts by, among other things, failing to pay for services in accordance with the terms of the contracts. The suits also allege violations of the Connecticut Unfair Trade Practices Act, breach of the implied duty of good faith and fair dealing, negligent misrepresentation and unjust enrichment. Two of the suits seek injunctive relief and monetary damages (both compensatory and punitive). The third suit, brought by the Connecticut State Medical Society, seeks injunctive relief only. The Company intends to vigorously defend these proceedings. All of the proceedings are in the early stages of litigation, and their ultimate outcomes cannot presently be determined. Accordingly, no provision has been made in the accompanying unaudited consolidated financial statements for liability, if any, that may result from these proceedings. Following the purchase of BCBS-ME, appeals have been filed by two parties that intervened in the administrative proceeding before Maine's Superintendent of Insurance (the "Superintendent"), challenging the Superintendent's decision approving the conversion of BCBS-ME to a stock insurer, which was a required step before the acquisition. In one appeal, Maine's Attorney General is requesting the Court to modify the Superintendent's decision, by requiring BCBS-ME to submit an update to the statutorily mandated appraisal of its fair market value and to deposit into the charitable foundation the difference between the net proceeds that have been transferred to the foundation and the final value of BCBS-ME, if greater. In the other appeal, a consumers' group is also challenging that portion of the Superintendent's decision regarding the value of BCBS-ME. While the appeals are still pending, Anthem does not believe that the appeals will have a material adverse effect on its unaudited consolidated financial position or results of operations. F-34
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) On March 11, 1998, Anthem and its Ohio subsidiary Community Insurance Company ("CIC") were named as defendants in a lawsuit, Robert Lee Dardinger, Executor of the Estate of Esther Louise Dardinger v. Anthem Blue Cross and Blue Shield, et al., filed in the Licking County Court of Common Pleas in Newark, Ohio. The plaintiff sought compensatory damages and unspecified punitive damages in connection with claims alleging wrongful death, bad faith and negligence arising out of the Company's denial of certain claims for medical treatment for Ms. Dardinger. On September 24, 1999, the jury returned a verdict for the plaintiff, awarding $1,350 (actual dollars) for compensatory damages, $2.5 for bad faith in claims handling and appeals processing, $49.0 for punitive damages and unspecified attorneys' fees in an amount to be determined by the court. The court later granted attorneys' fees of $0.8. An appeal of the verdict was filed by the defendants on November 19, 1999, and as part of the appeal, a bond in the amount of $60.0 was posted to secure the judgement and interest and attorneys' fees. On May 22, 2001, the Ohio Court of Appeals (Fifth District) affirmed the jury award of $1,350 (actual dollars) for breach of contract against CIC, affirmed the award of $2.5 compensatory damages for bad faith in claims handling and appeals processing against CIC, but dismissed the claims and judgments against Anthem. The court also reversed the award of $49.0 in punitive damages against CIC to the trial court for a new trial. The ultimate outcome of this matter cannot be determined at this time. In addition to the lawsuits described above, the Company is also involved in other pending and threatened litigation of the character incidental to the business transacted, arising out of its insurance and investment operations and is from time to time involved as a party in various governmental and administrative proceedings. The Company believes that any liability that may result from any one of these actions is unlikely to have a material adverse effect on its financial position or results of operations. Other Contingencies The Company, like a number of other Blue Cross and Blue Shield companies, serves as a fiscal intermediary for Medicare Part A and B. The fiscal intermediaries for these programs receive reimbursement for certain costs and expenditures, which is subject to adjustment upon audit by the Health Care Finance Administration. The laws and regulations governing fiscal intermediaries for the Medicare program are complex, subject to interpretation and can expose an intermediary to penalties for non-compliance. Fiscal intermediaries may be subject to criminal fines, civil penalties or other sanctions as a result of such audits or reviews. In the last five years, at least eight Medicare fiscal intermediaries have made payments to settle issues raised by such audits and reviews. These payments have ranged from $0.7 to $51.6, plus a payment by one company of $144.0. While the Company believes it is currently in compliance in all material respects with the regulations governing fiscal intermediaries, there are ongoing reviews by the federal government of the Company's activities under certain of its Medicare fiscal intermediary contracts. AdminaStar Federal, Inc., an affiliate of Anthem, has received several subpoenas from the Office of Inspector General, Department of Health and Human Services, one seeking documents and information concerning its responsibilities as a Medicare Part B contractor in its Kentucky office, and the other requesting certain financial records of AdminaStar Federal, Inc. and Anthem related to the Company's Medicare fiscal intermediary (Part A) and carrier (Part B) operations. The Company has made certain disclosures to the government of issues relating to its Medicare Part B work in Kentucky. The Company is not in a position to predict either the ultimate outcome of this review or F-35
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) the extent of any potential exposure should claims be made against the Company. However, the Company believes any fines or penalties that may arise from this review would not have a material adverse effect on the consolidated financial condition of the Company. As a Blue Cross Blue Shield Association licensee, the Company participates in the Federal Employee Program ("FEP"), a nationwide contract with the federal Office of Personnel Management, to provide coverage to federal employees and their dependents. On July 11, 2001 the Company received a subpoena from the Office of Inspector General, Office of Personnel Management, seeking certain financial documents and information, including information concerning intercompany transactions, related to operations in Ohio, Indiana and Kentucky under the FEP contract. The Company is currently evaluating the subpoena and intends to cooperate with the government's review. The Company is not in a position to predict either the ultimate outcome of this review or the extent of any potential exposure should claims be made against the Company. There can be no assurance that the ultimate outcome of this review will not have a material adverse effect on the Company's consolidated results of operations or financial condition. Anthem guaranteed certain financial contingencies of its subsidiary, Anthem Alliance Health Insurance Company ("Alliance") under a contract between Alliance and the United States Department of Defense. Under that contract, Alliance managed and administered the TRICARE Managed Care Support Program for military families from May 1, 1998 through May 31, 2001. The contract required Alliance, as the prime contractor, to assume certain risks in the event, and to the extent, the actual cost of delivering health care services exceeded the health care cost proposal submitted by Alliance ("the Health Care Risk"). The contract has a five-year term, but was transferred to a third party, effective May 31, 2001. Anthem guaranteed Alliance's assumption of the Health Care Risk, which is capped by the contract at $20.0 annually and $75.0 cumulatively over the contract period. Through December 31, 2000, Alliance had subcontracts with two other Blue Cross and Blue Shield companies not affiliated with the Company by which the subcontractors agreed to provide certain services under the contract and to assume approximately 50% of the Health Care Risk. Effective January 1, 2001, one of those subcontracts terminated by mutual agreement of the parties, which increased Alliance's portion of the Health Care Risk to 90%. Effective May 1, 2001, the other subcontract was amended to eliminate the Health Care Risk sharing provision, which resulted in Alliance assuming 100% of the Health Care Risk for the period from May 1, 2001 to May 31, 2001. There was no call on the guarantee for the period from May 1, 1998 to April 30, 1999 (which period is now "closed"), and we do not anticipate a call on the guarantee for the periods beginning May 1, 1999 through May 31, 2001 (which periods remain "open" for possible review by the Department of Defense). F-36
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) 6. Segment Information The following tables show financial data by segment for the six months ended June 30, 2001 and 2000: Reportable Segments --------------------------------------------------- Midwest East West Specialty Other Total -------- -------- ------ --------- ------ -------- Six Months Ended June 30, 2001 Premiums.................. $2,313.0 $1,658.3 $327.3 $47.4 $196.8 $4,542.8 Administrative fees....... 152.8 99.6 29.6 18.0 130.3 430.3 Other revenue............. 0.9 0.8 -- 120.1 (99.2) 22.6 -------- -------- ------ ----- ------ -------- Operating revenue(1).... 2,466.7 1,758.7 356.9 185.5 227.9 4,995.7 Benefit expense........... 1,952.8 1,418.1 275.3 31.8 192.8 3,870.8 Administrative expense(2)............... 428.9 292.2 78.5 137.8 54.2 991.6 -------- -------- ------ ----- ------ -------- Operating expense....... 2,381.7 1,710.3 353.8 169.6 247.0 4,862.4 -------- -------- ------ ----- ------ -------- Operating gain (loss)..... $ 85.0 $ 48.4 $ 3.1 $15.9 $(19.1) $ 133.3 ======== ======== ====== ===== ====== ======== (1) Includes intersegment revenues................. $ -- $ -- $ -- $97.5 $(97.5) $ -- (2) Includes depreciation and amortization........ 0.5 1.2 1.3 1.4 40.4 44.8 Reportable Segments --------------------------------------------------- Midwest East West Specialty Other Total -------- -------- ------ --------- ------ -------- Six Months Ended June 30, 2000 Premiums.................. $2,046.4 $1,175.6 $278.1 $64.3 $ 24.9 $3,589.3 Administrative fees....... 123.7 57.9 24.9 14.8 135.2 356.5 Other revenues............ 1.3 2.5 0.1 82.3 (67.3) 18.9 -------- -------- ------ ----- ------ -------- Operating revenue(1).... 2,171.4 1,236.0 303.1 161.4 92.8 3,964.7 Benefit expense........... 1,748.7 1,012.2 240.2 51.2 28.3 3,080.6 Administrative expense(2)............... 386.5 189.7 61.6 100.4 79.3 817.5 -------- -------- ------ ----- ------ -------- Operating expense....... 2,135.2 1,201.9 301.8 151.6 107.6 3,898.1 -------- -------- ------ ----- ------ -------- Operating gain (loss)..... $ 36.2 $ 34.1 $ 1.3 $ 9.8 $(14.8) $ 66.6 ======== ======== ====== ===== ====== ======== (1) Includes intersegment revenues................. $ 3.9 $ -- $ -- $68.6 $(72.5) $ -- (2) Includes depreciation and amortization........ 8.9 7.2 4.4 1.0 14.5 36.0 F-37
ANTHEM INSURANCE COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) A reconciliation of reportable segment operating revenues to the amounts of total revenues included in the unaudited consolidated statements of income for the six months ended June 30, 2001 and 2000 is as follows: Six Months Ended June 30 ------------------ 2001 2000 -------- -------- Reportable segments operating revenue.................. $4,995.7 $3,964.7 Net investment income.................................. 109.0 95.0 Net realized gains (losses) on investments............. (10.9) 6.5 Gain on sale of subsidiary operations.................. 25.0 -- -------- -------- Total revenues......................................... $5,118.8 $4,066.2 ======== ======== A reconciliation of reportable segment operating gain to income before income taxes and minority interest included in the unaudited consolidated statements of income for the six months ended June 30, 2001 and 2000 is as follows: Six Months Ended June 30 ------------------ 2001 2000 -------- -------- Reportable segments operating gain......... $ 133.3 $ 66.6 Net investment income... 109.0 95.0 Net realized gains (losses) on investments............ (10.9) 6.5 Gain on sale of subsidiary operations.. 25.0 -- Interest expense........ (28.0) (27.0) Amortization of goodwill and other intangible assets................. (15.7) (11.4) Demutualization expenses............... (3.0) -- -------- -------- Income before income taxes and minority interest............... $ 209.7 $ 129.7 ======== ======== F-38
ANNEX A ACTUARIAL OPINIONS [LOGO OF MILLIMAN] One Pennsylvania Plaza, 38th Floor New York, NY 10119 Tel +1 212 279.7166 Fax +1 212 629.5657 www.milliman.com June 18, 2001 Board of Directors Anthem Insurance Companies, Inc. 120 Monument Circle Indianapolis, Indiana 46204 Re: Plan of Conversion of Anthem Insurance Companies, Inc. STATEMENT OF ACTUARIAL OPINIONS Subject of this Opinion Letter This opinion letter relates to the actuarial aspects of the proposed reorganization of Anthem Insurance Companies, Inc. ("Anthem Insurance") pursuant to its Plan of Conversion (the "Plan") as presented to the Board of Directors of Anthem Insurance for its consideration and approval on June 18, 2001. The specific opinions set forth herein relate to the proposed allocation of consideration among the Eligible Statutory Members of Anthem Insurance and the decision not to include a Closed Block dividend preservation mechanism, each of which is described in the Plan. Capitalized terms have the same meaning in this opinion as they have in the Plan. Qualifications and Usage We, Robert H. Dobson, Dale S. Hagstrom, and Daniel J. McCarthy, are associated with the firm of Milliman USA ("Milliman") and are Members of the American Academy of Actuaries, qualified under the Academy's Qualification Standards to render the opinions set forth herein. We, and other Milliman staff acting under our direction, have advised Anthem Insurance during the course of its development of the Plan and the Actuarial Contribution Memorandum, which is Exhibit F thereto. The Plan is based on authority in Title 27 Article 15 of the Indiana Code ("the Indiana Demutualization Law"). The opinions set forth herein are not legal opinions concerning the Plan, the Articles of Incorporation of Anthem Insurance, or Indiana law, but rather are opinions concerning the application of actuarial concepts and standards of practice to the provisions of the Plan. Chapter 3 Section 2 (11) of the Indiana Demutualization Law requires "an actuarial opinion as to the following: (A) The reasonableness and appropriateness of the methodology or formulas used to allocate consideration among eligible members, and (B) The reasonableness of the plan of operation . . . of . . . the closed block if a closed block is used for . . . policies that provide for the distribution of policy dividends." We are aware that, per Chapter 3 Section 4 (4) of the Indiana Demutualization Law, our opinion will be furnished to the Insurance Commissioner of the State of Indiana in fulfillment of this requirement and for her use in determining the fairness of the Plan, and to the Statutory Members of Anthem Insurance as part of the Member Information Statement that will be delivered to them, and we consent to the use of this opinion letter for those purposes. A-1
Reliance In forming the opinions set forth in this opinion letter, we have received from Anthem Insurance extensive information concerning the past and present practices and financial results of Anthem Insurance and its predecessors. We also received from Anthem Insurance relevant corporate documents and Membership information. We, and other Milliman staff acting under our direction, met with personnel of Anthem Insurance and defined the information we required. In all cases, we were provided with the information we requested to the extent that it was available or to the extent it was practicable to develop the information from the records of Anthem Insurance. We have made no independent verification of this information, although we have reviewed it where practicable for general reasonableness and internal consistency. We have relied on this information, which was provided under the general direction of Cynthia S. Miller, Vice President and Chief Actuary of Anthem Insurance. Our opinions depend on the substantial accuracy of this information. Process In all cases, we and other Milliman staff acting under our direction either derived the results on which our opinions rest or reviewed derivations carried out by Anthem Insurance employees. Opinion #1 Under the Plan, consideration (shares of Common Stock or their equivalent value in cash) is to be distributed to each Eligible Statutory Member in exchange for such Member's Membership Interest. In our opinion, the principles, assumptions, methodologies, and formulas used to allocate consideration among the Eligible Statutory Members of Anthem Insurance as set forth in Article VII of the Plan (including the Actuarial Contribution Memorandum, which is Exhibit F thereto) are reasonable and appropriate and consistent with the requirements of the Indiana Demutualization Law, and the resulting allocation of consideration is fair and equitable to the Eligible Statutory Members. Discussion Statutory requirements. Chapter 9 Section 1 of the Indiana Demutualization Law requires that "The method or formula for allocating consideration among the eligible members shall provide for each eligible member to receive (1) a fixed value, amount or proportion of consideration; (2) a variable value, amount or proportion of consideration; or (3) a combination of fixed and variable values, amounts, or proportions of consideration." Section 2 of Chapter 9 further requires that "Any method used or formula developed for the fair and equitable allocation of stock among eligible members under this article must utilize generally accepted actuarial principles." General description of the method of allocation of consideration among Eligible Statutory Members. In general, Statutory Members with coverage in force on both the Board Adoption Date and the Effective Date are eligible to receive consideration, which will consist of both a variable component and a fixed component of consideration. The amount of such consideration, whether actually distributed in the form of cash or shares of Common Stock, is expressed in terms of shares of Common Stock. (For a further discussion of this subject, see "The effect of different forms of consideration", below.) Prior mergers. Statutory Members of Anthem Insurance include Statutory Members whose initial eligibility arose from three companies--Southeastern Mutual Insurance Company, Community Mutual Insurance Company, and Blue Cross & Blue Shield of Connecticut, Inc.-- that were merged into Anthem Insurance in 1993, 1995 and 1997, respectively. The Articles of Incorporation of Anthem A-2
Insurance contain provisions arising from these three mergers, and these provisions in the Articles of Incorporation are important to our understanding of the Plan and our view of the fairness and equity of the allocation. The allocation of the Aggregate Variable Component and the Aggregate Fixed Component, discussed below, reflects these provisions. The Aggregate Variable Component and its allocation. The Aggregate Variable Component is the majority of the consideration to be distributed to Eligible Statutory Members (approximately 80% of the total). Its allocation among the Eligible Statutory Members is based on an "actuarial contribution method", which takes into account Actuarial Contributions of policies held by Eligible Statutory Members. The "actuarial contribution" method used with respect to Anthem Insurance takes into account, at each past merger point and at the Actuarial Contribution Date, both historical contributions to surplus and then- anticipated future contributions to surplus. The concept of an actuarial contribution method is recognized in the actuarial literature, most notably in Actuarial Standard of Practice number 37, "Allocation of Policyholder Consideration in Mutual Life Insurance Company Demutualizations" ("ASOP 37") as an appropriate allocation method. While ASOP 37 does not strictly apply to a nonlife insurer such as Anthem Insurance, there is no other Actuarial Standard of Practice regarding allocation of consideration in a demutualization that does apply. Further, much of the health insurance underwritten by Anthem Insurance could be underwritten by a life insurer, to which ASOP 37 would apply. In our view, the conformance of the Plan with ASOP 37 means that the distribution methodology proposed in the Plan is consistent with generally accepted actuarial principles. We therefore find that the use of the "actuarial contribution" method as the principal basis underlying the allocation of consideration is reasonable and appropriate. We further find that the actuarial contribution method has been implemented in a reasonable manner, consistent with the Articles of Incorporation, as well as with the past and present business practices of Anthem Insurance. We disclose, as a deviation from the guidance of ASOP 37, the fact that Actuarial Contributions of group insurance policies issued by Anthem Insurance and by the three previously-mentioned companies that were merged into Anthem Insurance were calculated by treating the experience of such policies on a pooled basis, notwithstanding that some of them have historically been rated on a policy-by-policy basis. This deviation is justified principally because of data limitations; with respect to most of the time period over which historical contributions to surplus were analyzed, Anthem Insurance does not have sufficiently complete or reliable data to support a policy-by-policy analysis of such contributions. The Aggregate Fixed Component and its allocation. The distribution also takes into account, through the Aggregate Fixed Component, the fact that Statutory Members have membership rights that are independent of their actuarial contributions. Each Eligible Statutory Member is, under the Plan, allocated a fixed number of shares of Common Stock without regard to the Actuarial Contribution of Policies of which that Statutory Member is the Holder. This element of the allocation assures that each Eligible Statutory Member will receive some distribution, and is consistent with overall concepts of equity. Under the Plan, the percentage of the total consideration that is allocated in this manner (approximately 20% of the total) is small relative to that allocated in proportion to positive actuarial contributions, which is appropriate. We find that including a fixed share in the allocation to each Eligible Statutory Member to reflect intangible membership rights is reasonable and appropriate. The effect of different forms of consideration and of conditions under which shares of Common Stock may be sold. a. Section 6.1 of the Plan provides that, subject to the limitations set forth therein, Eligible Statutory Members who do not affirmatively elect to receive their consideration in the form of shares of Common Stock may, at the option of Anthem Insurance and Anthem, Inc., receive consideration in cash. Section 6.3 of the Plan provides that, if the average of the closing prices ("average price") of the Common Stock for the twenty consecutive days commencing with the Effective Date exceeds 110% of the IPO Price, each recipient of cash will receive A-3
an amount equal to the number of shares of Common Stock determined as set forth above multiplied by a price per share equal to the sum of the IPO Price and either (A) the excess of the average price over 110% of the IPO Price or (B) 10% of the IPO Price, whichever is less; otherwise, each recipient of cash will receive an amount equal to the number of shares of Common Stock determined as set forth above multiplied by a price per share equal to the IPO price. b. Section 6.2 of the Plan provides that Common Stock distributed to an Eligible Statutory Member who receives 30,000 or more shares of such Common Stock (a "large holder") may be sold or otherwise transferred, during the 180 days following the Effective Date, only under "Large holder sale program procedures and restrictions" set forth in Exhibit E to the Plan. We find that for recipients of cash, the adjustment to the allocation of consideration described in (a) above is fair and equitable because it reasonably reflects the different risks assumed by recipients of cash in contrast to those of recipients of Common Stock. We find that for large holders, the conditions and restrictions referred to in (b) above are fair and equitable because in their absence, such holders might have the unfair advantage of being able to dispose of their Common Stock on favorable terms to the detriment of other holders of Common Stock, and that those conditions and restrictions are not likely to impose an economic disadvantage on them. Opinion #2 Pursuant to Article VIII of the Plan, no special provisions, such as a closed block, are being created to preserve the dividend expectations of policyholders and members. In our opinion, this is fair and reasonable. Discussion Our opinion is based on the following considerations: 1. Anthem Insurance has not paid policyholder dividends regularly enough to create any expectations; in fact, Anthem Insurance and its predecessors have paid no policyholder dividends for more than twenty-five years. In addition, almost all policies are silent as to dividends or even as to participating status vs. nonparticipating status. 2. Because there are no reasonable dividend expectations to preserve, no special provisions are needed in the Plan. 3. Anthem Insurance has no individual life insurance policies or annuity contracts in force, nor has it ever issued any such contracts. Thus, under the Indiana Demutualization Law, a closed block is not required. Sincerely yours, /s/ Robert H. Dobson Robert H. Dobson Consulting Actuary /s/ Dale S. Hagstrom Dale S. Hagstrom Consulting Actuary /s/ Daniel J. McCarthy Daniel J. McCarthy Consulting Actuary A-4
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ---------------- TABLE OF CONTENTS Page ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 8 Available Information.................................................... 19 Information Pertaining to Forward-Looking Statements..................... 19 The Plan of Conversion................................................... 21 Use of Proceeds.......................................................... 28 Dividend Policy.......................................................... 28 Capitalization........................................................... 29 Selected Consolidated Financial and Other Data........................... 30 Unaudited Pro Forma Consolidated Financial Information................... 33 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 37 Recent Developments...................................................... 79 The Business of Anthem................................................... 81 Investments.............................................................. 98 Financial Strength Ratings............................................... 101 Legal and Regulatory Matters............................................. 102 Management............................................................... 114 Description of Capital Stock............................................. 127 Common Stock Eligible for Future Sale.................................... 133 Ownership of Common Stock................................................ 135 Certain United States Tax Consequences to Non-U.S. Holders of Common Stock................................................................... 136 Underwriting............................................................. 139 Validity of Common Stock................................................. 141 Experts.................................................................. 141 Consolidated Financial Statements........................................ F-1 Actuarial Opinions....................................................... A-1 Through and including , 2001 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 28,600,000 Shares Anthem, Inc. Common Stock ---------------- [LOGO] ---------------- Goldman, Sachs & Co. Merrill Lynch & Co. Morgan Stanley JPMorgan Banc of America Securities LLC Credit Suisse First Boston Lehman Brothers Salomon Smith Barney UBS Warburg ABN AMRO Rothschild LLC Dresdner Kleinwort Wasserstein A.G. Edwards & Sons, Inc. McDonald Investments Inc. Utendahl Capital Partners, L.P. Representatives of the Underwriters - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All the amounts shown are estimates, except the Securities and Exchange Commission registration fee, the New York Stock Exchange listing fee and the NASD filing fee. Items that are not completed will be supplied by amendment. Securities and Exchange Commission registration fee................. $287,788 New York Stock Exchange listing fee................................. 483,600 NASD filing fee..................................................... 30,500 Blue sky fees and expenses.......................................... [ ] Accounting fees and expenses........................................ [ ] Legal fees and expenses............................................. [ ] Printing and engraving expenses..................................... [ ] Transfer Agent and Registrar fees and expenses...................... [ ] Miscellaneous expenses.............................................. [ ] -------- Total............................................................. [ ] ======== Item 14. Indemnification of Directors and Officers The Indiana Business Corporation Law provides that a corporation, unless limited by its articles of incorporation, is required to indemnify its directors and officers against reasonable expenses incurred in the successful defense of any proceeding arising out of their serving as a director or officer of the corporation. As permitted by the Indiana Business Corporation Law, the Registrant's Articles of Incorporation provide for indemnification of directors, officers, employees and agents of the Registrant against any and all liability and reasonable expense that may be incurred by them, arising out of any claim or action, civil, criminal, administrative or investigative, in which they may become involved by reason of being or having been a director, officer, employee or agent. To be entitled to indemnification, those persons must have been wholly successful in the claim or action or the board of directors must have determined, based upon a written finding of legal counsel or another independent referee, or a court of competent jurisdiction must have determined, that such persons acted in good faith in what they reasonably believed to be the best interest of the Registrant (or at least not opposed to its best interests) and, in addition, in any criminal action, had reasonable cause to believe their conduct was lawful (or had no reasonable cause to believe that their conduct was unlawful). The Articles of Incorporation authorize the Registrant to advance funds for expenses to an indemnified person, but only upon receipt of an undertaking that he or she will repay the same if it is ultimately determined that such party is not entitled to indemnification. The Articles of Incorporation of Anthem Insurance Companies, Inc. contain substantially identical provisions. The rights of indemnification provided by the articles of incorporation of the Registrant and Anthem Insurance Companies, Inc. are not exhaustive and are in addition to any rights to which a director or officer may otherwise be entitled by contract or as a matter of law. Irrespective of the provisions of the articles of incorporation of the Registrant and Anthem Insurance Companies, Inc., the Registrant may, at any time and from time to time, indemnify directors, officers, employees and other persons to the full extent permitted by the provisions of applicable law at the time in effect, whether on account of past or future transactions. II-1
The Registrant and Anthem Insurance Companies, Inc., have agreed to indemnify the Underwriters, and the Underwriters have agreed to indemnify the Registrant and Anthem Insurance Companies, Inc. against certain civil liabilities, including liabilities under the Securities Act. See the Form of Underwriting Agreement filed as Exhibit 1 hereto. In addition, the Registrant has obtained a directors' and officers' liability and company reimbursement policy that insures against certain liabilities under the Securities Act, subject to applicable retentions. Item 15. Recent Sales of Unregistered Securities The Registrant will distribute to certain eligible statutory members approximately 76,080,000 million shares of common stock in the demutualization. Exemption from registration under the Securities Act for such distribution will be available under Section 3(a)(10) of the Securities Act based on the Indiana Insurance Commissioner's approval of the plan of conversion. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits The list of exhibits is incorporated herein by reference to the Index to Exhibits on page E-1. (b) Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included in the consolidated financial statements, and therefore have been omitted. Item 17. Undertakings The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant II-2
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3
SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Indianapolis, State of Indiana, on the 15th day of August, 2001. Anthem, Inc. /s/ Larry C. Glasscock By: _________________________________ Larry C. Glasscock President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby authorizes each of Larry C. Glasscock, David R. Frick and Michael L. Smith, each with full power of substitution, to execute in the name and on behalf of such person any amendment or any post-effective amendment to this Registration Statement and any subsequent registration statement filed pursuant to Rule 462 under the Securities Act of 1933 and to file the same, with exhibits thereto, and other documents in connection therewith, making such changes in this Registration Statement and any such subsequent registration statement as the Registrant deems appropriate, and appoints each of Larry C. Glasscock, David R. Frick and Michael L. Smith, each with full power of substitution, attorney-in-fact to sign any amendment and any post-effective amendment to this Registration Statement and any such subsequent registration statement and to file same, with exhibits thereto, and other documents in connection therewith. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Capacity Date --------- -------- ---- /s/ Larry C. Glasscock President, Chief Executive August 15, 2001 ______________________________________ Officer and Director Larry C. Glasscock (Principal Executive Officer) /s/ Michael L. Smith Executive Vice President August 15, 2001 ______________________________________ and Chief Financial and Michael L. Smith Accounting Officer (Principal Financial Officer and Principal Accounting Officer) /s/ L. Ben Lytle Director August 15, 2001 ______________________________________ L. Ben Lytle /s/ Susan B. Bayh Director August 15, 2001 ______________________________________ Susan B. Bayh /s/ William B. Hart Director August 15, 2001 ______________________________________ William B. Hart S-1
Signature Capacity Date --------- -------- ---- /s/ Allan B. Hubbard Director August 15, 2001 ______________________________________ Allan B. Hubbard /s/ Victor S. Liss Director August 15, 2001 ______________________________________ Victor S. Liss /s/ William G. Mays Director August 15, 2001 ______________________________________ William G. Mays /s/ James W. McDowell, Jr. Director August 15, 2001 ______________________________________ James W. McDowell, Jr. /s/ B. LaRae Orullian Director August 15, 2001 ______________________________________ B. LaRae Orullian /s/ Donald W. Riegle, Jr. Director August 15, 2001 ______________________________________ Senator Donald W. Riegle, Jr. /s/ William J. Ryan Director August 15, 2001 ______________________________________ William J. Ryan /s/ George A. Schaefer, Jr. Director August 15, 2001 ______________________________________ George A. Schaefer, Jr. /s/ Dennis J. Sullivan, Jr. Director August 15, 2001 ______________________________________ Dennis J. Sullivan, Jr. S-2
INDEX TO EXHIBITS Exhibit Number Document ------- -------- 1* Form of Underwriting Agreement 2.1 Plan of Conversion 2.2 Alliance Agreement, dated as of May 30, 2001, between Blue Cross and Blue Shield of Kansas, Inc. and Anthem Insurance Companies, Inc. (exhibits thereto will be furnished supplementally to the Securities and Exchange Commission upon request) 3.1 Articles of Incorporation of the Registrant 3.2 By-Laws of the Registrant 4.1* Form of certificate for the common stock, $0.01 par value per share, of the Registrant 4.2 Upon the request of the Securities and Exchange Commission, the Registrant will furnish copies of all instruments defining the rights of holders of long-term debt of the Registrant 5 Opinion of Baker & Daniels 8 Opinion of Ernst & Young LLP with respect to certain tax matters 10.1 Anthem 2001 Stock Incentive Plan 10.2 Anthem Employee Stock Purchase Plan 10.3 Employment Agreement by and between Anthem Insurance Companies, Inc. and Larry C. Glasscock, dated as of October 22, 1999 10.4 Employment Agreement by and between Anthem Insurance Companies, Inc. and David R. Frick, dated as of January 1, 2000 10.5 Employment Agreement by and between Anthem Insurance Companies, Inc. and Samuel R. Nussbaum, M.D., dated as of January 2, 2001 10.6 Employment Agreement by and between Anthem Insurance Companies, Inc. and Michael L. Smith, dated as of January 1, 2000 10.7 (i) Employment Agreement by and between Anthem Insurance Companies, Inc. and Marjorie W. Dorr, dated as of January 1, 1999 (ii) Amendment One to Employment Agreement by and between Anthem Insurance Companies, Inc. and Marjorie W. Dorr, effective as of January 1, 2000 (iii) Amendment Two to Employment Agreement by and between Anthem Insurance Companies, Inc. and Marjorie W. Dorr, effective as of July 29, 2000 (iv) Amendment Three to Employment Agreement by and between Anthem Insurance Companies, Inc. and Marjorie W. Dorr, effective as of January 1, 2001 10.8 (i) Employment Agreement by and between Anthem Insurance Companies, Inc. and Keith R. Faller, dated as of January 1, 1999 (ii) Amendment One to Employment Agreement by and between Anthem Insurance Companies, Inc. and Keith R. Faller, effective as of January 1, 2000 (iii) Amendment Two to Employment Agreement by and between Anthem Insurance Companies, Inc. and Keith R. Faller, effective as of January 1, 2001 10.9 Employment Agreement by and between Anthem Insurance Companies, Inc. and Michael D. Houk, dated as of August 12, 2000 10.10 (i) Employment Agreement by and between Anthem Insurance Companies, Inc. and Caroline S. Matthews, dated as of April 1, 1999 (ii) Amendment One to Employment Agreement by and between Anthem Insurance Companies, Inc. and Caroline S. Matthews, effective as of January 1, 2000 (iii) Amendment Two to Employment Agreement by and between Anthem Insurance Companies, Inc. and Caroline S. Matthews, effective as of January 1, 2001 10.11 Employment Agreement by and between Anthem Insurance Companies, Inc. and John M. Murphy, dated as of September 6, 2000 10.12 (i) Employment Agreement by and between Anthem Insurance Companies, Inc. and Jane Niederberger, dated as of February 22, 1999 E-1
Exhibit Number Document ------- -------- (ii) Amendment One to Employment Agreement by and between Anthem Insurance Companies, Inc. and Jane Niederberger, effective as of January 1, 2000 10.13 Letter from Anthem Insurance Companies, Inc. to L. Ben Lytle regarding retirement benefits. 10.14 (i) Anthem Deferred Compensation Plan (ii) First Amendment to Anthem Deferred Compensation Plan (iii) Second Amendment to Anthem Deferred Compensation Plan 10.15 Anthem Board of Directors Deferred Compensation Plan 10.16* (i) Anthem Supplemental Executive Retirement Plan (ii) First Amendment to Anthem Supplemental Executive Retirement Plan (iii) Second Amendment to Anthem Supplemental Executive Retirement Plan 10.17 Anthem 1998 Long-Term Incentive Plan 10.18* Anthem 2001-2003 Long-Term Incentive Plan 10.19 Anthem Annual Incentive Plan 10.20 Anthem Directed Executive Compensation Plan 10.21 Anthem Split Dollar Life Insurance Program 10.22 Form of Blue Cross License Agreement 10.23 Form of Blue Shield License Agreement 21* Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 23.2 Consent of Baker & Daniels (contained in Exhibit 5) 23.3 Consent of Robert H. Dobson, FSA, MAAA, Dale S. Hagstrom, FSA, MAAA, Daniel J. McCarthy, FSA, MAAA, and Milliman USA, Inc. 24 Power of Attorney (included on signature page) - -------- * To be filed by amendment E-2
Exhibit 2.1 ANTHEM INSURANCE COMPANIES, INC. a mutual insurance company organized and existing under the Indiana Insurance Law PLAN OF CONVERSION TO A STOCK INSURANCE COMPANY under Ind. Code 27-15-2-2 Proposed by the Board of Directors of Anthem Insurance Companies, Inc. on June 18, 2001
TABLE OF CONTENTS Preliminary Statements.......................................................................................1 ARTICLE I - Manner of Conversion.............................................................................2 Section 1.1. Conversion to a Stock Insurance Company...............................................2 Section 1.2. Parent Company........................................................................2 Section 1.3. Effectiveness of the Plan.............................................................3 Section 1.4. Tax Considerations....................................................................3 Section 1.5. ERISA Plans; Tax-Qualified Policies...................................................4 Section 1.6. Public Sale of Common Stock...........................................................5 Section 1.7. Continuation of Corporate Existence...................................................6 ARTICLE II - Extinguishment of Membership Interests..........................................................6 ARTICLE III - Distribution of Consideration..................................................................7 ARTICLE IV - Determination of Fair Value of Anthem...........................................................7 ARTICLE V - Form and Amount of Consideration to be Distributed...............................................7 Section 5.1. Aggregate Amount or Value.............................................................7 Section 5.2. Common Stock..........................................................................7 ARTICLE VI - Payment of Consideration to Eligible Statutory Members..........................................8 Section 6.1. Method of Election....................................................................8 Section 6.2. Payment in Common Stock...............................................................9 Section 6.3. Payment in Cash.......................................................................9 Section 6.4. Commission-Free Odd Lot Program......................................................10 ARTICLE VII - Method or Formula for the Allocation of Consideration.........................................10 Section 7.1. Allocation of Allocable Shares.......................................................11 Section 7.2. Aggregate Fixed Component and Aggregate Variable Component...........................11 Section 7.3. Allocation of Aggregate Variable Component...........................................11 ARTICLE VIII - Closed Block.................................................................................12 ARTICLE IX - Address and Telephone Number of Anthem.........................................................12 ARTICLE X - Approval by the Commissioner....................................................................12 Section 10.1. Application.........................................................................12 Section 10.2. Commissioner's Public Hearing on the Plan; Commissioner's Order.....................13 Section 10.3. Notice of Public Hearing............................................................13 Section 10.4 Findings Required for Approval......................................................13 -i-
ARTICLE XI - Approval by Statutory Members..................................................................14 Section 11.1. Voting..............................................................................14 Section 11.2. Notice of Special Meeting...........................................................14 ARTICLE XII - Additional Provisions.........................................................................14 Section 12.1. Holders of Policies.................................................................14 Section 12.2. In Force............................................................................16 Section 12.3. Confidentiality.....................................................................16 Section 12.4. Acquisition of Ownership............................................................16 Section 12.5. Restriction on Stock to Directors and Executive Officers............................16 Section 12.6. Trust...............................................................................16 Section 12.7. Amendment or Withdrawal of Plan.....................................................17 Section 12.8. Corrections.........................................................................17 Section 12.9. Adjustment of Share Numbers.........................................................17 Section 12.10. Notices............................................................................18 Section 12.11. Costs and Expenses.................................................................18 Section 12.12. Captions and Headings..............................................................18 Section 12.13. Governing Law......................................................................18 Section 12.14. Judicial Review.....................................................................18 Section 12.15. Stock Incentive Plan................................................................18 ARTICLE XIII - Definitions..................................................................................19 Section 13.1. General Terms.......................................................................19 Section 13.2. Specific Terms......................................................................19 EXHIBIT A - Amended and Restated Articles of Incorporation of Anthem Insurance Companies, Inc. EXHIBIT B - Amended and Restated By-Laws of Anthem Insurance Companies, Inc. EXHIBIT C - Articles of Incorporation of Anthem, Inc. EXHIBIT D - By-Laws of Anthem, Inc. EXHIBIT E - Large Holder Sale Program Procedures and Restrictions EXHIBIT F - Actuarial Contribution Memorandum -ii-
ANTHEM INSURANCE COMPANIES, INC. PLAN OF CONVERSION TO A STOCK INSURANCE COMPANY This Plan of Conversion to a Stock Insurance Company (this "Plan") has been proposed by the Board of Directors (the "Board") of Anthem Insurance Companies, Inc., a mutual insurance company organized and existing under the laws of the State of Indiana ("Anthem Insurance"), by resolutions of the Board duly adopted at a meeting duly called and held on June 18, 2001 (the "Adoption Date"). Capitalized terms have the meanings set forth in Article XIII. Preliminary Statements ---------------------- A. This Plan provides for the conversion of Anthem Insurance from a mutual insurance company into a stock insurance company pursuant to Ind. Code 27-15-2-2, and otherwise in accordance with Ind. Code 27-15 (the "Indiana Demutualization Law"), and the concurrent establishment of an Indiana domiciled parent company for Anthem Insurance through the transactions described herein (the "Conversion"). B. The principal purpose of the Conversion is to improve Anthem Insurance's access to capital through the public markets. Having access to the public markets through Anthem, Inc. (described in Section 1.2(a)) will enhance Anthem Insurance's financial flexibility by allowing it to obtain equity capital from sources that are available to a stock company, but not to a mutual insurance company. In addition, the Conversion will benefit Anthem Insurance's Eligible Statutory Members by distributing the fair value of Anthem Insurance at the time of the Conversion (before giving effect to new capital raised in the initial public offering) to its Eligible Statutory Members in the form of cash or Anthem, Inc. common stock in exchange for their otherwise illiquid Membership Interests, which will thereupon be extinguished. Thus, Eligible Statutory Members will have the ability to realize economic value from the conversion of their Membership Interests that is not available to them so long as Anthem Insurance remains a mutual company. C. The Conversion will also provide, upon receipt of requisite regulatory approvals, for Anthem Insurance to cease issuing or renewing the Guaranty Policies issued by Anthem Insurance in connection with its merger in 1993 with Southeastern Mutual Insurance Company, a mutual insurance company domiciled in Kentucky, its merger in 1995 with Community Mutual Insurance Company, a mutual insurance company domiciled in Ohio, and its merger in 1997 with Blue Cross & Blue Shield of Connecticut, Inc., a mutual insurance company domiciled in Connecticut. Those Guaranty Policies have been issued to protect and preserve the membership interests of the members of the merged mutual companies and to grant Membership Interests to certain customers of the successor insurers to those merged mutual companies, and continued issuance of Guaranty Policies will no longer be needed or appropriate upon completion of the Conversion. Pursuant to Sections 7.2, 7.3, 7.4, 7.5 and 7.6 of Anthem Insurance's Third Amended and Restated Articles of Incorporation, former members of
Southeastern Mutual Insurance Company, Community Mutual Insurance Company and Blue Cross & Blue Shield of Connecticut, Inc., as well as customers of the successor insurers to those merged mutual companies, who were entitled to receive Guaranty Policies or Certificates of Membership, as applicable, in connection with the mergers are considered to have been issued their insurance policies directly by Anthem Insurance for the purpose of this Plan. Through the Conversion, Anthem Insurance will complete its obligations arising out of those mergers with respect to the Membership Interests of the members of those merged companies and certain customers of the successors to those companies following such mergers. D. The Conversion will not, in any way, change policy premiums or health care benefits to Statutory Members or policyholders. E. The Board believes that the Conversion will provide Anthem Insurance with greater financial flexibility. The Board believes that this financial flexibility will improve Anthem Insurance's access to capital to permit Anthem Insurance to expand existing business, develop new business opportunities and enhance its competitive position in the health benefits industry, and continue to improve service to customers. The Board, therefore, has unanimously determined that the Plan is in the best interests of Anthem Insurance, the Eligible Statutory Members and other Statutory Members and policyholders of Anthem Insurance, and is fair, reasonable and equitable to the Eligible Statutory Members and will not prejudice the interests of the other Statutory Members and policyholders of Anthem Insurance. ARTICLE I Manner of Conversion -------------------- The manner in which the Conversion will occur, and the insurance and other companies that will result from or be directly affected by the Conversion, are as follows: Section 1.1. Conversion to a Stock Insurance Company. In accordance ----------- --------------------------------------- with the Indiana Demutualization Law, Anthem Insurance will as of and following the Effective Date of the Conversion become a stock insurance company, organized and existing under the Indiana Insurance Law (Ind. Code 27-1 et. seq.). The Articles of Incorporation and By-Laws of Anthem Insurance, as amended upon the Effective Date of the Conversion, will be substantially in the forms attached as Exhibit A and Exhibit B, respectively. The Conversion is intended to qualify as a tax-free reorganization described in Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). Section 1.2. Parent Company. (a) All of the outstanding capital ----------- -------------- stock of Anthem Insurance will, on and immediately following the Effective Date of the Conversion, be held by Anthem, Inc., a corporation to be formed under the Indiana Business Corporation Law. Anthem, Inc. will constitute a "parent company," meeting the requirements of Ind. Code 27-15-16-1. The Articles of Incorporation and By-Laws of Anthem, Inc. will be substantially in the forms attached as Exhibit C and Exhibit D, respectively. -2-
(b) Anthem, Inc. will initially be formed as a wholly owned subsidiary of Anthem Insurance. On the Effective Date of the Conversion and immediately prior to the cancellation of the capital stock of Anthem, Inc. then held by Anthem Insurance, as contemplated by Section 1.2(c)(iii) below, the Eligible Statutory Members will be entitled to receive the consideration described in Article V of this Plan. (c) The Conversion will be effected through the following structure or series of transactions in the following order: (i) Anthem Insurance will convert to and become a stock company and issue to Anthem, Inc. all of the outstanding capital stock of Anthem Insurance. (ii) Anthem, Inc. will distribute to the Eligible Statutory Members the consideration described in Article V of this Plan. (iii) The capital stock of Anthem, Inc. owned by Anthem Insurance will be cancelled and cease to exist. (iv) The foregoing transactions are intended to qualify as tax-free transactions within the meaning of Sections 351 and 368 of the Code. Section 1.3. Effectiveness of the Plan. The Plan and the amendment ----------- ------------------------- and restatement of Anthem Insurance's Articles of Incorporation contemplated by Section 1.1 (the "Articles Amendment") will become effective upon the date and time of approval of appropriate Articles of Amendment by the Indiana Secretary of State as provided in Ind. Code 27-1-8 unless a later date and time are specified in the Articles Amendment, in which event the Plan and the Articles Amendment will become effective and take place at the later date and time. The Effective Date shall be no more than 12 months after the date on which the Commissioner issues the order contemplated by Section 10.2, unless such period is extended by the Commissioner. Section 1.4. Tax Considerations. Anthem Insurance will not cause or ----------- ------------------ allow the Plan to become effective unless, on or prior to the Effective Date, and in any event reaffirmed as of the Effective Date, Anthem Insurance has received written Tax Opinions (and a ruling from the Internal Revenue Service, if deemed appropriate by Anthem Insurance), which collectively provide assurance substantially to the effect that, for federal income tax purposes: (i) Neither Anthem Insurance nor Anthem, Inc. will recognize gain or loss as a result of the Conversion. (ii) Each Eligible Statutory Member receiving solely Common Stock pursuant to Article VI will not recognize gain or loss as a result of the Conversion. (iii) Each Eligible Statutory Member receiving cash pursuant to Article VI will recognize taxable income in the year in which the cash is -3-
received. The amount of such cash will generally constitute long term capital gain, provided that, on the date of the Conversion, the Policy held by such Eligible Statutory Member constitutes a capital asset and such Eligible Statutory Member's holding period of the Policy in respect of which the payment is made is more than 12 months, and subject to the limitations of Section 302 of the Code, if applicable. (iv) The basis of the shares of Common Stock to be received by each Eligible Statutory Member pursuant to Article VI will be zero. (v) Provided that the applicable Policy or Policies held by an Eligible Statutory Member constitute a capital asset on the date of the Conversion, the holding period of the shares of Common Stock to be received by such Eligible Statutory Member pursuant to Article VI will include the period during which the Eligible Statutory Member held (A) such Policy, and (B) all Policies of which the Eligible Statutory Member has been a Holder from time to time through the Effective Date and under which the Eligible Statutory Member has had continuous health care benefits coverage with the same company (or such predecessor company from which its business was assumed in a merger described in Preliminary Statement C) without a break in coverage of more than one day. (vi) The summary of the principal income tax consequences to Eligible Statutory Members of their receipt of consideration set forth in the information provided to Statutory Members, to the extent it describes matters of law or legal conclusions, is, subject to the limitations and assumptions set forth therein, an accurate summary of the material federal income tax consequences to Eligible Statutory Members of the consummation of the Conversion under the federal income tax law and remains accurate under the applicable federal income tax law and other relevant authorities in effect as of the Effective Date, except for any developments between the date of the information provided to Statutory Members and the Effective Date that Anthem Insurance has determined are not materially adverse to the interests of Eligible Statutory Members. Section 1.5. ERISA Plans; Tax-Qualified Policies. (a) Anthem ----------- ----------------------------------- Insurance has applied to the Department of Labor for an exemption from Section 406(a) of the Employee Retirement Income Security Act of 1974 ("ERISA") and Section 4975 of the Code with respect to the receipt of consideration pursuant to the Plan in respect of employee benefit plans subject to the provisions of such sections (the "DOL Exemption"). Notwithstanding any other provision of this Plan, if such exemption is not granted prior to the Effective Date of the Plan, Anthem Insurance may delay payment of such consideration, if necessary, for a period not to -4-
exceed six months following the Effective Date, by depositing such consideration in the form of cash or stock in a trust established in accordance with Section 12.6. Anthem Insurance will not cause or allow the Conversion to become effective unless, on or prior to the Effective Date, (i) the Department of Labor has granted such exemption, (ii) Anthem Insurance has, upon advice of counsel, otherwise determined and reported to the Commissioner that the distribution of consideration will not have an adverse effect on Eligible Statutory Members or on Anthem Insurance, or that the distribution of consideration will not constitute a prohibited transaction under ERISA or the Code, or (iii) a trust, as described in the preceding sentence, has been established in accordance with Section 12.6. (b) Neither Anthem Insurance nor Anthem, Inc. nor any of their subsidiaries nor any of their or their subsidiaries' employees, officers or directors are or will be Eligible Statutory Members under any benefit or welfare plan established or maintained by Anthem Insurance, Anthem, Inc. or any of their subsidiaries for the benefit of such employees, officers or directors. (c) There are no Policies issued by Anthem Insurance that are part of tax-qualified retirement funding arrangements or individual retirement annuities described in Sections 401(a), 403(a), 403(b), 408 or 408A of the Code. Section 1.6. Public Sale of Common Stock. (a) As contemplated by Ind. ----------- --------------------------- Code 27-15-3-2(12)(E), on the Effective Date, Anthem, Inc. will offer and sell to the public shares of Common Stock (the "Public Offering") to raise capital for Anthem, Inc. and to provide cash for the cash payments to be made by Anthem, Inc. under Article VI. (b) Anthem Insurance and Anthem, Inc. will select as managing underwriters for the Public Offering investment banking firms of substantial national and/or regional reputation. The managing underwriters will conduct the Public Offering in a manner generally consistent with customary practices for initial public offerings of a type, size and nature comparable to the Public Offering. The Commissioner and the Commissioner's financial advisor will be given access to the process and information that leads to the pricing of the Common Stock in the Public Offering, it being understood that at the conclusion of the process a committee of the Board of Directors of Anthem, Inc. will make the final pricing determination in executive session. Such committee will consist of directors, the majority of whom are not officers or employees of Anthem Insurance or Anthem, Inc. or any of their subsidiaries, and no employees, officers or directors of, or legal counsel to, any of the underwriters for the Public Offering will serve on such committee. The Conversion will be subject to the Commissioner's (or her designee's) concurrence that the terms of the Public Offering are fair, reasonable and equitable to the Eligible Statutory Members. (c) In addition to the Public Offering, Anthem, Inc. may also raise capital or obtain funds substantially concurrently with the Public Offering through one or more of the following ("Other Capital Raising Transactions"): (i) A public offering or private placement of mandatorily convertible securities or trust preferred securities or similar instruments; -5-
(ii) A public offering or private placement of convertible or non-convertible preferred securities or similar instruments; and (iii) A public offering or private placement of debt securities, commercial paper issuances or bank or other borrowings. (d) The material terms of the securities to be offered in any proposed Other Capital Raising Transactions to be conducted substantially concurrently with the Public Offering will be provided to the Commissioner for the Commissioner's review not less than 30 days prior to the earlier of the distribution of any preliminary prospectus or preliminary offering memorandum, or commencement of the roadshow, or similar activity relating to any Other Capital Raising Transaction. The Conversion will be subject to the Commissioner's concurrence that the terms of any Other Capital Raising Transactions are fair, reasonable and equitable to the Eligible Statutory Members. (e) Anthem, Inc. will contribute to Anthem Insurance from the proceeds of the Public Offering and any Other Capital Raising Transactions an amount not less than the aggregate amount of the out-of-pocket costs and expenses incurred by Anthem Insurance in connection with the Conversion and related transactions. Any additional proceeds from the Public Offering and any Other Capital Raising Transactions will be used at the discretion of Anthem, Inc. for working capital and other general corporate purposes of Anthem, Inc. (f) Upon the completion of the Public Offering and any Other Capital Raising Transactions, Anthem Insurance's paid-in capital stock and surplus will be equal to an amount not less than the minimum paid-in capital stock and surplus required of a new domestic stock insurer upon initial authorization to transact like kinds of insurance. (g) The Indiana Department of Insurance and its financial advisors may, at their request, monitor the conduct of the Public Offering and any Other Capital Raising Transactions for compliance with the conditions set forth in this Section 1.6. Section 1.7. Continuation of Corporate Existence. Upon Anthem ----------- ----------------------------------- Insurance's conversion from a mutual insurance company into a stock insurance company pursuant to this Plan, Anthem Insurance shall continue as a stock insurance company as provided in Ind. Code 27-15-6-4. ARTICLE II Extinguishment of Membership Interests -------------------------------------- All Membership Interests will be extinguished and will cease as of the Effective Date of the Conversion. The extinguishing of Membership Interests will occur by operation of law under the Indiana Demutualization Law on the Effective Date. The contract rights under every Policy will continue in force under the terms of the contract. Anthem Insurance will cease issuing or renewing Guaranty Policies as of the Effective Date, or as of such later date as all regulatory approvals required therefor have been -6-
obtained. If all such requisite regulatory approvals have not been obtained by the Effective Date, Anthem Insurance will continue to issue and renew Guaranty Policies in those states where such regulatory approvals have not yet been obtained, to the customers of its subsidiaries in those states specified in the respective merger agreements relating to the mergers described in Preliminary Statement C of this Plan; and the terms of such Guaranty Policies will be as required by such merger agreements except that provisions relating to Membership Interests will be inapplicable and will be omitted. At the same time that Anthem Insurance ceases to issue or renew Guaranty Policies with respect to a subsidiary as provided above, Anthem Insurance will issue a corporate guaranty to that subsidiary, the form of which guaranty will be subject to prior approval or non-disapproval by the Commissioner pursuant to Ind. Code 27-1-23-4. ARTICLE III Distribution of Consideration ----------------------------- The Eligible Statutory Members will, upon the extinguishing of their Membership Interests, become entitled to receive aggregate consideration equal to the fair value of Anthem Insurance at the time of the Conversion as provided in Article V of this Plan. ARTICLE IV Determination of the Fair Value of Anthem Insurance --------------------------------------------------- Anthem Insurance has, with the assistance of its Financial Advisor and other advisors retained in connection with the Conversion and Public Offering, structured the Conversion and proposed Public Offering to provide fair value to the Eligible Statutory Members, and this Plan provides for Eligible Statutory Members to receive aggregate consideration equal to the fair value of Anthem Insurance at the time of the Conversion. In that regard, the Board has received written fairness opinions from the Financial Advisor, a qualified, independent financial advisor, confirming, subject to the limitations and qualifications in such opinions (which opinions will be reaffirmed to the Board as of the Effective Date), that: (i) the provision of aggregate consideration upon the extinguishing of Membership Interests under this Plan and the Articles Amendment is fair to the Eligible Statutory Members, as a group, from a financial point of view, and (ii) the total consideration to be paid to the Eligible Statutory Members under this Plan is equal to or greater than the statutory surplus of Anthem Insurance. ARTICLE V Form and Amount of Consideration to be Distributed -------------------------------------------------- Section 5.1. Aggregate Amount or Value. The aggregate consideration ----------- ------------------------- to be distributed to the Eligible Statutory Members in exchange for their Membership Interests will be shares of Common Stock or cash, as provided in Article VI, equal in value to one hundred million (100,000,000) shares of Common Stock (the "Allocable Shares"). Solely for purposes of calculating the amount of such consideration, each Eligible Statutory Member will be allocated (but not necessarily issued) shares of Common Stock in accordance with this Plan. The cash -7-
component of such aggregate consideration will be at least the amount of cash required to pay the distributions to Eligible Statutory Members of consideration as provided in Section 6.1(c). The cash component may be greater than such minimum amount pursuant to Section 6.1(d). Section 5.2. Common Stock. The Common Stock will be a class of ----------- ------------ securities that is registered under the Securities Exchange Act of 1934, as amended, and that is listed for trading on a nationally recognized stock exchange or on the Nasdaq National Market. Anthem, Inc. will use its best efforts to maintain such a listing for so long as Anthem, Inc. is a publicly traded company. The listing, and the efforts by Anthem, Inc. to maintain this listing, will satisfy any duty Anthem Insurance or Anthem, Inc. may have to assure that an active public trading market for the trading of Common Stock will develop. Neither Anthem Insurance nor Anthem, Inc. will have any obligation to provide a procedure for the disposition of shares of Common Stock, except as expressly stated in this Plan. ARTICLE VI Payment of Consideration to Eligible Statutory Members ------------------------------------------------------ Section 6.1. Method of Election. Every Eligible Statutory Member ----------- ------------------ will be entitled to shares of Common Stock or cash in accordance with the following provisions: (a) Eligible Statutory Members who affirmatively request Common Stock in accordance with this Section 6.1(a) will be paid in shares of Common Stock, subject to the limitations set forth in Section 6.1(c). Eligible Statutory Members may elect to be paid in shares of Common Stock by properly completing the card included with the materials accompanying the notice of the Special Meeting and returning the card to Anthem Insurance. Anthem Insurance must receive the card on or prior to the date set by Anthem Insurance, which date shall be no earlier than the date set for the receipt of proxies to be used at the Special Meeting. (b) Eligible Statutory Members who fail to make a Common Stock election in accordance with Section 6.1(a), may be paid in cash, subject to the limitations set forth in Section 6.1(d). (c) Notwithstanding the foregoing provisions of Section 6.1(a), any Eligible Statutory Member (i) whose receipt of Common Stock would, in the judgment of Anthem, Inc., upon advice from counsel, fail to comply with the securities registration or other requirements of the applicable securities laws of the state of domicile of such Eligible Statutory Member (which state of domicile shall be determined based on such Eligible Statutory Member's mailing address as shown on the records of Anthem Insurance) or to whom the requirements necessary to qualify Common Stock for issuance in the state of domicile of such Eligible Statutory Member are excessively burdensome or expensive or are likely to be subject to unreasonable delays or (ii) whose address for mailing purposes as shown on the records of Anthem Insurance is located outside the United States, will receive cash. (d) At the discretion of Anthem Insurance and Anthem, Inc., and subject to receipt of sufficient proceeds from the Public Offering or availability of funds from other sources (including, without limitation, Other Capital Raising Transactions), cash may be paid to Eligible -8-
Statutory Members who fail to make a Common Stock election as provided in Section 6.1(a). The maximum amount of "available cash" that may be paid pursuant to this Section 6.1(d) shall be determined by Anthem Insurance and Anthem, Inc. based upon such companies' liquidity and capital resources positions, and such tax and other factors as are deemed appropriate in the judgment of such companies (it being understood that Anthem, Inc. and Anthem Insurance intend and will use their best commercially reasonable efforts, consistent with their capital and liquidity needs and projections, to assure that funds sufficient to pay cash to a substantial number of Eligible Statutory Members will be utilized for cash payments under this Section 6.1(d)). Cash paid to Eligible Statutory Members under this Section 6.1(d) will be based on the number of shares allocated to such Eligible Statutory Members in increasing order until the total amount of available cash has been fully distributed, with those Eligible Statutory Members with the fewest number of Allocable Shares being paid in cash first. Furthermore, if there are two or more such Eligible Statutory Members under this Section 6.1(d) who have the same number of Allocable Shares and there is insufficient available cash to pay all such Eligible Statutory Members, then the remaining available cash shall be distributed first to those of such Eligible Statutory Members with the earliest date of coverage. After application of the foregoing procedures, all other Eligible Statutory Members (that is, Eligible Statutory Members other than those receiving cash pursuant to Section 6.1(c) or those already receiving Common Stock pursuant to Section 6.1(a)), will be paid consideration in the form of shares of Common Stock. All calculations required to be made pursuant to this Section 6.1(d) will be based on consultation with and the advice of the tax advisor that provided the Tax Opinion required under Section 1.4 of this Plan. Section 6.2. Payment in Common Stock. (a) Anthem Insurance and ----------- ----------------------- Anthem, Inc. will (i) issue to each Eligible Statutory Member, in book-entry form as uncertificated shares, the shares of Common Stock allocated to such Eligible Statutory Member for which such Eligible Statutory Member will not receive consideration in the form of cash, and (ii) use commercially reasonable efforts to mail to each such Eligible Statutory Member an appropriate notice that a designated number of shares of Common Stock have been registered in the name of such Eligible Statutory Member not later than six weeks or such longer period as approved by the Commissioner (but not later than six months, except as provided under Section 12.6) after the Effective Date. Upon written request of the registered holder of such shares issued in book-entry form as uncertificated shares, Anthem, Inc. will mail a stock certificate representing such shares to or at the direction of the registered holder. (b) Common Stock distributed to any Eligible Statutory Member who is allocated and receives thirty thousand (30,000) or more shares of Common Stock may not be sold, transferred, pledged, hypothecated or otherwise transferred or assigned by such Eligible Statutory Member until one hundred eighty (180) days after the Effective Date, except for: (i) sales in accordance with the large holder sale program procedures and restrictions set forth in Exhibit E to this Plan, (ii) any transfer that occurs by operation of law, or (iii) any transfer as to which Anthem, Inc. consents or agrees in writing at the written request of the holder thereof. With the consent of the Commissioner, upon a showing of good cause by Anthem, Inc., the detailed terms and provisions of the large holder sale program procedures and restrictions set forth in Exhibit E may be corrected, modified or revised. Section 6.3. Payment in Cash. (a) If consideration is to be paid to ----------- --------------- an Eligible -9-
Statutory Member in the form of cash under Section 6.1(c) or 6.1(d), the amount of such consideration will be equal to the number of shares of Common Stock allocated to the Eligible Statutory Member as determined in accordance with Article VII, multiplied by (i) the price at which Common Stock is offered to the public in the Public Offering (the "IPO Price") or (ii), if the average of the closing prices of the Common Stock (on the primary exchange where the Common Stock is listed) for the twenty (20) consecutive trading days commencing with the Effective Date exceeds 110% of the IPO Price, by the sum of the IPO Price plus the lesser of (A) the amount by which such average closing price exceeds 110% of the IPO Price or (B) 10% of the IPO Price. (b) If consideration is to be paid to an Eligible Statutory Member in cash under Section 6.1, Anthem, Inc. will use commercially reasonable efforts to make payment of such consideration not later than six weeks or such longer period as approved by the Commissioner (but not later than six months, except as provided under Section 12.6) after the Effective Date of this Plan, by check net of any applicable withholding tax. Section 6.4. Commission-Free Odd Lot Program. (a) In order to ----------- ------------------------------- benefit those Eligible Statutory Members who receive fewer than 100 shares of Common Stock, Anthem, Inc. will, subject to the provisions of Section 6.4(b), establish a commission-free program which will begin at such time after the 180th day following the Effective Date and before the 12 month anniversary of the Effective Date, and will continue for three months or for such longer period of time as the Board of Directors of Anthem, Inc. may determine to be appropriate and in the best interest of Anthem, Inc. and its shareholders. Pursuant to such program, each Eligible Statutory Member who receives under this Plan of Conversion and continues to hold 99 or fewer shares of Common Stock will be entitled to sell at prevailing market prices all, but not less than all, of the shares of Common Stock received by such shareholder, without paying brokerage commissions or administrative or similar expenses. As a part of such program, each Eligible Statutory Member who receives under this Plan of Conversion and continues to hold 99 or fewer shares of Common Stock will also be entitled to purchase at prevailing market prices additional shares to round-up their holdings to 100 shares, without paying brokerage commissions or other administrative or similar expenses. Anthem, Inc. will establish administrative procedures for the delivery of requests to sell or purchase shares of Common Stock and for the sale or purchase of such shares of Common Stock through such program. Such administrative procedures may include procedures under which shares of Common Stock are offered to Anthem, Inc. for repurchase at prevailing market prices when, during any particular day of the program, the number of shares requested to be sold exceeds the number of shares requested to be purchased pursuant to round-up requests. (b) Such program will be conducted pursuant to an exemption from the registration requirements of the Securities Act of 1933 and will otherwise comply with all applicable securities and other laws. With the consent of the Commissioner, upon a showing of good cause by Anthem, Inc., the terms, procedures and provisions (including time periods), of such program may be extended, modified, revised or limited, or such program may be delayed or suspended. -10-
ARTICLE VII Method or Formula for the Allocation of Consideration ----------------------------------------------------- The Board has received a written actuarial opinion from Robert H. Dobson, Dale S. Hagstrom, and Daniel J. McCarthy, consulting actuaries associated with Milliman USA, as to the reasonableness and appropriateness of the methodology or formula used to allocate consideration among Eligible Statutory Members, consistent with the Indiana Demutualization Law. The method or formula for the allocation of the consideration among the Eligible Statutory Members will be as follows: Section 7.1. Allocation of Allocable Shares. Each Eligible Statutory ----------- ------------------------------ Member will be allocated from the Allocable Shares a number of shares of Common Stock equal to the sum of: (a) a fixed component of consideration equal to twenty-one (21) shares of Common Stock (regardless of the size, type or number of Policies held by such Eligible Statutory Member); and (b) a variable component of consideration equal to the portion, if any, of the Aggregate Variable Component allocated with respect to such Eligible Statutory Member. Section 7.2. Aggregate Fixed Component and Aggregate Variable ----------- ------------------------------------------------ Component. The Allocable Shares will be allocated first to provide for the - --------- number of shares of Common Stock required for the aggregate fixed component of consideration allocable pursuant to Section 7.1(a) in respect of all Eligible Statutory Members (the "Aggregate Fixed Component"), and the remainder of the Allocable Shares will constitute the aggregate variable component of consideration (the "Aggregate Variable Component"). Section 7.3. Allocation of Aggregate Variable Component. (a) The ----------- ------------------------------------------ Aggregate Variable Component will be allocated in accordance with the principles set forth below and the calculation of Actuarial Contribution described in the Actuarial Contribution Memorandum (the "Actuarial Contribution Memorandum") attached as Exhibit F. (b) The Aggregate Variable Component will be allocated to Eligible Statutory Members as follows: (i) Such allocation will be made by multiplying an Equity Share (defined below) for each Eligible Statutory Member by the number of shares of Common Stock constituting the Aggregate Variable Component and, for each Eligible Statutory Member, rounding such result to the nearest whole number of shares (with one-half being rounded upward). Because of such rounding, the aggregate of Eligible Statutory Members' variable components will not necessarily be equal to the Aggregate Variable Component. -11-
(ii) The Equity Share for each Eligible Statutory Member will be equal to the ratio of the Actuarial Contribution attributable to such Eligible Statutory Member to the sum of all Actuarial Contributions attributable to all Eligible Statutory Members. (iii) Anthem Insurance will make a reasonable determination of the dollar amount of the Actuarial Contribution for each Eligible Statutory Member, which will be zero or a positive number (negative Actuarial Contributions will be deemed and treated as zero Actuarial Contributions), according to the principles and methodologies set forth in detail in the Actuarial Contribution Memorandum. (iv) Calculation of Actuarial Contributions will take into account and include the rights and interests of Eligible Statutory Members holding Policies, including Guaranty Policies (or certificates of coverage thereunder, as applicable), to the full extent called for by Section 8.5 of Anthem Insurance's Articles of Incorporation as in effect prior to the Effective Date. (v) Each such Actuarial Contribution will be determined on the basis of Anthem Insurance's records as of the Actuarial Contribution Date. ARTICLE VIII Closed Block ------------ Anthem Insurance has no Policies or other insurance policies or health care benefit contracts or certificates that require the payment of dividends or as to which any person has any reasonable expectation for the payment of dividends. Accordingly, no closed block nor any other method or procedure will be established to provide for the determination and preservation of reasonable dividend expectations of Eligible Statutory Members or other policyholders. ARTICLE IX Address and Telephone Number of Anthem -------------------------------------- The address and telephone number of Anthem Insurance will be unchanged by the Conversion, and each Statutory Member and other policyholder of Anthem Insurance will receive notification of such information along with a notice of hearing outlined in Section 10.3 of this Plan and in Ind. Code 27-15-4-4. ARTICLE X Approval by the Commissioner ---------------------------- -12-
Section 10.1 Application. Anthem Insurance will file with the ------------ ----------- Commissioner an application (the "Application") for approval of this Plan, including the Articles Amendment. The Application will include the documents and information required by Ind. Code 27-15-3-2. Section 10.2. Commissioner's Public Hearing on the Plan; ------------ ------------------------------------------ Commissioner's Order. This Plan is subject to the approval of the Commissioner. - -------------------- The Commissioner will hold a hearing on the Plan and the Articles Amendment (the "Public Hearing"). Statutory Members and other persons wishing to make comments and submit information may submit written statements before or at the Public Hearing and may also appear and be heard at the Public Hearing. The Commissioner will issue within thirty (30) days after the last day of the Public Hearing an order approving or disapproving the Application, the Plan and the Articles Amendment pursuant to Ind. Code 27-15-4-7. Section 10.3. Notice of Public Hearing. (a) Written notice by Anthem ------------ ------------------------ Insurance of the Public Hearing, in a form satisfactory to the Commissioner, will be mailed by first class mail by Anthem Insurance at Anthem Insurance's expense at least thirty (30) days prior to the Public Hearing to Anthem Insurance's Statutory Members and other policyholders. Such notice will be mailed to the address of each Statutory Member or other policyholder of Anthem Insurance as such address is shown on Anthem Insurance's records on the Adoption Date (or such other address as may be provided in writing to Anthem Insurance by the Voting Member a reasonable period of time prior to the mailing of the notice). Such notice of Public Hearing will include a brief statement of the subject of the hearing, the date, time and location of the Public Hearing, a description of the Statutory Members eligible to vote on the Plan and the Articles Amendment, a statement that the Statutory Members and the public may examine at the Indiana Department of Insurance the public record portion of the Application submitted to the Commissioner, the address and telephone number of Anthem Insurance, and such additional information as the Commissioner may require. (b) Anthem Insurance will also give prior notice of such Public Hearing by publication in The Indianapolis Star and USA Today (National Edition) (or, with the approval of the Commissioner, any other newspaper of national circulation) and in a newspaper of any other city specified by the Commissioner. The notice will be published at least two times at intervals of not less than two weeks, the first publication to be not more than forty-five days and the last publication not less than fifteen days before the Public Hearing. The notice of the Public Hearing will be in a form satisfactory to the Commissioner and state the purpose of the Public Hearing and the date, time, and place where the Public Hearing will occur. Section 10.4. Findings Required for Approval. The Commissioner shall ------------ ------------------------------ approve the Application and permit the Conversion under this Plan and the Articles Amendment if the Commissioner finds, following the Public Hearing: (a) that the amount and form of consideration is fair in the aggregate and to each member class; (b) that this Plan and the Articles Amendment comply with the Indiana Demutualization Law and other applicable laws; are fair, reasonable and equitable to the Eligible Statutory Members; and will not prejudice the interests of the other Statutory Members and policyholders of Anthem Insurance; and (c) that the total consideration provided to Eligible Statutory Members upon the extinguishing of Anthem Insurance's Membership Interests is equal to or greater than the surplus of Anthem Insurance. -13-
ARTICLE XI Approval by Statutory Members ----------------------------- Section 11.1. Voting. (a) Anthem Insurance will hold a special ------------ ------ meeting of Statutory Members (the "Special Meeting") within a time period complying with Ind. Code 27-15-5-2. At the Special Meeting, the Statutory Members eligible to vote will be entitled to vote on the proposal to approve the Plan and the Articles Amendment in person or by proxy. The Statutory Members eligible to vote at the Special Meeting will be the Statutory Members of Anthem Insurance as of the Adoption Date ("Voting Members"), which will be the record date for the Special Meeting. A Voting Member may vote by proxy if the proxy was solicited and obtained from the Voting Member for the express purpose of voting on the Plan and the Articles Amendment, and if the proxy solicitation materials were provided to and approved by the Commissioner before they were mailed or provided to the Voting Member. (b) The Plan and the Articles Amendment are subject to the approval of not less than two-thirds of the votes of the Voting Members voting thereon in person or by proxy at the Special Meeting at which at least 10% of the Voting Members must be represented in person or by proxy. The Voting Members will vote as a single class. (c) Each Voting Member will be entitled to one vote, regardless of the size, type or number of Policies held by such Voting Member. Two or more persons who qualify as Voting Members under a single Policy will be deemed one Voting Member for purposes of voting and collectively will be entitled to one vote. Section 11.2. Notice of Special Meeting. (a) Anthem Insurance will ------------ ------------------------- mail notice of the Special Meeting by first class mail to all Voting Members. The notice will comply with Ind. Code 27-15-5-3 and set forth the reasons for the vote and the date, time and place of the Special Meeting, and will enclose one proxy form for each Voting Member. Such notice and proxy form will be mailed, at least 30 days prior to the Special Meeting, to the address of each Voting Member as it appears on the records of Anthem Insurance on the Adoption Date (or such other address as may be provided in writing to Anthem Insurance by the Voting Member a reasonable period of time prior to the mailing of the notice). The notice will be in a form satisfactory to the Commissioner. (b) Such notice of the Special Meeting will be accompanied by a proxy form and information relevant to the Special Meeting, including a copy of this Plan and other explanatory information, all as set forth in Ind. Code 27-15-5-3. ARTICLE XII Additional Provisions --------------------- Section 12.1. Holders of Policies. The Holder of any Policy as of ------------ ------------------- any date specified in the Plan will be determined by Anthem Insurance on the basis of Anthem Insurance's records as of such date in accordance with the following provisions: (a) The Holder of a Policy that is an individual insurance policy or health care -14-
benefits contract is the Person specified in such Policy as the policy or contract holder, unless no policy or contract holder is so specified, in which case the Holder of the Policy will be deemed to be the Person in whose name the application for the Policy was made. (b) Except as provided in Section 12.1(c), the Holder of a Policy that is a group insurance policy or group health care benefits contract is the Person or Persons specified in such Policy as the policy or contract holder unless no policy or contract holder is so specified, in which case the Holder is the Person (other than Anthem Insurance) on whose behalf the policy or contract was executed. (c) The Holder of a Policy that is a certificate of coverage or participation issued under a group insurance policy or health benefits contract issued to an Administrative Trust is (i) with respect to such a Policy issued prior to the Ohio Merger, the employer, association or individual to whom the certificate of coverage was issued under the policy or contract or (ii) with respect to such a Policy issued after the Ohio Merger, (A) in the case of a certificate of coverage issued to an employer or association, the participants to whom reimbursement benefits under the certificate of coverage are payable (or on whose behalf payments may be made to providers) or (B) in the case of a certificate of coverage issued to an individual, that individual. The trustee of any such trust shall not be a Statutory Member or a Holder. (d) Except as provided in Section 12.1(c), the Holder of a Policy that is a certificate of coverage issued under a group insurance agreement or health care benefits contract is the Person specified in the certificate of coverage as the holder thereof unless no holder or certificate holder is so specified, in which case the Holder of such Policy will be deemed to be the Person to whom reimbursement benefits under the certificate of coverage are payable (or on whose behalf payments may be made to providers). (e) In no event may there be more than one Holder of a Policy, although more than one Person may constitute a single Holder. If a Person holds a Policy with one or more other Persons, they will constitute a single Holder with respect to the Policy, and any consideration allocated in accordance with Article VII will be distributed jointly to or on behalf of such Persons. (f) Except as otherwise set forth in this Section 12.1, the identity of the Holder of a Policy is determined by Anthem Insurance without giving effect to any interest of any other Person in such Policy. (g) In any situation not expressly covered by the foregoing provisions of this Section 12.1, or as to which application of the foregoing provisions is unclear, the Holder of a Policy, as reflected on the records of Anthem Insurance and determined in good faith by Anthem Insurance, will be presumed to be the Holder of such Policy for purposes of this Section 12.1, and, except for administrative errors, Anthem Insurance will not be required to examine or consider any other facts or circumstances. (h) The mailing address of a Holder as of any date for purposes of the Plan will be the Holder's last known address as shown on the records of Anthem Insurance as of such -15-
date. (i) Any dispute as to the identity of the Holder of a Policy or the right to vote or receive consideration will be determined in accordance with the foregoing or Ind. Code 27-15 or such other procedures as may be acceptable to the Commissioner. Section 12.2. In Force. (a) A Policy will be deemed to be in force ------------ -------- ("In Force") as of any date if, as shown on Anthem Insurance's records on such date, the effective date of such Policy occurs on or prior to such date, and as of such date the required premium has been received by Anthem Insurance and such Policy, as shown on Anthem Insurance's records on such date, has not expired or otherwise been surrendered or terminated; provided that a Policy will be deemed to be In Force during any applicable grace period for non-payment of premiums as administered by Anthem Insurance. (b) With respect to a Policy that is a certificate of coverage or participation issued under a group insurance policy or health care benefits contract issued to an Administrative Trust, the Policy will be deemed to be In Force as of any date if, as of such date, the Holder has requested and has been approved or deemed approved for participation in the Administration Trust or coverage is otherwise in effect under the Policy, as shown on Anthem Insurance's records. (c) Any dispute as to whether a Policy is In Force will be resolved in accordance with the foregoing or such other procedures as may be acceptable to the Commissioner. Section 12.3. Confidentiality. Anthem Insurance will receive the ------------ --------------- confidential treatment of documents in accordance with Ind. Code 27-15-7 et seq. Section 12.4. Acquisition of Ownership. Except for the acquisition ------------ ------------------------ by Anthem, Inc. of all of the outstanding capital stock of Anthem Insurance pursuant to Article II, for five years following the Effective Date of the Conversion no Person or Persons acting in concert (other than Anthem Insurance, Anthem, Inc., any other company that is directly or indirectly wholly-owned by Anthem, Inc., or any employee benefit plans or trusts sponsored by Anthem Insurance or Anthem, Inc.) may directly or indirectly acquire, or agree or offer to acquire, in any manner the beneficial ownership of five percent (5%) or more of the outstanding shares of any class of a voting security of Anthem Insurance or Anthem, Inc., other than in compliance with Ind. Code 27-15-13-2 or any ----- ---- regulations promulgated thereunder. Section 12.5. Restriction on Stock to Directors and Executive ------------ ----------------------------------------------- Officers. For a period of six months following the Effective Date, neither - -------- Anthem, Inc. nor Anthem Insurance, nor any of their subsidiaries, will make any grants of Common Stock or options to purchase Common Stock to any director, executive officer or member of a specified group of additional senior management executives (approximately 50 in number) of Anthem, Inc. and Anthem Insurance. The exercise price per share of any options to purchase Common Stock granted to any such persons at the expiration of such time will be not less than 100% of the fair market value of Common Stock on the date of the grant of such option. -16-
Section 12.6. Trust. Pursuant to Ind. Code 27-15-12-1, all or part ------------ ----- of the consideration to be distributed to Eligible Statutory Members may be delayed by more than six months following the Effective Date, but only by establishing one or more trusts for the purpose of holding assets on and following the Effective Date that are adequate to satisfy certain claims against Anthem Insurance and remaining unresolved on the Effective Date. Any such trust(s) will be effective and will hold assets on the Effective Date consisting of the consideration that otherwise would be distributed to affected Eligible Statutory Members. Any such trust(s), (a) will be in a form approved by the Commissioner, (b) will in all respects comply with the requirements of Ind. Code 27-15-12-2, (c) will be upon terms and conditions that ensure that the transactions described in this Plan qualify as tax-free transactions within the meaning of Sections 351 and 368 of the Code and (d) will provide that neither the Eligible Statutory Members nor the other policyholders of Anthem Insurance are subject to any income tax from any income received by any such trust(s) without the consent of the Commissioner. Section 12.7. Amendment or Withdrawal of Plan. This Plan may be ------------ ------------------------------- modified, amended, withdrawn or terminated only in a manner consistent with the provisions of the Indiana Demutualization Law and by action of the majority of directors on the Board of Anthem Insurance. After this Plan has been approved by the Voting Members pursuant to Article XI, no modification, amendment, withdrawal or termination of this Plan will require further approval by the Voting Members unless such further approval is required by the Board or the Commissioner or by applicable law. Section 12.8. Corrections. Anthem Insurance may, until the Effective ------------ ----------- Date, by an instrument executed by its President, Chief Executive Officer or any Executive Vice President, attested by its Secretary or Assistant Secretary under Anthem Insurance's corporate seal and submitted to the Commissioner, make such modifications as are appropriate to correct errors, clarify existing items or make additions to correct manifest omissions in the Plan (including the Exhibits). Anthem Insurance may in the same manner also make such modifications as may be required by the Commissioner after the Public Hearing as a condition of approval of the Plan. No such correction or modification will require approval by the Voting Members unless such approval is required by the Board or the Commissioner. Subject to the terms of the Plan, Anthem, Inc. may issue additional shares of Common Stock and take any other action it deems appropriate to remedy errors or miscalculations made in connection with the Plan. Section 12.9 Adjustment of Share Numbers. In order to effect a ------------ --------------------------- filing range (in the registration statement under the Securities Act of 1933, as amended, relating to the Public Offering) for the price of the Common Stock, Anthem Insurance may adjust, by vote of the Board or a duly authorized committee thereof at any time before the Effective Date and with the prior approval of the Commissioner, the number of shares of Common Stock set forth in the definition of Allocable Shares. Upon such an adjustment, the number of shares set forth in Section 7.1(a) as the fixed component of consideration will be adjusted proportionately; and the number of shares resulting from any such adjustment will be rounded up or down to the nearest whole share. Section 12.10. Notices. If Anthem Insurance complies substantially ------------- ------- and in good faith with the Indiana Demutualization Law with respect to any required notice to Statutory -17-
Members, its failure in any case to give the notice to any Person entitled to notice does not impair the validity of actions taken under the Indiana Demutualization Law or this Plan or entitle the Person to any injunctive or other relief. Section 12.11. Costs and Expenses. Anthem Insurance will pay the ------------- ------------------ expenses of any accountants, actuaries, attorneys, and other experts hired by the Commissioner to review any matter under the Indiana Demutualization Law with respect to this Plan. Section 12.12. Captions and Headings. The captions and headings of ------------- --------------------- this Plan have been inserted for convenience of reference only and will not affect the meaning or interpretation of this Plan. Section 12.13. Governing Law. The terms of this Plan will be ------------- ------------- governed by and construed in accordance with the laws of the State of Indiana. Section 12.14. Judicial Review. Pursuant to Ind. Code 27-15-15-2, ------------- --------------- all petitions for judicial review of, and any action challenging the validity of or arising out of the approval or disapproval of or any action proposed to be taken under any order or determination of the Commissioner in connection with this Plan must be filed not later than thirty (30) days after the order or determination is issued by the Commissioner. Section 12.15. Stock Incentive Plan. On or before the Effective ------------- -------------------- Date, Anthem, Inc. intends to adopt a stock incentive plan (the "Stock Plan"). The Stock Plan will allow for the grant of stock options, restricted stock, stock appreciation rights, performance stock and performance awards. Subject to the restrictions of Section 12.5, directors, executives and employees, as selected by the Compensation Committee of the Board of Directors of Anthem, Inc., will be eligible to participate in and receive grants or awards under the Stock Plan. The Compensation Committee will administer the Stock Plan and will have complete discretion to determine whether to grant incentive awards, the types of incentive awards to grant and any requirements and restrictions relating to incentive awards. The Stock Plan will reserve for issuance under its terms not more than five percent (5%) of the Common Stock outstanding after giving effect to both the Conversion and the Public Offering, plus it will reserve an additional up to two percent (2%) of the Common Stock so outstanding solely for issuance under grants of stock options that may be made to substantially all employees of Anthem Insurance and its subsidiaries (and for issuance under similar grants that may be made to new employees of Anthem Insurance or its subsidiaries). The exercise price per share of any options to purchase Common Stock granted under the Stock Plan will be not less than 100% of the fair market value of Common Stock on the date of the grant of such option. No options granted under the Stock Plan will be exercisable more than ten years after the date of grant. ARTICLE XIII Definitions ----------- Section 13.1. General Terms. For all purposes of this Plan, except ------------ ------------- as otherwise expressly provided or unless the context otherwise requires: -18-
(1) The terms defined in this Article XIII will, when used in this Plan, have the meanings assigned to them in this Article XIII and include the plural as well as the singular. (2) The words "herein," "hereof," "hereunder" and other words of similar import refer to this Plan as a whole and not to any particular article, section, subsection or other subdivision. Section 13.2. Specific Terms. For all purposes of this Plan, except ------------ -------------- as otherwise expressly provided, the following terms will have the meanings set forth below: "Actuarial Contribution" shall mean, with respect to a particular Eligible ---------------------- Statutory Member, the contributions to Anthem Insurance's statutory surplus, as calculated according to the principles, assumptions and methodologies set forth in this Plan and the Actuarial Contribution Memorandum, by all Policies (a) of which the Eligible Statutory Member has been the Holder through the Effective Date, and (b) under which the Eligible Statutory Member has had continuous health care benefits coverage with the same company (or the predecessor company from which its business was assumed in a merger described in Preliminary Statement C of this Plan) without a break of more than one day. "Actuarial Contribution Date" shall mean June 30, 2000. --------------------------- "Actuarial Contribution Memorandum" shall have the meaning specified in Section --------------------------------- 7.3(a). "Administrative Trust" shall mean certain trusts established for the -------------------- administrative convenience of the insurer, all of which were established by Community Mutual Insurance Company or Community Insurance Company. "Adoption Date" shall have the meaning specified in the first paragraph of this ------------- Plan. "Aggregate Fixed Component" shall have the meaning specified in Section 7.2. ------------------------- "Aggregate Variable Component" shall have the meaning specified in Section 7.2. ---------------------------- "Allocable Shares" shall have the meaning specified in Section 5.1. ---------------- "Anthem Insurance" shall have the meaning specified in the first paragraph of ---------------- this Plan. "Anthem, Inc." shall have the meaning specified in Section 1.2. ------------ "Annual Statement" shall mean the financial statement required to be filed with ---------------- the Commissioner under Ind. Code 27-1-20-21. "Application" shall have the meaning set forth in Section 10.1. ----------- -19-
"Articles Amendment" shall have the meaning set forth in Section 1.3. ------------------ "Board" shall have the meaning specified in the first paragraph of this Plan. ----- "Code" shall have the meaning specified in Section 1.1. ---- "Commissioner" shall mean the Commissioner of Insurance of the State of Indiana, ------------ or a governmental officer, body, or authority as may after the date hereof succeed the Commissioner as the primary regulator of Anthem Insurance's financial condition under applicable law. "Common Stock" shall mean the voting common stock of Anthem, Inc. ------------ "Conversion" shall have the meaning specified in Preliminary Statement A in this ---------- Plan. "DOL Exemption" shall have the meaning set forth in Section 1.5(a). ------------- "Effective Date" shall mean the date on which the Conversion contemplated by -------------- this Plan becomes effective in accordance with the Indiana Demutualization Law and Section 1.3. "Eligible Statutory Member" shall mean a Person who (a) is a Statutory Member of ------------------------- Anthem Insurance on the Adoption Date and continues to be a Statutory Member of Anthem Insurance on the Effective Date, and (b) has had continuous health care benefits coverage with the same company during the period between those two dates under any Policy or Policies without a break of more than one day. "Equity Share" shall have the meaning specified in Section 7.3(b)(ii). ------------ "ERISA" shall have the meaning specified in Section 1.5(a). ----- "Financial Advisor" shall mean Goldman, Sachs & Co. or any other investment ----------------- banking firm that shall be acceptable to the Commissioner. "Guaranty Policy" shall mean the individual or group guaranty insurance policies ---------------- issued by Anthem Insurance at the time of or following and pursuant to the terms of Anthem Insurance's 1993 merger with Southeastern Mutual Insurance Company, Anthem Insurance's 1995 merger with the Community Mutual Insurance Company, and Anthem Insurance's 1997 merger with Blue Cross & Blue Shield of Connecticut, Inc. "Holder" shall mean with respect to any Policy, the Person or Persons specified ------ or determined pursuant to Section 12.1 "In Force" shall have the meaning specified in Section 12.2 -------- "Indiana Demutualization Law" shall have the meaning specified in Preliminary --------------------------- Statement A of this Plan. -20-
"IPO Price" shall have the meaning specified in Section 6.3. --------- "Membership Interests" shall mean (i) the voting rights of Statutory Members of -------------------- Anthem Insurance as provided by law and by Anthem Insurance's Articles of Incorporation and Bylaws; and (ii) the rights of Statutory Members of Anthem Insurance to receive cash, stock, or other consideration in the event of a conversion to a stock insurance company under the Indiana Demutualization Law or a dissolution under Ind. Code 27-1-10, as provided by those laws and by Anthem Insurance's Articles of Incorporation and Bylaws. "Ohio Merger" shall mean the merger in 1995 of Community Mutual Insurance ----------- Company with and into Anthem Insurance. "Other Capital Raising Transactions" shall have the meaning specified in Section ---------------------------------- 1.6(c). "Person" shall mean an individual, corporation, limited liability company, joint ------ venture, partnership, association, trust, trustee, unincorporated entity, organization or government or any department or agency thereof. A Person who is a Holder of Policies in more than one legal capacity (e.g. a trustee under separate trusts) will be deemed to be a separate Person in each such capacity. "Plan" shall have the meaning specified in the first paragraph of this Plan. ---- "Policy" shall mean: (a) any individual insurance policy or health care benefits ------ contract that has been issued by Anthem Insurance and under which the Holder thereof is a member of Anthem Insurance with Membership Interests; (b) any certificate issued by Anthem Insurance under a group insurance policy or health care benefits contract under which certificate the Holder thereof is a member of Anthem Insurance with Membership Interests; or (c) certificates of membership issued by Anthem Insurance in or under Guaranty Policies under which certificate the Holder thereof is a member of Anthem Insurance with Membership Interests. "Policy" shall also be deemed to mean and include certain certificates of coverage or participation issued under a group insurance policy or health care benefits contract issued to an Administrative Trust, in accordance with Section 12.1(c). "Public Hearing" shall have the meaning specified in Section 10.2. -------------- "Special Meeting" shall have the meaning specified in Section 11.1. --------------- "Statutory Member" shall mean as of any specified date any Person who, in ---------------- accordance with the records, articles of incorporation and by-laws of Anthem Insurance, is the Holder of an In Force Policy. "Stock Plan" shall have the meaning specified in Section 12.15. ---------- "Tax Opinion" shall mean an opinion of a nationally recognized tax counsel or a ----------- firm of certified public accountants selected by Anthem Insurance. -21-
"United States" shall mean the States of the United States, the District of ------------- Columbia, the Commonwealth of Puerto Rico and Territories of the United States within the meaning of Section 2(6) of the Securities Act. -22-
EXHIBIT A AMENDED AND RESTATED ARTICLES OF INCORPORATION OF ANTHEM INSURANCE COMPANIES, INC. -------------------------------- Anthem Insurance Companies, Inc. (hereinafter referred to as the "Corporation"), duly existing under the Indiana Insurance Law and desiring to amend and restate its Articles of Incorporation in connection with its conversion from a mutual insurance company to a stock insurance company under the Indiana Demutualization Law, submits the following Amended and Restated Articles of Incorporation: ARTICLE I NAME ---- The name of the Corporation is Anthem Insurance Companies, Inc. ARTICLE II ADDRESS AND REGISTERED AGENT ---------------------------- The post office address of the Corporation's principal office at the time of the effectiveness of these Amended and Restated Articles of Incorporation is 120 Monument Circle, Indianapolis, Indiana 46204. The name and address of the Corporation's registered agent at the time of effectiveness of these Amended and Restated Articles of Incorporation is Nancy L. Purcell, 120 Monument Circle, Indianapolis, Indiana 46204. ARTICLE III PURPOSES AND POWERS; PLAN OR PRINCIPLE -------------------------------------- Section 3.1. Purposes and Powers. The purpose or purposes for which the ----------- ------------------- Corporation has been formed are as follows: to make or write all or any one or more of the kinds of insurance and reinsurance comprised in any one of Classes 2 and 3 under Section 27-1-5-1 of the Indiana Insurance Law, including, but not limited to, insurance for hospitalization expenses, medical and surgical expenses, illness expenses, and any and all other health care expenses to the extent fixed in coverage certificates and contracts, such insurance being in Class 2(a) under Section 27-1-5-1 of the Indiana Insurance Law, and to do all things necessary and appropriate for carrying on the business of such an insurance company. The Corporation shall have and may exercise all of the rights, privileges and powers set forth in Section 27-1-7-2 of the Indiana Insurance Law, and as
otherwise authorized by the Indiana Insurance Law, and shall have the power to do all acts and things necessary, convenient or expedient to carry out the purposes for which it was formed. Section 3.2. Plan or Principle. The plan or principle upon which the ----------- ----------------- business of the Corporation is to be conducted in the State of Indiana and other states is as follows: (a) To inaugurate, operate and maintain hospital service plans by which hospitalization will be furnished to those in need of hospital service who obtain coverage certificates or contracts from this Corporation, to the extent provided in such certificates or contracts. (b) To enter into contracts with hospitals for such hospitals to furnish hospital care to those entitled to it under the terms of the coverage certificates or contracts of the Corporation. (c) To enter into contracts of insurance providing for hospital care for persons named in the applications for coverage, with an assignment from such persons by which payments thereunder shall be made directly to the hospitals which render the service and not to the beneficiaries named in the service contracts. (d) To carry on business as a voluntary employee beneficiary association for the payment of hospital expenses to the extent provided in the service contracts or policies. (e) To develop and conduct an indemnity plan of insurance against the cost of medical and surgical care, and to operate under the Indiana Insurance Law as a stock insurance company on the indemnity plan, and to be the instrumentality through which prepayment for medical and surgical care may be arranged for those who are covered by the Corporation. (f) To issue policies in the form of coverage certificates, as approved by the appropriate state departments of insurance, to those who obtain insurance in the Corporation. (g) To issue policies guaranteeing the payment of medical, surgical, hospital and other health care benefits to persons who are entitled to such benefits under contracts with insurance companies, health maintenance, preferred provider, or similar organizations owned by or affiliated with the Corporation. (h) To do all things necessary and appropriate for carrying on the business of such an insurance company, and to exercise all of the general rights and privileges and powers authorized by the Indiana Insurance Law. (i) To enter into contracts of insurance and issue coverage certificates for all or any one or more of the kinds of insurance and reinsurance comprised in any one of Classes 2 and 3 of Section 27-1-5-1 of the Indiana Insurance Law, including, but not limited to, insurance providing for the payment of hospitalization expenses, medical and surgical expenses, illness expenses, and any and all other health care expenses. -2-
ARTICLE IV PERIOD OF EXISTENCE ------------------- The term for which the Corporation is to continue as a corporation shall be perpetual. ARTICLE V CAPITAL STOCK ------------- Upon effectiveness of these Amended and Restated Articles of Incorporation, the Corporation shall have authority to issue up to Five Hundred Million (500,000,000) shares of capital stock, which shall be of one class and kind any may be referred to as Common Stock. Each share of Common Stock shall have a par value of One Dollar ($1.00). Upon effectiveness of these Amended and Restated Articles of Incorporation, and pursuant to the Corporation's conversion from a mutual to a stock company under the Indiana Demutualization Law, the Corporation has issued and outstanding a total of One Hundred Million (100,000,000) shares of its Common Stock and has an additional paid-in capital or additional paid-in surplus in respect of that issued and outstanding Common Stock of not less than ___________________________ ($____________). ARTICLE VI INCORPORATORS, OFFICERS AND DIRECTORS ------------------------------------- Section 6.1. Original Incorporators, Officers and Directors. The name, ----------- ---------------------------------------------- occupation and post office address of each of the incorporators, officers and Directors at the time of the original incorporation of the Corporation in 1944 is included within the original incorporation documents of the Corporation, which are hereby incorporated by reference. Section 6.2. Current Directors. The name, occupation and post office ----------- ----------------- address of each Director of the Corporation as of the effectiveness of these Amended and Restated Articles of Incorporation are as follows: Name Occupation Address ----- ---------- ------- [Insert information prior to filing] Section 6.3. Current Officers. The name, title and post office address of ----------- ---------------- each officer of the Corporation as of the effectiveness of these Amended and Restated Articles of Incorporation are as follows: Name Title Address ---- ----- ------- [Insert information prior to filing] -3-
ARTICLE VII BOARD OF DIRECTORS ------------------ Section 7.1. Management. The business of the Corporation shall be managed ----------- ---------- by a Board of Directors. The Directors shall have all of the qualifications, powers and authority and shall be subject to all limitations as set forth in the Indiana Insurance Law. The number of Directors of the Corporation shall not be less than five (5) nor more than nineteen (19), the exact number to be specified from time to time in the manner provided by the Corporation's By-Laws. The number of Directors at the time of effectiveness of these Amended and Restated Articles of Incorporation is thirteen (13). Section 7.2. Vacancy. Any vacancy on the Board of Directors caused by ------------ ------- resignation, removal, death or other incapacity or increase in the number of Directors may be, at the discretion of the Board, filled by a majority vote of the remaining Directors, or left unfilled until the next meeting of shareholders. The failure of the Board of Directors or the shareholders to fill one or more vacancies on the Board of Directors or to elect a full Board of Directors shall not in any way prevent or restrict the Board of Directors from exercising the powers of the Corporation or from directing its business and affairs. Section 7.3. Removal of Directors. Any one or more of the members of the ------------ -------------------- Board of Directors may be removed only at a meeting of the shareholders or Directors called expressly for that purpose. Removal by the shareholders requires an affirmative vote of the holders of outstanding shares representing at least two-thirds (2/3) of all the votes then entitled to be cast at an election of Directors. Removal by the Board of Directors requires an affirmative vote of at least two-thirds (2/3) of all Directors. No Director may be removed except as provided in this Section 7.3. Section 7.4. By-Laws. The Board of Directors shall have the exclusive ----------- ------- power to make, alter, amend or repeal, or to waive provisions of, the By-Laws of the Corporation, in the manner provided therein. ARTICLE VIII MEETINGS OF SHAREHOLDERS ------------------------ Section 8.1. Shareholder Meetings. All meetings of shareholders shall be ----------- -------------------- held at such place, within or without the State of Indiana, as designated by the Board of Directors or the other persons calling the meeting. Section 8.2. Action Without Meeting. Any action required or permitted to be ----------- ---------------------- taken at any meeting of the shareholders may be taken without a meeting, if the action is taken by all shareholders entitled to vote on the action. The action must be evidenced by one or more written consents describing the action taken, signed by each shareholder and delivered to the Corporation for inclusion in the minutes for filing with the corporate records. The record date for determining the shareholders entitled to take action without a meeting is the date the first shareholder signs the consent. Action taken under this section is effective when the last -4-
shareholder signs the consent, unless the consent specifies a different prior or subsequent effective date, in which case the action is effective on or as of the specified date. Such consent shall have the same affect as a unanimous vote of all shareholders and may be described as such in any document. ARTICLE IX INDEMNIFICATION --------------- Section 9.1. Indemnification. The Corporation shall indemnify every Eligible ----------- --------------- Person (certain capitalized terms used in this Article IX are defined below) against all Liability and Expense that may be incurred by him or her in connection with or resulting from any Claim to the fullest extent authorized or permitted by the Indiana Insurance Law, as the same exists or may hereafter be amended (but in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), or otherwise consistent with the public policy of the State of Indiana. In furtherance of the foregoing, and not by way of limitation, every Eligible Person shall be indemnified by the Corporation against all Liability and reasonable Expense that may be incurred by him or her in connection with or resulting from any Claim, (a) if such Eligible Person is Wholly Successful, on the merits or otherwise, with respect to the Claim, or (b) if not Wholly Successful, then if such Eligible Person is determined to have acted in good faith, in what he or she reasonably believed to be the best interests of the Corporation or at least not opposed to its best interests and, in addition, with respect to any criminal Claim is determined to have had reasonable cause to believe that his or her conduct was lawful or had no reasonable cause to believe that his or her conduct was unlawful. The termination of any Claim, by judgment, order, settlement (whether with or without court approval), or conviction or upon a plea of guilty or of nolo contendere, or its equivalent, ---- ---------- shall not create a presumption that an Eligible Person did not meet the standards of conduct set forth in clause (b) of this Section 9.1. The actions of an Eligible Person with respect to an employee benefit plan subject to the Employee Retirement Income Security Act of 1974 shall be deemed to have been taken in what the Eligible Person reasonably believed to be the best interests of the Corporation or at least not opposed to its best interest if the Eligible Person reasonably believed he or she was acting in conformity with the requirements of such Act, or he or she reasonably believed his or her actions to be in the interests of the participants in or beneficiaries of the plan. Section 9.2. Definitions. ----------- ----------- (a) The term "Claim" as used in this Article IX shall include every pending, threatened or completed claim, action, suit or proceeding and all appeals thereof (whether brought by or in the right of this Corporation or any other corporation or otherwise), civil, criminal, administrative or investigative, formal or informal, in which an Eligible Person may become involved as a party or otherwise (i) by reason of his or her being or having been an Eligible Person, or (ii) by reason of any action taken or not taken by him or her in his or her capacity as an Eligible Person, whether or not he or she continued in such capacity at the time such Liability or Expense shall have been incurred. -5-
(b) The term "Eligible Person" as used in this Article IX shall mean every person (and the estate, heirs and personal representatives of such person) who is or was a Director, officer or employee of the Corporation or who, while a Director, officer or employee of the Corporation, is or was serving at the request of the Corporation as a Director, officer, partner, trustee, employee, member, manager, agent or fiduciary of any other corporation, partnership, joint venture, trust, employee benefit plan, limited liability company or other organization or entity, whether for profit or not. An Eligible Person shall also be considered to have been serving as a Director, officer, trustee, employee, agent or fiduciary of an employee benefit plan at the request of the Corporation if his or her duties to the Corporation also imposed duties on, or otherwise involved services by, him or her to the plan or to participants in or beneficiaries of the plan. (c) The terms "Liability" and "Expense" as used in this Article IX shall include, but shall not be limited to, counsel fees and disbursements and amounts of judgments, fines or penalties against (including excise taxes assessed with respect to an employee benefit plan), and amounts paid in settlement by or on behalf of, an Eligible Person. (d) The term "Wholly Successful" as used in this Article IX shall mean (i) termination of any Claim, whether on the merits or otherwise, against the Eligible Person in question without any finding of liability or guilt against him or her, (ii) approval by a court or agency, with knowledge of the indemnity herein provided, of a settlement of any Claim, or (iii) the expiration of a reasonable period of time after the threatened making of any Claim without commencement of an action, suit or proceeding and without any payment or promise made to induce a settlement. (e) As used in this Article IX, the term "Corporation" includes all constituent entities in a consolidation or merger and the new or surviving corporation of such consolidation or merger so that any Eligible Person who is or was a Director, officer or employee of such a constituent entity, or is or was serving at the request of such constituent entity as a Director, officer, partner, trustee, employee, member, manager, agent or fiduciary of any other corporation, partnership, joint venture, trust, employee benefit, limited liability company or other organization or entity, whether for profit or not, shall stand in the same position under this Article XI with respect to the new or surviving corporation as he would if he had served the new or surviving corporation in the same capacity. Section 9.3. Advancement of Expenses. Expenses incurred by an Eligible ----------- ----------------------- Person who is a Director of the Corporation in defending any Claim shall be paid by the Corporation in advance of the final disposition of such Claim promptly as they are incurred upon receipt of an undertaking by or on behalf of such Eligible Person to repay such amount if he or she is determined not to be entitled to indemnification. Expenses incurred by any other Eligible Person with respect to any Claim may be advanced by the Corporation (by action of the Board of Directors, whether or not a disinterested quorum exists) prior to the final disposition thereof upon receipt of an undertaking by or on behalf of the Eligible Person to repay such amount if he or she is determined not to be entitled to indemnification. Section 9.4. Non-Exclusivity. The rights of indemnification and advancement ----------- --------------- of expenses provided in this Article IX shall be in addition to any rights to which any Eligible Person may otherwise be entitled. The Board of Directors may, at any time and from time to time, (i) -6-
approve indemnification of any Eligible Person to the fullest extent authorized or permitted by the provisions of applicable law or otherwise consistent with the public policy of the State of Indiana, whether on account of past or future transactions, and (ii) authorize the Corporation to purchase and maintain insurance on behalf of any Eligible Person against any Liability or Expense asserted against or incurred by him or her in such capacity or arising out of his or her status as an Eligible Person, whether or not the Corporation would have the power to indemnify him or her against such Liability or Expense. Section 9.5. Contract. The provisions of this Article IX shall be deemed to ----------- -------- be a contract between the Corporation and each Eligible Person, and an Eligible Person's rights hereunder shall not be diminished or otherwise adversely affected by any repeal, amendment or modification of this Article IX that occurs subsequent to such person becoming an Eligible Person. ARTICLE X AMENDMENT OF ARTICLES --------------------- The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Amended and Restated Articles of Incorporation or in any amendment hereto or to add any provision to these Amended and Restated Articles of Incorporation or to any amendment hereto in any manner now or hereafter prescribed or permitted by the provisions of the Indiana Insurance Law as from time to time in effect or by the provisions of any other applicable statute of the State of Indiana; and all rights conferred upon shareholders in these Amended and Restated Articles of Incorporation or any amendment hereto are granted subject to this reservation. -7-
EXHIBIT B AMENDED AND RESTATED BY-LAWS OF ANTHEM INSURANCE COMPANIES, INC. --------------------------------- Effective ________________ ARTICLE I Meetings of the Shareholders ---------------------------- Section 1.1. Annual Meetings. The annual meeting of the shareholders of ----------- ---------------- the Corporation for the election of Directors and the transaction of such other business as may properly come before the meeting shall be held within the first five (5) months of each year, on such date, at such hour and at such place within or without the State of Indiana as shall be designated by the Board of Directors. In the absence of designation, the meeting shall be held at the principal office of the Corporation in the City of Indianapolis, Indiana. Section 1.2. Special Meetings. Special meetings of the shareholder may be ----------- ----------------- called by the President, Board of Directors, the Chairman of the Board or the shareholders as provided by law. Section 1.3. Notice. A written or printed notice stating the place, day, ----------- ------- and hour of the meeting, and in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered or mailed by the secretary, or by the officers or persons calling the meeting, to each Shareholder entitled by the Amended and Restated Articles of Incorporation and by the Indiana Insurance Law to vote at such meeting, at such address as appears upon the records of the Corporation, at least thirty (30) days before the date of the meeting. Notice of any meeting of the shareholders may be waived in writing by any shareholder if the waiver sets forth in reasonable detail the purpose or purposes for which the meeting is called and the time and place thereof. Attendance at any meeting in person or by proxy shall constitute a waiver of notice of such meeting. Section 1.4. Quorum. The presence at any meeting of shareholders, in ----------- ------- person or by proxy, of the holders of record of a majority of the shares then issued and outstanding and entitled to vote shall be necessary and sufficient to constitute a quorum for the transaction of business, except as otherwise required by law. Section 1.5. Adjournments. If a quorum shall not be present in person or ----------- ------------- represented by proxy authorized and eligible to vote at a meeting of shareholders, it shall be the duty of the
shareholders present to adjourn the meeting from day to day thereafter, until a quorum shall be obtained as above. No notice of any kind shall be required to be given the shareholders of the Corporation of any such adjourned meeting or meetings. If any annual meeting is adjourned as above, the election of Officers shall be deferred until a quorum shall have been obtained. Section 1.6. Proxies. Any Shareholder entitled to vote may vote by proxy, ----------- -------- provided that the instrument authorizing such proxy to act shall have been executed in writing (which shall include telegraphing, cabling or by facsimile) by the Shareholder personally or by such Shareholder's duly authorized attorney in fact. Shares standing in the name of a corporation, other than the Corporation, may be voted by such officer, agent or proxy as the board of directors of such corporation may appoint or as the by-laws of such corporation may prescribe. An appointment of proxy is effective when received by the Secretary of the Corporation or other officer or agent authorized to tabulate votes and is effective for eleven (11) months, unless a shorter or longer period is expressly provided in the proxy. ARTICLE II Directors --------- Section 2.1. Number of Directors. The number of Directors shall be fixed ----------- -------------------- by the Board of Directors from time to time and shall fall within the range prescribed by the Corporation's Amended and Restated Articles of Incorporation. Section 2.2. Terms of Directors. The Directors shall be divided into ----------- ------------------- three (3) groups as nearly equal in number as the then fixed number of directors permits, with the term of office of the first group to expire at the 2002 annual meeting of shareholders, and the term of office of the second group to expire at the 2003 annual meeting of members; and the term of office of the third group to expire at the 2004 annual meeting of shareholders; and at each annual meeting of shareholders, the Directors chosen to succeed those whose terms then expire shall be identified as being of the same group as the Directors they succeed and shall be elected for a term expiring at the third succeeding annual meeting of shareholders. A Director may not serve on the Board of Directors for more than twelve (12) years; provided, however, neither any years of service before the 1993 annual meeting of members, nor service while also acting as President, Chief Executive Officer or Chairman of the Board, shall be counted for purposes of this limitation. Section 2.3. Eligibility of Directors. A majority of the Board shall at ----------- ------------------------- all times be Public Members. A Public Member is one who is neither an employee of nor has an ownership interest in a health care provider and is not engaged in the active practice of a profession which provides health care services. Upon reaching the age of seventy (70), a Director shall no longer be eligible for reelection to the Board of Directors, although the Director may complete his or her unexpired term. Other requirements as to eligibility shall be determined by the Board of Directors, but in determining the eligibility of persons to become Members of the Board of Directors, consideration shall be given to the individual's knowledge and experience as to general business issues. -2-
Section 2.4. Election of Directors. The terms of office of all elected ----------- ---------------------- Directors shall begin on the date of their election or as soon thereafter as they can qualify by taking and subscribing an oath that he or she will, insofar as the duty devolves upon such person, faithfully, honestly and diligently administer the affairs of the Corporation, and that he or she will not knowingly violate or willingly permit to be violated any of the provisions of law applicable to the Corporation, all as required by the laws of the State of Indiana. Section 2.5. Regular Meetings of Directors. A meeting of the Directors ----------- ------------------------------ shall be held each year immediately following the annual meeting of the shareholders; and in addition thereto, meetings of the Directors shall be held no less than three (3) times per year. Notice of the meetings, giving the time and place thereof, shall be mailed by the Secretary to each of the Directors not less than three (3) days before the date of the meeting. Section 2.6. Special Meetings of Directors. Special meetings of the ----------- ------------------------------ Directors may be called by the Chairman of the Board or the Chief Executive Officer, or by one quarter (1/4) of the whole authorized number of Directors, at such time as the officer or Directors calling the meeting shall designate. Notice thereof giving the time, place, and purpose or purposes for the meeting shall be (a) mailed by the Secretary to each of the Directors not less than three (3) days before the date of the meeting, or (b) given personally or by telephone, telegraph, facsimile or other electronic communication, not less than twenty-four (24) hours before the date of the meeting. Section 2.7. Place of Meetings. All meetings of the Directors shall be at ----------- ------------------ the principal office of the Corporation or at such other place as may be designated by the Chairman of the Board or the Chief Executive Officer or approved by the Board of Directors. Section 2.8. Conduct of Meetings. The Chairman of the Board, and in his ----------- -------------------- or her absence, the Chief Executive Officer or, in the absence of both of them, another Director selected by a majority of the Directors in attendance, shall preside over all Directors' meetings. The Secretary, and in his or her absence, an Assistant Secretary, shall act as Secretary of all meetings and keep correct and complete minutes of the meetings. Section 2.9. Quorum. A majority of the whole Board of Directors shall be ----------- ------- necessary to constitute a quorum for the transaction of any business, except the filling of vacancies, and the act of a majority of the Board of Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, unless a greater number is otherwise provided by these Amended and Restated By-Laws, the Amended and Restated Articles of Incorporation or the Indiana Insurance Law. Section 2.10. Vacancies. Any vacancy that may occur in the membership of ------------ ---------- the Board of Directors caused by an increase in the number of Directors or otherwise shall be filled by a majority vote of the remaining members of the Board until the next annual meeting of the shareholders. Any vacancy in the membership of the Board of Directors caused by death, resignation or disqualification of a Director shall be filled by a majority vote of the remaining membership of the Board for the unexpired term of such Directorship. -3-
Section 2.11. Duties. The Board of Directors shall be the governing ------------ ------- entity and generally manage the fiscal and business affairs of this Corporation and discharge such duties as are required of it by law. Every Director, when elected, shall take and subscribe the oath provided in Section 2.4 of these Amended and Restated By-Laws. Section 2.12. Additional Duties of Directors. In addition to such other ------------ ------------------------------- duties as may be imposed upon the Directors, the Directors shall keep a record of the attendance of Directors at the meetings of the Board and shall make a report, showing the names of the Directors, the number of meetings of the Board, regular and special, the number of meetings attended and the number of meetings from which each Director was absent, which report shall be read at the annual meeting of shareholders and incorporated into the minutes thereof. ARTICLE III Officers -------- Section 3.1. Officers. The officers of the Corporation shall be the ----------- -------- Chairman of the Board, Chief Executive Officer, President, Secretary and Treasurer, each of whom shall be elected by the Board of Directors. Any two (2) or more offices may be held by the same person, except that the person holding the office of Secretary shall not hold the office of either Chairman, Chief Executive Officer or President. The Chief Executive Officer shall have the authority to appoint administrative officers such as Vice Presidents, Assistant Secretaries and Assistant Treasurers, to perform such functions and duties as prescribed and approved by the Chief Executive Officer. Section 3.2. Election and Term of Office. The officers of the Corporation ----------- --------------------------- shall be elected by the Board of Directors at a meeting to be held each year immediately following the annual meeting of the shareholders. Each officer shall be elected for a term of one (1) year and shall hold office until his or her successor shall have been duly elected and shall have qualified or until his or her death or until he or she shall resign or shall have been removed in the manner hereinafter provided. Section 3.3. Eligibility. Only members of the Board of Directors shall be ----------- ----------- eligible for election to the offices of Chairman of the Board and Chief Executive Officer. Section 3.4. Removal. Any officer elected by the Board of Directors may ----------- ------- be removed by the Board of Directors, upon recommendation of the Chief Executive Officer whenever in their judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 3.5. Vacancies. Any vacancy in any office because of death, ----------- --------- resignation, removal, or otherwise, may be filled by the Board of Directors, with due consideration given to the recommendation of the Chief Executive Officer, for the unexpired portion of the term. -4-
ARTICLE IV Duties of Officers ------------------ Section 4.1. Chairman of the Board. The Chairman of the Board shall ----------- --------------------- preside at all meetings of the Board of Directors and of the shareholders and shall also perform such other duties as may be required by law or as may be delegated to him or her by the Board of Directors. Section 4.2. Chief Executive Officer. The Chief Executive Officer of the ----------- ----------------------- Corporation shall have direct management authority and responsibility over the business and affairs of the Corporation, subject only to policy decisions of the Board of Directors. The Chief Executive Officer shall see that all corporate policies, orders and resolutions of the Board of Directors are carried into effect. The Chief Executive Officer shall also perform such other duties as may be required by law or as may be delegated to him or her by the Board of Directors. Section 4.3. President. The President shall perform such duties as may be ----------- --------- required by law or as may be delegated to him or her by the Board of Directors or by the Chief Executive Officer. Section 4.4. Treasurer. The Treasurer shall have the care and custody of ----------- --------- and be responsible for funds and securities of the Corporation, all of which shall be deposited in banks and depositories designated by or in a manner authorized by the Board of Directors. The Treasurer shall direct the keeping of a record of all receipts and disbursements and shall prepare or have prepared a report to be presented at the annual meeting of the shareholders. The Treasurer shall direct the manner in which records shall be kept of all financial transactions of the Corporation. The Treasurer shall give bond for the faithful performance of his or her duties in such sum as the Board of Directors may from time to time require. Section 4.5. Secretary. The Secretary of the Corporation shall keep the ----------- --------- minutes of all meetings of the shareholders, the Board of Directors, and all Board Committees in books provided for that purpose and shall be authorized to authenticate records of the Corporation. The Secretary shall attend to the giving and receiving of all notices of the Corporation. The Secretary shall perform such other duties as may be required by law or as may be delegated to him or her from time to time by the Board of Directors or by superior officers of the corporation. ARTICLE V Execution of Instruments ------------------------ The Board of Directors shall have the power at all times to designate by what officers all bills, notes, checks, vouchers, orders, contracts, deeds and mortgages or any other written instruments of the Corporation shall be executed. In the absence of such designation, the Chief Executive Officer shall be authorized to execute all such documents and instruments. -5-
ARTICLE VI Committees ---------- Section 6.1. Executive Committee. The Board of Directors may appoint ----------- ------------------- three (3) or more members to an Executive Committee. The Executive Committee shall, subject to the restrictions of Section 6.7 hereof, be authorized to exercise the authority of the full Board of Directors at any times other than during regular or special meetings of the Board of Directors. All actions taken by the Executive Committee shall be reported at the first regular meeting of the Board of Directors following such actions. Members of the Executive Committee shall serve at the pleasure of the Board of Directors. Section 6.2. Compensation Committee. The Board of Directors may ----------- ---------------------- appoint three (3) or more members to a Compensation Committee. The duties of the Compensation Committee shall be to: (a) consider and recommend to the Board of Directors and management the overall compensation programs of the Corporation; (b) review and approve the compensation payable to the senior management personnel of the Corporation; (c) review significant changes in employee benefit plans and stock related plans; and (d) administer the Corporation's stock plans. Section 6.3. Audit Committee. The Board of Directors may appoint ----------- --------------- three (3) or more members to an Audit Committee. The duties of the Audit Committee shall be to: (a) recommend to the Board of Directors the selection of and engagement arrangements for the independent public accountants and auditors for each fiscal year; (b) recommend to the Board of Directors as to the advisability of having the independent public accountants and auditors make specified studies and reports regarding auditing matters, accounting procedures, tax or other matters; (c) review the results of the audit for each fiscal year; (d) review such accounting policies of the Corporation as appropriate; (e) review the coordination between the independent public accountants and auditors and the Corporation's chief accounting officer; (f) review the scope and procedures of the Corporation's internal audit work and the quality and composition of the Corporation's internal audit staff; and (g) review all related party transactions. In addition, the audit committee shall review quarterly and annual financial statements (including reserves and taxes); review quarterly investment reports, portfolio performance and asset allocation; review budget and long-term forecasts; review and recommend to the Board any increases in the Corporation's debt facilities and changes in capital structure; and review and recommend to the Board any changes in investment policy. Section 6.4. Planning Committee. The Board of Directors may appoint ----------- ------------------ three (3) or more members to a Planning Committee. The duties of the Planning Committee shall be to: (a) assist the Chief Executive Officer in developing strategies to achieve the strategic plan; (b) review the annual operating plan for the Corporation; (c) review integration plans for mergers, acquisitions and other corporate transactions of the Corporation as requested by the Board or the Chief Executive Officer; (d) track the Corporation's performance to its plans; and (e) review specific strategic planning issues as and when requested by the Board or the Chief Executive Officer. -6-
Section 6.5. Board Governance and Executive Development Committee. ----------- ---------------------------------------------------- The Board of Directors may appoint three (3) or more members to a Board Governance and Executive Development Committee. The duties of the Board Governance and Executive Development Committee shall be to: (a) review the background and qualifications of potential board members; (b) review the performance of the Board of Directors; (c) recommend training plans for Directors to improve performance; and (d) prepare a slate of nominees to fill directorships up for election each year, vacancies as they occur, and skill needs as they arise. In addition, the Board Governance and Executive Development Committee shall assist the Chief Executive Officer in the design and implementation of an executive training and development program and counsel the Chief Executive Officer in the selection of executives for succession planning. Section 6.6. Other Committees. The Board of Directors may create one ----------- ---------------- (1) or more committees in addition to any Executive Committee, Compensation Committee, Audit Committee, Planning Committee or Board Governance and Executive Development Committee and appoint members of the Board of Directors to serve on them, by resolution of the Board of Directors adopted by a majority of all the Directors in office when the resolution is adopted. The committee may exercise the authority of the Board of Directors to the extent specified in the resolution. Each committee may have one (1) or more members, and all the members of such committee shall serve at the pleasure of the Board of Directors. Section 6.7. Limitations on Committees; Notice, Quorum and Voting. ----------- ---------------------------------------------------- (a) Neither the Executive Committee, Compensation Committee, Audit Committee, Planning Committee, Board Governance and Executive Development Committee nor any other committee hereafter established may: (1) authorize dividends or other distributions, except a committee may authorize or approve a dividend or distribution or a reacquisition of shares if done according to a formula or method prescribed by the Board of Directors; (2) approve or propose to shareholders action that is required to be approved by shareholders; (3) fill vacancies on the Board of Directors or on any of its committees; (4) amend the Corporation's Articles of Incorporation under Ind.Code 27-1- 8-3(b); (5) adopt, amend, repeal, or waive provisions of these By-Laws; (6) approve a plan of merger not requiring shareholder approval; or (7) authorize or approve the issuance or sale or a contract for sale of shares, except the Board of Directors may authorize a committee (or an executive -7-
officer of the Corporation designated by the Board of Directors) to take the action described in this Section 6.7(a)(7) within limits prescribed by the Board of Directors. (b) Except to the extent inconsistent with the resolutions creating a committee, Sections 2.5 through 2.9 of these By-Laws, which govern meetings, notice and waiver of notice, quorum and voting requirements and participation in meetings of the Board of Directors other than in person, apply to each committee and its members as well. Section 6.8. Committees Reporting. All Committees established pursuant to ----------- -------------------- this Article VI shall report to the annual meeting of shareholders and such report shall include names of Committee members, number of meetings held, and committee activities from the previous period. ARTICLE VII Fiscal Year The fiscal year of the Corporation shall be the calendar year. ARTICLE VIII Financial Reports ----------------- At a regular meeting of the Board of Directors following the end of each fiscal quarter, and at such other intervals as the Board may direct, a financial report shall be made to the Board by the Chief Financial Officer, the Treasurer and/or Assistant Treasurer showing a balance sheet, a statement of operations and the manner in which the assets are invested. At the annual meeting of the shareholders, the Chief Financial Officer, the Treasurer and/or Assistant Treasurer shall submit a report, verified by the independent certified public accountants, showing the financial condition and results of operations of the Corporation for the preceding calendar year. ARTICLE IX Stock ----- Section 8.1. Certificates of Stock; Uncertificated Shares; Execution. ----------- ------------------------------------------------------- The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the Corporation shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until each certificate is surrendered to the Corporation. Certificates for shares of the Corporation shall be signed by the Chief Executive Officer or the President and by the Secretary or an Assistant Secretary and the seal of the Corporation (or a facsimile thereof), if any, may be thereto affixed. Where any such certificate is also signed by a transfer agent or a registrar, or both, the signatures of the officers of the Corporation may be facsimiles. The Corporation may issue and deliver any such certificate notwithstanding that any such officer -8-
who shall have signed, or whose facsimile signature shall have been imprinted on, such certificate shall have ceased to be such officer. Section 8.2. Contents. Each certificate issued after the adoption of ----------- -------- these By-Laws shall state on its face the name of the Corporation and that it is organized under the laws of the State of Indiana, the name of the person to whom it is issued, and the number and class of shares. Section 8.3. Transfers. Except as otherwise provided by law or by ----------- --------- resolution of the Board of Directors, transfers of shares of the Corporation shall be made only on the books of the Corporation by the holder thereof, in person or by duly authorized attorney, on payment of all taxes thereon and surrender for cancellation of the certificate or certificates for such shares (except as hereinafter provided in the case of loss, destruction, or mutilation of certificates) properly endorsed by the holder thereof or accompanied by the proper evidence of succession, assignment, or authority to transfer, and delivered to the Secretary or an Assistant Secretary. Section 8.4. Stock Transfer Records. There shall be entered upon the ----------- ---------------------- stock records of the Corporation the number of each certificate issued, the name and address of the registered holder of such certificate, the number, kind, and class of shares represented by such certificate, the date of issue, whether the shares are originally issued or transferred, the registered holder from whom transferred, and such other information as is commonly required to be shown by such records. The stock records of the Corporation shall be kept at its principal office, unless the Corporation appoints a transfer agent or registrar, in which case the Corporation shall keep at its principal office a complete and accurate shareholders' list giving the names and addresses of all shareholders and the number and class of shares held by each, which shall be updated periodically as determined by the Secretary, but not less frequently than quarterly, and which shall be updated as of each record date established with respect to a meeting of shareholders or other shareholder action. If a transfer agent is appointed by the Corporation, shareholders shall give written notice of any changes in their addresses from time to time to the transfer agent. Section 8.5. Transfer Agents and Registrars. The Board of Directors ----------- ------------------------------ may appoint one or more transfer agents and one or more registrars and may require each stock certificate to bear the signature of either or both. Section 8.6. Loss, Destruction, or Mutilation of Certificates. The ----------- ------------------------------------------------ holder of any shares of the Corporation shall immediately notify the Corporation of any loss, destruction, or mutilation of the certificate therefor, and the Board of Directors may, in its discretion, cause to be issued to him a new certificate or certificates, upon the surrender of the mutilated certificate, or, in the case of loss or destruction, upon satisfactory proof of such loss or destruction. The Board of Directors may, in its discretion, require the holder of the lost or destroyed certificate or his legal representative to give the Corporation a bond in such sum and in such form, and with such surety or sureties as it may direct, to indemnify the Corporation, its transfer agents, and registrars, if any, against any claim that may be made against them or any of them with respect to the shares represented by the certificate or certificates alleged to have been lost or destroyed, but the Board of Directors may, in its discretion, refuse to issue a new certificate or certificates, save upon the order of a court having jurisdiction in such matters. -9-
Section 8.7. Form of Certificates. The form of the certificates for ----------- -------------------- shares of the Corporation shall conform to the requirements of Section 8.2 of these By-Laws and be in such printed form as shall from time to time be approved by resolution of the Board of Directors. ARTICLE X Amendment --------- These Amended and Restated By-Laws may be altered, amended or repealed, either in whole or in part, by the affirmative action of a two-thirds (2/3) of the Directors attending any meeting of the Board, when quorum requirements are met, whether regular or special, provided notice pursuant to Sections 2.5 or 2.6, as the case may be, shall have been given in advance of the meeting of the intent to so alter, amend or repeal, stating in such notice the action proposed to be taken . -10-
EXHIBIT C ARTICLES OF INCORPORATION OF ANTHEM, INC. The undersigned incorporator, desiring to form a corporation (hereinafter referred to as the "Corporation"), pursuant to the provisions of the Indiana Business Corporation Law (hereinafter referred to as the "Corporation Law"), executes the following Articles of Incorporation: ARTICLE I Name ---- The name of the Corporation is Anthem, Inc. ARTICLE II Purposes and Powers ------------------- Section 2.1. Purposes of the Corporation. The purpose for which the ----------- --------------------------- Corporation is formed is to engage in the transaction of any or all lawful business for which corporations may now or hereafter be incorporated under the Corporation Law. Section 2.2. Powers of the Corporation. The Corporation shall have ----------- ------------------------- (a) all powers now or hereafter authorized by or vested in corporations pursuant to the provisions of the Corporation Law, (b) all powers now or hereafter vested in corporations by common law or any other statute or act, and (c) all powers authorized by or vested in the Corporation by the provisions of these Articles of Incorporation or by the provisions of its By-Laws as from time to time in effect. ARTICLE III Term of Existence ----------------- The period during which the Corporation shall continue is perpetual.
