<PAGE>
As filed with the Securities and Exchange Commission on November 12, 1996
Registration No. 333-09773
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
Trigon Healthcare, Inc.
(Exact name of issuer as specified in its charter)
<TABLE>
<S> <C> <C>
Virginia 6324 54-1773225
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
THOMAS G. SNEAD, JR.
Treasurer and Chief Financial Officer
Trigon Healthcare, Inc.
2015 Staples Mill Road
Richmond, Virginia 23230
(804) 354-7000
(Name, address, including zip code, and telephone number, including
area code, of agent for service of process and registrant's principal executive
offices)
------------------------
Copies of all communications, including communications sent to agent for
service, should be sent to:
<TABLE>
<S> <C>
R. Gordon Smith, Esq. Michael W. Blair, Esq.
McGuire, Woods, Battle & Boothe, L.L.P. James C. Scoville, Esq.
One James Center Debevoise & Plimpton
901 East Cary Street 875 Third Avenue
Richmond, Virginia 23219 New York, New York 10022
(804) 775-1000 (212) 909-6000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
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, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
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 Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus: one to be
used in connection with the initial public offering of the Common Stock in the
United States and Canada (the "U.S. Prospectus"), and one to be used in
connection with the concurrent initial public offering of the Common Stock
outside the United States and Canada (the "International Prospectus"). The two
forms of prospectus are identical except that they contain different front and
back covers and different descriptions of the plan of distribution and except
that the International Prospectus contains a section on certain tax consequences
(under the caption "Certain United States Tax Consequences to Non-U.S.
Holders"). The complete U.S. Prospectus follows immediately after this
Explanatory Note. Alternate pages for the International Prospectus appear in the
Registration Statement immediately following the complete U.S. Prospectus.
<PAGE>
TRIGON HEALTHCARE, INC.
Cross Reference Sheet
Pursuant to Item 501(b) of Regulation S-K
Showing Location in Prospectus of Information
Required by Items of Form S-1
<TABLE>
<CAPTION>
Form S-1 Item Number and Caption Heading in Prospectus
------------------------------------------------ -----------------------------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.......... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus...................................... Inside Front and Outside Back Cover Pages of Prospectus
3. Summary Information, Risk Factors............... Prospectus Summary; The Company; Risk Factors
4. Use of Proceeds................................. Use of Proceeds
5. Determination of Offering Price................. Outside Front Cover Page of Prospectus; Risk Factors; Underwriting
6. Dilution........................................ Not Applicable
7. Selling Security Holders........................ Not Applicable
8. Plan of Distribution............................ Outside Front Cover Page of Prospectus; Underwriting
9. Description of Securities to be Registered...... Outside Front Cover Page of Prospectus; Dividend Policy; Description of
Capital Stock; Shares Eligible for Future Sale; Underwriting
10. Interests of Named Experts and Counsel.......... Legal Matters; Experts
11. Information With Respect to Registrant.......... Outside Front Cover Page of Prospectus; Prospectus Summary; Risk
Factors; The Company; The Demutualization; Use of Proceeds; Dividend
Policy; Capitalization; Selected Consolidated Financial and Operating
Data; Management's Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management; Description of Capital
Stock; Shares Eligible for Future Sale; Additional Information;
Glossary; Audited Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities..................................... Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 12, 1996
[LOGO]
PROSPECTUS
Shares
Trigon Healthcare, Inc.
Common Stock
------------------------
All of the shares of Class A Common Stock ("Common Stock") offered hereby
are being offered by Trigon Healthcare, Inc. ("Trigon" or the "Company"). Of the
shares of Common Stock offered hereby, shares are being
offered in the United States and Canada and shares are being offered
in a concurrent offering outside the United States and Canada. The initial
public offering price and the underwriting discount per share will be identical
for both offerings (together, the "Offerings"). See "Underwriting."
Prior to the Offerings, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
Application will be made to list the Common Stock on the New York Stock
Exchange.
See "Risk Factors" Commencing On Page Herein For A Discussion Of
Certain Factors That Should Be Considered By Prospective Purchasers Of The
Shares of Common Stock Offered Hereby.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION, THE VIRGINIA STATE
CORPORATION COMMISSION OR ANY STATE INSURANCE REGULATORY AGENCY, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION, THE VIRGINIA STATE CORPORATION COMMISSION OR ANY STATE
INSURANCE REGULATORY AGENCY PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total (3)............................................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
$ .
(3) The Company has granted to the several Underwriters an option, exercisable
within 30 days after the date of this Prospectus, to purchase up to an
additional shares of Common Stock, on the same terms as set forth
above, to cover over-allotments, if any. If the over-allotment option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. See "Underwriting." The Underwriters reserve the right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of the shares of Common Stock will be made in
New York, New York on or about , 1996.
------------------------
[List Managing Underwriters]
------------------------
The date of this Prospectus is , 1996
<PAGE>
THE COMPANY'S ARTICLES CONTAIN CERTAIN PROVISIONS THAT ARE INTENDED TO
PREVENT ANY STOCKHOLDER FROM ACQUIRING SHARES OF COMMON STOCK IN EXCESS OF
LIMITS SET FORTH IN THE COMPANY'S LICENSE AGREEMENT WITH THE BLUE CROSS AND BLUE
SHIELD ASSOCIATION. THOSE PROVISIONS GENERALLY PROHIBIT A STOCKHOLDER FROM
ACQUIRING BENEFICIAL OWNERSHIP OF MORE THAN 5% OF THE COMPANY'S OUTSTANDING
COMMON STOCK, WITHOUT THE APPROVAL OF THE BOARD OF DIRECTORS, RESTRICT TRANSFERS
OF SHARES OF COMMON STOCK THAT RESULT IN THE ACQUISITION BY A STOCKHOLDER OF
SHARES OF COMMON STOCK IN EXCESS OF 5% AND PERMIT THE BOARD OF DIRECTORS TO
CONVERT SHARES OF VOTING COMMON STOCK IN EXCESS OF 5% INTO SHARES OF A CLASS OF
NON-VOTING COMMON STOCK. BENEFICIAL OWNERSHIP OF SHARES OF COMMON STOCK INCLUDES
DIRECT OR INDIRECT OWNERSHIP, INCLUDING THE RIGHT TO VOTE SUCH SHARES PURSUANT
TO IRREVOCABLE PROXIES AND THE RIGHT TO ACQUIRE SUCH SHARES. SEE "RISK
FACTORS -- CERTAIN CHARTER AND STATE LAW PROVISIONS."
IN ADDITION, THE COMPANY'S PLAN OF DEMUTUALIZATION PROVIDES THAT NO
STOCKHOLDER MAY, DIRECTLY OR INDIRECTLY, ACQUIRE BENEFICIAL OWNERSHIP OF 5% OR
MORE OF THE COMMON STOCK UNTIL 30 MONTHS AFTER THE DEMUTUALIZATION WITHOUT THE
CONSENT OF THE COMPANY'S BOARD OF DIRECTORS. SEE "RISK FACTORS -- CERTAIN
CHARTER AND STATE LAW PROVISIONS."
VIRGINIA LAW CONTAINS PROVISIONS THAT ARE INTENDED TO LIMIT THE ABILITY OF
ANY PERSON TO ACQUIRE A SIGNIFICANT BLOCK OF COMMON STOCK OF A COMPANY. SHARES
OF COMMON STOCK ACQUIRED IN EXCESS OF CERTAIN BENEFICIAL OWNERSHIP THRESHOLDS DO
NOT HAVE VOTING RIGHTS UNLESS, IN CERTAIN CASES, THE ACQUISITION IS APPROVED BY
THE BOARD OF DIRECTORS OR THE COMPANY'S STOCKHOLDERS. THE LOWEST THRESHOLD
SUBJECT TO SUCH VOTING RESTRICTIONS IS 20% OF THE COMPANY'S COMMON STOCK.
VIRGINIA LAW ALSO RESTRICTS THE ABILITY OF ANY HOLDER OF 10% OR MORE OF ANY
CLASS OF THE COMPANY'S VOTING SECURITIES TO ENGAGE IN CERTAIN TRANSACTIONS WITH
THE COMPANY WITHOUT THE APPROVAL OF THE COMPANY'S STOCKHOLDERS OR THE BOARD OF
DIRECTORS. BENEFICIAL OWNERSHIP INCLUDES DIRECT OR INDIRECT OWNERSHIP INCLUDING
THE RIGHT TO VOTE SUCH SHARES PURSUANT TO IRREVOCABLE PROXIES AND THE RIGHT TO
ACQUIRE SUCH SHARES. SEE "RISK FACTORS -- CERTAIN CHARTER AND STATE LAW
PROVISIONS."
STATE INSURANCE HOLDING COMPANY STATUTES APPLICABLE TO THE COMPANY AND ITS
INSURANCE SUBSIDIARIES GENERALLY PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL OF
THE COMPANY, AND THUS INDIRECT CONTROL OF ITS INSURANCE SUBSIDIARIES, WITHOUT
THE PRIOR APPROVAL OF THE APPROPRIATE INSURANCE REGULATORS. GENERALLY, ANY
PERSON WHO ACQUIRES DIRECT OR INDIRECT OWNERSHIP OF 10% OR MORE OF THE
OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK (INCLUDING THE RIGHT TO VOTE
SUCH SHARES THROUGH PROXIES) WOULD BE PRESUMED TO HAVE ACQUIRED SUCH CONTROL,
UNLESS THE APPROPRIATE INSURANCE REGULATORS UPON APPLICATION DETERMINE
OTHERWISE. FOLLOWING THE DEMUTUALIZATION, THE COMPANY WILL HAVE INSURANCE
SUBSIDIARIES DOMICILED IN VIRGINIA, WISCONSIN AND NORTH CAROLINA.
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA NOR
HAS SUCH COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Blue Cross(Register mark) and Blue Shield(Register mark) are registered
tradenames, trademarks and service marks of the Blue Cross and Blue Shield
Association.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. Except as
set forth in the consolidated financial statements or as otherwise noted herein,
the information contained in this Prospectus (i) assumes no exercise of the
Underwriters' over-allotment option and (ii) gives effect to the consummation of
the transactions described under "The Demutualization."Prospective investors
should carefully consider the matters set forth in "Risk Factors." For purposes
of this Prospectus, the term the "Company" or "Trigon" refers, at all times
prior to the effective date (the "Effective Date") of the Demutualization (as
defined below) to Blue Cross and Blue Shield of Virginia ("Virginia BCBS") and
its subsidiaries, collectively, and, at all times on or after the Effective
Date, to Trigon Healthcare, Inc. ("Trigon Healthcare") and its subsidiaries,
collectively, including Trigon Insurance Company ("Trigon Insurance," the
successor to Virginia BCBS). Member enrollment information for the Federal
Employee Program, Mid-South Insurance Company, a subsidiary of Trigon
Healthcare, and certain national group accounts are not maintained on the
Company's systems. Member enrollment information presented herein for such
groups are calculated based on policy counts provided to the Company for these
groups which are converted to a membership number through the use of actuarially
determined conversion factors. For purposes of this Prospectus, the term
"member" refers to individuals or groups covered by any of the Company's
products. The term "Eligible Member"refers to those individuals or entities
holding membership interests in Virginia BCBS as of December 31, 1995 which will
be converted into shares of Common Stock or cash as a result of the
Demutualization. Certain defined terms relating to the business of the Company
are set forth in the Glossary. See "Glossary."
The Company
Overview
Trigon is the largest managed health care company in Virginia, serving
approximately 1.9 million members primarily through statewide and regional
provider networks. The Company's membership represents approximately 26% of the
Virginia population and 31% of the Virginia population in those areas where
Trigon has the exclusive right to use the Blue Cross and Blue Shield service
marks and tradenames. Within Virginia, Trigon provides a comprehensive spectrum
of managed care products through three network systems with a range of
utilization and cost containment controls. The Company is pursuing a growth
strategy which includes expansion outside of Virginia into other southeastern
and mid-Atlantic states.
As of September 30, 1996, the Company's network systems consisted of: the
health maintenance organization ("HMO") networks which, with 251,399 members,
are the Company's most tightly managed and cost efficient networks; the
preferred provider organization ("PPO") networks which, with 774,473 members,
offer greater choice of providers than Trigon's HMOs and may include a primary
care physician point of service ("POS") feature; and the participating provider
("PAR") network which, with 615,655 members, is the Company's broadest and most
flexible network. The Company also serves 218,814 additional members through
Medicare supplemental plans (128,006 members), third-party administration of
health care claims (40,383 members) and through Mid-South Insurance Company, a
Fayetteville, North Carolina-based health and life insurance company, which was
acquired by the Company in 1996 (50,425 members). Within the Company's managed
care product offerings, customers may choose between at-risk arrangements (in
which the Company bears the cost of providing specified health care services for
a fixed payment) and self-funded arrangements (in which the customer bears all
or a portion of the risk). As of September 30, 1996, 47.6% of members were
covered under at-risk arrangements and 41.8% were covered under self-funded
arrangements, with the remaining 10.6% covered under the Federal Employee
Program ("FEP") administered under contract with the Blue Cross and Blue Shield
Association (the "BCBSA").
Trigon, formerly doing business as Blue Cross and Blue Shield of Virginia,
was first established in Virginia in 1935, and retains its license to use the
Blue Cross and Blue Shield service marks and tradenames for the purpose of doing
business throughout Virginia other than certain northern Virginia suburbs
adjacent to Washington, D.C. The portion of the Commonwealth in which the
Company has the exclusive rights to use the Blue Cross and Blue Shield service
marks and tradenames includes approximately 5.6 million of the State's 6.6
million population. In June 1994, the Company adopted the name Trigon to reflect
its intention to pursue growth opportunities outside of Virginia, where it does
not have the right to use the Blue Cross and Blue Shield service marks and
tradenames.
<PAGE>
Transition to Managed Care
In 1990 the Company began to institute greater managed care controls in all
of its product lines and networks, focusing in particular on its PPO and HMO
networks and, depending on market readiness, designing, pricing and marketing
its products to encourage members to migrate into these more tightly managed
networks where the Company is better able to manage health care costs. While
members decide which network to select, the Company generally offers more
attractive rates in its more tightly managed networks to encourage members to
choose these products. This strategy contributed to accelerated enrollment
growth for the Company's HMO and PPO networks and a decline in enrollment in the
Company's more traditional PAR network, resulting in a compound annual growth
rate in total enrollment of 2.7% from December 31, 1991 through September 30,
1996. Trigon operates six HMOs which are licensed to serve most areas of
Virginia. Trigon's total HMO enrollment has grown from 60,154 members at
December 31, 1991 to 251,399 members as of September 30, 1996, representing a
compound annual growth rate of 35.1%. The Company's PPO network system is the
largest in Virginia. Trigon's total PPO enrollment has grown from 396,584
members at December 31, 1991 to 774,473 members as of September 30, 1996,
representing a compound annual growth rate of 15.1%. Membership in the Company's
HMOs and PPOs increased from 27.9% of total enrollment at December 31, 1991 to
55.1% as of September 30, 1996. Trigon's more traditional products are offered
through its PAR network which is the Company's largest network. As a result of
the Company's strategy of encouraging members to migrate to its more tightly
managed networks, total membership in the PAR network decreased from 951,020
members at December 31, 1991 to 615,655 members at September 30, 1996. The
Company believes that it will be necessary to significantly expand its market
share in the HMO market, in part by successfully transitioning its PAR and PPO
members into HMOs, if it is to succeed in retaining a high overall market share
in its existing geographic markets. See "Risk Factors." Trigon also offers
several specialty health care and related products.
Growth Strategy
Trigon has the largest membership base in Virginia, which generally allows
the Company to negotiate contracts with its Virginia providers that specify
favorable rates and incorporate utilization management and other cost controls.
As a result of its extensive networks, managed care expertise and broad product
offerings, the Company competes favorably in all of its Virginia lines of
business including the individual, small, mid-sized and large employer groups
and state and federal agency markets. In addition, Trigon's emphasis on
utilization management and cost control, as well as favorable pricing
arrangements with providers and hospitals, has led to a decrease in the
Company's medical loss ratio (medical costs expense as a percentage of premium
revenues) from 1991 through 1994. However, the medical loss ratio has increased
in both 1995 and through the first nine months of 1996, primarily as a result of
greater pressure on premium levels due to competition and an increase in medical
costs. See "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company plans to implement the
following growth strategy:
(Bullet) Offering a Choice Along a Continuum of Managed Care
Products -- from the broad PAR network to the tightly managed
HMO -- to meet the demands of its current customers and the needs
of new customers. The breadth and flexibility of the Company's
benefit plan options are designed to appeal to a broad variety of
employer groups and individuals with differing product and service
preferences, including freedom of choice, cost containment, scope
of coverage and risk assumption. The Company believes its broad
range of products gives it a unique market advantage, allowing
Trigon to become the sole managed care provider to many of its
customers.
(Bullet) Encouraging members to transition from traditional health
insurance into a continuum of managed care products in Virginia by
using the Company's expertise in designing, pricing and marketing
managed care products, and utilizing this expertise to enter into
other states that remain dominated by traditional insurance
coverage. Products such as PPO, POS and Blue Advantage (a
combination PPO/HMO product) are designed to facilitate the
transition of members to managed care.
(Bullet) Continually increasing the managed care content and cost
effectiveness of its PPO and HMO networks and products. To enhance
the cost effectiveness of its PPO networks, the Company offers an
optional POS feature which utilizes a primary care physician to
coordinate all health care services for the member. Within its
PPOs and HMOs, the Company is utilizing physician profiling
techniques, risk-sharing arrangements, ancillary networks for high
volume or high cost services, wellness programs and more
aggressive fee scheduling to reduce health care costs.
(Bullet) Growing its business in Virginia by increasing utilization of the
Company's HMO products particularly in the more densely populated
areas of Eastern and Central Virginia, entering into new markets
such as Medicaid and Medicare HMO, increasing utilization of the
Company's PPO and POS products in rural communities, which have
been slow to embrace managed care, and forming collaborative
relationships with provider groups and acquiring other managed
care companies.
<PAGE>
(Bullet) Expanding outside of Virginia to markets that have certain of the
following characteristics: reasonably large populations, low
market penetration of managed care products and a reasonable
regulatory environment. The Company considers the southeastern and
mid-Atlantic United States to be attractive and believes that it
can utilize its expertise in marketing, underwriting, network
development and cost control in these markets. The Company intends
to expand its out-of-state managed care business primarily through
a combination of acquisitions and strategic alliances with managed
care companies, traditional indemnity companies whose customers
can be transitioned to managed care, other health care providers
and other Blue Cross and Blue Shield companies. In line with this
strategy, Trigon completed the purchase of Mid-South Insurance
Company ("Mid-South") in February 1996. Mid-South provides health
insurance coverage to 50,425 members primarily through PPOs in
rural and suburban markets in North Carolina, South Carolina,
Georgia, Virginia and Tennessee. The Company currently has no
other material commitments or agreements with respect to expansion
outside of Virginia; however, the Company is in the process of
evaluating several potential acquisition opportunities outside of
Virginia. There can be no assurance that the Company's efforts to
expand outside of Virginia will be successful. See "Risk Factors"
and "Business -- Strategy."