ARTICLE IV Registered Office and Agent --------------------------- The street address of the Corporation's registered office at the time of adoption of these Articles of Incorporation is 120 Monument Circle, Indianapolis, Indiana 46204, and the name of its Resident Agent at such office at the time of adoption of these Articles of Incorporation is Nancy Purcell. ARTICLE V Authorized Shares ----------------- Section 5.1. Authorized Classes and Number of Shares. The total ----------- --------------------------------------- number of shares which the Corporation has authority to issue shall be one billion (1,000,000,000) shares, consisting of nine hundred million (900,000,000) shares of common stock, $0.01 par value per share (the "Common Stock"), and one hundred million (100,000,000) shares of preferred stock, without par value (the "Preferred Stock"). Section 5.2. General Terms of All Shares. The Corporation shall have ----------- --------------------------- the power to acquire (by purchase, redemption, or otherwise), hold, own, pledge, sell, transfer, assign, reissue, cancel, or otherwise dispose of the shares of the Corporation in the manner and to the extent now or hereafter permitted by the laws of the State of Indiana (but such power shall not imply an obligation on the part of the owner or holder of any share to sell or otherwise transfer such share to the Corporation), including the power to purchase, redeem, or otherwise acquire the Corporation's own shares, directly or indirectly, and without pro rata treatment of the owners or holders of any class or series of shares, unless, after giving effect thereto, the Corporation would not be able to pay its debts as they become due in the usual course of business or the Corporation's total assets would be less than its total liabilities (calculated without regard to any amounts that would be needed, if the Corporation were to be dissolved at the time of the purchase, redemption, or other acquisition, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those of the holders of the shares of the Corporation being purchased, redeemed, or otherwise acquired, unless otherwise expressly provided with respect to a series of Preferred Stock in the provisions of these Articles of Incorporation adopted by the Board of Directors pursuant to Section 5.5 hereof describing the terms of such series). Shares of the Corporation purchased, redeemed, or otherwise acquired by it shall constitute authorized but unissued shares, unless prior to any such purchase, redemption, or other acquisition, or within thirty (30) days thereafter, the Board of Directors adopts a resolution providing that such shares constitute authorized and issued but not outstanding shares. The Board of Directors of the Corporation may dispose of, issue, and sell shares in accordance with, and in such amounts as may be permitted by, the laws of the State of Indiana and the provisions of these Articles of Incorporation and for such consideration, at such price or prices, at such time or times and upon such terms and conditions (including the privilege of selectively repurchasing the same) as the Board of Directors of the Corporation shall determine, without the authorization or approval by any shareholders of the Corporation. Shares may be disposed of, issued, and sold to such persons, firms, or corporations as the Board of Directors -2-
may determine, without any preemptive right on the part of the owners or holders of other shares of the Corporation of any class or kind to acquire such shares by reason of their ownership of such other shares. When the Corporation receives the consideration specified in a subscription agreement entered into before incorporation, or for which the Board of Directors authorized the issuance of shares, as the case may be, the shares issued therefor shall be fully paid and nonassessable. The Corporation shall have the power to declare and pay dividends or other distributions upon the issued and outstanding shares of the Corporation, subject to the limitation that a dividend or other distribution may not be made if, after giving it effect, the Corporation would not be able to pay its debts as they become due in the usual course of business or the Corporation's total assets would be less than its total liabilities (calculated without regard to any amounts that would be needed, if the Corporation were to be dissolved at the time of the dividend or other distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those of the holders of shares receiving the dividend or other distribution, unless otherwise expressly provided with respect to a series of Preferred Stock in the provisions of these Articles of Incorporation adopted by the Board of Directors pursuant to Section 5.5 hereof describing the terms of such series). Except as otherwise provided in Section 5.4, the Corporation shall have the power to issue shares of one class or series as a share dividend or other distribution in respect of that class or series or one or more other classes or series. Section 5.3. Voting Rights of Shares. ----------- ----------------------- (a) Common Stock. Except as otherwise provided by the Corporation Law ------------ and subject to such shareholder disclosure and recognition procedures (which may include voting prohibition sanctions) as the Corporation may by action of its Board of Directors establish, shares of Common Stock have unlimited voting rights. Shares of Common Stock shall, when validly issued by the Corporation, entitle the record holder thereof to one (1) vote per share on all matters submitted to a vote of the shareholders of the Corporation. Shares of Common Stock shall not have cumulative voting rights. (b) Preferred Stock. Except as required by the Corporation Law or by --------------- the provisions of these Articles of Incorporation adopted by the Board of Directors pursuant to Section 5.5 hereof describing the terms of the Preferred Stock or a series thereof, the holders of Preferred Stock shall have no voting rights or powers. Shares of Preferred Stock shall, when validly issued by the Corporation, entitle the record holder thereof to vote as and on such matters, but only as and on such matters, as the holders thereof are entitled to vote under the Corporation Law or under the provisions of these Articles of Incorporation adopted by the Board of Directors pursuant to Section 5.5 hereof describing the terms of the Preferred Stock or a series thereof (which provisions may provide for special, conditional, limited, or unlimited voting rights, including multiple or fractional votes per share, or for no right to vote, except to the extent required by the Corporation Law) and subject to such shareholder disclosure and recognition -3-
procedures (which may include voting prohibition sanctions) as the Corporation may by action of the Board of Directors establish. Section 5.4. Other Terms of Common Stock. ----------- --------------------------- (a) Shares of Common Stock shall be equal in every respect insofar as their relationship to the Corporation is concerned, but such equality of rights shall not imply equality of treatment as to redemption or other acquisition of shares by the Corporation. (b) Subject to the rights of the holders of any outstanding Preferred Stock issued under Section 5.5 hereof, the holders of Common Stock shall be entitled to share ratably in such dividends or other distributions (other than purchases, redemptions, or other acquisitions of shares by the Corporation), if any, as are declared and paid from time to time at the discretion of the Board of Directors. (c) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment shall have been made to the holders of the Preferred Stock of the full amount to which they shall be entitled under this Article V, the holders of Common Stock shall be entitled, to the exclusion of the holders of the Preferred Stock of any and all series, to share, ratably according to the number of shares of Common Stock held by them, in all remaining assets of the Corporation available for distribution to its shareholders. Section 5.5. Other Terms of Preferred Stock. ----------- ------------------------------ (a) Preferred Stock may be issued from time to time in one or more series, each such series to have such distinctive designation and such preferences, limitations, and relative voting and other rights as shall be set forth in these Articles of Incorporation. Subject to the requirements of the Corporation Law and subject to all other provisions of these Articles of Incorporation, the Board of Directors of the Corporation may create one or more series of Preferred Stock and may determine the preferences, limitations, and relative voting and other rights of one or more series of Preferred Stock before the issuance of any shares of that series by the adoption of an amendment to these Articles of Incorporation that specifies the terms of the series of Preferred Stock. All shares of a series of Preferred Stock must have preferences, limitations, and relative voting and other rights identical with those of other shares of the same series and, if the description of the series set forth in these Articles of Incorporation so provides, no series of Preferred Stock need have preferences, limitations, or relative voting or other rights identical with those of any other series of Preferred Stock. Before issuing any shares of a series of Preferred Stock, the Board of Directors shall adopt an amendment to these Articles of Incorporation, which shall be effective without any shareholder approval or other action, that sets forth the preferences, limitations, and relative voting and other rights of the series, and authority is hereby expressly vested in the Board of Directors, by such amendment: -4-
(1) To fix the distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors; (2) To fix the voting rights of such series, which may consist of special, conditional, limited, or unlimited voting rights, including multiple or fractional votes per share, or no right to vote (except to the extent required by the Corporation Law); (3) To fix the dividend or distribution rights of such series and the manner of calculating the amount and time for payment of dividends or distributions, including, but not limited to: (A) the dividend rate, if any, of such series; (B) any limitations, restrictions, or conditions on the payment of dividends or other distributions, including whether dividends or other distributions shall be noncumulative or cumulative or partially cumulative and, if so, from which date or dates; (C) the relative rights of priority, if any, of payment of dividends or other distributions on shares of that series in relation to Common Stock and shares of any other series of Preferred Stock; and (D) the form of dividends or other distributions, which may be payable at the option of the Corporation, the shareholder, or another person (and in such case to prescribe the terms and conditions of exercising such option), or upon the occurrence of a designated event in cash, indebtedness, stock or other securities or other property, or in any combination thereof, and to make provisions, in the case of dividends or other distributions payable in stock or other securities, for adjustment of the dividend or distribution rate in such events as the Board of Directors shall determine; (4) To fix the price or prices at which, and the terms and conditions on which, the shares of such series may be redeemed or converted, which may be (A) at the option of the Corporation, the shareholder, or another person or upon the occurrence of a designated event; (B) for cash, indebtedness, securities, or other property or any combination thereof; and (C) in a designated amount or in an amount determined in accordance with a designated formula or by reference to extrinsic data or events; -5-
(5) To fix the amount or amounts payable upon the shares of such series in the event of any liquidation, dissolution, or winding up of the Corporation and the relative rights of priority, if any, of payment upon shares of such series in relation to Common Stock and shares of any other series of Preferred Stock; and to determine whether or not any such preferential rights upon dissolution need be considered in determining whether or not the Corporation may make dividends, repurchases, or other distributions; (6) To determine whether or not the shares of such series shall be entitled to the benefit of a sinking fund to be applied to the purchase or redemption of such series and, if so entitled, the amount of such fund and the manner of its application; (7) To determine whether or not the issue of any additional shares of such series or of any other series in addition to such series shall be subject to restrictions in addition to restrictions, if any, on the issue of additional shares imposed in the provisions of these Articles of Incorporation fixing the terms of any outstanding series of Preferred Stock theretofore issued pursuant to this Section 5.5 and, if subject to additional restrictions, the extent of such additional restrictions; and (8) Generally to fix the other preferences or rights, and any qualifications, limitations, or restrictions of such preferences or rights, of such series to the full extent permitted by the Corporation Law; provided, however, that no such preferences, rights, qualifications, limitations, or restrictions shall be in conflict with these Articles of Incorporation or any amendment hereof. (b) Shares of Preferred Stock of any series that have been redeemed (whether through the operation of a sinking fund or otherwise) or purchased by the Corporation, or which, if convertible, have been converted into shares of the Corporation of any other class or series, may be reissued as a part of such series or of any other series of Preferred Stock, subject to such limitations (if any) as may be fixed by the Board of Directors with respect to such series of Preferred Stock in accordance with subsection (a) of this Section 5.5. ARTICLE VI Directors --------- Section 6.1. Number. The number of Directors of the Corporation ----------- ------ shall not be less than five (5) nor more than nineteen (19), the exact number to be specified from time to time in the manner set forth in the By-Laws. The Board of Directors at the time of adoption of these Articles of Incorporation is composed of thirteen (13) members. The By-Laws shall provide for staggering the terms of the members of the Board of Directors by dividing the total number of Directors into three (3) groups (with each group containing one-third (1/3) of the total, as near as may be) whose terms of office expire at different times. -6-
Notwithstanding the first sentence of this Section 6.1, any amendment to the By-Laws or any resolution of the Board of Directors that would effect: (a) any increase in the number of Directors over such number as then in effect, (b) any reduction in the number of Directors below such number as then in effect, or (c) any elimination or modification of the groups or terms of office of the Directors as the By-Laws then in effect may provide, shall also be approved by the affirmative vote of a majority of the entire number of Directors of the Corporation who then qualify as Continuing Directors with respect to all Related Persons (as such terms are defined for purposes of Article VIII hereof). Section 6.2. Qualifications. Directors need not be shareholders of ----------- -------------- the Corporation or residents of this or any other state in the United States. Section 6.3. Vacancies. Vacancies occurring in the Board of ----------- --------- Directors shall be filled in the manner provided in the By-Laws or, if the By- Laws do not provide for the filling of vacancies, in the manner provided by the Corporation Law. The By-Laws may also provide that in certain circumstances specified therein, vacancies occurring in the Board of Directors may be filled by vote of the shareholders at a special meeting called for that purpose or at the next annual meeting of shareholders. Section 6.4. Liability of Directors. A Director's responsibility to ----------- ---------------------- the Corporation shall be limited to discharging his or her duties as a Director, including his or her duties as a member of any committee of the Board of Directors upon which he or she may serve, in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the Director reasonably believes to be in the best interests of the Corporation, all based on the facts then known to the Director. In discharging his or her duties, a Director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: (a) One (1) or more officers or employees of the Corporation whom the Director reasonably believes to be reliable and competent in the matters presented; (b) Legal counsel, public accountants, or other persons as to matters the Director reasonably believes are within such person's professional or expert competence; or (c) A committee of the Board of which the Director is not a member if the Director reasonably believes the Committee merits confidence; -7-
but a Director is not acting in good faith if the Director has knowledge concerning the matter in question that makes reliance otherwise permitted by this Section 6.4 unwarranted. A Director shall not be liable for any action taken as a Director, or any failure to take any action, unless (a) the Director has breached or failed to perform the duties of the Director's office in compliance with this Section 6.4, and (b) the breach or failure to perform constitutes willful misconduct or recklessness. Section 6.5. Factors to be Considered by Board. In determining ----------- --------------------------------- whether to take or refrain from taking any action with respect to any matter, including making or declining to make any recommendation to shareholders of the Corporation, the Board of Directors may, in its discretion, consider both the short term and long term best interests of the Corporation (including the possibility that these interests may be best served by the continued independence of the Corporation), taking into account, and weighing as the Directors deem appropriate, the social and economic effects thereof on the Corporation's present and future employees, suppliers and customers of the Corporation and its subsidiaries, the communities in which offices or other facilities of the Corporation are located, and any other factors the Directors consider pertinent. Section 6.6. Removal of Directors. Any or all of the members of the ----------- -------------------- Board of Directors may be removed only at a meeting of the shareholders or Directors called expressly for that purpose. Removal by the shareholders requires an affirmative vote of the holders of outstanding shares representing at least sixty-six and two-thirds percent (66-2/3%) of all the votes then entitled to be cast at an election of Directors. Removal by the Board of Directors requires an affirmative vote of both (a) a majority of the entire number of Directors at the time, and (b) a majority of Directors who then qualify as Continuing Directors (as such term is defined for purposes of Article VIII hereof). No Director may be removed except as provided in this Section 6.6. Section 6.7. Election of Directors by Holders of Preferred Stock. ----------- --------------------------------------------------- The holders of one (1) or more series of Preferred Stock may be entitled to elect all or a specified number of Directors, but only to the extent and subject to limitations as may be set forth in the provisions of these Articles of Incorporation adopted by the Board of Directors pursuant to Section 5.5 hereof describing the terms of the series of Preferred Stock. ARTICLE VII Provisions for Regulation of Business and Conduct of Affairs of Corporation ------------------------------------- Section 7.1. Meetings of Shareholders. Meetings of the shareholders ----------- ------------------------ of the Corporation shall be held at such time and at such place, either within or without the State of Indiana, as may be stated in or fixed in accordance with the By-Laws of the Corporation and specified in the respective notices or waivers of notice of any such meetings. Section 7.2. Special Meetings of Shareholders. Special meetings of ----------- -------------------------------- the shareholders, for any purpose or purposes, unless otherwise prescribed by the Corporation Law, -8-
may be called at any time only by the Board of Directors or the officers authorized to do so by the By-Laws. Shareholders of the Corporation shall not be authorized to call a special meeting of shareholders. Section 7.3. Quorum. Unless the Indiana Business Corporation Law ----------- ------ provides otherwise, at all meetings of shareholders, twenty-five percent (25%) of the votes entitled to be cast on a matter, represented in person or by proxy, constitutes a quorum for action on the matter. Action may be taken at a shareholders' meeting only on matters with respect to which a quorum exists; provided, however, that any meeting of shareholders, including annual and special meetings and any adjournments thereof, may be adjourned to a later date although less than a quorum is present. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. Section 7.4. Meetings of Directors. Meetings of the Board of ----------- --------------------- Directors of the Corporation shall be held at such place, either within or without the State of Indiana, as may be authorized by the By-Laws and specified in the respective notices or waivers of notice of any such meetings or otherwise specified by the Board of Directors. Unless the By-Laws provide otherwise, (a) regular meetings of the Board of Directors may be held without notice of the date, time, place, or purpose of the meeting and (b) the notice for a special meeting need not describe the purpose or purposes of the special meeting. Section 7.5. Action Without Meeting. Any action required or ----------- ---------------------- permitted to be taken at any meeting of the Board of Directors or shareholders, or of any committee of such Board, may be taken without a meeting, if the action is taken by all members of the Board or all shareholders entitled to vote on the action, or by all members of such committee, as the case may be. The action must be evidenced by one (1) or more written consents, in one or more counterparts, describing the action taken, signed by each Director, or all the shareholders entitled to vote on the action, or by each member of such committee, as the case may be, and, in the case of action by the Board of Directors or a committee thereof, included in the minutes or filed with the corporate records reflecting the action taken or, in the case of action by the shareholders, delivered to the Corporation for inclusion in the minutes or filing with the corporate records. Action taken under this Section 7.5 is effective when the last Director, shareholder, or committee member, as the case may be, signs the consent, unless the consent specifies a different prior or subsequent effective date, in which case the action is effective on or as of the specified date. Executed consents returned to the Corporation by facsimile transmission may be relied upon as, and shall have the same effect as, originals of such consents. A consent signed under this Section 7.5 shall have the same effect as a unanimous vote of all members of the Board, or all shareholders, or all members of the committee, as the case may be, and may be described as such in any document. Section 7.6. By-Laws. The Board of Directors shall have the ----------- ------- exclusive power to make, alter, amend, or repeal, or to waive provisions of, the By-Laws of the Corporation by the affirmative vote of a majority of the entire number of Directors at the time, except as expressly provided in Section 6.1 hereof and as provided by the Corporation Law. All provisions for the regulation of the business and management of the affairs of the Corporation not stated in these -9-
Articles of Incorporation shall be stated in the By-Laws. The Board of Directors may adopt Emergency By-Laws of the Corporation and shall have the exclusive power (except as may otherwise be provided therein) to make, alter, amend, or repeal, or to waive provisions of, the Emergency By-Laws by the affirmative vote of both (a) a majority of the entire number of Directors at the time and (b) a majority of the entire number of Directors who then qualify as Continuing Directors with respect to all Related Persons (as such terms are defined for purposes of Article VIII hereof). Section 7.7. Interest of Directors. ----------- --------------------- (a) A conflict of interest transaction is a transaction with the Corporation in which a Director of the Corporation has a direct or indirect interest. A conflict of interest transaction is not voidable by the Corporation solely because of the Director's interest in the transaction if any one (1) of the following is true: (1) The material facts of the transaction and the Director's interest were disclosed or known to the Board of Directors or a committee of the Board of Directors and the Board of Directors or committee authorized, approved, or ratified the transaction. (2) The material facts of the transaction and the Director's interest were disclosed or known to the shareholders entitled to vote and they authorized, approved, or ratified the transaction. (3) The transaction was fair to the Corporation. (b) For purposes of this Section 7.7, a Director of the Corporation has an indirect interest in a transaction if: (1) Another entity in which the Director has a material financial interest or in which the Director is a general partner is a party to the transaction; or (2) Another entity of which the Director is a director, officer, or trustee is a party to the transaction and the transaction is, or is required to be, considered by the Board of Directors of the Corporation. (c) For purposes of Section 7.7(a)(1), a conflict of interest transaction is authorized, approved, or ratified if it receives the affirmative vote of a majority of the Directors on the Board of Directors (or on the committee) who have no direct or indirect interest in the transaction, but a transaction may not be authorized, approved, or ratified under this section by a single Director. If a majority of the Directors who have no direct or indirect interest in the transaction vote to authorize, approve, or ratify the transaction, a quorum shall be deemed present for the purpose of taking action under this Section 7.7. The presence of, or a vote cast by, a Director with a direct or indirect interest in the transaction does not affect the validity of any action taken under Section 7.7(a)(1), if the transaction is otherwise authorized, approved, or ratified as provided in such subsection. -10-
(d) For purposes of Section 7.7(a)(2), a conflict of interest transaction is authorized, approved, or ratified if it receives the affirmative vote of the holders of shares representing a majority of the votes entitled to be cast. Shares owned by or voted under the control of a Director who has a direct or indirect interest in the transaction, and shares owned by or voted under the control of an entity described in Section 7.7(b), may be counted in such a vote of shareholders. Section 7.8. Nonliability of Shareholders. Shareholders of the ----------- ---------------------------- Corporation are not personally liable for the acts or debts of the Corporation, nor is private property of shareholders subject to the payment of corporate debts. Section 7.9. Indemnification of Officers, Directors, and Other ----------- ------------------------------------------------- Eligible Persons. - ---------------- (a) The Corporation shall indemnify every Eligible Person against all Liability and Expense that may be incurred by him or her in connection with or resulting from any Claim to the fullest extent authorized or permitted by the Corporation Law, as the same exists or may hereafter be amended (but in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), or otherwise consistent with the public policy of the State of Indiana. In furtherance of the foregoing, and not by way of limitation, every Eligible Person shall be indemnified by the Corporation against all Liability and reasonable Expense that may be incurred by him or her in connection with or resulting from any Claim, (1) if such Eligible Person is Wholly Successful with respect to the Claim, or (2) if not Wholly Successful, then if such Eligible Person is determined, as provided in either Section 7.9(g) or 7.9(h), to have acted in good faith, in what he or she reasonably believed to be the best interests of the Corporation or at least not opposed to its best interests and, in addition, with respect to any criminal claim is determined to have had reasonable cause to believe that his or her conduct was lawful or had no reasonable cause to believe that his or her conduct was unlawful. The termination of any Claim, by judgment, order, settlement (whether with or without court approval), or conviction or upon a plea of guilty or of nolo contendere, or its equivalent, shall not create a presumption that an Eligible Person did not meet the standards of conduct set forth in clause (2) of this subsection (a). The actions of an Eligible Person with respect to an employee benefit plan subject to the Employee Retirement Income Security Act of 1974 shall be deemed to have been taken in what the Eligible Person reasonably believed to be the best interests of the Corporation or at least not opposed to its best interests if the Eligible Person reasonably believed he was acting in conformity with the requirements of such Act or he reasonably believed his actions to be in the interests of the participants in or beneficiaries of the plan. (b) The term "Claim" as used in this Section 7.9 shall include every pending, threatened, or completed claim, action, suit, or proceeding and all appeals thereof (whether brought by or in the right of this Corporation or any other corporation or otherwise), civil, criminal, administrative, or investigative, formal or informal, in which an Eligible Person may become involved, as a party or otherwise: -11-
(1) by reason of his or her being or having been an Eligible Person, or (2) by reason of any action taken or not taken by him or her in his or her capacity as an Eligible Person, whether or not he or she continued in such capacity at the time such Liability or Expense shall have been incurred. (c) The term "Eligible Person" as used in this Section 7.9 shall mean every person (and the estate, heirs, and personal representatives of such person) who is or was a Director, officer, employee, or agent of the Corporation or is or was serving at the request of the Corporation as a Director, officer, employee, partner, trustee, member, manager, agent, or fiduciary of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other organization or entity, whether for profit or not. An Eligible Person shall also be considered to have been serving an employee benefit plan at the request of the Corporation if his or her duties to the Corporation also imposed duties on, or otherwise involved services by, him or her to the plan or to participants in or beneficiaries of the plan. (d) The terms "Liability" and "Expense" as used in this Section 7.9 shall include, but shall not be limited to, counsel fees and disbursements and amounts of judgments, fines, or penalties against (including excise taxes assessed with respect to an employee benefit plan), and amounts paid in settlement by or on behalf of an Eligible Person. (e) The term "Wholly Successful" as used in this Section 7.9 shall mean (1) termination of any Claim, whether on the merits or otherwise, against the Eligible Person in question without any finding of liability or guilt against him or her, (2) approval by a court, with knowledge of the indemnity herein provided, of a settlement of any Claim, or (3) the expiration of a reasonable period of time after the making or threatened making of any Claim without the institution of the same, without any payment or promise made to induce a settlement. (f) As used in this Section 7.9, the term "Corporation" includes all constituent entities in a consolidation or merger and the new or surviving corporation of such consolidation or merger, so that any Eligible Person who is or was a Director, officer, employee or agent of such a constituent entity, or is or was serving at the request of such constituent entity as a Director, officer, employee, partner, trustee, member, manager, agent, or fiduciary of any other corporation, partnership, joint venture, trust, employee benefit plan, limited liability company or other organization or entity, whether for profit or not, shall stand in the same position under this Section 7.9 with respect to the new or surviving corporation as he or she would if he or she had served the new or surviving corporation in the same capacity. (g) Every Eligible Person claiming indemnification hereunder (other than one who has been Wholly Successful with respect to any Claim) shall be entitled to indemnification (1) if special independent legal counsel, which may be regular counsel of the Corporation, or other disinterested person or persons, in either case selected by the Board of Directors, whether or not a disinterested quorum exists (such counsel or person or persons being hereinafter called the "Referee"), shall deliver to the Corporation a written finding that such Eligible Person has met the standards of conduct set forth in Section 7.9(a)(2), and (2) if the Board of Directors, acting upon such written finding, so determines. The Board of Directors shall, if an Eligible -12-
Person is found to be entitled to indemnification pursuant to the preceding sentence, also determine the reasonableness of the Eligible Person's Expenses. The Eligible Person claiming indemnification shall, if requested, appear before the Referee, answer questions that the Referee deems relevant and shall be given ample opportunity to present to the Referee evidence upon which the Eligible Person relies for indemnification. The Corporation shall, at the request of the Referee, make available facts, opinions, or other evidence in any way relevant to the Referee's findings that are within the possession or control of the Corporation. (h) If an Eligible Person claiming indemnification pursuant to Section 7.9(g) is found not to be entitled thereto, or if the Board of Directors fails to select a Referee under Section 7.9(g) within a reasonable amount of time following a written request of an Eligible Person for the selection of a Referee, or if the Referee or the Board of Directors fails to make a determination under Section 7.9(g) within a reasonable amount of time following the selection of a Referee, the Eligible Person may apply for indemnification with respect to a Claim to a court of competent jurisdiction, including a court in which the Claim is pending against the Eligible Person. On receipt of an application, the court, after giving notice to the Corporation and giving the Corporation ample opportunity to present to the court any information or evidence relating to the claim for indemnification that the Corporation deems appropriate, may order indemnification if it determines that the Eligible Person is entitled to indemnification with respect to the Claim because such Eligible Person met the standards of conduct set forth in Section 7.9(a)(2). If the court determines that the Eligible Person is entitled to indemnification, the court shall also determine the reasonableness of the Eligible Person's Expenses. (i) Expenses incurred by an Eligible Person who is a Director or officer of the Corporation in defending any Claim shall be paid by the Corporation in advance of the final disposition of such Claim promptly as they are incurred upon receipt of an undertaking by or on behalf of such Eligible Person to repay such amount if he or she is determined not to be entitled to indemnification. Expenses incurred by any other Eligible Person with respect to any Claim may be advanced by the Corporation (by action of the Board of Directors, whether or not a disinterested quorum exists) prior to the final disposition thereof upon receipt of an undertaking by or on behalf of the Eligible Person to repay such amount if he or she is determined not to be entitled to indemnification. (j) The rights of indemnification and advancement of Expenses provided in this Section 7.9 shall be in addition to any rights to which any Eligible Person may otherwise be entitled. Irrespective of the provisions of this Section 7.9, the Board of Directors may, at any time and from time to time, (1) approve indemnification of any Eligible Person to the full extent permitted by the provisions of applicable law at the time in effect, whether on account of past or future transactions, and (2) authorize the Corporation to purchase and maintain insurance on behalf of any Eligible Person against any Liability or Expense asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such Liability or Expense. (k) The provisions of this Section 7.9 shall be deemed to be a contract between the Corporation and each Eligible Person, and an Eligible Person's rights hereunder -13-
shall not be diminished or otherwise adversely affected by any repeal, amendment, or modification of this Section 7.9 that occurs subsequent to such person becoming an Eligible Person. (l) The provisions of this Section 7.9 shall be applicable to Claims made or commenced after the adoption hereof, whether arising from acts or omissions to act occurring before or after the adoption hereof. (m) If this Section 7.9 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Section 7.9 that shall not have been invalidated and to the fullest extent permitted by applicable law. ARTICLE VIII Approval of Business Combinations --------------------------------- Section 8.1. Supermajority Vote. Except as provided in Sections 8.2 ----------- ------------------ and 8.3 hereof, neither the Corporation nor its Subsidiaries, if any, shall become a party to any Business Combination with a Related Person without the prior affirmative vote at a meeting of the Corporation's shareholders: (a) Of not less than sixty-six and two-thirds percent (66-2/3%) of all the votes entitled to be cast by the holders of the outstanding shares of all classes of Voting Stock of the Corporation considered for purposes of this Article VIII as a single class, and (b) Of an Independent Majority of Shareholders. Such favorable votes shall be in addition to any shareholder vote which would be required without reference to this Section 8.1 and shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage may be specified by law or elsewhere in these Articles of Incorporation or the By-Laws of the Corporation or otherwise. Section 8.2. Fair Price Exception. The provisions of Section 8.1 of ----------- -------------------- this Article VIII shall not apply to a Business Combination if all of the conditions set forth in subsections (a) through (d) are satisfied. (a) The fair market value of the property, securities, or other consideration to be received per share by holders of each class or series of capital stock of the Corporation in the Business Combination is not less, as of the date of the consummation of the Business Combination (the "Consummation Date"), than the higher of the following: (1) the highest per share price (with appropriate adjustments for recapitalizations and for stock splits, stock dividends, and like distributions), including brokerage commissions and solicitation fees paid by -14-
the Related Person in acquiring any of its holdings, of such class or series of capital stock within the two-year period immediately prior to the first public announcement of the proposed Business Combination ("Announcement Date") plus interest compounded annually from the date that the Related Person became a Related Person (the "Determination Date"), or if later from a date two years before the Consummation Date, through the Consummation Date, at the rate publicly announced as the "prime rate" of interest of Citibank, N.A. (or of such other major bank headquartered in New York as may be selected by a majority of the Continuing Directors) from time to time in effect, less the aggregate amount of any cash dividends paid and the fair market value of any dividends paid in other than cash on each share of such stock from the date from which interest accrues under the preceding clause through the Consummation Date up to but not exceeding the amount of interest so payable per share; OR (2) the fair market -- value per share of such class or series on the Announcement Date as determined by the highest closing sale price during the 30-day period immediately preceding the Announcement Date if such stock is listed on a securities exchange registered under the Securities Exchange Act of 1934 or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to such stock during the 30-day period preceding the Announcement Date on the National Association of Securities Dealers, Inc. Automated Quotation System or any similar system then in use, or if no such quotations are available, the fair market value of such stock immediately prior to the first public announcement of the proposed Business Combination as determined by the Continuing Directors in good faith. In the event of a Business Combination upon the consummation of which the Corporation would be the surviving corporation or company or would continue to exist (unless it is provided, contemplated, or intended that as part of such Business Combination or within one year after consummation thereof a plan of liquidation or dissolution of the Corporation will be effected), the term "other consideration to be received" shall include (without limitation) Common Stock and/or the shares of any other class of stock retained by shareholders of the Corporation other than Related Persons who are parties to such Business Combination; (b) The consideration to be received in such Business Combination by holders of each class or series of capital stock of the Corporation other than the Related Person involved shall, except to the extent that a shareholder agrees otherwise as to all or part of the shares which he or she owns, be in the same form and of the same kind as the consideration paid by the Related Person in acquiring the majority of the shares of capital stock of such class or series already Beneficially Owned by it; (c) After such Related Person became a Related Person and prior to the consummation of such Business Combination: (1) such Related Person shall have taken steps to ensure that the Board of Directors of the Corporation included at all times representation by Continuing Directors proportionate to the ratio that the number of shares of Voting Stock of the Corporation from time to time owned by shareholders who are not Related Persons bears to all shares of Voting Stock of the Corporation outstanding at the time in question (with a Continuing Director to occupy any resulting fractional position among the Directors); (2) such Related Person shall not have acquired from the Corporation, directly or indirectly, any shares of the Corporation (except upon conversion of convertible securities acquired by it prior to becoming a Related Person or as a result of a pro rata stock dividend, stock split, or division of shares or in a transaction which satisfied all applicable requirements of this Article VIII); (3) such Related -15-
Person shall not have acquired any additional shares of Voting Stock of the Corporation or securities convertible into or exchangeable for shares of Voting Stock except as a part of the transaction which resulted in such Related Person's becoming a Related Person; and (4) such Related Person shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges, or other financial assistance or tax credits provided by the Corporation or any Subsidiary, or made any major change in the Corporation's business or equity capital structure or entered into any contract, arrangement, or understanding with the Corporation except any such change, contract, arrangement, or understanding as may have been approved by the favorable vote of not less than a majority of the Continuing Directors of the Corporation; and (d) A proxy or information statement complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations of the Securities and Exchange Commission thereunder, as then in force for corporations subject to the requirements of Section 14 of such Act (even if the Corporation is not otherwise subject to Section 14 of such Act), shall have been mailed to all holders of shares of the Corporation's capital stock entitled to vote with respect to such Business Combination. Such proxy or information statement shall contain on the face page thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by a majority of the Continuing Directors, a fair summary of an opinion of a reputable investment banking firm addressed to the Corporation as to the fairness (or lack of fairness) of the terms of such Business Combination from the point of view of the holders of shares of Voting Stock other than any Related Person (such investment banking firm to be selected by a majority of the Continuing Directors, to be furnished with all information it reasonably requests, and to be paid a reasonable fee for its services upon receipt by the Corporation of such opinion). Section 8.3. Director Approval Exception. The provisions of Section ----------- --------------------------- 8.1 hereof shall not apply to a Business Combination if: (a) The Directors, by a favorable vote of not less than two-thirds (2/3) of the Directors who then qualify as Continuing Directors, (1) have expressly approved a memorandum of understanding with the Related Person with respect to the Business Combination prior to the time that the Related Person became a Related Person and the Business Combination is effected on substantially the same terms and conditions as are provided by the memorandum of understanding, or (2) have otherwise approved the Business Combination; or (b) The Business Combination is solely between the Corporation and another corporation, one hundred percent (100%) of the Voting Stock of which is owned directly or indirectly by the Corporation. Section 8.4. Definitions. For purposes of this Article VIII: ----------- ----------- (a) A "Business Combination" means: -16-
(1) The sale, exchange, lease, transfer, or other disposition to or with a Related Person or any Affiliate or Associate of such Related Person by the Corporation or any Subsidiaries (in a single transaction or a Series of Related Transactions) of all or substantially all, or any Substantial Part, of its or their assets or businesses (including, without limitation, securities issued by a Subsidiary, if any); (2) The purchase, exchange, lease, or other acquisition by the Corporation or any Subsidiaries (in a single transaction or a Series of Related Transactions) of all or substantially all, or any Substantial Part, of the assets or business of a Related Person or any Affiliate or Associate of such Related Person; (3) Any merger or consolidation of the Corporation or any Subsidiary thereof into or with a Related Person or any Affiliate or Associate of such Related Person or into or with another Person which, after such merger or consolidation, would be an Affiliate or an Associate of a Related Person, in each case irrespective of which Person is the surviving entity in such merger or consolidation; (4) Any reclassification of securities, recapitalization, or other transaction (other than a redemption in accordance with the terms of the security redeemed) which has the effect, directly or indirectly, of increasing the proportionate amount of shares of Voting Stock of the Corporation or any Subsidiary thereof which are Beneficially Owned by a Related Person, or any partial or complete liquidation, spinoff, splitoff, or splitup of the Corporation or any Subsidiary thereof; provided, however, that this Section 8.4(a)(4) shall not relate to any transaction that has been approved by a majority of the Continuing Directors; or (5) The acquisition upon the issuance thereof of Beneficial Ownership by a Related Person of shares of Voting Stock or securities convertible into shares of Voting Stock or any voting securities or securities convertible into voting securities of any Subsidiary of the Corporation, or the acquisition upon the issuance thereof of Beneficial Ownership by a Related Person of any rights, warrants, or options to acquire any of the foregoing or any combination of the foregoing shares of Voting Stock or voting securities of a Subsidiary, if any. (b) A "Series of Related Transactions" shall be deemed to include not only a series of transactions with the same Related Person, but also a series of separate transactions with a Related Person or any Affiliate or Associate of such Related Person. (c) A "Person" shall mean any individual, firm, corporation, or other entity and any partnership, syndicate, or other group. (d) "Related Person" shall mean any Person (other than the Corporation or any Subsidiary of the Corporation or the Continuing Directors, singly or as a group) who or that at any time described in the last sentence of the penultimate paragraph of this subsection (d): -17-
(1) is the Beneficial Owner, directly or indirectly, of more than ten percent (10%) of the voting power of the outstanding shares of Voting Stock and who has not been the Beneficial Owner, directly or indirectly, of more than ten percent (10%) of the voting power of the outstanding shares of Voting Stock for a continuous period of two years prior to the date in question; or (2) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question (but not continuously during such two-year period) was the Beneficial Owner, directly or indirectly, of ten percent (10%) or more of the voting power of the then outstanding shares of Voting Stock; or (3) is an assignee of or has otherwise succeeded to any shares of the Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Related Person, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended. A Related Person shall be deemed to have acquired a share of the Corporation at the time when such Related Person became the Beneficial Owner thereof. For the purposes of determining whether a Person is the Beneficial Owner of ten percent (10%) or more of the voting power of the then outstanding Voting Stock, the outstanding Voting Stock shall be deemed to include any Voting Stock that may be issuable to such Person pursuant to a right to acquire such Voting Stock and that is therefore deemed to be Beneficially Owned by such Person pursuant to Section 8.4(e)(2)(A). A Person who is a Related Person at (1) the time any definitive agreement relating to a Business Combination is entered into, (2) the record date for the determination of shareholders entitled to notice of and to vote on a Business Combination, or (3) the time immediately prior to the consummation of a Business Combination shall be deemed a Related Person. A Related Person shall not include the Board of Directors of the Corporation acting as a group. In addition, a Related Person shall not include any Person who possesses ten percent (10%) or more of the voting power of the outstanding shares of Voting Stock of the Corporation at the time of filing these Articles of Incorporation. (e) A Person shall be a "Beneficial Owner" of any shares of Voting Stock: (1) which such Person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (2) which such Person or any of its Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement, or understanding or upon the exercise of conversion rights, exchange rights, warrants, or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement, or understanding; or -18-
(3) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of its Affiliates or Associates has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting, or disposing of any shares of Voting Stock. (f) An "Affiliate" of, or a person Affiliated with, a specific Person means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. (g) The term "Associate" used to indicate a relationship with any Person, means (1) any corporation or organization (other than this Corporation or a majority-owned Subsidiary of this Corporation) of which such Person is an officer or partner or is, directly or indirectly, the Beneficial Owner of five percent (5%) or more of any class of equity securities, (2) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, (3) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person, or (4) any investment company registered under the Investment Company Act of 1940, as amended, for which such Person or any Affiliate of such Person serves as investment adviser. (h) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Related Person set forth in Section 8.4(d) hereof, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (i) "Continuing Director" means any member of the Board of Directors of the Corporation (the "Board") who is not associated with the Related Person and was a member of the Board prior to the time that the Related Person became a Related Person, and any successor of a Continuing Director who is not associated with the Related Person and is recommended to succeed a Continuing Director by not less than two-thirds (2/3) of the Continuing Directors then on the Board. (j) "Independent Majority of Shareholders" shall mean the holders of the outstanding shares of Voting Stock representing a majority of all the votes entitled to be cast by all shares of Voting Stock other than shares Beneficially Owned or controlled, directly or indirectly, by a Related Person. (k) "Voting Stock" shall mean all outstanding shares of capital stock of the Corporation or another corporation entitled to vote generally on the election of Directors, and each reference to a proportion of shares of Voting Stock shall refer to such proportion of the total number of votes (taking into account any multiple votes per share) entitled to be cast by such shares. -19-
(l) "Substantial Part" means properties and assets involved in any single transaction or a Series of Related Transactions having an aggregate fair market value of more than ten percent (10%) of the total consolidated assets of the Person in question as determined immediately prior to such transaction or Series of Related Transactions. Section 8.5. Director Determinations. A majority of the Continuing ----------- ----------------------- Directors shall have the power to determine for the purposes of this Article VIII, on the basis of information known to them: (a) the number of shares of Voting Stock of which any Person is the Beneficial Owner, (b) whether a Person is an Affiliate or Associate of another, (c) whether a Person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of "Beneficial Owner," (d) whether the assets subject to any Business Combination constitute a Substantial Part, (e) whether two or more transactions constitute a Series of Related Transactions, and (f) such other matters with respect to which a determination is required under this Article VIII. Section 8.6. Amendment of Article VIII or Certain Other Provisions. ----------- ----------------------------------------------------- Any amendment, change, or repeal of this Article VIII or of Sections 6.6, 7.2, 7.6, 12.2, or 12.3, or any other amendment of these Articles of Incorporation which would have the effect of modifying or permitting circumvention of this Article VIII or such other provisions of these Articles of Incorporation, shall require the affirmative vote, at a meeting of shareholders of the Corporation: (a) Of at least seventy-five percent (75%) of the votes entitled to be cast by the holders of the outstanding shares of all classes of Voting Stock of the Corporation considered for purposes of this Section 8.6 as a single class; and (b) Of an Independent Majority of Shareholders; Provided, however, that this Section 8.6 shall not apply to, and such vote shall not be required for, any such amendment, change, or repeal recommended to shareholders by the favorable vote of not less than two-thirds (2/3) of the Directors who then qualify as Continuing Directors with respect to all Related Persons and any such amendment, change, or repeal so recommended shall require only the vote, if any, required under the applicable provisions of the Corporation Law. Section 8.7. Fiduciary Obligations Unaffected. Nothing in this ----------- -------------------------------- Article VIII shall be construed to relieve any Related Person from any fiduciary duty imposed by law. Section 8.8. Article VIII Nonexclusive. The provisions of this ----------- ------------------------- Article VIII are nonexclusive and are in addition to any other provisions of law or these Articles of Incorporation or the By-Laws of the Corporation relating to Business Combinations, Related Persons, or similar matters. -20-
ARTICLE IX Restrictions on Ownership and Transfer of Stock ----------------------------------------------- Section 9.1. Limitation on Ownership. Except with the prior approval ----------- ----------------------- of a majority of the Continuing Directors (as defined in Section 9.14 below), no Person (as defined in Section 9.14 below) shall Beneficially Own (as defined in Section 9.14 below) shares of Capital Stock (as defined in Section 9.14 below) in excess of the Ownership Limit (as defined in Section 9.14 below). Any Transfer (as defined in Section 9.14 below) that, if effective, would result in any Person Beneficially Owning Capital Stock in excess of the Ownership Limit shall result in such intended transferee acquiring no rights in such shares of Capital Stock (other than those rights expressly granted in this Article IX) and such number of shares of Capital Stock shall be deemed transferred to the Share Escrow Agent (as defined in Section 9.14 below) as set forth in this Article IX. Section 9.2. Excess Shares. If, notwithstanding any other provisions ----------- ------------- of this Article IX, there is a purported Transfer or other change in the capital structure of the Corporation such that any Person would Beneficially Own shares of Capital Stock in excess of the Ownership Limit (a "Purported Owner"), then, upon such Transfer or change in capital structure, such shares of Capital Stock in excess of the Ownership Limit shall be Excess Shares for purposes of this Article IX; provided, however, that in the event that any Person becomes a Purported Owner as a result of Beneficial Ownership of Capital Stock of one Person being aggregated with another Person, then the number of Excess Shares subject to this Article IX shall be allocated pro rata among each Purported Owner in proportion to each Person's total Beneficial Ownership (without regard to any aggregation with another Person pursuant to Section 9.14(b)(4) or (5). Upon the occurrence of any event that would cause any Person to exceed the Ownership Limit (including without limitation the expiration of a voting trust, without being renewed on substantially similar terms, that entitled such Person to an exemption from the Ownership Limit), all shares of Capital Stock Beneficially Owned by such Person in excess of the Ownership Limit shall also be Excess Shares for purposes of this Article IX, such Person shall be deemed the Purported Owner of such Excess Shares and such Person's rights in such Excess Shares shall be as prescribed in this Article IX. Excess Shares shall not constitute a separate class of Capital Stock. Section 9.3. Authority of the Corporation. If the Corporation at any ----------- ---------------------------- time determines that a Transfer has taken place in violation of Section 9.1 or that a Purported Owner intends to acquire or has attempted to acquire Beneficial Ownership of any shares of Capital Stock in violation of Section 9.1, the Corporation shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer, including, without limitation, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin or rescind such Transfer; provided, however, that any purported Transfers in violation of Section 9.1 shall automatically result in all shares of Capital Stock in excess of the Ownership Limit being deemed Excess Shares. Notwithstanding the foregoing, nothing contained in this Article IX shall limit the authority of the Corporation to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its stockholders. -21-
Section 9.4. Written Notice Required. Any Purported Owner who ----------- ----------------------- acquires or attempts to acquire shares of Capital Stock in violation of Section 9.l, or any Purported Owner who is a transferee such that any shares of Capital Stock are deemed Excess Shares under Section 9.2, shall immediately give written notice to the Corporation of such event and shall provide to the Corporation such other information as the Corporation may request. Section 9.5. Restrictive Legend. Each certificate for Capital Stock ----------- ------------------ issued by the Corporation shall bear an appropriate legend with regard to the restrictions on ownership and transfer of stock set forth in these Articles of Incorporation. Section 9.6. Share Escrow Agent. Upon the occurrence of a Transfer ----------- ------------------ or an event that results in Excess Shares pursuant to Section 9.2, such Excess Shares shall automatically be transferred immediately to the Share Escrow Agent, which Excess Shares, subject to the provisions of this Article IX, shall be held by the Share Escrow Agent until such time as the Excess Shares are transferred to a Person whose acquisition thereof will not violate the Ownership Limit (a "Permitted Transferee") and the Share Escrow Agent shall be authorized to execute any and all documents sufficient to transfer title to any Permitted Transferee, even in the absence of receipt of certificate(s) representing Excess Shares. The Corporation shall take such actions as it deems necessary to give effect to such transfer to the Share Escrow Agent, including by issuing a stop transfer order to the Corporation's transfer agent with respect to any attempted transfer by the Purported Owner or its nominee of any Excess Shares and by giving effect, or by instructing the Corporation's transfer agent to give effect, to such transfer to a Permitted Transferee on the books of the Corporation. Excess Shares so held shall be issued and outstanding shares of Capital Stock. The Purported Owner shall have no rights in such Excess Shares except as provided in Sections 9.7, 9.8, and 9.11 and the administration of the Excess Shares escrow shall be governed by the terms of a Share Escrow Agent Agreement. Section 9.7. Dividends on Excess Shares. The Share Escrow Agent, as ----------- -------------------------- record holder of Excess Shares, shall be entitled to receive all dividends and distributions as may be declared by the Board of Directors with respect to Excess Shares (the "Excess Share Dividends") and shall hold the Excess Share Dividends until disbursed in accordance with the provisions of Section 9.11 following. The Purported Owner, with respect to Excess Shares purported to be Beneficially Owned by such Purported Owner prior to such time that the Corporation determines that such shares are Excess Shares, shall repay to the Share Escrow Agent the amount of any Excess Share Dividends received by it that (i) are attributable to any Excess Shares and (ii) the record date of which is on or after the date that such shares become Excess Shares. The Corporation shall take all measures that it determines reasonably necessary to recover the amount of any Excess Share Dividends paid to a Purported Owner, including, if necessary, withholding any portion of future dividends or distributions payable on shares of Capital Stock Beneficially Owned by any Purported Owner (including on shares which fall below the Ownership Limit as well as on Excess Shares), and, as soon as practicable following the Corporation's receipt or withholding thereof, shall pay over to the Share Escrow Agent the dividends so received or withheld, as the case may be. Section 9.8. Effect of Liquidation etc. on Excess Shares. In the ----------- ------------------------------------------- event of any voluntary or involuntary liquidation, dissolution, or winding up of, or any distribution of the -22-
assets of, the Corporation, the Share Escrow Agent shall be entitled to receive, ratably with each other holder of Capital Stock of the same class or series, that portion of the assets of the Corporation that is available for distribution to the holders of such class or series of Capital Stock. The Share Escrow Agent shall distribute to the Purported Owner the amounts received upon such liquidations, dissolution or winding up or distribution in accordance with the provisions of Section 9.11. Section 9.9. Voting of Excess Shares. The Share Escrow Agent shall ----------- ----------------------- be entitled to vote all Excess Shares. The Share Escrow Agent shall be instructed by the Corporation to vote, consent or assent the Excess Shares as follows: (i) if the matter concerned is the election of directors, the Share Escrow Agent shall vote, consent or assent the whole number of Excess Shares held by the Share Escrow Agent for each director by multiplying the number of votes held in escrow by a fraction, the numerator of which is the number of Nonaffiliated Votes cast for the director and the denominator of which is the number of Nonaffiliated Votes that could have been cast in the election of the director and are present in person or by proxy at the meeting; (ii) where the matter under the Corporation Law or these Articles of Incorporation or the By- Laws of the Corporation requires at least an absolute majority of all outstanding shares of Common Stock in order to be effected, then the Share Escrow Agent shall vote, assent or consent all of such Excess Shares in favor of or in opposition to such matter as the majority of all Nonaffiliated Votes are cast; and (iii) on all other matters, the Share Escrow Agent shall at all times vote, assent or consent all of such shares in the identical proportion in favor of or in opposition to such matter as Nonaffiliated Votes are cast. If any calculation of votes under the preceding sentence would require a fractional vote, the Share Escrow Agent shall vote the next lower number of whole Excess Shares. The Share Escrow Agent shall use all reasonable commercial efforts to ensure, with respect to Excess Shares, that such Excess Shares are counted as being present for the purposes of any quorum required for stockholder action of the Corporation and to vote as set forth above. For purposes of these Articles of Incorporation, "Nonaffiliated Votes" shall mean the votes cast by stockholders other than any Share Escrow Agent with respect to Excess Shares. Section 9.10. Sale of Excess Shares. ------------ --------------------- (a) In an orderly fashion so as not to materially adversely affect the price of Common Stock on the New York Stock Exchange or, if Common Stock is not listed on the New York Stock Exchange, on the exchange or other principal market on which Common Stock is traded, the Share Escrow Agent shall sell or cause the sale of Excess Shares at such time or times as the Share Escrow Agent determines to be appropriate. The Share Escrow Agent shall have the right to take such actions as the Share Escrow Agent deems appropriate to seek to restrict sale of the shares to Permitted Transferees. (b) The Share Escrow Agent shall have the power to convey to the purchaser of any Excess Shares sold by the Share Escrow Agent ownership of the Excess Shares free of any interest of the Purported Owner of those Excess Shares and free of any other adverse interest arising through the Purported Owner. -23-
(c) Upon acquisition by any Permitted Transferee of any Excess Shares sold by the Share Escrow Agent or the Purported Owner, such shares shall upon such sale cease to be Excess Shares and shall become regular shares of Capital Stock in the class to which the Excess Shares belong, and the purchaser of such shares shall acquire such shares free of any claims of the Share Escrow Agent or the Purported Owner. (d) To the extent permitted by law, none of the Corporation, the Share Escrow Agent or anyone else shall have any liability to the Purported Owner or anyone else by reason of any action or inaction the Corporation or the Share Escrow Agent shall take which either shall in good faith believe to be within the scope of its authority under this Article IX or by reason of any decision as to when or how to sell any Excess Shares or by reason of any other action or inaction in connection with activities under this Article IX which docs not constitute gross negligence or willful misconduct. Without limiting by implication the scope of the preceding sentence, to the extent permitted by law, (a) neither the Share Escrow Agent nor the Corporation shall have any liability on grounds that either failed to take actions which would have produced higher proceeds for any of the Excess Shares or by reason of the manner or timing for any disposition of any Excess Shares and (b) the Share Escrow Agent shall not be deemed to be a fiduciary or Agent of any Purported Owner. Section 9.11. Application of the Proceeds from the Sale of Excess ------------ --------------------------------------------------- Shares. The proceeds from the sale of the Excess Shares to a Permitted - ------ Transferee and any Excess Share Dividends shall be distributed as follows: (i) first, to the Share Escrow Agent for any costs and expenses incurred in respect of its administration of the Excess Shares that have not theretofore been reimbursed by the Corporation; (ii) second, to the Corporation for all costs and expenses incurred by the Corporation in connection with the appointment of the Share Escrow Agent, the payment of fees to the Share Escrow Agent with respect to the services provided by the Share Escrow Agent in respect of the escrow and all funds expended by the Corporation to reimburse the Share Escrow Agent for costs and expenses incurred by the Share Escrow Agent in respect of its administration of the Excess Shares and for all fees, disbursements and expenses incurred by the Share Escrow Agent in connection with the sale of the Excess Shares; and (iii) third, the remainder thereof (as the case may be) to the Purported Owner or the Person who was the holder of record before the shares were transferred to the Share Escrow Agent (depending on who shall at such time be entitled to any economic interest in the Excess Shares); provided, however, if the Share Escrow Agent shall have any questions as to whether any security interest or other interest adverse to the Purported Owner shall have existed with respect to any Excess Shares, the Share Escrow Agent shall not be obligated to disburse proceeds for those shares until the Share Escrow Agent is provided with such evidence as the Share Escrow Agent shall deem necessary to determine the parties who shall be entitled such proceeds. Section 9.12. No Limit on the Authority of the Corporation. Subject ------------ -------------------------------------------- to Section 9.13, nothing contained in this Article IX or in any other provision of these Articles of Incorporation shall limit the authority of the Corporation to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its stockholders. Section 9.13. Settlement of Transactions. Nothing in these Articles ------------ -------------------------- of Incorporation shall preclude the settlement of any transactions entered into through the facilities -24-
of the New York Stock Exchange or any other exchange or through the means of any automated quotation system now or hereafter in effect. Section 9.14. Definitions. The following definitions shall apply ------------ ----------- with respect to this Article IX: (a) "Affiliate" and "associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended or supplemented (the "Exchange Act") at the time as of which the term shall be applied. (b) Except as is provided in (c) of this Section 9.14, a Person shall be deemed to "Beneficially Own," be the "Beneficial Owner" of or have "Beneficial Ownership" of any Capital Stock: (1) in which such Person shall then have a direct or indirect beneficial ownership interest; (2) in which such Person shall have the right to acquire any direct or indirect beneficial ownership interest pursuant to any option or other agreement (either immediately or after the passage of time or the occurrence of any contingency); (3) which such Person shall have the right to vote; (4) in which such Person shall hold any other interest which would count in determining whether such Person would be required to file a Schedule 13D; or (5) which shall be Beneficially Owned (under the concepts provided in the preceding clauses) by any affiliate or associate of the particular Person or by any other Person with whom the particular Person or any such affiliate or associate has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities). (c) The following provisions are included to clarify (b) above: (1) A Person shall not be deemed to Beneficially Own, be the Beneficial Owner of, or have Beneficial Ownership of Capital Stock by reason of possessing the right to vote if (i) such right arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act, and (ii) such Person is not the Purported Owner of any Excess Shares, is not named as holding a beneficial ownership interest in any Capital Stock in any filing on Schedule 13D and is not an affiliate or associate of any such Purported Owner or named Person. -25-
(2) A member of a national securities exchange or a registered depositary shall not be deemed to Beneficially Own, be the Beneficial Owner of or have Beneficial Ownership of Capital Stock held directly or indirectly by it on behalf of another Person (and not for its own account) solely because such member or depositary is the record holder of such Capital Stock, and (in the case of such member), pursuant to the rules of such exchange, such member may direct the vote of such Capital Stock without instruction on matters which are uncontested and do not affect substantially the rights or privileges of the holders of the Capital Stock to be voted but is otherwise precluded by the rules of such exchange from voting such Capital Stock without instruction on either contested matters or matters that may affect substantially the rights or the privileges of the holders of such Capital Stock to be voted. (3) A Person who in the ordinary course of business is a pledgee of Capital Stock under a written pledge agreement shall not be deemed to Beneficially Own, be the Beneficial Owner of or have Beneficial Ownership of such pledged Capital Stock solely by reason of such pledge until the pledgee has taken all formal steps which are necessary to declare a default or has otherwise acquired the power to vote or to direct to vote such pledged Capital Stock, provided that; (A) the pledge agreement is bona fide and was not entered into with the purpose nor with the effect of changing or influencing the control of the Corporation, nor in connection with any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b) promulgated under the Exchange Act; and (B) the pledge agreement does not grant to the pledgee the right to vote or to direct the vote of the pledged securities prior to the time the pledgee has taken all formal steps which are necessary to declare a default. (4) A Person engaged in business as an underwriter or a placement agent for securities who enters into an agreement to acquire or acquires Capital Stock solely by reason of its participation in good faith and in the ordinary course of its business in the capacity of underwriter or placement agent in any underwriting or agent representation registered under the Securities Act of 1933, as amended and in effect on the date these Articles of Incorporation were filed with the office of the Indiana Secretary of State (the "Securities Act"), a bona fide private placement, a resale under Rule 144A promulgated under the Securities Act or in any foreign or other offering exempt from the registration requirements under the Securities Act shall not be deemed to Beneficially Own, be the Beneficial Owner of or have Beneficial Ownership of such securities until the expiration of forty (40) days after the date of such acquisition so long as (i) such Person does not vote such Capital Stock during such period and (ii) such participation is not with the purpose or with the effect of changing or influencing control of the Corporation, nor in connection with or facilitating any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b) promulgated under the Exchange Act. -26-
(5) If the Corporation shall sell shares in a transaction not involving any public offering, then each purchaser in such offering shall be deemed to obtain Beneficial Ownership in such offering of the shares purchased by such purchaser, but no particular purchaser shall be deemed to Beneficially Own or have acquired Beneficial Ownership or be the Beneficial Owner in such offering of shares purchased by any other purchaser solely by reason of the fact that all such purchasers are parties to customary agreements relating to the purchase of equity securities directly from the Corporation in a transaction not involving a public offering, provided that: (A) all the purchasers are persons specified in Rule 13d- 1(b)(1)(ii) promulgated under the Exchange Act; (B) the purchase is in the ordinary course of each purchaser's business and not with the purpose nor with the effect of changing or influencing control of the Corporation, nor in connection with or as a participant in any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b) promulgated under the Exchange Act; (C) there is no agreement among or between any purchasers to act together with respect to the Corporation or its securities except for the purpose of facilitating the specific purchase involved; and (D) the only actions among or between any purchasers with respect to the Corporation or its securities subsequent to the closing date of the nonpublic offering are those which are necessary to conclude ministerial matters directly related to the completion of the offer or sale of the securities sold in such offering. (6) The Share Escrow Agent shall not be deemed to be the Beneficial Owner of any Excess Shares held by such Share Escrow Agent pursuant to a Share Escrow Agent Agreement, nor shall any such Excess Shares be aggregated with any other share of Capital Stock held by affiliates or associates of such Share Escrow Agent. (d) "Capital Stock" shall mean shares (or any other basic unit) of any class or series of any voting security which the Corporation may at any time issue or be authorized to issue, that entitles the holder thereof to vote on any election, but not necessarily all elections, of directors. To the extent that classes or series of Capital Stock vote together in the election of directors with equal votes per share, they shall be treated as a single class of Capital Stock for the purpose of computing the relevant Ownership Limit or the right to amend these Articles of Incorporation. (e) "Continuing Director" shall mean each member of the initial Board of Directors of the Corporation and any new member of the Board of Directors whose nomination for election to the board was approved by a vote of two-thirds of the directors still in office who were initial directors named in these Articles of Incorporation or whose nomination was approved by such directors. -27-
(f) "Institutional Investor" means any Person if (but only if) such Person is: (1) a broker or dealer registered under Section 15 of the Securities Exchange Act of 1934, as amended; (2) a bank as defined in Section 3(a)(6) of the Exchange Act; (3) an insurance company as defined in Section 3(a)(19) of the Exchange Act; (4) an investment company registered under Section 8 of the Investment Company Act of 1940; (5) an investment adviser registered under Section 203 of the Investment Advisers Act of 1940; (6) an employee benefit plan, or pension fund which is subject to the provisions of the Employee Retirement Income Security Act of 1974 or an endowment fund; (7) a parent holding company, provided the aggregate amount held directly by the parent, and directly and indirectly by its subsidiaries which are not persons specified in subsections (1) through (6) above, does not exceed one percent of the securities of the subject class such as common stock; or (8) a group, provided that all the members are Persons specified in the subsections (1) through (7) above. (g) "License Agreement" shall mean the license agreement between the Corporation and the Blue Cross and Blue Shield Association, including any and all addenda thereto, now in effect and, as it may be amended, modified, superseded and/or replaced from time to time, with respect to, among other things, the "Blue Cross" and "Blue Shield" name and mark. (h) "Noninstitutional Investor" means any Person that is not an Institutional Investor.: (i) "Ownership Limit" shall mean the following: (1) Except as otherwise expressly provided in this Subsection (i), the Ownership Limit for any Noninstitutional Investor shall be that number of shares of Capital Stock one share lower than the number of shares of Capital Stock which would represent 5% of the Voting Power. -28-
(2) Except as otherwise expressly provided in this Subsection (i), the Ownership Limit for any Institutional Investor shall be that number of shares of Capital Stock one share lower than the number of shares of Capital Stock which would represent 10% of the Voting Power. (3) Except as otherwise expressly provided in this Subsection (i), the Ownership Limit for any Person shall be that number of shares of Common Stock or other equity securities (or a combination thereof) representing 20% or more of the ownership interest in the Corporation. (4) In the event the Corporation and Blue Cross and Blue Shield Association shall agree in writing, through an amendment of the License Agreement or otherwise, that an Ownership Limit of a higher percentage than that prescribed in clause (1), (2) or (3) shall apply, then the Ownership Limit shall be as specified in such written agreement. (5) In the event any particular Person shall Beneficially Own shares of Capital Stock in excess of the Ownership Limit which would apply were it not for this clause (5) (the "Regular Limit"), such ownership shall not be deemed to exceed the Ownership Limit provided that (i) such Person shall not at any time Beneficially Own shares of Capital Stock in excess of the Regular Limit plus 1% and (ii) within thirty (30) days of the time when the particular Person becomes aware of the fact that the regular Limit has been exceeded, the particular Person reduces such Person's Beneficial Ownership below the Regular Limit. (j) "Person" shall mean any individual, firm, partnership, corporation, trust, association, joint venture or other entity, and shall include any successor (by merger or otherwise) of any such entity. (k) "Schedule 13D" means a report on Schedule 13D under Regulation 13D of the Exchange Act as in effect on the date these Articles of Incorporation were filed with the office of the Indiana Secretary of State and any report which may be required in the future under any requirements which Blue Cross and Blue Shield Association shall reasonably judge to have any of the purposes served by Schedule 13D as in effect on the date these Articles of Incorporation were filed with the office of the Indiana Secretary of State. (l) "Share Escrow Agent" shall mean the Person appointed by the Corporation to act as escrow agent with respect to some or all of the Excess Shares. (m) "Transfer" shall mean any sale, transfer, gift, hypothecation, pledge, assignment, devise or other disposition of Capital Stock (including (i) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Capital Stock or (ii) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Capital Stock), whether voluntary or involuntary, whether of record, constructively or beneficially and whether by operation of law or otherwise. -29-
(n) "Voting Power." The percentage of the voting power attributable to the shares of Capital Stock Beneficially Owned by any particular Person shall be equal to the percentage of all votes which could be cast in any election of any director which could be accounted for by the shares of Capital Stock Beneficially Owned by that particular Person. If in connection with an election for any particular position on the Board, shares in different classes or series are entitled to be voted together for purposes of such election, then in determining the number of "all votes which could be cast" in the election for that particular position for purposes of the preceding sentence, the number shall be equal to the number of votes which could be cast in the election for that particular position if all shares entitled to be voted in such election (regardless of series or class) were in fact voted in such election. If the Corporation shall issue any series or class of shares for which positions on the Board are reserved or shall otherwise issue shares which have voting rights which can arise or vary based upon terms governing that class or series, then the percentage of the voting power represented by the shares of Capital Stock Beneficially Owned by any particular Person shall be the highest percentage of the total votes which could be accounted for by those shares in any election of any director. Section 9.15. Amendment of Article IX, Section 5.3(a) or Section 6.1. ------------ ------------------------------------------------------ Any amendment, change or repeal of this Article 1X, or of Section 5.3(a) or 6.1 of these Articles of Incorporation, shall require the affirmative vote, at a meeting of the shareholders of the Corporation, of at least seventy-five percent (75%) of the votes entitled to be cast by the holders of the outstanding shares of all classes of Voting Stock (as defined in Section 8.4(k)) of the Corporation, considered for purposes of this Section 9.15 as a single class. ARTICLE X Initial Board of Directors -------------------------- The name and post office address of the members of the first Board of Directors of the Corporation are as follows: Number and Street City, State Name or Building Zip Code ---- ----------------- ----------- [Insert information prior to filing.] ARTICLE XI Incorporator ------------ The name and post office address of the incorporator of the Corporation are as follows: Number and Street City, State Name or Building Zip Code ---- -------------- ----------- Anthem Insurance Companies, Inc. 120 Monument Circle Indianapolis, Indiana 46204 -30-
ARTICLE XII Miscellaneous Provisions ------------------------ Section 12.1. Amendment or Repeal. Except as otherwise expressly ------------ ------------------- provided for in these Articles of Incorporation, the Corporation shall be deemed, for all purposes, to have reserved the right to amend, alter, change, or repeal any provision contained in these Articles of Incorporation to the extent and in the manner now or hereafter permitted or prescribed by statute, and all rights herein conferred upon shareholders are granted subject to such reservation. Section 12.2. Restriction on Acquisition of Ownership of 5% of More. ------------ ----------------------------------------------------- Except for the acquisition by the Corporation of all of the outstanding capital stock of Anthem Insurance Companies, Inc. ("Anthem Insurance"), in connection with the conversion of Anthem Insurance from a mutual insurance company to a stock insurance company under the Indiana Demutualization Law (Ind. Code 27-15), during the five (5) year period commencing on the effective date of such conversion, no person or persons acting in concert (other than the Corporation, Anthem Insurance, or any other company that is directly or indirectly wholly owned by the Corporation, or any employee benefit plans or trusts sponsored by the Corporation or Anthem Insurance) may directly or indirectly acquire, or agree to offer to acquire, in any manner the beneficial ownership of five percent (5%) or more of the outstanding shares of any class of a voting security of the Corporation or Anthem Insurance, other than in compliance with Ind. Code ----- ---- 27-5-13-2. Section 12.3. Redemption of Shares Acquired in Control Share ------------ ---------------------------------------------- Acquisitions. If and whenever the provisions of Ind. Code 23-1-42 apply to the - ------------ Corporation, it is authorized to redeem its securities pursuant to Ind. Code 23-1-42-10. Section 12.4. Voting as a Shareholder. The Chairman of the Board, ------------ ----------------------- the Chief Executive Officer, the President, any Vice President, the Secretary, the Treasurer or any other officers designated by the Board of Directors shall have full power and authority on behalf of the Corporation to attend any meeting of shareholders of any corporation in which the Corporation may hold stock, and to act, vote (or execute proxies to vote) and exercise in person or by proxy all other rights, powers and privileges incident to the ownership of such stock. Such officers acting on behalf of the Corporation shall have full power and authority to execute any instrument expressing consent to or dissent from any action of any such corporation without a meeting. Section 12.5. Captions. The captions of the Articles and Sections of ------------ -------- these Articles of Incorporation have been inserted for convenience of reference only and do not in any way define, limit, construe, or describe the scope or intent of any Article or Section hereof. -31-
IN WITNESS WHEREOF, the undersigned, being the incorporator designated in Article XI, executes these Articles of Incorporation this _____ day of _________, 2001. ANTHEM INSURANCE COMPANIES, INC. By:_______________________________________ -32-
EXHIBIT D BY-LAWS OF ANTHEM, INC. (Effective __________ __, 2001) ARTICLE I Meetings of Shareholders ------------------------ Section 1.1. Annual Meetings. Annual meetings of the shareholders of ----------- --------------- the Corporation shall be held each year commencing in 2002, on such date, at such hour and at such place within or without the State of Indiana as shall be designated by the Board of Directors. In the absence of designation, the meeting shall be held at the principal office of the Corporation. Section 1.2. Special Meetings. Special meetings of the shareholders ----------- ---------------- of the Corporation may be called at any time only by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President. The Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President, as the case may be, calling a special meeting of shareholders shall set the date, time and place of such meeting, which may be held within or without the State of Indiana. Section 1.3. Notices. A written notice, stating the date, time, and ----------- ------- place of any meeting of the shareholders, and, in the case of a special meeting, the purpose or purposes for which such meeting is called, shall be delivered, mailed or sent by electronic transmission by the Secretary of the Corporation, to each shareholder of record of the Corporation entitled to notice of or to vote at such meeting no fewer than ten (10) nor more than sixty (60) days before the date of the meeting. Notice of shareholders' meetings, if mailed, shall be mailed, postage prepaid, to each shareholder at his or her address shown in the Corporation's current record of shareholders. Notice of a meeting of shareholders shall be given to shareholders not entitled to vote, but only if a purpose for the meeting is to vote on any amendment to the Corporation's Articles of Incorporation, merger, or share exchange to which the Corporation would be a party, sale of the Corporation's assets, dissolution of the Corporation, or consideration of voting rights to be accorded to shares acquired or to be acquired in a "control share acquisition" (as such term is defined in the Indiana Business Corporation Law). Except as required by the foregoing sentence or as otherwise required by the Indiana Business Corporation Law or the Corporation's Articles of Incorporation, notice of a meeting of shareholders is required to be given only to shareholders entitled to vote at the meeting.
A shareholder or his or her proxy may at any time waive notice of a meeting if the waiver is in writing and is delivered to the Corporation for inclusion in the minutes or filing with the Corporation's records. A shareholder's attendance at a meeting, whether in person or by proxy, (a) waives objection to lack of notice or defective notice of the meeting, unless the shareholder or his proxy at the beginning of the meeting objects to holding the meeting or transacting business at the meeting, and (b) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder or his proxy objects to considering the matter when it is presented. Each shareholder who has, in the manner above provided, waived notice or objection to notice of a shareholders' meeting shall be conclusively presumed to have been given due notice of such meeting, including the purpose or purposes thereof. If an annual or special shareholders' meeting is adjourned to a different date, time, or place, notice need not be given of the new date, time, or place if the new date, time, or place is announced at the meeting before adjournment, unless a new record date is or must be established for the adjourned meeting. Section 1.4. Business of Shareholder Meetings. At each annual ----------- -------------------------------- meeting, the shareholders shall elect the directors and shall conduct only such other business as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (c) otherwise properly brought before the meeting by a shareholder of the Corporation who (i) was a shareholder of record at the time of giving the notice provided for in this Section 1.4, (ii) is entitled to vote at the meeting, and (iii) complied with the notice procedures set forth in this Section 1.4. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation at the principal executive office of the Corporation. To be timely, a shareholder's notice shall be delivered not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year's annual meeting and in the case of the annual meeting to be held in 2002, by January 31, 2002; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the shareholder, to be timely, must be so delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement (as defined herein) of the date of such meeting is first made. Such shareholder's notice shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; (b) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made (i) the name and address of such shareholder, as they appear on the Corporation's books, and the name and address of such beneficial owner, -2-
(ii) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owner as of the date such notice is given, and (iii) a representation that such shareholder intends to appear in person or by proxy at the meeting to propose such business; (c) in the event that such business includes a proposal to amend either the Articles of Incorporation or the By-Laws of the Corporation, the language of the proposed amendment; and (d) if the shareholder intends to solicit proxies in support of such shareholder's proposal, a representation to that effect. The foregoing notice requirements shall be deemed satisfied by a shareholder if the shareholder has notified the Corporation of his or her intention to present a proposal at an annual meeting and such shareholder's proposal has been included in a proxy statement that has been prepared by management of the Corporation to solicit proxies for such annual meeting; provided, however, that if such shareholder does not appear or send a qualified representative to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. Notwithstanding anything in these By- Laws to the contrary, no business shall be conducted at any annual meeting except in accordance with this Section 1.4, and the Chairman of the Board or other person presiding at an annual meeting of shareholders may refuse to permit any business to be brought before an annual meeting without compliance with the foregoing procedures or if the shareholder solicits proxies in support of such shareholder's proposal without such shareholder having made the representation required by clause (d) of the second preceding sentence. For the purposes of this Section 1.4, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition to the provisions of this Section 1.4, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in these By-Laws shall be deemed to affect any rights of the shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. In no event shall the adjournment of a meeting commence a new time period for the giving of a shareholder's notice as described above. Section 1.5. Notice of Shareholder Nominations. Nominations of ----------- --------------------------------- persons for election as Directors may be made by the Board of Directors or by any shareholder who is a shareholder of record at the time of giving the notice of nomination provided for in this Section 1.5 and who is entitled to vote in the election of Directors. Any shareholder of record entitled to vote in the election of Directors at a meeting may nominate a person or persons for election as Directors only if timely written notice of such shareholder's intent to make such nomination is given to the Secretary of the Corporation in accordance with the procedures for bringing business before an annual meeting set forth in Section 1.4 of these By-Laws. To be timely, a shareholder's notice shall be delivered (i) with respect to an election to be held at an annual meeting of shareholders, not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year's annual meeting and in the case of the annual meeting to be held in 2002, by January 31, 2002; provided, however, that in the event that the date of the -3-
annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the shareholder, to be timely, must be so delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement (as defined for purposes of Section 1.4 of these By-Laws) is first made of the date of such meeting, and (ii) with respect to an election to be held at a special meeting of shareholders, not earlier than the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees to be elected at such meeting. Such shareholder's notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination, of the person or persons to be nominated and of the beneficial owner, if any, on whose behalf the nomination is made; (b) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting in such election and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder, any such beneficial owner, each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; (e) the consent of each nominee to serve as a Director if so elected; and (f) if the shareholder intends to solicit proxies in support of such shareholder's nominee(s), a representation to that effect. The chairman of any meeting of shareholders to elect Directors and the Board of Directors may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure or if the shareholder solicits proxies in support of such shareholder's nominee(s) without such shareholder having made the representation required by clause (f) of the preceding sentence. In addition to the provisions of this Section 1.5, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Section 1.6. Voting. Except as otherwise provided by the Indiana ----------- ------ Business Corporation Law or the Corporation's Articles of Incorporation, each share of Common Stock of the Corporation that is outstanding at the record date established for any annual or special meeting of shareholders and is outstanding at the time of and represented in person or by proxy at the annual or special meeting, shall entitle the record holder thereof, or his proxy, to one (1) vote on each matter voted on at the meeting. Section 1.7. Quorum. Unless the Indiana Business Corporation Law ----------- ------ provides otherwise, at all meetings of shareholders, twenty-five percent (25%) of the votes entitled to be cast on a matter, represented in person or by proxy, constitutes a quorum for action on the matter. Action may be taken at a shareholders' meeting only on matters with respect to which a quorum exists; provided, however, that any meeting of shareholders, including annual and special meetings and any adjournments thereof, may be adjourned to a later date although less than a -4-
quorum is present. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. Section 1.8. Vote Required To Take Action. If a quorum exists as to ----------- ---------------------------- a matter to be considered at a meeting of shareholders, action on such matter (other than the election of Directors) is approved if the votes properly cast favoring the action exceed the votes properly cast opposing the action, except as the Corporation's Articles of Incorporation or the Indiana Business Corporation Law require a greater number of affirmative votes. Directors shall be elected by a plurality of the votes properly cast. Section 1.9. Record Date. Only such persons shall be entitled to ----------- ----------- notice of or to vote, in person or by proxy, at any shareholders' meeting as shall appear as shareholders upon the books of the Corporation as of such record date as the Board of Directors shall determine, which date may not be earlier than the date seventy (70) days immediately preceding the meeting. In the absence of such determination, the record date shall be the fiftieth (50th) day immediately preceding the date of such meeting. Unless otherwise provided by the Board of Directors, shareholders shall be determined as of the close of business on the record date. Section 1.10. Proxies. A shareholder may vote his or her shares ------------ ------- either in person or by proxy. A shareholder may appoint a proxy to vote or otherwise act for the shareholder (including authorizing the proxy to receive, or to waive, notice of any shareholders' meeting within the effective period of such proxy) by signing an appointment form, either personally or by the shareholder's attorney-in-fact. An appointment of a proxy is effective when received by the Secretary or other officer or agent authorized to tabulate votes and is effective for eleven (11) months unless a longer period is expressly provided in the appointment form. The proxy's authority may be limited to a particular meeting or may be general and authorize the proxy to represent the shareholder at any meeting of shareholders held within the time provided in the appointment form. Subject to the Indiana Business Corporation Law and to any express limitation on the proxy's authority appearing on the face of the appointment form, the Corporation is entitled to accept the proxy's vote or other action as that of the shareholder making the appointment. Section 1.11. Record Ownership. The Corporation shall be entitled to ------------ ---------------- treat the holder of any share or shares of stock of the Corporation, as recorded on the stock record or transfer books of the Corporation, as the holder of record and as the holder and owner in fact thereof and, accordingly, shall not be required to recognize any equitable or other claim to or interest in such share(s) on the part of any other person, firm, partnership, corporation or association, whether or not the Corporation shall have express or other notice thereof, save as is otherwise expressly required by law, and the term "shareholder" as used in these By-Laws means one who is a holder of record of shares of the Corporation. Section 1.12. Removal of Directors. Any or all of the members of the ------------ -------------------- Board of Directors may be removed only at a meeting of the shareholders or Directors called expressly for that purpose. Removal by the shareholders requires an affirmative vote of the holders of outstanding shares representing at least sixty-six and two-thirds percent (66-2/3%) of the votes -5-
then entitled to be cast at an election of Directors. Removal by the Board of Directors requires an affirmative vote of both (a) a majority of the entire number of Directors at the time, and (b) a majority of the entire number of Directors who then qualify as Continuing Directors (as such term is defined for purposes of Article VIII of the Corporation's Articles of Incorporation). Section 1.13. Written Consents. Any action required or permitted to ------------ ---------------- be taken at a shareholders' meeting may be taken without a meeting if the action is taken by all the shareholders entitled to vote on the action. The action must be evidenced by one (1) or more written consents, in one or more counterparts, describing the action taken, signed by all the shareholders entitled to vote on the action, and delivered to the Corporation for inclusion in the minutes or filing with the corporate records reflecting the action taken. Action taken under this Section 1.12 is effective when the last shareholder signs the consent, unless the consent specifies a different prior or subsequent effective date, in which case the action is effective on or as of the specified date. Executed consents returned to the Corporation by facsimile transmission may be relied upon as, and shall have the same effect as, originals of such consents. A consent signed under this Section 1.12 shall have the same effect as a unanimous vote of all shareholders and may be described as such in any document. Section 1.14. Participation Other Than in Person. The Chairman of ------------ ---------------------------------- the Board or the Board of Directors may permit any or all shareholders to participate in an annual or special meeting of shareholders by, or through the use of, any means of communication, such as conference telephone, by which all shareholders participating may simultaneously hear each other during the meeting. A shareholder participating in a meeting by such means shall be deemed to be present in person at the meeting. ARTICLE II Directors --------- Section 2.1. Number and Terms. The business and affairs of the ----------- ---------------- Corporation shall be managed under the direction of a Board of Directors consisting of at least five (5) Directors, but not more than nineteen (19) Directors, with the actual number of Directors being fixed from time to time by resolution of the Board of Directors. The Directors shall be divided into three (3) groups, with each group consisting of one-third (1/3) of the total Directors, as near as may be, with the term of office of the first group to expire at the annual meeting of shareholders in 2002, the term of office of the second group to expire at the annual meeting of shareholders in 2003, and the term of office of the third group to expire at the annual meeting of shareholders in 2004; and at each annual meeting of shareholders, the Directors chosen to succeed those whose terms then expire shall be identified as being of the same group as the Directors they succeed and shall be elected for a term expiring at the third succeeding annual meeting of shareholders. Despite the expiration of a Director's term, the Director shall continue to serve until his or her successor is elected and qualified, or until the earlier of his or her death, resignation, disqualification or removal, or until there is a decrease in the number of Directors. -6-
Any vacancy occurring in the Board of Directors, from whatever cause arising, shall be filled by selection of a successor by a majority vote of the remaining members (although less than a quorum) of the Board of Directors who then qualify as Continuing Directors (as such term is defined for purposes of Article VIII of the Corporation's Articles of Incorporation); provided, however, that if such vacancy or vacancies leave the Board of Directors with no members who then qualify as Continuing Directors or if the remaining members of the Board who then qualify as Continuing Directors are unable to agree upon a successor or determine not to select a successor, such vacancy may be filled by a vote of the shareholders at a special meeting called for that purpose or at the next annual meeting of shareholders. The term of a Director elected or selected to fill a vacancy shall expire at the end of the term for which such Director's predecessor was elected, or if the vacancy arises because of an increase in the size of the Board of Directors, at the end of the term specified at the time of election or selection. The Directors and each of them shall have no authority to bind the Corporation except when acting as a Board. Section 2.2. Quorum and Vote Required To Take Action. A majority of ----------- --------------------------------------- the whole Board of Directors shall be necessary to constitute a quorum for the transaction of any business, except the filling of vacancies. If a quorum is present when a vote is taken, the affirmative vote of a majority of the Directors present shall be the act of the Board of Directors, unless the act of a greater number is required by the Indiana Business Corporation Law, the Corporation's Articles of Incorporation or these By-Laws. Section 2.3. Annual and Regular Meetings. The Board of Directors ----------- --------------------------- shall meet annually, without notice, immediately following the annual meeting of the shareholders, for the purpose of transacting such business as properly may come before the meeting. Other regular meetings of the Board of Directors, in addition to said annual meeting, shall be held on such dates, at such times and at such places as shall be fixed by resolution adopted by the Board of Directors and specified in a notice of each such regular meeting, or otherwise communicated to the Directors. The Board of Directors may at any time alter the date for the next regular meeting of the Board of Directors. Section 2.4. Special Meetings. Special meetings of the Board of ----------- ---------------- Directors may be called by the Chairman of the Board, the Chief Executive Officer or by one quarter (1/4) of the whole authorized number of Directors, upon not less than twenty-four (24) hours' notice given to each Director of the date, time, and place of the meeting, which notice need not specify the purpose or purposes of the special meeting. Such notice may be communicated in person (either in writing or orally), by telephone, telegraph, teletype, or other form of wire or wireless communication, or by mail, and shall be effective at the earlier of the time of its receipt or, if mailed, three (3) days after its mailing. Notice of any meeting of the Board may be waived in writing at any time if the waiver is signed by the Director entitled to the notice and is filed with the minutes or corporate records. A Director's attendance at or participation in a meeting waives any required notice to the Director of the meeting, unless the Director at the beginning of the meeting (or promptly upon the Director's arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. -7-
Section 2.5. Written Consents. Any action required or permitted to ----------- ---------------- be taken at any meeting of the Board of Directors may be taken without a meeting if the action is taken by all members of the Board. The action must be evidenced by one (1) or more written consents, in one or more counterparts, describing the action taken, signed by each Director, and included in the minutes or filed with the corporate records reflecting the action taken. Action taken under this Section 2.5 is effective when the last Director signs the consent, unless the consent specifies a different prior or subsequent effective date, in which case the action is effective on or as of the specified date. Executed consents returned to the Corporation by facsimile transmission may be relied upon as, and shall have the same effect as, originals of such consents. A consent signed under this Section 2.5 shall have the same effect as a unanimous vote of all members of the Board and may be described as such in any document. Section 2.6. Participation Other Than in Person. The Board of ----------- ---------------------------------- Directors may permit any or all Directors to participate in a regular or special meeting by, or through the use of, any means of communication, such as conference telephone, by which all Directors participating may simultaneously hear each other during the meeting. A Director participating in a meeting by such means shall be deemed to be present in person at the meeting. Section 2.7. Executive Committee. The Board of Directors may appoint ----------- ------------------- three (3) or more members to an Executive Committee. The Executive Committee shall, subject to the restrictions of Section 2.13 hereof, be authorized to exercise the authority of the full Board of Directors at any times other than during regular or special meetings of the Board of Directors. All actions taken by the Executive Committee shall be reported at the first regular meeting of the Board of Directors following such actions. Members of the Executive Committee shall serve at the pleasure of the Board of Directors. Section 2.8. Compensation Committee. The Board of Directors may ----------- ---------------------- appoint three (3) or more members to a Compensation Committee. The duties of the Compensation Committee shall be to: (a) consider and recommend to the Board of Directors and management the overall compensation programs of the Corporation; (b) review and approve the compensation payable to the senior management personnel of the Corporation; (c) review and approve significant changes in employee benefit plans and stock related plans; and (d) administer the Corporation's stock plans. Section 2.9. Audit Committee. The Board of Directors may appoint ----------- --------------- three (3) or more members to an Audit Committee. The duties of the Audit Committee shall be to: (a) recommend to the Board of Directors the selection of and engagement arrangements for the independent public accountants and auditors for each fiscal year; (b) recommend to the Board of Directors as to the advisability of having the independent public accountants and auditors make specified studies and reports regarding auditing matters, accounting procedures, tax or other matters; (c) review the results of the audit for each fiscal year; (d) review such accounting policies of the Corporation as appropriate; (e) review the coordination between the independent public accountants and auditors and the Corporation's chief accounting officer; (f) review the scope and procedures of the Corporation's internal audit work and the quality and composition of the Corporation's internal audit staff; and (g) review all related party transactions. In addition, the audit committee shall review quarterly and annual financial statements (including reserves -8-
and taxes); review quarterly investment reports, portfolio performance and asset allocation; review budget and long-term forecasts; review and recommend to the Board any increases in the Corporation's debt facilities and changes in capital structure; and review and recommend to the Board any changes in investment policy. Section 2.10. Planning Committee. The Board of Directors may appoint ------------ ------------------ three (3) or more members to a Planning Committee. The duties of the Planning Committee shall be to: (a) assist the Chief Executive Officer in developing strategies to achieve the strategic plan; (b) review the annual operating plan for the Corporation; (c) review integration plans for mergers, acquisitions and other corporate transactions of the Corporation as requested by the Board or the Chief Executive Officer; (d) track the Corporation's performance to its plans; and (e) review specific strategic planning issues as and when requested by the Board or the Chief Executive Officer. Section 2.11. Board Governance and Executive Development Committee. ------------ ---------------------------------------------------- The Board of Directors may appoint three (3) or more members to a Board Governance and Executive Development Committee. The duties of the Board Governance and Executive Development Committee shall be to: (a) review the background and qualifications of potential board members; (b) review the performance of the Board of Directors; (c) recommend training plans for Directors to improve performance; and (d) prepare a slate of nominees to fill directorships up for election each year, vacancies as they occur, and skill needs as they arise. In addition, the Board Governance and Executive Development Committee shall assist the Chief Executive Officer in the design and implementation of an executive training and development program and counsel the Chief Executive Officer in the selection of executives for succession planning. Section 2.12. Other Committees. The Board of Directors may create ------------ ---------------- one (1) or more committees in addition to any Executive Committee, Compensation Committee, Audit Committee, Planning Committee or Board Governance and Executive Development Committee and appoint members of the Board of Directors to serve on them, by resolution of the Board of Directors adopted by a majority of all the Directors in office when the resolution is adopted. The committee may exercise the authority of the Board of Directors to the extent specified in the resolution. Each committee may have one (1) or more members, and all the members of such committee shall serve at the pleasure of the Board of Directors. Section 2.13. Limitations on Committees; Notice, Quorum and Voting. ------------ ---------------------------------------------------- (a) Neither the Executive Committee, Compensation Committee, Audit Committee, Planning Committee, Board Governance and Executive Development Committee nor any other committee hereafter established may: (1) authorize dividends or other distributions, except a committee may authorize or approve a reacquisition of shares if done according to a formula or method prescribed by the Board of Directors; -9-
(2) approve or propose to shareholders action that is required to be approved by shareholders; (3) fill vacancies on the Board of Directors or on any of its committees; (4) except as permitted under Section 2.13(a)(7) below, amend the Corporation's Articles of Incorporation under Ind. Code 23-1-38-2; (5) adopt, amend, repeal, or waive provisions of these By-Laws; (6) approve a plan of merger not requiring shareholder approval; or (7) authorize or approve the issuance or sale or a contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except the Board of Directors may authorize a committee (or an executive officer of the Corporation designated by the Board of Directors) to take the action described in this Section 2.13(a)(7) within limits prescribed by the Board of Directors. (b) Except to the extent inconsistent with the resolutions creating a committee, Sections 2.1 through 2.6 of these By-Laws, which govern meetings, action without meetings, notice and waiver of notice, quorum and voting requirements and participation in meetings of the Board of Directors other than in person, apply to each committee and its members as well. Section 2.14. Compensation of Directors. Unless otherwise restricted ------------ ------------------------- by the Corporation's Articles of Incorporation or theses By-Laws, Directors shall receive for their services on the Board or any Committee thereof such compensation and benefits, including the granting of options, together with expenses, if any, as the Board may from time to time determine. The Directors may be paid a fixed sum for attendance at each meeting of the Board or Committee thereof and / or a stated annual sum as a Director, together with expenses, if any, of attendance at each meeting of the Board or Committee thereof. Nothing herein contained shall be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE III Officers -------- Section 3.1. Designation, Selection and Terms. The officers of the ----------- -------------------------------- Corporation shall consist of the Chief Executive Officer, the President, the Chief Financial Officer, the Chief Accounting Officer, and the Secretary. The Board of Directors may also elect Executive Vice Presidents, Vice Presidents, a Treasurer, a Controller, Assistant Secretaries and Assistant Treasurers, and such other officers or assistant officers as it may from time to time determine by resolution creating the office and defining the duties thereof. In addition, the Chief Executive -10-
Officer or the President may, by a certificate of appointment creating the office and defining the duties and term thereof delivered to the Secretary for inclusion with the corporate records, from time to time create and appoint such assistant officers as they deem desirable. The officers of the Corporation shall be elected by the Board of Directors (or appointed by the Chief Executive Officer or the President as provided above) and need not be selected from among the members of the Board of Directors, except for the Chairman of the Board and the Chief Executive Officer who shall be members of the Board of Directors. Any two (2) or more offices may be held by the same person. All officers shall serve at the pleasure of the Board of Directors and, with respect to officers appointed by the Chief Executive Officer or the President, also at the pleasure of such officers. The election or appointment of an officer does not itself create contract rights. Section 3.2. Removal. The Board of Directors may remove any officer ----------- ------- at any time with or without cause. An officer appointed by the Chief Executive Officer or the President may also be removed at any time, with or without cause, by any of such officers. Vacancies in such offices, however occurring, may be filled by the Board of Directors at any meeting of the Board of Directors (or by appointment by the Chief Executive Officer or the President, to the extent provided in Section 3.1 of these By-Laws). Section 3.3. Chairman of the Board. The Chairman of the Board, if ----------- --------------------- any, shall, if present, preside at all meetings of the shareholders and of the Board of Directors and shall have such powers and perform such duties as are assigned to him by the Board of Directors. Section 3.4. Chief Executive Officer. The Chief Executive Officer ----------- ----------------------- shall be the chief executive and principal policymaking officer of the Corporation. Subject to the authority of the Board of Directors, he or she shall formulate the major policies to be pursued in the administration of the Corporation's affairs. He or she shall study and make reports and recommendations to the Board of Directors with respect to major problems and activities of the Corporation and shall see that the established policies are placed into effect and carried out. In the absence of the Chairman of the Board, the Chief Executive Officer shall preside at meetings of the shareholders and of the Board of Directors. Section 3.5. President. Subject to the provisions of Sections 3.3 ----------- --------- and 3.4, the President shall exercise the powers and perform the duties which ordinarily appertain to such office and shall manage and operate the business and affairs of the Corporation in conformity with the policies established by the Board of Directors and the Chief Executive Officer, or as may be provided for in these By-Laws. In connection with the performance of his or her duties, he or she shall keep the Chairman of the Board and the Chief Executive Officer fully informed as to all phases of the Corporation's activities. In the absence of the Chairman of the Board and the Chief Executive Officer, the President shall preside at meetings of the shareholders and, if a Director, at meetings of the Board of Directors. Section 3.6. Chief Financial Officer. The Chief Financial Officer ----------- ----------------------- shall be the chief financial officer of the Corporation and shall perform all of the duties customary to that office. He or she shall be responsible for all of the Corporation's financial affairs, subject to the supervision and direction of the Chief Executive Officer, and shall have and perform such further -11-
powers and duties as the Board of Directors may, from time to time, prescribe and as the Chief Executive Officer may, from time to time, delegate to him or her. Section 3.7. Executive Vice President. Each Executive Vice President ----------- ------------------------ shall have such powers and perform such duties as the Board of Directors may, from time to time, prescribe and as the Chief Executive Officer or the President may, from time to time, delegate to him or her. Section 3.8. Chief Accounting Officer. The Chief Accounting Officer ----------- ------------------------ shall perform all of the duties customary to that office, shall be the chief accounting officer of the Corporation and shall be responsible for maintaining the Corporation's accounting books and records and preparing its financial statements, subject to the supervision and direction of the Chief Financial Officer and other superior officers within the Corporation. He or she shall also be responsible for causing the Corporation to furnish financial statements to its shareholders pursuant to Ind. Code 23-1-53-1. Section 3.9. Secretary. The Secretary shall be the custodian of the ----------- --------- books, papers, and records of the Corporation and of its corporate seal, if any, and shall be responsible for seeing that the Corporation maintains the records required by Ind. Code 23-1-52-1 (other than accounting records) and that the Corporation files with the Indiana Secretary of State the biennial report required by Ind. Code 23-1-53-3. The Secretary shall be responsible for preparing minutes of the meetings of the shareholders and of the Board of Directors and for authenticating records of the Corporation, and he or she shall perform all of the other duties usual in the office of Secretary of a corporation. Section 3.10. Vice Presidents. Each Vice President shall have such ------------ --------------- powers and perform such duties as the Board of Directors may, from time to time, prescribe and as the Chief Executive Officer or the President may, from time to time, delegate to him or her. Section 3.11. Treasurer. The Treasurer, if any, shall be responsible ------------ --------- for the treasury functions of the Corporation, subject to the supervision of the Chief Financial Officer. Section 3.12. Salary. The Board of Directors may, at its discretion, ------------ ------ from time to time, fix the salary of any officer by resolution included in the minute book of the Corporation. ARTICLE IV Checks ------ All checks, drafts, or other orders for payment of money shall be signed in the name of the Corporation by such officers or persons as shall be designated from time to time by resolution adopted by the Board of Directors and included in the minute book of the Corporation; and in the absence of such designation, such checks, drafts, or other orders for payment shall be signed by the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer. -12-
ARTICLE V Loans ----- Such of the officers of the Corporation as shall be designated from time to time by resolution adopted by the Board of Directors and included in the minute book of the Corporation, and in the absence of such designation and subject to such limitations as the Board of Directors may fix, the Chief Executive Officer, the President and the Chief Financial Officer, shall have the power, with such limitations thereon as may be fixed by the Board of Directors, to borrow money in the Corporation's behalf, to establish credit, to discount bills and papers, to pledge collateral, and to execute such notes, bonds, debentures, or other evidences of indebtedness, and such mortgages, trust indentures, and other instruments in connection therewith, as may be authorized from time to time by such Board of Directors. ARTICLE VI Execution of Documents ---------------------- The Chief Executive Officer, the President or any other officer authorized by the Board of Directors may, in the Corporation's name, acting singly, sign all deeds, leases, contracts, or similar documents unless otherwise directed by the Board of Directors or otherwise provided herein or in the Corporation's Articles of Incorporation, or as otherwise required by law. Only one signature is required, unless otherwise provided by a resolution of the Board of Directors. ARTICLE VII Stock ----- Section 7.1. Certificates of Stock; Uncertificated Shares; Execution. ----------- ------------------------------------------------------- The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the Corporation shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until each certificate is surrendered to the Corporation. Certificates for shares of the Corporation shall be signed by the Chief Executive Officer or the President and by the Secretary or an Assistant Secretary and the seal of the Corporation (or a facsimile thereof), if any, may be thereto affixed. Where any such certificate is also signed by a transfer agent or a registrar, or both, the signatures of the officers of the Corporation may be facsimiles. The Corporation may issue and deliver any such certificate notwithstanding that any such officer who shall have signed, or whose facsimile signature shall have been imprinted on, such certificate shall have ceased to be such officer. -13-
Section 7.2. Contents. Each certificate issued after the adoption of ----------- -------- these By-Laws shall state on its face the name of the Corporation and that it is organized under the laws of the State of Indiana, the name of the person to whom it is issued, and the number and class of shares and the designation of the series, if any, the certificate represents, and shall state conspicuously on its front or back that the Corporation will furnish the shareholder, upon his written request and without charge, a summary of the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the Board of Directors to determine variations for future series). Section 7.3. Transfers. Except as otherwise provided by law or by ----------- --------- resolution of the Board of Directors, transfers of shares of the Corporation shall be made only on the books of the Corporation by the holder thereof, in person or by duly authorized attorney, on payment of all taxes thereon and surrender for cancellation of the certificate or certificates for such shares (except as hereinafter provided in the case of loss, destruction, or mutilation of certificates) properly endorsed by the holder thereof or accompanied by the proper evidence of succession, assignment, or authority to transfer, and delivered to the Secretary or an Assistant Secretary. Section 7.4. Stock Transfer Records. There shall be entered upon the ----------- ---------------------- stock records of the Corporation the number of each certificate issued, the name and address of the registered holder of such certificate, the number, kind, and class of shares represented by such certificate, the date of issue, whether the shares are originally issued or transferred, the registered holder from whom transferred, and such other information as is commonly required to be shown by such records. The stock records of the Corporation shall be kept at its principal office, unless the Corporation appoints a transfer agent or registrar, in which case the Corporation shall keep at its principal office a complete and accurate shareholders' list giving the names and addresses of all shareholders and the number and class of shares held by each, which shall be updated periodically as determined by the Secretary, but not less frequently than quarterly, and which shall be updated as of each record date established with respect to a meeting of shareholders or other shareholder action. If a transfer agent is appointed by the Corporation, shareholders shall give written notice of any changes in their addresses from time to time to the transfer agent. Section 7.5. Transfer Agents and Registrars. The Board of Directors ----------- ------------------------------ may appoint one or more transfer agents and one or more registrars and may require each stock certificate to bear the signature of either or both. Section 7.6. Loss, Destruction, or Mutilation of Certificates. The ----------- ------------------------------------------------ holder of any shares of the Corporation shall immediately notify the Corporation of any loss, destruction, or mutilation of the certificate therefor, and the Board of Directors may, in its discretion, cause to be issued to him a new certificate or certificates, upon the surrender of the mutilated certificate, or, in the case of loss or destruction, upon satisfactory proof of such loss or destruction. The Board of Directors may, in its discretion, require the holder of the lost or destroyed certificate or his legal representative to give the Corporation a bond in such sum and in such form, and with such surety or sureties as it may direct, to indemnify the Corporation, its transfer agents, and registrars, if any, against any claim that may be made against them or any of them with respect to the shares represented by the certificate or certificates alleged to have been lost or destroyed, but -14-
the Board of Directors may, in its discretion, refuse to issue a new certificate or certificates, save upon the order of a court having jurisdiction in such matters. Section 7.7. Form of Certificates. The form of the certificates for ----------- -------------------- shares of the Corporation shall conform to the requirements of Section 7.2 of these By-Laws and be in such printed form as shall from time to time be approved by resolution of the Board of Directors. ARTICLE VIII Seal ---- The corporate seal of the Corporation shall, if the Corporation elects to have one, be in the form of a disc, with the name of the Corporation and "INDIANA" on the periphery thereof and the word "SEAL" in the center. ARTICLE IX Miscellaneous ------------- Section 9.1. Indiana Business Corporation Law. The provisions of the ----------- -------------------------------- Indiana Business Corporation law, as amended, applicable to all matters relevant to, but not specifically covered by, these By-Laws are hereby, by reference, incorporated in and made a part of these By-Laws. Section 9.2. Fiscal Year. The fiscal year of the Corporation shall ----------- ----------- end on December 31 of each year. Section 9.3. Election to be governed by Indiana Code (S) 23-1-43. ----------- --------------------------------------------------- Effective upon the registration of any class of the Corporation's shares under Section 12 of the Securities Exchange Act of 1934, as amended, the Corporation shall be governed by the provisions of Ind. Code 23-1-43 regarding business combinations. Section 9.4. Control Share Acquisition Statute. The provisions of ----------- --------------------------------- Ind. Code 23-1-42 shall apply to the acquisition of shares of the Corporation. Section 9.5. Redemption of Shares Acquired in Control Share ----------- ---------------------------------------------- Acquisitions. If and whenever the provisions of Ind. Code 23-1-42 apply to the - ------------ Corporation, any or all control shares acquired in a control share acquisition shall be subject to redemption by the Corporation, if either: (a) no acquiring person statement has been filed with the Corporation with respect to such control share acquisition in accordance with Ind. Code 23-1-42-6, or -15-
(b) the control shares are not accorded full voting rights by the Corporation's shareholders as provided in Ind. Code 23-1-42-9. A redemption pursuant to Section 9.5(a) may be made at any time during the period ending sixty (60) days after the last acquisition of control shares by the acquiring person. A redemption pursuant to Section 9.5(b) may be made at any time during the period ending two (2) years after the shareholder vote with respect to the granting of voting rights to such control shares. Any redemption pursuant to this Section 9.5 shall be made at the fair value of the control shares and pursuant to such procedures for such redemption as may be set forth in these By-Laws or adopted by resolution of the Board of Directors. As used in this Section 9.5, the terms "control shares," "control share acquisition," "acquiring person statement," and "acquiring person" shall have the meanings ascribed to such terms in Ind. Code 23-1-42. Section 9.6. Amendments. These By-Laws may be rescinded, changed, or ----------- ---------- amended, and provisions hereof may be waived, at any meeting of the Board of Directors by the affirmative vote of a majority of the entire number of Directors at the time, except as otherwise required by the Corporation's Articles of Incorporation or by the Indiana Business Corporation Law. Section 9.7. Definition of Articles of Incorporation. The term ----------- --------------------------------------- "Articles of Incorporation" as used in these By-Laws means the articles of incorporation of the Corporation as from time to time are in effect. -16-
EXHIBIT E Large Holder Sale Program Procedures and Restricitons ----------------------------------------------------- A. Defined Terms (terms used but not defined herein shall have the respective meanings set forth in the Plan). 1. Batch: has the meaning set forth in Section B.1. hereof. 2. Broker-Dealer Affiliate: an affiliate of the Program Agent or a service organization acting on its behalf, that is (a) registered as a broker- dealer under the Exchange Act or (b) a "bank" (within the meaning of such term in Section 3(a)(6) of the Exchange Act) that is excluded from the definition of "broker" under Sections 3(a)(4) and 15(a) of the Exchange Act. "Broker-Dealer Affiliate" may also include the Program Agent itself if it meets these requirements. Some of the activities described in these Sale Program Procedures will be performed by the Broker-Dealer Affiliate in order to meet regulatory requirements under the federal securities laws. The Initial Broker-Dealer Affiliate will be a broker-dealer or bank acceptable to the Commissioner. 3. Daily Trading Limit: has the meaning set forth in Section B.4. hereof. 4. Exchange Act: the Securities Exchange Act of 1934, as amended. 5. Initial Investment Bank: Goldman, Sachs & Co. 6. Large Holders: Eligible Statutory Members for which valid instructions to sell shares of Common Stock ("Shares") have been received (i) that were initially allocated more than 30,000 Shares pursuant to the Plan and (ii) that hold more than 30,000 Shares on the date the instructions are received. 7. pro rata: the method for allocating Shares to be sold in a given Batch on behalf of Large Holders when not all sale instructions received from the Large Holders can be processed in a given way (for instance, when not all of the sale instructions received from the Large Holders can be sold on a given day, or when Anthem, Inc. elects to purchase less than all of the Shares available to be purchased from Large Holders in a Batch). When these Sale Program Procedures require that Shares be allocated on a pro rata basis, it means that Shares will be allocated in a given Batch among Large Holders based on the proportion in such Batch that the number of Shares covered by the sale instructions of each such Large Holders bears to Shares covered by the sale instructions of all such Large Holders. 8. Program Agent: the program agent for the Sale Program. The initial Program Agent shall be a bank, trust company or other institution acceptable to the Commissioner. Some of the activities described in these Sale Program Procedures will be performed by the Broker-Dealer Affiliate in order to meet regulatory requirements under the federal securities laws.
9. Surplus Shares: has the meaning set forth in Section B.4. below. B. Sale Transactions 1. All valid sale instructions received from Large Holders after 3:00 p.m. on a particular business day and until 3:00 p.m. on the next business day will be combined and processed together (each, a "Batch"). 2. The executing brokers may be affiliates of the Program Agent but not affiliates of Anthem, Inc. 3. The Broker-Dealer Affiliate and the brokers will process sale instructions for a Batch on the trading day following the day the Batch is formed. However, (a) if there has occurred any act of God or nature, mechanical or electrical breakdown, computer failure, failure or unavailability of the Federal Reserve Bank wire, facsimile, Internet, telex, or other transaction or communications system or power supply, in each case the effect of which is such as to make it, in the judgment of the Broker-Dealer Affiliate, after taking into account all commercially reasonable means of doing so, impracticable to process sale instructions under the Program, or (b) if trading in any equity securities of Anthem, Inc. has been suspended or materially limited by the Securities and Exchange Commission or the New York Stock Exchange ("NYSE"), or if trading generally on the NYSE or has been suspended or materially limited, or (c) if a banking moratorium has been declared by either Federal or New York authorities, then instructions will not be processed during the pendency of such events. Instructions will be processed by the close of the NYSE on the trading day following the expiry of such events. 4. Limitations on Sales on Behalf of Large Holders. If, during the first 180 days after the Effective Date, the number of shares to be sold in a Batch (after sales to Anthem, Inc. pursuant to paragraph 6 below) by or on behalf of the Large Holders exceeds the lesser of (i) 1/10th of 1% of the number of shares of Common Stock outstanding or (ii) 25% of the average daily trading volume for the 20 consecutive trading days (or such shorter period, if fewer than 20 consecutive trading days have elapsed since the Effective Date) preceding such day (the "Daily Trading Limit"), the Broker-Dealer Affiliate shall process instructions on behalf of the Large Holders through market orders for only a number of shares equal to the Daily Trading Limit for that day. The remaining Shares to be sold on behalf of Large Holders will be processed in the manner described below. These Shares are called "Surplus Shares." -2-
If there are Surplus Shares in a Batch, the Shares covered by sale instructions from Large Holders shall be allocated between the Shares to be sold within the Daily Trading Limit (and thus not subject to the limits set forth in this paragraph 4) and Surplus Shares subject to the limits set forth in this paragraph 4 on a pro rata basis. The Broker-Dealer Affiliate shall process the Surplus Shares in accordance with one or more of the following options: (a) The Broker-Dealer Affiliate shall include all Surplus Shares not sold in accordance with clause (b) or (c) below in the Batch formed on the next succeeding trading day. These Surplus Shares will be deemed to be included in that next trading day's Batch (and no longer will be included in the original trading day's Batch) for purposes of determining the price and date at which the related sale instructions are processed. These Surplus Shares, together with other Shares to be sold on behalf of Large Holders in the next day's Batch, will be subject to the Daily Trading Limit applicable to that Batch. If the total number of these Surplus Shares and the other Shares to be sold on behalf of Large Holders in the next day's Batch exceeds the Daily Trading Limit on that day, then these Surplus Shares shall be sold before the other Shares to be sold on behalf of Large Holders in that Batch. This priority will continue in any succeeding trading day such that if Shares are to be sold on that trading day on behalf of Large Holders from more than one Batch, the Shares will be sold in the order in which the Batches were formed. (b) (i) if the Batch is formed within 90 days of the Effective Date, the Broker-Dealer Affiliate may request the Initial Investment Bank to act exclusively as agent to sell all or a portion of the Surplus Shares at market clearing prices. The Initial Investment Bank shall not be obligated to accept the request and the Initial Investment Bank shall be deemed to have accepted such a request if and only if it has agreed in writing to act; (ii) If the Batch is formed more than 90 days after the Effective Date, the Broker-Dealer Affiliate may request any nationally recognized brokerage firm to act as agent to sell all or a portion of the Surplus Shares at market clearing prices. Any institution acting as agent as described in this paragraph 4(b) will either cross the Surplus Shares which it has agreed to sell on the NYSE or will sell the Surplus Shares off exchange, in which case the agent will have a general obligation to obtain the best price reasonably available in the circumstance. Sales effected in accordance with this paragraph 4(b) will be processed on the trading day following the day the Batch is formed. (c) The Broker-Dealer Affiliate may sell all or a portion of the Surplus Shares in a block trade. (i) If the Batch is formed within 90 days of the Effective Date, the Broker-Dealer Affiliate may request bids for a fixed number of Shares (determined by the Broker-Dealer Affiliate in its sole discretion) from each of the Initial Investment Bank -3-
and one or more other nationally recognized brokerage firm. The block of Shares will be sold to the firm submitting the highest bid. If more than one firm submits the same bid and such bid is the highest bid, the Broker- Dealer Affiliate will request new bids from each of the firms previously submitting the highest bid until one becomes the highest. If no one bid becomes the highest, then the Broker-Dealer Affiliate will sell the block to one of the firms submitting the highest bids, randomly selected by the Broker-Dealer Affiliate (provided that the Broker-Dealer Affiliate will alternate between firms in any subsequent tied-bid or use other equitable procedures to ensure that no firm is favored if there is more than one occasion in which there is a tied-bid). (ii) If the Batch is formed more than 90 days after the Effective Date, the Broker-Dealer Affiliate may request bids from any three nationally recognized brokerage firms selected by the Broker-Dealer Affiliate in its sole discretion. The block of shares will be sold to the firm submitting the highest bid. If more than one firm submits the same bid and such bid is the highest bid, the Broker-Dealer Affiliate will request new bids from each of the firms previously submitting the highest bid until one becomes the highest. If no one bid becomes the highest, then the Broker-Dealer Affiliate will sell the block to one of the firms submitting the highest bids, randomly selected by the Broker-Dealer Affiliate (provided that the Broker-Dealer Affiliate will alternate between firms in any subsequent tied-bid or use other equitable procedures to ensure that no firm is favored if there is more than one occasion in which there is a tied-bid). Notwithstanding the foregoing no institution shall be obligated to submit a bid for any Surplus Shares if requested by the Broker-Dealer Affiliate pursuant to this paragraph 4(c), and the Broker-Dealer Affiliate shall not be obligated to accept any bid it receives. Sales effected in accordance with this paragraph 4(c) will be processed on the trading day following the day the Batch is formed. The Broker-Dealer Affiliate may determine which option or options to use in its sole discretion, except that if not all Surplus Shares are sold pursuant to paragraphs B.4(b) or B.4(c), then the remaining Shares shall be sold pursuant to paragraph B.4(a). If more than one option is used, the Surplus Shares will be allocated among the Large Holders on a pro rata basis. 5. Subject to paragraphs B.4 and B.3, the timing of transactions and the frequency of transaction intervals will be subject solely to the control of the Broker-Dealer Affiliate and the broker or brokers. The brokers will effect all transactions in connection with the Program in the open market on the floor of the NYSE in the ordinary course of their business, except as set forth in paragraph B.4 and as described below with respect to sales to Anthem, Inc. Except as set forth in paragraph B.4, the brokers will effect brokers' transactions solely as agent. The brokers may also cross, solely on an agency basis, purchase instructions in Common Stock submitted by their customers with sale instructions received by the Broker Dealer Affiliate. All such crossing transactions will be effected by the brokers on the floor of the NYSE and the brokers will not conduct negotiations off the floor of the NYSE with respect to such transactions. -4-
6. Anthem, Inc. may, in its discretion, purchase Shares for sale through the Program; however, no such repurchase will be made while Anthem, Inc. is otherwise engaged in a distribution as defined in Regulation M under the Exchange Act. The Broker-Dealer Affiliate will notify Anthem, Inc. of the number of shares available for purchase on any trading day no later than 1/2 hour after the opening of the NYSE on that trading day, and Anthem, Inc. will inform the Broker-Dealer Affiliate no later than one hour after the open of the NYSE on that trading day, of the number of Shares it wishes to purchase. Purchases by Anthem, Inc. will be at a purchase price equal to the average of the high and low prices on the day of the purchase. 7. If the Broker-Dealer Affiliate places a sell order, all sales in the Batch will be assigned the same price per share. Such sale price will be the volume weighted average price per share of the Shares in the Batch sold on the day the sales in the Batch occur (including any sales to the Holding Company). For purposes of determing the prices of sales in a Batch, the prices will be those reported on the New York Stock Exchange Composite Tape on the date the sale is made, except for the prices of shares sold to Anthem, Inc., which shall be the price determined as described above. 8. All brokerage commissions, mailing charges, registration fees or other administrative or similar expenses arising in connection with the Program will be borne by Anthem, Inc. 9. Anthem, Inc. will implement appropriate procedures and restrictions, including restrictive legends on any share certificates evidencing Shares subject to the Program, to give effect to, and monitor compliance with, the Program. 10. The Program Agent will establish a Sale Program call center (with a toll- free number), staffed with employees of the Program Agent, to answer inquiries about the Program and through which sale instructions may be given. No recommendation or solicitation will be made by the Program Agent or these employees, nor will any assurance be given by them about the price that will be received for Shares sold. 11. The procedures and restrictions set forth in this Exhibit E will apply only to sales by Large Holders during the first 180 days after the Effective Date, and thereafter Shares held by Large Holders will not be subject to any restrictions on transfer pursuant to the Plan of Conversion. -5-
EXHIBIT F ACTUARIAL CONTRIBUTION MEMORANDUM -1-
Table of Contents ----------------- Section Page - ------- ---- I. OVERVIEW 1 II. BASIC PRINCIPLES AND METHODOLOGY FOR CALCULATING ACTUARIAL CONTRIBUTIONS 3 A. General Calculation 3 B. Certain Definitions 4 C. Statutory Members 6 D. Line of Business Definitions 6 E. Relative Profit 7 F. Adjustments to Financial Statements, including Treatment of Settlements of Charitable Asset Claims 8 III. ASSIGNMENTS 9 A. Assignments to Individual Statutory Members 9 B. Assignments to Grandfathered Groups 9 -2-
I. OVERVIEW This memorandum describes the methodology for calculating the Actuarial Contribution ("AC") of each Eligible Statutory Member pursuant to Article VII of the Plan of Conversion ("Plan") of which this memorandum is Exhibit F. As stated in Article VII of the Plan, each Eligible Statutory Member will be allocated a number of shares of Common Stock determined in part by the ratio of such Eligible Statutory Member's AC to the sum of ACs attributable to all Eligible Statutory Members. The information used in the calculations of ACs comes from: 1. a variety of proprietary files and reports, including (a) policy, contract and customer records maintained in electronic media, (b) internal analyses and memoranda, and 2. public documents, such as statutory annual statements filed with insurance regulators ("Annual Statements"). These data sources are referenced where appropriate. The data in 1.(a) are available at the individual policy, contract or customer level, and the data in 1.(b) are only available at a more aggregate level. Both types of data are combined to develop ACs for classes of Statutory Members (where classes are defined as groupings of Statutory Members with comparable membership history). In the development of such ACs, to the extent appropriate data are not available or are not credible for certain periods of time, reasonable approximations are made to estimate the missing data, or reasonable methodologies are developed that do not require such data. Sensitivity tests have been performed to test potential biases caused by imperfect data. No material effect on ACs for classes of Statutory Members was found in these sensitivity tests. Capitalized terms used in this Exhibit have the meanings ascribed to them in the Plan or in this Exhibit. In this Exhibit, the predecessor companies to Anthem Insurance -- Associated Insurance Companies, Inc., Southeastern Mutual Insurance Company, Community Mutual Insurance Company, and Blue Cross & Blue Shield of Connecticut, Inc. -- will be referred to as AICI, SMIC, CMIC, and BCBS-CT, respectively. Legally, AICI was the surviving company in each merger, and AICI changed its name to "Anthem Insurance Companies, Inc." in 1995, but for simplicity this Exhibit uses the name AICI to refer to the Indiana-only company before its merger with SMIC and uses the name Anthem Insurance to refer to AICI at and after the SMIC merger. Anthem Insurance does business in states other than Indiana through subsidiaries. Three of these subsidiaries are "Qualifying Subsidiaries": Anthem Health Plans of Kentucky, or AHP-KY, Community Insurance Company, or CIC, and Anthem Health Plans (Connecticut), or AHP-CT. Statutory Members in Qualifying Subsidiaries hold Guaranty Policies issued by Anthem Insurance, as well as regular insurance policies issued by the Qualifying Subsidiaries. (The Guaranty Policies grant Membership Interests to certain customers of the Qualifying Subsidiaries and provide benefit payments only in the event of insolvency of the Qualifying Subsidiary.) No Guaranty Policies are issued to, and no Membership Interests exist for, -1-
policyholders in other subsidiaries when their coverages are provided by such subsidiaries. In this Exhibit, references to "insurance," "insured," "insured coverage," "policies" or similar words refer to both traditional indemnity insurance policies and health care benefits contracts or coverage. For convenience of reference, SMIC, CMIC, and BCBS-CT (but not AICI) are defined to be "Predecessor Companies." The allocations of equity in accordance with Anthem Insurance's Articles of Incorporation reflect the regular insurance coverage not only in Anthem Insurance or the applicable Qualifying Subsidiary but also in the corresponding Predecessor Companies. Except when the context (in Section II.C. of this Exhibit) clearly refers to the January 1, 1999 mergers of certain subsidiaries either into AHP-KY, the word "mergers" refers to only the mergers of SMIC, CMIC, and BCBS-CT into Anthem Insurance. -2-
II. BASIC PRINCIPLES AND METHODOLOGY FOR CALCULATING ACTUARIAL CONTRIBUTIONS A. General Calculation - ----------------------- In general, the AC of each Statutory Member is calculated as follows: 1. For each "time period" (defined below) from January 1, 1990 forward to June 30, 2000 (the Actuarial Contribution Date or "AC Date") the "contribution to surplus" (defined below) is allocated among Statutory Members in force at the end of the time period in proportion to their estimated historical profitability (as described in Section III of this Exhibit). The amount allocated to a given Statutory Member is called a "direct assignment." If the contribution to surplus is negative for a time period, the direct assignment is zero. Such direct assignments are used period by period in Steps 3(b) and 4(b) below. Direct assignments are calculated also for Statutory Members while they were members in a Predecessor Company based on the contribution to the surplus of those companies. 2. Assignments (as described in Steps 3 and 4 below) to a Statutory Member are accumulated to the AC Date at the "net investment return rate" (defined below) on such accumulated assignments if the Statutory Member maintained insured coverage in his or her legal entity until the AC Date. For this purpose, the Qualifying Subsidiaries are deemed identical to the corresponding Predecessor Companies. If a Statutory Member discontinued insured coverage in his or her legal entity, the accumulated assignments are forfeited. A new accumulation of assignments begins with any subsequent re-initiation of insured coverage, and a new Statutory Membership is started. The most recent date on which insured coverage was initiated (and from which insured coverage has been continuously maintained) is defined to be the "issue date." 3. At each merger date each Statutory Member in force on that date is assigned: (a) The accumulation of the amount, if any, assigned at the date of the most recent prior merger involving such Statutory Member, plus (b) The accumulation of the direct assignments in Step 1 since the later of (i) January 1, 1990, (ii) the most recent merger date, and (iii) the issue date (which, as defined above, is the most recent issue date), plus (c) An amount estimated to equal the present value of contributions to surplus that the Statutory Member will generate over the next five years, taking into account the probability of lapse during the five year period, plus (d) The Statutory Member's proportionate share of the "Unassigned Surplus" (defined below), which may be positive or negative, in the Statutory Member's company on such merger date. The Unassigned Surplus (positive or negative) of a company is allocated among Statutory Members -3-
of that company in force in such company on such merger date in proportion to their proportionate shares of the sum of 3(b) and 3(c). These calculations, pursuant to Anthem Insurance's Articles of Incorporation, are carried out separately for the Predecessor Company and for either AICI or Anthem Insurance (depending on which merger), immediately before the applicable merger. 4. At the AC Date each Statutory Member in force on that date is assigned: (a) The accumulation of the amount, if any, assigned at the date of the most recent prior merger involving such Statutory Member, plus (b) The accumulation of the direct assignments in Step 1 since the later of (i) the most recent merger date, and (ii) the issue date (which, as defined above, is the most recent issue date), plus (c) An amount estimated to equal the present value of contributions to surplus that the Statutory Member will generate over the next five years, taking into account the probability of lapse during the five year period, plus (d) The Statutory Member's proportionate share of the "Unassigned Surplus" (defined below), which may be positive or negative, of Anthem Insurance at the AC Date. The Unassigned Surplus (positive or negative) of Anthem Insurance is allocated among Statutory Members of Anthem Insurance in proportion to their proportionate shares of the sum of 4(b) and 4(c). 5. The AC for a Statutory Member in force on the AC Date is the result of the calculation in Step 4 above. 6. ACs for Statutory Members with issue dates after the AC Date and prior to the Adoption Date are set equal to the ACs for Statutory Members with the identical coverage and with issue dates immediately prior to the AC Date. 7. ACs calculated for Statutory Members who do not persist to become Eligible Statutory Members are not used in the calculation of the ratio mentioned in the first paragraph of Section I of this Exhibit. For those Statutory Members who do persist to become Eligible Statutory Members, their AC is as determined in Steps 5 or 6. B. Certain Definitions 1. "Time periods" refer to . calendar years for years not containing a merger date or the AC Date, . pre-merger and post-merger segments of the calendar year for years in which mergers occurred, and -4-
. January 1, 2000 through June 30, 2000. 2. "Surplus," as used herein, refers to statutory surplus, as shown in the Annual Statements (or comparable interim financial reports) of Anthem Insurance, AICI or the Predecessor Companies and adjusted as described below in Section II.F. of this Exhibit. 3. "Contribution to surplus" in a time period equals that time period's excess of (a) premium and other income plus investment return from operations (defined below) over (b) the sum of benefits paid, increases in claim liabilities and reserves, commissions, expenses, and taxes. Tax includes the federal income tax, which is treated historically as having been incurred at a single rate for all companies for all calculations, other than the reflection of the financial effects of the 1999 settlements of charitable asset claims, until the AC Date. (See Section II.F. for a discussion of the treatment of the settlements of charitable asset claims.) The present value of future contributions to surplus anticipated at the AC Date is calculated assuming a 35% federal income tax rate applies after the AC Date. 4. "Investment return from operations" is the product of the investment return rate (defined below) for a time period and the statutory liabilities at the beginning of the time period. 5. "Investment return rate" in Anthem Insurance is the ratio of statutory net investment income and realized capital gains to mean statutory assets on a consolidated Anthem Insurance basis, but not less than the one year U.S. Treasury rate for that year (adjusted if used for a time period less than one year). Unrealized capital gains, which involve most corporate activities related to subsidiaries, are ignored. "Investment return rate" in Predecessor Companies or in AICI is the company's ratio of statutory net investment income and realized capital gains to mean statutory assets, but not less than the one year U.S. Treasury rate for that year (adjusted if used for a time period less than one year). Unrealized capital gains are ignored. 6. "Net investment return rate" is the investment return rate times the quantity one minus the federal income tax rate for that time period used in the AC calculations. 7 "Fixed share amount" is the approximate proportion of Anthem Insurance's surplus as of the AC Date represented by the ratio of the fixed component of consideration specified in Section 7.1(a) of the Plan (expressed as a number of shares of Common Stock) to the Allocable Shares specified in Section 5.1 of the Plan. 8. "Unassigned Surplus" of AICI, of a Predecessor Company or of Anthem Insurance at a merger date is the excess (positive or negative) of surplus in such company at such -5-
merger date over the sum of II.A.3(a), 3(b), 3(c) and the fixed share amount for all Statutory Members then in force in such company on such merger date. 9. "Unassigned Surplus" of Anthem Insurance at the AC Date is the excess (positive or negative) of surplus in Anthem Insurance at the AC Date over the sum of II.A.4(a), 4(b), 4(c) and the fixed share amount for all Statutory Members then in force in Anthem Insurance on the AC Date. C. Statutory Members For AICI originally, and for Anthem Insurance after the mergers, Statutory Members are individual primary insureds, whether their coverage is individual coverage or coverage as a participant in an insured employer or association group plan. For the three Predecessor Companies, Statutory Members were defined as (a) individual primary insureds if they had individual coverage, or (b) the employer (or association) if the coverage was insured on a group basis. Employer and association groups with membership in a Predecessor Company in effect as of the date of merger into Anthem Insurance have their membership rights continued in Anthem Insurance. These groups are referred to as "Grandfathered Groups" in this Exhibit. Individual primary insureds within a Grandfathered Group are not themselves Statutory Members. Article XIII of the Plan provides that "Policy" is deemed to include contracts issued to an Administrative Trust, so Statutory Members may include Holders of such Policies pursuant to Section 12.1(c) of the Plan. The assumption reinsurance transfer of Anthem Health of Indiana (AHI) policies into Anthem Insurance on January 1, 1999 resulted in AHI insured enrollees becoming Statutory Members of Anthem Insurance. The mergers of Alternative Health Delivery Systems (AHDS) and Southeastern United Medical Insurance (SUMI) into AHP-KY on January 1, 1999 resulted in the issuance of Guaranty Policies, and thus the granting of Statutory Membership rights in Anthem Insurance, to insured enrollees of SUMI and AHDS as of January 1, 1999. D. Line of Business Definitions To facilitate analysis of financial results, products were consolidated into five representative Lines of Business ("LOBs"). These categories are reasonably homogeneous with regard to their experience and risk characteristics, given materiality considerations and the way the policies are managed. The five LOBs are: . Individual Medicare Supplement . Individual Medicare Risk (Medicare+Choice) . Direct pay individual medical other than related to Medicare -6-
. Insured group medical (including large and small groups, with or without other non-medical coverage, but excluding administrative services only contracts)/1/ . Insured group non-medical (insured dental, vision, or drugs, when written without insured medical coverage, but excluding administrative services only contracts) Individual policies are categorized into one of the first three LOBs. The coverage of each individual primary insured in a group is categorized into one of the last two LOBs above: group medical or group non-medical. Such individual primary insureds in a group may be Statutory Members themselves, or they may be employees within a Grandfathered Group. Assignments for the Grandfathered Groups are calculated as the sum of the assignments related to the individual primary insureds in such group at a given point in time. Under the calculation approach for Grandfathered Groups, the year-by-year history of individual primary insureds (and their LOBs) in each such group policy is taken into account, so that a specific AC is calculated for each such group. For individual Statutory Members who have maintained continuous coverage but changed the type of coverage over the AC calculation period, their AC recognizes the full, continuous period of time during which they were Statutory Members, but the AC is determined as though their LOB on the Adoption Date applies for the entire coverage period with one exception. The one exception to this LOB classification relates to Statutory Members in the Medicare Risk LOB on the Adoption Date who had earlier transferred from a different LOB. Such Statutory Members will have their AC assigned based in part on when they most recently transferred and from which LOB they most recently transferred. (Those who transferred to Medicare Risk from Medicare Supplement are assumed to have had Medicare Supplement in all years prior to the transfer, and those who transferred to Medicare Risk from other LOBs are treated as if they had transferred from the direct pay individual medical LOB and had had direct pay individual medical in all years prior to the transfer.) E. Relative Profit Allocations are based on the relative levels of historical and anticipated profit per individual primary insured in the LOBs. Such relative levels of profit per individual primary insured are determined as the average profits of the LOB over the ten-year period from 1990 through 1999, divided by the average number of individual primary insureds over that period. - ------------------------ /1/ Anthem Insurance has a small number of individual long term care insurance policies, which are treated for this purpose as though they were group medical. -7-
F. Adjustments to Financial Statements, including Treatment of Settlements of Charitable Asset Claims Statutory financial reports form the basis for the determination of the amount of surplus available for allocation through the assignment processes, as well as the calculation of certain factors used. Financial operating results from AICI, SMIC, CMIC, and BCBS-CT are considered for each time period before a merger for those particular companies. Financial operating results from Anthem Insurance and the Qualifying Subsidiaries are consolidated for each time period that they exist. In the consolidation of surplus and assets of Qualifying Subsidiaries with those of Anthem Insurance, adjustments are made for the surpluses of Qualifying Subsidiaries that also appear as assets (and therefore in the surplus) of Anthem Insurance. Surplus notes are treated as liabilities, so surplus is adjusted to exclude surplus notes. In addition, the Qualifying Subsidiaries settled merger-related charitable asset claims in 1999, and these settlements appear in the companies' 1999 statutory financial statements. These settlements are considered in the AC calculations to be an expense of the relevant merger. Therefore, the liabilities of each Predecessor Company at the applicable merger date are adjusted to include the then present value of the applicable 1999 settlement amount. The present values are calculated using the net investment return rates used in the AC accumulations of contributions to surplus between the applicable merger date and the AC Date, and using in the case of each Qualifying Subsidiary the federal income tax rate employed in the Qualifying Subsidiary's 1999 financial statements in reflecting the effect of the settlement. The 1999 contribution to surplus excludes any charge for the settlement of charitable asset claims in that year because the settlement payment is offset by the release of the liability deemed created at the time of the applicable merger. -8-
III. ASSIGNMENTS A. Assignments to Individual Statutory Members As described in Section II of this Exhibit, as of each merger date or the AC Date, the amount assigned to each Statutory Member for the applicable time period as a direct assignment is the contribution to surplus multiplied by the ratio of the Statutory Member's profit to the sum of the profit of all Statutory Members (including in both numerator and denominator all applicable individual primary insureds, not only those who are Statutory Members but also those individual primary insureds in Grandfathered Groups) in force at the time. In the calculation each Statutory Member who is an individual primary insured in force at the time of assignment who has an issue date in the same time period and who is in the same LOB is assigned the same amount of direct assignment. In the calculation each Statutory Member who is an individual primary insured in force at the time of a merger (or the AC Date) who is in the same LOB is assigned the same amount of anticipated future profit, without regard to issue date. All assignments to a Statutory Member who terminates no longer remain assigned after such termination. As a result, at the next subsequent merger date or AC Date, the Unassigned Surplus will be that much larger, increasing the next merger-related (or demutualization-related) assignment. B. Assignments to Grandfathered Groups As described in Section II of this Exhibit, as of each merger date or the AC Date, the amount assigned to a Grandfathered Group at a particular point in time is the sum of the amounts that would have been assigned to the individual primary insureds in the Grandfathered Group using the same methodology as described above. Once assignments are made to a Grandfathered Group account, they are not released until there are no longer any insured individuals in the group. All assignments to a Grandfathered Group that terminates all insured coverage no longer remain assigned after such termination, so the Unassigned Surplus at the next subsequent merger date (or AC Date) will be that much larger, increasing the next merger-related (or demutualization-related) assignment. -9-
Exhibit 2.2 - -------------------------------------------------------------------------------- ALLIANCE AGREEMENT between BLUE CROSS AND BLUE SHIELD OF KANSAS, INC. and ANTHEM INSURANCE COMPANIES, INC. Dated as of May 30, 2001 - --------------------------------------------------------------------------------
Table of Contents ----------------- Page ---- ARTICLE I DEFINITIONS.......................................................................... 1 SECTION 1.01. Certain Defined Terms................................................................ 1 ARTICLE II TRANSACTION.......................................................................... 15 SECTION 2.01. The Conversion....................................................................... 15 SECTION 2.02. Sale and Purchase of the Shares...................................................... 17 SECTION 2.03. Purchase Price....................................................................... 17 SECTION 2.04. Closing.............................................................................. 17 SECTION 2.05. Closing Deliveries by BCBSKS......................................................... 18 SECTION 2.06. Closing Deliveries by Purchaser...................................................... 18 SECTION 2.07. Escrow Matters....................................................................... 18 SECTION 2.08. Additional Purchase Price............................................................ 23 SECTION 2.09. Special Distribution................................................................. 25 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BCBSKS............................................. 25 SECTION 3.01. Organization and Authority........................................................... 25 SECTION 3.02. Ownership Interests.................................................................. 27 SECTION 3.03. Books and Records.................................................................... 28 SECTION 3.04. No Conflict.......................................................................... 28 SECTION 3.05. Consents and Approvals of Governmental Authorities................................... 28 SECTION 3.06. Financial Information; Books and Records............................................. 29 SECTION 3.07. No Undisclosed Liabilities........................................................... 30 SECTION 3.08. Receivables.......................................................................... 30 SECTION 3.09. Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions.... 30 SECTION 3.10. Litigation........................................................................... 33 SECTION 3.11. Compliance with Laws................................................................. 34 SECTION 3.12. Environmental and Other Permits and Licenses; Related Matters........................ 34 SECTION 3.13. Material Contracts................................................................... 35 SECTION 3.14. Intellectual Property................................................................ 38 SECTION 3.15. Real Property........................................................................ 39 SECTION 3.16. Tangible Personal Property........................................................... 40 SECTION 3.17. Assets............................................................................... 41 SECTION 3.18. Significant Agreements............................................................... 41 SECTION 3.19. Suppliers............................................................................ 41 SECTION 3.20. Employee Benefit Matters............................................................. 42 SECTION 3.21. Labor Matters........................................................................ 44 SECTION 3.22. Key Employees........................................................................ 45 SECTION 3.23. Certain Interests.................................................................... 45 SECTION 3.24. Taxes................................................................................ 45 SECTION 3.25. Insurance............................................................................ 47 SECTION 3.26. Accounts; Lockboxes; Safe Deposit Boxes; Powers of Attorney.......................... 48 -i-
Table of Contents ----------------- (continued) Page ---- SECTION 3.27. Brokers........................................................................ 48 SECTION 3.28. No Pecuniary Interests......................................................... 49 SECTION 3.29. Computer Systems............................................................... 49 SECTION 3.30. Brokers and Agents............................................................. 49 SECTION 3.31. Government Contracts........................................................... 49 SECTION 3.32. Medicare Secondary Payor Rules................................................. 49 SECTION 3.33. Confidentiality of Personal Information........................................ 50 SECTION 3.34. Resolution of Charitable Claims, etc........................................... 50 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER.................................... 50 SECTION 4.01. Organization and Authority of Purchaser........................................ 50 SECTION 4.02. No Conflict.................................................................... 51 SECTION 4.03. Brokers........................................................................ 52 SECTION 4.04. No Pecuniary Interest.......................................................... 52 SECTION 4.05. Consents and Approvals of Governmental Authorities............................. 52 SECTION 4.06. Investment Representations..................................................... 52 SECTION 4.07. Financial Ability to Perform................................................... 53 SECTION 4.08. No Litigation.................................................................. 53 SECTION 4.09. Charitable Claims, etc......................................................... 53 ARTICLE V ADDITIONAL AGREEMENTS.......................................................... 53 SECTION 5.01. Conduct of Business Prior to the Closing....................................... 53 SECTION 5.02. Access to Information.......................................................... 55 SECTION 5.03. Regulatory and Other Authorizations; Notices and Consents...................... 56 SECTION 5.04. Notice of Developments......................................................... 57 SECTION 5.05. No Solicitation or Negotiation................................................. 57 SECTION 5.06. Termination Fees............................................................... 58 SECTION 5.07. Directors...................................................................... 59 SECTION 5.08. Advisory Committees............................................................ 59 SECTION 5.09. Further Action................................................................. 59 ARTICLE VI EMPLOYEE MATTERS............................................................... 60 SECTION 6.01. Transferred Employees.......................................................... 60 SECTION 6.02. Maintenance of Certain Plans; Contributions.................................... 60 SECTION 6.03. Treatment of Transferred Employees............................................. 60 SECTION 6.04. Post-Closing Employment Levels................................................. 61 SECTION 6.05. Non-Competition/Non-Solicitation Agreements.................................... 62 SECTION 6.06. No Employment Agreement or Third Party Beneficiary Status...................... 62 ARTICLE VII TAX MATTERS.................................................................... 62 SECTION 7.01. Returns and Payments........................................................... 62 SECTION 7.02. Contests....................................................................... 63 SECTION 7.03. Conveyance Taxes............................................................... 63 -ii-
Table of Contents ----------------- (continued) Page ---- SECTION 7.04. Miscellaneous.................................................................. 63 SECTION 7.05. Tax Disputes................................................................... 63 SECTION 7.06. Special Distribution........................................................... 66 ARTICLE VIII CONDITIONS TO CLOSING.......................................................... 67 SECTION 8.01. Conditions to Each Party's Obligations......................................... 67 SECTION 8.02. Conditions to Obligations of BCBSKS............................................ 67 SECTION 8.03. Conditions to Obligations of Purchaser......................................... 68 SECTION 8.04. Frustration of Closing Conditions.............................................. 70 ARTICLE IX CERTAIN INDEMNIFICATION MATTERS................................................ 70 SECTION 9.01. Director and Officer Liability................................................. 70 SECTION 9.02. Procedure...................................................................... 70 SECTION 9.03. Maintenance of D&O Liability Policies.......................................... 71 ARTICLE X TERMINATION AND WAIVER......................................................... 71 SECTION 10.01. Termination.................................................................... 71 SECTION 10.02. Effect of Termination.......................................................... 73 SECTION 10.03. Waiver......................................................................... 74 ARTICLE XI GENERAL PROVISIONS............................................................. 74 SECTION 11.01. Expenses....................................................................... 74 SECTION 11.02. Notices........................................................................ 75 SECTION 11.03. Public Announcements........................................................... 75 SECTION 11.04. Headings....................................................................... 76 SECTION 11.05. Severability................................................................... 76 SECTION 11.06. Entire Agreement............................................................... 76 SECTION 11.07. Assignment..................................................................... 76 SECTION 11.08. No Third Party Beneficiaries................................................... 76 SECTION 11.09. Amendment...................................................................... 77 SECTION 11.10. Governing Law; Consent to Jurisdiction......................................... 77 SECTION 11.11. Counterparts................................................................... 77 SECTION 11.12. Specific Performance........................................................... 77 SECTION 11.13. Survival of Representations, Warranties and Agreements......................... 77 EXHIBITS 2.01(a) Plan of Conversion (Form) 8.01(c) Governmental Consents and Approvals 8.02(d) Opinion of Purchaser's Counsel (Form) 8.03(d) Opinion of BCBSKS's Counsel (Form) 8.03(e) Third Party Consents -iii-
ALLIANCE AGREEMENT ------------------ ALLIANCE AGREEMENT, dated as of May 30, 2001, by and between BLUE CROSS AND BLUE SHIELD OF KANSAS, INC., a Kansas mutual life insurance company ("BCBSKS"), ------ and ANTHEM INSURANCE COMPANIES, INC., an Indiana mutual insurance company ("Anthem" or "Purchaser"). ------ --------- W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Board of Directors of BCBSKS is currently preparing a plan of conversion (such plan of conversion as adopted, and as may be amended from time to time in accordance herewith, the "Plan of Conversion") pursuant to which ------------------ BCBSKS will be converted (the "Conversion") from a mutual insurance company to a ---------- stock insurance corporation pursuant to the Kansas Insurance Code; and WHEREAS, the Plan of Conversion will provide for and be contingent on the sale (the "Sale") of all of the shares of common stock of BCBSKS (the "Common ---- ------ Stock") immediately following the Conversion to Purchaser upon the terms and - ----- subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, Purchaser and BCBSKS hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the --------------------- following terms shall have the following meanings: "Action" means any written claim, formal action, suit, arbitration or ------ proceeding by or before any Governmental Authority. "Additional Purchase Price" has the meaning specified in Section 2.03. ------------------------- "Affiliate" means, with respect to any specified Person, any other Person --------- that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. "Agreement" or "this Agreement" means this Alliance Agreement, dated as of --------- -------------- May 30, 2001, between BCBSKS and Purchaser (including the Exhibits hereto, the
Disclosure Statement, and the Purchaser Disclosure Statement) and all amendments hereto made in accordance with the provisions of Section 11.09. "Anthem Holding Company" means the public holding company to be formed in ---------------------- connection with a demutualization of Anthem to hold all of the shares of its common stock, and which shall, as of the Closing Date, hold all of such shares (provided that for purposes of this Agreement if Anthem shall not have demutualized prior to the Closing Date references to Anthem Holding Company herein shall be deemed not to have any effect). "Anthem West" means Anthem West Company, Inc., an Indiana corporation and a ----------- wholly-owned direct subsidiary of Anthem. "Assets" means the properties and assets (real, personal or mixed, tangible ------ or intangible) used or held for use in connection with , necessary for the conduct of, or material to, the Business. "BCBS" means BCBSKS and its Affiliates, collectively. ---- "BCBSA" means the Blue Cross Blue Shield Association. ----- "BCBSKS" has the meaning specified in the recitals to this Agreement, ------ except as provided in Section 7.04(a). "BCBSKS's knowledge" or "knowledge of BCBSKS" means to the actual knowledge ------------------ ------------------- of the Named Officers, after reasonable investigation but without giving effect to imputed knowledge. "Burdensome Condition" means, with respect to any required regulatory -------------------- approval, and/or any Law, rule, regulation or administrative interpretation made, adopted, declared, or announced (written or orally) by any Governmental Authority of the State of Kansas after the date hereof but on or prior to the Closing Date to be applicable to Purchaser (or BCBSKS or any of the Affiliates of BCBSKS acquired by Purchaser pursuant to this Agreement), (i) any term, condition, restriction or limitation that would be reasonably likely to have a Material Adverse Effect on BCBS; or (ii) any statutory or regulatory obligation on BCBS that materially differs from those statutory or regulatory obligations imposed on companies holding insurance licenses or certificates of authority similar to those of BCBS and engaged in business similar to that of BCBS and which would materially and adversely affect the economic or business benefits to Purchaser of the transactions contemplated by this Agreement. "Business" means BCBS's business as currently conducted, including the -------- provision of indemnity and managed health insurance products and services, including without limitation health maintenance organization, point-of-service, preferred provider -2-
organization, Medicare risk and supplemental Medicare insurance, Medicaid managed care, third-party administrative services and integrated health plan services, and other products and services within Kansas and other states, including, without limitation, the provision of such products and services in Kansas by BCBSKS and certain Affiliates under the Blue Cross and Blue Shield trademarks and service marks pursuant to a license from BCBSA. "Business Day" means any day that is not a Saturday, a Sunday or other day ------------ on which banks are required or authorized by Law to be closed in Topeka, Kansas. "Change of Control" means a transaction or related group of transactions as ----------------- a result of which: (i) any Person (within the meaning of Section 3(a)(9) of the Securities Exchange Act), including any group (within the meaning of Rule 13d-5(b) under the Securities Exchange Act), acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of securities of a Party representing 40% or more of the combined Voting Power of that Party's securities; (ii) the persons who were directors of a Party 12 months prior to the date in question shall cease to constitute at least a majority of the Board of Directors of that Party or the Board of Directors of any successor to that Party; (iii) the policyholders of a Party, if at the time in question that Party is a mutual insurance company, approve a Mutual Event; provided, -------- however, that a Mutual Event shall not be treated as a Change of Control ------- for purposes of this Agreement if: (x) that Party is a surviving company in any such merger or other transaction, and (y) pursuant to the terms of the agreement governing the transaction constituting the Mutual Event, the persons who were directors of that Party immediately prior to such Mutual Event constitute at least 60% of the members of the Board of Directors of that Party immediately following the consummation of such Mutual Event; or (iv) the stockholders of a Party, if at the time in question that Party is a stock company, approve a Corporate Event and immediately following the consummation of which the stockholders of that Party immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant -3-
Corporate Event, holds more than 40% of the consolidated assets of that Party immediately prior to such Corporate Event. Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred as to Purchaser merely as a result of: (i) the conversion of Purchaser from a mutual insurance company to a stock company whose shareholders are either (x) primarily persons who were policyholders of Purchaser immediately prior to such transaction and/or a trust holding the shares of Purchaser for the benefit of such policyholders or (y) another corporation the shares of which are held primarily by the persons and/or trust described in subclause (x); or (ii) an underwritten offering of the equity securities of Purchaser where no Person (including any group (within the meaning of Rule 13d-5(b) under the Securities Exchange Act)) acquires more than 40% of the combined Voting Power of Purchaser's securities. "Closing" has the meaning specified in Section 2.04. ------- "Closing Balance Sheet" means a consolidated balance sheet of BCBSKS --------------------- showing the Closing Book Value of BCBSKS as of the close of business on the Closing Date, prepared in accordance with U.S. GAAP applied on a consistent basis with the Reference Balance Sheet. "Closing Book Value" means the consolidated net worth of BCBSKS as of the ------------------ close of business on the Closing Date, calculated in accordance with U.S. GAAP applied on a consistent basis with the Reference Balance Sheet (including, for the avoidance of doubt, the use of statements of employee benefit liabilities and asset valuations prepared as of the Closing Date in accordance with FAS 87 and FAS 106), provided, that no liability for any employee severance costs for -------- Transferred Employees shall be accrued on the Closing Balance Sheet or taken into account in calculating Closing Book Value. Notwithstanding, and without limiting the generality of the foregoing, the following liabilities shall be accrued and adequate reserves established on the Closing Balance Sheet and taken into account in calculating Closing Book Value, each as determined in accordance with U.S. GAAP applied on a consistent basis with the Reference Balance Sheet): (i) all unpaid fees, costs and expenses for which BCBSKS is responsible pursuant to Section 11.01; (ii) all unpaid Taxes for which BCBSKS is responsible pursuant to Sections 7.01 and 7.03 and (iii) all unpaid Contingent Litigation Matter Costs incurred by BCBS on or before the Closing Date. "Closing Date" has the meaning specified in Section 2.04. ------------ "Code" means the Internal Revenue Code of 1986, as amended through the date ---- hereof. "Common Stock" has the meaning specified in the Recitals to this Agreement. ------------ -4-
"Confidentiality Agreement" means the letter agreement, dated as of January ------------------------- 5, 2001, between BCBSKS and Purchaser. "Contingent Litigation Matter" means any Action (including without ---------------------------- limitation, for purposes of this definition, written or oral claims or demands, and responding to the Subpoena Duces Tecum served on BCBSKS by the Office of the Inspector General of the U.S. Department of Health and Human Services dated February 28, 2001 ("Subpoena")) or voluntary disclosure arising out of, or relating to the purposes recited for the issuance of the Subpoena, or arising out of any related investigation, examination, or discovery proceedings regarding BCBS's practices, procedures, or actions relating to the purposes recited in such Subpoena, but without limitation to the "subpoena period" as defined in the Subpoena, but not including matters to the extent that they arise or are based on a course of conduct or practice which had their first origin after the end of such "subpoena period"; provided that Contingent Litigation -------- Matter shall not include any Action that is first filed, asserted or otherwise initiated against BCBS after (or, if filed under seal, the seal is removed after): (a) the occurrence of an event which, in the reasonable judgment of Purchaser and the Policyholder Committee, finally resolves, waives or releases any Action filed, asserted or initiated, or reasonably likely to be filed, asserted or initiated, arising out of the purposes recited for the issuance of the Subpoena and any related investigation, examination or discovery proceedings stemming therefrom, or (b) the later of (i) the end of five years commencing with the date of service of the last subpoena related to the purposes recited for the issuance of the Subpoena, or (ii) the expiration of five years from and after the Closing Date; provided, further, that any Action initially filed -------- ------- during such period, dismissed or withdrawn without prejudice, and subsequently refiled (whether during or after such period) shall be deemed included in Contingent Litigation Matter. "Contingent Litigation Matter Costs" means any attorney fees, professional ---------------------------------- consultant fees, expert fees, fines, amounts of settlement, judgments, witness expenses, court costs, costs of transcripts, costs of appeal, or other costs paid by BCBS attributable solely to the Contingent Litigation Matter; provided, -------- that "Contingent Litigation Matter Costs" do not include any consequential damages of or to BCBSKS or Purchaser, including by way of illustration and not by way of limitation, costs or expenses of any nature relating to loss of government contracts held by BCBSKS or by Purchaser (whether attributable to the Contingent Litigation Matter or not), and amounts paid for advertising, communications or public relations relating to or arising out of the Contingent Litigation Matter and not approved or authorized by the Policyholder Committee; and provided further, that "Contingent Litigation Matter Costs" as of any -------- ------- determination date shall be reduced by any Net Insurance Recoveries actually recovered but not reflected as a reduction to Contingent Litigation Matter Costs prior to that date. "Contracts" has the meaning specified in Section 3.13(a). --------- -5-
"Control" (including the terms "controlled by" and "under common control ------- ------------- -------------------- with"), with respect to the relationship between or among two or more Persons, - ---- means the possession, directly or indirectly or as trustee, personal representative or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee, personal representative or executor, by contract or otherwise, including, without limitation, the ownership, directly or indirectly, of securities having the power to elect a majority of the Board of Directors or similar body governing the affairs of such Person. "Conversion" has the meaning specified in the Recitals to this Agreement. ---------- "Conversion Date" means the effective date of the Plan of Conversion, as --------------- determined in accordance with the Plan of Conversion. "Corporate Event" means a merger, consolidation, share exchange, division, --------------- sale or other disposition of all or substantially all of the assets, in each case of a Party. "Costs" has the meaning specified in Section 9.01. ----- "Current Premium" has the meaning specified in Section 9.03. --------------- "Customary Action" has the meaning specified in Section 5.01(d). ---------------- "Disclosure Statement" means the Disclosure Statement, dated as of the date -------------------- hereof, referring to and forming a part of this Agreement. "Effective Time" has the meaning specified in Section 2.04. -------------- "Eligible Policyholder" means those policyholders entitled to vote on , and --------------------- receive consideration under, the Plan of Conversion. "Encumbrance" means any security interest, pledge, mortgage, lien ----------- (including, without limitation, tax liens), charge, or encumbrance. "Environmental Laws" means any Law in effect and as amended through the ------------------ Closing Date, and including any Governmental Order governing the protection of the environment or Hazardous Materials, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980; the Resource Conservation and Recovery Act, 42 U.S.C. (S)(S) 6901 et seq.; the -- --- Hazardous Materials Transportation Act, 49 U.S.C. (S)(S) 6901 et seq.; the Clean -- --- Water Act, 33 U.S.C. (S)(S) 1251 et seq.; the Toxic Substances Control Act, 15 -- --- U.S.C. (S)(S) 2601 et seq.; the Clean Air Act, 42 U.S.C. (S)(S) 7401 et seq., in -- --- -- --- each case as amended through the Closing Date, and similar laws adopted by states with jurisdiction over the Assets. -6-
"Environmental Permits" means all material permits, approvals, --------------------- identification numbers, licenses and other authorizations required under any applicable Environmental Law. "EPIP" has the meaning specified in Section 6.02(a). ---- "ERISA" has the meaning specified in Section 3.20(a). ----- "Escrow Agreement" means the mutually acceptable escrow agreement to be ---------------- entered into among BCBSKS, Purchaser, Anthem West, or Anthem Holding Company, as the case may be, and the Escrow Agent on or before the Closing Date, governing the establishment and operation of the Escrow Fund consistent with the requirements of this Agreement, including, without limitation, Section 2.07, and assuming the liabilities and obligations of the Escrow Fund otherwise specified in this Agreement. "Escrow Agent" means the bank or trust company selected by BCBSKS, and ------------ accepted by Purchaser (which acceptance shall not be unreasonably refused), to act as escrow agent under the Escrow Agreement. "Escrow Company Funds Notice" has the meaning specified in Section 2.07(g). --------------------------- "Escrow Fund" has the meaning specified in Section 2.07(a). ----------- "Expected Costs and Expenses" has the meaning specified in Section 2.07(h). --------------------------- "Extraordinary Business Combination" means a transaction or related group ---------------------------------- of transactions resulting in, or reasonably likely to result in, a Change of Control of either BCBSKS or BCBS. "Final Closing Balance Sheet" has the meaning specified in Section --------------------------- 2.08(b)(iii). "Final Determination" will have occurred with respect to any Tax issue on ------------------- the earliest of (i) the receipt of a private letter ruling from the IRS or, with respect to any state Tax issue, comparable definitive written guidance from the relevant state authority, with respect to the resolution of such issue; (ii) the actual payment by BCBSKS of additional Taxes with respect to such Tax issue as a result of the filing of a Return that meets the requirements of Section 7.05(a); (iii) the IRS, or the relevant state Tax authority, having entered into a binding agreement with BCBSKS with respect to such issue or having reached a final administrative determination regarding BCBSKS with respect to such issue that, whether by applicable law or agreement, has become final, non-appealable and incapable of being challenged by judicial proceedings; (iv) the resolution of such issue by a decision, judgment, decree or other order of a court of competent jurisdiction that has become final and unappealable; or (v) the expiration of -7-
the applicable statute of limitations with respect to the Return of BCBSKS on which the items relating to such issue are, or would have been, reported or deducted. "Final Disposition Escrow Company Funds Notice" has the meaning specified --------------------------------------------- in Section 2.07(h). "Final Recoverable Amount" has the meaning specified in Section 2.07(h). ------------------------ "Financial Statements" has the meaning specified in Section 3.06(a). -------------------- "Government Contracts" has the meaning specified in Section 3.31. -------------------- "Governmental Authority" means any United States federal, state or local ---------------------- governmental entity or authority, or any foreign government entity or authority, including, without limitation, any legislative, executive, administrative, or judicial entity or authority. "Governmental Order" means any order, writ, judgment, injunction, decree, ------------------ stipulation, determination or award entered by or with any Governmental Authority. "Hazardous Materials" means any chemicals, materials or substances defined ------------------- as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants," or words of similar import, under any applicable Environmental Law. "Health Benefit Permits" means those governmental licenses, franchises, ---------------------- permits, certificates, accreditations, provider numbers, consents, rights, privileges and other authorizations issued by Governmental Authorities which are necessary under applicable Law to the conduct of the Business, including without limitation licensure by state departments of insurance as a health maintenance organization, federal qualification under the Federal HMO Act of 1973 and approval by the Office of Prepaid Health Care of the United States Department of Health and Human Services. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, ------- as amended, and the rules and regulations promulgated thereunder. "Indebtedness" means (a) all indebtedness of such BCBS, whether or not ------------ contingent, for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services, (c) all obligations of BCBS evidenced by notes (including surplus notes), bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of BCBS or lender under such agreement in the event of default are limited to -8-
repossession or sale of such property), (e) all obligations of BCBS as lessee under leases that have been or should be, in accordance with U.S. GAAP, recorded as capital leases, (f) all obligations, contingent or otherwise, of BCBS under acceptance, letter of credit or similar facilities, (g) all obligations of BCBS to purchase, redeem, retire, defease or otherwise acquire for value any capital stock of BCBS or any warrants, rights or options to acquire such capital stock, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (h) all Indebtedness of others referred to in clauses (a) through (f) above guaranteed directly or indirectly in any manner by BCBS, or in effect guaranteed directly or indirectly by BCBS through an agreement to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or otherwise to assure a creditor against loss, and (i) all Indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Encumbrance on property (including, without limitation, accounts and contract rights) owned by BCBS, even though BCBS has not assumed or become liable for the payment of such Indebtedness. "Indemnifiable Tax Cost" means any increase in Taxes paid by, or any ---------------------- interest or penalties that are imposed on, BCBSKS or its Affiliates following the Closing Date, and all reasonable out-of-pocket fees and expenses incurred in connection with the assessment or collection thereof, that are (i) attributable to the disallowance of a position reflected on a Return filed by BCBSKS prior to the Closing Date for which a reserve has been established pursuant to Section 2.08(b)(iv) (but only to the extent of the amount of such reserve), or (ii) attributable to the disallowance of the Policyholder Committee's position with respect to any Tax Escrow Dispute (as reflected on a return filed with respect to BCBSKS that meets the requirements of Section 7.05(a)). "Indemnified Parties" has the meaning specified in Section 9.01. ------------------- "Independent Tax Counsel" shall be as defined in Section 7.05(a). ----------------------- "Initial Purchase Price" has the meaning specified in Section 2.03. ---------------------- "Information Statement" has the meaning specified in Section 2.01(c). --------------------- "Insurance Contracts" means all policies, binders, slips, certificates, and ------------------- other agreements of insurance or reinsurance and service agreements for the administration of health benefit plans, whether HMO, PPO, health care or health benefit service contract, -9-
health insurance or other product and whether individual or group (including all supplements, endorsements, riders and ancillary agreements in connection therewith) which are issued by BCBS in connection with the Business. "Intellectual Property" means (a) inventions, whether or not patentable, --------------------- whether or not reduced to practice or whether or not yet made the subject of a pending patent application or applications, (b) ideas and conceptions of potentially patentable subject matter, including, without limitation, any patent disclosures, whether or not reduced to practice and whether or not yet made the subject of a pending patent application or applications, (c) national (including the United States) and multinational statutory invention registrations, patents, patent registrations and patent applications (including all reissues, divisions, continuations, continuations-in-part, extensions and reexaminations) and all rights therein provided by multinational treaties or conventions and all improvements to the inventions disclosed in each such registration, patent or application, (d) trademarks, service marks, trade dress, logos, trade names and corporate names, whether or not registered, including all common law rights, and registrations and applications for registration thereof, including, but not limited to, all marks registered in the United States Patent and Trademark Office, the trademark offices of the states and territories of the United States of America, and the trademark offices of other nations throughout the world, and all rights therein provided by multinational treaties or conventions, (e) copyrights (registered or otherwise) and registrations and applications for registration thereof, and all rights therein provided by multinational treaties or conventions, (f) moral rights (including, without limitation, rights of paternity and integrity), and waivers of such rights by others, (g) computer software, including, without limitation, source and object code, operating systems and specifications, data, data bases, files, documentation and other materials related thereto, (h) trade secrets and confidential, technical or business information (including ideas, formulas, compositions, inventions, and conceptions of inventions whether patentable or unpatentable and whether or not reduced to practice), (i) whether or not confidential, technology (including know-how and show-how), manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, (j) copies and tangible embodiments of all the foregoing, in whatever form or medium, (k) all rights to obtain and rights to apply for patents, and to register trademarks and copyrights, and (l) all rights to sue and recover and retain damages and costs and attorneys' fees for present and past infringement of any of the Intellectual Property rights hereinabove set out. "IRS" means the Internal Revenue Service of the United States. --- "Kansas Insurance Code" means Article 40 of Chapter 40 of the Kansas --------------------- Statutes Annotated, as amended, and the rules and regulations promulgated thereunder. -10-
"Law" means any federal, state, local or foreign statute, law, ordinance, --- regulation, rule, code, order, or requirement. "Lease" has the meaning specified in Section 3.13(a). ----- "Leased Real Property" means the real property leased by BCBSKS or any of -------------------- its Affiliates as tenant, together with, to the extent leased by BCBS, all buildings and other structures, facilities or improvements currently or hereafter located thereon, all fixtures, systems, equipment and items of personal property of BCBS attached or appurtenant thereto, and all casements, licenses, rights and appurtenances relating to the foregoing. "Liabilities" means any and all Indebtedness, liabilities and obligations, ----------- whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including, without limitation, those arising under any Law (including, without limitation, any Environmental Law), Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or undertaking. "Licensed Intellectual Property" means all Intellectual Property used or ------------------------------ previously used in the Business and licensed or sublicensed by BCBSKS or any of its Affiliates from a third party. "Matching Notice" has the meaning specified in Section 10.01(b)(ii). --------------- "Material Adverse Effect" means, with respect to any party, any ----------------------- circumstance relating to, change in, or effect on, that party or its business that would reasonably be expected to be materially adverse to the business, or the assets or financial condition of that party taken as a whole, except to the extent such adverse effect results from (i) general economic conditions or changes, (ii) financial market conditions or changes, (iii) economic or regulatory changes affecting the health care or health insurance industries in Kansas generally, or (iv) the announcement of the transactions contemplated by this Agreement. "Material Contract" has the meaning specified in Section 3.13(a). ----------------- "Mutual Event" means a merger, consolidation, conversion or ------------ demutualization, division, sale or other disposition (including without limitation through reinsurance) of all or substantially all of the assets, in each case of a Party. "Named Officers" means the officers of BCBSKS specified in Section 1.01 of -------------- the Disclosure Statement, which officers are the members of BCBSKS's steering committee on the date hereof, plus any other persons who, at any time between the date hereof through the Closing Date, serve as members of BCBSKS's steering committee. -11-
"Net Insurance Recoveries" means the amounts actually recovered from any ------------------------ insurer for Contingent Litigation Matter Costs, net of any reasonable out-of- pocket costs and expenses incurred by Purchaser or BCBSKS after the Closing Date in effecting such recovery, to the extent such costs and expenses have not been previously reflected as a reduction to Contingent Litigation Matter Costs. "Neutral Auditor" has the meaning specified in Section 2.07(i). --------------- "Owned Intellectual Property" means all Intellectual Property used or --------------------------- previously used in the Business and in which BCBSKS or any of its Affiliates has any ownership right, title or interest. "Owned Real Property" means the real property owned by BCBSKS or any of its ------------------- Affiliates, together with all buildings and other structures, facilities or improvements currently or hereafter located thereon, all fixtures, systems, equipment and items of personal property of BCBS attached or appurtenant thereto and all easements, licenses, rights and appurtenances relating to the foregoing. "Party" means Purchaser or BCBSKS, as the context requires. ----- "PC's Accountants" means Deloitte & Touche LLP (or successor thereto), ---------------- independent certified public accountants retained by the Policyholder Committee (which may be the independent certified public accountants of BCBSKS). "Permits" has the meaning specified in Section 3.12(d). ------- "Permitted Encumbrances" means such of the following as to which no ---------------------- enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced: (a) liens for Taxes, assessments and governmental charges or levies not yet due and payable; (b) Encumbrances imposed by Law, such as materialmen's, mechanics', carriers', workmen's and repairmen's liens and other similar liens arising in the ordinary course of business securing obligations; (c) pledges or deposits to secure obligations under workers' compensation laws or similar legislation or to secure public or statutory obligations; (d) minor survey exceptions, reciprocal easement agreements and other customary encumbrances on title to real property that (i) would not render title to the property encumbered thereby unmarketable and (ii) would not, individually or in the aggregate, materially adversely affect the value of or the use of such property for its present purposes; and (e) any lien, levy or assessment (i) contested in good faith by BCBS for which it establishes adequate reserves on its books, or (ii) that would not, individually or in the aggregate, materially adversely affect the value of or use of any asset or property for its present purposes. "Person" means any individual, partnership, firm, corporation, association, ------ trust, unincorporated organization or other entity, as well as any syndicate or group that would -12-
be deemed to be a person under Section 13(d)(3) of the Securities Exchange Act, as amended. "Plans" has the meaning specified in Section 3.20(a). ----- "Plan of Conversion" has the meaning specified in the Recitals to this ------------------ Agreement. "Policyholder Committee" has the meaning specified in Section 2.07(f). ---------------------- "Preliminary Closing Balance Sheet" has the meaning specified in Section --------------------------------- 2.08(a). "Purchase Price" has the meaning specified in Section 2.03. -------------- "Purchaser" has the meaning specified in the Recitals to this Agreement, --------- except as provided in Section 7.04(a). "Purchaser's Accountants" means Ernst & Young, LLP, the independent ----------------------- certified public accountants of Purchaser. "Purchaser Disclosure Statement" means the Purchaser Disclosure Statement, ------------------------------ dated as of the date hereof, referring to and forming part of this Agreement. "Real Property" means the Leased Real Property and the Owned Real Property. ------------- "Receivables" means any and all accounts receivable, notes and other ----------- amounts receivable from third parties, including, without limitation, customers and employees, arising from the conduct of the Business on or before the Closing Date, whether or not in the ordinary course, together with any unpaid financing charges accrued thereon. "Reference Balance Sheet" means the audited consolidated balance sheet ----------------------- (including related notes and schedules thereto, if any) of BCBSKS, prepared in accordance with U.S. GAAP and dated as of December 31, 2000, a copy of which is set forth in Section 3.06(a)(i) of the Disclosure Statement. "Reference Balance Sheet Date" means December 31, 2000. ---------------------------- "Release" means releasing, disposing, discharging, injecting, spilling, ------- leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing and the like into or upon any land or water or air or otherwise entering into the environment. "Return" has the meaning specified in Section 7.01. ------ "Secondary Payor Rules" has the meaning specified in Section 3.32. --------------------- -13-
"Securities Act" means the Securities Act of 1933, as amended, and the -------------- rules and regulations promulgated thereunder. "Securities Exchange Act" means the Securities Exchange Act of 1934, as ----------------------- amended, and the rules and regulations promulgated thereunder. "Shares" has the meaning specified in Section 2.02. ------ "Special Distribution" has the meaning specified in Section 2.09. -------------------- "Special Meeting" has the meaning specified in Section 2.01(b). --------------- "STAT" means statutory accounting practices prescribed or permitted by the ---- Department of Insurance of the State of Kansas. "Superior Proposal" means a proposal relating to an Extraordinary Business ----------------- Combination with respect to BCBS made by any third party on terms that the BCBSKS's Board of Directors determines in its good faith reasonable judgment are more favorable in the aggregate to BCBSKS and its policyholders than the transactions contemplated hereby when considered from a financial point of view and in such other respects as BCBSKS's Board of Directors determines in good faith (after consultation with its legal counsel) that are appropriate to consider in order to fulfill its statutory and fiduciary duties under Kansas Law. "Superior Proposal Notice" has the meaning specified in Section ------------------------ 10.01(b)(ii). "Tangible Personal Property" has the meaning specified in Section 3.16(a). -------------------------- "Tax" or "Taxes" means any and all taxes, fees, levies, duties, tariffs, --- ----- imposts, and other charges of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any government or taxing authority, including, without limitation: taxes or other charges on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers' compensation, unemployment compensation, or net worth; taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, conveyance, controlling interest transfer, value added, or gains taxes; license, registration and documentation fees; and customs duties, tariffs, and similar charges; provided, however, that Taxes shall not -------- ------- include charges under a Government Contract. "Tax Audit" means any Tax audit, investigation, inquiry or proposed --------- assessment, adjustment or imposition of Taxes by any Governmental Authority. -14-
"Tax Escrow Dispute" means any dispute described in Section 2.07(i) ------------------ regarding the Tax treatment of (i) any Contingent Litigation Matter Costs (except to the extent that a reserve has been established with respect thereto under Section 2.08(b)(iv)), or (ii) amounts payable to BCBSKS out of the Escrow Fund pursuant to Section 2.07. "Transferred Employees" has the meaning specified in Section 6.01. --------------------- "U.S. GAAP" means accounting principles generally accepted in the United --------- States in effect from time to time. "Voting Power" means, when expressed as a specified percentage with respect ------------ to any Person, that number of Voting Securities of that Person as shall enable the holders thereof to cast that specified percentage of all the votes which could be cast in an annual election of directors of that Person. "Voting Securities" means all securities of a Person entitling the holders ----------------- of those securities to vote in an annual election of directors of that Person. "WARN" has the meaning specified in Section 3.21(a). ---- ARTICLE II TRANSACTION SECTION 2.01. The Conversion. -------------- (a) Plan of Conversion. BCBSKS shall use its best and diligent efforts to ------------------ prepare, complete and submit to its Board of Directors for adoption as soon as practicable the Plan of Conversion. The Plan of Conversion shall contain the terms set forth in substantially the form attached hereto as Exhibit 2.01(a) and in this Section 2.01(a); provided, however, that the Plan of Conversion may -------- ------- contain such additions, deletions, and modifications to such terms as otherwise may be approved by Purchaser (which approval shall not be unreasonably withheld); and provided further, however, that the Plan of Conversion may -------- ------- contain such additions, deletions, and modifications to such terms to the extent such terms would not, individually or in the aggregate, have a Material Adverse Effect on Purchaser or BCBS, to ensure that (x) the Escrow Fund is not required to be registered as an "investment company" under the Investment Company Act of 1940, as amended, (y) any rights of Eligible Policyholders therein are not required to be registered under the Securities Act or the Securities Exchange Act, and (z) amounts deposited in the Escrow Fund and any earnings thereon are not includable in the income of Eligible Policyholders for federal income tax purposes prior to distribution of such amounts to Eligible Policyholders. BCBSKS shall use reasonable efforts to obtain a no- -15-
action letter or exemptive order from the Securities and Exchange Commission to the effect that such registrations are not required under such Acts. Subject to this Section 2.01(a), the Plan of Conversion shall contain the following terms: (i) Conversion of Membership Interests. On the Conversion Date, by ---------------------------------- virtue of the Conversion and without any action on the part of any of the parties hereto or any policyholder of BCBSKS, all membership interests shall be extinguished and, in exchange therefor, each Eligible Policyholder shall have the right, as provided in the Plan of Conversion, to receive cash in an amount equal to such Eligible Policyholder's proportionate allocable share of the Purchase Price, as provided in the Plan of Conversion, such amount to be distributed in accordance with the Plan of Conversion and this Agreement. (ii) Payment to Eligible Policyholders. Payment to Eligible --------------------------------- Policyholders of amounts out of the Escrow Fund shall be made by check, net of any applicable withholding tax. Any cash consideration that is unclaimed by any Eligible Policyholder shall be distributed to BCBSKS and retained by it and held in a manner that is consistent with its practices for holding undeliverable or unclaimed funds on behalf of that Eligible Policyholder until it escheats in accordance with applicable laws. (b) Policyholder Special Meeting. BCBSKS, in accordance with the Plan of ---------------------------- Conversion and applicable law, shall duly call, give notice of, convene and hold a special meeting (the "Special Meeting") of its Eligible Policyholders to --------------- approve the Plan of Conversion as may be required under applicable Law (including without limitation the Kansas Insurance Code). (c) Information Statement. BCBSKS and Purchaser shall prepare and provide --------------------- to Eligible Policyholders, in connection with the solicitation of approval of the Plan of Conversion, an information statement relating to the Plan of Conversion and the Sale, including a copy of the Plan of Conversion (with a summary of the Exhibits thereto) (the "Information Statement") and use --------------------- reasonable efforts to obtain and furnish the information required to be included by state and federal law, including the Kansas Insurance Code, and to clear the information statement with the Kansas Department of Insurance. Each of Purchaser and BCBSKS agrees that the information provided and to be provided by Purchaser or BCBSKS, as the case may be, specifically for use in the Information Statement shall not, with respect to the information supplied by such party, on the date upon which the Information Statement is mailed to Eligible Policyholders or on the date of the Special Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Each of Purchaser and BCBSKS agrees to correct as promptly as practicable any such information provided by it that shall have become false or misleading in any -16-
material respect and to take all steps necessary to furnish to the Kansas Department of Insurance and have cleared by the Kansas Department of Insurance any amendment or supplement to the Information Statement so as to correct the same and to cause the Information Statement as so corrected to be disseminated to Eligible Policyholders to the extent required by or advisable under applicable law. Each party shall use all reasonable efforts to cause their respective independent accountants to deliver to the other party a letter dated as of the date of the Information Statement and addressed to the other party, in form and substance reasonably satisfactory to the other party, in connection with the procedures undertaken by them with respect to the financial statements and other financial information of such party contained in the Information Statement (if any) and the other matters contemplated by applicable accounting statements and standards. SECTION 2.02. Sale and Purchase of the Shares. Subject to the terms and ------------------------------- conditions hereof, on the Conversion Date, BCBSKS will issue and sell shares of Common Stock (the "Shares") to Purchaser, Anthem West or Anthem Holding Company, ------ which shall constitute all of the issued and outstanding stock of BCBSKS, and Purchaser will or will cause Anthem West or Anthem Holding Company to purchase the Shares from BCBSKS. SECTION 2.03. Purchase Price. The aggregate purchase price to be paid -------------- by Purchaser to BCBSKS for the Shares shall be the sum of (a) $190,000,000 (One Hundred Ninety Million) (the "Initial Purchase Price") and (b) 30% of the ---------------------- excess, if any, of the Closing Book Value, after payment of the Special Distribution, over $155,000,000 (the "Additional Purchase Price" and, together ------------------------- with the Initial Purchase Price, the "Purchase Price"), in each case in cash. -------------- SECTION 2.04. Closing. Subject to the terms and conditions of this ------- Agreement, the consummation of the transaction contemplated by this Agreement shall take place at a closing (the "Closing") to be held at the offices of ------- Debevoise & Plimpton at 10:00 A.M. on the earliest practicable date after the conditions to the obligations of the parties set forth in Article VIII and the conditions set forth in the Plan of Conversion have been satisfied or waived (but not later than September 30, 2002), or at such other place or at such other time or on such other date as BCBSKS and Purchaser may mutually agree upon in writing. At Purchaser's election, exercised by giving BCBSKS written notice within three (3) Business Days after the conditions to the obligations of the parties set forth in Article VIII and the conditions set forth in the Plan of Conversion have been satisfied or waived, the Closing shall be held on the next practicable day which is the last day of a calendar month (but not later than September 30, 2002). The day on which the Closing takes place is the "Closing ------- Date". The closing of the transactions contemplated herein shall be deemed to - ---- have occurred and be effective at 11:59:59 p.m., Topeka time on the Closing Date (the "Effective Time"). -------------- -17-
SECTION 2.05. Closing Deliveries by BCBSKS. At the Closing, BCBSKS ---------------------------- shall deliver or cause to be delivered to Purchaser: (i) a stock certificate representing the Shares; (ii) the Escrow Agreement; and (iii) the opinions, certificates and other documents required to be delivered pursuant to Section 8.03. SECTION 2.06. Closing Deliveries by Purchaser. At the Closing, ------------------------------- Purchaser shall deliver or cause to be delivered to BCBSKS: (i) the Initial Purchase Price, by wire transfer of immediately available funds to previously designated accounts; (ii) the Escrow Agreement; and (iii) the opinions, certificates and other documents required to be delivered pursuant to Section 8.02. SECTION 2.07. Escrow Matters. -------------- (a) At the Closing, BCBSKS shall deposit the Initial Purchase Price received by it into a separately designated interest bearing deposit account established on or prior to the Conversion Date (the "Escrow Fund") pursuant to ----------- the Escrow Agreement. The parties agree that Purchaser, Anthem West or Anthem Holding Company, as the case may be, may deposit the Initial Purchase Price into the Escrow Fund on behalf of BCBSKS. From time to time, promptly after receipt thereof, BCBSKS shall deposit into the Escrow Fund all amounts that constitute Net Insurance Recoveries. Purchaser shall use commercially reasonable efforts to effect such recoveries. (b) In accordance with the terms of the Escrow Agreement, the Escrow Fund will provide funding for the payment of (i) the net after-tax amount of all Contingent Litigation Matter Costs (including Indemnifiable Tax Costs arising from any Tax Escrow Dispute), (ii) Tax matters described in Section 2.08(b)(iv) (but only to the extent of the amount of any reserve established for each such matter pursuant to Section 2.08(b)(iv)), and (iii) such other amounts as may be specified in the Escrow Agreement or in this Agreement (all as certified by the Policyholder Committee and Purchaser as due for payment in accordance with the procedures set forth in the Escrow Agreement), and following the satisfaction of all such Contingent Litigation Matter Costs and such other costs and expenses, to provide security for the payment by BCBSKS of amounts payable to Eligible Policyholders under the Plan of Conversion. (c) Subject to the terms of the Escrow Agreement, amounts held in the Escrow Fund shall be invested by the Escrow Agent solely in obligations of, or obligations fully guaranteed as to timely payment of principal and interest by, the United States of America or an agency or instrumentality thereof with a maturity date of one year or less from the date of investment. All costs and expenses of maintaining the Escrow Fund, including the fees and expenses of the Escrow Agent, the costs and expenses of making distributions out of the Escrow Fund and the fees and expenses of the Policyholder Committee, shall be borne by the Escrow Fund. -18-
(d) The rights of Eligible Policyholders to amounts held in the Escrow Fund shall not be represented by any form of certificate or instrument and shall not be transferable or assignable except by will, the laws of intestacy or by other operation of law. (e) The Escrow Fund shall continue until the Contingent Litigation Matter has been finally disposed of by binding settlement or court order, all Tax matters for which a reserve has been established pursuant to Section 2.08(b)(iv) or which are the subject of a Tax Escrow Dispute have had a Final Determination, all amounts that are reasonably recoverable from any insurer in respect of the Contingent Litigation Matter Costs are recovered, and all amounts in the Escrow Fund have been paid or distributed by the Escrow Agent in accordance with the Escrow Agreement and this Agreement. Upon delivery by BCBSKS and the Policyholder Committee of a certificate certifying that all such amounts have been paid, the Escrow Fund shall terminate and all remaining amounts held in the Escrow Fund shall be distributed to the Eligible Policyholders in accordance with the Plan of Conversion. No amounts need be distributed if the Policyholder Committee determines that it would be impractical to do so, taking into account the costs of distribution in relation to the amounts to be distributed. Any amounts that are not so distributed shall instead be distributed to a charitable foundation selected by the Policyholder Committee. (f) On or before the Closing Date, but effective on the Closing Date, the Board of Directors of BCBSKS shall appoint a committee (the "Policyholder ------------ Committee") to oversee the conduct of the Contingent Litigation Matter and to - --------- perform the other duties assigned by the provisions of this Agreement and/or the Escrow Agreement. The Policyholder Committee shall initially be comprised of five (5) individuals who were members of the Board of Directors of BCBSKS immediately prior to the Closing Date and who are acceptable to Purchaser (which acceptance shall not be unreasonably refused). Vacancies in the Policyholder Committee shall be filled by individuals selected by the remaining members of the Policyholder Committee who are acceptable to Purchaser (which acceptance shall not be unreasonably refused). BCBSKS shall use commercially reasonable efforts to obtain and maintain, at the expense of the Escrow Fund, liability insurance for the members of the Policyholder Committee during the existence of the Policyholder Committee and for six years thereafter that provides at least the same coverage and amounts and contains terms and conditions that are no less advantageous as the liability insurance provided to the Board of Directors of Purchaser. The Policyholder Committee shall retain sole responsibility for the defense of the Contingent Litigation Matter, including the selection of counsel, and for the determination of all amounts payable out of the Escrow Fund with respect thereto and with respect to the other items specified in Section 2.07(a). Purchaser shall not settle or compromise any Contingent Litigation Matter or consent to the entry of any judgment without the approval of the Policyholder Committee and shall give such assistance in any Actions relating to the Contingent Litigation Matter as may reasonably be requested by -19-
the Policyholder Committee, at the expense of the Escrow Fund. Purchaser shall agree or consent to such a settlement, compromise, or judgment approved by the Policyholder Committee that provides solely for monetary relief in an amount not greater than the amounts remaining in the Escrow Fund, and shall not unreasonably withhold agreement or consent to any other settlement, compromise or judgment. The Policyholder Committee may engage legal counsel and other advisors at the expense of the Escrow Fund to assist the Policyholder Committee in its duties. The Policyholder Committee shall terminate upon the distribution of all amounts out of the Escrow Fund in accordance with this Section 2.07, the Escrow Agreement and the Plan of Conversion. (g) From time to time as it incurs costs and expenses constituting Contingent Litigation Matter Costs or Indemnifiable Tax Costs, BCBSKS may deliver to the Escrow Agent, with a copy to the Policyholder Committee, a written notice setting forth its calculation of the amount of costs and expenses that constitute Contingent Litigation Matter Costs or Indemnifiable Tax Costs that have been incurred or paid but not reimbursed to date out of the Escrow Fund and showing in reasonable detail the principal components of such calculation (an "Escrow Company Funds Notice"). BCBSKS shall grant the --------------------------- Policyholder Committee reasonable access to the records and Returns of BCBSKS and Purchaser for the sole purpose of verifying the reimbursement requested in the Escrow Company Funds Notice. If, following receipt of any such Escrow Company Funds Notice, either (i) the Escrow Agent receives from the Policyholder Committee a written certification to the Escrow Company Funds Notice, or (ii) within twenty (20) days of the date the Escrow Company Funds Notice is delivered to the Escrow Agent, the Escrow Agent has not received a notice of objection from the Policyholder Committee, the amount specified in the Escrow Company Funds Notice shall be released by the Escrow Agent and distributed to BCBSKS. If the Policyholder Committee timely delivers a notice of objection disputing in good faith payment of all or any portion of the amount specified in the Escrow Company Funds Notice, then the Escrow Agent shall (x) release any undisputed amount from the Escrow Fund and distribute such amount to BCBSKS, and (y) continue to hold any disputed amount in the Escrow Fund in escrow until resolution of such dispute as provided below. Within ten (10) days after being notified in writing of the final resolution of any such dispute, the Escrow Agent shall distribute any amount resolved in favor of BCBSKS together with interest thereon at the rate of 7% per annum calculated from the date of the Escrow Company Funds Notice. (h) Within ninety (90) days following the date that the Contingent Litigation Matter has been finally disposed of by binding settlement or court order, BCBSKS shall deliver to the Escrow Agent, with a copy to the Policyholder Committee, an Escrow Company Funds Notice (the "Final Disposition Escrow Company -------------------------------- Funds Notice"). BCBSKS shall grant the Policyholder Committee reasonable access - ------------ to the records of BCBSKS and Purchaser for the sole purpose of verifying the reimbursement requested in the Final Disposition Escrow Company Funds Notice. If, following receipt of the Final Disposition Escrow Company Funds Notice, either (i) the Escrow Agent receives from -20-
the Policyholder Committee a written certification to the Final Disposition Escrow Company Funds Notice, or (ii) within twenty (20) days of the date the Final Disposition Escrow Company Funds Notice is delivered to the Escrow Agent, the Escrow Agent has not received a notice of objection from the Policyholder Committee, the Escrow Agent shall distribute to BCBSKS the amount for which it sought reimbursement in the Final Disposition Escrow Company Funds Notice, and distribute the entire remaining amount held in the Escrow Fund, after retaining all amounts required by this Section 2.07(h) to be retained, to the Eligible Policyholders in accordance with the Plan of Conversion. If the Policyholder Committee timely delivers a notice of objection disputing in good faith payment of all or any portion of the amount of reimbursement specified in the Final Disposition Escrow Company Funds Notice, then the Escrow Agent shall (x) release any undisputed reimbursement amount from the Escrow Fund and distribute such amount to BCBSKS, (y) continue to hold any disputed amount in the Escrow Fund in escrow until resolution of such dispute as provided below, and (z) distribute the entire amount held in the Escrow Fund, after retaining all amounts required by this Section 2.07(h) to be retained, to the Eligible Policyholders in accordance with the Plan of Conversion. Prior to the release of any amounts to be distributed from the Escrow Fund to the Eligible Policyholders pursuant to this Section 2.07(h), the Escrow Agent shall deliver to BCBSKS and the Policyholder Committee written notice ("Policyholder Distribution Notice") of -------------------------------- its intention to make such distribution indicating the amount thereof, how such amount has been calculated, and the amount and designated purpose of all amounts that will be retained in the Escrow Fund after such distribution is made. Within twenty (20) days after its receipt of the Policyholder Distribution Notice, BCBSKS shall deliver to the Escrow Agent a certificate showing in reasonable detail the amount of out-of-pocket costs and expenses that are reasonably expected to be incurred in the future in connection with the assessment or collection of the Indemnifiable Tax Costs and effecting the Net Insurance Recoveries, or which are described in the last sentence of Section 2.07(c). The Policyholder Committee shall be entitled to dispute such amounts pursuant to the procedures set forth in Section 2.07(i) (such amounts as finally resolved, and after giving credit for any reasonably expected after-tax earnings thereon during the period for which such amounts will be retained in the Escrow Fund as determined by the Escrow Agent, being referred to as the "Expected Costs and ------------------ Expenses"). When making any distribution from the Escrow Fund to the Eligible - -------- Policyholders, the Escrow Agent shall retain in the Escrow Fund, and the amount of such distribution shall not include: (i) the amount, if any, attributable to all unresolved reimbursement disputes with respect to the Escrow Company Funds Notices delivered by BCBSKS, (ii) the amount of any and all reserves which have been established with respect to Tax Escrow Disputes or pursuant to Section 2.08(b)(iv) with respect to Tax matters, for which, in either case, there has been no Final Determination, and (iii) the Expected Costs and Expenses. Within ten (10) days after being notified in writing of the final resolution of any reimbursement dispute, or the Final Determination of any Tax Escrow Dispute or Tax matter for which a reserve has been established pursuant to Section 2.08(b)(iv), the Escrow Agent shall (i) distribute to BCBSKS all amounts resolved in favor of BCBSKS, together with interest on such -21-
amounts (except for amounts attributable to a Tax Escrow Dispute or a Tax matter for which a reserve has been established pursuant to Section 2.08(b)(iv)) at the rate of 7% per annum calculated from the date of the applicable Escrow Company Funds Notice out of which the issue first arose, and (ii) the Escrow Agent shall distribute all amounts resolved in favor of the Policyholder Committee to the Eligible Policyholders in accordance with the Plan of Conversion. Within ten (10) days after receipt of the final amounts that constitute the Net Insurance Recoveries (the "Final Recoverable Amount"), the Escrow Agent shall distribute ------------------------ the Final Recoverable Amount, plus the earnings in the Escrow Fund thereon, to the Eligible Policyholders in accordance with the Plan of Conversion. The Policyholder Committee may dispute the recovery and amount of any amounts that are reasonably recoverable in respect of the Contingent Litigation Matter in accordance with the provisions of Section 2.07(i). The Policyholder Committee may also direct the Escrow Agent to defer a distribution to the Eligible Policyholders and to accumulate the amount eligible for such distribution in the Escrow Fund for a later aggregate distribution when the Policyholder Committee determines that it would be impractical to make current distributions, taking into account the costs of distribution in relation to the amounts to be distributed. (i) If the Policyholder Committee disputes in good faith payment of all or any portion of the reimbursement requested in either a Escrow Company Funds Notice or a Final Disposition Escrow Company Funds Notice pursuant to Sections 2.07(g) or (h) above and delivers a timely notice of objection to the Escrow Agent, with a copy to BCBSKS, and if BCBSKS and the Policyholder Committee shall not have resolved all of the issues set forth in the notice of objection within fifteen (15) days after BCBSKS's receipt of the notice of objection, then not more than five (5) days thereafter BCBSKS and the Policyholder Committee shall submit the items remaining in dispute under the notice of objection to KPMG Peat Marwick or its successor, or if such firm is unable or unwilling to act in such capacity for any reason, to another nationally recognized firm of independent accountants agreed upon by BCBSKS and the Policyholder Committee, or if BCBSKS and the Policyholder Committee are unable to agree within such 5-day period, designated at the request of either BCBSKS or the Policyholder Committee by an authorized representative of the American Arbitration Association (the "Neutral ------- Auditor"). The fees and expenses of the Neutral Auditor shall be borne equally - ------- by BCBSKS and the Escrow Fund. The Neutral Auditor shall act as an arbitrator to determine, based solely on presentations by the Policyholder Committee and BCBSKS, and not by independent review, only those issues still in dispute other than any Tax Escrow Dispute or dispute regarding the disposition of a reserve established pursuant to Section 2.08(b)(iv), which shall be resolved in accordance with Section 7.05. The Neutral Auditor's determination shall be made within thirty (30) days of the submission of the items remaining in dispute under the notice of objection, and shall be set forth in a written statement delivered to the Escrow Agent, with a copy to the Policyholder Committee and BCBSKS, which shall be final, binding and conclusive. -22-
(j) The Commissioner of Insurance of the State of Kansas shall retain regulatory oversight over the investment and distribution of the assets held in the Escrow Fund to ensure that policyholder interests are protected. SECTION 2.08. Additional Purchase Price. The Additional Purchase Price ------------------------- and the Special Distribution, if any, shall be determined and paid as provided in this Section 2.08: (a) Preliminary Closing Balance Sheet. As promptly as practicable, but in --------------------------------- any event within ninety (90) calendar days following the Closing Date, the Policyholder Committee shall deliver to Purchaser an audited Closing Balance Sheet (the "Preliminary Closing Balance Sheet") setting forth the Closing Book --------------------------------- Value, together with the report thereon of PC's Accountants, stating that the Preliminary Closing Balance Sheet has been prepared and calculated in accordance with the requirements of this Agreement. During the preparation of the Preliminary Closing Balance Sheet and until the final resolution of any dispute of the matters covered by this Section 2.08, Purchaser shall cause BCBS to provide the Policyholder Committee and the PC's Accountants full access to the books, records, facilities and employees of BCBS, and shall cause BCBS and the Purchaser's Accountants to cooperate fully with the Policyholder Committee and the PC's Accountants, in each case to the extent required by the Policyholder Committee or the PC's Accountants in order to prepare the Preliminary Closing Balance Sheet or the PC's Accountants' report thereon or to investigate the basis for any such dispute. (b) Disputes. -------- (i) Purchaser may dispute amounts reflected on the Preliminary Closing Balance Sheet, but only on the basis that (x) such amounts were arrived at as a result of arithmetic errors in computation, (y) such amounts were not calculated in accordance with the definition of Closing Book Value in Section 1.01, or (z) such amounts were not arrived at using the same U.S. GAAP accounting principles and methods as those used in the preparation of, and as are reflected in, the Reference Balance Sheet, and Purchaser may not dispute any such accounting principles and methods if such principles and methods were applied on a consistent basis; provided, however that -------- ------- Purchaser shall have notified the Policyholder Committee and the PC's Accountants in writing of each disputed item, specifying the amount thereof in dispute and setting forth, in reasonable detail, the basis for such dispute, within thirty (30) calendar days of delivery of the Preliminary Closing Balance Sheet to Purchaser. In the event of such a dispute, PC's Accountants and the Purchaser's Accountants shall attempt to reconcile their differences, and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties hereto. If the PC's Accountants and the Purchaser's Accountants are unable to reach a resolution with such effect within twenty (20) Business Days after receipt by the -23-
Policyholder Committee and the PC's Accountants of Purchaser's written notice of dispute, the PC's Accountants and the Purchaser's Accountants shall submit the items remaining in dispute for resolution to the Neutral Auditor, which shall, within thirty (30) Business Days after such submission, determine and report to Purchaser and the Policyholder Committee upon such remaining disputed items, and such report shall be final, binding and conclusive on the Policyholder Committee, BCBSKS and Purchaser. The fees and disbursements of the Neutral Auditor shall be allocated between the Escrow Fund and Purchaser in the same proportion that the aggregate amount of the remaining disputed items submitted to the Neutral Auditor that is unsuccessfully disputed by each such party (as finally determined by the Neutral Auditor) bears to the total amount of such remaining disputed items so submitted. (ii) In acting under this Agreement, Purchaser's Accountants, PC's Accountants and the Neutral Auditor shall be entitled to the privileges and immunities of arbitrators. (iii) The Preliminary Closing Balance Sheet shall be final, binding and conclusive (the "Final Closing Balance Sheet") on the parties herein --------------------------- upon the earliest of (A) the failure of Purchaser to notify the Policyholder Committee of a dispute within thirty (30) calendar days of delivery of the Preliminary Closing Balance Sheet to Purchaser, (B) the resolution of all disputes, pursuant to Section 2.08(b)(i), by the Purchaser's Accountants and the PC's Accountants, and (C) the resolution of all disputes, pursuant to Section 2.08(b)(i), by the Neutral Auditor. (iv) Notwithstanding the foregoing, if, within thirty (30) calendar days after the delivery of the Preliminary Closing Balance Sheet to Purchaser, Purchaser alleges that there is a reasonable basis for asserting that all or any part of any Tax deduction taken on any Return filed by BCBSKS on or before the Closing Date with respect to any Contingent Litigation Matter Costs which were paid on or before the Closing date may not be allowable under applicable law, Purchaser shall provide BCBSKS with a schedule, specifying in reasonable detail the amount of such deduction and its calculation of the reserve that should be established to make BCBSKS whole for such disallowance. The Policyholder Committee may dispute the amount of such reserve but only on the basis that (x) such amount was arrived at as a result of arithmetic errors in computation or (y) such reserve is not described in this Section 2.08(b)(iv). Any such dispute shall be resolved as provided in Section 2.08(b)(i). The amount of such reserve shall not be distributed to Eligible Policyholders as part of the Special Distribution, but shall instead be deposited into and held in the Escrow Fund, and distributed as provided in Section 2.07, Section 7.05 and the Escrow Agreement. -24-
(v) Notwithstanding the foregoing, the full amount of any insurance claim made by BCBSKS on or before the Closing Date for recovery of any Contingent Litigation Matter Costs, to the extent that such insurance claim is recorded as an asset on the Closing Balance Sheet, but has not been paid on or before the date that the Preliminary Closing Balance Sheet is delivered by the Policyholder Committee to Purchaser pursuant to this Section 2.08, shall not be distributed to Eligible Policyholders as part of the Special Distribution but shall be deposited into the Escrow Fund in accordance with Section 2.07(a). (c) Payment of Additional Purchase Price. Within ten (10) business days ------------------------------------ after resolution of the Final Closing Balance Sheet, Purchaser shall deposit the Additional Purchase Price, if any, together with interest thereon at a rate of 7% calculated from the Closing Date, into the Escrow Fund pursuant to the Escrow Agreement. SECTION 2.09. Special Distribution. On or prior to the Closing Date, -------------------- the Board of Directors of BCBSKS shall, after obtaining appropriate regulatory approvals, declare a distribution to the Eligible Policyholders of all or any portion of the excess, if any, of the Closing Book Value over $155,000,000 (the "Special Distribution"). Subject to Section 2.08(b)(iv) and 2.08(b)(v), -------------------- Purchaser shall cause BCBSKS to distribute to the Eligible Policyholders in accordance with the Plan of Conversion the Special Distribution approved by the Board of Directors of BCBSKS in accordance with this Agreement, net of out-of- pocket costs of effecting such distribution, together with interest thereon at a rate of 7% calculated from the Closing Date. Such distribution shall be made as soon as reasonably practicable following resolution of the Final Closing Balance Sheet in accordance with the Plan of Conversion. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BCBSKS As an inducement to Purchaser to enter into this Agreement, BCBSKS hereby represents and warrants to Purchaser that, as of the date of this Agreement and the Closing Date: SECTION 3.01. Organization and Authority. -------------------------- (a) As of the date of this Agreement: (i) BCBSKS is a mutual insurance company duly organized, validly existing and in good standing under the laws of the State of Kansas; (ii) BCBSKS has no authorized capital stock and no shares of capital stock outstanding or held in its treasury; (iii) there are no outstanding or authorized options, warrants, stock subscription rights, preemption rights, stock appreciation rights, -25-
phantom stock rights, profit participation rights, or similar rights with respect to BCBSKS, or any agreement or obligation to issue or grant any of the foregoing. As of the Closing Date: (i) BCBSKS will be a Kansas stock insurance corporation, with authorized capital stock consisting of the Shares; (ii) there will be no outstanding or authorized options, warrants, stock subscription rights, preemption rights, stock appreciation rights, phantom stock rights, profit participation rights, or similar rights with respect to BCBSKS, or any agreement or obligation to issue or grant any of the foregoing. Each of BCBSKS's Affiliates is a corporation duly organized, validly existing and in good standing under the laws of the state in which it was organized. (b) Subject to the necessary approvals by Governmental Authorities described in Section 3.05, the adoption of the Plan of Conversion by the Board of Directors of BCBSKS and the approval of the Conversion by the Eligible Policyholders, BCBSKS has all necessary power and authority to enter into this Agreement and the Escrow Agreement, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. Subject to the adoption of the Plan of Conversion by the Board of Directors of BCBSKS, the execution and delivery of this Agreement and the Escrow Agreement by BCBSKS, the performance by BCBSKS of its obligations hereunder and thereunder and the consummation by BCBSKS of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of BCBSKS. This Agreement has been, and upon its execution the Escrow Agreement will be, duly executed and delivered by BCBSKS, and (assuming due authorization, execution and delivery by Purchaser) this Agreement constitutes, and upon its execution the Escrow Agreement will constitute, legal, valid and binding obligations of BCBSKS enforceable against BCBSKS in accordance with their respective terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting or relating to the enforcement of creditors' rights generally, (ii) applicable insurance company delinquency, rehabilitation and liquidation laws and (iii) general equitable principles. BCBSKS has received a fairness opinion relative to the transactions contemplated by this Agreement and the Escrow Agreement from Dresdner Kleinwort Wasserstein reasonably satisfactory in form and substance to the Board of Directors of BCBSKS, dated as of the date that BCBSKS's Board of Directors authorized the execution and delivery of this Agreement and the Escrow Agreement by BCBSKS. (c) Except as set forth in Section 3.01(c) of the Disclosure Statement, BCBSKS and each of its Affiliates is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of the Business makes such licensing or qualification necessary, except where the failure to be so licensed or qualified and in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS. Without limiting the generality of the foregoing, BCBSKS and each of its Affiliates has all material Health Benefit Permits necessary to own its assets and conduct its Business -26-
as such Business is now conducted, and all such material Health Benefit Permits are in full force and effect and are listed in Section 3.01(c) of the Disclosure Statement. Except as set forth in Section 3.01(c) of the Disclosure Statement, BCBS has not engaged in any activity which would reasonably be expected to cause the loss, limitation, restriction, revocation or suspension of any of the material Health Benefit Permits, and no action, proceeding, claim or notification with respect to any loss, limitation, restriction, revocation or suspension of any of the material Health Benefit Permits is pending or, to the knowledge of BCBSKS, threatened. Assuming the receipt of all consents and approvals listed in Article VIII, the execution and delivery of this Agreement and the consummation of the transactions contemplated herein will not limit, restrict, revoke, suspend or terminate, or result in the limitation, loss, restriction, revocation, suspension or termination of, any of the Health Benefit Permits, except such as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS. (d) BCBS has previously made available to Purchaser true and complete copies of all required filings made by BCBS within the past three (3) years to federal and state Governmental Authorities, including without limitation the Kansas Department of Insurance and the report required by 42 U.S.C. Section 300e-17, to the extent such filings have been specifically requested by the Purchaser (including in a data room made available to Purchaser). As of their respective dates, such filings did not contain any untrue statement of a material fact except as would not result in a violation of any Law which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on BCBS. SECTION 3.02. Ownership Interests. Section 3.02 of the Disclosure ------------------- Statement sets forth each corporation, partnership, joint venture, association or other entity in which BCBS owns, of record or beneficially, any direct or indirect equity or other ownership interest, or any right (contingent or otherwise) to acquire the same together with a description of such ownership interest, except for the ownership of securities having no more than five percent (5%) of the outstanding voting power of any entity which are listed on any national securities exchange or traded actively in the national over-the- counter market. Except as described in Section 3.02 of the Disclosure Statement, neither BCBSKS nor any of its Affiliates is a member of (nor is any part of the Business conducted through) any partnership, nor is BCBSKS or any of its Affiliates a participant in any joint venture or similar arrangement. Except as noted in Section 3.02 of the Disclosure Statement, BCBSKS's and its Affiliates' respective ownership interest in the entities set forth therein are owned by BCBSKS or its Affiliate, as applicable, free and clear of all Encumbrances other than Permitted Encumbrances. BCBSKS or its Affiliate, as applicable, has full power, right and authority to vote all of such ownership interests. Except as set forth on Section 3.02 of the Disclosure Statement, neither BCBSKS nor any of its Affiliates is a party to or bound by any voting trust, proxy, or -27-
other agreement affecting or relating to its right to transfer or vote the ownership interests set forth in Section 3.02 of the Disclosure Statement. SECTION 3.03. Books and Records. The minute books for the period since ----------------- January 1, 1997 of BCBSKS and each of its Affiliates contain accurate records of all meetings and accurately reflect, in all material respects, all meetings and other actions taken by their respective Board of Directors, all committees of the Board of Directors, and members or stockholders (if any). Complete and accurate copies of all such minute books have been provided to Purchaser to the extent specifically requested (including in a data room made available to Purchaser). SECTION 3.04. No Conflict. Assuming that all consents, approvals, ----------- authorizations and other actions described in Article VIII have been obtained, except as may result from any facts or circumstances relating solely to Purchaser, Anthem West, or Anthem Holding Company, the execution, delivery and performance of this Agreement and the Escrow Agreement by BCBSKS do not and would not reasonably be expected to: (a) violate, conflict with or result in the breach of any provision of the charter or By-laws (or similar organizational documents) of BCBS, (b) conflict with or violate any Law or Governmental Order applicable to BCBS or any of its assets, properties or businesses in a manner that would reasonably be expected to have a Material Adverse Effect on BCBS, or (c) except as set forth in Section 3.04(c) of the Disclosure Statement, conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance (other than a Permitted Encumbrance) on any of the assets or properties of BCBS pursuant to, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which BCBS is a party or by which any of such assets or properties is bound or affected, except such as would not, individually or in the aggregate, reasonably be expected to be have a Material Adverse Effect on BCBS. SECTION 3.05. Consents and Approvals of Governmental Authorities. -------------------------------------------------- Except for: (i) the filing of appropriate documents to effect the transactions contemplated herein as required by the laws of the State of Kansas, (ii) the approval of the Kansas and Indiana Insurance Departments, and (iii) the filing of a Pre-Merger Notification pursuant to the HSR Act and the consents and approvals listed in Section 3.05 of the Disclosure Statement, no consent, approval or authorization of, or declaration, filing or registration with, any Governmental Authority is required to be obtained or made by BCBS in connection with the execution, delivery and performance of this Agreement and the Escrow Agreement and the transactions contemplated herein and therein by BCBSKS, except such as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS. -28-
SECTION 3.06. Financial Information; Books and Records. ---------------------------------------- (a) True and complete copies of (i) the audited U.S. GAAP balance sheets of BCBSKS and its consolidated subsidiaries for each of fiscal years ended as of December 31, 1998, December 31, 1999, and December 31, 2000, and the related audited statements of operations, comprehensive loss, policyholders surplus and cash flows, together with all related notes and schedules thereto, accompanied by the reports thereon of Deloitte & Touche LLP, and (ii) the audited STAT financial statements of BCBSKS for each of the fiscal years ended as of December 31, 1998, December 31, 1999, and December 31, 2000 (collectively referred to herein as the "Financial Statements"), have been delivered by BCBSKS to -------------------- Purchaser. The Financial Statements (i) were prepared in accordance with the books of account and other financial records of BCBS, (ii) present fairly, in all material respects, the consolidated financial condition and results of operations of BCBS as of the dates thereof or for the periods covered thereby, (iii) have been prepared in accordance with U.S. GAAP or STAT, as applicable, applied on a basis consistent with past practices and throughout the periods involved, and (iv) include all adjustments that are necessary for a fair presentation of the financial condition and results of the operations of the applicable entities as of the dates thereof and for the periods covered thereby. (b) The books of account and other financial records of BCBS: have, in all material respects, been maintained in accordance with U.S. GAAP and STAT, as applicable, in each case applied on a basis consistent with the past practices and throughout the periods involved. (c) The aggregate actuarial reserves and other actuarial amounts held in respect of statutorily required reserves and for incurred but not yet paid claims for, or relating to, health care or other insurance claims with respect to BCBSKS as established or reflected on the Reference Balance Sheet: (i) were, in all material respects, and in each case with respect to practices, principles and methodologies, applied on a basis consistent with past practices and principles, and using the same methodologies throughout the periods involved: (A) determined in accordance with U.S. GAAP, (B) fairly stated in accordance with sound actuarial principles, and (C) based on sound actuarial assumptions; and (ii) met, in all material respects, the requirements of the applicable insurance laws (including those applicable to health maintenance organizations) of the State of Kansas or any other state having such jurisdiction. BCBSKS is not aware of any facts or circumstances which would necessitate, in the good faith application of prudent reserving practices, policies and methodologies, any -29-
material adverse change in the statutorily required reserves or reserves for such incurred by not yet paid claims above those reflected in Reference Balance Sheet, other than increases consistent with past experience resulting from increases in enrollment with respect to services provided by BCBSKS or any of its Affiliates. (d) Except as disclosed in Section 3.06(d) of the Disclosure Statement, BCBSKS's surplus is now, and continuously to the Closing Date will be, sufficient to meet the minimum capital/surplus requirements of BCBSA to maintain the primary Blue Cross and Blue Shield service mark and trademark licenses for the State of Kansas. SECTION 3.07. No Undisclosed Liabilities. There are no Liabilities of -------------------------- BCBS other than Liabilities: (i) reflected or reserved against on the Reference Balance Sheet; (ii) disclosed in Section 3.07 of the Disclosure Statement, provided that BCBSKS shall not be required to so disclose any individual - -------- Liability which is less than $200,000 that is not part of a group of related Liabilities which in the aggregate exceed $500,000; (iii) incurred since the date of the Reference Balance Sheet in the ordinary course of business and consistent with past practice of BCBS; or (iv) which would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect on BCBS. SECTION 3.08. Receivables. Section 3.08 of the Disclosure Statement is ----------- an aged list of the Receivables as of the Reference Balance Sheet Date showing separately those Receivables that as of such date had been outstanding (i) for thirty (30) days or less, (ii) thirty-one (31) to sixty (60) days, (iii) sixty- one (61) to ninety (90) days, and (iv) more than ninety (90) days. Except to the extent, if any, reserved for on the Reference Balance Sheet, all Receivables reflected on the Reference Balance Sheet arose from, and the Receivables existing on the Closing Date will have arisen from, the ordinary course of the Business consistent with past practice of BCBS. Reserves on the Reference Balance Sheet for the non-collection of Receivables were reasonable on the Reference Balance Sheet Date based on past experience of BCBS. SECTION 3.09. Conduct in the Ordinary Course; Absence of Certain -------------------------------------------------- Changes, Events and Conditions. Since the Reference Balance Sheet Date, except - ------------------------------ as disclosed in Section 3.09 of the Disclosure Statement, and except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, the Business has been conducted in the ordinary course and consistent with past practice. As amplification and not limitation of the foregoing, except as disclosed in Section 3.09 of the Disclosure Statement or in the ordinary course and consistent with past practice, since the Reference Balance Sheet Date, BCBS has not: (i) permitted or allowed any of its material assets or properties (whether tangible or intangible) to be subjected to any material Encumbrance, other than Permitted Encumbrances and Encumbrances that will be released at or prior to the Closing; -30-
(ii) written down or written up (or failed to write down or write up) other than in accordance with U.S. GAAP consistent with past practice, in any material way, the value of any Receivables or revalued any assets other than in the ordinary course of business consistent with past practice and in accordance with U.S. GAAP or STAT; (iii) made any material change in any method of accounting or accounting practice or policy other than such changes required or permitted by U.S. GAAP or STAT; (iv) amended, terminated, canceled or compromised any material claims or waived any other rights of material value; (v) sold, transferred, leased, subleased, licensed or otherwise disposed of any material properties or material assets, real, personal or mixed (including, without limitation, leasehold interests and intangible property); (vi) issued, sold or transferred any notes, bonds or other securities, or any option, warrant or other right to acquire the same, except in accordance with its investment policy as currently in effect and consistently applied through the period; (vii) taken any action or omitted to take any action which would reasonably be expected to cause BCBSKS to no longer meet the requirements of Section 833(c) of the Code; (viii) merged with, entered into a consolidation with or acquired an equity or other ownership interest of five percent (5%) or more in any Person or acquired a substantial portion of the assets or business of any Person or any division or line of business thereof, or otherwise acquired any assets in excess of $300,000 individually or $1,000,000 in the aggregate, except in accordance with its investment policy as currently in effect and consistently applied through the period; (ix) made any capital expenditure or commitment for any capital expenditure in excess of $300,000 individually or $1,000,000 in the aggregate; (x) issued any sales orders or otherwise agreed to make any purchases involving exchanges in value in excess of $300,000 individually or $1,000,000 in the aggregate from any particular vendor or relating to a specific project; (xi) except as required by Law, made any material changes in the Business's methods of operation, including, without limitation, material changes in practices and policies relating to purchasing, marketing, selling and pricing; -31-
(xii) made any material express or deemed election, or settled or compromised, any material liability with respect to Taxes; (xiii) incurred any Indebtedness in excess of $300,000 individually or $1,000,000 in the aggregate; (xiv) made any loan to, guaranteed any Indebtedness of or otherwise incurred any Indebtedness on behalf of any Person; (xv) failed to pay any creditor any material amount owed to such creditor when due; (xvi) granted, promised or announced any increase in the wages, salaries, compensation, bonuses, incentives, pension or other benefits payable by it to any of its employees, including, without limitation, any increase or change pursuant to any Plan, or granted, promised or announced any other material change in any benefits under any Plan, in any such case except as required by Law or any currently existing Plan, employment or collective bargaining agreement, except for regular salary or bonus or benefit increases in the ordinary course of business which are (except in specific cases of individual merit) consistent with past practices; (xvii) entered into any material agreement, arrangement or transaction with any of its directors, officers or employees (or with any spouse, lineal descendant or Affiliate of, any such Person); (xviii) terminated, discontinued, closed or disposed of any material facility or other material business operation, or laid off any employees (other than layoffs of less than fifty (50) employees in any six (6) month period in the ordinary course of business consistent in all material respects with past practices) or implemented any early retirement, separation or severance program providing early retirement benefits or announced any such action or program for the future; (xix) disclosed any secret or confidential material Intellectual Property (except by way of issuance of a patent) or permitted to lapse or go abandoned any material Intellectual Property (or any registration or grant thereof, or any application relating thereto) owned by it; (xx) allowed any material Permit or material Environmental Permit that was issued to it to lapse or terminate, or failed to renew any material insurance policy, material Permit or material Environmental Permit, in each case that is scheduled to terminate or expire within forty- five (45) calendar days of the date hereof; -32-
(xxi) failed to maintain its property and equipment in good repair and operating condition, ordinary wear and tear excepted, except such as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on BCBS; (xxii) suffered any casualty loss or damage with respect to any of the Assets which in the aggregate have a replacement cost of more than $500,000, whether or not such losses or damage shall have been covered by insurance; (xxiii) consented to any material modification of, or amendment to, or the termination of any Material Contract or its rights thereunder, except in the ordinary course of business consistent with past practice; (xxiv) amended or restated its charter or By-laws (or other organizational documents); (xxv) suffered any Material Adverse Effect; (xxvi) converted into a stock corporation or otherwise changed its form of entity (except as contemplated by this Agreement); or (xxvii) agreed, whether in writing or otherwise, to take any of the actions specified in this Section 3.09 or granted any options to purchase, rights of first refusal, rights of first offer or any other similar rights with respect to any of the actions specified in this Section 3.09, except as expressly contemplated by this Agreement and the Escrow Agreement. SECTION 3.10. Litigation. Except as set forth in Section 3.10 of the ---------- Disclosure Statement (which identifies the parties, issues and amounts in controversy), there are no Actions by or against BCBS, or affecting any of the Assets or the Business, pending before any Governmental Authority (or, to the knowledge of BCBSKS, threatened to be brought by or before any Governmental Authority), which, if adversely determined, would reasonably be expected have a Material Adverse Effect on BCBS. As of the date hereof, none of the matters disclosed in Section 3.10 of the Disclosure Statement would reasonably be expected to have a material and adverse affect on the legality, validity or enforceability of this Agreement, the Escrow Agreement or the consummation of the transactions contemplated hereby or thereby. Except as set forth in Section 3.10 of the Disclosure Statement, neither BCBS nor any of its assets or properties, including, without limitation, the Assets, are subject to any Governmental Order (nor, to the knowledge of BCBSKS, are there any such Governmental Orders threatened to be imposed by any Governmental Authority) which has had or would reasonably be expected to have a Material Adverse Effect on BCBS. There is no Action pending, or to the knowledge of BCBSKS, threatened against or involving BCBS before any Governmental Authority that -33-
questions the validity of, or the obligations of, BCBS under this Agreement, the Plan of Conversion, or the Escrow Agreement, or that seeks to impede, enjoin or invalidate the transactions contemplated by this Agreement or the Escrow Agreement. SECTION 3.11. Compliance with Laws. Except as set forth in Section 3.11 -------------------- of the Disclosure Statement: (a) To the knowledge of BCBSKS: (i) BCBS has conducted and continues to conduct the Business in accordance with all Laws, including without limitation the Social Security Act and the amendments thereto, including the so-called "Medicare/Medicaid Anti-Kickback Statute," "Stark I" and "Stark II," and Governmental Orders applicable to BCBSKS or any of its Affiliates, or any of its or their properties or assets, except such as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, and (ii) BCBSKS is not aware of any facts or circumstances which would constitute or result in any such violation. (b) Except as disclosed in Section 3.13(a) of the Disclosure Statement, neither BCBSKS, nor any of its Affiliates, is a party to any contract, agreement or undertaking, other than Insurance Contracts, with any Governmental Authority. Neither BCBSKS, nor any of its Affiliates, is subject to any order by, or is a recipient of any supervisory letter, notice of breach, suspension or revocation of rights, or other directed regulatory action of any kind from, any Governmental Authority which currently has or would reasonably be expected to have a Material Adverse Effect on BCBS or which would result, or would reasonably be expected to result, in a material adverse change in BCBS's investment, sales or trade practices and policies, underwriting practices and policies, or management. Neither BCBSKS, nor any of its Affiliates, has been advised in writing by a Governmental Authority that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any order, supervisory letter, notice of breach, suspension or revocation of rights, or other directed regulatory action of any kind. (c) Except as disclosed in Section 3.11(c) of the Disclosure Statement, to BCBSKS's knowledge, there are no pending or threatened audits or investigations with regard to any contract currently or formerly in existence between BCBSKS, or any of its Affiliates, and any Government Authority, including, without limitation, Medicare, FEHBP, TRICARE or Medicaid, and neither BCBSKS, nor any of its Affiliates, has been the subject of any such audit or investigation within the last three (3) years. SECTION 3.12. Environmental and Other Permits and Licenses; Related ----------------------------------------------------- Matters. Except as set forth in Section 3.12 of the Disclosure Statement, or as - ------- would not reasonably be expected to have a Material Adverse Effect on BCBS: (a) There are no outstanding or, to BCBSKS's knowledge, threatened actions, claims, proceedings, or judgments by any party, including but not limited to any -34-
Governmental Authority, against BCBS, in any matter arising under any Environmental Law or requiring the remediation or removal of Hazardous Materials. There are no outstanding or, to the knowledge of BCBSKS, threatened orders, determinations or written notices of violation issued by any Governmental Authority administering Environmental Laws in connection with ownership of or operation by BCBS of the Business which have not been complied with or resolved to the satisfaction of such Governmental Authority. (b) The Business is being and has been operated in compliance with all applicable Environmental Laws governing BCBS and the Business including, but not limited to, all discharges of Hazardous Materials into or onto the soil and/or the ground or surface water, emissions of Hazardous Materials into the ambient air, and generation, accumulation, labeling, transportation, removal, handling, treatment, storage and disposal of Hazardous Materials. BCBS has complied with all notice, record keeping and reporting requirements, informational requests and demands imposed by any Governmental Authority arising under any Environmental Laws. (c) BCBS has not released, disposed of or caused or permitted the disposal of any Hazardous Materials upon any of the Real Property or any of the real properties at which BCBS has conducted the Business in violation of applicable Environmental Laws. BCBS has not, directly or indirectly, disposed of Hazardous Materials off-site in violation of applicable Environmental Laws. (d) Except for Health Benefit Permits which are covered in Section 3.01(c), BCBS currently holds all the health and safety and other permits, licenses, authorizations, franchises, certificates, exemptions and approvals of Governmental Authorities (collectively, "Permits"), including, without ------- limitation, Environmental Permits, necessary for the current use, occupancy and operation of each of its assets and properties, including, without limitation, the Assets, and the conduct of the Business, and all such Permits and Environmental Permits are in full force and effect. BCBS is in compliance with all Permits and the requirements of all Environmental Permits. Section 3.12 of the Disclosure Statement identifies all material Permits and Environmental Permits which are nontransferable or which will require the consent of any Governmental Authority in order to be transferred to Purchaser in the event of the consummation of the transactions contemplated by this Agreement. SECTION 3.13. Material Contracts. ------------------ (a) Section 3.13(a) of the Disclosure Statement lists each of the following contracts and agreements (including, without limitation, oral agreements) of BCBS that are in force and effect and create a future commitment of BCBS as of the date hereof (collectively, the "Material Contracts"): ------------------ -35-
(i) each contract, agreement, and other arrangement (in each case, identified by the name of the physician , physician group, health care provider, hospital or treatment facility, as the case may be) under the terms of which BCBS is likely to pay or otherwise give consideration in the aggregate either during the calendar year ended December 31, 2001 or over the remaining term of such contract of more than $250,000 for medical or other health or mental health services of a physician, physician group or other health care provider, or $1,000,000 for medical, surgical, mental health, or hospital services from a single hospital or other treatment facility; (ii) all broker, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion, market research, marketing consulting and advertising contracts and agreements, in each case involving consideration in excess of $300,000; (iii) all management contracts and contracts with independent contractors or consultants (or similar arrangements) which are not cancelable without penalty or further payment and without more than thirty (30) days' notice; (iv) all contracts and agreements relating to Indebtedness, other than those regarding Indebtedness of less than $300,000 and which have been incurred in the ordinary course of business consistent with past practice; (v) all material contracts and agreements, other than Insurance Contracts, with any Governmental Authority; (vi) all contracts and agreements that limit the ability of BCBS to compete in any line of business or with any Person or in any geographic area or during any period of time, except for licensing agreements between BCBSKS and/or any of its Affiliates and the BCBSA; (vii) all material contracts and agreements between or among BCBSKS and any of its Affiliates, other than contracts and agreements entered into in the ordinary course consistent with past practice; (viii) all contracts and agreements for providing benefits in excess of $300,000 under any Plan; and (ix) all other contracts and agreements, other than Insurance Contracts, whether or not made in the ordinary course of the Business, which are material to BCBS or the conduct of the Business, or the absence of which would have a Material Adverse Effect on BCBS. -36-
Section 3.13(a) of the Disclosure Statement also indicates for each Material Contract and each other contract, agreement or arrangement described in Sections 3.14(a), 3.15 and 3.16 of the Disclosure Statement (the "Contracts") whether the --------- consent of any third party is necessary to avoid a penalty, termination or other material adverse consequence as a result of the transactions contemplated by this Agreement. For purposes of this Section 3.13 and Sections 3.15 and 3.16, the term "Lease" shall include any and all leases, subleases, sale/leaseback ----- agreements or similar arrangements. (b) Except as disclosed in Section 3.13(b) of the Disclosure Statement, and except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, each Contract (other than those that have expired under their terms in the ordinary course): (i) is legal, valid and binding on BCBS and, to the knowledge of BCBSKS, on the other parties thereto, is in full force and effect in all material respects, and, to the knowledge of BCBSKS, is enforceable by BCBS in accordance with its terms, except that such enforcement may be subject to (A) bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting or relating to the enforcement of creditors' rights generally, (B) applicable insurance company delinquency, rehabilitation and liquidation laws, and (C) general equitable principles) and (ii) upon consummation of the transactions contemplated by this Agreement and the Escrow Agreement, except to the extent that any consents set forth in Section 3.04 of the Disclosure Statement are not obtained, shall continue in full force and effect without penalty or other adverse consequence. Except such as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, BCBS has not received a written notice that it is in breach or default of any Contract (which has not been adequately cured so there is no longer any grounds for penalty, termination or other material adverse consequence to BCBS from such breach), and BCBS is not in material breach or default of any Contract and, to the knowledge of BCBSKS, no event has occurred which, with notice or the lapse of time, would constitute such a material breach or default, or permit termination or modification of, any Contract. (c) Except as disclosed in Section 3.13(c) of the Disclosure Statement, and except such as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, no other party to a Material Contract is in material breach or default thereof, and, to the knowledge of BCBSKS, no event has occurred which, with notice or the lapse of time, would constitute such a breach or default thereof by such other party. (d) Except as disclosed in Section 3.13(d) of the Disclosure Statement, there is no contract, agreement or other arrangement granting any Person any preferential right to purchase, other than in the ordinary course of the Business consistent with past practice, any of the properties or assets of BCBS, including, without limitation, the Assets. -37-
SECTION 3.14. Intellectual Property. --------------------- (a) Section 3.14(a)(i) of the Disclosure Statement sets forth a true and complete list and identification of (A) each patent and patent application, and (B) each registration or application for registration of all other material registered Owned Intellectual Property, and Section 3.14(a)(ii) of the Disclosure Statement sets forth a true and complete list (with identifying information) of all Licensed Intellectual Property (with the exception of "off- the-shelf" software). Except as otherwise described in Section 3.14(a)(i) of the Disclosure Statement, for each item listed in Section 3.14(a)(i) of the Disclosure Statement that is held by assignment, the assignment has been duly recorded with the state or national trademark office from which the original patent or registration issued or before which the patent application or application for registration is pending. Except as disclosed in Section 3.14(a)(iii) of the Disclosure Statement, to the knowledge of BCBSKS the rights of BCBS in or to such Owned Intellectual Property or Licensed Intellectual Property do not infringe on the Intellectual Property rights of any other Person, excluding any infringements that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, and BCBS has not received any written notice of such infringement from any Person. To BCBSKS's knowledge, no Person is infringing the rights of BCBSKS or any of its Affiliates in either the Owned Intellectual Property or Licensed Intellectual Property, excluding those infringements that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS. (b) Except to the extent any of the following would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS: (i) all the Owned Intellectual Property is owned by BCBS, free and clear of any Encumbrance (other than Permitted Encumbrances) and (ii) no Actions have been made or asserted or are pending (nor, to the knowledge of BCBSKS, has any such Action been threatened) against BCBS either (A) challenging or seeking to deny or restrict the use by BCBS of any of the Owned Intellectual Property or (B) alleging that any services provided, or products manufactured or sold by BCBS infringe any material patents or trademarks, or any other Intellectual Property rights of any Person. Except as disclosed in Section 3.14(b) of the Disclosure Statement, BCBS has not granted any license or other right to any other Person with respect to the Owned Intellectual Property. Except as set forth in Section 3.14(b) of the Disclosure Statement, the consummation of the transactions contemplated by this Agreement will not result in the termination or impairment of any of the material Owned Intellectual Property or material Licensed Intellectual Property, or the payment of any transfer, assignment, change of control, or similar fee or penalty expressly provided for in any applicable licenses, sublicenses or other grants of rights of use. -38-
(c) BCBSKS has, or has caused to be, made available to Purchaser correct and complete copies of all licenses and sublicenses for material Licensed Intellectual Property set forth in Section 3.14(a)(ii) of the Disclosure Statement (including all amendments). (d) No Actions are pending (nor, to the knowledge of BCBSKS, has any such Action been threatened) against BCBS either (i) challenging or seeking to deny or restrict the use by BCBS of any of the Licensed Intellectual Property or (ii) alleging that any Licensed Intellectual Property that is being licensed or sublicensed infringes any patents or trademarks, or any other Intellectual Property rights of any Person, other than Actions that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS. (e) The Intellectual Property described in Sections 3.14(a)(i) and (ii) of the Disclosure Statement constitutes all of the material Intellectual Property used in the conduct of the Business. SECTION 3.15. Real Property. ------------- (a) Section 3.15(a) of the Disclosure Statement lists: (i) the street address of each parcel of Owned Real Property, where applicable, and (ii) the current owner of each such parcel of Owned Real Property. (b) Section 3.15(b) of the Disclosure Statement lists: (i) the street address of each parcel of Leased Real Property, (ii) the identity of the lessor, lessee and current occupant (if different from lessee) of each such parcel of Leased Real Property, and (iii) the current use of each such parcel of Leased Real Property. (c) Except as described in Sections 3.15(c) or 3.11 of the Disclosure Statement, to BCBSKS' knowledge, BCBSKS is not in violation of any Law (including, without limitation, any building, planning or zoning Law) relating to any of the Owned Real Property or the Leased Real Property, except for such violations as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS. Except as set forth in Section 3.15(c) of the Disclosure Statement, BCBS has not leased or subleased any parcel or any portion of any parcel of Real Property to any other Person, nor has BCBS assigned its interest under any Lease listed in Section 3.15(b) of the Disclosure Statement to any third party. (d) BCBSKS has not received written notice of any condemnation proceedings or eminent domain proceedings against any of the Owned Real Property or the Leased Real Property. (e) Except as described in Section 3.15(e) of the Disclosure Statement, to BCBSKS' knowledge, none of the improvements on the Owned Real Property or the Leased Real Property and none of the current uses and conditions thereof violate in any -39-
material respect any applicable deed restrictions or other applicable covenants, restrictions, agreements, existing site plan approvals, zoning or subdivision regulations or urban redevelopment plans as modified by any duly issued variances, and, to the knowledge of BCBSKS, without independent investigation or inquiry, no Permits, licenses or certificates pertaining to the ownership or operation of all improvements on the Owned Real Property, or, to the knowledge of BCBSKS, the Leased Real Property other than those which are transferable with the Real Property are required by any Governmental Authority having jurisdiction over the Real Property. SECTION 3.16. Tangible Personal Property. -------------------------- (a) BCBSKS has, or has caused to be, made available to Purchaser complete and correct schedules listing each item or distinct group of machinery, equipment, tools, supplies, furniture, fixtures, vehicles, other rolling stock, and other tangible personal property used in the Business or owned or leased by BCBS with a book value in excess of $500 as of the dates thereof (the "Tangible -------- Personal Property"). - ----------------- (b) BCBSKS has, or has caused to be, made available to Purchaser correct and complete copies of all leases and subleases for Tangible Personal Property and any and all material ancillary documents pertaining thereto (including all amendments) to the extent specifically requested by Purchaser. With respect to each of such Leases, other than those that have expired under their terms in the ordinary course: (i) except as set forth in Section 3.16(b) of the Disclosure Statement, and except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, each such Lease, together with the ancillary documents delivered pursuant to the first sentence of this Section 3.16(b), is in full force and effect and is legal, valid, binding and enforceable in all material respects (except as such enforcement may be subject to (A) bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting or relating to the enforcement of creditors' rights generally, (B) applicable insurance company delinquency, rehabilitation and liquidation laws, and (C) general equitable principles); (ii) except as set forth in Section 3.16(b) of the Disclosure Statement, such Lease will not cease to be legal, valid, binding, enforceable and in full force and effect on terms identical to those currently in effect as a result of the consummation of the transactions contemplated by this Agreement, nor will the consummation of the transactions contemplated by this Agreement constitute a breach or default under such Lease or otherwise give the lessor a right to terminate such Lease; -40-
(iii) except as otherwise disclosed in Section 3.16(b) of the Disclosure Statement, and except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, with respect to each such Lease: (A) BCBS has not received any written notice of cancellation or termination under such Lease, (B) BCBS has not received any written notice of a breach or default under such Lease, which breach or default has not been cured, and (C) BCBS has not granted to any other Person any material rights, adverse or otherwise, under such Lease; and (c) except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, BCBS is not in breach or default in any material respect, and, to the knowledge of BCBSKS, no event has occurred that, with notice or lapse of time, would constitute such a breach or default under such Lease. SECTION 3.17. Assets. Except as disclosed in Section 3.17 of the ------ Disclosure Statement, BCBS owns, leases or has the legal right to use or hold for use all the material properties and assets necessary for the conduct of the Business or otherwise owned, leased, used or held for use by BCBS, including, without limitation, the Owned Intellectual Property, the Licensed Intellectual Property, the Real Property and the Tangible Personal Property. BCBS has title to or, in the case of leased or subleased Assets, valid and subsisting leasehold interests in, all the Assets necessary for BCBS to conduct the Business as it is currently being conducted, and to consummate the transactions contemplated by this Agreement, other than as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS. Except as set forth in Section 3.17 of the Disclosure Statement, BCBS has good and marketable (subject in certain cases to the consent of third parties) title to all the Owned Real Property. SECTION 3.18. Significant Agreements. Listed in Section 3.18 of the ---------------------- Disclosure Statement are the names of all employers, multiple employers associations, trusts and other health benefits plans with which, as of the date of this Agreement, BCBS has Insurance Contracts for the provision or administration of health benefits for more than 100 employees, members or beneficiaries (including government sponsored plans such as Medicaid and Medicare). Except as disclosed in Section 3.18 of the Disclosure Statement, and except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, on the date hereof, neither BCBSKS nor any of its Affiliates has received any written notice, or has reasonable reason to believe, that (i) any significant Insurance Contract of BCBS has terminated or will terminate, or (ii) BCBS's provision of services pursuant to any such significant Insurance Contract has been reduced or will be substantially reduced. SECTION 3.19. Suppliers. Listed in Section 3.19 of the Disclosure --------- Statement are the names and addresses of the suppliers and other providers of goods or services -41-
(other than physicians, hospitals or other Persons furnishing health care services) which invoiced BCBS for amounts in excess of $300,000 in each case during the twelve-month period ended December 31, 2000, and the amount for which each such supplier invoiced BCBS during such period. Except as disclosed in Section 3.19 of the Disclosure Statement, and except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, on the date hereof, neither BCBSKS nor any of its Affiliates has received any written notice or has reasonable reason to believe that any such supplier will not sell supplies, merchandise and other goods to BCBSKS and/or Purchaser at any time after the Closing Date on terms and conditions similar to those imposed on current sales to the Business, subject to general and customary price increases. SECTION 3.20. Employee Benefit Matters. ------------------------ (a) Plans and Material Documents. Section 3.20(a) of the Disclosure ---------------------------- Statement lists (i) all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and ----- all bonus, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, severance or other benefit plans, programs or arrangements, and all employment, termination, severance or other contracts or agreements, whether legally enforceable or not, and whether funded or not, to which BCBS is a party, with respect to which BCBS has any obligation or which are maintained, contributed to or sponsored by BCBS for the benefit of any current or former employee, officer or director of BCBS, including frozen or terminated plans as to which, to the knowledge of BCBSKS, BCBS may still have liability, (ii) each employee benefit plan for which BCBS could incur liability under Section 4069 of ERISA in the event such plan has been or were to be terminated, (iii) any plan in respect of which BCBS could incur liability under Section 4212(c) of ERISA, (iv) any contracts, arrangements or understandings between BCBS and any employee of BCBS including, without limitation, any contracts, arrangements or understandings (A) relating to a sale of BCBS, (B) relating to the payment of severance benefits, or (C) relating to the payment of benefits as a result of a change of control, (v) all cafeteria plans established pursuant to Section 125 of the Code, and (vi) all rabbi trusts, secular trusts or other funding vehicles for any benefit plan or arrangement listed in Section 3.20 of the Disclosure Statement, other than trusts established pursuant to Section 401(a) of the Code for a benefit plan or arrangement listed in Section 3.20 of the Disclosure Statement (all of the above, collectively, the "Plans"). ----- Except as disclosed on Section 3.20 of the Disclosure Statement, there are no other employee benefit plans, programs, arrangements or agreements, whether formal or informal, with respect to which BCBS has any obligation or which are maintained, contributed to or sponsored by BCBS for the benefit of any current or former employee, officer or director. (b) Absence of Certain Types of Plans. Except as set forth on Section --------------------------------- 3.20(b) of the Disclosure Statement, none of the Plans is a multiemployer plan (within the -42-
meaning of Section 3(37) or 4001(a)(3) of ERISA) or a single employer pension plan (within the meaning of Section 4001(a)(15) of ERISA) for which BCBS could incur liability under Section 4063 or 4064 of ERISA. Except as set forth in Section 3.20 of the Disclosure Statement, none of the Plans (i) provides for the payment of separation, severance, termination or similar-type benefits to any Person or obligates BCBS to pay separation, severance, termination or similar- type benefits solely as a result of any transaction contemplated by this Agreement or as a result of a "change in control" within the meaning of such term under Section 280G of the Code, or (ii) provides for or promises retiree medical, disability or life insurance benefits to any current or former employee, officer or director of BCBS. Each of the Plans is subject only to the laws of the United States or a political subdivision thereof. (c) Compliance with Applicable Law. Each Plan is now and always has been ------------------------------ operated and administered in all material respects in accordance with the requirements of all applicable Law. BCBS has performed all obligations required to be performed by it under, and is not in default under, any Plan, except where such noncompliance, individually or taken together with any amounts arising as a results of noncompliance with any of the other paragraphs of this Section 3.20, would not reasonably be expected to have a Material Adverse Effect on BCBS. No legal Action is pending or, to the knowledge of BCBSKS, is threatened with respect to any Plan (other than claims for benefits in the ordinary course) and, to the knowledge of BCBSKS, no fact or event exists that could give rise to any such Action. (d) Qualification of Certain Plans. Each Plan which is intended to be ------------------------------ qualified under Section 401(a) of the Code (including but not limited to Plans intended to comply with Section 401(k) of the Code) has received a favorable determination letter from the IRS that it is so qualified; and each trust established in connection with any Plan which is intended to be exempt from federal income taxation under either Sections 501(a) or 501(c)(9) of the Code has received a determination letter from the IRS that it is so exempt, and, to the knowledge of BCBSKS, no fact or event has occurred since the date of such determination letter from the IRS to adversely affect such qualified status. (e) Absence of Certain Liabilities and Events. Neither BCBS nor, to the ----------------------------------------- knowledge of BCBSKS, any other party in interest (within the meaning of Section 3(14) of ERISA) or disqualified person (within the meaning of Section 4975 of the Code) has engaged in a prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) with respect to any Plan, that would reasonably be expected to have a Material Adverse Effect on BCBS. BCBS has not incurred any liability that would reasonably be expected to have a Material Adverse Effect on BCBS for any excise tax arising under Section 4971, 4972, 4980 or 4980B of the Code and, to the knowledge of BCBSKS, no fact or event exists which could give rise to any such liability. BCBS has not incurred any liability (other than liability for premiums to the Pension Benefit Guaranty Corporation arising in the ordinary course) under, arising out of or by operation -43-
of Title IV of ERISA that would reasonably be expected to have a Material Adverse Effect on BCBS. No complete or partial termination has occurred within the five (5) years preceding the date hereof with respect to any Plan. No reportable event (within the meaning of Section 4043 of ERISA) has occurred or is expected to occur with respect to any Plan subject to Title IV of ERISA. No Plan had an accumulated funding deficiency (within the meaning of Section 302 of ERISA or Section 412 of the Code), whether or not waived, as of the most recently ended plan year of such Plan. None of the assets of BCBS is the subject of any lien arising under Section 302(f) of ERISA or Section 412(n) of the Code; BCBS has not been required to post any security under Section 307 of ERISA or Section 401(a)(29) of the Code; and no fact or event exists which could give rise to any such lien or requirement to post any such security. (f) Plan Contributions and Funding. All contributions, premiums or ------------------------------ payments required to be made with respect to any Plan have been made on or before their due dates. All such contributions, for years for which Returns have been filed, have been fully deducted for income tax purposes and no such deduction has been challenged or disallowed by any government entity and, to the knowledge of BCBSKS, no fact or event exists which could give rise to any such challenge or disallowance. As of the Closing Date, no Plan which is subject to Title IV of ERISA will have an "unfunded benefit liability" (within the meaning of Section 4001(a)(18) of ERISA). SECTION 3.21. Labor Matters. ------------- (a) (i) BCBS is not a party to any collective bargaining agreement or other labor union contract applicable to persons employed by BCBS or in the Business, and, to BCBSKS's knowledge, currently there are no organizational campaigns, petitions or other unionization activities seeking recognition of a collective bargaining unit involving BCBS employees; (ii) there are no strikes, slowdowns or work stoppages pending or, to BCBSKS's knowledge, threatened between BCBS and any of its employees, and BCBS has not experienced any such strike, slowdown or work stoppage within the past three (3) years; (iii) BCBS has paid in full to all its respective employees, or adequately accrued for in accordance with U.S. GAAP consistently applied, all wages, salaries, commissions, bonuses, benefits and other compensation due to or on behalf of such employees; (iv) BCBS is not a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Authority relating to employees or employment practices; and (v) BCBS is in compliance with the requirements of the Workers Adjustment and Retraining Notification Act ("WARN") and has no ---- liabilities pursuant to WARN. (b) Except as set forth in Section 3.21 of the Disclosure Statement, BCBS is not a party to any written contract with any of its employees, agents, consultants, officers, salespeople, sales representatives, distributors, or dealers that is not cancelable by BCBS without penalty or premium on not more than thirty (30) days' notice. Except as set forth in Section 3.21 of the Disclosure Statement, BCBS has not promulgated any policy or -44-
entered into any written agreement relating to the payment of severance pay to employees whose employment is terminated or suspended, voluntarily or otherwise. SECTION 3.22. Key Employees. ------------- (a) Section 3.22 of the Disclosure Statement lists the name, place of employment, the annual salary rates, bonuses and deferred compensation, paid or payable (in cash or otherwise) in the calendar year ending December 31, 2000 of each Named Officer as of the date hereof. Except as set forth in Section 3.22 of the Disclosure Statement, on the date hereof, none of the Named Officers of BCBS has resigned or, to the knowledge of BCBSKS, threatened to resign since the Reference Balance Sheet Date. (b) All directors, officers, management employees, and material technical and professional employees of BCBS have been notified of their obligation to BCBS to maintain in confidence all confidential or proprietary information acquired by them in the course of their employment. SECTION 3.23. Certain Interests. Except as disclosed in Section 3.23(a) ----------------- of the Disclosure Statement, to the knowledge of BCBSKS, no Named Officer or director of BCBS, or his or her spouse or lineal descendants: (a) has any direct or indirect financial interest in any competitor, supplier or customer of BCBS, provided, however, that the ownership of -------- ------- securities representing no more than five percent (5%) of the outstanding voting power of any competitor, supplier or customer, and which are also listed on any national securities exchange or traded actively in the national over-the-counter market, shall not be deemed to be a "financial interest" so long as the Person owning such securities has no other connection or relationship with such competitor, supplier or customer; (b) owns, directly or indirectly, in whole or in part, or has any other interest in any tangible or intangible property which BCBS uses or has used in the conduct of the Business or otherwise; (c) has outstanding any material Indebtedness to BCBS; or (d) is a party to any written agreement with BCBS under which BCBS provides any benefit or could incur any obligation or liability to such person, except for (i) agreements disclosed in Section 3.22 or 3.23(d) of the Disclosure Statement, and (ii) agreements relating to employee benefits under a Plan. SECTION 3.24. Taxes. ----- (a) Except as set forth in Section 3.24 of the Disclosure Statement or as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse -45-
Effect on BCBS: (i) all Returns in respect of Taxes required to be filed on or before the Closing Date with respect to BCBS have been or will be timely filed; (ii) all Taxes required to be shown on such Returns or otherwise due have been or will be timely paid or are being contested in good faith and have not been finally determined (as to which appropriate reserves determined in accordance with the applicable accounting standard have been provided for in the Financial Statements); (iii) no adjustment relating to such Returns has been proposed in writing by any Governmental Authority; (iv) there are no actions or proceedings pending or, to the knowledge of BCBSKS, that have been threatened in writing for the assessment or collection of Taxes against BCBS or (insofar as either relates to the activities, income or assets of BCBS or the Business or could result in liability of BCBS on the basis of joint and/or several liability) any corporation that was includible in the filing of a return with BCBS on a consolidated or combined basis; (v) no consent under Section 341(f) of the Code has been filed with respect to BCBS; (vi) other than Permitted Encumbrances, there are and will be as of the Closing Date no Tax liens on any assets or income of BCBS or of the Business; (vii) all amounts of Taxes that are required to be collected or withheld on or before the Closing Date by BCBS or in connection with the Business have been or will be duly and timely collected or withheld, and have been or will be duly and timely remitted or deposited in accordance with law; (viii) BCBSKS has made all payments of estimated Taxes required to be made on the income earned by BCBS during the most recent previously-completed income year and will make all payments of estimated Taxes required to be made on the income earned by BCBS during the years preceding the Closing Date; (ix) no subsidiary of BCBSKS was acquired in a "qualified stock purchase" under Section 338(d)(3) of the Code, and no election under Section 338(g) of the Code, protective carryover basis election, or offset prohibition election is applicable to BCBS; (x) to the knowledge of BCBSKS, no payment which has, will or may be made by BCBSKS has been or will be characterized as an "excess parachute payment" within the meaning of Section 280G(b)(1) of the Code; (xi) BCBS is not currently, and will not be with respect to any period on or before the Closing Date, required to include in income any adjustment pursuant to Section 481(a) of the Code (or any similar provision of federal, state or local law or regulations) by reason of a change in accounting method, nor, to the knowledge of BCBSKS, is any Governmental Authority considering any such adjustment; (xii) BCBSKS has provided to Purchaser access to the federal income tax returns of BCBS for the taxable years ending 1996 through 1999, inclusive; (xiii) there are no Tax sharing agreements in force between BCBSKS and any of its Affiliates; and (xiv) no Governmental Authority has raised in writing any issue with respect to the liability of BCBS for any Tax that is likely to result in the issuance of a notice of deficiency or similar notice of intention to assess Taxes by any Governmental Authority. There have been no "excess benefit transactions" (as defined in Section 4958 of the Code) between BCBSKS or its Affiliates and a tax exempt entity. (b) Except as disclosed with reasonable specificity in Section 3.24 of the Disclosure Statement: (i) there are no outstanding waivers or agreements extending the -46-
statute of limitations for any period with respect to any Tax to which BCBS may be subject; (ii) there are no proposed reassessments of any property owned by BCBSKS or other proposals that would materially increase the amount of any Tax to which BCBS would be subject; (iii) no power of attorney has been granted by BCBS, and is currently in force, with respect to any matter relating to Taxes; and (iv) there is no outstanding request for any extension of time within which to pay any Taxes or file any Returns of BCBS. (c) BCBSKS is, and will be prior to and through the Closing Date, an "existing Blue Cross and Blue Shield organization" as defined in (S)833(c)(2) of the Code, and has filed its federal income tax returns for all periods after the effective date of (S)833 of the Code consistent with the treatment described in (S)833 of the Code. (d) The representations set forth in Section 3.09(xii) and this Section 3.24 shall be the only representations with respect to Taxes set forth in this Agreement and any other representations shall not be deemed applicable to Tax matters. SECTION 3.25. Insurance. --------- (a) Section 3.25(a) of the Disclosure Statement sets forth the following information with respect to each material insurance policy (including policies providing property, casualty, liability, workers' compensation, and bond and surety arrangements, but excluding title insurance policies) under which BCBS has been an insured, a named insured or otherwise the principal beneficiary of coverage, which policy covers occurrences or claims made as of or during the two (2) years preceding the date hereof: (i) the name of the insurer and the names of the principal insured and each named insured; (ii) the policy number and the period of coverage; and (iii) the type, scope (including an indication of whether the coverage was on a claims made, occurrence or other basis) and amount of coverage. (b) With respect to each such insurance policy, except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS: (i) to the knowledge of BCBSKS, the policy is legal, valid, binding and enforceable in accordance with its terms in all material respects (except that such enforcement may be subject to (A) bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting or relating to the enforcement of creditors' rights generally, (B) applicable insurance company delinquency, rehabilitation and liquidation laws and (C) general equitable principles) and, except for policies that have expired under their terms in the ordinary course, is in full force and effect; and (ii) BCBS is not in breach or default in any material respect (including any breach or default with respect to the payment of -47-
premiums or the giving of notice), and, to the knowledge of BCBS, no event has occurred which, with notice or the lapse of time, would constitute such a breach or default or permit termination or modification under the policy. (c) Section 3.25(c) of the Disclosure Statement sets forth all material risks against which BCBS is self-insured or which are covered under any risk retention program in which BCBS participates and details for the last five (5) years of BCBS's loss experience with respect to such risks. (d) At no time subsequent to January 1, 1996, except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, has BCBS (i) been denied any insurance or indemnity bond coverage which it has requested, (ii) failed to have those material assets and risks that are customarily insured against by other Persons with similar businesses and properties in the same localities covered by valid insurance policies issued by responsible insurance companies in types and amounts of coverage that are commercially reasonable for companies engaged in businesses similar to the Business, (iii) made any material reduction in the scope or amount of its insurance coverage, (iv) been notified in writing that any existing material insurance coverage will not be available in the future substantially on the same terms as are now in effect, except for expirations in the ordinary course, or (v) suffered any extraordinary increase in premium for renewed coverage. (e) As of the date hereof, all material insurance policies currently in effect are expected to be outstanding and duly in force at the time of Closing, except for those policies that will expire under their terms in the ordinary course. SECTION 3.26. Accounts; Lockboxes; Safe Deposit Boxes; Powers of -------------------------------------------------- Attorney. Section 3.26 of the Disclosure Statement is a true and complete list - -------- of (i) the names of each bank, savings and loan association, securities or commodities broker or other financial institution in which BCBS has an account, including cash contribution accounts, and the names of all persons authorized to draw thereon or have access thereto, (ii) the location of all lockboxes and safe deposit boxes of BCBS and the names of all Persons authorized to draw thereon or have access thereto, and (iii) the names of all Persons, if any, holding powers of attorney from BCBS relating to the Business or BCBS. SECTION 3.27. Brokers. Except for Dresdner Kleinwort Wasserstein and ------- Michael Lewis, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement or the Escrow Agreement based upon arrangements made by or on behalf of BCBS. -48-
SECTION 3.28. No Pecuniary Interests. BCBSKS and, to the knowledge of ---------------------- BCBSKS, its directors, officers, agents and employees, have complied with Section 40-4007 of the Kansas Insurance Law. SECTION 3.29. Computer Systems. Except as set forth in Section 3.29 of ---------------- the Disclosure Statement, BCBS's business critical computer systems and related software are presently serving BCBS and the needs of the Business adequately. SECTION 3.30. Brokers and Agents. To BCBSKS's knowledge, no ------------------ broker/agent through which BCBS places or sells products who is among the top fifty (50) brokers/agents based on annual commission volume has indicated any unwillingness to participate with Purchaser in connection with the Business. Except as indicated in Section 3.30 of the Disclosure Statement, BCBS is not a party to any fronting, quota-sharing or similar agreement to place or sell insurance for the full or partial benefit of any other insurance company. SECTION 3.31. Government Contracts. Except as set forth in Section 3.31 -------------------- of the Disclosure Statement, BCBS is and has operated in compliance in all material respects with all contractual, statutory, regulatory and other requirements applicable to BCBS as a provider of insurance coverage to, or administrator of health benefit programs for employees of the federal, state and local governments and subdivisions and to beneficiaries under programs sponsored or administered by any such governments or subdivisions thereof (collectively "Government Contracts") and, to the knowledge of BCBSKS, is subject to no claim -------------------- for, and no event has occurred which, with notice and the lapse of time, would constitute a basis for a claim for, a penalty, fine, return of premium, repayment of costs charged, renegotiation of charges or fees, change in claims or billings as a result of audit, adjustment, charge, retroactive restatements of costs or charges, or other liability in respect of any Government Contract, which claim, if successful, would reasonably be expected to have a Material Adverse Effect on BCBS. SECTION 3.32. Medicare Secondary Payor Rules. Except as set forth in ------------------------------ Section 3.32 of the Disclosure Statement, or as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS: without in any way limiting the generality of other representations and warranties made herein by BCBSKS, (i) all actions taken or failed to have been taken by BCBS or its agents in connection with the insuring or administration of healthcare plans maintained for BCBS's employer clients or other clients have been taken or omitted in compliance in all material respects with the so-called "Medicare Secondary Payor Rules" and all applicable federal laws, as supplemented by the regulations of the Department of Health and Human Services concerning Medicare Secondary Payer liability ("Secondary Payor Rules"); and --------------------- (ii) no healthcare plan administered or insured by BCBS has any liability (including but not limited to any liability under the Code, ERISA, the Social Security Act and Age Discrimination in Employment Act) to the United States of America or to any other -49-
Person with respect to the Secondary Payor Rules. Except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, neither BCBS nor, to the knowledge of BCBSKS, its agents have incurred any liability with respect to acts taken or omitted prior to Closing under existing or prior contracts with its employer clients or other clients for any excise tax liability under Section 5000 of the Code. SECTION 3.33. Confidentiality of Personal Information. BCBS has complied --------------------------------------- in all material respects with all applicable Laws, agreements and other legal obligations relating to privacy, confidentiality, use and disclosure of personal information of policyholders, insureds, beneficiaries, employees and other persons, including, without limitation, personal health, financial and credit information. BCBS has complied in all material respects with all limitations and obligations concerning the privacy, confidentiality, use and disclosure of personal information contained in all privacy notices published or distributed by BCBS, including, without limitation, transactional, annual and posted notices and privacy policies on BCBS websites, given pursuant to the Graham-Leach-Bliley Act of 1999, the Health Insurance Portability And Accountability Act of 1996, and applicable state privacy acts, each as amended, together with the regulations relating thereto. SECTION 3.34. Resolution of Charitable Claims, etc. All applicable ------------------------------------ Governmental Authorities have discharged or released all present and future charitable, cy pres, and similar claims with respect to BCBS, including the assets and business thereof. There is no Action pending before any Governmental Authority with respect to (or, to the knowledge of BCBSKS, threatened against or involving) BCBSKS or any of its Affiliates, involving a charitable, cy pres or similar claim with respect to BCBSKS or any of its Affiliates or any of the assets or businesses of BCBSKS or any of its Affiliates, and to the knowledge of BCBSKS, there exists no reasonable basis for the assertion thereof by any Person other than a Governmental Authority. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER As an inducement to BCBSKS to enter into this Agreement, Purchaser hereby represents and warrants to BCBSKS that, as of the date of this Agreement and the Closing Date: SECTION 4.01. Organization and Authority of Purchaser. Anthem is a --------------------------------------- mutual insurance company duly organized, validly existing and in good standing under -50-
the laws of the State of Indiana. Anthem West is, and Anthem Holding Company will be, on the Closing Date, a corporation duly incorporated, validly existing and in good standing under the laws of the State of Indiana. Subject to the necessary approvals by Governmental Authorities described in Article VIII, each of Purchaser, Anthem West and Anthem Holding Company has or will have all necessary corporate power and authority to enter into this Agreement and the Escrow Agreement, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement by Purchaser, the performance by Purchaser of its obligations hereunder, and the consummation by Purchaser of the transactions contemplated hereby, have been duly authorized by all requisite action on the part of Purchaser. On the Closing Date, the following will have been duly authorized by all requisite action on the part of Purchaser, Anthem West and Anthem Holding Company, as applicable: (a) the execution and delivery of the Escrow Agreement by Purchaser, Anthem West and/or Anthem Holding Company, as the case may be; (b) the performance by Purchaser, Anthem and/or Anthem Holding Company of their respective obligations, if any, under the Escrow Agreement; and (c) the consummation by Purchaser, Anthem West and/or Anthem Holding Company, as the case may be, of the transactions contemplated by the Escrow Agreement. This Agreement (with respect to Anthem) has been, and upon its execution the Escrow Agreements (with respect to Anthem, Anthem West and Anthem Holding Company) will be, duly executed and delivered by Purchaser, Anthem West and Anthem Holding Company, as the case may be, and (assuming due authorization, execution and delivery by BCBSKS) this Agreement (with respect to Anthem) constitutes, and upon its execution the Escrow Agreement (with respect to Anthem, Anthem West and Anthem Holding Company) will constitute, legal, valid and binding obligations of Purchaser, Anthem West and Anthem Holding Company, as the case may be, enforceable against Purchaser, Anthem West and Anthem Holding Company, as the case may be, in accordance with their respective terms except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to the enforcement of creditors' rights generally, (ii) applicable insurance company delinquency, rehabilitation and liquidation laws and (iii) general equitable principles. SECTION 4.02. No Conflict. Assuming compliance with the requirements of ----------- the HSR Act and the making and obtaining of all filings, notifications, consents, approvals, authorizations and other actions referred to in Article VIII, except as may result from any facts or circumstances relating solely to BCBSKS, the execution, delivery and performance of this Agreement and the Escrow Agreement by Purchaser, Anthem West and Anthem Holding Company do not and would not reasonably be expected to (a) violate, conflict with or result in the breach of any provision of the Articles of Incorporation or By-laws of Purchaser, Anthem West or Anthem Holding Company, (b) conflict with or violate any Law or Governmental Order applicable to Purchaser, Anthem West or Anthem Holding Company or any of their respective assets, properties or businesses, or (c) conflict with, or result in any breach of, constitute a default (or event -51-
which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance on any of the assets or properties of Purchaser, Anthem West or Anthem Holding Company pursuant to, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which Purchaser, Anthem West or Anthem Holding Company is a party or by which any of such assets or properties is bound or affected, which, in the cases of clauses (b) and (c), would have a material adverse effect on the ability of Purchaser, Anthem West or Anthem Holding Company to consummate the transactions contemplated by this Agreement or by the Escrow Agreement. SECTION 4.03. Brokers. Except for Goldman, Sachs & Co., no broker, ------- finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Purchaser. SECTION 4.04. No Pecuniary Interest. No director, officer, agent or --------------------- employee of Purchaser, Anthem West or Anthem Holding Company, or any member of the family of such director, officer, agent or employee, has directly or indirectly received, or will directly or indirectly receive, any fee, commission, compensation or other valuable consideration whatsoever for in any manner aiding, promoting or assisting in the fulfillment of this Agreement, except as may be disclosed in certificates or affidavits to be filed with the Indiana Insurance Department and the Kansas Insurance Division. SECTION 4.05. Consents and Approvals of Governmental Authorities. -------------------------------------------------- Except for: (i) the filing of appropriate documents and the obtaining of appropriate approvals to effect the transactions contemplated herein as required by the laws of the States of Kansas and Indiana, including, without limitation, the approval of the Kansas and Indiana Insurance Departments, and (ii) the filing of a Pre-Merger Notification pursuant to the HSR Act and the consents and approvals listed in Section 4.05 of the Purchaser Disclosure Statement, no consent, approval or authorization of, or declaration, filing or registration with, any Governmental Authority is required to be obtained or made by Purchaser, Anthem West or Anthem Holding Company in connection with the execution, delivery and performance of this Agreement and the Escrow Agreement and the transactions contemplated herein and therein, except such as would not, individually or in the aggregate, reasonably be expected to be material. SECTION 4.06. Investment Representations. Each of Purchaser, Anthem -------------------------- West or Anthem Holding Company, is acquiring the Shares for its own account for investment and not with a view toward any resale, assignment, or distribution thereof. Each of Purchaser, Anthem West or Anthem Holding Company, understands that the Shares have not been registered under the Securities Act in reliance upon an exemption therefrom for nonpublic offerings, and understands that the Shares may not be sold or otherwise transferred unless such sale or other transfer is registered under the Securities Act or an exemption -52-
from registration is available, and a legend evidencing such restrictions will be placed on the Shares. Purchaser is and as of the Closing Date each of Purchaser, Anthem West and Anthem Holding Company will be, an "accredited investor" within the meaning given such term in Regulation D promulgated under the Securities Act. Each of Purchaser, Anthem West or Anthem Holding Company, either by itself or with the assistance of financial advisors employed by it has sufficient knowledge and experience to evaluate the merits and bear the economic risks of an investment in the Shares. Each of Purchaser, Anthem West and Anthem Holding Company, has been given the opportunity to ask questions about the Business and has had any such questions answered to its satisfaction. SECTION 4.07. Financial Ability to Perform. Each of Purchaser, Anthem ---------------------------- West and Anthem Holding Company has, and at all times up to and including the Closing Date will have, the financial resources necessary on its part to consummate the transactions contemplated by this Agreement. SECTION 4.08. No Litigation. There is no Action pending or, to the ------------- knowledge of Purchaser, threatened against or involving Purchaser, Anthem West, or Anthem Holding Company before any Governmental Authority that questions the validity of, or the obligations of Purchaser, Anthem West, or Anthem Holding Company under this Agreement or the Escrow Agreement, or that seeks to impede, enjoin or invalidate the transactions contemplated by this Agreement or the Escrow Agreement. SECTION 4.09. Charitable Claims, etc. Except as set forth in Section ---------------------- 4.09 of the Purchaser Disclosure Statement, there is no Action pending before any Governmental Authority with respect to (or, to the knowledge of Purchaser, threatened against or involving) Purchaser or any of its Affiliates, involving a charitable, cy pres or similar claim with respect to Purchaser or any of its Affiliates or any of the assets or businesses of Purchaser or any of its Affiliates. ARTICLE V ADDITIONAL AGREEMENTS SECTION 5.01. Conduct of Business Prior to the Closing. ---------------------------------------- (a) BCBSKS covenants and agrees that, except with the prior approval of Purchaser (which approval shall not be unreasonably withheld), between the date hereof and the Closing, or as contemplated or permitted by this Agreement, or as set forth in the Disclosure Statement, BCBSKS shall conduct the Business only in the ordinary course -53-
and either consistent with BCBSKS's prior practice or pursuant to Customary Actions. Without limiting the generality of the foregoing, and without Purchaser's consultation and approval (which approval shall not be unreasonably withheld), BCBSKS shall use commercially reasonable efforts to: (i) continue its advertising and promotional activities in accordance with past practice or pursuant to Customary Actions; (ii) not shorten or lengthen the customary payment cycles for any of its payables or receivables; (iii) (A) preserve intact its business organization and the business organization of the Business, (B) keep available to Purchaser the services of the employees of BCBS, (C) continue in full force and effect without material modification all existing policies or binders of insurance currently maintained in respect of BCBS and the Business, and (D) preserve its current relationships with its customers, suppliers and other persons with which it has significant business relationships; (iv) exercise, but only after notice to Purchaser, any rights of renewal pursuant to the terms of any of the leases or subleases set forth in Section 3.13(a) of the Disclosure Statement which by their terms would otherwise expire; and (v) not engage in any practice, take any action, fail to take any action or enter into any transaction which would reasonably be expected to cause any representation or warranty of BCBSKS to be untrue at any time prior to the Closing Date, or result in a breach of any covenant made by BCBSKS in this Agreement. (b) Except in the ordinary course and either consistent with past practice or pursuant to Customary Actions and without limiting the generality of the foregoing, BCBSKS covenants and agrees that, prior to the Closing, without the prior written consent of Purchaser (which consent shall not be unreasonably withheld), BCBSKS will: (i) not do any of the things enumerated in the second sentence of Section 3.09 thereof (except as set forth on Section 5.01(b) of the Disclosure Statement), and (ii) not adopt or amend any of the plans, agreements or policies described in Article VI so as to increase the compensation payable to any employee. (c) Promptly following execution of this Agreement, BCBSKS will co-operate with Purchaser in planning for the combination and integration of the businesses. BCBSKS shall advise Purchaser of the status of achieving BCBS's then current Business Plan (as has been presented to Purchaser), including all of the material components thereof, and shall provide Purchaser with such information regarding the Business and its operations and Purchaser shall reasonably request. (d) For purposes of this Agreement, a "Customary Action" means an action ---------------- taken that occurs in the ordinary course of the relevant Person's business and where the taking of such action is generally recognized as being customary for enterprises of similar size and scope in such Person's line of business. -54-
SECTION 5.02. Access to Information. --------------------- (a) From the date hereof until the Closing, upon reasonable notice and subject to applicable laws relating to the exchange of information, BCBSKS shall, and shall cause each of its officers, directors, employees, agents, accountants and counsel to: (i) afford the officers, employees and authorized agents, accountants, counsel, financing sources and other representatives of Purchaser reasonable access, during normal business hours during the period prior to the Closing Date, to the offices, properties, plants, other facilities, books and records of BCBS, and to those officers, directors, employees, agents, accountants and counsel of BCBS who have any knowledge relevant to BCBS or the Business, (ii) furnish to the officers, employees and authorized agents, accountants, counsel, financing sources and representatives of Purchaser such additional financial and operating data and other information regarding the Business, assets, properties, personnel and goodwill of BCBS as Purchaser may from time to time reasonably request; and (iii) cooperate with and assist Purchaser in planning and preparing for post-Closing operations, including without limitation matters relating to customer and employee retention. From the date hereof until the Closing, each party shall make available to the other party a copy of each report, schedule, registration statement, and other document files or received by it during such period pursuant to the requirements of federal or state law (other than those reports or documents which Purchaser or BCBSKS, as the case may be, is not permitted to disclose under applicable Law). Notwithstanding anything contained in this Agreement to the contrary, neither Purchaser nor BCBSKS nor any of their respective Affiliates, shall be required to provide access to or to disclose information where such access or disclosure would violate or prejudice the rights of Purchaser's or BCBSKS's customers, jeopardize the attorney-client or accountant-client privilege of the institution in possession or control of such information or contravene any Law, fiduciary duty or binding agreement entered into prior to the date of this Agreement. The parties hereto will make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply. (b) In order to facilitate the resolution of any claims made against BCBS which were incurred by BCBS prior to the Closing, for a period of seven (7) years after the Closing, Purchaser shall (i) retain the books and records of BCBS which are transferred to Purchaser pursuant to this Agreement relating to periods prior to the Closing in a manner reasonably consistent with the prior practices of BCBS, and (ii) upon reasonable notice, afford the officers, employees and authorized agents and representatives of BCBSKS (including without limitation the Policyholder Committee) reasonable access (including without limitation the right to make, at BCBSKS's expense, photocopies), during normal business hours, to such books and records. (c) Without limiting the requirements of Section 3.06, as soon as they are compiled, BCBSKS shall deliver to Purchaser each financial statement which is prepared -55-
for BCBSKS between the date of this Agreement and the Closing Date (whether interim or annual). (d) Each of Purchaser and BCBSKS shall hold all information furnished by or on behalf of the other party or any of such party's Affiliates or representatives pursuant to this Agreement in confidence to the extent required by, and in accordance with the provisions of, the Confidentiality Agreement. SECTION 5.03. Regulatory and Other Authorizations; Notices and Consents. --------------------------------------------------------- (a) Without limiting the generality or effect of any other provision hereof, each of the parties will use commercially reasonable efforts to take, or cause to be taken, all reasonable actions, and to do or cause to be done, and to assist and cooperate with the other party in doing, all things reasonable, necessary (or advisable), and proper to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement, including (i) the obtaining of all necessary actions or non-actions, waivers, consents and approvals from Governmental Authorities and the making of all necessary registrations and filings (including those referred to in Section 3.05 and/or Section 4.05), and the taking of all reasonable steps as may be necessary to obtain approval or waiver from, or to avoid an Action or proceeding by, any Governmental Authority, (ii) the obtaining of all necessary consents, approvals or waivers from third parties, (iii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated by this Agreement, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Authority vacated or reversed, and (iv) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement. Without limiting the generality of this paragraph (a), the parties agree to the allocation of principal responsibilities set forth in paragraphs (b) through (c) as follows: (b) HSR. Each party hereto agrees to make an appropriate filing pursuant to --- the HSR Act with respect to the transactions contemplated by this Agreement within a mutually agreed time after the date hereof and to supply as promptly as practicable to the appropriate Governmental Authorities any additional information and documentary material that may be requested pursuant to the HSR Act. (c) Form A. Purchaser shall prepare and file the "Form A" regulatory filing ------ to be made pursuant to Kansas Insurance Law and the insurance Law of the State of Arizona, in connection with this Agreement and the transactions contemplated hereby, and shall, subject to Section 5.03(d), coordinate the conduct of the hearing before the Kansas Division of Insurance in connection with such filing. -56-
(d) Conversion. BCBSKS shall prepare and, subject to the adoption of the ---------- Plan of Conversion by the Board of Directors of BCBSKS, file, after consultation with Purchaser and with the consent of Purchaser (which consent shall not be unreasonably withheld), the Plan of Conversion. Such regulatory filing shall be made pursuant to Kansas Insurance Law and other applicable Kansas Law in connection with this Agreement and the transactions contemplated hereby. BCBSKS shall coordinate the conduct of the regulatory proceeding before the applicable regulatory agencies in connection with such filing, except to the extent that any required hearing shall be combined with the Form A hearing, in which event such hearing shall be coordinated together with Purchaser. (e) Third Party Consents. BCBSKS shall give promptly such notices to third -------------------- parties and use its commercially reasonable efforts to obtain such third party consents and estoppel certificates as Purchaser may reasonably deem necessary or desirable in connection with the transactions contemplated by this Agreement, including, without limitation, all third party consents that are necessary or desirable in connection with the Material Contracts. Purchaser shall cooperate and use commercially reasonable efforts to assist BCBSKS in giving such notices and obtaining such consents and estoppel certificates; provided, however that -------- ------- Purchaser shall have no obligation to give any guarantee or other consideration of any nature in connection with any such notice, consent or estoppel certificate or to consent to any change in the terms of any Material Contract which Purchaser in its reasonable discretion may deem materially adverse to the interests of Purchaser or the Business. SECTION 5.04. Notice of Developments. Prior to the Closing, BCBSKS ---------------------- shall promptly notify Purchaser in writing of (i) all events, circumstances, facts and occurrences arising subsequent to the date of this Agreement within the knowledge of BCBSKS which would reasonably be expected to result in a Material Adverse Effect on BCBS, or (ii) any written notice or other written communication from or to any rating agency in connection with this Agreement or the transactions contemplated hereby, or otherwise, and from or to any Governmental Authority in connection with this Agreement or the transactions contemplated hereby, or otherwise. SECTION 5.05. No Solicitation or Negotiation. ------------------------------ (a) BCBSKS agrees that, between the date of this Agreement and the earlier of the Closing and the termination of this Agreement, neither BCBSKS nor any of its Affiliates, or their respective officers, directors, representatives or agents will (i) solicit, initiate or encourage any other proposals or offers from any Person relating to an Extraordinary Business Combination, or (ii) participate in any discussions or negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way, assist or participate in, facilitate or encourage any effort or attempt by any other Person relating to, an Extraordinary Business Combination, except that -57-
BCBSKS may state that it is bound by this Agreement. BCBS immediately shall cease and cause to be terminated all existing discussions and negotiations with any Persons conducted heretofore with respect to an Extraordinary Business Combination. Between the date of this Agreement and the earlier of the Closing and the termination of this Agreement, BCBSKS agrees not to, without the prior written consent of Purchaser, release any Person from, or waive any provision of, any confidentiality or standstill agreement to which BCBS is a party. (b) Nothing contained in this Section 5.05 or in any other provision of this Agreement shall prohibit BCBSKS from (i) making any disclosure of information required by law (provided, BCBSKS uses commercially reasonable -------- efforts to obtain confidential treatment for such information), (ii) communicating any information to the Board of Directors of BCBSKS or any its Affiliates, or (iii) providing information regarding BCBS to, or participating in discussions or negotiations with, any third party (provided such party is subject to an executed confidentiality agreement) that makes an unsolicited proposal for an Extraordinary Business Combination if the Board of Directors of BCBS shall have determined in its good faith reasonable judgment, after consultation with its outside legal counsel and financial advisors, that failure to take such action to determine if the unsolicited proposal for an Extraordinary Business Combination is a Superior Proposal would be inconsistent with its statutory or fiduciary duties. For purposes of this Section 5.05(b), receipt of a new proposal for an Extraordinary Business Combination after the date hereof, without any direct or indirect solicitation by BCBS or its representatives, from a third party that presented BCBS with a proposal for an Extraordinary Business Combination prior to the date hereof that was rejected by BCBS shall be deemed to be an unsolicited proposal for an Extraordinary Business Combination. Notwithstanding anything contained in this Agreement to the contrary, neither BCBSKS nor its Board of Directors may terminate this Agreement except in accordance with the terms of Article X. Any action by the Board of Directors of BCBSKS permitted by this Section 5.05 shall not constitute a breach of this Agreement by BCBSKS. (c) BCBSKS shall notify Purchaser promptly (and in any event within forty- eight (48) hours) if any proposal or offer is made, and shall, in any such notice to Purchaser, indicate in reasonable detail the identity of the Person making such proposal or offer and the material terms and conditions of such proposal or offer. BCBSKS will keep Purchaser reasonably informed of the status and details (including amendments or proposed amendments) of any such proposal or offer. SECTION 5.06. Termination Fees. ---------------- (a) In the event that this Agreement is terminated by BCBSKS pursuant to Section 10.01(b)(ii), then BCBSKS shall promptly pay to Purchaser, by wire transfer in -58-
immediately available funds contemporaneously with such termination, a break-up fee equal to $12,000,000. (b) The payment of fees provided for in Section 5.06(a) shall not in any way limit any remedies against BCBSKS under this Agreement for breach of any covenant, representation or warranty of this Agreement by BCBSKS, and Purchaser reserves its rights to pursue its remedies, at Law or in equity, against BCBSKS therefor. BCBSKS acknowledges that the agreements contained in this Section 5.06 are an integral part of the transactions contemplated by this Agreement and are not a penalty, and that, without these agreements, Purchaser would not enter into this Agreement. SECTION 5.07. Directors. --------- (a) Purchaser will use its reasonable best efforts to cause a mutually satisfactory candidate from BCBSKS's current Board of Directors to be nominated and elected to Purchaser's Board of Directors for a two year term at Purchaser's first annual meeting after the Closing Date. (b) Purchaser will create and maintain after Closing a local advisory board for Purchaser's Kansas business. Purchaser will also provide proportionate representation for Kansas residents on a regional advisory board that will contribute to the oversight and development of Purchaser's West Region. The fees paid by Purchaser after the Closing Date to existing members of the Board of Directors of BCBSKS who continue to serve after the Closing Date on either the local or a regional advisory board created by Purchaser will not be less than the director fees currently paid to such individuals by BCBSKS. SECTION 5.08. Advisory Committees. As soon as practicable following the ------------------- Closing Date, and continuing for not less than three (3) years after the Closing Date, Purchaser shall establish and maintain (or continue existing) hospital, medical and dental advisory committees for BCBSKS, each consisting of similar numbers and qualifications of members as those of equivalent advisory committees of BCBSKS pursuant to the Bylaws of BCBSKS in effect as of the date hereof (except as may be modified by mutual agreement of Purchaser and BCBSKS on or before the Closing Date). SECTION 5.09. Further Action. Each of the parties hereto shall use all -------------- reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable Laws, and execute and deliver such documents and other papers, as may be required to carry out the provisions of this Agreement and consummate and make effective the transactions contemplated by this Agreement. -59-
ARTICLE VI EMPLOYEE MATTERS SECTION 6.01. Transferred Employees. --------------------- (a) As used herein, "Transferred Employees" shall mean those employees of --------------------- BCBS who are employed by BCBS as of the Closing Date. (b) At the Effective Time, Purchaser shall employ all of the Transferred Employees. SECTION 6.02. Maintenance of Certain Plans; Contributions. ------------------------------------------- (a) Purchaser shall maintain the BCBSKS Employee Performance Incentive Program (the "EPIP") in accordance with its terms as in effect on the Closing ---- Date for the full calendar year in which the Closing Date occurs. Any employee participant goals contained in the terms of the EPIP that are based on BCBSKS's financial performance during such calendar year shall be determined with reference to Purchaser's good faith judgment of pro forma results of the income, administrative expense and enrollment throughout the calendar year which, but for the transaction contemplated by this Agreement, would have been attributable solely to BCBSKS. (b) From and after the Closing Date, and continuing unless and until the maintenance of such policy becomes impossible by operation of applicable Law, Purchaser shall maintain in effect the policy of contribution to retiree health insurance of BCBSKS in effect immediately prior to the Closing Date with benefits that provide: (i) seventy-five percent (75%) of the cost of health insurance coverage for (A) each former BCBSKS employee who retired prior to, and was eligible to receive benefits under such policy on, the Closing Date; and (B) each Transferred Employee who was hired prior to February 1, 1986 and whose completed age plus total years of service with BCBSKS on the Closing Date equals 60 or more; and (ii) a percentage of the cost of health insurance coverage that equals (A) 2.5 multiplied by (B) such Transferred Employee's total combined years of service with BCBSKS and Purchaser (whether occurring before or after the Closing Date) for each Transferred Employee hired on or after February 1, 1986 whose completed age plus total years of service with BCBSKS on the Closing Date equals 60 or more. SECTION 6.03. Treatment of Transferred Employees. ---------------------------------- (a) Purchaser shall provide each Transferred Employee (i) whose completed age plus total years of service with BCBSKS equals 60 or more on the Closing Date; or (ii) who is age 50 or greater with at least five years of service with BCBSKS on the Closing Date, with defined benefit pension benefits upon retirement that are at least equal -60-
to the benefits such Transferred Employee would have received upon retirement under the BCBSKS defined benefit pension plan that such Transferred Employee participated in immediately prior to the Closing Date. (b) From and after the Closing Date, Purchaser shall provide each Transferred Employee who was a "highly compensated employee" (as such term is defined in Section 414 of the Code) immediately prior to the Closing Date with such supplementary deferred compensation benefits as are necessary to compensate each such Transferred Employee for any adverse effect each such Transferred Employee may experience as a result of IRS maximum limitations on elective salary deferrals to any tax-qualified retirement plan in which such Transferred Employee participates. (c) From and after the Closing Date and subject to Section 6.03(a) hereof, Purchaser shall provide each Transferred Employee with benefits, rights and entitlements which, in the aggregate, are substantially equivalent to those provided to similarly situated employees of Purchaser, taking into account all relevant factors, including, without limitation, family status, duties, geographic location and length of service. Without limiting the generality of the foregoing, until January 1, 2003 Purchaser shall maintain, in accordance with its terms, the defined contribution 401(k) plan of BCBSKS in effect immediately prior to the Closing Date for the benefit of each Transferred Employee and each employee hired at any former BCBSKS location after the Closing Date. (d) To the extent service is a factor in determining eligibility for and vesting in the benefits provided thereunder, the plans and programs in which each Transferred Employee participates in after the Closing Date shall recognize service with BCBSKS and its subsidiaries for purposes of determining (i) each such Transferred Employee's eligibility to participate in, and vest in the benefits provided under, such plan or program and (ii) the benefits accrued under such plan or program. Notwithstanding the foregoing, in no event shall any Transferred Employee receive duplicate benefits with respect to any period of prior service. To the extent any welfare benefit plan in which any Transferred Employee participates after the Closing Date (other than under a continued BCBSKS plan) imposes any pre-existing condition limitation, such condition shall be waived and all costs incurred by such Transferred Employee's under any health or welfare plan in the calendar year in which the Closing Date occurs shall be applied toward such Transferred Employee's deductible and any applicable out of pocket expense limitation. SECTION 6.04. Post-Closing Employment Levels. Purchaser covenants that, ------------------------------ within three (3) years after the Closing Date, the Purchaser will achieve the goal of maintaining substantially proportionate employment levels with respect to its operations in Kansas as compared to the other geographic areas in which Purchaser operates based on the level of membership in those areas, subject to such fluctuations as are required in -61-
the Purchaser's reasonable business judgment to respond to business conditions in general, or to substantial changes in relevant Kansas laws or regulations. SECTION 6.05. Non-Competition/Non-Solicitation Agreements. BCBSKS will ------------------------------------------- cooperate with Purchaser's efforts to obtain non-competition/non-solicitation agreements by those key employees of BCBS who are identified by Purchaser. SECTION 6.06. No Employment Agreement or Third Party Beneficiary Status. --------------------------------------------------------- Except as provided in the next succeeding sentence, nothing in this Article VI shall be deemed to create an employment agreement or create or grant any third party beneficiary rights or any other rights in third parties to rely upon or enforce the provisions thereof. Notwithstanding the foregoing, those Transferred Employees described in Sections 6.02(b) and 6.03(a) hereof shall be deemed to be third party beneficiaries in respect of such Sections and shall be entitled to enforce Purchaser's obligations thereunder as fully as though they were parties to this Agreement. ARTICLE VII TAX MATTERS SECTION 7.01. Returns and Payments. From the date of this Agreement -------------------- through and after the Closing Date, BCBSKS shall prepare and file or otherwise furnish in proper form to the appropriate Governmental Authority (or cause to be prepared and filed or so furnished) in a timely manner all Tax returns, reports and forms (each, a "Return") relating to BCBS required to be filed (taking into ------ account all extensions) with respect to operations of BCBS on or before the Closing Date and shall timely pay all Taxes shown as due on such Returns, all Taxes payable that are not required to be shown on any Return or all Taxes otherwise payable as a result of the completion or settlement of a Tax Audit or other such proceeding. In connection with the foregoing, BCBSKS shall not accelerate its recognition of items of loss, deduction or credit to periods before the Closing Date without the prior written consent of Purchaser, which consent will not be unreasonably withheld. With respect to any Return required to be filed by BCBSKS hereunder, BCBSKS shall provide the Purchaser and its authorized representatives with a copy of such completed Return, together with appropriate supporting information and schedules, at least twenty (20) Business Days prior to the due date (including any extension thereof) for the filing of such Return, and Purchaser and its authorized representatives shall have the right to review and comment on such Return and statement prior the filing of such Return, which comments shall, in good faith, be considered by BCBSKS; provided, however, that BCBSKS shall make any changes requested by Purchaser - -------- ------- with respect to any Return to the extent (i) such Return violates this Agreement or (ii) the Neutral Auditor renders an opinion that such Return, if not so changed, cannot -62-
be so prepared and filed without it more likely than not being subject to penalties if audited. SECTION 7.02. Contests. -------- (a) Before the Closing, Purchaser and BCBSKS shall each promptly notify the other (and the Policyholder Committee, if then established) in writing of any written notice of a proposed assessment or claim in a Tax Audit or administrative or judicial proceeding of Purchaser or BCBSKS which, if determined adversely to the taxpayer, could adversely effect the other party, its business or its assets. (b) Before the Closing, BCBSKS shall permit Purchaser to participate in any Tax Audit relating to BCBS. BCBS shall have the right to control any such Tax Audit. BCBSKS shall not settle any Tax Audit under its or their control without the prior consent of the Purchaser, which consent shall not be unreasonably withheld, if such settlement will have a material adverse economic impact on Purchaser or the Business. SECTION 7.03. Conveyance Taxes. BCBSKS shall be liable for and shall ---------------- timely pay any real property transfer or gains, sales, use, transfer, value added, stock transfer, and stamp taxes, any transfer, recording, registration, and other fees, and any similar Taxes which become payable in connection with the transactions contemplated by this Agreement. SECTION 7.04. Miscellaneous. ------------- (a) For purposes of this Article VII, "Purchaser" and "BCBSKS" shall include each member of the affiliated group of corporations of which it was, is or becomes a member. (b) As and to the extent requested by Purchaser and permitted under the applicable agreement, BCBSKS shall cause any and all Tax sharing agreements to which BCBS is a member to be terminated, and all amounts due under each of such agreements to be paid in full, on or prior to the Closing. SECTION 7.05. Tax Disputes. In the case of (i) any amount for which a ------------ reserve has been established pursuant to Section 2.08(b)(iv) or (ii) any Tax Escrow Dispute, the reserve or disputed amount shall be retained in the Escrow Fund until there has been a Final Determination with respect to the Tax issue for which the reserve was established or which gave rise to the dispute. All references to BCBSKS in this Section 7.05 shall include, without limitation, its successors and Affiliates. (a) Filing of Returns. Purchaser shall, and shall cause BCBSKS to, prepare ----------------- and file all Returns in a manner consistent with the Policyholder Committee's position with respect to any Tax Escrow Dispute, unless (and only to the extent that) Purchaser -63-
shall have provided the Policyholder Committee with an opinion of nationally- recognized independent tax counsel ("Independent Tax Counsel"), which opinion ----------------------- shall in form and substance be reasonably acceptable to the Policyholder Committee, to the effect that there is no reasonable basis for the Policyholder Committee's position. (b) Tax Rulings. The Policyholder Committee may request a private letter ----------- ruling from the IRS or, with respect to any state Tax issue, comparable definitive guidance from the relevant state Tax authority, with respect to any Tax issue for which a reserve has been established pursuant to Section 2.08(b)(iv) or that is the subject of a Tax Escrow Dispute. Purchaser shall, and shall cause BCBSKS to, cooperate with the Policyholder Committee and its counsel in connection with such ruling request, including, without limitation, by providing the Policyholder Committee and its counsel with powers of attorney or other appropriate documents that will enable the Policyholder Committee and its counsel to represent BCBSKS in connection therewith. The Policyholder Committee shall control the conduct of such request. Such control shall include, without limitation, the right to withdraw such request at any time. (c) Tax Audits. If any government auditing agent or other Government ---------- Authority proposes an adjustment to any Return of BCBSKS that, if agreed to, would result in the payment by BCBSKS of an Indemnifiable Tax Cost, Purchaser shall, and shall cause BCBSKS to (i) promptly so notify the Policyholder Committee in writing, (ii) not make any payment of such proposed adjustment for at least thirty (30) days and (iii) request, to the extent permitted by law, an extension of time to file a formal protest with respect to such proposed adjustment. If requested by the Policyholder Committee and not materially adverse to Purchaser or BCBSKS, Purchaser shall, and shall cause BCBSKS to, make all reasonable efforts to sever the resolution of such issue from all other Tax issues pertaining to BCBSKS that are the subject of such audit or other proceeding, and, in the event that the resolution of such issue is so-severed, shall afford the Policyholder Committee and its counsel the right to assume control of the conduct of any administrative or judicial proceeding regarding the resolution of such issue including, without limitation, by providing the Policyholder Committee and its counsel with powers of attorney or other appropriate documents that will enable the Policyholder Committee and its counsel to conduct such proceedings. Such control shall include, without limitation, the right to make all determinations regarding the resolution of such matter by settlement or otherwise; whether to contest the resolution of such matter by judicial proceedings or otherwise (including selecting the proper forum for such proceedings); whether to pay the Tax claimed and seek a refund or not pay the Tax claimed; and whether to appeal any adverse determination. Purchaser shall, and shall cause BCBSKS to, cooperate with the Policyholder Committee and its counsel in the conduct of such proceedings, including, without limitation, by providing all information and documents reasonably requested by the Policyholder Committee and its counsel with respect thereto. If the resolution of any such issue has not been severed, Purchaser shall, and shall cause BCBSKS to, afford the Policyholder Committee and its counsel a reasonable opportunity -64-
to participate in the conduct of any administrative or judicial proceedings regarding such issue, including, without limitation, the right to review all pertinent information and documents; to consult with Purchaser, BCBSKS and its counsel; to participate in conferences with taxing authorities; and to submit pertinent material in support of the Policyholder Committee's position. Purchaser shall not, and shall not permit BCBSKS to, accept any proposed adjustment or agreement in compromise which could result in a claim against the Escrow Fund for an Indemnifiable Tax Cost without the express written consent of the Policyholder Committee and, if directed by the Policyholder Committee, shall, and shall cause BCBSKS to, diligently contest (including pursuing all judicial appeals) the validity, applicability and the amount of and such proposed adjustment; provided that, BCBSKS shall not be required to reject any -------- proposed adjustment or agreement in compromise or to appeal any adverse judicial determination if BCBSKS shall have provided to the Policyholder Committee an opinion of Independent Tax Counsel, which opinion shall in form and substance be reasonably acceptable to the Policyholder Committee, concluding that there is no reasonable possibility of success on the merits if such matter were pursued. The Policyholder Committee shall have the right to reasonably approve (i) counsel selected by BCBSKS in connection with any dispute or proceeding regarding such proposed adjustment, (ii) the choice of forum for any such dispute and (iii) whether to pay the Tax claimed and seek a refund thereof or not to pay the Tax claimed. (d) Cooperation. Notwithstanding anything in this Section 7.05 to the ----------- contrary, the Policyholder Committee shall afford Purchaser and BCBSKS a reasonable opportunity to participate in the conduct of any proceeding (including any request for rulings) that it controls pursuant to this Section 7.05. Such participation shall include the right to review all information and documents and the right to consult with the Policyholder Committee and its counsel with respect thereto whether or not such right is specifically referenced in this Section 7.05(d). The Policyholder Committee shall not accept any proposed adjustment or agreement in compromise on behalf of BCBSKS, commence any administrative or judicial action, make any Tax payment or withdraw any ruling request without the prior consent of Purchaser, which consent shall not be unreasonably withheld, provided, that the Policyholder Committee may take any -------- ---- such action without the consent of Purchaser if it reasonably determines that the failure to do so will be materially adverse to the interests of Eligible Policyholders, and provided further that if the Policyholder Committee requests ---------------- that BCBSKS accept a settlement of any proposed adjustment, BCBSKS shall either consent to such settlement or agree with the Policyholder Committee that BCBSKS's right to indemnification from the Escrow Fund with respect to the issue that is the subject of such proposed settlement be limited to an amount calculated on the basis of the settlement offer. (e) Notice of Final Determination. Purchaser shall provide the ----------------------------- Policyholder Committee with prompt notice of any Final Determination (including the expiration of any applicable statute of limitations) with respect to any Tax issue for which a reserve -65-
has been established pursuant to Section 2.08(b)(iv) or that is the subject of a Tax Escrow Dispute. If the purchaser fails to provide notice of any such Final Determination within sixty (60) calendar days thereof, Purchaser shall pay into the Escrow Fund, for distribution to the Eligible Policyholders, interest, at the rate of 7% per annum calculated from the date of such Final Determination, on any amount payable to the Eligible Policyholders out of the Escrow Fund as a result of such Final Determination. (f) Tax Payments. Within ninety (90) calendar days following the Final ------------ Determination of any Tax issue for which a reserve has been established pursuant to Section 2.08(b)(iv) or that is the subject of a Tax Escrow Dispute, Purchaser shall provide to the Policyholder Committee an Escrow Company Funds Notice setting forth its calculation of the amount of any Indemnifiable Tax Costs resulting therefrom. BCBSKS shall grant the Policyholder Committee reasonable access to the records and Returns of BCBSKS and Purchaser for the sole purpose of verifying the reimbursement requested in the Escrow Company Funds Notice. Any payment or dispute with respect to such Escrow Company Funds Notice shall be subject to Sections 2.07(g) through (i) above, including the resolution of any disputes with respect thereto by the Neutral Auditor, provided that such Escrow -------- Company Funds Notice may only be disputed on the basis that (i) any amount claimed was arrived at as a result of arithmetic errors in computation or (ii) any such amount was not calculated as required by this Agreement. SECTION 7.06. Special Distribution. If there is a Final Determination -------------------- that BCBSKS is permitted to deduct all or any portion of the Special Distribution for federal or state income tax purposes, BCBSKS shall promptly thereafter deposit in the Escrow Fund (or, if the Escrow Fund has terminated, shall distribute to Eligible Policyholders) an amount equal to 50% of the aggregate reduction in Taxes payable by BCBSKS or its Affiliates that is attributable to such deduction, reduced by (i) 50% of the out-of-pocket fees and expenses incurred by BCBSKS that are directly attributable to the defense of such deduction, and (ii) 100% of the out-of-pocket costs incurred by BCBSKS in connection with such distribution. The decision of whether to claim a Tax deduction for all or any portion of the Special Distribution shall be entirely within the discretion of Purchaser, and Purchaser shall control all administrative and judicial proceedings with respect thereto. Within sixty (60) days following any such Final Determination, BCBSKS shall deliver to the Policyholder Committee a written notice setting forth its calculation of the amount payable to the Escrow Fund or distributable to Eligible Policyholders pursuant to this Section 7.06. The Policyholder Committee may object to such calculation within twenty (20) days after its receipt thereof. Any dispute shall be resolved in accordance with Section 2.07(i). -66-
ARTICLE VIII CONDITIONS TO CLOSING SECTION 8.01. Conditions to Each Party's Obligations. The respective -------------------------------------- obligations of each party to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions: (a) HSR Act. Any waiting period (and any extension thereof) under the HSR ------- Act applicable to the transactions contemplated hereby shall have expired or shall have been terminated; (b) No Proceeding or Litigation. No Action shall have been commenced by or --------------------------- before any Governmental Authority against either BCBSKS or Purchaser seeking to restrain or materially and adversely alter the transactions contemplated by this Agreement which is reasonably likely to render it impossible or unlawful to consummate the transactions contemplated by this Agreement or which is reasonably likely to have a Material Adverse Effect on BCBS or Purchaser; provided, however, that the provisions of this Section 8.01(b) shall not apply - -------- ------- to a party if such party has directly or indirectly solicited or encouraged any such Action; (c) Consents and Approvals. Purchaser and BCBSKS shall have received all ---------------------- approvals, licenses and certificates from Governmental Authorities set forth on Exhibit 8.01(c) without the existence of a Burdensome Condition, which - --------------- approvals, licenses and certificates shall be in full force and effect; (d) Effectiveness of the Plan of Conversion. The Plan of Conversion shall --------------------------------------- have been adopted by the Board of Directors of BCBSKS and approved by the Eligible Policyholders and the Commissioner of the Kansas Department of Insurance; each of the conditions set forth in the Plan of Conversion shall have been satisfied, and the Plan of Conversion shall have become effective; and (e) Federal Securities Laws Matters. BCBSKS shall have received a no- ------------------------ action letter or exemptive order from the Securities and Exchange Commission in form and substance satisfactory to BCBSKS to the effect that the Escrow Fund is not required to be registered as an "investment company" under the Investment Company Act of 1940, as amended, and that any rights of Eligible Policyholders therein are not required to be registered under the Securities Act or the Securities Exchange Act. SECTION 8.02. Conditions to Obligations of BCBSKS. The obligations of ----------------------------------- BCBSKS to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions: -67-
(a) Representations, Warranties and Covenants. The representations and ----------------------------------------- warranties of Purchaser contained in this Agreement shall have been true and correct when made and shall be true and correct as of the Closing, with the same force and effect as if made as of the Closing Date (without regard to any materiality qualifiers contained in any specific representation or warranty), other than such representations and warranties as are made as of another date, and the covenants and agreements contained in this Agreement to be complied with by Purchaser on or before the Closing shall have been complied with, except where any such failure of the representations and warranties to be true and correct or such covenants and agreements to be complied with would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Purchaser, and BCBSKS shall have received a certificate from Purchaser to such effect signed by a duly authorized officer thereof. (b) Resolutions. BCBSKS shall have received a true and complete copy, ----------- certified by the Secretary or an Assistant Secretary of Purchaser, of the resolutions duly and validly adopted by the Board of Directors of Purchaser evidencing its authorization of the execution and delivery of this Agreement and the Escrow Agreement and the consummation of the transactions contemplated hereby and thereby; (c) Incumbency Certificate. BCBSKS shall have received a certificate of ---------------------- the Secretary or an Assistant Secretary of Purchaser certifying the names and signatures of the officers of Purchaser authorized to sign this Agreement and the Escrow Agreement and the other documents to be delivered hereunder and thereunder; and (d) Legal Opinion. BCBSKS shall have received from Purchaser's legal ------------- counsel an opinion, addressed to BCBSKS and dated the Closing Date, in a mutually acceptable form similar to that set forth in Exhibit 8.02(d). --------------- (e) Escrow Agreement. The Escrow Agreement shall have been executed and ---------------- delivered by Purchaser and Anthem West. (f) Approval of Special Distribution. BCBSKS shall have received any -------------------------------- required approval from the Commissioner of Insurance of the State of Kansas for the declaration and payment of the Special Distribution in an amount equal to the excess, if any, of the Closing Book Value over $155,000,000, or shall have received an opinion from Dresdner Kleinwort Wasserstein confirming the fairness, from a financial point of view, of the Purchase Price to the Eligible Policyholders in the absence of such Special Distribution. SECTION 8.03. Conditions to Obligations of Purchaser. The obligations -------------------------------------- of Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions: -68-
(a) Representations, Warranties and Covenants. The representations and ----------------------------------------- warranties of BCBSKS contained in this Agreement shall have been true and correct when made and shall be true and correct as of the Closing with the same force and effect as if made as of the Closing Date (without regard to any materiality qualifiers contained in any specific representation or warranty), other than such representations and warranties as are made as of another date, and the covenants and agreements contained in this Agreement to be complied with by BCBSKS on or before the Closing shall have been complied with, except where any such failure of the representations and warranties to be true and correct or such covenants and agreements to be complied with would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on BCBS, and Purchaser shall have received a certificate of BCBSKS to such effect signed by a duly authorized officer thereof; (b) Resolutions of BCBSKS. Purchaser shall have received a true and --------------------- complete copy, certified by the Secretary or an Assistant Secretary of BCBSKS, of the resolutions (i) duly and validly adopted by the Board of Directors of BCBSKS evidencing its approval and authorization of the execution and delivery of this Agreement, the Plan of Conversion, and the Escrow Agreement and the consummation of the transactions contemplated hereby and thereby and (ii) duly and validly adopted by the Eligible Policyholders evidencing their approval of the Plan of Conversion; (c) Incumbency Certificate of BCBSKS. Purchaser shall have received a -------------------------------- certificate of the Secretary or an Assistant Secretary of BCBSKS certifying the names and signatures of the officers of BCBSKS authorized to sign this Agreement and the Escrow Agreement and the other documents to be delivered hereunder and thereunder; (d) Legal Opinion. Purchaser shall have received from BCBSKS's legal ------------- counsel an opinion, addressed to Purchaser and dated the Closing Date, in a mutually acceptable form similar to that set forth in Exhibit 8.03(d); --------------- (e) Consents and Approvals. Purchaser and BCBSKS shall have received (each ---------------------- in form and substance reasonably satisfactory to Purchaser) those third party consents to be listed on Exhibit 8.03(e) hereto (which Exhibit 8.03(e) shall be --------------- --------------- delivered within thirty (30) days following Purchaser's receipt of the Disclosure Statement), without material conditions; (f) No Material Adverse Effect. No circumstance, change in, or effect on -------------------------- the Business shall have occurred which has a Material Adverse Effect on BCBS; (g) BCBSA Licenses. BCBSA shall have consented to the transfer of BCBSKS's -------------- rights to use the Blue Cross and Blue Shield names and marks to Purchaser, or shall have issued to Purchaser primary Blue Cross and Blue Shield licenses for the State of Kansas; -69-
(h) Certificates of Good Standing. BCBSKS shall have delivered to ----------------------------- Purchaser Certificates of Good Standing from the Secretary of State for the State of Kansas, and the Kansas Department of Insurance, as applicable, regarding BCBSKS and its Affiliates, and from such applicable Governmental Authorities in other jurisdictions in which BCBSKS or its Affiliates are conducting business; and (i) Escrow Agreement. The Escrow Agreement shall have been executed and ---------------- delivered by BCBSKS. SECTION 8.04. Frustration of Closing Conditions. Neither party may rely --------------------------------- on the failure of any condition set forth in Sections 8.01 through 8.03, as the case may be, to be satisfied if such failure was caused by such party's failure to use commercially reasonable efforts to assist in the satisfaction of such condition; provided, however, that this Section 8.04 shall not be construed to -------- ------- require a party to waive all or part of any condition to its obligations hereunder. ARTICLE IX CERTAIN INDEMNIFICATION MATTERS SECTION 9.01. Director and Officer Liability. From and after the ------------------------------ Closing Date, Purchaser shall, and shall cause BCBSKS (or any successor thereof) to, indemnify and hold harmless each present and former director and officer of BCBSKS, determined immediately prior to the Closing Date (the "Indemnified ----------- Parties"), against any costs or expenses (including reasonable attorneys' fees), - ------- judgments, fines, losses, claims, damages or liabilities (collectively, "Costs") ----- incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the Closing Date (including without limitation in connection with the transactions contemplated by this Agreement), whether asserted or claimed prior to, at or after the Closing Date, to the fullest extent permitted under the Bylaws of BCBSKS as of the date hereof, and cause BCBSKS to also advance expenses as incurred to the fullest extent permitted under the Bylaws of BCBSKS as of the date hereof; provided the Person to whom expenses are advanced provides an -------- undertaking to repay such advances if it is ultimately determined that such Person is not entitled to indemnification. SECTION 9.02. Procedure. Any Indemnified Party wishing to claim --------- indemnification under Section 9.01, upon learning of any such claim, action, suit, proceeding or investigation, shall promptly notify BCBSKS thereof, but the failure to so notify shall not relieve BCBSKS of any liability it may have to such Indemnified Party if such failure does not materially prejudice BCBSKS. In the event of any such claim, -70-
action, suit, proceeding or investigation (whether arising before or after the Closing Date), BCBSKS shall have the right to assume the defense thereof and BCBSKS shall not be liable to such Indemnified Parties for any legal expenses of other counsel or any other expenses subsequently incurred by such Indemnified Parties in connection with the defense thereof, except that if BCBSKS elects not to assume such defense or counsel for the Indemnified Parties advises that there are issues which raise conflicts of interest between BCBSKS and the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to them, and BCBSKS shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received. SECTION 9.03. Maintenance of D&O Liability Policies. For six (6) years ------------------------------------- after the Closing Date, Purchaser shall obtain and maintain in effect directors' and officers' liability insurance policies with coverage for events occurring prior to the Closing Date for each such person currently covered by BCBSKS's directors' and officers' liability insurance policies, on terms with respect to coverage and amount which are substantially equivalent to the policies maintained in effect by BCBSKS on the date hereof; provided, however, that -------- ------- nothing contained herein shall require Purchaser or BCBSKS to incur any annual premium in excess of 250% of the last annual estimated aggregate premium paid prior to the date of this Agreement for all current directors' and officers' insurance policies maintained by BCBSKS, which BCBSKS estimates to be $117,275 (the "Current Premium"). If such premiums for such insurance would at any time --------------- exceed 250% of the Current Premium, then Purchaser shall cause to be maintained policies of insurance which, in Purchaser's good faith determination, provide the maximum coverage available at an annual premium equal to 250% of the Current Premium. ARTICLE X TERMINATION AND WAIVER SECTION 10.01. Termination. This Agreement may be terminated at any ----------- time prior to the Closing: (a) by Purchaser, if: ---------------- (i) BCBSKS makes a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against BCBSKS seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up or reorganization, arrangement, adjustment, protection, relief or composition of its debts under any Law relating to bankruptcy, insolvency or reorganization, which proceeding has not been dismissed within ninety (90) days; or -71-
(ii) BCBSKS shall have breached any of its representations or warranties contained in this Agreement, or breached or failed to perform in any material respect any of its covenants or other agreements contained in this Agreement (provided that Purchaser shall not have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement), which if not cured would cause the conditions set forth in Section 8.03(a) not to be satisfied, and such breach or failure is incapable of being cured or shall not have been cured within 45 days after written notice thereof shall have been received by BCBSKS; (b) by BCBSKS, if: ------------- (i) Purchaser shall have breached any of its representations or warranties contained in this Agreement, or breached or failed to perform in any material respect any of its covenants or other agreements contained in this Agreement (provided that BCBSKS shall not have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement), which if not cured would cause the conditions set forth in Section 8.02(a) not to be satisfied, and such breach or failure is incapable of being cured or shall not have been cured within 45 days after written notice thereof shall have been received by Purchaser; (ii) by action of its Board of Directors in order to enter into an agreement with respect to, or to consummate, a transaction constituting a Superior Proposal; provided, that BCBSKS shall not enter into a commitment -------- with a third party with regard to the terms of a Superior Proposal prior to 10 days after notice of the proposed terms thereof (a "Superior Proposal ----------------- Notice") is delivered to Purchaser, which notice shall state the name of ------ the third party, the nature of the Superior Proposal, the consideration to be paid in connection therewith and all other material terms of the Superior Proposal; Purchaser shall have the right to submit to BCBSKS, within ten (10) days from its receipt of the Superior Proposal Notice, an alternative proposal, which shall be intended to provide benefits to BCBSKS and its policyholders that are equal to or greater than those purported to be provided by the Superior Proposal (the "Matching Notice"); the failure --------------- of Purchaser to timely deliver a Matching Notice shall be deemed a declination by Purchaser of its option to deliver a Matching Notice; BCBSKS shall be under no obligation to accept the terms set forth in the Matching Notice; and contemporaneous with such termination, BCBSKS shall have paid Purchaser the termination fees set forth in Section 5.06; or (iii) a Change of Control of Purchaser shall have occurred; -72-
(c) by either Purchaser or BCBSKS: ----------------------------- (i) by means of a written statement of termination executed by the Chief Executive Officer of that party, if the Closing shall not have occurred by September 30, 2002; (ii) any Governmental Authority shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, or the Commissioner of Insurance of the State of Kansas shall have disapproved one or more of the transactions contemplated by this Agreement without which the transactions contemplated by this Agreement may not legally proceed (provided any such disapproval may not serve as ground for termination by a -------- Party unless that disapproval was not the result of the failure by such Party to use commercially reasonable efforts to obtain the applicable approval) and such order, decree, ruling or other action or disapproval shall have become final and nonappealable; (iii) the Plan of Conversion shall not have been adopted by the Board of Directors of BCBSKS before September 30, 2001; provided, BCBSKS cannot -------- terminate due to such failure to adopt if it resulted from a failure by BCBSKS to comply with the first sentence of Section 2.01(a); and provided, -------- further that if the Board of Directors of BCBSKS shall not have adopted the ------- Plan of Conversion by such date, prior to such termination the parties shall negotiate in good faith for no fewer than 20 days thereafter to determine whether there are modifications to the transactions contemplated by this Agreement that may make such adoption possible; or (iv) the Plan of Conversion shall fail to receive the requisite vote for approval by Eligible Policyholders of BCBSKS at the meeting called for that purpose; and (d) by both BCBSKS and Purchaser, by mutual written consent. ---------------------------- SECTION 10.02. Effect of Termination. In the event of termination of --------------------- this Agreement as provided in Section 10.01: (a) this Agreement shall forthwith become void and there shall be no liability on the part of either party hereto except (i) under the provisions of Sections 5.06, 10.02, 11.01, 11.05, 11.06, and 11.10, and any other Section of this Agreement which, by its express provisions, survives the termination of this Agreement, or the survival of which is necessary to the fulfill the intended effect of any other Section which, by its express provisions, survive the termination of this Agreement, (ii) under the Confidentiality -73-
Agreement, and (iii) that nothing herein shall relieve either party from liability for any breach of this Agreement prior to its termination; and (b) all filings, applications and other submissions made pursuant to the transactions contemplated by this Agreement shall, to the extent practicable, be withdrawn from the agency or Person to which made. SECTION 10.03. Waiver. Either party to this Agreement may (a) extend ------ the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered by the other party pursuant hereto, or (c) waive compliance with any of the agreements or conditions of the other party contained herein or in any document delivered by the other party pursuant hereto. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party to be bound thereby. Any waiver of any term or condition shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition, or a waiver of any other term or condition, of this Agreement. The failure of any party to assert any of its rights hereunder shall not constitute a waiver of any of such rights. ARTICLE XI GENERAL PROVISIONS SECTION 11.01. Expenses. Except as otherwise specified in this -------- Agreement, all costs and expenses, including, without limitation, fees and disbursements of attorneys, brokers, consultants, advisors, actuaries, and accountants (including the fees and expenses of any of the same retained by any Governmental Authority for which such party is responsible), incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred. Any costs, fees and expenses incurred in connection with the transactions contemplated hereby by any Governmental Authority, which costs, fees and expenses require reimbursement from one of the parties to this Agreement, shall be reimbursed by the party primarily responsible under Section 5.03 for the approval in connection with which such costs, fees or expenses were incurred. To the extent that the fees or expenses of any consultants, accountants, actuaries or attorneys retained by any Governmental Authority in connection with the transactions contemplated by this Agreement cannot be reasonably allocated to a party, the parties will bear such unallocated portion equally. Purchaser will be responsible for the HSR filing fee. -74-
SECTION 11.02. Notices. All notices, requests, claims, demands and ------- other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by courier service, by telecopy, or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 11.02): (a) if to BCBSKS: Blue Cross and Blue Shield of Kansas, Inc. 1133 Topeka Boulevard Topeka, KS 66629 Attention: William H. Pitsenberger, General Counsel Telecopy No.: (785) 291-7329 with a copy to: Debevoise & Plimpton 875 Third Avenue New York, New York Attention: James C. Scoville Telecopy No.: (212) 909-6836 (b) if to Purchaser to: Anthem Insurance Companies, Inc. 120 Monument Circle Indianapolis, Indiana 46204-4903 Telecopy No.: (818) 703-4406 Attention: Executive Vice President and Chief Legal and Administrative Officer with a copy to: Shipman & Goodwin LLP One American Row Hartford, Connecticut 06103-2819 Telecopy No.: (860) 251-5900 Attention: John E. Kreitler, Esq. SECTION 11.03. Public Announcements. No party to this Agreement shall -------------------- make, or cause to be made, any press release or public announcement in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any -75-
news media without the prior written consent of the other party, and the parties shall cooperate as to the timing and contents of any such press release or public announcement. SECTION 11.04. Headings. The descriptive headings contained in this -------- Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 11.05. Severability. If any term or other provision of this ------------ Agreement is invalid, illegal or incapable of being enforced by any Law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. SECTION 11.06. Entire Agreement. This Agreement and the Escrow ---------------- Agreement constitute the entire agreement of the parties hereto with respect to the subject matter hereof and thereof and supersede all prior agreements and undertakings (other than those contained in the Confidentiality Agreement, which are hereby incorporated by reference herein), both written and oral, between BCBSKS and Purchaser with respect to the subject matter hereof and thereof. SECTION 11.07. Assignment. This Agreement may not be assigned by ---------- operation of Law or otherwise without the express written consent of BCBSKS and Purchaser (which consent may be granted or withheld in the sole discretion of BCBSKS and Purchaser); provided, however, that Purchaser shall assign this -------- ------- Agreement to Anthem Holding Company if Anthem Holding Company is the purchaser of the Shares, provided further, however, that any such assignment shall not -------- ------- ------- relieve Purchaser of Purchaser's obligations hereunder. SECTION 11.08. No Third Party Beneficiaries. Except as set forth in ---------------------------- Section 6.06, this Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person, including, without limitation, any union or any employee or former employee of BCBS, any legal or equitable right, benefit or remedy of any nature whatsoever, including, without limitation, any rights of employment for any specified period, under or by reason of this Agreement. -76-
SECTION 11.09. Amendment. This Agreement may not be amended or modified --------- except (a) by an instrument in writing signed by, or on behalf of, BCBSKS and Purchaser, or (b) by a waiver in accordance with Section 10.03. SECTION 11.10. Governing Law; Consent to Jurisdiction. This Agreement -------------------------------------- shall be governed by, and construed in accordance with, the laws of the State of Kansas, applicable to contracts executed in and to be performed entirely within that state. By execution and delivery of this Agreement, each of the parties hereto accepts and consents to the exclusive jurisdiction of the courts of the State of Kansas and the federal courts sitting in the State of Kansas, for itself and in respect of its property, and waives in respect of both itself and its property any defense it may have as to or based on sovereign immunity, jurisdiction, improper venue or inconvenient forum. Each of the parties hereto irrevocably consents to the service of any process or other papers by the use of any of the methods and to the addresses set for the giving of notices pursuant to this Agreement. Nothing herein shall affect the right of any party hereto to serve such process or papers in any other manner permitted by law. SECTION 11.11. Counterparts. This Agreement may be executed in one or ------------ more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. SECTION 11.12. Specific Performance. The parties hereto agree that -------------------- irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at Law or equity, without the necessity of demonstrating the inadequacy of money damages. SECTION 11.13. Survival of Representations, Warranties and Agreements. ------------------------------------------------------ No representations or warranties in this Agreement or in any instrument delivered pursuant to this Agreement, shall survive beyond the Closing Date. This Section 11.13 shall not limit any covenant or agreement set forth in this Agreement, which covenants and agreements shall survive the Closing Date. [The remainder of this page intentionally left blank.] -77-
IN WITNESS WHEREOF, BCBSKS and Purchaser have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. BLUE CROSS AND BLUE SHIELD OF KANSAS, INC. By /s/ John W. Knack -------------------------------- Name: Title: CEO ANTHEM INSURANCE COMPANIES, INC. By /s/ Larry C. Glasscock -------------------------------- Name: Title: -78-
Exhibit 3.1 ARTICLES OF INCORPORATION OF ANTHEM, INC. The undersigned incorporator, desiring to form a corporation (hereinafter referred to as the "Corporation"), pursuant to the provisions of the Indiana Business Corporation Law (hereinafter referred to as the "Corporation Law"), executes the following Articles of Incorporation: ARTICLE I Name ---- The name of the Corporation is Anthem, Inc. ARTICLE II Purposes and Powers ------------------- Section 2.1. Purposes of the Corporation. The purpose for which the Corporation is formed is to engage in the transaction of any or all lawful business for which corporations may now or hereafter be incorporated under the Corporation Law. Section 2.2. Powers of the Corporation. The Corporation shall have (a) all powers now or hereafter authorized by or vested in corporations pursuant to the provisions of the Corporation Law, (b) all powers now or hereafter vested in corporations by common law or any other statute or act, and (c) all powers authorized by or vested in the Corporation by the provisions of these Articles of Incorporation or by the provisions of its By-Laws as from time to time in effect. ARTICLE III Term of Existence ----------------- The period during which the Corporation shall continue is perpetual. ARTICLE IV Registered Office and Agent --------------------------- The street address of the Corporation's registered office at the time of adoption of these Articles of Incorporation is 120 Monument Circle, Indianapolis, Indiana 46204, and the name of its Resident Agent at such office at the time of adoption of these Articles of Incorporation is Nancy Purcell.