The Demutualization
The Board of Directors has voted to approve the Company's conversion from a
mutual insurance company to a stock insurance company (the "Demutualization")
pursuant to a Plan of Demutualization (the "Plan of Demutualization"). On
September 6, 1996, the members of Virginia BCBS entitled to vote approved the
Plan of Demutualization. On November 5, 1996, the Virginia State Corporation
Commission (the "State Corporation Commission") entered a final order approving
the Plan of Demutualization after a public hearing. The principal purpose of the
Demutualization is to allow the Company access to the equity capital markets in
order to finance its expansion plans and to enhance its strategic position in
the consolidating managed care industry. The Demutualization will also enable
the Company to enter into strategic alliances, including acquisitions, by
issuing shares of its stock. Prior to the Demutualization, sources of financing
were limited to internally generated funds or borrowings. The Demutualization
and related transactions are expected to be tax-free transactions for the
Company.
The Plan of Demutualization requires that, pursuant to applicable Virginia
law, the Treasurer of the Commonwealth of Virginia must receive an amount (the
"Commonwealth Payment") equal to the surplus, computed in accordance with
generally accepted accounting principles, of Virginia BCBS on December 31, 1987,
plus $10 million. The Commonwealth Payment will be approximately $175 million.
The Commonwealth Payment is in addition to any shares of Common Stock to which
the Commonwealth of Virginia is entitled as an Eligible Member. The Plan of
Demutualization provides that at least one-half of the Commonwealth Payment will
be made in cash and the remainder will be in cash or shares of Class C Common
Stock, par value $.01 ("Class C Common Stock") (valued at the initial per share
price of the Common Stock to the public in the Offerings). Any Class C Common
Stock issued as part of the Commonwealth Payment will be redeemable by the
Company at any time and, if not sooner redeemed, must be redeemed on June 30,
1998. The amount paid to the Commonwealth of Virginia on redemption (the "Class
C Redemption Price") will equal the initial per share price to the public in the
Offerings for each share of Class C Common Stock redeemed, plus interest from
the effective date of the Demutualization through the date of payment at a rate
per annum set by the Virginia Commissioner of Insurance and the Virginia
Attorney General. Trigon Healthcare will bear the expense of financial advisors
engaged to assist the Virginia Commissioner of Insurance and the Virginia
Attorney General in setting the interest rate for the Class C Redemption Price.
The Class C Common Stock will not be transferable and each share will have a
vote equal to one-tenth of the vote of a share of Common Stock. The Class C
Common Stock will not be convertible into any other capital stock of the
Company. See "The Demutualization" and "Description of Capital Stock."
Risk Factors
There are certain risks associated with the Company's business and with
investment in the Common Stock. These include: (i) the potential negative impact
of escalating healthcare costs in the Company's business; (ii) the impact of
increased competition in Virginia and within Trigon's target expansion area;
(iii) the impact of government regulation on the healthcare industry; (iv) the
reaction to the Demutualization; (v) the risk of appeal from the State
Corporation Commission's order approving the Demutualization and the delay that
such an appeal may entail; (vi) the potential adverse effect on the Company's
ability to expand outside Virginia resulting from the Company's inability to use
the Blue Cross and Blue Shield service marks and tradenames outside the
Company's licensed territory in Virginia and the Company's lack of substantial
market share or established provider relationships outside Virginia; (vii) the
potential loss of the Blue Cross and Blue Shield service marks and tradenames as
a result of changing ownership and the potential negative impact of unfavorable
publicity concerning other BCBSA licensees on the Company; (viii) the potential
impact of certain charter provisions and state law provisions with respect to
change of control on the market for the Common Stock; (ix) the Company's
dependence on
<PAGE>
dividends from its subsidiaries to meet its liquidity needs and the restrictions
under Virginia insurance law on the payment of such dividends; (x) the lack of a
prior public market for the Common Stock and the absence of any assurance that
an active public trading market will develop; (xi) the potential adverse impact
on the prevailing market prices of the Common Stock as a result of sales of
substantial amounts of Common Stock or the perception that such sales could
occur; and (xii) the potential impact of the Demutualization on the Company's
ability to continue to use certain federal income tax benefits. See "Risk
Factors."
The Offerings
<TABLE>
<S> <C> <C>
Common Stock Offered by the Company:
U.S. Offering....................................... shares
International Offering.............................. shares
------------
Total............................................ shares
------------
------------
Common Stock to be outstanding after the Offerings.... shares (1)
</TABLE>
<TABLE>
<S> <C>
Use of Proceeds....................................... Of the $ million estimated net proceeds of the Offerings, $
of the proceeds is expected to be used to make a portion of the
Commonwealth Payment and $ of the proceeds is expected to be
used to make cash payments to Eligible Members in the
Demutualization. The balance of the proceeds (which will be at least
$25 million) will be used for general corporate purposes, including
expansion of the Company's business both through internal growth and
through acquisitions of managed health care companies or related
lines of business.
Proposed New York Stock Exchange Symbol............... TGH
</TABLE>
- ---------------
(1) Excludes shares of Class C Common Stock. See "The
Demutualization -- The Commonwealth Payment."
<PAGE>
Summary Consolidated Financial and Operating Data
The summary consolidated financial and operating data presented below as of
the end of and for each of the years in the five-year period ended December 31,
1995 and the nine months ended September 30, 1996 are derived from the audited
consolidated financial statements of Virginia BCBS. The Statement of Operations
Data for the nine months ended September 30, 1995, the Balance Sheet Data as of
September 30, 1995, the pro forma data and the information under the caption
"Members at end of period" are unaudited. The results for the nine months ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full year. This summary data should be read in conjunction with the
Company's audited consolidated financial statements and the related summary of
significant accounting policies and notes thereto included elsewhere in this
Prospectus. The pro forma data are not necessarily indicative of the financial
condition or results of operations of the Company that would have been reported
had the transactions been consummated on the dates assumed, or of future
financial condition or results of operations.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30
------------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in 000's)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Premium and fee revenues
Commercial..................... $1,024,066 $1,057,821 $1,050,157 $1,081,820 $1,157,899 $ 857,448 $ 985,127
Federal Employee Program....... 206,878 254,102 279,058 303,250 329,243 248,109 265,587
Amounts attributable to self-
funded arrangements.......... 777,420 871,101 905,529 908,234 981,741 719,067 798,358
Less: Amounts attributable to
claims under self-funded
arrangements................. (697,069) (786,252) (815,488) (827,869) (897,954) (655,731) (731,062)
---------- ---------- ---------- ---------- ---------- ---------- ----------
1,311,295 1,396,772 1,419,256 1,465,435 1,570,929 1,168,893 1,318,010
Investment income................ 31,558 31,810 34,279 39,962 45,861 34,881 34,081
Net realized gains............... 24,017 25,584 26,199 12,793 52,976 34,833 50,685
Other revenues................... 25,579 27,946 30,555 45,467 55,176 41,096 37,666
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues................. 1,392,449 1,482,112 1,510,289 1,563,657 1,724,942 1,279,703 1,440,442
Operating expenses
Medical and other benefit costs
Commercial..................... 825,925 835,777 795,921 802,666 959,328 689,705 809,344
Federal Employee Program....... 193,505 238,986 262,295 283,645 312,222 234,965 252,478
---------- ---------- ---------- ---------- ---------- ---------- ----------
1,019,430 1,074,763 1,058,216 1,086,311 1,271,550 924,670 1,061,822
Selling, general and adminis-
trative expenses............... 246,617 281,191 308,412 322,391 346,353 247,059 283,704
Copayment refund program (1)..... -- -- -- 36,432 47,073 46,702 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses....... 1,266,047 1,355,954 1,366,628 1,445,134 1,664,976 1,218,431 1,345,526
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes,
cumulative effects of changes in
accounting principles and
extraordinary items (operating
income).......................... 126,402 126,158 143,661 118,523 59,966 61,272 94,916
Income tax expense (benefit) (2)... 29,107 32,220 35,803 24,564 8,264 8,475 (46,751)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effects of
changes in accounting principles
and extraordinary items.......... 97,295 93,938 107,858 93,959 51,702 52,797 141,667
Cumulative effects of changes in
accounting principles, net of
income taxes (3)................. (21,876) -- 8,126 -- -- -- --
Extraordinary items, net of income
taxes (4)........................ -- -- -- (644) (4,707) (2,999) (186,280)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).................. $ 75,419 $ 93,938 $ 115,984 $ 93,315 $ 46,995 $ 49,798 ($ 44,613)
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in 000's, except per share data and operating statistics)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA DATA (UNAUDITED) (5):
Net income before extraordinary
items
Net income before extraordinary
items per share
Shares used in calculating per
share amounts
OPERATING STATISTICS:
Medical loss ratio (6)
Commercial....................... 80.7% 79.0% 75.8% 74.2% 82.9% 80.4% 82.2%
Federal Employee Program......... 93.5 94.1 94.0 93.5 94.8 94.7 95.1
Total.......................... 82.8 81.9 79.6 78.4 85.5 83.6 84.9
Selling, general and administrative
expenses ratio (7)............... 12.1 12.7 13.6 13.8 13.7 13.2 13.6
Operating margin (7)............... 9.1 8.5 9.5 9.9 6.2 8.4 6.6
Net margin (7)..................... 7.0 6.3 7.1 7.9 5.4 7.3 5.4
Members at end of period
(unaudited)
HMO.............................. 60,154 60,683 84,081 119,982 221,148 210,057 251,399
PPO.............................. 396,584 561,686 624,811 672,610 747,297 710,365 774,473
PAR.............................. 951,020 770,038 687,475 653,097 618,238 629,213 615,655
Other (8)........................ 231,714 228,749 235,640 235,984 212,935 212,032 218,814
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.......................... 1,639,472 1,621,156 1,632,007 1,681,673 1,799,618 1,761,667 1,860,341
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(in 000's) (unaudited)
BALANCE SHEET DATA:
Cash and
investments...... $590,623 $ 714,827 $ 940,914 $1,001,571 $1,119,652 $1,107,079 $1,124,280
Total assets....... 939,912 1,037,301 1,266,952 1,403,104 1,565,331 1,557,263 1,734,737
Debt outstanding... -- -- -- -- 4,145 3,400 4,880
Surplus (9)........ 350,333 444,271 606,146 655,875 740,071 743,501 686,650
Stockholders'
equity........... -- -- -- -- -- -- --
<CAPTION>
Pro Forma
as adjusted (10)
September 30,
-----------------
1996
-----------------
<S> <C>
(unaudited)
BALANCE SHEET DATA:
Cash and
investments......
Total assets.......
Debt outstanding...
Surplus (9)........
Stockholders'
equity...........
</TABLE>
- ---------------
(1) The Company conducted a Copayment Refund Program (the "Copayment Program")
in accordance with an agreement with the State Corporation Commission dated
September 22, 1994. During the Copayment Program, members who had paid
coinsurance on services rendered at the Company's network facilities from
January 1, 1984 through December 31, 1993 were eligible for a refund.
Refunds represented the difference between the member's original
coinsurance payment, which had been based on the facility's undiscounted
charges, and an adjusted coinsurance payment calculated using the Company's
average discount percentage at the facility. Costs incurred under the
Copayment Program included refunds, interest and administrative costs
associated with the Copayment Program that the Company would not otherwise
have incurred. The cost of the Copayment Program in 1994 was $36.4 million,
or $30.0 million net of income taxes. In accordance with an agreement with
the State Corporation Commission dated November 16, 1995, the Company
re-opened the Copayment Program. As part of the re-opening of the Copayment
Program, the Company mailed refunds to approximately 300,000 members who
had not filed a claim under the original program and for whom the Company
had an address. In addition, the Company announced that there are
approximately 200,000 former members for whom the Company does not have an
address and who are eligible for refunds. Under this new agreement, any
amounts not paid by December 31, 1996 will be escheated to the Commonwealth
of Virginia as unclaimed property. The cost of re-opening the Copayment
Program was $47.1 million, or $40.6 million net of income taxes, in 1995.
(2) The Company's effective tax rates (income tax expense as a percentage of
operating income) were 13.8% for the year-ended December 31, 1995 and 13.8%
for the nine months ended September 30, 1995. These effective tax rates
were lower than the 35% statutory federal income tax rate due to the
recognition of nontaxable income and the reduction in
<PAGE>
the valuation allowance on deferred tax assets. The reduction in the
valuation allowance on deferred tax assets is primarily related to
realization of alternative minimum tax credits. The effective tax rate for
the nine months ended September 30, 1996 (income tax benefit as a
percentage of operating income) was a tax benefit of 49.3%. This rate
differs from the 35% statutory federal rate due primarily to the
realization of alternative minimum tax credits during the nine-month period
and the elimination as of September 30, 1996 of the $63.9 million valuation
allowance maintained by the Company with respect to deferred tax assets
because the Demutualization has made it more likely than not that the
assets will be realized. Excluding the effects of the elimination of the
valuation allowance the effective tax rate would have been 18.1% for the
nine months ended September 30, 1996. These items are not recurring and the
Company believes that in the future its effective tax rate as reflected in
its consolidated financial statements should approximate the 35% federal
statutory rate. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Income Taxes."
(3) During 1991, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions." The cumulative effect at January 1, 1991 of
the change in accounting for postretirement benefits was a charge of $21.9
million to net income. During 1993, the Company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The cumulative effect
at January 1, 1993 of the change in accounting for postemployment benefits
was a charge of $4.8 million to net income. During 1993, the Company also
adopted SFAS No. 109, "Accounting for Income Taxes." The cumulative effect
at January 1, 1993 of the change in accounting for income taxes was a $12.9
million increase in net income.
(4) For the years ended December 31, 1994 and 1995, the Company recognized
extraordinary charges of $644,000 and $4.7 million net of income taxes of
$347,000 and $2.5 million, for costs incurred in connection with the
Demutualization. During the nine-month periods ended September 30, 1995 and
1996, the Company recognized extraordinary charges of $3.0 million and
$11.3 million, net of income taxes of $1.6 million and $594,000,
respectively, for costs incurred in connection with the Demutualization.
For the nine months ended September 30, 1996, the Company also recognized
an extraordinary charge for the $175 million obligation to the Treasurer of
the Commonwealth of Virginia in connection with the Demutualization as
required by Virginia law. See "The Demutualization -- The Commonwealth
Payment."
(5) Pro forma data assumes (i) the issuance of shares of Common Stock to
Eligible Members pursuant to the Demutualization, which is based on the
assumption that certain Eligible Members receive $ in cash in
lieu of shares of Common Stock that would otherwise be issued to
such Eligible Members pursuant to the Demutualization, (ii) the interest at
% per annum on the obligation to redeem outstanding redeemable Class C
Common Stock in connection with the Commonwealth Payment; (iii) the sale of
shares of Common Stock in the Offerings, and (iv) adjustment of the
Company's effective tax rate to the 35% statutory federal rate. In the pro
forma calculations, net income before extraordinary items does not include
any rate of return on the net proceeds of the Offerings.
(6) Medical loss ratio represents, for each period, the ratio of medical costs
to premium revenues for such period.
(7) The selling, general and administrative expenses ratio is calculated as a
percentage of total revenues excluding amounts attributable to claims under
self-funded arrangements, investment income and net realized gains while
the operating margin and net margin ratios are calculated by dividing
operating income or net income by total revenues. These ratios have been
calculated exclusive of non-recurring items which include the Copayment
Program, the elimination of the $63.9 valuation allowance on deferred tax
assets, effects of changes in accounting principles and extraordinary
items.
(8) "Other" members include enrollment from Medicare supplemental plans,
third-party administration of health care claims, out-of-state student
health care coverage and Mid-South members.
(9) Effective December 31, 1993, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, at December 31, 1993, 1994 and 1995, surplus included net
unrealized gains on investment securities, net of deferred income taxes, of
$45.9 million, $2.3 million and $39.5 million, respectively. At September
30, 1995 and 1996 surplus included net unrealized gains on investment
securities, net of deferred income taxes, of $40.1 million and $30.7
million, respectively.
(10) Pro forma balance sheet data assumes, (i) the issuance of shares of
Common Stock to Eligible Members pursuant to the Demutualization, (ii) the
payment of $ to certain Eligible Members in lieu of shares
of Common Stock that would otherwise be issued to such Eligible Members
pursuant to the Demutualization, (iii) the payment of $ in cash
and the obligation to redeem all outstanding shares of redeemable Class C
Common Stock at the Class C Redemption Price in connection with the
Commonwealth Payment, and (iv) the sale of shares of Common Stock in
the Offerings at an offering price of $ per share, less
underwriting discount and estimated offering expenses payable by the
Company, as if such transactions had occurred as of September 30, 1996.
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully before purchasing any of the
shares of Common Stock offered hereby.
Escalating Health Care Costs and the Health Care Industry
The Company's profitability depends in large part on accurately predicting
and effectively managing health care costs. Predicting medical costs is
difficult partially due to the variability of medical inflation. From 1988 to
1995, the consumer price index, as a whole, had annual rates of increase ranging
from a high of 6.1% to a low of 2.5%. Medical cost inflation, on the other hand,
showed greater volatility with annual rates of increase ranging from a high of
9.6% to a low of 3.2% during the period. The aging of the population and other
demographic characteristics along with 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. Trigon continually reviews its
premium and benefit structure to reflect its underlying claims experience and
revised actuarial data; however, several factors could adversely affect the
medical loss ratios. Certain of these factors, which include changes in health
care practices, inflation, new technologies, major epidemics, natural disasters
and malpractice litigation, are beyond any health plan's control and could
adversely affect the Company's ability to accurately predict and effectively
control health care costs. Costs in excess of those anticipated could have a
material adverse effect on the Company's results of operations. See "Business."
Competitive price pressures in the health insurance and managed care
industry, which generally result from the entry and exit of health care
companies in the marketplace, historically have resulted in, or contributed to,
pricing and profitability cycles. The extent to which recent structural changes
in the managed health care and health insurance industry have altered cyclical
patterns is uncertain. There can be no assurance, however, that a continuation
of the typical cyclical pattern will not adversely affect the profitability of
the Company in the next few years. See "Business."