ARTICLE V Authorized Shares ----------------- Section 5.1. Authorized Classes and Number of Shares. The total number of shares which the Corporation has authority to issue shall be one billion (1,000,000,000) shares, consisting of nine hundred million (900,000,000) shares of common stock, $0.01 par value per share (the "Common Stock"), and one hundred million (100,000,000) shares of preferred stock, without par value (the "Preferred Stock"). Section 5.2. General Terms of All Shares. The Corporation shall have the power to acquire (by purchase, redemption, or otherwise), hold, own, pledge, sell, transfer, assign, reissue, cancel, or otherwise dispose of the shares of the Corporation in the manner and to the extent now or hereafter permitted by the laws of the State of Indiana (but such power shall not imply an obligation on the part of the owner or holder of any share to sell or otherwise transfer such share to the Corporation), including the power to purchase, redeem, or otherwise acquire the Corporation's own shares, directly or indirectly, and without pro rata treatment of the owners or holders of any class or series of shares, unless, after giving effect thereto, the Corporation would not be able to pay its debts as they become due in the usual course of business or the Corporation's total assets would be less than its total liabilities (calculated without regard to any amounts that would be needed, if the Corporation were to be dissolved at the time of the purchase, redemption, or other acquisition, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those of the holders of the shares of the Corporation being purchased, redeemed, or otherwise acquired, unless otherwise expressly provided with respect to a series of Preferred Stock in the provisions of these Articles of Incorporation adopted by the Board of Directors pursuant to Section 5.5 hereof describing the terms of such series). Shares of the Corporation purchased, redeemed, or otherwise acquired by it shall constitute authorized but unissued shares, unless prior to any such purchase, redemption, or other acquisition, or within thirty (30) days thereafter, the Board of Directors adopts a resolution providing that such shares constitute authorized and issued but not outstanding shares. The Board of Directors of the Corporation may dispose of, issue, and sell shares in accordance with, and in such amounts as may be permitted by, the laws of the State of Indiana and the provisions of these Articles of Incorporation and for such consideration, at such price or prices, at such time or times and upon such terms and conditions (including the privilege of selectively repurchasing the same) as the Board of Directors of the Corporation shall determine, without the authorization or approval by any shareholders of the Corporation. Shares may be disposed of, issued, and sold to such persons, firms, or corporations as the Board of Directors may determine, without any preemptive right on the part of the owners or holders of other shares of the Corporation of any class or kind to acquire such shares by reason of their ownership of such other shares. When the Corporation receives the consideration specified in a subscription agreement entered into before incorporation, or for which the Board of Directors authorized the issuance of shares, as the case may be, the shares issued therefor shall be fully paid and nonassessable. -2-
The Corporation shall have the power to declare and pay dividends or other distributions upon the issued and outstanding shares of the Corporation, subject to the limitation that a dividend or other distribution may not be made if, after giving it effect, the Corporation would not be able to pay its debts as they become due in the usual course of business or the Corporation's total assets would be less than its total liabilities (calculated without regard to any amounts that would be needed, if the Corporation were to be dissolved at the time of the dividend or other distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those of the holders of shares receiving the dividend or other distribution, unless otherwise expressly provided with respect to a series of Preferred Stock in the provisions of these Articles of Incorporation adopted by the Board of Directors pursuant to Section 5.5 hereof describing the terms of such series). Except as otherwise provided in Section 5.4, the Corporation shall have the power to issue shares of one class or series as a share dividend or other distribution in respect of that class or series or one or more other classes or series. Section 5.3. Voting Rights of Shares. (a) Common Stock. Except as otherwise provided by the Corporation Law and subject to such shareholder disclosure and recognition procedures (which may include voting prohibition sanctions) as the Corporation may by action of its Board of Directors establish, shares of Common Stock have unlimited voting rights. Shares of Common Stock shall, when validly issued by the Corporation, entitle the record holder thereof to one (1) vote per share on all matters submitted to a vote of the shareholders of the Corporation. Shares of Common Stock shall not have cumulative voting rights. (b) Preferred Stock. Except as required by the Corporation Law or by the provisions of these Articles of Incorporation adopted by the Board of Directors pursuant to Section 5.5 hereof describing the terms of the Preferred Stock or a series thereof, the holders of Preferred Stock shall have no voting rights or powers. Shares of Preferred Stock shall, when validly issued by the Corporation, entitle the record holder thereof to vote as and on such matters, but only as and on such matters, as the holders thereof are entitled to vote under the Corporation Law or under the provisions of these Articles of Incorporation adopted by the Board of Directors pursuant to Section 5.5 hereof describing the terms of the Preferred Stock or a series thereof (which provisions may provide for special, conditional, limited, or unlimited voting rights, including multiple or fractional votes per share, or for no right to vote, except to the extent required by the Corporation Law) and subject to such shareholder disclosure and recognition procedures (which may include voting prohibition sanctions) as the Corporation may by action of the Board of Directors establish. Section 5.4. Other Terms of Common Stock. (a) Shares of Common Stock shall be equal in every respect insofar as their relationship to the Corporation is concerned, but such equality of rights shall not imply equality of treatment as to redemption or other acquisition of shares by the Corporation. (b) Subject to the rights of the holders of any outstanding Preferred Stock issued under Section 5.5 hereof, the holders of Common Stock shall be entitled to share ratably in such dividends or other distributions (other than purchases, redemptions, or other acquisitions -3-
of shares by the Corporation), if any, as are declared and paid from time to time at the discretion of the Board of Directors. (c) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment shall have been made to the holders of the Preferred Stock of the full amount to which they shall be entitled under this Article V, the holders of Common Stock shall be entitled, to the exclusion of the holders of the Preferred Stock of any and all series, to share, ratably according to the number of shares of Common Stock held by them, in all remaining assets of the Corporation available for distribution to its shareholders. Section 5.5. Other Terms of Preferred Stock. (a) Preferred Stock may be issued from time to time in one or more series, each such series to have such distinctive designation and such preferences, limitations, and relative voting and other rights as shall be set forth in these Articles of Incorporation. Subject to the requirements of the Corporation Law and subject to all other provisions of these Articles of Incorporation, the Board of Directors of the Corporation may create one or more series of Preferred Stock and may determine the preferences, limitations, and relative voting and other rights of one or more series of Preferred Stock before the issuance of any shares of that series by the adoption of an amendment to these Articles of Incorporation that specifies the terms of the series of Preferred Stock. All shares of a series of Preferred Stock must have preferences, limitations, and relative voting and other rights identical with those of other shares of the same series and, if the description of the series set forth in these Articles of Incorporation so provides, no series of Preferred Stock need have preferences, limitations, or relative voting or other rights identical with those of any other series of Preferred Stock. Before issuing any shares of a series of Preferred Stock, the Board of Directors shall adopt an amendment to these Articles of Incorporation, which shall be effective without any shareholder approval or other action, that sets forth the preferences, limitations, and relative voting and other rights of the series, and authority is hereby expressly vested in the Board of Directors, by such amendment: (1) To fix the distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors; (2) To fix the voting rights of such series, which may consist of special, conditional, limited, or unlimited voting rights, including multiple or fractional votes per share, or no right to vote (except to the extent required by the Corporation Law); (3) To fix the dividend or distribution rights of such series and the manner of calculating the amount and time for payment of dividends or distributions, including, but not limited to: (A) the dividend rate, if any, of such series; -4-
(B) any limitations, restrictions, or conditions on the payment of dividends or other distributions, including whether dividends or other distributions shall be noncumulative or cumulative or partially cumulative and, if so, from which date or dates; (C) the relative rights of priority, if any, of payment of dividends or other distributions on shares of that series in relation to Common Stock and shares of any other series of Preferred Stock; and (D) the form of dividends or other distributions, which may be payable at the option of the Corporation, the shareholder, or another person (and in such case to prescribe the terms and conditions of exercising such option), or upon the occurrence of a designated event in cash, indebtedness, stock or other securities or other property, or in any combination thereof, and to make provisions, in the case of dividends or other distributions payable in stock or other securities, for adjustment of the dividend or distribution rate in such events as the Board of Directors shall determine; (4) To fix the price or prices at which, and the terms and conditions on which, the shares of such series may be redeemed or converted, which may be (A) at the option of the Corporation, the shareholder, or another person or upon the occurrence of a designated event; (B) for cash, indebtedness, securities, or other property or any combination thereof; and (C) in a designated amount or in an amount determined in accordance with a designated formula or by reference to extrinsic data or events; (5) To fix the amount or amounts payable upon the shares of such series in the event of any liquidation, dissolution, or winding up of the Corporation and the relative rights of priority, if any, of payment upon shares of such series in relation to Common Stock and shares of any other series of Preferred Stock; and to determine whether or not any such preferential rights upon dissolution need be considered in determining whether or not the Corporation may make dividends, repurchases, or other distributions; (6) To determine whether or not the shares of such series shall be entitled to the benefit of a sinking fund to be applied to the purchase or redemption of such series and, if so entitled, the amount of such fund and the manner of its application; (7) To determine whether or not the issue of any additional shares of such series or of any other series in addition to such series shall be subject to restrictions in addition to restrictions, if any, on the issue of additional shares imposed in the provisions of these Articles of Incorporation fixing the terms of any outstanding series of -5-
Preferred Stock theretofore issued pursuant to this Section 5.5 and, if subject to additional restrictions, the extent of such additional restrictions; and (8) Generally to fix the other preferences or rights, and any qualifications, limitations, or restrictions of such preferences or rights, of such series to the full extent permitted by the Corporation Law; provided, however, that no such preferences, rights, qualifications, limitations, or restrictions shall be in conflict with these Articles of Incorporation or any amendment hereof. (b) Shares of Preferred Stock of any series that have been redeemed (whether through the operation of a sinking fund or otherwise) or purchased by the Corporation, or which, if convertible, have been converted into shares of the Corporation of any other class or series, may be reissued as a part of such series or of any other series of Preferred Stock, subject to such limitations (if any) as may be fixed by the Board of Directors with respect to such series of Preferred Stock in accordance with subsection (a) of this Section 5.5. ARTICLE VI Directors --------- Section 6.1. Number. The number of Directors of the Corporation shall not be less than five (5) nor more than nineteen (19), the exact number to be specified from time to time in the manner set forth in the By-Laws. The Board of Directors at the time of adoption of these Articles of Incorporation is composed of thirteen (13) members. The By-Laws shall provide for staggering the terms of the members of the Board of Directors by dividing the total number of Directors into three (3) groups (with each group containing one-third (1/3) of the total, as near as may be) whose terms of office expire at different times. Notwithstanding the first sentence of this Section 6.1, any amendment to the By-Laws or any resolution of the Board of Directors that would effect: (a) any increase in the number of Directors over such number as then in effect, (b) any reduction in the number of Directors below such number as then in effect, or (c) any elimination or modification of the groups or terms of office of the Directors as the By-Laws then in effect may provide, shall also be approved by the affirmative vote of a majority of the entire number of Directors of the Corporation who then qualify as Continuing Directors with respect to all Related Persons (as such terms are defined for purposes of Article VIII hereof). Section 6.2. Qualifications. Directors need not be shareholders of the Corporation or residents of this or any other state in the United States. -6-
Section 6.3. Vacancies. Vacancies occurring in the Board of Directors shall be filled in the manner provided in the By-Laws or, if the By- Laws do not provide for the filling of vacancies, in the manner provided by the Corporation Law. The By-Laws may also provide that in certain circumstances specified therein, vacancies occurring in the Board of Directors may be filled by vote of the shareholders at a special meeting called for that purpose or at the next annual meeting of shareholders. Section 6.4. Liability of Directors. A Director's responsibility to the Corporation shall be limited to discharging his or her duties as a Director, including his or her duties as a member of any committee of the Board of Directors upon which he or she may serve, in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the Director reasonably believes to be in the best interests of the Corporation, all based on the facts then known to the Director. In discharging his or her duties, a Director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: (a) One (1) or more officers or employees of the Corporation whom the Director reasonably believes to be reliable and competent in the matters presented; (b) Legal counsel, public accountants, or other persons as to matters the Director reasonably believes are within such person's professional or expert competence; or (c) A committee of the Board of which the Director is not a member if the Director reasonably believes the Committee merits confidence; but a Director is not acting in good faith if the Director has knowledge concerning the matter in question that makes reliance otherwise permitted by this Section 6.4 unwarranted. A Director shall not be liable for any action taken as a Director, or any failure to take any action, unless (a) the Director has breached or failed to perform the duties of the Director's office in compliance with this Section 6.4, and (b) the breach or failure to perform constitutes willful misconduct or recklessness. Section 6.5. Factors to be Considered by Board. In determining whether to take or refrain from taking any action with respect to any matter, including making or declining to make any recommendation to shareholders of the Corporation, the Board of Directors may, in its discretion, consider both the short term and long term best interests of the Corporation (including the possibility that these interests may be best served by the continued independence of the Corporation), taking into account, and weighing as the Directors deem appropriate, the social and economic effects thereof on the Corporation's present and future employees, suppliers and customers of the Corporation and its subsidiaries, the communities in which offices or other facilities of the Corporation are located, and any other factors the Directors consider pertinent. Section 6.6. Removal of Directors. Any or all of the members of the Board of Directors may be removed only at a meeting of the shareholders or Directors called expressly for that purpose. Removal by the shareholders requires an affirmative vote of the holders of -7-
outstanding shares representing at least sixty-six and two-thirds percent (66-2/3%) of all the votes then entitled to be cast at an election of Directors. Removal by the Board of Directors requires an affirmative vote of both (a) a majority of the entire number of Directors at the time, and (b) a majority of Directors who then qualify as Continuing Directors (as such term is defined for purposes of Article VIII hereof). No Director may be removed except as provided in this Section 6.6. Section 6.7. Election of Directors by Holders of Preferred Stock. The holders of one (1) or more series of Preferred Stock may be entitled to elect all or a specified number of Directors, but only to the extent and subject to limitations as may be set forth in the provisions of these Articles of Incorporation adopted by the Board of Directors pursuant to Section 5.5 hereof describing the terms of the series of Preferred Stock. ARTICLE VII Provisions for Regulation of Business and Conduct of Affairs of Corporation ------------------------------------- Section 7.1. Meetings of Shareholders. Meetings of the shareholders of the Corporation shall be held at such time and at such place, either within or without the State of Indiana, as may be stated in or fixed in accordance with the By-Laws of the Corporation and specified in the respective notices or waivers of notice of any such meetings. Section 7.2. Special Meetings of Shareholders. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by the Corporation Law, may be called at any time only by the Board of Directors or the officers authorized to do so by the By-Laws. Shareholders of the Corporation shall not be authorized to call a special meeting of shareholders. Section 7.3. Quorum. Unless the Indiana Business Corporation Law provides otherwise, at all meetings of shareholders, twenty-five percent (25%) of the votes entitled to be cast on a matter, represented in person or by proxy, constitutes a quorum for action on the matter. Action may be taken at a shareholders' meeting only on matters with respect to which a quorum exists; provided, however, that any meeting of shareholders, including annual and special meetings and any adjournments thereof, may be adjourned to a later date although less than a quorum is present. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. Section 7.4. Meetings of Directors. Meetings of the Board of Directors of the Corporation shall be held at such place, either within or without the State of Indiana, as may be authorized by the By-Laws and specified in the respective notices or waivers of notice of any such meetings or otherwise specified by the Board of Directors. Unless the By-Laws provide otherwise, (a) regular meetings of the Board of Directors may be held without notice of the date, time, place, or purpose of the meeting and (b) the notice for a special meeting need not describe the purpose or purposes of the special meeting. -8-
Section 7.5. Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or shareholders, or of any committee of such Board, may be taken without a meeting, if the action is taken by all members of the Board or all shareholders entitled to vote on the action, or by all members of such committee, as the case may be. The action must be evidenced by one (1) or more written consents, in one or more counterparts, describing the action taken, signed by each Director, or all the shareholders entitled to vote on the action, or by each member of such committee, as the case may be, and, in the case of action by the Board of Directors or a committee thereof, included in the minutes or filed with the corporate records reflecting the action taken or, in the case of action by the shareholders, delivered to the Corporation for inclusion in the minutes or filing with the corporate records. Action taken under this Section 7.5 is effective when the last Director, shareholder, or committee member, as the case may be, signs the consent, unless the consent specifies a different prior or subsequent effective date, in which case the action is effective on or as of the specified date. Executed consents returned to the Corporation by facsimile transmission may be relied upon as, and shall have the same effect as, originals of such consents. A consent signed under this Section 7.5 shall have the same effect as a unanimous vote of all members of the Board, or all shareholders, or all members of the committee, as the case may be, and may be described as such in any document. Section 7.6. By-Laws. The Board of Directors shall have the exclusive power to make, alter, amend, or repeal, or to waive provisions of, the By-Laws of the Corporation by the affirmative vote of a majority of the entire number of Directors at the time, except as expressly provided in Section 6.1 hereof and as provided by the Corporation Law. All provisions for the regulation of the business and management of the affairs of the Corporation not stated in these Articles of Incorporation shall be stated in the By-Laws. The Board of Directors may adopt Emergency By-Laws of the Corporation and shall have the exclusive power (except as may otherwise be provided therein) to make, alter, amend, or repeal, or to waive provisions of, the Emergency By-Laws by the affirmative vote of both (a) a majority of the entire number of Directors at the time and (b) a majority of the entire number of Directors who then qualify as Continuing Directors with respect to all Related Persons (as such terms are defined for purposes of Article VIII hereof). Section 7.7. Interest of Directors. (a) A conflict of interest transaction is a transaction with the Corporation in which a Director of the Corporation has a direct or indirect interest. A conflict of interest transaction is not voidable by the Corporation solely because of the Director's interest in the transaction if any one (1) of the following is true: (1) The material facts of the transaction and the Director's interest were disclosed or known to the Board of Directors or a committee of the Board of Directors and the Board of Directors or committee authorized, approved, or ratified the transaction. (2) The material facts of the transaction and the Director's interest were disclosed or known to the shareholders entitled to vote and they authorized, approved, or ratified the transaction. -9-
(3) The transaction was fair to the Corporation. (b) For purposes of this Section 7.7, a Director of the Corporation has an indirect interest in a transaction if: (1) Another entity in which the Director has a material financial interest or in which the Director is a general partner is a party to the transaction; or (2) Another entity of which the Director is a director, officer, or trustee is a party to the transaction and the transaction is, or is required to be, considered by the Board of Directors of the Corporation. (c) For purposes of Section 7.7(a)(1), a conflict of interest transaction is authorized, approved, or ratified if it receives the affirmative vote of a majority of the Directors on the Board of Directors (or on the committee) who have no direct or indirect interest in the transaction, but a transaction may not be authorized, approved, or ratified under this section by a single Director. If a majority of the Directors who have no direct or indirect interest in the transaction vote to authorize, approve, or ratify the transaction, a quorum shall be deemed present for the purpose of taking action under this Section 7.7. The presence of, or a vote cast by, a Director with a direct or indirect interest in the transaction does not affect the validity of any action taken under Section 7.7(a)(1), if the transaction is otherwise authorized, approved, or ratified as provided in such subsection. (d) For purposes of Section 7.7(a)(2), a conflict of interest transaction is authorized, approved, or ratified if it receives the affirmative vote of the holders of shares representing a majority of the votes entitled to be cast. Shares owned by or voted under the control of a Director who has a direct or indirect interest in the transaction, and shares owned by or voted under the control of an entity described in Section 7.7(b), may be counted in such a vote of shareholders. Section 7.8. Nonliability of Shareholders. Shareholders of the Corporation are not personally liable for the acts or debts of the Corporation, nor is private property of shareholders subject to the payment of corporate debts. Section 7.9. Indemnification of Officers, Directors, and Other Eligible Persons. (a) The Corporation shall indemnify every Eligible Person against all Liability and Expense that may be incurred by him or her in connection with or resulting from any Claim to the fullest extent authorized or permitted by the Corporation Law, as the same exists or may hereafter be amended (but in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), or otherwise consistent with the public policy of the State of Indiana. In furtherance of the foregoing, and not by way of limitation, every Eligible Person shall be indemnified by the Corporation against all Liability and reasonable Expense that may be incurred by him or her in connection with or resulting from any Claim, (1) if such Eligible Person is Wholly Successful with respect to the Claim, or (2) if not Wholly Successful, then if such Eligible Person is determined, as provided in either Section 7.9(g) or 7.9(h), to have acted in good faith, in what he or she reasonably believed to be -10-
the best interests of the Corporation or at least not opposed to its best interests and, in addition, with respect to any criminal claim is determined to have had reasonable cause to believe that his or her conduct was lawful or had no reasonable cause to believe that his or her conduct was unlawful. The termination of any Claim, by judgment, order, settlement (whether with or without court approval), or conviction or upon a plea of guilty or of nolo contendere, or its equivalent, shall not create a presumption that an Eligible Person did not meet the standards of conduct set forth in clause (2) of this subsection (a). The actions of an Eligible Person with respect to an employee benefit plan subject to the Employee Retirement Income Security Act of 1974 shall be deemed to have been taken in what the Eligible Person reasonably believed to be the best interests of the Corporation or at least not opposed to its best interests if the Eligible Person reasonably believed he was acting in conformity with the requirements of such Act or he reasonably believed his actions to be in the interests of the participants in or beneficiaries of the plan. (b) The term "Claim" as used in this Section 7.9 shall include every pending, threatened, or completed claim, action, suit, or proceeding and all appeals thereof (whether brought by or in the right of this Corporation or any other corporation or otherwise), civil, criminal, administrative, or investigative, formal or informal, in which an Eligible Person may become involved, as a party or otherwise: (1) by reason of his or her being or having been an Eligible Person, or (2) by reason of any action taken or not taken by him or her in his or her capacity as an Eligible Person, whether or not he or she continued in such capacity at the time such Liability or Expense shall have been incurred. (c) The term "Eligible Person" as used in this Section 7.9 shall mean every person (and the estate, heirs, and personal representatives of such person) who is or was a Director, officer, employee, or agent of the Corporation or is or was serving at the request of the Corporation as a Director, officer, employee, partner, trustee, member, manager, agent, or fiduciary of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other organization or entity, whether for profit or not. An Eligible Person shall also be considered to have been serving an employee benefit plan at the request of the Corporation if his or her duties to the Corporation also imposed duties on, or otherwise involved services by, him or her to the plan or to participants in or beneficiaries of the plan. (d) The terms "Liability" and "Expense" as used in this Section 7.9 shall include, but shall not be limited to, counsel fees and disbursements and amounts of judgments, fines, or penalties against (including excise taxes assessed with respect to an employee benefit plan), and amounts paid in settlement by or on behalf of an Eligible Person. (e) The term "Wholly Successful" as used in this Section 7.9 shall mean (1) termination of any Claim, whether on the merits or otherwise, against the Eligible Person in question without any finding of liability or guilt against him or her, (2) approval by a court, with knowledge of the indemnity herein provided, of a settlement of any Claim, or (3) the expiration of a reasonable period of time after the making or threatened making of any Claim without the institution of the same, without any payment or promise made to induce a settlement. -11-
(f) As used in this Section 7.9, the term "Corporation" includes all constituent entities in a consolidation or merger and the new or surviving corporation of such consolidation or merger, so that any Eligible Person who is or was a Director, officer, employee or agent of such a constituent entity, or is or was serving at the request of such constituent entity as a Director, officer, employee, partner, trustee, member, manager, agent, or fiduciary of any other corporation, partnership, joint venture, trust, employee benefit plan, limited liability company or other organization or entity, whether for profit or not, shall stand in the same position under this Section 7.9 with respect to the new or surviving corporation as he or she would if he or she had served the new or surviving corporation in the same capacity. (g) Every Eligible Person claiming indemnification hereunder (other than one who has been Wholly Successful with respect to any Claim) shall be entitled to indemnification (1) if special independent legal counsel, which may be regular counsel of the Corporation, or other disinterested person or persons, in either case selected by the Board of Directors, whether or not a disinterested quorum exists (such counsel or person or persons being hereinafter called the "Referee"), shall deliver to the Corporation a written finding that such Eligible Person has met the standards of conduct set forth in Section 7.9(a)(2), and (2) if the Board of Directors, acting upon such written finding, so determines. The Board of Directors shall, if an Eligible Person is found to be entitled to indemnification pursuant to the preceding sentence, also determine the reasonableness of the Eligible Person's Expenses. The Eligible Person claiming indemnification shall, if requested, appear before the Referee, answer questions that the Referee deems relevant and shall be given ample opportunity to present to the Referee evidence upon which the Eligible Person relies for indemnification. The Corporation shall, at the request of the Referee, make available facts, opinions, or other evidence in any way relevant to the Referee's findings that are within the possession or control of the Corporation. (h) If an Eligible Person claiming indemnification pursuant to Section 7.9(g) is found not to be entitled thereto, or if the Board of Directors fails to select a Referee under Section 7.9(g) within a reasonable amount of time following a written request of an Eligible Person for the selection of a Referee, or if the Referee or the Board of Directors fails to make a determination under Section 7.9(g) within a reasonable amount of time following the selection of a Referee, the Eligible Person may apply for indemnification with respect to a Claim to a court of competent jurisdiction, including a court in which the Claim is pending against the Eligible Person. On receipt of an application, the court, after giving notice to the Corporation and giving the Corporation ample opportunity to present to the court any information or evidence relating to the claim for indemnification that the Corporation deems appropriate, may order indemnification if it determines that the Eligible Person is entitled to indemnification with respect to the Claim because such Eligible Person met the standards of conduct set forth in Section 7.9(a)(2). If the court determines that the Eligible Person is entitled to indemnification, the court shall also determine the reasonableness of the Eligible Person's Expenses. (i) Expenses incurred by an Eligible Person who is a Director or officer of the Corporation in defending any Claim shall be paid by the Corporation in advance of the final disposition of such Claim promptly as they are incurred upon receipt of an undertaking by or on behalf of such Eligible Person to repay such amount if he or she is determined not to be entitled to indemnification. Expenses incurred by any other Eligible Person with respect to any Claim may be advanced by the Corporation (by action of the Board of Directors, whether or not a disinterested quorum exists) prior to the final disposition thereof upon receipt of an undertaking -12-
by or on behalf of the Eligible Person to repay such amount if he or she is determined not to be entitled to indemnification. (j) The rights of indemnification and advancement of Expenses provided in this Section 7.9 shall be in addition to any rights to which any Eligible Person may otherwise be entitled. Irrespective of the provisions of this Section 7.9, the Board of Directors may, at any time and from time to time, (1) approve indemnification of any Eligible Person to the full extent permitted by the provisions of applicable law at the time in effect, whether on account of past or future transactions, and (2) authorize the Corporation to purchase and maintain insurance on behalf of any Eligible Person against any Liability or Expense asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such Liability or Expense. (k) The provisions of this Section 7.9 shall be deemed to be a contract between the Corporation and each Eligible Person, and an Eligible Person's rights hereunder shall not be diminished or otherwise adversely affected by any repeal, amendment, or modification of this Section 7.9 that occurs subsequent to such person becoming an Eligible Person. (l) The provisions of this Section 7.9 shall be applicable to Claims made or commenced after the adoption hereof, whether arising from acts or omissions to act occurring before or after the adoption hereof. (m) If this Section 7.9 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Section 7.9 that shall not have been invalidated and to the fullest extent permitted by applicable law. ARTICLE VIII Approval of Business Combinations --------------------------------- Section 8.1. Supermajority Vote. Except as provided in Sections 8.2 and 8.3 hereof, neither the Corporation nor its Subsidiaries, if any, shall become a party to any Business Combination with a Related Person without the prior affirmative vote at a meeting of the Corporation's shareholders: (a) Of not less than sixty-six and two-thirds percent (66-2/3%) of all the votes entitled to be cast by the holders of the outstanding shares of all classes of Voting Stock of the Corporation considered for purposes of this Article VIII as a single class, and (b) Of an Independent Majority of Shareholders. -13-
Such favorable votes shall be in addition to any shareholder vote which would be required without reference to this Section 8.1 and shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage may be specified by law or elsewhere in these Articles of Incorporation or the By-Laws of the Corporation or otherwise. Section 8.2. Fair Price Exception. The provisions of Section 8.1 of this Article VIII shall not apply to a Business Combination if all of the conditions set forth in subsections (a) through (d) are satisfied. (a) The fair market value of the property, securities, or other consideration to be received per share by holders of each class or series of capital stock of the Corporation in the Business Combination is not less, as of the date of the consummation of the Business Combination (the "Consummation Date"), than the higher of the following: (1) the highest per share price (with appropriate adjustments for recapitalizations and for stock splits, stock dividends, and like distributions), including brokerage commissions and solicitation fees paid by the Related Person in acquiring any of its holdings, of such class or series of capital stock within the two-year period immediately prior to the first public announcement of the proposed Business Combination ("Announcement Date") plus interest compounded annually from the date that the Related Person became a Related Person (the "Determination Date"), or if later from a date two years before the Consummation Date, through the Consummation Date, at the rate publicly announced as the "prime rate" of interest of Citibank, N.A. (or of such other major bank headquartered in New York as may be selected by a majority of the Continuing Directors) from time to time in effect, less the aggregate amount of any cash dividends paid and the fair market value of any dividends paid in other than cash on each share of such stock from the date from which interest accrues under the preceding clause through the Consummation Date up to but not exceeding the amount of interest so payable per share; OR (2) the fair market value per share of such class or series on the Announcement Date as determined by the highest closing sale price during the 30- day period immediately preceding the Announcement Date if such stock is listed on a securities exchange registered under the Securities Exchange Act of 1934 or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to such stock during the 30-day period preceding the Announcement Date on the National Association of Securities Dealers, Inc. Automated Quotation System or any similar system then in use, or if no such quotations are available, the fair market value of such stock immediately prior to the first public announcement of the proposed Business Combination as determined by the Continuing Directors in good faith. In the event of a Business Combination upon the consummation of which the Corporation would be the surviving corporation or company or would continue to exist (unless it is provided, contemplated, or intended that as part of such Business Combination or within one year after consummation thereof a plan of liquidation or dissolution of the Corporation will be effected), the term "other consideration to be received" shall include (without limitation) Common Stock and/or the shares of any other class of stock retained by shareholders of the Corporation other than Related Persons who are parties to such Business Combination; (b) The consideration to be received in such Business Combination by holders of each class or series of capital stock of the Corporation other than the Related Person involved shall, except to the extent that a shareholder agrees otherwise as to all or part of the shares which he or she owns, be in the same form and of the same kind as the consideration paid by the Related Person in acquiring the majority of the shares of capital stock of such class or series -14-
already Beneficially Owned by it; (c) After such Related Person became a Related Person and prior to the consummation of such Business Combination: (1) such Related Person shall have taken steps to ensure that the Board of Directors of the Corporation included at all times representation by Continuing Directors proportionate to the ratio that the number of shares of Voting Stock of the Corporation from time to time owned by shareholders who are not Related Persons bears to all shares of Voting Stock of the Corporation outstanding at the time in question (with a Continuing Director to occupy any resulting fractional position among the Directors); (2) such Related Person shall not have acquired from the Corporation, directly or indirectly, any shares of the Corporation (except upon conversion of convertible securities acquired by it prior to becoming a Related Person or as a result of a pro rata stock dividend, stock split, or division of shares or in a transaction which satisfied all applicable requirements of this Article VIII); (3) such Related Person shall not have acquired any additional shares of Voting Stock of the Corporation or securities convertible into or exchangeable for shares of Voting Stock except as a part of the transaction which resulted in such Related Person's becoming a Related Person; and (4) such Related Person shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges, or other financial assistance or tax credits provided by the Corporation or any Subsidiary, or made any major change in the Corporation's business or equity capital structure or entered into any contract, arrangement, or understanding with the Corporation except any such change, contract, arrangement, or understanding as may have been approved by the favorable vote of not less than a majority of the Continuing Directors of the Corporation; and (d) A proxy or information statement complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations of the Securities and Exchange Commission thereunder, as then in force for corporations subject to the requirements of Section 14 of such Act (even if the Corporation is not otherwise subject to Section 14 of such Act), shall have been mailed to all holders of shares of the Corporation's capital stock entitled to vote with respect to such Business Combination. Such proxy or information statement shall contain on the face page thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by a majority of the Continuing Directors, a fair summary of an opinion of a reputable investment banking firm addressed to the Corporation as to the fairness (or lack of fairness) of the terms of such Business Combination from the point of view of the holders of shares of Voting Stock other than any Related Person (such investment banking firm to be selected by a majority of the Continuing Directors, to be furnished with all information it reasonably requests, and to be paid a reasonable fee for its services upon receipt by the Corporation of such opinion). Section 8.3. Director Approval Exception. The provisions of Section 8.1 hereof shall not apply to a Business Combination if: -15-
(a) The Directors, by a favorable vote of not less than two-thirds (2/3) of the Directors who then qualify as Continuing Directors, (1) have expressly approved a memorandum of understanding with the Related Person with respect to the Business Combination prior to the time that the Related Person became a Related Person and the Business Combination is effected on substantially the same terms and conditions as are provided by the memorandum of understanding, or (2) have otherwise approved the Business Combination; or (b) The Business Combination is solely between the Corporation and another corporation, one hundred percent (100%) of the Voting Stock of which is owned directly or indirectly by the Corporation. Section 8.4. Definitions. For purposes of this Article VIII: (a) A "Business Combination" means: (1) The sale, exchange, lease, transfer, or other disposition to or with a Related Person or any Affiliate or Associate of such Related Person by the Corporation or any Subsidiaries (in a single transaction or a Series of Related Transactions) of all or substantially all, or any Substantial Part, of its or their assets or businesses (including, without limitation, securities issued by a Subsidiary, if any); (2) The purchase, exchange, lease, or other acquisition by the Corporation or any Subsidiaries (in a single transaction or a Series of Related Transactions) of all or substantially all, or any Substantial Part, of the assets or business of a Related Person or any Affiliate or Associate of such Related Person; (3) Any merger or consolidation of the Corporation or any Subsidiary thereof into or with a Related Person or any Affiliate or Associate of such Related Person or into or with another Person which, after such merger or consolidation, would be an Affiliate or an Associate of a Related Person, in each case irrespective of which Person is the surviving entity in such merger or consolidation; (4) Any reclassification of securities, recapitalization, or other transaction (other than a redemption in accordance with the terms of the security redeemed) which has the effect, directly or indirectly, of increasing the proportionate amount of shares of Voting Stock of the Corporation or any Subsidiary thereof which are Beneficially Owned by a Related Person, or any partial or complete liquidation, spinoff, splitoff, or splitup of the Corporation or any Subsidiary thereof; provided, however, that this Section 8.4(a)(4) shall not relate to any transaction that has been approved by a majority of the Continuing Directors; or (5) The acquisition upon the issuance thereof of Beneficial Ownership by a Related Person of shares of Voting Stock or securities convertible into shares of Voting Stock or any voting securities or securities convertible into voting securities of any Subsidiary of the Corporation, or the acquisition upon the issuance thereof of Beneficial Ownership by a Related Person of any rights, warrants, or options to acquire any of the foregoing or any combination of the foregoing shares of Voting Stock or voting securities of a Subsidiary, if any. -16-
(b) A "Series of Related Transactions" shall be deemed to include not only a series of transactions with the same Related Person, but also a series of separate transactions with a Related Person or any Affiliate or Associate of such Related Person. (c) A "Person" shall mean any individual, firm, corporation, or other entity and any partnership, syndicate, or other group. (d) "Related Person" shall mean any Person (other than the Corporation or any Subsidiary of the Corporation or the Continuing Directors, singly or as a group) who or that at any time described in the last sentence of the penultimate paragraph of this subsection (d): (1) is the Beneficial Owner, directly or indirectly, of more than ten percent (10%) of the voting power of the outstanding shares of Voting Stock and who has not been the Beneficial Owner, directly or indirectly, of more than ten percent (10%) of the voting power of the outstanding shares of Voting Stock for a continuous period of two years prior to the date in question; or (2) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question (but not continuously during such two-year period) was the Beneficial Owner, directly or indirectly, of ten percent (10%) or more of the voting power of the then outstanding shares of Voting Stock; or (3) is an assignee of or has otherwise succeeded to any shares of the Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Related Person, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended. A Related Person shall be deemed to have acquired a share of the Corporation at the time when such Related Person became the Beneficial Owner thereof. For the purposes of determining whether a Person is the Beneficial Owner of ten percent (10%) or more of the voting power of the then outstanding Voting Stock, the outstanding Voting Stock shall be deemed to include any Voting Stock that may be issuable to such Person pursuant to a right to acquire such Voting Stock and that is therefore deemed to be Beneficially Owned by such Person pursuant to Section 8.4(e)(2)(A). A Person who is a Related Person at (1) the time any definitive agreement relating to a Business Combination is entered into, (2) the record date for the determination of shareholders entitled to notice of and to vote on a Business Combination, or (3) the time immediately prior to the consummation of a Business Combination shall be deemed a Related Person. A Related Person shall not include the Board of Directors of the Corporation acting as a group. In addition, a Related Person shall not include any Person who possesses ten percent (10%) or more of the voting power of the outstanding shares of Voting Stock of the Corporation at the time of filing these Articles of Incorporation. (e) A Person shall be a "Beneficial Owner" of any shares of Voting Stock: -17-
(1) which such Person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (2) which such Person or any of its Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement, or understanding or upon the exercise of conversion rights, exchange rights, warrants, or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement, or understanding; or (3) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of its Affiliates or Associates has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting, or disposing of any shares of Voting Stock. (f) An "Affiliate" of, or a person Affiliated with, a specific Person means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. (g) The term "Associate" used to indicate a relationship with any Person, means (1) any corporation or organization (other than this Corporation or a majority-owned Subsidiary of this Corporation) of which such Person is an officer or partner or is, directly or indirectly, the Beneficial Owner of five percent (5%) or more of any class of equity securities, (2) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, (3) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person, or (4) any investment company registered under the Investment Company Act of 1940, as amended, for which such Person or any Affiliate of such Person serves as investment adviser. (h) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Related Person set forth in Section 8.4(d) hereof, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (i) "Continuing Director" means any member of the Board of Directors of the Corporation (the "Board") who is not associated with the Related Person and was a member of the Board prior to the time that the Related Person became a Related Person, and any successor of a Continuing Director who is not associated with the Related Person and is recommended to succeed a Continuing Director by not less than two-thirds (2/3) of the Continuing Directors then on the Board. (j) "Independent Majority of Shareholders" shall mean the holders of the outstanding shares of Voting Stock representing a majority of all the votes entitled to be cast by all shares of Voting Stock other than shares Beneficially Owned or controlled, directly or indirectly, by a Related Person. -18-
(k) "Voting Stock" shall mean all outstanding shares of capital stock of the Corporation or another corporation entitled to vote generally on the election of Directors, and each reference to a proportion of shares of Voting Stock shall refer to such proportion of the total number of votes (taking into account any multiple votes per share) entitled to be cast by such shares. (l) "Substantial Part" means properties and assets involved in any single transaction or a Series of Related Transactions having an aggregate fair market value of more than ten percent (10%) of the total consolidated assets of the Person in question as determined immediately prior to such transaction or Series of Related Transactions. Section 8.5. Director Determinations. A majority of the Continuing Directors shall have the power to determine for the purposes of this Article VIII, on the basis of information known to them: (a) the number of shares of Voting Stock of which any Person is the Beneficial Owner, (b) whether a Person is an Affiliate or Associate of another, (c) whether a Person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of "Beneficial Owner," (d) whether the assets subject to any Business Combination constitute a Substantial Part, (e) whether two or more transactions constitute a Series of Related Transactions, and (f) such other matters with respect to which a determination is required under this Article VIII. Section 8.6. Amendment of Article VIII or Certain Other Provisions. Any amendment, change, or repeal of this Article VIII or of Sections 6.6, 7.2, 7.6, 12.2, or 12.3, or any other amendment of these Articles of Incorporation which would have the effect of modifying or permitting circumvention of this Article VIII or such other provisions of these Articles of Incorporation, shall require the affirmative vote, at a meeting of shareholders of the Corporation: (a) Of at least seventy-five percent (75%) of the votes entitled to be cast by the holders of the outstanding shares of all classes of Voting Stock of the Corporation considered for purposes of this Section 8.6 as a single class; and (b) Of an Independent Majority of Shareholders; Provided, however, that this Section 8.6 shall not apply to, and such vote shall not be required for, any such amendment, change, or repeal recommended to shareholders by the favorable vote of not less than two-thirds (2/3) of the Directors who then qualify as Continuing Directors with respect to all Related Persons and any such amendment, change, or repeal so recommended shall require only the vote, if any, required under the applicable provisions of the Corporation Law. Section 8.7. Fiduciary Obligations Unaffected. Nothing in this Article VIII shall be construed to relieve any Related Person from any fiduciary duty imposed by law. Section 8.8. Article VIII Nonexclusive. The provisions of this Article VIII are nonexclusive and are in addition to any other provisions of law or these Articles of Incorporation or the By-Laws of the Corporation relating to Business Combinations, Related Persons, or similar matters. -19-
ARTICLE IX Restrictions on Ownership and Transfer of Stock ----------------------------------------------- Section 9.1. Limitation on Ownership. Except with the prior approval of a majority of the Continuing Directors (as defined in Section 9.14 below), no Person (as defined in Section 9.14 below) shall Beneficially Own (as defined in Section 9.14 below) shares of Capital Stock (as defined in Section 9.14 below) in excess of the Ownership Limit (as defined in Section 9.14 below). Any Transfer (as defined in Section 9.14 below) that, if effective, would result in any Person Beneficially Owning Capital Stock in excess of the Ownership Limit shall result in such intended transferee acquiring no rights in such shares of Capital Stock (other than those rights expressly granted in this Article IX) and such number of shares of Capital Stock shall be deemed transferred to the Share Escrow Agent (as defined in Section 9.14 below) as set forth in this Article IX. Section 9.2. Excess Shares. If, notwithstanding any other provisions of this Article IX, there is a purported Transfer or other change in the capital structure of the Corporation such that any Person would Beneficially Own shares of Capital Stock in excess of the Ownership Limit (a "Purported Owner"), then, upon such Transfer or change in capital structure, such shares of Capital Stock in excess of the Ownership Limit shall be Excess Shares for purposes of this Article IX; provided, however, that in the event that any Person becomes a Purported Owner as a result of Beneficial Ownership of Capital Stock of one Person being aggregated with another Person, then the number of Excess Shares subject to this Article IX shall be allocated pro rata among each Purported Owner in proportion to each Person's total Beneficial Ownership (without regard to any aggregation with another Person pursuant to Section 9.14(b)(4) or (5). Upon the occurrence of any event that would cause any Person to exceed the Ownership Limit (including without limitation the expiration of a voting trust, without being renewed on substantially similar terms, that entitled such Person to an exemption from the Ownership Limit), all shares of Capital Stock Beneficially Owned by such Person in excess of the Ownership Limit shall also be Excess Shares for purposes of this Article IX, such Person shall be deemed the Purported Owner of such Excess Shares and such Person's rights in such Excess Shares shall be as prescribed in this Article IX. Excess Shares shall not constitute a separate class of Capital Stock. Section 9.3. Authority of the Corporation. If the Corporation at any time determines that a Transfer has taken place in violation of Section 9.1 or that a Purported Owner intends to acquire or has attempted to acquire Beneficial Ownership of any shares of Capital Stock in violation of Section 9.1, the Corporation shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer, including, without limitation, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin or rescind such Transfer; provided, however, that any purported Transfers in violation of Section 9.1 shall automatically result in all shares of Capital Stock in excess of the Ownership Limit being deemed Excess Shares. Notwithstanding the foregoing, nothing contained in this Article IX shall limit the authority of the Corporation to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its stockholders. Section 9.4. Written Notice Required. Any Purported Owner who acquires or attempts to acquire shares of Capital Stock in violation of Section 9.l, or any Purported Owner -20-
who is a transferee such that any shares of Capital Stock are deemed Excess Shares under Section 9.2, shall immediately give written notice to the Corporation of such event and shall provide to the Corporation such other information as the Corporation may request. Section 9.5. Restrictive Legend. Each certificate for Capital Stock issued by the Corporation shall bear an appropriate legend with regard to the restrictions on ownership and transfer of stock set forth in these Articles of Incorporation. Section 9.6. Share Escrow Agent. Upon the occurrence of a Transfer or an event that results in Excess Shares pursuant to Section 9.2, such Excess Shares shall automatically be transferred immediately to the Share Escrow Agent, which Excess Shares, subject to the provisions of this Article IX, shall be held by the Share Escrow Agent until such time as the Excess Shares are transferred to a Person whose acquisition thereof will not violate the Ownership Limit (a "Permitted Transferee") and the Share Escrow Agent shall be authorized to execute any and all documents sufficient to transfer title to any Permitted Transferee, even in the absence of receipt of certificate(s) representing Excess Shares. The Corporation shall take such actions as it deems necessary to give effect to such transfer to the Share Escrow Agent, including by issuing a stop transfer order to the Corporation's transfer agent with respect to any attempted transfer by the Purported Owner or its nominee of any Excess Shares and by giving effect, or by instructing the Corporation's transfer agent to give effect, to such transfer to a Permitted Transferee on the books of the Corporation. Excess Shares so held shall be issued and outstanding shares of Capital Stock. The Purported Owner shall have no rights in such Excess Shares except as provided in Sections 9.7, 9.8, and 9.11 and the administration of the Excess Shares escrow shall be governed by the terms of a Share Escrow Agent Agreement. Section 9.7. Dividends on Excess Shares. The Share Escrow Agent, as record holder of Excess Shares, shall be entitled to receive all dividends and distributions as may be declared by the Board of Directors with respect to Excess Shares (the "Excess Share Dividends") and shall hold the Excess Share Dividends until disbursed in accordance with the provisions of Section 9.11 following. The Purported Owner, with respect to Excess Shares purported to be Beneficially Owned by such Purported Owner prior to such time that the Corporation determines that such shares are Excess Shares, shall repay to the Share Escrow Agent the amount of any Excess Share Dividends received by it that (i) are attributable to any Excess Shares and (ii) the record date of which is on or after the date that such shares become Excess Shares. The Corporation shall take all measures that it determines reasonably necessary to recover the amount of any Excess Share Dividends paid to a Purported Owner, including, if necessary, withholding any portion of future dividends or distributions payable on shares of Capital Stock Beneficially Owned by any Purported Owner (including on shares which fall below the Ownership Limit as well as on Excess Shares), and, as soon as practicable following the Corporation's receipt or withholding thereof, shall pay over to the Share Escrow Agent the dividends so received or withheld, as the case may be. Section 9.8. Effect of Liquidation etc. on Excess Shares. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of, or any distribution of the assets of, the Corporation, the Share Escrow Agent shall be entitled to receive, ratably with each other holder of Capital Stock of the same class or series, that portion of the assets of the Corporation that is available for distribution to the holders of such class or series of Capital Stock. The Share Escrow Agent shall distribute to the Purported Owner the amounts received -21-
upon such liquidations, dissolution or winding up or distribution in accordance with the provisions of Section 9.11. Section 9.9. Voting of Excess Shares. The Share Escrow Agent shall be entitled to vote all Excess Shares. The Share Escrow Agent shall be instructed by the Corporation to vote, consent or assent the Excess Shares as follows: (i) if the matter concerned is the election of directors, the Share Escrow Agent shall vote, consent or assent the whole number of Excess Shares held by the Share Escrow Agent for each director by multiplying the number of votes held in escrow by a fraction, the numerator of which is the number of Nonaffiliated Votes cast for the director and the denominator of which is the number of Nonaffiliated Votes that could have been cast in the election of the director and are present in person or by proxy at the meeting; (ii) where the matter under the Corporation Law or these Articles of Incorporation or the By-Laws of the Corporation requires at least an absolute majority of all outstanding shares of Common Stock in order to be effected, then the Share Escrow Agent shall vote, assent or consent all of such Excess Shares in favor of or in opposition to such matter as the majority of all Nonaffiliated Votes are cast; and (iii) on all other matters, the Share Escrow Agent shall at all times vote, assent or consent all of such shares in the identical proportion in favor of or in opposition to such matter as Nonaffiliated Votes are cast. If any calculation of votes under the preceding sentence would require a fractional vote, the Share Escrow Agent shall vote the next lower number of whole Excess Shares. The Share Escrow Agent shall use all reasonable commercial efforts to ensure, with respect to Excess Shares, that such Excess Shares are counted as being present for the purposes of any quorum required for stockholder action of the Corporation and to vote as set forth above. For purposes of these Articles of Incorporation, "Nonaffiliated Votes" shall mean the votes cast by stockholders other than any Share Escrow Agent with respect to Excess Shares. Section 9.10. Sale of Excess Shares. ------------ --------------------- (a) In an orderly fashion so as not to materially adversely affect the price of Common Stock on the New York Stock Exchange or, if Common Stock is not listed on the New York Stock Exchange, on the exchange or other principal market on which Common Stock is traded, the Share Escrow Agent shall sell or cause the sale of Excess Shares at such time or times as the Share Escrow Agent determines to be appropriate. The Share Escrow Agent shall have the right to take such actions as the Share Escrow Agent deems appropriate to seek to restrict sale of the shares to Permitted Transferees. (b) The Share Escrow Agent shall have the power to convey to the purchaser of any Excess Shares sold by the Share Escrow Agent ownership of the Excess Shares free of any interest of the Purported Owner of those Excess Shares and free of any other adverse interest arising through the Purported Owner. (c) Upon acquisition by any Permitted Transferee of any Excess Shares sold by the Share Escrow Agent or the Purported Owner, such shares shall upon such sale cease to be Excess Shares and shall become regular shares of Capital Stock in the class to which the Excess Shares belong, and the purchaser of such shares shall acquire such shares free of any claims of the Share Escrow Agent or the Purported Owner. -22-
(d) To the extent permitted by law, none of the Corporation, the Share Escrow Agent or anyone else shall have any liability to the Purported Owner or anyone else by reason of any action or inaction the Corporation or the Share Escrow Agent shall take which either shall in good faith believe to be within the scope of its authority under this Article IX or by reason of any decision as to when or how to sell any Excess Shares or by reason of any other action or inaction in connection with activities under this Article IX which docs not constitute gross negligence or willful misconduct. Without limiting by implication the scope of the preceding sentence, to the extent permitted by law, (a) neither the Share Escrow Agent nor the Corporation shall have any liability on grounds that either failed to take actions which would have produced higher proceeds for any of the Excess Shares or by reason of the manner or timing for any disposition of any Excess Shares and (b) the Share Escrow Agent shall not be deemed to be a fiduciary or Agent of any Purported Owner. Section 9.11. Application of the Proceeds from the Sale of Excess Shares. The proceeds from the sale of the Excess Shares to a Permitted Transferee and any Excess Share Dividends shall be distributed as follows: (i) first, to the Share Escrow Agent for any costs and expenses incurred in respect of its administration of the Excess Shares that have not theretofore been reimbursed by the Corporation; (ii) second, to the Corporation for all costs and expenses incurred by the Corporation in connection with the appointment of the Share Escrow Agent, the payment of fees to the Share Escrow Agent with respect to the services provided by the Share Escrow Agent in respect of the escrow and all funds expended by the Corporation to reimburse the Share Escrow Agent for costs and expenses incurred by the Share Escrow Agent in respect of its administration of the Excess Shares and for all fees, disbursements and expenses incurred by the Share Escrow Agent in connection with the sale of the Excess Shares; and (iii) third, the remainder thereof (as the case may be) to the Purported Owner or the Person who was the holder of record before the shares were transferred to the Share Escrow Agent (depending on who shall at such time be entitled to any economic interest in the Excess Shares); provided, however, if the Share Escrow Agent shall have any questions as to whether any security interest or other interest adverse to the Purported Owner shall have existed with respect to any Excess Shares, the Share Escrow Agent shall not be obligated to disburse proceeds for those shares until the Share Escrow Agent is provided with such evidence as the Share Escrow Agent shall deem necessary to determine the parties who shall be entitled such proceeds. Section 9.12. No Limit on the Authority of the Corporation. Subject to Section 9.13, nothing contained in this Article IX or in any other provision of these Articles of Incorporation shall limit the authority of the Corporation to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its stockholders. Section 9.13. Settlement of Transactions. Nothing in these Articles of Incorporation shall preclude the settlement of any transactions entered into through the facilities of the New York Stock Exchange or any other exchange or through the means of any automated quotation system now or hereafter in effect. Section 9.14. Definitions. The following definitions shall apply with respect to this Article IX: -23-
(a) "Affiliate" and "associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended or supplemented (the "Exchange Act") at the time as of which the term shall be applied. (b) Except as is provided in (c) of this Section 9.14, a Person shall be deemed to "Beneficially Own," be the "Beneficial Owner" of or have "Beneficial Ownership" of any Capital Stock: (1) in which such Person shall then have a direct or indirect beneficial ownership interest; (2) in which such Person shall have the right to acquire any direct or indirect beneficial ownership interest pursuant to any option or other agreement (either immediately or after the passage of time or the occurrence of any contingency); (3) which such Person shall have the right to vote; (4) in which such Person shall hold any other interest which would count in determining whether such Person would be required to file a Schedule 13D; or (5) which shall be Beneficially Owned (under the concepts provided in the preceding clauses) by any affiliate or associate of the particular Person or by any other Person with whom the particular Person or any such affiliate or associate has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities). (c) The following provisions are included to clarify (b) above: (1) A Person shall not be deemed to Beneficially Own, be the Beneficial Owner of, or have Beneficial Ownership of Capital Stock by reason of possessing the right to vote if (i) such right arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act, and (ii) such Person is not the Purported Owner of any Excess Shares, is not named as holding a beneficial ownership interest in any Capital Stock in any filing on Schedule 13D and is not an affiliate or associate of any such Purported Owner or named Person. (2) A member of a national securities exchange or a registered depositary shall not be deemed to Beneficially Own, be the Beneficial Owner of or have Beneficial Ownership of Capital Stock held directly or indirectly by it on behalf of another Person (and not for its own account) solely because such member or depositary is the record holder of such Capital Stock, and (in the case of such member), pursuant to the rules of such exchange, such member may direct the vote of such Capital Stock without instruction on matters which are uncontested and do not affect substantially the rights or privileges of the holders of the Capital Stock to be voted but is otherwise precluded by -24-
the rules of such exchange from voting such Capital Stock without instruction on either contested matters or matters that may affect substantially the rights or the privileges of the holders of such Capital Stock to be voted. (3) A Person who in the ordinary course of business is a pledgee of Capital Stock under a written pledge agreement shall not be deemed to Beneficially Own, be the Beneficial Owner of or have Beneficial Ownership of such pledged Capital Stock solely by reason of such pledge until the pledgee has taken all formal steps which are necessary to declare a default or has otherwise acquired the power to vote or to direct to vote such pledged Capital Stock, provided that; (A) the pledge agreement is bona fide and was not entered into with the purpose nor with the effect of changing or influencing the control of the Corporation, nor in connection with any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b) promulgated under the Exchange Act; and (B) the pledge agreement does not grant to the pledgee the right to vote or to direct the vote of the pledged securities prior to the time the pledgee has taken all formal steps which are necessary to declare a default. (4) A Person engaged in business as an underwriter or a placement agent for securities who enters into an agreement to acquire or acquires Capital Stock solely by reason of its participation in good faith and in the ordinary course of its business in the capacity of underwriter or placement agent in any underwriting or agent representation registered under the Securities Act of 1933, as amended and in effect on the date these Articles of Incorporation were filed with the office of the Indiana Secretary of State (the "Securities Act"), a bona fide private placement, a resale under Rule 144A promulgated under the Securities Act or in any foreign or other offering exempt from the registration requirements under the Securities Act shall not be deemed to Beneficially Own, be the Beneficial Owner of or have Beneficial Ownership of such securities until the expiration of forty (40) days after the date of such acquisition so long as (i) such Person does not vote such Capital Stock during such period and (ii) such participation is not with the purpose or with the effect of changing or influencing control of the Corporation, nor in connection with or facilitating any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b) promulgated under the Exchange Act. (5) If the Corporation shall sell shares in a transaction not involving any public offering, then each purchaser in such offering shall be deemed to obtain Beneficial Ownership in such offering of the shares purchased by such purchaser, but no particular purchaser shall be deemed to Beneficially Own or have acquired Beneficial Ownership or be the Beneficial Owner in such offering of shares purchased by any other purchaser solely by reason of the fact that all such purchasers are parties to customary agreements relating to the purchase of equity securities directly from the Corporation in a transaction not involving a public offering, provided that: -25-
(A) all the purchasers are persons specified in Rule 13d-1(b)(1)(ii) promulgated under the Exchange Act; (B) the purchase is in the ordinary course of each purchaser's business and not with the purpose nor with the effect of changing or influencing control of the Corporation, nor in connection with or as a participant in any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b) promulgated under the Exchange Act; (C) there is no agreement among or between any purchasers to act together with respect to the Corporation or its securities except for the purpose of facilitating the specific purchase involved; and (D) the only actions among or between any purchasers with respect to the Corporation or its securities subsequent to the closing date of the nonpublic offering are those which are necessary to conclude ministerial matters directly related to the completion of the offer or sale of the securities sold in such offering. (6) The Share Escrow Agent shall not be deemed to be the Beneficial Owner of any Excess Shares held by such Share Escrow Agent pursuant to a Share Escrow Agent Agreement, nor shall any such Excess Shares be aggregated with any other share of Capital Stock held by affiliates or associates of such Share Escrow Agent. (d) "Capital Stock" shall mean shares (or any other basic unit) of any class or series of any voting security which the Corporation may at any time issue or be authorized to issue, that entitles the holder thereof to vote on any election, but not necessarily all elections, of directors. To the extent that classes or series of Capital Stock vote together in the election of directors with equal votes per share, they shall be treated as a single class of Capital Stock for the purpose of computing the relevant Ownership Limit or the right to amend these Articles of Incorporation. (e) "Continuing Director" shall mean each member of the initial Board of Directors of the Corporation and any new member of the Board of Directors whose nomination for election to the board was approved by a vote of two-thirds of the directors still in office who were initial directors named in these Articles of Incorporation or whose nomination was approved by such directors. (f) "Institutional Investor" means any Person if (but only if) such Person is: (1) a broker or dealer registered under Section 15 of the Securities Exchange Act of 1934, as amended; (2) a bank as defined in Section 3(a)(6) of the Exchange Act; (3) an insurance company as defined in Section 3(a)(19) of the Exchange Act; -26-
(4) an investment company registered under Section 8 of the Investment Company Act of 1940; (5) an investment adviser registered under Section 203 of the Investment Advisers Act of 1940; (6) an employee benefit plan, or pension fund which is subject to the provisions of the Employee Retirement Income Security Act of 1974 or an endowment fund; (7) a parent holding company, provided the aggregate amount held directly by the parent, and directly and indirectly by its subsidiaries which are not persons specified in subsections (1) through (6) above, does not exceed one percent of the securities of the subject class such as common stock; or (8) a group, provided that all the members are Persons specified in the subsections (1) through (7) above. (g) "License Agreement" shall mean the license agreement between the Corporation and the Blue Cross and Blue Shield Association, including any and all addenda thereto, now in effect and, as it may be amended, modified, superseded and/or replaced from time to time, with respect to, among other things, the "Blue Cross" and "Blue Shield" name and mark. (h) "Noninstitutional Investor" means any Person that is not an Institutional Investor.: (i) "Ownership Limit" shall mean the following: (1) Except as otherwise expressly provided in this Subsection (i), the Ownership Limit for any Noninstitutional Investor shall be that number of shares of Capital Stock one share lower than the number of shares of Capital Stock which would represent 5% of the Voting Power. (2) Except as otherwise expressly provided in this Subsection (i), the Ownership Limit for any Institutional Investor shall be that number of shares of Capital Stock one share lower than the number of shares of Capital Stock which would represent 10% of the Voting Power. (3) Except as otherwise expressly provided in this Subsection (i), the Ownership Limit for any Person shall be one share lower than that number of shares of Common Stock or other equity securities (or a combination thereof) which would represent 20% of the ownership interest in the Corporation. (4) In the event the Corporation and Blue Cross and Blue Shield Association shall agree in writing, through an amendment of the License Agreement or otherwise, that an Ownership Limit of a higher percentage than that prescribed in clause -27-
(1), (2) or (3) shall apply, then the Ownership Limit shall be as specified in such written agreement. (5) In the event any particular Person shall Beneficially Own shares of Capital Stock in excess of the Ownership Limit which would apply were it not for this clause (5) (the "Regular Limit"), such ownership shall not be deemed to exceed the Ownership Limit provided that (i) such Person shall not at any time Beneficially Own shares of Capital Stock in excess of the Regular Limit plus 1% and (ii) within thirty (30) days of the time when the particular Person becomes aware of the fact that the regular Limit has been exceeded, the particular Person reduces such Person's Beneficial Ownership below the Regular Limit. (j) "Person" shall mean any individual, firm, partnership, corporation, trust, association, joint venture or other entity, and shall include any successor (by merger or otherwise) of any such entity. (k) "Schedule 13D" means a report on Schedule 13D under Regulation 13D of the Exchange Act as in effect on the date these Articles of Incorporation were filed with the office of the Indiana Secretary of State and any report which may be required in the future under any requirements which Blue Cross and Blue Shield Association shall reasonably judge to have any of the purposes served by Schedule 13D as in effect on the date these Articles of Incorporation were filed with the office of the Indiana Secretary of State. (l) "Share Escrow Agent" shall mean the Person appointed by the Corporation to act as escrow agent with respect to some or all of the Excess Shares. (m) "Transfer" shall mean any sale, transfer, gift, hypothecation, pledge, assignment, devise or other disposition of Capital Stock (including (i) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Capital Stock or (ii) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Capital Stock), whether voluntary or involuntary, whether of record, constructively or beneficially and whether by operation of law or otherwise. (n) "Voting Power." The percentage of the voting power attributable to the shares of Capital Stock Beneficially Owned by any particular Person shall be equal to the percentage of all votes which could be cast in any election of any director which could be accounted for by the shares of Capital Stock Beneficially Owned by that particular Person. If in connection with an election for any particular position on the Board, shares in different classes or series are entitled to be voted together for purposes of such election, then in determining the number of "all votes which could be cast" in the election for that particular position for purposes of the preceding sentence, the number shall be equal to the number of votes which could be cast in the election for that particular position if all shares entitled to be voted in such election (regardless of series or class) were in fact voted in such election. If the Corporation shall issue any series or class of shares for which positions on the Board are reserved or shall otherwise issue shares which have voting rights which can arise or vary based upon terms governing that class or series, then the percentage of the voting power represented by the shares of Capital Stock Beneficially Owned by any particular Person shall be the highest percentage of the total votes which could be accounted for by those shares in any election of any director. -28-
Section 9.15. Amendment of Article IX, Section 5.3(a) or Section 6.1. Any amendment, change or repeal of this Article 1X, or of Section 5.3(a) or 6.1 of these Articles of Incorporation, shall require the affirmative vote, at a meeting of the shareholders of the Corporation, of at least seventy-five percent (75%) of the votes entitled to be cast by the holders of the outstanding shares of all classes of Voting Stock (as defined in Section 8.4(k)) of the Corporation, considered for purposes of this Section 9.15 as a single class. ARTICLE X Initial Board of Directors -------------------------- The name and post office address of the members of the first Board of Directors of the Corporation are as follows: Number and Street City, State Name or Building Zip Code - ----------------------------- ------------------- --------------------------- L. Ben Lytle 120 Monument Circle Indianapolis, Indiana 46204 Larry C. Glasscock 120 Monument Circle Indianapolis, Indiana 46204 Susan B. Bayh 120 Monument Circle Indianapolis, Indiana 46204 William B. Hart 120 Monument Circle Indianapolis, Indiana 46204 Allan B. Hubbard 120 Monument Circle Indianapolis, Indiana 46204 Victor S. Liss 120 Monument Circle Indianapolis, Indiana 46204 William G. Mays 120 Monument Circle Indianapolis, Indiana 46204 James W. McDowell, Jr. 120 Monument Circle Indianapolis, Indiana 46204 B. LaRae Orullian 120 Monument Circle Indianapolis, Indiana 46204 Senator Donald W. Riegle, Jr. 120 Monument Circle Indianapolis, Indiana 46204 William J. Ryan 120 Monument Circle Indianapolis, Indiana 46204 George A. Schaefer, Jr. 120 Monument Circle Indianapolis, Indiana 46204 Dennis J. Sullivan, Jr. 120 Monument Circle Indianapolis, Indiana 46204 ARTICLE XI Incorporator ------------ The name and post office address of the incorporator of the Corporation are as follows: Number and Street City, State Name or Building Zip Code ---- -------------- ----------- Anthem Insurance Companies, Inc. 120 Monument Circle Indianapolis, Indiana 46204 -29-
ARTICLE XII Miscellaneous Provisions ------------------------ Section 12.1. Amendment or Repeal. Except as otherwise expressly provided for in these Articles of Incorporation, the Corporation shall be deemed, for all purposes, to have reserved the right to amend, alter, change, or repeal any provision contained in these Articles of Incorporation to the extent and in the manner now or hereafter permitted or prescribed by statute, and all rights herein conferred upon shareholders are granted subject to such reservation. Section 12.2. Restriction on Acquisition of Ownership of 5% of More. Except for the acquisition by the Corporation of all of the outstanding capital stock of Anthem Insurance Companies, Inc. ("Anthem Insurance"), in connection with the conversion of Anthem Insurance from a mutual insurance company to a stock insurance company under the Indiana Demutualization Law (Ind. Code 27-15), during the five (5) year period commencing on the effective date of such conversion, no person or persons acting in concert (other than the Corporation, Anthem Insurance, or any other company that is directly or indirectly wholly owned by the Corporation, or any employee benefit plans or trusts sponsored by the Corporation or Anthem Insurance) may directly or indirectly acquire, or agree to offer to acquire, in any manner the beneficial ownership of five percent (5%) or more of the outstanding shares of any class of a voting security of the Corporation or Anthem Insurance, other than in compliance with Ind. Code 27-5-13-2. Section 12.3. Redemption of Shares Acquired in Control Share Acquisitions. If and whenever the provisions of Ind. Code 23-1-42 apply to the Corporation, it is authorized to redeem its securities pursuant to Ind. Code 23-1-42-10. Section 12.4. Voting as a Shareholder. The Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Secretary, the Treasurer or any other officers designated by the Board of Directors shall have full power and authority on behalf of the Corporation to attend any meeting of shareholders of any corporation in which the Corporation may hold stock, and to act, vote (or execute proxies to vote) and exercise in person or by proxy all other rights, powers and privileges incident to the ownership of such stock. Such officers acting on behalf of the Corporation shall have full power and authority to execute any instrument expressing consent to or dissent from any action of any such corporation without a meeting. Section 12.5. Captions. The captions of the Articles and Sections of these Articles of Incorporation have been inserted for convenience of reference only and do not in any way define, limit, construe, or describe the scope or intent of any Article or Section hereof. -30-
IN WITNESS WHEREOF, the undersigned, being the incorporator designated in Article XI, executes these Articles of Incorporation this 17th day of July, 2001. ANTHEM INSURANCE COMPANIES, INC. By: /s/ David R. Frick -------------------------------------------- David R. Frick Executive Vice President, Chief Legal and Administrative Officer -31-
Exhibit 3.2 BY-LAWS OF ANTHEM, INC. (Effective July 27, 2001) ARTICLE I Meetings of Shareholders ------------------------ Section 1.1. Annual Meetings. Annual meetings of the shareholders of the Corporation shall be held each year commencing in 2002, on such date, at such hour and at such place within or without the State of Indiana as shall be designated by the Board of Directors. In the absence of designation, the meeting shall be held at the principal office of the Corporation. Section 1.2. Special Meetings. Special meetings of the shareholders of the Corporation may be called at any time only by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President. The Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President, as the case may be, calling a special meeting of shareholders shall set the date, time and place of such meeting, which may be held within or without the State of Indiana. Section 1.3. Notices. A written notice, stating the date, time, and place of any meeting of the shareholders, and, in the case of a special meeting, the purpose or purposes for which such meeting is called, shall be delivered, mailed or sent by electronic transmission by the Secretary of the Corporation, to each shareholder of record of the Corporation entitled to notice of or to vote at such meeting no fewer than ten (10) nor more than sixty (60) days before the date of the meeting. Notice of shareholders' meetings, if mailed, shall be mailed, postage prepaid, to each shareholder at his or her address shown in the Corporation's current record of shareholders. Notice of a meeting of shareholders shall be given to shareholders not entitled to vote, but only if a purpose for the meeting is to vote on any amendment to the Corporation's Articles of Incorporation, merger, or share exchange to which the Corporation would be a party, sale of the Corporation's assets, dissolution of the Corporation, or consideration of voting rights to be accorded to shares acquired or to be acquired in a "control share acquisition" (as such term is defined in the Indiana Business Corporation Law). Except as required by the foregoing sentence or as otherwise required by the Indiana Business Corporation Law or the Corporation's Articles of Incorporation, notice of a meeting of shareholders is required to be given only to shareholders entitled to vote at the meeting. A shareholder or his or her proxy may at any time waive notice of a meeting if the waiver is in writing and is delivered to the Corporation for inclusion in the minutes or filing with the Corporation's records. A shareholder's attendance at a meeting, whether in person or by proxy, (a) waives objection to lack of notice or defective notice of the meeting, unless the
shareholder or his proxy at the beginning of the meeting objects to holding the meeting or transacting business at the meeting, and (b) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder or his proxy objects to considering the matter when it is presented. Each shareholder who has, in the manner above provided, waived notice or objection to notice of a shareholders' meeting shall be conclusively presumed to have been given due notice of such meeting, including the purpose or purposes thereof. If an annual or special shareholders' meeting is adjourned to a different date, time, or place, notice need not be given of the new date, time, or place if the new date, time, or place is announced at the meeting before adjournment, unless a new record date is or must be established for the adjourned meeting. Section 1.4. Business of Shareholder Meetings. At each annual meeting, the shareholders shall elect the directors and shall conduct only such other business as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (c) otherwise properly brought before the meeting by a shareholder of the Corporation who (i) was a shareholder of record at the time of giving the notice provided for in this Section 1.4, (ii) is entitled to vote at the meeting, and (iii) complied with the notice procedures set forth in this Section 1.4. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation at the principal executive office of the Corporation. To be timely, a shareholder's notice shall be delivered not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year's annual meeting and in the case of the annual meeting to be held in 2002, by January 31, 2002; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the shareholder, to be timely, must be so delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement (as defined herein) of the date of such meeting is first made. Such shareholder's notice shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; (b) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made (i) the name and address of such shareholder, as they appear on the Corporation's books, and the name and address of such beneficial owner, (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owner as of the date such notice is given, and (iii) a representation that such shareholder intends to appear in person or by proxy at the meeting to propose such business; (c) in the event that such business includes a proposal to amend either the Articles of Incorporation or the By-Laws of the Corporation, the language of the proposed -2-
amendment; and (d) if the shareholder intends to solicit proxies in support of such shareholder's proposal, a representation to that effect. The foregoing notice requirements shall be deemed satisfied by a shareholder if the shareholder has notified the Corporation of his or her intention to present a proposal at an annual meeting and such shareholder's proposal has been included in a proxy statement that has been prepared by management of the Corporation to solicit proxies for such annual meeting; provided, however, that if such shareholder does not appear or send a qualified representative to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. Notwithstanding anything in these By- Laws to the contrary, no business shall be conducted at any annual meeting except in accordance with this Section 1.4, and the Chairman of the Board or other person presiding at an annual meeting of shareholders may refuse to permit any business to be brought before an annual meeting without compliance with the foregoing procedures or if the shareholder solicits proxies in support of such shareholder's proposal without such shareholder having made the representation required by clause (d) of the second preceding sentence. For the purposes of this Section 1.4, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition to the provisions of this Section 1.4, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in these By-Laws shall be deemed to affect any rights of the shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. In no event shall the adjournment of a meeting commence a new time period for the giving of a shareholder's notice as described above. Section 1.5. Notice of Shareholder Nominations. Nominations of persons for election as Directors may be made by the Board of Directors or by any shareholder who is a shareholder of record at the time of giving the notice of nomination provided for in this Section 1.5 and who is entitled to vote in the election of Directors. Any shareholder of record entitled to vote in the election of Directors at a meeting may nominate a person or persons for election as Directors only if timely written notice of such shareholder's intent to make such nomination is given to the Secretary of the Corporation in accordance with the procedures for bringing business before an annual meeting set forth in Section 1.4 of these By-Laws. To be timely, a shareholder's notice shall be delivered (i) with respect to an election to be held at an annual meeting of shareholders, not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year's annual meeting and in the case of the annual meeting to be held in 2002, by January 31, 2002; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the shareholder, to be timely, must be so delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement (as defined for purposes of Section 1.4 of these By-Laws) is first made of the date -3-
of such meeting, and (ii) with respect to an election to be held at a special meeting of shareholders, not earlier than the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees to be elected at such meeting. Such shareholder's notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination, of the person or persons to be nominated and of the beneficial owner, if any, on whose behalf the nomination is made; (b) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting in such election and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder, any such beneficial owner, each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; (e) the consent of each nominee to serve as a Director if so elected; and (f) if the shareholder intends to solicit proxies in support of such shareholder's nominee(s), a representation to that effect. The chairman of any meeting of shareholders to elect Directors and the Board of Directors may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure or if the shareholder solicits proxies in support of such shareholder's nominee(s) without such shareholder having made the representation required by clause (f) of the preceding sentence. In addition to the provisions of this Section 1.5, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Section 1.6. Voting. Except as otherwise provided by the Indiana Business Corporation Law or the Corporation's Articles of Incorporation, each share of Common Stock of the Corporation that is outstanding at the record date established for any annual or special meeting of shareholders and is outstanding at the time of and represented in person or by proxy at the annual or special meeting, shall entitle the record holder thereof, or his proxy, to one (1) vote on each matter voted on at the meeting. Section 1.7. Quorum. Unless the Indiana Business Corporation Law provides otherwise, at all meetings of shareholders, twenty-five percent (25%) of the votes entitled to be cast on a matter, represented in person or by proxy, constitutes a quorum for action on the matter. Action may be taken at a shareholders' meeting only on matters with respect to which a quorum exists; provided, however, that any meeting of shareholders, including annual and special meetings and any adjournments thereof, may be adjourned to a later date although less than a quorum is present. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. -4-
Section 1.8. Vote Required To Take Action. If a quorum exists as to a matter to be considered at a meeting of shareholders, action on such matter (other than the election of Directors) is approved if the votes properly cast favoring the action exceed the votes properly cast opposing the action, except as the Corporation's Articles of Incorporation or the Indiana Business Corporation Law require a greater number of affirmative votes. Directors shall be elected by a plurality of the votes properly cast. Section 1.9. Record Date. Only such persons shall be entitled to notice of or to vote, in person or by proxy, at any shareholders' meeting as shall appear as shareholders upon the books of the Corporation as of such record date as the Board of Directors shall determine, which date may not be earlier than the date seventy (70) days immediately preceding the meeting. In the absence of such determination, the record date shall be the fiftieth (50th) day immediately preceding the date of such meeting. Unless otherwise provided by the Board of Directors, shareholders shall be determined as of the close of business on the record date. Section 1.10. Proxies. A shareholder may vote his or her shares either in person or by proxy. A shareholder may appoint a proxy to vote or otherwise act for the shareholder (including authorizing the proxy to receive, or to waive, notice of any shareholders' meeting within the effective period of such proxy) by signing an appointment form, either personally or by the shareholder's attorney-in-fact. An appointment of a proxy is effective when received by the Secretary or other officer or agent authorized to tabulate votes and is effective for eleven (11) months unless a longer period is expressly provided in the appointment form. The proxy's authority may be limited to a particular meeting or may be general and authorize the proxy to represent the shareholder at any meeting of shareholders held within the time provided in the appointment form. Subject to the Indiana Business Corporation Law and to any express limitation on the proxy's authority appearing on the face of the appointment form, the Corporation is entitled to accept the proxy's vote or other action as that of the shareholder making the appointment. Section 1.11. Record Ownership. The Corporation shall be entitled to treat the holder of any share or shares of stock of the Corporation, as recorded on the stock record or transfer books of the Corporation, as the holder of record and as the holder and owner in fact thereof and, accordingly, shall not be required to recognize any equitable or other claim to or interest in such share(s) on the part of any other person, firm, partnership, corporation or association, whether or not the Corporation shall have express or other notice thereof, save as is otherwise expressly required by law, and the term "shareholder" as used in these By-Laws means one who is a holder of record of shares of the Corporation. Section 1.12. Removal of Directors. Any or all of the members of the Board of Directors may be removed only at a meeting of the shareholders or Directors called expressly for that purpose. Removal by the shareholders requires an affirmative vote of the holders of outstanding shares representing at least sixty-six and two-thirds percent (66-2/3%) of the votes then entitled to be cast at an election of Directors. Removal by the Board of Directors requires an affirmative vote of both (a) a majority of the entire number of Directors at the time, and (b) a majority of the entire number of Directors who then qualify as Continuing Directors (as such term is defined for purposes of Article VIII of the Corporation's Articles of Incorporation). -5-
Section 1.13. Written Consents. Any action required or permitted to be taken at a shareholders' meeting may be taken without a meeting if the action is taken by all the shareholders entitled to vote on the action. The action must be evidenced by one (1) or more written consents, in one or more counterparts, describing the action taken, signed by all the shareholders entitled to vote on the action, and delivered to the Corporation for inclusion in the minutes or filing with the corporate records reflecting the action taken. Action taken under this Section 1.12 is effective when the last shareholder signs the consent, unless the consent specifies a different prior or subsequent effective date, in which case the action is effective on or as of the specified date. Executed consents returned to the Corporation by facsimile transmission may be relied upon as, and shall have the same effect as, originals of such consents. A consent signed under this Section 1.12 shall have the same effect as a unanimous vote of all shareholders and may be described as such in any document. Section 1.14. Participation Other Than in Person. The Chairman of the Board or the Board of Directors may permit any or all shareholders to participate in an annual or special meeting of shareholders by, or through the use of, any means of communication, such as conference telephone, by which all shareholders participating may simultaneously hear each other during the meeting. A shareholder participating in a meeting by such means shall be deemed to be present in person at the meeting. ARTICLE II Directors --------- Section 2.1. Number and Terms. The business and affairs of the Corporation shall be managed under the direction of a Board of Directors consisting of at least five (5) Directors, but not more than nineteen (19) Directors, with the actual number of Directors being fixed from time to time by resolution of the Board of Directors. The Directors shall be divided into three (3) groups, with each group consisting of one-third (1/3) of the total Directors, as near as may be, with the term of office of the first group to expire at the annual meeting of shareholders in 2002, the term of office of the second group to expire at the annual meeting of shareholders in 2003, and the term of office of the third group to expire at the annual meeting of shareholders in 2004; and at each annual meeting of shareholders, the Directors chosen to succeed those whose terms then expire shall be identified as being of the same group as the Directors they succeed and shall be elected for a term expiring at the third succeeding annual meeting of shareholders. Despite the expiration of a Director's term, the Director shall continue to serve until his or her successor is elected and qualified, or until the earlier of his or her death, resignation, disqualification or removal, or until there is a decrease in the number of Directors. Any vacancy occurring in the Board of Directors, from whatever cause arising, shall be filled by selection of a successor by a majority vote of the remaining members (although less than a quorum) of the Board of Directors who then qualify as Continuing Directors (as such term is defined for purposes of Article VIII of the Corporation's Articles of Incorporation); provided, -6-
however, that if such vacancy or vacancies leave the Board of Directors with no members who then qualify as Continuing Directors or if the remaining members of the Board who then qualify as Continuing Directors are unable to agree upon a successor or determine not to select a successor, such vacancy may be filled by a vote of the shareholders at a special meeting called for that purpose or at the next annual meeting of shareholders. The term of a Director elected or selected to fill a vacancy shall expire at the end of the term for which such Director's predecessor was elected, or if the vacancy arises because of an increase in the size of the Board of Directors, at the end of the term specified at the time of election or selection. The Directors and each of them shall have no authority to bind the Corporation except when acting as a Board. Section 2.2. Quorum and Vote Required To Take Action. A majority of the whole Board of Directors shall be necessary to constitute a quorum for the transaction of any business, except the filling of vacancies. If a quorum is present when a vote is taken, the affirmative vote of a majority of the Directors present shall be the act of the Board of Directors, unless the act of a greater number is required by the Indiana Business Corporation Law, the Corporation's Articles of Incorporation or these By-Laws. Section 2.3. Annual and Regular Meetings. The Board of Directors shall meet annually, without notice, immediately following the annual meeting of the shareholders, for the purpose of transacting such business as properly may come before the meeting. Other regular meetings of the Board of Directors, in addition to said annual meeting, shall be held on such dates, at such times and at such places as shall be fixed by resolution adopted by the Board of Directors and specified in a notice of each such regular meeting, or otherwise communicated to the Directors. The Board of Directors may at any time alter the date for the next regular meeting of the Board of Directors. Section 2.4. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer or by one quarter (1/4) of the whole authorized number of Directors, upon not less than twenty-four (24) hours' notice given to each Director of the date, time, and place of the meeting, which notice need not specify the purpose or purposes of the special meeting. Such notice may be communicated in person (either in writing or orally), by telephone, telegraph, teletype, or other form of wire or wireless communication, or by mail, and shall be effective at the earlier of the time of its receipt or, if mailed, three (3) days after its mailing. Notice of any meeting of the Board may be waived in writing at any time if the waiver is signed by the Director entitled to the notice and is filed with the minutes or corporate records. A Director's attendance at or participation in a meeting waives any required notice to the Director of the meeting, unless the Director at the beginning of the meeting (or promptly upon the Director's arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Section 2.5. Written Consents. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if the action is taken by all members of the Board. The action must be evidenced by one (1) or more written consents, in one or more counterparts, describing the action taken, signed by each Director, and included in -7-
the minutes or filed with the corporate records reflecting the action taken. Action taken under this Section 2.5 is effective when the last Director signs the consent, unless the consent specifies a different prior or subsequent effective date, in which case the action is effective on or as of the specified date. Executed consents returned to the Corporation by facsimile transmission may be relied upon as, and shall have the same effect as, originals of such consents. A consent signed under this Section 2.5 shall have the same effect as a unanimous vote of all members of the Board and may be described as such in any document. Section 2.6. Participation Other Than in Person. The Board of Directors may permit any or all Directors to participate in a regular or special meeting by, or through the use of, any means of communication, such as conference telephone, by which all Directors participating may simultaneously hear each other during the meeting. A Director participating in a meeting by such means shall be deemed to be present in person at the meeting. Section 2.7. Executive Committee. The Board of Directors may appoint three (3) or more members to an Executive Committee. The Executive Committee shall, subject to the restrictions of Section 2.13 hereof, be authorized to exercise the authority of the full Board of Directors at any times other than during regular or special meetings of the Board of Directors. All actions taken by the Executive Committee shall be reported at the first regular meeting of the Board of Directors following such actions. Members of the Executive Committee shall serve at the pleasure of the Board of Directors. Section 2.8. Compensation Committee. The Board of Directors may appoint three (3) or more members to a Compensation Committee. The duties of the Compensation Committee shall be to: (a) consider and recommend to the Board of Directors and management the overall compensation programs of the Corporation; (b) review and approve the compensation payable to the senior management personnel of the Corporation; (c) review and approve significant changes in employee benefit plans and stock related plans; and (d) administer the Corporation's stock plans. Section 2.9. Audit Committee. The Board of Directors may appoint three (3) or more members to an Audit Committee. The duties of the Audit Committee shall be to: (a) recommend to the Board of Directors the selection of and engagement arrangements for the independent public accountants and auditors for each fiscal year; (b) recommend to the Board of Directors as to the advisability of having the independent public accountants and auditors make specified studies and reports regarding auditing matters, accounting procedures, tax or other matters; (c) review the results of the audit for each fiscal year; (d) review such accounting policies of the Corporation as appropriate; (e) review the coordination between the independent public accountants and auditors and the Corporation's chief accounting officer; (f) review the scope and procedures of the Corporation's internal audit work and the quality and composition of the Corporation's internal audit staff; and (g) review all related party transactions. In addition, the audit committee shall review quarterly and annual financial statements (including reserves and taxes); review quarterly investment reports, portfolio performance and asset allocation; review budget and long-term forecasts; review and recommend to the Board any increases in the Corporation's debt facilities and changes in capital structure; and review and recommend to the Board any changes in investment policy. -8-
Section 2.10. Planning Committee. The Board of Directors may appoint three (3) or more members to a Planning Committee. The duties of the Planning Committee shall be to: (a) assist the Chief Executive Officer in developing strategies to achieve the strategic plan; (b) review the annual operating plan for the Corporation; (c) review integration plans for mergers, acquisitions and other corporate transactions of the Corporation as requested by the Board or the Chief Executive Officer; (d) track the Corporation's performance to its plans; and (e) review specific strategic planning issues as and when requested by the Board or the Chief Executive Officer. Section 2.11. Board Governance and Executive Development Committee. The Board of Directors may appoint three (3) or more members to a Board Governance and Executive Development Committee. The duties of the Board Governance and Executive Development Committee shall be to: (a) review the background and qualifications of potential board members; (b) review the performance of the Board of Directors; (c) recommend training plans for Directors to improve performance; and (d) prepare a slate of nominees to fill directorships up for election each year, vacancies as they occur, and skill needs as they arise. In addition, the Board Governance and Executive Development Committee shall assist the Chief Executive Officer in the design and implementation of an executive training and development program and counsel the Chief Executive Officer in the selection of executives for succession planning. Section 2.12. Other Committees. The Board of Directors may create one (1) or more committees in addition to any Executive Committee, Compensation Committee, Audit Committee, Planning Committee or Board Governance and Executive Development Committee and appoint members of the Board of Directors to serve on them, by resolution of the Board of Directors adopted by a majority of all the Directors in office when the resolution is adopted. The committee may exercise the authority of the Board of Directors to the extent specified in the resolution. Each committee may have one (1) or more members, and all the members of such committee shall serve at the pleasure of the Board of Directors. Section 2.13. Limitations on Committees; Notice, Quorum and Voting. (a) Neither the Executive Committee, Compensation Committee, Audit Committee, Planning Committee, Board Governance and Executive Development Committee nor any other committee hereafter established may: (1) authorize dividends or other distributions, except a committee may authorize or approve a reacquisition of shares if done according to a formula or method prescribed by the Board of Directors; (2) approve or propose to shareholders action that is required to be approved by shareholders; (3) fill vacancies on the Board of Directors or on any of its committees; -9-
(4) except as permitted under Section 2.13(a)(7) below, amend the Corporation's Articles of Incorporation under Ind. Code 23-1-38-2; (5) adopt, amend, repeal, or waive provisions of these By-Laws; (6) approve a plan of merger not requiring shareholder approval; or (7) authorize or approve the issuance or sale or a contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except the Board of Directors may authorize a committee (or an executive officer of the Corporation designated by the Board of Directors) to take the action described in this Section 2.13(a)(7) within limits prescribed by the Board of Directors. (b) Except to the extent inconsistent with the resolutions creating a committee, Sections 2.1 through 2.6 of these By-Laws, which govern meetings, action without meetings, notice and waiver of notice, quorum and voting requirements and participation in meetings of the Board of Directors other than in person, apply to each committee and its members as well. Section 2.14. Compensation of Directors. Unless otherwise restricted by the Corporation's Articles of Incorporation or theses By-Laws, Directors shall receive for their services on the Board or any Committee thereof such compensation and benefits, including the granting of options, together with expenses, if any, as the Board may from time to time determine. The Directors may be paid a fixed sum for attendance at each meeting of the Board or Committee thereof and / or a stated annual sum as a Director, together with expenses, if any, of attendance at each meeting of the Board or Committee thereof. Nothing herein contained shall be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. -10-
ARTICLE III Officers Section 3.1. Designation, Selection and Terms. The officers of the Corporation shall consist of the Chief Executive Officer, the President, the Chief Financial Officer, the Chief Accounting Officer, and the Secretary. The Board of Directors may also elect Executive Vice Presidents, Vice Presidents, a Treasurer, a Controller, Assistant Secretaries and Assistant Treasurers, and such other officers or assistant officers as it may from time to time determine by resolution creating the office and defining the duties thereof. In addition, the Chief Executive Officer or the President may, by a certificate of appointment creating the office and defining the duties and term thereof delivered to the Secretary for inclusion with the corporate records, from time to time create and appoint such assistant officers as they deem desirable. The officers of the Corporation shall be elected by the Board of Directors (or appointed by the Chief Executive Officer or the President as provided above) and need not be selected from among the members of the Board of Directors, except for the Chairman of the Board and the Chief Executive Officer who shall be members of the Board of Directors. Any two (2) or more offices may be held by the same person. All officers shall serve at the pleasure of the Board of Directors and, with respect to officers appointed by the Chief Executive Officer or the President, also at the pleasure of such officers. The election or appointment of an officer does not itself create contract rights. Section 3.2. Removal. The Board of Directors may remove any officer at any time with or without cause. An officer appointed by the Chief Executive Officer or the President may also be removed at any time, with or without cause, by any of such officers. Vacancies in such offices, however occurring, may be filled by the Board of Directors at any meeting of the Board of Directors (or by appointment by the Chief Executive Officer or the President, to the extent provided in Section 3.1 of these By-Laws). Section 3.3. Chairman of the Board. The Chairman of the Board, if any, shall, if present, preside at all meetings of the shareholders and of the Board of Directors and shall have such powers and perform such duties as are assigned to him by the Board of Directors. Section 3.4. Chief Executive Officer. The Chief Executive Officer shall be the chief executive and principal policymaking officer of the Corporation. Subject to the authority of the Board of Directors, he or she shall formulate the major policies to be pursued in the administration of the Corporation's affairs. He or she shall study and make reports and recommendations to the Board of Directors with respect to major problems and activities of the Corporation and shall see that the established policies are placed into effect and carried out. In the absence of the Chairman of the Board, the Chief Executive Officer shall preside at meetings of the shareholders and of the Board of Directors. Section 3.5. President. Subject to the provisions of Sections 3.3 and 3.4, the President shall exercise the powers and perform the duties which ordinarily appertain to such office and shall manage and operate the business and affairs of the Corporation in conformity with the policies established by the Board of Directors and the Chief Executive Officer, or as may be provided for in these By-Laws. In connection with the performance of his or her duties, -11-
he or she shall keep the Chairman of the Board and the Chief Executive Officer fully informed as to all phases of the Corporation's activities. In the absence of the Chairman of the Board and the Chief Executive Officer, the President shall preside at meetings of the shareholders and, if a Director, at meetings of the Board of Directors. Section 3.6. Chief Financial Officer. The Chief Financial Officer shall be the chief financial officer of the Corporation and shall perform all of the duties customary to that office. He or she shall be responsible for all of the Corporation's financial affairs, subject to the supervision and direction of the Chief Executive Officer, and shall have and perform such further powers and duties as the Board of Directors may, from time to time, prescribe and as the Chief Executive Officer may, from time to time, delegate to him or her. Section 3.7. Executive Vice President. Each Executive Vice President shall have such powers and perform such duties as the Board of Directors may, from time to time, prescribe and as the Chief Executive Officer or the President may, from time to time, delegate to him or her. Section 3.8. Chief Accounting Officer. The Chief Accounting Officer shall perform all of the duties customary to that office, shall be the chief accounting officer of the Corporation and shall be responsible for maintaining the Corporation's accounting books and records and preparing its financial statements, subject to the supervision and direction of the Chief Financial Officer and other superior officers within the Corporation. He or she shall also be responsible for causing the Corporation to furnish financial statements to its shareholders pursuant to Ind. Code 23-1-53-1. Section 3.9. Secretary. The Secretary shall be the custodian of the books, papers, and records of the Corporation and of its corporate seal, if any, and shall be responsible for seeing that the Corporation maintains the records required by Ind. Code 23-1-52-1 (other than accounting records) and that the Corporation files with the Indiana Secretary of State the biennial report required by Ind. Code 23-1-53-3. The Secretary shall be responsible for preparing minutes of the meetings of the shareholders and of the Board of Directors and for authenticating records of the Corporation, and he or she shall perform all of the other duties usual in the office of Secretary of a corporation. Section 3.10. Vice Presidents. Each Vice President shall have such powers and perform such duties as the Board of Directors may, from time to time, prescribe and as the Chief Executive Officer or the President may, from time to time, delegate to him or her. Section 3.11. Treasurer. The Treasurer, if any, shall be responsible for the treasury functions of the Corporation, subject to the supervision of the Chief Financial Officer. Section 3.12. Salary. The Board of Directors may, at its discretion, from time to time, fix the salary of any officer by resolution included in the minute book of the Corporation. -12-
ARTICLE IV Checks All checks, drafts, or other orders for payment of money shall be signed in the name of the Corporation by such officers or persons as shall be designated from time to time by resolution adopted by the Board of Directors and included in the minute book of the Corporation; and in the absence of such designation, such checks, drafts, or other orders for payment shall be signed by the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer. ARTICLE V Loans Such of the officers of the Corporation as shall be designated from time to time by resolution adopted by the Board of Directors and included in the minute book of the Corporation, and in the absence of such designation and subject to such limitations as the Board of Directors may fix, the Chief Executive Officer, the President and the Chief Financial Officer, shall have the power, with such limitations thereon as may be fixed by the Board of Directors, to borrow money in the Corporation's behalf, to establish credit, to discount bills and papers, to pledge collateral, and to execute such notes, bonds, debentures, or other evidences of indebtedness, and such mortgages, trust indentures, and other instruments in connection therewith, as may be authorized from time to time by such Board of Directors. ARTICLE VI Execution of Documents The Chief Executive Officer, the President or any other officer authorized by the Board of Directors may, in the Corporation's name, acting singly, sign all deeds, leases, contracts, or similar documents unless otherwise directed by the Board of Directors or otherwise provided herein or in the Corporation's Articles of Incorporation, or as otherwise required by law. Only one signature is required, unless otherwise provided by a resolution of the Board of Directors. -13-
ARTICLE VII Stock Section 7.1. Certificates of Stock; Uncertificated Shares; Execution. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the Corporation shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until each certificate is surrendered to the Corporation. Certificates for shares of the Corporation shall be signed by the Chief Executive Officer or the President and by the Secretary or an Assistant Secretary and the seal of the Corporation (or a facsimile thereof), if any, may be thereto affixed. Where any such certificate is also signed by a transfer agent or a registrar, or both, the signatures of the officers of the Corporation may be facsimiles. The Corporation may issue and deliver any such certificate notwithstanding that any such officer who shall have signed, or whose facsimile signature shall have been imprinted on, such certificate shall have ceased to be such officer. Section 7.2. Contents. Each certificate issued after the adoption of these By-Laws shall state on its face the name of the Corporation and that it is organized under the laws of the State of Indiana, the name of the person to whom it is issued, and the number and class of shares and the designation of the series, if any, the certificate represents, and shall state conspicuously on its front or back that the Corporation will furnish the shareholder, upon his written request and without charge, a summary of the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the Board of Directors to determine variations for future series). Section 7.3. Transfers. Except as otherwise provided by law or by resolution of the Board of Directors, transfers of shares of the Corporation shall be made only on the books of the Corporation by the holder thereof, in person or by duly authorized attorney, on payment of all taxes thereon and surrender for cancellation of the certificate or certificates for such shares (except as hereinafter provided in the case of loss, destruction, or mutilation of certificates) properly endorsed by the holder thereof or accompanied by the proper evidence of succession, assignment, or authority to transfer, and delivered to the Secretary or an Assistant Secretary. Section 7.4. Stock Transfer Records. There shall be entered upon the stock records of the Corporation the number of each certificate issued, the name and address of the registered holder of such certificate, the number, kind, and class of shares represented by such certificate, the date of issue, whether the shares are originally issued or transferred, the registered holder from whom transferred, and such other information as is commonly required to be shown by such records. The stock records of the Corporation shall be kept at its principal office, unless the Corporation appoints a transfer agent or registrar, in which case the Corporation shall keep at its principal office a complete and accurate shareholders' list giving the names and addresses of all shareholders and the number and class of shares held by each, which shall be updated periodically as determined by the Secretary, but not less frequently than quarterly, and which shall be updated as of each record date established with respect to a meeting of shareholders or -14-
other shareholder action. If a transfer agent is appointed by the Corporation, shareholders shall give written notice of any changes in their addresses from time to time to the transfer agent. Section 7.5. Transfer Agents and Registrars. The Board of Directors may appoint one or more transfer agents and one or more registrars and may require each stock certificate to bear the signature of either or both. Section 7.6. Loss, Destruction, or Mutilation of Certificates. The holder of any shares of the Corporation shall immediately notify the Corporation of any loss, destruction, or mutilation of the certificate therefor, and the Board of Directors may, in its discretion, cause to be issued to him a new certificate or certificates, upon the surrender of the mutilated certificate, or, in the case of loss or destruction, upon satisfactory proof of such loss or destruction. The Board of Directors may, in its discretion, require the holder of the lost or destroyed certificate or his legal representative to give the Corporation a bond in such sum and in such form, and with such surety or sureties as it may direct, to indemnify the Corporation, its transfer agents, and registrars, if any, against any claim that may be made against them or any of them with respect to the shares represented by the certificate or certificates alleged to have been lost or destroyed, but the Board of Directors may, in its discretion, refuse to issue a new certificate or certificates, save upon the order of a court having jurisdiction in such matters. Section 7.7. Form of Certificates. The form of the certificates for shares of the Corporation shall conform to the requirements of Section 7.2 of these By-Laws and be in such printed form as shall from time to time be approved by resolution of the Board of Directors. ARTICLE VIII Seal The corporate seal of the Corporation shall, if the Corporation elects to have one, be in the form of a disc, with the name of the Corporation and "INDIANA" on the periphery thereof and the word "SEAL" in the center. ARTICLE IX Miscellaneous Section 9.1. Indiana Business Corporation Law. The provisions of the Indiana Business Corporation law, as amended, applicable to all matters relevant to, but not specifically covered by, these By-Laws are hereby, by reference, incorporated in and made a part of these By-Laws. Section 9.2. Fiscal Year. The fiscal year of the Corporation shall end on December 31 of each year. -15-
Section 9.3. Election to be governed by Indiana Code (S) 23-1-43. Effective upon the registration of any class of the Corporation's shares under Section 12 of the Securities Exchange Act of 1934, as amended, the Corporation shall be governed by the provisions of Ind. Code 23-1-43 regarding business combinations. Section 9.4. Control Share Acquisition Statute. The provisions of Ind. Code 23-1-42 shall apply to the acquisition of shares of the Corporation. Section 9.5. Redemption of Shares Acquired in Control Share Acquisitions. If and whenever the provisions of Ind. Code 23-1-42 apply to the Corporation, any or all control shares acquired in a control share acquisition shall be subject to redemption by the Corporation, if either: (a) no acquiring person statement has been filed with the Corporation with respect to such control share acquisition in accordance with Ind. Code 23-1-42-6, or (b) the control shares are not accorded full voting rights by the Corporation's shareholders as provided in Ind. Code 23-1-42-9. A redemption pursuant to Section 9.5(a) may be made at any time during the period ending sixty (60) days after the last acquisition of control shares by the acquiring person. A redemption pursuant to Section 9.5(b) may be made at any time during the period ending two (2) years after the shareholder vote with respect to the granting of voting rights to such control shares. Any redemption pursuant to this Section 9.5 shall be made at the fair value of the control shares and pursuant to such procedures for such redemption as may be set forth in these By-Laws or adopted by resolution of the Board of Directors. As used in this Section 9.5, the terms "control shares," "control share acquisition," "acquiring person statement," and "acquiring person" shall have the meanings ascribed to such terms in Ind. Code 23-1-42. Section 9.6. Amendments. These By-Laws may be rescinded, changed, or amended, and provisions hereof may be waived, at any meeting of the Board of Directors by the affirmative vote of a majority of the entire number of Directors at the time, except as otherwise required by the Corporation's Articles of Incorporation or by the Indiana Business Corporation Law. Section 9.7. Definition of Articles of Incorporation. The term "Articles of Incorporation" as used in these By-Laws means the articles of incorporation of the Corporation as from time to time are in effect. -16-
EXHIBIT 5 BAKER & DANIELS 300 NORTH MERIDIAN STREET, SUITE 2700, INDIANAPOLIS, INDIANA 46204 (317) 237-0300. FAX (317) 237-1000 August 15, 2001 Anthem, Inc. 120 Monument Circle Indianapolis, IN 46204 Ladies and Gentlemen: We have examined the corporate records and proceedings of Anthem, Inc., an Indiana corporation (the "Company"), with respect to: (a) the existence of the Company and (b) the legal sufficiency of all corporate proceedings of the Company taken in connection with the authorization, issuance, form, validity and nonassessability of the shares (including the shares to cover an over-allotment option) of Common Stock, $.01 par value per share, of the Company ("Common Stock") to be offered for sale by the Company under its Registration Statement on Form S-1 (the "Registration Statement"), in connection with which this opinion is given. Based on such examination, we are of the opinion that: 1. The Company is a validly existing corporation under the laws of the State of Indiana. 2. The Company is authorized to have outstanding 900,000,000 shares of Common Stock. 3. The shares of Common Stock being offered pursuant to the Registration Statement are validly authorized and, when the Registration Statement shall have become effective and the authorized but unissued shares of Common Stock being offered by the Company pursuant thereto have been sold upon the terms and conditions described in the Registration Statement, all of such shares will be legally issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as Exhibit 5 to the Registration Statement and to the reference to us under the heading "Validity of Common Stock" in the Prospectus which is a part of the Registration Statement. In giving this consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Act or rules and regulations of the Securities and Exchange Commission promulgated thereunder. Yours very truly, BAKER & DANIELS
Exhibit 8 [LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE] August 14, 2001 Board of Directors Anthem Insurance Companies, Inc. 120 Monument Circle Indianapolis, Indiana 46204 Ladies and Gentlemen: We have acted as the tax advisor to Anthem Insurance Companies, Inc. ("Anthem Insurance") in connection with the proposed (a) conversion of Anthem Insurance from a mutual insurance company to a stock insurance company pursuant to applicable Indiana law, (b) holding company formation whereby Anthem Insurance will become a wholly owned subsidiary of Anthem, Inc., and (c) initial public offering of Anthem, Inc. stock (collectively, the "Proposed Transaction"). We have reviewed the following documents (collectively, the "Documents") in connection with the Proposed Transaction: (1) The Anthem Insurance Companies, Inc. Plan of Conversion to a Stock Insurance Company under Ind. Code 27-15-2-2, as approved by the Board of Directors of Anthem Insurance on June 18, 2001; (2) Form S-1 Registration Statement of Anthem, Inc. under the Securities Act of 1933 as filed with the Securities and Exchange Commission on or about August 15, 2001 (the "Registration Statement"); (3) Anthem Insurance Companies, Inc. Member Information Statement, dated August 17, 2001; and (4) Representation Letter from the management of Anthem Insurance Companies, Inc. and Anthem Holdings, Inc. to Ernst & Young LLP, dated August 14, 2001.
Board of Directors August 14, 2001 Anthem Insurance Companies, Inc. Page 2 You have advised us that the information set forth in the Documents is true, correct, and complete in all material respects and constitutes an accurate and complete description of the Proposed Transaction. We have made no independent determination or investigation regarding such facts, circumstances, terms or conditions and, therefore, have relied exclusively upon the Documents. Moreover, we have assumed that the Documents are authentic, that the copies provided to us are accurate and complete, that the Proposed Transaction described in the Documents has been authorized by all necessary parties and will be consummated in accordance with the terms of the Documents and that any statement subject to a knowledge qualification is true without such qualification. If any of these assumptions is incorrect, our opinion could be materially and adversely affected, and might be inapplicable. References herein to the "Code" are to the Internal Revenue Code of 1986, as amended, and to "Treasury Regulations" are to the Income Tax Regulations issued thereunder. References to defined terms which are not otherwise expressly defined in this opinion shall have the meanings given in the Documents. Based upon the foregoing, we hereby confirm that, subject to the qualifications and limitations stated herein and in the Documents, in our opinion, the Registration Statement sections entitled "Tax Effect on Anthem" and "Certain United States Tax Consequences to Non-U.S. Holders of Common Stock," are accurate summaries of the material United States federal tax law consequences of the Proposed Transaction. Our opinion is expressly limited to the United States federal income tax issues specifically set forth in the above-referred sections of the Registration Statement. No opinion has been requested, and none is provided, with respect to any other consequences arising in connection with the Proposed Transaction, including, but not limited to, any other consequences under Subchapter C of the Code or the consolidated return Treasury Regulations, alternative minimum tax consequences, state and local tax consequences, foreign tax consequences, or employee benefit tax consequences. Our opinion is based upon our analysis of the Code, the Treasury Regulations promulgated thereunder, case law, and administrative pronouncements in effect on the date of this letter. The foregoing are subject to change, and any such change may be retroactively effective. If so, our opinion as set forth above may be affected and may not be relied upon. We have undertaken no obligation to update our opinion for changes in law or fact occurring subsequent to the date of this letter. This opinion letter is provided for the exclusive benefit of Anthem Insurance, Anthem, Inc. and the purchasers of shares of Anthem, Inc. stock in the initial public offering to determine the United States federal income tax consequences of the Proposed Transaction, and pertains solely to the Proposed Transaction. Accordingly, our opinion may not be relied on by any other person or persons, or used by any person in connection with any other transaction, or used for any other purpose, without the prior written consent of Ernst & Young LLP.
Board of Diretors August 14, 2001 Anthem Insurance Companies, Inc. Page 3 This letter is an opinion of our firm as to the interpretation of existing law and, as such, is not binding on the Internal Revenue Service or the courts. Accordingly, there can be no assurance that the Internal Revenue Service or the courts will agree with our opinion. We hereby consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement and to the reference to our firm under the appropriate headings in the prospectus that forms a part of the Registration Statement. Very truly yours, /s/ Ernst & Young LLP
EXHIBIT 10.1 ANTHEM 2001 STOCK INCENTIVE PLAN 1. PURPOSE The purpose of this Anthem 2001 Stock Incentive Plan is to further the long term stability and financial success of Anthem, Inc. (the "Company"), and its Subsidiaries, by attracting and retaining employees through the use of cash and stock incentives and to encourage ownership in the Company by non-employee members of the Board of Directors of the Company. It is believed that ownership of Company Stock and the use of cash incentives will stimulate the efforts of those employees upon whose judgment and interests the Employers are and will be dependent for the successful conduct of their business. It is also believed that Incentive Awards granted to such employees under this Plan will strengthen their desire to remain employed with the Employers and will further the identification of those employees' interests with those of the Company's shareholders. Finally, it is believed that Options granted to non-employee members of the Board of Directors of the Company will promote long-term shareholder value and will provide non-employee members of the Board of Directors of the Company with an incentive to continue as directors of the Company. The Plan is intended to operate in compliance with the provisions of Rule 16b-3. 2. DEFINITIONS As used in the Plan, the following terms have the meanings indicated: (a) "Act" means the Securities Exchange Act of 1934, as amended. (b) "Annual Meeting" means the annual meeting of shareholders at which members of the Board are routinely elected. (c) "Applicable Withholding Taxes" means the aggregate amount of federal, state and local income, payroll and other withholding taxes that an Employer is required to withhold in connection with any Performance Award, any lapse of restrictions on Restricted Stock, any grant of Performance Stock, or any exercise of a Nonstatutory Stock Option or Stock Appreciation Right. (d) "Beneficial Ownership" has the meaning in Rule 13d-3 promulgated under the Act. (e) "Board" means the Board of Directors of the Company. (f) "Change of Control" means any of the following events: (i) the acquisition by a Group of Beneficial Ownership of 20% or more of the Company Stock, but excluding for this purpose any acquisition by the Company (or a Subsidiary) or an employee benefit plan of the Company;
(ii) the Incumbent Board ceases to constitute at least a majority of the Board, provided that any director whose nomination was approved by a majority of the Incumbent Board shall be considered a member of the Incumbent Board; (iii) consummation of a reorganization, merger or consolidation, in each case, in which the owners of the Company Stock do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 50% of the stock of the corporation resulting from such reorganization, merger or consolidation; or (iv) a complete liquidation or dissolution of the Company, or the sale or other disposition of all or substantially all of the assets of the Company; provided, however, that neither the Conversion nor the Initial Public Offering shall constitute a Change of Control for purposes of this Plan. (g) "Code" means the Internal Revenue Code of 1986, as amended or any subsequently enacted federal revenue law. (h) "Committee" means the Compensation Committee of the Board, provided that, if any member of the Committee does not qualify as both an outside director for purposes of Code section 162(m) and a non-employee director for purposes of Rule 16b-3, the remaining members of the Committee (but not less than two members) shall be constituted as a subcommittee of the Committee to act as the Committee for purposes of the Plan. (i) "Company" means Anthem, Inc., an Indiana corporation, and any successor by merger, consolidation or otherwise. (j) "Company Stock" means common stock of the Company. In the event of a change in the capital structure of the Company (as provided in Section 16), the shares resulting from such a change shall be deemed to be Company Stock within the meaning of the Plan. (k) "Conversion" means the transaction pursuant to which the Company's sole shareholder at the time of approval of this Plan, Anthem Insurance Companies, Inc., converts from a mutual insurance company to a stock insurance company in accordance with Indiana Code Section 27-15 et. seq. and, as a part of that same transaction, establishes the Company as the parent company of Anthem Insurance Companies, Inc. (l) "Date of Grant" means, with respect to eligible employees, the date on which an Incentive Award is granted by the Committee (or, in the case of Options granted in connection with the Initial Public Offering, the first day the Company Stock trades on the New York Stock Exchange) and, with respect to Eligible Directors, the date on which a director is awarded an Option pursuant to Section 11. (m) "Disability" or "Disabled" means, as to an Incentive Stock Option, a Disability within the meaning of Code section 22(e)(3). As to all other Incentive Awards, the Committee shall determine whether a Disability exists and such determination shall be conclusive. 2
(n) "Effective Date" means the date the Plan is adopted by shareholders of the Company. (o) "Eligible Director" means a member of the Board who is not an employee of the Company or any Subsidiary. (p) "Employer" means the Company, and each Subsidiary that employs one or more Participants. (q) "Fair Market Value" means the closing trading price of a share of Company Stock, as reported on the New York Stock Exchange as of the last day on which Company Stock is traded preceding the Date of Grant or preceding any other date for which the value of Company Stock must be determined under the Plan, or with respect to grants of Incentive Awards made as of the first day the Company Stock trades on the New York Stock Exchange, the price at which shares of the Company Stock are offered to the public in the Initial Public Offering. (r) "Fees" means all amounts payable to an Eligible Director for services rendered as a director, including meeting fees, and committee fees, but excluding travel and other out of pocket expense reimbursements and excluding Retainer Fees. (s) "Group" means any individual, entity or group within the meanings of Sections 13(d)(3) or 14(d)(2) of the Act. (t) "Incentive Award" means, collectively, a Performance Award or the award of Restricted Stock, Performance Stock, an Option, or a Stock Appreciation Right under the Plan. (u) "Incentive Stock Option" means an Option intended to meet the requirements of and qualify for favorable federal income tax treatment under Code section 422. (v) "Incumbent Board" means individuals who constitute the Board on the date of approval of this Plan by shareholders. (w) "Initial Public Offering" means the registered public offering of the Company Stock that will be conducted by the Company in connection with the Conversion. (x) "Mature Shares" means shares of Company Stock for which the holder thereof has good title, free and clear of all liens and encumbrances and which such holder either (i) has held for at least six months or (ii) has purchased on the open market. (y) "Nonstatutory Stock Option" means an Option that does not meet the requirements of Code section 422, or, even if meeting the requirements of Code section 422, is not intended to be an Incentive Stock Option and is so designated. 3
(z) "Option" means a right to purchase Company Stock granted under the Plan, at a price determined in accordance with the Plan. (aa) "Participant" means any employee of the Company or any Subsidiary who receives an Incentive Award under the Plan. (bb) "Performance Award" means an Incentive Award made pursuant to Section 6. (cc) "Performance Criteria" means any of the following areas of performance of the Company, or any Subsidiary, as determined under generally accepted accounting principles or as publicly reported by the Company: asset growth; combined net worth; debt to equity ratio; earnings per share; revenues; investment performance; operating income (with or without investment income or income taxes); operating cash flow; operating margins; net income, before or after taxes; earnings before interest, taxes, depreciation and/or amortization; return on total capital, equity, revenue or assets; medical loss ratio; or number of policyholders or insured. Any Performance Criteria may be used with or without adjustment for extraordinary items or nonrecurring items. (dd) "Performance Goal" means an objectively determinable performance goal established by the Committee with respect to a given Performance Award or grant of Restricted Stock that, if the Performance Award or grant of Restricted Stock is intended to comply with the requirements of Code Section 162(m), relates to one or more Performance Criteria. (ee) "Performance Stock" means Company Stock awarded when performance goals are achieved pursuant to an award as provided in Section 8. (ff) "Plan" means this "Anthem 2001 Stock Incentive Plan," as set forth herein and as amended from time to time. (gg) "Plan Year" means the period on the date of an Annual Meeting and ending on the day before the next Annual Meeting. (hh) "Restricted Stock" means Company Stock awarded upon the terms and subject to the restrictions set forth in Section 7. (ii) "Retainer Fees" means all retainer fees paid to an Eligible Director to retain that Eligible Director to perform services as a director. (jj) "Rule 16b-3" means Rule 16b-3 of the Securities and Exchange Commission promulgated under the Act. A reference in the Plan to Rule 16b-3 shall include a reference to any corresponding rule (or number redesignation) of any amendments to Rule 16b-3 enacted after the effective date of the Plan's adoption. (kk) "Stock Appreciation Right" means a right to receive amounts from the Employer granted under Section 10. 4
(ll) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, as of the Date of Grant, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (mm) "Taxable Year" means the fiscal period used by the Company for reporting taxes on income under the Code. 3. GENERAL The following types of Incentive Awards may be granted to eligible employees under the Plan: Performance Awards, Restricted Stock, Performance Stock, Options or Stock Appreciation Rights. Options granted to eligible employees under the Plan may be Incentive Stock Options or Nonstatutory Stock Options. The following type of Incentive Award may be granted to Eligible Directors under the Plan: Options. Options granted to Eligible Directors under the Plan shall be Nonstatutory Stock Options. 4. STOCK Subject to Section 16 of the Plan, there shall be reserved for issuance under the Plan an aggregate of 7,000,000 shares of Company Stock which shall be authorized but unissued shares. This 7,000,000 shares shall include (a) an aggregate of 5,000,000 shares of Company Stock for the grant of Incentive Awards to eligible employees and Eligible Directors; and (b) an aggregate of 2,000,000 shares of Company Stock for the grant of Options (i) to substantially all eligible employees of the Company or any Subsidiary and (ii) to new eligible employees of the Company and its Subsidiaries, including employees of any business acquired by the Company or a Subsidiary. Shares allocable to Options, Restricted Stock or portions thereof granted under the Plan that expire, are forfeited, or otherwise terminate unexercised may again be subjected to an Incentive Award under the Plan. Until after the date six months following the effective date of the Conversion, no Company Stock or Option may be made to any Participant under this Plan who, as of either the effective date of the Conversion or the date of grant of Company Stock or Option, is: (a) a member of the Board; (b) a member of the Board of Directors of Anthem Insurance Companies, Inc.; or (c) a participant in the Company's or its Subsidiaries' long term incentive plan. 5
5. ELIGIBILITY (a) All present and future employees of the Company or any Subsidiary (whether now existing or hereafter created or acquired) whom the Committee determines to have contributed or who are expected to contribute to the Company or any Subsidiary shall be eligible to receive Incentive Awards under the Plan. The Committee shall have the power and complete discretion, as provided in Section 17, to select eligible employees to receive Incentive Awards and to determine for each employee the nature of the award and the terms and conditions of each Incentive Award. (b) The grant of an Incentive Award shall not obligate an Employer to pay an employee any particular amount of remuneration, to continue the employment of the employee after the grant or to make further grants to the employee at any time thereafter. (c) Each Eligible Director who was not an employee of the Company or any Subsidiary for at least one year before the Date of Grant of an Option under the Plan shall be eligible to receive Nonstatutory Stock Options under Section 11. Each Eligible Director shall be eligible to receive Company Stock in lieu of Fees and Retainer Fees under Section 11 and to elect to defer receipt of Company Stock under Section 11. 6. PERFORMANCE AWARDS (a) Each Performance Award shall be evidenced by an agreement (an "Award Agreement") setting forth the Performance Goals for the award, including, if the Performance Award is intended to comply with the requirements of Code Section 162(m), the Performance Criteria, the minimum, target and maximum amounts payable and such other terms and conditions as are applicable to the Performance Award. In the event of any conflict between an Award Agreement and the Plan, the terms of the Plan shall govern. (b) The Committee shall establish for each Performance Award the amount of cash or Company Stock payable at specified levels of performance, based on the Performance Goal. Any Performance Award shall be made not later than 90 days after the start of the period for which the Performance Award relates and shall be made prior to the completion of 25% of such period. All determinations regarding the achievement of any Performance Goals will be made by the Committee. The Committee may not increase during a Plan Year the amount of cash or Company Stock that would otherwise be payable upon achievement of the Performance Goal(s) but may reduce or eliminate the payments as provided in a Performance Award. (c) The actual payments to a Participant under a Performance Award will be calculated by applying the achievement of a Performance Criteria (if such Performance Award is intended to comply with Code Section 162(m)) or other financial criteria to the Performance Goal as established in the Award Agreement. All calculations of actual payments shall be verified by the Committee and the Committee shall certify in writing the extent, if any, to which the Performance Goals have been met. (d) Performance Awards will be paid in cash, Company Stock or both, at such time or times as are provided in the Award Agreement. The Committee may provide in the Award 6
Agreement that the Participant may make a prior election to defer the payment under a Performance Award subject to such terms and conditions as the Committee may determine. (e) Nothing contained in the Plan will be deemed in any way to limit or restrict any Employer or the Committee from making any award or payment to any person under any other plan, arrangement or understanding, whether now existing or hereafter in effect. (f) A Participant who receives a Performance Award payable in Company Stock shall have no rights as a shareholder until the Company Stock is issued pursuant to the terms of the Performance Award. The Company Stock may be issued without cash consideration. (g) A Participant's interest in a Performance Award may not be sold, assigned, transferred, pledged, hypothecated, or otherwise encumbered. (h) Whenever payments under a Performance Award are to be made in cash, the Employer will withhold therefrom an amount sufficient to satisfy any Applicable Withholding Taxes. Each Participant shall agree, as a condition of receiving a Performance Award payable in the form of Company Stock, to pay to the Employer, or make arrangements satisfactory to the Employer regarding the payment to the Employer of, Applicable Withholding Taxes. Until such amount has been paid or arrangements satisfactory to the Employer have been made, no stock certificate shall be issued to such Participant. As an alternative to making a cash payment to the Employer to satisfy Applicable Withholding Taxes, if the Award Agreement so provides or the Committee subsequently authorizes, the Participant may elect (i) to deliver Mature Shares (valued at their Fair Market Value) or (ii) to have the Employer retain that number of shares of Company Stock (valued at their Fair Market Value) that would satisfy all or a specified portion of the Applicable Withholding Taxes. 7. RESTRICTED STOCK AWARDS (a) The Committee may make grants of Restricted Stock to Participants. Whenever the Committee deems it appropriate to grant Restricted Stock, notice shall be given to the Participant stating the number of shares of Restricted Stock granted and the terms and conditions to which the Restricted Stock is subject. This notice, when accepted by the Participant shall become an award agreement between the Employer and the Participant. Restricted Stock may be awarded by the Committee in its discretion without cash consideration. (b) No shares of Restricted Stock may be sold, assigned, transferred, pledged, hypothecated, or otherwise encumbered or disposed of until the restrictions on such shares as set forth in the Participant's award agreement have lapsed or been removed pursuant to paragraph (d) or (e) below. (c) Upon the acceptance by a Participant of an award of Restricted Stock, such Participant shall, subject to the restrictions set forth in paragraph (b) above, have all the rights of a shareholder with respect to such shares of Restricted Stock, including, but not limited to, the right to vote such shares of Restricted Stock and the right to receive all dividends and other distributions paid thereon. Certificates representing Restricted Stock shall be held by the 7
Company until the restrictions lapse and the Participant shall provide the Company with appropriate stock powers endorsed in blank. (d) The Committee shall establish as to each award of Restricted Stock the terms and conditions upon which the restrictions set forth in paragraph (b) above shall lapse. The terms and conditions may include the achievement of a Performance Goal which shall be governed by the provisions of Section 6 to the extent that the award is intended to comply with the requirements of Code section 162(m). Such terms and conditions may also include, without limitation, the lapsing of such restrictions as a result of the Disability, death or retirement of the Participant or the occurrence of a Change of Control. (e) Notwithstanding the provisions of paragraph (b) above, the Committee may at any time, in its sole discretion, accelerate the time at which any or all restrictions will lapse or remove any and all such restrictions, subject to the restrictions of Section 6 as to any Performance Goal if the award is intended to comply with the requirements of Code section 162(m). (f) Each Participant shall agree, at the time his or her Restricted Stock is granted, and as a condition thereof, to pay to the Employer, or make arrangements satisfactory to the Employer regarding the payment to the Employer of, Applicable Withholding Taxes. Until such amount has been paid or arrangements satisfactory to the Employer have been made, no stock certificate shall be issued to such Participant. As an alternative to making a cash payment to the Employer to satisfy Applicable Withholding Taxes, if the Participant's award agreement so provides or the Committee subsequently authorizes, the Participant may elect (i) to deliver Mature Shares (valued at their Fair Market Value) or (ii) to have the Employer retain that number of shares of Company Stock (valued at their Fair Market Value) that would satisfy all or a specified portion of the Applicable Withholding Taxes. 8. PERFORMANCE STOCK AWARDS (a) The Committee may make grants of Performance Stock to Participants. Whenever the Committee deems it appropriate to grant Performance Stock, notice shall be given to the Participant stating the number of shares of Performance Stock granted and the terms and conditions to which the Performance Stock is subject. This notice, when accepted by the Participant, shall become an award agreement between the Employer and the Participant. (b) Performance Stock may be issued pursuant to the Plan from time to time by the Committee when performance criteria established by the Committee have been achieved and certified by the Committee. (c) Whenever the Committee deems it appropriate, the Committee may establish a performance criteria for an award of Performance Stock and notify Participants of their receipt of an award of Performance Stock. More than one award of Performance Stock may be established by the Committee for a Participant and the awards may operate concurrently or for varied periods of time. Performance Stock will be issued only subject to the award and the Plan and consistent with meeting the goal or goals set by the Committee in the award. A Participant shall have no rights as a shareholder until the Committee has certified that the performance objectives 8
of the Performance Stock award have been met and the Performance Stock is issued. Performance Stock may be issued without cash consideration. (d) A Participant's interest in a Performance Stock award may not be sold, assigned, transferred, pledged, hypothecated, or otherwise encumbered. (e) The Committee may at any time, in its sole discretion, remove or revise any and all performance criteria for an award of Performance Stock. (f) Each Participant shall agree, at the time of receiving an award of Performance Stock, and as a condition thereof, to pay to the Employer, or make arrangements satisfactory to the Employer regarding the payment to the Employer of, Applicable Withholding Taxes. Until such amount has been paid or arrangements satisfactory to the Employer have been made, no stock certificate shall be issued to such Participant. As an alternative to making a cash payment to the Employer to satisfy Applicable Withholding Taxes, if the Participant's award agreement so provides or the Committee subsequently authorizes, the Participant may elect (i) to deliver Mature Shares (valued at their Fair Market Value) or (ii) to have the Employer retain that number of shares of Company Stock (valued at their Fair Market Value) that would satisfy all or a specified portion of the Applicable Withholding Taxes. 9. STOCK OPTIONS (a) The Committee may make grants of Options to Participants. Whenever the Committee deems it appropriate to grant Options, notice shall be given to the Participant stating the number of shares for which Options are granted, the Option price per share, whether the Options are Incentive Stock Options or Nonstatutory Stock Options, the extent to which Stock Appreciation Rights are granted (as provided in Section 10), and the conditions to which the grant and exercise of the Options are subject. This notice, when duly accepted by the Participant, shall become a stock option agreement (the "Stock Option Agreement"). (b) The exercise price of shares of Company Stock covered by an Option shall be not less than 100% of the Fair Market Value of such shares on the Date of Grant. (c) Options may be exercised in whole or in part at such times as may be specified by the Committee in the Participant's Stock Option Agreement; provided that (A) an Option shall not be exercisable more than 10 years after the Date of Grant, and (B) the exercise provisions for Incentive Stock Options shall in all events not be more favorable than the following provisions: (i) No Incentive Stock Option may be exercised before the Plan is approved by the shareholders of the Company in the manner prescribed by Code section 422 and the Company Stock under the Plan is registered with the Securities and Exchange Commission and after the first to occur of (x) ten years from the Date of Grant, (y) three months following the date of the Participant's retirement or termination of employment with all Employers for reasons other than Disability or death, or (z) one year following the date of the Participant's termination of employment on account of Disability or death. 9
(ii) An Incentive Stock Option by its terms, shall be exercisable in any calendar year only to the extent that the aggregate Fair Market Value (determined at the Date of Grant) of the Company Stock with respect to which Incentive Stock Options are exercisable for the first time during the calendar year does not exceed $100,000 (the "Limitation Amount"). Incentive Stock Options granted under the Plan and all other plans of any Employer shall be aggregated for purposes of determining whether the Limitation Amount has been exceeded. The Committee granting the Option may impose such conditions as it deems appropriate on an Incentive Stock Option to ensure that the foregoing requirement is met. If Incentive Stock Options that first become exercisable in a calendar year exceed the Limitation Amount, the excess Options will be treated as Nonstatutory Stock Options to the extent permitted by law. (d) Notwithstanding any other provision herein contained, no employee of the Company or any Subsidiary may receive an Incentive Stock Option under the Plan if such employee, on the Date of Grant, owns (as defined in Code section 424(d)) Company Stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary, unless the exercise price for such Incentive Stock Option is at least 110% of the Fair Market Value (determined at the Date of Grant) and such Incentive Stock Option is not exercisable after the date five (5) years from the Date of Grant. 10. STOCK APPRECIATION RIGHTS (a) Whenever the Committee deems it appropriate, Stock Appreciation Rights may be granted in connection with all or any part of an Option to a Participant or in a separate Incentive Award. (b) The following provisions apply to all Stock Appreciation Rights that are granted in connection with Options: (i) Stock Appreciation Rights shall entitle the Participant, upon exercise of all or any part of the Stock Appreciation Rights, to surrender to the Employer unexercised that portion of the underlying Option relating to the same number of shares of Company Stock as is covered by the Stock Appreciation Rights (or the portion of the Stock Appreciation Rights so exercised) and to receive in exchange from the Employer an amount equal to the excess of (x) the Fair Market Value on the date of exercise of the Company Stock covered by the surrendered portion of the underlying Option over (y) the exercise price of the Company Stock covered by the surrendered portion of the underlying Option. The Committee may limit the amount that the Participant will be entitled to receive upon exercise of Stock Appreciation Rights. (ii) Upon the exercise of a Stock Appreciation Right and surrender of the related portion of the underlying Option, the Option, to the extent surrendered, shall not thereafter be exercisable. (iii) Subject to any further conditions upon exercise imposed by the Board, a Stock Appreciation Right shall be exercisable only to the extent that the related Option is 10
exercisable and a Stock Appreciation Right shall expire no later than the date on which the related Option expires. (iv) A Stock Appreciation Right may only be exercised at a time when the Fair Market Value of the Company Stock covered by the Stock Appreciation Right exceeds the exercise price of the Company Stock covered by the underlying Option. (c) The following provisions apply to all Stock Appreciation Rights that are not granted in connection with Options: (i) Stock Appreciation Rights shall entitle the Participant, upon exercise of all or any part of the Stock Appreciation Rights, to receive in exchange from the Employer an amount equal to the excess of (x) the Fair Market Value on the date of exercise of the Company Stock covered by the surrendered Stock Appreciation Right over (y) the price of the Company Stock on the Date of Grant of the Stock Appreciation Right. The Committee may limit the amount that the Participant will be entitled to receive upon exercise of Stock Appreciation Rights. (ii) A Stock Appreciation Right may only be exercised at a time when the Fair Market Value of the Company Stock covered by the Stock Appreciation Right exceeds the Fair Market Value of the Company Stock on the Date of Grant of the Stock Appreciation Right. (d) The manner in which the Employer's obligation arising upon the exercise of a Stock Appreciation Right shall be paid shall be determined by the Committee and shall be set forth in the Incentive Award. The Incentive Award may provide for payment in Company Stock or cash, or a fixed combination of Company Stock or cash, or the Committee may reserve the right to determine the manner of payment at the time the Stock Appreciation Right is exercised. Shares of Company Stock issued upon the exercise of a Stock Appreciation Right shall be valued at their Fair Market Value on the date of exercise. 11. NON-EMPLOYEE DIRECTOR OPTIONS (a) GENERAL. Each Eligible Director may receive grants of Options pursuant to this Section 11 of the Plan. All Options granted under this Section 11 of the Plan shall be Nonstatutory Stock Options and shall not be entitled to special tax treatment under Internal Revenue Code section 422. (b) OPTIONS. Each Option granted under this Section 11 of the Plan shall be evidenced by an agreement in such form as the Board shall from time to time approve, which agreement shall comply with and be subject to the following terms and conditions: (i) AWARD OF OPTION. Options for the purchase of shares of Company Stock may be awarded to Eligible Directors upon the satisfaction of each of the following: (A) after the date the Plan is approved by the Board, (B) after the date the Plan is approved by the shareholders in the manner prescribed by Code section 422, and 11
(C) after the date the Company Stock under the Plan is registered with the Securities and Exchange Commission. The time of the award and the number of shares awarded shall be determined by the Board. If at any time under the Plan there are not sufficient shares of Company Stock available to permit fully the Option grants to the Eligible Directors described in this paragraph, the Option grants shall be reduced pro rata (to zero if necessary) so as not to exceed the number of shares of Company Stock available. (ii) OPTION EXERCISE PRICE. The Option exercise price shall be the Fair Market Value of the Company Stock on the Date of Grant. (iii) EXERCISE OF OPTIONS. Subject to Section 11(b)(v) below, all Options shall become exercisable as follows: one-third on the day before the first annual meeting of shareholders after the Date of Grant; one-third on the day before the second annual meeting after the Date of Grant; and the remainder on the day before the third annual meeting of shareholders after the Date of Grant. Once exercisable, all or any portion of an Option may be exercised until the earlier of: (1) thirty-six months of the date the Eligible Director ceases to be a director of the Company for any reason, including death or disability; or (2) the expiration of ten (10) years from the Date of Grant. (iv) METHOD OF EXERCISE. An Option may be exercised in the manner described in Section 12. (v) CHANGE OF CONTROL. Options granted to Eligible Directors shall become fully vested and exercisable upon a Change of Control. (c) RECEIPT OF FEES IN STOCK (i) The Board may elect to pay an Eligible Director up to 100% of his or her Retainer Fees in shares of Company Stock. The amount of Retainer Fees to be paid to an Eligible Director during each calendar quarter shall be determined on the last day of the quarter. The number of shares of Company Stock to be issued as Retainer Fees shall be determined by multiplying the applicable percentage of Retainer Fees that the Board has elected to pay an Eligible Director in Company Stock times the Retainer Fees otherwise payable for the quarter and dividing the product by the Fair Market Value of the Company Stock on the last day of the quarter. If this formula produces a fractional share, the Eligible Director may be paid in cash the Fair Market Value of the fractional share. (ii) An Eligible Director may elect to receive up to 100% of his or her Fees in shares of Company Stock (a "Stock Election"). A Stock Election must be in writing and shall be delivered to the Corporate Secretary of the Company prior to the Annual Meeting for the Plan Year to which the Stock Election pertains. Except as provided in this Section 11, a Stock Election may be revoked prior to 12
the last day of any calendar quarter for all calendar quarters beginning after the revocation. A Stock Election must specify the applicable percentage of the Fees that the Eligible Director wishes to receive in shares of Company Stock (the "Designated Percentage"). If a Stock Election is made, the amount of Fees to be paid to an Eligible Director during each calendar quarter shall be determined on the last day of the quarter. The number of shares of Company Stock to be issued in lieu of the Fees shall be determined by multiplying the Designated Percentage times the Fees otherwise payable for the quarter and dividing that product by the Fair Market Value of the Company Stock on the last day of the quarter. If this formula produces a fractional share, the Eligible Director may be paid in cash the Fair Market Value of the fractional share. (d) DEFERRALS OF STOCK. An Eligible Director may elect to defer the payment of some or all of the shares of Company Stock otherwise payable under Section 11(c) pursuant to and in accordance with the Board of Directors Deferred Compensation Plan, as now in effect or as hereinafter amended and restated, which plan is incorporated herein by reference. (e) WITHHOLDING. If at any time it is determined that the Company is obligated to withhold income taxes upon the transfer of Company Stock as a result of the exercise of an Option or the receipt of Retainer Fees or Fees in Company Stock by an Eligible Director, the Company shall have the right to retain or sell without notice shares of Company Stock having a Fair Market Value sufficient on such date or dates as may be determined by the Board (but not more than five business days prior to the date on which such shares would otherwise have been delivered) to cover the amount of any federal or state income tax if required to be withheld or otherwise deducted and paid with respect to such payment and/or the exercise of the Option, remitting any balance to the Eligible Director; provided, however, that the Eligible Director shall have the right to make other arrangements satisfactory to the Company or to provide the Company with the funds to enable it to pay such tax. Notwithstanding the foregoing, the Company shall not sell shares of Company Stock if such sale will cause the Eligible Director to incur a liability under section 16b of the Act. (f) TRANSFERABILITY. An Option granted under this Section 11 shall not be transferable by the Eligible Director otherwise than by will, or by the laws of descent and distribution, and shall be exercised during the lifetime of the Eligible Director only by him or her; provided that an Eligible Director may transfer any Option to members of the Eligible Directors' immediate family or trusts or family partnerships for the benefit of such persons, subject to such terms and conditions as may be established by the Board. Except as specifically provided in an written option agreement, no Option or interest therein may be transferred, assigned, pledged or hypothecated by the Eligible Director during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. (g) ADMINISTRATION. This Section 11 of the Plan shall be administered by the Board. The Board shall have all powers necessary to administer this Section 11 of the Plan, including, without limitation, the authority (within the limitations described herein) to prescribe the form of the agreement embodying awards of Options under this Section 11 of the Plan, to construe this Section 11 of the Plan, to determine all questions arising under this Section 11 of 13
the Plan, and to adopt and amend rules and regulations for the administration of this Section 11 of the Plan as it may deem desirable. Any decision of the Board in the administration of this Section 11 of the Plan shall be final and conclusive. The Board may act only by a majority of its members in office, except that members thereof may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Board. No member of the Board shall be liable for anything done or omitted to be done by him or any other member of the Board in connection with this Section 11 of the Plan, except for his or her own willful misconduct or as expressly provided by statute. (h) MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Except for the terms of an Option contained in Section 11, the Board shall have the power to modify, extend or renew outstanding Options and to authorize the grant of new Options in substitution therefore, provided that any such action may not have the effect of altering, enhancing or impairing any rights or obligations of any person under any Option previously granted without the consent of the Eligible Director. (i) LIMITATION OF RIGHTS (i) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan nor the granting of an Option nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain any person as a director for any period of time. (ii) NO SHAREHOLDERS RIGHTS UNDER OPTIONS. An Eligible Director shall have no rights as a shareholder with respect to Shares covered by his or her Options until the date of exercise of the Option, and, except as provided in Section 16, no adjustment will be made for dividends or other rights for which the record date is prior to the date of such exercise. 12. METHOD OF EXERCISE OF OPTIONS AND STOCK APPRECIATION RIGHTS (a) Options and Stock Appreciation Rights may be exercised by the Participant giving notice of the exercise to the Employer stating the number of shares the Participant has elected to purchase under the Option or the number of Stock Appreciation Rights the Participant has elected to exercise. In the case of the purchase of shares under an Option, such notice shall be effective only if accompanied by the exercise price in full in cash; provided, however, that if the terms of an Option so permit, the Participant may (i) deliver Mature Shares (valued at their Fair Market Value) in satisfaction of all or any part of the exercise price, (ii) cause to be withheld from the Option shares, shares of Company Stock (valued at their Fair Market Value) in satisfaction of all or any part of the exercise price, (iii) deliver a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Employer, from the sale or loan proceeds with respect to the sale of Company Stock or a loan secured by Company Stock, the amount necessary to pay the exercise price, or (iv) deliver an interest bearing promissory note, payable to the Company, in payment of all or part of the exercise price together with such collateral as may be required by the Committee at the time of exercise. The interest rate under any such promissory note shall be established by the Committee and shall be 14
at least equal to the minimum interest rate required at the time to avoid imputed interest under the Code. (b) The Company may place on any certificate representing Company Stock issued upon the exercise of an Option or a Stock Appreciation Right any legend deemed desirable by the Company's counsel to comply with federal or state securities laws, and the Company may require a customary written indication of the Participant's investment intent. Until the Participant has made any required payment, including any Applicable Withholding Taxes, and has had issued a certificate for the shares of Company Stock acquired, he or she shall possess no shareholder rights with respect to the shares of Company Stock. (c) Each Participant shall agree, as a condition of the exercise of an Option or a Stock Appreciation Right, to pay to the Employer, or make arrangements satisfactory to the Employer regarding the payment to the Employer of, Applicable Withholding Taxes. Until such amount has been paid or arrangements satisfactory to the Employer have been made, no stock certificate shall be issued upon the exercise of an Option or cash paid upon the exercise of a Stock Appreciation Right. (d) As an alternative to making a cash payment to the Employer to satisfy Applicable Withholding Taxes, if the Option or Stock Appreciation Rights agreement so provides or the Committee subsequently authorizes, the Participant may elect (i) to deliver Mature Shares (valued at their Fair Market Value) or (ii) to have the Employer retain that number of shares of Company Stock (valued at their Fair Market Value) that would satisfy all or a specified portion of the Applicable Withholding Taxes. 13. NONTRANSFERABILITY OF OPTIONS AND STOCK APPRECIATION RIGHTS Options (other than Incentive Stock Options) and Stock Appreciation Rights by their terms, shall be transferable to the extent specifically provided in the Incentive Award. Incentive Stock Options granted to Participants, by their terms, shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable, during the Participant's lifetime, only by the Participant. The transferability of Options granted to Eligible Directors shall be governed by Section 11 of this Plan. 14. EFFECTIVE DATE OF THE PLAN The Plan was approved by the Company's board of directors and shareholders on July 30, 2001 and the effective date of the Plan is July 30, 2001. Until the requirements of any applicable Federal or State securities laws have been met, no Company Stock in connection with a Performance Award, Restricted Stock or Performance Stock shall be awarded that is not contingent on these events and no Option or Stock Appreciation Right granted shall be exercisable. 15
15. TERMINATION, MODIFICATION, CHANGE If not sooner terminated by the Board, this Plan shall terminate at the close of business on July 29, 2011. No Incentive Awards shall be made under the Plan after its termination. The Board may amend or terminate the Plan in such respects as it shall deem advisable; provided that, if and to the extent required by the Code, no change shall be made that increases the total number of shares of Company Stock reserved for issuance pursuant to Incentive Awards granted under the Plan (except pursuant to Section 16), materially modifies the requirements as to eligibility for participation in the Plan, or materially increases the benefits accruing to Participants under the Plan, unless such change is authorized by the shareholders of the Company. Notwithstanding the foregoing, the Board may unilaterally amend the Plan and Incentive Awards with respect to Participants as it deems appropriate to ensure compliance with Rule 16b-3 and to cause Incentive Stock Options to meet the requirements of the Code and regulations thereunder. Except as provided in the preceding two sentences, a termination or amendment of the Plan shall not, without the consent of the Participant, adversely affect a Participant's rights under an Incentive Award previously granted to him or her. 16. CHANGE IN CAPITAL STRUCTURE (a) In the event of a stock dividend, stock split or combination of shares, recapitalization or merger in which the Company is the surviving corporation or other change in the Company's capital stock (including, but not limited to, the creation or issuance to shareholders generally of rights, options or warrants for the purchase of common stock or preferred stock of the Company), the number and kind of shares of stock or securities of the Company to be subject to the Plan and to Options then outstanding or to be granted thereunder, the maximum number of shares or securities which may be delivered under the Plan, the exercise price, the terms of Incentive Awards and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. If the adjustment would produce fractional shares with respect to any unexercised Option, the Committee may adjust appropriately the number of shares covered by the Option so as to eliminate the fractional shares. (b) If the Company is a party to a consolidation or a merger in which the Company is not the surviving corporation, a transaction that results in the acquisition of substantially all of the Company's outstanding stock by a single person or entity, or a sale or transfer of substantially all of the Company's assets, the Committee may take such actions with respect to outstanding Incentive Awards as the Committee deems appropriate. (c) Notwithstanding anything in the Plan to the contrary, the Committee may take the foregoing actions without the consent of any Participant, and the Committee's determination shall be conclusive and binding on all persons for all purposes. 16
17. ADMINISTRATION OF THE PLAN Except as provided in Section 11(g), the Plan shall be administered by the Committee. The Committee shall have general authority to impose any limitation or condition upon an Incentive Award the Committee deems appropriate to achieve the objectives of the Incentive Award and the Plan and, without limitation and in addition to powers set forth elsewhere in the Plan, shall have the following specific authority: (a) The Committee shall have the power and complete discretion to determine (i) which eligible employees shall receive Incentive Awards and the nature of each Incentive Award, (ii) the terms and conditions of any Performance Award, (iii) whether all or any part of an Incentive Award shall be accelerated upon a Change of Control; provided, however, that unless the respective award agreement states otherwise, all Incentive Awards shall be accelerated upon a Change in Control, (iv) the number of shares of Company Stock to be covered by each Incentive Award, (v) whether Options shall be Incentive Stock Options or Nonstatutory Stock Options, (vi) when, whether and to what extent Stock Appreciation Rights shall be granted, (vii) the time or times when an Incentive Award shall be granted, (viii) whether an Incentive Award shall become vested over a period of time and when it shall be fully vested, (ix) when Options and Stock Appreciation Rights may be exercised, (x) whether a Disability exists, (xi) the manner in which payment will be made upon the exercise of Options or Stock Appreciation Rights, (xii) conditions relating to the length of time before disposition of Company Stock received upon the exercise of Options or Stock Appreciation Rights is permitted, (xiii) whether to authorize a Participant (A) to deliver Mature Shares to satisfy Applicable Withholding Taxes or (B) to have the Employer withhold from the shares to be issued upon the exercise of an Incentive Award (other than an Incentive Option) the number of shares necessary to satisfy Applicable Withholding Taxes, (xiv) the terms and conditions applicable to Restricted Stock awards, (xv) the terms and conditions on which restrictions upon Restricted Stock shall lapse, (xvi) whether to accelerate the time at which any or all restrictions with respect to Restricted Stock will lapse or be removed, (xvii) the terms and conditions applicable to Performance Stock awards, (xviii) notice provisions relating to the sale of Company Stock acquired under the Plan, and (xix) any additional requirements relating to Incentive Awards that the Committee deems appropriate. Notwithstanding the foregoing, no "tandem stock options" (where two stock options are issued together and the exercise of one option affects the right to exercise the other option) may be issued in connection with Incentive Stock Options. The Committee shall have the power to amend the terms of previously granted Incentive Awards so long as the terms as amended are consistent with the terms of the Plan and provided that the consent of the Participant is obtained with respect to any amendment that would be detrimental to him or her, except that such consent will not be required if such amendment is for the purpose of complying with Rule 16b-3 or any requirement of the Code applicable to the Incentive Award. (b) The Committee may adopt rules and regulations for carrying out the Plan with respect to Participants. The interpretation and construction of any provision of the Plan by the Committee shall be final and conclusive as to any Participant. The Committee may consult with counsel, who may be counsel to the Employer, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel. 17
(c) A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members, and any action so taken shall be fully effective as if it had been taken at a meeting. 18. NOTICE All notices and other communications required or permitted to be given under this Plan shall be in writing or other form approved by the Committee and shall be deemed to have been duly given as follows (a) if to an Employer then delivered personally to the stock plan administrator of the Company or mailed first class, postage prepaid at the principal business address of the Company to the attention of the stock plan administrator at the Company; or (b) if to any Participant then delivered personally, mailed first class, postage prepaid at the last address of the Participant known to the sender at the time the notice or other communication is sent or delivered, or by e-mail, interoffice mail, intranet or other means of office communication determined by the Committee. 19. INTERPRETATION The terms of this Plan are subject to all present and future regulations and rulings of the Secretary of the Treasury or his or her delegate relating to the qualification of Incentive Stock Options under the Code. If any provision of the Plan conflicts with any such regulation or ruling, then that provision of the Plan shall be void and of no effect. The terms of this Plan shall be governed by the laws of the State of Indiana. 20. LEGENDS In its sole and complete discretion, the Committee may elect to legend certificates representing Company Stock sold or awarded under the Plan to make appropriate references to the restrictions imposed on such Company Stock. 21. TAX BENEFIT The Committee may, in its sole discretion, include a provision in any Nonstatutory Stock Option agreement that provides for an additional cash payment from the Company to the grantee of the Nonstatutory Stock Option as soon as practicable after the exercise date of such Nonstatutory Stock Option equal to all or a portion of the tax benefit to be received by the Company attributable to its federal income tax deduction resulting from the exercise of such Nonstatutory Stock Option. 18
EXHIBIT 10.2 ANTHEM EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSE The purpose of the Anthem Employee Stock Purchase Plan (the "Plan") is to secure for the Company and its stockholders the benefits of the incentive inherent in the ownership of Company Stock by eligible present and future employees of the Company and its designated Subsidiaries. The Plan is intended to comply with the terms of Code section 423 and Rule 16b-3 of the Act. 2. DEFINITIONS Where indicated by initial capital letters, the following terms shall have the following meanings: (a) "Act" means the Securities Exchange Act of 1934, as amended. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended, or any subsequently enacted federal revenue law. (d) "Committee" means the Compensation Committee of the Board, provided that, if any member of the Committee does not qualify as both an outside director for purposes of Code section 162(m) and a non-employee director for purposes of Rule 16b-3, the remaining members of the Committee (but not less than two members) shall be constituted as a subcommittee of the Committee to act as the Committee for purposes of the Plan. (e) "Company" means Anthem, Inc., an Indiana corporation, and any successor by merger, consolidation or otherwise. (f) "Company Stock" means the Company's common stock. In the event of a change in the capital structure of the Company (as provided in Section 13), the shares resulting from such change shall be deemed to be Company Stock within the meaning of the Plan. (g) "Compensation" means the total earnings, prior to withholding, paid to an Eligible Employee during the applicable pay period, including bonuses, overtime and salary reduction contributions pursuant to a Code section 401(k) plan. Compensation shall exclude salary reduction contributions and flex dollars pursuant to a Code section 125 plan, tax gross ups, relocation expenses, referral bonuses, tuition reimbursement, the imputed value of group life insurance, the economic value attributable to the employee under split dollar life insurance, car allowances, contest earnings (other than marketing or sales incentives, long term incentives and any employer contributions (other than salary reduction contributions)) to a Code section 401(k) plan.
(h) "Custodian" means a financial institution or other corporate entity selected by the Company from time to time to act as custodian for the Plan. (i) "Eligible Employee" means any employee of the Company or its Subsidiaries who meets the eligibility requirements of Section 5 and Section 9. (j) "Enrollment Form" means the form filed by a Participant with the Committee authorizing payroll deductions. (k) "Fair Market Value" means the closing trading price of a share of Common Stock, as reported on the New York Stock Exchange on the applicable Grant Date or Investment Date, or, if the Common Stock was not quoted on such date, the closing trading price on the last day prior thereto on which the Common Stock was quoted. (l) "Grant Date" means the first business day of each quarter, as determined by the Committee, on which shares of Common Stock are or could be traded on the New York Stock Exchange. (m) "Investment Account" means the account established for each Participant to hold Company Stock purchased under the Plan pursuant to Section 7. (n) "Investment Date" means the last business day of each quarter, as determined by the Committee, on which shares of Company Stock are or could be traded on the New York Stock Exchange. (o) "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, as of an Investment Date, each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (p) "Participant" means an Eligible Employee who elects to participate in the Plan by filing an Enrollment Form pursuant to Section 6. (q) "Payroll Deduction Account" means the account established for a Participant to hold payroll deductions pursuant to Section 6. (r) "Plan" means the "Anthem Employee Stock Purchase Plan," as set forth herein and as amended from time to time. (s) "Purchase Price" means a percentage of the lower of the Fair Market Value of a share of Company Stock on the Grant Date or on the Investment Date. The percentage shall be eighty-five percent (85%) unless the Committee, in its sole discretion, increases the percentage at any time. After any such increase, the Committee, in its sole discretion, may decrease the percentage, but not below eighty-five percent (85%) at any time. Any increase or decrease shall be communicated to Eligible Employees not less than thirty (30) days prior to the first Grant Date affected by the change. 2
(t) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, as of an Investment Date, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 3. SHARES RESERVED FOR THE PLAN There shall be reserved for issuance and purchase by employees under the Plan an aggregate of 3,000,000 shares of Company Stock, subject to adjustment as provided in Section 13. Shares subject to the Plan shall be authorized but unissued shares. Shares needed to satisfy the needs of the Plan may be newly issued by the Company or acquired by purchase at the expense of the Company on the open market or in private transactions. 4. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Committee. Subject to the express provisions of the Plan, the Committee shall have the authority to take any and all actions (including directing the Custodian as to the acquisition of shares) necessary to implement the Plan and to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations necessary or advisable in administering the Plan. All of such determinations shall be final and binding upon all persons. A quorum of the Committee shall consist of a majority of its members and the Committee may act by vote of a majority of its members at a meeting at which a quorum is present, or without a meeting by a written consent to their action taken signed by all members of the Committee. The Committee may request advice or assistance or employ such other persons as are necessary for proper administration of the Plan. The Committee may delegate administration of the Plan to one or more employees or positions of the Company or any Subsidiary. 5. ELIGIBILITY Except as hereinafter provided, an employee of the Company, its current Subsidiaries listed on Exhibit A attached hereto or such of its future participating Subsidiaries as may from time to time be designated by the Committee and listed on Exhibit B attached hereto shall be eligible to participate in the Plan as of the first day of the quarter following the receipt, by the Committee, of an Enrollment Form; provided, however, if the first day of the quarter following the receipt by the Committee of an Enrollment Form is less than 30 days after such receipt, then such employee shall be eligible to participate in the Plan as of the first day of the second quarter following the receipt by the Committee of an Enrollment Form, or as soon as administratively practicable thereafter. Eligibility to participate is also subject to the provisions of Section 9. No director of the Company or of any Subsidiary who is not an employee shall be eligible to participate in the Plan. No independent contractor who is not an employee shall be eligible to participate in the Plan. No employee of the Company or of any Subsidiary whose customary 3
employment is 20 hours or less per week shall be eligible to participate in the Plan. No employee of the Company or of any Subsidiary whose customary employment is for not more than five months in any calendar year shall be eligible to participate in the Plan. 6. ELECTION TO PARTICIPATE Each Eligible Employee may become a Participant by filing with the Committee an Enrollment Form in accordance with Section 5 authorizing specified regular payroll deductions from his or her Compensation. Such regular payroll deductions shall be in one percent (1%) increments of Compensation subject to a minimum deduction of one percent (1%) and a maximum deduction of fifteen percent (15%) of Compensation per pay period. All regular payroll deductions shall be credited to the Payroll Deduction Account that the Company has established in the name of the Participant. A Participant may cease his or her participation in the Plan at any time. An Eligible Employee who has ceased to be a Participant may not again become a Participant until such Eligible Employee has complied with Section 5. Not more than four (4) times during any calendar year, a Participant may increase or decrease his or her payroll deduction by filing a new Enrollment Form. Any cessation or change in payroll deduction will be effective as of the payroll period following the date of the Participant's election, or as soon as administratively practicable thereafter. Once an election is in place, it may not be revoked for the remainder of the payroll period. 7. METHOD OF PURCHASE AND INVESTMENT ACCOUNTS Each Participant having eligible funds in his or her Payroll Deduction Account on an Investment Date shall be deemed, without any further action, to have purchased the number of shares of Company Stock (including fractional shares unless otherwise determined by the Committee) which the eligible funds in his or her Payroll Deduction Account could purchase on that Investment Date at the Purchase Price. All shares purchased shall be maintained by the Custodian in a separate Investment Account for each Participant. All cash dividends paid with respect to shares of the Company Stock held in the Investment Account shall be added to a Participant's Payroll Deduction Account and shall be used to purchase shares of Company Stock for the Participant's Investment Account. Expenses incurred in the purchase of such shares shall be paid by the Company. All dividends distributed in-kind with respect to Company Stock held in the Investment Account shall be added to the shares held for a Participant in his or her Investment Account. Any distribution of shares with respect to shares of Company Stock held for a Participant in his or her Investment Account shall be added to the shares of Company Stock held for a Participant in his or her Investment Account. 4
8. STOCK PURCHASES The Custodian shall acquire shares of Company Stock for Participants as of each Investment Date from the Company or, if directed by the Committee, by purchases on the open market or in private transactions using total payroll deduction amounts received by the Custodian. If shares of Company Stock are purchased in one or more transactions on the open market or in private transactions at the direction of the Committee, the Company will pay the Custodian the difference between the Purchase Price and the price at which such shares are purchased for Participants. 9. LIMITATION ON PURCHASES No Participant may purchase, during any one calendar year under the Plan (or combined with any other plan qualified under Code section 423), shares of Company Stock having a Fair Market Value (determined by reference to the Fair Market Value on each Grant Date) in excess of $25,000. This limitation shall be interpreted to comply with Code section 423(b)(8). A Participant's Payroll Deduction Account may not be used to purchase Company Stock on any Investment Date to the extent that, after such purchase, the Participant would own (or be considered as owning within the meaning of Code section 424(d)) stock possessing 5% or more of the total combined voting power of the Company or its Parent or Subsidiary. For this purpose, stock which the Participant may purchase under any outstanding option (whether or not exercisable) shall be treated as owned by such Participant. As of the first Investment Date on which this paragraph limits a Participant's ability to purchase Company Stock, the employee shall cease to be a Participant. 10. TITLE OF ACCOUNTS The Custodian shall maintain an Investment Account for each Participant. Each Investment Account shall be in the name of the Participant or, if he or she so indicates on his or her Enrollment Form, in his or her name jointly with a member of his or her family, with right of survivorship. A Participant who is a resident of a jurisdiction which does not recognize such a joint tenancy may have an Investment Account in his or her name as tenant in common with a member of his or her family, without rights of survivorship. 11. RIGHT TO SELL COMPANY STOCK IN INVESTMENT ACCOUNT A Participant shall have the right at any time to obtain a certificate (if the Company Stock is certificated) for the shares (including fractional shares) of Company Stock credited to his or her Investment Account. A Participant shall have the right at any time to direct that any shares of Company Stock in his or her Investment Account be sold and that the proceeds, less expenses of sale, be remitted to him or her. When a Participant ceases to be a Participant, the Participant may elect to have his or her shares sold by the Custodian and the proceeds, after selling expenses, remitted to him or her or 5
the Participant may elect to have a certificate (if the Company Stock is certificated) for the shares of Company Stock credited to the Participant's Investment Account forwarded to him or her. In either event, the Custodian may sell any fractional interest held in the Participant's Investment Account to the Company and remit the proceeds of such sale, less selling expenses, and the balance in his or her Payroll Deduction Account to him or her. As a condition of participation in the Plan, each Participant agrees to notify the Company if he or she sells or otherwise disposes of any of his or her shares of Company Stock within two years of the Grant Date on which such shares were purchased. 12. RIGHTS NOT TRANSFERABLE Rights under the Plan are not transferable by a Participant, except by will or by the laws of descent and distribution. Rights under the Plan are exercisable during a Participant's lifetime only by him or her, pursuant to Section 7. 13. CHANGE IN CAPITAL STRUCTURE In the event of a stock dividend, spinoff, stock split or combination of shares, recapitalization or merger in which the Company is the surviving corporation or other change in the Company's capital stock (including, but not limited to, the creation or issuance to shareholders generally of rights, options or warrants for the purchase of common stock or preferred stock of the Company), the number and kind of shares of stock or securities of the Company to be subject to the Plan, the maximum number of shares or securities which may be delivered under the Plan, the selling price and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. If the Company is a party to a consolidation or a merger in which the Company is not the surviving corporation, a transaction that results in the acquisition of substantially all of the Company's outstanding stock by a single person or entity, or a sale or transfer of substantially all of the Company's assets, the Committee may take such actions with respect to the Plan as the Committee deems appropriate. Notwithstanding anything in the Plan to the contrary, the Committee may take the foregoing actions without the consent of any Participant, and the Committee's determination shall be conclusive and binding on all persons for all purposes. 14. RETIREMENT, TERMINATION AND DEATH In the event of a Participant's retirement, termination of active employment, or death, the amount in his or her Payroll Deduction Account shall be refunded to him or her, and, unless otherwise elected, certificates (if the Company Stock is certificated) will be issued for full shares of Company Stock held in his or her Investment Account. If a Participant elects to have his or her shares sold, he or she will receive the proceeds of the sale, less selling expenses. In the event of his or her death, the amount in his or her Payroll Deduction Account and all shares of 6
Company Stock in his or her Investment Account shall be delivered to the beneficiary designated by the Participant in writing filed with the Company. If no beneficiary has been designated, or if the designated beneficiary does not survive the Participant, such amount and all shares shall be delivered to his or her estate. 15. AMENDMENT OF THE PLAN The Board of Directors may at any time, or from time to time, amend the Plan in any respect; provided, however, that the shareholders of the Company must approve any amendment that would materially (i) increase the benefits accruing to Participants under the Plan, (ii) increase the number of securities that may be issued under the Plan, or (iii) modify the requirements as to eligibility for participation in the Plan. 16. TERMINATION OF THE PLAN The Plan and all rights of employees hereunder shall terminate: (a) on the Investment Date that Participants become entitled to purchase a number of shares greater than the number of reserved shares remaining available for purchase; or (b) at any prior date at the discretion of the Board of Directors. In the event that the Plan terminates under circumstances described in (a) above, reserved shares remaining as of the termination date shall be issued to Participants on a pro rata basis. Upon termination of the Plan, all amounts in an employee's Payroll Deduction Account that are not used to purchase Company Stock will be refunded. 17. EFFECTIVE DATE OF PLAN The Plan was approved by the Board of Directors and the Company's shareholders on July 30, 2001 and the Plan shall become effective on the date designated by the Committee subsequent to registration of stock or plan interests in the Plan. 18. GOVERNMENT AND OTHER REGULATIONS The Plan, and the grant and exercise of the rights to purchase shares hereunder, and the Company's obligation to sell and deliver shares upon the exercise of rights to purchase shares, shall be subject to all applicable federal, state and foreign laws, rules and regulations, and to such approvals by any regulatory or government agency as may, in the opinion of counsel for the Company, be required. 7
19. INDEMNIFICATION OF COMMITTEE Service on the Committee shall constitute service as a director of the Company so that members of the Committee shall be entitled to such indemnification and reimbursement as directors of the Company as provided in its Articles of Incorporation and/or Bylaws. 20. GOVERNING LAW The Plan shall be construed and administered in accordance with the laws of the State of Indiana. 21. LEGENDS In its sole and complete discretion, the Committee may elect to legend certificates representing Company Stock sold under the Plan to make appropriate references to the restrictions imposed on such Company Stock. 8
EXHIBIT A Current Subsidiaries AdminaStar Federal, Inc. Anthem Alliance Health Insurance Company The Anthem Companies, Inc. 9
EXHIBIT B Future Participating Subsidiaries 10
EXHIBIT 10.3 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") is by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company"), with offices located at 120 Monument Circle, Indianapolis, Indiana, and Larry C. Glasscock (the "Executive"), residing at 7837 Morningside Lane, Indianapolis, Indiana 46240, dated as of the 22nd day of October, 1999. W I T N E S S E T H: -------------------- WHEREAS, the Company (which hereinafter also includes subsidiaries of the Company) desires to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive is willing to serve in the employ of the Company on a full-time basis for such period, all in accordance with the terms and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Title and Condition of Employment. The Company hereby employs the Executive as President and Chief Executive Officer and the Executive hereby accepts such employment for the period provided for in Section 2, all upon the terms and conditions contained in this Agreement. As a condition to the Executive's employment, the Executive affirms and represents that the Executive is under no obligation to any former employer or other person which is in any way inconsistent with, or which imposes any restriction upon, the employment of the Executive by the Company or the Executive's undertakings under this Agreement, except a consulting arrangement with CareFirst, Inc. which was previously disclosed to the former Chief Executive Officer of the Company. 2. Term of Employment. Unless sooner terminated pursuant to Section 7, the term of the Executive's employment under this Agreement shall be for a period commencing on the date hereof through December 31, 2005 (the "Term"). -1-
3. Duties. During the Term, the Executive shall serve as President and Chief Executive Officer, reporting directly to the Board of Directors of the Company, and shall provide executive, administrative and managerial services consistent with such position and perform such other reasonable employment duties as the Board of Directors may from time to time prescribe. The Executive shall also serve as a director of the Company and any of the Company's subsidiaries to which he is elected. The Executive shall, except to the extent approved by the Board of Directors, (i) devote his full-time to the services required of the Executive, (ii) render his services exclusively to the Company, and (iii) use his best efforts, judgment, and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of the Executive's position. The Executive may serve on boards of directors or advisory boards of businesses that are not competitors of the Company or which do not create a conflict of interest or on the boards of civic and not for profit organizations. The Executive has disclosed in writing such memberships to the Board of Directors prior to the execution of this Agreement and shall disclose such information, at least, annually thereafter. 4. Compensation. As compensation for the services to be performed by the Executive during the Term, the Company shall provide to the Executive: (a) an annual base salary of not less than eight hundred thousand dollars ($800,000) ("Salary"); (b) a target annual incentive opportunity of not less than one hundred percent (100%) of the Salary ("Target Annual Incentive"). The performance goals required to earn the Target Annual Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the year for which the opportunity pertains; and (c) a target annualized long-term incentive opportunity of not less than one hundred fifty percent (150%) of the Salary("Target Long- -2-
Term Incentive"). The performance goals required to earn the Target Long-Term Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the performance period for which the opportunity pertains. If such performance period is longer than one year, the Target Long-Term Incentive opportunity shall be adjusted accordingly based on the number of years in the performance period. Should the Company elect to increase any element of the Executive's compensation during the Term, the Agreement shall be deemed amended to incorporate the new increased Salary or Target Annual Incentive or Target Long-Term Incentive effective as of the date specified for the increase. The payment of any compensation hereunder shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, and shall be paid in accordance with the Company's normal payroll and incentive administration practices as they may exist from time to time. 5. Benefits. In addition to the payments set forth in Section 4, the Executive shall: (a) be eligible to participate in all fringe benefits, paid time off program, incentive plans, and retirement programs, both tax-qualified and non-qualified, that may be provided by the Company for its key executives, in accordance with the provisions of any such programs or plans; (b) be entitled to a benefit based on a percentage of the Executive's pay ("Replacement Ratio SERP Benefit" or "Benefit") which Benefit shall be fully paid by the Company and shall be equal to the amount, if any, by which: (i) the amount (expressed as a single lump sum) which is the actuarial equivalent (as determined below) of a benefit (expressed as a straight life annuity with payments beginning at age sixty-two (62) or, if later, beginning at the Executive's age at the date of his termination of employment) equal to fifty percent (50%) of the -3-
Executive's average annual pay (as determined below) during the three (3) consecutive calendar years of his final five (5) calendar years of employment with the Company in which his pay was the highest; provided, however, if the Executive has less than three (3) calendar years of full year pay (Salary and Annual Incentive), the Executive's average annual pay shall be determined by annualizing the pay for any partial calendar year and calculating the average for the period; exceeds (ii) the sum of the following: (A) the total benefit (expressed as a single lump sum) payable under the Anthem Cash Balance Pension Plan ("Cash Balance Plan"); plus (B) the amount (expressed as a single lump sum) payable to the Executive under the Anthem Supplemental Executive Retirement Plan ("SERP"). For purposes of this Section 5(b), the Executive's pay in a calendar year shall include the Executive's Salary in each applicable calendar year (including amounts deferred under the Anthem Deferred Compensation Plan) and shall also include the amount of any award of the Annual Incentive paid in the calendar year or payments which would have been paid during the applicable calendar year but for a deferral election made by the Executive, but shall exclude deferred amounts actually paid in the calendar year pursuant to deferral elections made in earlier calendar years. Actuarial equivalent shall be determined using the same actuarial assumptions set forth in the Cash Balance Plan; provided, however, that before the lump sum conversion is effected under subparagraph (i) above, the benefit under such subparagraph shall be reduced by four-twelfths (4/12ths) of one (1) percent for each month that the Executive's age at the date of his employment termination precedes the Executive's attainment of age sixty-two (62) unless (i) the Executive is entitled to receive payments pursuant to Section 8, 9, 11 or 12, or (ii) the Executive completes the original term of -4-
his employment set forth in Section 2 (December 31, 2005), then the Executive shall be assumed to have attained the age of sixty-two (62). The Replacement Ratio SERP Benefit shall be fully vested if (i) the Executive continues his employment with the Company through December 31, 2003, or (ii) the Executive is entitled to receive payments pursuant to Section 8, 9, 11 or 12. The payment of the Replacement Ratio SERP Benefit shall be made at the same time (and in the same form) as payment of the Executive's SERP benefit and by using the same actuarial factors applicable to the SERP in converting the Benefit to a form other than a single lump sum; (c) be eligible to participate in any life, disability or other similar insurance plans, medical and dental plans or other employee welfare benefit plans that may be provided by the Company for its key executives, in accordance with the provisions of any such plans; and (d) be eligible to participate in any postretirement medical coverage comparable to the plan that is provided by the Company for its key executives, in accordance with the provisions of such plan in effect on October 22, 1999, but with the payment of whatever contribution that the Company requires that other such retirees would pay for such coverage. 6. Expenses. The Company shall, in accordance with and to the extent of its policies, pay all ordinary and necessary business expenses incurred by the Executive in performing his duties as a key executive including, but not limited to, first class air travel, airline travel clubs, and initiation and other membership fees and business use charges at two (2) clubs of the Executive's choosing. The Executive shall account promptly for all such business expenses in the manner prescribed by the Company and shall submit, on request, all records necessary to confirm that the Executive's business use of any club is more than fifty percent (50%) of the Executive's total use of such club. 7. Termination. The Executive's employment shall be terminated upon the occurrence of any of the following: (a) the death of the Executive; -5-
(b) the Executive's disability (as such term is defined in the Company's executive long-term disability plan) ("Disability"); (c) the termination of employment by the Executive for Good Reason (as defined below); (d) the termination of the employment by the Executive for any reason other than Good Reason; (e) the termination of employment by the Company For Cause (as defined below); (f) the termination of employment by the Company other than For Cause; or (g) the termination of employment by mutual agreement of the Executive and the Company through an Approved Retirement (as defined below). The term for "Good Reason" shall mean (i) a reduction in Salary or Target Annual Incentive or Target Long-Term Incentive opportunity, (ii) a reduction in benefits below the level of other key executives, (iii) a diminution in status, office or title, (iv) a change in the reporting relationship from the direct supervision by the Board of Directors, (v) an assignment of duties inconsistent with the Executive's position as a key executive or materially less than exists as of the effective date of this Agreement, which duties are those commonly associated with the position of chief executive officer and include direct responsibility for all the units and entities of the Company (including its successor) or its subsidiaries, whether currently existing or hereinafter acquired, or (vi) an assignment outside of the greater Indianapolis area or the imposition of business travel obligations substantially greater than existing business travel obligations. In a merger or consolidation of the Company, it shall not be "Good Reason" if the Executive is not selected as the initial Chief Executive Officer and the provisions of subparagraphs (iii), (iv) or (v) are triggered, if there exists an agreement that the Executive is designated as the successor Chief Executive Officer and will begin serving as the Chief Executive Officer of the surviving entity within twelve (12) -6-
months of the closing of the transaction and, during such period of transition, the Executive is to serve as a director of the surviving entity. In order to be effective, the Executive must give the Chairman of the Board of the Company at least sixty (60) calendar days advance written notice of his intent to terminate his employment for "Good Reason" setting forth the specific action(s) by the Company which triggered the notice and such written notice must be received by the Company no more than one hundred eighty (180) calendar days after the complained-of action(s) was implemented. Once written notice is received by the Company, the Chairman of the Board and the Compensation Committee of the Board of Directors shall promptly meet to consider the notice of the complained-of actions. The Company shall have thirty (30) calendar days within which to concur that the "Good Reason" exists or to cure or remedy the action(s) giving rise to the Executive's notice. If cured or remedied, there shall be no "Good Reason" for the Executive terminating his employment, and the Executive shall not be entitled to the payments set forth in Section 12. The term "For Cause" or "Cause" shall mean a reasonable determination by the Company that the Executive (i) has been convicted of a felony, (ii) has engaged in an activity which, if proven in a criminal proceeding, could result in conviction of a felony involving dishonesty or fraud, or (iii) has willfully engaged in gross misconduct likely to be materially damaging or materially detrimental to the Company. In order to be effective, the Company must give the Executive at least sixty (60) calendar days advance written notice of its intent to terminate his employment "For Cause" setting forth the specific action(s) by the Executive which triggered the notice and such written notice must be received by the Executive no more than one hundred eighty (180) calendar days after the Company learned of the action(s) giving rise to the "For Cause" termination. The term "Approved Retirement" shall mean (i) retirement as defined in the Company's qualified retirement plans and with approval by the Board of Directors of the Company, or (ii) at the option of the Executive, after the Executive completes the original term of his employment set forth in Section 2 (December 31, 2005). Once the Executive has been granted Approved Retirement, the provisions of Section 11 govern instead of Section 8 or 9 in the case of the Executive's death or disability prior to the date of retirement. -7-
8. Death of The Executive. In the event the Executive's employment is terminated as a result of the Executive's death, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the estate of the Executive: (a) for the lesser of twelve (12) months or the unexpired portion of the Term, the Executive's Salary; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of death, based upon the achievement of the performance goals for the plans for the entire year of death prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the year of death, an amount equal to the Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's death; (e) for the lesser of twelve (12) months or the unexpired portion of the Term, the DEC plan core and cash credits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's death; and (f) the Replacement Ratio SERP Benefit payable under Section 5. 9. Disability of the Executive. In the event the Executive's employment is terminated as a result of the Executive's disability, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the Executive if the Executive satisfies the terms of Section 14: (a) for the lesser of twelve (12) months or the unexpired portion of the Term, the Executive's Salary, reduced by any payments to be -8-
received by the Executive under the Company's Executive Long-Term Disability Plan for the same period; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of disability, based upon the achievement of the performance goals for the plans for the entire year of disability prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the year of disability, an amount equal to the Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's disability; (e) for the lesser of twelve (12) months or the unexpired portion of the Term, the medical and dental plan benefits and DEC plan core and cash credits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's disability; and (f) the Replacement Ratio SERP Benefit payable under Section 5. 10. Executive-Initiated Termination Other Than For Good Reason or Company-Initiated For Cause. If the Executive terminates this Agreement for other than Good Reason or the Company terminates this Agreement For Cause, the Company shall have no further obligations and liabilities under this Agreement after the termination of employment except that the Company shall pay to the Executive (i) any amount vested of the Replacement Ratio SERP Benefit payable under Section 5 and (ii) amounts due to the Executive in accordance with the provisions of programs or plans that may be provided by the Company for its key executives, if the Executive satisfies the terms of Section 14. 11. Termination Other Than For Cause or Approved Retirement. In the event the Executive's employment is terminated by the Company other than For Cause or for an Approved Retirement, the Company shall have no further -9-
obligations or liabilities under this Agreement except that the Company shall pay the following to the Executive if the Executive satisfies the terms of Section 14: (a) for the remainder of the Term, the Executive's Salary; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of termination, based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the Term, an amount equal to eighty percent (80%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; (e) for the remainder of the Term, an amount equal to twenty percent (20%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment if the Executive offers to be available for consultation, at mutually agreed upon times, up to a maximum of eight (8) days each quarter of the year; (f) for the remainder of the Term, the medical and dental plan benefits and DEC plan core and cash credits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; and (g) the Replacement Ratio SERP Benefit payable under Section 5. 12. Termination For Good Reason. In the event the Executive's employment is terminated by the Executive for Good Reason, the Company shall have no further obligations or liabilities under this Agreement except that the -10-
Company shall pay the following to the Executive if the Executive satisfies the terms of Section 14: (a) for the remainder of the Term, the Executive's Salary; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of termination, based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the Term, an amount equal to eighty percent (80%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; (e) for the remainder of the Term, an amount equal to twenty percent (20%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment if the Executive offers to be available for consultation, at mutually agreed upon times, up to a maximum of eight (8) days each quarter of the year; (f) for the remainder of the Term, the medical and dental plan benefits and DEC plan core and cash credits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; and (g) the Replacement Ratio SERP Benefit payable under Section 5. 13. Payment of Compensation Described in Section 8, 9, 11 or 12. The compensation items specified in Section 8, 9, 11 or 12 shall be paid as follows: -11-
(a) the Salary shall be paid over the remaining Term or any shorter period as described in Section 8, 9, 11 or 12 in accordance with the Company's normal payroll practices; (b) the prior unvested Long-Term Incentive awards shall be paid within ninety (90) days after the termination of employment; (c) the current and future Annual Incentive and Long-Term Incentive awards and opportunities shall be paid within ninety (90) days after the end of the calendar year for which the incentive applied; and (d) the Replacement Ratio SERP Benefit shall be paid at the same time and in the same form as the Executive's SERP benefit. 14. Execution of Release. As a condition of receiving the compensation and benefits described in Sections 9, 11 and 12, the Executive shall first execute a release of any and all claims arising out of the Executive's employment with the Company or the Executive's separation from such employment (including, without limitation, claims relating to age, disability, sex or race discrimination to the extent permitted by law), excepting only claims arising out of the alleged breach of this Agreement or of any other written contract between the Executive and the Company. Such release shall be in a form reasonably satisfactory to the Company and shall comply with any applicable legislative or judicial requirements, including, but not limited to, the Older Workers Benefit Protection Act. An example of such release is attached as Attachment A. 15. Protection of the Company's Business. The Executive acknowledges that in the course of his employment he will acquire knowledge of trade secrets and confidential data of the Company. Such trade secrets and confidential data may include, but are not limited to, confidential product information, provider contracts, customer lists, technical information, methods by which the Company proposes to compete with its business competitors, strategic and business plans, confidential reports prepared by business consultants which may reveal strengths and weaknesses of the Company and its competition and similar information relating to the Company. The Executive, in order to perform -12-
his obligations under this Agreement, must necessarily acquire knowledge of such trade secrets and confidential data, all of which the Executive acknowledges are not known outside the business of the Company, are known only to a limited group of its top executives and directors, are protected by strict measure to preserve secrecy, are of great value to the Company, are the result of the expenditure of large sums of money, are difficult for an outsider to duplicate, and disclosure of which would be extremely detrimental to the Company. The Executive covenants to keep all such trade secrets or confidential data secret and not to release such information to persons not authorized by the Company to receive such secrets and data, both during the term of this Agreement and at all times following its termination. The Executive acknowledges that trade secrets and confidential data need not be expressly marked as such by the Company. 16. Documents, Etc. All records, files, documents, equipment and the like shall be, and remain, the sole property of the Company. The Executive, on the termination of his employment, shall immediately return to the Company all such items without retention of any copies. 17. Limited Non-Competition. During the Executive's employment and for a limited time thereafter, the Company must protect its legitimate business interests by limiting the Executive's ability to compete with the Company. This limited non-competition provision is drafted narrowly so as to be able to safeguard the Company's legitimate business interests while not unreasonably interfering with the Executive's ability to obtain other employment. The Company does not intend, and the Executive acknowledges, that this limited non-competition provision is not an attempt to prevent the Executive from obtaining other employment. The Executive further acknowledges that the Company may need to take action, including litigation, to enforce this limited non-competition provision, which efforts the parties stipulate shall not be deemed an attempt to prevent the Executive from obtaining other employment. (a) During Employment By the Company. During the Executive's employment, Executive shall not, directly or indirectly, have any ownership interest in, work for, advise, manage, or act as an agent or consultant for, or have any business connection or business or employment relationship with any person or entity that competes with the Company or -13-
that contemplates competing with the Company without the prior written approval of the Board of Directors. (b) During Post-Employment Period. For a period of two (2) years after the Executive's termination of employment (regardless of the reason), or for the duration of the Executive's receipt of Salary under Section 11 or 12, whichever is longer, the Executive shall not: (i)(A) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (i)(B) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which he has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (ii)(A) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (ii)(B) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by -14-
the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which the Executive has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(A) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company with whom the Executive has had contact (either directly or indirectly) or over which he has had responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(B) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company; and (iv) directly or indirectly, on behalf of the Executive or any third party, make any business contacts with, solicit or accept business from any customer of the Company for any product or service which is competitive with or substantially similar to any product or service sold by the Company; (c) Separate and Several Covenants. The Executive acknowledges that after termination of his employment, he will inevitably possess trade secrets and confidential data of the Company which he would inevitably use if he were to engage in conduct prohibited as set forth above, and such use would be unfair to and extremely detrimental to the Company. The Executive further acknowledges that in view of the benefits provided him by this Agreement, such conduct on his part would be inequitable. Accordingly, the Executive separately and severally covenants for the benefit of the Company to keep each of the covenants described in this Section 17 for the period specified above. (d) Acknowledgment of the Company's Superseding Interest in Protecting its Business. The Executive recognizes that personal relationships between the Company, its employees and customers are -15-
essential to the Company's business operations and that the Company furthers such relationships by investments of time and money. The Executive recognizes that this Agreement is reasonably necessary to protect the Company's legitimate interest in its customers, and to protect the Company's confidential information and goodwill, and acknowledges that nothing contained in this Agreement shall unreasonably alter the Executive's ability to obtain a livelihood or preclude the Executive from engaging in his profession. The Executive, therefore, acknowledges that the Company's interest in maintaining its relationships with its established customers for at least two (2) years after termination of the Executive's employment, or for the duration of the Executive's receipt of Salary under Section 11 or 12, whichever is longer, supersedes any interest of the Executive in soliciting, servicing, or accepting the Company's customers on behalf of any entity other than the Company during that period of time. (e) Publicly Traded Stock. Nothing in the foregoing provisions of this section prohibits the Executive from purchasing for investment purposes only, any stock or corporate security traded or quoted on a national securities exchange or national market system. (f) Maximum Application. The parties expressly agree that the terms of this limited non-competition provision under this section are reasonable, enforceable, and necessary to protect the Company's interests, and are valid and enforceable. In the unlikely event, however, that a court of competent jurisdiction were to determine that any portion of this limited non-competition provision is unenforceable, then the parties agree that the remainder of the limited non-competition provision shall remain valid and enforceable to the maximum extent possible. 18. Other Limited Prohibitions. During the Executive's employment and for two (2) years after termination, or for the duration of the Executive's receipt of Salary under Section 11 or 12, whichever is longer, the Executive shall not: (a) request or advise any customer of the Company, or any person or entity having business dealings with the Company, to withdraw, curtail or cease such business with the Company; -16-
(b) disclose to any person or entity the identities of any customers of the Company, or the identity of any persons or entities having business dealings with the Company; or (c) directly or indirectly influence or attempt to influence any other employee of the Company to separate from the Company. 19. Specific Enforcement/Injunctive Relief. The Executive agrees that it would be difficult to measure damages to the Company from any breach of the covenants contained in Sections 15 through 18, but that such damages from any breach would be great, incalculable and irremediable, and that damages would be an inadequate remedy. Accordingly, the Executive agrees that the Company may have specific performance of the terms of this Agreement in any court permitted by this Agreement. In addition, if the Executive violates the non-competition provisions of Section 17 or 18, the Executive agrees that any period of such violation shall be added to the term of the non-competition. For example, if the Executive violates the provision for three (3) months, the Company shall be entitled to enforce the non-competition provision for two (2) years, or for the duration of the Executive's receipt of Salary under Section 11 or 12, plus three (3) months post-termination. In determining the period of any violation, the parties stipulate that in any calendar month in which the Executive engages in any activity violative of the non-competition provision, the Executive is deemed to have violated the non-competition provision for the entire month, and that month shall be added to the duration of the non-competition provision as set out above. The parties agree however, that specific performance and the "add back" remedies described above shall not be the exclusive remedies, and the Company may enforce any other remedy or remedies available to it either in law or in equity including, but not limited to, temporary, preliminary, and/or permanent injunctive relief. 20. Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions of this Agreement which shall be given effect independently of the invalid provisions and, in such circumstances, the invalid provision is severable. -17-
21. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Indiana. The parties expressly agree that it is appropriate for Indiana law to apply to: (i) the interpretation of the Agreement; (ii) any disputes arising out of this Agreement; (iii) any disputes arising out of the employment relationship of the parties; and (iv) any and all other disputes between the parties. 22. Choice of Forum. The Company is based in Indiana, and the Executive understands and acknowledges the Company's desire and need to defend any litigation against it in Indiana. Accordingly, the parties agree that any claim of any type brought by the Executive against the Company or any of its employees or agents must be maintained only in a court sitting in Marion County, Indiana, or, if a federal court, the Southern District of Indiana, Indianapolis Division. The Executive further understands and acknowledges that in the event the Company initiates litigation against the Executive, the Company may need to prosecute such litigation in the Executive's forum state, in the State of Indiana, or in such other state where the Executive is subject to personal jurisdiction. Accordingly, the parties agree that the Company can pursue any claim against the Executive in any forum in which the Executive is subject to personal jurisdiction. The Executive specifically consents to personal jurisdiction in the State of Indiana. 23. Mandatory Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, other than a claim arising out of the Executive's breach of the confidentiality and non-competition provisions of Sections 15 through 19, shall be settled by arbitration in Indianapolis, Indiana, in accordance with the Rules of the American Arbitration Association before arbitrators who are licensed to practice law. The arbitrator or arbitrators shall apply the substantive law of Indiana or federal law, or both, as applicable to the dispute. Any award entered shall be final, binding and nonappealable, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. In the event that the Company refuses or otherwise fails to make a payment when due and it is ultimately decided that the Executive is entitled to such payment, such payment shall be increased to reflect an interest equivalent for -18-
the period of delay, compounded annually, equal to the prime or base lending rate used by Bank One Indiana, NA, and in effect as of the date the payment was first due. 24. Non-Jury Trials. Notwithstanding the provisions of Sections 19 and 23 above, and if the provisions of Section 19 or 23 above are not enforceable, the Executive expressly waives any rights to a jury trial and agrees that any claim of any type made against the Company or its agents or executives (including, but not limited to, employment discrimination litigation, wage litigation, defamation, or any other claim) lodged in any court will be tried, if at all, without a jury. 25. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary or any termination of this Agreement notwithstanding, in the event it shall be determined that any payment or distribution or benefit ("Payment") made or provided by the Company or its affiliates to or for the benefit of the Executive whether pursuant to this Agreement or otherwise, and determined without regard to any additional payments required under this Section 25 would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code") or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment ("Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes) including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments; (b) Subject to the provisions of Section 25(c), all determinations required to be made under this Section 25, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such -19-
determination, shall be made by the Company's independent auditor (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within a reasonable period of time of the receipt of notice from the Executive that there has been a Gross-Up Payment. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 25, shall be paid by the Company to the Executive within a reasonable period of time of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 25(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive; (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; -20-
(ii) take such action in connection with contesting such claims as the Company shall reasonably request in writing from time to time, including without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 25(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of -21-
the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority; (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 25(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 25(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 25(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 26. Rabbi Trust. The Company has established The Anthem Employee Benefit Trust, a rabbi trust ("Trust") for key executives, and intends for such Trust to remain in effect in accordance with its terms. This Agreement shall, upon Triggering Events (as defined below), become covered under the Trust and become subject to the Trust funding requirements. For purposes of this Section 26, the term "Triggering Event" shall mean the first to occur of: (a) the termination of the employment of the Executive by the Company other than For Cause; (b) the termination of the employment by the Executive for Good Reason; (c) the termination of the employment by the Executive as a result of an Approved Retirement; or -22-
(d) the occurrence of a change of control (as such term is defined in the Trust) of the Company. 27. Nonalienation of Benefits. Except as may otherwise be required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, bankruptcy or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 28. Legal Fees and Cost. All legal and other fees and expenses, including, without limitation, any arbitration expenses, incurred by the Executive in connection with contesting or disputing any termination of employment, in seeking to obtain or enforce any right or benefit provided for in this Agreement, or in otherwise pursuing any right or claim, shall be paid by the Company, to the extent permitted by law, provided that the Executive makes a formal written settlement demand prior to trial or arbitration and is ultimately successful, in obtaining through trial or arbitration more than fifty percent (50%) of the monetary relief sought, in his final written settlement demand exclusive of attorney's fees. 29. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and will be deemed to have been given when delivered in person (to the Executive if such notice is for the Executive) or five (5) days following sending by overnight courier or mailing by first class, certified or registered mail, postage prepaid, to the Executive at his home address, or such addresses as the Executive shall have designated in writing, or if to the Company, to the attention of the Corporate Secretary, at the Company's principal place of business, 120 Monument Circle, Indianapolis, Indiana 46204. 30. Headings. The various headings of this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any of its provisions. 31. Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to its benefit, its successors and affiliated companies and shall be binding upon the successors and assigns of the -23-
Company. This Agreement, being personal to the Executive, cannot be assigned by the Executive, but his personal representative shall be bound by all its terms and conditions. 32. Waiver and Amendments, Etc. Failure of the Company to insist upon strict compliance with any terms or provisions of this Agreement shall not be deemed a waiver of any terms, provisions or rights of the Company. Moreover, no modifications, amendments, extensions or waivers of this Agreement or any provisions hereof shall be binding upon the Company or the Executive unless in writing and signed by the Executive and the Company. 33. Complete Agreement. This Agreement constitutes the entire employment agreement of the parties and supersedes all prior employment agreements addressing the terms, conditions, and issues contained herein. Nothing in this Agreement, however, affects any separate written agreements addressing other terms and conditions and issues agreed to by the parties. 34. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. -24-
IN WITNESS WHEREOF, the Company and the Executive have duly executed and delivered this Agreement effective as of the day and year first above written. Larry C. Glasscock /s/ Larry C. Glasscock ____________________________________ Anthem Insurance Companies, Inc. By: /s/ L. Ben Lytle -------------------------------- L. Ben Lytle, Chairman of the Board -25-
ATTACHMENT A RELEASE AND WAIVER AGREEMENT This Release and Waiver Agreement ("Agreement") is entered into on this __ day of __________, ____, by and between Anthem Insurance Companies, Inc., including its subsidiaries and affiliates (the "Company") and Larry C. Glasscock (the "Executive"). NOW, THEREFORE, the parties agree to the following: 1. The Executive and the Company acknowledge and agree that the Employee's last day of employment with the Company or one of its affiliates shall be ___________________. Service credit for purposes of all Company benefits, including but not limited to the Anthem Cash Balance Pension Plan, shall terminate as of that date. 2. The Company agrees that it shall pay to the Executive the amounts described in Section [9, 11 or 12] of the Employment Agreement between the Company and the Executive effective ______________ ("Employment Agreement"). All payments made pursuant to Section [9, 11 or 12] of the Employment Agreement shall be made pursuant to Sections 13 and 14 of the Employment Agreement. The Executive shall also be entitled to any benefits described in Section [9, 11 or 12] of the Employment Agreement for the duration noted therein. 3. Any and all benefits not specifically discussed in this Agreement or provided by law will cease on [termination date from paragraph 1]. ----------------------------------- 4. The provisions of the Employment Agreement relating to Protection of the Company's Business, Documents, Limited Non-Competition, Other Limited Prohibitions, and Specific Enforcement (Sections 15, 16, 17, 18 and 19) shall remain in full force and effect upon termination of employment. The Executive acknowledges that he possesses trade secrets and confidential data of the Company and further acknowledges that the provisions of Sections 15 through 19 of the Employment Agreement are reasonably necessary to protect the Company's legitimate business interests, confidential data, and goodwill. 5. The Executive hereby forever releases and waives as against the Company, and each of their directors, officers, employees and agents, any and all legal and equitable causes of action and claims which the Executive possesses, whether known or unknown, including, but not limited to, any such causes of action and claims relating to the Employee's employment with, or termination of employment from, the Company or any of its affiliates, including any and all rights, entitlements or claims under any and all federal, state and local laws and regulations, all as amended, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991 and the Americans with Disabilities Act of 1990. The Executive further expressly and specifically waives any and all rights and claims under the Age Discrimination in Employment Act of 1967 and the Older Workers' Benefit Protection Act (collectively referred to as the "Act"). The Executive acknowledges and agrees that this
Page 2 waiver of any right or claim under the Act (hereinafter "Waiver") is knowing and voluntary, and specifically agrees as follows: that this Waiver is written in a manner which he understands; that this Waiver specifically relates to rights or claims under the Act; that he does not waive any rights or claims under the Act that may arise after the date of execution of this Agreement; that he waives rights or claims under the Act in exchange for consideration in addition to anything of value to which he already is entitled; and that he has been advised in writing to consult with an attorney prior to executing it. The Executive acknowledges that he understands that he has twenty-one (21) days after receipt of this Agreement to decide whether to accept it and that he may revoke any acceptance of this Agreement within seven (7) days of such acceptance. This Agreement shall not become effective until the seven (7) day revocation period has expired and no amounts will be paid to the Executive until the seven (7) day revocation period has expired. 6. It is understood and agreed between the Executive and the Company that this Agreement shall in no way affect any claims of the Executive arising out of Social Security, Worker's Compensation, or Unemployment Laws. 7. The Company and the Executive agree that any breach of the terms of this Agreement may, at the Company's discretion, result in the immediate termination of any subsequent payments to be made under this Agreement. In the event of a breach of this Agreement or any dispute regarding this Agreement, the provisions of the Employment Agreement relating to Specific Enforcement, Governing Law, Choice of Forum, Mandatory Arbitration, Non-Jury Trials, and Legal Fees and Costs (Sections 19, 21, 22, 23, 24 and 28) shall remain in full force and effect. 8. The Executive expressly agrees that the consideration designated in this Agreement is sufficient for the terms of this Agreement. The Executive further agrees that upon the execution of this Agreement he shall keep confidential and not disclose the existence or terms of this Agreement unless compelled to do so by a court or administrative body. 9. The rights and obligations hereunder shall not be assigned or transferred by the Executive and shall be binding upon and inure to the benefit of the Executive, his heirs, legatees and legal representatives, and the Company, its subsidiaries and affiliates, successors and assigns. No waiver of any breach of this Agreement shall be deemed or construed as a waiver of any other or subsequent breach. Any amendment of this Agreement shall be effective only if in writing and signed by both parties. If any provision of this Agreement shall be held invalid under applicable laws, such provision shall be ineffective only to the extent of any invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements, whether oral or written, between the parties. The terms of this Agreement shall be governed by Indiana law. The parties represent that they have read and understood this Agreement, and the officer executing this document on behalf of the Company represents that he has the authority to do so.
Page 3 10. This Agreement shall not be effective or enforceable against the Company until the seven (7) day revocation period has expired or if the Executive revokes it not later than seven (7) days after he signs it. This revocation must be in writing and must be personally delivered, or sent by certified mail to: Corporate Secretary Anthem, Inc. 120 Monument Circle Indianapolis, Indiana 46204 11. The Executive expressly acknowledges that he understands all of the provisions of this Agreement and is voluntarily entering into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement. Larry C. Glasscock _________________________________________ Anthem Insurance Companies, Inc. By: ______________________________________ Printed: ________________________________ Title: __________________________________
EXHIBIT 10.4 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") is by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company"), with offices located at 120 Monument Circle, Indianapolis, Indiana, and David R. Frick (the "Executive"), residing at 8508 Green Braes S. Drive, Indianapolis, Indiana, dated as of the 1st day of January, 2000. W I T N E S S E T H: ------------------- WHEREAS, the Company (which hereinafter also includes subsidiaries of the Company) desires to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive is willing to serve in the employ of the Company on a full-time basis for such period, all in accordance with the terms and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Title and Condition of Employment. The Company hereby employs the Executive as Executive Vice President and Chief Legal and Administrative Officer and the Executive hereby accepts such employment for the period provided for in Section 2, all upon the terms and conditions contained in this Agreement. As a condition to the Executive's employment, the Executive affirms and represents that the Executive is under no obligation to any former employer or other person which is in any way inconsistent with, or which imposes any restriction upon, the employment of the Executive by the Company or the Executive's undertakings under this Agreement. 2. Term of Employment. Unless sooner terminated pursuant to Section 7, the term of the Executive's employment under this Agreement shall be for a period commencing on the date hereof through the later of (i) December 31, 2003, or (ii) December 31, 2004, if the Executive has not received by December -1-
31, 2001 written notice from the Company of its intent to extend this Agreement for a period of two (2) years beyond December 31, 2003 (the "Term"). 3. Duties. During the Term, the Executive shall serve as Executive Vice President and Chief Legal and Administrative Officer, reporting directly to the Chief Executive Officer of the Company, and shall provide executive, administrative and managerial services consistent with such position and perform such other reasonable employment duties as the Chief Executive Officer may from time to time prescribe. The Executive shall also serve as a director of any of the Company's subsidiaries to which he is elected. The Executive shall, except to the extent approved by the Chief Executive Officer, (i) devote his full-time to the services required of the Executive, (ii) render his services exclusively to the Company, and (iii) use his best efforts, judgment, and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of the Executive's position. The Executive may serve on boards of directors or advisory boards of businesses that are not competitors of the Company or which do not create a conflict of interest or on the boards of civic and not for profit organizations. The Executive has disclosed in writing such memberships to the Chief Executive Officer prior to the execution of this Agreement and shall disclose such information, at least, annually thereafter. 4. Compensation. As compensation for the services to be performed by the Executive during the Term, the Company shall provide to the Executive: (a) an annual base salary of not less than four hundred ten thousand dollars ($410,000) ("Salary"); (b) a target annual incentive opportunity of not less than eighty percent (80%) of the Salary ("Target Annual Incentive"). The performance goals required to earn the Target Annual Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the year for which the opportunity pertains; and -2-
(c) a target annualized long-term incentive opportunity of not less than one hundred twenty percent (120%) of the Salary ("Target Long-Term Incentive"). The performance goals required to earn the Target Long-Term Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the performance period for which the opportunity pertains. If such performance period is longer than one year, the Target Long-Term Incentive opportunity shall be adjusted accordingly based on the number of years in the performance period. Should the Company elect to increase any element of the Executive's compensation during the Term, the Agreement shall be deemed amended to incorporate the new increased Salary or Target Annual Incentive or Target Long-Term Incentive effective as of the date specified for the increase. The payment of any compensation hereunder shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, and shall be paid in accordance with the Company's normal payroll and incentive administration practices as they may exist from time to time. 5. Benefits. In addition to the payments set forth in Section 4, the Executive shall: (a) be eligible to participate in all fringe benefits, paid time off program, incentive plans, and retirement programs, both tax-qualified and non-qualified, that may be provided by the Company for its key executives, in accordance with the provisions of any such programs or plans; (b) be entitled to a benefit based on a percentage of the Executive's pay ("Replacement Ratio SERP Benefit" or "Benefit") which Benefit shall be fully paid by the Company and shall be equal to the amount, if any, by which: (i) the amount (expressed as a single lump sum) which is the actuarial equivalent (as determined below) of a benefit (expressed as a straight life annuity with payments beginning at age -3-
sixty-two (62) or, if later, beginning at the Executive's age at the date of his termination of employment) equal to fifty percent (50%) of the Executive's average annual pay (as determined below) during the three (3) consecutive calendar years of his final five (5) calendar years of employment with the Company in which his pay was the highest; provided, however, if the Executive has less than three (3) calendar years of full year pay (Salary and Annual Incentive), the Executive's average annual pay shall be determined by annualizing the pay for any partial calendar year and calculating the average for the period; exceeds (ii) the sum of the following: (A) the total benefit (expressed as a single lump sum) payable under the Anthem Cash Balance Pension Plan ("Cash Balance Plan"); plus (B) the amount (expressed as a single lump sum) payable to the Executive under the Anthem Supplemental Executive Retirement Plan ("SERP"). For purposes of this Section 5(b), the Executive's pay in a calendar year shall include the Executive's Salary in each applicable calendar year (including amounts deferred under the Anthem Deferred Compensation Plan) and shall also include the amount of any award of the Annual Incentive paid in the calendar year or payments which would have been paid during the applicable calendar year but for a deferral election made by the Executive, but shall exclude deferred amounts actually paid in the calendar year pursuant to deferral elections made in earlier calendar years. Actuarial equivalent shall be determined using the same actuarial assumptions set forth in the Cash Balance Plan; provided, however, that before the lump sum conversion is effected under subparagraph (i) above, the benefit under such subparagraph shall be reduced by four-twelfths (4/12ths) of one (1) percent for each month that the Executive's age at the date of his -4-
employment termination precedes the Executive's attainment of age sixty-two (62) unless the Executive is entitled to receive payments pursuant to Section 8, 9, 11 or 12, then the Executive shall be assumed to have attained the age at the expiration date of the term set forth in Section 2 (December 31, 2004). The Replacement Ratio SERP Benefit shall be fully vested if (i) the Executive continues his employment with the Company through December 31, 2003, or (ii) the Executive is entitled to receive payments pursuant to Section 8, 9, 11 or 12. The payment of the Replacement Ratio SERP Benefit shall be made at the same time (and in the same form) as payment of the Executive's SERP benefit and by using the same actuarial factors applicable to the SERP in converting the Benefit to a form other than a single lump sum; (c) be eligible to participate in any life, disability or other similar insurance plans, medical and dental plans or other employee welfare benefit plans that may be provided by the Company for its key executives, in accordance with the provisions of any such plans; and (d) be eligible to participate in any postretirement medical coverage comparable to the plan that is provided by the Company for its key executives, in accordance with the provisions of such plan in effect on December 31, 1999, but with the payment of whatever contribution that the Company requires that other such retirees would pay for such coverage. 6. Expenses. The Company shall, in accordance with and to the extent of its policies, pay all ordinary and necessary business expenses incurred by the Executive in performing his duties as a key executive including, but not limited to, first class air travel, airline travel clubs, and initiation and other membership fees and business use charges at one luncheon club of the Executive's choosing. The Executive shall account promptly for all such business expenses in the manner prescribed by the Company and shall submit, on request, all records necessary to confirm that the Executive's business use of any club is more than fifty percent (50%) of the Executive's total use of such club. -5-
7. Termination. The Executive's employment shall be terminated upon the occurrence of any of the following: (a) the death of the Executive; (b) the Executive's disability (as such term is defined in the Company's executive long-term disability plan) ("Disability"); (c) the termination of employment by the Executive for Good Reason (as defined below); (d) the termination of the employment by the Executive for any reason other than Good Reason; (e) the termination of employment by the Company For Cause (as defined below); (f) the termination of employment by the Company other than For Cause; or (g) the termination of employment by mutual agreement of the Executive and the Company through an Approved Retirement (as defined below). The term for "Good Reason" shall mean (i) a reduction in Salary or Target Annual Incentive or Target Long-Term Incentive opportunity, (ii) a reduction in benefits below the level of other key executives, (iii) a diminution in status, office or title, (iv) a change in the reporting relationship from the direct supervision by the Chief Executive Officer, (v) an assignment of duties inconsistent with the Executive's position as a key executive or materially less than exists as of the effective date of this Agreement, which duties are those commonly associated with the position of chief legal and administrative officer and include direct responsibility for all the staff positions of the Company (including its successor) or its subsidiaries, whether currently existing or hereinafter created, other than the staff positions which report directly to the Chief Executive Officer or the Chief Financial Officer, or (vi) an assignment outside of the greater Indianapolis area or the imposition of business travel obligations -6-
substantially greater than existing business travel obligations. In order to be effective, the Executive must give the Chief Executive Officer and the Chairman of the Board of Directors of the Company at least sixty (60) calendar days advance written notice of his intent to terminate his employment for "Good Reason" setting forth the specific action(s) by the Company which triggered the notice and such written notice must be received by the Company no more than one hundred eighty (180) calendar days after the complained-of action(s) was implemented. Once written notice is received by the Company, the Chairman of the Board and the Compensation Committee of the Board of Directors shall promptly meet to consider the notice and the complained-of actions. The Company shall have thirty (30) calendar days within which to concur that "Good Reason" exists or to cure or remedy the action(s) giving rise to the Executive's notice. If cured or remedied, there shall be no "Good Reason" for the Executive terminating his employment, and the Executive shall not be entitled to the payments set forth in Section 12. The term "For Cause" or "Cause" shall mean a reasonable determination by the Company that the Executive (i) has been convicted of a felony, (ii) has engaged in an activity which, if proven in a criminal proceeding, could result in conviction of a felony involving dishonesty or fraud, or (iii) has willfully engaged in gross misconduct likely to be materially damaging or materially detrimental to the Company. In order to be effective, the Company must give the Executive at least sixty (60) calendar days advance written notice of its intent to terminate his employment "For Cause" setting forth the specific action(s) by the Executive which triggered the notice and such written notice must be received by the Executive no more than one hundred eighty (180) calendar days after the Company learned of the action(s) giving rise to the "For Cause" termination. The term "Approved Retirement" shall mean retirement as defined in the Company's qualified retirement plans and with approval by the Chief Executive Officer of the Company. Once the Executive has been granted Approved Retirement, the provisions of Section 11 govern instead of Section 8 or 9 in the case of the Executive's death or disability prior to the date of retirement. 8. Death of The Executive. In the event the Executive's employment is terminated as a result of the Executive's death, the Company shall -7-
have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the estate of the Executive: (a) for the lesser of twelve (12) months or the unexpired portion of the Term, the Executive's Salary; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of death, based upon the achievement of the performance goals for the plans for the entire year of death prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the year of death, an amount equal to the Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's death; (e) for the lesser of twelve (12) months or the unexpired portion of the Term, the DEC plan core and cash credits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's death; and (f) the Replacement Ratio SERP Benefit payable under Section 5. 9. Disability of the Executive. In the event the Executive's employment is terminated as a result of the Executive's disability, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the Executive if the Executive satisfies the terms of Section 14: (a) for the lesser of twelve (12) months or the unexpired portion of the Term, the Executive's Salary, reduced by any payments to be received by the Executive under the Company's Executive Long-Term Disability Plan for the same period; -8-
(b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of disability, based upon the achievement of the performance goals for the plans for the entire year of disability prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the year of disability, an amount equal to the Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's disability; (e) for the lesser of twelve (12) months or the unexpired portion of the Term, the medical and dental plan benefits and DEC plan core and cash credits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's disability; and (f) the Replacement Ratio SERP Benefit payable under Section 5. 10. Executive-Initiated Termination Other Than For Good Reason or Company-Initiated For Cause. If the Executive terminates this Agreement for other than Good Reason or the Company terminates this Agreement For Cause, the Company shall have no further obligations and liabilities under this Agreement after the termination of employment except that the Company shall pay to the Executive (i) any amount vested of the Replacement Ratio SERP Benefit payable under Section 5 and (ii) amounts due to the Executive in accordance with the provisions of programs or plans that may be provided by the Company for its key executives, if the Executive satisfies the terms of Section 14. 11. Termination Other Than For Cause or Approved Retirement. In the event the Executive's employment is terminated by the Company other than For Cause or for an Approved Retirement, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the Executive if the Executive satisfies the terms of Section 14: (a) for the remainder of the Term, the Executive's Salary; -9-
(b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of termination, based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the Term, an amount equal to eighty percent (80%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; (e) for the remainder of the Term, an amount equal to twenty percent (20%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment if the Executive offers to be available for consultation, at mutually agreed upon times, up to a maximum of eight (8) days each quarter of the year; (f) for the remainder of the Term, the medical and dental plan benefits and DEC plan core and cash credits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; and (g) the Replacement Ratio SERP Benefit payable under Section 5. 12. Termination For Good Reason. In the event the Executive's employment is terminated by the Executive for Good Reason, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the Executive if the Executive satisfies the terms of Section 14: (a) for the remainder of the Term, the Executive's Salary; -10-
(b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of termination, based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the Term, an amount equal to eighty percent (80%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; (e) for the remainder of the Term, an amount equal to twenty percent (20%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment if the Executive offers to be available for consultation, at mutually agreed upon times, up to a maximum of eight (8) days each quarter of the year; (f) for the remainder of the Term, the medical and dental plan benefits and DEC plan core and cash credits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; and (g) the Replacement Ratio SERP Benefit payable under Section 5. 13. Payment of Compensation Described in Section 8, 9, 11 or 12. The compensation items specified in Section 8, 9, 11 or 12 shall be paid as follows: (a) the Salary shall be paid over the remaining Term or any shorter period as described in Section 8, 9, 11 or 12 in accordance with the Company's normal payroll practices; -11-
(b) the prior unvested Long-Term Incentive awards shall be paid within ninety (90) days after the termination of employment; (c) the current and future Annual Incentive and Long-Term Incentive awards and opportunities shall be paid within ninety (90) days after the end of the calendar year for which the incentive applied; and (d) the Replacement Ratio SERP Benefit shall be paid at the same time and in the same form as the Executive's SERP benefit. 14. Execution of Release. As a condition of receiving the compensation and benefits described in Sections 9, 11 and 12, the Executive shall first execute a release of any and all claims arising out of the Executive's employment with the Company or the Executive's separation from such employment (including, without limitation, claims relating to age, disability, sex or race discrimination to the extent permitted by law), excepting only claims arising out of the alleged breach of this Agreement or of any other written contract between the Executive and the Company. Such release shall be in a form reasonably satisfactory to the Company and shall comply with any applicable legislative or judicial requirements, including, but not limited to, the Older Workers Benefit Protection Act. An example of such release is attached as Attachment A. 15. Protection of the Company's Business. The Executive acknowledges that in the course of his employment he will acquire knowledge of trade secrets and confidential data of the Company. Such trade secrets and confidential data may include, but are not limited to, confidential product information, provider contracts, customer lists, technical information, methods by which the Company proposes to compete with its business competitors, strategic and business plans, confidential reports prepared by business consultants which may reveal strengths and weaknesses of the Company and its competition and similar information relating to the Company. The Executive, in order to perform his obligations under this Agreement, must necessarily acquire knowledge of such trade secrets and confidential data, all of which the Executive acknowledges are not known outside the business of the Company, are known only to a limited group of its top executives and directors, are protected by strict measure to -12-
preserve secrecy, are of great value to the Company, are the result of the expenditure of large sums of money, are difficult for an outsider to duplicate, and disclosure of which would be extremely detrimental to the Company. The Executive covenants to keep all such trade secrets or confidential data secret and not to release such information to persons not authorized by the Company to receive such secrets and data, both during the term of this Agreement and at all times following its termination. The Executive acknowledges that trade secrets and confidential data need not be expressly marked as such by the Company. 16. Documents, Etc. All records, files, documents, equipment and the like shall be, and remain, the sole property of the Company. The Executive, on the termination of his employment, shall immediately return to the Company all such items without retention of any copies. 17. Limited Non-Competition. During the Executive's employment and for a limited time thereafter, the Company must protect its legitimate business interests by limiting the Executive's ability to compete with the Company. This limited non-competition provision is drafted narrowly so as to be able to safeguard the Company's legitimate business interests while not unreasonably interfering with the Executive's ability to obtain other employment. The Company does not intend, and the Executive acknowledges, that this limited non-competition provision is not an attempt to prevent the Executive from obtaining other employment. The Executive further acknowledges that the Company may need to take action, including litigation, to enforce this limited non-competition provision, which efforts the parties stipulate shall not be deemed an attempt to prevent the Executive from obtaining other employment. (a) During Employment By Company. During the Executive's employment, Executive shall not, directly or indirectly, have any ownership interest in, work for, advise, manage, or act as an agent or consultant for, or have any business connection or business or employment relationship with any person or entity that competes with the Company or that contemplates competing with the Company without the prior written approval of the Chief Executive Officer. (b) During Post-Employment Period. For a period of two (2) years after the Executive's termination of employment (regardless of the -13-
reason), or for the duration of the Executive's receipt of Salary under Section 11 or 12, whichever is longer, the Executive shall not: (i)(A) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (i)(B) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which he has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (ii)(A) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (ii)(B) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which the Executive has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; -14-
(iii)(A) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company with whom the Executive has had contact (either directly or indirectly) or over which he has had responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(B) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company; and (iv) directly or indirectly, on behalf of the Executive or any third party, make any business contacts with, solicit or accept business from any customer of the Company for any product or service which is competitive with or substantially similar to any product or service sold by the Company; (c) Separate and Several Covenants. The Executive acknowledges that after termination of his employment, he will inevitably possess trade secrets and confidential data of the Company which he would inevitably use if he were to engage in conduct prohibited as set forth above, and such use would be unfair to and extremely detrimental to the Company. The Executive further acknowledges that in view of the benefits provided him by this Agreement, such conduct on his part would be inequitable. Accordingly, the Executive separately and severally covenants for the benefit of the Company to keep each of the covenants described in this Section 17 for the period specified above. (d) Acknowledgment of the Company's Superseding Interest in Protecting its Business. The Executive recognizes that personal relationships between the Company, its employees and customers are essential to the Company's business operations and that the Company furthers such relationships by investments of time and money. The Executive recognizes that this Agreement is reasonably necessary to protect the Company's legitimate interest in its customers, and to protect the Company's confidential information and goodwill, and acknowledges that -15-
nothing contained in this Agreement shall unreasonably alter the Executive's ability to obtain a livelihood or preclude the Executive from engaging in his profession. The Executive, therefore, acknowledges that the Company's interest in maintaining its relationships with its established customers for at least two (2) years after termination of the Executive's employment, or for the duration of the Executive's receipt of Salary under Section 11 or 12, whichever is longer, supersedes any interest of the Executive in soliciting, servicing, or accepting the Company's customers on behalf of any entity other than the Company during that period of time. (e) Publicly Traded Stock. Nothing in the foregoing provisions of this section prohibits the Executive from purchasing for investment purposes only, any stock or corporate security traded or quoted on a national securities exchange or national market system. (f) Maximum Application. The parties expressly agree that the terms of this limited non-competition provision under this section are reasonable, enforceable, and necessary to protect the Company's interests, and are valid and enforceable. In the unlikely event, however, that a court of competent jurisdiction were to determine that any portion of this limited non-competition provision is unenforceable, then the parties agree that the remainder of the limited non-competition provision shall remain valid and enforceable to the maximum extent possible. 18. Other Limited Prohibitions. During the Executive's employment and for two (2) years after termination, or for the duration of the Executive's receipt of Salary under Section 11 or 12, whichever is longer, the Executive shall not: (a) request or advise any customer of the Company, or any person or entity having business dealings with the Company, to withdraw, curtail or cease such business with the Company; (b) disclose to any person or entity the identities of any customers of the Company, or the identity of any persons or entities having business dealings with the Company; or -16-
(c) directly or indirectly influence or attempt to influence any other employee of the Company to separate from the Company. 19. Specific Enforcement/Injunctive Relief. The Executive agrees that it would be difficult to measure damages to the Company from any breach of the covenants contained in Sections 15 through 18, but that such damages from any breach would be great, incalculable and irremediable, and that damages would be an inadequate remedy. Accordingly, the Executive agrees that the Company may have specific performance of the terms of this Agreement in any court permitted by this Agreement. In addition, if the Executive violates the non-competition provisions of Section 17 or 18, the Executive agrees that any period of such violation shall be added to the term of the non-competition. For example, if the Executive violates the provision for three (3) months, the Company shall be entitled to enforce the non-competition provision for two (2) years, or for the duration of the Executive's receipt of Salary under Section 11 or 12, plus three (3) months post-termination. In determining the period of any violation, the parties stipulate that in any calendar month in which the Executive engages in any activity violative of the non-competition provision, the Executive is deemed to have violated the non-competition provision for the entire month, and that month shall be added to the duration of the non-competition provision as set out above. The parties agree however, that specific performance and the "add back" remedies described above shall not be the exclusive remedies, and the Company may enforce any other remedy or remedies available to it either in law or in equity including, but not limited to, temporary, preliminary, and/or permanent injunctive relief. 20. Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions of this Agreement which shall be given effect independently of the invalid provisions and, in such circumstances, the invalid provision is severable. 21. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Indiana. The parties expressly agree that it is appropriate for Indiana law to apply to: (i) the interpretation of the Agreement; (ii) any disputes arising out of this Agreement; (iii) any disputes arising out of the employment relationship of the parties; and (iv) any and all other disputes between the parties. -17-
22. Choice of Forum. The Company is based in Indiana, and the Executive understands and acknowledges the Company's desire and need to defend any litigation against it in Indiana. Accordingly, the parties agree that any claim of any type brought by the Executive against the Company or any of its employees or agents must be maintained only in a court sitting in Marion County, Indiana, or, if a federal court, the Southern District of Indiana, Indianapolis Division. The Executive further understands and acknowledges that in the event the Company initiates litigation against the Executive, the Company may need to prosecute such litigation in the Executive's forum state, in the State of Indiana, or in such other state where the Executive is subject to personal jurisdiction. Accordingly, the parties agree that the Company can pursue any claim against the Executive in any forum in which the Executive is subject to personal jurisdiction. The Executive specifically consents to personal jurisdiction in the State of Indiana. 23. Mandatory Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, other than a claim arising out of the Executive's breach of the confidentiality and non-competition provisions of Sections 15 through 19, shall be settled by arbitration in Indianapolis, Indiana, in accordance with the Rules of the American Arbitration Association before arbitrators who are licensed to practice law. The arbitrator or arbitrators shall apply the substantive law of Indiana or federal law, or both, as applicable to the dispute. Any award entered shall be final, binding and nonappealable, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. In the event that the Company refuses or otherwise fails to make a payment when due and it is ultimately decided that the Executive is entitled to such payment, such payment shall be increased to reflect an interest equivalent for the period of delay, compounded annually, equal to the prime or base lending rate used by Bank One Indiana, NA, and in effect as of the date the payment was first due. 24. Non-Jury Trials. Notwithstanding the provisions of Sections 19 and 23 above, and if the provisions of Section 19 or 23 above are not -18-
enforceable, the Executive expressly waives any rights to a jury trial and agrees that any claim of any type made against the Company or its agents or executives (including, but not limited to, employment discrimination litigation, wage litigation, defamation, or any other claim) lodged in any court will be tried, if at all, without a jury. 25. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary or any termination of this Agreement notwithstanding, in the event it shall be determined that any payment or distribution or benefit ("Payment") made or provided by the Company or its affiliates to or for the benefit of the Executive whether pursuant to this Agreement or otherwise, and determined without regard to any additional payments required under this Section 25 would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code") or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment ("Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 25(c) all determinations required to be made under this Section 25, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's independent auditor (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within a reasonable period of time of the receipt of notice from the Executive that there has been a Gross-Up Payment. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to -19-
this Section 25, shall be paid by the Company to the Executive within a reasonable period of time of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 25(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claims as the Company shall reasonably request in writing from time to time, including without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, -20-
(iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 25(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. -21-
(d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 25(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 25(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 25(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 26. Rabbi Trust. The Company has established The Anthem Employee Benefit Trust, a rabbi trust ("Trust") for key executives, and intends for such Trust to remain in effect in accordance with its terms. This Agreement shall, upon Triggering Events (as defined below), become covered under the Trust and become subject to the Trust funding requirements. For purposes of this Section 26, the term "Triggering Event" shall mean the first to occur of: (a) the termination of the employment of the Executive by the Company other than For Cause; (b) the termination of the employment by the Executive for Good Reason; (c) the termination of the employment by the Executive as a result of an Approved Retirement; or (d) the occurrence of a change of control (as such term is defined in the Trust) of the Company. 27. Nonalienation of Benefits. Except as may otherwise be required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, -22-
charge, pledge, bankruptcy or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 28. Legal Fees and Cost. All legal and other fees and expenses, including, without limitation, any arbitration expenses, incurred by the Executive in connection with contesting or disputing any termination of employment, in seeking to obtain or enforce any right or benefit provided for in this Agreement, or in otherwise pursuing any right or claim, shall be paid by the Company, to the extent permitted by law, provided that the Executive makes a formal written settlement demand prior to trial or arbitration and is ultimately successful, in obtaining through trial or arbitration more than fifty percent (50%) of the monetary relief sought, in his final written settlement demand exclusive of attorney's fees. 29. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and will be deemed to have been given when delivered in person (to the Executive if such notice is for the Executive) or five (5) days following sending by overnight courier or mailing by first class, certified or registered mail, postage prepaid, to the Executive at his home address, or such addresses as the Executive shall have designated in writing, or if to the Company, to the attention of the Corporate Secretary, at the Company's principal place of business, 120 Monument Circle, Indianapolis, Indiana 46204. 30. Headings. The various headings of this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any of its provisions. 31. Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to its benefit, its successors and affiliated companies and shall be binding upon the successors and assigns of the Company. This Agreement, being personal to the Executive, cannot be assigned by the Executive, but his personal representative shall be bound by all its terms and conditions. 32. Waiver and Amendments, Etc. Failure of the Company to insist upon strict compliance with any terms or provisions of this Agreement shall -23-
not be deemed a waiver of any terms, provisions or rights of the Company. Moreover, no modifications, amendments, extensions or waivers of this Agreement or any provisions hereof shall be binding upon the Company or the Executive unless in writing and signed by the Executive and the Company. 33. Complete Agreement. This Agreement constitutes the entire employment agreement of the parties and supersedes all prior employment agreements addressing the terms, conditions, and issues contained herein. Nothing in this Agreement, however, affects any separate written agreements addressing other terms and conditions and issues agreed to by the parties. 34. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. -24-
IN WITNESS WHEREOF, the Company and the Executive have duly executed and delivered this Agreement effective as of the day and year first above written. David R. Frick /s/ David R. Frick -------------------------------------- Anthem Insurance Companies, Inc. By: /s/ Larry C. Glasscock ----------------------------------- Larry C. Glasscock, President and CEO -25-
ATTACHMENT A RELEASE AND WAIVER AGREEMENT This Release and Waiver Agreement ("Agreement") is entered into on this __ day of __________, ____, by and between Anthem Insurance Companies, Inc., including its subsidiaries and affiliates (the "Company") and David R. Frick (the "Executive"). NOW, THEREFORE, the parties agree to the following: 1. The Executive and the Company acknowledge and agree that the Employee's last day of employment with the Company or one of its affiliates shall be ___________________. Service credit for purposes of all Company benefits, including but not limited to the Anthem Cash Balance Pension Plan, shall terminate as of that date. 2. The Company agrees that it shall pay to the Executive the amounts described in Section [9, 11 or 12] of the Employment Agreement between the Company and the Executive effective ______________ ("Employment Agreement"). All payments made pursuant to Section [9, 11 or 12] of the Employment Agreement shall be made pursuant to Sections 13 and 14 of the Employment Agreement. The Executive shall also be entitled to any benefits described in Section [9, 11 or 12] of the Employment Agreement for the duration noted therein. 3. Any and all benefits not specifically discussed in this Agreement or provided by law will cease on [termination date from paragraph 1]. ----------------------------------- 4. The provisions of the Employment Agreement relating to Protection of the Company's Business, Documents, Limited Non-Competition, Other Limited Prohibitions, and Specific Enforcement (Sections 15, 16, 17, 18 and 19) shall remain in full force and effect upon termination of employment. The Executive acknowledges that he possesses trade secrets and confidential data of the Company and further acknowledges that the provisions of Sections 15 through 19 of the Employment Agreement are reasonably necessary to protect the Company's legitimate business interests, confidential data, and goodwill. 5. The Executive hereby forever releases and waives as against the Company, and each of their directors, officers, employees and agents, any and all legal and equitable causes of action and claims which the Executive possesses, whether known or unknown, including, but not limited to, any such causes of action and claims relating to the Employee's employment with, or termination of employment from, the Company or any of its affiliates, including any and all rights, entitlements or claims under any and all federal, state and local laws and regulations, all as amended, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991 and the Americans with Disabilities Act of 1990. The Executive further expressly and specifically waives any and all rights and claims under the Age Discrimination in Employment Act of 1967 and the Older Workers' Benefit Protection Act (collectively referred to as the "Act"). The Executive acknowledges and agrees that this
Page 2 waiver of any right or claim under the Act (hereinafter "Waiver") is knowing and voluntary, and specifically agrees as follows: that this Waiver is written in a manner which he understands; that this Waiver specifically relates to rights or claims under the Act; that he does not waive any rights or claims under the Act that may arise after the date of execution of this Agreement; that he waives rights or claims under the Act in exchange for consideration in addition to anything of value to which he already is entitled; and that he has been advised in writing to consult with an attorney prior to executing it. The Executive acknowledges that he understands that he has twenty-one (21) days after receipt of this Agreement to decide whether to accept it and that he may revoke any acceptance of this Agreement within seven (7) days of such acceptance. This Agreement shall not become effective until the seven (7) day revocation period has expired and no amounts will be paid to the Executive until the seven (7) day revocation period has expired. 6. It is understood and agreed between the Executive and the Company that this Agreement shall in no way affect any claims of the Executive arising out of Social Security, Worker's Compensation, or Unemployment Laws. 7. The Company and the Executive agree that any breach of the terms of this Agreement may, at the Company's discretion, result in the immediate termination of any subsequent payments to be made under this Agreement. In the event of a breach of this Agreement or any dispute regarding this Agreement, the provisions of the Employment Agreement relating to Specific Enforcement, Governing Law, Choice of Forum, Mandatory Arbitration, Non-Jury Trials, and Legal Fees and Costs (Sections 19, 21, 22, 23, 24 and 28) shall remain in full force and effect. 8. The Executive expressly agrees that the consideration designated in this Agreement is sufficient for the terms of this Agreement. The Executive further agrees that upon the execution of this Agreement he shall keep confidential and not disclose the existence or terms of this Agreement unless compelled to do so by a court or administrative body. 9. The rights and obligations hereunder shall not be assigned or transferred by the Executive and shall be binding upon and inure to the benefit of the Executive, his heirs, legatees and legal representatives, and the Company, its subsidiaries and affiliates, successors and assigns. No waiver of any breach of this Agreement shall be deemed or construed as a waiver of any other or subsequent breach. Any amendment of this Agreement shall be effective only if in writing and signed by both parties. If any provision of this Agreement shall be held invalid under applicable laws, such provision shall be ineffective only to the extent of any invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements, whether oral or written, between the parties. The terms of this Agreement shall be governed by Indiana law. The parties represent that they have read and understood this Agreement, and the officer executing this document on behalf of the Company represents that he has the authority to do so.
Page 3 10. This Agreement shall not be effective or enforceable against the Company until the seven (7) day revocation period has expired or if the Executive revokes it not later than seven (7) days after he signs it. This revocation must be in writing and must be personally delivered, or sent by certified mail to: Corporate Secretary Anthem, Inc. 120 Monument Circle Indianapolis, Indiana 46204 11. The Executive expressly acknowledges that he understands all of the provisions of this Agreement and is voluntarily entering into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement. David R. Frick _________________________________________ Anthem Insurance Companies, Inc. By: ________________________________________ Printed: __________________________________ Title: ____________________________________
EXHIBIT 10.5 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement"), is by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company"), with offices located at 120 Monument Circle, Indianapolis, Indiana, and Samuel R. Nussbaum, M.D. (the "Executive"), residing at 21 Southmoor Drive, Clayton, Missouri 63105, dated as of the 2nd day of January, 2001. W I T N E S S E T H: ------------------- WHEREAS, the Company (which hereinafter also includes subsidiaries of the Company) desires to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive is willing to serve in the employ of the Company on a full-time basis for such period, all in accordance with the terms and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Condition of Employment. The Company hereby employs the Executive and the Executive hereby accepts such employment for the period provided for in Section 2, all upon the terms and conditions contained in this Agreement. As a condition to the Executive's employment, the Executive affirms and represents that the Executive is under no obligation to any former employer or other person which is in any way inconsistent with, or which imposes any restriction upon, the employment of the Executive by the Company or the Executive's undertakings under this Agreement. 2. Term of Employment. Unless sooner terminated pursuant to Section 7, the term of the Executive's employment under this Agreement shall be for a period commencing on the date hereof through the 31st day of December, 2002 ("Term"). 3. Duties. During the Term, the Executive shall provide executive, administrative and managerial services to the Company and perform such other reasonable employment duties as the Chief Executive Officer of the Company may from time to time prescribe. The Executive shall also serve as a director of any of the Company's subsidiaries to which he is elected. -1-
The Executive shall, except to the extent approved by the Chief Executive Officer, (i) devote his full-time to the services required of the Executive, (ii) render his services exclusively to the Company and (iii) use his best efforts, judgment, and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of the Executive's position. The Executive may serve on boards of directors or advisory boards of businesses that are not competitors of the Company or which do not create a conflict of interest or on the boards of civic and not for profit organizations. The Executive has disclosed in writing such memberships to the Chief Executive Officer prior to the execution of this Agreement and shall disclose such information, at least, annually thereafter. 4. Compensation. As compensation for the services to be performed by the Executive during the Term, the Company shall provide to the Executive: (a) an annual base salary of not less than three hundred fifty thousand dollars ($350,000) ("Salary"); (b) a target annual incentive opportunity of not less than sixty percent (60%) of the Salary ("Target Annual Incentive"). The performance goals required to earn the Target Annual Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the year for which the opportunity pertains; and (c) a target annualized long-term incentive opportunity of not less than fifty percent (50%) of the Salary ("Target Long-Term Incentive"). The performance goals required to earn the Target Long-Term Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the performance period for which the opportunity pertains. If such performance period is longer than one year, the Target Long-Term Incentive opportunity shall be adjusted accordingly based on the number of years in the performance period. Should the Company elect to increase any element of the Executive's compensation during the Term, the Agreement shall be deemed amended to incorporate the new increased Salary or Target Annual Incentive or Target Long- -2-
Term Incentive effective as of the date specified for the increase. The payment of any compensation hereunder shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, and shall be paid in accordance with the Company's normal payroll and incentive administration practices as they may exist from time to time. 5. Benefits. In addition to the payments set forth in Section 4, the Executive shall: (a) be eligible to participate in all fringe benefits, paid time off program, incentive plans, and retirement programs, both tax-qualified and non-qualified, that may be provided by the Company for its executives, in accordance with the provisions of any such programs or plans; (b) be entitled to a benefit based on a percentage of the Executive's pay ("Replacement Ratio SERP Benefit" or "Benefit") which Benefit shall be fully paid by the Company and shall be equal to the amount, if any, by which: (i) the amount (expressed as a single lump sum) which is the actuarial equivalent (as determined below) of a benefit (expressed as a straight life annuity with payments beginning at age sixty-two (62) or, if later, beginning at the Executive's age at the date of his termination of employment) equal to fifty percent (50%) of the Executive's average annual pay (as determined below) during the three (3) consecutive calendar years of his final five (5) calendar years of employment with the Company in which his pay was the highest; provided, however, if the Executive has less than three (3) calendar years of full year pay (Salary and Annual Incentive), the Executive's average annual pay shall be determined by annualizing the pay for any partial calendar year and calculating the average for the period; exceeds (ii) the sum of the following: -3-
(A) the total benefit (expressed as a single lump sum) payable under the Anthem Cash Balance Pension Plan ("Cash Balance Plan"); plus (B) the amount (expressed as a single lump sum) payable to the Executive under the Anthem Supplemental Executive Retirement Plan ("SERP"). For purposes of this Section 5(b), the Executive's pay in a calendar year shall include the Executive's Salary in each applicable calendar year (including amounts deferred under the Anthem Deferred Compensation Plan) and shall also include the amount of any award of the Annual Incentive paid in the calendar year or payments which would have been paid during the applicable calendar year but for a deferral election made by the Executive, but shall exclude deferred amounts actually paid in the calendar year pursuant to deferral elections made in earlier calendar years. Actuarial equivalent shall be determined using the same actuarial assumptions set forth in the Cash Balance Plan; provided, however, that before the lump sum conversion is effected under subparagraph (i) above, the benefit under such subparagraphs shall be reduced by four-twelfths (4/12ths) of one (1) percent for each month that the Executive's age at the date of his employment termination precedes the Executive's attainment of age sixty-two (62). The Replacement Ratio SERP Benefit shall vest as follows: (i) twenty-five percent (25%) on January 2, 2006; (ii) fifty percent (50%) on January 2, 2007; (iii) seventy-five percent (75%) on January 2, 2008; and one hundred percent (100%) on January 2, 2009, and thereafter. Notwithstanding the last sentence, if the Executive is entitled to receive payments pursuant to Section 11, the amount of the Replacement Ratio SERP Benefit that is vested is determined by the vesting schedule in that Section. The payment of the Replacement Ratio SERP Benefit shall be made at the same time (and in the same form) as payment of the Executive's SERP benefit and by using the same actuarial factors applicable to the SERP in converting the Benefit to a form other than a single lump sum. The provisions of this Section 5(b) shall survive and remain in full force and effect after the Term if the term of this (or a similar) Agreement is not extended through January 2, 2009; -4-
(c) be eligible to participate in any life, disability or other similar insurance plans, medical and dental plans or other employee welfare benefit plans that may be provided by the Company for its executives, in accordance with the provisions of any such plans; and (d) be eligible to participate in any postretirement medical, dental and life insurance plans that may be provided by the Company for its executives, in accordance with the provision of any such plans, but with the payment of whatever contribution that the Company requires that other such retirees would pay for such coverage. 6. Expenses. The Company shall, in accordance with and to the extent of its policies, pay all ordinary and necessary business expenses incurred by the Executive in performing his duties as an executive. The Executive shall account promptly for all such business expenses in the manner prescribed by the Company. 7. Termination. The Executive's employment shall be terminated upon the occurrence of any of the following: (a) the death of the Executive; (b) the Executive's disability (as such term is defined in the Company's executive long-term disability plan) ("Disability"); (c) the termination of employment by the Executive for any reason; (d) the termination of employment by the Company For Cause (as defined below); or (e) the termination of employment by the Company other than For Cause. The term "For Cause" or "Cause" shall mean a reasonable determination by the Company that the Executive (i) has been convicted of a felony, (ii) has engaged in an activity which, if proven in a criminal proceeding, could result in conviction of a felony involving dishonesty or fraud, or (iii) has -5-
willfully engaged in gross misconduct likely to be materially damaging or materially detrimental to the Company. In order to be effective, the Company must give the Executive at least sixty (60) calendar days advance written notice of its intent to terminate his employment "For Cause" setting forth the specific action(s) by the Executive which triggered the notice and such written notice must be received by the Executive no more than one hundred eighty (180) calendar days after the Company learned of the action(s) giving rise to the "For Cause" termination. 8. Death of The Executive. In the event the Executive's employment is terminated as a result of the Executive's death, the estate of the Executive shall be entitled to receive the Executive's Salary for a period of the lesser of six (6) months or the unexpired portion of the Term, plus an amount equal to fifty percent (50%) of Target Annual Incentive and Target Long-Term Incentive for the year of death. 9. Disability of The Executive. In the event the Executive's employment is terminated as a result of Disability, the Executive shall be entitled to receive his Salary and medical and dental benefits for a period of the lesser of six (6) months or the unexpired portion of the Term, plus an amount equal to fifty percent (50%) of Target Annual Incentive and Target Long-Term Incentive for the year of Disability, reduced by any payments received by the Executive under the Company's executive long-term disability plan. 10. Executive-Initiated Termination or Company-Initiated For Cause. If the Executive terminates this Agreement for any reason or the Company terminates this Agreement For Cause, the Company shall have no further obligations and liabilities under this Agreement after the termination of employment. 11. Termination Other Than For Cause. In the event the Executive's employment is terminated by the Company other than For Cause, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay, for the greater of one (1) year or the remainder of the Term, the following to the Executive if the Executive satisfies the terms of Section 13: (a) the Executive's Salary; -6-
(b) the Annual Incentive and Long-Term Incentive awards for the year of termination, based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the Executive was employed during that year; (c) all unvested, prior Long-Term Incentive awards; (d) an amount equal to fifty percent (50%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; (e) the medical and dental plan benefits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; and (f) the Replacement Ratio SERP Benefit described in Section 5, vested as follows: (i) twenty-five percent (25%) on the first day of the Term of this Agreement; (ii) fifty percent (50%) on January 2, 2007; (iii) seventy-five percent (75%) on January 2, 2008; and (iv) one hundred percent (100%) on January 2, 2009 and thereafter. 12. Payment of Compensation Described in Sections 8, 9, or 11. The compensation items specified in Sections 8, 9, or 11 shall be paid as follows: (a) the Salary shall be paid over the remaining Term or other period as described in Sections 8, 9 or 11 in accordance with the Company's normal payroll practices; (b) the current and future Annual Incentive and Long-Term Incentive awards and opportunities shall be paid within ninety (90) days after the end of the calendar year for which the incentive applied; and -7-
(c) the prior unvested Long-Term Incentive awards shall be paid within ninety (90) days after the termination of employment; and (d) the Replacement Ratio SERP Benefit shall be paid at the same time and in the same form as payment of the Executive's SERP benefit. 13. Execution of Release. As a condition of receiving the compensation and benefits described in Sections 9 or 11, the Executive shall first execute a release of any and all claims arising out of the Executive's employment with the Company or the Executive's separation from such employment (including, without limitation, claims relating to age, disability, sex or race discrimination to the extent permitted by law), excepting only claims arising out of the alleged breach of this Agreement or of any other written contract between the Executive and the Company. Such release shall be in a form reasonably satisfactory to the Company and shall comply with any applicable legislative or judicial requirements, including, but not limited to, the Older Workers Benefit Protection Act. An example of such release is attached as Attachment A. 14. Protection of the Company's Business. The Executive acknowledges that in the course of his employment he will acquire knowledge of trade secrets and confidential data of the Company. Such trade secrets and confidential data may include, but are not limited to, confidential product information, provider contracts, customer lists, technical information, methods by which the Company proposes to compete with its business competitors, strategic and business plans, confidential reports prepared by business consultants which may reveal strengths and weaknesses of the Company and its competition and similar information relating to the Company. The Executive, in order to perform his obligations under this Agreement, must necessarily acquire knowledge of such trade secrets and confidential data, all of which the Executive acknowledges are not known outside the business of the Company, are known only to a limited group of its top executives and directors, are protected by strict measure to preserve secrecy, are of great value to the Company, are the result of the expenditure of large sums of money, are difficult for an outsider to duplicate, and disclosure of which would be extremely detrimental to the Company. The Executive covenants to keep all such trade secrets or confidential data secret and not to release such information to persons not authorized by the Company to receive such secrets and data, both during the term of this Agreement and at all -8-
times following its termination. The Executive acknowledges that trade secrets and confidential data need not be expressly marked as such by the Company. 15. Documents, Etc. All records, files, documents, equipment and the like shall be, and remain, the sole property of the Company. The Executive, on the termination of his employment, shall immediately return to the Company all such items without retention of any copies. 16. Limited Non-Competition. During the Executive's employment and for a limited time thereafter, the Company must protect its legitimate business interests by limiting the Executive's ability to compete with the Company. This limited non-competition provision is drafted narrowly so as to be able to safeguard the Company's legitimate business interests while not unreasonably interfering with the Executive's ability to obtain other employment. The Company does not intend, and the Executive acknowledges, that this limited non-competition provision is not an attempt to prevent the Executive from obtaining other employment. The Executive further acknowledges that the Company may need to take action, including litigation, to enforce this limited non-competition provision, which efforts the parties stipulate shall not be deemed an attempt to prevent the Executive from obtaining other employment. (a) During Employment By Company. During the Executive's employment, Executive shall not, directly or indirectly, have any ownership interest in, work for, advise, manage, or act as an agent or consultant for, or have any business connection or business or employment relationship with any person or entity that competes with the Company or that contemplates competing with the Company without the prior written approval of the Chief Executive Officer. (b) During Post-Employment Period. For a period of one (1) year after the Executive's termination of employment (regardless of the reason), or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: (i)(A) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company -9-
operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (i)(B) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which he has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (ii)(A) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (ii)(B) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which the Executive has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(A) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company with whom the Executive has had contact (either directly or indirectly) or over which he has had responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(B) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially -10-
similar to any product or service sold by the Company, to any customer of the Company; or (iv) directly or indirectly, on behalf of the Executive or any third party, make any business contacts with, solicit or accept business from any customer of the Company for any product or service which is competitive with or substantially similar to any product or service sold by the Company; (c) Separate and Several Covenants. The Executive acknowledges that after termination of his employment, he will inevitably possess trade secrets and confidential data of the Company which he would inevitably use if he were to engage in conduct prohibited as set forth above, and such use would be unfair to and extremely detrimental to the Company. The Executive further acknowledges that in view of the benefits provided him by this Agreement, such conduct on his part would be inequitable. Accordingly, the Executive separately and severally covenants for the benefit of the Company to keep each of the covenants described in this Section 16 for the period specified above. (d) Acknowledgment of the Company's Superseding Interest in Protecting its Business. The Executive recognizes that personal relationships between the Company, its employees and customers are essential to the Company's business operations and that the Company furthers such relationships by investments of time and money. The Executive recognizes that this Agreement is reasonably necessary to protect the Company's legitimate interest in its customers, and to protect the Company's confidential information and goodwill, and acknowledges that nothing contained in this Agreement shall unreasonably alter the Executive's ability to obtain a livelihood or preclude the Executive from engaging in his profession. The Executive, therefore, acknowledges that the Company's interest in maintaining its relationships with its established customers for at least one (1) year after termination of the Executive's employment, or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, supersedes any interest of the Executive in soliciting, servicing, or accepting the Company's customers on behalf of any entity other than the Company during that period of time. -11-
(e) Publicly Traded Stock. Nothing in the foregoing provisions of this section prohibits the Executive from purchasing for investment purposes only, any stock or corporate security traded or quoted on a national securities exchange or national market system. (f) Maximum Application. The parties expressly agree that the terms of this limited non-competition provision under this section are reasonable, enforceable, and necessary to protect the Company's interests, and are valid and enforceable. In the unlikely event, however, that a court of competent jurisdiction were to determine that any portion of this limited non-competition provision is unenforceable, then the parties agree that the remainder of the limited non-competition provision shall remain valid and enforceable to the maximum extent possible. 17. Other Limited Prohibitions. During the Executive's employment and for one (1) year after termination, or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: (a) request or advise any customer of the Company, or any person or entity having business dealings with the Company, to withdraw, curtail or cease such business with the Company; (b) disclose to any person or entity the identities of any customers of the Company, or the identity of any persons or entities having business dealings with the Company; or (c) directly or indirectly influence or attempt to influence any other employee of the Company to separate from the Company. 18. Specific Enforcement/Injunctive Relief. The Executive agrees that it would be difficult to measure damages to the Company from any breach of the covenants contained in Sections 14 through 17, but that such damages from any breach would be great, incalculable and irremediable, and that damages would be an inadequate remedy. Accordingly, the Executive agrees that the Company may have specific performance of the terms of this Agreement in any court permitted by this Agreement. In addition, if the Executive violates the non-competition provisions of Section 16 or 17, the Executive agrees that any period of such violation shall be added to the term of the non-competition. For example, -12-
if the Executive violates the provision for three (3) months, the Company shall be entitled to enforce the non-competition provision for one (1) year, or for the duration of the Executive's receipt of Salary under Section 11, plus three (3) months post-termination. In determining the period of any violation, the parties stipulate that in any calendar month in which the Executive engages in any activity violative of the non-competition provision, the Executive is deemed to have violated the non-competition provision for the entire month, and that month shall be added to the duration of the non-competition provision as set out above. The parties agree however, that specific performance and the "add back" remedies described above shall not be the exclusive remedies, and the Company may enforce any other remedy or remedies available to it either in law or in equity including, but not limited to, temporary, preliminary, and/or permanent injunctive relief. 19. Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions of this Agreement which shall be given effect independently of the invalid provisions and, in such circumstances, the invalid provision is severable. 20. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Indiana. The parties expressly agree that it is appropriate for Indiana law to apply to: (i) the interpretation of the Agreement; (ii) any disputes arising out of this Agreement; (iii) any disputes arising out of the employment relationship of the parties; and (iv) any and all other disputes between the parties. 21. Choice of Forum. The Company is based in Indiana, and the Executive understands and acknowledges the Company's desire and need to defend any litigation against it in Indiana. Accordingly, the parties agree that any claim of any type brought by the Executive against the Company or any of its employees or agents must be maintained only in a court sitting in Marion County, Indiana, or, if a federal court, the Southern District of Indiana, Indianapolis Division. The Executive further understands and acknowledges that in the event the Company initiates litigation against the Executive, the Company may need to prosecute such litigation in the Executive's forum state, in the State of Indiana, or in such other state where the Executive is subject to personal jurisdiction. Accordingly, the parties agree that the Company can pursue any claim against the -13-
Executive in any forum in which the Executive is subject to personal jurisdiction. The Executive specifically consents to personal jurisdiction in the State of Indiana. 22. Mandatory Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, other than a claim arising out of the Executive's breach of the confidentiality and non-competition provisions of Section 14 through 18, shall be settled by arbitration in Indianapolis, Indiana, in accordance with the Rules of the American Arbitration Association before arbitrators who are licensed to practice law. The arbitrator or arbitrators shall apply the substantive law of Indiana or federal law, or both, as applicable to the dispute. Any award entered shall be final, binding and nonappealable, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. In the event that the Company refuses or otherwise fails to make a payment when due and it is ultimately decided that the Executive is entitled to such payment, such payment shall be increased to reflect an interest equivalent for the period of delay, compounded annually, equal to the prime or base lending rate used by Bank One Indiana, NA, and in effect as of the date the payment was first due. 23. Non-Jury Trials. Notwithstanding the provisions of Sections 18 and 22 above, and if the provisions of Section 18 or 22 above are not enforceable, the Executive expressly waives any rights to a jury trial and agrees that any claim of any type made against the Company or its agents or executives (including, but not limited to, employment discrimination litigation, wage litigation, defamation, or any other claim) lodged in any court will be tried, if at all, without a jury. 24. Nonalienation of Benefits. Except as may otherwise be required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, bankruptcy or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 25. Legal Fees and Cost. All legal and other fees and expenses, including, without limitation, any arbitration expenses, incurred by the Executive in connection with contesting or disputing any termination of employment, in -14-
seeking to obtain or enforce any right or benefit provided for in this Agreement, or in otherwise pursuing any right or claim, shall be paid by the Company, to the extent permitted by law, provided that the Executive makes a formal written settlement demand prior to trial or arbitration and is ultimately successful, in obtaining through trial or arbitration more than fifty percent (50%) of the monetary relief sought, in his final written settlement demand exclusive of attorney's fees. 26. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and will be deemed to have been given when delivered in person (to the Executive if such notice is for the Executive) or five (5) days following sending by overnight courier or mailing by first class, certified or registered mail, postage prepaid, to the Executive at his home address, or such addresses as the Executive shall have designated in writing, or if to the Company, to the attention of the Corporate Secretary, at the Company's principal place of business, 120 Monument Circle, Indianapolis, Indiana 46204. 27. Headings. The various headings of this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any of its provisions. 28. Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to its benefit, its successors and affiliated companies and shall be binding upon the successors and assigns of the Company. This Agreement, being personal to the Executive, cannot be assigned by the Executive, but his personal representative shall be bound by all its terms and conditions. 29. Waiver and Amendments, Etc. Failure of the Company to insist upon strict compliance with any terms or provisions of this Agreement shall not be deemed a waiver of any terms, provisions or rights of the Company. Moreover, no modifications, amendments, extensions or waivers of this Agreement or any provisions hereof shall be binding upon the Company or the Executive unless in writing and signed by the Executive and the Company. 30. Complete Agreement. This Agreement constitutes the entire employment agreement of the parties and supersedes all prior employment agreements addressing the terms, conditions, and issues contained herein. Nothing -15-
in this Agreement, however, affects any separate written agreements addressing other terms and conditions and issues agreed to by the parties. 31. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Company and the Executive have duly executed and delivered this Agreement effective as of the day and year first above written. Samuel R. Nussbaum, M.D. /s/ Samuel R. Nussbaum, M.D. ___________________________________ Anthem Insurance Companies, Inc. By: /s/ Larry C. Glasscock -------------------------------- Name: Larry C. Glasscock ------------------------------ Title: President and CEO ----------------------------- -16-
ATTACHMENT A RELEASE AND WAIVER AGREEMENT This Release and Waiver Agreement ("Agreement") is entered into on this __ day of __________, ____, by and between Anthem Insurance Companies, Inc., including its subsidiaries and affiliates (the "Company") and Samuel R. Nussbaum, M.D. (the "Executive"). NOW, THEREFORE, the parties agree to the following: 1. The Executive and the Company acknowledge and agree that the Executive's last day of employment with the Company or one of its affiliates shall be ___________________. Service credit for purposes of all Company benefits, including but not limited to the Anthem Cash Balance Pension Plan, will terminate as of that date. 2. The Company agrees that it will pay to the Executive the amounts described in Section [9 or 11] of the Employment Agreement between the Company and the Executive effective ______________ ("Employment Agreement"). All payments made pursuant to Section [9 or 11] of the Employment Agreement shall be made pursuant to Section 12 of the Employment Agreement. The Executive will also be entitled to any benefits described in Section [9 or 11] of the Employment Agreement for the duration noted therein. 3. Any and all benefits not specifically discussed in this Agreement or provided by law will cease on [termination date from paragraph 1]. ----------------------------------- 4. The provisions of the Employment Agreement relating to Protection of the Company's Business, Documents, Limited Non-Competition, Other Limited Prohibitions, and Specific Enforcement (Sections 14, 15, 16, 17, and 18) shall remain in full force and effect upon termination of employment. The Executive acknowledges that he possesses trade secrets and confidential data of the Company and further acknowledges that the provisions of Sections 14 through 18 of the Employment Agreement are reasonably necessary to protect the Company's legitimate business interests, confidential data, and goodwill. 5. The Executive hereby forever releases and waives as against the Company, its subsidiaries and affiliates, and each of their directors, officers, employees and agents, any and all legal and equitable causes of action and claims which the Executive possesses, whether known or unknown, including, but not limited to, any such causes of action and claims relating to the Employee's employment with, or termination of employment from, the Company or any of its affiliates, including any and all rights, entitlements or claims under any and all federal, state and local laws and regulations, all as amended, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991 and the Americans with Disabilities Act of 1990. The Executive further expressly and specifically waives any and all rights and claims under the Age Discrimination in Employment Act of 1967 and the Older Workers' Benefit Protection Act (collectively referred to as the "Act"). The Executive acknowledges
Page 2 and agrees that this waiver of any right or claim under the Act (hereinafter "Waiver") is knowing and voluntary, and specifically agrees as follows: that this Waiver is written in a manner which he understands; that this Waiver specifically relates to rights or claims under the Act; that he does not waive any rights or claims under the Act that may arise after the date of execution of this Agreement; that he waives rights or claims under the Act in exchange for consideration in addition to anything of value to which he already is entitled; and that he has been advised in writing to consult with an attorney prior to executing it. The Executive acknowledges that he understands that he has twenty- one (21) days after receipt of this Agreement to decide whether to accept it and that he may revoke any acceptance of this Agreement within seven (7) days of such acceptance. This Agreement shall not become effective until the seven (7)- day revocation period has expired and no amounts will be paid to the Executive until the seven (7)-day revocation period has expired. 6. It is understood and agreed between the Executive and the Company that this Agreement shall in no way affect any claims of the Executive arising out of Social Security, Worker's Compensation, or Unemployment Laws. 7. The Company and the Executive agree that any breach of the terms of this Agreement may, at the Company's discretion, result in the immediate termination of any subsequent payments to be made under this Agreement. In the event of a breach of this Agreement or any dispute regarding this Agreement, the provisions of the Employment Agreement relating to Specific Enforcement, Governing Law, Choice of Forum, Mandatory Arbitration, Non-Jury Trials, and Legal Fees and Costs (Sections 18, 20, 21, 22, 23, and 25) shall remain in full force and effect. 8. The Executive expressly agrees that the consideration designated in this Agreement is sufficient for the terms of this Agreement. The Executive further agrees that upon the execution of this Agreement he will keep confidential and not disclose the existence or terms of this Agreement unless compelled to do so by a court or administrative body. 9. The rights and obligations hereunder shall not be assigned or transferred by the Executive and shall be binding upon and inure to the benefit of the Executive, his heirs, legatees and legal representatives, and the Company, its subsidiaries and affiliates, successors and assigns. No waiver of any breach of this Agreement shall be deemed or construed as a waiver of any other or subsequent breach. Any amendment of this Agreement shall be effective only if in writing and signed by both parties. If any provision of this Agreement shall be held invalid under applicable laws, such provision shall be ineffective only to the extent of any invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements, whether oral or written, between the parties. The terms of this Agreement shall be governed by Indiana law. The parties represent that they have read and understood this Agreement, and the officer executing this document on behalf of the Company represents that he has the authority to do so.
Page 3 10. This Agreement shall not be effective or enforceable against the Company until the seven (7)-day revocation period has expired or if the Executive revokes it not later than seven (7) days after he signs it. This revocation must be in writing and must be personally delivered, or sent by certified mail to: Corporate Secretary Anthem, Inc. 120 Monument Circle Indianapolis, Indiana 46204 11. The Executive expressly acknowledges that he understands all of the provisions of this Agreement and is voluntarily entering into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement. Samuel R. Nussbaum, M.D. Anthem Insurance Companies, Inc. _____________________________ By:________________________________ Printed:____________________________ Title:______________________________
Exhibit 10.6 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") is by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company"), with offices located at 120 Monument Circle, Indianapolis, Indiana, and Michael L. Smith (the "Executive"), residing at 4975 Deer Ridge Drive South, Carmel, Indiana, dated as of the 1st day of January, 2000. W I T N E S S E T H: ------------------- WHEREAS, the Company (which hereinafter also includes subsidiaries of the Company) desires to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive is willing to serve in the employ of the Company on a full-time basis for such period, all in accordance with the terms and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Title and Condition of Employment. The Company hereby employs the Executive as Executive Vice President and Chief Financial Officer and the Executive hereby accepts such employment for the period provided for in Section 2, all upon the terms and conditions contained in this Agreement. As a condition to the Executive's employment, the Executive affirms and represents that the Executive is under no obligation to any former employer or other person which is in any way inconsistent with, or which imposes any restriction upon, the employment of the Executive by the Company or the Executive's undertakings under this Agreement. 2. Term of Employment. Unless sooner terminated pursuant to Section 7, the term of the Executive's employment under this Agreement shall be for a period commencing on the date hereof through the later of (i) December 31, 2003, or (ii) December 31, 2004, if the Executive has not received by December 31, 2001 written notice from the Company of its intent to extend this Agreement for a period of two (2) years beyond December 31, 2003 (the "Term"). -1-
3. Duties. During the Term, the Executive shall serve as Executive Vice President and Chief Financial Officer, reporting directly to the Chief Executive Officer of the Company, and shall provide executive, administrative and managerial services consistent with such position and perform such other reasonable employment duties as the Chief Executive Officer may from time to time prescribe. The Executive shall also serve as a director of any of the Company's subsidiaries to which he is elected. The Executive shall, except to the extent approved by the Chief Executive Officer, (i) devote his full-time to the services required of the Executive, (ii) render his services exclusively to the Company, and (iii) use his best efforts, judgment, and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of the Executive's position. The Executive may serve on boards of directors or advisory boards of businesses that are not competitors of the Company or which do not create a conflict of interest or on the boards of civic and not for profit organizations. The Executive has disclosed in writing such memberships to the Chief Executive Officer prior to the execution of this Agreement and shall disclose such information, at least, annually thereafter. 4. Compensation. As compensation for the services to be performed by the Executive during the Term, the Company shall provide to the Executive: (a) an annual base salary of not less than three hundred seventy-five thousand dollars ($375,000) ("Salary"); (b) a target annual incentive opportunity of not less than eighty percent (80%) of the Salary ("Target Annual Incentive"). The performance goals required to earn the Target Annual Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the year for which the opportunity pertains; and (c) a target annualized long-term incentive opportunity of not less than one hundred twenty percent (120%) of the Salary ("Target Long-Term Incentive"). The performance goals required to earn the Target Long-Term Incentive shall be approved by the Board of Directors and -2-
communicated to the Executive prior to the end of the first quarter of the performance period for which the opportunity pertains. If such performance period is longer than one year, the Target Long-Term Incentive opportunity shall be adjusted accordingly based on the number of years in the performance period. Should the Company elect to increase any element of the Executive's compensation during the Term, the Agreement shall be deemed amended to incorporate the new increased Salary or Target Annual Incentive or Target Long-Term Incentive effective as of the date specified for the increase. The payment of any compensation hereunder shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, and shall be paid in accordance with the Company's normal payroll and incentive administration practices as they may exist from time to time. 5. Benefits. In addition to the payments set forth in Section 4, the Executive shall: (a) be eligible to participate in all fringe benefits, paid time off program, incentive plans, and retirement programs, both tax-qualified and non-qualified, that may be provided by the Company for its key executives, in accordance with the provisions of any such programs or plans; (b) be entitled to a benefit based on a percentage of the Executive's pay ("Replacement Ratio SERP Benefit" or "Benefit") which Benefit shall be fully paid by the Company and shall be equal to the amount, if any, by which: (i) the amount (expressed as a single lump sum) which is the actuarial equivalent (as determined below) of a benefit (expressed as a straight life annuity with payments beginning at age sixty-two (62) or, if later, beginning at the Executive's age at the date of his termination of employment) equal to fifty percent (50%) of the Executive's average annual pay (as determined below) during the three (3) consecutive calendar years of his final five (5) calendar years of employment with the Company in which his pay was the -3-
highest; provided, however, if the Executive has less than three (3) calendar years of full year pay (Salary and Annual Incentive), the Executive's average annual pay shall be determined by annualizing the pay for any partial calendar year and calculating the average for the period; exceeds (ii) the sum of the following: (A) the total benefit (expressed as a single lump sum) payable under the Anthem Cash Balance Pension Plan ("Cash Balance Plan"); plus (B) the amount (expressed as a single lump sum) payable to the Executive under the Anthem Supplemental Executive Retirement Plan ("SERP"). For purposes of this Section 5(b), the Executive's pay in a calendar year shall include the Executive's Salary in each applicable calendar year (including amounts deferred under the Anthem Deferred Compensation Plan) and shall also include the amount of any award of the Annual Incentive paid in the calendar year or payments which would have been paid during the applicable calendar year but for a deferral election made by the Executive, but shall exclude deferred amounts actually paid in the calendar year pursuant to deferral elections made in earlier calendar years. Actuarial equivalent shall be determined using the same actuarial assumptions set forth in the Cash Balance Plan; provided, however, that before the lump sum conversion is effected under subparagraph (i) above, the benefit under such subparagraph shall be reduced by four-twelfths (4/12ths) of one (1) percent for each month that the Executive's age at the date of his employment termination precedes the Executive's attainment of age sixty-two (62) unless the Executive is entitled to receive payments pursuant to Section 8, 9, 11 or 12, then the Executive shall be assumed to have attained the age at the expiration date of the Term set forth in Section 2 (December 31, 2004). -4-
The Replacement Ratio SERP Benefit shall be fully vested if (i) the Executive continues his employment with the Company through December 31, 2003, or (ii) the Executive is entitled to receive payments pursuant to Section 8, 9, 11, or 12. The payment of the Replacement Ratio SERP Benefit shall be made at the same time (and in the same form) as payment of the Executive's SERP benefit and by using the same actuarial factors applicable to the SERP in converting the Benefit to a form other than a single lump sum; (c) be eligible to participate in any life, disability or other similar insurance plans, medical and dental plans or other employee welfare benefit plans that may be provided by the Company for its key executives, in accordance with the provisions of any such plans; and (d) be eligible to participate in any postretirement medical coverage comparable to the plan that is provided by the Company for its key executives, in accordance with the provisions of such plan in effect on December 31, 1999, but with the payment of whatever contribution that the Company requires that other such retirees would pay for such coverage. 6. Expenses. The Company shall, in accordance with and to the extent of its policies, pay all ordinary and necessary business expenses incurred by the Executive in performing his duties as a key executive including, but not limited to, first class air travel, airline travel clubs, and initiation and other membership fees and business use charges at one luncheon club of the Executive's choosing. The Executive shall account promptly for all such business expenses in the manner prescribed by the Company and shall submit, on request, all records necessary to confirm that the Executive's business use of any club is more than fifty percent (50%) of the Executive's total use of such club. 7. Termination. The Executive's employment shall be terminated upon the occurrence of any of the following: (a) the death of the Executive; (b) the Executive's disability (as such term is defined in the Company's executive long-term disability plan) ("Disability"); -5-
(c) the termination of employment by the Executive for Good Reason (as defined below); (d) the termination of the employment by the Executive for any reason other than Good Reason; (e) the termination of employment by the Company For Cause (as defined below); (f) the termination of employment by the Company other than For Cause; or (g) the termination of employment by mutual agreement of the Executive and the Company through an Approved Retirement (as defined below). The term for "Good Reason" shall mean (i) a reduction in Salary or Target Annual Incentive or Target Long-Term Incentive opportunity, (ii) a reduction in benefits below the level of other key executives, (iii) a diminution in status, office or title, (iv) a change in the reporting relationship from the direct supervision by the Chief Executive Officer, (v) an assignment of duties inconsistent with the Executive's position as a key executive or materially less than exists as of the effective date of this Agreement, which duties are those commonly associated with the position of chief financial officer and include direct responsibility for all the finance staff positions of the Company (including its successor) or its subsidiaries, whether currently existing or hereinafter created, other than the staff positions which report directly to the Chief Executive Officer or the Chief Legal and Administrative Officer, or (vi) an assignment outside of the greater Indianapolis area or the imposition of business travel obligations substantially greater than existing business travel obligations. In order to be effective, the Executive must give the Chief Executive Officer and the Chairman of the Board of Directors of the Company at least sixty (60) calendar days advance written notice of his intent to terminate his employment for "Good Reason" setting forth the specific action(s) by the Company which triggered the notice and such written notice must be received by the Company no more than one hundred eighty (180) calendar days after the complained-of action(s) was implemented. Once written notice is received by the Company, the Chairman of the Board and the Compensation Committee of the Board of Directors shall promptly meet to -6-
consider the notice and the complained-of actions. The Company shall have thirty (30) calendar days within which to concur that "Good Reason" exists or to cure or remedy the action(s) giving rise to the Executive's notice. If cured or remedied, there shall be no "Good Reason" for the Executive terminating his employment, and the Executive shall not be entitled to the payments set forth in Section 12. The term "For Cause" or "Cause" shall mean a reasonable determination by the Company that the Executive (i) has been convicted of a felony, (ii) has engaged in an activity which, if proven in a criminal proceeding, could result in conviction of a felony involving dishonesty or fraud, or (iii) has willfully engaged in gross misconduct likely to be materially damaging or materially detrimental to the Company. In order to be effective, the Company must give the Executive at least sixty (60) calendar days advance written notice of its intent to terminate his employment "For Cause" setting forth the specific action(s) by the Executive which triggered the notice and such written notice must be received by the Executive no more than one hundred eighty (180) calendar days after the Company learned of the action(s) giving rise to the "or Cause" termination. The term "Approved Retirement" shall mean retirement as defined in the Company's qualified retirement plans and with approval by the Chief Executive Officer of the Company. Once the Executive has been granted Approved Retirement, the provisions of Section 11 govern instead of Section 8 or 9 in the case of the Executive's death or disability prior to the date of retirement. 8. Death of The Executive. In the event the Executive's employment is terminated as a result of the Executive's death, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the estate of the Executive: (a) for the lesser of twelve (12) months or the unexpired portion of the Term, the Executive's Salary; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of death, based upon the achievement of the performance goals -7-
for the plans for the entire year of death prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the year of death, an amount equal to the Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's death; (e) for the lesser of twelve (12) months or the unexpired portion of the Term, the DEC plan core and cash credits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's death; and (f) the Replacement Ratio SERP Benefit payable under Section 5. 9. Disability of the Executive. In the event the Executive's employment is terminated as a result of the Executive's disability, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the Executive if the Executive satisfies the terms of Section 14: (a) for the lesser of twelve (12) months or the unexpired portion of the Term, the Executive's Salary, reduced by any payments to be received by the Executive under the Company's Executive Long-Term Disability Plan for the same period; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of disability, based upon the achievement of the performance goals for the plans for the entire year of disability prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the year of disability, an amount equal to the Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's disability; -8-
(e) for the lesser of twelve (12) months or the unexpired portion of the Term, the medical and dental plan benefits and DEC plan core and cash credits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's disability; and (f) the Replacement Ratio SERP Benefit payable under Section 5. 10. Executive-Initiated Termination Other Than For Good Reason or Company-Initiated For Cause. If the Executive terminates this Agreement for other than Good Reason or the Company terminates this Agreement For Cause, the Company shall have no further obligations and liabilities under this Agreement after the termination of employment except that the Company shall pay to the Executive (i) any amount vested of the Replacement Ratio SERP Benefit payable under Section 5 and (ii) amounts due to the Executive in accordance with the provisions of programs or plans that may be provided by the Company for its key executives, if the Executive satisfies the terms of Section 14. 11. Termination Other Than For Cause or Approved Retirement. In the event the Executive's employment is terminated by the Company other than For Cause or for an Approved Retirement, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the Executive if the Executive satisfies the terms of Section 14: (a) for the remainder of the Term, the Executive's Salary; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of termination, based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the Term, an amount equal to eighty percent (80%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been -9-
eligible to receive as of the effective date of the Executive's termination of employment; (e) for the remainder of the Term, an amount equal to twenty percent (20%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment if the Executive offers to be available for consultation, at mutually agreed upon times, up to a maximum of eight (8) days each quarter of the year; (f) for the remainder of the Term, the medical and dental plan benefits and DEC plan core and cash credits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; and (g) the Replacement Ratio SERP Benefit payable under Section 5. 12. Termination For Good Reason. In the event the Executive's employment is terminated by the Executive for Good Reason, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the Executive if the Executive satisfies the terms of Section 14: (a) for the remainder of the Term, the Executive's Salary; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of termination, based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the Term, an amount equal to eighty percent (80%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been -10-
eligible to receive as of the effective date of the Executive's termination of employment; (e) for the remainder of the Term, an amount equal to twenty percent (20%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment if the Executive offers to be available for consultation, at mutually agreed upon times, up to a maximum of eight (8) days each quarter of the year; (f) for the remainder of the Term, the medical and dental plan benefits and DEC plan core and cash credits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; and (g) the Replacement Ratio SERP Benefit payable under Section 5. 13. Payment of Compensation Described in Section 8, 9, 11 or 12. The compensation items specified in Section 8, 9, 11 or 12 shall be paid as follows: (a) the Salary shall be paid over the remaining Term or any shorter period as described in Section 8, 9, 11 or 12 in accordance with the Company's normal payroll practices; (b) the prior unvested Long-Term Incentive awards shall be paid within ninety (90) days after the termination of employment; (c) the current and future Annual Incentive and Long-Term Incentive awards and opportunities shall be paid within ninety (90) days after the end of the calendar year for which the incentive applied; and (d) the Replacement Ratio SERP Benefit shall be paid at the same time and in the same form as the Executive's SERP benefit. -11-
14. Execution of Release. As a condition of receiving the compensation and benefits described in Sections 9, 11 and 12, the Executive shall first execute a release of any and all claims arising out of the Executive's employment with the Company or the Executive's separation from such employment (including, without limitation, claims relating to age, disability, sex or race discrimination to the extent permitted by law), excepting only claims arising out of the alleged breach of this Agreement or of any other written contract between the Executive and the Company. Such release shall be in a form reasonably satisfactory to the Company and shall comply with any applicable legislative or judicial requirements, including, but not limited to, the Older Workers Benefit Protection Act. An example of such release is attached as Attachment A. 15. Protection of the Company's Business. The Executive acknowledges that in the course of his employment he will acquire knowledge of trade secrets and confidential data of the Company. Such trade secrets and confidential data may include, but are not limited to, confidential product information, provider contracts, customer lists, technical information, methods by which the Company proposes to compete with its business competitors, strategic and business plans, confidential reports prepared by business consultants which may reveal strengths and weaknesses of the Company and its competition and similar information relating to the Company. The Executive, in order to perform his obligations under this Agreement, must necessarily acquire knowledge of such trade secrets and confidential data, all of which the Executive acknowledges are not known outside the business of the Company, are known only to a limited group of its top executives and directors, are protected by strict measure to preserve secrecy, are of great value to the Company, are the result of the expenditure of large sums of money, are difficult for an outsider to duplicate, and disclosure of which would be extremely detrimental to the Company. The Executive covenants to keep all such trade secrets or confidential data secret and not to release such information to persons not authorized by the Company to receive such secrets and data, both during the term of this Agreement and at all times following its termination. The Executive acknowledges that trade secrets and confidential data need not be expressly marked as such by the Company. 16. Documents, Etc. All records, files, documents, equipment and the like shall be, and remain, the sole property of the Company. The Executive, on -12-
the termination of his employment, shall immediately return to the Company all such items without retention of any copies. 17. Limited Non-Competition. During the Executive's employment and for a limited time thereafter, the Company must protect its legitimate business interests by limiting the Executive's ability to compete with the Company. This limited non-competition provision is drafted narrowly so as to be able to safeguard the Company's legitimate business interests while not unreasonably interfering with the Executive's ability to obtain other employment. The Company does not intend, and the Executive acknowledges, that this limited non-competition provision is not an attempt to prevent the Executive from obtaining other employment. The Executive further acknowledges that the Company may need to take action, including litigation, to enforce this limited non-competition provision, which efforts the parties stipulate shall not be deemed an attempt to prevent the Executive from obtaining other employment. (a) During Employment By Company. During the Executive's employment, Executive shall not, directly or indirectly, have any ownership interest in, work for, advise, manage, or act as an agent or consultant for, or have any business connection or business or employment relationship with any person or entity that competes with the Company or that contemplates competing with the Company without the prior written approval of the Chief Executive Officer. (b) During Post-Employment Period. For a period of two (2) years after the Executive's termination of employment (regardless of the reason), or for the duration of the Executive's receipt of Salary under Section 11 or 12, whichever is longer, the Executive shall not: (i)(A) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (i)(B) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or -13-
service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which he has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (ii)(A) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (ii)(B) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which the Executive has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(A) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company with whom the Executive has had contact (either directly or indirectly) or over which he has had responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(B) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company; and -14-
(iv) directly or indirectly, on behalf of the Executive or any third party, make any business contacts with, solicit or accept business from any customer of the Company for any product or service which is competitive with or substantially similar to any product or service sold by the Company; (c) Separate and Several Covenants. The Executive acknowledges that after termination of his employment, he will inevitably possess trade secrets and confidential data of the Company which he would inevitably use if he were to engage in conduct prohibited as set forth above, and such use would be unfair to and extremely detrimental to the Company. The Executive further acknowledges that in view of the benefits provided him by this Agreement, such conduct on his part would be inequitable. Accordingly, the Executive separately and severally covenants for the benefit of the Company to keep each of the covenants described in this Section 17 for the period specified above. (d) Acknowledgment of the Company's Superseding Interest in Protecting its Business. The Executive recognizes that personal relationships between the Company, its employees and customers are essential to the Company's business operations and that the Company furthers such relationships by investments of time and money. The Executive recognizes that this Agreement is reasonably necessary to protect the Company's legitimate interest in its customers, and to protect the Company's confidential information and goodwill, and acknowledges that nothing contained in this Agreement shall unreasonably alter the Executive's ability to obtain a livelihood or preclude the Executive from engaging in his profession. The Executive, therefore, acknowledges that the Company's interest in maintaining its relationships with its established customers for at least two (2) years after termination of the Executive's employment, or for the duration of the Executive's receipt of Salary under Section 11 or 12, whichever is longer, supersedes any interest of the Executive in soliciting, servicing, or accepting the Company's customers on behalf of any entity other than the Company during that period of time. (e) Publicly Traded Stock. Nothing in the foregoing provisions of this section prohibits the Executive from purchasing for -15-
investment purposes only, any stock or corporate security traded or quoted on a national securities exchange or national market system. (f) Maximum Application. The parties expressly agree that the terms of this limited non-competition provision under this section are reasonable, enforceable, and necessary to protect the Company's interests, and are valid and enforceable. In the unlikely event, however, that a court of competent jurisdiction were to determine that any portion of this limited non-competition provision is unenforceable, then the parties agree that the remainder of the limited non-competition provision shall remain valid and enforceable to the maximum extent possible. 18. Other Limited Prohibitions. During the Executive's employment and for two (2) years after termination, or for the duration of the Executive's receipt of Salary under Section 11 or 12, whichever is longer, the Executive shall not: (a) request or advise any customer of the Company, or any person or entity having business dealings with the Company, to withdraw, curtail or cease such business with the Company; (b) disclose to any person or entity the identities of any customers of the Company, or the identity of any persons or entities having business dealings with the Company; or (c) directly or indirectly influence or attempt to influence any other employee of the Company to separate from the Company. 19. Specific Enforcement/Injunctive Relief. The Executive agrees that it would be difficult to measure damages to the Company from any breach of the covenants contained in Sections 15 through 18, but that such damages from any breach would be great, incalculable and irremediable, and that damages would be an inadequate remedy. Accordingly, the Executive agrees that the Company may have specific performance of the terms of this Agreement in any court permitted by this Agreement. In addition, if the Executive violates the non-competition provisions of Section 17 or 18, the Executive agrees that any period of such violation shall be added to the term of the non-competition. For example, if the Executive violates the provision for three (3) months, the Company shall be -16-
entitled to enforce the non-competition provision for two (2) years, or for the duration of the Executive's receipt of Salary under Section 11 or 12, plus three (3) months post-termination. In determining the period of any violation, the parties stipulate that in any calendar month in which the Executive engages in any activity violative of the non-competition provision, the Executive is deemed to have violated the non-competition provision for the entire month, and that month shall be added to the duration of the non-competition provision as set out above. The parties agree however, that specific performance and the "add back" remedies described above shall not be the exclusive remedies, and the Company may enforce any other remedy or remedies available to it either in law or in equity including, but not limited to, temporary, preliminary, and/or permanent injunctive relief. 20. Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions of this Agreement which shall be given effect independently of the invalid provisions and, in such circumstances, the invalid provision is severable. 21. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Indiana. The parties expressly agree that it is appropriate for Indiana law to apply to: (i) the interpretation of the Agreement; (ii) any disputes arising out of this Agreement; (iii) any disputes arising out of the employment relationship of the parties; and (iv) any and all other disputes between the parties. 22. Choice of Forum. The Company is based in Indiana, and the Executive understands and acknowledges the Company's desire and need to defend any litigation against it in Indiana. Accordingly, the parties agree that any claim of any type brought by the Executive against the Company or any of its employees or agents must be maintained only in a court sitting in Marion County, Indiana, or, if a federal court, the Southern District of Indiana, Indianapolis Division. The Executive further understands and acknowledges that in the event the Company initiates litigation against the Executive, the Company may need to prosecute such litigation in the Executive's forum state, in the State of Indiana, or in such other state where the Executive is subject to personal jurisdiction. Accordingly, the parties agree that the Company can pursue any claim against the -17-
Executive in any forum in which the Executive is subject to personal jurisdiction. The Executive specifically consents to personal jurisdiction in the State of Indiana. 23. Mandatory Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, other than a claim arising out of the Executive's breach of the confidentiality and non-competition provisions of Sections 15 through 19, shall be settled by arbitration in Indianapolis, Indiana, in accordance with the Rules of the American Arbitration Association before arbitrators who are licensed to practice law. The arbitrator or arbitrators shall apply the substantive law of Indiana or federal law, or both, as applicable to the dispute. Any award entered shall be final, binding and nonappealable, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. In the event that the Company refuses or otherwise fails to make a payment when due and it is ultimately decided that the Executive is entitled to such payment, such payment shall be increased to reflect an interest equivalent for the period of delay, compounded annually, equal to the prime or base lending rate used by Bank One Indiana, NA, and in effect as of the date the payment was first due. 24. Non-Jury Trials. Notwithstanding the provisions of Sections 19 and 23 above, and if the provisions of Section 19 or 23 above are not enforceable, the Executive expressly waives any rights to a jury trial and agrees that any claim of any type made against the Company or its agents or executives (including, but not limited to, employment discrimination litigation, wage litigation, defamation, or any other claim) lodged in any court will be tried, if at all, without a jury. 25. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary or any termination of this Agreement notwithstanding, in the event it shall be determined that any payment or distribution or benefit ("Payment") made or provided by the Company or its affiliates to or for the benefit of the Executive whether pursuant to this Agreement or otherwise, and determined without regard to any additional payments required under this Section 25 -18-
would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code") or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment ("Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 25(c) all determinations required to be made under this Section 25, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's independent auditor (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within a reasonable period of time of the receipt of notice from the Executive that there has been a Gross-Up Payment. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 25, shall be paid by the Company to the Executive within a reasonable period of time of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 25(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. -19-
(c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claims as the Company shall reasonably request in writing from time to time, including without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 25(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim -20-
and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 25(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 25(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 25(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 26. Rabbi Trust. The Company has established The Anthem Employee Benefit Trust, a rabbi trust ("Trust") for key executives, and intends for such Trust to remain in effect in accordance with its terms. This Agreement shall, -21-
upon Triggering Events (as defined below), become covered under the Trust and become subject to the Trust funding requirements. For purposes of this Section 26, the term "Triggering Event" shall mean the first to occur of: (a) the termination of the employment of the Executive by the Company other than For Cause; (b) the termination of the employment by the Executive for Good Reason; (c) the termination of the employment by the Executive as a result of an Approved Retirement; or (d) the occurrence of a change of control (as such term is defined in the Trust) of the Company. 27. Nonalienation of Benefits. Except as may otherwise be required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, bankruptcy or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 28. Legal Fees and Cost. All legal and other fees and expenses, including, without limitation, any arbitration expenses, incurred by the Executive in connection with contesting or disputing any termination of employment, in seeking to obtain or enforce any right or benefit provided for in this Agreement, or in otherwise pursuing any right or claim, shall be paid by the Company, to the extent permitted by law, provided that the Executive makes a formal written settlement demand prior to trial or arbitration and is ultimately successful, in obtaining through trial or arbitration more than fifty percent (50%) of the monetary relief sought, in his final written settlement demand exclusive of attorney's fees. 29. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and will be deemed to have been given when delivered in person (to the Executive if such notice is for the Executive) or five (5) days following sending by overnight courier or mailing by -22-
first class, certified or registered mail, postage prepaid, to the Executive at his home address, or such addresses as the Executive shall have designated in writing, or if to the Company, to the attention of the Corporate Secretary, at the Company's principal place of business, 120 Monument Circle, Indianapolis, Indiana 46204. 30. Headings. The various headings of this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any of its provisions. 31. Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to its benefit, its successors and affiliated companies and shall be binding upon the successors and assigns of the Company. This Agreement, being personal to the Executive, cannot be assigned by the Executive, but his personal representative shall be bound by all its terms and conditions. 32. Waiver and Amendments, Etc. Failure of the Company to insist upon strict compliance with any terms or provisions of this Agreement shall not be deemed a waiver of any terms, provisions or rights of the Company. Moreover, no modifications, amendments, extensions or waivers of this Agreement or any provisions hereof shall be binding upon the Company or the Executive unless in writing and signed by the Executive and the Company. 33. Complete Agreement. This Agreement constitutes the entire employment agreement of the parties and supersedes all prior employment agreements addressing the terms, conditions, and issues contained herein. Nothing in this Agreement, however, affects any separate written agreements addressing other terms and conditions and issues agreed to by the parties. 34. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Company and the Executive have duly executed and delivered this Agreement effective as of the day and year first above written. -23-
Michael L. Smith /s/ Michael L. Smith ____________________________________ Anthem Insurance Companies, Inc. By: /s/ Larry C. Glasscock -------------------------------- Larry C. Glasscock, President and CEO -24-
ATTACHMENT A RELEASE AND WAIVER AGREEMENT This Release and Waiver Agreement ("Agreement") is entered into on this __ day of __________, ____, by and between Anthem Insurance Companies, Inc., including its subsidiaries and affiliates (the "Company") and Michael L. Smith (the "Executive"). NOW, THEREFORE, the parties agree to the following: 1. The Executive and the Company acknowledge and agree that the Employee's last day of employment with the Company or one of its affiliates shall be ___________________. Service credit for purposes of all Company benefits, including but not limited to the Anthem Cash Balance Pension Plan, shall terminate as of that date. 2. The Company agrees that it shall pay to the Executive the amounts described in Section [9, 11 or 12] of the Employment Agreement between the Company and the Executive effective ______________ ("Employment Agreement"). All payments made pursuant to Section [9, 11 or 12] of the Employment Agreement shall be made pursuant to Sections 13 and 14 of the Employment Agreement. The Executive shall also be entitled to any benefits described in Section [9, 11 or 12] of the Employment Agreement for the duration noted therein. 3. Any and all benefits not specifically discussed in this Agreement or provided by law will cease on [termination date from paragraph 1]. ----------------------------------- 4. The provisions of the Employment Agreement relating to Protection of the Company's Business, Documents, Limited Non-Competition, Other Limited Prohibitions, and Specific Enforcement (Sections 15, 16, 17, 18 and 19) shall remain in full force and effect upon termination of employment. The Executive acknowledges that he possesses trade secrets and confidential data of the Company and further acknowledges that the provisions of Sections 15 through 19 of the Employment Agreement are reasonably necessary to protect the Company's legitimate business interests, confidential data, and goodwill. 5. The Executive hereby forever releases and waives as against the Company, and each of their directors, officers, employees and agents, any and all legal and equitable causes of action and claims which the Executive possesses, whether known or unknown, including, but not limited to, any such causes of action and claims relating to the Employee's employment with, or termination of employment from, the Company or any of its affiliates, including any and all rights, entitlements or claims under any and all federal, state and local laws and regulations, all as amended, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991 and the Americans with Disabilities Act of 1990. The Executive further expressly and specifically waives any and all rights and claims under the Age Discrimination in Employment Act of 1967 and the Older Workers' Benefit Protection Act (collectively referred to as the "Act"). The Executive acknowledges and agrees that this
Page 2 waiver of any right or claim under the Act (hereinafter "Waiver") is knowing and voluntary, and specifically agrees as follows: that this Waiver is written in a manner which he understands; that this Waiver specifically relates to rights or claims under the Act; that he does not waive any rights or claims under the Act that may arise after the date of execution of this Agreement; that he waives rights or claims under the Act in exchange for consideration in addition to anything of value to which he already is entitled; and that he has been advised in writing to consult with an attorney prior to executing it. The Executive acknowledges that he understands that he has twenty-one (21) days after receipt of this Agreement to decide whether to accept it and that he may revoke any acceptance of this Agreement within seven (7) days of such acceptance. This Agreement shall not become effective until the seven (7) day revocation period has expired and no amounts will be paid to the Executive until the seven (7) day revocation period has expired. 6. It is understood and agreed between the Executive and the Company that this Agreement shall in no way affect any claims of the Executive arising out of Social Security, Worker's Compensation, or Unemployment Laws. 7. The Company and the Executive agree that any breach of the terms of this Agreement may, at the Company's discretion, result in the immediate termination of any subsequent payments to be made under this Agreement. In the event of a breach of this Agreement or any dispute regarding this Agreement, the provisions of the Employment Agreement relating to Specific Enforcement, Governing Law, Choice of Forum, Mandatory Arbitration, Non-Jury Trials, and Legal Fees and Costs (Sections 19, 21, 22, 23, 24 and 28) shall remain in full force and effect. 8. The Executive expressly agrees that the consideration designated in this Agreement is sufficient for the terms of this Agreement. The Executive further agrees that upon the execution of this Agreement he shall keep confidential and not disclose the existence or terms of this Agreement unless compelled to do so by a court or administrative body. 9. The rights and obligations hereunder shall not be assigned or transferred by the Executive and shall be binding upon and inure to the benefit of the Executive, his heirs, legatees and legal representatives, and the Company, its subsidiaries and affiliates, successors and assigns. No waiver of any breach of this Agreement shall be deemed or construed as a waiver of any other or subsequent breach. Any amendment of this Agreement shall be effective only if in writing and signed by both parties. If any provision of this Agreement shall be held invalid under applicable laws, such provision shall be ineffective only to the extent of any invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements, whether oral or written, between the parties. The terms of this Agreement shall be governed by Indiana law. The parties represent that they have read and understood this Agreement, and the officer executing this document on behalf of the Company represents that he has the authority to do so.
Page 3 10. This Agreement shall not be effective or enforceable against the Company until the seven (7) day revocation period has expired or if the Executive revokes it not later than seven (7) days after he signs it. This revocation must be in writing and must be personally delivered, or sent by certified mail to: Corporate Secretary Anthem, Inc. 120 Monument Circle Indianapolis, Indiana 46204 11. The Executive expressly acknowledges that he understands all of the provisions of this Agreement and is voluntarily entering into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement. Michael L. Smith Anthem Insurance Companies, Inc. __________________________ By:___________________________________ Printed: _____________________________ Title: _______________________________
Exhibit 10.7(i) EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement"), is by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company"), with offices located at 120 Monument Circle, Indianapolis, Indiana, and Marjorie W. Dorr (the "Executive"), residing at 11 Woodlawn, Madison, Connecticut 06443, dated as of the 1st day of January, 1999. W I T N E S S E T H: -------------------- WHEREAS, the Company (which hereinafter also includes subsidiaries of the Company) desires to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive is willing to serve in the employ of the Company on a full-time basis for such period, all in accordance with the terms and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Condition of Employment. The Company hereby employs the Executive and the Executive hereby accepts such employment for the period provided for in Section 2, all upon the terms and conditions contained in this Agreement. As a condition to the Executive's employment, the Executive affirms and represents that the Executive is under no obligation to any former employer or other person which is in any way inconsistent with, or which imposes any restriction upon, the employment of the Executive by the Company or the Executive's undertakings under this Agreement. 2. Term of Employment. Unless sooner terminated pursuant to Section 7, the term of the Executive's employment under this Agreement shall be for a period commencing on the date hereof through the 31st day of December, 2001 ("Term"). 3. Duties. During the Term, the Executive shall provide executive, administrative and managerial services to the Company and perform such other reasonable employment duties as the Chief Executive Officer of the Company may from time to time prescribe. The Executive shall also serve as a director of any of the Company's subsidiaries to which he is elected. - 1 -
The Executive shall, except to the extent approved by the Chief Executive Officer, (i) devote her full-time to the services required of the Executive, (ii) render her services exclusively to the Company and (iii) use her best efforts, judgment, and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of the Executive's position. The Executive may serve on boards of directors or advisory boards of businesses that are not competitors of the Company or which do not create a conflict of interest or on the boards of civic and not for profit organizations. The Executive has disclosed in writing such memberships to the Chief Executive Officer prior to the execution of this Agreement and shall disclose such information, at least, annually thereafter. 4. Compensation. As compensation for the services to be performed by the Executive during the Term, the Company shall provide to the Executive: (a) an annual base salary of not less than two hundred twenty five thousand dollars ($225,000) ("Salary"); (b) a target annual incentive opportunity of not less than sixty percent (60%) of the Salary ("Target Annual Incentive"). The performance goals required to earn the Target Annual Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the year for which the opportunity pertains; and (c) a target annualized long-term incentive opportunity of not less than fifty percent (50%) of the Salary ("Target Long-Term Incentive"). The performance goals required to earn the Target Long-Term Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the performance period for which the opportunity pertains. If such performance period is longer than one year, the Target Long-Term Incentive opportunity shall be adjusted accordingly based on the number of years in the performance period. Should the Company elect to increase any element of the Executive's compensation during the Term, the Agreement shall be deemed amended to incorporate the new increased Salary or Target Annual Incentive or Target Long-Term Incentive effective as of the date specified for the increase. The payment of - 2 -
any compensation hereunder shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, and shall be paid in accordance with the Company's normal payroll and incentive administration practices as they may exist from time to time. 5. Benefits. In addition to the payments set forth in Section 4, the Executive shall: (a) be eligible to participate in all fringe benefits, paid time off program, incentive plans, and retirement programs, both tax-qualified and non-qualified, that may be provided by the Company for its executives, in accordance with the provisions of any such programs or plans; (b) be eligible to participate in any life, disability or other similar insurance plans, medical and dental plans or other employee welfare benefit plans that may be provided by the Company for its executives, in accordance with the provisions of any such plans; and (c) be eligible to participate in any postretirement medical, dental and life insurance plans that may be provided by the Company for its executives, in accordance with the provision of any such plans, but with the payment of whatever contribution that the Company requires that other such retirees would pay for such coverage. 6. Expenses. The Company shall, in accordance with and to the extent of its policies, pay all ordinary and necessary business expenses incurred by the Executive in performing his duties as an executive. The Executive shall account promptly for all such business expenses in the manner prescribed by the Company. 7. Termination. The Executive's employment shall be terminated upon the occurrence of any of the following: (a) the death of the Executive; (b) the Executive's disability (as such term is defined in the Company's executive long-term disability plan) ("Disability"); - 3 -
(c) the termination of employment by the Executive for any reason; (d) the termination of employment by the Company For Cause (as defined below); or (e) the termination of employment by the Company other than For Cause. The term "For Cause" or "Cause" shall mean a reasonable determination by the Company that the Executive (i) has been convicted of a felony, (ii) has engaged in an activity which, if proven in a criminal proceeding, could result in conviction of a felony involving dishonesty or fraud, or (iii) has willfully engaged in gross misconduct likely to be materially damaging or materially detrimental to the Company. In order to be effective, the Company must give the Executive at least sixty (60) calendar days advance written notice of its intent to terminate her employment "For Cause" setting forth the specific action(s) by the Executive which triggered the notice and such written notice must be received by the Executive no more than one hundred eighty (180) calendar days after the Company learned of the action(s) giving rise to the "For Cause" termination. 8. Death of The Executive. In the event the Executive's employment is terminated as a result of the Executive's death, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the estate of the Executive: (a) for the lesser of six (6) months or the unexpired portion of the Term, the Executive's Salary; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of death, based upon the achievement of the performance goals for the plans for the entire year of death prorated to reflect the full number of months the Executive was employed during that year; and (d) for the remainder of the year of death, an amount equal to fifty percent (50%) of any Target Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's death. 9. Disability of The Executive. In the event the Executive's employment is terminated as a result of the Executive's disability, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the Executive if the Executive satisfies the terms of Section 13: (a) for the lesser of six (6) months or the unexpired portion of the Term, the Executive's Salary, reduced by any payments to be received by the Executive under the Company's Executive Long-Term Disability Plan for the same period; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of disability, based upon the achievement of the performance goals for the plans for the entire year of disability prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the year of disability, and amount equal to fifty percent (50%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's disability; and (e) for the lesser of six (6) months or the unexpired portion of the Term, the medical and dental plan benefits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's disability. 10. Executive-Initiated Termination or Company-Initiated For Cause. If the Executive terminates this Agreement for any reason or the Company - 4 -
terminates this Agreement For Cause, the Company shall have no further obligations and liabilities under this Agreement after the termination of employment. 11. Termination Other Than For Cause. In the event the Executive's employment is terminated by the Company other than For Cause, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay, for the greater of one (1) year or the remainder of the Term, the following to the Executive if the Executive satisfies the terms of Section 13: (a) the Executive's Salary; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of termination, based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the Executive was employed during that year; (d) an amount equal to fifty percent (50%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; and (e) the medical and dental plan benefits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment. 12. Payment of Compensation Described in Sections 8, 9, or 11. The compensation items specified in Sections 8, 9, or 11 shall be paid as follows: (a) the Salary shall be paid over the remaining Term or other period as described in Sections 8, 9 or 11 in accordance with the Company's normal payroll practices; (b) the prior unvested Long-term Incentive awards shall be paid within ninety (90) days after the termination of employment; and (c) the current and future Annual Incentive and Long-Term Incentive awards and opportunities shall be paid within ninety (90) days after the end of the calendar year for which the incentive applied. - 5 -
13. Execution of Release. As a condition of receiving the compensation and benefits described in Sections 9 or 11, the Executive shall first execute a release of any and all claims arising out of the Executive's employment with the Company or the Executive's separation from such employment (including, without limitation, claims relating to age, disability, sex or race discrimination to the extent permitted by law), excepting only claims arising out of the alleged breach of this Agreement or of any other written contract between the Executive and the Company. Such release shall be in a form reasonably satisfactory to the Company and shall comply with any applicable legislative or judicial requirements, including, but not limited to, the Older Workers Benefit Protection Act. An example of such release is attached as Attachment A. 14. Protection of the Company's Business. The Executive acknowledges that in the course of her employment she will acquire knowledge of trade secrets and confidential data of the Company. Such trade secrets and confidential data may include, but are not limited to, confidential product information, provider contracts, customer lists, technical information, methods by which the Company proposes to compete with its business competitors, strategic and business plans, confidential reports prepared by business consultants which may reveal strengths and weaknesses of the Company and its competition and similar information relating to the Company. The Executive, in order to perform her obligations under this Agreement, must necessarily acquire knowledge of such trade secrets and confidential data, all of which the Executive acknowledges are not known outside the business of the Company, are known only to a limited group of its top executives and directors, are protected by strict measure to preserve secrecy, are of great value to the Company, are the result of the expenditure of large sums of money, are difficult for an outsider to duplicate, and disclosure of which would be extremely detrimental to the Company. The Executive covenants to keep all such trade secrets or confidential data secret and not to release such information to persons not authorized by the Company to receive such secrets and data, both during the term of this Agreement and at all times following its termination. The Executive acknowledges that trade secrets and confidential data need not be expressly marked as such by the Company. - 6 -
15. Documents, Etc. All records, files, documents, equipment and the like shall be, and remain, the sole property of the Company. The Executive, on the termination of his employment, shall immediately return to the Company all such items without retention of any copies. 16. Limited Non-Competition. During the Executive's employment and for a limited time thereafter, the Company must protect its legitimate business interests by limiting the Executive's ability to compete with the Company. This limited non-competition provision is drafted narrowly so as to be able to safeguard the Company's legitimate business interests while not unreasonably interfering with the Executive's ability to obtain other employment. The Company does not intend, and the Executive acknowledges, that this limited non-competition provision is not an attempt to prevent the Executive from obtaining other employment. The Executive further acknowledges that the Company may need to take action, including litigation, to enforce this limited non-competition provision, which efforts the parties stipulate shall not be deemed an attempt to prevent the Executive from obtaining other employment. (a) During Employment By Company. During the Executive's employment, Executive shall not, directly or indirectly, have any ownership interest in, work for, advise, manage, or act as an agent or consultant for, or have any business connection or business or employment relationship with any person or entity that competes with the Company or that contemplates competing with the Company without the prior written approval of the Chief Executive Officer. (b) During Post-Employment Period. For a period of one (1) year after the Executive's termination of employment (regardless of the reason), or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: (i)(A) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; - 7 -
(i)(B) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which he has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (ii)(A) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (ii)(B) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which the Executive has been assigned responsibility at any time within the twenty-four (24) months preceding her termination; (iii)(A) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company with whom the Executive has had contact (either directly or indirectly) or over which she has had responsibility at any time within the twenty-four (24) months preceding her termination; (iii)(B) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company; or - 8 -
(iv) directly or indirectly, on behalf of the Executive or any third party, make any business contacts with, solicit or accept business from any customer of the Company for any product or service which is competitive with or substantially similar to any product or service sold by the Company; (c) Separate and Several Covenants. The Executive acknowledges that after termination of her employment, she will inevitably possess trade secrets and confidential data of the Company which she would inevitably use if she were to engage in conduct prohibited as set forth above, and such use would be unfair to and extremely detrimental to the Company. The Executive further acknowledges that in view of the benefits provided her by this Agreement, such conduct on her part would be inequitable. Accordingly, the Executive separately and severally covenants for the benefit of the Company to keep each of the covenants described in this Section 16 for the period specified above. (d) Acknowledgment of the Company's Superseding Interest in Protecting its Business. The Executive recognizes that personal relationships between the Company, its employees and customers are essential to the Company's business operations and that the Company furthers such relationships by investments of time and money. The Executive recognizes that this Agreement is reasonably necessary to protect the Company's legitimate interest in its customers, and to protect the Company's confidential information and goodwill, and acknowledges that nothing contained in this Agreement shall unreasonably alter the Executive's ability to obtain a livelihood or preclude the Executive from engaging in her profession. The Executive, therefore, acknowledges that the Company's interest in maintaining its relationships with its established customers for at least one (1) year after termination of the Executive's employment, or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, supersedes any interest of the Executive in soliciting, servicing, or accepting the Company's customers on behalf of any entity other than the Company during that period of time. (e) Publicly Traded Stock. Nothing in the foregoing provisions of this section prohibits the Executive from purchasing for investment purposes only, any stock or corporate security traded or quoted on a national securities exchange or national market system. - 9 -
(f) Maximum Application. The parties expressly agree that the terms of this limited non-competition provision under this section are reasonable, enforceable, and necessary to protect the Company's interests, and are valid and enforceable. In the unlikely event, however, that a court of competent jurisdiction were to determine that any portion of this limited non-competition provision is unenforceable, then the parties agree that the remainder of the limited non-competition provision shall remain valid and enforceable to the maximum extent possible. 17. Other Limited Prohibitions. During the Executive's employment and for one (1) year after termination, or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: (a) request or advise any customer of the Company, or any person or entity having business dealings with the Company, to withdraw, curtail or cease such business with the Company; (b) disclose to any person or entity the identities of any customers of the Company, or the identity of any persons or entities having business dealings with the Company; or (c) directly or indirectly influence or attempt to influence any other employee of the Company to separate from the Company. 18. Specific Enforcement/Injunctive Relief. The Executive agrees that it would be difficult to measure damages to the Company from any breach of the covenants contained in Sections 14 through 17, but that such damages from any breach would be great, incalculable and irremediable, and that damages would be an inadequate remedy. Accordingly, the Executive agrees that the Company may have specific performance of the terms of this Agreement in any court permitted by this Agreement. In addition, if the Executive violates the non-competition provisions of Section 16 or 17, the Executive agrees that any period of such violation shall be added to the term of the non-competition. For example, if the Executive violates the provision for three (3) months, the Company shall be entitled to enforce the non-competition provision for one (1) year, or for the duration of the Executive's receipt of Salary under Section 11, plus three (3) months post-termination. In determining the period of any violation, the parties - 10 -
stipulate that in any calendar month in which the Executive engages in any activity violative of the non-competition provision, the Executive is deemed to have violated the non-competition provision for the entire month, and that month shall be added to the duration of the non-competition provision as set out above. The parties agree however, that specific performance and the "add back" remedies described above shall not be the exclusive remedies, and the Company may enforce any other remedy or remedies available to it either in law or in equity including, but not limited to, temporary, preliminary, and/or permanent injunctive relief. 19. Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions of this Agreement which shall be given effect independently of the invalid provisions and, in such circumstances, the invalid provision is severable. 20. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Indiana. The parties expressly agree that it is appropriate for Indiana law to apply to: (i) the interpretation of the Agreement; (ii) any disputes arising out of this Agreement; (iii) any disputes arising out of the employment relationship of the parties; and (iv) any and all other disputes between the parties. 21. Choice of Forum. The Company is based in Indiana, and the Executive understands and acknowledges the Company's desire and need to defend any litigation against it in Indiana. Accordingly, the parties agree that any claim of any type brought by the Executive against the Company or any of its employees or agents must be maintained only in a court sitting in Marion County, Indiana, or, if a federal court, the Southern District of Indiana, Indianapolis Division. The Executive further understands and acknowledges that in the event the Company initiates litigation against the Executive, the Company may need to prosecute such litigation in the Executive's forum state, in the State of Indiana, or in such other state where the Executive is subject to personal jurisdiction. Accordingly, the parties agree that the Company can pursue any claim against the Executive in any forum in which the Executive is subject to personal jurisdiction. The Executive specifically consents to personal jurisdiction in the State of Indiana. - 11 -
22. Mandatory Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, other than a claim arising out of the Executive's breach of the confidentiality and non-competition provisions of Section 14 through 18, shall be settled by arbitration in Indianapolis, Indiana, in accordance with the Rules of the American Arbitration Association before arbitrators who are licensed to practice law. The arbitrator or arbitrators shall apply the substantive law of Indiana or federal law, or both, as applicable to the dispute. Any award entered shall be final, binding and nonappealable, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. In the event that the Company refuses or otherwise fails to make a payment when due and it is ultimately decided that the Executive is entitled to such payment, such payment shall be increased to reflect an interest equivalent for the period of delay, compounded annually, equal to the prime or base lending rate used by Bank One Indiana, NA, and in effect as of the date the payment was first due. 23. Non-Jury Trials. Notwithstanding the provisions of Sections 18 and 22 above, and if the provisions of Section 18 or 22 above are not enforceable, the Executive expressly waives any rights to a jury trial and agrees that any claim of any type made against the Company or its agents or executives (including, but not limited to, employment discrimination litigation, wage litigation, defamation, or any other claim) lodged in any court will be tried, if at all, without a jury. 24. Nonalienation of Benefits. Except as may otherwise be required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, bankruptcy or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 25. Legal Fees and Cost. All legal and other fees and expenses, including, without limitation, any arbitration expenses, incurred by the Executive in connection with contesting or disputing any termination of employment, in seeking to obtain or enforce any right or benefit provided for in this Agreement, or in otherwise pursuing any right or claim, shall be paid by the Company, to the extent permitted by law, provided that the Executive makes a formal written - 12 -
settlement demand prior to trial or arbitration and is ultimately successful, in obtaining through trial or arbitration more than fifty percent (50%) of the monetary relief sought, in her final written settlement demand exclusive of attorney's fees. 26. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and will be deemed to have been given when delivered in person (to the Executive if such notice is for the Executive) or five (5) days following sending by overnight courier or mailing by first class, certified or registered mail, postage prepaid, to the Executive at her home address, or such addresses as the Executive shall have designated in writing, or if to the Company, to the attention of the Corporate Secretary, at the Company's principal place of business, 120 Monument Circle, Indianapolis, Indiana 46204. 27. Headings. The various headings of this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any of its provisions. 28. Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to its benefit, its successors and affiliated companies and shall be binding upon the successors and assigns of the Company. This Agreement, being personal to the Executive, cannot be assigned by the Executive, but her personal representative shall be bound by all its terms and conditions. 29. Waiver and Amendments, Etc. Failure of the Company to insist upon strict compliance with any terms or provisions of this Agreement shall not be deemed a waiver of any terms, provisions or rights of the Company. Moreover, no modifications, amendments, extensions or waivers of this Agreement or any provisions hereof shall be binding upon the Company or the Executive unless in writing and signed by the Executive and the Company. 30. Complete Agreement. This Agreement constitutes the entire employment agreement of the parties and supersedes all prior employment agreements addressing the terms, conditions, and issues contained herein. Nothing in this Agreement, however, affects any separate written agreements addressing other terms and conditions and issues agreed to by the parties. - 13 -
31. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Company and the Executive have duly executed and delivered this Agreement effective as of the day and year first above written. Marjorie W. Dorr /s/ Marjorie W. Dorr ____________________________________ Anthem Insurance Companies, Inc. By: /s/ L. Ben Lytle -------------------------------- Name: L. Ben Lytle ------------------------------- Title: Chairman, President & CEO ---------------------------- - 14 -
ATTACHMENT A RELEASE AND WAIVER AGREEMENT This Release and Waiver Agreement ("Agreement") is entered into on this __ day of __________, ____, by and between Anthem Insurance Companies, Inc., including its subsidiaries and affiliates (the "Company") and Marjorie W. Dorr (the "Executive"). NOW, THEREFORE, the parties agree to the following: 1. The Executive and the Company acknowledge and agree that the Executive's last day of employment with the Company or one of its affiliates shall be ___________________. Service credit for purposes of all Company benefits, including but not limited to the Anthem Cash Balance Pension Plan, will terminate as of that date. 2. The Company agrees that it will pay to the Executive the amounts described in Section [9 or 11] of the Employment Agreement between the Company and the Executive effective ______________ ("Employment Agreement"). All payments made pursuant to Section [9 or 11] of the Employment Agreement shall be made pursuant to Section 12 of the Employment Agreement. The Executive will also be entitled to any benefits described in Section [9 or 11] of the Employment Agreement for the duration noted therein. 3. Any and all benefits not specifically discussed in this Agreement or provided by law will cease on [termination date from paragraph 1]. ----------------------------------- 4. The provisions of the Employment Agreement relating to Protection of the Company's Business, Documents, Limited Non-Competition, Other Limited Prohibitions, and Specific Enforcement (Sections 14, 15, 16, 17, and 18) shall remain in full force and effect upon termination of employment. The Executive acknowledges that she possesses trade secrets and confidential data of the Company and further acknowledges that the provisions of Sections 14 through 18 of the Employment Agreement are reasonably necessary to protect the Company's legitimate business interests, confidential data, and goodwill. 5. The Executive hereby forever releases and waives as against the Company, its subsidiaries and affiliates, and each of their directors, officers, employees and agents, any and all legal and equitable causes of action and claims which the Executive possesses, whether known or unknown, including, but not limited to, any such causes of action and claims relating to the Employee's employment with, or termination of employment from, the Company or any of its affiliates, including any and all rights, entitlements or claims under any and all federal, state and local laws and regulations, all as amended, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991 and the Americans with Disabilities Act of 1990. The Executive further expressly and specifically waives any and all rights and claims under the Age Discrimination in Employment Act of 1967 and the Older Workers' Benefit Protection Act (collectively referred to as the "Act"). The Executive acknowledges and agrees that this waiver of any right or claim under the Act (hereinafter "Waiver") is
Page 2 knowing and voluntary, and specifically agrees as follows: that this Waiver is written in a manner which she understands; that this Waiver specifically relates to rights or claims under the Act; that she does not waive any rights or claims under the Act that may arise after the date of execution of this Agreement; that she waives rights or claims under the Act in exchange for consideration in addition to anything of value to which she already is entitled; and that she has been advised in writing to consult with an attorney prior to executing it. The Executive acknowledges that she understands that she has twenty-one (21) days after receipt of this Agreement to decide whether to accept it and that she may revoke any acceptance of this Agreement within seven (7) days of such acceptance. This Agreement shall not become effective until the seven (7)-day revocation period has expired and no amounts will be paid to the Executive until the seven (7)-day revocation period has expired. 6. It is understood and agreed between the Executive and the Company that this Agreement shall in no way affect any claims of the Executive arising out of Social Security, Worker's Compensation, or Unemployment Laws. 7. The Company and the Executive agree that any breach of the terms of this Agreement may, at the Company's discretion, result in the immediate termination of any subsequent payments to be made under this Agreement. In the event of a breach of this Agreement or any dispute regarding this Agreement, the provisions of the Employment Agreement relating to Specific Enforcement, Governing Law, Choice of Forum, Mandatory Arbitration, Non-Jury Trials, and Legal Fees and Costs (Sections 18, 20, 21, 22, 23, and 25) shall remain in full force and effect. 8. The Executive expressly agrees that the consideration designated in this Agreement is sufficient for the terms of this Agreement. The Executive further agrees that upon the execution of this Agreement she will keep confidential and not disclose the existence or terms of this Agreement unless compelled to do so by a court or administrative body. 9. The rights and obligations hereunder shall not be assigned or transferred by the Executive and shall be binding upon and inure to the benefit of the Executive, her heirs, legatees and legal representatives, and the Company, its subsidiaries and affiliates, successors and assigns. No waiver of any breach of this Agreement shall be deemed or construed as a waiver of any other or subsequent breach. Any amendment of this Agreement shall be effective only if in writing and signed by both parties. If any provision of this Agreement shall be held invalid under applicable laws, such provision shall be ineffective only to the extent of any invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements, whether oral or written, between the parties. The terms of this Agreement shall be governed by Indiana law. The parties represent that they have read and understood this Agreement, and the officer executing this document on behalf of the Company represents that she has the authority to do so. 10. This Agreement shall not be effective or enforceable against the Company until the seven (7)-day revocation period has expired or if the Executive revokes it not later
Page 3 than seven (7) days after she signs it. This revocation must be in writing and must be personally delivered, or sent by certified mail to: Corporate Secretary Anthem, Inc. 120 Monument Circle Indianapolis, Indiana 46204 11. The Executive expressly acknowledges that she understands all of the provisions of this Agreement and is voluntarily entering into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement. Marjorie W. Dorr Anthem Insurance Companies, Inc. _____________________________ By:________________________________ Printed:___________________________ Title:_____________________________
EXHIBIT 10.7(ii) AMENDMENT ONE ------------- TO -- EMPLOYMENT AGREEMENT -------------------- This AMENDMENT ONE TO EMPLOYMENT AGREEMENT by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company") and Marjorie W. Dorr (the "Executive") hereby amends the EMPLOYMENT AGREEMENT (the "Agreement") between the parties dated as of the 1st day of January, 1999, as follows: 1. Effective January 1, 2000, Section 2 of the Agreement is hereby amended by deleting the termination date and inserting in place thereof the 31st day of December, 2002. 2. All other provision of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Company and the Executive have duly executed this AMENDMENT ONE TO EMPLOYMENT AGREEMENT effective as of the day and year first above written. Marjorie W. Dorr Anthem Insurance Companies, Inc. /s/ Marjorie W. Dorr By: /s/ Larry C. Glasscock ______________________________ -------------------------- Name: Larry C. Glasscock Title: President and CEO
EXIBIT 10.7(iii) AMENDMENT TWO ------------- TO -- EMPLOYMENT AGREEMENT -------------------- This AMENDMENT TWO TO EMPLOYMENT AGREEMENT by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company") and Marjorie W. Dorr (the "Executive") hereby amends the EMPLOYMENT AGREEMENT (the "Agreement") between the parties dated as of the 1st day of January, 1999, as follows: 1. Effective July 29, 2000, Section 4(a) is hereby amended by deleting two hundred twenty-five thousand dollars ($225,000) and inserting in place thereof three hundred fifty thousand dollars ($350,000), section 4(b) is hereby amended by deleting sixty percent (60%) and inserting in place thereof seventy percent (70%), and section 4(c) is hereby amended effective January 1, 2000, seventy percent (70%) after fifty percent (50%), and 2. Effective July 29, 2000, Section 10 is hereby amended by inserting after employment the following" "; provided, however, if the Executive terminates this Agreement because the Company has assigned her to a new position outside of the greater North Haven, Connecticut area, then the provisions of Section 11 shall govern instead of this Section unless the employment duties in the new position are comparable to or greater than those employment duties assigned to the Executive as of July 29, 2000. 3. All other provisions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Company and the Executive have duly executed this AMENDMENT TWO TO EMPLOYMENT AGREEMENT effective as of the day and year first above written. Marjorie W. Dorr Anthem Insurance Companies, Inc. /s/ Marjorie W. Dorr By: /s/ Larry C. Glasscock - ----------------------- --------------------------- Name: Larry C. Glasscock Title: President and CEO
EXHIBIT 10.7(iv) AMENDMENT THREE --------------- TO -- EMPLOYMENT AGREEMENT -------------------- This AMENDMENT THREE TO EMPLOYMENT AGREEMENT by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company") and Marjorie W. Dorr (the "Executive") hereby amends the EMPLOYMENT AGREEMENT (the "Agreement") between the parties dated as of the 1st day of January, 1999, as follows: 1. Effective January 1, 2001, Section 2 is hereby amended by deleting the termination date and inserting in place thereof the 31st of December 2003. 2. Effective January 1, 2001, Section 4(a) is hereby amended by deleting two hundred twenty-five thousand dollars ($225,000) and inserting in place thereof four hundred thousand dollars ($400,000); Section 4(b) is hereby amended by deleting sixty percent (60%) and inserting in place thereof eighty percent (80%); and Section 4(c) is hereby amended by inserting effective January 1, 2000, seventy percent (70%) after fifty percent (50%). 3. Effective July 29, 2000, Section 10 is hereby amended by inserting after employment the following" "; provided, however, if the Executive terminates this Agreement because the Company has assigned her to a new position outside of the greater North Haven, Connecticut area, then the provisions of Section 11 shall govern instead of this Section unless the employment duties in the new position are comparable to or greater than those employment duties assigned to the Executive as of July 29, 2000. 4. All other provisions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Company and the Executive have duly executed this AMENDMENT THREE TO EMPLOYMENT AGREEMENT effective as of the days and years above written. Marjorie W. Dorr Anthem Insurance Companies, Inc. /s/ Marjorie W. Dorr _______________________ By: /s/ Larry C. Glasscock ----------------------------- Name: Larry C. Glasscock Title: President and CEO
Exhibit 10.8(i) EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement"), is by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company"), with offices located at 120 Monument Circle, Indianapolis, Indiana, and Keith R. Faller (the "Executive"), residing at 668 West 62nd Street, Indianapolis, Indiana 46260, dated as of the 1st day of January, 1999. W I T N E S S E T H: ------------------- WHEREAS, the Company (which hereinafter also includes subsidiaries of the Company) desires to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive is willing to serve in the employ of the Company on a full-time basis for such period, all in accordance with the terms and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Condition of Employment. The Company hereby employs the Executive and the Executive hereby accepts such employment for the period provided for in Section 2, all upon the terms and conditions contained in this Agreement. As a condition to the Executive's employment, the Executive affirms and represents that the Executive is under no obligation to any former employer or other person which is in any way inconsistent with, or which imposes any restriction upon, the employment of the Executive by the Company or the Executive's undertakings under this Agreement. 2. Term of Employment. Unless sooner terminated pursuant to Section 7, the term of the Executive's employment under this Agreement shall be for a period commencing on the date hereof through the 31st day of December, 2001 ("Term"). 3. Duties. During the Term, the Executive shall provide executive, administrative and managerial services to the Company and perform such other reasonable employment duties as the Chief Executive Officer of the Company may from time to time prescribe. The Executive shall also serve as a director of any of the Company's subsidiaries to which he is elected. - 1 -
The Executive shall, except to the extent approved by the Chief Executive Officer, (i) devote his full-time to the services required of the Executive, (ii) render his services exclusively to the Company and (iii) use his best efforts, judgment, and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of the Executive's position. The Executive may serve on boards of directors or advisory boards of businesses that are not competitors of the Company or which do not create a conflict of interest or on the boards of civic and not for profit organizations. The Executive has disclosed in writing such memberships to the Chief Executive Officer prior to the execution of this Agreement and shall disclose such information, at least, annually thereafter. 4. Compensation. As compensation for the services to be performed by the Executive during the Term, the Company shall provide to the Executive: (a) an annual base salary of not less than three hundred twenty-five thousand dollars ($325,000) ("Salary"); (b) a target annual incentive opportunity of not less than seventy percent (70%) of the Salary ("Target Annual Incentive"). The performance goals required to earn the Target Annual Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the year for which the opportunity pertains; and (c) a target annualized long-term incentive opportunity of not less than ninety percent (90%) of the Salary ("Target Long-Term Incentive"). The performance goals required to earn the Target Long-Term Incentive shall be approved by the Board of Directors and communicated to the Executive - 2 -
prior to the end of the first quarter of the performance period for which the opportunity pertains. If such performance period is longer than one year, the Target Long-Term Incentive opportunity shall be adjusted accordingly based on the number of years in the performance period. Should the Company elect to increase any element of the Executive's compensation during the Term, the Agreement shall be deemed amended to incorporate the new increased Salary or Target Annual Incentive or Target Long-Term Incentive effective as of the date specified for the increase. The payment of any compensation hereunder shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, and shall be paid in accordance with the Company's normal payroll and incentive administration practices as they may exist from time to time. 5. Benefits. In addition to the payments set forth in Section 4, the Executive shall: (a) be eligible to participate in all fringe benefits, paid time off program, incentive plans, and retirement programs, both tax-qualified and non-qualified, that may be provided by the Company for its executives, in accordance with the provisions of any such programs or plans; (b) be eligible to participate in any life, disability or other similar insurance plans, medical and dental plans or other employee welfare benefit plans that may be provided by the Company for its executives, in accordance with the provisions of any such plans; and (c) be eligible to participate in any postretirement medical, dental and life insurance plans that may be provided by the Company for its executives, in accordance with the provision of any such plans, but with the payment of whatever contribution that the Company requires that other such retirees would pay for such coverage. 6. Expenses. The Company shall, in accordance with and to the extent of its policies, pay all ordinary and necessary business expenses incurred by the Executive in performing his duties as an executive. The Executive shall account promptly for all such business expenses in the manner prescribed by the Company. - 3 -
7. Termination. The Executive's employment shall be terminated upon the occurrence of any of the following: (a) the death of the Executive; (b) the Executive's disability (as such term is defined in the Company's executive long-term disability plan) ("Disability"); (c) the termination of employment by the Executive for any reason; (d) the termination of employment by the Company For Cause (as defined below); or (e) the termination of employment by the Company other than For Cause. The term "For Cause" or "Cause" shall mean a reasonable determination by the Company that the Executive (i) has been convicted of a felony, (ii) has engaged in an activity which, if proven in a criminal proceeding, could result in conviction of a felony involving dishonesty or fraud, or (iii) has willfully engaged in gross misconduct likely to be materially damaging or materially detrimental to the Company. In order to be effective, the Company must give the Executive at least sixty (60) calendar days advance written notice of its intent to terminate his employment "For Cause" setting forth the specific action(s) by the Executive which triggered the notice and such written notice must be received by the Executive no more than one hundred eighty (180) calendar days after the Company learned of the action(s) giving rise to the "For Cause" termination. 8. Death of The Executive. In the event the Executive's employment is terminated as a result of the Executive's death, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the estate of the Executive: (a) for the lesser of six (6) months or the unexpired portion of the Term, the Executive's Salary; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of death, based upon the achievement of the performance goals for the plans for the entire year of death prorated to reflect the full number of months the Executive was employed during that year; and (d) for the remainder of the year of death, an amount equal to fifty percent (50%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the executive's termination of employment. - 4 -
9. Disability of The Executive. In the event the Executive's employment is terminated as a result of the Executive's disability, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay the following to the Executive if the Executive satisfies the terms of Section 13: (a) for the lesser of six (6) months or the unexpired portion of the Term, the Executive's Salary, reduced by any payments to be received by the Executive under the Company's Executive Long-Term Disability Plan for the same period; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of disability, based upon the achievement of the performance goals for the plans for the entire year of disability prorated to reflect the full number of months the Executive was employed during that year; (d) for the remainder of the year of disability, an amount equal to fifty percent (50%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's disability; and (e) for the lesser of six (6) months or the unexpired portion of the Term, the medical and dental plan benefits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's disability. 10. Executive-Initiated Termination or Company-Initiated For Cause. If the Executive terminates this Agreement for any reason or the Company terminates this Agreement For Cause, the Company shall have no further obligations and liabilities under this Agreement after the termination of employment. 11. Termination Other Than For Cause. In the event the Executive's employment is terminated by the Company other than For Cause, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay, for the greater of one (1) year or the remainder of the Term, the following to the Executive if the Executive satisfies the terms of Section 13: (a) the Executive's Salary; (b) all unvested, prior Long-Term Incentive awards; (c) the Annual Incentive and Long-Term Incentive awards for the year of termination, based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the Executive was employed during that year; (d) an amount equal to fifty percent (50%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; and (e) the medical and dental plan benefits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment. - 5 -
12. Payment of Compensation Described in Sections 8, 9, or 11. The compensation items specified in Sections 8, 9, or 11 shall be paid as follows: (a) the Salary shall be paid over the remaining Term or other period as described in Sections 8, 9 or 11 in accordance with the Company's normal payroll practices; (b) the prior unvested Long-Term Incentive awards shall be paid within ninety (90) days after the termination of employment; and (c) the current and future Annual Incentive and Long-Term Incentive awards and opportunities shall be paid within ninety (90) days after the end of the calendar year for which the incentive applied. 13. Execution of Release. As a condition of receiving the compensation and benefits described in Sections 9 or 11, the Executive shall first execute a release of any and all claims arising out of the Executive's employment with the Company or the Executive's separation from such employment (including, without limitation, claims relating to age, disability, sex or race discrimination to the extent permitted by law), excepting only claims arising out of the alleged breach of this Agreement or of any other written contract between the Executive and the Company. Such release shall be in a form reasonably satisfactory to the Company and shall comply with any applicable legislative or judicial requirements, including, but not limited to, the Older Workers Benefit Protection Act. An example of such release is attached as Attachment A. 14. Protection of the Company's Business. The Executive acknowledges that in the course of his employment he will acquire knowledge of trade secrets and confidential data of the Company. Such trade secrets and confidential data may include, but are not limited to, confidential product information, provider contracts, customer lists, technical information, methods by which the Company proposes to compete with its business competitors, strategic and business plans, confidential reports prepared by business consultants which may reveal strengths and weaknesses of the Company and its competition and similar information relating to the Company. The Executive, in order to perform his obligations under this Agreement, must necessarily acquire knowledge of such trade secrets and confidential data, all of which the Executive acknowledges are not known outside the business of the Company, are known only to a limited group of its top executives and directors, are protected by strict measure to - 6 -
preserve secrecy, are of great value to the Company, are the result of the expenditure of large sums of money, are difficult for an outsider to duplicate, and disclosure of which would be extremely detrimental to the Company. The Executive covenants to keep all such trade secrets or confidential data secret and not to release such information to persons not authorized by the Company to receive such secrets and data, both during the term of this Agreement and at all times following its termination. The Executive acknowledges that trade secrets and confidential data need not be expressly marked as such by the Company. 15. Documents, Etc. All records, files, documents, equipment and the like shall be, and remain, the sole property of the Company. The Executive, on the termination of his employment, shall immediately return to the Company all such items without retention of any copies. 16. Limited Non-Competition. During the Executive's employment and for a limited time thereafter, the Company must protect its legitimate business interests by limiting the Executive's ability to compete with the Company. This limited non-competition provision is drafted narrowly so as to be able to safeguard the Company's legitimate business interests while not unreasonably interfering with the Executive's ability to obtain other employment. The Company does not intend, and the Executive acknowledges, that this limited non-competition provision is not an attempt to prevent the Executive from obtaining other employment. The Executive further acknowledges that the Company may need to take action, including litigation, to enforce this limited non-competition provision, which efforts the parties stipulate shall not be deemed an attempt to prevent the Executive from obtaining other employment. (a) During Employment By Company. During the Executive's employment, Executive shall not, directly or indirectly, have any ownership interest in, work for, advise, manage, or act as an agent or consultant for, or have any business connection or business or employment relationship with any person or entity that competes with the Company or that contemplates competing with the Company without the prior written approval of the Chief Executive Officer. (b) During Post-Employment Period. For a period of one (1) year after the Executive's termination of employment (regardless of the reason), or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: - 7 -
(i)(A) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (i)(B) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which he has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (ii)(A) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (ii)(B) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which the Executive has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(A) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company with whom the Executive has had contact (either directly or - 8 -
indirectly) or over which he has had responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(B) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company; and (iv) directly or indirectly, on behalf of the Executive or any third party, make any business contacts with, solicit or accept business from any customer of the Company for any product or service which is competitive with or substantially similar to any product or service sold by the Company; (c) Separate and Several Covenants. The Executive acknowledges that after termination of his employment, he will inevitably possess trade secrets and confidential data of the Company which he would inevitably use if he were to engage in conduct prohibited as set forth above, and such use would be unfair to and extremely detrimental to the Company. The Executive further acknowledges that in view of the benefits provided him by this Agreement, such conduct on his part would be inequitable. Accordingly, the Executive separately and severally covenants for the benefit of the Company to keep each of the covenants described in this Section 16 for the period specified above. (d) Acknowledgment of the Company's Superseding Interest in Protecting its Business. The Executive recognizes that personal relationships between the Company, its employees and customers are essential to the Company's business operations and that the Company furthers such relationships by investments of time and money. The Executive recognizes that this Agreement is reasonably necessary to protect the Company's legitimate interest in its customers, and to protect the Company's confidential information and goodwill, and acknowledges that nothing contained in this Agreement shall unreasonably alter the Executive's ability to obtain a livelihood or preclude the Executive from engaging in his profession. The Executive, therefore, acknowledges that the Company's interest in maintaining its relationships with its established customers for at least one (1) year after termination of the Executive's employment, or for the duration of the Executive's receipt of Salary under - 9 -
Section 11, whichever is longer, supersedes any interest of the Executive in soliciting, servicing, or accepting the Company's customers on behalf of any entity other than the Company during that period of time. (e) Publicly Traded Stock. Nothing in the foregoing provisions of this section prohibits the Executive from purchasing for investment purposes only, any stock or corporate security traded or quoted on a national securities exchange or national market system. (f) Maximum Application. The parties expressly agree that the terms of this limited non-competition provision under this section are reasonable, enforceable, and necessary to protect the Company's interests, and are valid and enforceable. In the unlikely event, however, that a court of competent jurisdiction were to determine that any portion of this limited non-competition provision is unenforceable, then the parties agree that the remainder of the limited non-competition provision shall remain valid and enforceable to the maximum extent possible. 17. Other Limited Prohibitions. During the Executive's employment and for one (1) year after termination, or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: (a) request or advise any customer of the Company, or any person or entity having business dealings with the Company, to withdraw, curtail or cease such business with the Company; (b) disclose to any person or entity the identities of any customers of the Company, or the identity of any persons or entities having business dealings with the Company; or (c) directly or indirectly influence or attempt to influence any other employee of the Company to separate from the Company. 18. Specific Enforcement/Injunctive Relief. The Executive agrees that it would be difficult to measure damages to the Company from any breach of the covenants contained in Sections 14 through 17, but that such damages from any breach would be great, incalculable and irremediable, and that damages would be an inadequate remedy. Accordingly, the Executive agrees that the Company - 10 -
may have specific performance of the terms of this Agreement in any court permitted by this Agreement. In addition, if the Executive violates the non-competition provisions of Section 16 or 17, the Executive agrees that any period of such violation shall be added to the term of the non-competition. For example, if the Executive violates the provision for three (3) months, the Company shall be entitled to enforce the non-competition provision for one (1) year, or for the duration of the Executive's receipt of Salary under Section 11, plus three (3) months post-termination. In determining the period of any violation, the parties stipulate that in any calendar month in which the Executive engages in any activity violative of the non-competition provision, the Executive is deemed to have violated the non-competition provision for the entire month, and that month shall be added to the duration of the non-competition provision as set out above. The parties agree however, that specific performance and the "add back" remedies described above shall not be the exclusive remedies, and the Company may enforce any other remedy or remedies available to it either in law or in equity including, but not limited to, temporary, preliminary, and/or permanent injunctive relief. 19. Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions of this Agreement which shall be given effect independently of the invalid provisions and, in such circumstances, the invalid provision is severable. 20. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Indiana. The parties expressly agree that it is appropriate for Indiana law to apply to: (i) the interpretation of the Agreement; (ii) any disputes arising out of this Agreement; (iii) any disputes arising out of the employment relationship of the parties; and (iv) any and all other disputes between the parties. 21. Choice of Forum. The Company is based in Indiana, and the Executive understands and acknowledges the Company's desire and need to defend any litigation against it in Indiana. Accordingly, the parties agree that any claim of any type brought by the Executive against the Company or any of its employees or agents must be maintained only in a court sitting in Marion County, Indiana, or, if a federal court, the Southern District of Indiana, Indianapolis Division. - 11 -
The Executive further understands and acknowledges that in the event the Company initiates litigation against the Executive, the Company may need to prosecute such litigation in the Executive's forum state, in the State of Indiana, or in such other state where the Executive is subject to personal jurisdiction. Accordingly, the parties agree that the Company can pursue any claim against the Executive in any forum in which the Executive is subject to personal jurisdiction. The Executive specifically consents to personal jurisdiction in the State of Indiana. 22. Mandatory Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, other than a claim arising out of the Executive's breach of the confidentiality and non-competition provisions of Section 14 through 18, shall be settled by arbitration in Indianapolis, Indiana, in accordance with the Rules of the American Arbitration Association before arbitrators who are licensed to practice law. The arbitrator or arbitrators shall apply the substantive law of Indiana or federal law, or both, as applicable to the dispute. Any award entered shall be final, binding and nonappealable, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. In the event that the Company refuses or otherwise fails to make a payment when due and it is ultimately decided that the Executive is entitled to such payment, such payment shall be increased to reflect an interest equivalent for the period of delay, compounded annually, equal to the prime or base lending rate used by Bank One Indiana, NA, and in effect as of the date the payment was first due. 23. Non-Jury Trials. Notwithstanding the provisions of Sections 18 and 22 above, and if the provisions of Section 18 or 22 above are not enforceable, the Executive expressly waives any rights to a jury trial and agrees that any claim of any type made against the Company or its agents or executives (including, but not limited to, employment discrimination litigation, wage litigation, defamation, or any other claim) lodged in any court will be tried, if at all, without a jury. 24. Nonalienation of Benefits. Except as may otherwise be required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, bankruptcy or hypothecation or to exclusion, attachment, levy or - 12 -
similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 25. Legal Fees and Cost. All legal and other fees and expenses, including, without limitation, any arbitration expenses, incurred by the Executive in connection with contesting or disputing any termination of employment, in seeking to obtain or enforce any right or benefit provided for in this Agreement, or in otherwise pursuing any right or claim, shall be paid by the Company, to the extent permitted by law, provided that the Executive makes a formal written settlement demand prior to trial or arbitration and is ultimately successful, in obtaining through trial or arbitration more than fifty percent (50%) of the monetary relief sought, in his final written settlement demand exclusive of attorney's fees. 26. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and will be deemed to have been given when delivered in person (to the Executive if such notice is for the Executive) or five (5) days following sending by overnight courier or mailing by first class, certified or registered mail, postage prepaid, to the Executive at his home address, or such addresses as the Executive shall have designated in writing, or if to the Company, to the attention of the Corporate Secretary, at the Company's principal place of business, 120 Monument Circle, Indianapolis, Indiana 46204. 27. Headings. The various headings of this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any of its provisions. 28. Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to its benefit, its successors and affiliated companies and shall be binding upon the successors and assigns of the Company. This Agreement, being personal to the Executive, cannot be assigned by the Executive, but his personal representative shall be bound by all its terms and conditions. 29. Waiver and Amendments, Etc. Failure of the Company to insist upon strict compliance with any terms or provisions of this Agreement shall not be deemed a waiver of any terms, provisions or rights of the Company. Moreover, no modifications, amendments, extensions or waivers of this - 13 -
Agreement or any provisions hereof shall be binding upon the Company or the Executive unless in writing and signed by the Executive and the Company. 30. Complete Agreement. This Agreement constitutes the entire employment agreement of the parties and supersedes all prior employment agreements addressing the terms, conditions, and issues contained herein. Nothing in this Agreement, however, affects any separate written agreements addressing other terms and conditions and issues agreed to by the parties. 31. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Company and the Executive have duly executed and delivered this Agreement effective as of the day and year first above written. Keith R. Faller /s/ Keith R. Faller ------------------------------------ Anthem Insurance Companies, Inc. By: /s/ L. Ben Lytle ------------------------------ Name: L. Ben Lytle ------------------------------ Title: Chairman, President & CEO ------------------------------ - 14 -
ATTACHMENT A RELEASE AND WAIVER AGREEMENT This Release and Waiver Agreement ("Agreement") is entered into on this __ day of __________, ____, by and between Anthem Insurance Companies, Inc., including its subsidiaries and affiliates (the "Company") and Keith R. Faller (the "Executive"). NOW, THEREFORE, the parties agree to the following: 1. The Executive and the Company acknowledge and agree that the Executive's last day of employment with the Company or one of its affiliates shall be ___________________. Service credit for purposes of all Company benefits, including but not limited to the Anthem Cash Balance Pension Plan, will terminate as of that date. 2. The Company agrees that it will pay to the Executive the amounts described in Section [9 or 11] of the Employment Agreement between the Company and the Executive effective ______________ ("Employment Agreement"). All payments made pursuant to Section [9 or 11] of the Employment Agreement shall be made pursuant to Section 12 of the Employment Agreement. The Executive will also be entitled to any benefits described in Section [9 or 11] of the Employment Agreement for the duration noted therein. 3. Any and all benefits not specifically discussed in this Agreement or provided by law will cease on [termination date from paragraph 1]. ----------------------------------- 4. The provisions of the Employment Agreement relating to Protection of the Company's Business, Documents, Limited Non-Competition, Other Limited Prohibitions, and Specific Enforcement (Sections 14, 15, 16, 17, and 18) shall remain in full force and effect upon termination of employment. The Executive acknowledges that he possesses trade secrets and confidential data of the Company and further acknowledges that the provisions of Sections 14 through 18 of the Employment Agreement are reasonably necessary to protect the Company's legitimate business interests, confidential data, and goodwill. 5. The Executive hereby forever releases and waives as against the Company, its subsidiaries and affiliates, and each of their directors, officers, employees and agents, any and all legal and equitable causes of action and claims which the Executive possesses, whether known or unknown, including, but not limited to, any such causes of action and claims relating to the Employee's employment with, or termination of employment from, the Company or any of its affiliates, including any and all rights, entitlements or claims under any and all federal, state and local laws and regulations, all as amended, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991 and the Americans with Disabilities Act of 1990. The Executive further expressly and specifically waives any and all rights and claims under the Age Discrimination in Employment Act of 1967 and the Older Workers' Benefit Protection Act (collectively referred to as the "Act"). The Executive acknowledges and agrees that this waiver of any right or claim under the Act (hereinafter "Waiver") is
Page 2 knowing and voluntary, and specifically agrees as follows: that this Waiver is written in a manner which he understands; that this Waiver specifically relates to rights or claims under the Act; that he does not waive any rights or claims under the Act that may arise after the date of execution of this Agreement; that he waives rights or claims under the Act in exchange for consideration in addition to anything of value to which he already is entitled; and that he has been advised in writing to consult with an attorney prior to executing it. The Executive acknowledges that he understands that he has twenty-one (21) days after receipt of this Agreement to decide whether to accept it and that he may revoke any acceptance of this Agreement within seven (7) days of such acceptance. This Agreement shall not become effective until the seven (7)-day revocation period has expired and no amounts will be paid to the Executive until the seven (7)-day revocation period has expired. 6. It is understood and agreed between the Executive and the Company that this Agreement shall in no way affect any claims of the Executive arising out of Social Security, Worker's Compensation, or Unemployment Laws. 7. The Company and the Executive agree that any breach of the terms of this Agreement may, at the Company's discretion, result in the immediate termination of any subsequent payments to be made under this Agreement. In the event of a breach of this Agreement or any dispute regarding this Agreement, the provisions of the Employment Agreement relating to Specific Enforcement, Governing Law, Choice of Forum, Mandatory Arbitration, Non-Jury Trials, and Legal Fees and Costs (Sections 18, 20, 21, 22, 23, and 25) shall remain in full force and effect. 8. The Executive expressly agrees that the consideration designated in this Agreement is sufficient for the terms of this Agreement. The Executive further agrees that upon the execution of this Agreement he will keep confidential and not disclose the existence or terms of this Agreement unless compelled to do so by a court or administrative body. 9. The rights and obligations hereunder shall not be assigned or transferred by the Executive and shall be binding upon and inure to the benefit of the Executive, his heirs, legatees and legal representatives, and the Company, its subsidiaries and affiliates, successors and assigns. No waiver of any breach of this Agreement shall be deemed or construed as a waiver of any other or subsequent breach. Any amendment of this Agreement shall be effective only if in writing and signed by both parties. If any provision of this Agreement shall be held invalid under applicable laws, such provision shall be ineffective only to the extent of any invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements, whether oral or written, between the parties. The terms of this Agreement shall be governed by Indiana law. The parties represent that they have read and understood this Agreement, and the officer executing this document on behalf of the Company represents that he has the authority to do so. 10. This Agreement shall not be effective or enforceable against the Company until the seven (7)-day revocation period has expired or if the Executive revokes it not later than
Page 3 seven (7) days after he signs it. This revocation must be in writing and must be personally delivered, or sent by certified mail to: Corporate Secretary Anthem, Inc. 120 Monument Circle Indianapolis, Indiana 46204 11. The Executive expressly acknowledges that he understands all of the provisions of this Agreement and is voluntarily entering into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement. Keith R. Faller Anthem Insurance Companies, Inc. _____________________________ By:________________________________ Printed:___________________________ Title:_____________________________
Exhibit 10.8(ii) AMENDMENT ONE ------------- TO -- EMPLOYMENT AGREEMENT -------------------- This AMENDMENT ONE TO EMPLOYMENT AGREEMENT by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company") and Keith R. Faller (the "Executive") hereby amends the EMPLOYMENT AGREEMENT (the "Agreement") between the parties dated as of the 1st day of January, 1999, as follows: 1. Effective January 1, 2000, Section 2 of the Agreement is hereby amended by deleting the termination date and inserting in place thereof the 31st day of December, 2002. 2. All other provision of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Company and the Executive have duly executed this AMENDMENT ONE TO EMPLOYMENT AGREEMENT effective as of the day and year first above written. Keith R. Faller Anthem Insurance Companies, Inc. /s/ Keith R. Faller By: /s/ Larry C. Glasscock - -------------------------------- ------------------------------------ Name: Larry C. Glasscock Title: President and CEO
EXHIBIT 10.8(iii) AMENDMENT TWO ------------- TO -- EMPLOYMENT AGREEMENT -------------------- This AMENDMENT THREE TO EMPLOYMENT AGREEMENT by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company") and Keith R. Faller (the "Executive") hereby amends the EMPLOYMENT AGREEMENT (the "Agreement") between the parties dates as of the 1st day of January, 1999, as follows: 1. Effective January 1, 2001, Section 2 of the Agreement is hereby amended by deleting the termination date and inserting in place thereof the 31st of December, 2003. 2. All other provisions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Company and the Executive have duly executed this AMENDMENT TWO TO EMPLOYMENT AGREEMENT effective as of the day and year first above written. Keith R. Faller Anthem Insurance Companies, Inc. /s/ Keith R. Faller By: /s/ Larry C. Glasscock - ---------------------------------- ---------------------------------- Name: Larry C. Glasscock Title: President and CEO
EXHIBIT 10.9 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement"), is by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company"), with offices located at 120 Monument Circle, Indianapolis, Indiana, and Michael D. Houk (the "Executive"), residing at 10959 Innisbrooke Lane, Fishers, Indiana 46038, dated as of the 12th day of August, 2000. W I T N E S S E T H: ------------------- WHEREAS, the Company (which hereinafter also includes subsidiaries of the Company) desires to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive is willing to serve in the employ of the Company on a full-time basis for such period, all in accordance with the terms and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Condition of Employment. The Company hereby employs the Executive and the Executive hereby accepts such employment for the period provided for in Section 2, all upon the terms and conditions contained in this Agreement. As a condition to the Executive's employment, the Executive affirms and represents that the Executive is under no obligation to any former employer or other person which is in any way inconsistent with, or which imposes any restriction upon, the employment of the Executive by the Company or the Executive's undertakings under this Agreement. 2. Term of Employment. Unless sooner terminated pursuant to Section 7, the term of the Executive's employment under this Agreement shall be for a period commencing on the date hereof through the 31st day of December, 2002 ("Term"). 3. Duties. During the Term, the Executive shall provide executive, administrative and managerial services to the Company and perform such other reasonable employment duties as the Chief Executive Officer of the Company may from time to time prescribe. The Executive shall also serve as a director of any of the Company's subsidiaries to which he is elected. -1-
The Executive shall, except to the extent approved by the Chief Executive Officer, (i) devote his full-time to the services required of the Executive, (ii) render his services exclusively to the Company and (iii) use his best efforts, judgment, and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of the Executive's position. The Executive may serve on boards of directors or advisory boards of businesses that are not competitors of the Company or which do not create a conflict of interest or on the boards of civic and not for profit organizations. The Executive has disclosed in writing such memberships to the Chief Executive Officer prior to the execution of this Agreement and shall disclose such information, at least, annually thereafter. 4. Compensation. As compensation for the services to be performed by the Executive during the Term, the Company shall provide to the Executive: (a) an annual base salary of not less than two hundred thousand dollars ($200,000) ("Salary"); (b) a target annual incentive opportunity of not less than sixty percent (60%) of the Salary ("Target Annual Incentive"). The performance goals required to earn the Target Annual Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the year for which the opportunity pertains; and (c) a target annualized long-term incentive opportunity of not less than thirty percent (30%) of the Salary through 2000 and effective January 1, 2001, forty percent (40%) of the Salary ("Target Long-Term Incentive"). The performance goals required to earn the Target Long-Term Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the performance period for which the opportunity pertains. If such performance period is longer than one year, the Target Long-Term Incentive opportunity shall be adjusted accordingly based on the number of years in the performance period. Should the Company elect to increase any element of the Executive's compensation during the Term, the Agreement shall be deemed amended to -2-
Term Incentive effective as of the date specified for the increase. The payment of any compensation hereunder shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, and shall be paid in accordance with the Company's normal payroll and incentive administration practices as they may exist from time to time. 5. Benefits. In addition to the payments set forth in Section 4, the Executive shall: (a) be eligible to participate in all fringe benefits, paid time off program, incentive plans, and retirement programs, both tax-qualified and non-qualified, that may be provided by the Company for its executives, in accordance with the provisions of any such programs or plans; (b) be eligible to participate in any life, disability or other similar insurance plans, medical and dental plans or other employee welfare benefit plans that may be provided by the Company for its executives, in accordance with the provisions of any such plans; and (c) be eligible to participate in any postretirement medical, dental and life insurance plans that may be provided by the Company for its executives, in accordance with the provision of any such plans, but with the payment of whatever contribution that the Company requires that other such retirees would pay for such coverage. 6. Expenses. The Company shall, in accordance with and to the extent of its policies, pay all ordinary and necessary business expenses incurred by the Executive in performing his duties as an executive. The Executive shall account promptly for all such business expenses in the manner prescribed by the Company. 7. Termination. The Executive's employment shall be terminated upon the occurrence of any of the following: (a) the death of the Executive; -3-
(b) the Executive's disability (as such term is defined in the Company's executive long-term disability plan) ("Disability"); (c) the termination of employment by the Executive for any reason; (d) the termination of employment by the Company For Cause (as defined below); or (e) the termination of employment by the Company other than For Cause. The term "For Cause" or "Cause" shall mean a reasonable determination by the Company that the Executive (i) has been convicted of a felony, (ii) has engaged in an activity which, if proven in a criminal proceeding, could result in conviction of a felony involving dishonesty or fraud, or (iii) has willfully engaged in gross misconduct likely to be materially damaging or materially detrimental to the Company. In order to be effective, the Company must give the Executive at least sixty (60) calendar days advance written notice of its intent to terminate his employment "For Cause" setting forth the specific action(s) by the Executive which triggered the notice and such written notice must be received by the Executive no more than one hundred eighty (180) calendar days after the Company learned of the action(s) giving rise to the "For Cause" termination. 8. Death of The Executive. In the event the Executive's employment is terminated as a result of the Executive's death, the estate of the Executive shall be entitled to receive the Executive's Salary for a period of the lesser of six (6) months or the unexpired portion of the Term, plus an amount equal to fifty percent (50%) of Target Annual Incentive and Target Long-Term Incentive for the year of death. 9. Disability of The Executive. In the event the Executive's employment is terminated as a result of Disability, the Executive shall be entitled to receive his Salary and medical and dental benefits for a period of the lesser of six (6) months or the unexpired portion of the Term, plus an amount equal to fifty percent (50%) of Target Annual Incentive and Target Long-Term Incentive for the year of Disability, reduced by any payments received by the Executive under the Company's executive long-term disability plan. -4-