Competition
The managed care industry is highly competitive both in Virginia and in
other states in the southeastern and mid-Atlantic United States into which the
Company principally intends to expand. Managed care companies, including large,
well-capitalized companies which market managed care products nationwide, have
targeted the southeastern and mid-Atlantic regions of the United States as being
favorable for expansion, and have begun entering Virginia and markets targeted
by Trigon in increasing numbers. In some cases, new market entrants have
competed with the Company for business by offering very favorable pricing terms
to customers. This increased pricing pressure has adversely affected the
Company's medical loss ratio during 1995 and through the first nine months of
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General." The Company is facing this increased
competition in the areas in which it is licensed to use the Blue Cross and Blue
Shield service marks and tradenames, as well as in the areas it operates without
these service marks and tradenames. The Company also faces competition from a
trend among health care providers to combine and form their own networks in
order to contract directly with employer groups and other prospective customers
to provide health care services. There is no assurance that such overall
increased competition will not exert strong pressures upon Trigon's
profitability, its ability to increase enrollment, or its ability to
successfully pursue growth in areas both within and outside of Virginia.
The Company believes that it has effectively integrated its managed care
programs into its traditional business, principally through its PPO networks and
products. The trend in the health care industry is toward both vertical and
horizontal integration coupled with significant levels of managed care,
principally through HMOs. In the Company's principal geographic market areas,
HMOs have a smaller share of the health care market than in other areas of the
country, but the Company believes that HMOs will capture an increasing share of
the health care market. The Company believes that it will be necessary to
significantly expand its market share in the HMO market, in part by successfully
transitioning its PAR and PPO members into HMOs, if it is to succeed in
retaining a high overall market share in its existing geographic markets. There
can be no assurance that the Company will succeed in significantly expanding its
market share in HMOs. See "Business -- Competition."
Government Regulation
The Company and its operating subsidiaries are regulated by state
regulators in Virginia, its state of incorporation, and to a lesser extent by
regulators in other states in which the Company's subsidiaries do business. This
regulation includes, among other things, limits on the amount of dividends and
other distributions that can be paid to the Company by its operating
<PAGE>
subsidiaries without prior approval or notification, restrictions on
transactions among the Company's operating subsidiaries, or between the Company
and its operating subsidiaries without prior approval or notification, the
granting and revoking of licenses to transact business, premium rate regulation
for certain lines of business, regulation of trade practices, policy forms and
claims payment, licensing of agents and brokers, limits on the amount and type
of investments that the Company may hold, minimum reserve and surplus
requirements, risk-based capital requirements and mandatory participation in,
and assessments in connection with, risk-sharing pools and guaranty funds. Such
regulation is primarily intended to protect policyholders rather than investors.
During 1996, the Congress passed and the President signed into law the
Health Insurance Portability and Accountability Act of 1996, and new federal
mandates concerning mental health parity and maternity stays. Among other
things, the new insurance reform law addresses group and individual market
reforms (increasing the portability of health insurance), permits medical
savings accounts on a trial basis, and increases the deductibility of health
insurance for self-employed. Although this legislation was recently adopted, the
Company does not believe it will have a material adverse impact on its
operations. In addition, many states, including states in which the Company does
business, have enacted or are considering various health care reform statutes.
The Virginia General Assembly has passed health insurance market reform measures
with the general objective of encouraging greater access to health insurance for
small groups (employers with 2-99 employees) and individuals. These reforms
relate to, among other things, managed care practices such as requirements with
respect to maternity stays, waiting period restrictions for pre-existing
conditions, credit for certain prior coverage and guaranteed renewability of
small group employer plans and policies for individuals. The Company does not
believe that these reforms will have a material adverse effect on its results of
operations.
There can be no assurance that additional regulatory initiatives will not
be undertaken in the future, either at the federal or state level, to engage in
structural reform of the health care industry in order to reduce the escalation
in health care costs or to make health care more accessible. Such reform, if it
occurs, could adversely affect Trigon's results of operations or financial
condition. See "Business -- Regulation."
Potential Adverse Reaction to the Demutualization
The contracts that the Company has with its members and providers are
cancelable with minimal notice requirements and are renewable periodically.
Virginia BCBS, Trigon's predecessor, has not experienced significant contract
cancellation or non-renewal in recent years. The Company is not aware of any
potential material adverse customer reaction to the Demutualization. However,
there can be no assurance that the conversion of the Company to a stock
corporation in connection with the Demutualization or the fact that certain
customers will not receive stock in the Demutualization will not adversely
affect the marketability of the Trigon products or that the current members or
providers will not object to Trigon's conversion to a stock corporation and
either cancel or decline to renew their contracts. See "The Demutualization."
Risk of Appeal from State Corporation Commission's Order
On November 5, 1996, the State Corporation Commission entered a final order
approving the Plan of Demutualization.The order approving the Plan of
Demutualization by the State Corporation Commission did not address the fairness
of the Plan of Demutualization to purchasers of Common Stock in the Offerings.
Any appeal of the State Corporation Commission's order must be made
directly to the Virginia Supreme Court. Notice of appeal must be filed within 30
days after entry of such order. The Company cannot predict what aspects of the
Plan, if any, such an appeal might challenge.
In the event that the order of the State Corporation Commission is
appealed, a successful appeal could result in the State Corporation Commission's
approval of the Plan of Demutualization being set aside or in the Virginia
Supreme Court's remand of issues to the State Corporation Commission for further
consideration. A successful appeal would likely result in substantial
uncertainty as to whether, or on what terms, the State Corporation Commission
would ultimately approve the Plan of Demutualization, and a substantial period
of time might be required to reach a final determination, thereby delaying the
Demutualization indefinitely.
Potential Risks Associated with Growth Through Acquisitions
The Company intends to expand its business in part through acquisitions.
However, as a result of the expansion of managed care companies into Virginia
and the southeastern and mid-Atlantic regions of the United States, the
competition to purchase managed care companies has intensified, which in many
instances has resulted in significant increases in the costs of acquiring such
companies, and which could affect the availability of attractive acquisition
opportunities. In addition, the
<PAGE>
Company has no significant experience in expanding its managed healthcare
business outside Virginia. There can be no assurance that the Company will
successfully identify or complete acquisitions or that any acquisitions, if
completed, will perform as expected or will contribute significant revenues or
profits to the Company.
The Company's ability to expand successfully outside of Virginia through
acquisitions or otherwise may be adversely affected by its inability to use the
Blue Cross and Blue Shield service marks and trademarks outside of the Company's
licensed territory in Virginia, by the Company's lack of substantial market
share or established provider networks outside of Virginia and by the presence
of competitors with strong market positions in these areas.
Potential Loss of Blue Cross and Blue Shield Service Marks and Tradenames
In connection with the Demutualization, Trigon Healthcare and the BCBSA
will enter into a new license agreement pursuant to which the Company and its
subsidiaries will continue to have the right after the Demutualization to use
certain Blue Cross and Blue Shield service marks and tradenames for their
products throughout Virginia other than certain northern Virginia suburbs
adjacent to Washington, D.C. The license requires a fee to be paid to BCBSA
equal to total association expenses allocated to members based upon enrollment
and premiums written. The Company's license from BCBSA will terminate if any
person, without the prior approval of a majority of the disinterested members of
BCBSA, acquires securities representing 20% or more of the voting control of the
Company. In addition, BCBSA may terminate the license if any person acquires
securities representing 5% or more of the voting control of the Company, such
stock ownership is deemed by BCBSA to be detrimental to the Blue Cross and Blue
Shield service marks and tradenames and a super majority of the disinterested
members of BCBSA votes for termination. The Company's Articles of Incorporation
(the "Articles") will contain certain provisions intended to prevent such
termination of the BCBSA license. There can be no assurance that a court would
enforce these provisions, or that if these provisions were not enforced the
Company would retain the license from BCBSA. If the BCBSA license were to be
terminated, there would be a material adverse effect on the Company's business
and operations, which the Company does not believe it can meaningfully quantify.
See "Description of Capital Stock -- Certain Provisions of the Charter and Plan"
and "Business -- The Blue Cross Blue Shield License."
To the extent that the Company continues to use the Blue Cross and Blue
Shield service marks and tradenames in marketing its managed care products,
there can be no assurance that any negative publicity concerning BCBSA and other
BCBSA licensees will not adversely affect the sales of the Company's managed
care products and the Company's operations.
Certain Charter and State Law Provisions
The Company's Articles will contain certain provisions which are intended
to prevent any holder from acquiring shares in excess of the limits set forth in
the Company's license agreement with BCBSA. These provisions will provide that,
except with the consent of the Company's continuing directors (as defined in the
license agreement with BCBSA), a stockholder (other than the Commonwealth of
Virginia with respect to the Class C Common Stock) is prohibited from acquiring
beneficial ownership of more than 5% of any class of the Company's capital stock
(for which purpose, the Common Stock and the Non-Voting Common Stock described
below will be treated as a single class). Furthermore, capital stock may not be
transferred to any person to the extent that such person would own more than 5%,
or some higher percentage as determined by the Company's continuing directors,
of such class of capital stock as a result of such transfer. If this restriction
is held to be unenforceable, the Articles will give the Company certain rights
with respect to the capital stock held by such person in excess of 5% (or other
percentage applicable to such person) of such class of capital stock. In
addition, the Articles will give the Company the right to convert any Common
Stock held by any person and that person's associates in excess of 5% of the
outstanding Common Stock into a separate class of common stock ("Non-Voting
Common Stock") which will have no voting rights (except and only as conferred by
law) but which will otherwise have rights identical to the Common Stock. The
Company is unaware of any legal interpretations regarding the enforceability of
these provisions of the Company's Articles, and there can therefore be no
assurance that a court would enforce these provisions, or that if these
provisions were not enforced that the Company would retain the license from
BCBSA. The Articles of Trigon Healthcare will provide that these provisions, as
well as certain other provisions of the Articles, generally may be amended only
with the affirmative vote of more than 75% of each class of the outstanding
shares of Trigon Healthcare entitled to vote. See "Description of Capital
Stock -- Certain Provisions of the Charter and Plan." In addition, the Plan of
Demutualization provides that no stockholder may, directly or indirectly,
acquire beneficial ownership of more than 5% of the Common Stock until 30 months
after the Demutualization without the consent of the Company's Board of
Directors. This limitation will not prevent the issuance to any Eligible Member
of the shares of Common Stock to which such Eligible Member is entitled under
the Plan of Demutualization. However, any Eligible Member who receives more than
5% of the Common Stock as a result of the Demutualization may not acquire,
directly or indirectly, any additional Common Stock until 30 months after the
Demutualization, unless at the
<PAGE>
time of such acquisition and immediately following such acquisition, such
Eligible Member would not, directly or indirectly, own more than 5% of the
Common Stock.
Virginia insurance holding company laws and regulations, as well as similar
laws and regulations in Wisconsin and North Carolina where insurance company
subsidiaries of the Company are domiciled, prohibit acquisition of control of
the Company unless the applicable state regulator has approved the acquisition.
Under the laws and regulations of these states, control would be presumed to
exist if a person directly or indirectly has beneficial ownership of 10% or more
of the Common Stock. See "Business -- Regulation -- Insurance Holding Company
Regulation."
The Virginia Stock Corporation Act (the "VSCA") contains provisions
governing "Affiliated Transactions" which are designed to deter certain
takeovers of Virginia corporations. These provisions, with several exceptions,
require approval of material transactions between a Virginia corporation and any
holder of more than 10% of any class of its outstanding voting shares by the
holders of at least two-thirds of the remaining voting shares. See "Description
of Capital Stock -- Virginia Anti-Takeover Law."
The VSCA also contains provisions governing "Control Share Acquisitions."
These provisions provide that shares of a Virginia public issuer acquired in a
transaction that would cause the voting strength of the acquiring person and its
associates to meet or exceed any of three thresholds (20%, 33 1/3% or 50%) have
no voting rights unless granted by a majority vote of shares not owned by the
acquiring person or any officer or employee-director of the Virginia public
issuer. See "Description of Capital Stock -- Virginia Anti-Takeover Law."
Generally, beneficial ownership of shares of Common Stock includes direct
or indirect ownership, including the right to vote such shares pursuant to
irrevocable proxies and the right to acquire such shares.
Limitation on Dividends; Liquidity of the Holding Company
As a holding company, the Company will depend principally upon dividends
received from its subsidiaries to meet its liquidity needs (including any future
dividends). The Virginia insurance laws limit the payment of dividends by
insurers, such as Trigon Insurance, the Company's principal operating
subsidiary. See "Dividend Policy" and "Business -- Regulation."
No Prior Public Market
Prior to the distribution of Common Stock in the Demutualization and the
Offerings, there has been no public market for the Common Stock. The Company
intends to apply to list the Common Stock on the New York Stock Exchange.
However, there can be no assurance that an active trading market in the Common
Stock will develop or be sustained. The initial public offering price of the
Common Stock will be determined through negotiations between the Company and the
representatives of the Underwriters and may not be indicative of the market
price for the Common Stock after the Offerings. See "Underwriting."
Shares Eligible for Future Sale
The shares of Common Stock distributed in the Demutualization to Eligible
Members will be subject to a six-month lockup. After expiration of the lockup
period, the shares of Common Stock distributed in the Demutualization will be
eligible for immediate resale in the public market without restriction by
Eligible Members who are not "affiliates" of Virginia BCBS or Trigon Healthcare
within the meaning of Rule 144 under the Securities Act of 1933. Moreover, in
accordance with the Plan of Demutualization, the Company will for a period of 90
days, which may be extended by the Company, commencing no earlier than six
months and no later than 18 months after the Effective Date of the
Demutualization provide for the public sale, at market prices and without
brokerage commissions or similar fees, of odd lot shares of Common Stock
received pursuant to the Plan of Demutualization by certain Eligible Members. In
the alternative, these Eligible Members will be able to purchase sufficient
shares of Common Stock to round up their holding to 100 shares. The Company will
determine after the Demutualization and at least 30 days before the program
begins the maximum number of shares of Common Stock received in the
Demutualization, not to exceed 99, that will entitle such holders to participate
in the program. The Company will also agree not to offer, sell or otherwise
dispose of any shares of Common Stock (or securities convertible into Common
Stock) for a period of 180 days after the date of this Prospectus without the
prior written consent of the Underwriters. No prediction can be made as to the
effect, if any, such future sales of shares, or the availability of shares for
future sales, will have on the market price of the Common Stock prevailing from
time to time. Sales of substantial amounts of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices for
the Common Stock. See "The Demutualization -- Commission-Free Sales and Round-Up
Program;" "Shares Eligible for Future Sale" and "Underwriting."
<PAGE>
Potential Impact on Tax Liability
As a Blue Cross and Blue Shield organization, the Company is entitled to
certain federal income tax benefits, which have had the effect of reducing its
marginal federal income tax rate from 35% to 20%. Demutualization could cause
the Company to be ineligible for these benefits in future years. Regardless of
whether the Demutualization takes place, the Company would be ineligible for
some of these benefits if it were to maintain the current relationship between
its adjusted surplus and the amount of its claims and claims related expenses.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Income Taxes."
<PAGE>
THE COMPANY
Trigon is the largest managed health care company in Virginia, serving
approximately 1.9 million members primarily through statewide and regional
provider networks. The Company's membership represents approximately 27% of the
Virginia population and 31% of the Virginia population in those areas where
Trigon has the exclusive right to use the Blue Cross and Blue Shield service
marks and tradenames. Within Virginia, Trigon provides a comprehensive spectrum
of managed care products through three network systems with a range of
utilization and cost containment controls. The Company is pursuing a growth
strategy which includes expansion outside of Virginia into other southeastern
and mid-Atlantic states.
As of September 30, 1996, the Company's network systems consisted of: HMO
networks which, with 251,399 members, are the Company's most tightly managed and
cost efficient networks; the PPO networks which, with 774,473 members, offer
greater choice of providers than Trigon's HMOs and may include a POS feature;
and the PAR network which, with 615,655 members, is the Company's broadest and
most flexible network. The Company's more tightly managed networks exert greater
controls upon members in return for greater premium rate reductions, as well as
stronger utilization and price controls upon providers in return for larger
numbers of members directed to these businesses. See "Business -- Network
Systems." The Company also serves 218,814 additional members through its
Medicare supplemental plans (128,006 members), third-party administration of
health care claims (40,383 members) and through Mid-South Insurance Company, a
Fayetteville, North Carolina-based health and life insurance company, which the
Company acquired in 1996 (50,425 members). Within the Company's managed care
product offerings, customers may choose between at-risk arrangements (in which
the Company bears the cost of providing specified health care services for a
fixed payment) and self-funded arrangements (in which the customer bears all or
a portion of the risk). As of September 30, 1996, 47.6% of members were covered
under at-risk arrangements and 41.8% were covered under self-funded
arrangements, with the remaining 10.6% covered under the FEP administered under
a contract with the BCBSA.
In 1990 the Company began to institute greater managed care controls in all
of its product lines and networks, focusing in particular on its PPO and HMO
networks and, depending on market readiness, designing, pricing and marketing
its products to encourage members to migrate into these more tightly managed
networks where the Company is better able to manage health care costs. While
members decide which network to select, the Company generally offers more
attractive rates in its more tightly managed networks to encourage members to
choose these products. This strategy contributed to accelerated enrollment
growth for the Company's HMO and PPO networks and a decline in enrollment in the
Company's more traditional PAR network, resulting in a compound annual growth
rate in total enrollment of 2.7% from December 31, 1991 through September 30,
1996. Trigon operates six HMOs which are licensed to serve most areas of
Virginia. Trigon's total HMO enrollment has grown from 60,154 members at
December 31, 1991 to 251,399 members as of September 30, 1996, representing a
compound annual growth rate of 35.1%. The Company's PPO network system is the
largest in Virginia. Trigon's total PPO enrollment has grown from 396,584
members at December 31, 1991 to 774,473 members as of September 30, 1996,
representing a compound annual growth rate of 15.1%. Membership in the Company's
HMOs and PPOs increased from 27.9% of total enrollment at December 31, 1991 to
55.1% as of September 30, 1996. Trigon's more traditional products are offered
through its PAR network, which is the Company's largest network. As a result of
the Company's strategy of encouraging members to migrate to its more tightly
managed networks, total membership in the PAR network decreased from 951,020
members at December 31, 1991 to 615,655 members at September 30, 1996. Trigon
also offers several specialty health care and related products.
Trigon has the largest membership base in Virginia, which generally allows
the Company to negotiate contracts with its Virginia providers that specify
favorable rates and incorporate utilization management and other cost controls.
As a result of its extensive networks, managed care expertise and broad product
offerings, the Company competes favorably in all of its Virginia lines of
business including the individual, small, mid-sized and large employer groups
and state and federal agency markets. Trigon has exclusive rights to use the
Blue Cross and Blue Shield service marks and tradenames for purposes of doing
business throughout Virginia other than certain northern Virginia suburbs
adjacent to Washington, D.C. As a result of the Demutualization to be effective
concurrently with the Offerings, Trigon Healthcare will be the holding company
for Trigon Insurance, which is the successor company to Virginia BCBS.
The mailing address for the Company's Corporate Headquarters is P.O. Box
27401, Richmond, VA 23279. Its telephone number is (804) 354-7000.
<PAGE>
THE DEMUTUALIZATION
History
The Company's Blue Cross predecessors were first established in Virginia in
1935 as prepaid health service plans by groups of hospitals. Originally, several
such hospital plans existed in the Company's service area. These plans
ultimately consolidated into two plans based in Richmond and Roanoke,
respectively, and these two plans later merged in 1986. The Company's Blue
Shield predecessors were first established in Virginia in 1944 as prepaid health
service plans by groups of physicians, later becoming the Virginia Blue Shield
plan. In 1982, the Blue Cross plan based in Richmond and the Blue Shield plan
merged to form Blue Cross and Blue Shield of Virginia, a nonstock corporation.
In 1991, the Company became a mutual company.
Background of the Demutualization
As a mutual company, Trigon is not able to issue stock. The Company is
therefore generally unable to raise capital through the equity capital markets
or effect acquisitions through the issuance of equity securities, as stock
corporations are able to do. The Company believes that if it is to enhance its
strategic position in the consolidating managed care industry and finance its
expansion plans, it will be necessary for the Company to access the equity
capital markets, as well as to effect acquisitions and other strategic alliances
through the issuance of equity securities. Additionally, by creating a holding
company structure through demutualization, the Company will no longer be subject
to the regulatory limitations on subsidiary investments that currently restrict
its ability to effect acquisitions. See "Risk Factors -- Competition" and
"Potential Risks Associated with Growth Through Acquisitions."
Process of Demutualization
Under the Plan of Demutualization, Virginia BCBS will be converted into a
stock insurance corporation, will change its name to Trigon Insurance Company,
and will become a wholly owned subsidiary of Trigon Healthcare. The membership
interests of the Company's Eligible Members will be converted in the
Demutualization into Common Stock of Trigon Healthcare, or in certain
circumstances, cash. The cash consideration payable in lieu of Common Stock will
be based on the net proceeds per share of Common Stock received by the Company
in the Offerings. The Company does not expect that any single Eligible Member
will receive more than 5% of the Common Stock issuable in the Demutualization.
The only Common Stock that will be outstanding following the Demutualization
will be that issued in the Demutualization and that to be issued pursuant to the
Offerings. In addition, the Company may issue shares of Class C Common Stock to
the Commonwealth of Virginia in connection with the Demutualization. See "The
Commonwealth Payment."
As required by Virginia law, the Plan of Demutualization was approved by
the members of Virginia BCBS at a special meeting held on September 6, 1996. On
November 5, 1996, the State Corporation Commission entered a final order
approving the Plan of Demutualization after a public hearing. The Company
expects that the Demutualization will become effective in early 1997. The Plan
of Demutualization requires the Company to complete, simultaneously with the
Demutualization, an initial public offering of Common Stock that will generate
net proceeds equal to at least $25.0 million plus the cash needed to make
mandatory cash payments under the Plan of Demutualization. The Plan of
Demutualization also provides that the Company may make other offerings of other
equity or debt securities or incur debt obligations, simultaneously with such
initial public offering or anytime thereafter. The Company has not determined at
this time whether to make any such additional offerings.
The Commonwealth Payment
Virginia law requires that, in connection with the Demutualization, the
Treasurer of the Commonwealth of Virginia must receive the Commonwealth Payment,
which is an amount equal to the surplus, computed in accordance with generally
accepted accounting principles, of Virginia BCBS on December 31, 1987, plus $10
million. The Commonwealth Payment will be approximately $175 million. From its
formation in 1935 until January 1, 1988, Virginia BCBS, as a health services
plan, was exempt pursuant to Virginia law from the premium tax that the
Commonwealth of Virginia imposed on other health insurers. While operating as a
tax exempt entity, Virginia BCBS accumulated a surplus of approximately $165
million. The Commonwealth Payment is in addition to any shares of Common Stock
to which the Commonwealth of Virginia is entitled as an Eligible Member.
The Plan of Demutualization provides that at least one-half of the
Commonwealth Payment will be made in cash. The remainder will be made in cash or
shares of Class C Common Stock (valued at the initial per share price of the
Common
<PAGE>
Stock to the public in the Offerings) and the Company expects to determine at
the time of the Offerings the portion of this part of the Commonwealth Payment
to be made in cash or Class C Common Stock. If available proceeds from the
Offerings are insufficient to make the cash portion of the Commonwealth Payment,
the Company intends to fund the balance from borrowings under bank credit
facilities, from proceeds of additional offerings of securities to be completed
simultaneously with the Offerings or from available surplus of Trigon Insurance.
Assuming that the Demutualization had occurred on December 31, 1995 and not
giving effect to the Offerings, Trigon Insurance would have had a statutory
surplus of $478.2 million. The maximum amount available during 1996 for payment
of dividends by Trigon Insurance to Trigon Healthcare without the prior approval
of the SCC would have been $47.8 million. See "Business -- Regulation --
Restrictions on Dividends."
Any Class C Common Stock issued as part of the Commonwealth Payment will be
redeemable by the Company at any time and, if not sooner redeemed, must be
redeemed on June 30, 1998. The amount paid to the Commonwealth of Virginia on
redemption (the "Class C Redemption Price") will equal the initial per share
price of the Common Stock to the public in the Offerings for each share of Class
C Common Stock redeemed, plus interest from the date of the Demutualization
through the date of payment at a rate per annum set by the Virginia Commissioner
of Insurance and the Virginia Attorney General. Trigon Healthcare will bear the
expense of financial advisors engaged to assist the Virginia Commissioner of
Insurance and the Virginia Attorney General in setting the interest rate for the
Class C Redemption Price. The Class C Redemption Price may be paid by delivery
of an unsecured promissory note with a due date of June 30, 1998, in form and
substance reasonably satisfactory to the Commonwealth of Virginia, in an amount
equal to the Class C Redemption Price and bearing interest at the same rate as
used to calculate the Class C Redemption Price.
The Class C Common Stock will not be transferable and each share will have
a vote equal to one-tenth of the vote of a share of Common Stock. The
Commonwealth of Virginia also may not grant any revocable or irrevocable proxy
to vote Class C Common Stock to any person other than the chairman or president
of the Company. The Class C Common Stock will not be convertible into any other
capital stock of the Company.
Within 15 days after a State Corporation Commission order approving the
Demutualization, the Plan of Demutualization provides that the Virginia Attorney
General and the Joint Rules Committee of the Virginia General Assembly will each
identify to the Company three proposed nominees to the Board of the Company.
These persons must be citizens of the Commonwealth of Virginia who do not hold
public office and have no direct or indirect financial interest, except as
consumers, in Virginia BCBS. The Company will cause two of these nominees (one
from the list submitted by the Virginia Attorney General and one from the list
submitted by the Joint Rules Committee) to be elected directors of the Company
before or within seven days after the effective date of the Demutualization.
These two nominees will each be appointed to serve a three-year term as a
director of the Company.
Federal Income Tax Consequences of the Demutualization
Based on current law, including judicial decisions and the existing
administrative position of the Internal Revenue Service ("IRS"), the Company
believes that the Demutualization should be tax-free to the Company and that
Eligible Members of the Company should not be subject to federal income tax on
the receipt of Common Stock in exchange for their membership interests.
Accordingly, the Company believes that it will not realize any significant
income or loss for federal income tax purposes as a result of the
Demutualization, and that the federal income tax attributes of the Company,
including its basis and holding period in its assets, its earnings and profits
and any tax accounting methods will not be significantly affected by the
Demutualization.
However, it is possible that the Demutualization could affect the Company's
ability to claim certain special federal income tax deductions, available to
certain Blue Cross and Blue Shield organizations, that it is currently entitled
to claim. If the Company were to lose the ability to claim these special
deductions, management believes that there could be a significant increase in
the Company's federal income tax liability in tax years beginning after 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Income Taxes."
In a recent case brought against the Federal Government in Federal District
Court in Maine, UNUM Corporation and UNUM Life Insurance Company, a Maine life
insurance company that demutualized in 1986 (collectively, "UNUM"), claimed that
its distribution of stock and cash to its policyholders pursuant to a plan of
demutualization should be treated for federal income tax purposes as the
distribution of a policyholder dividend rather than as a payment in exchange for
a membership interest. If the distribution were treated for federal income tax
purposes as a policyholder dividend, UNUM would be entitled to a deduction equal
to the amount of cash and the fair market value of any stock so distributed, and
each policyholder receiving cash or stock likely would be treated for federal
income tax purposes as having received a policyholder
<PAGE>
dividend equal to the amount of cash and the fair market value of the stock so
distributed. On May 23, 1996, the Federal District Court ruled in favor of the
Federal Government and against UNUM. Under the District Court's decision, no
portion of the stock or other property distributed by UNUM would be treated as a
deductible policyholder dividend. UNUM has appealed the District Court decision
to the United States Court of Appeals for the First Circuit.
The Company has been advised by its special tax counsel that the position
advanced by UNUM has not previously been tested in the courts and is
inconsistent with the treatment that has been applied by taxpayers and the IRS
to stock distributed in other demutualization transactions. The Company is
unable to predict the eventual outcome of the UNUM litigation, or whether the
outcome of the UNUM litigation could have any effect on the tax treatment of the
Demutualization.
The Company may decide, based on the eventual outcome of the UNUM case or
other judicial decisions, actions taken by the IRS, or other developments in the
law, and the advice of its tax advisors, that all or some portion of its
distribution of cash and Common Stock to Eligible Members pursuant to the
Demutualization should be treated for federal income tax purposes as a
policyholder dividend. In that event, the Company may claim a policyholder
dividend deduction equal to some or all of the amount of cash or fair market
value of the Common Stock distributed to Eligible Members. If the Company
attempts to claim a policyholder dividend deduction, it is likely that the IRS
would challenge its claim. The tax treatment could remain unresolved for a
number of years. Final resolution of the issue could result in retroactive
changes to the tax treatment of Eligible Members. It is also possible that as a
result of the pending litigation or actions taken by the Company the IRS could
decide to treat some or all of the cash and Common Stock distributed in the
Demutualization as a policyholder dividend and seek to assert federal income tax
liability against certain Eligible Members.
For other potential federal income tax consequences of the Demutualization,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Income Taxes."
Cash Payments
Under the Plan of Demutualization, Eligible Members may elect a preference
to receive cash instead of Common Stock. In addition, certain Eligible Members
are required to receive cash in the Demutualization. The amount of funds
allocated to make cash payments to Eligible Members who elect to receive cash
will be determined by the Board of Directors of the Company but may not, under
the Plan of Demutualization, exceed the net proceeds from the Offerings and any
other offering of equity or debt securities completed on the effective date of
the Plan of Demutualization less the sum of (i) $25.0 million and (ii) the
amount required to make mandatory cash payments to Eligible Members.
If there is not sufficient cash available to allow all Eligible Members who
have elected a preference for cash ("Preferred Cash Members") to receive all of
their consideration in cash, then the available cash will be allocated as
follows. First, all Eligible Members required to receive cash under the Plan of
Demutualization ("Mandatory Cash Members") will receive cash in lieu of all
Common Stock allocated to them. Second, all Preferred Cash Members allocated
fewer than 100 shares of Common Stock in the Demutualization will receive cash
in lieu of all Common Stock allocated to them, and if the cash remaining after
paying cash to the Mandatory Cash Members is not sufficient to make payments to
all Preferred Cash Members allocated fewer than 100 shares, then the cash
available to such Preferred Cash Members will be distributed to them pro rata to
the number of shares of Common Stock allocated to them in the Demutualization.
Any cash remaining after those payments will be distributed among all other
Preferred Cash Members expressing a preference for cash pro rata to the number
of shares of Common Stock allocated to them in the Demutualization. Any portion
of consideration not paid to Eligible Members in cash will be paid by issuance
of shares of Common Stock, provided that, regardless of how the available cash
is allocated, no fractional shares of Common Stock will be issued in the
Demutualization.
Eligible Members are required under the Plan of Demutualization to receive
cash if (i) they are known by the Company to be subject to a lien or bankruptcy
proceeding; (ii) their address for mailing purposes is shown on the records of
Virginia BCBS as located outside of the United States; (iii) their address for
mailing purposes is shown on the records of Virginia BCBS as located in a state
in which there are 30 or fewer Eligible Members; or (iv) their address for
mailing purposes is shown on the records of Virginia BCBS as located in a state
in which in the reasonable determination of the Company, the requirements
necessary to qualify the Common Stock in that state are excessively burdensome
or expensive or are likely to be subject to unreasonable delays.
Lockup Period
All shares of Common Stock to be issued to Eligible Members as
consideration initially will be uncertificated and will be subject to a
six-month lockup to enhance the value of the Common Stock and achieve orderly
trading following the
<PAGE>
Offerings. All shares of Common Stock or securities convertible into or
exchangeable for Common Stock issued as a dividend or distribution on shares of
Common Stock subject to the lockup may, at the Company's discretion, also be
subject to the lockup.
During the lockup period, Trigon Healthcare will be under no obligation to
recognize any transfer of any right or interest in any Common Stock subject to
the lockup, other than a transfer by an Eligible Member to a trust established
in connection with an ERISA Plan of the Eligible Member, the granting of a
revocable proxy that complies with the Articles and bylaws of Trigon Healthcare,
the Plan of Demutualization and Virginia law, a transfer as a result of the
bankruptcy or insolvency of an Eligible Member, a transfer as a result of the
death of an Eligible Member, or a transfer as a result of a merger or
consolidation affecting an Eligible Member. Thus, Eligible Members will not be
able to sell, pledge, or to realize their interest in the Common Stock or any
part of it while it is subject to the lockup, except pursuant to the limited
cases described above.
Commission-Free Sales and Round-Up Program
The Company intends to conduct a commission-free odd-lot sale and round-up
program to enable stockholders who receive fewer than a specified number of
shares of Common Stock in the Demutualization to either sell all of their shares
or to purchase sufficient stock to round up their holding to 100 shares. The
Plan of Demutualization provides that the odd-lot program will commence no
earlier than six months after the Demutualization and no later than 18 months
after the Demutualization. The Company expects that the odd-lot program will
continue for 90 days, but may be extended by the Company at its discretion. Only
stockholders who received fewer than a specified number of shares in the
Demutualization will be eligible to participate in either the selling or
round-up features of the program. The Company will determine after the
Demutualization and at least 30 days before the program begins the maximum
number of shares of Common Stock received in the Demutualization, not to exceed
99, that will entitle such holder to participate in either the selling or
round-up features of the program. The expenses of the program will be borne by
the Company. Purchases and sales under the program will be matched at the
then-prevailing market prices of Common Stock, and any excess purchases or sales
needed to fulfill the program will be made in the market. Details of the odd-lot
program will be mailed by the Company to holders eligible to participate
following the Demutualization and prior to the commencement of the program.
USE OF PROCEEDS
Assuming an initial public offering price of $ per share, the net
proceeds to the Company from the Offerings are estimated to be approximately
$ million ($ million if the Underwriters' over-allotment option is
exercised in full), after deducting the underwriting discount and estimated
offering expenses payable by the Company. The Company intends to use $ of
the net proceeds of the Offerings to make a portion of the Commonwealth Payment,
$ of the net proceeds of the Offerings to make cash payments to Eligible
Members in the Demutualization, and the balance (which amount will be at least
$25 million) of the net proceeds of the Offerings for general corporate
purposes, including expansion of the Company's networks, products and geographic
base, both through internal growth and through acquisitions of managed health
care companies or related lines of business. Although the Company has no
commitments or agreements with respect to any acquisitions, the Company believes
that the increased resources and financial flexibility provided by the Offerings
will enhance its ability to take advantage of acquisition opportunities as they
arise. Pending such uses, the net proceeds will be invested primarily in
short-term and medium-term fixed income securities.
<PAGE>
DIVIDEND POLICY
The Company anticipates that all earnings in the foreseeable future will be
retained to finance the continuing development of its business. The payment of
any future dividends will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, future earnings, the success
of the Company's business activities, regulatory and capital requirements, the
general financial condition of the Company and general business conditions.
To the extent that the Company determines to pay dividends in the future,
the principal source of funds to pay dividends to stockholders would be
dividends received by the Company from its subsidiaries, including Trigon
Insurance. Virginia insurance laws and regulations restrict the payment of
extraordinary dividends (defined below) by health care insurance companies, such
as Trigon Insurance, in a holding company structure. A health care insurance
company is prohibited from paying an extraordinary dividend unless it obtains
the approval of the State Corporation Commission. The State Corporation
Commission must approve or disapprove the dividend within thirty days after
receiving notice of the declaration of the dividend. If the State Corporation
Commission does not disapprove the dividend within thirty days, the distribution
is considered approved. An extraordinary dividend is one which, together with
the amount of dividends and distributions paid by the health care insurance
company during the immediately preceding 12 months, exceeds the lesser of (i)
10% of the insurance company's surplus to policyholders as of the preceding
December 31st or (ii) the insurance company's net income (not including realized
capital gains) for the preceding calendar year. In determining whether a
dividend is extraordinary, a health care insurer may carry forward net income
(not including realized capital gains) from the second and third preceding years
less dividends paid in the second and immediately preceding years. Laws of other
states in which the Company's insurance subsidiaries are domiciled contain
similar restrictions on the payment of dividends.
In addition, an insurance company may not pay any dividend unless, after
such payment, its surplus to policyholders is reasonable in relation to its
outstanding liabilities and adequate to its financial needs. The State
Corporation Commission may bring an action to enjoin or rescind the payment of
any dividend or distribution that would cause the insurance company's statutory
surplus to be unreasonable or inadequate. Assuming that the Demutualization had
occurred on December 31, 1995 and not giving effect to the Offerings, Trigon
Insurance would have had a statutory surplus of $478.2 million. The maximum
amount available during 1996 for payment of dividends by Trigon Insurance to the
Company without the prior approval of the State Corporation Commission would
have been $47.8 million.