10. Executive-Initiated Termination or Company-Initiated For Cause. If the Executive terminates this Agreement for any reason or the Company terminates this Agreement For Cause, the Company shall have no further obligations and liabilities under this Agreement after the termination of employment. 11. Termination Other Than For Cause. In the event the Executive's employment is terminated by the Company other than For Cause, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay, for the greater of one (1) year or the remainder of the Term, the following to the Executive if the Executive satisfies the terms of Section 13: (a) the Executive's Salary; (b) the Annual Incentive and Long-Term Incentive awards for the year of termination, based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the Executive was employed during that year; (c) all unvested, prior Long-Term Incentive awards; (d) an amount equal to fifty percent (50%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; and (e) the medical and dental plan benefits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment. 12. Payment of Compensation Described in Sections 8, 9, or 11. The compensation items specified in Sections 8, 9, or 11 shall be paid as follows: (a) the Salary shall be paid over the remaining Term or other period as described in Sections 8, 9 or 11 in accordance with the Company's normal payroll practices; -5-
(b) the current and future Annual Incentive and Long-Term Incentive awards and opportunities shall be paid within ninety (90) days after the end of the calendar year for which the incentive applied; and (c) the prior unvested Long-Term Incentive awards shall be paid within ninety (90) days after the termination of employment. 13. Execution of Release. As a condition of receiving the compensation and benefits described in Sections 9 or 11, the Executive shall first execute a release of any and all claims arising out of the Executive's employment with the Company or the Executive's separation from such employment (including, without limitation, claims relating to age, disability, sex or race discrimination to the extent permitted by law), excepting only claims arising out of the alleged breach of this Agreement or of any other written contract between the Executive and the Company. Such release shall be in a form reasonably satisfactory to the Company and shall comply with any applicable legislative or judicial requirements, including, but not limited to, the Older Workers Benefit Protection Act. An example of such release is attached as Attachment A. 14. Protection of the Company's Business. The Executive acknowledges that in the course of his employment he will acquire knowledge of trade secrets and confidential data of the Company. Such trade secrets and confidential data may include, but are not limited to, confidential product information, provider contracts, customer lists, technical information, methods by which the Company proposes to compete with its business competitors, strategic and business plans, confidential reports prepared by business consultants which may reveal strengths and weaknesses of the Company and its competition and similar information relating to the Company. The Executive, in order to perform his obligations under this Agreement, must necessarily acquire knowledge of such trade secrets and confidential data, all of which the Executive acknowledges are not known outside the business of the Company, are known only to a limited group of its top executives and directors, are protected by strict measure to preserve secrecy, are of great value to the Company, are the result of the expenditure of large sums of money, are difficult for an outsider to duplicate, and disclosure of which would be extremely detrimental to the Company. The Executive covenants to keep all such trade secrets or confidential data secret and not to release such information to persons not authorized by the Company to receive such secrets and data, both during the term of this Agreement and at all -6-
times following its termination. The Executive acknowledges that trade secrets and confidential data need not be expressly marked as such by the Company. 15. Documents, Etc. All records, files, documents, equipment and the like shall be, and remain, the sole property of the Company. The Executive, on the termination of his employment, shall immediately return to the Company all such items without retention of any copies. 16. Limited Non-Competition. During the Executive's employment and for a limited time thereafter, the Company must protect its legitimate business interests by limiting the Executive's ability to compete with the Company. This limited non-competition provision is drafted narrowly so as to be able to safeguard the Company's legitimate business interests while not unreasonably interfering with the Executive's ability to obtain other employment. The Company does not intend, and the Executive acknowledges, that this limited non-competition provision is not an attempt to prevent the Executive from obtaining other employment. The Executive further acknowledges that the Company may need to take action, including litigation, to enforce this limited non-competition provision, which efforts the parties stipulate shall not be deemed an attempt to prevent the Executive from obtaining other employment. (a) During Employment By Company. During the Executive's employment, Executive shall not, directly or indirectly, have any ownership interest in, work for, advise, manage, or act as an agent or consultant for, or have any business connection or business or employment relationship with any person or entity that competes with the Company or that contemplates competing with the Company without the prior written approval of the Chief Executive Officer. (b) During Post-Employment Period. For a period of one (1) year after the Executive's termination of employment (regardless of the reason), or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: (i)(A) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company -7-
operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (i)(B) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which he has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (ii)(A) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (ii)(B) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which the Executive has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(A) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company with whom the Executive has had contact (either directly or indirectly) or over which he has had responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(B) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially -8-
similar to any product or service sold by the Company, to any customer of the Company; or (iv) directly or indirectly, on behalf of the Executive or any third party, make any business contacts with, solicit or accept business from any customer of the Company for any product or service which is competitive with or substantially similar to any product or service sold by the Company; (c) Separate and Several Covenants. The Executive acknowledges that after termination of his employment, he will inevitably possess trade secrets and confidential data of the Company which he would inevitably use if he were to engage in conduct prohibited as set forth above, and such use would be unfair to and extremely detrimental to the Company. The Executive further acknowledges that in view of the benefits provided him by this Agreement, such conduct on his part would be inequitable. Accordingly, the Executive separately and severally covenants for the benefit of the Company to keep each of the covenants described in this Section 16 for the period specified above. (d) Acknowledgment of the Company's Superseding Interest in Protecting its Business. The Executive recognizes that personal relationships between the Company, its employees and customers are essential to the Company's business operations and that the Company furthers such relationships by investments of time and money. The Executive recognizes that this Agreement is reasonably necessary to protect the Company's legitimate interest in its customers, and to protect the Company's confidential information and goodwill, and acknowledges that nothing contained in this Agreement shall unreasonably alter the Executive's ability to obtain a livelihood or preclude the Executive from engaging in his profession. The Executive, therefore, acknowledges that the Company's interest in maintaining its relationships with its established customers for at least one (1) year after termination of the Executive's employment, or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, supersedes any interest of the Executive in soliciting, servicing, or accepting the Company's customers on behalf of any entity other than the Company during that period of time. -9-
(e) Publicly Traded Stock. Nothing in the foregoing provisions of this section prohibits the Executive from purchasing for investment purposes only, any stock or corporate security traded or quoted on a national securities exchange or national market system. (f) Maximum Application. The parties expressly agree that the terms of this limited non-competition provision under this section are reasonable, enforceable, and necessary to protect the Company's interests, and are valid and enforceable. In the unlikely event, however, that a court of competent jurisdiction were to determine that any portion of this limited non-competition provision is unenforceable, then the parties agree that the remainder of the limited non-competition provision shall remain valid and enforceable to the maximum extent possible. 17. Other Limited Prohibitions. During the Executive's employment and for one (1) year after termination, or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: (a) request or advise any customer of the Company, or any person or entity having business dealings with the Company, to withdraw, curtail or cease such business with the Company; (b) disclose to any person or entity the identities of any customers of the Company, or the identity of any persons or entities having business dealings with the Company; or (c) directly or indirectly influence or attempt to influence any other employee of the Company to separate from the Company. 18. Specific Enforcement/Injunctive Relief. The Executive agrees that it would be difficult to measure damages to the Company from any breach of the covenants contained in Sections 14 through 17, but that such damages from any breach would be great, incalculable and irremediable, and that damages would be an inadequate remedy. Accordingly, the Executive agrees that the Company may have specific performance of the terms of this Agreement in any court permitted by this Agreement. In addition, if the Executive violates the non-competition provisions of Section 16 or 17, the Executive agrees that any period of such violation shall be added to the term of the non-competition. For example, -10-
if the Executive violates the provision for three (3) months, the Company shall be entitled to enforce the non-competition provision for one (1) year, or for the duration of the Executive's receipt of Salary under Section 11, plus three (3) months post-termination. In determining the period of any violation, the parties stipulate that in any calendar month in which the Executive engages in any activity violative of the non-competition provision, the Executive is deemed to have violated the non-competition provision for the entire month, and that month shall be added to the duration of the non-competition provision as set out above. The parties agree however, that specific performance and the "add back" remedies described above shall not be the exclusive remedies, and the Company may enforce any other remedy or remedies available to it either in law or in equity including, but not limited to, temporary, preliminary, and/or permanent injunctive relief. 19. Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions of this Agreement which shall be given effect independently of the invalid provisions and, in such circumstances, the invalid provision is severable. 20. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Indiana. The parties expressly agree that it is appropriate for Indiana law to apply to: (i) the interpretation of the Agreement; (ii) any disputes arising out of this Agreement; (iii) any disputes arising out of the employment relationship of the parties; and (iv) any and all other disputes between the parties. 21. Choice of Forum. The Company is based in Indiana, and the Executive understands and acknowledges the Company's desire and need to defend any litigation against it in Indiana. Accordingly, the parties agree that any claim of any type brought by the Executive against the Company or any of its employees or agents must be maintained only in a court sitting in Marion County, Indiana, or, if a federal court, the Southern District of Indiana, Indianapolis Division. The Executive further understands and acknowledges that in the event the Company initiates litigation against the Executive, the Company may need to prosecute such litigation in the Executive's forum state, in the State of Indiana, or in such other state where the Executive is subject to personal jurisdiction. Accordingly, the parties agree that the Company can pursue any claim against the -11-
Executive in any forum in which the Executive is subject to personal jurisdiction. The Executive specifically consents to personal jurisdiction in the State of Indiana. 22. Mandatory Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, other than a claim arising out of the Executive's breach of the confidentiality and non-competition provisions of Section 14 through 18, shall be settled by arbitration in Indianapolis, Indiana, in accordance with the Rules of the American Arbitration Association before arbitrators who are licensed to practice law. The arbitrator or arbitrators shall apply the substantive law of Indiana or federal law, or both, as applicable to the dispute. Any award entered shall be final, binding and nonappealable, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. In the event that the Company refuses or otherwise fails to make a payment when due and it is ultimately decided that the Executive is entitled to such payment, such payment shall be increased to reflect an interest equivalent for the period of delay, compounded annually, equal to the prime or base lending rate used by Bank One Indiana, NA, and in effect as of the date the payment was first due. 23. Non-Jury Trials. Notwithstanding the provisions of Sections 18 and 22 above, and if the provisions of Section 18 or 22 above are not enforceable, the Executive expressly waives any rights to a jury trial and agrees that any claim of any type made against the Company or its agents or executives (including, but not limited to, employment discrimination litigation, wage litigation, defamation, or any other claim) lodged in any court will be tried, if at all, without a jury. 24. Nonalienation of Benefits. Except as may otherwise be required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, bankruptcy or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 25. Legal Fees and Cost. All legal and other fees and expenses, including, without limitation, any arbitration expenses, incurred by the Executive in connection with contesting or disputing any termination of employment, in -12-
seeking to obtain or enforce any right or benefit provided for in this Agreement, or in otherwise pursuing any right or claim, shall be paid by the Company, to the extent permitted by law, provided that the Executive makes a formal written settlement demand prior to trial or arbitration and is ultimately successful, in obtaining through trial or arbitration more than fifty percent (50%) of the monetary relief sought, in his final written settlement demand exclusive of attorney's fees. 26. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and will be deemed to have been given when delivered in person (to the Executive if such notice is for the Executive) or five (5) days following sending by overnight courier or mailing by first class, certified or registered mail, postage prepaid, to the Executive at his home address, or such addresses as the Executive shall have designated in writing, or if to the Company, to the attention of the Corporate Secretary, at the Company's principal place of business, 120 Monument Circle, Indianapolis, Indiana 46204. 27. Headings. The various headings of this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any of its provisions. 28. Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to its benefit, its successors and affiliated companies and shall be binding upon the successors and assigns of the Company. This Agreement, being personal to the Executive, cannot be assigned by the Executive, but his personal representative shall be bound by all its terms and conditions. 29. Waiver and Amendments, Etc. Failure of the Company to insist upon strict compliance with any terms or provisions of this Agreement shall not be deemed a waiver of any terms, provisions or rights of the Company. Moreover, no modifications, amendments, extensions or waivers of this Agreement or any provisions hereof shall be binding upon the Company or the Executive unless in writing and signed by the Executive and the Company. 30. Complete Agreement. This Agreement constitutes the entire employment agreement of the parties and supersedes all prior employment agreements addressing the terms, conditions, and issues contained herein. Nothing -13-
in this Agreement, however, affects any separate written agreements addressing other terms and conditions and issues agreed to by the parties. 31. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Company and the Executive have duly executed and delivered this Agreement effective as of the day and year first above written. Michael D. Houk /s/ Michael D. Houk ------------------------------------------- Anthem Insurance Companies, Inc. By: /s/ Larry C. Glasscock ---------------------------------------- Name: Larry C. Glasscock Title: President and CEO -14-
ATTACHMENT A RELEASE AND WAIVER AGREEMENT This Release and Waiver Agreement ("Agreement") is entered into on this __ day of __________, ____, by and between Anthem Insurance Companies, Inc., including its subsidiaries and affiliates (the "Company") and _________________ (the "Executive"). NOW, THEREFORE, the parties agree to the following: 1. The Executive and the Company acknowledge and agree that the Executive's last day of employment with the Company or one of its affiliates shall be ___________________. Service credit for purposes of all Company benefits, including but not limited to the Anthem Cash Balance Pension Plan, will terminate as of that date. 2. The Company agrees that it will pay to the Executive the amounts described in Section [9 or 11] of the Employment Agreement between the Company and the Executive effective ______________ ("Employment Agreement"). All payments made pursuant to Section [9 or 11] of the Employment Agreement shall be made pursuant to Section 12 of the Employment Agreement. The Executive will also be entitled to any benefits described in Section [9 or 11] of the Employment Agreement for the duration noted therein. 3. Any and all benefits not specifically discussed in this Agreement or provided by law will cease on [termination date from paragraph 1]. ----------------------------------- 4. The provisions of the Employment Agreement relating to Protection of the Company's Business, Documents, Limited Non-Competition, Other Limited Prohibitions, and Specific Enforcement (Sections 14, 15, 16, 17, and 18) shall remain in full force and effect upon termination of employment. The Executive acknowledges that he possesses trade secrets and confidential data of the Company and further acknowledges that the provisions of Sections 14 through 18 of the Employment Agreement are reasonably necessary to protect the Company's legitimate business interests, confidential data, and goodwill. 5. The Executive hereby forever releases and waives as against the Company, its subsidiaries and affiliates, and each of their directors, officers, employees and agents, any and all legal and equitable causes of action and claims which the Executive possesses, whether known or unknown, including, but not limited to, any such causes of action and claims relating to the Employee's employment with, or termination of employment from, the Company or any of its affiliates, including any and all rights, entitlements or claims under any and all federal, state and local laws and regulations, all as amended, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991 and the Americans with Disabilities Act of 1990. The Executive further expressly and specifically waives any and all rights and claims under the Age Discrimination in Employment Act of 1967 and the Older Workers' Benefit Protection Act (collectively referred to as the "Act"). The Executive acknowledges and agrees that this waiver of any right or claim under the Act (hereinafter "Waiver") is
Page 2 knowing and voluntary, and specifically agrees as follows: that this Waiver is written in a manner which he understands; that this Waiver specifically relates to rights or claims under the Act; that he does not waive any rights or claims under the Act that may arise after the date of execution of this Agreement; that he waives rights or claims under the Act in exchange for consideration in addition to anything of value to which he already is entitled; and that he has been advised in writing to consult with an attorney prior to executing it. The Executive acknowledges that he understands that he has twenty-one (21) days after receipt of this Agreement to decide whether to accept it and that he may revoke any acceptance of this Agreement within seven (7) days of such acceptance. This Agreement shall not become effective until the seven (7)-day revocation period has expired and no amounts will be paid to the Executive until the seven (7)-day revocation period has expired. 6. It is understood and agreed between the Executive and the Company that this Agreement shall in no way affect any claims of the Executive arising out of Social Security, Worker's Compensation, or Unemployment Laws. 7. The Company and the Executive agree that any breach of the terms of this Agreement may, at the Company's discretion, result in the immediate termination of any subsequent payments to be made under this Agreement. In the event of a breach of this Agreement or any dispute regarding this Agreement, the provisions of the Employment Agreement relating to Specific Enforcement, Governing Law, Choice of Forum, Mandatory Arbitration, Non-Jury Trials, and Legal Fees and Costs (Sections 18, 20, 21, 22, 23, and 25) shall remain in full force and effect. 8. The Executive expressly agrees that the consideration designated in this Agreement is sufficient for the terms of this Agreement. The Executive further agrees that upon the execution of this Agreement he will keep confidential and not disclose the existence or terms of this Agreement unless compelled to do so by a court or administrative body. 9. The rights and obligations hereunder shall not be assigned or transferred by the Executive and shall be binding upon and inure to the benefit of the Executive, his heirs, legatees and legal representatives, and the Company, its subsidiaries and affiliates, successors and assigns. No waiver of any breach of this Agreement shall be deemed or construed as a waiver of any other or subsequent breach. Any amendment of this Agreement shall be effective only if in writing and signed by both parties. If any provision of this Agreement shall be held invalid under applicable laws, such provision shall be ineffective only to the extent of any invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements, whether oral or written, between the parties. The terms of this Agreement shall be governed by Indiana law. The parties represent that they have read and understood this Agreement, and the officer executing this document on behalf of the Company represents that he has the authority to do so. 10. This Agreement shall not be effective or enforceable against the Company until the seven (7)-day revocation period has expired or if the Executive revokes it not later than
Page 3 seven (7) days after he signs it. This revocation must be in writing and must be personally delivered, or sent by certified mail to: Corporate Secretary Anthem, Inc. 120 Monument Circle Indianapolis, Indiana 46204 11. The Executive expressly acknowledges that he understands all of the provisions of this Agreement and is voluntarily entering into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement. Michael D. Houk Anthem Insurance Companies, Inc. _____________________________ By:________________________________ Printed:___________________________ Title:_____________________________
Exhibit 10.10(i) EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement"), is by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company"), with offices located at 120 Monument Circle, Indianapolis, Indiana, and Caroline S. Matthews (the "Executive"), residing at 11211 North Ogden Street, Indianapolis, Indiana, dated as of the 1st day of April, 1999. W I T N E S S E T H: ------------------- WHEREAS, the Company (which hereinafter also includes subsidiaries of the Company) desires to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive is willing to serve in the employ of the Company on a full-time basis for such period, all in accordance with the terms and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Condition of Employment. The Company hereby employs the Executive and the Executive hereby accepts such employment for the period provided for in Section 2, all upon the terms and conditions contained in this Agreement. As a condition to the Executive's employment, the Executive affirms and represents that the Executive is under no obligation to any former employer or other person which is in any way inconsistent with, or which imposes any restriction upon, the employment of the Executive by the Company or the Executive's undertakings under this Agreement. 2. Term of Employment. Unless sooner terminated pursuant to Section 7, the term of the Executive's employment under this Agreement shall be for a period commencing on the date hereof through the 31st day of March, 2001 ("Term"). 3. Duties. During the Term, the Executive shall provide executive, administrative and managerial services to the Company and perform such other reasonable employment duties as the Chief Executive Officer or the President and Chief Operating Officer of the Company may from time to time - 1 -
prescribe. The Executive shall also serve as a director of any of the Company's subsidiaries to which she is elected. The Executive shall, except to the extent approved by the Chief Executive Officer, (i) devote her full-time to the services required of the Executive, (ii) render her services exclusively to the Company, and (iii) use her best efforts, judgment, and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of the Executive's position. The Executive may serve on boards of directors or advisory boards of businesses that are not competitors of the Company or which do not create a conflict of interest or on the boards of civic and not for profit organizations. The Executive has disclosed in writing such memberships to the Chief Executive Officer prior to the execution of this Agreement and shall disclose such information, at least annually thereafter. 4. Compensation. As compensation for the services to be performed by the Executive during the Term, the Company shall provide to the Executive: (a) an annual base salary of not less than One Hundred Eighty Thousand dollars ($180,000) ("Salary"); (b) an incentive opportunity of Thirty Thousand dollars ($30,000) for calendar year 1999. The performance goals required to earn this incentive opportunity shall be related to the Colorado/Nevada project or any subsequent project identified by the Chief Executive Officer or the President and Chief Operating Officer and any incentive award earned pursuant to this subparagraph shall be subject to the same eligibility rules as the Company's Annual Incentive Plan, including the timing of payment of any award; (c) a target annual incentive opportunity of not less than fifty percent (50%) of the Salary ("Target Annual Incentive"), using the Salary as though it were effective January 1, 1999. The performance goals required to earn the Target Annual Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the year for which the opportunity pertains; and - 2 -
(d) a target annualized long-term incentive opportunity of not less than fifty percent (50%) of the Salary ("Target Long-Term Incentive"), using the Salary as though it were effective January 1, 1999. The performance goals required to earn the Target Long-Term Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the performance period for which the opportunity pertains. If such performance period is longer than one (1) year, the Target Long-Term Incentive opportunity shall be adjusted accordingly based on the number of years in the performance period. Should the Company elect to increase any element of the Executive's compensation during the Term, the Agreement shall be deemed amended to incorporate the new increased Salary or Target Annual Incentive or Target Long-Term Incentive effective as of the date specified for the increase. The payment of any compensation hereunder shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, and shall be paid in accordance with the Company's normal payroll and incentive administration practices as they may exist from time to time. 5. Benefits. In addition to the payments set forth in Section 4, the Executive shall: (a) be eligible to participate in all fringe benefits, paid time off program, incentive plans, and retirement programs, both tax-qualified and non-qualified, that may be provided by the Company for its executives, in accordance with the provisions of any such programs or plans; (b) be eligible to participate in any life, disability or other similar insurance plans, medical and dental plans or other employee welfare benefit plans that may be provided by the Company for its executives, in accordance with the provisions of any such plans; and (c) be eligible to participate in any postretirement medical, dental and life insurance plans that may be provided by the Company for its executives, in accordance with the provision of any such plans, but with the payment of whatever contribution that the Company requires that other such retirees would pay for such coverage. - 3 -
The Company shall also reimburse the Executive for the amount of any capital gains tax the Executive owes as a result of the sale of her house in Atlanta, Georgia plus a tax gross-up on such amount. The Executive shall provide documentation as to the amount of the capital gains tax associated with this house sale before any reimbursement is made to the Executive. In addition, if the Executive voluntarily terminates her employment before March 31, 2000, then she agrees to reimburse the Company for this amount. The Company reserves the right to withhold the amount owed by the Executive to the Company pursuant to this paragraph from any amounts the Company may owe the Executive for final payments of compensation, commission or any other obligations, and the Executive hereby authorizes the Company to withhold such amounts. 6. Expenses. The Company shall, in accordance with and to the extent of its policies, pay all ordinary and necessary business expenses incurred by the Executive in performing her duties as an executive. The Executive shall account promptly for all such business expenses in the manner prescribed by the Company. 7. Termination. The Executive's employment shall be terminated upon the occurrence of any of the following: (a) the death of the Executive; (b) the Executive's disability (as such term is defined in the Company's executive long-term disability plan) ("Disability"); (c) the termination of employment by the Executive for any reason; (d) the termination of employment by the Company For Cause (as defined below); or (e) the termination of employment by the Company other than For Cause. The term "For Cause" or "Cause" shall mean a reasonable determination by the Company that the Executive (i) has been convicted of a felony, (ii) has engaged in an activity which, if proven in a criminal proceeding, could result in conviction of a felony involving dishonesty or fraud, or (iii) has - 4 -
willfully engaged in gross misconduct likely to be materially damaging or materially detrimental to the Company. In order to be effective, the Company must give the Executive at least sixty (60) calendar days advance written notice of its intent to terminate her employment "For Cause" setting forth the specific action(s) by the Executive which triggered the notice and such written notice must be received by the Executive no more than one hundred eighty (180) calendar days after the Company learned of the action(s) giving rise to the "For Cause" termination. 8. Death of The Executive. In the event the Executive's employment is terminated as a result of the Executive's death, the estate of the Executive shall be entitled to receive the Executive's Salary for a period of the lesser of six (6) months or the unexpired portion of the Term. 9. Disability of The Executive. In the event the Executive's employment is terminated as a result of Disability, the Executive shall be entitled to receive her Salary and medical and dental benefits for a period of the lesser of six (6) months or the unexpired portion of the Term, reduced by any payments received by the Executive under the Company's executive long-term disability plan. 10. Executive-Initiated Termination or Company-Initiated For Cause. If the Executive terminates this Agreement for any reason or the Company terminates this Agreement For Cause, the Company shall have no further obligations and liabilities under this Agreement after the termination of employment. 11. Termination Other Than For Cause. In the event the Executive's employment is terminated by the Company other than For Cause, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay, for the greater of one (1) year or the remainder of the Term the following to the Executive if the Executive satisfies the terms of Section 13: (a) the Executive's Salary; (b) all unvested, prior Long-Term Incentive awards; and - 5 -
(c) the medical and dental plan benefits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment. 12. Payment of Compensation Described in Sections 8, 9, or 11. The compensation items specified in Sections 8, 9, or 11 shall be paid as follows: (a) the Salary shall be paid over the remaining Term or other period as described in Sections 8, 9 or 11 in accordance with the Company's normal payroll practices; and (b) the prior unvested Long-Term Incentive awards shall be paid within ninety (90) days after the termination of employment. 13. Execution of Release. As a condition of receiving the compensation and benefits described in Sections 9 or 11, the Executive shall first execute a release of any and all claims arising out of the Executive's employment with the Company or the Executive's separation from such employment (including, without limitation, claims relating to age, disability, sex or race discrimination to the extent permitted by law), excepting only claims arising out of the alleged breach of this Agreement or of any other written contract between the Executive and the Company. Such release shall be in a form reasonably satisfactory to the Company and shall comply with any applicable legislative or judicial requirements, including, but not limited to, the Older Workers Benefit Protection Act. An example of such release is attached as Attachment A. 14. Protection of the Company's Business. The Executive acknowledges that in the course of her employment she will acquire knowledge of trade secrets and confidential data of the Company. Such trade secrets and confidential data may include, but are not limited to, confidential product information, provider contracts, customer lists, technical information, methods by which the Company proposes to compete with its business competitors, strategic and business plans, confidential reports prepared by business consultants which may reveal strengths and weaknesses of the Company and its competition and similar information relating to the Company. The Executive, in order to perform her obligations under this Agreement, must necessarily acquire knowledge of such trade secrets and confidential data, all of which the Executive acknowledges are not known outside the business of the Company, are known only to a limited group of its top executives and directors, are protected by strict measure to - 6 -
preserve secrecy, are of great value to the Company, are the result of the expenditure of large sums of money, are difficult for an outsider to duplicate, and disclosure of which would be extremely detrimental to the Company. The Executive covenants to keep all such trade secrets or confidential data secret and not to release such information to persons not authorized by the Company to receive such secrets and data, both during the term of this Agreement and at all times following its termination. The Executive acknowledges that trade secrets and confidential data need not be expressly marked as such by the Company. 15. Documents, Etc. All records, files, documents, equipment and the like shall be, and remain, the sole property of the Company. The Executive, on the termination of her employment, shall immediately return to the Company all such items without retention of any copies. 16. Limited Non-Competition. During the Executive's employment and for a limited time thereafter, the Company must protect its legitimate business interests by limiting the Executive's ability to compete with the Company. This limited non-competition provision is drafted narrowly so as to be able to safeguard the Company's legitimate business interests while not unreasonably interfering with the Executive's ability to obtain other employment. The Company does not intend, and the Executive acknowledges, that this limited non-competition provision is not an attempt to prevent the Executive from obtaining other employment. The Executive further acknowledges that the Company may need to take action, including litigation, to enforce this limited non-competition provision, which efforts the parties stipulate shall not be deemed an attempt to prevent the Executive from obtaining other employment. (a) During Employment By Company. During the Executive's employment, Executive shall not, directly or indirectly, have any ownership interest in, work for, advise, manage, or act as an agent or consultant for, or have any business connection or business or employment relationship with any person or entity that competes with the Company or that contemplates competing with the Company without the prior written approval of the Chief Executive Officer. (b) During Post-Employment Period. For a period of one (1) year after the Executive's termination of employment (regardless of the reason), or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: - 7 -
(i)(A) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (i)(B) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which she has been assigned responsibility at any time within the twenty-four (24) months preceding her termination; (ii)(A) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (ii)(B) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which the Executive has been assigned responsibility at any time within the twenty-four (24) months preceding her termination; (iii)(A) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company with whom the Executive has had contact (either directly or - 8 -
indirectly) or over which she has had responsibility at any time within the twenty-four (24) months preceding her termination; (iii)(B) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company; or (iv) directly or indirectly, on behalf of the Executive or any third party, make any business contacts with, solicit or accept business from any customer of the Company for any product or service which is competitive with or substantially similar to any product or service sold by the Company; (c) Separate and Several Covenants. The Executive acknowledges that after termination of her employment, she will inevitably possess trade secrets and confidential data of the Company which she would inevitably use if she were to engage in conduct prohibited as set forth above, and such use would be unfair to and extremely detrimental to the Company. The Executive further acknowledges that in view of the benefits provided her by this Agreement, such conduct on her part would be inequitable. Accordingly, the Executive separately and severally covenants for the benefit of the Company to keep each of the covenants described in this Section 16 for the period specified above. (d) Acknowledgment of the Company's Superseding Interest in Protecting its Business. The Executive recognizes that personal relationships between the Company, its employees and customers are essential to the Company's business operations and that the Company furthers such relationships by investments of time and money. The Executive recognizes that this Agreement is reasonably necessary to protect the Company's legitimate interest in its customers, and to protect the Company's confidential information and goodwill, and acknowledges that nothing contained in this Agreement shall unreasonably alter the Executive's ability to obtain a livelihood or preclude the Executive from engaging in her profession. The Executive, therefore, acknowledges that the Company's interest in maintaining its relationships with its established customers for at least one (1) year after termination of the Executive's employment, or for the duration of the Executive's receipt of Salary under - 9 -
Section 11, whichever is longer, supersedes any interest of the Executive in soliciting, servicing, or accepting the Company's customers on behalf of any entity other than the Company during that period of time. (e) Publicly Traded Stock. Nothing in the foregoing provisions of this section prohibits the Executive from purchasing for investment purposes only, any stock or corporate security traded or quoted on a national securities exchange or national market system. (f) Maximum Application. The parties expressly agree that the terms of this limited non-competition provision under this section are reasonable, enforceable, and necessary to protect the Company's interests, and are valid and enforceable. In the unlikely event, however, that a court of competent jurisdiction were to determine that any portion of this limited non-competition provision is unenforceable, then the parties agree that the remainder of the limited non-competition provision shall remain valid and enforceable to the maximum extent possible. 17. Other Limited Prohibitions. During the Executive's employment and for one (1) year after termination, or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: (a) request or advise any customer of the Company, or any person or entity having business dealings with the Company, to withdraw, curtail or cease such business with the Company; (b) disclose to any person or entity the identities of any customers of the Company, or the identity of any persons or entities having business dealings with the Company; or (c) directly or indirectly influence or attempt to influence any other employee of the Company to separate from the Company. 18. Specific Enforcement/Injunctive Relief. The Executive agrees that it would be difficult to measure damages to the Company from any breach of the covenants contained in Sections 14 through 17, but that such damages from any breach would be great, incalculable and irremediable, and that damages would be an inadequate remedy. Accordingly, the Executive agrees that the Company - 10 -
may have specific performance of the terms of this Agreement in any court permitted by this Agreement. In addition, if the Executive violates the non-competition provisions of Section 16 or 17, the Executive agrees that any period of such violation shall be added to the term of the non-competition. For example, if the Executive violates the provision for three (3) months, the Company shall be entitled to enforce the non-competition provision for one (1) year, or for the duration of the Executive's receipt of Salary under Section 11, plus three (3) months post-termination. In determining the period of any violation, the parties stipulate that in any calendar month in which the Executive engages in any activity violative of the non-competition provision, the Executive is deemed to have violated the non-competition provision for the entire month, and that month shall be added to the duration of the non-competition provision as set out above. The parties agree, however, that specific performance and the "add back" remedies described above shall not be the exclusive remedies, and the Company may enforce any other remedy or remedies available to it either in law or in equity including, but not limited to, temporary, preliminary, and/or permanent injunctive relief. 19. Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions of this Agreement which shall be given effect independently of the invalid provisions and, in such circumstances, the invalid provision is severable. 20. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Indiana. The parties expressly agree that it is appropriate for Indiana law to apply to: (i) the interpretation of the Agreement; (ii) any disputes arising out of this Agreement; (iii) any disputes arising out of the employment relationship of the parties; and (iv) any and all other disputes between the parties. 21. Choice of Forum. The Company is based in Indiana, and the Executive understands and acknowledges the Company's desire and need to defend any litigation against it in Indiana. Accordingly, the parties agree that any claim of any type brought by the Executive against the Company or any of its employees or agents must be maintained only in a court sitting in Marion County, Indiana, or, if a federal court, the Southern District of Indiana, Indianapolis Division. - 11 -
The Executive further understands and acknowledges that in the event the Company initiates litigation against the Executive, the Company may need to prosecute such litigation in the Executive's forum state, in the State of Indiana, or in such other state where the Executive is subject to personal jurisdiction. Accordingly, the parties agree that the Company can pursue any claim against the Executive in any forum in which the Executive is subject to personal jurisdiction. The Executive specifically consents to personal jurisdiction in the State of Indiana. 22. Mandatory Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, other than a claim arising out of the Executive's breach of the confidentiality and non-competition provisions of Section 14 through 18, shall be settled by arbitration in Indianapolis, Indiana, in accordance with the Rules of the American Arbitration Association before arbitrators who are licensed to practice law. The arbitrator or arbitrators shall apply the substantive law of Indiana or federal law, or both, as applicable to the dispute. Any award entered shall be final, binding and nonappealable, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. In the event that the Company refuses or otherwise fails to make a payment when due and it is ultimately decided that the Executive is entitled to such payment, such payment shall be increased to reflect an interest equivalent for the period of delay, compounded annually, equal to the prime or base lending rate used by Bank One Indiana, NA, and in effect as of the date the payment was first due. 23. Non-Jury Trials. Notwithstanding the provisions of Sections 18 and 22 above, and if the provisions of Section 18 or 22 above are not enforceable, the Executive expressly waives any rights to a jury trial and agrees that any claim of any type made against the Company or its agents or executives (including, but not limited to, employment discrimination litigation, wage litigation, defamation, or any other claim) lodged in any court will be tried, if at all, without a jury. 24. Nonalienation of Benefits. Except as may otherwise be required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, bankruptcy or hypothecation or to exclusion, attachment, levy or - 12 -
similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 25. Legal Fees and Cost. All legal and other fees and expenses, including, without limitation, any arbitration expenses, incurred by the Executive in connection with contesting or disputing any termination of employment, in seeking to obtain or enforce any right or benefit provided for in this Agreement, or in otherwise pursuing any right or claim, shall be paid by the Company, to the extent permitted by law, provided that the Executive makes a formal written settlement demand prior to trial or arbitration and is ultimately successful, in obtaining through trial or arbitration more than fifty percent (50%) of the monetary relief sought, in her final written settlement demand exclusive of attorney's fees. 26. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and will be deemed to have been given when delivered in person (to the Executive if such notice is for the Executive) or five (5) days following sending by overnight courier or mailing by first class, certified or registered mail, postage prepaid, to the Executive at her home address, or such addresses as the Executive shall have designated in writing, or if to the Company, to the attention of the Corporate Secretary, at the Company's principal place of business, 120 Monument Circle, Indianapolis, Indiana 46204. 27. Headings. The various headings of this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any of its provisions. 28. Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to its benefit, its successors and affiliated companies and shall be binding upon the successors and assigns of the Company. This Agreement, being personal to the Executive, cannot be assigned by the Executive, but her personal representative shall be bound by all its terms and conditions. 29. Waiver and Amendments, Etc. Failure of the Company to insist upon strict compliance with any terms or provisions of this Agreement shall not be deemed a waiver of any terms, provisions or rights of the Company. Moreover, no modifications, amendments, extensions or waivers of this - 13 -
Agreement or any provisions hereof shall be binding upon the Company or the Executive unless in writing and signed by the Executive and the Company. 30. Complete Agreement. This Agreement constitutes the entire employment agreement of the parties and supersedes all prior employment agreements addressing the terms, conditions, and issues contained herein. Nothing in this Agreement, however, affects any separate written agreements addressing other terms and conditions and issues agreed to by the parties. 31. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Company and the Executive have duly executed and delivered this Agreement effective as of the day and year first above written. Caroline S. Matthews /s/ Caroline S. Matthews ----------------------------------------------- Anthem Insurance Companies, Inc. By: /s/ Larry C. Glasscock ------------------------------------------- Name: Larry C. Glasscock ----------------------------------------- Title: President & COO ---------------------------------------- - 14 -
ATTACHMENT A RELEASE AND WAIVER AGREEMENT This Release and Waiver Agreement ("Agreement") is entered into on this __ day of __________, ____, by and between Anthem Insurance Companies, Inc., including its subsidiaries and affiliates (the "Company") and Caroline S. Matthews (the "Executive"). NOW, THEREFORE, the parties agree to the following: 1. The Executive and the Company acknowledge and agree that the Executive's last day of employment with the Company or one of its affiliates shall be ___________________. Service credit for purposes of all Company benefits, including but not limited to the Anthem Cash Balance Pension Plan, will terminate as of that date. 2. The Company agrees that it will pay to the Executive the amounts described in Section [9 or 11] of the Employment Agreement between the Company and the Executive effective ______________ ("Employment Agreement"). All payments made pursuant to Section [9 or 11] of the Employment Agreement shall be made pursuant to Section 12 of the Employment Agreement. The Executive will also be entitled to any benefits described in Section [9 or 11] of the Employment Agreement for the duration noted therein. 3. Any and all benefits not specifically discussed in this Agreement or provided by law will cease on [termination date from paragraph 1]. ----------------------------------- 4. The provisions of the Employment Agreement relating to Protection of the Company's Business, Documents, Limited Non-Competition, Other Limited Prohibitions, and Specific Enforcement (Sections 14, 15, 16, 17, and 18) shall remain in full force and effect upon termination of employment. The Executive acknowledges that she possesses trade secrets and confidential data of the Company and further acknowledges that the provisions of Sections 14 through 18 of the Employment Agreement are reasonably necessary to protect the Company's legitimate business interests, confidential data, and goodwill. 5. The Executive hereby forever releases and waives as against the Company, its subsidiaries and affiliates, and each of their directors, officers, employees and agents, any and all legal and equitable causes of action and claims which the Executive possesses, whether known or unknown, including, but not limited to, any such causes of action and claims relating to the Employee's employment with, or termination of employment from, the Company or any of its affiliates, including any and all rights, entitlements or claims under any and all federal, state and local laws and regulations, all as amended, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991 and the Americans with Disabilities Act of 1990. The Executive further expressly and specifically waives any and all rights and claims under the Age Discrimination in Employment Act of 1967 and the Older Workers' Benefit Protection Act (collectively referred to as the "Act"). The Executive acknowledges and agrees that this waiver of any right or claim under the Act (hereinafter "Waiver") is
Page 2 knowing and voluntary, and specifically agrees as follows: that this Waiver is written in a manner which she understands; that this Waiver specifically relates to rights or claims under the Act; that she does not waive any rights or claims under the Act that may arise after the date of execution of this Agreement; that she waives rights or claims under the Act in exchange for consideration in addition to anything of value to which she already is entitled; and that she has been advised in writing to consult with an attorney prior to executing it. The Executive acknowledges that she understands that she has twenty-one (21) days after receipt of this Agreement to decide whether to accept it and that she may revoke any acceptance of this Agreement within seven (7) days of such acceptance. This Agreement shall not become effective until the seven (7)-day revocation period has expired and no amounts will be paid to the Executive until the seven (7)-day revocation period has expired. 6. It is understood and agreed between the Executive and the Company that this Agreement shall in no way affect any claims of the Executive arising out of Social Security, Worker's Compensation, or Unemployment Laws. 7. The Company and the Executive agree that any breach of the terms of this Agreement may, at the Company's discretion, result in the immediate termination of any subsequent payments to be made under this Agreement. In the event of a breach of this Agreement or any dispute regarding this Agreement, the provisions of the Employment Agreement relating to Specific Enforcement, Governing Law, Choice of Forum, Mandatory Arbitration, Non-Jury Trials, and Legal Fees and Costs (Sections 18, 20, 21, 22, 23, and 25) shall remain in full force and effect. 8. The Executive expressly agrees that the consideration designated in this Agreement is sufficient for the terms of this Agreement. The Executive further agrees that upon the execution of this Agreement she will keep confidential and not disclose the existence or terms of this Agreement unless compelled to do so by a court or administrative body. 9. The rights and obligations hereunder shall not be assigned or transferred by the Executive and shall be binding upon and inure to the benefit of the Executive, her heirs, legatees and legal representatives, and the Company, its subsidiaries and affiliates, successors and assigns. No waiver of any breach of this Agreement shall be deemed or construed as a waiver of any other or subsequent breach. Any amendment of this Agreement shall be effective only if in writing and signed by both parties. If any provision of this Agreement shall be held invalid under applicable laws, such provision shall be ineffective only to the extent of any invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements, whether oral or written, between the parties. The terms of this Agreement shall be governed by Indiana law. The parties represent that they have read and understood this Agreement, and the officer executing this document on behalf of the Company represents that she has the authority to do so. 10. This Agreement shall not be effective or enforceable against the Company until the seven (7)-day revocation period has expired or if the Executive revokes it not later than
Page 3 seven (7) days after she signs it. This revocation must be in writing and must be personally delivered, or sent by certified mail to: Corporate Secretary Anthem, Inc. 120 Monument Circle Indianapolis, Indiana 46204 11. The Executive expressly acknowledges that she understands all of the provisions of this Agreement and is voluntarily entering into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement. Caroline S. Matthews Anthem Insurance Companies, Inc. _____________________________ By:________________________________ Printed:____________________________ Title:______________________________
Exhibit 10.10(ii) AMENDMENT ONE ------------- TO -- EMPLOYMENT AGREEMENT -------------------- This AMENDMENT ONE TO EMPLOYMENT AGREEMENT by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company") and Caroline S. Matthews (the "Executive") hereby amends the EMPLOYMENT AGREEMENT (the "Agreement") between the parties dated as of the 1st day of April 1999, as follows: 1. Effective January 1, 2000, Section 2 of the Agreement is hereby amended by deleting the termination date and inserting in place thereof the 31st day of December, 2001. 2. All other provision of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Company and the Executive have duly executed this AMENDMENT ONE TO EMPLOYMENT AGREEMENT effective as of the day and year first above written. Caroline S. Matthews Anthem Insurance Companies, Inc. /s/ Caroline S. Matthews By: /s/ Larry C. Glasscock - ----------------------------- ------------------------------------- Name: Larry C. Glasscock Title: President and CEO
Exhibit 10.10(iii) AMENDMENT TWO ------------- TO -- EMPLOYMENT AGREEMENT -------------------- This AMENDMENT THREE TO EMPLOYMENT AGREEMENT by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company") and Caroline S. Matthews (the "Executive") hereby amends the EMPLOYMENT AGREEMENT (the "Agreement") between the parties dates as of the 1st day of April, 1999, as follows: 1. Effective January 1, 2001, Section 2 of the Agreement is hereby amended by deleting the termination date and inserting in place thereof the 31st of December, 2002. 2. All other provisions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Company and the Executive have duly executed this AMENDMENT TWO TO EMPLOYMENT AGREEMENT effective as of the day and year first above written. Caroline S. Matthews Anthem Insurance Companies, Inc. /s/ Caroline S. Matthews By: /s/ Larry C. Glasscock - ------------------------------ ---------------------------------------- Name: Larry C. Glasscock Title: President and CEO
Exhibit 10.11 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement"), is by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company"), with offices located at 120 Monument Circle, Indianapolis, Indiana, and John M. Murphy (the "Executive"), residing at 12978 Brighton Lane, Carmel, Indiana 46038, dated as of the 6th day of September, 2000. W I T N E S S E T H: ------------------- WHEREAS, the Company (which hereinafter also includes subsidiaries of the Company) desires to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive is willing to serve in the employ of the Company on a full-time basis for such period, all in accordance with the terms and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Condition of Employment. The Company hereby employs the Executive and the Executive hereby accepts such employment for the period provided for in Section 2, all upon the terms and conditions contained in this Agreement. As a condition to the Executive's employment, the Executive affirms and represents that the Executive is under no obligation to any former employer or other person which is in any way inconsistent with, or which imposes any restriction upon, the employment of the Executive by the Company or the Executive's undertakings under this Agreement. 2. Term of Employment. Unless sooner terminated pursuant to Section 7, the term of the Executive's employment under this Agreement shall be for a period commencing on the date hereof through the 31st day of December, 2002 ("Term"). 3. Duties. During the Term, the Executive shall provide executive, administrative and managerial services to the Company and perform such other reasonable employment duties as the Chief Executive Officer of the Company may from time to time prescribe. The Executive shall also serve as a director of any of the Company's subsidiaries to which he is elected. -1-
The Executive shall, except to the extent approved by the Chief Executive Officer, (i) devote his full-time to the services required of the Executive, (ii) render his services exclusively to the Company and (iii) use his best efforts, judgment, and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of the Executive's position. The Executive may serve on boards of directors or advisory boards of businesses that are not competitors of the Company or which do not create a conflict of interest or on the boards of civic and not for profit organizations. The Executive has disclosed in writing such memberships to the Chief Executive Officer prior to the execution of this Agreement and shall disclose such information, at least, annually thereafter. 4. Compensation. As compensation for the services to be performed by the Executive during the Term, the Company shall provide to the Executive: (a) an annual base salary of not less than two hundred fifty thousand dollars ($250,000) ("Salary"); (b) a target annual incentive opportunity of not less than sixty percent (60%) of the Salary ("Target Annual Incentive"). The performance goals required to earn the Target Annual Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the year for which the opportunity pertains; and (c) a target annualized long-term incentive opportunity of not less than fifty percent (50%) of the Salary ("Target Long-Term Incentive"). The performance goals required to earn the Target Long-Term Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the performance period for which the opportunity pertains. If such performance period is longer than one year, the Target Long-Term Incentive opportunity shall be adjusted accordingly based on the number of years in the performance period. Should the Company elect to increase any element of the Executive's compensation during the Term, the Agreement shall be deemed amended to incorporate the new increased Salary or Target Annual Incentive or Target Long-Term Incentive effective as of the date specified for the increase. The payment of -2-
any compensation hereunder shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, and shall be paid in accordance with the Company's normal payroll and incentive administration practices as they may exist from time to time. 5. Benefits. In addition to the payments set forth in Section 4, the Executive shall: (a) be eligible to participate in all fringe benefits, paid time off program, incentive plans, and retirement programs, both tax-qualified and non-qualified, that may be provided by the Company for its executives, in accordance with the provisions of any such programs or plans; (b) be eligible to participate in any life, disability or other similar insurance plans, medical and dental plans or other employee welfare benefit plans that may be provided by the Company for its executives, in accordance with the provisions of any such plans; and (c) be eligible to participate in any postretirement medical, dental and life insurance plans that may be provided by the Company for its executives, in accordance with the provision of any such plans, but with the payment of whatever contribution that the Company requires that other such retirees would pay for such coverage. 6. Expenses. The Company shall, in accordance with and to the extent of its policies, pay all ordinary and necessary business expenses incurred by the Executive in performing his duties as an executive. The Executive shall account promptly for all such business expenses in the manner prescribed by the Company. 7. Termination. The Executive's employment shall be terminated upon the occurrence of any of the following: (a) the death of the Executive; (b) the Executive's disability (as such term is defined in the Company's executive long-term disability plan) ("Disability"); -3-
(c) the termination of employment by the Executive for any reason; (d) the termination of employment by the Company For Cause (as defined below); or (e) the termination of employment by the Company other than For Cause. The term "For Cause" or "Cause" shall mean a reasonable determination by the Company that the Executive (i) has been convicted of a felony, (ii) has engaged in an activity which, if proven in a criminal proceeding, could result in conviction of a felony involving dishonesty or fraud, or (iii) has willfully engaged in gross misconduct likely to be materially damaging or materially detrimental to the Company. In order to be effective, the Company must give the Executive at least sixty (60) calendar days advance written notice of its intent to terminate his employment "For Cause" setting forth the specific action(s) by the Executive which triggered the notice and such written notice must be received by the Executive no more than one hundred eighty (180) calendar days after the Company learned of the action(s) giving rise to the "For Cause" termination. 8. Death of The Executive. In the event the Executive's employment is terminated as a result of the Executive's death, the estate of the Executive shall be entitled to receive the Executive's Salary for a period of the lesser of six (6) months or the unexpired portion of the Term, plus an amount equal to fifty percent (50%) of Target Annual Incentive and Target Long-Term Incentive for the year of death. 9. Disability of The Executive. In the event the Executive's employment is terminated as a result of Disability, the Executive shall be entitled to receive his Salary and medical and dental benefits for a period of the lesser of six (6) months or the unexpired portion of the Term, plus an amount equal to fifty percent (50%) of Target Annual Incentive and Target Long-Term Incentive for the year of Disability, reduced by any payments received by the Executive under the Company's executive long-term disability plan. 10. Executive-Initiated Termination or Company-Initiated For Cause. If the Executive terminates this Agreement for any reason or the Company -4-
terminates this Agreement For Cause, the Company shall have no further obligations and liabilities under this Agreement after the termination of employment. 11. Termination Other Than For Cause. In the event the Executive's employment is terminated by the Company other than For Cause, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay, for the greater of one (1) year or the remainder of the Term, the following to the Executive if the Executive satisfies the terms of Section 13: (a) the Executive's Salary; (b) the Annual Incentive and Long-Term Incentive awards for the year of termination, based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the Executive was employed during that year; (c) all unvested, prior Long-Term Incentive awards; (d) an amount equal to fifty percent (50%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; and (e) the medical and dental plan benefits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment. 12. Payment of Compensation Described in Sections 8, 9, or 11. The compensation items specified in Sections 8, 9, or 11 shall be paid as follows: (a) the Salary shall be paid over the remaining Term or other period as described in Sections 8, 9 or 11 in accordance with the Company's normal payroll practices; (b) the current and future Annual Incentive and Long-Term Incentive awards and opportunities shall be paid within ninety (90) days after the end of the calendar year for which the incentive applied; and -5-
(c) the prior unvested Long-Term Incentive awards shall be paid within ninety (90) days after the termination of employment. 13. Execution of Release. As a condition of receiving the compensation and benefits described in Sections 9 or 11, the Executive shall first execute a release of any and all claims arising out of the Executive's employment with the Company or the Executive's separation from such employment (including, without limitation, claims relating to age, disability, sex or race discrimination to the extent permitted by law), excepting only claims arising out of the alleged breach of this Agreement or of any other written contract between the Executive and the Company. Such release shall be in a form reasonably satisfactory to the Company and shall comply with any applicable legislative or judicial requirements, including, but not limited to, the Older Workers Benefit Protection Act. An example of such release is attached as Attachment A. 14. Protection of the Company's Business. The Executive acknowledges that in the course of his employment he will acquire knowledge of trade secrets and confidential data of the Company. Such trade secrets and confidential data may include, but are not limited to, confidential product information, provider contracts, customer lists, technical information, methods by which the Company proposes to compete with its business competitors, strategic and business plans, confidential reports prepared by business consultants which may reveal strengths and weaknesses of the Company and its competition and similar information relating to the Company. The Executive, in order to perform his obligations under this Agreement, must necessarily acquire knowledge of such trade secrets and confidential data, all of which the Executive acknowledges are not known outside the business of the Company, are known only to a limited group of its top executives and directors, are protected by strict measure to preserve secrecy, are of great value to the Company, are the result of the expenditure of large sums of money, are difficult for an outsider to duplicate, and disclosure of which would be extremely detrimental to the Company. The Executive covenants to keep all such trade secrets or confidential data secret and not to release such information to persons not authorized by the Company to receive such secrets and data, both during the term of this Agreement and at all times following its termination. The Executive acknowledges that trade secrets and confidential data need not be expressly marked as such by the Company. -6-
15. Documents, Etc. All records, files, documents, equipment and the like shall be, and remain, the sole property of the Company. The Executive, on the termination of his employment, shall immediately return to the Company all such items without retention of any copies. 16. Limited Non-Competition. During the Executive's employment and for a limited time thereafter, the Company must protect its legitimate business interests by limiting the Executive's ability to compete with the Company. This limited non-competition provision is drafted narrowly so as to be able to safeguard the Company's legitimate business interests while not unreasonably interfering with the Executive's ability to obtain other employment. The Company does not intend, and the Executive acknowledges, that this limited non-competition provision is not an attempt to prevent the Executive from obtaining other employment. The Executive further acknowledges that the Company may need to take action, including litigation, to enforce this limited non-competition provision, which efforts the parties stipulate shall not be deemed an attempt to prevent the Executive from obtaining other employment. (a) During Employment By Company. During the Executive's employment, Executive shall not, directly or indirectly, have any ownership interest in, work for, advise, manage, or act as an agent or consultant for, or have any business connection or business or employment relationship with any person or entity that competes with the Company or that contemplates competing with the Company without the prior written approval of the Chief Executive Officer. (b) During Post-Employment Period. For a period of one (1) year after the Executive's termination of employment (regardless of the reason), or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: (i)(A) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; -7-
(i)(B) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which he has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (ii)(A) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (ii)(B) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which the Executive has been assigned responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(A) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company with whom the Executive has had contact (either directly or indirectly) or over which he has had responsibility at any time within the twenty-four (24) months preceding his termination; (iii)(B) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company; or -8-
(iv) directly or indirectly, on behalf of the Executive or any third party, make any business contacts with, solicit or accept business from any customer of the Company for any product or service which is competitive with or substantially similar to any product or service sold by the Company; (c) Separate and Several Covenants. The Executive acknowledges that after termination of his employment, he will inevitably possess trade secrets and confidential data of the Company which he would inevitably use if he were to engage in conduct prohibited as set forth above, and such use would be unfair to and extremely detrimental to the Company. The Executive further acknowledges that in view of the benefits provided him by this Agreement, such conduct on his part would be inequitable. Accordingly, the Executive separately and severally covenants for the benefit of the Company to keep each of the covenants described in this Section 16 for the period specified above. (d) Acknowledgment of the Company's Superseding Interest in Protecting its Business. The Executive recognizes that personal relationships between the Company, its employees and customers are essential to the Company's business operations and that the Company furthers such relationships by investments of time and money. The Executive recognizes that this Agreement is reasonably necessary to protect the Company's legitimate interest in its customers, and to protect the Company's confidential information and goodwill, and acknowledges that nothing contained in this Agreement shall unreasonably alter the Executive's ability to obtain a livelihood or preclude the Executive from engaging in his profession. The Executive, therefore, acknowledges that the Company's interest in maintaining its relationships with its established customers for at least one (1) year after termination of the Executive's employment, or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, supersedes any interest of the Executive in soliciting, servicing, or accepting the Company's customers on behalf of any entity other than the Company during that period of time. (e) Publicly Traded Stock. Nothing in the foregoing provisions of this section prohibits the Executive from purchasing for investment purposes only, any stock or corporate security traded or quoted on a national securities exchange or national market system. -9-
(f) Maximum Application. The parties expressly agree that the terms of this limited non-competition provision under this section are reasonable, enforceable, and necessary to protect the Company's interests, and are valid and enforceable. In the unlikely event, however, that a court of competent jurisdiction were to determine that any portion of this limited non-competition provision is unenforceable, then the parties agree that the remainder of the limited non-competition provision shall remain valid and enforceable to the maximum extent possible. 17. Other Limited Prohibitions. During the Executive's employment and for one (1) year after termination, or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: (a) request or advise any customer of the Company, or any person or entity having business dealings with the Company, to withdraw, curtail or cease such business with the Company; (b) disclose to any person or entity the identities of any customers of the Company, or the identity of any persons or entities having business dealings with the Company; or (c) directly or indirectly influence or attempt to influence any other employee of the Company to separate from the Company. 18. Specific Enforcement/Injunctive Relief. The Executive agrees that it would be difficult to measure damages to the Company from any breach of the covenants contained in Sections 14 through 17, but that such damages from any breach would be great, incalculable and irremediable, and that damages would be an inadequate remedy. Accordingly, the Executive agrees that the Company may have specific performance of the terms of this Agreement in any court permitted by this Agreement. In addition, if the Executive violates the non-competition provisions of Section 16 or 17, the Executive agrees that any period of such violation shall be added to the term of the non-competition. For example, if the Executive violates the provision for three (3) months, the Company shall be entitled to enforce the non-competition provision for one (1) year, or for the duration of the Executive's receipt of Salary under Section 11, plus three (3) months post-termination. In determining the period of any violation, the parties -10-
stipulate that in any calendar month in which the Executive engages in any activity violative of the non-competition provision, the Executive is deemed to have violated the non-competition provision for the entire month, and that month shall be added to the duration of the non-competition provision as set out above. The parties agree however, that specific performance and the "add back" remedies described above shall not be the exclusive remedies, and the Company may enforce any other remedy or remedies available to it either in law or in equity including, but not limited to, temporary, preliminary, and/or permanent injunctive relief. 19. Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions of this Agreement which shall be given effect independently of the invalid provisions and, in such circumstances, the invalid provision is severable. 20. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Indiana. The parties expressly agree that it is appropriate for Indiana law to apply to: (i) the interpretation of the Agreement; (ii) any disputes arising out of this Agreement; (iii) any disputes arising out of the employment relationship of the parties; and (iv) any and all other disputes between the parties. 21. Choice of Forum. The Company is based in Indiana, and the Executive understands and acknowledges the Company's desire and need to defend any litigation against it in Indiana. Accordingly, the parties agree that any claim of any type brought by the Executive against the Company or any of its employees or agents must be maintained only in a court sitting in Marion County, Indiana, or, if a federal court, the Southern District of Indiana, Indianapolis Division. The Executive further understands and acknowledges that in the event the Company initiates litigation against the Executive, the Company may need to prosecute such litigation in the Executive's forum state, in the State of Indiana, or in such other state where the Executive is subject to personal jurisdiction. Accordingly, the parties agree that the Company can pursue any claim against the Executive in any forum in which the Executive is subject to personal jurisdiction. The Executive specifically consents to personal jurisdiction in the State of Indiana. -11-
22. Mandatory Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, other than a claim arising out of the Executive's breach of the confidentiality and non-competition provisions of Section 14 through 18, shall be settled by arbitration in Indianapolis, Indiana, in accordance with the Rules of the American Arbitration Association before arbitrators who are licensed to practice law. The arbitrator or arbitrators shall apply the substantive law of Indiana or federal law, or both, as applicable to the dispute. Any award entered shall be final, binding and nonappealable, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. In the event that the Company refuses or otherwise fails to make a payment when due and it is ultimately decided that the Executive is entitled to such payment, such payment shall be increased to reflect an interest equivalent for the period of delay, compounded annually, equal to the prime or base lending rate used by Bank One Indiana, NA, and in effect as of the date the payment was first due. 23. Non-Jury Trials. Notwithstanding the provisions of Sections 18 and 22 above, and if the provisions of Section 18 or 22 above are not enforceable, the Executive expressly waives any rights to a jury trial and agrees that any claim of any type made against the Company or its agents or executives (including, but not limited to, employment discrimination litigation, wage litigation, defamation, or any other claim) lodged in any court will be tried, if at all, without a jury. 24. Nonalienation of Benefits. Except as may otherwise be required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, bankruptcy or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 25. Legal Fees and Cost. All legal and other fees and expenses, including, without limitation, any arbitration expenses, incurred by the Executive in connection with contesting or disputing any termination of employment, in seeking to obtain or enforce any right or benefit provided for in this Agreement, or in otherwise pursuing any right or claim, shall be paid by the Company, to the extent permitted by law, provided that the Executive makes a formal written -12-
settlement demand prior to trial or arbitration and is ultimately successful, in obtaining through trial or arbitration more than fifty percent (50%) of the monetary relief sought, in his final written settlement demand exclusive of attorney's fees. 26. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and will be deemed to have been given when delivered in person (to the Executive if such notice is for the Executive) or five (5) days following sending by overnight courier or mailing by first class, certified or registered mail, postage prepaid, to the Executive at his home address, or such addresses as the Executive shall have designated in writing, or if to the Company, to the attention of the Corporate Secretary, at the Company's principal place of business, 120 Monument Circle, Indianapolis, Indiana 46204. 27. Headings. The various headings of this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any of its provisions. 28. Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to its benefit, its successors and affiliated companies and shall be binding upon the successors and assigns of the Company. This Agreement, being personal to the Executive, cannot be assigned by the Executive, but his personal representative shall be bound by all its terms and conditions. 29. Waiver and Amendments, Etc. Failure of the Company to insist upon strict compliance with any terms or provisions of this Agreement shall not be deemed a waiver of any terms, provisions or rights of the Company. Moreover, no modifications, amendments, extensions or waivers of this Agreement or any provisions hereof shall be binding upon the Company or the Executive unless in writing and signed by the Executive and the Company. 30. Complete Agreement. This Agreement constitutes the entire employment agreement of the parties and supersedes all prior employment agreements addressing the terms, conditions, and issues contained herein. Nothing in this Agreement, however, affects any separate written agreements addressing other terms and conditions and issues agreed to by the parties. -13-
31. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Company and the Executive have duly executed and delivered this Agreement effective as of the day and year first above written. John M. Murphy /s/ John M. Murphy ------------------------------------------ Anthem Insurance Companies, Inc. By: /s/ Larry C. Glasscock --------------------------------------- Name: Larry C. Glasscock Title: President and CEO -14-
ATTACHMENT A RELEASE AND WAIVER AGREEMENT This Release and Waiver Agreement ("Agreement") is entered into on this __ day of __________, ____, by and between Anthem Insurance Companies, Inc., including its subsidiaries and affiliates (the "Company") and _____________________ (the "Executive"). NOW, THEREFORE, the parties agree to the following: 1. The Executive and the Company acknowledge and agree that the Executive's last day of employment with the Company or one of its affiliates shall be ___________________. Service credit for purposes of all Company benefits, including but not limited to the Anthem Cash Balance Pension Plan, will terminate as of that date. 2. The Company agrees that it will pay to the Executive the amounts described in Section [9 or 11] of the Employment Agreement between the Company and the Executive effective ______________ ("Employment Agreement"). All payments made pursuant to Section [9 or 11] of the Employment Agreement shall be made pursuant to Section 12 of the Employment Agreement. The Executive will also be entitled to any benefits described in Section [9 or 11] of the Employment Agreement for the duration noted therein. 3. Any and all benefits not specifically discussed in this Agreement or provided by law will cease on [termination date from paragraph 1]. ----------------------------------- 4. The provisions of the Employment Agreement relating to Protection of the Company's Business, Documents, Limited Non-Competition, Other Limited Prohibitions, and Specific Enforcement (Sections 14, 15, 16, 17, and 18) shall remain in full force and effect upon termination of employment. The Executive acknowledges that he possesses trade secrets and confidential data of the Company and further acknowledges that the provisions of Sections 14 through 18 of the Employment Agreement are reasonably necessary to protect the Company's legitimate business interests, confidential data, and goodwill. 5. The Executive hereby forever releases and waives as against the Company, its subsidiaries and affiliates, and each of their directors, officers, employees and agents, any and all legal and equitable causes of action and claims which the Executive possesses, whether known or unknown, including, but not limited to, any such causes of action and claims relating to the Employee's employment with, or termination of employment from, the Company or any of its affiliates, including any and all rights, entitlements or claims under any and all federal, state and local laws and regulations, all as amended, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991 and the Americans with Disabilities Act of 1990. The Executive further expressly and specifically waives any and all rights and claims under the Age Discrimination in Employment Act of 1967 and the Older Workers' Benefit Protection Act (collectively referred to as the "Act"). The Executive acknowledges and agrees that this waiver of any right or claim under the Act (hereinafter "Waiver") is
Page 2 knowing and voluntary, and specifically agrees as follows: that this Waiver is written in a manner which he understands; that this Waiver specifically relates to rights or claims under the Act; that he does not waive any rights or claims under the Act that may arise after the date of execution of this Agreement; that he waives rights or claims under the Act in exchange for consideration in addition to anything of value to which he already is entitled; and that he has been advised in writing to consult with an attorney prior to executing it. The Executive acknowledges that he understands that he has twenty-one (21) days after receipt of this Agreement to decide whether to accept it and that he may revoke any acceptance of this Agreement within seven (7) days of such acceptance. This Agreement shall not become effective until the seven (7)-day revocation period has expired and no amounts will be paid to the Executive until the seven (7)-day revocation period has expired. 6. It is understood and agreed between the Executive and the Company that this Agreement shall in no way affect any claims of the Executive arising out of Social Security, Worker's Compensation, or Unemployment Laws. 7. The Company and the Executive agree that any breach of the terms of this Agreement may, at the Company's discretion, result in the immediate termination of any subsequent payments to be made under this Agreement. In the event of a breach of this Agreement or any dispute regarding this Agreement, the provisions of the Employment Agreement relating to Specific Enforcement, Governing Law, Choice of Forum, Mandatory Arbitration, Non-Jury Trials, and Legal Fees and Costs (Sections 18, 20, 21, 22, 23, and 25) shall remain in full force and effect. 8. The Executive expressly agrees that the consideration designated in this Agreement is sufficient for the terms of this Agreement. The Executive further agrees that upon the execution of this Agreement he will keep confidential and not disclose the existence or terms of this Agreement unless compelled to do so by a court or administrative body. 9. The rights and obligations hereunder shall not be assigned or transferred by the Executive and shall be binding upon and inure to the benefit of the Executive, his heirs, legatees and legal representatives, and the Company, its subsidiaries and affiliates, successors and assigns. No waiver of any breach of this Agreement shall be deemed or construed as a waiver of any other or subsequent breach. Any amendment of this Agreement shall be effective only if in writing and signed by both parties. If any provision of this Agreement shall be held invalid under applicable laws, such provision shall be ineffective only to the extent of any invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements, whether oral or written, between the parties. The terms of this Agreement shall be governed by Indiana law. The parties represent that they have read and understood this Agreement, and the officer executing this document on behalf of the Company represents that he has the authority to do so. 10. This Agreement shall not be effective or enforceable against the Company until the seven (7)-day revocation period has expired or if the Executive revokes it not later than
Page 3 seven (7) days after he signs it. This revocation must be in writing and must be personally delivered, or sent by certified mail to: Corporate Secretary Anthem, Inc. 120 Monument Circle Indianapolis, Indiana 46204 11. The Executive expressly acknowledges that he understands all of the provisions of this Agreement and is voluntarily entering into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement. John M. Murphy Anthem Insurance Companies, Inc. /s/ John M. Murphy By:________________________________ ____________________________ Printed:____________________________ Title:______________________________
Exhibit 10.12(i) EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement"), is by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company"), with offices located at 120 Monument Circle, Indianapolis, Indiana, and Jane Niederberger (the "Executive"), residing at 8379 Cypresswood Drive, Cincinnati, Ohio 45249, dated as of the 22nd day of February, 1999. W I T N E S S E T H: ------------------- WHEREAS, the Company (which hereinafter also includes subsidiaries of the Company) desires to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive is willing to serve in the employ of the Company on a full-time basis for such period, all in accordance with the terms and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Condition of Employment. The Company hereby employs the Executive and the Executive hereby accepts such employment for the period provided for in Section 2, all upon the terms and conditions contained in this Agreement. As a condition to the Executive's employment, the Executive affirms and represents that the Executive is under no obligation to any former employer or other person which is in any way inconsistent with, or which imposes any restriction upon, the employment of the Executive by the Company or the Executive's undertakings under this Agreement. 2. Term of Employment. Unless sooner terminated pursuant to Section 7, the term of the Executive's employment under this Agreement shall be for a period commencing on the date hereof through the 31st day of December, 2000 ("Term"). 3. Duties. During the Term, the Executive shall provide executive, administrative and managerial services to the Company and perform such other reasonable employment duties as the Chief Executive Officer of the Company may from time to time prescribe. The Executive shall also serve as a director of any of the Company's subsidiaries to which she is elected. -1-
The Executive shall, except to the extent approved by the Chief Executive Officer, (i) devote her full-time to the services required of the Executive, (ii) render her services exclusively to the Company and (iii) use her best efforts, judgment, and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of the Executive's position. The Executive may serve on boards of directors or advisory boards of businesses that are not competitors of the Company or which do not create a conflict of interest or on the boards of civic and not for profit organizations. The Executive has disclosed in writing such memberships to the Chief Executive Officer prior to the execution of this Agreement and shall disclose such information, at least, annually thereafter. 4. Compensation. As compensation for the services to be performed by the Executive during the Term, the Company shall provide to the Executive: (a) an annual base salary of not less than two hundred ten thousand dollars ($210,000) ("Salary"); (b) a target annual incentive opportunity of not less than sixty-five percent (65%) of the Salary ("Target Annual Incentive"). The performance goals required to earn the Target Annual Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the year for which the opportunity pertains; and (c) effective January 1, 1999, a target annualized long-term incentive opportunity of not less than fifty percent (50%) of the Salary ("Target Long-Term Incentive"). The performance goals required to earn the Target Long-Term Incentive shall be approved by the Board of Directors and communicated to the Executive prior to the end of the first quarter of the performance period for which the opportunity pertains. If such performance period is longer than one year, the Target Long-Term Incentive opportunity shall be adjusted accordingly based on the number of years in the performance period. Should the Company elect to increase any element of the Executive's compensation during the Term, the Agreement shall be deemed amended to -2-
incorporate the new increased Salary or Target Annual Incentive or Target Long-Term Incentive effective as of the date specified for the increase. The payment of any compensation hereunder shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, and shall be paid in accordance with the Company's normal payroll and incentive administration practices as they may exist from time to time. 5. Benefits. In addition to the payments set forth in Section 4, the Executive shall: (a) be eligible to participate in all fringe benefits, paid time off program, incentive plans, and retirement programs, both tax-qualified and non-qualified, that may be provided by the Company for its executives, in accordance with the provisions of any such programs or plans; (b) be eligible to participate in any life, disability or other similar insurance plans, medical and dental plans or other employee welfare benefit plans that may be provided by the Company for its executives, in accordance with the provisions of any such plans; and (c) be eligible to participate in any postretirement medical, dental and life insurance plans that may be provided by the Company for its executives, in accordance with the provision of any such plans, but with the payment of whatever contribution that the Company requires that other such retirees would pay for such coverage. 6. Expenses. The Company shall, in accordance with and to the extent of its policies, pay all ordinary and necessary business expenses incurred by the Executive in performing her duties as an executive. The Executive shall account promptly for all such business expenses in the manner prescribed by the Company. 7. Termination. The Executive's employment shall be terminated upon the occurrence of any of the following: (a) the death of the Executive; -3-
(b) the Executive's disability (as such term is defined in the Company's executive long-term disability plan) ("Disability"); (c) the termination of employment by the Executive for any reason; (d) the termination of employment by the Company For Cause (as defined below); or (e) the termination of employment by the Company other than For Cause. The term "For Cause" or "Cause" shall mean a reasonable determination by the Company that the Executive (i) has been convicted of a felony, (ii) has engaged in an activity which, if proven in a criminal proceeding, could result in conviction of a felony involving dishonesty or fraud, or (iii) has willfully engaged in gross misconduct likely to be materially damaging or materially detrimental to the Company. In order to be effective, the Company must give the Executive at least sixty (60) calendar days advance written notice of its intent to terminate her employment "For Cause" setting forth the specific action(s) by the Executive which triggered the notice and such written notice must be received by the Executive no more than one hundred eighty (180) calendar days after the Company learned of the action(s) giving rise to the "For Cause" termination. 8. Death of The Executive. In the event the Executive's employment is terminated as a result of the Executive's death, the estate of the Executive shall be entitled to receive the Executive's Salary for a period of the lesser of six (6) months or the unexpired portion of the Term, plus an amount equal to fifty percent (50%) of Target Annual Incentive and Target Long-Term Incentive for the year of death. 9. Disability of The Executive. In the event the Executive's employment is terminated as a result of Disability, the Executive shall be entitled to receive her Salary and medical and dental benefits for a period of the lesser of six (6) months or the unexpired portion of the Term, plus an amount equal to fifty percent (50%) of Target Annual Incentive and Target Long-Term Incentive for the year of Disability, reduced by any payments received by the Executive under the Company's executive long-term disability plan. -4-
10. Executive-Initiated Termination or Company-Initiated For Cause. If the Executive terminates this Agreement for any reason or the Company terminates this Agreement For Cause, the Company shall have no further obligations and liabilities under this Agreement after the termination of employment. 11. Termination Other Than For Cause. In the event the Executive's employment is terminated by the Company other than For Cause, the Company shall have no further obligations or liabilities under this Agreement except that the Company shall pay, for the greater of one (1) year or the remainder of the Term, the following to the Executive if the Executive satisfies the terms of Section 13: (a) the Executive's Salary; (b) the Annual Incentive and Long-Term Incentive awards for the year of termination, based upon the achievement of the performance goals for the plans for the entire year of termination prorated to reflect the full number of months the Executive was employed during that year; (c) all unvested, prior Long-Term Incentive awards; (d) an amount equal to fifty percent (50%) of any Target Annual Incentive and Target Long-Term Incentive opportunity which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment; and (e) the medical and dental plan benefits for which the Executive would otherwise have been eligible to receive as of the effective date of the Executive's termination of employment. 12. Payment of Compensation Described in Sections 8, 9, or 11. The compensation items specified in Sections 8, 9, or 11 shall be paid as follows: (a) the Salary shall be paid over the remaining Term or other period as described in Sections 8, 9 or 11 in accordance with the Company's normal payroll practices; -5-
(b) the current and future Annual Incentive and Long-Term Incentive awards and opportunities shall be paid within ninety (90) days after the end of the calendar year for which the incentive applied; and (c) the prior unvested Long-Term Incentive awards shall be paid within ninety (90) days after the termination of employment. 13. Execution of Release. As a condition of receiving the compensation and benefits described in Sections 9 or 11, the Executive shall first execute a release of any and all claims arising out of the Executive's employment with the Company or the Executive's separation from such employment (including, without limitation, claims relating to age, disability, sex or race discrimination to the extent permitted by law), excepting only claims arising out of the alleged breach of this Agreement or of any other written contract between the Executive and the Company. Such release shall be in a form reasonably satisfactory to the Company and shall comply with any applicable legislative or judicial requirements, including, but not limited to, the Older Workers Benefit Protection Act. An example of such release is attached as Attachment A. 14. Protection of the Company's Business. The Executive acknowledges that in the course of her employment she will acquire knowledge of trade secrets and confidential data of the Company. Such trade secrets and confidential data may include, but are not limited to, confidential product information, provider contracts, customer lists, technical information, methods by which the Company proposes to compete with its business competitors, strategic and business plans, confidential reports prepared by business consultants which may reveal strengths and weaknesses of the Company and its competition and similar information relating to the Company. The Executive, in order to perform her obligations under this Agreement, must necessarily acquire knowledge of such trade secrets and confidential data, all of which the Executive acknowledges are not known outside the business of the Company, are known only to a limited group of its top executives and directors, are protected by strict measure to preserve secrecy, are of great value to the Company, are the result of the expenditure of large sums of money, are difficult for an outsider to duplicate, and disclosure of which would be extremely detrimental to the Company. The Executive covenants to keep all such trade secrets or confidential data secret and not to release such information to persons not authorized by the Company to receive such secrets and data, both during the term of this Agreement and at all -6-
times following its termination. The Executive acknowledges that trade secrets and confidential data need not be expressly marked as such by the Company. 15. Documents, Etc. All records, files, documents, equipment and the like shall be, and remain, the sole property of the Company. The Executive, on the termination of her employment, shall immediately return to the Company all such items without retention of any copies. 16. Limited Non-Competition. During the Executive's employment and for a limited time thereafter, the Company must protect its legitimate business interests by limiting the Executive's ability to compete with the Company. This limited non-competition provision is drafted narrowly so as to be able to safeguard the Company's legitimate business interests while not unreasonably interfering with the Executive's ability to obtain other employment. The Company does not intend, and the Executive acknowledges, that this limited non-competition provision is not an attempt to prevent the Executive from obtaining other employment. The Executive further acknowledges that the Company may need to take action, including litigation, to enforce this limited non-competition provision, which efforts the parties stipulate shall not be deemed an attempt to prevent the Executive from obtaining other employment. (a) During Employment By Company. During the Executive's employment, Executive shall not, directly or indirectly, have any ownership interest in, work for, advise, manage, or act as an agent or consultant for, or have any business connection or business or employment relationship with any person or entity that competes with the Company or that contemplates competing with the Company without the prior written approval of the Chief Executive Officer. (b) During Post-Employment Period. For a period of one (1) year after the Executive's termination of employment (regardless of the reason), or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: (i)(A) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company -7-
operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (i)(B) directly or indirectly have any ownership interest in any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which she has been assigned responsibility at any time within the twenty-four (24) months preceding her termination; (ii)(A) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, in any jurisdiction in which the Company operates or in which the Company reasonably expects to operate pursuant to provisions of a strategic plan adopted by the Board of Directors; (ii)(B) in a competitive capacity, directly or indirectly work for, advise, manage, or act as an agent or consultant for or have any business connection or business or employment relationship with any entity or person engaged in development or sale of a product or service which competes with or is substantially similar to any product or service sold by the Company, within the geographical area in which the Executive has been performing services on behalf of the Company or for which the Executive has been assigned responsibility at any time within the twenty-four (24) months preceding her termination; (iii)(A) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially similar to any product or service sold by the Company, to any customer of the Company with whom the Executive has had contact (either directly or indirectly) or over which she has had responsibility at any time within the twenty-four (24) months preceding her termination; (iii)(B) directly or indirectly market, sell or otherwise provide any product or service which is competitive with or substantially -8-
similar to any product or service sold by the Company, to any customer of the Company; or (iv) directly or indirectly, on behalf of the Executive or any third party, make any business contacts with, solicit or accept business from any customer of the Company for any product or service which is competitive with or substantially similar to any product or service sold by the Company; (c) Separate and Several Covenants. The Executive acknowledges that after termination of her employment, she will inevitably possess trade secrets and confidential data of the Company which she would inevitably use if she were to engage in conduct prohibited as set forth above, and such use would be unfair to and extremely detrimental to the Company. The Executive further acknowledges that in view of the benefits provided her by this Agreement, such conduct on her part would be inequitable. Accordingly, the Executive separately and severally covenants for the benefit of the Company to keep each of the covenants described in this Section 16 for the period specified above. (d) Acknowledgment of the Company's Superseding Interest in Protecting its Business. The Executive recognizes that personal relationships between the Company, its employees and customers are essential to the Company's business operations and that the Company furthers such relationships by investments of time and money. The Executive recognizes that this Agreement is reasonably necessary to protect the Company's legitimate interest in its customers, and to protect the Company's confidential information and goodwill, and acknowledges that nothing contained in this Agreement shall unreasonably alter the Executive's ability to obtain a livelihood or preclude the Executive from engaging in her profession. The Executive, therefore, acknowledges that the Company's interest in maintaining its relationships with its established customers for at least one (1) year after termination of the Executive's employment, or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, supersedes any interest of the Executive in soliciting, servicing, or accepting the Company's customers on behalf of any entity other than the Company during that period of time. -9-
(e) Publicly Traded Stock. Nothing in the foregoing provisions of this section prohibits the Executive from purchasing for investment purposes only, any stock or corporate security traded or quoted on a national securities exchange or national market system. (f) Maximum Application. The parties expressly agree that the terms of this limited non-competition provision under this section are reasonable, enforceable, and necessary to protect the Company's interests, and are valid and enforceable. In the unlikely event, however, that a court of competent jurisdiction were to determine that any portion of this limited non-competition provision is unenforceable, then the parties agree that the remainder of the limited non-competition provision shall remain valid and enforceable to the maximum extent possible. 17. Other Limited Prohibitions. During the Executive's employment and for one (1) year after termination, or for the duration of the Executive's receipt of Salary under Section 11, whichever is longer, the Executive shall not: (a) request or advise any customer of the Company, or any person or entity having business dealings with the Company, to withdraw, curtail or cease such business with the Company; (b) disclose to any person or entity the identities of any customers of the Company, or the identity of any persons or entities having business dealings with the Company; or (c) directly or indirectly influence or attempt to influence any other employee of the Company to separate from the Company. 18. Specific Enforcement/Injunctive Relief. The Executive agrees that it would be difficult to measure damages to the Company from any breach of the covenants contained in Sections 14 through 17, but that such damages from any breach would be great, incalculable and irremediable, and that damages would be an inadequate remedy. Accordingly, the Executive agrees that the Company may have specific performance of the terms of this Agreement in any court permitted by this Agreement. In addition, if the Executive violates the non-competition provisions of Section 16 or 17, the Executive agrees that any period of such violation shall be added to the term of the non-competition. For example, -10-
if the Executive violates the provision for three (3) months, the Company shall be entitled to enforce the non-competition provision for one (1) year, or for the duration of the Executive's receipt of Salary under Section 11, plus three (3) months post-termination. In determining the period of any violation, the parties stipulate that in any calendar month in which the Executive engages in any activity violative of the non-competition provision, the Executive is deemed to have violated the non-competition provision for the entire month, and that month shall be added to the duration of the non-competition provision as set out above. The parties agree however, that specific performance and the "add back" remedies described above shall not be the exclusive remedies, and the Company may enforce any other remedy or remedies available to it either in law or in equity including, but not limited to, temporary, preliminary, and/or permanent injunctive relief. 19. Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions of this Agreement which shall be given effect independently of the invalid provisions and, in such circumstances, the invalid provision is severable. 20. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Indiana. The parties expressly agree that it is appropriate for Indiana law to apply to: (i) the interpretation of the Agreement; (ii) any disputes arising out of this Agreement; (iii) any disputes arising out of the employment relationship of the parties; and (iv) any and all other disputes between the parties. 21. Choice of Forum. The Company is based in Indiana, and the Executive understands and acknowledges the Company's desire and need to defend any litigation against it in Indiana. Accordingly, the parties agree that any claim of any type brought by the Executive against the Company or any of its employees or agents must be maintained only in a court sitting in Marion County, Indiana, or, if a federal court, the Southern District of Indiana, Indianapolis Division. The Executive further understands and acknowledges that in the event the Company initiates litigation against the Executive, the Company may need to prosecute such litigation in the Executive's forum state, in the State of Indiana, or in such other state where the Executive is subject to personal jurisdiction. Accordingly, the parties agree that the Company can pursue any claim against the -11-
Executive in any forum in which the Executive is subject to personal jurisdiction. The Executive specifically consents to personal jurisdiction in the State of Indiana. 22. Mandatory Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, other than a claim arising out of the Executive's breach of the confidentiality and non-competition provisions of Section 14 through 18, shall be settled by arbitration in Indianapolis, Indiana, in accordance with the Rules of the American Arbitration Association before arbitrators who are licensed to practice law. The arbitrator or arbitrators shall apply the substantive law of Indiana or federal law, or both, as applicable to the dispute. Any award entered shall be final, binding and nonappealable, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. In the event that the Company refuses or otherwise fails to make a payment when due and it is ultimately decided that the Executive is entitled to such payment, such payment shall be increased to reflect an interest equivalent for the period of delay, compounded annually, equal to the prime or base lending rate used by Bank One Indiana, NA, and in effect as of the date the payment was first due. 23. Non-Jury Trials. Notwithstanding the provisions of Sections 18 and 22 above, and if the provisions of Section 18 or 22 above are not enforceable, the Executive expressly waives any rights to a jury trial and agrees that any claim of any type made against the Company or its agents or executives (including, but not limited to, employment discrimination litigation, wage litigation, defamation, or any other claim) lodged in any court will be tried, if at all, without a jury. 24. Nonalienation of Benefits. Except as may otherwise be required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, bankruptcy or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 25. Legal Fees and Cost. All legal and other fees and expenses, including, without limitation, any arbitration expenses, incurred by the Executive in connection with contesting or disputing any termination of employment, in -12-
seeking to obtain or enforce any right or benefit provided for in this Agreement, or in otherwise pursuing any right or claim, shall be paid by the Company, to the extent permitted by law, provided that the Executive makes a formal written settlement demand prior to trial or arbitration and is ultimately successful, in obtaining through trial or arbitration more than fifty percent (50%) of the monetary relief sought, in her final written settlement demand exclusive of attorney's fees. 26. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and will be deemed to have been given when delivered in person (to the Executive if such notice is for the Executive) or five (5) days following sending by overnight courier or mailing by first class, certified or registered mail, postage prepaid, to the Executive at her home address, or such addresses as the Executive shall have designated in writing, or if to the Company, to the attention of the Corporate Secretary, at the Company's principal place of business, 120 Monument Circle, Indianapolis, Indiana 46204. 27. Headings. The various headings of this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any of its provisions. 28. Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to its benefit, its successors and affiliated companies and shall be binding upon the successors and assigns of the Company. This Agreement, being personal to the Executive, cannot be assigned by the Executive, but her personal representative shall be bound by all its terms and conditions. 29. Waiver and Amendments, Etc. Failure of the Company to insist upon strict compliance with any terms or provisions of this Agreement shall not be deemed a waiver of any terms, provisions or rights of the Company. Moreover, no modifications, amendments, extensions or waivers of this Agreement or any provisions hereof shall be binding upon the Company or the Executive unless in writing and signed by the Executive and the Company. 30. Complete Agreement. This Agreement constitutes the entire employment agreement of the parties and supersedes all prior employment agreements addressing the terms, conditions, and issues contained herein. Nothing -13-
in this Agreement, however, affects any separate written agreements addressing other terms and conditions and issues agreed to by the parties. 31. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Company and the Executive have duly executed and delivered this Agreement effective as of the day and year first above written. Jane Niederberger /s/ Jane Niederberger ------------------------------------- Anthem Insurance Companies, Inc. By: /s/ L. Ben Lytle ---------------------------------- Name: L. Ben Lytle -------------------------------- Title: Chairman, President & CEO ------------------------------- -14-
ATTACHMENT A RELEASE AND WAIVER AGREEMENT This Release and Waiver Agreement ("Agreement") is entered into on this __ day of __________, ____, by and between Anthem Insurance Companies, Inc., including its subsidiaries and affiliates (the "Company") and Jane Niederberger (the "Executive"). NOW, THEREFORE, the parties agree to the following: 1. The Executive and the Company acknowledge and agree that the Executive's last day of employment with the Company or one of its affiliates shall be ___________________. Service credit for purposes of all Company benefits, including but not limited to the Anthem Cash Balance Pension Plan, will terminate as of that date. 2. The Company agrees that it will pay to the Executive the amounts described in Section [9 or 11] of the Employment Agreement between the Company and the Executive effective ______________ ("Employment Agreement"). All payments made pursuant to Section [9 or 11] of the Employment Agreement shall be made pursuant to Section 12 of the Employment Agreement. The Executive will also be entitled to any benefits described in Section [9 or 11] of the Employment Agreement for the duration noted therein. 3. Any and all benefits not specifically discussed in this Agreement or provided by law will cease on [termination date from paragraph 1]. ----------------------------------- 4. The provisions of the Employment Agreement relating to Protection of the Company's Business, Documents, Limited Non-Competition, Other Limited Prohibitions, and Specific Enforcement (Sections 14, 15, 16, 17, and 18) shall remain in full force and effect upon termination of employment. The Executive acknowledges that she possesses trade secrets and confidential data of the Company and further acknowledges that the provisions of Sections 14 through 18 of the Employment Agreement are reasonably necessary to protect the Company's legitimate business interests, confidential data, and goodwill. 5. The Executive hereby forever releases and waives as against the Company, its subsidiaries and affiliates, and each of their directors, officers, employees and agents, any and all legal and equitable causes of action and claims which the Executive possesses, whether known or unknown, including, but not limited to, any such causes of action and claims relating to the Employee's employment with, or termination of employment from, the Company or any of its affiliates, including any and all rights, entitlements or claims under any and all federal, state and local laws and regulations, all as amended, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991 and the Americans with Disabilities Act of 1990. The Executive further expressly and specifically waives any and all rights and claims under the Age Discrimination in Employment Act of 1967 and the Older Workers' Benefit Protection Act (collectively referred to as the "Act"). The Executive acknowledges and agrees that this waiver of any right or claim under the Act (hereinafter "Waiver") is
Page 2 knowing and voluntary, and specifically agrees as follows: that this Waiver is written in a manner which she understands; that this Waiver specifically relates to rights or claims under the Act; that she does not waive any rights or claims under the Act that may arise after the date of execution of this Agreement; that she waives rights or claims under the Act in exchange for consideration in addition to anything of value to which she already is entitled; and that she has been advised in writing to consult with an attorney prior to executing it. The Executive acknowledges that she understands that she has twenty-one (21) days after receipt of this Agreement to decide whether to accept it and that she may revoke any acceptance of this Agreement within seven (7) days of such acceptance. This Agreement shall not become effective until the seven (7)-day revocation period has expired and no amounts will be paid to the Executive until the seven (7)-day revocation period has expired. 6. It is understood and agreed between the Executive and the Company that this Agreement shall in no way affect any claims of the Executive arising out of Social Security, Worker's Compensation, or Unemployment Laws. 7. The Company and the Executive agree that any breach of the terms of this Agreement may, at the Company's discretion, result in the immediate termination of any subsequent payments to be made under this Agreement. In the event of a breach of this Agreement or any dispute regarding this Agreement, the provisions of the Employment Agreement relating to Specific Enforcement, Governing Law, Choice of Forum, Mandatory Arbitration, Non-Jury Trials, and Legal Fees and Costs (Sections 18, 20, 21, 22, 23, and 25) shall remain in full force and effect. 8. The Executive expressly agrees that the consideration designated in this Agreement is sufficient for the terms of this Agreement. The Executive further agrees that upon the execution of this Agreement she will keep confidential and not disclose the existence or terms of this Agreement unless compelled to do so by a court or administrative body. 9. The rights and obligations hereunder shall not be assigned or transferred by the Executive and shall be binding upon and inure to the benefit of the Executive, her heirs, legatees and legal representatives, and the Company, its subsidiaries and affiliates, successors and assigns. No waiver of any breach of this Agreement shall be deemed or construed as a waiver of any other or subsequent breach. Any amendment of this Agreement shall be effective only if in writing and signed by both parties. If any provision of this Agreement shall be held invalid under applicable laws, such provision shall be ineffective only to the extent of any invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements, whether oral or written, between the parties. The terms of this Agreement shall be governed by Indiana law. The parties represent that they have read and understood this Agreement, and the officer executing this document on behalf of the Company represents that he has the authority to do so. 10. This Agreement shall not be effective or enforceable against the Company until the seven (7)-day revocation period has expired or if the Executive revokes it not later than
seven (7) days after she signs it. This revocation must be in writing and must be personally delivered, or sent by certified mail to: Corporate Secretary Anthem, Inc. 120 Monument Circle Indianapolis, Indiana 46204 11. The Executive expressly acknowledges that she understands all of the provisions of this Agreement and is voluntarily entering into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement. Jane Niederberger Anthem Insurance Companies, Inc. _____________________________ By:_______________________________ Printed:__________________________ Title:____________________________
EXHIBIT 10.12(ii) AMENDMENT ONE ------------- TO -- EMPLOYMENT AGREEMENT -------------------- This AMENDMENT ONE TO EMPLOYMENT AGREEMENT by and between Anthem Insurance Companies, Inc., an Indiana mutual insurance company (the "Company") and Jane E. Niederberger (the "Executive") hereby amends the EMPLOYMENT AGREEMENT (the "Agreement") between the parties dated as of the 22nd day of February, 1999, as follows: 1. Effective January 1, 2000, Section 2 of the Agreement is hereby amended by deleting the termination date and inserting in place thereof the 31st day of December, 2002. 2. All other provision of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Company and the Executive have duly executed this AMENDMENT ONE TO EMPLOYMENT AGREEMENT effective as of the day and year first above written. Jane E. Niederberger Anthem Insurance Companies, Inc. /s/ Jane E. Niederberger By: /s/ Larry C. Glasscock - --------------------------- ---------------------------- Name: Larry C. Glasscock Title: President and CEO
EXHIBIT 10.13 Mr. L. Ben Lytle Grandview Lake 3741 Poplar Drive Columbus, IN 47201 Re: Anthem Insurance Companies, Inc. - L. Ben Lytle Approved Retirement Consulting Arrangement Dear Ben: When you retired from Anthem Insurance Companies, Inc. ("Anthem") effective April 1, 1999, pursuant to an Approved Retirement, the Compensation Committee of the Board of Directors approval payments to you if you agreed to be available for consultation at mutually agreed upon times, up to a maximum of eight (8) days each quarter of the year until December 31, 2002. Since you agreed to make yourself so available, Anthem has paid and is obligated to continue to pay you $400,000 annually for your consultation services through December 31, 2002. In addition, the Compensation Committee approved that in any quarter in which Anthem has requested you to provide more than eight (8) days of consultation, Anthem will pay you $500 per hour, up to a maximum of $5,000 per day. Sincerely, /s/ David R. Frick David R. Frick /jrs
Exhibit 10.14(i) ANTHEM DEFERRED COMPENSATION PLAN ARTICLE I. INTRODUCTION. The Anthem Deferred Compensation Plan (the "Plan") is maintained to provide a means for the payment of deferred compensation to a select group of key senior management or highly compensated employees of the Company and certain of its subsidiaries, as hereinafter defined, in recognition of their substantial contributions to the operation of the Company, and to provide those employees with an opportunity for additional financial security as an inducement to them to remain in the employment of the Company. The Plan is a successor plan to The Associated Group Financial Security Program Deferred Compensation Plan (the "Prior Plan"). Effective January 1, 1994, Deferral Accounts of participants in the Prior Plan (as defined therein) were transferred by the Company to The Associated Group Deferred Compensation Plan. Employees had no right to elect to receive or further defer their Deferral Accounts in connection with the transfer. Effective July 1, 1996, the name of the Plan was changed from The Associated Group Deferred Compensation Plan to the Anthem Deferred Compensation Plan. Effective January 1, 1997, the Plan is amended and restated in its entirety. ARTICLE II. DEFINITIONS AND RULES OF CONSTRUCTION. 2.1 Definitions. The following words and phrases, when capitalized, have the following meanings: (a) "Annual Base Salary" means, with respect to a Participant for a Plan Year, the Participant's regular recurring wages and salary, and vacation or paid time off pay received from the Company; provided, however, that "Annual Base Salary" shall not, for purposes of this Plan, include the regular base salary and bonus, if any, for a Plan Year, of a Participant whose compensation is determined, estimated or measured based exclusively on the production of the Participant, whether measured in fees for services performed, number of managed care patients, or other production units. "Annual Base Salary" does not include compensation paid in lieu of vacation or paid time off; overtime payments; bonuses; severance pay; Incentive Compensation; Commission Earnings; Defined Contribution Plan, Pension Plan, or other plan contributions or benefits paid by the Employer; retainers; insurance premiums or benefits; or direct reimbursements; but shall include amounts deferred under Code section 125 or 401(k) plans. (b) "Automatic Lump Sum Cashout Amount" means the amount set forth in Appendix B hereto.
(c) "Before-Tax Matched Contribution" means the salary deferral contribution a Participant may make to the Defined Contribution Plan in which the Participant participates for which an allocation of an employer contribution, if any, would be made on a matching basis. (d) "Beneficiary" is defined in Section 6.8. (e) "Board" means the Board of Directors of Anthem Insurance Companies, Inc. (f) "Code" means the Internal Revenue Code of 1986, as amended. (g) "Commission Earnings" means commission compensation based on the sale of products or services. (h) "Committee" means the Anthem Pension Committee, or such other committee as shall be designated by the Board. (i) "Company" means Anthem Insurance Companies, Inc. and any affiliated company whose Board of Directors shall elect to participate in the Plan, provided that such participation must be approved by the Committee. A list of such participating companies is attached hereto as Exhibit A. (j) "Declared Rate" means (i) prior to January 1, 1996, the 120-month rolling average rate of United States Treasury Notes determined as of the month of September of the preceding Plan Year and shall be based on the monthly average rates for the 120 months ending with that September 30, and (ii) effective on and after January 1, 1996, the average of the monthly average rates of the 10-year United States Treasury Note for the 12 months ending on September 30 of the preceding Plan Year plus 150 basis points. The Committee reserves the right, in its sole discretion, to change the method of determining or to increase or decrease the interest rate which is credited to Participants' accounts, but the interest rate shall not be decreased for periods prior to such action. (k) "Deferral Account" means the bookkeeping account pursuant to which each Participant's interest under this Plan and, if applicable, under the Prior Plan, is determined. (l) "Defined Contribution Plan" means the Anthem 401(k) Long Term Savings Investment Plan, as amended from time to time, and any other qualified defined contribution plan of the Company designated by the Committee in which the Participant is a participant. (m) "Direct Cash Compensation" means, with respect to a Participant for a Plan Year, the sum of (1) the Participant's Annual Base Salary and (2) the Participant's 2
Incentive Compensation and (3) the Participant's Commission Earnings, including any part of his compensation that he elects to defer under this Plan. Direct Cash Compensation shall not include any amounts payable under the Company's long-term incentive plan or similar items. (n) "Disability" has the same meaning as set forth in the Defined Contribution Plan. (o) "Distribution Date" shall mean the date elected by the Participant in accordance with Section 6.5. (p) "Eligible Employee" means a full-time or part-time key management or other highly compensated Employee of the Company who is selected by the Committee as an individual who has the opportunity to impact significantly the annual operating success of the Company. A non-resident alien who receives no income from sources within the United States shall not be deemed to be an Eligible Employee. Any Employee who is included in a unit of employees covered by a negotiated collective bargaining agreement where there exists evidences that retirement benefits were the subject of good faith bargaining, shall not be deemed to be an Eligible Employee, unless the agreement provides for participation in the Plan. (q) "Employee" means a person employed by the Company on a salaried basis, commission basis, or salary plus commission basis. (r) "Enrollment Agreement" means the agreement between an Eligible Employee and the Company pursuant to Section 3.1. (s) "ERISA" means the Employment Retirement Income Security Act of 1974, as amended. (t) "Incentive Compensation" means, with respect to a Participant, the compensation that is awarded to the Participant under the Incentive Plan. "Incentive Compensation" shall not include any compensation payable under the Incentive Plan in a form other than cash. Commission Earnings are not considered "Incentive Compensation." (u) "Incentive Deferral Participant" means a Participant who is designated by the Committee individually or as a member of a group permitted to elect an Incentive Deferral Option. (v) "Incentive Plan" means the Anthem Annual Incentive Plan, as amended from time to time, and any other bonus or incentive compensation plans, programs or other arrangements sponsored by the Company from time to time and determined by the Committee to be an annual "Incentive Plan" for purposes of the Plan. 3
(w) "Participant" means an Eligible Employee who has executed an Enrollment Agreement in accordance with Section 3.1. (x) "Pension Plan" means the Anthem Cash Balance Pension Plan, as amended from time to time, or such other qualified defined benefit pension plan of the Company designated by the Committee in which the Participant is a participant. (y) "Plan Year" means the calendar year. (z) "Retirement" means termination of a Participant's employment, for any reason other than death, on or after the date the Participant attains age 55 or, effective December 1, 1995, pursuant to the Early Retirement Program announced August 18, 1995. (aa) "Termination of Employment" means termination from employment with the Company and all affiliates of the Company. 2.2 Rules of Construction. The following rules of construction shall govern in interpreting the Plan: (a) The provisions of this Plan shall be construed and governed in all respects under and by the internal laws of the State of Indiana, to the extent not preempted by federal law. (b) Words used in the masculine gender shall be construed to include the feminine gender, where appropriate. (c) Words used in the singular shall be construed to include the plural, where appropriate, and vice versa. (d) The headings and subheadings in the Plan are inserted for convenience of reference only and are not to be considered in the construction of any provision of the Plan. (e) If any provision of the Plan shall be held to be illegal or invalid for any reason, that provision shall be deemed to be null and void, but the invalidation of that provision shall not otherwise impair or affect the Plan. (f) The Plan shall be construed and interpreted as an unfunded plan for purposes of the Code, and with respect to the Defined Contribution Restoration Option, an unfunded excess benefit Plan within the meaning of ERISA section 3(36), and with respect to the Plan as a whole, an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of ERISA section 201(2). 4
ARTICLE III. DEFERRAL OF COMPENSATION. 3.1 Election to Participate. (a) General. Before the beginning of each Plan Year, the Committee shall provide each Eligible Employee with a procedure to enroll in the Plan. Such procedure may be either a written form, electronic/computer response system, or telephonic response system, all of which shall be referred to herein as the Enrollment Agreement. An Eligible Employee may enroll in the Plan by filing or submitting a completed Enrollment Agreement with the Committee within the time prescribed by the Committee and prior to the first day of the Plan Year. On the Enrollment Agreement, the Eligible Employee shall indicate his election of the deferral options described in Section 3.2 (other than 3.2(c)) and designate the amounts by which his aggregate cash compensation will be reduced under each elected deferral option for the Plan Year. An election made in accordance with this Section shall be effective as of the first day of the Plan Year, shall be irrevocable, and shall cease to be effective after the last day of the Plan Year. In addition, the Committee, in its sole discretion, may permit new Eligible Employees to enroll in the Plan during a Plan Year and make irrevocable prospective elections to defer a portion of their cash compensation earned during the period within the Plan Year following the date of his election. (b) Incentive Deferral Option Election. A separate enrollment procedure may be adopted by the Committee with respect to elections to defer Incentive Compensation. An election made in accordance with this Section 3.1(b) shall be made prior to the date the Incentive Compensation is earned, determined or paid, shall be effective when made and shall be irrevocable. (c) Extraordinary Events. From time to time, the Company may determine to pay some or all Incentive Compensation in the Plan Year during which the services to which the Incentive Compensation relates are performed. In such an event, the Committee may, but is not required to, permit a special Enrollment procedure, which shall permit an Eligible Employee to make an election of his deferral option with respect to the Incentive Compensation, provided, however, that the election shall be made prior to the time the Incentive Compensation is constructively or actually received. 3.2 Deferral Options. An Eligible Employee may elect to defer a portion of his cash compensation for the Plan Year under one or more of the following deferral options: (a) Defined Contribution Restoration Option. Under this option, a Participant may elect to defer a portion of his Direct Cash Compensation for the Plan Year, up to an amount equal to the difference between (1) the highest maximum allowable percent of compensation that non-highly compensated participants are allowed to defer as a Before-Tax Matched Contribution under the Defined Contribution Plan for that Plan Year multiplied by his Direct Cash Compensation and (2) the maximum amount of Before-Tax Matched Contributions that the Participant is permitted to make to the Defined 5
Contribution Plan for that Plan Year due to the limitations imposed on his deferrals by the annual deferral percentage test of Code paragraph 401(k)(3), the compensation limitations of Code paragraph 401(a)(17), and the maximum deferral limitations of Code paragraph 402(g)(1). A Participant may not elect to defer a portion of his Direct Cash Compensation under this option until the Participant has satisfied any applicable requirements for participation in the Defined Contribution Plan in which he is eligible to participate and has elected to make the maximum allowable Before-Tax Matched Contribution under the Defined Contribution Plan for the Plan Year. (b) Supplemental Contribution Option. Under this option, a Participant may elect to defer a percentage of his Annual Base Salary. Any deferrals made under the Defined Contribution Restoration and Supplemental Contribution Options shall not exceed 100% of Annual Base Salary through May 31, 1997. As of June 1, 1997, deferrals made pursuant to the Supplemental Contribution Option shall not exceed 80% of Annual Base Salary. (c) Incentive Deferral Option. Under this option, an Incentive Deferral Participant may elect to defer, through October 14, 1997, up to 100% of his Incentive Compensation and, as of October 15, 1997, up to 80% of his Incentive Compensation. (d) Special Payment Deferral. Under this option, a Participant may elect to defer all or a portion of other types of compensation (such as payments related to an acquisition); provided, however, that no election to defer may be made with respect to such payments if the plan, program or arrangement would have permitted the participant to defer receipt of the payment. These elections must be pre-approved by the Committee. 3.3 Crediting of Deferred Amounts. All the amounts deferred by a Participant shall be credited to his Deferral Account on the same date as those amounts would otherwise have been paid to the Participant or credited to his accounts under the Defined Contribution Plan. 3.4 Suspension or Cessation of Deferrals. With the written consent of the Committee, a Participant may suspend deferrals due to an unforeseeable financial emergency, as that term is defined in Section 6.6. Suspension or cessation of deferrals shall in no way affect a Participant's rights or benefits with respect to amounts already deferred under the Plan. A suspended participant may not recommence deferrals until the Plan Year beginning at least twelve (12) months after the suspension. 3.5 Disability. If a Participant suffers a Disability, deferrals and matching contributions that otherwise would have been credited to the Participant's Deferral Account under this Plan shall cease as of the date of Disability. The Participant's Deferral Account will continue to earn interest under Section 5.2 during the period of Disability. 6
3.6 Ineligible Employees. Any Participant who ceases to be an Eligible Employee but has not incurred a Termination of Employment shall cease to be eligible to make deferrals under Article III or to be credited with employer contributions under Article IV, but he shall continue to have a Deferral Account and to be credited with interest on his Deferral Account under Section 5.2 and shall be entitled to receive benefits under Article VI. ARTICLE IV. EMPLOYER CREDIT. 4.1 Restorative and Incentive Deferral Matching Credit. Effective for Plan Years beginning on or after January 1, 1994, the Company shall credit a Participant with a contribution for each Plan Year equal to the amount deferred by the Participant pursuant to Sections 3.2(a) and 3.2(c) multiplied by the rate of Company matching contributions provided under the Defined Contribution Plan in which the Participant participates during such Plan Year. The Company's Restorative Matching Credit shall be credited to the Participant's Deferral Account on the same date as matching contributions are credited to Participant's accounts under the Defined Contribution Plan in which the Participant participates, and interest will be credited as earned from the date credited. 4.2 Defined Contribution Augmentation Credit. Effective for Plan Years beginning on or after January 1, 1994, if a Participant has made the maximum allowable Before-Tax Matched Contribution to the Defined Contribution Plan in which the Participant participates during a Plan Year, the Company shall credit such Participant's Deferral Account for such Plan Year, provided the Participant is employed on the last day of the Plan Year, with an amount equal to: (a) Participant's Direct Cash Compensation for such Plan Year, multiplied by (b) the maximum salary deferral percentage of Before-Tax Matched Contribution a non-highly compensated employee participating in the Defined Contribution Plan in which the Participant participates may make to such Plan for the Plan Year, multiplied by (c) the rate of Company matching contribution provided for under the Defined Contribution Plan in which the Participant participates during the Plan Year, minus (d) the amount of matching contribution the Participant was credited under the Defined Contribution Plan in which the Participant participates for such Plan Year (without adjustment for earnings or losses thereon), minus (e) the Matching Credit the Participant is credited with for such Plan Year under Section 4.1 hereof (before interest credits). This credit will be made annually as soon as administratively feasible after the end of the Plan Year, and interest will be credited as earned from the first day of the then-current Plan Year. 4.3 Prior Year. For Plan Years ending prior to January 1, 1994, the Company's obligations to credit contributions shall be as determined under the Prior Plan. ARTICLE V. PARTICIPANTS' ACCOUNTS. 5.1 Participants' Accounts. The Committee shall create and maintain adequate records to disclose the interest in the Plan of each Participant and Beneficiary. Records 7
shall be in the form of individual bookkeeping accounts, and credits and charges shall be made to those accounts pursuant to Articles III and IV and the following provisions of Article V. Each Participant shall have a separate Deferral Account. The Participant's interest in his Deferral Account shall at all times be fully vested. 5.2 Interest on Accounts. Each Participant's Deferral Account shall be credited with interest as provided in this Section 5.2. (a) Disability/Retirement/Survivor Interest. The Deferral Account of a Participant who has a Disability, attains Retirement or dies while an Employee shall be deemed to bear interest from the date it was established through the end of the quarter ending prior to the date distribution begins at a rate equal to 125% of the Declared Rate for each Plan Year. Interest will be credited in the manner determined by the Committee from time to time in its sole discretion. (b) Other Interest. The Deferral Account of a Participant who terminates employment with the Company other than by reason of Retirement or death shall be deemed to bear interest from the date it was established to the end of the quarter ending prior to the date distribution begins at the Declared Rate for each Plan Year. Interest will be credited in the manner determined by the Committee from time to time in its sole discretion. (c) Crediting of Interest. The Deferral Account of a Participant shall be credited with interest determined in accordance with (b) above unless and until such time as (a) applies, at which time interest shall be redetermined. In the event of Termination of Employment, interest shall be credited through the end of the calendar quarter in which termination occurs. 5.3 Valuation of Accounts. The value of a Participant's Deferral Account as of any date shall equal the dollar amount of any deferrals and employer contributions credited to the Deferral Account, increased by the interest credited to the Deferral Account in accordance with Section 5.2 through the immediately preceding crediting date, and decreased by the amount of any payments made from the Deferral Account to the Participant or his Beneficiary since the immediately preceding crediting date. 5.4 Annual Report. Within a reasonable time following the end of each Plan Year, the Committee shall provide to each Participant a written statement of the amount standing to his credit in the Deferral Account as of the end of that Plan Year. ARTICLE VI. PAYMENT OF DEFERRED COMPENSATION. 6.1 Payments Upon Retirement. 8
(a) General Rule. Except as provided in Section 6.7 or 6.1(b), upon Retirement a Participant's Deferral Account (including any deferrals pursuant to Section 3.2(c) hereof) shall be distributed to him in ten (10) substantially equal annual installments, the sum of which shall equal the value of the Participant's Deferral Account as of the date of his Retirement plus the interest on the unpaid balance of the Deferral Account, at the rate set forth in Section 5.2(a) as of the end of the quarter prior to the date distribution begins, during the payout period. The first annual installment shall be paid at the end of the month following the calendar quarter in which the Participant's Retirement Date occurs. Subsequent annual installments shall be paid on each anniversary of the initial payment until the full amount has been paid. (b) Retirement Payout Alternative Election. In lieu of the ten (10) year payment in 6.1(a) above, a Participant may elect a single lump sum payment or a payout period of five (5) years (for elections made prior to January 1, 1995, a Participant may elect payout periods of three (3) years, five (5) years, or fifteen (15) years). Elections must be made within three months of initial entry in the Plan and are irrevocable; provided, however, that no later than one year prior to the date distribution is to commence, a Participant may modify his election. Installments and account balances shall be determined as set forth in Section 6.1(a). (c) Effect of Recommencement of Employment. Should the Participant re-commence employment with the Company, (a) payment of benefits under the Plan shall be suspended and (b) the Participant shall be eligible to begin participation in the Plan as of January 1 coincident with or next following the date his employment re-commenced (provided that the Participant is then an Eligible Employee). 6.2 Payments upon Disability. If a Participant's Disability continues without interruption for a full calendar quarter beyond the date deferrals and contributions cease pursuant to Section 3.5, the Participant shall be treated for purposes of this Plan as if he had Retired and, except as provided in Section 6.7, his Deferral Account shall be distributed pursuant to Section 6.1 as if he had retired on the last day of such full calendar quarter. Should the Participant recover from such Disability and re-commence employment with the Company, (a) payment of benefits under the Plan shall be suspended and (b) the Participant shall be eligible to begin participation in the Plan as of the January 1 coincident with or not following the date his employment re-commenced (provided the Participant is then an Eligible Employee). 6.3 Payments upon Termination. (a) General Rule. Except as provided in Section 6.7 or in Section 6.3(b), in the event of a Participant's Termination of Employment for any reason other than death, Disability, or Retirement, a Participant's Deferral Account (including any deferrals pursuant to Section 3.2(c) hereof) shall be distributed as provided to him in five (5) substantially equal annual installments, the sum of which shall equal the value of the Participant's Deferral Account as of the date of his Termination of Employment plus the 9
interest on the unpaid balance of the Deferral Account, at the rate set forth in Section 5.2(b) as of the end of the quarter prior to the date distribution begins, during the payout period. The first annual installment shall be paid at the end of the month following the calendar quarter in which the Participant's Termination of Employment date occurs. Subsequent annual installments shall be paid on each anniversary date of the initial payment until the full amount has been paid. (b) Termination Payout Alternative Election. In lieu of the period set forth in 6.3(a) above, a Participant may elect to have his account balance distributed in a single lump sum. The election must be made at least within three (3) months of initial entry into the Plan and is irrevocable; provided, however, that at least one year prior to the date of Termination of Employment a Participant may modify his election (c) Effect of Recommencement of Employment. Should the Participant re-commence employment with the Company, (a) payment of benefits under the Plan shall be suspended and (b) the Participant shall be eligible to begin participation in the Plan as of the January 1 coincident with or next following the date his employment re-commenced (provided the Participant is then an Eligible Employee). 6.4 Payments Upon Death. If a Participant dies, his remaining Deferral Account shall be distributed as provided in this Section. (a) Death Prior to Distribution Commencement. If a Participant dies before distribution of his Deferral Account has begun, the value of his Deferral Account, determined as of the last day of the calendar quarter following the date of his death, shall be distributed to his Beneficiary in a single lump sum payment as soon as practicable after the end of the calendar quarter in which the Participant's death occurs. The value of the Participant's Deferral Account shall be also be determined as of the date of his death, for estate tax purposes. (b) Death After Distribution Commencement. If a Participant dies after distribution of his Deferral Account has begun, his remaining Deferral Account, if any, shall be distributed to his Beneficiary under the method and at the time of distribution in effect as of the date of the Participant's death. 6.5 Alternative Payment for Incentive Deferrals. Subject to approval of the Committee, at the time a Participant files an Enrollment Agreement with the Committee, he may irrevocably specify on that Enrollment Agreement the time of distribution of any Incentive Compensation deferred under that Agreement pursuant to Section 3.2(c) of the Plan. Payments shall be made as soon as practicable following the Distribution Date, unless the account has been distributed earlier pursuant to Sections 6.1-6.4 hereof. A Participant may not elect distribution of his deferred Incentive Compensation to begin earlier than one year after the year of his deferral election. 10
6.6 Payments upon Financial Emergency. A Participant or Beneficiary, upon written application to and consent of the Committee and after all loans available under the Defined Contribution Plan have been made, may withdraw some or all of the balance of his Deferral Account if the Committee, in its sole discretion, determines that the requested withdrawal is on account of an unforeseeable financial emergency and that the amount to be withdrawn does not exceed the amount necessary to satisfy the financial emergency. Withdrawals under this Section shall not be permitted to the extent that the financial emergency may reasonably be relieved through (a) reimbursement or compensation by insurance or otherwise, (b) liquidation of the Participant's or Beneficiary's assets (to the extent liquidation would not in itself cause a financial hardship) or (c) suspension or cessation of deferrals under the Plan pursuant to Section 3.4. For purposes of this Section, an "unforeseeable financial emergency" means an immediate and heavy financial need of the Participant or Beneficiary which satisfies or would have satisfied the requirements established for hardship withdrawals under the Defined Contribution Plan applicable to the Participant. In the event of a withdrawal from this Plan and the Defined Contribution Plan is available to the Participant due to an unforeseeable financial emergency, such withdrawal shall first be made from this Plan. A Participant who makes a withdrawal under this section must suspend deferrals pursuant to Section 3.4. 6.7 Automatic Lump Sum Cashout Payment. Notwithstanding any other provision of this Plan, if the remaining value of a Participant's Deferral Account upon Retirement, Disability, Termination of Employment, or death does not exceed the applicable Automatic Lump Sum Cashout Amount (as defined in Appendix B), the balance of his Deferral Account shall be distributed in the form of a single lump sum payment to the Participant or his Beneficiary. 6.8 Beneficiary. A Participant's "Beneficiary" shall be the person or persons, including a trustee, designated in writing by the Participant pursuant to practices of, or rules prescribed by, the Committee, as the recipient of a benefit payable under the Plan following the Participant's death. To be effective, a Beneficiary designation must be filed with the Committee on a form prescribed by the Committee. The last such beneficiary designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof shall be effective unless received by the Committee prior to the Participant's death and in no event shall it be effective as of a date prior to such receipt. If a proper designation is not on record with the Committee, the Participant's Beneficiary shall be the Participant's spouse or, if there is no spouse, the Beneficiary shall be the Participant's estate. ARTICLE VII. ADMINISTRATION. 7.1 Administrator. The Anthem Pension Committee, or such other Committee as shall be designated by the Board, shall be the administrator of the Plan. The Committee shall hold membership at the pleasure of the Board and shall consist of the number of members that is specified from time to time by the Board. 11
7.2 Notices. Any notice or filing required or permitted to be given to the Committee or Company under the Plan shall be sufficient if it is in writing and hand delivered, or sent by registered or certified mail, to the Company at the principal office of the Company. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 7.3 Powers and Duties of the Committee. Subject to the specific limitations stated in this Plan, the Committee shall have the following powers, duties, and responsibilities: (a) to carry out the general administration of the Plan; (b) to cause to be prepared all forms necessary or appropriate for the administration of the Plan: (c) to keep appropriate books and records; (d) to determine amounts to be disbursed to Participants and others under the provisions of the Plan; (e) to determine, consistent with the provisions of this instrument, all questions of eligibility, rights, and status of Participants and others under the Plan; (f) to exercise all other powers and duties specifically conferred upon the Committee elsewhere in this instrument; (g) to interpret, in its full discretion, the terms of the Plan and the benefits payable pursuant to it and to resolve, in its full discretion, all disputed questions of Plan interpretation and benefit eligibility. All decisions of the Committee shall be by vote of a majority of its members and shall be final and binding; and (h) to delegate all or a part of its powers, duties or responsibilities to other persons or entities, in its discretion. 7.4 Appeals to Committee. (a) General. Eligible Employees may request that the Committee review a decision of the Committee (other than a determination of whether an Employee is an Eligible Employee) by filing an appeal in writing with the Committee pursuant to such procedures as the Committee may establish. The Committee may set a time limit for such appeals. Each appeal shall be filed individually by the Eligible Employee on his own behalf. Appeals shall be reviewed by the Committee in the ordinary course of conduct of the Committee's business. Any adjustments shall be made prospectively. 12
(b) Enrollment. In the case of appeals relating to failure to enroll in the Plan or errors in enrollment, the appeal must be received by the Committee no later than January 31 of the year with respect to which enrollment is appealed. If upon review of the appeal, the Committee determines that an adjustment is required, the adjustment will be made prospectively beginning with the first payroll cycle beginning on or after the thirtieth (30th) day following the Committee's determination. ARTICLE VIII. AMENDMENT AND TERMINATION. 8.1 Amendment. The Board reserves the right to amend the Plan at any time by written instrument, with written notice given to each Participant in the Plan. No amendment shall reduce any account balances credited prior to the date of the amendment. 8.2 Termination. The Board reserves the right to terminate the Plan at any time as it deems appropriate. Upon termination of the Plan, no further deferrals or credits shall be made to the Plan. The value of a Participant's Deferral Account shall be determined as of the date of the Plan's termination. Distributions shall be made at the time and under the terms and conditions as the Company, in its sole discretion, shall determine, but shall commence no later than the earlier of a Participant's Retirement, death, Disability, Termination of Employment or Distribution Date. ARTICLE IX. MISCELLANEOUS. 9.1 Relationship. Notwithstanding any other provision of this Plan, this Plan and action taken pursuant to it shall not be deemed or construed to establish a trust or fiduciary relationship of any kind between or among the Company, Participants, Beneficiaries, or any other persons. The Plan is intended to be unfunded for purposes of the Code and ERISA. The right of Participants and Beneficiaries to receive payment of deferred compensation is strictly a contractual right to payment, and this Plan does not grant nor shall it be deemed to grant Participants, Beneficiaries, or any other person any interest in or right to any of the funds, property, or assets of the Company other than as an unsecured general creditor of the Company. 9.2 Other Benefits and Plans. Nothing in this Plan shall be deemed to prevent Participants from receiving, in addition to the deferred compensation provided for under this Plan, any funds that may be distributable to them at any time under any other present or future retirement or incentive plan of the Company, other than as a result of excluding deferred amounts under the terms of a qualified retirement plan of the Company. 9.3 Anticipation of Benefits. Neither Participants nor Beneficiaries shall have the power, except by will or the law of descent and distribution, to transfer, assign, anticipate, pledge, alienate, or otherwise encumber in advance any of the payments that may become due under this Plan, and any attempt to do so shall be void. Any payments that may become due under this Plan shall not be subject to attachment, garnishment, or execution 13
or be transferable by operation of law in the event of bankruptcy or insolvency of a Participant. 9.4 Obligations to Company. If a Participant becomes entitled to a distribution of deferred compensation under the Plan, and if at that time the Participant has outstanding any debt, obligation, or other liability representing an amount owing to the Company, then the Committee may determine in its sole discretion to offset the amount owing to the Company against the distribution. 9.5 Employment Not Guaranteed. Nothing contained in this Plan nor any action taken under the Plan shall be construed as a contract of employment or as giving any Employee any right to be retained in employment with the Company. 9.6 Protective Provisions. Each Participant shall cooperate with the Company and the Committee by furnishing any and all information requested by the Company or the Committee in order to facilitate the payment of benefits under the Plan, by taking any relevant actions as may be requested by the Company or Committee. If a Participant refuses to so cooperate, the Company shall have no further obligation to the Participant or his Beneficiary under this Plan, other than to distribute to the Participant the cumulative deferrals he has already made pursuant to the Plan. 9.7 Waiver of Breach. The Company's waiver of any Plan provision shall not operate or be constructed as a waiver of any subsequent breach by the Participant or an agreement to grant a waiver with respect to a subsequent breach. 9.8 Successors or Assigns. This Plan shall be binding upon and inure to the benefit of the Company and its successors and assigns. 9.9 Tax Withholding. All amounts deferred, credited or distributed pursuant to the Plan shall be subject to withholding to the extent required by applicable federal, state, and local laws, and, if applicable, FICA tax, and the Committee may make such arrangements for the payment of any withholding taxes on distributions as it deems satisfactory, including, (i) deducting the amount required to be withheld from salary or any other amount then or thereafter payable to a Participant, beneficiary or legal representative, and (ii) requiring a Participant, Beneficiary or legal representative to pay to the Company the amount required to be withheld as a condition of releasing the distributions related thereto. 9.10 Indemnification. No member of the Committee or the Board shall be personally liable by reason of any contract or other instrument executed by such member or on such member's behalf in his or her capacity as a member of the Committee for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each employee, officer or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement 14
of a claim) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or bad faith. IN WITNESS WHEREOF, the Company has executed this Plan to be effective as of January 1, 1997. By: /s/ L. Ben Lytle ---------------------------------------- L. Ben Lytle President & Chief Executive Officer 15
APPENDIX A PARTICIPATING EMPLOYERS As Of January 1, 1997 (unless otherwise noted) Acordia Claims, Inc. (As of August 15, 1997) Acordia Healthcare Solutions, Inc. (As of August 1, 1997) Acordia of Central Indiana, Inc. (As of August 1, 1997) Acordia of Evansville, Inc. (As of August 1, 1997) Acordia of Lexington, Inc. (As of August 1, 1997) Acordia of Louisville, Inc. (As of August 1, 1997) Acordia of Northwest, Inc. (As of August 1, 1997) Acordia Senior Benefits, Inc. (As of August 1, 1997) Acordia Senior of the Southeast, Inc. (As of August 1, 1997) AdminaStar Communications, Inc. (January 1, 1997 through March 31, 1997) AdminaStar Federal, Inc. AdminaStar, Inc. American Health Network of Indiana, Inc. American Health Network of Kentucky, Inc. American Health Network of Ohio, Inc. American Health Network of Ohio Professional Corporation American Health Network, Inc. Anthem Benefit Services, Inc. Anthem Casualty Insurance Group, Inc. (January 1, 1997 through June 30, 1997) Anthem Health & Life Insurance Company of New York Anthem Insurance Companies, Inc. Anthem Life Insurance Company of Indiana Anthem Prescription Management, Inc. Anthem Transition Corp. (As of August 1, 1997) Community Insurance Company CorePoint MCO, Inc. (As of August 15, 1997) Corporate Claims Services, Inc. (As of August 15, 1997) Davis & Associates, Inc. (As of August 15, 1997) Executive & Employee Benefit Plans, Inc. Southeastern Group, Inc. SpecialMed of Indiana, Inc. Wright Health Associates, Inc. 16
APPENDIX B AUTOMATIC LUMP SUM CASHOUT AMOUNTS Employment Termination Date Amount - --------------------------- ------ Prior to January 1, 1995 $15,000 On or after January 1, 1995 and $25,000 prior to January 1, 1996 On or after January 1, 1996 and $35,000 prior to January 1, 1997 On or after January 1, 1997 and $45,000 prior to January 1, 1998 On or after January 1, 1998 $55,000 17
Exhibit 10.14(ii) FIRST AMENDMENT TO THE ANTHEM DEFERRED COMPENSATION PLAN Pursuant to rights reserved under Article VIII of the Anthem Deferred Compensation Plan (the "Plan"), Anthem Insurance Companies, Inc. (the "Company") hereby amends the Plan, effective January 1, 1999, as follows: 1. Section 2.1(a) of the Plan is hereby amended in its entirety as follows: ""Annual Base Salary" means, with respect to a Participant for a Plan Year, the Participant's regular recurring wages and salary, Commission Earnings, and vacation or paid time off pay received from the Company; provided, however, that "Annual Base Salary" shall not, for purposes of this Plan, include the regular base salary and bonus, if any, for a Plan Year, of a Participant whose compensation is determined, estimated or measured based exclusively on the production of the Participant, whether measured in fees for services performed, number of managed care patients, or other production units. "Annual Base Salary" does not include compensation paid in lieu of vacation or paid time off; overtime payments; bonuses; severance pay; Incentive Compensation; Defined Contribution Plan, Pension Plan, or other plan contributions or benefits paid by the Company; retainers; insurance premiums or benefits; or direct reimbursements; but shall include amounts deferred under Code section 125 or 401(k) plans." 2. Section 2.1(m) of the Plan is hereby amended in its entirety as follows: ""Direct Cash Compensation" means, with respect to a Participant for a Plan Year, the sum of (1) the Participant's Annual Base Salary and (2) the Participant's Incentive Compensation, including any part of his compensation that he elects to defer under this Plan. Direct Cash Compensation shall not include any amounts payable under the Company's long-term incentive plan or similar items. 3. Appendix A is restated in its entirety in the form attached to this First Amendment. IN WITNESS WHEREOF, this First Amendment to the Plan has been adopted this 16th day of December, 1998. ANTHEM INSURANCE COMPANIES, INC. /s/ L. Ben Lytle --------------------------------------------- L. Ben Lytle
Chairman, President & Chief Executive Officer
APPENDIX A PARTICIPATING EMPLOYERS As Of January 1, 1999 Acordia of Lexington, Inc. Acordia of Louisville, Inc. Acordia Senior of the Southeast, Inc. AdminaStar Federal, Inc. AdminaStar, Inc. Anthem Alliance Health Insurance Company Anthem Benefit Administrators, Inc. Anthem Health & Life Insurance Company of New York Anthem Health Plans, Inc. Anthem Insurance Companies, Inc. Anthem Life Insurance Company of Indiana Anthem Prescription Management, Inc. Community Insurance Company Davis & Associates, Inc. Southeastern Group, Inc. The Anthem Companies, Inc. Wright Health Associates, Inc.
Exhibit 10.14(iii) SECOND AMENDMENT TO THE ANTHEM DEFERRED COMPENSATION PLAN Pursuant to rights reserved under Article VIII of the Anthem Deferred Compensation Plan (the "Plan"), Anthem Insurance Companies, Inc. (the "Company") hereby amends the Plan as follows: 1. Effective April 1, 2000, Section 6.1(c) of the Plan is hereby amended in its entirety as follows: "(c) Effect of Recommencement of Employment. Should the Participant recommence employment with the Company, (a) payment of benefits under the Plan shall be suspended if the recommencement of employment is on a full-time basis and (b) the Participant shall be eligible to begin participation in the Plan as of January 1 coincident with or next following the date his employment re-commenced (provided that the Participant is then an Eligible Employee)." 2. Effective January 1, 2000, Appendix A is restated in its entirety in the form attached to this Second Amendment. IN WITNESS WHEREOF, this Second Amendment to the Plan has been executed this 30th day of March, 2000. ANTHEM INSURANCE COMPANIES, INC. /s/ Larry C. Glasscock -------------------------------------- Larry C. Glasscock President & Chief Executive Officer
APPENDIX A PARTICIPATING EMPLOYERS As Of January 1, 2000 AdminaStar Federal, Inc. AdminaStar, Inc. Anthem Alliance Health Insurance Company Anthem Benefit Administrators, Inc. Anthem Health & Life Insurance Company of New York Anthem Health Plans, Inc. Anthem Health Plans of Kentucky, Inc. Anthem Insurance Companies, Inc. Anthem Life Insurance Company of Indiana Anthem Prescription Management, Inc. Community Insurance Company Davis & Associates, Inc. The Anthem Companies, Inc. Wright Health Associates, Inc.
EXHIBIT 10.15 BOARD OF DIRECTORS' DEFERRED COMPENSATION PLAN As Amended and Restated Effective January 1, 1999
BOARD OF DIRECTORS' ------------------ DEFERRED COMPENSATION PLAN -------------------------- (AS AMENDED AND RESTATED JANUARY 1, 1999) ----------------------------------------- PREAMBLE -------- The Board of Directors' Deferred Compensation Plan (the "Plan") is an unfunded supplemental retirement plan for directors of Anthem Insurance Companies, Inc. ("Anthem") and such other subsidiaries and affiliates of Anthem which have adopted the Plan and which are listed on Appendix A. ARTICLE I --------- DEFINITIONS ----------- Section 1.01. Administrator. The term "Administrator" means the Director Benefits Committee which committee is appointed by the Chief Executive Officer of the Company and which committee which shall have the authority to manage and control the operation of this Plan. Section 1.02. Beneficiary. The term "Beneficiary" means, for a Participant, the individual or individuals designated by that Participant in the last Beneficiary Designation Form executed by that Participant to receive benefits in the event of that Participant's death. Section 1.03. Company. The term "Company" means and shall include the entities listed on Appendix A. Section 1.04. Compensation. The term "Compensation" means for each Participant in any Plan Year the total amount of remuneration (including retainers, meeting fees and, if applicable, incentive compensation) for director services as paid to that Participant by the Company in that Plan Year. Section 1.05. Director. The term "Director" means each non-employee member of the Board of Directors of the Company. Section 1.06. Effective Date. The term "Effective Date" means January 1, 1999. Section 1.07. Forms. The term "Forms" means the forms used by the Company for Plan operation and shall include the following: (a) Enrollment Form. The term "Enrollment Form" shall be the form on which a Director annually designates the amount of Compensation to be deferred under the Plan. 1
(b) Beneficiary Designation Form. The term "Beneficiary Designation Form" means the form on which a Director designates his Beneficiary. (c) Distribution Election Form. The term "Distribution Election Form" means the form on which a Director designates when and how his Participation Account shall be distributed. Section 1.08. Interest Rate. The term "Interest Rate" means the rate of return credited to amounts held in the Participant's Participation Account. The rate shall change each January 1. For the period before January 1, 1999, the rate shall be equal to the yield of the book value of the Company's non-subsidiary investment portfolio as of the December 31 immediately preceding the Plan Year for which the rate becomes effective. For the period on and after January 1, 1999, the rate shall be equal to the average of the monthly average rates of the 10-year United States Treasury Notes for the twelve (12) months ending on September 30 immediately preceding such January 1 plus one hundred and fifty (150) basis points; provided, however, that the Company reserves the right to change the method of determining or to increase or decrease the interest rate which is credited to a Participant's Participation Account as long as the interest rate shall not be decreased for periods prior to such action. Section 1.09. Participant. The term "Participant" means any individual who fulfills the eligibility requirements contained in Article II of this Plan. Section 1.10. Participation Account. The term "Participation Account" means the bookkeeping account maintained by the Company for each Participant reflecting amounts deferred under this Plan (as adjusted from time to time). Section 1.11. Plan. The term "Plan" means the plan embodied by this instrument as now in effect or hereafter amended. Section 1.12. Plan Year. The term "Plan Year" means the calendar year. ARTICLE II ---------- PARTICIPATION IN THE PLAN ------------------------- Section 2.01. Eligibility. As of the Effective Date, all Directors shall be eligible to become Participants in this Plan; provided, however, that former Directors shall be eligible to participate to the extent they are entitled to consulting fees or continuing director fees. 2
Section 2.02. Deferral Amounts. (a) Amount of Deferral. The amount of Compensation to be deferred in a Plan Year shall be designated by each Participant in the Enrollment Form executed by that Participant for that Plan Year prior to the beginning of that Plan Year and within the time period established by the Company. (b) Special Rules for New Directors. For the Plan Year during which a person first becomes eligible to become a Participant, the Participant shall be provided by the Company the opportunity to make a special election for such Plan Year with respect to the Compensation paid in such Plan Year after the date on which he becomes an eligible Participant. (c) Timing of Deferral. The following rules govern the timing of the deferral of Compensation under this Plan: (i) Compensation deferred by Participants shall be effected pro-rata from each payment date in the Plan Year. (ii) For purposes of the allocations described in Article III, the amount of any Compensation deferred hereunder shall be credited to a Participant's Participation Account on the day, but for the deferral, the deferred Compensation would have been paid. (d) Manner of Payout of a Participant's Participation Account. The manner and date in which a Participant's Participation Account attributable to deferrals in a Plan Year is to be distributed to that Participant under the provisions of this Plan shall be designated by that Participant in the most recent Distribution Election Form executed by that Participant. The distribution options available to a Participant shall include: (i) lump sum, or (ii) five (5) or ten (10) annual installments The Participant shall designate in the Distribution Election Form the year in which distribution is to be made or begin. Any lump sum payment or installment under this Plan for a Plan Year shall be made on or about July 1. (e) Special Rules. Notwithstanding anything contained in this Article II to the contrary, the following special rules shall govern distributions made under this Plan; (i) A Participant shall be permitted to change the manner in which his Participation Account shall be distributed by completing a new Distribution Election Form which is delivered to the Company at least one (1) calendar year before the earlier of the date on which the Participant ceases to be a Director or begins receiving consulting fees or continuing director fees the date on which distribution of the Participant's Participation Account would have been made but for the 3
change in election; provided, however, that any completed Distribution Election Form which was not received prior to the beginning of the one (1) year period described above shall be null and void. (ii) If the aggregate amount in a Participant's Participation Account on the initial installment date is equal to or less than fifty-five thousand dollars ($55,000), payment of his Participation Account shall be required to be made in a single lump sum. (iii) If a Participant fails to complete a Distribution Election Form, amounts credited to his Participation Account shall automatically be distributed in a single lump sum on the July 1 immediately following the later of the date on which the Participant ceases to be a Director or ceases receiving consulting fees or continuing director fees. (iv) With respect to any amounts credited to a Participant's Participation Account attributable to deferrals made before January 1, 1999 and except as otherwise provided in Subsection (ii) above, any quarterly or annual installment election made by the Participant prior to January 1, 1999 shall be given effect. ARTICLE III ----------- INTEREST CREDITS ---------------- Any monies credited to a Participant's Participation Account shall be credited with interest, earned daily, posted monthly and compounded annually, on the amounts held in such Participation Account. ARTICLE IV ---------- DEATH BENEFITS -------------- If a Participant dies prior to the commencement of his benefits under Article II, the Beneficiary of that Participant, as determined pursuant to the last Beneficiary Designation Form executed by that Participant, shall receive the balance contained in his Participation Account in a single lump sum on the July 1 immediately following the Participant's death. If a Participant dies after the commencement of his benefits under Article III, payment of any remaining installments due shall be made to the Participant's Beneficiary at the same times that the installments would have been paid to the Participant. ARTICLE V --------- ADMINISTRATION -------------- Section 5.01. Delegation of Responsibility. The Company may delegate duties involved in the administration of this Plan to such person or persons whose services are deemed by it to be necessary or convenient. 4
Section 5.02. Payment of Benefits. The amounts allocated to a Participant's Participation Account and payable as benefits under this Plan shall be paid solely from the general assets of the Company. The payment of benefit obligation shall be allocated among the Companies based on the portion of the Compensation which would have been paid by the applicable Company but for the deferral. No Participant shall have any interest in any specific assets of the Company under the terms of this Plan. This Plan shall not be considered to create an escrow account, trust fund or other funding arrangement of any kind or a fiduciary relationship between any Participant and the Company. The Companies' obligations under this Plan is purely contractual and shall not be funded or secured in any way. ARTICLE VI ---------- AMENDMENT OR TERMINATION OF PLAN -------------------------------- Section 6.01. Termination. The Company may at any time terminate this Plan. As of the date on which this Plan is terminated, no additional amounts shall be deferred from any Participant's Compensation. The Company shall pay to each such Participant the balance contained in his Participation Account at such time and in the manner designated by that Participant in the Participation Agreements executed by that Participant; provided, however, that the Committee, in its sole and complete discretion, may direct the Company to pay out to the Participants their Participation Accounts in a single lump sum as soon as practicable after the Plan termination. Section 6.02. Amendment. The Company may amend the provisions of this Plan at any time; provided, however, that no amendment shall adversely affect the rights of Participants or their Beneficiaries with respect to the balances contained in their Participation Accounts immediately prior to the amendment. ARTICLE VII ----------- MISCELLANEOUS ------------- Section 7.01. Successors. This Plan shall be binding upon the successors of the Company. Section 7.02. Choice of Law. This Plan shall be construed and interpreted pursuant to, and in accordance with, the laws of the State of Indiana. Section 7.03. No Service Contract. This Plan shall not be construed as affecting in any manner the rights or obligations of the Company or of any Participant to continue or to terminate director status at any time. Section 7.04. Non-Alienation. No Participant or his Beneficiary shall have any right to anticipate, pledge, alienate or assign any of his rights under this Plan, and any effort to do so shall be null and void. The benefits payable under this Plan shall be exempt from the claims of 5
creditors or other claimants and from all orders, decrees, levies and executions and any other legal process to the fullest extent that may be permitted by law. Section 7.05. Disclaimer. The Companies make no representations or assurances and assume no responsibility as to the performance by any parties, solvency, compliance with state and federal securities regulation or state and federal tax consequences of this Plan or participation therein. It shall be the responsibility of the respective Participants to determine such issues or any other pertinent issues to their own satisfaction. Section 7.06. Designation of Beneficiaries. Each Participant shall designate in his Beneficiary Designation Form his Beneficiary and his contingent Beneficiary to whom death benefits due hereunder at the date of his death shall be paid; provided, however, that the Beneficiary and Contingent Beneficiary designated by a Participant in the last Beneficiary Designation Form executed by that Participant shall supersede all other Beneficiary or Contingent Beneficiary designations made by that Participant in any earlier Beneficiary Designation Form executed by that Participant. If any Participant fails to designate a Beneficiary or if the designated Beneficiary predeceases any Participant, death benefits due hereunder at that Participant's death shall be paid to his contingent Beneficiary or, if none, to the deceased Participant's surviving spouse, if any, and if none to the deceased Participant's estate. This Plan has been executed on this 20th day of April, 1999, and shall be effective as of January 1, 1999. ANTHEM INSURANCE COMPANIES, INC. By: /s/ L. Ben Lytle --------------------------- Its: Chairman, President & CEO --------------------------- 6
APPENDIX A BOARD OF DIRECTORS' DEFERRED COMPENSATION PLAN LIST OF PARTICIPATING COMPANIES 1. Anthem Insurance Companies, Inc. 2. Community Insurance Company 3. Anthem Health Plans, Inc. 7
Exhibit 10.17 ANTHEM 1998 LONG-TERM INCENTIVE PLAN PLAN DOCUMENT Effective January 1, 1998
I. Plan Purpose The Anthem 1998 Long-Term Incentive Plan (the "Plan") is intended to benefit Anthem Insurance Companies, Inc. (the "Company") by increasing motivation on the part of its executive personnel who, the Company determines, materially contribute through their services to the long-term sustained profitability of the Company, by providing incentives and financial rewards. The Plan, by providing executives an opportunity to earn long-term incentive compensation based upon increases in the value of the Company, is designed to align executive interests with policyholder interests, focus on long-term strategic performance, recognize team achievement, facilitate attracting, motivating and retaining key executives of the highest caliber and provide equity opportunities to all Plan participants. II. Definitions Except as otherwise specified or as the context may otherwise require, the following terms have the meanings indicated below for the purposes of this Plan: Account Value means the bookkeeping amounts credited to an Award Account for the Performance Period. Approved Retirement means a Retirement that has been approved by the Committee. Award Account means an accounting accrual entry in the Company books in the Participant's name. A separate Award Account shall be established for each Phantom Unit grant under this Plan. The Initial Phantom Unit Value shall also be maintained for 1
each Phantom Unit grant. There is no requirement that amounts be set aside by the Company to fund the Award Account. Beneficiary means the person or persons, including a trustee, designated by the Participant to receive amounts under this Plan in the event of a Participant's death. To be effective, a Beneficiary designation must be filed with the Committee during the Participant's life on a form prescribed by the Committee. If no person has been designated as the Participant's Beneficiary, or if no person designated as Beneficiary survives the Participant, the Participant's estate shall be his/her "Beneficiary". A Participant may elect a separate Beneficiary for each Award Account. Board or Board of Directors means the Board of Directors of the Company. Change in Control means: (i) a merger or consolidation in which the Company is not the surviving entity; (ii) a change in a majority of the Company's Board of Directors over a twenty-four (24) month period, not taking into account directors nominated by a majority of the current directors; (iii) a complete liquidation of the Company; or (iv) sale or disposition of all or substantially all of the Company's assets of the Company. Code means the Internal Revenue Code of 1986 as now in effect or as amended from time to time. 2
Committee means the Compensation Committee of the Board or any other committee to which the Board has delegated the responsibilities of the Committee under the Plan. Company means Anthem Insurance Companies, Inc. or any successor thereto. Company Value means the value of the Company at a Valuation Date as determined by an independent investment banking firm or a valuation company selected by the Committee and which determination is intended to reflect as of the Valuation Date the aggregate fair market value of the continuing operations of the Company as if it were going public. The initial Company Value at December 31, 1997 was determined to be one billion and twenty-five million dollars ($1,025,000,000). Company Value shall be determined by the independent third party selected by the Committee using the methodology established by the Committee in its complete and sole discretion. If there is a Change in Control of the Company and notwithstanding anything contained in this Section to the contrary, the Committee, in its complete and sole discretion, may elect to use the value of the Company determined under the Change in Control for purposes of determining Company Value in lieu of the valuation conducted by the designated third party. Declared Rate means, for a calendar year, an interest rate equal to the rate on Five-Year Treasury Notes on the last business day of the immediately preceding calendar year, plus three hundred basis points. Disability means disability according to the terms of the Anthem Group Long-term Disability Plan as may be applicable from time to time to the particular Participant. 3
ERISA means the Employee Retirement Income Security Act of 1974 as now in effect or as amended from time to time. Initial Phantom Unit Value means the Phantom Unit Value of a Phantom Unit as of the date of grant and shall be determined separately as of each date Phantom Units are granted. Phantom units granted as of January 1, 1998 shall have an Initial Phantom Unit Value equal to $100. Phantom Units granted after January 1, 1998 shall have an Initial Phantom Unit Value equal to the Phantom Unit Value as of the nearest Valuation Date. New Hire means a new executive employee of the Company who is approved by the Committee to participate in the Plan. Participant means an eligible Company or Subsidiary executive selected for participation in the Plan in accordance with the procedures set forth in Section III. A Participant's participation shall cease when all Plan Payments have been made to such Participant. Performance Period means January 1, 1998 - December 31, 2000. Phantom Unit means a unit of measurement intended to reflect a percentage of the Company Value. Except as specifically provided in this Plan, a Phantom Unit shall not provide its holder with any rights with respect to assets or ownership of the Company. Phantom Unit Value means the value of Phantom Units as of any Valuation Date and shall be equal to the product of $100 and a fraction, the numerator of which is the Company Value at the Valuation Date and the denominator of which is $1,025,000,000. Plan means this Anthem 1998 Long-Term Incentive Plan as set forth herein. 4
Plan Payments means the amount or amounts to be paid to a Participant as a consequence of the operation of the Plan. Retirement means retirement according to the terms of the Anthem 401(k) Long-Term Savings Investment Plan, as now in effect or as amended from time to time. Subsidiary means any corporation designated as such by the Committee, which corporation is at least partially owned by the Company or by any Subsidiary (as so defined) of the Company. Termination for Cause means a determination by the Chief Executive Officer of the Company that the Executive (i) has been convicted of a felony, (ii) has engaged in an activity which, if proven in a criminal proceeding, could result in conviction of a felony involving dishonesty or fraud, or (iii) has willfully engaged in gross misconduct likely to be materially damaging or materially detrimental to the Company or a Subsidiary. Any determination regarding a Termination for Cause of the Chief Executive Officer of the Company shall be made by the Committee. Valuation Date means December 31, 1997, December 31, 1998, December 31, 1999 and December 31, 2000; provided, however, that the Committee, in its sole discretion, may elect to defer a December 31 Valuation Date to the immediately following June 30 to the extent it determines that the Company valuation may be adversely affected at a December 31 by reason of a downturn in the stock market due to broad economic factors or as a result of managed care industry specific issues. In addition, if there is a Change in Control, the Committee shall cause there to be completed a final valuation of the Company as of the date of the Change in Control and which date shall be the final Valuation Date. 5
Vesting means the nonforfeitable right to payment of Plan benefits, other than in the event of Termination for Cause. III. Eligibility and Participation Plan eligibility is limited to executives of the Company or a Subsidiary having the opportunity to significantly affect the long-term operating success of the Company who are approved for participation by the Committee in its complete and sole discretion. In general, the group considered for participation will be the key executives of the Company or of any of the Subsidiaries, including their officers. Participants who are approved by the Committee will be notified of their eligibility in writing. IV. Awards under the Plan The Committee may award Phantom Units to the Participants who, in the opinion of the Committee, are in a position to make a significant contribution to the long-term success of the Company. Each Phantom Unit grant to a Participant shall be credited to an Award Account established for such Participant for purposes of determining the amount of payout under this Plan. The Committee shall cause to be maintained for each Award Account the Initial Phantom Unit Value for the grant credited to the Award Account. Phantom Units may be granted at any time during the Performance Period by the Committee in its sole discretion. 6
Promotions and New Hires: Executives hired or promoted into positions eligible for Plan participation may receive as a grant of Phantom Units at any time during a Performance Period if the Committee so determines in its complete and sole discretion. V. Establishment of Accounts The Committee shall establish, or cause to be established, an Award Account for each Participant for each Phantom Unit grant made to the Participant. Account Values credited to Participant Award Accounts shall be an accounting accrual in the name of the Participant in the Company's books and shall not be required to be funded. VI. Interest on Award Accounts At such time Phantom Units are converted into an equivalent dollar amount under Section IX, interest shall be credited to Award Accounts of active Participants during each calendar year at the Declared Rate in effect for such calendar year. Interest shall be compounded annually and shall continue to be accrued through the date established from time to time by the Company which date precedes the date of distribution of the Award Account and provides the Company adequate time to effect the distribution and which date shall under no circumstances be more than ninety (90) calendar days before the applicable distribution date. VII. Initial Public Offering Stock Option Conversion After the date on which a Participant's Award Account is converted into dollars under Article IX and subject to approval by the Committee, a Participant may request that, in lieu of interest credits under Article VI, all or a portion of his or her Award Account 7
receive gains and losses as if that portion had been invested in stock of the Company or one or more of its Subsidiaries upon or after an initial public offering. The Company shall have no obligation to acquire or hold any shares that may be designated by a Participant and any stock acquired or held by the Company in connection with a Participant's designation shall be held solely in the name of the Company and shall be assets of the Company subject to the claims of the Company's general creditors and no Participant may exercise voting or similar rights with respect to any such shares. The Company may, in its sole discretion, permit a Participant to elect to receive payment of a portion of the balance of his Account Value in stock of the Company or one or more of its Subsidiaries. A Participant shall have no right under this Section VII or any other Section of this Plan to demand that his Account Value be invested or paid in such stock. Such election, if available, shall be made in accordance with rules established by the Company. If the initial public offering occurs before the Phantom Units are converted into dollars under Article IX, the Board may, but is not required to, elect to change the manner in which the value of the Phantom Units and Company Value is determined consistent with the value of the Company as determined at the time of the initial public offering. VIII. Payment of Awards Payment Deferral Options: Participants who are active employees of the Company as of December 31, 2000 shall be entitled to receive payment of their vested Account Values according to their choice among the following options: 8
(i) A lump sum equal to vested Account Values paid as soon as practicable after the Vesting of each Award Account or, if later, the Valuation Date as of which the Award Account is converted into a cash equivalent. (ii) Five equal annual installments with the first installment beginning as soon as practicable after Vesting of each Award Account or, if later, after the Valuation Date as of which the Award Account is converted into a cash equivalent. (iii) Lump sum paid at Retirement. (iv) Five annual installments, with the first installment beginning on the first day of the Participant's Retirement. (v) Payments in two calendar years (not necessarily consecutive) elected by a Participant of a specified percentage (not necessarily equal percentages, but in the aggregate 100%) of his/her Award Account. Each Participant shall make an irrevocable election as to the desired form of payment of his or her entire Award Account as soon as practicable after the date of the Phantom Unit grant in accordance with procedures established by the Committee. If no deferral election is on file and except as otherwise provided in this Section, awards will be paid in a lump sum within ninety (90) calendar days after Vesting. Taxes: The Company will deduct from all Plan Payments made any and all taxes determined by the Company as required by law to be withheld from these payments. FICA taxes will be due upon Vesting. At such time, Participant's Account Values will be reduced for their taxes due. IX. Vesting and Dollar Conversion 9
General Rules: Except as set forth below, a Participant shall be entitled to Account Values credited to his or her Award Account during the Performance Period if the Participant is still employed by the Company or a Subsidiary on December 31, 2000. Exceptions: Exceptions to the General Rules shall be made in the cases of Approved Retirement, Disability, Death, Termination for Cause, and Change in Control as described below. The Committee or the Chief Executive Officer of the Company may also, in its or his sole discretion, permit other exceptions to this rule. Approved Retirement: If a Participant meets the requirements for Retirement or Approved Retirement, his/her total Award Account will be paid in accordance with his/her distribution election. Disability or Death: In the event a Participant becomes disabled or dies and notwithstanding any Participant distribution election to the contrary, his/her total Award Account will be distributed within ninety (90) days to the Participant or the Participant's designated Beneficiary, respectively. Termination Without Cause: If a Participant's employment is terminated but it is not a Termination for Cause and notwithstanding any Participant distribution election to the contrary, the Participant shall be entitled to a lump sum payment of his/her Award Accounts that have met the requirements for Vesting. The lump sum payment shall be made as soon as practicable after the Participant's termination of employment or, if earlier, the date on which distributions are required to commence pursuant to the Participant's distribution election; provided, however, that if installment payments have commenced at the date on which the Participant's employment is terminated, installment payments shall continue in accordance with the Participant's distribution election. 10
Termination for Cause: All Account Values of a Participant (whether or not he or she has met the Vesting requirements) shall be forfeited if the Participant incurs a Termination for Cause. Change in Control: All Account Values shall vest immediately upon a Change in Control. Payment shall be made as soon as practicable following the Change in Control in a single lump sum. Conversion into Dollars: Upon the Vesting of an Award Account, it shall be converted into a dollar equivalent as of the Valuation Date nearest to the Vesting date. For example, if the Award Account becomes vested on March 1, 2001, the conversion into a dollar equivalent shall be based on the December 31, 2000 Valuation Date. If the Vesting of an Award Account occurs as of July 15, 1999, the conversion shall be based on the December 31, 1999 Valuation Date. For purposes of both examples, it is assumed that there were no special Valuation Dates. Interest shall be credited in accordance with Section VI beginning on the conversion date. Amount of Conversion: The amount to be credited to a Participant's Award Account for each Phantom Unit at the date it is converted into a dollar equivalent shall be equal to the amount, if any, by which the Phantom Unit Value at the Valuation Date coinciding with the conversion date exceeds the Initial Phantom Unit Value applicable for such Award Account. 11
X. Administration The Committee is authorized and empowered to administer the Plan; interpret, and make binding determinations under, the Plan; prescribe, amend and rescind the rules relating to the Plan; and determine rights and obligations of the Participants under the Plan. The Committee may delegate some or all of these responsibilities, and all other matters as it solely determines. All decisions of the Committee shall be final and binding upon the Company, its shareholders and Participants. The Committee shall make all determinations as to the right of any person to a benefit. Any denial by the Committee of a claim for benefits under this Plan by a Participant or by any deceased Participant's Beneficiary shall be stated in writing by the Committee, or its designate, and delivered or mailed within ninety (90) calendar days to the Participant or to such deceased Participant's Beneficiary. XI. Additional Provisions No Effect on Employee Benefits. No award under the Plan shall be taken into account for determining a Participant's compensation for purposes of any group life insurance or other employee benefit plan, including, but not limited to, the Anthem Cash Balance Pension Plan, the Anthem Group 401(k) Long-Term Savings Plan, the Anthem Flexible Benefit Plan, and the Anthem Long-Term Disability Plan. No Contract or Guarantee of Continued Employment. Nothing contained in this Plan nor any action taken under the Plan shall be construed as a contract of employment or as giving any Participant any right to be retained in employment with the Company or any Subsidiary. 12
No Guarantee of Plan Payments. Eligibility to participate in this Plan does not guarantee the payment of Plan Payments. Participants who have accrued rights to Plan Payments shall be unsecured and general creditors of the Company and shall not have any superseding interest in the income or assets of the Company except as provided by law. The Company has no obligation to fund the Award Accounts. Assignment and Transfers. With the exception of transfer by will or by the laws of descent and distribution, rights under the Plan and Account Values may not be transferred or assigned. No such rights or values may be subject to any encumbrance, pledge, or charge of any kind, except that a Participant may designate a Beneficiary in accordance with procedures established by the Committee. Waiver or Breach. The Company's waiver of any Plan provision shall not operate or be construed as a waiver of any subsequent breach by the Participant or an agreement to grant a waiver with respect to a subsequent breach. Indemnification. No member of the Committee shall be personally liable by reason of any contract or other instrument executed by such member or on such member's behalf in his or her capacity as a member of the Committee for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each employee, officer or director of the Company or any Subsidiary to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or bad faith. 13
Notices. Any notice or filing required or permitted to be given to the Committee or Company under the Plan shall be sufficient if it is in writing and hand delivered, or sent by registered or certified mail, to the Company at the principal office of the Company. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Notices to the Participant shall be delivered personally or mailed to the Participant at his or her address appearing in the records of the Company. The address of any party may be changed at any time by written notice to the other party given in accordance with this provision. Disclaimer. The Company makes no representations as to the value or future value of any shares awarded pursuant to the Plan, or as to any intention or design of the Company with respect to any Subsidiary. XII. Governing Law The Plan shall be construed, administered and governed in all respects under and by the applicable internal laws of the State of Indiana, without giving effect to the principles of conflict of law thereof. 14
XIII. Relationship Notwithstanding any other provision of this Plan, this Plan and action taken pursuant to it shall not be deemed or construed to establish a trust or fiduciary relationship of any kind between or among the Company, any Subsidiary, Participants, or any other persons. The Plan is intended to be unfunded for purposes of the Code and ERISA. The right of Participants to amounts credited to their Award Accounts is strictly a contractual right of payment, and this Plan does not grant nor shall it be deemed to grant Participants or any other persons any interest in or right to any of the funds, property, or assets of the Company or any Subsidiary, other than as an unsecured general creditor of the Company or any Subsidiary. XIV. Plan Amendment and Termination The Committee may, in its sole discretion, amend, suspend or terminate the Plan at any time, provided that no change to the plan be made, unless required by law, that adversely affects a previously credited Account Value. IN WITNESS WHEREOF, the Company has executed this Plan to be effective January 1, 1998. By: /s/ L. Ben Lytle -------------------------- Title: Chairman, President & CEO -------------------------- 15
Exhbit 10.19 2001 Annual Incentive Plan Anthem(R) - -------------------------------------------------------------------------------- The 2001 Annual Incentive Plan (AIP) is a special program designed to provide you with the opportunity to earn a cash award over and above your base salary when Anthem achieves our strategic, financial, customer service and other goals for the year. We are pleased to offer this program as a part of your total compensation package. By using a combination of base pay and incentive awards, your total cash compensation opportunity is designed to be competitive with market practices and above-market when the established goals are exceeded for the year. Read on. You will learn how you can share in Anthem's success!