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1996. The "Pro Forma As Adjusted" column assumes (i)
the sale of shares of Common Stock in the Offerings at an offering price
of $ per share, less the underwriting discount and estimated offering
expenses payable by the Company, (ii) the issuance of shares of Common
Stock to Eligible Members pursuant to the Demutualization, (iii) the payment of
$ to certain Eligible Members in lieu of shares of Common Stock
that would otherwise be issued to such Eligible Members pursuant to the
Demutualization, and (iv) the issuance of shares of Class C Common Stock to
the Commonwealth of Virginia in connection with the Commonwealth Payment and the
obligation to redeem all outstanding redeemable Class C Common Stock at the
Class C Redemption Price. This table should be read in conjunction with the
Company's consolidated financial statements and the related summary of
significant accounting policies and notes thereto included elsewhere in this
Prospectus. The pro forma as adjusted data are not necessarily indicative of the
financial condition of the Company that would have been reported had the
transactions been consummated on the date assumed, or of future financial
condition.
<TABLE>
<CAPTION>
As of September 30,
1996
-----------------------
Pro Forma
Actual As Adjusted
-------- -----------
<S> <C> <C>
(unaudited)
<CAPTION>
(in 000's)
<S> <C> <C>
LIABILITIES:
Redeemable Class C Common Stock, $0.01 per share par value, 75,000,000
shares authorized; shares issued and outstanding.................... (a)
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 per share par value, 300,000,000 shares authorized;
shares issued and outstanding.................................. (b)(c)
Additional paid-in capital............................................... (b)
Retained earnings........................................................ 655,952 (a)(c)
Net unrealized gain on investments available for sale net of deferred
income taxes of $16,517................................................ 30,698 30,698
-------- -----------
Total surplus....................................................... 686,650
Total stockholders' equity...............................................
-------- -----------
Total capitalization.............................................. $686,650 $
-------- -----------
-------- -----------
</TABLE>
- ---------------
(a) Reflects the issuance of shares of Class C Common Stock to the
Commonwealth of Virginia as part of the Commonwealth Payment. These Class C
shares are redeemable no later than June 30, 1998 at the Class C Redemption
Price.
(b) Reflects the issuance of shares of Common Stock to Eligible Members
in the Demutualization and the proceeds from the sale of shares of
Common Stock in the Offerings at $ per share, less the underwriting
discount and estimated offering expenses.
(c) Reflects the reclassification of the retained earnings of the mutual
insurance company after the effect of the Commonwealth Payment and the
payment of $ to certain Eligible Members in lieu of shares of
Common Stock that would otherwise be issued to such Eligible Members in the
Demutualization.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial and operating data presented below as
of the end of and for each of the years in the five-year period ended December
31, 1995 and the nine months ended September 30, 1996 are derived from the
audited consolidated financial statements of Virginia BCBS, which consolidated
financial statements have been audited by KPMG Peat Marwick LLP, independent
auditors. The Statement of Operations Data for the nine months ended September
30, 1995, the Balance Sheet Data as of September 30, 1995 and the information
under the caption "Members at end of period" are unaudited. The results for the
nine months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the full year. The selected data should be read in
conjunction with the Company's audited consolidated financial statements and the
related summary of significant accounting policies and notes thereto included
elsewhere in this Prospectus. The audit report refers to changes in accounting
for investment securities, income taxes and postemployment benefits.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------------------------------ ----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- --------- ---------
(in 000's)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Premium and fee revenues
Commercial....................... $1,024,066 $1,057,821 $1,050,157 $1,081,820 $1,157,899 $ 857,448 $ 985,127
Federal Employee Program......... 206,878 254,102 279,058 303,250 329,243 248,109 265,587
Amounts attributable to self-
funded arrangements............ 777,420 871,101 905,529 908,234 981,741 719,067 798,358
Less: Amounts attributable to
claims under self-funded
arrangements................... (697,069) (786,252) (815,488) (827,869) (897,954) (655,731) (731,062)
---------- ---------- ---------- ---------- ---------- --------- ---------
1,311,295 1,396,772 1,419,256 1,465,435 1,570,929 1,168,893 1,318,010
Investment income.................. 31,558 31,810 34,279 39,962 45,861 34,881 34,081
Net realized gains................. 24,017 25,584 26,199 12,793 52,976 34,833 50,685
Other revenues..................... 25,579 27,946 30,555 45,467 55,176 41,096 37,666
---------- ---------- ---------- ---------- ---------- --------- ---------
Total revenues................... 1,392,449 1,482,112 1,510,289 1,563,657 1,724,942 1,279,703 1,440,442
Operating expenses
Medical and other benefit costs
Commercial....................... 825,925 835,777 795,921 802,666 959,328 689,705 809,344
Federal Employee Program......... 193,505 238,986 262,295 283,645 312,222 234,965 252,478
---------- ---------- ---------- ---------- ---------- --------- ---------
1,019,430 1,074,763 1,058,216 1,086,311 1,271,550 924,670 1,061,822
Selling, general and administrative
expenses......................... 246,617 281,191 308,412 322,391 346,353 247,059 283,704
Copayment refund program (1)....... -- -- -- 36,432 47,073 46,702 --
---------- ---------- ---------- ---------- ---------- --------- ---------
Total operating expenses......... 1,266,047 1,355,954 1,366,628 1,445,134 1,664,976 1,218,431 1,345,526
---------- ---------- ---------- ---------- ---------- --------- ---------
Income before income taxes,
cumulative effects of changes in
accounting principles and
extraordinary items (operating
income)............................ 126,402 126,158 143,661 118,523 59,966 61,272 94,916
Income tax expense (benefit) (2)..... 29,107 32,220 35,803 24,564 8,264 8,475 (46,751)
---------- ---------- ---------- ---------- ---------- --------- ---------
Income before cumulative effects of
changes in accounting principles
and extraordinary items............ 97,295 93,938 107,858 93,959 51,702 52,797 141,667
Cumulative effects of changes in
accounting principles, net of
income taxes (3)................... (21,876) -- 8,126 -- -- -- --
Extraordinary items, net of income
taxes (4).......................... -- -- -- (644) (4,707) (2,999) (186,280)
---------- ---------- ---------- ---------- ---------- --------- ---------
Net income (loss).................... $ 75,419 $ 93,938 $ 115,984 $ 93,315 $ 46,995 $ 49,798 $ (44,613)
---------- ---------- ---------- ---------- ---------- --------- ---------
---------- ---------- ---------- ---------- ---------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended
September
Years Ended December 31, 30,
------------------------------------------------------------------ -----------
1991 1992 1993 1994 1995 1995
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(unaudited)
OPERATING STATISTICS:
Medical loss ratio (5)
Commercial.............................. 80.7% 79.0% 75.8% 74.2% 82.9% 80.4%
Federal Employee Program................ 93.5 94.1 94.0 93.5 94.8 94.7
Total................................. 82.8 81.9 79.6 78.4 85.5 83.6
Selling, general and administrative
expenses ratio (6)...................... 12.1% 12.7% 13.6% 13.8% 13.7% 13.2%
Operating margin (6)...................... 9.1 8.5 9.5 9.9 6.2 8.4
Net margin (6)............................ 7.0 6.3 7.1 7.9 5.4 7.3
Members at end of period (unaudited)
HMO..................................... 60,154 60,683 84,081 119,982 221,148 210,057
PPO..................................... 396,584 561,686 624,811 672,610 747,297 710,365
PAR..................................... 951,020 770,038 687,475 653,097 618,238 629,213
Other (7)............................... 231,714 228,749 235,640 235,984 212,935 212,032
---------- ---------- ---------- ---------- ---------- -----------
Total................................. 1,639,472 1,621,156 1,632,007 1,681,673 1,799,618 1,761,667
---------- ---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- ---------- -----------
<CAPTION>
1996
---------
<S> <C>
OPERATING STATISTICS:
Medical loss ratio (5)
Commercial.............................. 82.2%
Federal Employee Program................ 95.1
Total................................. 84.9
Selling, general and administrative
expenses ratio (6)...................... 13.6%
Operating margin (6)...................... 6.6
Net margin (6)............................ 5.4
Members at end of period (unaudited)
HMO..................................... 251,399
PPO..................................... 774,473
PAR..................................... 615,655
Other (7)............................... 218,814
---------
Total................................. 1,860,341
---------
---------
</TABLE>
<TABLE>
<CAPTION>
September
December 31, 30,
---------------------------------------------------------------- -----------
1991 1992 1993 1994 1995 1995
-------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(in 000's) (unaudited)
BALANCE SHEET DATA:
Cash and investments....................... $590,623 $ 714,827 $ 940,914 $1,001,571 $1,119,652 $1,107,079
Total assets............................... 939,912 1,037,301 1,266,952 1,403,104 1,565,331 1,557,263
Debt outstanding........................... -- -- -- -- 4,145 3,400
Surplus (8)................................ 350,333 444,271 606,146 655,875 740,071 743,501
<CAPTION>
1996
----------
<S> <C>
BALANCE SHEET DATA:
Cash and investments....................... $1,124,280
Total assets............................... 1,734,737
Debt outstanding........................... 4,880
Surplus (8)................................ 686,650
</TABLE>
- ---------------
(1) The Company conducted a Copayment Refund Program (the "Copayment Program")
in accordance with an agreement with the State Corporation Commission dated
September 22, 1994. During the Copayment Program, members who had paid
coinsurance on services rendered at the Company's network facilities from
January 1, 1984 through December 31, 1993 were eligible for a refund.
Refunds represented the difference between the member's original coinsurance
payment, which had been based on the facility's undiscounted charges, and an
adjusted coinsurance payment calculated using the Company's average discount
percentage at the facility. Costs incurred under the Copayment Program
included refunds, interest and administrative costs associated with the
Copayment Program that the Company would not otherwise have incurred. The
cost of the Copayment Program in 1994 was $36.4 million, or $30.0 million
net of income taxes. In accordance with an agreement with the State
Corporation Commission dated November 16, 1995, the Company re-opened the
Copayment Program. As part of the re-opening of the Copayment Program, the
Company mailed refunds to approximately 300,000 members who had not filed a
claim under the original program and for whom the Company had an address. In
addition, the Company announced that there are approximately 200,000 former
members for whom the Company does not have an address and who are eligible
for refunds. Under this new agreement, any amounts not paid by December 31,
1996 will be escheated to the Commonwealth of Virginia as unclaimed
property. The cost of re-opening the Copayment Program was $47.1 million, or
$40.6 million net of income taxes, in 1995.
(2) The Company's effective tax rates (income tax expense as a percentage of
operating income) were 13.8% for the year-ended December 31, 1995 and 13.8%
for the nine months ended September 30, 1995. These effective tax rates were
lower than the 35% statutory federal income tax rate due to the recognition
of nontaxable income and the reduction in the valuation allowance on
deferred tax assets. The reduction in the valuation allowance on deferred
tax assets is primarily related to realization of alternative minimum tax
credits. The effective tax rate for the nine months ended September 30, 1996
(income tax benefit as a percentage of operating income) was a tax benefit
of 49.3%. This rate differs from the 35% statutory federal rate due
primarily to the realization of alternative minimum tax credits during the
nine-month period and the elimination as of September 30, 1996 of the $63.9
million valuation allowance maintained by the Company with respect to
deferred tax assets because the Demutualization has made it more likely than
not that the assets will be realized. Excluding the effects of the
elimination of the valuation allowance, the effective tax rate would have
been 18.1% for the nine months ended September 30, 1996. These items are not
recurring and the Company believes that in the future its effective tax rate
as reflected in its consolidated financial statements should approximate the
35% federal statutory rate. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Income Taxes."
(3) During 1991, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions." The cumulative effect at January 1, 1991 of the change in
<PAGE>
accounting for postretirement benefits was a charge of $21.9 million to net
income. During 1993, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." The cumulative effect at January 1,
1993 of the change in accounting for postemployment benefits was a charge of
$4.8 million to net income. During 1993, the Company also adopted SFAS No.
109, "Accounting for Income Taxes." The cumulative effect at January 1, 1993
of the change in accounting for income taxes was a $12.9 million increase in
net income.
(4) For the years ended December 31, 1994 and 1995, the Company recognized
extraordinary charges of $644,000 and $4.7 million net of income taxes of
$347,000 and $2.5 million, for costs incurred in connection with the
Demutualization. During the nine-month periods ended September 30, 1995 and
1996, the Company recognized extraordinary charges of $3.0 million, and
$11.3 million, net of income taxes of $1.6 million and $594,000,
respectively, for costs incurred in connection with the Demutualization. For
the nine months ended September 30, 1996, the Company also recognized an
extraordinary charge for the $175 million obligation to the Treasurer of the
Commonwealth of Virginia in connection with the Demutualization as required
by Virginia law. See "The Demutualization -- The Commonwealth Payment."
(5) Medical loss ratio represents, for each period, the ratio of medical costs
to premium revenues for such period.
(6) The selling, general and administrative expenses ratio is calculated as a
percentage of total revenues excluding amounts attributable to claims under
self-funded arrangements, investment income and net realized gains while the
operating margin and net margin ratios are calculated by dividing operating
income or net income by total revenues. These ratios have been calculated
exclusive of non-recurring items which include the Copayment Program, the
$63.9 million elimination of the valuation allowance on deferred tax assets,
effects of changes in accounting principles and extraordinary items.
(7) "Other" members include enrollment from Medicare supplemental plans,
third-party administration of health care claims, out-of-state student
health care coverage, and Mid-South members.
(8) Effective December 31, 1993, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, at December 31, 1993, 1994 and 1995, surplus included net
unrealized gains on investment securities, net of deferred income taxes, of
$45.9 million, $2.3 million and $39.5 million, respectively. At September
30, 1995 and 1996 surplus included net unrealized gains on investment
securities, net of deferred income taxes, of $40.1 million and $30.7
million, respectively.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated financial information (the "Pro Forma
Information") presented below gives effect to (i) the Demutualization, including
the issuance of million shares of Common Stock in connection therewith to
Eligible Members, (ii) issuance of shares of redeemable Class C Common
Stock in connection with the Commonwealth Payment and (iii) the sale of
million shares of Common Stock in the Offerings at an assumed initial public
offering price of per share (before deducting the estimated underwriting
discount and offering expenses payable by the Company), as if the
Demutualization had occurred as of September 30, 1996 for purposes of the
unaudited pro forma consolidated balance sheet, and as of January 1, 1995 for
purposes of the unaudited pro forma consolidated statements of operations for
the year ended December 31, 1995 and the nine months ended September 30, 1996.
The Pro Forma Information reflects gross and estimated net proceeds of the
Offerings of million and million, respectively. The Pro Forma
Information also assumes that $ million of the estimated net proceeds will
be paid to certain Eligible Members in lieu of shares of Common Stock that would
otherwise be issued to such Eligible Members in the Demutualization and that
$87.5 million will be used to make a portion of the Commonwealth Payment. The
balance of the net proceeds will be retained by the Company for general
corporate purposes. See "Use of Proceeds."
The Pro Forma Information is based on available information and on
assumptions the Company believes are reasonable and that reflect the effects of
these transactions. The Pro Forma Information is provided for informational
purposes only and should not be construed to be indicative of the Company's
consolidated financial position or its consolidated results of operations had
these transactions been consummated on the dates assumed and does not in any way
represent a projection or forecast of the Company's consolidated financial
position or consolidated results of operations for any future date or period.
The Pro Forma Information should be read in conjunction with the historical
consolidated financial statements of the Company included elsewhere in this
Prospectus and with the information set forth under "The Demutualization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
<PAGE>
Unaudited Pro Forma Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------
Transaction
ASSETS: Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
(in 000's)
Current assets
Cash................................................................................ $ 33,303 (1)
(87,500)(2)
Investment securities, at estimated fair value...................................... 1,090,977
Premiums and other receivables...................................................... 369,406
Deferred income taxes............................................................... 18,474
Other assets........................................................................ 9,717
----------
Total current assets............................................................. 1,521,877
Property and equipment, net........................................................... 51,514
Deferred income taxes................................................................. 58,108
Goodwill and other intangibles, net................................................... 77,372
Restricted investments, at estimated fair value....................................... 10,314
Other assets.......................................................................... 15,552
----------
Total assets..................................................................... $1,734,737
----------
----------
LIABILITIES:
Current liabilities
Medical and other benefits payable.................................................. $ 444,200
Unearned premiums................................................................... 98,558
Accounts payable and accrued expenses............................................... 80,896
Deferred income taxes............................................................... --
Other liabilities................................................................... 153,103
Obligation for Commonwealth payment................................................. 87,500 (87,500)(2)
----------
Total current liabilities........................................................ 864,257
Obligation for Commonwealth payment, noncurrent....................................... 87,500 (87,500)(2)
Obligations for employee benefits, noncurrent......................................... 57,539
Medical costs payable, noncurrent..................................................... 34,734
Redeemable Class C Common Stock....................................................... -- 87,500(2)
Minority interest in subsidiary....................................................... 4,057
----------
Total liabilities................................................................ 1,048,087
----------
EQUITY:
Common stock........................................................................ (1)
(4)
Capital in excess of par............................................................ (1)
(4)
Retained earnings................................................................... 686,650
(4)
(5)
----------
Total equity..................................................................... 686,650
----------
Total liabilities and equity..................................................... $1,734,737
----------
----------
</TABLE>
<PAGE>
Unaudited Pro Forma Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Nine Months Ended September 30, 1996
-------------------------------------- -------------------------------------
Transaction Transaction
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
---------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(in 000's)
Revenues
Premium and fee revenues
Commercial............................... $1,157,899 $ 985,127
Federal Employee Program................. 329,243 265,587
Amounts attributable to self-funded
arrangements........................... 981,741 798,358
Less: Amounts attributable to claims
under self-funded arrangements......... (897,954) (731,062)
---------- ---------
1,570,929 1,318,010
Investment income........................... 45,861 34,081
Net realized gains.......................... 52,976 50,685
Other revenues.............................. 55,176 37,666
---------- ---------
Total revenues........................... 1,724,942 1,440,442
Operating expenses
Medical and other benefit costs
Commercial............................... 959,328 809,344
Federal Employee Program................. 312,222 252,478
---------- ---------
1,271,550 1,061,822
Selling, general and administrative
expenses................................. 346,353 283,704
Interest expense............................ (2) (2)
Copayment refund program.................... 47,073 --
---------- ---------
Total operating expenses................. 1,664,976 1,345,526
---------- ---------
Income before income taxes and extraordinary
items (operating income).................... 59,966 94,916
Income tax expense (benefit).................. 8,264 (3) (46,751) (3)
---------- ---------
Income before extraordinary items (6).... 51,702 141,667
Extraordinary items, net of income taxes
(5)......................................... (4,707) (186,280)
---------- ---------
Net income (loss)........................ $ 46,995 $ (44,613)
---------- ---------
---------- ---------
Income before extraordinary items per common
share
Shares used in calculating per common share
amount (7)
</TABLE>
Notes To Unaudited Pro Forma Consolidated Financial Information
(1) Represents gross proceeds of million from the issuance of
million shares of Common Stock in the Offerings at an assumed initial
offering price of per share less underwriting discounts and offering
expenses of million. Also represents the payment of million, the
amount of cash which is expected to be paid to certain Eligible Members in
lieu of shares of Common Stock that would otherwise be issued to such
Eligible Members in the Demutualization.
(2) Represents the following effects of the Commonwealth Payment: on the
Unaudited Pro Forma Consolidated Balance Sheet (i) the $87.5 million in cash
payment and (ii) the obligation to redeem all outstanding redeemable Class C
Common Stock at the Class C Redemption Price, with offsetting reductions to
the obligation for the Commonwealth Payment shown on the Unaudited Pro Forma
Consolidated Balance Sheet, and, on the Unaudited Pro Forma Consolidated
Statements of Operations, (iii) the interest on the redemption amount
outstanding at % per annum.
<PAGE>
(3) As a result of the elimination at September 30, 1996 of the $63.9 million
valuation allowance on deferred tax assets, the Company's income in future
years should be subject to an effective tax rate (as reflected in its
consolidated financial statements) that approximates the 35% statutory
federal rate. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Income Taxes." On the Unaudited Pro
Forma Consolidated Statements of Operations, the current period impact of
the valuation allowance elimination has been excluded and the effective tax
rate has been adjusted to the 35% federal statutory rate.
(4) Represents the reclassification of the retained earnings of the mutual
insurance company to reflect conversion to a stock company.
(5) Represents estimated additional nonrecurring expenses of million related
to the Demutualization assumed to be incurred as of the date of the
Unaudited Pro Forma Consolidated Balance Sheet. Such expenses will be
reported as extraordinary expenses.
(6) The unaudited pro forma income before extraordinary items does not include
investment income related to the proceeds from the sale of the Common Stock
in the Offerings.
(7) The number of shares used in the calculation of unaudited pro forma income
before extraordinary items per common share are as follows (in millions):
<TABLE>
<CAPTION>
Number
of Shares
---------
<S> <C>
Shares allocated to Eligible Members.................................
Less: shares allocated to Eligible Members who receive cash (a)......
Shares issued to Eligible Members....................................
Shares issued in the Offerings.......................................
Total shares of Common Stock outstanding.............................
</TABLE>
- ---------------
(a) Assumes that million is paid to certain Eligible Members who
receive cash in lieu of shares of Common Stock.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Substantially all of Trigon's revenues are generated from premiums and fees
received for health care services provided to its members and from net
investment income. Trigon's expenses are primarily related to health care
services provided which consist of payments to physicians, hospitals and other
providers. A portion of medical costs expense for each period consists of an
actuarial estimate of claims incurred but not reported to Trigon during the
period.
The Company's results of operations depend in large part on its ability to
accurately predict and effectively manage health care costs. The Company has
been a leader in Virginia in the movement towards managed care. The Company
established the first PPO in Virginia in 1983, and in the following year created
one of the first HMOs in the state. The Company continued the transition to
managed care in 1990 with the development and implementation of a strategy to
emphasize the management of health care rather than simply administering health
care benefits. Additionally, the Company employs sophisticated underwriting and
pricing techniques, using its accumulated actuarial data to evaluate health care
costs for specific groups, with adjustment factors such as age, sex, industry
and geographic differences. Since 1991, the Company's key demographic features
have not significantly changed or materially affected medical cost trends. As of
September 30, 1996, the average member age was 38.0 years. Excluding members
holding Medicare supplemental policies, the average age was 33.6 years. Adult
males make up 34.7%, adult females make up 39.3% and children make up 26.0% of
total membership.
As a result of the Company's emphasis on utilization management and cost
control, the Company has achieved improvements in its inpatient days per
thousand members from 356 in 1991 to 266 in 1995, a 25.3% reduction, and an
improvement in admissions per thousand members from 76 in 1991 to 66 in 1995, a
13.2% reduction. The Company cannot predict whether or to what extent these
trends will continue in the future. These improvements in utilization controls,
combined with favorable pricing arrangements with providers and hospitals,
resulted in a decrease in medical costs expense as a percentage of premium
revenues (the "medical loss ratio") for the Company's commercial business from
80.7% for the year ended December 31, 1991 to 74.2% for the year ended December
31, 1994. The Company's medical loss ratio on commercial business has recently
increased from 74.2% in 1994 to 82.9% in 1995 and from 80.4% through the first
nine months of 1995 to 82.2% for the same period in 1996. The increase in the
medical loss ratio can be attributed to two main factors: 1) a higher degree of
competition for market share and 2) an increase in medical costs which, in part,
reflects industry trends.
With respect to competition, in recent years there have been a number of
new entrants into Virginia's health insurance markets. Over the past two years,
these new entrants, as well as existing competitors, have been reducing prices
in order to maintain or increase market share. In the face of this increased
competition, margins have decreased as the Company priced its products to
maintain market share. Notwithstanding this competitive environment, commercial
enrollment increased by approximately 150,000 members from December 31, 1994 to
September 30, 1996, a 20.4% increase. The commercial enrollment increase came
primarily from growth in HMO enrollment (approximately 65,000 members), the
acquisition of Mid-South (approximately 50,000 members), the acquisition of an
80% ownership interest in Priority Health Care, Inc. (approximately 25,000 HMO
members), the introduction of a Medicaid HMO product (approximately 29,000
members), the conversion of HMO self-funded groups to commercial products
(approximately 31,000 members), offset by net enrollment losses in the PAR/PPO
networks (approximately 21,000 members) and losses in out of state student and
medicare supplemental products (approximately 29,000 members). Premium revenues
from commercial business have decreased by 1.1% on a per member month basis
comparing the twelve months ended December 31, 1994 period average to the nine
months ended September 30, 1996 period average.
Commercial medical costs increased 9.7% on a per member basis comparing the
twelve months ended December 31, 1994 period average to the nine months ended
September 30, 1996 period average. The increases in medical costs reflect a
higher cost per hospital inpatient day, increased outpatient utilization and
cost per encounter and higher pharmacy costs. These increases were partially
offset by continued improvements in hospital inpatient utilization. The Company
has taken and continues to take steps to improve the medical loss ratio and to
reduce its exposure to health care cost trends. These steps include: increasing
efforts to negotiate more advantageous contracts with key health care providers,
particularly in the area of outpatient facility fees; continuing the successful
implementation of changes to physician lab reimbursement methods, which includes
expanding the program to include facility labs; focusing on internal claims
processing accuracy with an emphasis on strict enforcement of medical policy
rules; and continuing to improve claims adjudication methods to reduce
administrative costs. To supplement these cost reduction actions, the Company
will continue to seek higher premium rates on selected groups and product lines
while exiting certain unprofitable accounts to improve the Company's overall
risk profile. The
<PAGE>
Company expects to continue investing heavily in managed care information
systems to enhance medical management efforts and to continue improving and
expanding existing case management and appropriateness review programs so as to
avoid unnecessary or inappropriate care.
The Company participates in the Federal Employee Program (the "FEP"), a
national contract with the U.S. Office of Personnel Management ("OPM"),to
provide benefits through its PPO network for approximately 198,000 federal
employees and their dependents living in Virginia. FEP revenues represent the
reimbursement by OPM of actual medical costs incurred including the actual cost
of administering the program, as well as a performance based share of the
national program's overall profit. The FEP medical loss ratio remained
relatively constant from 1991 to 1994. The FEP medical loss ratio increased from
93.5% in 1994 to 95.1% through the first nine months of 1996. The increase was
primarily due to reductions, on a per member basis, in the cost of administering
the FEP program which results in a smaller spread between revenues and medical
costs.
Medical Loss Ratios
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
--------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial.................... 80.7% 79.0% 75.8% 74.2% 82.9% 80.4% 82.2%
FEP........................... 93.5 94.1 94.0 93.5 94.8 94.7 95.1
Total......................... 82.8 81.9 79.6 78.4 85.5 83.6 84.9
</TABLE>
Within the Company's network product offerings, employer groups may choose
various funding options ranging from at-risk to partially or fully self-funded
financial arrangements. While self-funded customers participate in Trigon's
networks, the customers bear all or a portion of the underwriting risk.
Self-funded arrangements are typically utilized by large and mid-size groups.
Most self-funded groups purchase aggregate and/or claim specific stop-loss
coverage. In exchange for a premium, the group's aggregate liability is capped
for the year or the group's liability on any one episode of care is capped.
Trigon charges self-funded groups an administrative fee which is based on the
number of members in a group or the group's claims experience. Under the
Company's self-funded arrangements, amounts due are recognized based on incurred
claims plus administrative and other fees and any stop-loss premiums.
Trigon's HMO and PPO networks and products are the Company's fastest
growing lines of business. Since December 31, 1991, HMO enrollment has increased
at a compound annual rate of 35.1% and PPO enrollment has increased at a
compound annual rate of 15.1%. The acquisition in May 1995 of an 80% interest in
Priority Health Care, Inc., an eastern Virginia-based HMO, accounted for
approximately 25,000 of the 191,000 growth in HMO members. In contrast, PAR
network enrollment has declined at a compound annual rate of 8.7% since December
31, 1991 due largely to the Company's emphasis on transitioning its customer
base toward the more cost-effective PPO and HMO products. From 1991 through
1994, Trigon's total enrollment remained relatively stable. Growth in total
enrollment of more than 178,000 members has occurred since December 31, 1994.
Approximately 75,000 of the growth in members is attributable to the Mid-South
and Priority acquisitions. Approximately 3.5%, 26.7% and 61.3% of premium and
fee revenues including amounts attributable to self-funded arrangements (premium
equivalents) were derived from the Company's HMO, PPO and PAR networks,
respectively, in 1991 versus 12.2%, 44.7% and 33.7% through the first nine
months of 1996.
Premium and Premium Equivalents by Network System
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------------------------ -------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(in 000's) (unaudited)
HMO........................ $ 69,383 $ 81,179 $ 104,026 $ 148,269 $ 241,691 $ 171,150 $ 250,828
PPO........................ 536,556 707,303 894,557 976,127 1,083,274 790,908 916,265
PAR........................ 1,232,150.. 1,200,395 1,028,053 946,287 923,735 699,784 690,682
Other...................... 170,275 194,147 208,108 222,621 220,183 162,782 191,297
---------- ---------- ---------- ---------- ---------- ----------- ----------
Total...................... $2,008,364 $2,183,024 $2,234,744 $2,293,304 $2,468,883 $ 1,824,624 $2,049,072
---------- ---------- ---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ---------- ---------- ----------- ----------
</TABLE>
<PAGE>
Premium and Premium Equivalents by Network System as a Percent of Total
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
HMO........................... 3.5% 3.7% 4.7% 6.4% 9.8% 9.4% 12.2%
PPO........................... 26.7 32.4 40.0 42.6 43.9 43.3 44.7
PAR........................... 61.3 55.0 46.0 41.3 37.4 38.4 33.7
Other......................... 8.5 8.9 9.3 9.7 8.9 8.9 9.4
------ ------ ------ ------ ------ ------ ------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
</TABLE>
Between 1991 and September 30, 1996, Trigon significantly increased its
selling, general and administrative expenditures to develop its managed care
technologies, improve data collection and analysis tools and internally develop
a new claims processing system customized to support the Company's products. The
Company intends to continue its investment in managed care technologies and in
providing support for business expansion opportunities, both within and outside
Virginia. The Company expects that these investments will be partially funded
through administrative expense reductions in overhead and production departments
by means of implementing cost saving programs and automation improvement
projects such as imaging to reduce paper handling.
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September 30,
1996
Premium and fee revenues increased 12.8% from $1.169 billion through the
first nine months of 1995 to $1.318 billion for the same period in 1996,
primarily due to the growth in membership in the Company's HMO and PPO networks,
which was partially offset by declines in PAR network enrollment, and as a
result of the Mid-South acquisition. Commercial HMO revenues grew from $125.8
million in the first nine months of 1995 to $233.1 million through the same
period in 1996, a growth rate of 85.3%. The $107.3 million increase in
commercial HMO revenues is attributable to increased HMO enrollment as a result
of a shift in members from PAR and PPO networks into the HMO network and from
enrollment of new HMO members (collectively accounting for $44.1 million of the
increase), the Priority acquisition ($38.5 million), the conversion of 31,000
members from self-funded products to commercial products ($19.4 million) and a
3.8% increase in the average revenue per member ($5.3 million). Commercial PPO
revenues grew from $192.6 million to $240.0 million for the same periods, a
growth rate of 24.6%. Commercial PAR revenues declined from $376.3 million for
the first nine months of 1995 to $320.7 million for the same period in 1996 as a
result of the Company's efforts to transition groups into more tightly managed
networks. Commercial revenues for the nine months ended September 30, 1996 also
included $37.7 million of revenues from Mid-South, which was acquired on
February 29, 1996. FEP revenues increased 7.0% from $248.1 million for the first
nine months of 1995 to $265.6 million for the same period in 1996 as a result of
increased medical costs reimbursed by the OPM.
The number of members served by the Company increased 5.6%, or by 98,674
members, from September 30, 1995 to September 30, 1996. The increase in
enrollment, excluding acquisitions, was 22,586 members, primarily in the HMOs.
In addition, the Mid-South acquisition added 51,321 members and the Priority
acquisition added 24,767 initial members.
Investment income decreased 2.3% from $34.9 million for the nine months
ended September 30, 1995 to $34.1 million for the nine months ended September
30, 1996. Realized gains increased 45.5% from $34.8 million for the nine months
ended September 30, 1995 to $50.7 million for the nine months ended September
30, 1996. The decline in investment income and the increase in realized gains
are both due primarily to the sale of investment securities to fund the
Mid-South acquisition. Net realized gains have also increased due to the sale of
investment securities in an effort to shorten bond maturity levels. Net
unrealized gains at September 30, 1996 totaled $47.2 million as compared to
$61.6 million at September 30, 1995.
Other revenues decreased by 8.3% from $41.1 million for the first nine
months of 1995 to $37.7 million for the same period in 1996. Increased revenue
generated from Healthy Homecomings, Inc., a women's health care company, and
from the workers' compensation administration business were offset by declining
administrative services only revenues. Prior year results also include
nonrecurring gains of $5.4 million related to the sale to unrelated parties of
joint venture interests and other assets. The Company is currently pursuing the
possible sale of its electronic communication services subsidiary Health
Communication Services, Inc. ("HCS"). For the nine months ended September 30,
1996, HCS contributed $16.1 million in third-party revenues.
Medical costs increased 14.8% from $924.7 million for the first nine months
of 1995 to $1,061.8 million for the same period in 1996. The increase is
primarily the result of enrollment growth in the HMOs and the Priority and
Mid-South
<PAGE>
acquisitions. The Company's medical loss ratio on commercial business increased
from 80.4% for the first nine months of 1995 to 82.2% for the same period in
1996. The increase is a result of greater competition within Virginia for market
share and a moderate increase in medical costs trends. The medical cost per
member per month for the Company's commercial business increased 2.8% from
$99.79 for the first nine months of 1995 to $102.58 for the same period in 1996.
Selling, general and administrative ("SG&A") expenses increased 14.8% from
$247.1 million for the first nine months of 1995 to $283.7 million for the first
nine months of 1996. The Company incurred $13.8 million of additional costs
related to its growing HMO business including the impact of the Priority
acquisition. The acquisitions of Mid-South, Healthy Homecomings, Inc. and
Healthcare Venture Associates resulted in a $12.4 million increase in the first
nine months of 1996. The Company continues to invest in managed care
infrastructure and technology, increasing SG&A $6.1 million, for improved
medical cost data analysis, internally developed managed mental health
capabilities, expansion of appropriateness review, costs associated with
obtaining NCQA accreditation and upgrading systems software for the century date
change.
Operating income, ignoring the effect of the Copayment Program, decreased
by 12.1% from $108.0 million in the first nine months of 1995 to $94.9 million
for the same period in 1996. The decrease is a result of competitive pricing
pressure and increased medical costs on commercial margins offset by favorable
net realized gains on investments.
The Company's effective tax rate (income tax expense as a percentage of
operating income) was 13.8% for the nine months ended September 30, 1995. This
effective tax rate for 1995 was lower than the 35% statutory federal income tax
rate due to the recognition of nontaxable income and the reduction in the
valuation allowance on deferred tax assets. The reduction in the valuation
allowance on deferred tax assets is primarily related to realization of
alternative minimum tax credits. The effective tax rate for the nine months
ended September 30, 1996 (income tax benefit as a percentage of operating
income) was a tax benefit of 49.3%. This rate differs from the 35% statutory
federal rate primarily due to the realization of alternative minimum tax credits
during the nine-month period and the elimination as of September 30, 1996 of the
$63.9 million valuation allowance maintained by the Company with respect to
deferred tax assets because the Demutualization has made it more likely than not
that the assets will be realized. Excluding the effects of the elimination of
the valuation allowance, the effective tax rate would have been 18.1% for the
nine months ended September 30, 1996. These items are not recurring and the
Company believes that in the future its effective tax rate as reflected in its
consolidated financial statements should approximate the 35% federal statutory
rate. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Income Taxes."
The Company has reflected the impact of the $175 million obligation to the
Commonwealth of Virginia (the Commonwealth Payment) in the consolidated
financial statements for the nine months ended September 30, 1996 as an
extraordinary item. See "The Demutualization -- The Commonwealth Payment."
Year Ended December 31, 1994 Compared to Year Ended December 31, 1995
Premium and fee revenues increased 7.2% from $1.465 billion in 1994 to
$1.571 billion in 1995, primarily due to the growth in membership in the
Company's PPO and HMO networks offset by declines in PAR network enrollment.
Commercial HMO revenues grew from $106.1 million in 1994 to $181.1 million in
1995, a growth rate of 70.7%. The $75.0 million increase in commercial HMO
revenues is attributable to increased HMO enrollment as a result of a shift in
members from PAR and PPO networks into the HMO networks and from enrollment of
new HMO members (collectively accounting for $73.7 million of the increase) and
the Priority acquisition ($19.0 million) partially offset by a 9.8% decrease in
the average revenue per member, causing a decrease in revenue of $17.7 million.
Commercial PPO revenues grew from $215.6 million to $271.3 million during the
same period, a growth rate of 25.8%. Commercial PAR revenues declined from
$537.5 million in 1994 to $485.4 million in 1995 as a result of the Company's
greater emphasis on its HMO and PPO networks as customers transition to more
tightly managed networks. Premium revenues on a per member basis for the
Company's commercial business decreased 2.2%. FEP revenues increased 8.6% from
$303.3 million in 1994 to $329.2 million in 1995 as a result of increased
medical costs reimbursed by the OPM. The net impact of self-funded arrangements
increased 4.3% from $80.4 million in 1994 to $83.8 million in 1995. The increase
includes a non-recurring $6.0 million adjustment resulting from the favorable
settlement of a potential liability with the Health Care Financing
Administration.