AIP at a Glance - -------------------------------------------------------------------------------- What is AIP? AIP is your opportunity to earn a cash award based on the achievement of our strategic, financial, customer service and other stated goals for 2001. Why do we have AIP? AIP encourages you to focus on specific goals important to the success of Anthem and allows you to receive a cash award when the goals are met. By using a combination of base pay and incentive awards, your total cash compensation opportunities at target are designed to be competitive with market practices. In addition, AIP offers the opportunity to earn above-market compensation for superior performance. Who is eligible? You are eligible to participate if you are an active full-time or part-time associate and not participating in another incentive or commission plan. How does AIP work? Annual incentive awards are designed to reward you for the achievement of stated goals for the year. Your "target award percent" is based on your role and level within Anthem and represents a percent of your eligible earnings for the year. The target award percent represents how much you will receive if 100% of the combined goals are achieved. What are the goals and The Anthem Board of Directors approves goals and performance measures? performance measures each year. The 2001 AIP performance measures are a combination of Corporate, Business Unit and Customer or Strategic Business Unit or Work Group goals. Your role within Anthem determines what combination of goals and performance measures applies to you. For more detailed information, please see pages 6 and 7 in this communication. When do I get my Awards are distributed within 90 days of the end of the award? plan year. What about my 401(k) Your current 401(k) contribution election and company contribution? match are applied to your award check. - 2 -
How AIP Works - The Details - -------------------------------------------------------------------------------- Eligibility All active full-time and part-time Anthem associates are eligible to participate, if not participating in another commission or incentive plan. Some business units have incentive programs unique to their operations. Associates participating in one of these programs are not eligible for AIP. Important Eligibility Rules . Awards for all participants are based on eligible earnings. Eligible earnings are calculated beginning January 1, 2001, or the associate's hire date or rehire date, whichever is later. - New associates hired before October 1 of the plan year are eligible to participate in AIP. - Associates who are rehired during the plan year (before October 1) will be treated as new participants. - Associates hired or rehired on or after October 1 are not eligible to participate this year. . Associates must be actively employed by Anthem on the last business day of the plan year to receive an award. . Associates on written warning during the plan year may have their award reduced as recommended by their manager. . In the event of a long-term disability, a death or an approved retirement during the plan year, associates receive an award based on eligible earnings, if awards are paid out. . Associates terminated for Serious Misconduct (as described in the Anthem Associate Handbook) after December 31 but before the distribution of the awards will not receive an award. . No associate has any legal claim or right to participate or to be granted an award under the AIP. Plan Year January 1 through the last business day, 2001 Determining Award Percents Eligible associates are assigned a "target award opportunity," based on their role and level. This target is expressed as a percent of eligible earnings and represents the amount of the award if 100% of the goals are achieved (e.g., target). Role and Level Target Award Opportunity -------------- ------------------------ A1 through A6 5% P1, P2 and M1 5% P3 and M2 10% P4 and M3 15% P5 and M4 20% P6* and M5 25% M6* 30% * Associates whose titles are "Medical Director" or "Manager, Medical Director" participate in this Plan at a different target award opportunity. Please speak to your manager for more information. - 3 -
How AIP Works - The Details (continued) - -------------------------------------------------------------------------------- Establishing The Anthem Board of Directors approves the goals and Performance performance measures each year. The goals and Measures and Goals performance measures for AIP are a combination of goals for: . Corporate . Business Unit - In addition to financial goals, AdminaStar Federal will have goals linked to the performance measures outlined in their Federal contracts, resulting in 50% Business Unit goals and 50% Work Group goals. . Customer or Strategic Business Unit (CBU/SBU) or Work Group Corporate Goals Budgeted Net Income and budgeted Operating Gain Business Unit Goals Budgeted Operating Gain CBU/SBU and Work Unique goals and performance measures are established Group Goals for the CBU/SBU and Work Groups. These goals include CBU/SBU or Work Group Operating Gain and then may be a combination of goals from three other categories: Customer Service, Membership Growth and Administrative Expenses.1 At least one-half of CBU/SBU goals must be based on Operating Gain. Work Group goals may be a subset of any of these four categories or may be performance of a significant project. In total, there are usually no more than three goals for any participant (excluding the Corporate and Business Unit financial goals), as approved by senior management. Award Opportunity AIP offers a target award that represents the amount of the award if 100% of the combined goals are achieved. It also offers the opportunity to earn a threshold award of 50% of target if minimum results (typically the greater of prior year results or at least 80% of the combined goals) are achieved. In addition, associates can earn up to a maximum award of 200% of target if maximum results (typically 120% of the combined goals, or greater in certain instances) are achieved. Award Approval The Anthem Board of Directors approves the payout of any Process awards and can modify this plan at any time. Award Distribution Awards are distributed within 90 days of the end of the plan year. 401(k) Plan An associate's current 401(k) contribution election and company match are also applied to the award check. This means that, by contributing to the 401(k) plan, associates can receive an additional amount in company match on the award for retirement savings. Remember: Anthem contributes $.50 for each $1.00 an associate puts into the 401(k) Plan, up to 6% of the award amount, once 401(k) eligibility requirements are met. /1/ For AdminaStar Federal, other applicable measures as approved by the CEO. - 4 -
2001 Performance Measures - -------------------------------------------------------------------------------- The Performance Measures established for 2001 are: Threshold Target Maximum --------- ------ ------- Corporate -- Anthem, Inc. Budgeted Net Income $230.6 million $256.2 million $316.2 million Budgeted Operating Gain $191.5 million $212.8 million $267.4 million Business Units Budgeted Operating Gain AdminaStar Federal ($1.0 million) ($0.9 million) ($0.7 million) (Medicare Operations) Anthem Alliance(1), (4) $4.3 million $4.8 million $7.9 million (TRICARE Operations) Anthem East(1) $75.7 million $84.1 million $115.2 million Anthem Midwest(2) $117.3 million $130.3 million $168.6 million Anthem Specialty(3) $22.9 million $25.5 million $30.7 million Anthem West(2) $10.0 million $11.1 million $15.2 million National Accounts $17.3 million $19.2 million $30.0 million - -------------------------------------------------------------------------------- Threshold: The threshold award is a 50% payout of a target award. Threshold is the lowest level of goal attainment qualifying for an incentive award. To receive a 50% payout, typically the greater of prior year results or at least 80% of the combined goals must be achieved. Maximum: The maximum award is a 200% payout of a target award and is the highest award that can be earned under the AIP. To receive a 200% award, typically 120% of target goal, or greater in certain instances, must be achieved. - -------------------------------------------------------------------------------- /1/ Includes a portion of the APM Operating Gain /2/ Includes a portion of the APM Operating Gain and Life Operating Gain /3/ Specialty unit includes APM, Life, OHMS and HMS entities /4/ Anthem has entered into a definitive agreement to sell the TRICARE operations of Anthem Alliance to Humana with an anticipated transaction close date of May 31, 2001. A decision has not been made as to how this sale affects those associates with Anthem who had goals tied to Anthem Alliance between January 1 and May 31, 2001. - 5 -
Business Units - -------------------------------------------------------------------------------- The performance measures established for you are based on where you work within Anthem. Here are the performance measures and weightings for Business Unit associates. - ------------------------------------------------------------------------------------------------------------ Business Unit Performance Administrative, Professional and Measures Managerial Roles - ------------------------------------------------------------------------------------------------------------ Anthem, Inc. Operating Gain Net Income 25%(1) - ------------------------------------------------------------------------------------------------------------ Business Unit Operating Gain 25% - ------------------------------------------------------------------------------------------------------------ CBU/SBU or Operating Gain (if applicable) plus a 50%(2) Work Group combination of not more than three goals - ------------------------------------------------------------------------------------------------------------ Total 100% - ------------------------------------------------------------------------------------------------------------ Business Units AdminaStar Federal (Medicare Operations) Anthem Alliance (TRICARE Operations)(3) Anthem East Anthem Midwest Anthem Specialty Anthem West National Accounts Customer or Strategic Business Unit (CBU/SBU) or Work Group SBUs (Midwest) SBUs (Specialty) -------------- ---------------- Indiana Group Business Anthem Life Individual Business Anthem Prescription Management Kentucky Group Business Health Management Services Ohio Group Business Occupational Health Management Midwest Government Business Services CBUs (East) Work Group ------------ ---------- Government Programs-Connecticut Work Group refers to a full-time project Major Accounts-Connecticut team or department, such as Anthem Core Public Sector Accounts-Connecticut East System Consolidation (ACES) or Small Group Business-Connecticut Government Relations. Maine New Hampshire New York Operations /1/ To ensure compliance with government contracts, the Corporate goal does not apply to AdminaStar Federal associates. Instead, the Corporate percentage should be added to the Business Unit percentage for a total of 50% Business Unit Operating Gain goal. /2/ One-half of CBU/SBU goals must be based on Operating Gain, if applicable. /3/ Anthem has entered into a definitive agreement to sell the TRICARE operations of Anthem Alliance to Humana with an anticipated transaction close date of May 31, 2001. A decision has not been made as to how this sale affects those associates with Anthem who had goals tied to Anthem Alliance between January 1 and May 31, 2001. - 6 -
Shared Services - -------------------------------------------------------------------------------- The performance measures established for you are based on where you work within Anthem. Here are the performance measures and weightings for Shared Services associates. - ---------------------------------------------------------------------------------------------------------------- Shared Services Administrative, Professional and Managerial Roles Performance ------------------------ -------------------------- Measures Business Unit Corporate - ------------------------------------------------------------------------------------ -------------------------- Anthem, Inc. Operating Gain 25% Net Income 25%(1) 25% - ------------------------------------------------------------------------------------ -------------------------- Business Unit Operating Gain 25% - ------------------------------------------------------------------------------------ -------------------------- CBU/SBU or Operating Gain (if applicable) 50%(2) 50% Work Group plus a combination of not more than three goals - ------------------------------------------------------------------------------------ -------------------------- Total 100% 100% - ------------------------------------------------------------------------------------ -------------------------- Shared Services Units-Corporate Shared Services Units-BU Administrative Services Actuarial Corporate Secretary Health Care Management Finance Provider Contracting Government Relations Utilization Management Human Resources Marketing Services Information Technology Any Corporate Shared Services associate who serves Internal Audit only one Business Unit Legal Public Affairs Risk Management Customer or Strategic Business Unit (CBU/SBU) or Work Group SBUs (Midwest) SBUs (Specialty) -------------- ---------------- Indiana Group Business Anthem Life Individual Business Anthem Prescription Management Kentucky Group Business Health Management Services Ohio Group Business Occupational Health Management Midwest Government Business Services CBUs (East) Work Group ----------- ---------- Government Programs-Connecticut Work Group refers to a full-time project Major Accounts-Connecticut team or department, such as Anthem Core Public Sector Accounts-Connecticut East System Consolidation (ACES) or Small Group Business-Connecticut Government Relations. Maine New Hampshire New York Operations /1/ To ensure compliance with government contracts, the Corporate goal does not apply to AdminaStar Federal associates. Instead, the Corporate percentage should be added to the Business Unit percentage for a total of 50% Business Unit Operating Gain goal. /2/ One-half of CBU/SBU goals must be based on Operating Gain, if applicable. - 7 -
Key Terms to Know - -------------------------------------------------------------------------------- Business Unit A significant operating unit with external customers and revenues. Corporate Corporate refers to the parent company, Anthem, Inc. Customer or Strategic Profit centers within a recognized business unit. CBUs Business Unit are located in Anthem East and SBUs are located in (CBU/SBU) Anthem Midwest and Anthem Specialty. Maximum Award The maximum award is a 200% payout of a target award and is the highest award that can be earned under the AIP. To receive a 200% award typically 120% of combined target goals, or greater in certain instances, must be achieved. Member Growth Increase in the net number of members served by Anthem. Net Income Anthem's total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses. Operating Gain Operating gain is revenue minus benefit and operating expenses. Profit Center A unit for which costs, revenues and profits are calculated separately. Shared Services A unit that has leveraged its resources to provide better service to all Anthem customers - both internal and external. The term Shared Services is used because the activities of these units are shared across a Business Unit or all of Anthem. For example, Information Technology is a Shared Services unit. Target Award Target award represents the award amount if 100% of goal attainment is achieved. Threshold Award The threshold award is a 50% payout of a target award. Threshold is the lowest level of goal attainment qualifying for an incentive award. To receive a 50% payout, typically the greater of prior year results or at least 80% of the combined target goals must be achieved. Work Group A full-time project team or department, such as ACES or Government Relations. - 8 -
================================================================================ It is your responsibility to read, understand and comply with the information described in this Annual Incentive Plan electronic communication. This communication does not create any contractual obligations for Anthem, Inc. ("Company") and your employment and compensation with the Company is for no definite period of time and may be terminated at any time by the Company with or without cause and with or without notice. Changes in Company compensation plans may be made at any time without prior notice. If you have questions about Company employment policies and procedures, it is your responsibility to contact your immediate supervisor or the Human Resources department. ================================================================================ - 9 -
Exhibit 10.20 Directed Executive Compensation Plan Anthem(R) The 2001 DEC Plan The Directed Executive Compensation Plan (DEC) is an executive perquisite plan that allows Anthem executives the maximum flexibility in tailoring to their specific needs. This plan offers executives cash credits for such items as automobile expenses, airline travel clubs or luncheon clubs. In addition, the Plan offers core credits to be used for estate planning, financial counseling, retirement planning and tax and legal services. This plan does not impact the benefits you receive in the Flexible Benefits Program (i.e., medical, dental, etc.), Cash Balance Pension Plan, 401(k) Savings Plan or any other plan. Effective Date of the Plan Calendar year Plan beginning January 1, 2001 ending December 31, 2001. Participation Participants are selected for each plan year based on their level in the organization. In general, participants primarily include Anthem, Inc. officers, Business Unit officers, and other executives at comparable levels in the organization. How the Plan Works . Core and cash credits are based upon your level in the organization and are awarded at the beginning of the plan year. Core credits must be used for "listed executive benefits." . Cash credits are paid in your first paycheck each month. This cash may be used for increased coverage in core benefits, automobile expenses, or any other benefit needs. Core Credits . All participants receive core credits that may only be used for: Financial / retirement planning Estate planning Tax return preparation Legal services Tax, legal and financial investment magazine subscriptions & software
Core Credits (continued) . Vendors providing core executive benefit services may bill Anthem directly (up to your annual core benefit credit limit) or you may pay the vendor(s) yourself and submit expenses for reimbursement to Anthem Executive Benefits in Anthem, Inc. Human Resources. . All expenses for reimbursement must be submitted within 60 days of the end of a plan year. . Anthem Inc. Human Resources will notify you of the benefits paid on your behalf and will deduct the required taxes from your next paycheck. Cash Credits . All participants receive some level of cash credits that are paid in equal monthly installments in the first paycheck of each month. . Cash credits may be used for your choice of benefits. Examples of benefits you may wish to purchase with your cash credits are: Automobile-related benefits Airline clubs First class upgrades Increased coverage of core executive benefit service Savings or retirement accounts Expanded life insurance Supplemental long-term disability Termination of Employment . For Approved Retirement, DEC core credits may be used through the end of the current DEC year. . For termination other than Approved Retirement, participation in the core credits will end upon termination. . DEC participants added to a plan cycle mid-year would receive a prorated amount of core credits. . All expenses for reimbursement must be submitted within 60 days of termination date. Additional Information . All unused core credits earned in the 1997/98, 1998 Transition Period and 1999 plan year were forfeited. . Per the Anthem expense reimbursement policy, mileage will be reimbursed at the IRS limit for business-related trips with round-trip mileage exceeding 100 miles. Mileage between your residence and office is not reimbursable. This brochure outlines the benefits of Anthem's Directed Executive Compensation Plan. For additional information, contact Cheryl Hawkins at 317-488-6416.
Exhibit 10.21 ANTHEM SPLIT DOLLAR LIFE INSURANCE PROGRAM AND SUMMARY PLAN DESCRIPTION AMENDED AND RESTATED EFFECTIVE NOVEMBER 1, 1998 ARTICLE 1 PURPOSE The purpose of the Anthem Split Dollar Life Insurance Program (the "Split Dollar Program") is to provide life insurance coverage for certain key management employees of Anthem Insurance Companies, Inc. (the "Corporation"). The Split Dollar Program is part of the Anthem Flexible Benefit Plan (the "Flex Plan"), and it is the intent of the Corporation that the Split Dollar Program be maintained and administered consistent with the terms of the Flex Plan. ARTICLE 2 DEFINITIONS Annual Base Salary. "Annual Base Salary" means an Employee's annual basic rate of pay as of his last date of active employment or highest annual basic rate of pay on any previous date. An Employee's basic rate of pay shall mean fixed, basic, straight time, and regularly recurring wages and salary, vacation pay, and holiday pay from the Employer, but excluding compensation paid in lieu of vacation, any payments for overtime hours, any bonus, all severance allowances, forms of incentive compensation, any Savings Investment Plan, Pension Plan, or other qualified plan contributions made by the Employer or qualified plan benefits paid by the Employer, retainers, insurance premiums or benefits, reimbursements, and all other payments. Beneficiary. "Beneficiary" means the person or persons designated as such in accordance with Article 8. Committee. "Committee" means the Split Dollar Program Administrative Committee appointed to administer the Split Dollar Program pursuant to Article 3. Disability. "Disability" shall have the same meaning as under the Pension Plan. Economic Benefit. "Economic Benefit" means the value of the economic benefit of life insurance coverage under this Split Dollar Program for income tax purposes determined based on revenue rulings issued by the Internal Revenue Service and other applicable authorities. Eligible Employee. "Eligible Employee" means each of those key management Employees listed in Exhibit C. Employee. "Employee" means any person employed by the Employer on a regular full-time salaried basis, including officers of the Employer. Effective November 1, 1998
Employer. "Employer" means the Corporation. Enrollment Agreement. "Enrollment Agreement" means the written agreement entered into by the Employer and an Eligible Employee pursuant to which the Eligible Employee becomes a Participant in the Split Dollar Program. Group Life Program. "Group Life Program" means that portion of the Flex Plan (but not including this Split Dollar Program) pursuant to which eligible employees of the Employer are entitled to group term life insurance benefits. Participant. "Participant" means an Eligible Employee or retired Eligible Employee who has filed a completed and executed Enrollment Agreement with the Committee and is participating in the Split Dollar Program in accordance with the provisions of Article 4. Pension Plan. "Pension Plan" means the Anthem Cash Balance Pension Plan, as amended from time to time. Plan Administrator. "Plan Administrator" means the Employer. Plan Year. "Plan Year" means the calendar year and in 1987 meant the period from October 1 through December 31. Retirement. "Retirement" means termination of a Participant's employment with the Employer for reasons other than death after the Participant attains age 55. Savings Investment Plan. "Savings Investment Plan" means the Anthem 401(k) Long Term Savings Investment Plan, as amended from time to time. Service. "Service" means the period of time during which an employment relationship exists between an Employee and the Employer. ARTICLE 3 ADMINISTRATION OF THE SPLIT DOLLAR PROGRAM A Split Dollar Program Administrative Committee will be appointed by the Chief Executive Officer of the Corporation to administer the Split Dollar Program and establish, adopt, or revise such rules and regulations as it may deem necessary or advisable for the administration of the Split Dollar Program and to interpret the provisions of the Split Dollar Program. All decisions of the Committee shall be by vote of a majority of its members and shall be final and binding unless the Corporation's Board of Directors should determine otherwise. Members of the Committee shall be eligible to participate in the Split Dollar Program while serving as members of the Committee, but a member of the Committee shall not vote or act upon any Effective November 1, 1998 -2-
manner which relates solely to such member's interest in the Split Dollar Program as a Participant. ARTICLE 4 PARTICIPATION 4.1 Election to Participate. Any Eligible Employee may enroll in the Split Dollar Program by filing a completed and fully executed Enrollment Agreement with the Employer. Each Eligible Employee shall also be required, as a condition of participation in this Split Dollar Program, to elect one or more of the life insurance options available under the Group Life Program in accordance with the Group Life Program's election procedures, as those may exist from time to time. An Eligible Employee shall become a Participant in this Split Dollar Program when he is notified in writing that his participation is approved by the Employer. 4.2 Insurability. Eligible Employees are not automatically entitled to the insurance benefits provided under this Split Dollar Program. Each Eligible Employee must satisfy the requirements for obtaining insurance before he becomes covered under this Split Dollar Program. 4.3 Addition and Removal of Participants. The Employer may, at its discretion and at any time, designate additional Employees to participate in the Split Dollar Program and remove Employees from participation in the Split Dollar Program. 4.4 Funding of Death Benefits. The first $50,000 of pre-retirement death benefits payable on account of the death of a Participant shall be funded through a group life insurance policy maintained by the Employer under the Group Life Program. To provide any additional insurance benefits under this Split Dollar Program, the Employer may acquire one or more insurance policies on the life of each participating Employee who satisfies the insurer's requirements for insurability. Except as otherwise specifically provided, the Employer will be the owner and hold all the incidents of ownership in the insurance policies, including the rights to borrow from any policies and to receive dividends, if paid, and the entire interest in the cash value with respect to all of the insurance policies shall belong to the Employer. The Participant may specify in writing to the Employer the Beneficiary or Beneficiaries for his life insurance coverage under this Split Dollar Program. Upon receipt of a written request from the Participant, the Employer will immediately take such action as shall be necessary to implement such Beneficiary designation. The remaining aggregate death benefits under the insurance policies on the life of the Participant shall be payable to the Employer. 4.5 Assignment. A Participant may assign to one or more individuals or trustees all or any part of his right, title, claim, interest, benefit and all other incidents of ownership which he may have in any life insurance coverage under this Split Dollar Program, provided that any such assignment shall be subject to Section 11.1 and the other terms of the Split Dollar Program and Effective November 1, 1998 -3-
shall not apply to any rights to salary continuation payments. Such assignee shall then have all rights and obligations which have been assigned and otherwise are the Participant's under this Split Dollar Program. In the event that there has been such an assignment, the term Employee or Participant shall mean the Employee's or Participant's assignee (or any subsequent assignee) as the context requires, in connection with ownership, actions, elections, or other events concerning life insurance coverage on the Employee. 4.6 Coordination with Flex Plan. It is the intent of the Employer that: (a) the first $50,000 of pre-retirement death benefits payable to a Participant be paid solely from the group insurance policy maintained by the Employer under the Group Life Program (and solely at such time and in such manner as provided under the Group Life Program); (b) death benefits shall next be payable from this Split Dollar Program in an amount equal to the amount otherwise payable under this Split Dollar Program minus the death benefits payable under subsection (a); and (c) death benefits shall finally be payable under the Group Life Program if and to the extent the benefits otherwise payable under the Group Life Program exceed the benefits payable under subsections (a) and (b). Any election of a life insurance coverage option or designation of a Beneficiary under the Group Life Program shall be deemed to be an election of coverage or designation of Beneficiary under this Split Dollar Program and shall be binding on the Participant in all respects under this Split Dollar Program. Elections of life insurance coverage options under the Group Life Program shall be subject to such rules and requirements as may apply under the Group Life Program from time to time. ARTICLE 5 BASIC LIFE INSURANCE COVERAGE 5.1 Amount of Insurance. The amount of basic life insurance coverage which will be payable to the Beneficiary designated by the Participant will be determined based on the status and age of the Participant at the time of his death. In each case, the amount determined below, if uneven, will be rounded to the next higher $1,000, and there will be subtracted any amount payable under any group term life insurance covering the Participant which is maintained by the Employer. Subject to the foregoing adjustments, the amounts of basic life insurance coverage under this Split Dollar Program are as follows: (a) During Employment. While employed with the Employer, a Participant will have basic life insurance coverage equal to two (2) times his Annual Base Salary. (b) After Retirement Between Ages 55 and 65. A Participant who retires from employment with the Employer between ages 55 and 65 may elect to continue his basic life insurance coverage in an amount equal to two (2) times his Annual Base Salary until he reaches age 65. Effective November 1, 1998 -4-
(c) Retirement On or After Age 65. A Participant who retires from employment with the Employer on or after age 65, or who retires from employment with the Employer after age 55 and continues his basic coverage until age 65, will be provided with basic life insurance coverage determined from the schedule below based on his age at the time of death: Multiple of Annual Age at Death Base Salary ------------ ----------- 65-69 One and one-half (1-1/2) 70 and over One (1) 5.2 Payment of Premiums and Contributions. (a) During Employment. All premiums for basic life insurance coverage while a Participant is employed with the Employer will be paid by the Employer. However, the Employer will be required to include in the Participant's income for income tax purposes an amount equivalent to the Economic Benefit of coverage provided under this Split Dollar Program. (b) After Retirement Between Aces 55 and 65. A Participant who elects to continue his basic life insurance coverage following Retirement between ages 55 and 65 will be required to contribute toward the cost of this coverage at the rate determined by the Employer. This rate will be announced by the Employer and is subject to change by the Employer at any time. The Employer will be required to include in the Participant's income for income tax purposes an amount equivalent to (i) the Economic Benefit of this coverage, minus (ii) the contributions made by the Participant for this coverage. (c) Retirement On or After Age 65. All premiums for basic coverage for eligible retired Participants on or after age 65 will be paid by the Employer. The Employer will not be required to include any amount in the Participant's income for income tax purposes due to the Economic Benefit of this coverage, since the death benefit will be paid as a taxable lump sum payment from the Employer. 5.3 Forms of Death Benefit. During employment and after Retirement between ages 55 and 65, a Participant may elect either a Lump Sum Payment option (as defined herein) or salary continuation option (as defined herein) for payment of the basic life insurance benefit payable under this Split Dollar Program. Following Retirement on or after age 65, the basic benefit will be paid as a taxable lump sum payment by the Employer. If the Participant elects the Lump Sum Payment option, a tax-free lump sum death benefit will be paid directly from the life insurance company to the Participant's Beneficiary. If the Participant elects the Salary Continuation option, the Employer will make taxable annual Effective November 1, 1998 -5-
payments to the Participant's Beneficiary for fifteen (15) years with each annual payment equal to seventeen percent (17%) of the lump sum death benefit which would otherwise be payable. The Participant may elect the Lump Sum Payment and Salary Continuation options for his basic life insurance coverage in increments of 50% under each option. The Participant shall elect the Lump Sum Payment or Salary Continuation option when he enrolls in the Split Dollar Program, provided no election of the Salary Continuation option shall be effective to the extent the Participant has previously made an irrevocable, absolute assignment of all incidents of ownership in his basic life insurance benefit under the Split Dollar Program. The Participant's initial election (or any subsequent election made pursuant to this paragraph) shall continue to be effective for all subsequent calendar years, unless the Participant files a further election prior to the beginning of any subsequent calendar year. Any new election shall become effective for the calendar year next following the calendar year in which the new election is filed with the Employer. All elections of a Lump Sum Payment or Salary Continuation option shall terminate following the Participant's Retirement after age 65. The timing and form of payment of life insurance benefits payable from the Group Life Program shall be governed solely by the terms of the Group Life Program. For elections made on or after November 1, 1998, the Salary Continuation option shall no longer be available. 5.4 Disability. If a Participant suffers a Disability, the Participant's basic life insurance coverage will be continued by the Employer during the period of Disability until the Participant reaches age 65. All premiums for this coverage will be paid by the Employer, and the Participant will not be required to make any contributions. When the Participant reaches age 65, the Participant will continue to have basic life insurance coverage on the same terms and conditions as if he had retired from employment with the Employer after age 65. ARTICLE 6 SUPPLEMENTAL LIFE INSURANCE COVERAGE 6.1 Amount of Insurance. The amount of supplemental life insurance coverage which the Participant may elect will be determined based on the status of the Participant. In each case, the amount determined below, if uneven, shall be rounded to the next higher $1,000. The amounts of supplemental life insurance coverage which a Participant may elect under this Split Dollar Program are as follows: (a) During Employment. While employed with the Employer, a Participant may elect supplemental life insurance coverage equal to one (1) or two (2) times his Annual Base Salary. A Participant may change the amount of supplemental life insurance coverage while he is employed with the Employer between one (1) and two (2) Effective November 1, 1998 -6-
times his Annual Base salary by filing a new written election with the Employer. Any new election will become effective on the first day of the next calendar month. However, a Participant must furnish satisfactory proof of insurability in order to obtain supplemental life insurance coverage or to increase his supplemental life insurance coverage from one (1) to two (2) times his Annual Base Salary. (b) After Retirement Between Aces 55 and 65. A Participant who retires from employment with the Employer between ages 55 and 65 may elect to continue the supplemental life insurance coverage which is in effect when the Participant retires. A Participant may not change the amount of his supplemental life insurance coverage after Retirement. (c) Retirement On or After Age 65. A Participant who retires from employment with the Employer on or after age 65, or who retires from employment with the Employer after age 55 and continues his supplemental life insurance coverage until age 65, will be provided with an individual life insurance policy with an initial death benefit equal to fifty percent (50%) of the Participant's amount of supplemental life insurance coverage in effect when he reaches age 65. This policy will have a cash value at least equal to the contributions paid by the Participant for his supplemental life insurance coverage. (d) If a Participant who retires from employment with the Employer on or after age 60 has not maintained the same amount of supplemental life insurance coverage for at least five (5) years prior to his reaching age 65 or his Retirement, if later, the Participant must continue to make contributions for such supplemental life insurance coverage for the balance of this five (5) year period at the same rate in effect immediately prior to his Retirement. During the balance of this five (5) year period the full amount of supplemental life insurance coverage will be in effect. At the end of such five (5) year period, the individual life insurance policy with an initial death benefit equal to fifty percent (50%) of this amount will be distributed to the Participant. 6.2 Payment of Premiums and Contributions. (a) During Employment and After Retirement Between Ages 55 and 65. A Participant who elects supplemental life insurance coverage will be required to make contributions for this coverage at the rates determined by the Employer. These rates will be announced by the Employer and are subject to change by the Employer at any time. (b) Retirement On or After Age 65. All premiums for the individual life insurance policy which is distributed to the Participant must be paid by the Participant. 6.3 Forms of Benefit. Prior to distribution of an individual life insurance policy to the Participant on or after age 65, the Participant may elect either a Lump Sum Payment option or Salary Continuation option for payment of the supplemental life insurance benefit payable under this Split Dollar Program. Effective November 1, 1998 -7-
If the Participant elects the Lump Sum Payment option, a tax-free lump sum death benefit will be paid directly from the life insurance company to the Participant's Beneficiary. If the Participant elects the Salary Continuation option, the Employer will make taxable annual payments to the Participant's Beneficiary for fifteen (15) years with each annual payment equal to seventeen percent (17%) of the lump sum death benefit which would otherwise be payable. The Participant may elect the Lump Sum Payment and Salary Continuation options for his supplemental life insurance coverage in increments of 50% under each option. The Participant shall elect the Lump Sum Payment or Salary Continuation option when he enrolls for supplemental life insurance coverage under the Split Dollar Program, provided no election of the Salary Continuation option shall be effective to the extent the Participant has previously made an irrevocable, absolute assignment of all incidents of ownership in his supplemental life insurance benefit under the Split Dollar Program. The Participant's initial election (or any subsequent election made pursuant to this paragraph) shall continue to be effective for all subsequent calendar years, unless the Participant files a further election prior to the beginning of any subsequent calendar year. Any new election shall become effective for the calendar year next following the calendar year in which the new election is filed with the Employer. All elections of a Lump Sum Payment or Salary Continuation option shall terminate when the individual life insurance policy is distributed to the Participant following Retirement on or after age 65. The timing and form of payment of life insurance benefits payable from the Group Life Program shall be governed solely by the terms of the Group Life Program. For elections made on or after November 1, 1998, the Salary Continuation option shall no longer be available. 6.4 Disability. If a Participant suffers a Disability, the Participant may continue his supplemental life insurance coverage during the period of Disability until the Participant reaches age 65. The Participant will be required to continue to make contributions for this coverage at the same rates determined by the Employer for active Employees. When the Participant reaches age 65, an individual life insurance policy will be distributed to the Participant on the same terms and conditions as if he had retired from employment with the Employer on or after age 65. ARTICLE 7 CONVERSION RIGHT ON TERMINATION OF EMPLOYMENT If a Participant terminates employment with the Employer before age 55, the Participant may elect, in writing received by the Employer not later than 31 days after his termination of employment, to acquire a new life insurance policy on his life issued at his attained age upon termination of employment without providing evidence of insurability with an aggregate death Effective November 1, 1998 -8-
benefit equal to all or part of the basic and supplemental life insurance coverage in effect for him under this Split Dollar Program immediately prior to his termination of employment. A Participant's basic and supplemental life insurance coverage under this Split Dollar Program will remain in effect during this 31 day conversion period. The new insurance policy issued on the exercise of a conversion right will not have any cash value. The cost for this coverage will be based on the premium rates of the life insurance company for newly issued policies that are in effect at the time of conversion and will be determined by the amount of coverage and the Participant's age on the date coverage under the new policy is effective. The new policy issued to the Participant will not include any disability or other riders added to the original policy covering the Participant during his employment with the Employer. The conversion rights of Participants with respect to insurance coverage provided through the Group Life Program shall be governed solely by the Group Life Program. ARTICLE 8 BENEFICIARY DESIGNATION Subject to Section 4.6 of this Split Dollar Program, each Participant (or his assignee in the case of an assignment of the Participant's life insurance coverage pursuant to Section 4.5 of the Split Dollar Program) shall have the right, at any time, to designate any person or persons as Beneficiary or Beneficiaries to whom payment under this Split Dollar Program shall be made in the event of the Participant's death. Each Beneficiary designation shall become effective only when filed in writing with the Employer during the Participant's lifetime on a form prescribed by the Employer. The filing of a new Beneficiary designation form will cancel all Beneficiary designations previously filed. Any finalized divorce or marriage (other than a common law marriage) of a Participant subsequent to the date of filing of a Beneficiary designation form shall revoke such designation, unless in the case of divorce the previous spouse was not designated as Beneficiary and unless in the case of marriage the Participant's new spouse has previously been designated as Beneficiary. The spouse of a married Participant domiciled in a community property jurisdiction shall join in any designation of Beneficiary or Beneficiaries other than the spouse. If a Participant fails to designate a Beneficiary as provided above, or if his Beneficiary designation is revoked by marriage, divorce, or otherwise without execution of a new designation, or if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Committee shall direct the distribution of such benefits to the Participant's estate. Effective November 1, 1998 -9-
ARTICLE 9 AMENDMENT AND TERMINATION OF SPLIT DOLLAR PROGRAM The Corporation may at any time amend or terminate the Split Dollar Program in whole or in part, provided, however, that no such action shall affect the right of any Participant or Beneficiary which has accrued before such action. The Corporation is not obligated to continue any benefit, any insurance or any insurance policy after such action. Written notice of termination or any amendment of the Split Dollar Program shall be given to each Participant in the Split Dollar Program. ARTICLE 10 ADMINISTRATION 10.1 Application. This Article 10 shall apply only with respect to the administration of life insurance benefits provided directly by or through this Split Dollar Program. The administration of life insurance benefits provided through the Group Life Program shall be governed solely by the terms of the Group Life Program. 10.2 Plan Administrator. The Plan Administrator shall have the right to designate certain of its affiliates or its officers and employees to perform any administrative functions described in this Article. 10.3 Powers and Duties of the Plan Administrator. The Plan Administrator shall be responsible for controlling and managing the operation and administration of this Split Dollar Program, including, but not limited to, the power: (a) To employ one (1) or more persons or entities to render advice with respect to any responsibility the Plan Administrator has under this Split Dollar Program. (b) To construe and interpret this Split Dollar Program. (c) To adopt such rules, regulations, forms and procedures as from time to time it deems advisable and appropriate in the proper administration of this Split Dollar Program. (d) To decide all questions of eligibility and to determine the amount, manner and time of payment of any benefits hereunder. (e) To prescribe procedures to be followed by any person in applying for any benefits under this Split Dollar Program and to designate the forms or documents, evidence and such other information as the Split Dollar Program Administrator may reasonably deem necessary, desirable or convenient to support an application for any benefits under this Split Dollar Program. Effective November 1, 1998 -10-
(f) To authorize, in its discretion, payments of benefits properly payable pursuant to the provisions of this Split Dollar Program. (g) To prepare and to distribute, in such manner as the Plan Administrator or Corporation deems appropriate, information explaining this Split Dollar Program. (h) To apply consistently and uniformly the rules, regulations, determinations and decisions to all Participants and Beneficiaries in similar circumstances. (i) To prepare and file such reports and to complete and to distribute such other documents as may be required to comply fully with the provisions of ERISA, and of all other applicable laws or governmental regulations. (j) To retain counsel (who may, but need not, be counsel to the Employer), to employ agents and to provide for such clerical, medical, accounting, auditing and other services as it may require in carrying out the provisions of this Split Dollar Program. Any determination made or action taken by the Plan Administrator pursuant to this Article 10 shall be deemed to be conclusive with respect to any Participant, Beneficiary or other individual to whom that determination or action relates, and any such determination or action may be reversed by a court of competent jurisdiction only upon a finding by the court that such determination or action was arbitrary and capricious. 10.4 Claim Procedure. The Plan Administrator shall receive all applications for benefits. Upon receipt by the Plan Administrator of such an application, it shall determine all facts which are necessary to establish the right of an applicant to benefits under the provisions of this Split Dollar Program and the amount thereof as herein provided. The applicant shall be notified in writing of any adverse decision with respect to his claim within ninety (90) calendar days after its submission. The notice shall be written in a manner calculated to be understood by the applicant and shall include: (a) the specific reason or reasons for the denial; (b) specific references to the pertinent Split Dollar Program provisions on which the denial is based; (c) a description of any additional material or information necessary for the applicant to perfect the claim and an explanation why such material or information is necessary; and (d) an explanation of this Split Dollar Program's claim review procedures. Effective November 1, 1998 -11-
If special circumstances require an extension of time for processing the initial claim, a written notice of the extension and the reason therefor shall be furnished to the applicant before the end of the initial ninety (90) calendar day period. In no event shall such extension exceed ninety (90) calendar days. In the event a claim for benefits is denied or if the applicant has had no response to such claim within ninety (90) calendar days of its submission (in which case the claim for benefits shall be deemed to have been denied), the applicant or his duly authorized representative, at the applicant's sole expense, may appeal the denial to the Plan Administrator within sixty (60) calendar days from the date such claim is deemed to be denied. In pursuing such appeal the applicant or his duly authorized representative: (e) may request in writing that the Plan Administrator review the denial; (f) may review pertinent documents; and (g) may submit issues and comments in writing. The decision on review shall be made within sixty (60) calendar days of receipt of the request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) calendar days after receipt of a request for review. If such an extension of time is required, written notice of the extension shall be furnished to the applicant before the end of the original sixty (60) calendar day period. The decision on review shall be made in writing, shall be written in a manner calculated to be understood by the applicant, shall include specific references to the provisions of this Split Dollar Program on which such denial is based, and shall be in accordance with Section 503 of ERISA. If the decision on review is not furnished within the time specified above, the claim shall be deemed denied on review. This Section 10.4 shall automatically be deemed to have been amended to comply with any final regulations promulgated by the United States Department of Labor ("Final Regulations") to the extent those Final Regulations are inconsistent with this Section 10.4. Effective November 1, 1998 -12-
ARTICLE 11 MISCELLANEOUS 11.1 Restriction on Assignment. The Participant may assign all or any part of his right, title, claim, interest, benefit and all other incidents of ownership which he may have in any life insurance coverage under this Split Dollar Program, provided that any such assignment shall be subject to the terms of the Split Dollar Program. Neither the Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable pursuant to any election of a Salary continuation option under Articles 5 or 6 of this Split Dollar Program, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable pursuant to an election of a Salary Continuation option shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Participant or any other person, nor be transferable by operation of law in the event of the Participant's or any other person's bankruptcy or insolvency. 11.2 Unsecured General Creditor. The provisions of this paragraph shall apply except to the extent of rights with respect to life insurance coverage for which the Participant has elected a Lump Sum Payment option pursuant to Article 5 or 6 of this Split Dollar Program. Except for such rights, the Participant and his Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, interests, or claims in any property or assets of the Employer, nor shall they be beneficiaries of, or have any rights, interests or claims in any life insurance policies, annuity contract, or the proceeds therefrom owned or which may be acquired by the Employer ("Policies"). Such Policies or other assets of the Employer shall not be held under any trust for the benefit of Participants, their Beneficiaries, heirs, successors, or assigns, or held in any way as collateral security for the fulfilling of the obligations of the Employer under this Split Dollar Program. Any and all of the Employer's assets and Policies shall be, and remain, the general, unpledged, unrestricted assets of the Employer. The Employer's obligation under this Split Dollar Program shall be merely that of an unfunded and unsecured promise of the Employer to pay money in the future. 11.3 Tax Liability and Withholding. A Participant may have income for Federal, state or local income tax purposes by reason of the Economic Benefit of his insurance coverage provided by the Employer under this Split Dollar Program both while he is employed with the Employer and after his Retirement. The Participant and any Beneficiary shall make appropriate arrangements with the Employer for the satisfaction of any federal, state or local income tax withholding requirements and Social Security or other employee tax requirements applicable to the provision of benefits under this Split Dollar Program. If no other arrangements are made, the Employer may provide, at its discretion, for such withholding and tax payments as may be required. Effective November 1, 1998 -13-
11.4 ERISA Plan. This Split Dollar Program is covered by Title I of ERISA as part of a welfare benefit plan. The Employer is the "named fiduciary" of the Split Dollar Program for purposes of Section 402(a)(2) of ERISA. 11.5 Employment Not Guaranteed. Nothing contained in this Split Dollar Program nor any action taken hereunder shall be construed as a contract of employment or as giving any Employee any right to be retained in employment with the Employer. 11.6 Protective Provisions. Each Participant shall cooperate with the Employer by furnishing any and all information requested by the Employer in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Employer may deem necessary and taking such other relevant action as may be requested by the Employer. If a Participant refuses so to cooperate, the Employer shall have no further obligation to the Participant or has Beneficiary under the Split Dollar Program. If a Participant makes any material misstatement of information or nondisclosure of medical history, then no benefits will be payable hereunder to such Participant's Beneficiary, provided, that in the Employer's sole discretion, benefits may be payable in an amount reduced to compensate the Employer for any loss, cost, damage or expense suffered or incurred by the Employer as a result in any way of any such action, misstatement or nondisclosure. 11.7 Gender, Singular & Plural. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity or the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular. 11.8 Captions. The captions of the articles, sections and paragraphs of this Split Dollar Program are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 11.9 Validity. In the event any provision of this Split Dollar Program is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provisions of this Split Dollar Program. 11.10 Notice. Any notice or filing required or permitted to be given to the Employer under the Split Dollar Program shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of the Employer, directed to the attention of the Chief Executive Officer of the Employer. Such notice shall be deemed given as to the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 11.11 Notice to Insurance Company. The Employer shall be responsible for notifying the life insurance company which issues any policy or policies under this Split Dollar Program of any changes in the ownership rights and interests of the Participant and the Employer and of any Effective November 1, 1998 -14-
changes in the Beneficiaries to receive death benefits under the Split Dollar Program, and the life insurance company shall be entitled to rely upon such notification received from the Employer. 11.12 Applicable Law. To the extent not pre-empted by ERISA, this Split Dollar Program shall be governed and construed in accordance with the laws of the State of Indiana. 11.13 Waiver of Breach. The waiver by the Employer of any provision of this Split Dollar Program shall not operate or be construed as a waiver of any subsequent breach by the Participant. 11.14 Benefit. The rights and obligations of the Employer under this agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Employer. EXECUTED on behalf of Anthem Insurance Companies, Inc. as of the 17th day of December , 1998. - ---------- ---------------- ANTHEM INSURANCE COMPANIES, INC. By /s/ L. Ben Lytle ------------------------------- Chairman of the Board, President and Chief Executive Officer Effective November 1, 1998 -15-
EXHIBIT A --------- YOUR RIGHTS UNDER ERISA ----------------------- As a participant in (name of Plan) you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that all Plan participants shall be entitled to: Examine, without charge, at the Plan Administrator's office and at other specified locations, such as worksites and union halls, all documents governing the Plan, including insurance contracts and collective bargaining agreements, and a copy of the latest annual report (Form 5500 Series) filed by the Plan with the U.S. Department of Labor. Obtain, upon written request to the Plan Administrator, copies of documents governing the operation of the Plan, including insurance contracts and collective bargaining agreements, and a copy of the latest annual report (Form 5500 Series) and updated summary Plan description. The Administrator may make a reasonable charge for the copies. Receive a summary of the Plan's annual financial report. The Plan Administrator is required by law to furnish each participant with a copy of this summary annual report. In addition to creating rights for Plan participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit Plan. The people who operate your Plan, called "fiduciaries" of the Plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries. No one, including your employer, your union, or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a (pension, welfare) benefit or exercising your rights under ERISA. If your claim for a (pension, welfare) benefit is denied in whole or in part you must receive a written explanation of the reason for the denial. You have the right to have the Plan review and reconsider your claim. Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan and do not receive them within thirty (30) days, you may file suit in a Federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to one hundred and ten dollars ($110) a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or Federal court. If it should happen that Plan fiduciaries misuse the Plan's money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a Federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous. If you have any questions about your Plan, you should contact the Plan Administrator. If you have any questions about this statement or about your rights under ERISA, you should Effective November 1, 1998 -16-
contact the nearest office of the Pension and Welfare Benefits Administration, U.S. Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, Pension and Welfare Benefit Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. Effective November 1, 1998 -17-
EXHIBIT B --------- ADDITIONAL INFORMATION ---------------------- The Anthem Split Dollar Life Insurance Program is part of the Anthem Flexible Benefit Plan. The full name and address of the Plan Sponsor are: Anthem Insurance Companies, Inc. 120 Monument Circle Indianapolis, Indiana 46204-4903 Telephone: (317) 488-6000 The full name and address of the Plan Administrator are the same as those for the Plan Sponsor. The federal employer identification number of the Plan Sponsor is 35-0781558. The Flex Plan number assigned by the Employer is 526. The Flex Plan records are maintained on a calendar year basis. The Flex Plan is a welfare benefit Plan providing benefits to eligible individuals. Some of these welfare benefits are payable from the Company's general assets. Some of these welfare benefits are payable through insurance policies issued to, or on behalf of, the Flex Plan. The Plan Administrator also serves as the agent for service of legal process for the Flex Plan. Should you desire further information concerning the Flex Plan, it may be obtained from the Plan Administrator. Effective November 1, 1998 -18-
EXHIBIT C --------- ELIGIBLE EMPLOYEES ------------------ Robert D. Arnold Lloyd J. Banks Edward W. Benton William W. Carmichael Robert W. Cloncs Joseph E. Connell Jerry D. Delp Raymond M. Dwyer Keith R. Faller William L. Garrison Douglas R. Gettelfinger Charles D. Groth Michael D. Houk Joanna M. Jaggar Daniel W. Kendall Richard C. Kilborn Jerold Knight Howard L. Korn L. Ben Lytle Alfred G. Marino George D. Martin Curtis L. Massey Sandra H. Miller Jack A. Milnes John M. Murphy George R. Nelson Curtis C. O'Brien John J. O'Connor Ronald E. Rosenberg Patrick M. Sheridan Robert B. Wagner George L. Walker James J. Wilson
Exhibit 10.22 BLUE CROSS LICENSE AGREEMENT (Includes revisions, if any, adopted by Member Plans through their March 16, 2001 meeting) This agreement by and between Blue Cross and Blue Shield Association ("BCBSA") and The Blue Cross Plan, known as ________________ (the "Plan"). Preamble WHEREAS, the Plan and/or its predecessor(s) in interest (collectively the "Plan") had the right to use the BLUE CROSS and BLUE CROSS Design service marks (collectively the "Licensed Marks") for health care plans in its service area, which was essentially local in nature; WHEREAS, the Plan was desirous of assuring nationwide protection of the Licensed Marks, maintaining uniform quality controls among Plans, facilitating the provision of cost effective health care services to the public and otherwise benefiting the public; WHEREAS, to better attain such ends, the Plan and the predecessor of BCBSA in 1972 simultaneously executed the BCA License Agreement (s) and the Ownership Agreement; and WHEREAS, BCBSA and the Plan desire to supercede said Agreement(s) to reflect their current practices and to assure the continued integrity of the Licensed Marks and of the BLUE CROSS system; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
Agreement 1. BCBSA hereby grants to the Plan, upon the terms and conditions of this License Agreement, the right to use BLUE CROSS in its trade and/or corporate name (the "Licensed Name"), and the right to use the Licensed Marks, in the sale, marketing and administration of health care plans and related services in the Service Area set forth and defined in paragraph 5 below. As used herein, health care plans and related services shall include acting as a nonprofit health care plan, a for-profit health care plan, or mutual health insurer operating on a not-for-profit or for-profit basis, under state law; financing access to health care services; providing health care management and administration; administering, but not underwriting, non-health portions of Worker's Compensation insurance; and delivering health care services, except hospital services (as defined in the Guidelines to Membership Standards Applicable to Regular Members). 2. The Plan may use the Licensed Marks and Name in connection with the offering of: a) health care plans and related services in the Service Area through Controlled Affiliates, provided that each such Controlled Affiliate is separately licensed to use the Licensed Marks and Name under the terms and conditions contained in the Agreement attached as Exhibit 1 hereto (the "Controlled Affiliate License Agreement"); and: b) insurance coverages offered by life insurers under the applicable law in the Service Area, other than those which the Plan may offer in its own name, provided through Controlled Affiliates, provided that each such Controlled Affiliate is separately licensed to use the Licensed Marks and Name under the terms and conditions contained in the Agreement attached as Exhibit 1A hereto (the "Controlled Affiliate License Agreement Applicable to Life Insurance Companies") and further provided that the offering of such services does not and will not dilute or tarnish the unique value of the Licensed Marks and Name; and c) administration and underwriting of Workers' Compensation Insurance Controlled Affiliates, provided that each such Controlled Affiliate is separately licensed to use the Licensed Marks and Name under the terms and conditions contained in the Agreement attached as Exhibit 1 hereto (the "Controlled Affiliate License."). As used herein, a Controlled Affiliate is defined as an entity organized and operated in such a manner that it is subject to the bona fide control of a Plan or Plans and, if the entity meets the standards of subparagraph B but not subparagraph A of this paragraph, the entity, its owners, and persons with authority to select or appoint members or board members, other than a Plan or Plans, have received written approval of BCBSA. Absent written approval by BCBSA of an alternative method of control, bona fide control shall mean that a Plan or Plans authorized to use the Licensed Marks in the Service Area of the Controlled Affiliate pursuant to this License Agreement(s) with BCBSA, other than such Controlled Affiliate's License Agreement(s), (the "Controlling Plan(s)"), must have: A. The legal authority, directly or indirectly through wholly-owned subsidiaries: (a) to select members of the Controlled Affiliate's governing body having more than 50% voting control thereof; (b) to exercise control over the policy and operations of the Controlled Affiliate; (c) to prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which the Controlling Plan(s) do(es) not concur. In addition, a Plan or Plans directly or indirectly through wholly-owned subsidiaries shall own more than 50% of any for-profit Controlled Affiliate; or Amended as of March 11, 1999 -2-
B. The legal authority directly or indirectly through wholly-owned subsidiaries (a) to select members of the Controlled Affiliate's governing body having not less than 50% voting control thereof; (b) to prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which the Controlling Plan(s) do(es) not concur; (c) to exercise control over the policy and operations of the Controlled Affiliate at least equal to that exercised by persons or entities (jointly or individually) other than the Controlling Plan(s). Notwithstanding anything to the contrary in (a) through (c) hereof, the Controlled Affiliate's establishing or governing documents must also require written approval by the Controlling Plan(s) before the Controlled Affiliate can: 1. Change its legal and/or trade name; 2. Change the geographic area in which it operates; 3. Change any of the types of businesses in which it engages; 4. Create, or become liable for by way of guarantee, any indebtedness, other than indebtedness arising in the ordinary course of business; 5. Sell any assets, except for sales in the ordinary course of business or sales of equipment no longer useful or being replaced; 6. Make any loans or advances except in the ordinary course of business; 7. Enter into any arrangement or agreement with any party directly or indirectly affiliated with any of the owners of the Controlled Affiliate or persons or entities with the authority to select or appoint members or board members of the Controlled Affiliate, other than the Plan or Plans (excluding owners of stock holdings of under 5% in a publicly traded Controlled Affiliate); 8. Conduct any business other than under the Licensed Marks and Name; 9. Take any action that any Controlling Plan or BCBSA reasonably believes will adversely affect the Licensed Marks or Names. In addition, a Plan or Plans directly or indirectly through wholly owned subsidiaries shall own at least 50% of any for-profit Controlled Affiliate. Amended as of June 11, 1998 -2a- (The next page is page 3)
3. The Plan may engage in activities not required by BCBSA to be directly licensed through Controlled Affiliates and may indicate its relationship thereto by use of the Licensed Name as a tag line, provided that the engaging in such activities does not and will not dilute or tarnish the unique value of the Licensed Marks and Name and further provided that such tag line use is not in a manner likely to cause confusion or mistake. Consistent with the avoidance of confusion or mistake, each tag line use of the Plan's Licensed Name: (a) shall be in the style and manner specified by BCBSA from time-to-time; (b) shall not include the design service marks; (c) shall not be in a manner to import more than the Plan's mere ownership of the Controlled Affiliate; and (d) shall be restricted to the Service Area. No rights are hereby created in any Controlled Affiliate to use the Licensed Name in its own name or otherwise. At least annually, the Plan shall provide BCBSA with representative samples of each such use of its Licensed Name pursuant to the foregoing conditions. 4. The Plan recognizes the importance of a comprehensive national network of independent BCBSA licensees which are committed to strengthening the Licensed Marks and Name. The Plan further recognizes that its actions within its Service Area may affect the value of the Licensed Marks and Name nationwide. The Plan agrees (a) to maintain in good standing its membership in BCBSA; (b) promptly to pay its dues to BCBSA, said dues to represent the royalties for this License Agreement; (c) materially to comply with all applicable laws; (d) to comply with the Membership Standards Applicable to Regular Members of BCBSA, a current copy of which is attached as Exhibit 2 hereto; and (e) reasonably to permit BCBSA, upon a written, good faith request and during reasonable business hours, to inspect the Plan's books and records necessary to ascertain compliance herewith. As to other Plans and third parties, BCBSA shall maintain the confidentiality of all documents and information furnished by the Plan pursuant hereto, or pursuant to the Membership Standards, and clearly designated by the Plan as containing proprietary information of the Plan. 5. The rights hereby granted are exclusive to the Plan within the geographical area(s) served by the Plan on June 30, 1972, and/or as to which the Plan has been granted a subsequent license, which is hereby defined as the "Service Area," except that BCBSA reserves the right to use the Licensed Marks in said Service Area, and except to the extent that said Service Area may overlap areas served by one or more other licensed Blue Cross Plans as of said date or subsequent license, as to which overlapping areas the rights hereby granted are nonexclusive as to such other Plan or Plans only. Amended as of November 20, 1997 -3-
6. Except as expressly provided by BCBSA with respect to National Accounts, Government Programs and certain other necessary and collateral uses, the current rules and regulations governing which are attached as Exhibit 3 and Exhibit 4 hereto, or as expressly provided herein, the Plan may not use the Licensed Marks and Name outside the Service Area or in connection with other goods and services, nor may the Plan use the Licensed Marks or Name in a manner which is intended to transfer in the Service Area the goodwill associated therewith to another mark or name. Nothing herein shall be construed to prevent the Plan from engaging in lawful activity anywhere under other marks and names not confusingly similar to the Licensed Marks and Name, provided that engaging in such activity does and will not dilute or tarnish the unique value of the Licensed Marks and Name. In addition to any and all remedies available hereunder, BCBSA may impose monetary fines on the Plan for the Plan's use of the Licensed Marks and Names outside the Service Area provided that the procedure used in imposing a fine is consistent with procedures specifically prescribed by BCBSA from time to time in regulations of general application. 7. The Plan agrees that it will display the Licensed Marks and Name only in such form, style and manner as shall be specifically prescribed by BCBSA from time-to-time in regulations of general application in order to prevent impairment of the distinctiveness of the Licensed Marks and Name and the goodwill pertaining thereto. The Plan shall cause to appear on all materials on or in connection with which the Licensed Marks or Name are used such legends, markings and notices as BCBSA may reasonably request in order to give appropriate notice of service mark or other proprietary rights therein or pertaining thereto. 8. BCBSA agrees that: (a) it will not grant any other license effective during the term of this License Agreement for the use of the Licensed Marks or Name which is inconsistent with the rights granted to the Plan hereunder; and (b) it will not itself use the Licensed Marks in derogation of the rights of the Plan or in a manner to deprive the Plan of the full benefits of this License Agreement. The Plan agrees that it will not attack the title of BCBSA in and to the Licensed Marks or Name or attack the validity of the Licensed Marks or of this License Agreement. The Plan further agrees that all use by it of the Licensed Marks and Name or any similar mark or name shall inure to the benefit of BCBSA, and the Plan shall cooperate with BCBSA in effectuating the assignment to BCBSA of any service mark or trademark registrations of the Licensed Marks or any similar mark or name held by the Plan or a Controlled Affiliate of the Plan, all or any portion of which registration consists of the Licensed Marks. Amended November 18, 1999 -4-
9. (a). Should the Plan fail to comply with the provisions of paragraphs 2-4, 6, 7 and/or 12, and not cure such failure within thirty (30) days of receiving written notice thereof (or commence curing such failure within such thirty day period and continue diligent efforts to complete the curing of such failure if such curing cannot reasonably be completed within such thirty day period), BCBSA shall have the right to issue a notice that the Plan is in a state of noncompliance. Except as to the termination of a Plan's License Agreement or the merger of two or more Plans, disputes as to noncompliance, and all other disputes between or among BCBSA, the Plan, other Plans and/or Controlled Affiliates, shall be submitted promptly to mediation and mandatory dispute resolution pursuant to the rules and regulations of BCBSA, a current copy of which is attached as Exhibit 5 hereto, and shall be timely presented and resolved. The mandatory dispute resolution panel shall have authority to issue orders for specific performance and assess monetary penalties. If a state of noncompliance as aforesaid is undisputed by the Plan or is found to exist by a mandatory dispute resolution panel and is uncured as provided above, BCBSA shall have the right to seek judicial enforcement of the License Agreement. Except, however, as provided in paragraphs 9(d)(iii) and 15(a)(i)-(viii) below, no Plan's license to use the Licensed Marks and Name may be finally terminated for any reason without the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans. (b). Notwithstanding any other provision of this License Agreement, a Plan's license to use the Licensed Marks and Name may be forthwith terminated by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans at a special meeting expressly called by BCBSA for the purpose on ten (10) days written notice to the Plan advising of the specific matters at issue and granting the Plan an opportunity to be heard and to present its response to Member Plans for: (i) failure to comply with any minimum capital or liquidity requirement under the Membership Standard on Financial Responsibility; or (ii) impending financial insolvency; or (iii) the pendency of any action instituted against the Plan seeking its dissolution or liquidation or its assets or seeking appointment of a trustee, interim trustee, receiver or other custodian for any of its property or business or seeking the declaration or establishment of a trust for any of its property of business, unless this License Agreement has been earlier terminated under paragraph 15(a); or (iv) such other reason as is determined in good faith immediately and irreparably to threaten the integrity and reputation of BCBSA, the Plans and/or the Licensed Marks. (c). To the extent not otherwise provided therein, neither: (i) the Membership Standards Applicable to Regular Members of BCBSA; nor (ii) the rules and regulations governing National Accounts, Government Programs and certain other uses; nor (iii) the rules and regulations governing mediation and mandatory dispute resolution, may be amended unless and until each such amendment is first adopted by the affirmative vote of three-fourths of the Plans and of three-fourths of the total then current weighted vote of all the Plans. Amended as of March 11, 1999 -5-
9. (d). The Plan may operate as a for-profit company on the following conditions: (i) The Plan shall discharge all responsibilities which it has to the Association and to other Plans by virtue of this Agreement and the Plan's membership in BCBSA. (ii) The Plan shall not use the licensed Marks and Name, or any derivative thereof, as part of its legal name or any symbol used to identify the Plan in any securities market. The Plan shall use the licensed Marks and Name as part of its trade name within its service area for the sale, marketing and administration of health care and related services in the service area. (iii) The Plan's license to use the Licensed Marks and Name shall automatically terminate effective: (a) thirty days after the Plan knows, or there is an SEC filing indicating that, any Institutional Investor, has become the Beneficial Owner of securities representing 10% or more of the voting power of the Plan ("Excess Institutional Voter"), unless such Excess Institutional Voter shall cease to be an Excess Institutional Voter prior to such automatic termination becoming effective; (b) thirty days after the Plan knows, or there is an SEC filing indicating that, any Noninstitutional Investor has become the Beneficial Owner of securities representing 5% or more of the voting power of the Plan ("Excess Noninstitutional Voter") unless such Excess Noninstitutional Voter shall cease to be an Excess Noninstitutional Voter prior to such automatic termination becoming effective; (c) thirty days after the Plan knows, or there is an SEC filing indicating that, any Person has become the Beneficial Owner of 20% or more of the Plan's then outstanding common stock or other equity securities which (either by themselves or in combination) represent an ownership interest of 20% or more pursuant to determinations made under paragraph 9(d)(iv) below ("Excess Owner"), unless such Excess Owner shall cease to be an Excess Owner prior to such automatic termination becoming effective; (d) ten business days after individuals who at the time the Plan went public constituted the Board of Directors of the Plan (together with any new directors whose election to the Board was approved by a vote of 2/3 of the directors then still in office who were directors at the time the Plan went public or whose election or nomination was previously so approved) (the "Continuing Directors") cease for any reason to constitute a majority of the Board of Directors; or (e) ten business days after the Plan consolidates with or merges with or into any person or conveys, assigns, transfers or sells all or substantially all of its assets to any person other than a merger in which the Plan is the surviving entity and immediately after which merger, no person is an Excess Institutional Voter, an Excess Noninstitutional Voter or an Excess Owner: provided that, if requested by the affected Plan in a writing received by BCBSA prior to such automatic termination becoming effective, the provisions of this paragraph 9(d)(iii) may be waived, in whole or in part, Amended as of September 17, 1997 -5a-
upon the affirmative vote of a majority of the disinterested Plans and a majority of the total then current weighted vote of the disinterested Plans. Any waiver so granted may be conditioned upon such additional requirements (including but not limited to imposing new and independent grounds for termination of this License) as shall be approved by the affirmative vote of a majority of the disinterested Plans and a majority of the total then current weighted vote of the disinterested Plans. If a timely waiver request is received, no automatic termination shall become effective until the later of: (1) the conclusion of the applicable time period specified in paragraphs 9(d)(iii)(a)-(d) above, or (2) the conclusion of the first Member Plan meeting after receipt of such a waiver request. In the event that the Plan's license to use the Licensed Marks and Name is terminated pursuant to this Paragraph 9(d)(iii), the license may be reinstated in BCBSA's sole discretion if, within 30 days of the date of such termination, the Plan demonstrates that the Person referred to in clause (a), (b) or (c) of the preceding paragraph is no longer an Excess Institutional Voter, an Excess Noninstitutional Voter or an Excess Owner. (iv) The Plan shall not issue any class or series of security other than (i) shares of common stock having identical terms or options or derivatives of such common stock, (ii) non-voting, non-convertible debt securities or (iii) such other securities as the Plan may approve, provided that BCBSA receives notice at least thirty days prior to the issuance of such securities, including a description of the terms for such securities, and BCBSA shall have the authority to determine how such other securities will be counted in determining whether any Person is an Excess Institutional Voter, Excess Noninstitutional Voter or an Excess Owner. (v) For purposes of paragraph 9(d)(iii), the following definitions shall apply: (a) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended and in effect on November 17, 1993 (the "Exchange Act"). (b) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; Amended as of September 17, 1997 -5b-
(ii) which such Person or any of such Person's Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) relating to the acquisition, holding, voting (except to the extent contemplated by the proviso to (b)(ii)(B) above) or disposing of any securities of the Plan. Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding," when used with reference to a Person's Beneficial Ownership of securities of the Plan, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder. (c) A Person shall be deemed an "Institutional Investor" if (but only if) such Person (i) is an entity or group identified in the SEC's Rule 13d-1(b)(1)(ii) as constituted on June 1, 1997, and (ii) every filing made by such Person with the SEC under Regulation 13D-G (or any successor Regulation) with respect to such Person's Beneficial Ownership of Plan securities shall have contained a certification identical to the one required by item 10 of SEC Schedule 13G as constituted on June 1, 1997. Amended as of September 17, 1997 -5c-
(d) "Noninstitutional Investor" means any Person who is not an Institutional Investor. (e)"Person" shall mean any individual, firm, partnership, corporation, trust, association, joint venture or other entity, and shall include any successor (by merger or otherwise) of such entity. Amended as of September 17, 1997 -5d- (The next page is page 6)
10. This License Agreement shall remain in effect: (a) until terminated as provided herein; or (b) until this and all such other License Agreements are terminated by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans; (c) until terminated by the Plan upon six (6) months written notice to BCBSA. 11. Except as otherwise provided in paragraph 15 below or by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans, or unless this and all such other License Agreements are simultaneously terminated by force of law, the termination of this License Agreement for any reason whatsoever shall cause the reversion to BCBSA of all rights in and to the Licensed Marks and Name, and the Plan agrees that it will promptly discontinue all use of the Licensed Marks and Name, will not use them thereafter, and will promptly, upon written notice from BCBSA, change its corporate name so as to eliminate the Licensed Name therefrom. 12. The license hereby granted to Plan to use the Licensed Marks and Name is and shall be personal to the Plan so licensed and shall not be assignable by any act of the Plan, directly or indirectly, without the written consent of BCBSA. Said license shall not be assignable by operation of law, nor shall Plan mortgage or part with possession or control of this license or any right hereunder, and the Plan shall have no right to grant any sublicense to use the Licensed Marks and Name. 13. BCBSA shall maintain appropriate service mark registrations of the Licensed Marks and BCBSA shall take such lawful steps and proceedings as may be necessary or proper to prevent use of the Licensed Marks by any person who is not authorized to use the same. Any actions or proceedings undertaken by BCBSA under the provisions of this paragraph shall be at BCBSA's sole cost and expense. BCBSA shall have the sole right to determine whether or not any legal action shall be taken on account of unauthorized use of the Licensed Marks, such right not to be unreasonably exercised. The Plan shall report any unlawful usage of the Licensed Marks to BCBSA in writing and agrees, free of charge, to cooperate fully with BCBSA's program of enforcing and protecting the service mark rights, trade name rights and other rights in the Licensed Marks. -6-
14. The Plan hereby agrees to save, defend, indemnify and hold BCBSA and any other Plan(s) harmless from and against all claims, damages, liabilities and costs of every kind, nature and description which may arise exclusively and directly as a result of the activities of the Plan. BCBSA hereby agrees to save, defend, indemnify and hold the Plan and any other Plan(s) harmless from and against all claims, damages, liabilities and costs of every kind, nature and description which may arise exclusively and directly as a result of the activities of BCBSA. 15. (a). This Agreement shall automatically terminate upon the occurrence of any of the following events: (i) a voluntary petition shall be filed by the Plan or by BCBSA seeking bankruptcy, reorganization, arrangement with creditors or other relief under the bankruptcy laws of the United States or any other law governing insolvency or debtor relief, or (ii) an involuntary petition or proceeding shall be filed against the Plan or BCBSA seeking bankruptcy, reorganization, arrangement with creditors or other relief under the bankruptcy laws of the United States or any other law governing insolvency or debtor relief and such petition or proceeding is consented to or acquiesced in by the Plan or BCBSA or is not dismissed within sixty (60) days of the date upon which the petition or other document commencing the proceeding is served upon the Plan or BCBSA respectively, or (iii) an order for relief is entered against the Plan or BCBSA in any case under the bankruptcy laws of the United States, or the Plan or BCBSA is adjudged bankrupt or insolvent (as that term is defined in the Uniform Commercial Code as enacted in the state of Illinois) by any court of competent jurisdiction, or (iv) the Plan or BCBSA makes a general assignment of its assets for the benefit of creditors, or (v) the Department of Insurance or other regulatory agency assumes control of the Plan or delinquency proceedings (voluntary or involuntary) are instituted, or (vi) an action is brought by the Plan or BCBSA seeking its dissolution or liquidation of its assets or seeking the appointment of a trustee, interim trustee, receiver or other custodian for any of its property or business, or (vii) an action is instituted by any governmental entity or officer against the Plan or BCBSA seeking its dissolution or liquidation of its assets or seeking appointment of a trustee, interim trustee, receiver or other custodian for any of its property or business and such action is consented to or acquiesced in by the Plan or BCBSA or is not dismissed within one hundred thirty (130) days of the date upon which the pleading or other document commencing the action is served upon the Plan or BCBSA respectively, provided that if the action is stayed or its prosecution is enjoined, the one hundred thirty (130) day period is tolled for the duration of the stay or injunction, and provided further, that the Association's Board of Directors may toll or extend the 130 day period at any time prior to its expiration, or (viii) a trustee, interim trustee, receiver or other custodian for any of the Plan's or BCBSA's property or business is appointed, or the Plan or BCBSA is ordered dissolved or liquidated, or (ix) the Plan shall fail to pay its dues and shall not cure such failure within thirty (30) days of receiving written notice thereof. Notwithstanding any other provision of this Agreement, a declaration or a request for declaration of the existence of a trust over any of the Plan's or BCBSA's property or business shall not in itself be deemed to constitute or seek appointment of a trustee, interim trustee, receiver or other custodian for purposes of subparagraphs 15(a)(vii) and (viii) of this Agreement. Amended March 12, 1998 -7-
(b). BCBSA, or the Plans (as provided and in addition to the rights conferred in Paragraph 10(b) above), may terminate this Agreement immediately upon written notice upon the occurrence of either of the following events: (a) the Plan or BCBSA becomes insolvent (as that term is defined in the Uniform Commercial Code enacted in the state of Illinois), or (b) any final judgment against the Plan or BCBSA remains unsatisfied or unbonded of record for a period of sixty (60) days or longer. (c). If this License Agreement is terminated as to BCBSA for any reason stated in subparagraphs 15(a) and (b) above, the ownership of the Licensed Marks shall revert to each of the Plans. (d). Upon termination of this License Agreement or any Controlled Affiliate License Agreement of a Larger Controlled Affiliate, as defined in Exhibit 1 to this License Agreement: (i) The terminated entity shall send a notice through the U.S. mails, with first class postage affixed, to all individual and group customers, providers, brokers and agents of products or services sold, marketed, underwritten or administered by the terminated entity or its Controlled Affiliates under the Licensed Marks and Name. The form and content of the notice shall be specified by BCBSA and shall, at a minimum, notify the recipient of the termination of the license, the consequences thereof, and instructions for obtaining alternate products or services licensed by BCBSA. This notice shall be mailed within 15 days after termination or, if termination is pursuant to paragraph 10(d) of this Agreement, within 15 days after the written notice to BCBSA described in paragraph 10(d). (ii) The terminated entity shall deliver to BCBSA within five days of a request by BCBSA a listing of national accounts in which the terminated entity is involved (in a Control, Participating or Servicing capacity), identifying the national account and the terminated entity's role therein. For those accounts where the terminated entity is the Control Plan, the Plan must also indicate the Participating and Servicing Plans in the national account syndicate. Amended as of September 19, 1996 -8-
(iii) Unless the cause of termination is an event stated in paragraph 15(a) or (b) above respecting BCBSA, the Plan and its Licensed Controlled Affiliates shall be jointly liable for payment to BCBSA of an amount equal to $25 multiplied by the number of Licensed Enrollees of the terminated entity and its Licensed Controlled Affiliates; provided that if any other Plan is permitted by BCBSA to use marks or names licensed by BCBSA in the Service Area established by this Agreement, the payment shall be multiplied by a fraction, the numerator of which is the number of Licensed Enrollees of the terminated entity and its Licensed Controlled Affiliates and the denominator of which is the total number of Licensed Enrollees in the Service Area. Licensed Enrollee means each and every person and covered dependent who is enrolled as an individual or member of a group receiving products or services sold, marketed or administered under marks or names licensed by BCBSA as determined at the earlier of (a) the end of the last fiscal year of the terminated entity which ended prior to termination or (b) the fiscal year which ended before any transactions causing the termination began. Notwithstanding the foregoing, the amount payable pursuant to this subparagraph (d)(iii) shall be due only to the extent that, in BCBSA's opinion, it does not cause the net worth of the Plan to fall below 100% of the capital benchmark formula or its equivalent under any successor formula, as set forth in the applicable financial responsibility standards established by BCBSA (provided such equivalent is approved for purposes of this sub paragraph by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans), measured as of the date of termination and adjusted for the value of any transactions not made in the ordinary course of business. This payment shall not be due in connection with transactions exclusively by or among Plan or their affiliates, including reorganizations, combinations or mergers, where the BCBSA Board of Directors determines that the license termination does not result in a material diminution in the number of Licensed Enrollees or the extent of their coverage. Amended as of November 19, 1998 -8a-
(iv) BCBSA shall have the right to audit the books and records of the terminated entity and its Licensed Controlled Affiliates to verify compliance with this paragraph 15(d). (v) As to a breach of 15 (d) (i), (ii), (iii) or (iv), the parties agree that the obligations are immediately enforceable in a court of competent jurisdiction. As to a breach of 15 (d) (i), (ii) or (iv) by the Plan, the parties agree there is no adequate remedy at law and BCBSA is entitled to obtain specific performance. (e). BCBSA shall be entitled to enjoin the Plan or any related party in a court of competent jurisdiction from entry into any transaction which would result in a termination of this License Agreement unless the License Agreement has been terminated pursuant to paragraph 10 (d) of this Agreement upon the required six (6) month written notice. (f). BCBSA acknowledges that it is not the owner of assets of the Plan. 16. This Agreement supersedes any and all other agreements between the parties with respect to the subject matter herein, and contains all of the covenants and agreements of the parties as to the licensing of the Licensed Marks and Name. This Agreement may be amended only by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans as officially recorded by the BCBSA Corporate Secretary. 17. If any provision or any part of any provision of this Agreement is judicially declared unlawful, each and every other provision, or any part of any provision, shall continue in full force and effect notwithstanding such judicial declaration. 18. No waiver by BCBSA or the Plan of any breach or default in performance on the part of BCBSA or the Plan or any other licensee of any of the terms, covenants or conditions of this Agreement shall constitute a waiver of any subsequent breach or default in performance of said terms, covenants or conditions. 19a. All notices provided for hereunder shall be in writing and shall be sent in duplicate by regular mail to BCBSA or the Plan at the address currently published for each by BCBSA and shall be marked respectively to the attention of the President and, if any, the General Counsel, of BCBSA or the Plan. Amended as of November 20, 1997 -8b-
19b. Except as provided in paragraphs 9(b), 9(d)(iii), 15(a), and 15(b) above, this Agreement may be terminated for a breach only upon at least 30 days' written notice to the Plan advising of the specific matters at issue and granting the Plan an opportunity to be heard and to present its response to the Member Plans. 19c. For all provisions of this Agreement referring to voting, the term `Plans' shall mean all entities licensed under the Blue Cross License Agreement and/or the Blue Shield License Agreement, and in all votes of the Plans under this Agreement the Plans shall vote together. For weighted votes of the Plans, the Plan shall have a number of votes equal to the number of weighted votes (if any) that it holds as a Blue Cross Plan plus the number of weighted votes (if any) that it holds as a Blue Shield Plan. For all other votes of the Plans, the Plan shall have one vote. For all questions requiring an affirmative three-fourths weighted vote of the Plans, the requirement shall be deemed satisfied with a lesser weighted vote unless six (6) or more Plans fail to cast weighted votes in favor of the question. Amended as of June 16, 2000 -8c- (The next page is page 9)
20. Nothing herein contained shall be construed to constitute the parties hereto as partners or joint venturers, or either as the agent of the other, and Plan shall have no right to bind or obligate BCBSA in any way, nor shall it represent that it has any right to do so. BCBSA shall have no liability to third parties with respect to any aspect of the business, activities, operations, products, or services of the Plan. 21. This Agreement shall be governed, construed and interpreted in accordance with the laws of the State of Illinois. IN WITNESS WHEREOF, the parties have caused this License Agreement to be executed, effective as of the date of last signature written below. BLUE CROSS AND BLUE SHIELD ASSOCIATION By ----------------------------------- Title -------------------------------- Date --------------------------------- - -------------------------------------- By ----------------------------------- Title -------------------------------- Date --------------------------------- -9-
EXHIBIT 1 BLUE CROSS CONTROLLED AFFILIATE LICENSE AGREEMENT (Includes revisions adopted by Member Plans through their March 16, 2001, meeting) This Agreement by and among Blue Cross and Blue Shield Association ("BCBSA") and _______ ("Controlled Affiliate"), a Controlled Affiliate of the Blue Cross Plan(s), known as _________ ("Plan"), which is also a Party signatory hereto. WHEREAS, BCBSA is the owner of the BLUE CROSS and BLUE CROSS Design service marks; WHEREAS, Plan and Controlled Affiliate desire that the latter be entitled to use the BLUE CROSS and BLUE CROSS Design service marks (collectively the "Licensed Marks") as service marks and be entitled to use the term BLUE CROSS in a trade name ("Licensed Name"); NOW THEREFORE, in consideration of the foregoing and the mutual agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. GRANT OF LICENSE Subject to the terms and conditions of this Agreement, BCBSA hereby grants to Controlled Affiliate the right to use the Licensed Marks and Name in connection with, and only in connection with: (i) health care plans and related services, as defined in BCBSA's License Agreement with Plan, and administering the non-health portion of workers' compensation insurance, and (ii) underwriting the indemnity portion of workers' compensation insurance, provided that Controlled Affiliate's total premium revenue comprises less than 15 percent of the sponsoring Plan's net subscription revenue. This grant of rights is non-exclusive and is limited to the Service Area served by the Plan. Controlled Affiliate may use the Licensed Marks and Name in its legal name on the following conditions: (i) the legal name must be approved in advance, in writing, by BCBSA; (ii) Controlled Affiliate shall not do business outside the Service Area under any name or mark; and (iii) Controlled Affiliate shall not use the Licensed Marks and Name, or any derivative thereof, as part of any name or symbol used to identify itself in any securities market. Controlled Affiliate may use the Licensed Marks and Name in its Trade Name only with the prior, written, consent of BCBSA. 2. QUALITY CONTROL A. Controlled Affiliate agrees to use the Licensed Marks and Name only in connection with the licensed services and further agrees to be bound by the conditions regarding quality control shown in attached Exhibit A as they may be amended by BCBSA from time-to-time. Amended as of November 16, 2000
B. Controlled Affiliate agrees to comply with all applicable federal, state and local laws. C. Controlled Affiliate agrees that it will provide on an annual basis (or more often if reasonably required by Plan or by BCBSA) a report or reports to Plan and BCBSA demonstrating Controlled Affiliate's compliance with the requirements of this Agreement including but not limited to the quality control provisions of this paragraph and the attached Exhibit A. D. Controlled Affiliate agrees that Plan and/or BCBSA may, from time-to-time, upon reasonable notice, review and inspect the manner and method of Controlled Affiliate's rendering of service and use of the Licensed Marks and Name. E. As used herein, a Controlled Affiliate is defined as an entity organized and operated in such a manner, that it meets the following requirements: (1) A Plan or Plans authorized to use the Licensed Marks in the Service Area of the Controlled Affiliate pursuant to separate License Agreement(s) with BCBSA, other than such Controlled Affiliate's License Agreement(s), (the "Controlling Plan(s)"), must have the legal authority directly or indirectly through wholly-owned subsidiaries to select members of the Controlled Affiliate's governing body having not less than 50% voting control thereof and to: (a) prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which the Controlling Plan(s) do(es) not concur; (b) exercise control over the policy and operations of the Controlled Affiliate at least equal to that exercised by persons or entities (jointly or individually) other than the Controlling Plan(s); and Notwithstanding anything to the contrary in (a) through (b) hereof, the Controlled Affiliate's establishing or governing documents must also require written approval by the Controlling Plan(s) before the Controlled Affiliate can: (i) change its legal and/or trade names; (ii) change the geographic area in which it operates; (iii) change any of the type(s) of businesses in which it engages; 2
(iv) create, or become liable for by way of guarantee, any indebtedness, other than indebtedness arising in the ordinary course of business; (v) sell any assets, except for sales in the ordinary course of business or sales of equipment no longer useful or being replaced; (vi) make any loans or advances except in the ordinary course of business; (vii) enter into any arrangement or agreement with any party directly or indirectly affiliated with any of the owners or persons or entities with the authority to select or appoint members or board members of the Controlled Affiliate, other than the Plan or Plans (excluding owners of stock holdings of under 5% in a publicly traded Controlled Affiliate); (viii) conduct any business other than under the Licensed Marks and Name; (ix) take any action that any Controlling Plan or BCBSA reasonably believes will adversely affect the Licensed Marks and Name. In addition, a Plan or Plans directly or indirectly through wholly owned subsidiaries shall own at least 50% of any for-profit Controlled Affiliate. Or (2) A Plan or Plans authorized to use the Licensed Marks in the Service Area of the Controlled Affiliate pursuant to separate License Agreement(s) with BCBSA, other than such Controlled Affiliate's License Agreement(s), (the "Controlling Plan(s)"), have the legal authority directly or indirectly through wholly-owned subsidiaries to select members of the Controlled Affiliate's governing body having more than 50% voting control thereof and to: (a) prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which the Controlling Plan(s) do(es) not concur; (b) exercise control over the policy and operations of the Controlled Affiliate. 3
In addition, a Plan or Plans directly or indirectly through wholly-owned subsidiaries shall own at least 50% of any for-profit Controlled Affiliate. 3. SERVICE MARK USE A. Controlled Affiliate recognizes the importance of a comprehensive national network of independent BCBSA licensees which are committed to strengthening the Licensed Marks and Name. The Controlled Affiliate further recognizes that its actions within its Service Area may affect the value of the Licensed Marks and Name nationwide. B. Controlled Affiliate shall at all times make proper service mark use of the Licensed Marks and Name, including but not limited to use of such symbols or words as BCBSA shall specify to protect the Licensed Marks and Name and shall comply with such rules (generally applicable to Controlled Affiliates licensed to use the Licensed Marks and Name) relative to service mark use, as are issued from time-to-time by BCBSA. Controlled Affiliate recognizes and agrees that all use of the Licensed Marks and Name by Controlled Affiliate shall inure to the benefit of BCBSA. C. Controlled Affiliate may not directly or indirectly use the Licensed Marks and Name in a manner that transfers or is intended to transfer in the Service Area the goodwill associated therewith to another mark or name, nor may Controlled Affiliate engage in activity that may dilute or tarnish the unique value of the Licensed Marks and Name. D. If Controlled Affiliate meets the standards of 2E(1) but not 2E(2) above and any of Controlled Affiliate's advertising or promotional material is reasonably determined by BCBSA and/or the Plan to be in contravention of rules and regulations governing the use of the Licensed Marks and Name, Controlled Affiliate shall for ninety (90) days thereafter obtain prior approval from BCBSA of advertising and promotional efforts using the Licensed Marks and Name, approval or disapproval thereof to be forthcoming within five (5) business days of receipt of same by BCBSA or its designee. In all advertising and promotional efforts, Controlled Affiliate shall observe the Service Area limitations applicable to Plan. E. Controlled Affiliate shall use its best efforts in the Service Area to promote and build the value of the Licensed Marks and Name. 4
4. SUBLICENSING AND ASSIGNMENT Controlled Affiliate shall not, directly or indirectly, sublicense, transfer, hypothecate, sell, encumber or mortgage, by operation of law or otherwise, the rights granted hereunder and any such act shall be voidable at the sole option of Plan or BCBSA. This Agreement and all rights and duties hereunder are personal to Controlled Affiliate. 5. INFRINGEMENT Controlled Affiliate shall promptly notify Plan and Plan shall promptly notify BCBSA of any suspected acts of infringement, unfair competition or passing off that may occur in relation to the Licensed Marks and Name. Controlled Affiliate shall not be entitled to require Plan or BCBSA to take any actions or institute any proceedings to prevent infringement, unfair competition or passing off by third parties. Controlled Affiliate agrees to render to Plan and BCBSA, without charge, all reasonable assistance in connection with any matter pertaining to the protection of the Licensed Marks and Name by BCBSA. 6. LIABILITY INDEMNIFICATION Controlled Affiliate and Plan hereby agree to save, defend, indemnify and hold BCBSA harmless from and against all claims, damages, liabilities and costs of every kind, nature and description (except those arising solely as a result of BCBSA's negligence) that may arise as a result of or related to Controlled Affiliate's rendering of services under the Licensed Marks and Name. 7. LICENSE TERM A. Except as otherwise provided herein, the license granted by this Agreement shall remain in effect for a period of one (1) year and shall be automatically extended for additional one (1) year periods unless terminated pursuant to the provisions herein. B. This Agreement and all of Controlled Affiliate's rights hereunder shall immediately terminate without any further action by any party or entity in the event that Plan ceases to be authorized to use the Licensed Marks and Name. C. Notwithstanding any other provision of this Agreement, this license to use the Licensed Marks and Name may be forthwith terminated by the Plan or the affirmative vote of the majority of the Board of Directors of BCBSA present and voting at a special meeting expressly called by BCBSA for the purpose on ten (10) days written notice to the Plan advising of the specific matters at issue and granting the Plan an opportunity to be heard and to present its response to 5
the Board for: (1) failure to comply with any applicable minimum capital or liquidity requirement under the quality control standards of this Agreement; or (2) failure to comply with the "Organization and Governance" quality control standard of this Agreement; or (3) impending financial insolvency; or (4) for a Smaller Controlled Affiliate (as defined in Exhibit A), failure to comply with any of the applicable requirements of Standards 2, 3, 4, 5 or 7 of attached Exhibit A; or (5) the pendency of any action instituted against the Controlled Affiliate seeking its dissolution or liquidation of its assets or seeking appointment of a trustee, interim trustee, receiver or other custodian for any of its property or business or seeking the declaration or establishment of a trust for any of its property or business, unless this Controlled Affiliate License Agreement has been earlier terminated under paragraph 7(e); or (6) failure by a Controlled Affiliate that meets the standards of 2E(1) but not 2E(2) above to obtain BCBSA's written consent to a change in the identity of any owner, in the extent of ownership, or in the identity of any person or entity with the authority to select or appoint members or board members, provided that as to publicly traded Controlled Affiliates this provision shall apply only if the change affects a person or entity that owns at least 5% of the Controlled Affiliate's stock before or after the change; or (7) such other reason as is determined in good faith immediately and irreparably to threaten the integrity and reputation of BCBSA, the Plans, any other licensee including Controlled Affiliate and/or the Licensed Marks and Name. D. Except as otherwise provided in Paragraphs 7(B), 7(C) or 7(E) herein, should Controlled Affiliate fail to comply with the provisions of this Agreement and not cure such failure within thirty (30) days of receiving written notice thereof (or commence a cure within such thirty day period and continue diligent efforts to complete the cure if such curing cannot reasonably be completed within such thirty day period) BCBSA or the Plan shall have the right to issue a notice that the Controlled Affiliate is in a state of noncompliance. If a state of noncompliance as aforesaid is undisputed by the Controlled Affiliate or is found to exist by a mandatory dispute resolution panel and is uncured as provided above, BCBSA shall have the right to seek judicial enforcement of the Agreement or to issue a notice of termination thereof. Notwithstanding any other provisions of this Agreement, any disputes as to the termination of this License pursuant to Paragraphs 7(B), 7(C) or 7(E) of this Agreement shall not be subject to mediation and mandatory dispute resolution. All other disputes between BCBSA, the Plan and/or Controlled Affiliate shall be submitted promptly to mediation and mandatory dispute resolution. The mandatory dispute resolution panel shall have authority to issue orders for specific performance and assess monetary penalties. Except, however, as provided in Paragraphs 7(B) and 7(E) of this Agreement, this license to use the Licensed Marks and Name may not be finally terminated for any reason without the affirmative vote of a majority of the present and voting members of the Board of Directors of BCBSA. 6
E. This Agreement and all of Controlled Affiliate's rights hereunder shall immediately terminate without any further action by any party or entity in the event that: (1) Controlled Affiliate shall no longer comply with item 2(E) above; (2) Appropriate dues, royalties and other payments for Controlled Affiliate pursuant to paragraph 9 hereof, which are the royalties for this License Agreement, are more than sixty (60) days in arrears to BCBSA; or (3) Any of the following events occur: (i) a voluntary petition shall be filed by Controlled Affiliate seeking bankruptcy, reorganization, arrangement with creditors or other relief under the bankruptcy laws of the United States or any other law governing insolvency or debtor relief, or (ii) an involuntary petition or proceeding shall be filed against Controlled Affiliate seeking bankruptcy, reorganization, arrangement with creditors or other relief under the bankruptcy laws of the United States or any other law governing insolvency or debtor relief and such petition or proceeding is consented to or acquiesced in by Controlled Affiliate or is not dismissed within sixty (60) days of the date upon which the petition or other document commencing the proceeding is served upon the Controlled Affiliate, or (iii) an order for relief is entered against Controlled Affiliate in any case under the bankruptcy laws of the United States, or Controlled Affiliate is adjudged bankrupt or insolvent as those terms are defined in the Uniform Commercial Code as enacted in the State of Illinois by any court of competent jurisdiction, or (iv) Controlled Affiliate makes a general assignment of its assets for the benefit of creditors, or (v) the Department of Insurance or other regulatory agency assumes control of Controlled Affiliate or delinquency proceedings (voluntary or involuntary) are instituted, or (vi) an action is brought by Controlled Affiliate seeking its dissolution or liquidation of its assets or seeking the appointment of a trustee, interim trustee, receiver or other custodian for any of its property or business, or (vii) an action is instituted by any governmental entity or officer against Controlled Affiliate seeking its dissolution or liquidation of its assets or seeking the appointment of a trustee, interim trustee, receiver or other custodian for any of its property or business and such action is consented to or acquiesced in by Controlled Affiliate or is not dismissed within one hundred thirty (130) days of the date upon which the pleading or other document commencing the action is served upon the Controlled Affiliate, provided that if the action is stayed or its prosecution is enjoined, the one hundred thirty (130) day period is tolled for the duration of the stay or injunction, and provided further, that the Association's Board of Directors may toll or extend the 130 day period at any time prior to its expiration, or (viii) a trustee, interim trustee, receiver or other custodian for any of Controlled Affiliate's property or business is appointed or the Controlled Affiliate is ordered dissolved or liquidated. Notwithstanding any other provision of this Agreement, 7
a declaration or a request for declaration of the existence of a trust over any of the Controlled Affiliate's property or business shall not in itself be deemed to constitute or seek appointment of a trustee, interim trustee, receiver or other custodian for purposes of subparagraphs 7(e)(3)(vii) and (viii) of this Agreement. F. Upon termination of this Agreement for cause or otherwise, Controlled Affiliate agrees that it shall immediately discontinue all use of the Licensed Marks and Name, including any use in its trade name. G. Upon termination of this Agreement, Controlled Affiliate shall immediately notify all of its customers that it is no longer a licensee of BCBSA and, if directed by the Association's Board of Directors, shall provide instruction on how the customer can contact BCBSA or a designated licensee to obtain further information on securing coverage. The notification required by this paragraph shall be in writing and in a form approved by BCBSA. The BCBSA shall have the right to audit the terminated entity's books and records to verify compliance with this paragraph. H. In the event this Agreement terminates pursuant to 7(b) hereof, or in the event the Controlled Affiliate is a Larger Controlled Affiliate (as defined in Exhibit A), upon termination of this Agreement, the provisions of Paragraph 7.G. shall not apply and the following provisions shall apply: (1) The Controlled Affiliate shall send a notice through the U.S. mails, with first class postage affixed, to all individual and group customers, providers, brokers and agents of products or services sold, marketed, underwritten or administered by the Controlled Affiliate under the Licensed Marks and Name. The form and content of the notice shall be specified by BCBSA and shall, at a minimum, notify the recipient of the termination of the license, the consequences thereof, and instructions for obtaining alternate products or services licensed by BCBSA. This notice shall be mailed within 15 days after termination. (2) The Controlled Affiliate shall deliver to BCBSA within five days of a request by BCBSA a listing of national accounts in which the Controlled Affiliate is involved (in a control, participating or servicing capacity), identifying the national account and the Controlled Affiliate's role therein. (3) Unless the cause of termination is an event respecting BCBSA stated in paragraph 15(a) or (b) of the Plan's license agreement with BCBSA to use the Licensed Marks and Name, the Controlled Affiliate, the Plan, and any other Licensed Controlled Affiliates of the Plan shall be jointly liable for payment to BCBSA of an amount equal to $25 multiplied by the number of Licensed Enrollees of the Controlled Affiliate; provided that if any other Plan is permitted by BCBSA to use marks or names licensed by BCBSA in the Service Area 8
established by this Agreement, the payment shall be multiplied by a fraction, the numerator of which is the number of Licensed Enrollees of the Controlled Affiliate, the Plan, and any other Licensed Controlled Affiliates and the denominator of which is the total number of Licensed Enrollees in the Service Area. Licensed Enrollee means each and every person and covered dependent who is enrolled as an individual or member of a group receiving products or services sold, marketed or administered under marks or names licensed by BCBSA as determined at the earlier of (i) the end of the last fiscal year of the terminated entity which ended prior to termination or (ii) the fiscal year which ended before any transactions causing the termination began. Notwithstanding the foregoing, the amount payable pursuant to this subparagraph H. (3) shall be due only to the extent that, in BCBSA's opinion, it does not cause the net worth of the Controlled Affiliate, the Plan or any other Licensed Controlled Affiliates of the Plan to fall below 100% of the capital benchmark formula, or its equivalent under any successor formula, as set forth in the applicable financial responsibility standards established by BCBSA (provided such equivalent is approved for purposes of this sub paragraph by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans); measured as of the date of termination, and adjusted for the value of any transactions not made in the ordinary course of business. This payment shall not be due in connection with transactions exclusively by or among Plans or their affiliates, including reorganizations, combinations or mergers, where the BCBSA Board of Directors determines that the license termination does not result in a material diminution in the number of Licensed Enrollees or the extent of their coverage. (4) BCBSA shall have the right to audit the books and records of the Controlled Affiliate, the Plan, and any other Licensed Controlled Affiliates of the Plan to verify compliance with this paragraph 7.H. (5) As to a breach of 7.H.(1), (2), (3) or (4), the parties agree that the obligations are immediately enforceable in a court of competent jurisdiction. As to a breach of 7.H.(1), (2) or (4) by the Controlled Affiliate, the parties agree there is no adequate remedy at law and BCBSA is entitled to obtain specific performance. I. In the event the Controlled Affiliate is a Smaller Controlled Affiliate (as defined in Exhibit A), the Controlled Affiliate agrees to be jointly liable for the amount described in H.3. hereof upon termination of the BCBSA license agreement of any Larger Controlled Affiliate of the Plan. J. BCBSA shall be entitled to enjoin the Controlled Affiliate or any related party in a court of competent jurisdiction from entry into any transaction which would result in a termination of this Agreement unless the Plan's license from BCBSA to use the Licensed Marks and Names has been terminated 9
pursuant to 10(d) of the Plan's license agreement upon the required 6 month written notice. K. BCBSA acknowledges that it is not the owner of assets of the Controlled Affiliate. L. In the event that the Plan has more than 50 percent voting control of the Controlled Affiliate under Paragraph 2(E)(2) above and is a Larger Controlled Affiliate (as defined in Exhibit A), then the vote called for in Paragraphs 7(C) and 7(D) above shall require the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans. 8. DISPUTE RESOLUTION The parties agree that any disputes between them or between or among either of them and one or more Plans or Controlled Affiliates of Plans that use in any manner the Blue Cross and Blue Cross Marks and Name are subject to the Mediation and Mandatory Dispute Resolution process attached to and made a part of Plan's License from BCBSA to use the Licensed Marks and Name as Exhibits 5, 5A and 5B as amended from time-to-time, which documents are incorporated herein by reference as though fully set forth herein. 9. LICENSE FEE Controlled Affiliate will pay to BCBSA a fee for this License determined pursuant to the formula(s) set forth in Exhibit B. 10. JOINT VENTURE Nothing contained in the Agreement shall be construed as creating a joint venture, partnership, agency or employment relationship between Plan and Controlled Affiliate or between either and BCBSA. Amended as of March 11, 1999 10
11. NOTICES AND CORRESPONDENCE Notices regarding the subject matter of this Agreement or breach or termination thereof shall be in writing and shall be addressed in duplicate to the last known address of each other party, marked respectively to the attention of its President and, if any, its General Counsel. 12. COMPLETE AGREEMENT This Agreement contains the complete understandings of the parties in relation to the subject matter hereof. This Agreement may only be amended by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans as officially recorded by the BCBSA Corporate Secretary. 13. SEVERABILITY If any term of this Agreement is held to be unlawful by a court of competent jurisdiction, such findings shall in no way affect the remaining obligations of the parties hereunder and the court may substitute a lawful term or condition for any unlawful term or condition so long as the effect of such substitution is to provide the parties with the benefits of this Agreement. 14. NONWAIVER No waiver by BCBSA of any breach or default in performance on the part of Controlled Affiliate or any other licensee of any of the terms, covenants or conditions of this Agreement shall constitute a waiver of any subsequent breach or default in performance of said terms, covenants or conditions. 14A. VOTING For all provisions of this Agreement referring to voting, the term `Plans' shall mean all entities licensed under the Blue Cross License Agreement and/or the Blue Shield License Agreement, and in all votes of the Plans under this Agreement the Plans shall vote together. For weighted votes of the Plans, the Plan shall have a number of votes equal to the number of weighted votes (if any) that it holds as a Blue Cross Plan plus the number of weighted votes (if any) that it holds as a Blue Shield Plan. For all other votes of the Plans, the Plan shall have one vote. For all questions requiring an affirmative three-fourths weighted vote of the Plans, the requirement shall be deemed satisfied with a lesser weighted vote unless six (6) or more Plans fail to cast weighted votes in favor of the question. Amended as of June 16, 2000 11
THIS PAGE IS INTENTIONALLY BLANK. 12
15. GOVERNING LAW This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Illinois. 16. HEADINGS The headings inserted in this agreement are for convenience only and shall have no bearing on the interpretation hereof. IN WITNESS WHEREOF, the parties have caused this License Agreement to be executed and effective as of the date of last signature written below. Controlled Affiliate: By: -------------------------------------------- Date: -------------------------------------- Plan: By: -------------------------------------------- Date: -------------------------------------- BLUE CROSS AND BLUE SHIELD ASSOCIATION By: -------------------------------------------- Date: -------------------------------------- 13
EXHIBIT A CONTROLLED AFFILIATE LICENSE STANDARDS March 2001 PREAMBLE The standards for licensing Controlled Affiliates are established by BCBSA and are subject to change from time-to-time upon the affirmative vote of three-fourths (3/4) of the Plans and three-fourths (3/4) of the total weighted vote. Each licensed Plan is required to use a standard Controlled Affiliate license form provided by BCBSA and to cooperate fully in assuring that the licensed Controlled Affiliate maintains compliance with the license standards. The Controlled Affiliate License provides a flexible vehicle to accommodate the potential range of health and workers' compensation related products and services Plan Controlled Affiliates provide. The Controlled Affiliate License collapses former health Controlled Affiliate licenses (HCC, HMO, PPO, TPA, and IDS) into a single license using the following business-based criteria to provide a framework for license standards: o Percent of Controlled Affiliate controlled by parent: Greater than 50 percent or 50 percent? o Risk assumption: yes or no? o Medical care delivery: yes or no? o Size of the Controlled Affiliate: If the Controlled Affiliate has health or workers' compensation administration business, does such business constitute 15 percent or more of the parent's and other licensed health subsidiaries' contract enrollment? 14
EXHIBIT A (continued) For purposes of definition: o A "smaller Controlled Affiliate:" (1) comprises less than fifteen percent (15%) of Plan's and its licensed Controlled Affiliates' total contract enrollment (as reported on the BCBSA Quarterly Enrollment Report, excluding rider and freestanding coverage, and treating an entity seeking licensure as licensed);* or (2) underwrites the indemnity portion of workers' compensation insurance and has total premium revenue less than 15 percent of the sponsoring Plan's net subscription revenue. o A "larger Controlled Affiliate" comprises fifteen percent (15%) or more of Plan's and its licensed Controlled Affiliates' total contract enrollment (as reported on the BCBSA Quarterly Enrollment Report, excluding rider and freestanding coverage, and treating an entity seeking licensure as licensed.)* Changes in Controlled Affiliate status: If any Controlled Affiliate's status changes regarding: its Plan ownership level, its risk acceptance or direct delivery of medical care, the Controlled Affiliate shall notify BCBSA within thirty (30) days of such occurrence in writing and come into compliance with the applicable standards within six (6) months. If a smaller Controlled Affiliate's health and workers' compensation administration business reaches or surpasses fifteen percent (15%) of the total contract enrollment of the Plan and licensed Controlled Affiliates, the Controlled Affiliate shall: 15
EXHIBIT A (continued) 1. Within thirty (30) days, notify BCBSA of this fact in writing, including evidence that the Controlled Affiliate meets the minimum liquidity and capital (BCBSA "Managed Care Organizations Risk-Based Capital (MCO-RBC)" as defined by the NAIC and state-established minimum reserve) requirements of the larger Controlled Affiliate Financial Responsibility standard; and 2. Within six (6) months after reaching or surpassing the fifteen percent (15%) threshold, demonstrate compliance with all license requirements for a larger Controlled Affiliate. If a Controlled Affiliate that underwrites the indemnity portion of workers' compensation insurance receives a change in rating or proposed change in rating, the Controlled Affiliate shall notify BCBSA within 30 days of notification by the external rating agency. *For purposes of this calculation, The numerator equals: Applicant Controlled Affiliate's contract enrollment, as defined in BCBSA's Quarterly Enrollment Report (excluding rider and freestanding coverage). The denominator equals: Numerator PLUS Plan and all other licensed Controlled Affiliates' contract enrollment, as reported in BCBSA's Quarterly Enrollment Report (excluding rider and freestanding coverage). November 16, 2000 16
EXHIBIT A (continued) STANDARDS FOR LICENSED CONTROLLED AFFILIATES As described in Preamble section of Exhibit A to the Affiliate License Agreement, each controlled affiliate seeking licensure must answer four questions. Depending on the controlled affiliate's answers, certain standards apply: 1. What percent of the controlled affiliate is controlled by the parent Plan? - -------------------------------------------------------------------------------- More than 50% 50% 100% and Primary Business is Government Non-Risk | | | | | | V V V Standard 1A, 4 Standard 1B, 4 Standard 4*,10A - -------------------------------------------------------------------------------- * Applicable only if using the names and marks. IN ADDITION, 2. Is risk being assumed? - ------------------------------------------------------------------------------------------------------------------------------------ Yes No / / | | \ \ / / | | \ \ V V V V V V Controlled Affiliate Controlled Affiliate Controlled Affiliate Controlled Affiliate Controlled Affiliate Controlled underwrites any comprises less than comprises => 15% of comprises less than comprises => 15% of Affiliate's indemnity portion 15% of total contract total contract 15% of total contract total contract Primary Business of workers' enrollment of Plan enrollment of Plan enrollment of Plan enrollment of Plan is Government compensation and its licensed and its licensed and its licensed and its licensed Non-Risk insurance affiliates, and does affiliates, and does affiliates affiliates | | not underwrite the not underwrite the | | V indemnity portion of indemnity portion of | | | | V Standards 7A-7E workers' workers' V V compensation compensation insurance insurance Standard 2 Standard 6H Standard 10B (Guidelines 1.1,1.3) | | | | V V Standard 2 Standard 6H (Guidelines 1.1,1.2) - ------------------------------------------------------------------------------------------------------------------------------------ IN ADDITION, 3. Is medical care being directly provided? - -------------------------------------------------------------------------------- Yes No | | | | V V Standard 3A Standard 3B - -------------------------------------------------------------------------------- IN ADDITION, 4. If the controlled affiliate has health or workers' compensation administration business, does such business comprise 15% or more of the total contract enrollment of Plan and its licensed controlled affiliates? - ---------------------------------------------------------------------------------------------------------- Yes No / / | | \ \ | | V V V V Standards 6A-6I Controlled Affiliate is Controlled Controlled Affiliate's a former primary Affiliate is not a Primary Business is licensee former primary Government Non-Risk licensee | | | | | | V V V Standards 8, 10(C) Standards 5,8,9 Standards 5,8 - ---------------------------------------------------------------------------------------------------------- 17
EXHIBIT A (continued) Standard 1 - Organization and Governance 1A.) The Standard for more than 50% Plan control is: A Controlled Affiliate shall be organized and operated in such a manner that a licensed Plan or Plans authorized to use the Licensed Marks in the Service Area of the Controlled Affiliate pursuant to separate License Agreement(s) with BCBSA, other than such Controlled Affiliate's License Agreement(s), (the "Controlling Plan(s)"), have the legal authority, directly or indirectly through wholly-owned subsidiaries: 1) to select members of the Controlled Affiliate's governing body having more than 50% voting control thereof; and 2) to prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which the Controlling Plan(s) do(es) not concur; and 3) to exercise control over the policy and operations of the Controlled Affiliate. In addition, a Plan or Plans directly or indirectly through wholly-owned subsidiaries shall own more than 50% of any for-profit Controlled Affiliate. 1B.) The Standard for 50% Plan control is: A Controlled Affiliate shall be organized and operated in such a manner that a licensed Plan or Plans authorized to use the Licensed Marks in the Service Area of the Controlled Affiliate pursuant to separate License Agreement(s) with BCBSA, other than such Controlled Affiliate's License Agreement(s), (the "Controlling Plan(s)"), have the legal authority, directly or indirectly through wholly-owned subsidiaries: 1) to select members of the Controlled Affiliate's governing body having not less than 50% voting control thereof ; and 2) to prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which the Controlling Plan(s) do(es) not concur; and 3) to exercise control over the policy and operations of the Controlled Affiliate at least equal to that exercised by persons or entities (jointly or individually) other than the Controlling Plan(s). 18
Notwithstanding anything to the contrary in 1) through 3) hereof, the Controlled Affiliate's establishing or governing documents must also require written approval by the Controlling Plan(s) before the Controlled Affiliate can: o change the geographic area in which it operates o change its legal and/or trade names o change any of the types of businesses in which it engages o create, or become liable for by way of guarantee, any indebtedness, other than indebtedness arising in the ordinary course of business o sell any assets, except for sales in the ordinary course of business or sales of equipment no longer useful or being replaced o make any loans or advances except in the ordinary course of business o enter into any arrangement or agreement with any party directly or indirectly affiliated with any of the owners or persons or entities with the authority to select or appoint members or board members of the Controlled Affiliate, other than the Plan or Plans (excluding owners of stock holdings of under 5% in a publicly traded Controlled Affiliate) o conduct any business other than under the Licensed Marks and Name o take any action that any Controlling Plan or BCBSA reasonably believes will adversely affect the Licensed Marks and Name. In addition, a Plan or Plans directly or indirectly through wholly-owned subsidiaries shall own at least 50% of any for-profit Controlled Affiliate. 19
EXHIBIT A (continued) Standard 2 - Financial Responsibility A Controlled Affiliate shall be operated in a manner that provides reasonable financial assurance that it can fulfill all of its contractual obligations to its customers. If a risk-assuming Controlled Affiliate ceases operations for any reason, Blue Cross and/or Blue Cross Plan coverage will be offered to all Controlled Affiliate subscribers without exclusions, limitations or conditions based on health status. If a nonrisk-assuming Controlled Affiliate ceases operations for any reason, sponsoring Plan(s) will provide for services to its (their) customers. Standard 3 - State Licensure/Certification 3A.) The Standard for a Controlled Affiliate that employs, owns or contracts on a substantially exclusive basis for medical services is: A Controlled Affiliate shall maintain unimpaired licensure or certification for its medical care providers to operate under applicable state laws. 3B.) The Standard for a Controlled Affiliate that does not employ, own or contract on a substantially exclusive basis for medical services is: A Controlled Affiliate shall maintain unimpaired licensure or certification to operate under applicable state laws. Standard 4 - Certain Disclosures A Controlled Affiliate shall make adequate disclosure in contracting with third parties and in disseminating public statements of 1) the structure of the Blue Cross and Blue Shield System; and 2) the independent nature of every licensee; and 3) the Controlled Affiliate's financial condition. Standard 5 - Reports and Records for Certain Smaller Controlled Affiliates For a smaller Controlled Affiliate that does not underwrite the indemnity portion of workers' compensation insurance, the Standard is: 20
EXHIBIT A (continued) A Controlled Affiliate and/or its licensed Plan(s) shall furnish, on a timely and accurate basis, reports and records relating to these Standards and the License Agreements between BCBSA and Controlled Affiliate. Standard 6 - Other Standards for Larger Controlled Affiliates Standards 6(A) - (I) that follow apply to larger Controlled Affiliates. Standard 6(A): Board of Directors A Controlled Affiliate Governing Board shall act in the interest of its Corporation in providing cost-effective health care services to its customers. A Controlled Affiliate shall maintain a governing Board, which shall control the Controlled Affiliate, composed of a majority of persons other than providers of health care services, who shall be known as public members. A public member shall not be an employee of or have a financial interest in a health care provider, nor be a member of a profession which provides health care services. Standard 6(B): Responsiveness to Customers A Controlled Affiliate shall be operated in a manner responsive to customer needs and requirements. Standard 6(C): Participation in National Programs A Controlled Affiliate shall effectively and efficiently participate in each national program as from time to time may be adopted by the Member Plans for the purposes of providing portability of membership between the licensees and ease of claims processing for customers receiving benefits outside of the Controlled Affiliate's Service Area. Such programs are applicable to licensees, and include: 1. Transfer Program; 2. BlueCard Program; 21
EXHIBIT A (continued) 3. Inter-Plan Teleprocessing System (ITS); and 4. Electronic Claims Routing Process. Standard 6(D): Financial Performance Requirements In addition to requirements under the national programs listed in Standard 6C: Participation in National Programs, a Controlled Affiliate shall take such action as required to ensure its financial performance in programs and contracts of an inter-licensee nature or where BCBSA is a party. Standard 6(E): Cooperation with Plan Performance Response Process A Controlled Affiliate shall cooperate with BCBSA's Board of Directors and its Plan Performance and Financial Standards Committee in the administration of the Plan Performance Response Process and in addressing Controlled Affiliate performance problems identified thereunder. Standard 6(F): Independent Financial Rating A Controlled Affiliate shall obtain a rating of its financial strength from an independent rating agency approved by BCBSA's Board of Directors for such purpose. Standard 6(G): Best Efforts During each year, a Controlled Affiliate shall use its best efforts in the designated Service Area to promote and build the value of the Blue Cross Mark. Standard 6(H): Financial Responsibility A Controlled Affiliate shall be operated in a manner that provides reasonable financial assurance that it can fulfill all of its contractual obligations to its customers. Amended March 10, 2000 22
EXHIBIT A (continued) Standard 6(I): Reports and Records A Controlled Affiliate shall furnish to BCBSA on a timely and accurate basis reports and records relating to compliance with these Standards and the License Agreements between BCBSA and Controlled Affiliate. Such reports and records are the following: A) BCBSA Controlled Affiliate Licensure Information Request; and B) Biennial trade name and service mark usage material, including disclosure material; and C) Changes in the ownership and governance of the Controlled Affiliate, including changes in its charter, articles of incorporation, or bylaws, changes in a Controlled Affiliate's Board composition, or changes in the identity of the Controlled Affiliate's Principal Officers, and changes in risk acceptance, contract growth, or direct delivery of medical care; and D) Quarterly Financial Report, Semi-annual "Managed Care Organizations Risk-Based Capital (MCO-RBC) Report"as defined by the NAIC, Annual Financial Forecast, Annual Certified Audit Report, Insurance Department Examination Report, Annual Statement filed with State Insurance Department (with all attachments), and E) Quarterly Enrollment Report, Semi-Annual Benefit Cost Management Report. Amended November 16, 2000 23
EXHIBIT A (continued) Standard 6(J): Control by Unlicensed Entities Prohibited No Controlled Affiliate shall cause or permit an entity other than a Plan or a Licensed Controlled Affiliate thereof to obtain control of the Controlled Affiliate or to acquire a substantial portion of its assets related to licensable services. Standard 7 - Other Standards for Risk-Assuming Workers' Compensation Controlled Affiliates Standards 7(A) - (E) that follow apply to Controlled Affiliates that underwrite the indemnity portion of workers' compensation insurance. Standard 7 (A): Financial Responsibility A Controlled Affiliate shall be operated in a manner that provides reasonable financial assurance that it can fulfill all of its contractual obligations to its customers. Standard 7(B): Reports and Records A Controlled Affiliate shall furnish, on a timely and accurate basis, reports and records relating to compliance with these Standards and the License Agreements between BCBSA and the Controlled Affiliate. Such reports and records are the following: A. BCBSA Controlled Affiliate Licensure Information Request; and B. Biennial trade name and service mark usage materials, including disclosure materials; and C. Annual Certified Audit Report, Annual Statement as filed with the State Insurance Department (with all attachments), Annual NAIC's Risk-Based Capital Worksheets for Property and Casualty Insurers, Annual Financial Forecast; and Amended June 16, 2000 24
EXHIBIT A (continued) Quarterly Financial Report, Quarterly Estimated Risk-Based Capital for Property and Casualty Insurers, Insurance Department Examination Report. D. Notification of all changes and proposed changes to independent ratings within 30 days of receipt and submission of a copy of all rating reports; and E. Changes in the ownership and governance of the Controlled Affiliate including changes in its charter, articles of incorporation, or bylaws, changes in a Controlled Affiliate's Board composition, Plan control, state license status, operating area, the Controlled Affiliate's Principal Officers or direct delivery of medical care. Standard 7(C): Loss Prevention A Controlled Affiliate shall apply loss prevention protocol to both new and existing business. Standard 7(D): Claims Administration A Controlled Affiliate shall maintain an effective claims administration process that includes all the necessary functions to assure prompt and proper resolution of medical and indemnity claims. Standard 7(E): Disability and Provider Management A Controlled Affiliate shall arrange for the provision of appropriate and necessary medical and rehabilitative services to facilitate early intervention by medical professionals and timely and appropriate return to work. Amended November 16, 2000 25
EXHIBIT A (continued) Standard 8 - Cooperation with Controlled Affiliate License Performance Response Process Protocol A Controlled Affiliate and its Sponsoring Plan(s) shall cooperate with BCBSA's Board of Directors and its Plan Performance and Financial Standards Committee in the administration of the Controlled Affiliate License Performance Response Process Protocol (ALPRPP) and in addressing Controlled Affiliate compliance problems identified thereunder. Standard 9 - Participation in National Programs by Smaller Controlled Affiliates A smaller Controlled Affiliate for which this standard applies pursuant to the Preamble section of Exhibit A of the Controlled Affiliate License Agreement shall effectively and efficiently participate in certain national programs from time to time as may be adopted by Member Plans for the purposes of providing ease of claims processing for customers receiving benefits outside of the Controlled Affiliate's service area and be subject to certain relevant financial and reporting requirements. A. National program requirements include: o BlueCard Program; o Inter-Plan Teleprocessing System (ITS); o Transfer Program; and o Electronic Claims Routing Process. B. Financial Requirements include: o Standard 6(D): Financial Performance Requirements and Standard 6(H): Financial Responsibility; or o A financial guarantee covering the Controlled Affiliate's BlueCard Program obligations in a form, and from a guarantor, acceptable to BCBSA. C. Reporting requirements include: o The Quarterly Capital Benchmark Worksheet. Amended March 10, 2000 26
Standard 10 - Other Standards for Controlled Affiliates Whose Primary Business is Government Non-Risk Standards 10(A) - (C) that follow apply to Controlled Affiliates whose primary business is government non-risk. Standard 10(A) - Organization and Governance A Controlled Affiliate shall be organized and operated in such a manner that it is 1) wholly owned by a licensed Plan or Plans and 2) the sponsoring licensed Plan or Plans have the legal ability to prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which it does not concur. 27
EXHIBIT A (continued) Standard 10(B) - Financial Responsibility A Controlled Affiliate shall be operated in a manner that provides reasonable financial assurance that it can fulfill all of its contractual obligations to its customers. Standard 10(C):- Reports and Records A Controlled Affiliate shall furnish, on a timely and accurate basis, reports and records relating to compliance with these Standards and the License Agreements between BCBSA and the Controlled Affiliate. Such reports and records are the following: A. BCBSA Affiliate Licensure Information Request; and B. Biennial trade name and service mark usage materials, including disclosure material; and C. Annual Certified Audit Report, Annual Statement (if required) as filed with the State Insurance Department (with all attachments), Annual NAIC Risk-Based Capital Worksheets (if required) as filed with the State Insurance Department (with all attachments), and Insurance Department Examination Report (if applicable)*; and D. Changes in the ownership and governance of the Controlled Affiliate, including changes in its charter, articles of incorporation, or bylaws, changes in the Controlled Affiliate's Board composition, Plan control, state license status, operating area, the Controlled Affiliate's Principal Officers or direct delivery of medical care. 28
EXHIBIT B ROYALTY FORMULA FOR SECTION 9 OF THE CONTROLLED AFFILIATE LICENSE AGREEMENT Controlled Affiliate will pay BCBSA a fee for this license in accordance with the following formula: FOR RISK AND GOVERNMENT NON-RISK PRODUCTS: For Controlled Affiliates not underwriting the indemnity portion of workers' compensation insurance: An amount equal to its pro rata share of each sponsoring Plan's dues payable to BCBSA computed with the addition of the Controlled Affiliate's subscription revenue and contracts arising from products using the marks. The payment by each sponsoring Plan of its dues to BCBSA, including that portion described in this paragraph, will satisfy the requirement of this paragraph, and no separate payment will be necessary. For Controlled Affiliates underwriting the indemnity portion of workers' compensation insurance: An amount equal to 0.35 percent of the gross revenue per annum of Controlled Affiliate arising from products using the marks; plus, an annual fee of $5,000 per license for a Controlled Affiliate subject to Standard 7. For Controlled Affiliates whose primary business is government non-risk: An amount equal to its pro-rata share of each sponsoring Plan's dues payable to BCBSA computed with the addition of the Controlled Affiliate's government non-risk beneficiaries.
EXHIBIT B (continued) FOR NONRISK PRODUCTS: An amount equal to 0.24 percent of the gross revenue per annum of Controlled Affiliate arising from products using the marks; plus: 1) An annual fee of $5,000 per license for a Controlled Affiliate subject to Standard 6 D. 2) An annual fee of $2,000 per license for all other Controlled Affiliates. The foregoing shall be reduced by one-half where both a BLUE CROSS(R) and BLUE SHIELD(R) License are issued to the same Controlled Affiliate. In the event that any license period is greater or less than one (1) year, any amounts due shall be prorated. Royalties under this formula will be calculated, billed and paid in arrears.
EXHIBIT 1A CONTROLLED AFFILIATE LICENSE AGREEMENT APPLICABLE TO LIFE INSURANCE COMPANIES (Includes revisions adopted by Member Plans through their March 16, 2001 meeting) This agreement by and among Blue Cross and Blue Shield Association ("BCBSA") _______________________________("Controlled Affiliate"), a Controlled Affiliate of the Blue Cross Plan(s), known as _________________________("Plan"). WHEREAS, BCBSA is the owner of the BLUE CROSS and BLUE CROSS Design service marks; WHEREAS, the Plan and the Controlled Affiliate desire that the latter be entitled to use the BLUE CROSS and BLUE CROSS Design service marks (collectively the "Licensed Marks") as service marks and be entitled to use the term BLUE CROSS in a trade name ("Licensed Name"); NOW, THEREFORE, in consideration of the foregoing and the mutual agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. GRANT OF LICENSE Subject to the terms and conditions of this Agreement, BCBSA hereby grants to the Controlled Affiliate the exclusive right to use the licensed Marks and Names in connection with and only in connection with those life insurance and related services authorized by applicable state law, other than health care plans and related services (as defined in the Plan's License Agreements with BCBSA) which services are not separately licensed to Controlled Affiliate by BCBSA, in the Service Area served by the Plan, except that BCBSA reserves the right to use the Licensed Marks and Name in said Service Area, and except to the extent that said Service Area may overlap the area or areas served by one or more other licensed Blue Cross Plans as of the date of this License as to which overlapping areas the rights hereby granted are non-exclusive as to such other Plan or Plans and their respective Licensed Controlled Affiliates only. Controlled Affiliate cannot use the Licensed Marks or Name outside the Service Area or, anything in any other license to Controlled Affiliate notwithstanding, in its legal or trade name. 2. QUALITY CONTROL A. Controlled Affiliate agrees to use the Licensed Marks and Name only in relation to the sale, marketing and rendering of authorized products and further agrees to be bound by the conditions regarding quality control shown in Exhibit A as it may be amended by BCBSA from time-to-time. Amended as of November 17, 1994 -1-
B. Controlled Affiliate agrees that Plan and/or BCBSA may, from time-to-time, upon reasonable notice, review and inspect the manner and method of Controlled Affiliate's rendering of service and use of the Licensed Marks and Name. C. Controlled Affiliate agrees that it will provide on an annual basis (or more often if reasonably required by Plan or by BCBSA) a report to Plan and BCBSA demonstrating Controlled Affiliate's compliance with the requirements of this Agreement including but not limited to the quality control provisions of Exhibit A. D. As used herein, a Controlled Affiliate is defined as an entity organized and operated in such a manner that it is subject to the bona fide control of a Plan or Plans. Absent written approval by BCBSA of an alternative method of control, bona fide control shall mean the legal authority, directly or indirectly through wholly-owned subsidiaries: (a) to select members of the Controlled Affiliate's governing body having not less than 51% voting control thereof; (b) to exercise operational control with respect to the governance thereof; and (c) to prevent any change in its articles of incorporation, bylaws or other governing documents deemed inappropriate. In addition, a Plan or Plans shall own at least 51% of any for-profit Controlled Affiliate. If the Controlled Affiliate is a mutual company, the Plan or its designee(s) shall have and maintain, in lieu of the requirements of items (a) and (c) above, proxies representing 51% of the votes at any meeting of the policyholders and shall demonstrate that there is no reason to believe this such proxies shall be revoked by sufficient policyholders to reduce such percentage below 51%. 3. SERVICE MARK USE Controlled Affiliate shall at all times make proper service mark use of the Licensed Marks, including but not limited to use of such symbols or words as BCBSA shall specify to protect the Licensed Marks, and shall comply with such rules (applicable to all Controlled Affiliates licensed to use the Marks) relative to service mark use, as are issued from time-to-time by BCBSA. If there is any public reference to the affiliation between the Plan and the Controlled Affiliate, all of the Controlled Affiliate's licensed services in the Service Area of the Plan shall be rendered under the Licensed Marks. Controlled Affiliate recognizes and agrees that all use of the Licensed Marks by Controlled Affiliate shall inure to the benefit of BCBSA. 4. SUBLICENSING AND ASSIGNMENT Controlled Affiliate shall not sublicense, transfer, hypothecate, sell, encumber or mortgage, by operation of law or otherwise, the rights granted -2-
hereunder and any such act shall be voidable at the option of Plan or BCBSA. This Agreement and all rights and duties hereunder are personal to Controlled Affiliate. 5. INFRINGEMENTS Controlled Affiliate shall promptly notify Plan and BCBSA of any suspected acts of infringement, unfair competition or passing off which may occur in relation to the Licensed Marks. Controlled Affiliate shall not be entitled to require Plan or BCBSA to take any actions or institute any proceedings to prevent infringement, unfair competition or passing off by third parties. Controlled Affiliate agrees to render to Plan and BCBSA, free of charge, all reasonable assistance in connection with any matter pertaining to the protection of the Licensed Marks by BCBSA. 6. LIABILITY INDEMNIFICATION Controlled Affiliate hereby agrees to save, defend, indemnify and hold Plan and BCBSA harmless from and against all claims, damages, liabilities and costs of every kind, nature and description which may arise as a result of Controlled Affiliate's rendering of health care services under the Licensed Marks. 7. LICENSE TERM The license granted by this Agreement shall remain in effect for a period of one (1) year and shall be automatically extended for additional one (1) year periods upon evidence satisfactory to the Plan and BCBSA that Controlled Affiliate meets the then applicable quality control standards, unless one of the parties hereto notifies the other party of the termination hereof at least sixty (60) days prior to expiration of any license period. This Agreement may be terminated by the Plan or by BCBSA for cause at any time provided that Controlled Affiliate has been given a reasonable opportunity to cure and shall not effect such a cure within thirty (30) days of receiving written notice of the intent to terminate (or commence a cure within such thirty day period and continue diligent efforts to complete the cure if such curing cannot reasonably be completed within such thirty day period). By way of example and not for purposes of limitation, Controlled Affiliate's failure to abide by the quality control provisions of Paragraph 2, above, shall be considered a proper ground for cancellation of this Agreement. This Agreement and all of Controlled Affiliate's rights hereunder shall immediately terminate without any further action by any party or entity in the event that: -3-
A. Controlled Affiliate shall no longer comply with Standard No. 1 (Organization and Governance) of Exhibit A or, following an opportunity to cure, with the remaining quality control provisions of Exhibit A, as it may be amended from time-to-time; or B. Plan ceases to be authorized to use the Licensed Marks; or C. Appropriate dues for Controlled Affiliate pursuant to item 8 hereof, which are the royalties for this License Agreement are more than sixty (60) days in arrears to BCBSA. Upon termination of this Agreement for cause or otherwise, Controlled Affiliate agrees that it shall immediately discontinue all use of the Licensed Marks including any use in its trade name. In the event of any disagreement between Plan and BCBSA as to whether grounds exist for termination or as to any other term or condition hereof, the decision of BCBSA shall control, subject to provisions for mediation or mandatory dispute resolution in effect between the parties. Upon termination of this Agreement, Licensed Controlled Affiliate shall immediately notify all of its customers that it is no longer a licensee of the Blue Cross and Blue Shield Association and provide instruction on how the customer can contact the Blue Cross and Blue Shield Association or a designated licensee to obtain further information on securing coverage. The written notification required by this paragraph shall be in writing and in a form approved by the Association. The Association shall have the right to audit the terminated entity's books and records to verify compliance with this paragraph. 8. DUES Controlled Affiliate will pay to BCBSA a fee for this license in accordance with the following formula: o An annual fee of five thousand dollars ($5,000) per license, plus o .05% of gross revenue per year from branded group products, plus o .5% of gross revenue per year from branded individual products plus o .14% of gross revenue per year from branded individual annuity products. Amended as of November 20, 1997 -4-
The foregoing percentages shall be reduced by one-half where both a BLUE CROSS(R) and BLUE SHIELD(R) license are issued to the same entity. In the event that any License period is greater or less than one (1) year, any amounts due shall be prorated. Royalties under this formula will be calculated, billed and paid in arrears. Plan will promptly and timely transmit to BCBSA all dues owed by Controlled Affiliate as determined by the above formula and if Plan shall fail to do so, Controlled Affiliate shall pay such dues directly. 9. JOINT VENTURE Nothing contained in this Agreement shall be construed as creating a joint venture, partnership, agency or employment relationship between Plan and Controlled Affiliate or between either and BCBSA. 9A. VOTING For all provisions of this Agreement referring to voting, the term `Plans' shall mean all entities licensed under the Blue Cross License Agreement and/or the Blue Shield License Agreement, and in all votes of the Plans under this Agreement the Plans shall vote together. For weighted votes of the Plans, the Plan shall have a number of votes equal to the number of weighted votes (if any) that it holds as a Blue Cross Plan plus the number of weighted votes (if any) that it holds as a Blue Shield Plan. For all other votes of the Plans, the Plan shall have one vote. For all questions requiring an affirmative three-fourths weighted vote of the Plans, the requirement shall be deemed satisfied with a lesser weighted vote unless six (6) or more Plans fail to cast weighted votes in favor of the question. 10. NOTICES AND CORRESPONDENCE Notices regarding the subject matter of this Agreement or breach or termination thereof shall be in writing and shall be addressed in duplicate to the last known address of each other party, marked respectively to the attention of its President and, if any, its General Counsel. Amended as of June 16, 2000 -4a- (The next page is page 5)
11. COMPLETE AGREEMENT This Agreement contains the complete understandings of the parties in relation to the subject matter hereof. This Agreement may only be amended by a writing executed by all parties. 12. SEVERABILITY If any term of this Agreement is held to be unlawful by a court of competent jurisdiction, such finding shall in no way effect the remaining obligations of the parties hereunder and the court may substitute a lawful term or condition for any unlawful term or condition so long as the effect of such substitution is to provide the parties with the benefits of this Agreement. 13. NONWAIVER No waiver by BCBSA of any breach or default in performance on the part of the Controlled Affiliate or any other licensee of any of the terms, covenants or conditions of this Agreement shall constitute a waiver of any subsequent breach or default in performance of said terms, covenants or conditions. 14 . GOVERNING LAW This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Illinois. IN WITNESS WHEREOF, the parties have caused this License Agreement to be executed, effective as of the date of last signature written below. BLUE CROSS AND BLUE SHIELD ASSOCIATION By: ----------------------------------------- Date: --------------------------------------- - --------------------------------------------- Controlled Affiliate By: ----------------------------------------- Date: --------------------------------------- Plan: --------------------------------------- -5-
EXHIBIT A CONTROLLED AFFILIATE LICENSE STANDARDS LIFE INSURANCE COMPANIES Page 1 of 2 PREAMBLE The standards for licensing Life Insurance Companies (Life and Health Insurance companies, as defined by state statute) are established by BCBSA and are subject to change from time-to-time upon the affirmative vote of three-fourths (3/4) of the Plans and three-fourths (3/4) of the total weighted vote of all Plans. Each Licensed Plan is required to use a standard controlled affiliate license form provided by BCBSA and to cooperate fully in assuring that the licensed Life Insurance Company maintains compliance with the license standards. An organization meeting the following standards shall be eligible for a license to use the Licensed Marks within the service area of its sponsoring Licensed Plan to the extent and the manner authorized under the Controlled Affiliate License applicable to Life Insurance Companies and the principal license to the Plan. Standard 1 - Organization and Governance The LIC shall be organized and operated in such a manner that it is controlled by a licensed Plan or Plans which have, directly or indirectly: 1) not less than 51% of the voting control of the LIC; and 2) the legal ability to prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the LIC with which it does not concur; and 3) operational control of the LIC. If the LIC is a mutual company, the Plan or its designee(s) shall have and maintain, in lieu of the requirements of items 1 and 2 above, proxies representing at least 51% of the votes at any policyholder meeting and shall demonstrate that there is no reason to believe such proxies shall be revoked by sufficient policyholders to reduce such percentage below 51%. Standard 2 - State Licensure The LIC must maintain unimpaired licensure or certificate of authority to operate under applicable state laws as a life and health insurance company in each state in which the LIC does business. -1-
CONTROLLED AFFILIATE LICENSE STANDARDS LIFE INSURANCE COMPANIES Page 2 of 2 Standard 3 - Records and Examination The LIC and its sponsoring licensed Plan(s) shall maintain and furnish, on a timely and accurate basis, such records and reports regarding the LIC as may be required in order to establish compliance with the license agreement. The LIC and its sponsoring licensed Plan(s) shall permit BCBSA to examine the affairs of the LIC and shall agree that BCBSA's board may submit a written report to the chief executive officer(s) and the board(s) of directors of the sponsoring Plan(s). Standard 4 - Mediation The LIC and its sponsoring Plan(s) shall agree to use the then-current BCBSA mediation and mandatory dispute resolution processes, in lieu of a legal action between or among another licensed controlled affiliate, a licensed Plan or BCBSA. Standard 5 - Financial Responsibility The LIC shall maintain adequate financial resources to protect its customers and meet its business obligations. Standard 6 - Cooperation with Affiliate License Performance Response Process Protocol The LIC and its Sponsoring Plan(s) shall cooperate with BCBSA's Board of Directors and its Plan Performance and Financial Standards Committee in the administration of the Affiliate License Performance Response Process Protocol (ALPRPP) and in addressing LIC compliance problems identified thereunder. -2-
EXHIBIT 2 Membership Standards Page 1 of 4 Preamble The Membership Standards apply to all organizations seeking to become or to continue as Regular Members of the Blue Cross and Blue Shield Association. Any organization seeking to become a Regular Member must be found to be in substantial compliance with all Membership Standards at the time membership is granted and the organization must be found to be in substantial compliance with all Membership Standards for a period of two (2) years preceding the date of its application. If Membership is sought by an entity which controls or is controlled by one or more Plans, such compliance shall be determined on the basis of compliance by such Plan or Plans. The Regular Member Plans shall have authority to interpret these Standards. Compliance with any Membership Standard may be excused, at the Plans' discretion, if the Plans agree that compliance with such Standard would require the Plan to violate a law or governmental regulation governing its operation or activities. A Regular Member Plan that operates as a "Shell Holding Company" is defined as an entity that assumes no underwriting risk and has less than 1% of the consolidated enterprise assets (excludes investments in subsidiaries) and less than 5% of the consolidated enterprise general and administrative expenses. A Regular Member Plan that operates as a "Hybrid Holding Company" is defined as an entity that assumes no underwriting risk and has either more than 1% of the consolidated enterprise assets (excludes investments in subsidiaries) or more than 5% of the consolidated enterprise general and administrative expenses. Standard 1: A Plan's Board shall not be controlled by any special interest group, and shall act in the interest of its Corporation in providing cost-effective health care services to its customers. A Plan shall maintain a governing Board, which shall control the Plan, composed of a majority of persons other than providers of health care services, who shall be known as public members. A public member shall not be an employee of or have a financial interest in a health care provider, nor be a member of a profession which provides health care services. Amended as of November 19, 1998
EXHIBIT 2 Membership Standards Page 2 of 4 Standard 2: A Plan shall furnish to the Association on a timely and accurate basis reports and records relating to compliance with these Standards and the License Agreements between the Association and the Plans. Such reports and records are the following: A. BCBSA Membership Information Request; B. Biennial trade name and service mark usage material, including disclosure material under Standard 7; C. Changes in the governance of the Plan, including changes in a Plan's Charter, Articles of Incorporation, or Bylaws, changes in a Plan's Board composition, or changes in the identity of the Plan's Principal Officers; D. Quarterly Financial Report, Semi-annual "Managed Care Organizations Risk-Based Capital (MCO-RBC) Report" as defined by the NAIC, Annual Financial Forecast, Annual Certified Audit Report, Insurance Department Examination Report, Annual Statement filed with State Insurance Department (with all attachments), Plan, Subsidiary and Affiliate Report; and o Plans that are a Shell Holding Company as defined in the Preamble hereto are required to furnish only a calendar year-end "Managed Care Organizations Risk-Based Capital (MCO-RBC) Report" as defined by the NAIC. Amended as of November 16, 2000
EXHIBIT 2 Membership Standards Page 3 of 4 E. Quarterly Enrollment Report, Semi-Annual Benefit Cost Management Report and Member Touchpoint Measures Index (MTM) starting 12/31/00 and semi-annually thereafter; and o Plans that are a Shell Holding Company as defined in the Preamble hereto are not required to furnish any items identified in Paragraph E. Standard 3: A Plan shall be operated in a manner that provides reasonable financial assurance that it can fulfill its contractual obligations to its customers. Standard 4: A Plan shall be operated in a manner responsive to customer needs and requirements. Standard 5: A Plan shall effectively and efficiently participate in each national program as from time to time may be adopted by the Member Plans for the purposes of providing portability of membership between the Plans and ease of claims processing for customers receiving benefits outside of the Plan's Service Area. Such programs are applicable to Blue Cross and Blue Shield Plans, and include: A. Transfer Program; B. Inter-Plan Teleprocessing System (ITS); C. BlueCard Program; and D. Electronic Claims Routing Process Amended as of November 16, 2000
EXHIBIT 2 Membership Standards Page 4 of 4 Standard 6: In addition to requirements under the national programs listed in Standard 5: Participation in National Programs, a Plan shall take such action as required to ensure its financial performance in programs and contracts of an inter-Plan nature or where the Association is a party. Standard 7: A Plan shall make adequate disclosure in contracting with third parties and in disseminating public statements of (i) the structure of the Blue Cross and Blue Shield System, (ii) the independent nature of every Plan, and (iii) the Plan's financial condition. Standard 8: A Plan shall cooperate with the Association's Board of Directors and its Plan Performance and Financial Standards Committee in the administration of the Plan Performance Response Process and in addressing Plan performance problems identified thereunder. Standard 9: A Plan shall obtain a rating of its financial strength from an independent rating agency approved by the Association's Board of Directors for such purpose. Standard 10: During each year, a Plan and its Controlled Affiliate(s) engaged in providing licensable services (excluding Life Insurance and Charitable Foundation Services) shall use their best efforts in the designated Service Area to promote and build the value of the Blue Cross and Blue Shield Marks. Standard 11 Neither a Plan nor any Larger Controlled Affiliate shall cause or permit an entity other than a Plan or a Licensed Controlled Affiliate thereof to obtain control of the Plan or Larger Controlled Affiliate or to acquire a substantial portion of its assets related to licensable services. Amended as of June 18, 1999
EXHIBIT 3 GUIDELINES WITH RESPECT TO USE OF LICENSED NAME AND MARKS IN CONNECTION WITH NATIONAL ACCOUNTS Page 1 of 3 1. The strength of the Blue Cross/Blue Cross National Accounts mechanism, and the continued provision of cost effective, quality health care benefits to National Accounts, are predicated on locally managed provider networks coordinated on a national scale in a manner consistent with effective service to National Account customers and consistent with the preservation of the integrity of the Blue Cross/Blue Shield system and the Licensed Marks. These guidelines shall be interpreted in keeping with such ends. 2. A National Account is an entity with employee and/or retiree locations in more than one Plan's Service Area. Unless otherwise agreed, a National Account is deemed located in the Service Area in which the corporate headquarters of the National Account is located. The Control Plan of a National Account is the Plan in whose Service Area the National Account is located. A participating ("Par") Plan is a Plan in whose Service Area the National Account has employee and/or retiree locations, but in which the National Account is not located. 3. The National Account Guidelines enunciated herein below shall be applicable only with respect to the business of new National Accounts acquired after January 1, 1991. 4. Control Plans shall utilize National Account identification cards complying with then currently effective BCBSA graphic standards in connection with all National Accounts business to facilitate administration thereof, to minimize subscriber and provider confusion, and to reflect a commitment to cooperation among Plans. 5. Disputes among Plans and/or BCBSA as to the interpretation or implementation of these Guidelines or as to other National Accounts issues shall be submitted to mediation and mandatory dispute resolution as provided in the License Agreement. For two years from the effective date of the License Agreement, however, such disputes shall be subject to mediation only, with the results of such mediation to be collected and reported in order to establish more definitive operating parameters for National Accounts business and to serve as ground rules for future binding dispute resolution.
EXHIBIT 3 Page 2 of 3 6. The Control Plan may use the BlueCard Program (as defined by IPOC) to deliver benefits to employees and non-Medicare eligible retirees in a Participating Plan's service area if an alternative arrangement with the Participating Plan cannot be negotiated. The Participating Plan's minimum servicing requirement for those employees and non-Medicare retirees in its service area is to deliver benefits using the BlueCard Program. Account delivery is subject to the policies, provisions and procedures of the BlueCard Program. 7. For provider payments in a Participating Plan's area (on non-BlueCard claims), payment to the provider may be made by the Participating Plan or the Control Plan at the Participating Plan's option. If the Participating Plan elects to pay the provider, it may not withhold payment of a claim verified by the Control Plan or its designated processor, and payment must be in conformity with service criteria established by the Board of Directors of BCBSA (or an authorized committee thereof) to assure prompt payment, good service and minimum confusion with providers and subscribers. The Control Plan, at the Participating Plan's request, will also assure that measures are taken to protect the confidentiality of the data pertaining to provider reimbursement levels and profiles. 8. For claim payments in a Participating Plan's area (on non-BlueCard claims), Participating Plans are strongly encouraged, but not required, to pass along to the Control Plan part or all of local provider discounts and differentials for use by the Control Plan in negotiating financial arrangements with National Accounts. However, since the size, basis, form and use of local differentials can vary substantially among Plans and also by individual National Account characteristics, the degree and form of any discount or differential passed along to the Control Plan shall be strictly a matter of negotiated contractual agreement between a Participating Plan and the Control Plan and may also vary from one National Account to another. In order to facilitate the quotation of national account pricing and the offering of a variety of National Account delivery systems, all Plans are strongly encouraged to periodically publish to other Plans and the BCBSA their National Account contracting policies with respect to the handling of differentials. The Control Plan, in its financial agreements with a National Account, is expected to reasonably reflect the aggregate amount of differentials passed along to the Control Plan by all Participating Plans in a National Account. The exact form and substance of this may vary from one National Account to another and shall be a matter of Amended as of June 14, 1996
EXHIBIT 3 Page 3 of 3 explicit negotiation and contractual relationship between the National Account and the Control Plan. The specifics in an agreement between the Control Plan and the National Account may vary in form (e.g., a guaranteed offset against retentions, or a direct pass through, or a guaranteed aggregate percentage discount, or no pass back at all, etc.), and the Control Plan has the responsibility and the Authority to negotiate precise arrangements. However, irrespective of the final arrangements between the Control Plan and the National Account, a Participating Plan's liability for passing along differentials shall be limited to the contractual agreement the Participating Plan has with the Control Plan on a specific National Account. 9. Other than in contracting with health care providers or soliciting such contracts in areas contiguous to a Plan's Service Area in order to serve its subscribers or those of its licensed Controlled Affiliate residing or working in its Service Area, a Control Plan may not use the Licensed Marks and/or Name, as a tag line or otherwise, to negotiate directly with providers outside its Service Area.
EXHIBIT 4 GOVERNMENT PROGRAMS AND CERTAIN OTHER USES Page 1 of 2 1. A Plan and its licensed Controlled Affiliate may use the Licensed Marks and Name in bidding on and executing a contract to serve a Government Program, and in thereafter communicating with the Government concerning the Program. With respect, however, to such contracts entered into after the 1st day of January, 1991, the Licensed Marks and Name will not be used in communications or transactions with beneficiaries or providers in the Government Program located outside a Plan's Service Area, unless the Plan can demonstrate to the satisfaction of BCBSA's governing body that such a restriction on use of the Licensed Marks and Name will jeopardize its ability to procure the contract for the Government Program. As to both existing and future contracts for Government Programs, Plans will discontinue use of the Licensed Marks and Name as to beneficiaries and Providers outside their Service Area as expenditiously as circumstances reasonably permit. Effective January 1, 1995, except as provided in the first sentence above, all use by a Plan of the Licensed Marks and Name in Government Programs outside of the Plan's Service Area shall be discontinued. Incidental communications outside a Plan's Service Area with resident or former resident beneficiaries of the Plan, and other categories of necessary incidental communications approved by BCBSA, are not prohibited. 2. In connection with activity otherwise in furtherance of the License Agreement, a Plan may use the Licensed Marks and Name outside its Service Area in the following circumstances which are deemed legitimate and necessary and not likely to cause consumer confusion: a. sending letterhead, envelopes, and similar items solely for administrative purposes (e.g., not for purposes of marketing, advertising, promoting, selling or soliciting the sale of health care plans and related services); b. distributing business cards other than in marketing and selling; c. contracting with health care providers or soliciting such contracts in areas contiguous to a Plan's Service Area in order to serve its subscribers or those of its licensed Controlled Affiliate residing or working in its service area; d. issuing a small sign containing the legal name or trade name of the Plan or its licensed Controlled Affiliate for display by a provider to identify the latter as a participating provider of the Plan or Controlled Affiliate; Amended March 16, 2001
EXHIBIT 4 Page 2 of 2 e. advertising in publications or electronic media solely to persons for employment; f. advertising in print, electronic or other media which serve, as a substantial market, the Service Area of the Plan or licensed Controlled Affiliate, provided that no Plan may advertise outside its Service Area on the national broadcast and cable networks and that advertisements in national print media are limited to the smallest regional edition encompassing the Service Area; g. advertising by direct mail where the addressee's zip code plus 4 includes, at least in part, the Plan's Service Area or that of a licensed Controlled Affiliate.
EXHIBIT 5 MEDIATION AND MANDATORY DISPUTE RESOLUTION (MMDR) RULES The Blue Cross and Blue Shield Plans ("Plans") and the Blue Cross Blue Shield Association ("BCBSA") recognize and acknowledge that the Blue Cross and Blue Shield system is a unique nonprofit and for-profit system offering cost effective health care financing and services. The Plans and BCBSA desire to utilize Mediation and Mandatory Dispute Resolution ("MMDR") to avoid expensive and time-consuming litigation that may otherwise occur in the federal and state judicial systems. Even MMDR should be viewed, however, as methods of last resort, all other procedures for dispute resolution having failed. Except as otherwise provided in the License Agreements, the Plans, their Controlled Affiliates and BCBSA agree to submit all disputes to MMDR pursuant to these Rules and in lieu of litigation. 1. Initiation of Proceedings A. Pre-MMDR Efforts Before filing a Complaint to invoke the MMDR process, the CEO of a complaining party, or his/her designated representative, shall undertake good faith efforts with the other side(s) to try to resolve any dispute. B. Complaint To commence a proceeding, the complaining party (or parties) shall provide by certified mail, return receipt requested, a written Complaint to the BCBSA Corporate Secretary (which shall also constitute service on BCBSA if it is a respondent) and to any Plan(s) and/or Controlled Affiliate(s) named therein. The Complaint shall contain: i. identification of the complaining party (or parties) requesting the proceeding; ii. identification of the respondent(s); iii. identification of any other persons or entities who are interested in a resolution of the dispute; iv. a full statement describing the nature of the dispute; v. identification of all of the issues that are being submitted for resolution; Amended as of November 21, 1996
vi. the remedy sought; vii. a statement as to whether the complaining party (or parties) elect(s) first to pursue Mediation; viii. any request, if applicable, that one or more members of the Mediation Committee be disqualified from the proceeding and the grounds for such request; ix. any request, if applicable, that the matter be handled on an expedited basis and the reasons therefor; and x. a statement signed by the CEO of the complaining party affirming that the CEO has undertaken efforts, or has directed efforts to be undertaken, to resolve the dispute before resorting to the MMDR process. The complaining party (or parties) shall file and serve with the Complaint copies of all documents which the party (or parties) intend(s) to offer at the Arbitration Hearing and a statement identifying the witnesses the party (or parties) intend(s) to present at the Hearing, along with a summary of each witness' expected testimony. C. Answer Within twenty (20) days after receipt of the Complaint, each respondent shall serve on the BCBSA and on the complaining party (or parties) and on the Chairman of the Mediation Committee; i. a full Answer to the aforesaid Complaint; ii. a statement of any Counterclaims against the complaining party (or parties), providing with respect thereto the information specified in Paragraph 1.B., above; iii. a statement as to whether the respondent elects to first pursue Mediation; iv. any request, if applicable, that one or more members of the Mediation Committee be disqualified from the proceeding and the grounds for such request; and v. any request, if applicable, that the matter be handled on an expedited basis and the reasons therefor.
The respondent(s) shall file and serve with the Answer or by the date of the Initial Conference set forth in Paragraph 3.B., below, copies of all documents which the respondent(s) intend(s) to offer at the Arbitration Hearing and a statement identifying the witnesses the party (or parties) intend(s) to present at the Hearing, along with a summary of each witness' expected testimony. D. Reply To Counterclaim Within ten (10) days after receipt of any Counterclaim, the complaining party (or parties) shall serve on BCBSA and on the responding party (or parties) and on the Chairman of the Mediation Committee, a Reply to the Counterclaim. Such Reply must provide the same information required by Paragraph 1.C. 2. Mediation A. Mediation Committee To facilitate the mediation of disputes between or among BCBSA, the Plans and/or their Controlled Affiliates, the BCBSA Board has established a Mediation Committee. Mediation may be pursued in lieu of or in an effort to obviate the Mandatory Dispute Resolution process, and all parties are strongly urged to exhaust the mediation procedure. B. Election To Mediate If any party elects first to pursue Mediation, and if it appears to the Corporate Secretary that the dispute falls within the jurisdiction of the Mediation Committee, as set forth in Exhibit 5-A hereto, then the Corporate Secretary will promptly furnish the Mediation Committee with copies of the Complaint, Answer, Counterclaim and Reply to Counterclaim, and other documents referenced in Paragraph 1, above. C. Selection of Mediators The parties shall promptly attempt to agree upon: (i) the number of mediators desired, not to exceed three mediators; and (ii) the selection of the mediator(s) who may include members of the Mediation Committee and/or experienced mediators from an independent entity to mediate all disputes set forth in the Complaint and Answer (and Counterclaim and Reply, if any). In the event the parties cannot agree upon the number of mediators desired, that number shall default to three. In the event the parties cannot agree upon the selection of mediator(s), the Chairman will select the mediator(s), at least one of which shall be an experienced mediator from an independent entity, consistent with the provisions set forth in this Paragraph. No member of the Mediation Committee who is a representative of any party to the Mediation may be
selected to mediate the dispute. The Chairman shall also endeavor not to select as a mediator any member of the Mediation Committee whom a party has requested to be disqualified. If, after due regard for availability, expertise, and such other considerations as may best promote an expeditious Mediation, the Chairman believes that he or she must consider for selection a member of the Mediation Committee whom a party has requested to be disqualified, the other members of the Committee eligible to be selected to mediate the dispute shall decide the request for disqualification. By agreeing to participate in the Mediation of a dispute, a member of the Mediation Committee represents to the party (or parties) thereto that he or she knows of no grounds which would require his or her disqualification. D. Binding Decision Before the date of the Mediation Hearing described below, the Corporate Secretary will contact the party (or parties) to determine whether they wish to be bound by any recommendation of the selected mediators for resolution of the disputes. If all wish to be bound, the Corporate Secretary will send appropriate documentation to them for their signatures before the Mediation Hearing begins. E. Mediation Procedure The Chairman shall promptly advise the parties of a scheduled Mediation Hearing date. Unless a party requests an expedited procedure, or unless all parties to the proceeding agree to one or more extensions of time, the Mediation Hearing set forth below shall be completed within forty (40) days of BCBSA's receipt of the Complaint. The selected mediators, unless the parties otherwise agree, shall adhere to the following procedure: i. Each party must be represented by its CEO or other representative who has been delegated full authority to resolve the dispute. However, parties may send additional representatives as they see fit. ii. By no later than five (5) days prior to the date designated for the Mediation Hearing, each party shall supply and serve a list of all persons who will be attending the Mediation Hearing, and indicate who will have the authority to resolve the dispute. iii. Each party will be given one-half hour to present its case, beginning with the complaining party (or parties), followed by the other party or parties. The parties are free to structure their presentations as they see fit, using oral statements or direct examination of witnesses. However, neither cross-examination nor questioning of opposing representatives will be
permitted. At the close of each presentation, the selected mediators will be given an opportunity to ask questions of the presenters and witnesses. All parties must be present throughout the Mediation Hearing. The selected mediators may extend the time allowed for each party's presentation at the Mediation Hearing. The selected mediators may meet in executive session, outside the presence of the parties, or may meet with the parties separately, to discuss the controversy. iv. After the close of the presentations, the parties will attempt to negotiate a settlement of the dispute. If the parties desire, the selected mediators, or any one or more of the selected mediators, will sit in on the negotiations. v. After the close of the presentations, the selected mediators may meet privately to agree upon a recommendation for resolution of the dispute which would be submitted to the parties for their consideration and approval. If the parties have previously agreed to be bound by the results of this procedure, this recommendation shall be binding upon the parties. vi. The purpose of the Mediation Hearing is to assist the parties to settle their grievances short of mandatory dispute resolution. As a result, the Mediation Hearing has been designed to be as informal as possible. Rules of evidence shall not apply. There will be no transcript of the proceedings, and no party may make a tape recording of the Mediation Hearing. vii. In order to facilitate a free and open discussion, the Mediation proceeding shall remain confidential. A "Stipulation to Confidentiality" which prohibits future use of settlement offers, all position papers or other statements furnished to the selected mediators, and decisions or recommendations in any Mediation proceeding shall be executed by each party. viii. Upon request of the selected mediators, or one of the parties, BCBSA staff may also submit documentation at any time during the proceedings.