The number of members served by the Company increased 7.0% over 1994.
Enrollment in the HMO networks increased 84.3% over 1994 and at December 31,
1995 accounted for 12.3% of the Company's total enrollment and 20.8% of the
Company's commercial enrollment. Enrollment in the PPO networks increased 11.1%
over 1994 and at December 31, 1995 represented 41.5% of the Company's total
enrollment. The number of PAR members declined 5.3% from 1994 and such members
represented 34.4% of the Company's total members at December 31, 1995.
<PAGE>
Investment income increased 14.8% from $40.0 million in 1994 to $45.9
million in 1995. Also, net realized gains increased $40.2 million from $12.8
million in 1994 to $53.0 million in 1995. The improvement in investment income
is primarily due to the increase in fixed income securities held. With regard to
realized gains, 1995 net realized gain on equities was $48.2 million, an
improvement of $28.2 million over 1994. The 1995 net realized gain on fixed
income securities was $4.8 million, an improvement of $12.0 million over 1994.
Realized gains improved due to normal portfolio turnover during a period of
favorable equity and bond market advances and asset class rotation (primarily
reducing the portion of the portfolio allocated to domestic equities and
increasing the portion allocated to international equities). As of December
1995, net unrealized gains totaled $60.7 million compared to $3.4 million at
December 31, 1994.
Other revenues increased by 21.4% from $45.5 million in 1994 to $55.2
million in 1995. The increase in other revenue is a result of the acquisition of
Healthy Homecomings, Inc., a women's health care company, continued revenue
growth in the electronic communication services and workers' compensation
administration businesses and from non-recurring gains of $5.4 million (related
to the sale to unrelated parties of joint venture interests and other assets).
Medical costs increased 17.1% from $1.086 billion in 1994 to $1.272 billion
in 1995. The $186.0 million increase includes a $28.6 million increase in FEP
medical costs with the balance of the increase attributable to both enrollment
growth in the HMOs and an increase in commercial per member medical costs.
Compared to 1994, the commercial medical cost per member month increased by 9.2%
from $93.67 to $102.31. The increase in medical costs reflects higher cost per
hospital inpatient day and higher hospital outpatient utilization and cost per
encounter. These increases were partially offset by improvements in inpatient
days per thousand members. The Company's medical loss ratio on commercial
business increased from 74.2% in 1994 to 82.9% in 1995. The increase in the
medical loss ratio can be attributed to two main factors: a higher degree of
competition for market share and an increase in medical costs which, in part,
reflects industry trends.
Selling, general and administrative expenses increased 7.4% from $322.4
million in 1994 to $346.4 million in 1995. The Company incurred $19.2 million of
additional costs related to its growing HMO business, of which $5.4 million is
related to the purchase of an 80% interest in Priority. SG&A expenses also
increased as a result of the acquisitions of Healthy Homecomings, Inc. and
Healthcare Venture Associates and in support of revenue growth in electronic
communications services, offset to a degree by a $5.0 million favorable
adjustment to eliminate a liability for potential losses associated with the
financial difficulties of other insurance companies. The SG&A expense ratio for
the year ended December 31, 1995 was 13.7%. Eliminating the favorable impact of
the $5.0 million adjustment described above would increase the ratio to 13.9%
compared to 13.8% for the year ended December 31, 1994.
In accordance with an agreement with the State Corporation Commission dated
November 16, 1995, the Company re-opened the Copayment Program. As part of the
re-opening of the Copayment Program, the Company mailed refunds to approximately
300,000 members who had not filed a claim under the original program and for
whom the Company had an address. In addition, the Company announced that it has
determined that there are approximately 200,000 former members for whom the
Company does not have an address and who are eligible for refunds. Under this
new agreement, any amounts not paid by December 31, 1996 will be escheated to
the Commonwealth of Virginia as unclaimed property. The cost of the Copayment
Program in 1994 was $36.4 million or $30.0 million, net of income taxes, and the
cost of re-opening the Copayment Program in 1995 was $47.1 million or $40.6
million, net of taxes.
Operating income prior to the effect of the Copayment Program decreased
30.9% from $155.0 million in 1994 to $107.0 million in 1995. The decrease is a
result of competitive pricing pressure and increased medical costs on commercial
margins offset by favorable investment income and $16.4 million of one-time
gains and adjustments. Operating income including the effect of the Copayment
Program decreased 49.4% from $118.5 million in 1994 to $60.0 million in 1995.
The Company's effective tax rate was 20.7% for 1994 compared to 13.8% for
1995. The effective rate for 1994 was reduced primarily by a reduction in the
valuation allowance on deferred tax assets relating to AMT credit carryforwards.
The 1995 effective tax rate as reflected in its financial statements was reduced
by the recognition of nontaxable income and by a reduction of the valuation
allowance on deferred tax assets. The reduction in the valuation allowance is
the result of the reversal of certain liabilities, the deductibility of which
were considered uncertain, and the realization of AMT credit
carryforwards. These items are not recurring and the Company believes that its
effective tax rate as reflected in its financial statements should approximate
35% after the Demutualization. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Income Taxes."
Income before extraordinary item decreased from $94.0 million in 1994 to
$51.7 million in 1995, due primarily to the effects of the declining margin in
the Company's commercial business and to the effect of the Copayment Program.
Without the Copayment Program, income before extraordinary item would have been
$124.0 million in 1994 and $92.3 million in
<PAGE>
1995. As a percentage of total revenues, net margin exclusive of cumulative
effects of changes in accounting principles and extraordinary item decreased
from 7.9% in 1994 to 5.4% in 1995, before giving effect to the Copayment Program
and decreased from 6.0% in 1994 to 3.0% in 1995 after giving effect to the
Copayment Program.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1994
Premium and fee revenues increased 3.3% from $1.419 billion in 1993 to
$1.465 billion in 1994, primarily due to the growth in membership in the
Company's HMO and PPO networks. Commercial HMO revenues grew from $75.9 million
in 1993 to $106.1 million in 1994, a 39.7% growth rate, while commercial PPO
revenues grew from $175.5 million in 1993 to $215.6 million in 1994, a 22.8%
growth rate. Commercial PAR revenues declined from $590.6 million in 1993 to
$537.5 million in 1994 as a result of the Company's greater emphasis on its HMO
and PPO networks as its customers transitioned to its more tightly managed
networks. FEP revenues increased 8.7% from $279.1 million in 1993 to $303.3
million in 1994 as a result of increased medical costs reimbursed by OPM. While
the number of members served by the Company's networks and products increased by
3.0% during 1994, the number of HMO members grew 42.7% and at December 31, 1994
accounted for 7.1% of the Company's total enrollment. PPO membership grew by
7.7% during 1994 and at December 31, 1994 represented 40.0% of the Company's
total enrollment. The number of PAR members dropped 5.0% and such members
represented 38.8% of the Company's total members at December 31, 1994. Premium
revenue increases, on a per member basis, for the Company's commercial business
averaged 1.6%, reflecting the Company's efforts to control claims utilization,
minimal medical inflation and increasing competitive pricing pressure.
Investment income increased 16.6% from $34.3 million in 1993 to $40.0
million in 1994. Net realized gains decreased $13.4 million from $26.2 million
in 1993 to $12.8 million in 1994. The increase in investment income was driven
primarily by an increase in fixed income securities held. With regard to
realized gains, the 1994 net realized gain on equities was $20.0 million, an
improvement of $4.6 million over 1993. The 1994 net realized loss on fixed
income securities was $7.2 million, a decrease of $18.0 million from the
previous year. Much of the decrease in net realized investment gains was a
result of interest rate increases throughout 1994 which resulted in realized
losses on the sale of fixed income securities.
Other revenues increased by 48.8% from $30.6 million in 1993 to $45.5
million in 1994. The increase was primarily attributable to the addition of
revenues from two electronic data interchange companies acquired in late 1993.
After giving effect to these acquisitions, the Company, through a subsidiary, is
one of the largest suppliers of electronic data processing for hospitals,
physicians, insurance companies and other health care organizations. In
addition, revenues from third-party administration for workers' compensation
increased from $7.0 million in 1993 to $9.9 million in 1994, a 41.8% increase.
Medical costs increased by 2.7% from $1.058 billion in 1993 to $1.086
billion in 1994. The increase was primarily a result of growth in business sold
through the HMO and PPO networks. As a result of the Company's continued
emphasis on managing utilization and medical inflation, medical costs per member
were essentially unchanged from 1993. The total medical loss ratio improved from
79.6% in 1993 to 78.4% in 1994. The medical loss ratio for commercial business
fell from 75.8% to 74.2% over the same period.
Selling, general and administrative expenses increased by 4.5% from $308.4
million in 1993 to $322.4 million in 1994. The Company incurred $6.4 million of
additional costs related to the Company's growing HMO business and the workers'
compensation processing unit. To enhance its managed care products, the Company
spent an additional $3.3 million to further its provider alliance strategy and
to improve its managed care information systems and related programs. This
expenditure was largely offset by savings created through a reduction in
overhead and an increase in operational efficiencies through the implementation
of multi-functional customer support teams, company-wide administrative
cost-cutting programs and imaging technology intended to reduce paper handling
costs. Commissions paid to outside brokers and agents representing the Company
increased 22.4% from $23.3 million in 1993 to $28.6 million in 1994. The Company
believes that brokers are an important distribution channel for its small
business products. The percentage of small group and individual policies sold
through brokers continues to increase. Accordingly, the Company has increased
commission levels and continues to support a broker bonus program. In addition,
1994 expenses reflect the full year impact, $8.5 million, of the electronic data
interchange acquisitions made in late 1993. Selling, general and administrative
expenses as a percentage of premium and fee revenues (including amounts
attributable to claims under self-funded arrangements) and other revenues
increased slightly from 13.6% in 1993 to 13.8% in 1994.
The Company conducted a Copayment Refund Program in accordance with an
agreement with the State Corporation Commission dated September 22, 1994. The
total cost of this phase of the Copayment Program was $36.4 million pre-tax and
$30.0 million after-tax. Costs incurred under this phase of the Copayment
Program included refunds, interest and administrative costs associated with this
phase of the Copayment Program that the Company would not otherwise have
incurred. In
<PAGE>
addition, the Company agreed to pay a $5 million civil forfeiture to the
Commonwealth of Virginia which is included in the total cost of this phase of
the Copayment Program.
Operating income prior to the effect of the Copayment Program improved 7.9%
from $143.7 million in 1993 to $155.0 million in 1994 as a result of enrollment
increases in the commercial business of 4.9% and an improvement in the
commercial medical loss ratio from 75.8% in 1993 to 74.2% in 1994. Operating
income after the effect of the Copayment Program was $118.5 million in 1994.
The Company's effective tax rate (as reflected in its financial statements)
was 24.9% for 1993 compared to 20.7% for 1994. The 1993 effective tax rate
reflects a reduction for the benefit generated by the Internal Revenue Code
Section 833 deduction and an increase in the valuation allowance maintained by
the Company on deferred tax assets due to (i) expenses that were deducted for
financial statement purposes in 1993 but will not be deductible for income tax
purposes until well into the future and (ii) AMT credit carryforwards generated
in 1993. The expenses which will not be deductible until well into the future
relate primarily to retiree medical obligations and certain medical costs
reserves. The effective rate for 1994 was reduced primarily by a reduction in
the valuation allowance on deferred tax assets relating to AMT credit
carryforwards. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Income Taxes."
Income before the cumulative effects of changes in accounting principles
and extraordinary item decreased from $107.9 million in 1993 to $94.0 million in
1994, due primarily to the effect of the Copayment Program. Without the
Copayment Program, income from continuing operations before the cumulative
effects of changes in accounting principles would have been $124.0 million, a
14.9% increase over 1993. As a percentage of total revenues, net margin
exclusive of the cumulative effects of changes in accounting principles
increased from 7.1% in 1993 to 7.9% in 1994, before giving effect to the
Copayment Program and decreased to 6.0% after giving effect to the Copayment
Program.
Liquidity and Capital Resources
The Company's primary sources of cash are from premiums and fees received
and investment income. The primary uses of cash include health care benefit
expenses and capitation payments, brokers' and agents' commissions,
administrative expenses and income taxes. Trigon receives premium revenues in
advance of anticipated claims for related health care services.
The Company's investment policies are designed to provide liquidity to meet
anticipated payment obligations, preserve capital and maximize return. Trigon
fundamentally believes that concentrations of investments in any one asset class
are unwise due to constantly changing interest rates, market and economic
conditions; accordingly the Company maintains a diversified investment portfolio
consisting both of fixed income and equity securities, with the objective of
reducing risk and maximizing overall return. The fixed income portfolio includes
high grade (minimum average quality rating of AA as of September 30, 1996)
government and corporate securities, both domestic and international. The
short-term fixed income portfolio had an average contractual maturity of five
years as of September 30, 1996 and is intended to cover near term cash flow
needs and to serve as a buffer for unanticipated business needs. The long-term
fixed income portfolio had an average contractual maturity as of September 30,
1996 of 9.2 years. The equity portfolios contain readily marketable securities
ranging from small growth to well-established Fortune 500 companies. The
international equity portfolio is diversified by industry, country and
currency-related exposure. The Company does enter into foreign currency exchange
forward contracts and foreign currency options to manage its exposure to
fluctuations in foreign currency exchange rates on its foreign debt and equity
investments.
As of September 30, 1996, the Company's investment portfolio of $1,101.3
million included U.S. Treasury and other governmental obligations ($157.6
million), foreign government obligations ($48.4 million), domestic corporate
bonds ($141.0 million), foreign corporate bonds ($6.5 million), mortgage-backed
and asset-backed securities ($284.7 million), domestic equity securities ($151.1
million), foreign equity securities ($150.7 million), short-term debt securities
($159.1 million) and derivative instruments (primarily foreign currency options
and forward currency contracts) ($2.2 million). Approximately 27.4% of the
Company's portfolio was invested in equities. As of September 30, 1996 the
equity portfolio consisted of approximately 50.1% domestic holdings and 49.9%
international holdings. As of the same date, approximately 19.6% of the
Company's portfolio was invested in international equities or fixed income
securities. Included in this amount was $21.9 million of U.S. dollar-denominated
investment funds which are invested internationally. While each of these asset
classes by itself may be volatile over short time periods, the Company believes
that a portfolio diversified with multiple asset classes will be less volatile
in the long run than one concentrated in a single asset class.
<PAGE>
As of September 30, 1996, net unrealized gains totaled $47.2 million as
compared to $60.7 million at December 31, 1995. Net unrealized gains in the
equity portfolio decreased to $42.2 million from $47.3 million at December 31,
1995. Net unrealized gains in the long-term and short-term fixed income
investment portfolios were $3.0 million at September 30, 1996 compared to $13.1
million at December 31, 1995. The net unrealized gain on derivative instruments
was $2.0 million at September 30, 1996 as compared to $371,000 at December 31,
1995. For more information on the Company's investment portfolio, see
"Business -- Investments."
Cash provided by operations for the years ended December 31, 1993, 1994 and
1995, was $147.9 million, $122.6 million and $34.1 million, respectively. Cash
provided by operations for the nine months ended September 30, 1995 and 1996 was
$55.4 million and $32.3 million, respectively.
The Company believes that cash flow generated by operations and its cash
and investment balances will be sufficient to fund continuing operations and
capital expenditures for the foreseeable future. The nature of the Company's
operations is such that cash receipts are principally premium revenues typically
received up to three months prior to the expected cash payment for related
health care services. The Company's operations are not capital intensive, and
there are currently no commitments for major capital expenditures to support
existing business. The Company currently has no commitments or agreements with
respect to expansion outside of Virginia. The net proceeds from the Offerings
will enable the Company to make a portion of the Commonwealth Payment, make cash
payments to Eligible Members in the Demutualization and enable the Company to
further expand its networks, products and geographic base through both internal
growth and acquisitions. See "Use of Proceeds."
In connection with the Demutualization, the Company will be required to
make the Commonwealth Payment, which will be approximately $175 million. See
"The Demutualization -- The Commonwealth Payment." Up to $87.5 million of the
Commonwealth Payment may be made in shares of Class C Common Stock, which must
be redeemed on or before June 30, 1998. Class C Common Stock may also be
redeemed by delivery of an unsecured promissory note due June 30, 1998. The
Company believes that the funds necessary for any such redemption or payment
would be available from borrowings under bank credit facilities, proceeds of
additional offerings of securities, available surplus of Trigon Insurance or a
combination of the foregoing. The Commonwealth Payment has been accrued as an
extraordinary charge as of September 30, 1996.
The Company's strategy contemplates growth through acquisitions and
strategic alliances. See "Business -- Strategy." These transactions may be
financed through the issuance of securities, including Common Stock, cash which
may be generated internally or from other sources, or a combination of cash and
securities. The source of financing will be determined at the time of any such
transaction, based on a variety of factors including the market value of Common
Stock at such time and the size of the proposed transaction. Depending on the
size and source of financing, any such future acquisition or strategic alliance
may have a material impact on the Company's results of operations or financial
position.
The Company's claims paying ability has been rated "AA-(Excellent)" by
Standard & Poor's ("S&P") since 1992, and the rating was re-affirmed in February
1996. The claims-paying ability represents S&P's opinion of an assessment of an
operating insurance company's financial capacity to meet the obligations of its
insurance policies in accordance with their terms. This opinion is not a rating
of the Company's securities, including those covered by this registration
statement. The rating scale is divided into two main categories. Ratings from
"AAA' to "BBB' are classified as "secure" claims-paying ability and ratings from
"BB' to "CCC' are classified as "vulnerable" claims-paying ability. Plus (+) and
minus (-) signs show relative standing within a category. The "AA-' rating means
excellent financial security; i.e., the capacity to meet policyholders
obligations is strong under a variety of economic and underwriting conditions.
As a holding company, the Company will depend principally upon dividends
received from its subsidiaries to meet its liquidity needs (including any future
dividends). The Virginia insurance laws limit the payment of dividends by
insurers such as Trigon Insurance, the Company's principal operating subsidiary.
See "Business -- Regulation."
Income Taxes
Prior to 1987, the Company was exempt from United States federal income
taxation. The Tax Reform Act of 1986 (the "Act") eliminated the tax exemption
for Blue Cross and Blue Shield organizations, and since 1987 the Company has
been subject to federal income tax. Under the Act, however, certain Blue Cross
and Blue Shield organizations that were in existence on August 16, 1986, are
entitled to certain special tax provisions, including special tax deductions.