F. Notice Of Termination Of Mediation If the Mediation cannot be completed within the prescribed or agreed time period due to the lack of cooperation of any party, as determined by the selected mediators, or if the Mediation does not result in a final resolution of all disputes at the Mediation Hearing or within forty (40) days after the Complaint was served, whichever comes first, any party or any one of the selected mediators may so notify the Corporate Secretary, who shall promptly issue a Notice of termination of mediation to all parties, to the selected mediators, and to the MDR Administrator, defined below. Such notice shall serve to bring the Mediation to an end and to initiate Mandatory Dispute Resolution. Upon agreement of all parties and the selected mediators, the Mediation process may continue at the same time the MDR process is invoked. The Notice described above would serve to initiate the MDR proceeding and would not terminate the proceedings. 3. Mandatory Dispute Resolution (MDR) If all parties elect not to first pursue Mediation, or if a notice of termination of Mediation is issued as set forth in Paragraph 2.F., above, then the unresolved disputes set forth in any Complaint and Answer (and Counterclaim and Reply, if any) shall be subject to MDR. A. MDR Administrator The Administrator shall be an independent entity such as the Center for Public Resources, Inc. or Endispute, Inc., specializing in alternative dispute resolution. The Administrator shall be designated initially, and may be changed from time to time, by the affirmative vote of a majority of the Plans present and voting and a majority of the total then current weighted vote of all the Plans present and voting. B. Initial Conference Within five (5) days after a Notice of Termination has issued, or within five (5) days after the time for filing and serving the Reply to any Counterclaim if the parties elect first not to mediate, the parties shall confer with the Administrator to discuss selecting a dispute resolution panel ("the Panel"). This Initial Conference may be by telephone. The parties are encouraged to agree to the composition of the Panel and to present that agreement to the Administrator at the Initial Conference. If the parties do not agree on the composition of the Panel by the time of the Initial Conference, or by any extension thereof agreed to by all parties and the Administrator, then the Panel Selection Process set forth in subparagraph C shall be followed. Amended September 21, 2000
C. Panel Selection Process The Administrator shall designate at least seven potential arbitrators. The exact number designated shall be sufficient to give each party at least two peremptory strikes. Each party shall be permitted to strike any designee for cause and the Administrator shall determine the sufficiency thereof in its sole discretion. The Administrator will designate a replacement for any designee so stricken. Each party shall then be permitted two peremptory strikes. From the remaining designees, the Administrator shall select a three member Panel. The Administrator shall set the dates for exercising all strikes and shall complete the Panel Selection Process within fifteen (15) days of the Initial Conference. Each Arbitrator shall be compensated at his or her normal hourly rate or, in the absence of an established rate, at a reasonable hourly rate to be promptly fixed by the Administrator for all time spent in connection with the proceedings and shall be reimbursed for any travel and other reasonable expenses. D. Duties Of The Arbitrators The Panel shall promptly designate a Presiding Arbitrator for the purposes reflected below, but shall retain the power to review and modify any ruling or other action of said Presiding Arbitrator. Each Arbitrator shall be an independent Arbitrator, shall be governed by the Code of Ethics for Arbitrators in Commercial Disputes, appended as Exhibit "5-B" hereto, and shall at or prior to the commencement of any Arbitration Hearing take an oath to that effect. Each Arbitrator shall promptly disclose in writing to the Panel and to the parties any circumstances, whenever arising, that might cause doubt as to such Arbitrator's compliance, or ability to comply, with said Code of Ethics, and, absent resignation by such Arbitrator, the remaining Arbitrators shall determine in their sole discretion whether the circumstances so disclosed constitute grounds for disqualification and for replacement. With respect to such circumstances arising or coming to the attention of a party after an Arbitrator's selection, a party may likewise request the Arbitrator's resignation or a determination as to disqualification by the remaining Arbitrators. With respect to a sole Arbitrator, the determination as to disqualification shall be made by the Administrator. There shall be no ex parte communication between the parties or their counsel and any member of the Panel. E. Panel's Jurisdiction And Authority The Panel's jurisdiction and authority shall extend to all disputes between or among the Plans, their Controlled Affiliates, and/or BCBSA, except for those disputes excepted from these MMDR procedures as set forth in the License Agreements.
With the exception of punitive or treble damages, the Panel shall have full authority to award the relief it deems appropriate to resolve the parties' disputes, including monetary awards and injunctions, mandatory or prohibitory. The Panel has no authority to award punitive or treble damages except that the Panel may allocate or assess responsibility for punitive or treble damages assessed by another tribunal. Subject to the above limitations, the Panel may, by way of example, but not of limitation: i. interpret or construe the meaning of any terms, phrase or provision in any license between BCBSA and a Plan or a Controlled Affiliate relating to the use of the BLUE CROSS(R) or BLUE SHIELD(R) service marks. ii. determine whether BCBSA, a Plan or a Controlled Affiliate has violated the terms or conditions of any license between the BCBSA and a Plan or a Controlled Affiliate relating to the use of the BLUE CROSS(R) or BLUE CROSS(R) service marks. iii. decide challenges as to its own jurisdiction. iv. issue such orders for interim relief as it deems appropriate pending Hearing and Award in any Arbitration. It is understood that the Panel is expected to resolve issues based on governing principles of law, preserving to the maximum extent legally possible the continued integrity of the Licensed Marks and the BLUE CROSS/BLUE SHIELD system. The Panel shall apply federal law to all issues which, if asserted in the United States District Court, would give rise to federal question jurisdiction, 28 U.S.C. ss. 1331. The Panel shall apply Illinois law to all issues involving interpretation, performance or construction of any License Agreement or Controlled Affiliate License Agreement unless the agreement otherwise provides. As to other issues, the Panel shall choose the applicable law based on conflicts of law principles of the State of Illinois.
F. Administrative Conference And Preliminary Arbitration Hearing Within ten (10) days of the Panel being selected, the Presiding Arbitrator will schedule an Administrative Conference to discuss scheduling of the Arbitration Hearing and any other matter appropriate to be considered including: any written discovery in the form of requests for production of documents or requests to admit facts; the identity of any witness whose deposition a party may desire and a showing of exceptional good cause for the taking of any such deposition; the desirability of bifurcation or other separation of the issues; the need for and the type of record of conferences and hearings, including the need for transcripts; the need for expert witnesses and how expert testimony should be presented; the appropriateness of motions to dismiss and/or for full or partial summary judgment; consideration of stipulations; the desirability of presenting any direct testimony in writing; and the necessity for any on-site inspection by the Panel. G. Discovery i. Requests for Production of Documents: All requests for the production of documents must be served as of the date of the Administrative Conference as set forth in Paragraph 3.F., above. Within twenty (20) days after receipt of a request for documents, a party shall produce all relevant and non-privileged documents to the requesting party. In his or her discretion, the Presiding Arbitrator may require the parties to provide lists in such detail as is deemed appropriate of all documents as to which privilege is claimed and may further require in-camera inspection of the same. ii. Requests for Admissions: Requests for Admissions may be served up to 21 days prior to the Arbitration Hearing. A party served with Requests For Admissions must respond within twenty (20) days of receipt of said request. The good faith use of and response to Requests for Admissions is encouraged, and the Panel shall have full discretion, with reference to the Federal Rules of Civil Procedure, in awarding appropriate sanctions with respect to abuse of the procedure.
iii. Depositions As a general rule, the parties will not be permitted to take deposition testimony for discovery purposes. The Presiding Arbitrator, in his or her sole discretion, shall have the authority to permit a party to take such deposition testimony upon a showing of exceptional good cause, provided that no deposition, for discovery purposes or otherwise, shall exceed three (3) hours, excluding objections and colloquy of counsel. iv. Expert witness(es): If a party intends to present the testimony of an expert witness during the oral hearing, it shall provide all other parties with a written statement setting forth the information required to be provided by Fed. R. Civ. P. 26(b)(4)(A)(i) prior to the expiration of the discovery period. v. Discovery cut-off: The Presiding Arbitrator shall determine the date on which the discovery period will end, but the discovery period shall not exceed forty-five (45) days from its commencement, without the agreement of all parties. vi. Additional discovery: Any additional discovery will be at the discretion of the Presiding Arbitrator. The Presiding Arbitrator is authorized to resolve all discovery disputes, which resolution will be binding on the parties unless modified by the Arbitration Panel. If a party refuses to comply with a decision resolving a discovery dispute, the Panel, in keeping with Fed. R. Civ. P. 37, may refuse to allow that party to support or oppose designated claims or defenses, prohibit that party from introducing designated matters into evidence or, in extreme cases, decide an issue submitted for resolution adversely to that party. H. Panel Suggested Settlement/Mediation At any point during the proceedings, the Panel at the request of any party or on its own initiative, may suggest that the parties explore settlement and that they do so at or before the conclusion of the Arbitration Hearing, and the Panel shall give such assistance in settlement negotiations as the parties may request and the Panel may deem appropriate. Alternatively, the Panel may direct the parties to endeavor to mediate their disputes as provided above, or to explore a mini-trial proceeding, or to have an independent party render a neutral evaluation of the parties' respective positions. The Panel shall enter such sanctions as it deems appropriate with respect to any party failing to pursue in good faith such Mediation or other alternate dispute resolution methods.
I. Subpoenas On Third Parties Pursuant to, and consistent with, the Federal Arbitration Act, 9 U.S.C. ss. 9 et seq., a party may request the issuance of a subpoena on a third party, to compel testimony or documents, and, if good and sufficient cause is shown, the Panel shall issue such a subpoena. J. Arbitration Hearing An Arbitration Hearing will be held within thirty (30) days after the Administrative Conference if no discovery is taken, or within thirty (30) days after the close of discovery, unless all parties and the Panel agree to extend the Arbitration Hearing date, or unless the parties agree in writing to waive the Arbitration Hearing. The parties may mutually agree on the location of the Arbitration Hearing. If the parties fail to agree, the Arbitration Hearing shall be held in Chicago, Illinois, or at such other location determined by the Presiding Arbitrator to be most convenient to the participants. The Panel will determine the date(s) and time(s) of the Arbitration Hearing(s) after consultation with all parties and shall provide reasonable notice thereof to all parties or their representatives. K. Arbitration Hearing Memoranda Twenty (20) days prior to the Arbitration Hearing, each party shall submit to the other party (or parties) and to the Panel an Arbitration Hearing Memorandum which sets forth the applicable law and any argument as to any relevant issue. The Arbitration Hearing Memorandum will supplement, and not repeat, the allegations, information and documents contained in or with the Complaint, Answer, Counterclaim and Reply, if any. Ten (10) days prior to the Arbitration Hearing, each party may submit to the other party (or parties) and to the Panel a Response Arbitration Hearing Memorandum which sets forth any response to another party's Arbitration Hearing Memorandum.
L. Notice For Testimony Ten (10) days prior to the Arbitration Hearing, any party may serve a Notice on any other party (or parties) requesting the attendance at the Arbitration Hearing of any officer, employee or director of the other party (or parties) for the purpose of providing noncumulative testimony. If a party fails to produce one of its officers, employees or directors whose noncumulative testimony during the Arbitration Hearing is reasonably requested by an adverse party, the Panel may refuse to allow that party to support or oppose designated claims or defenses, prohibit that party from introducing designated matters into evidence or, in extreme cases, decide an issue submitted for mandatory dispute resolution adversely to that party. This Rule may not be used for the purpose of burdening or harassing any party, and the Presiding Arbitrator may impose such orders as are appropriate so as to prevent or remedy any such burden or harassment. M. Arbitration Hearing Procedures i. Attendance at Arbitration Hearing: Any person having a direct interest in the proceeding is entitled to attend the Arbitration Hearing. The Presiding Arbitrator shall otherwise have the power to require the exclusion of any witness, other than a party or other essential person, during the testimony of any other witness. It shall be discretionary with the Presiding Arbitrator to determine the propriety of the attendance of any other person. ii. Confidentiality: The Panel and all parties shall maintain the privacy of the Arbitration Proceeding. The parties and the Panel shall treat the Arbitration Hearing and any discovery or other proceedings or events related thereto, including any award resulting therefrom, as confidential except as otherwise necessary in connection with a judicial challenge to or enforcement of an award or unless otherwise required by law. iii. Stenographic Record: Any party, or if the parties do not object, the Panel, may request that a stenographic or other record be made of any Arbitration Hearing or portion thereof. The costs of the recording and/or of preparing the transcript shall be borne by the requesting party and by any party who receives a copy thereof. If the Panel requests a recording and/or a transcript, the costs thereof shall be borne equally by the parties.
iv. Oaths: The Panel may require witnesses to testify under oath or affirmation administered by any duly qualified person and, if requested by any party, shall do so. v. Order of Arbitration Hearing: An Arbitration Hearing shall be opened by the recording of the date, time, and place of the Arbitration Hearing, and the presence of the Panel, the parties, and their representatives, if any. The Panel may, at the beginning of the Arbitration Hearing, ask for statements clarifying the issues involved. Unless otherwise agreed, the complaining party (or parties) shall then present evidence to support their claim(s). The respondent(s) shall then present evidence supporting their defenses and Counterclaims, if any. The complaining party (or parties) shall then present evidence supporting defenses to the Counterclaims, if any, and rebuttal. Witnesses for each party shall submit to questions by adverse parties and/or the Panel. The Panel has the discretion to vary these procedures, but shall afford a full and equal opportunity to all parties for the presentation of any material and relevant evidence vi. Evidence: The parties may offer such evidence as is relevant and material to the dispute and shall produce such evidence as the Panel may deem necessary to an understanding and resolution of the dispute. Unless good cause is shown, as determined by the Panel or agreed to by all other parties, no party shall be permitted to offer evidence at the Arbitration Hearing which was not disclosed prior to the Arbitration Hearing by that party. The Panel may receive and consider the evidence of witnesses by affidavit upon such terms as the Panel deems appropriate.
The Panel shall be the judge of the relevance and materiality of the evidence offered, and conformity to legal rules of evidence, other than enforcement of the attorney-client privilege and the work product protection, shall not be necessary. The Federal Rules of Evidence shall be considered by the Panel in conducting the Arbitration Hearing but those rules shall not be controlling. All evidence shall be taken in the presence of the Panel and all of the parties, except where any party is in default or has waived the right to be present. Settlement offers by any party in connection with Mediation or MDR proceedings, decisions or recommendations of the selected mediators, and a party's position papers or statements furnished to the selected mediators shall not be admissible evidence or considered by the Panel without the consent of all parties. vii. Closing of Arbitration Hearing: The Presiding Arbitrator shall specifically inquire of all parties whether they have any further proofs to offer or witnesses to be heard. Upon receiving negative replies or if he or she is satisfied that the record is complete, the Presiding Arbitrator shall declare the Arbitration Hearing closed with an appropriate notation made on the record. Subject to being reopened as provided below, the time within which the Panel is required to make the award shall commence to run, in the absence of contrary agreement by the parties, upon the closing of the Arbitration Hearing. With respect to complex disputes, the Panel may, in its sole discretion, defer the closing of the Arbitration Hearing for a period of up to thirty (30) days after the presentation of proofs in order to permit the parties to submit post-hearing briefs and argument, as the Panel deems appropriate, prior to making an award. For good cause, the Arbitration Hearing may be reopened for up to thirty (30) days on the Panel's initiative, or upon application of a party, at any time before the award is made
N. Awards An Award must be in writing and shall be made promptly by the Panel and, unless otherwise agreed by the parties or specified by law, no later than thirty (30) days from the date of closing the Arbitration Hearing. If all parties so request, the Award shall contain findings of fact and conclusions of law. The Award, and all other rulings and determinations by the Panel, may be by a majority vote. Parties shall accept as legal delivery of the Award the placing of the Award or a true copy thereof in the mail addressed to a party or its representative at its last known address or personal service of the Award on a party or its representative. Awards are binding only on the parties to the Arbitration and are not binding on any non-parties to the Arbitration and may not be used or cited as precedent in any other proceeding. After the expiration of twenty (20) days from initial delivery, the Award (with corrections, if any) shall be final and binding on the parties, and the parties shall undertake to carry out the Award without delay. Proceedings to confirm, modify or vacate an Award shall be conducted in conformity with and controlled by the Federal Arbitration Act. 9 U.S.C. ss. 1, et seq. O. Return Of Documents Within sixty (60) days after the Award and the conclusion of any judicial proceedings with respect thereto, each party and the Panel shall return any documents produced by any other party, including all copies thereof. If a party receives a discovery request in any other proceeding which would require it to produce any documents produced to it by any other party in a proceeding hereunder, it shall not produce such documents without first notifying the producing party and giving said party reasonable time to respond, if appropriate, to the discovery request.
4. Miscellaneous A. Expedited Procedures Any party to a Mediation may direct a request for an expedited Mediation Hearing to the Chairman of the Mediation Committee, to the selected Mediators, and to all other parties at any time. The Chairman of the Mediation Committee, or at his or her direction, the then selected Mediators, shall grant any request which is supported by good and sufficient reasons. If such a request is granted, the Mediation shall be completed within as short a period as practicable, as determined by the Chairman of the Mediation Committee or, at his or her direction, the then selected Mediators. Any party to an Arbitration may direct a request for expedited proceedings to the Administrator, to the Panel, and to all other parties at any time. The Administrator, or the Presiding Arbitrator if the Panel has been selected, shall grant any such request which is supported by good and sufficient reasons. If such a request is granted, the Arbitration shall be completed within as short a time as practicable, as determined by the Administrator and/or the Presiding Arbitrator. B. Temporary Or Preliminary Injunctive Relief Any party may seek temporary or preliminary injunctive relief with the filing of a Complaint or at any time thereafter. If such relief is sought prior to the time that an Arbitration Panel has been selected, then the Administrator shall select a single Arbitrator who is a lawyer who has no interest in the subject matter of the dispute, and no connection to any of the parties, to hear and determine the request for temporary or preliminary injunction. If such relief is sought after the time that an Arbitration Panel has been selected, then the Arbitration Panel will hear and determine the request. The request for temporary or preliminary injunctive relief will be determined with reference to the temporary or preliminary injunction standards set forth in Fed. R. Civ. P. 65. C. Defaults And Proceedings In The Absence Of A Party Whenever a party fails to comply with the MDR Rules in a manner deemed material by the Panel, the Panel shall fix a reasonable time for compliance and, if the party does not comply within said period, the Panel may enter an Order of default or afford such other relief as it deems appropriate. Arbitration may proceed in the event of a default or in the absence of any party who, after due notice, fails to be present or fails to obtain an extension. An Award shall not be made solely on the default or absence of a party, but the Panel shall require the party who is present to submit such evidence as the Panel may require for the making of findings, determinations, conclusions, and Awards.
D. Notice Each party shall be deemed to have consented that any papers, notices, or process necessary or proper for the initiation or continuation of a proceeding under these rules or for any court action in connection therewith may be served on a party by mail addressed to the party or its representative at its last known address or by personal service, in or outside the state where the MDR proceeding is to be held. The Corporate Secretary and the parties may also use facsimile transmission, telex, telegram, or other written forms of electronic communication to give the notices required by these rules. E. Expenses The expenses of witnesses shall be paid by the party causing or requesting the appearance of such witnesses. All expenses of the MDR proceeding, including compensation, required travel and other reasonable expenses of the Panel, and the cost of any proof produced at the direct request of the Panel, shall be borne equally by the parties and shall be paid periodically on a timely basis, unless they agree otherwise or unless the Panel in the Award assesses such expenses, or any part thereof against any party (or parties). In exceptional cases, the Panel may award reasonable attorneys' fees as an item of expense, and the Panel shall promptly determine the amount of such fees based on affidavits or such other proofs as the Panel deems sufficient. F. Disqualification Or Disability Of A Panel Member In the event that any Arbitrator of a Panel with more than one Arbitrator should become disqualified, resign, die, or refuse or be unable to perform or discharge his or her duties after the commencement of MDR but prior to the rendition of an Award, and the parties are unable to agree upon a replacement, the remaining Panel member(s): i. shall designate a replacement, subject to the right of any party to challenge such replacement for cause. ii. shall decide the extent to which previously held hearings shall be repeated.
If the remaining Panel members consider the proceedings to have progressed to a stage as to make replacement impracticable, the parties may agree, as an alternative to the recommencement of the Mandatory Dispute Resolution process, to resolution of the dispute by the remaining Panel members. In the event that a single Arbitrator should become disqualified, resign, die, or refuse or be unable to perform or discharge his or her duties after the commencement of MDR but prior to the rendition of an Award, and the parties are unable to agree upon a replacement, the Administrator shall appoint a successor, subject to the right of any party to challenge such successor for cause, and the successor shall decide the extent to which previously held proceedings shall be repeated. G. Extensions of Time Any time limit set forth in these Rules may be extended upon agreement of the parties and approval of: (i) the Chairman of the Mediation Committee if the proceeding is then in Mediation; (ii) the Administrator if the proceeding is in Arbitration, but no Arbitration Panel has been selected; or (iii) the Arbitration Panel, if the proceeding is in Arbitration and the Arbitration Panel has been selected. H. Intervention The Plans, their Controlled Affiliates, and BCBSA, to the extent subject to MMDR pursuant to their License Agreements, shall have the right to move to intervene in any pending Arbitration. A written motion for intervention shall be made to: (i) the Administrator, if the proceeding is in Arbitration, but no Arbitration Panel has been selected; or (ii) the Arbitration Panel, if the proceeding is in Arbitration and the Arbitration Panel has been selected. The written motion for intervention shall be delivered to the BCBSA Corporate Secretary (which shall also constitute service on the BCBSA if it is a respondent) and to any Plan(s) and/or Controlled Affiliate(s) which are parties to the proceeding. Any party to the proceeding can submit written objections to the motion to intervene. The motion for intervention shall be granted upon good cause shown. Intervention also may be allowed by stipulation of the parties to the Arbitration proceeding. Intervention shall be allowed upon such terms as the Arbitration Panel decides. I. BCBSA Assistance In Resolution of Disputes The resources and personnel of the BCBSA may be requested by any member Plan at any time to try to resolve disputes with another Plan. Amended September 21, 2000
J. Neutral Evaluation The parties can voluntarily agree at any time to have an independent party render a neutral evaluation of the parties' respective positions. K. Recovery of Attorney Fees and Expenses Motions to Compel Nothwithstanding any other provisions of these Rules, any Party subject to the License Agreements (for purposes of this Section L and all of its subsections only hereinafter referred to collectively and individually as a "Party") that initiates a court action or administrative proceeding solely to compel adherence to these Rules shall not be determined to have violated these Rules by initiating such action or proceeding. Recovery of Fees, Expenses and Costs The Arbitration Panel may, in its sole discretion, award a Party its reasonable attorneys' fees, expenses and costs associated with a filing to compel adherence to these Rules and/or reasonable attorneys' fees, expenses and costs incurred in responding to an action filed in violation of these Rules; provided, however, that neither fees, expenses, nor costs shall be awarded by the Arbitration Panel if the Party from which the award is sought can demonstrate to the Arbitration panel, in its sole discretion, that it did not violate these Rules or that it had reasonable grounds for believing that its action did not violate these Rules. Requests for Reimbursement For purposes of this Section L, any Party may request reimbursement of fees, expenses and/or costs by submitting said request in writing to the Arbitration Panel at any time before an award is delivered pursuant to Section 3-N hereof, with a copy to the Party from which reimbursement is sought, explaining why it is entitled to such reimbursement. The Party from which reimbursement is sought shall have 20 days to submit a response to such request to the Arbitration Panel with a copy to the Party seeking reimbursement. Amended September 21, 2000
EXHIBIT 5-A MEDIATION COMMITTEE REPORTS TO: Board of Directors CHARGE: 1. Develop and implement processes for resolving misunderstandings or disagreements between Plans or between Plans and the Association under the following circumstances: a. Matters at issue regarding relationships between Plans or between Plans and the Association. b. Matters at issue regarding relationships between Plans or between Plans and the Association. c. Matters at issue under the Inter-Plan Bank, Reciprocity, and Transfer Programs. d. Matters at issue regarding contractor selection or performance under the Medicare Part A Program. 2. Determination of equalization allowances and/or cost allowances under FEP shall not be considered by this Committee. MEMBERSHIP: Six to Eight STAFF: Senior Vice President and General Counsel
Exhibit 10.23 BLUE SHIELD LICENSE AGREEMENT (Includes revisions, if any, adopted by Member Plans through their March 16, 2001 meeting) This agreement by and between Blue Cross and Blue Shield Association ("BCBSA") and The Blue Shield Plan, known as ________________ (the "Plan"). Preamble WHEREAS, the Plan and/or its predecessor(s) in interest (collectively the "Plan") had the right to use the BLUE SHIELD and BLUE SHIELD Design service marks (collectively the "Licensed Marks") for health care plans in its service area, which was essentially local in nature; WHEREAS, the Plan was desirous of assuring nationwide protection of the Licensed Marks, maintaining uniform quality controls among Plans, facilitating the provision of cost effective health care services to the public and otherwise benefiting the public; WHEREAS, to better attain such ends, the Plan and the predecessor of BCBSA executed the Agreement(s) Relating to the Collective Service Mark "Blue Shield"; and WHEREAS, BCBSA and the Plan desire to supercede said Agreement(s) to reflect their current practices and to assure the continued integrity of the Licensed Marks and of the BLUE SHIELD system; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
Agreement 1. BCBSA hereby grants to the Plan, upon the terms and conditions of this License Agreement, the right to use BLUE SHIELD in its trade and/or corporate name (the "Licensed Name"), and the right to use the Licensed Marks, in the sale, marketing and administration of health care plans and related services in the Service Area set forth and defined in paragraph 5 below. As used herein, health care plans and related services shall include acting as a nonprofit health care plan, a for-profit health care plan, or mutual health insurer operating on a not-for-profit or for-profit basis, under state law; financing access to health care services; providing health care management and administration; administering, but not underwriting, non-health portions of Worker's Compensation insurance; and delivering health care services, except hospital services (as defined in the Guidelines to Membership Standards Applicable to Regular Members). 2. The Plan may use the Licensed Marks and Name in connection with the offering of: a) health care plans and related services in the Service Area through Controlled Affiliates, provided that each such Controlled Affiliate is separately licensed to use the Licensed Marks and Name under the terms and conditions contained in the Agreement attached as Exhibit 1 hereto (the "Controlled Affiliate License Agreement"); and: b) insurance coverages offered by life insurers under the applicable law in the Service Area, other than those which the Plan may offer in its own name, provided through Controlled Affiliates, provided that each such Controlled Affiliate is separately licensed to use the Licensed Marks and Name under the terms and conditions contained in the Agreement attached as Exhibit 1A hereto (the "Controlled Affiliate License Agreement Applicable to Life Insurance Companies") and further provided that the offering of such services does not and will not dilute or tarnish the unique value of the Licensed Marks and Name; and c) administration and underwriting of Workers' Compensation Insurance Controlled Affiliates, provided that each such Controlled Affiliate is separately licensed to use the Licensed Marks and Name under the terms and conditions contained in the Agreement attached as Exhibit 1 hereto (the "Controlled Affiliate License."). As used herein, a Controlled Affiliate is defined as an entity organized and operated in such a manner that it is subject to the bona fide control of a Plan or Plans and, if the entity meets the standards of subparagraph B but not subparagraph A of this paragraph, the entity, its owners, and persons with authority to select or appoint members or board members, other than a Plan or Plans, have received written approval of BCBSA. Absent written approval by BCBSA of an alternative method of control, bona fide control shall mean that a Plan or Plans authorized to use the Licensed Marks in the Service Area of the Controlled Affiliate pursuant to this License Agreement(s) with BCBSA, other than such Controlled Affiliate's License Agreement(s), (the "Controlling Plan(s)"), must have: A. The legal authority, directly or indirectly through wholly-owned subsidiaries: (a) to select members of the Controlled Affiliate's governing body having more than 50% voting control thereof; (b) to exercise control over the policy and operations of the Controlled Affiliate; (c) to prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which the Controlling Plan(s) do(es) not concur. In addition, a Plan or Plans directly or indirectly through wholly-owned subsidiaries shall own more than 50% of any for-profit Controlled Affiliate; or Amended as of March 11, 1999 -2-
B. The legal authority directly or indirectly through wholly-owned subsidiaries (a) to select members of the Controlled Affiliate's governing body having not less than 50% voting control thereof; (b) to prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which the Controlling Plan(s) do(es) not concur; (c) to exercise control over the policy and operations of the Controlled Affiliate at least equal to that exercised by persons or entities (jointly or individually) other than the Controlling Plan(s). Notwithstanding anything to the contrary in (a) through (c) hereof, the Controlled Affiliate's establishing or governing documents must also require written approval by the Controlling Plan(s) before the Controlled Affiliate can: 1. Change its legal and/or trade name; 2. Change the geographic area in which it operates; 3. Change any of the types of businesses in which it engages; 4. Create, or become liable for by way of guarantee, any indebtedness, other than indebtedness arising in the ordinary course of business; 5. Sell any assets, except for sales in the ordinary course of business or sales of equipment no longer useful or being replaced; 6. Make any loans or advances except in the ordinary course of business; 7. Enter into any arrangement or agreement with any party directly or indirectly affiliated with any of the owners of the Controlled Affiliate or persons or entities with the authority to select or appoint members or board members of the Controlled Affiliate, other than the Plan or Plans (excluding owners of stock holdings of under 5% in a publicly traded Controlled Affiliate); 8. Conduct any business other than under the Licensed Marks and Name; 9. Take any action that any Controlling Plan or BCBSA reasonably believes will adversely affect the Licensed Marks or Names. In addition, a Plan or Plans directly or indirectly through wholly owned subsidiaries shall own at least 50% of any for-profit Controlled Affiliate. Amended as of June 11, 1998 -2a- (The next page is page 3)
3. The Plan may engage in activities not required by BCBSA to be directly licensed through Controlled Affiliates and may indicate its relationship thereto by use of the Licensed Name as a tag line, provided that the engaging in such activities does not and will not dilute or tarnish the unique value of the Licensed Marks and Name and further provided that such tag line use is not in a manner likely to cause confusion or mistake. Consistent with the avoidance of confusion or mistake, each tag line use of the Plan's Licensed Name: (a) shall be in the style and manner specified by BCBSA from time-to-time; (b) shall not include the design service marks; (c) shall not be in a manner to import more than the Plan's mere ownership of the Controlled Affiliate; and (d) shall be restricted to the Service Area. No rights are hereby created in any Controlled Affiliate to use the Licensed Name in its own name or otherwise. At least annually, the Plan shall provide BCBSA with representative samples of each such use of its Licensed Name pursuant to the foregoing conditions. 4. The Plan recognizes the importance of a comprehensive national network of independent BCBSA licensees which are committed to strengthening the Licensed Marks and Name. The Plan further recognizes that its actions within its Service Area may affect the value of the Licensed Marks and Name nationwide. The Plan agrees (a) to maintain in good standing its membership in BCBSA; (b) promptly to pay its dues to BCBSA, said dues to represent the royalties for this License Agreement; (c) materially to comply with all applicable laws; (d) to comply with the Membership Standards Applicable to Regular Members of BCBSA, a current copy of which is attached as Exhibit 2 hereto; and (e) reasonably to permit BCBSA, upon a written, good faith request and during reasonable business hours, to inspect the Plan's books and records necessary to ascertain compliance herewith. As to other Plans and third parties, BCBSA shall maintain the confidentiality of all documents and information furnished by the Plan pursuant hereto, or pursuant to the Membership Standards, and clearly designated by the Plan as containing proprietary information of the Plan. 5. The rights hereby granted are exclusive to the Plan within the geographical area(s) served by the Plan on June 30, 1972, and/or as to which the Plan has been granted a subsequent license, which is hereby defined as the "Service Area," except that BCBSA reserves the right to use the Licensed Marks in said Service Area, and except to the extent that said Service Area may overlap areas served by one or more other licensed Blue Shield Plans as of said date or subsequent license, as to which overlapping areas the rights hereby granted are nonexclusive as to such other Plan or Plans only. Amended as of November 20, 1997 -3-
6. Except as expressly provided by BCBSA with respect to National Accounts, Government Programs and certain other necessary and collateral uses, the current rules and regulations governing which are attached as Exhibit 3 and Exhibit 4 hereto, or as expressly provided herein, the Plan may not use the Licensed Marks and Name outside the Service Area or in connection with other goods and services, nor may the Plan use the Licensed Marks or Name in a manner which is intended to transfer in the Service Area the goodwill associated therewith to another mark or name. Nothing herein shall be construed to prevent the Plan from engaging in lawful activity anywhere under other marks and names not confusingly similar to the Licensed Marks and Name, provided that engaging in such activity does and will not dilute or tarnish the unique value of the Licensed Marks and Name. In addition to any and all remedies available hereunder, BCBSA may impose monetary fines on the Plan for the Plan's use of the Licensed Marks and Names outside the Service Area provided that the procedure used in imposing a fine is consistent with procedures specifically prescribed by BCBSA from time to time in regulations of general application. 7. The Plan agrees that it will display the Licensed Marks and Name only in such form, style and manner as shall be specifically prescribed by BCBSA from time-to-time in regulations of general application in order to prevent impairment of the distinctiveness of the Licensed Marks and Name and the goodwill pertaining thereto. The Plan shall cause to appear on all materials on or in connection with which the Licensed Marks or Name are used such legends, markings and notices as BCBSA may reasonably request in order to give appropriate notice of service mark or other proprietary rights therein or pertaining thereto. 8. BCBSA agrees that: (a) it will not grant any other license effective during the term of this License Agreement for the use of the Licensed Marks or Name which is inconsistent with the rights granted to the Plan hereunder; and (b) it will not itself use the Licensed Marks in derogation of the rights of the Plan or in a manner to deprive the Plan of the full benefits of this License Agreement. The Plan agrees that it will not attack the title of BCBSA in and to the Licensed Marks or Name or attack the validity of the Licensed Marks or of this License Agreement. The Plan further agrees that all use by it of the Licensed Marks and Name or any similar mark or name shall inure to the benefit of BCBSA, and the Plan shall cooperate with BCBSA in effectuating the assignment to BCBSA of any service mark or trademark registrations of the Licensed Marks or any similar mark or name held by the Plan or a Controlled Affiliate of the Plan, all or any portion of which registration consists of the Licensed Marks. Amended November 18, 1999 -4-
9. (a). Should the Plan fail to comply with the provisions of paragraphs 2-4, 6, 7 and/or 12, and not cure such failure within thirty (30) days of receiving written notice thereof (or commence curing such failure within such thirty day period and continue diligent efforts to complete the curing of such failure if such curing cannot reasonably be completed within such thirty day period), BCBSA shall have the right to issue a notice that the Plan is in a state of noncompliance. Except as to the termination of a Plan's License Agreement or the merger of two or more Plans, disputes as to noncompliance, and all other disputes between or among BCBSA, the Plan, other Plans and/or Controlled Affiliates, shall be submitted promptly to mediation and mandatory dispute resolution pursuant to the rules and regulations of BCBSA, a current copy of which is attached as Exhibit 5 hereto, and shall be timely presented and resolved. The mandatory dispute resolution panel shall have authority to issue orders for specific performance and assess monetary penalties. If a state of noncompliance as aforesaid is undisputed by the Plan or is found to exist by a mandatory dispute resolution panel and is uncured as provided above, BCBSA shall have the right to seek judicial enforcement of the License Agreement. Except, however, as provided in paragraphs 9(d)(iii) and 15(a)(i)-(viii) below, no Plan's license to use the Licensed Marks and Name may be finally terminated for any reason without the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans. (b). Notwithstanding any other provision of this License Agreement, a Plan's license to use the Licensed Marks and Name may be forthwith terminated by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans at a special meeting expressly called by BCBSA for the purpose on ten (10) days written notice to the Plan advising of the specific matters at issue and granting the Plan an opportunity to be heard and to present its response to Member Plans for: (i) failure to comply with any minimum capital or liquidity requirement under the Membership Standard on Financial Responsibility; or (ii) impending financial insolvency; or (iii) the pendency of any action instituted against the Plan seeking its dissolution or liquidation or its assets or seeking appointment of a trustee, interim trustee, receiver or other custodian for any of its property or business or seeking the declaration or establishment of a trust for any of its property of business, unless this License Agreement has been earlier terminated under paragraph 15(a); or (iv) such other reason as is determined in good faith immediately and irreparably to threaten the integrity and reputation of BCBSA, the Plans and/or the Licensed Marks. (c). To the extent not otherwise provided therein, neither: (i) the Membership Standards Applicable to Regular Members of BCBSA; nor (ii) the rules and regulations governing National Accounts, Government Programs and certain other uses; nor (iii) the rules and regulations governing mediation and mandatory dispute resolution, may be amended unless and until each such amendment is first adopted by the affirmative vote of three-fourths of the Plans and of three-fourths of the total then current weighted vote of all the Plans. Amended as of March 11, 1999 -5-
9. (d). The Plan may operate as a for-profit company on the following conditions: (i) The Plan shall discharge all responsibilities which it has to the Association and to other Plans by virtue of this Agreement and the Plan's membership in BCBSA. (ii) The Plan shall not use the licensed Marks and Name, or any derivative thereof, as part of its legal name or any symbol used to identify the Plan in any securities market. The Plan shall use the licensed Marks and Name as part of its trade name within its service area for the sale, marketing and administration of health care and related services in the service area. (iii) The Plan's license to use the Licensed Marks and Name shall automatically terminate effective: (a) thirty days after the Plan knows, or there is an SEC filing indicating that, any Institutional Investor, has become the Beneficial Owner of securities representing 10% or more of the voting power of the Plan ("Excess Institutional Voter"), unless such Excess Institutional Voter shall cease to be an Excess Institutional Voter prior to such automatic termination becoming effective; (b) thirty days after the Plan knows, or there is an SEC filing indicating that, any Noninstitutional Investor has become the Beneficial Owner of securities representing 5% or more of the voting power of the Plan ("Excess Noninstitutional Voter") unless such Excess Noninstitutional Voter shall cease to be an Excess Noninstitutional Voter prior to such automatic termination becoming effective; (c) thirty days after the Plan knows, or there is an SEC filing indicating that, any Person has become the Beneficial Owner of 20% or more of the Plan's then outstanding common stock or other equity securities which (either by themselves or in combination) represent an ownership interest of 20% or more pursuant to determinations made under paragraph 9(d)(iv) below ("Excess Owner"), unless such Excess Owner shall cease to be an Excess Owner prior to such automatic termination becoming effective; (d) ten business days after individuals who at the time the Plan went public constituted the Board of Directors of the Plan (together with any new directors whose election to the Board was approved by a vote of 2/3 of the directors then still in office who were directors at the time the Plan went public or whose election or nomination was previously so approved) (the "Continuing Directors") cease for any reason to constitute a majority of the Board of Directors; or (e) ten business days after the Plan consolidates with or merges with or into any person or conveys, assigns, transfers or sells all or substantially all of its assets to any person other than a merger in which the Plan is the surviving entity and immediately after which merger, no person is an Excess Institutional Voter, an Excess Noninstitutional Voter or an Excess Owner: provided that, if requested by the affected Plan in a writing received by BCBSA prior to such automatic termination becoming effective, the provisions of this paragraph 9(d)(iii) may be waived, in whole or in part, Amended as of September 17, 1997 -5a-
upon the affirmative vote of a majority of the disinterested Plans and a majority of the total then current weighted vote of the disinterested Plans. Any waiver so granted may be conditioned upon such additional requirements (including but not limited to imposing new and independent grounds for termination of this License) as shall be approved by the affirmative vote of a majority of the disinterested Plans and a majority of the total then current weighted vote of the disinterested Plans. If a timely waiver request is received, no automatic termination shall become effective until the later of: (1) the conclusion of the applicable time period specified in paragraphs 9(d)(iii)(a)-(d) above, or (2) the conclusion of the first Member Plan meeting after receipt of such a waiver request. In the event that the Plan's license to use the Licensed Marks and Name is terminated pursuant to this Paragraph 9(d)(iii), the license may be reinstated in BCBSA's sole discretion if, within 30 days of the date of such termination, the Plan demonstrates that the Person referred to in clause (a), (b) or (c) of the preceding paragraph is no longer an Excess Institutional Voter, an Excess Noninstitutional Voter or an Excess Owner. (iv) The Plan shall not issue any class or series of security other than (i) shares of common stock having identical terms or options or derivatives of such common stock, (ii) non-voting, non-convertible debt securities or (iii) such other securities as the Plan may approve, provided that BCBSA receives notice at least thirty days prior to the issuance of such securities, including a description of the terms for such securities, and BCBSA shall have the authority to determine how such other securities will be counted in determining whether any Person is an Excess Institutional Voter, Excess Noninstitutional Voter or an Excess Owner. (v) For purposes of paragraph 9(d)(iii), the following definitions shall apply: (a) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended and in effect on November 17, 1993 (the "Exchange Act"). (b) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; Amended as of September 17, 1997 -5b-
(ii) which such Person or any of such Person's Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) relating to the acquisition, holding, voting (except to the extent contemplated by the proviso to (b)(ii)(B) above) or disposing of any securities of the Plan. Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding," when used with reference to a Person's Beneficial Ownership of securities of the Plan, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder. (c) A Person shall be deemed an "Institutional Investor" if (but only if) such Person (i) is an entity or group identified in the SEC's Rule 13d-1(b)(1)(ii) as constituted on June 1, 1997, and (ii) every filing made by such Person with the SEC under Regulation 13D-G (or any successor Regulation) with respect to such Person's Beneficial Ownership of Plan securities shall have contained a certification identical to the one required by item 10 of SEC Schedule 13G as constituted on June 1, 1997. Amended as of September 17, 1997 -5c-
(d) "Noninstitutional Investor" means any Person who is not an Institutional Investor. (e) "Person" shall mean any individual, firm, partnership, corporation, trust, association, joint venture or other entity, and shall include any successor (by merger or otherwise) or such entity. Amended as of September 17, 1997 -5d- (The next page is page 6)
10. This License Agreement shall remain in effect: (a) until terminated as provided herein; or (b) until this and all such other License Agreements are terminated by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans; (c) until terminated by the Plan upon six (6) months written notice to BCBSA. 11. Except as otherwise provided in paragraph 15 below or by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans, or unless this and all such other License Agreements are simultaneously terminated by force of law, the termination of this License Agreement for any reason whatsoever shall cause the reversion to BCBSA of all rights in and to the Licensed Marks and Name, and the Plan agrees that it will promptly discontinue all use of the Licensed Marks and Name, will not use them thereafter, and will promptly, upon written notice from BCBSA, change its corporate name so as to eliminate the Licensed Name therefrom. 12. The license hereby granted to Plan to use the Licensed Marks and Name is and shall be personal to the Plan so licensed and shall not be assignable by any act of the Plan, directly or indirectly, without the written consent of BCBSA. Said license shall not be assignable by operation of law, nor shall Plan mortgage or part with possession or control of this license or any right hereunder, and the Plan shall have no right to grant any sublicense to use the Licensed Marks and Name. 13. BCBSA shall maintain appropriate service mark registrations of the Licensed Marks and BCBSA shall take such lawful steps and proceedings as may be necessary or proper to prevent use of the Licensed Marks by any person who is not authorized to use the same. Any actions or proceedings undertaken by BCBSA under the provisions of this paragraph shall be at BCBSA's sole cost and expense. BCBSA shall have the sole right to determine whether or not any legal action shall be taken on account of unauthorized use of the Licensed Marks, such right not to be unreasonably exercised. The Plan shall report any unlawful usage of the Licensed Marks to BCBSA in writing and agrees, free of charge, to cooperate fully with BCBSA's program of enforcing and protecting the service mark rights, trade name rights and other rights in the Licensed Marks. -6-
14. The Plan hereby agrees to save, defend, indemnify and hold BCBSA and any other Plan(s) harmless from and against all claims, damages, liabilities and costs of every kind, nature and description which may arise exclusively and directly as a result of the activities of the Plan. BCBSA hereby agrees to save, defend, indemnify and hold the Plan and any other Plan(s) harmless from and against all claims, damages, liabilities and costs of every kind, nature and description which may arise exclusively and directly as a result of the activities of BCBSA. 15. (a). This Agreement shall automatically terminate upon the occurrence of any of the following events: (i) a voluntary petition shall be filed by the Plan or by BCBSA seeking bankruptcy, reorganization, arrangement with creditors or other relief under the bankruptcy laws of the United States or any other law governing insolvency or debtor relief, or (ii) an involuntary petition or proceeding shall be filed against the Plan or BCBSA seeking bankruptcy, reorganization, arrangement with creditors or other relief under the bankruptcy laws of the United States or any other law governing insolvency or debtor relief and such petition or proceeding is consented to or acquiesced in by the Plan or BCBSA or is not dismissed within sixty (60) days of the date upon which the petition or other document commencing the proceeding is served upon the Plan or BCBSA respectively, or (iii) an order for relief is entered against the Plan or BCBSA in any case under the bankruptcy laws of the United States, or the Plan or BCBSA is adjudged bankrupt or insolvent (as that term is defined in the Uniform Commercial Code as enacted in the state of Illinois) by any court of competent jurisdiction, or (iv) the Plan or BCBSA makes a general assignment of its assets for the benefit of creditors, or (v) the Department of Insurance or other regulatory agency assumes control of the Plan or delinquency proceedings (voluntary or involuntary) are instituted, or (vi) an action is brought by the Plan or BCBSA seeking its dissolution or liquidation of its assets or seeking the appointment of a trustee, interim trustee, receiver or other custodian for any of its property or business, or (vii) an action is instituted by any governmental entity or officer against the Plan or BCBSA seeking its dissolution or liquidation of its assets or seeking appointment of a trustee, interim trustee, receiver or other custodian for any of its property or business and such action is consented to or acquiesced in by the Plan or BCBSA or is not dismissed within one hundred thirty (130) days of the date upon which the pleading or other document commencing the action is served upon the Plan or BCBSA respectively, provided that if the action is stayed or its prosecution is enjoined, the one hundred thirty (130) day period is tolled for the duration of the stay or injunction, and provided further, that the Association's Board of Directors may toll or extend the 130 day period at any time prior to its expiration, or (viii) a trustee, interim trustee, receiver or other custodian for any of the Plan's or BCBSA's property or business is appointed, or the Plan or BCBSA is ordered dissolved or liquidated, or (ix) the Plan shall fail to pay its dues and shall not cure such failure within thirty (30) days of receiving written notice thereof. Notwithstanding any other provision of this Agreement, a declaration or a request for declaration of the existence of a trust over any of the Plan's or BCBSA's property or business shall not in itself be deemed to constitute or seek appointment of a trustee, interim trustee, receiver or other custodian for purposes of subparagraphs 15(a)(vii) and (viii) of this Agreement. Amended March 12, 1998 -7-
(b). BCBSA, or the Plans (as provided and in addition to the rights conferred in Paragraph 10(b) above), may terminate this Agreement immediately upon written notice upon the occurrence of either of the following events: (a) the Plan or BCBSA becomes insolvent (as that term is defined in the Uniform Commercial Code enacted in the state of Illinois), or (b) any final judgment against the Plan or BCBSA remains unsatisfied or unbonded of record for a period of sixty (60) days or longer. (c). If this License Agreement is terminated as to BCBSA for any reason stated in subparagraphs 15(a) and (b) above, the ownership of the Licensed Marks shall revert to each of the Plans. (d). Upon termination of this License Agreement or any Controlled Affiliate License Agreement of a Larger Controlled Affiliate, as defined in Exhibit 1 to this License Agreement: (i) The terminated entity shall send a notice through the U.S. mails, with first class postage affixed, to all individual and group customers, providers, brokers and agents of products or services sold, marketed, underwritten or administered by the terminated entity or its Controlled Affiliates under the Licensed Marks and Name. The form and content of the notice shall be specified by BCBSA and shall, at a minimum, notify the recipient of the termination of the license, the consequences thereof, and instructions for obtaining alternate products or services licensed by BCBSA. This notice shall be mailed within 15 days after termination or, if termination is pursuant to paragraph 10(d) of this Agreement, within 15 days after the written notice to BCBSA described in paragraph 10(d). (ii) The terminated entity shall deliver to BCBSA within five days of a request by BCBSA a listing of national accounts in which the terminated entity is involved (in a Control, Participating or Servicing capacity), identifying the national account and the terminated entity's role therein. For those accounts where the terminated entity is the Control Plan, the Plan must also indicate the Participating and Servicing Plans in the national account syndicate. Amended as of September 19, 1996 -8-
(iii) Unless the cause of termination is an event stated in paragraph 15(a) or (b) above respecting BCBSA, the Plan and its Licensed Controlled Affiliates shall be jointly liable for payment to BCBSA of an amount equal to $25 multiplied by the number of Licensed Enrollees of the terminated entity and its Licensed Controlled Affiliates; provided that if any other Plan is permitted by BCBSA to use marks or names licensed by BCBSA in the Service Area established by this Agreement, the payment shall be multiplied by a fraction, the numerator of which is the number of Licensed Enrollees of the terminated entity and its Licensed Controlled Affiliates and the denominator of which is the total number of Licensed Enrollees in the Service Area. Licensed Enrollee means each and every person and covered dependent who is enrolled as an individual or member of a group receiving products or services sold, marketed or administered under marks or names licensed by BCBSA as determined at the earlier of (a) the end of the last fiscal year of the terminated entity which ended prior to termination or (b) the fiscal year which ended before any transactions causing the termination began. Notwithstanding the foregoing, the amount payable pursuant to this subparagraph (d)(iii) shall be due only to the extent that, in BCBSA's opinion, it does not cause the net worth of the Plan to fall below 100% of the capital benchmark formula or its equivalent under any successor formula, as set forth in the applicable financial responsibility standards established by BCBSA (provided such equivalent is approved for purposes of this sub paragraph by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans), measured as of the date of termination and adjusted for the value of any transactions not made in the ordinary course of business. This payment shall not be due in connection with transactions exclusively by or among Plan or their affiliates, including reorganizations, combinations or mergers, where the BCBSA Board of Directors determines that the license termination does not result in a material diminution in the number of Licensed Enrollees or the extent of their coverage. Amended as of November 19, 1998 -8a-
(iv) BCBSA shall have the right to audit the books and records of the terminated entity and its Licensed Controlled Affiliates to verify compliance with this paragraph 15(d). (v) As to a breach of 15 (d) (i), (ii), (iii) or (iv), the parties agree that the obligations are immediately enforceable in a court of competent jurisdiction. As to a breach of 15 (d) (i), (ii) or (iv) by the Plan, the parties agree there is no adequate remedy at law and BCBSA is entitled to obtain specific performance. (e). BCBSA shall be entitled to enjoin the Plan or any related party in a court of competent jurisdiction from entry into any transaction which would result in a termination of this License Agreement unless the License Agreement has been terminated pursuant to paragraph 10 (d) of this Agreement upon the required six (6) month written notice. (f). BCBSA acknowledges that it is not the owner of assets of the Plan. 16. This Agreement supersedes any and all other agreements between the parties with respect to the subject matter herein, and contains all of the covenants and agreements of the parties as to the licensing of the Licensed Marks and Name. This Agreement may be amended only by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans as officially recorded by the BCBSA Corporate Secretary. 17. If any provision or any part of any provision of this Agreement is judicially declared unlawful, each and every other provision, or any part of any provision, shall continue in full force and effect notwithstanding such judicial declaration. 18. No waiver by BCBSA or the Plan of any breach or default in performance on the part of BCBSA or the Plan or any other licensee of any of the terms, covenants or conditions of this Agreement shall constitute a waiver of any subsequent breach or default in performance of said terms, covenants or conditions. 19a. All notices provided for hereunder shall be in writing and shall be sent in duplicate by regular mail to BCBSA or the Plan at the address currently published for each by BCBSA and shall be marked respectively to the attention of the President and, if any, the General Counsel, of BCBSA or the Plan. Amended as of November 20, 1997 -8b-
19b. Except as provided in paragraphs 9(b), 9(d)(iii), 15(a), and 15(b) above, this Agreement may be terminated for a breach only upon at least 30 days' written notice to the Plan advising of the specific matters at issue and granting the Plan an opportunity to be heard and to present its response to the Member Plans. 19c. For all provisions of this Agreement referring to voting, the term 'Plans' shall mean all entities licensed under the Blue Cross License Agreement and/or the Blue Shield License Agreement, and in all votes of the Plans under this Agreement the Plans shall vote together. For weighted votes of the Plans, the Plan shall have a number of votes equal to the number of weighted votes (if any) that it holds as a Blue Cross Plan plus the number of weighted votes (if any) that it holds as a Blue Shield Plan. For all other votes of the Plans, the Plan shall have one vote. For all questions requiring an affirmative three-fourths weighted vote of the Plans, the requirement shall be deemed satisfied with a lesser weighted vote unless six (6) or more Plans fail to cast weighted votes in favor of the question. -8c- (The next page is page 9) Amended as of June 16, 2000
20. Nothing herein contained shall be construed to constitute the parties hereto as partners or joint venturers, or either as the agent of the other, and Plan shall have no right to bind or obligate BCBSA in any way, nor shall it represent that it has any right to do so. BCBSA shall have no liability to third parties with respect to any aspect of the business, activities, operations, products, or services of the Plan. 21. This Agreement shall be governed, construed and interpreted in accordance with the laws of the State of Illinois. IN WITNESS WHEREOF, the parties have caused this License Agreement to be executed, effective as of the date of last signature written below. BLUE CROSS AND BLUE SHIELD ASSOCIATION By ___________________________________ Title ________________________________ Date _________________________________ - -------------------------------------- By ___________________________________ Title ________________________________ Date _________________________________ -9-
EXHIBIT 1 BLUE SHIELD CONTROLLED AFFILIATE LICENSE AGREEMENT (Includes revisions adopted by Member Plans through their March 16, 2001 meeting) This Agreement by and among Blue Cross and Blue Shield Association ("BCBSA") and _______ ("Controlled Affiliate"), a Controlled Affiliate of the Blue Shield Plan(s), known as _________ ("Plan"), which is also a Party signatory hereto. WHEREAS, BCBSA is the owner of the BLUE SHIELD and BLUE SHIELD Design service marks; WHEREAS, Plan and Controlled Affiliate desire that the latter be entitled to use the BLUE SHIELD and BLUE SHIELD Design service marks (collectively the "Licensed Marks") as service marks and be entitled to use the term BLUE SHIELD in a trade name ("Licensed Name"); NOW THEREFORE, in consideration of the foregoing and the mutual agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. GRANT OF LICENSE Subject to the terms and conditions of this Agreement, BCBSA hereby grants to Controlled Affiliate the right to use the Licensed Marks and Name in connection with, and only in connection with: (i) health care plans and related services, as defined in BCBSA's License Agreement with Plan, and administering the non-health portion of workers' compensation insurance, and (ii) underwriting the indemnity portion of workers' compensation insurance, provided that Controlled Affiliate's total premium revenue comprises less than 15 percent of the sponsoring Plan's net subscription revenue. This grant of rights is non-exclusive and is limited to the Service Area served by the Plan. Controlled Affiliate may use the Licensed Marks and Name in its legal name on the following conditions: (i) the legal name must be approved in advance, in writing, by BCBSA; (ii) Controlled Affiliate shall not do business outside the Service Area under any name or mark; and (iii) Controlled Affiliate shall not use the Licensed Marks and Name, or any derivative thereof, as part of any name or symbol used to identify itself in any securities market. Controlled Affiliate may use the Licensed Marks and Name in its Trade Name only with the prior, written, consent of BCBSA. 2. QUALITY CONTROL A. Controlled Affiliate agrees to use the Licensed Marks and Name only in connection with the licensed services and further agrees to be bound by the conditions regarding quality control shown in attached Exhibit A as they may be amended by BCBSA from time-to-time. Amended as of November 16, 2000
B. Controlled Affiliate agrees to comply with all applicable federal, state and local laws. C. Controlled Affiliate agrees that it will provide on an annual basis (or more often if reasonably required by Plan or by BCBSA) a report or reports to Plan and BCBSA demonstrating Controlled Affiliate's compliance with the requirements of this Agreement including but not limited to the quality control provisions of this paragraph and the attached Exhibit A. D. Controlled Affiliate agrees that Plan and/or BCBSA may, from time-to-time, upon reasonable notice, review and inspect the manner and method of Controlled Affiliate's rendering of service and use of the Licensed Marks and Name. E. As used herein, a Controlled Affiliate is defined as an entity organized and operated in such a manner, that it meets the following requirements: (1) A Plan or Plans authorized to use the Licensed Marks in the Service Area of the Controlled Affiliate pursuant to separate License Agreement(s) with BCBSA, other than such Controlled Affiliate's License Agreement(s), (the "Controlling Plan(s)"), must have the legal authority directly or indirectly through wholly-owned subsidiaries to select members of the Controlled Affiliate's governing body having not less than 50% voting control thereof and to: (a) prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which the Controlling Plan(s) do(es) not concur; (b) exercise control over the policy and operations of the Controlled Affiliate at least equal to that exercised by persons or entities (jointly or individually) other than the Controlling Plan(s); and Notwithstanding anything to the contrary in (a) through (b) hereof, the Controlled Affiliate's establishing or governing documents must also require written approval by the Controlling Plan(s) before the Controlled Affiliate can: (i) change its legal and/or trade names; (ii) change the geographic area in which it operates; (iii) change any of the type(s) of businesses in which it engages; 2
(iv) create, or become liable for by way of guarantee, any indebtedness, other than indebtedness arising in the ordinary course of business; (v) sell any assets, except for sales in the ordinary course of business or sales of equipment no longer useful or being replaced; (vi) make any loans or advances except in the ordinary course of business; (vii) enter into any arrangement or agreement with any party directly or indirectly affiliated with any of the owners or persons or entities with the authority to select or appoint members or board members of the Controlled Affiliate, other than the Plan or Plans (excluding owners of stock holdings of under 5% in a publicly traded Controlled Affiliate); (viii) conduct any business other than under the Licensed Marks and Name; (ix) take any action that any Controlling Plan or BCBSA reasonably believes will adversely affect the Licensed Marks and Name. In addition, a Plan or Plans directly or indirectly through wholly owned subsidiaries shall own at least 50% of any for-profit Controlled Affiliate. Or (2) A Plan or Plans authorized to use the Licensed Marks in the Service Area of the Controlled Affiliate pursuant to separate License Agreement(s) with BCBSA, other than such Controlled Affiliate's License Agreement(s), (the "Controlling Plan(s)"), have the legal authority directly or indirectly through wholly-owned subsidiaries to select members of the Controlled Affiliate's governing body having more than 50% voting control thereof and to: (a) prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which the Controlling Plan(s) do(es) not concur; (b) exercise control over the policy and operations of the Controlled Affiliate. 3
In addition, a Plan or Plans directly or indirectly through wholly-owned subsidiaries shall own at least 50% of any for-profit Controlled Affiliate. 3. SERVICE MARK USE A. Controlled Affiliate recognizes the importance of a comprehensive national network of independent BCBSA licensees which are committed to strengthening the Licensed Marks and Name. The Controlled Affiliate further recognizes that its actions within its Service Area may affect the value of the Licensed Marks and Name nationwide. B. Controlled Affiliate shall at all times make proper service mark use of the Licensed Marks and Name, including but not limited to use of such symbols or words as BCBSA shall specify to protect the Licensed Marks and Name and shall comply with such rules (generally applicable to Controlled Affiliates licensed to use the Licensed Marks and Name) relative to service mark use, as are issued from time-to-time by BCBSA. Controlled Affiliate recognizes and agrees that all use of the Licensed Marks and Name by Controlled Affiliate shall inure to the benefit of BCBSA. C. Controlled Affiliate may not directly or indirectly use the Licensed Marks and Name in a manner that transfers or is intended to transfer in the Service Area the goodwill associated therewith to another mark or name, nor may Controlled Affiliate engage in activity that may dilute or tarnish the unique value of the Licensed Marks and Name. D. If Controlled Affiliate meets the standards of 2E(1) but not 2E(2) above and any of Controlled Affiliate's advertising or promotional material is reasonably determined by BCBSA and/or the Plan to be in contravention of rules and regulations governing the use of the Licensed Marks and Name, Controlled Affiliate shall for ninety (90) days thereafter obtain prior approval from BCBSA of advertising and promotional efforts using the Licensed Marks and Name, approval or disapproval thereof to be forthcoming within five (5) business days of receipt of same by BCBSA or its designee. In all advertising and promotional efforts, Controlled Affiliate shall observe the Service Area limitations applicable to Plan. E. Controlled Affiliate shall use its best efforts in the Service Area to promote and build the value of the Licensed Marks and Name. 4
4. SUBLICENSING AND ASSIGNMENT Controlled Affiliate shall not, directly or indirectly, sublicense, transfer, hypothecate, sell, encumber or mortgage, by operation of law or otherwise, the rights granted hereunder and any such act shall be voidable at the sole option of Plan or BCBSA. This Agreement and all rights and duties hereunder are personal to Controlled Affiliate. 5. INFRINGEMENT Controlled Affiliate shall promptly notify Plan and Plan shall promptly notify BCBSA of any suspected acts of infringement, unfair competition or passing off that may occur in relation to the Licensed Marks and Name. Controlled Affiliate shall not be entitled to require Plan or BCBSA to take any actions or institute any proceedings to prevent infringement, unfair competition or passing off by third parties. Controlled Affiliate agrees to render to Plan and BCBSA, without charge, all reasonable assistance in connection with any matter pertaining to the protection of the Licensed Marks and Name by BCBSA. 6. LIABILITY INDEMNIFICATION Controlled Affiliate and Plan hereby agree to save, defend, indemnify and hold BCBSA harmless from and against all claims, damages, liabilities and costs of every kind, nature and description (except those arising solely as a result of BCBSA's negligence) that may arise as a result of or related to Controlled Affiliate's rendering of services under the Licensed Marks and Name. 7. LICENSE TERM A. Except as otherwise provided herein, the license granted by this Agreement shall remain in effect for a period of one (1) year and shall be automatically extended for additional one (1) year periods unless terminated pursuant to the provisions herein. B. This Agreement and all of Controlled Affiliate's rights hereunder shall immediately terminate without any further action by any party or entity in the event that Plan ceases to be authorized to use the Licensed Marks and Name. C. Notwithstanding any other provision of this Agreement, this license to use the Licensed Marks and Name may be forthwith terminated by the Plan or the affirmative vote of the majority of the Board of Directors of BCBSA present and voting at a special meeting expressly called by BCBSA for the purpose on ten (10) days written notice to the Plan advising of the specific matters at issue and granting the Plan an opportunity to be heard and to present its response to 5
the Board for: (1) failure to comply with any applicable minimum capital or liquidity requirement under the quality control standards of this Agreement; or (2) failure to comply with the "Organization and Governance" quality control standard of this Agreement; or (3) impending financial insolvency; or (4) for a Smaller Controlled Affiliate (as defined in Exhibit A), failure to comply with any of the applicable requirements of Standards 2, 3, 4, 5 or 7 of attached Exhibit A; or (5) the pendency of any action instituted against the Controlled Affiliate seeking its dissolution or liquidation of its assets or seeking appointment of a trustee, interim trustee, receiver or other custodian for any of its property or business or seeking the declaration or establishment of a trust for any of its property or business, unless this Controlled Affiliate License Agreement has been earlier terminated under paragraph 7(e); or (6) failure by a Controlled Affiliate that meets the standards of 2E(1) but not 2E(2) above to obtain BCBSA's written consent to a change in the identity of any owner, in the extent of ownership, or in the identity of any person or entity with the authority to select or appoint members or board members, provided that as to publicly traded Controlled Affiliates this provision shall apply only if the change affects a person or entity that owns at least 5% of the Controlled Affiliate's stock before or after the change; or (7) such other reason as is determined in good faith immediately and irreparably to threaten the integrity and reputation of BCBSA, the Plans, any other licensee including Controlled Affiliate and/or the Licensed Marks and Name. D. Except as otherwise provided in Paragraphs 7(B), 7(C) or 7(E) herein, should Controlled Affiliate fail to comply with the provisions of this Agreement and not cure such failure within thirty (30) days of receiving written notice thereof (or commence a cure within such thirty day period and continue diligent efforts to complete the cure if such curing cannot reasonably be completed within such thirty day period) BCBSA or the Plan shall have the right to issue a notice that the Controlled Affiliate is in a state of noncompliance. If a state of noncompliance as aforesaid is undisputed by the Controlled Affiliate or is found to exist by a mandatory dispute resolution panel and is uncured as provided above, BCBSA shall have the right to seek judicial enforcement of the Agreement or to issue a notice of termination thereof. Notwithstanding any other provisions of this Agreement, any disputes as to the termination of this License pursuant to Paragraphs 7(B), 7(C) or 7(E) of this Agreement shall not be subject to mediation and mandatory dispute resolution. All other disputes between BCBSA, the Plan and/or Controlled Affiliate shall be submitted promptly to mediation and mandatory dispute resolution. The mandatory dispute resolution panel shall have authority to issue orders for specific performance and assess monetary penalties. Except, however, as provided in Paragraphs 7(B) and 7(E) of this Agreement, this license to use the Licensed Marks and Name may not be finally terminated for any reason without the affirmative vote of a majority of the present and voting members of the Board of Directors of BCBSA. 6
E. This Agreement and all of Controlled Affiliate's rights hereunder shall immediately terminate without any further action by any party or entity in the event that: (1) Controlled Affiliate shall no longer comply with item 2(E) above; (2) Appropriate dues, royalties and other payments for Controlled Affiliate pursuant to paragraph 9 hereof, which are the royalties for this License Agreement, are more than sixty (60) days in arrears to BCBSA; or (3) Any of the following events occur: (i) a voluntary petition shall be filed by Controlled Affiliate seeking bankruptcy, reorganization, arrangement with creditors or other relief under the bankruptcy laws of the United States or any other law governing insolvency or debtor relief, or (ii) an involuntary petition or proceeding shall be filed against Controlled Affiliate seeking bankruptcy, reorganization, arrangement with creditors or other relief under the bankruptcy laws of the United States or any other law governing insolvency or debtor relief and such petition or proceeding is consented to or acquiesced in by Controlled Affiliate or is not dismissed within sixty (60) days of the date upon which the petition or other document commencing the proceeding is served upon the Controlled Affiliate, or (iii) an order for relief is entered against Controlled Affiliate in any case under the bankruptcy laws of the United States, or Controlled Affiliate is adjudged bankrupt or insolvent as those terms are defined in the Uniform Commercial Code as enacted in the State of Illinois by any court of competent jurisdiction, or (iv) Controlled Affiliate makes a general assignment of its assets for the benefit of creditors, or (v) the Department of Insurance or other regulatory agency assumes control of Controlled Affiliate or delinquency proceedings (voluntary or involuntary) are instituted, or (vi) an action is brought by Controlled Affiliate seeking its dissolution or liquidation of its assets or seeking the appointment of a trustee, interim trustee, receiver or other custodian for any of its property or business, or (vii) an action is instituted by any governmental entity or officer against Controlled Affiliate seeking its dissolution or liquidation of its assets or seeking the appointment of a trustee, interim trustee, receiver or other custodian for any of its property or business and such action is consented to or acquiesced in by Controlled Affiliate or is not dismissed within one hundred thirty (130) days of the date upon which the pleading or other document commencing the action is served upon the Controlled Affiliate, provided that if the action is stayed or its prosecution is enjoined, the one hundred thirty (130) day period is tolled for the duration of the stay or injunction, and provided further, that the Association's Board of Directors may toll or extend the 130 day period at any time prior to its expiration, or (viii) a trustee, interim trustee, receiver or other custodian for any of Controlled Affiliate's property or business is appointed or the Controlled Affiliate is ordered dissolved or liquidated. Notwithstanding any other provision of this Agreement, 7
a declaration or a request for declaration of the existence of a trust over any of the Controlled Affiliate's property or business shall not in itself be deemed to constitute or seek appointment of a trustee, interim trustee, receiver or other custodian for purposes of subparagraphs 7(e)(3)(vii) and (viii) of this Agreement. F. Upon termination of this Agreement for cause or otherwise, Controlled Affiliate agrees that it shall immediately discontinue all use of the Licensed Marks and Name, including any use in its trade name. G. Upon termination of this Agreement, Controlled Affiliate shall immediately notify all of its customers that it is no longer a licensee of BCBSA and, if directed by the Association's Board of Directors, shall provide instruction on how the customer can contact BCBSA or a designated licensee to obtain further information on securing coverage. The notification required by this paragraph shall be in writing and in a form approved by BCBSA. The BCBSA shall have the right to audit the terminated entity's books and records to verify compliance with this paragraph. H. In the event this Agreement terminates pursuant to 7(b) hereof, or in the event the Controlled Affiliate is a Larger Controlled Affiliate (as defined in Exhibit A), upon termination of this Agreement, the provisions of Paragraph 7.G. shall not apply and the following provisions shall apply: (1) The Controlled Affiliate shall send a notice through the U.S. mails, with first class postage affixed, to all individual and group customers, providers, brokers and agents of products or services sold, marketed, underwritten or administered by the Controlled Affiliate under the Licensed Marks and Name. The form and content of the notice shall be specified by BCBSA and shall, at a minimum, notify the recipient of the termination of the license, the consequences thereof, and instructions for obtaining alternate products or services licensed by BCBSA. This notice shall be mailed within 15 days after termination. (2) The Controlled Affiliate shall deliver to BCBSA within five days of a request by BCBSA a listing of national accounts in which the Controlled Affiliate is involved (in a control, participating or servicing capacity), identifying the national account and the Controlled Affiliate's role therein. (3) Unless the cause of termination is an event respecting BCBSA stated in paragraph 15(a) or (b) of the Plan's license agreement with BCBSA to use the Licensed Marks and Name, the Controlled Affiliate, the Plan, and any other Licensed Controlled Affiliates of the Plan shall be jointly liable for payment to BCBSA of an amount equal to $25 multiplied by the number of Licensed Enrollees of the Controlled Affiliate; provided that if any other Plan is permitted by BCBSA to use marks or names licensed by BCBSA in the Service Area 8
established by this Agreement, the payment shall be multiplied by a fraction, the numerator of which is the number of Licensed Enrollees of the Controlled Affiliate, the Plan, and any other Licensed Controlled Affiliates and the denominator of which is the total number of Licensed Enrollees in the Service Area. Licensed Enrollee means each and every person and covered dependent who is enrolled as an individual or member of a group receiving products or services sold, marketed or administered under marks or names licensed by BCBSA as determined at the earlier of (i) the end of the last fiscal year of the terminated entity which ended prior to termination or (ii) the fiscal year which ended before any transactions causing the termination began. Notwithstanding the foregoing, the amount payable pursuant to this subparagraph H. (3) shall be due only to the extent that, in BCBSA's opinion, it does not cause the net worth of the Controlled Affiliate, the Plan or any other Licensed Controlled Affiliates of the Plan to fall below 100% of the capital benchmark formula, or its equivalent under any successor formula, as set forth in the applicable financial responsibility standards established by BCBSA (provided such equivalent is approved for purposes of this subparagraph by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans); measured as of the date of termination, and adjusted for the value of any transactions not made in the ordinary course of business. This payment shall not be due in connection with transactions exclusively by or among Plans or their affiliates, including reorganizations, combinations or mergers, where the BCBSA Board of Directors determines that the license termination does not result in a material diminution in the number of Licensed Enrollees or the extent of their coverage. (4) BCBSA shall have the right to audit the books and records of the Controlled Affiliate, the Plan, and any other Licensed Controlled Affiliates of the Plan to verify compliance with this paragraph 7.H. (5) As to a breach of 7.H.(1), (2), (3) or (4), the parties agree that the obligations are immediately enforceable in a court of competent jurisdiction. As to a breach of 7.H.(1), (2) or (4) by the Controlled Affiliate, the parties agree there is no adequate remedy at law and BCBSA is entitled to obtain specific performance. I. In the event the Controlled Affiliate is a Smaller Controlled Affiliate (as defined in Exhibit A), the Controlled Affiliate agrees to be jointly liable for the amount described in H.3. hereof upon termination of the BCBSA license agreement of any Larger Controlled Affiliate of the Plan. J. BCBSA shall be entitled to enjoin the Controlled Affiliate or any related party in a court of competent jurisdiction from entry into any transaction which would result in a termination of this Agreement unless the Plan's license from BCBSA to use the Licensed Marks and Names has been terminated 9
pursuant to 10(d) of the Plan's license agreement upon the required 6 month written notice. K. BCBSA acknowledges that it is not the owner of assets of the Controlled Affiliate. L. In the event that the Plan has more than 50 percent voting control of the Controlled Affiliate under Paragraph 2(E)(2) above and is a Larger Controlled Affiliate (as defined in Exhibit A), then the vote called for in Paragraphs 7(C) and 7(D) above shall require the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans. 8. DISPUTE RESOLUTION The parties agree that any disputes between them or between or among either of them and one or more Plans or Controlled Affiliates of Plans that use in any manner the Blue Shield and Blue Shield Marks and Name are subject to the Mediation and Mandatory Dispute Resolution process attached to and made a part of Plan's License from BCBSA to use the Licensed Marks and Name as Exhibits 5, 5A and 5B as amended from time-to-time, which documents are incorporated herein by reference as though fully set forth herein. 9. LICENSE FEE Controlled Affiliate will pay to BCBSA a fee for this License determined pursuant to the formula(s) set forth in Exhibit B. 10. JOINT VENTURE Nothing contained in the Agreement shall be construed as creating a joint venture, partnership, agency or employment relationship between Plan and Controlled Affiliate or between either and BCBSA. Amended as of March 11, 1999 10
11. NOTICES AND CORRESPONDENCE Notices regarding the subject matter of this Agreement or breach or termination thereof shall be in writing and shall be addressed in duplicate to the last known address of each other party, marked respectively to the attention of its President and, if any, its General Counsel. 12. COMPLETE AGREEMENT This Agreement contains the complete understandings of the parties in relation to the subject matter hereof. This Agreement may only be amended by the affirmative vote of three-fourths of the Plans and three-fourths of the total then current weighted vote of all the Plans as officially recorded by the BCBSA Corporate Secretary. 13. SEVERABILITY If any term of this Agreement is held to be unlawful by a court of competent jurisdiction, such findings shall in no way affect the remaining obligations of the parties hereunder and the court may substitute a lawful term or condition for any unlawful term or condition so long as the effect of such substitution is to provide the parties with the benefits of this Agreement. 14. NONWAIVER No waiver by BCBSA of any breach or default in performance on the part of Controlled Affiliate or any other licensee of any of the terms, covenants or conditions of this Agreement shall constitute a waiver of any subsequent breach or default in performance of said terms, covenants or conditions. 14A. VOTING For all provisions of this Agreement referring to voting, the term `Plans' shall mean all entities licensed under the Blue Cross License Agreement and/or the Blue Shield License Agreement, and in all votes of the Plans under this Agreement the Plans shall vote together. For weighted votes of the Plans, the Plan shall have a number of votes equal to the number of weighted votes (if any) that it holds as a Blue Cross Plan plus the number of weighted votes (if any) that it holds as a Blue Shield Plan. For all other votes of the Plans, the Plan shall have one vote. For all questions requiring an affirmative three-fourths weighted vote of the Plans, the requirement shall be deemed satisfied with a lesser weighted vote unless six (6) or more Plans fail to cast weighted votes in favor of the question. Amended as of June 16, 2000 11
THIS PAGE IS INTENTIONALLY BLANK. 12
15. GOVERNING LAW This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Illinois. 16. HEADINGS The headings inserted in this agreement are for convenience only and shall have no bearing on the interpretation hereof. IN WITNESS WHEREOF, the parties have caused this License Agreement to be executed and effective as of the date of last signature written below. Controlled Affiliate: By: ___________________________________ Date: _________________________________ Plan: By: ___________________________________ Date: _________________________________ BLUE CROSS AND BLUE SHIELD ASSOCIATION By: ___________________________________ Date: _________________________________ 13
EXHIBIT A CONTROLLED AFFILIATE LICENSE STANDARDS March 2001 PREAMBLE The standards for licensing Controlled Affiliates are established by BCBSA and are subject to change from time-to-time upon the affirmative vote of three-fourths (3/4) of the Plans and three-fourths (3/4) of the total weighted vote. Each licensed Plan is required to use a standard Controlled Affiliate license form provided by BCBSA and to cooperate fully in assuring that the licensed Controlled Affiliate maintains compliance with the license standards. The Controlled Affiliate License provides a flexible vehicle to accommodate the potential range of health and workers' compensation related products and services Plan Controlled Affiliates provide. The Controlled Affiliate License collapses former health Controlled Affiliate licenses (HCC, HMO, PPO, TPA, and IDS) into a single license using the following business-based criteria to provide a framework for license standards: o Percent of Controlled Affiliate controlled by parent: Greater than 50 percent or 50 percent? o Risk assumption: yes or no? o Medical care delivery: yes or no? o Size of the Controlled Affiliate: If the Controlled Affiliate has health or workers' compensation administration business, does such business constitute 15 percent or more of the parent's and other licensed health subsidiaries' contract enrollment? 14
EXHIBIT A (continued) For purposes of definition: o A "smaller Controlled Affiliate:" (1) comprises less than fifteen percent (15%) of Plan's and its licensed Controlled Affiliates' total contract enrollment (as reported on the BCBSA Quarterly Enrollment Report, excluding rider and freestanding coverage, and treating an entity seeking licensure as licensed);* or (2) underwrites the indemnity portion of workers' compensation insurance and has total premium revenue less than 15 percent of the sponsoring Plan's net subscription revenue. o A "larger Controlled Affiliate" comprises fifteen percent (15%) or more of Plan's and its licensed Controlled Affiliates' total contract enrollment (as reported on the BCBSA Quarterly Enrollment Report, excluding rider and freestanding coverage, and treating an entity seeking licensure as licensed.)* Changes in Controlled Affiliate status: If any Controlled Affiliate's status changes regarding: its Plan ownership level, its risk acceptance or direct delivery of medical care, the Controlled Affiliate shall notify BCBSA within thirty (30) days of such occurrence in writing and come into compliance with the applicable standards within six (6) months. If a smaller Controlled Affiliate's health and workers' compensation administration business reaches or surpasses fifteen percent (15%) of the total contract enrollment of the Plan and licensed Controlled Affiliates, the Controlled Affiliate shall: 15
EXHIBIT A (continued) 1. Within thirty (30) days, notify BCBSA of this fact in writing, including evidence that the Controlled Affiliate meets the minimum liquidity and capital (BCBSA "Managed Care Organizations Risk-Based Capital (MCO-RBC)" as defined by the NAIC and state-established minimum reserve) requirements of the larger Controlled Affiliate Financial Responsibility standard; and 2. Within six (6) months after reaching or surpassing the fifteen percent (15%) threshold, demonstrate compliance with all license requirements for a larger Controlled Affiliate. If a Controlled Affiliate that underwrites the indemnity portion of workers' compensation insurance receives a change in rating or proposed change in rating, the Controlled Affiliate shall notify BCBSA within 30 days of notification by the external rating agency. - ---------- *For purposes of this calculation, The numerator equals: Applicant Controlled Affiliate's contract enrollment, as defined in BCBSA's Quarterly Enrollment Report (excluding rider and freestanding coverage). The denominator equals: Numerator PLUS Plan and all other licensed Controlled Affiliates' contract enrollment, as reported in BCBSA's Quarterly Enrollment Report (excluding rider and freestanding coverage). November 16, 2000 16
EXHIBIT A (continued) STANDARDS FOR LICENSED CONTROLLED AFFILIATES As described in Preamble section of Exhibit A to the Affiliate License Agreement, each controlled affiliate seeking licensure must answer four questions. Depending on the controlled affiliate's answers, certain standards apply: 1. What percent of the controlled affiliate is controlled by the parent Plan? - -------------------------------------------------------------------------------- More than 50% 50% 100% and Primary Business is Government Non-Risk | | | | | | V V V Standard 1A, 4 Standard 1B, 4 Standard 4*,10A - -------------------------------------------------------------------------------- * Applicable only if using the names and marks. IN ADDITION, 2. Is risk being assumed? - ------------------------------------------------------------------------------------------------------------------------------------ Yes No / / | | \ \ / / | | \ \ V V V V V V Controlled Affiliate Controlled Affiliate Controlled Affiliate Controlled Affiliate Controlled Affiliate Controlled underwrites any comprises less than comprises >= 15% of comprises less than comprises >= 15% of Affiliate's indemnity portion 15% of total contract total contract 15% of total contract total contract Primary Business of workers' enrollment of Plan enrollment of Plan enrollment of Plan enrollment of Plan is Government compensation and its licensed and its licensed and its licensed and its licensed Non-Risk insurance affiliates, and does affiliates, and does affiliates affiliates | | not underwrite the not underwrite the | | V indemnity portion of indemnity portion of | | | | V Standards 7A-7E workers' workers' V V compensation compensation insurance insurance Standard 2 Standard 6H Standard 10B (Guidelines 1.1,1.3) | | | | V V Standard 2 Standard 6H (Guidelines 1.1,1.2) - ------------------------------------------------------------------------------------------------------------------------------------ IN ADDITION, 3. Is medical care being directly provided? - -------------------------------------------------------------------------------- Yes No | | | | V V Standard 3A Standard 3B - -------------------------------------------------------------------------------- IN ADDITION, 4. If the controlled affiliate has health or workers' compensation administration business, does such business comprise 15% or more of the total contract enrollment of Plan and its licensed controlled affiliates? - ---------------------------------------------------------------------------------------------------------- Yes No / / | | \ \ | | V V V V Standards 6A-6I Controlled Affiliate is Controlled Controlled Affiliate's a former primary Affiliate is not a Primary Business is licensee former primary Government Non-Risk licensee | | | | | | V V V Standards 8, 10(C) Standards 5,8,9 Standards 5,8 - ---------------------------------------------------------------------------------------------------------- 17
EXHIBIT A (continued) Standard 1 - Organization and Governance 1A.) The Standard for more than 50% Plan control is: A Controlled Affiliate shall be organized and operated in such a manner that a licensed Plan or Plans authorized to use the Licensed Marks in the Service Area of the Controlled Affiliate pursuant to separate License Agreement(s) with BCBSA, other than such Controlled Affiliate's License Agreement(s), (the "Controlling Plan(s)"), have the legal authority, directly or indirectly through wholly-owned subsidiaries: 1) to select members of the Controlled Affiliate's governing body having more than 50% voting control thereof; and 2) to prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which the Controlling Plan(s) do(es) not concur; and 3) to exercise control over the policy and operations of the Controlled Affiliate. In addition, a Plan or Plans directly or indirectly through wholly-owned subsidiaries shall own more than 50% of any for-profit Controlled Affiliate. 1B.) The Standard for 50% Plan control is: A Controlled Affiliate shall be organized and operated in such a manner that a licensed Plan or Plans authorized to use the Licensed Marks in the Service Area of the Controlled Affiliate pursuant to separate License Agreement(s) with BCBSA, other than such Controlled Affiliate's License Agreement(s), (the "Controlling Plan(s)"), have the legal authority, directly or indirectly through wholly-owned subsidiaries: 1) to select members of the Controlled Affiliate's governing body having not less than 50% voting control thereof; and 2) to prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which the Controlling Plan(s) do(es) not concur; and 3) to exercise control over the policy and operations of the Controlled Affiliate at least equal to that exercised by persons or entities (jointly or individually) other than the Controlling Plan(s). 18
Notwithstanding anything to the contrary in 1) through 3) hereof, the Controlled Affiliate's establishing or governing documents must also require written approval by the Controlling Plan(s) before the Controlled Affiliate can: o change the geographic area in which it operates o change its legal and/or trade names o change any of the types of businesses in which it engages o create, or become liable for by way of guarantee, any indebtedness, other than indebtedness arising in the ordinary course of business o sell any assets, except for sales in the ordinary course of business or sales of equipment no longer useful or being replaced o make any loans or advances except in the ordinary course of business o enter into any arrangement or agreement with any party directly or indirectly affiliated with any of the owners or persons or entities with the authority to select or appoint members or board members of the Controlled Affiliate, other than the Plan or Plans (excluding owners of stock holdings of under 5% in a publicly traded Controlled Affiliate) o conduct any business other than under the Licensed Marks and Name o take any action that any Controlling Plan or BCBSA reasonably believes will adversely affect the Licensed Marks and Name. In addition, a Plan or Plans directly or indirectly through wholly-owned subsidiaries shall own at least 50% of any for-profit Controlled Affiliate. 19
EXHIBIT A (continued) Standard 2 - Financial Responsibility A Controlled Affiliate shall be operated in a manner that provides reasonable financial assurance that it can fulfill all of its contractual obligations to its customers. If a risk-assuming Controlled Affiliate ceases operations for any reason, Blue Cross and/or Blue Cross Plan coverage will be offered to all Controlled Affiliate subscribers without exclusions, limitations or conditions based on health status. If a nonrisk-assuming Controlled Affiliate ceases operations for any reason, sponsoring Plan(s) will provide for services to its (their) customers. Standard 3 - State Licensure/Certification 3A.) The Standard for a Controlled Affiliate that employs, owns or contracts on a substantially exclusive basis for medical services is: A Controlled Affiliate shall maintain unimpaired licensure or certification for its medical care providers to operate under applicable state laws. 3B.) The Standard for a Controlled Affiliate that does not employ, own or contract on a substantially exclusive basis for medical services is: A Controlled Affiliate shall maintain unimpaired licensure or certification to operate under applicable state laws. Standard 4 - Certain Disclosures A Controlled Affiliate shall make adequate disclosure in contracting with third parties and in disseminating public statements of 1) the structure of the Blue Cross and Blue Shield System; and 2) the independent nature of every licensee; and 3) the Controlled Affiliate's financial condition. Standard 5 - Reports and Records for Certain Smaller Controlled Affiliates For a smaller Controlled Affiliate that does not underwrite the indemnity portion of workers' compensation insurance, the Standard is: 20
EXHIBIT A (continued) A Controlled Affiliate and/or its licensed Plan(s) shall furnish, on a timely and accurate basis, reports and records relating to these Standards and the License Agreements between BCBSA and Controlled Affiliate. Standard 6 - Other Standards for Larger Controlled Affiliates Standards 6(A) - (I) that follow apply to larger Controlled Affiliates. Standard 6(A): Board of Directors A Controlled Affiliate Governing Board shall act in the interest of its Corporation in providing cost-effective health care services to its customers. A Controlled Affiliate shall maintain a governing Board, which shall control the Controlled Affiliate, composed of a majority of persons other than providers of health care services, who shall be known as public members. A public member shall not be an employee of or have a financial interest in a health care provider, nor be a member of a profession which provides health care services. Standard 6(B): Responsiveness to Customers A Controlled Affiliate shall be operated in a manner responsive to customer needs and requirements. Standard 6(C): Participation in National Programs A Controlled Affiliate shall effectively and efficiently participate in each national program as from time to time may be adopted by the Member Plans for the purposes of providing portability of membership between the licensees and ease of claims processing for customers receiving benefits outside of the Controlled Affiliate's Service Area. Such programs are applicable to licensees, and include: 1. Transfer Program; 2. BlueCard Program; 21
EXHIBIT A (continued) 3. Inter-Plan Teleprocessing System (ITS); and 4. Electronic Claims Routing Process. Standard 6(D): Financial Performance Requirements In addition to requirements under the national programs listed in Standard 6C: Participation in National Programs, a Controlled Affiliate shall take such action as required to ensure its financial performance in programs and contracts of an inter-licensee nature or where BCBSA is a party. Standard 6(E): Cooperation with Plan Performance Response Process A Controlled Affiliate shall cooperate with BCBSA's Board of Directors and its Plan Performance and Financial Standards Committee in the administration of the Plan Performance Response Process and in addressing Controlled Affiliate performance problems identified thereunder. Standard 6(F): Independent Financial Rating A Controlled Affiliate shall obtain a rating of its financial strength from an independent rating agency approved by BCBSA's Board of Directors for such purpose. Standard 6(G): Best Efforts During each year, a Controlled Affiliate shall use its best efforts in the designated Service Area to promote and build the value of the Blue Cross Mark. Standard 6(H): Financial Responsibility A Controlled Affiliate shall be operated in a manner that provides reasonable financial assurance that it can fulfill all of its contractual obligations to its customers. Amended March 10, 2000 22
EXHIBIT A (continued) Standard 6(I): Reports and Records A Controlled Affiliate shall furnish to BCBSA on a timely and accurate basis reports and records relating to compliance with these Standards and the License Agreements between BCBSA and Controlled Affiliate. Such reports and records are the following: A) BCBSA Controlled Affiliate Licensure Information Request; and B) Biennial trade name and service mark usage material, including disclosure material; and C) Changes in the ownership and governance of the Controlled Affiliate, including changes in its charter, articles of incorporation, or bylaws, changes in a Controlled Affiliate's Board composition, or changes in the identity of the Controlled Affiliate's Principal Officers, and changes in risk acceptance, contract growth, or direct delivery of medical care; and D) Quarterly Financial Report, Semi-annual "Managed Care Organizations Risk-Based Capital (MCO-RBC) Report" as defined by the NAIC, Annual Financial Forecast, Annual Certified Audit Report, Insurance Department Examination Report, Annual Statement filed with State Insurance Department (with all attachments), and E) Quarterly Enrollment Report, Semi-Annual Benefit Cost Management Report. Amended November 16, 2000 23
EXHIBIT A (continued) Standard 6(J): Control by Unlicensed Entities Prohibited No Controlled Affiliate shall cause or permit an entity other than a Plan or a Licensed Controlled Affiliate thereof to obtain control of the Controlled Affiliate or to acquire a substantial portion of its assets related to licensable services. Standard 7 - Other Standards for Risk-Assuming Workers' Compensation Controlled Affiliates Standards 7(A) - (E) that follow apply to Controlled Affiliates that underwrite the indemnity portion of workers' compensation insurance. Standard 7 (A): Financial Responsibility A Controlled Affiliate shall be operated in a manner that provides reasonable financial assurance that it can fulfill all of its contractual obligations to its customers. Standard 7(B): Reports and Records A Controlled Affiliate shall furnish, on a timely and accurate basis, reports and records relating to compliance with these Standards and the License Agreements between BCBSA and the Controlled Affiliate. Such reports and records are the following: A. BCBSA Controlled Affiliate Licensure Information Request; and B. Biennial trade name and service mark usage materials, including disclosure materials; and C. Annual Certified Audit Report, Annual Statement as filed with the State Insurance Department (with all attachments), Annual NAIC's Risk-Based Capital Worksheets for Property and Casualty Insurers, Annual Financial Forecast; and Amended June 16, 2000 24
EXHIBIT A (continued) Quarterly Financial Report, Quarterly Estimated Risk-Based Capital for Property and Casualty Insurers, Insurance Department Examination Report. D. Notification of all changes and proposed changes to independent ratings within 30 days of receipt and submission of a copy of all rating reports; and E. Changes in the ownership and governance of the Controlled Affiliate including changes in its charter, articles of incorporation, or bylaws, changes in a Controlled Affiliate's Board composition, Plan control, state license status, operating area, the Controlled Affiliate's Principal Officers or direct delivery of medical care. Standard 7(C): Loss Prevention A Controlled Affiliate shall apply loss prevention protocol to both new and existing business. Standard 7(D): Claims Administration A Controlled Affiliate shall maintain an effective claims administration process that includes all the necessary functions to assure prompt and proper resolution of medical and indemnity claims. Standard 7(E): Disability and Provider Management A Controlled Affiliate shall arrange for the provision of appropriate and necessary medical and rehabilitative services to facilitate early intervention by medical professionals and timely and appropriate return to work. Amended November 16, 2000 25
EXHIBIT A (continued) Standard 8 - Cooperation with Controlled Affiliate License Performance Response Process Protocol A Controlled Affiliate and its Sponsoring Plan(s) shall cooperate with BCBSA's Board of Directors and its Plan Performance and Financial Standards Committee in the administration of the Controlled Affiliate License Performance Response Process Protocol (ALPRPP) and in addressing Controlled Affiliate compliance problems identified thereunder. Standard 9 - Participation in National Programs by Smaller Controlled Affiliates A smaller Controlled Affiliate for which this standard applies pursuant to the Preamble section of Exhibit A of the Controlled Affiliate License Agreement shall effectively and efficiently participate in certain national programs from time to time as may be adopted by Member Plans for the purposes of providing ease of claims processing for customers receiving benefits outside of the Controlled Affiliate's service area and be subject to certain relevant financial and reporting requirements. A. National program requirements include: o BlueCard Program; o Inter-Plan Teleprocessing System (ITS); o Transfer Program; and o Electronic Claims Routing Process. B. Financial Requirements include: o Standard 6(D): Financial Performance Requirements and Standard 6(H): Financial Responsibility; or o A financial guarantee covering the Controlled Affiliate's BlueCard Program obligations in a form, and from a guarantor, acceptable to BCBSA. C. Reporting requirements include: o The Quarterly Capital Benchmark Worksheet. Amended March 10, 2000 26
Standard 10 - Other Standards for Controlled Affiliates Whose Primary Business is Government Non-Risk Standards 10(A) - (C) that follow apply to Controlled Affiliates whose primary business is government non-risk. Standard 10(A) - Organization and Governance A Controlled Affiliate shall be organized and operated in such a manner that it is 1) wholly owned by a licensed Plan or Plans and 2) the sponsoring licensed Plan or Plans have the legal ability to prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the Controlled Affiliate with which it does not concur. 27
EXHIBIT A (continued) Standard 10(B) - Financial Responsibility A Controlled Affiliate shall be operated in a manner that provides reasonable financial assurance that it can fulfill all of its contractual obligations to its customers. Standard 10(C):- Reports and Records A Controlled Affiliate shall furnish, on a timely and accurate basis, reports and records relating to compliance with these Standards and the License Agreements between BCBSA and the Controlled Affiliate. Such reports and records are the following: A. BCBSA Affiliate Licensure Information Request; and B. Biennial trade name and service mark usage materials, including disclosure material; and C. Annual Certified Audit Report, Annual Statement (if required) as filed with the State Insurance Department (with all attachments), Annual NAIC Risk-Based Capital Worksheets (if required) as filed with the State Insurance Department (with all attachments), and Insurance Department Examination Report (if applicable)*; and D. Changes in the ownership and governance of the Controlled Affiliate, including changes in its charter, articles of incorporation, or bylaws, changes in the Controlled Affiliate's Board composition, Plan control, state license status, operating area, the Controlled Affiliate's Principal Officers or direct delivery of medical care. 28
EXHIBIT B ROYALTY FORMULA FOR SECTION 9 OF THE CONTROLLED AFFILIATE LICENSE AGREEMENT Controlled Affiliate will pay BCBSA a fee for this license in accordance with the following formula: FOR RISK AND GOVERNMENT NON-RISK PRODUCTS: For Controlled Affiliates not underwriting the indemnity portion of workers' compensation insurance: An amount equal to its pro rata share of each sponsoring Plan's dues payable to BCBSA computed with the addition of the Controlled Affiliate's subscription revenue and contracts arising from products using the marks. The payment by each sponsoring Plan of its dues to BCBSA, including that portion described in this paragraph, will satisfy the requirement of this paragraph, and no separate payment will be necessary. For Controlled Affiliates underwriting the indemnity portion of workers' compensation insurance: An amount equal to 0.35 percent of the gross revenue per annum of Controlled Affiliate arising from products using the marks; plus, an annual fee of $5,000 per license for a Controlled Affiliate subject to Standard 7. For Controlled Affiliates whose primary business is government non-risk: An amount equal to its pro-rata share of each sponsoring Plan's dues payable to BCBSA computed with the addition of the Controlled Affiliate's government non-risk beneficiaries.
EXHIBIT B (continued) FOR NONRISK PRODUCTS: An amount equal to 0.24 percent of the gross revenue per annum of Controlled Affiliate arising from products using the marks; plus: 1) An annual fee of $5,000 per license for a Controlled Affiliate subject to Standard 6 D. 2) An annual fee of $2,000 per license for all other Controlled Affiliates. The foregoing shall be reduced by one-half where both a BLUE CROSS(R) and BLUE SHIELD(R) License are issued to the same Controlled Affiliate. In the event that any license period is greater or less than one (1) year, any amounts due shall be prorated. Royalties under this formula will be calculated, billed and paid in arrears.
EXHIBIT 1A CONTROLLED AFFILIATE LICENSE AGREEMENT APPLICABLE TO LIFE INSURANCE COMPANIES (Includes revisions adopted by Member Plans through their March 16, 2001 meeting) This agreement by and among Blue Cross and Blue Shield Association ("BCBSA") _______________________________("Controlled Affiliate"), a Controlled Affiliate of the Blue Shield Plan(s), known as _______________________________________("Plan"). WHEREAS, BCBSA is the owner of the BLUE SHIELD and BLUE SHIELD Design service marks; WHEREAS, the Plan and the Controlled Affiliate desire that the latter be entitled to use the BLUE SHIELD and BLUE SHIELD Design service marks (collectively the "Licensed Marks") as service marks and be entitled to use the term BLUE SHIELD in a trade name ("Licensed Name"); NOW, THEREFORE, in consideration of the foregoing and the mutual agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. GRANT OF LICENSE Subject to the terms and conditions of this Agreement, BCBSA hereby grants to the Controlled Affiliate the exclusive right to use the licensed Marks and Names in connection with and only in connection with those life insurance and related services authorized by applicable state law, other than health care plans and related services (as defined in the Plan's License Agreements with BCBSA) which services are not separately licensed to Controlled Affiliate by BCBSA, in the Service Area served by the Plan, except that BCBSA reserves the right to use the Licensed Marks and Name in said Service Area, and except to the extent that said Service Area may overlap the area or areas served by one or more other licensed Blue Shield Plans as of the date of this License as to which overlapping areas the rights hereby granted are non-exclusive as to such other Plan or Plans and their respective Licensed Controlled Affiliates only. Controlled Affiliate cannot use the Licensed Marks or Name outside the Service Area or, anything in any other license to Controlled Affiliate notwithstanding, in its legal or trade name. 2. QUALITY CONTROL A. Controlled Affiliate agrees to use the Licensed Marks and Name only in relation to the sale, marketing and rendering of authorized products and further agrees to be bound by the conditions regarding quality control shown in Exhibit A as it may be amended by BCBSA from time-to-time. Amended as of November 17, 1994 -1-
B. Controlled Affiliate agrees that Plan and/or BCBSA may, from time-to-time, upon reasonable notice, review and inspect the manner and method of Controlled Affiliate's rendering of service and use of the Licensed Marks and Name. C. Controlled Affiliate agrees that it will provide on an annual basis (or more often if reasonably required by Plan or by BCBSA) a report to Plan and BCBSA demonstrating Controlled Affiliate's compliance with the requirements of this Agreement including but not limited to the quality control provisions of Exhibit A. D. As used herein, a Controlled Affiliate is defined as an entity organized and operated in such a manner that it is subject to the bona fide control of a Plan or Plans. Absent written approval by BCBSA of an alternative method of control, bona fide control shall mean the legal authority, directly or indirectly through wholly-owned subsidiaries: (a) to select members of the Controlled Affiliate's governing body having not less than 51% voting control thereof; (b) to exercise operational control with respect to the governance thereof; and (c) to prevent any change in its articles of incorporation, bylaws or other governing documents deemed inappropriate. In addition, a Plan or Plans shall own at least 51% of any for-profit Controlled Affiliate. If the Controlled Affiliate is a mutual company, the Plan or its designee(s) shall have and maintain, in lieu of the requirements of items (a) and (c) above, proxies representing 51% of the votes at any meeting of the policyholders and shall demonstrate that there is no reason to believe this such proxies shall be revoked by sufficient policyholders to reduce such percentage below 51%. 3. SERVICE MARK USE Controlled Affiliate shall at all times make proper service mark use of the Licensed Marks, including but not limited to use of such symbols or words as BCBSA shall specify to protect the Licensed Marks, and shall comply with such rules (applicable to all Controlled Affiliates licensed to use the Marks) relative to service mark use, as are issued from time-to-time by BCBSA. If there is any public reference to the affiliation between the Plan and the Controlled Affiliate, all of the Controlled Affiliate's licensed services in the Service Area of the Plan shall be rendered under the Licensed Marks. Controlled Affiliate recognizes and agrees that all use of the Licensed Marks by Controlled Affiliate shall inure to the benefit of BCBSA. -2-
4. SUBLICENSING AND ASSIGNMENT Controlled Affiliate shall not sublicense, transfer, hypothecate, sell, encumber or mortgage, by operation of law or otherwise, the rights granted hereunder and any such act shall be voidable at the option of Plan or BCBSA. This Agreement and all rights and duties hereunder are personal to Controlled Affiliate. 5. INFRINGEMENTS Controlled Affiliate shall promptly notify Plan and BCBSA of any suspected acts of infringement, unfair competition or passing off which may occur in relation to the Licensed Marks. Controlled Affiliate shall not be entitled to require Plan or BCBSA to take any actions or institute any proceedings to prevent infringement, unfair competition or passing off by third parties. Controlled Affiliate agrees to render to Plan and BCBSA, free of charge, all reasonable assistance in connection with any matter pertaining to the protection of the Licensed Marks by BCBSA. 6. LIABILITY INDEMNIFICATION Controlled Affiliate hereby agrees to save, defend, indemnify and hold Plan and BCBSA harmless from and against all claims, damages, liabilities and costs of every kind, nature and description which may arise as a result of Controlled Affiliate's rendering of health care services under the Licensed Marks. 7. LICENSE TERM The license granted by this Agreement shall remain in effect for a period of one (1) year and shall be automatically extended for additional one (1) year periods upon evidence satisfactory to the Plan and BCBSA that Controlled Affiliate meets the then applicable quality control standards, unless one of the parties hereto notifies the other party of the termination hereof at least sixty (60) days prior to expiration of any license period. This Agreement may be terminated by the Plan or by BCBSA for cause at any time provided that Controlled Affiliate has been given a reasonable opportunity to cure and shall not effect such a cure within thirty (30) days of receiving written notice of the intent to terminate (or commence a cure within such thirty day period and continue diligent efforts to complete the cure if such curing cannot reasonably be completed within such thirty day period). By way of example and not for purposes of limitation, Controlled Affiliate's failure to abide by the quality control provisions of Paragraph 2, above, shall be considered a proper ground for cancellation of this Agreement. -3-
A. Controlled Affiliate shall no longer comply with Standard No. 1 (Organization and Governance) of Exhibit A or, following an opportunity to cure, with the remaining quality control provisions of Exhibit A, as it may be amended from time-to-time; or B. Plan ceases to be authorized to use the Licensed Marks; or C. Appropriate dues for Controlled Affiliate pursuant to item 8 hereof, which are the royalties for this License Agreement are more than sixty (60) days in arrears to BCBSA. Upon termination of this Agreement for cause or otherwise, Controlled Affiliate agrees that it shall immediately discontinue all use of the Licensed Marks including any use in its trade name. In the event of any disagreement between Plan and BCBSA as to whether grounds exist for termination or as to any other term or condition hereof, the decision of BCBSA shall control, subject to provisions for mediation or mandatory dispute resolution in effect between the parties. Upon termination of this Agreement, Licensed Controlled Affiliate shall immediately notify all of its customers that it is no longer a licensee of the Blue Cross and Blue Shield Association and provide instruction on how the customer can contact the Blue Cross and Blue Shield Association or a designated licensee to obtain further information on securing coverage. The written notification required by this paragraph shall be in writing and in a form approved by the Association. The Association shall have the right to audit the terminated entity's books and records to verify compliance with this paragraph. 8. DUES Controlled Affiliate will pay to BCBSA a fee for this license in accordance with the following formula: o An annual fee of five thousand dollars ($5,000) per license, plus o .05% of gross revenue per year from branded group products, plus o .5% of gross revenue per year from branded individual products plus o .14% of gross revenue per year from branded individual annuity products. Amended as of November 20, 1997 -4-
The foregoing percentages shall be reduced by one-half where both a BLUE CROSS(R) and BLUE SHIELD(R) license are issued to the same entity. In the event that any License period is greater or less than one (1) year, any amounts due shall be prorated. Royalties under this formula will be calculated, billed and paid in arrears. Plan will promptly and timely transmit to BCBSA all dues owed by Controlled Affiliate as determined by the above formula and if Plan shall fail to do so, Controlled Affiliate shall pay such dues directly. 9. JOINT VENTURE Nothing contained in this Agreement shall be construed as creating a joint venture, partnership, agency or employment relationship between Plan and Controlled Affiliate or between either and BCBSA. 9A. VOTING For all provisions of this Agreement referring to voting, the term `Plans' shall mean all entities licensed under the Blue Cross License Agreement and/or the Blue Shield License Agreement, and in all votes of the Plans under this Agreement the Plans shall vote together. For weighted votes of the Plans, the Plan shall have a number of votes equal to the number of weighted votes (if any) that it holds as a Blue Cross Plan plus the number of weighted votes (if any) that it holds as a Blue Shield Plan. For all other votes of the Plans, the Plan shall have one vote. For all questions requiring an affirmative three-fourths weighted vote of the Plans, the requirement shall be deemed satisfied with a lesser weighted vote unless six (6) or more Plans fail to cast weighted votes in favor of the question. 10. NOTICES AND CORRESPONDENCE Notices regarding the subject matter of this Agreement or breach or termination thereof shall be in writing and shall be addressed in duplicate to the last known address of each other party, marked respectively to the attention of its President and, if any, its General Counsel. Amended as of June 16, 2000 -4a- (The next page is page 5)
11. COMPLETE AGREEMENT This Agreement contains the complete understandings of the parties in relation to the subject matter hereof. This Agreement may only be amended by a writing executed by all parties. 12. SEVERABILITY If any term of this Agreement is held to be unlawful by a court of competent jurisdiction, such finding shall in no way effect the remaining obligations of the parties hereunder and the court may substitute a lawful term or condition for any unlawful term or condition so long as the effect of such substitution is to provide the parties with the benefits of this Agreement. 13. NONWAIVER No waiver by BCBSA of any breach or default in performance on the part of the Controlled Affiliate or any other licensee of any of the terms, covenants or conditions of this Agreement shall constitute a waiver of any subsequent breach or default in performance of said terms, covenants or conditions. 14. GOVERNING LAW This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Illinois. IN WITNESS WHEREOF, the parties have caused this License Agreement to be executed, effective as of the date of last signature written below. BLUE CROSS AND BLUE SHIELD ASSOCIATION By:__________________________________________ Date:________________________________________ _____________________________________________ Controlled Affiliate By:__________________________________________ Date:________________________________________ Plan:________________________________________ -5-
EXHIBIT A CONTROLLED AFFILIATE LICENSE STANDARDS LIFE INSURANCE COMPANIES Page 1 of 2 PREAMBLE The standards for licensing Life Insurance Companies (Life and Health Insurance companies, as defined by state statute) are established by BCBSA and are subject to change from time-to-time upon the affirmative vote of three-fourths (3/4) of the Plans and three-fourths (3/4) of the total weighted vote of all Plans. Each Licensed Plan is required to use a standard controlled affiliate license form provided by BCBSA and to cooperate fully in assuring that the licensed Life Insurance Company maintains compliance with the license standards. An organization meeting the following standards shall be eligible for a license to use the Licensed Marks within the service area of its sponsoring Licensed Plan to the extent and the manner authorized under the Controlled Affiliate License applicable to Life Insurance Companies and the principal license to the Plan. Standard 1 - Organization and Governance The LIC shall be organized and operated in such a manner that it is controlled by a licensed Plan or Plans which have, directly or indirectly: 1) not less than 51% of the voting control of the LIC; and 2) the legal ability to prevent any change in the articles of incorporation, bylaws or other establishing or governing documents of the LIC with which it does not concur; and 3) operational control of the LIC. If the LIC is a mutual company, the Plan or its designee(s) shall have and maintain, in lieu of the requirements of items 1 and 2 above, proxies representing at least 51% of the votes at any policyholder meeting and shall demonstrate that there is no reason to believe such proxies shall be revoked by sufficient policyholders to reduce such percentage below 51%. Standard 2 - State Licensure The LIC must maintain unimpaired licensure or certificate of authority to operate under applicable state laws as a life and health insurance company in each state in which the LIC does business. Standard 3 - Records and Examination The LIC and its sponsoring licensed Plan(s) shall maintain and furnish, on a timely and accurate basis, such records and reports regarding the LIC as may be required in order to establish compliance with the license agreement. The -1-
CONTROLLED AFFILIATE LICENSE STANDARDS LIFE INSURANCE COMPANIES Page 2 of 2 LIC and its sponsoring licensed Plan(s) shall permit BCBSA to examine the affairs of the LIC and shall agree that BCBSA's board may submit a written report to the chief executive officer(s) and the board(s) of directors of the sponsoring Plan(s). Standard 4 - Mediation The LIC and its sponsoring Plan(s) shall agree to use the then-current BCBSA mediation and mandatory dispute resolution processes, in lieu of a legal action between or among another licensed controlled affiliate, a licensed Plan or BCBSA. Standard 5 - Financial Responsibility The LIC shall maintain adequate financial resources to protect its customers and meet its business obligations. Standard 6 - Cooperation with Affiliate License Performance Response Process Protocol The LIC and its Sponsoring Plan(s) shall cooperate with BCBSA's Board of Directors and its Plan Performance and Financial Standards Committee in the administration of the Affiliate License Performance Response Process Protocol (ALPRPP) and in addressing LIC compliance problems identified thereunder. -2-
EXHIBIT 2 Membership Standards Page 1 of 4 Preamble The Membership Standards apply to all organizations seeking to become or to continue as Regular Members of the Blue Cross and Blue Shield Association. Any organization seeking to become a Regular Member must be found to be in substantial compliance with all Membership Standards at the time membership is granted and the organization must be found to be in substantial compliance with all Membership Standards for a period of two (2) years preceding the date of its application. If Membership is sought by an entity which controls or is controlled by one or more Plans, such compliance shall be determined on the basis of compliance by such Plan or Plans. The Regular Member Plans shall have authority to interpret these Standards. Compliance with any Membership Standard may be excused, at the Plans' discretion, if the Plans agree that compliance with such Standard would require the Plan to violate a law or governmental regulation governing its operation or activities. A Regular Member Plan that operates as a "Shell Holding Company" is defined as an entity that assumes no underwriting risk and has less than 1% of the consolidated enterprise assets (excludes investments in subsidiaries) and less than 5% of the consolidated enterprise general and administrative expenses. A Regular Member Plan that operates as a "Hybrid Holding Company" is defined as an entity that assumes no underwriting risk and has either more than 1% of the consolidated enterprise assets (excludes investments in subsidiaries) or more than 5% of the consolidated enterprise general and administrative expenses. Standard 1: A Plan's Board shall not be controlled by any special interest group, and shall act in the interest of its Corporation in providing cost-effective health care services to its customers. A Plan shall maintain a governing Board, which shall control the Plan, composed of a majority of persons other than providers of health care services, who shall be known as public members. A public member shall not be an employee of or have a financial interest in a health care provider, nor be a member of a profession which provides health care services. Amended as of November 19, 1998
EXHIBIT 2 Membership Standards Page 2 of 4 Standard 2: A Plan shall furnish to the Association on a timely and accurate basis reports and records relating to compliance with these Standards and the License Agreements between the Association and the Plans. Such reports and records are the following: A. BCBSA Membership Information Request; B. Biennial trade name and service mark usage material, including disclosure material under Standard 7; C. Changes in the governance of the Plan, including changes in a Plan's Charter, Articles of Incorporation, or Bylaws, changes in a Plan's Board composition, or changes in the identity of the Plan's Principal Officers; D. Quarterly Financial Report, Semi-annual "Managed Care Organizations Risk-Based Capital (MCO-RBC) Report" as defined by the NAIC, Annual Financial Forecast, Annual Certified Audit Report, Insurance Department Examination Report, Annual Statement filed with State Insurance Department (with all attachments), Plan, Subsidiary and Affiliate Report; and o Plans that are a Shell Holding Company as defined in the Preamble hereto are required to furnish only a calendar year-end "Managed Care Organizations Risk-Based Capital (MCO-RBC) Report" as defined by the NAIC. Amended as of November 16, 2000
EXHIBIT 2 Membership Standards Page 3 of 4 E. Quarterly Enrollment Report, Semi-Annual Benefit Cost Management Report and Member Touchpoint Measures Index (MTM) starting 12/31/00 and semi-annually thereafter; and o Plans that are a Shell Holding Company as defined in the Preamble hereto are not required to furnish any items identified in Paragraph E. Standard 3: A Plan shall be operated in a manner that provides reasonable financial assurance that it can fulfill its contractual obligations to its customers. Standard 4: A Plan shall be operated in a manner responsive to customer needs and requirements. Standard 5: A Plan shall effectively and efficiently participate in each national program as from time to time may be adopted by the Member Plans for the purposes of providing portability of membership between the Plans and ease of claims processing for customers receiving benefits outside of the Plan's Service Area. Such programs are applicable to Blue Cross and Blue Shield Plans, and include: A. Transfer Program; B. Inter-Plan Teleprocessing System (ITS); C. BlueCard Program; and D. Electronic Claims Routing Process Amended as of November 16, 2000
EXHIBIT 2 Membership Standards Page 4 of 4 Standard 6: In addition to requirements under the national programs listed in Standard 5: Participation in National Programs, a Plan shall take such action as required to ensure its financial performance in programs and contracts of an inter-Plan nature or where the Association is a party. Standard 7: A Plan shall make adequate disclosure in contracting with third parties and in disseminating public statements of (i) the structure of the Blue Cross and Blue Shield System, (ii) the independent nature of every Plan, and (iii) the Plan's financial condition. Standard 8: A Plan shall cooperate with the Association's Board of Directors and its Plan Performance and Financial Standards Committee in the administration of the Plan Performance Response Process and in addressing Plan performance problems identified thereunder. Standard 9: A Plan shall obtain a rating of its financial strength from an independent rating agency approved by the Association's Board of Directors for such purpose. Standard 10: During each year, a Plan and its Controlled Affiliate(s) engaged in providing licensable services (excluding Life Insurance and Charitable Foundation Services) shall use their best efforts in the designated Service Area to promote and build the value of the Blue Cross and Blue Shield Marks. Standard 11 Neither a Plan nor any Larger Controlled Affiliate shall cause or permit an entity other than a Plan or a Licensed Controlled Affiliate thereof to obtain control of the Plan or Larger Controlled Affiliate or to acquire a substantial portion of its assets related to licensable services. Amended as of June 18, 1999
EXHIBIT 3 GUIDELINES WITH RESPECT TO USE OF LICENSED NAME AND MARKS IN CONNECTION WITH NATIONAL ACCOUNTS Page 1 of 3 1. The strength of the Blue Cross/Blue Shield National Accounts mechanism, and the continued provision of cost effective, quality health care benefits to National Accounts, are predicated on locally managed provider networks coordinated on a national scale in a manner consistent with effective service to National Account customers and consistent with the preservation of the integrity of the Blue Cross/Blue Shield system and the Licensed Marks. These guidelines shall be interpreted in keeping with such ends. 2. A National Account is an entity with employee and/or retiree locations in more than one Plan's Service Area. Unless otherwise agreed, a National Account is deemed located in the Service Area in which the corporate headquarters of the National Account is located. The Control Plan of a National Account is the Plan in whose Service Area the National Account is located. A participating ("Par") Plan is a Plan in whose Service Area the National Account has employee and/or retiree locations, but in which the National Account is not located. 3. The National Account Guidelines enunciated herein below shall be applicable only with respect to the business of new National Accounts acquired after January 1, 1991. 4. Control Plans shall utilize National Account identification cards complying with then currently effective BCBSA graphic standards in connection with all National Accounts business to facilitate administration thereof, to minimize subscriber and provider confusion, and to reflect a commitment to cooperation among Plans. 5. Disputes among Plans and/or BCBSA as to the interpretation or implementation of these Guidelines or as to other National Accounts issues shall be submitted to mediation and mandatory dispute resolution as provided in the License Agreement. For two years from the effective date of the License Agreement, however, such disputes shall be subject to mediation only, with the results of such mediation to be collected and reported in order to establish more definitive operating parameters for National Accounts business and to serve as ground rules for future binding dispute resolution.
EXHIBIT 3 Page 2 of 3 6. The Control Plan may use the BlueCard Program (as defined by IPOC) to deliver benefits to employees and non-Medicare eligible retirees in a Participating Plan's service area if an alternative arrangement with the Participating Plan cannot be negotiated. The Participating Plan's minimum servicing requirement for those employees and non-Medicare retirees in its service area is to deliver benefits using the BlueCard Program. Account delivery is subject to the policies, provisions and procedures of the BlueCard Program. 7. For provider payments in a Participating Plan's area (on non-BlueCard claims), payment to the provider may be made by the Participating Plan or the Control Plan at the Participating Plan's option. If the Participating Plan elects to pay the provider, it may not withhold payment of a claim verified by the Control Plan or its designated processor, and payment must be in conformity with service criteria established by the Board of Directors of BCBSA (or an authorized committee thereof) to assure prompt payment, good service and minimum confusion with providers and subscribers. The Control Plan, at the Participating Plan's request, will also assure that measures are taken to protect the confidentiality of the data pertaining to provider reimbursement levels and profiles. 8. For claim payments in a Participating Plan's area (on non-BlueCard claims), Participating Plans are strongly encouraged, but not required, to pass along to the Control Plan part or all of local provider discounts and differentials for use by the Control Plan in negotiating financial arrangements with National Accounts. However, since the size, basis, form and use of local differentials can vary substantially among Plans and also by individual National Account characteristics, the degree and form of any discount or differential passed along to the Control Plan shall be strictly a matter of negotiated contractual agreement between a Participating Plan and the Control Plan and may also vary from one National Account to another. In order to facilitate the quotation of national account pricing and the offering of a variety of National Account delivery systems, all Plans are strongly encouraged to periodically publish to other Plans and the BCBSA their National Account contracting policies with respect to the handling of differentials. The Control Plan, in its financial agreements with a National Account, is expected to reasonably reflect the aggregate amount of differentials passed along to the Control Plan by all Participating Plans in a National Account. The exact form and substance of this may vary from one National Account to another and shall be a matter of Amended as of June 14, 1996
EXHIBIT 3 Page 3 of 3 explicit negotiation and contractual relationship between the National Account and the Control Plan. The specifics in an agreement between the Control Plan and the National Account may vary in form (e.g., a guaranteed offset against retentions, or a direct pass through, or a guaranteed aggregate percentage discount, or no pass back at all, etc.), and the Control Plan has the responsibility and the Authority to negotiate precise arrangements. However, irrespective of the final arrangements between the Control Plan and the National Account, a Participating Plan's liability for passing along differentials shall be limited to the contractual agreement the Participating Plan has with the Control Plan on a specific National Account. 9. Other than in contracting with health care providers or soliciting such contracts in areas contiguous to a Plan's Service Area in order to serve its subscribers or those of its licensed Controlled Affiliate residing or working in its Service Area, a Control Plan may not use the Licensed Marks and/or Name, as a tag line or otherwise, to negotiate directly with providers outside its Service Area.
EXHIBIT 4 GOVERNMENT PROGRAMS AND CERTAIN OTHER USES Page 1 of 2 1. A Plan and its licensed Controlled Affiliate may use the Licensed Marks and Name in bidding on and executing a contract to serve a Government Program, and in thereafter communicating with the Government concerning the Program. With respect, however, to such contracts entered into after the 1st day of January, 1991, the Licensed Marks and Name will not be used in communications or transactions with beneficiaries or providers in the Government Program located outside a Plan's Service Area, unless the Plan can demonstrate to the satisfaction of BCBSA's governing body that such a restriction on use of the Licensed Marks and Name will jeopardize its ability to procure the contract for the Government Program. As to both existing and future contracts for Government Programs, Plans will discontinue use of the Licensed Marks and Name as to beneficiaries and Providers outside their Service Area as expenditiously as circumstances reasonably permit. Effective January 1, 1995, except as provided in the first sentence above, all use by a Plan of the Licensed Marks and Name in Government Programs outside of the Plan's Service Area shall be discontinued. Incidental communications outside a Plan's Service Area with resident or former resident beneficiaries of the Plan, and other categories of necessary incidental communications approved by BCBSA, are not prohibited. 2. In connection with activity otherwise in furtherance of the License Agreement, a Plan may use the Licensed Marks and Name outside its Service Area in the following circumstances which are deemed legitimate and necessary and not likely to cause consumer confusion: a. sending letterhead, envelopes, and similar items solely for administrative purposes (e.g., not for purposes of marketing, advertising, promoting, selling or soliciting the sale of health care plans and related services); b. distributing business cards other than in marketing and selling; c. contracting with health care providers or soliciting such contracts in areas contiguous to a Plan's Service Area in order to serve its subscribers or those of its licensed Controlled Affiliate residing or working in its service area; d. issuing a small sign containing the legal name or trade name of the Plan or its licensed Controlled Affiliate for display by a provider to identify the latter as a participating provider of the Plan or Controlled Affiliate; Amended March 16, 2001
EXHIBIT 4 Page 2 of 2 e. advertising in publications or electronic media solely to persons for employment; f. advertising in print, electronic or other media which serve, as a substantial market, the Service Area of the Plan or licensed Controlled Affiliate, provided that no Plan may advertise outside its Service Area on the national broadcast and cable networks and that advertisements in national print media are limited to the smallest regional edition encompassing the Service Area; g. advertising by direct mail where the addressee's zip code plus 4 includes, at least in part, the Plan's Service Area or that of a licensed Controlled Affiliate.
EXHIBIT 5 MEDIATION AND MANDATORY DISPUTE RESOLUTION (MMDR) RULES The Blue Cross and Blue Shield Plans ("Plans") and the Blue Cross Blue Shield Association ("BCBSA") recognize and acknowledge that the Blue Cross and Blue Shield system is a unique nonprofit and for-profit system offering cost effective health care financing and services. The Plans and BCBSA desire to utilize Mediation and Mandatory Dispute Resolution ("MMDR") to avoid expensive and time-consuming litigation that may otherwise occur in the federal and state judicial systems. Even MMDR should be viewed, however, as methods of last resort, all other procedures for dispute resolution having failed. Except as otherwise provided in the License Agreements, the Plans, their Controlled Affiliates and BCBSA agree to submit all disputes to MMDR pursuant to these Rules and in lieu of litigation. 1. Initiation of Proceedings A. Pre-MMDR Efforts Before filing a Complaint to invoke the MMDR process, the CEO of a complaining party, or his/her designated representative, shall undertake good faith efforts with the other side(s) to try to resolve any dispute. B. Complaint To commence a proceeding, the complaining party (or parties) shall provide by certified mail, return receipt requested, a written Complaint to the BCBSA Corporate Secretary (which shall also constitute service on BCBSA if it is a respondent) and to any Plan(s) and/or Controlled Affiliate(s) named therein. The Complaint shall contain: i. identification of the complaining party (or parties) requesting the proceeding; ii. identification of the respondent(s); iii. identification of any other persons or entities who are interested in a resolution of the dispute; iv. a full statement describing the nature of the dispute; v. identification of all of the issues that are being submitted for resolution; Amended as of November 21, 1996
vi. the remedy sought; vii. a statement as to whether the complaining party (or parties) elect(s) first to pursue Mediation; viii. any request, if applicable, that one or more members of the Mediation Committee be disqualified from the proceeding and the grounds for such request; ix. any request, if applicable, that the matter be handled on an expedited basis and the reasons therefor; and x. a statement signed by the CEO of the complaining party affirming that the CEO has undertaken efforts, or has directed efforts to be undertaken, to resolve the dispute before resorting to the MMDR process. The complaining party (or parties) shall file and serve with the Complaint copies of all documents which the party (or parties) intend(s) to offer at the Arbitration Hearing and a statement identifying the witnesses the party (or parties) intend(s) to present at the Hearing, along with a summary of each witness' expected testimony. C. Answer Within twenty (20) days after receipt of the Complaint, each respondent shall serve on the BCBSA and on the complaining party (or parties) and on the Chairman of the Mediation Committee; i. a full Answer to the aforesaid Complaint; ii. a statement of any Counterclaims against the complaining party (or parties), providing with respect thereto the information specified in Paragraph 1.B., above; iii. a statement as to whether the respondent elects to first pursue Mediation; iv. any request, if applicable, that one or more members of the Mediation Committee be disqualified from the proceeding and the grounds for such request; and v. any request, if applicable, that the matter be handled on an expedited basis and the reasons therefor.
The respondent(s) shall file and serve with the Answer or by the date of the Initial Conference set forth in Paragraph 3.B., below, copies of all documents which the respondent(s) intend(s) to offer at the Arbitration Hearing and a statement identifying the witnesses the party (or parties) intend(s) to present at the Hearing, along with a summary of each witness' expected testimony. D. Reply To Counterclaim Within ten (10) days after receipt of any Counterclaim, the complaining party (or parties) shall serve on BCBSA and on the responding party (or parties) and on the Chairman of the Mediation Committee, a Reply to the Counterclaim. Such Reply must provide the same information required by Paragraph 1.C. 2. Mediation A. Mediation Committee To facilitate the mediation of disputes between or among BCBSA, the Plans and/or their Controlled Affiliates, the BCBSA Board has established a Mediation Committee. Mediation may be pursued in lieu of or in an effort to obviate the Mandatory Dispute Resolution process, and all parties are strongly urged to exhaust the mediation procedure. B. Election To Mediate If any party elects first to pursue Mediation, and if it appears to the Corporate Secretary that the dispute falls within the jurisdiction of the Mediation Committee, as set forth in Exhibit 5-A hereto, then the Corporate Secretary will promptly furnish the Mediation Committee with copies of the Complaint, Answer, Counterclaim and Reply to Counterclaim, and other documents referenced in Paragraph 1, above. C. Selection of Mediators The parties shall promptly attempt to agree upon: (i) the number of mediators desired, not to exceed three mediators; and (ii) the selection of the mediator(s) who may include members of the Mediation Committee and/or experienced mediators from an independent entity to mediate all disputes set forth in the Complaint and Answer (and Counterclaim and Reply, if any). In the event the parties cannot agree upon the number of mediators desired, that number shall default to three. In the event the parties cannot agree upon the selection of mediator(s), the Chairman will select the mediator(s), at least one of which shall be an experienced mediator from an independent entity, consistent with the provisions set forth in this Paragraph. No member of the Mediation Committee who is a representative of any party to the Mediation may be
selected to mediate the dispute. The Chairman shall also endeavor not to select as a mediator any member of the Mediation Committee whom a party has requested to be disqualified. If, after due regard for availability, expertise, and such other considerations as may best promote an expeditious Mediation, the Chairman believes that he or she must consider for selection a member of the Mediation Committee whom a party has requested to be disqualified, the other members of the Committee eligible to be selected to mediate the dispute shall decide the request for disqualification. By agreeing to participate in the Mediation of a dispute, a member of the Mediation Committee represents to the party (or parties) thereto that he or she knows of no grounds which would require his or her disqualification. D. Binding Decision Before the date of the Mediation Hearing described below, the Corporate Secretary will contact the party (or parties) to determine whether they wish to be bound by any recommendation of the selected mediators for resolution of the disputes. If all wish to be bound, the Corporate Secretary will send appropriate documentation to them for their signatures before the Mediation Hearing begins. E. Mediation Procedure The Chairman shall promptly advise the parties of a scheduled Mediation Hearing date. Unless a party requests an expedited procedure, or unless all parties to the proceeding agree to one or more extensions of time, the Mediation Hearing set forth below shall be completed within forty (40) days of BCBSA's receipt of the Complaint. The selected mediators, unless the parties otherwise agree, shall adhere to the following procedure: i. Each party must be represented by its CEO or other representative who has been delegated full authority to resolve the dispute. However, parties may send additional representatives as they see fit. ii. By no later than five (5) days prior to the date designated for the Mediation Hearing, each party shall supply and serve a list of all persons who will be attending the Mediation Hearing, and indicate who will have the authority to resolve the dispute. iii. Each party will be given one-half hour to present its case, beginning with the complaining party (or parties), followed by the other party or parties. The parties are free to structure their presentations as they see fit, using oral statements or direct examination of witnesses. However, neither cross-examination nor questioning of opposing representatives will be
permitted. At the close of each presentation, the selected mediators will be given an opportunity to ask questions of the presenters and witnesses. All parties must be present throughout the Mediation Hearing. The selected mediators may extend the time allowed for each party's presentation at the Mediation Hearing. The selected mediators may meet in executive session, outside the presence of the parties, or may meet with the parties separately, to discuss the controversy. iv. After the close of the presentations, the parties will attempt to negotiate a settlement of the dispute. If the parties desire, the selected mediators, or any one or more of the selected mediators, will sit in on the negotiations. v. After the close of the presentations, the selected mediators may meet privately to agree upon a recommendation for resolution of the dispute which would be submitted to the parties for their consideration and approval. If the parties have previously agreed to be bound by the results of this procedure, this recommendation shall be binding upon the parties. vi. The purpose of the Mediation Hearing is to assist the parties to settle their grievances short of mandatory dispute resolution. As a result, the Mediation Hearing has been designed to be as informal as possible. Rules of evidence shall not apply. There will be no transcript of the proceedings, and no party may make a tape recording of the Mediation Hearing. vii. In order to facilitate a free and open discussion, the Mediation proceeding shall remain confidential. A "Stipulation to Confidentiality" which prohibits future use of settlement offers, all position papers or other statements furnished to the selected mediators, and decisions or recommendations in any Mediation proceeding shall be executed by each party. viii. Upon request of the selected mediators, or one of the parties, BCBSA staff may also submit documentation at any time during the proceedings.
F. Notice Of Termination Of Mediation If the Mediation cannot be completed within the prescribed or agreed time period due to the lack of cooperation of any party, as determined by the selected mediators, or if the Mediation does not result in a final resolution of all disputes at the Mediation Hearing or within forty (40) days after the Complaint was served, whichever comes first, any party or any one of the selected mediators may so notify the Corporate Secretary, who shall promptly issue a Notice of termination of mediation to all parties, to the selected mediators, and to the MDR Administrator, defined below. Such notice shall serve to bring the Mediation to an end and to initiate Mandatory Dispute Resolution. Upon agreement of all parties and the selected mediators, the Mediation process may continue at the same time the MDR process is invoked. The Notice described above would serve to initiate the MDR proceeding and would not terminate the proceedings. 3. Mandatory Dispute Resolution (MDR) If all parties elect not to first pursue Mediation, or if a notice of termination of Mediation is issued as set forth in Paragraph 2.F., above, then the unresolved disputes set forth in any Complaint and Answer (and Counterclaim and Reply, if any) shall be subject to MDR. A. MDR Administrator The Administrator shall be an independent entity such as the Center for Public Resources, Inc. or Endispute, Inc., specializing in alternative dispute resolution. The Administrator shall be designated initially, and may be changed from time to time, by the affirmative vote of a majority of the Plans present and voting and a majority of the total then current weighted vote of all the Plans present and voting. B. Initial Conference Within five (5) days after a Notice of Termination has issued, or within five (5) days after the time for filing and serving the Reply to any Counterclaim if the parties elect first not to mediate, the parties shall confer with the Administrator to discuss selecting a dispute resolution panel ("the Panel"). This Initial Conference may be by telephone. The parties are encouraged to agree to the composition of the Panel and to present that agreement to the Administrator at the Initial Conference. If the parties do not agree on the composition of the Panel by the time of the Initial Conference, or by any extension thereof agreed to by all parties and the Administrator, then the Panel Selection Process set forth in subparagraph C shall be followed. Amended September 21, 2000
C. Panel Selection Process The Administrator shall designate at least seven potential arbitrators. The exact number designated shall be sufficient to give each party at least two peremptory strikes. Each party shall be permitted to strike any designee for cause and the Administrator shall determine the sufficiency thereof in its sole discretion. The Administrator will designate a replacement for any designee so stricken. Each party shall then be permitted two peremptory strikes. From the remaining designees, the Administrator shall select a three member Panel. The Administrator shall set the dates for exercising all strikes and shall complete the Panel Selection Process within fifteen (15) days of the Initial Conference. Each Arbitrator shall be compensated at his or her normal hourly rate or, in the absence of an established rate, at a reasonable hourly rate to be promptly fixed by the Administrator for all time spent in connection with the proceedings and shall be reimbursed for any travel and other reasonable expenses. D. Duties Of The Arbitrators The Panel shall promptly designate a Presiding Arbitrator for the purposes reflected below, but shall retain the power to review and modify any ruling or other action of said Presiding Arbitrator. Each Arbitrator shall be an independent Arbitrator, shall be governed by the Code of Ethics for Arbitrators in Commercial Disputes, appended as Exhibit "5-B" hereto, and shall at or prior to the commencement of any Arbitration Hearing take an oath to that effect. Each Arbitrator shall promptly disclose in writing to the Panel and to the parties any circumstances, whenever arising, that might cause doubt as to such Arbitrator's compliance, or ability to comply, with said Code of Ethics, and, absent resignation by such Arbitrator, the remaining Arbitrators shall determine in their sole discretion whether the circumstances so disclosed constitute grounds for disqualification and for replacement. With respect to such circumstances arising or coming to the attention of a party after an Arbitrator's selection, a party may likewise request the Arbitrator's resignation or a determination as to disqualification by the remaining Arbitrators. With respect to a sole Arbitrator, the determination as to disqualification shall be made by the Administrator. There shall be no ex parte communication between the parties or their counsel and any member of the Panel. E. Panel's Jurisdiction And Authority The Panel's jurisdiction and authority shall extend to all disputes between or among the Plans, their Controlled Affiliates, and/or BCBSA, except for those disputes excepted from these MMDR procedures as set forth in the License Agreements.
With the exception of punitive or treble damages, the Panel shall have full authority to award the relief it deems appropriate to resolve the parties' disputes, including monetary awards and injunctions, mandatory or prohibitory. The Panel has no authority to award punitive or treble damages except that the Panel may allocate or assess responsibility for punitive or treble damages assessed by another tribunal. Subject to the above limitations, the Panel may, by way of example, but not of limitation: i. interpret or construe the meaning of any terms, phrase or provision in any license between BCBSA and a Plan or a Controlled Affiliate relating to the use of the BLUE CROSS(R)or BLUE SHIELD(R)service marks. ii. determine whether BCBSA, a Plan or a Controlled Affiliate has violated the terms or conditions of any license between the BCBSA and a Plan or a Controlled Affiliate relating to the use of the BLUE CROSS(R) or BLUE SHIELD(R) service marks. iii. decide challenges as to its own jurisdiction. iv. issue such orders for interim relief as it deems appropriate pending Hearing and Award in any Arbitration. It is understood that the Panel is expected to resolve issues based on governing principles of law, preserving to the maximum extent legally possible the continued integrity of the Licensed Marks and the BLUE CROSS/BLUE SHIELD system. The Panel shall apply federal law to all issues which, if asserted in the United States District Court, would give rise to federal question jurisdiction, 28 U.S.C. ss. 1331. The Panel shall apply Illinois law to all issues involving interpretation, performance or construction of any License Agreement or Controlled Affiliate License Agreement unless the agreement otherwise provides. As to other issues, the Panel shall choose the applicable law based on conflicts of law principles of the State of Illinois.
F. Administrative Conference And Preliminary Arbitration Hearing Within ten (10) days of the Panel being selected, the Presiding Arbitrator will schedule an Administrative Conference to discuss scheduling of the Arbitration Hearing and any other matter appropriate to be considered including: any written discovery in the form of requests for production of documents or requests to admit facts; the identity of any witness whose deposition a party may desire and a showing of exceptional good cause for the taking of any such deposition; the desirability of bifurcation or other separation of the issues; the need for and the type of record of conferences and hearings, including the need for transcripts; the need for expert witnesses and how expert testimony should be presented; the appropriateness of motions to dismiss and/or for full or partial summary judgment; consideration of stipulations; the desirability of presenting any direct testimony in writing; and the necessity for any on-site inspection by the Panel. G. Discovery i. Requests for Production of Documents: All requests for the production of documents must be served as of the date of the Administrative Conference as set forth in Paragraph 3.F., above. Within twenty (20) days after receipt of a request for documents, a party shall produce all relevant and non-privileged documents to the requesting party. In his or her discretion, the Presiding Arbitrator may require the parties to provide lists in such detail as is deemed appropriate of all documents as to which privilege is claimed and may further require in-camera inspection of the same. ii. Requests for Admissions: Requests for Admissions may be served up to 21 days prior to the Arbitration Hearing. A party served with Requests For Admissions must respond within twenty (20) days of receipt of said request. The good faith use of and response to Requests for Admissions is encouraged, and the Panel shall have full discretion, with reference to the Federal Rules of Civil Procedure, in awarding appropriate sanctions with respect to abuse of the procedure.
iii. Depositions As a general rule, the parties will not be permitted to take deposition testimony for discovery purposes. The Presiding Arbitrator, in his or her sole discretion, shall have the authority to permit a party to take such deposition testimony upon a showing of exceptional good cause, provided that no deposition, for discovery purposes or otherwise, shall exceed three (3) hours, excluding objections and colloquy of counsel. iv. Expert witness(es): If a party intends to present the testimony of an expert witness during the oral hearing, it shall provide all other parties with a written statement setting forth the information required to be provided by Fed. R. Civ. P. 26(b)(4)(A)(i) prior to the expiration of the discovery period. v. Discovery cut-off: The Presiding Arbitrator shall determine the date on which the discovery period will end, but the discovery period shall not exceed forty-five (45) days from its commencement, without the agreement of all parties. vi. Additional discovery: Any additional discovery will be at the discretion of the Presiding Arbitrator. The Presiding Arbitrator is authorized to resolve all discovery disputes, which resolution will be binding on the parties unless modified by the Arbitration Panel. If a party refuses to comply with a decision resolving a discovery dispute, the Panel, in keeping with Fed. R. Civ. P. 37, may refuse to allow that party to support or oppose designated claims or defenses, prohibit that party from introducing designated matters into evidence or, in extreme cases, decide an issue submitted for resolution adversely to that party. H. Panel Suggested Settlement/Mediation At any point during the proceedings, the Panel at the request of any party or on its own initiative, may suggest that the parties explore settlement and that they do so at or before the conclusion of the Arbitration Hearing, and the Panel shall give such assistance in settlement negotiations as the parties may request and the Panel may deem appropriate. Alternatively, the Panel may direct the parties to endeavor to mediate their disputes as provided above, or to explore a mini-trial proceeding, or to have an independent party render a neutral evaluation of the parties' respective positions. The Panel shall enter such sanctions as it deems appropriate with respect to any party failing to pursue in good faith such Mediation or other alternate dispute resolution methods.
I. Subpoenas On Third Parties Pursuant to, and consistent with, the Federal Arbitration Act, 9 U.S.C. ss. 9 et seq., a party may request the issuance of a subpoena on a third party, to compel testimony or documents, and, if good and sufficient cause is shown, the Panel shall issue such a subpoena. J. Arbitration Hearing An Arbitration Hearing will be held within thirty (30) days after the Administrative Conference if no discovery is taken, or within thirty (30) days after the close of discovery, unless all parties and the Panel agree to extend the Arbitration Hearing date, or unless the parties agree in writing to waive the Arbitration Hearing. The parties may mutually agree on the location of the Arbitration Hearing. If the parties fail to agree, the Arbitration Hearing shall be held in Chicago, Illinois, or at such other location determined by the Presiding Arbitrator to be most convenient to the participants. The Panel will determine the date(s) and time(s) of the Arbitration Hearing(s) after consultation with all parties and shall provide reasonable notice thereof to all parties or their representatives. K. Arbitration Hearing Memoranda Twenty (20) days prior to the Arbitration Hearing, each party shall submit to the other party (or parties) and to the Panel an Arbitration Hearing Memorandum which sets forth the applicable law and any argument as to any relevant issue. The Arbitration Hearing Memorandum will supplement, and not repeat, the allegations, information and documents contained in or with the Complaint, Answer, Counterclaim and Reply, if any. Ten (10) days prior to the Arbitration Hearing, each party may submit to the other party (or parties) and to the Panel a Response Arbitration Hearing Memorandum which sets forth any response to another party's Arbitration Hearing Memorandum.
L. Notice For Testimony Ten (10) days prior to the Arbitration Hearing, any party may serve a Notice on any other party (or parties) requesting the attendance at the Arbitration Hearing of any officer, employee or director of the other party (or parties) for the purpose of providing noncumulative testimony. If a party fails to produce one of its officers, employees or directors whose noncumulative testimony during the Arbitration Hearing is reasonably requested by an adverse party, the Panel may refuse to allow that party to support or oppose designated claims or defenses, prohibit that party from introducing designated matters into evidence or, in extreme cases, decide an issue submitted for mandatory dispute resolution adversely to that party. This Rule may not be used for the purpose of burdening or harassing any party, and the Presiding Arbitrator may impose such orders as are appropriate so as to prevent or remedy any such burden or harassment. M. Arbitration Hearing Procedures i. Attendance at Arbitration Hearing: Any person having a direct interest in the proceeding is entitled to attend the Arbitration Hearing. The Presiding Arbitrator shall otherwise have the power to require the exclusion of any witness, other than a party or other essential person, during the testimony of any other witness. It shall be discretionary with the Presiding Arbitrator to determine the propriety of the attendance of any other person. ii. Confidentiality: The Panel and all parties shall maintain the privacy of the Arbitration Proceeding. The parties and the Panel shall treat the Arbitration Hearing and any discovery or other proceedings or events related thereto, including any award resulting therefrom, as confidential except as otherwise necessary in connection with a judicial challenge to or enforcement of an award or unless otherwise required by law. iii. Stenographic Record: Any party, or if the parties do not object, the Panel, may request that a stenographic or other record be made of any Arbitration Hearing or portion thereof. The costs of the recording and/or of preparing the transcript shall be borne by the requesting party and by any party who receives a copy thereof. If the Panel requests a recording and/or a transcript, the costs thereof shall be borne equally by the parties.
iv. Oaths: The Panel may require witnesses to testify under oath or affirmation administered by any duly qualified person and, if requested by any party, shall do so. v. Order of Arbitration Hearing: An Arbitration Hearing shall be opened by the recording of the date, time, and place of the Arbitration Hearing, and the presence of the Panel, the parties, and their representatives, if any. The Panel may, at the beginning of the Arbitration Hearing, ask for statements clarifying the issues involved. Unless otherwise agreed, the complaining party (or parties) shall then present evidence to support their claim(s). The respondent(s) shall then present evidence supporting their defenses and Counterclaims, if any. The complaining party (or parties) shall then present evidence supporting defenses to the Counterclaims, if any, and rebuttal. Witnesses for each party shall submit to questions by adverse parties and/or the Panel. The Panel has the discretion to vary these procedures, but shall afford a full and equal opportunity to all parties for the presentation of any material and relevant evidence vi. Evidence: The parties may offer such evidence as is relevant and material to the dispute and shall produce such evidence as the Panel may deem necessary to an understanding and resolution of the dispute. Unless good cause is shown, as determined by the Panel or agreed to by all other parties, no party shall be permitted to offer evidence at the Arbitration Hearing which was not disclosed prior to the Arbitration Hearing by that party. The Panel may receive and consider the evidence of witnesses by affidavit upon such terms as the Panel deems appropriate.
The Panel shall be the judge of the relevance and materiality of the evidence offered, and conformity to legal rules of evidence, other than enforcement of the attorney-client privilege and the work product protection, shall not be necessary. The Federal Rules of Evidence shall be considered by the Panel in conducting the Arbitration Hearing but those rules shall not be controlling. All evidence shall be taken in the presence of the Panel and all of the parties, except where any party is in default or has waived the right to be present. Settlement offers by any party in connection with Mediation or MDR proceedings, decisions or recommendations of the selected mediators, and a party's position papers or statements furnished to the selected mediators shall not be admissible evidence or considered by the Panel without the consent of all parties. vii. Closing of Arbitration Hearing: The Presiding Arbitrator shall specifically inquire of all parties whether they have any further proofs to offer or witnesses to be heard. Upon receiving negative replies or if he or she is satisfied that the record is complete, the Presiding Arbitrator shall declare the Arbitration Hearing closed with an appropriate notation made on the record. Subject to being reopened as provided below, the time within which the Panel is required to make the award shall commence to run, in the absence of contrary agreement by the parties, upon the closing of the Arbitration Hearing. With respect to complex disputes, the Panel may, in its sole discretion, defer the closing of the Arbitration Hearing for a period of up to thirty (30) days after the presentation of proofs in order to permit the parties to submit post-hearing briefs and argument, as the Panel deems appropriate, prior to making an award. For good cause, the Arbitration Hearing may be reopened for up to thirty (30) days on the Panel's initiative, or upon application of a party, at any time before the award is made
N. Awards An Award must be in writing and shall be made promptly by the Panel and, unless otherwise agreed by the parties or specified by law, no later than thirty (30) days from the date of closing the Arbitration Hearing. If all parties so request, the Award shall contain findings of fact and conclusions of law. The Award, and all other rulings and determinations by the Panel, may be by a majority vote. Parties shall accept as legal delivery of the Award the placing of the Award or a true copy thereof in the mail addressed to a party or its representative at its last known address or personal service of the Award on a party or its representative. Awards are binding only on the parties to the Arbitration and are not binding on any non-parties to the Arbitration and may not be used or cited as precedent in any other proceeding. After the expiration of twenty (20) days from initial delivery, the Award (with corrections, if any) shall be final and binding on the parties, and the parties shall undertake to carry out the Award without delay. Proceedings to confirm, modify or vacate an Award shall be conducted in conformity with and controlled by the Federal Arbitration Act. 9 U.S.C.ss.1, et seq. O. Return Of Documents Within sixty (60) days after the Award and the conclusion of any judicial proceedings with respect thereto, each party and the Panel shall return any documents produced by any other party, including all copies thereof. If a party receives a discovery request in any other proceeding which would require it to produce any documents produced to it by any other party in a proceeding hereunder, it shall not produce such documents without first notifying the producing party and giving said party reasonable time to respond, if appropriate, to the discovery request.
4. Miscellaneous A. Expedited Procedures Any party to a Mediation may direct a request for an expedited Mediation Hearing to the Chairman of the Mediation Committee, to the selected Mediators, and to all other parties at any time. The Chairman of the Mediation Committee, or at his or her direction, the then selected Mediators, shall grant any request which is supported by good and sufficient reasons. If such a request is granted, the Mediation shall be completed within as short a period as practicable, as determined by the Chairman of the Mediation Committee or, at his or her direction, the then selected Mediators. Any party to an Arbitration may direct a request for expedited proceedings to the Administrator, to the Panel, and to all other parties at any time. The Administrator, or the Presiding Arbitrator if the Panel has been selected, shall grant any such request which is supported by good and sufficient reasons. If such a request is granted, the Arbitration shall be completed within as short a time as practicable, as determined by the Administrator and/or the Presiding Arbitrator. B. Temporary Or Preliminary Injunctive Relief Any party may seek temporary or preliminary injunctive relief with the filing of a Complaint or at any time thereafter. If such relief is sought prior to the time that an Arbitration Panel has been selected, then the Administrator shall select a single Arbitrator who is a lawyer who has no interest in the subject matter of the dispute, and no connection to any of the parties, to hear and determine the request for temporary or preliminary injunction. If such relief is sought after the time that an Arbitration Panel has been selected, then the Arbitration Panel will hear and determine the request. The request for temporary or preliminary injunctive relief will be determined with reference to the temporary or preliminary injunction standards set forth in Fed. R. Civ. P. 65. C. Defaults And Proceedings In The Absence Of A Party Whenever a party fails to comply with the MDR Rules in a manner deemed material by the Panel, the Panel shall fix a reasonable time for compliance and, if the party does not comply within said period, the Panel may enter an Order of default or afford such other relief as it deems appropriate. Arbitration may proceed in the event of a default or in the absence of any party who, after due notice, fails to be present or fails to obtain an extension. An Award shall not be made solely on the default or absence of a party, but the Panel shall require the party who is present to submit such evidence as the
Panel may require for the making of findings, determinations, conclusions, and Awards. D. Notice Each party shall be deemed to have consented that any papers, notices, or process necessary or proper for the initiation or continuation of a proceeding under these rules or for any court action in connection therewith may be served on a party by mail addressed to the party or its representative at its last known address or by personal service, in or outside the state where the MDR proceeding is to be held. The Corporate Secretary and the parties may also use facsimile transmission, telex, telegram, or other written forms of electronic communication to give the notices required by these rules. E. Expenses The expenses of witnesses shall be paid by the party causing or requesting the appearance of such witnesses. All expenses of the MDR proceeding, including compensation, required travel and other reasonable expenses of the Panel, and the cost of any proof produced at the direct request of the Panel, shall be borne equally by the parties and shall be paid periodically on a timely basis, unless they agree otherwise or unless the Panel in the Award assesses such expenses, or any part thereof against any party (or parties). In exceptional cases, the Panel may award reasonable attorneys' fees as an item of expense, and the Panel shall promptly determine the amount of such fees based on affidavits or such other proofs as the Panel deems sufficient. F. Disqualification Or Disability Of A Panel Member In the event that any Arbitrator of a Panel with more than one Arbitrator should become disqualified, resign, die, or refuse or be unable to perform or discharge his or her duties after the commencement of MDR but prior to the rendition of an Award, and the parties are unable to agree upon a replacement, the remaining Panel member(s): i. shall designate a replacement, subject to the right of any party to challenge such replacement for cause. ii. shall decide the extent to which previously held hearings shall be repeated.
If the remaining Panel members consider the proceedings to have progressed to a stage as to make replacement impracticable, the parties may agree, as an alternative to the recommencement of the Mandatory Dispute Resolution process, to resolution of the dispute by the remaining Panel members. In the event that a single Arbitrator should become disqualified, resign, die, or refuse or be unable to perform or discharge his or her duties after the commencement of MDR but prior to the rendition of an Award, and the parties are unable to agree upon a replacement, the Administrator shall appoint a successor, subject to the right of any party to challenge such successor for cause, and the successor shall decide the extent to which previously held proceedings shall be repeated. G. Extensions of Time Any time limit set forth in these Rules may be extended upon agreement of the parties and approval of: (i) the Chairman of the Mediation Committee if the proceeding is then in Mediation; (ii) the Administrator if the proceeding is in Arbitration, but no Arbitration Panel has been selected; or (iii) the Arbitration Panel, if the proceeding is in Arbitration and the Arbitration Panel has been selected. H. Intervention The Plans, their Controlled Affiliates, and BCBSA, to the extent subject to MMDR pursuant to their License Agreements, shall have the right to move to intervene in any pending Arbitration. A written motion for intervention shall be made to: (i) the Administrator, if the proceeding is in Arbitration, but no Arbitration Panel has been selected; or (ii) the Arbitration Panel, if the proceeding is in Arbitration and the Arbitration Panel has been selected. The written motion for intervention shall be delivered to the BCBSA Corporate Secretary (which shall also constitute service on the BCBSA if it is a respondent) and to any Plan(s) and/or Controlled Affiliate(s) which are parties to the proceeding. Any party to the proceeding can submit written objections to the motion to intervene. The motion for intervention shall be granted upon good cause shown. Intervention also may be allowed by stipulation of the parties to the Arbitration proceeding. Intervention shall be allowed upon such terms as the Arbitration Panel decides. I. BCBSA Assistance In Resolution of Disputes The resources and personnel of the BCBSA may be requested by any member Plan at any time to try to resolve disputes with another Plan. Amended September 21, 2000
J. Neutral Evaluation The parties can voluntarily agree at any time to have an independent party render a neutral evaluation of the parties' respective positions. K. Recovery of Attorney Fees and Expenses Motions to Compel Nothwithstanding any other provisions of these Rules, any Party subject to the License Agreements (for purposes of this Section L and all of its subsections only hereinafter referred to collectively and individually as a "Party") that initiates a court action or administrative proceeding solely to compel adherence to these Rules shall not be determined to have violated these Rules by initiating such action or proceeding. Recovery of Fees, Expenses and Costs The Arbitration Panel may, in its sole discretion, award a Party its reasonable attorneys' fees, expenses and costs associated with a filing to compel adherence to these Rules and/or reasonable attorneys' fees, expenses and costs incurred in responding to an action filed in violation of these Rules; provided, however, that neither fees, expenses, nor costs shall be awarded by the Arbitration Panel if the Party from which the award is sought can demonstrate to the Arbitration panel, in its sole discretion, that it did not violate these Rules or that it had reasonable grounds for believing that its action did not violate these Rules. Requests for Reimbursement For purposes of this Section L, any Party may request reimbursement of fees, expenses and/or costs by submitting said request in writing to the Arbitration Panel at any time before an award is delivered pursuant to Section 3-N hereof, with a copy to the Party from which reimbursement is sought, explaining why it is entitled to such reimbursement. The Party from which reimbursement is sought shall have 20 days to submit a response to such request to the Arbitration Panel with a copy to the Party seeking reimbursement. Amended September 21, 2000
EXHIBIT 5-A MEDIATION COMMITTEE REPORTS TO: Board of Directors CHARGE: 1. Develop and implement processes for resolving misunderstandings or disagreements between Plans or between Plans and the Association under the following circumstances: a. Matters at issue regarding relationships between Plans or between Plans and the Association. b. Matters at issue regarding relationships between Plans or between Plans and the Association. c. Matters at issue under the Inter-Plan Bank, Reciprocity, and Transfer Programs. d. Matters at issue regarding contractor selection or performance under the Medicare Part A Program. 2. Determination of equalization allowances and/or cost allowances under FEP shall not be considered by this Committee. MEMBERSHIP: Six to Eight STAFF: Senior Vice President and General Counsel
Exhibit 23.1 Consent of Independent Auditors We consent to the reference to our firm under the captions "Summary Consolidated Financial and Other Data," "Experts," "The Plan of Conversion--Conditions to Effectiveness of the Plan and Tax Effect on Anthem," and "Selected Consolidated Financial and Other Data" and to the use of our report dated January 29, 2001, (except for Note 17, as to which the date is June 18, 2001), for Anthem Insurance Companies, Inc. in the Registration Statement (Form S-1) and related Prospectus of Anthem, Inc. dated August 16, 2001. /s/ Ernst & Young LLP Indianapolis, Indiana August 13, 2001
Exhibit 23.3 [LETTERHEAD OF MILLIMAN USA] August 14, 2001 Re: Anthem Insurance Companies, Inc. Consent of Robert H. Dobson, FSA, MAAA, Dale S. Hagstrom, FSA, MAAA, Daniel J. McCarthy, FSA, MAAA, and Milliman USA, Inc. We consent to the use in this registration statement of Messrs. Dobson, Hagstrom and McCarthy's opinion letter dated June 18, 2001, as Annex A to the prospectus and to the references made to Messrs. Dobson, Hagstrom and McCarthy, to such letter and to Milliman USA, Inc., under the following captions in the prospectus: "The Plan of Conversion--Consideration--Allocation of Shares" and "Experts." /s/ Robert H. Dobson ---------------------- Robert H. Dobson, FSA, MAAA Consulting Actuary /s/ Dale S. Hagstrom ---------------------- Dale S. Hagstrom, FSA, MAAA Consulting Actuary /s/ Daniel J. McCarthy ------------------------ Daniel J. McCarthy, FSA, MAAA Consulting Actuary MILLIMAN USA, INC. By: /s/ Daniel J. McCarthy ----------------------- Daniel J. McCarthy, FSA, MAAA Consulting Actuary