The most important of these provisions is a deduction (the "Section 833(b)
deduction"), which, if otherwise available, is equal to the amount by which 25%
of the Company's claims and claims-related expenses incurred during the year
exceeds its adjusted surplus as of the beginning of the year. Because of these
special provisions, the Company was not subject to regular tax for the years
1990
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through 1993; however, because the Section 833(b) deduction is not allowable for
purposes of the AMT, the Company was subject to AMT during those years at the
rate of 20% of federal taxable income. For 1995 and 1996, the Company's Section
833(b) deduction was limited due to the relationship between the Company's
adjusted surplus and the amount of its claims and claims related expenses and
the Company was therefore subject to the regular tax; however, because of the
Company's prior payments of AMT, it was entitled to claim an AMT credit against
its regular tax liability, which had the effect of preserving its marginal
federal income tax rate at the 20% AMT rate (as applied to income as adjusted
for AMT purposes). The Company's ability to continue to qualify for the special
provisions for taxable years beginning with the year in which the
Demutualization occurs depends on whether the Demutualization is characterized
as a "material change" in its operations or structure within the meaning of
Section 833(c)(2) of the Internal Revenue Code, which is unclear under current
law. Personnel in the National Office of the IRS have indicated informally that
the IRS will likely take the position that any issuance of stock by a Blue Cross
or Blue Shield organization generally will result in a material change.
Because it is unclear whether the Company will be subject to the regular
tax in the future, the Company has maintained a valuation allowance with respect
to its existing AMT credits. If as a result of the Demutualization the Company
were to undergo a material change, it would lose the ability to take advantage
of the special provisions and therefore would be subject to the regular tax. As
a result, the Company would be required to eliminate the valuation allowance,
causing the full amount of its existing AMT credits to be taken into account in
computing its income for financial accounting purposes for the year in which the
Demutualization has received all necessary legal clearances and regulatory
approvals. Although whether the Demutualization will result in a "material
change" for federal income tax purposes is unclear under current law, for
financial accounting purposes it is assumed that a material change will occur as
a result of the Demutualization. Because all legal clearances and regulatory
approvals necessary to effect the Demutualization have been received, the
valuation allowance on the deferred tax assets relating to the AMT credits has
been eliminated as of September 30, 1996. The balance of the Company's valuation
allowance, which relates primarily to employee benefit liabilities and certain
medical cost reserves, has been eliminated as it is more likely than not that
such assets will be realized. Thereafter the effective rate as reflected in the
Company's consolidated financial statements should approximate the 35% statutory
federal rate.
Reinsurance
Prior to 1995, the Company ceded 100% of the risk on any individual claim
in excess of $500,000 up to $1,000,000. This reinsurance was discontinued
effective January 1, 1995. The Company currently cedes 50% to 75% of the risk on
its long-term care business and portions of its risk on certain student
insurance policies. The Company's HMO subsidiaries have stop-loss coverage on
health claims. Total reinsurance premiums paid for the nine months ended
September 30, 1996 were $2.5 million, and have been netted against commercial
premium revenue. Claims ceded in the amount of $1.7 million have been netted
against commercial medical costs. In addition, both Mid-South and Monticello
Life have stop-loss coverage on life insurance. Total stop-loss premiums on life
insurance amounted to $1.9 million for the nine months ended September 30, 1996.
Recent Accounting Pronouncement
In March 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
provides guidance for recognition of impairment losses related to long-lived
assets (for example, property and equipment), and certain intangibles and
related goodwill for (1) assets to be held and used and (2) assets to be
disposed of. SFAS No. 121 is effective for years beginning after December 15,
1995. Implementation of SFAS No. 121 is not expected to have a material effect
on the Company's consolidated financial statements.
Inflation
Health care costs in the United States have increased more rapidly than the
national consumer price index ("CPI") in recent years and although health care
trends have moderated they are still expected to exceed CPI. The Company
believes that it has reduced the impact of such increases through expanding and
aggressively managing its provider networks, establishing risk-sharing
arrangements, and enhancing its underwriting standards. The Company has
negotiated favorable rates, terms and incentives with its provider network of
hospitals and physicians. Additionally, the Company has strengthened its ability
to apply appropriate underwriting criteria in selecting groups and individuals
and in controlling the utilization of health care services. However, there can
be no assurance that the Company's efforts to reduce the impact of inflation
will be as effective as in the past or that premium increases will equal or
exceed increasing health care costs.
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BUSINESS
The Company
Trigon is the largest managed health care company in Virginia, serving
approximately 1.9 million members primarily through statewide and regional
provider networks. The Company's membership represents approximately 26% of the
Virginia population and 31% of the Virginia population in those areas where
Trigon has the exclusive right to use the Blue Cross and Blue Shield service
marks and tradenames. Within Virginia, Trigon provides a comprehensive spectrum
of managed care products through three network systems with a range of
utilization and cost containment controls. The Company is pursuing a growth
strategy which includes expansion outside of Virginia into other southeastern
and mid-Atlantic states.
As of September 30, 1996, the Company's network systems consisted of: HMO
networks which, with 251,399 members, are the Company's most tightly managed and
cost efficient networks; the PPO networks which, with 774,473 members, offer
greater choice of providers than Trigon's HMOs and may include a POS feature;
and the PAR network which, with 615,655 members, is the Company's broadest and
most flexible network. The Company also serves 218,814 additional members
through Medicare supplemental plans (128,006 members), third-party
administration of health care claims (40,383 members) and through Mid-South
Insurance Company, a Fayetteville, North Carolina-based health and life
insurance company, which was acquired by the Company in 1996 (50,425 members).
Within the Company's managed care product offerings, customers may choose
between at-risk arrangements (in which the Company bears the cost of providing
specified health care services for a fixed payment) and self-funded arrangements
(in which the customer bears all or a portion of the risk). As of September 30,
1996, 47.6% of members were covered under at-risk arrangements and 41.8% were
covered under self-funded arrangements, with the remaining 10.6% covered under
the FEP, administered under contract with the BCBSA.
In 1990 the Company began to institute greater managed care controls in all
of its product lines and networks, focusing in particular on its PPO and HMO
networks and, depending on market readiness, designing, pricing and marketing
its products to encourage members to migrate into these more tightly managed
networks where the Company is better able to manage health care costs. While
members decide which network to select, the Company generally offers more
attractive rates in its more tightly managed networks to encourage members to
choose these products. This strategy contributed to accelerated enrollment
growth for the Company's HMO and PPO networks and a decline in enrollment in the
Company's more traditional PAR network, resulting in a compound annual growth
rate in total enrollment of 2.7% from December 31, 1991 through September 30,
1996. Trigon operates six HMOs which are licensed to serve most areas of
Virginia. Trigon's total HMO enrollment has grown from 60,154 members at
December 31, 1991 to 251,399 members as of September 30, 1996, representing a
compound annual growth rate of 35.1%. The Company's PPO network system is the
largest in Virginia. Trigon's total PPO enrollment has grown from 396,584
members at December 31, 1991 to 774,473 members as of September 30, 1996,
representing a compound annual growth rate of 15.1%. Membership in the Company's
HMOs and PPOs increased from 27.9% of total enrollment at December 31, 1991 to
55.1% as of September 30, 1996. Trigon's more traditional products are offered
through its PAR network, which is the Company's largest network. As a result of
the Company's strategy of encouraging members to migrate to its more tightly
managed networks, total membership in the PAR network decreased from 951,020
members at December 31, 1991 to 615,655 members at September 30, 1996. Trigon
also offers several specialty health care and related products.
Trigon has the largest membership base in Virginia, which generally allows
the Company to negotiate contracts with its Virginia providers that specify
favorable rates and incorporate utilization management and other cost controls.
As a result of its extensive networks, managed care expertise and broad product
offerings, the Company competes favorably in all of its Virginia lines of
business, including the individual, small, mid-sized and large employer groups
and state and federal agency markets. Trigon has exclusive rights to use the
Blue Cross and Blue Shield service marks and tradenames for purposes of doing
business throughout Virginia other than certain northern Virginia suburbs
adjacent to Washington, D.C. As a result of the Demutualization to be effective
concurrently with the Offerings, Trigon will be the holding company for Trigon
Insurance, which will be the successor company to Virginia BCBS.
Reasons for Demutualization
As a mutual company, Trigon is not able to issue stock. The Company is
therefore generally unable to raise capital through the equity capital markets
or effect acquisitions through the issuance of equity securities, as stock
corporations are able to do. The Company believes that if it is to enhance its
strategic position in the consolidating managed care industry and finance its
expansion plans, the Company must have the ability to access the equity capital
markets, as well as to effect
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acquisitions and other strategic alliances through the issuance of equity
securities. Additionally, by creating a holding company structure through
demutualization, the Company will no longer be subject to the regulatory
limitations on subsidiary investments that currently restrict its ability to
effect acquisitions. See "Risk Factors -- Competition" and "Potential Risks
Associated with Growth Through Acquisitions."
Managed Health Care Industry
According to the Health Care Financing Administration, health care spending
in the U.S. rose from $697 billion in 1990 to $1,008 billion in 1995, an average
annual increase of 7.7%. This rate was considerably more than the average annual
increase of the Consumer Price Index ("CPI") of 3.1% for the same period. Health
care spending accounted for 13.9% of the Gross Domestic Product ("GDP") in 1995,
versus 12.1% in 1990. For 1996, health care spending is estimated to account for
14.3% of the GDP, with projected health care expenses exceeding $1.1 trillion.
On an absolute dollar basis, as well as on a percentage of GDP basis, the United
States spends more on health care than any other country in the world. Factors
contributing to this increase in health care costs include: the development of
new medical technologies and procedures, the aging of the population, the
excessive duplication of medical resources, the growth of third-party payment
(both private insurance and government health care programs), and defensive
medicine practiced out of fear of malpractice litigation.
In response to continuing increases in health care costs, purchasers of
health care services have sought plans that control the cost of health care.
These plans include HMOs, PPOs and other managed health care plans, such as
broader participating provider networks and plans which incorporate some of the
features of PPOs. Typically, HMO and PPO plans develop networks of health care
providers by entering into contracts with hospitals and physicians which
incorporate health care utilization management and other cost control measures.
HMO and PPO plans for individuals and small groups often are able to control
costs by applying strict underwriting criteria prior to accepting new members.
HMO and PPO members are charged periodic, prepaid premiums, and such plans
frequently charge modest copayments for services provided by network providers.
PPOs and a number of HMOs (including some of the Company's HMOs) allow
out-of-network usage but at substantially higher out-of-pocket costs. PPOs allow
members to select physicians from a panel of providers in a network. In HMOs,
members select one primary care physician from a network. That primary care
physician is responsible for coordinating health care services for the member.
According to a compilation of industry sources, membership in HMOs nationwide
has grown from 33.1 million in 1990 to 53.4 million as of July 1, 1995, an
increase in market penetration from 13.3% in 1990 to 20.3% as of July 1, 1995.
The ability of a managed health care company to offer a variety of
cost-effective products depends in large part on its ability to develop provider
networks in its geographical market. A managed health care company with a
substantial membership base in its market is often able to negotiate provider
contracts with favorable rates. A managed health care company is also able to
reduce expenses by curtailing unnecessary or inappropriate health care services
its members receive by employing utilization management techniques. These
include member selection of a primary care physician to coordinate all patient
care and manage referrals to specialists, profiling of providers to identify and
correct over-utilization patterns, review of hospital admissions and cases and
intensive management of all high-cost cases.
Traditional indemnity health insurance generally provides reimbursement to
the insured for health care services rendered by physicians, hospitals and other
providers according to a standard fee schedule. Persons insured through
indemnity insurance are not restricted to receiving health care services from a
specified provider network. Unlike managed health care plans, indemnity
insurance is generally not designed to control health care costs. As a result of
increasing concern over health care costs, demand for traditional indemnity
products has declined as demand for managed health care plans has increased
among purchasers of health care services.
The Virginia Market
Approximately 5.2 million of Virginia's population reside within eight
metropolitan areas, with the remaining approximately 1.4 million people located
in more sparsely populated rural areas. For purposes of marketing, Trigon
divides the state into four regions: Central, which includes the Richmond,
Petersburg and Charlottesville metropolitan statistical areas ("MSA") and 1.4
million people; Eastern, which includes the Norfolk/Newport News MSA and 1.6
million people; Northern, which includes the Virginia portion of the Washington,
D.C. MSA and 2.0 million people; and Western, which includes Bristol, Danville,
Lynchburg and Roanoke and 1.6 million people. Approximately 50% of the
population in the Northern region resides in areas where the Company is not
licensed to use the Blue Cross and Blue Shield service marks and tradenames.
While the state population has grown at the rate of about one percent per year
during the last four years, employment has increased approximately 2.5% from
1994 to 1995, with the service sector growing at approximately 6%.
<PAGE>
Trigon's membership constituted approximately 27% of Virginia's total
population as of September 30, 1996 and 31% of the Virginia population in those
areas where Trigon has the exclusive right to use the Blue Cross and Blue Shield
service marks and tradenames. The Company's PPO network system, including its
POS feature, serves nearly the entire state, and its HMO network system serves
the majority of the Central, Northern and Eastern portions of the state. During
1995 the Company began offering HMO services in the Roanoke area of western
Virginia, and plans to expand HMO coverage to other strategic portions of the
state. As of June 30, 1995, HMO penetration throughout the state was
approximately 16.5%, compared to a national average of approximately 20.3%.
Trigon's HMO membership represents approximately 21.4% of Virginia's total HMO
market with a higher concentration in the Central and Eastern regions.
Since 1972, the Company has provided health benefits to employees and
retirees of the Commonwealth of Virginia. In 1995, the Company recorded $340.5
million for amounts attributable to this self-funded arrangement, which
represented 35% of the Company's self-funded business. In the latter part of
1994, the Commonwealth of Virginia, after a competitive bid process, awarded the
Company a new five year agreement effective July 1, 1995 to provide health
benefits to the employees and retirees of the Commonwealth of Virginia. Under
the agreement, such services may be terminated by either party upon twelve
months' written notice. The Company believes, as demonstrated by the recent
awarding of the five year contract, that it is well qualified to meet the
Commonwealth of Virginia's health care requirements because of the size and
geographic range of the Company's network systems and its broad offering of PPO
and HMO network products.
The Company is specifically targeting the densely populated eastern and
northern regions of Virginia, where its market share is lowest, for much of its
new growth in Virginia. Activities in the Eastern and Central regions include
the start-up of a Medicaid HMO product and the acquisition of 80% of Priority.
In the Northern region, the Company has formed an alliance with a major medical
system in order to improve HMO growth in this region. Trigon is targeting HMO
growth in the Central region, with the goal of obtaining much of that growth
from groups not currently covered by the Company. In the rural Western region,
where the population has been slower to adopt the concept of managed care,
Trigon believes that its significant market share and large provider networks
give it a significant competitive advantage in marketing its PPO and HMO network
systems. The Company believes that its expanded statewide contract with the
Commonwealth of Virginia provides a competitive advantage to the Company
allowing it to offer the POS feature and its HMOs to commercial customers
throughout the state. The Company also plans to introduce a Medicare HMO product
in the Central region beginning in mid-1997.
Strategy
Background. In 1990, the Company implemented a long-term corporate strategy
called SHOWCASE with the goals of attaining market leadership in managed care
and strong financial performance. The strategy initiated specific programs aimed
at generating a market-targeted range of managed care products, strengthening
managed care support systems and management expertise and enhancing customer
support services. These initiatives included development of an integrated data
base for capturing and analyzing financial and other information on provider
claims and group experience; investment of approximately $59 million in a new
claims processing system; tighter underwriting standards intended to promote
group profitability; and the expansion of health-related product lines,
including illness and disease management and prevention, within Virginia and
other states.
From 1990 through 1993 Trigon's membership declined slightly. This slight
decline in enrollment was largely the result of two key factors. First, based
upon its 1990 SHOWCASE strategy, Trigon decided to focus on increasing
profitability by tightening underwriting criteria for new groups. This resulted
in the loss of approximately 26,000 members of small groups from 1991 through
1993, and a slow-down in overall new membership gains. Also impacting enrollment
was the loss of approximately 72,000 Virginia employees of groups headquartered
outside of Virginia during the period from 1990 to 1993 that decided to leave
Blue Cross carriers elsewhere. In addition, Trigon lost approximately 96,000
members between 1991 and 1993 due to recession-prompted economic downsizing in
groups where Trigon, for the most part, was the exclusive carrier. Second, the
Company emphasized transitioning current PAR membership into its PPO and HMO
networks where costs could be better controlled, rather than directing its sales
and marketing energies to new prospects. Beginning in 1994, Trigon began to
focus on new growth opportunities in addition to the transitioning of existing
groups into its PPO and HMO networks. Due in part to this focus on growth, total
members increased 3.0% from December 31, 1993 to December 31, 1994, increased
7.0% from December 31, 1994 to December 31, 1995, and increased 3.4% from
December 31, 1995 to September 30, 1996.
The Company plans to implement the following growth strategy:
Offering a Choice Along A Continuum of Managed Care Products. Trigon has
developed a continuum of health care network systems and products -- from the
broad PAR network to the tightly managed HMO -- to meet the demands of its
<PAGE>
current customers and appeal to the needs of potential new customers. The
breadth and flexibility of the Company's benefit plan options are designed to
appeal to a broad variety of employer groups and individuals with differing
product and service preferences, including freedom of choice, cost containment,
scope of coverage and risk assumption. The Company believes its broad range of
products gives it a unique market advantage, allowing Trigon to become the sole
managed care provider to many of its members.
Migrating Members Into the Company's More Tightly Managed Network Systems
and Products. Trigon intends to design, price and market its products to
encourage its customers to migrate over time into the Company's more
cost-effective, tightly controlled networks, but will do so at a pace that the
Company's markets will support. Products such as PPO, POS (the Company's
gatekeeper PPO) and Blue Advantage (a combination PPO/HMO product) are designed
to facilitate the transition of employees to managed care. While the Company
anticipates that its more tightly managed networks will continue to be more
attractively priced than PAR products, future pricing decisions will be based on
a variety of factors including competitive pressures and medical cost trends.
Trigon believes that its experience in converting customers from traditional
health insurance into a continuum of managed care products will allow the
Company to continue to manage its medical costs and to grow within Virginia as
well as in other states that remain dominated by traditional insurance coverage.
Increasing the Managed Care Content and Cost Effectiveness of its PPO and
HMO Products. Trigon intends to continually increase the managed care content
and cost effectiveness of its PPO and HMO networks and products. To enhance the
cost effectiveness of its PPO networks, the Company offers an optional POS
feature within the Company's PPO networks, which utilizes a primary care
physician to coordinate all health care services for the member. Within its PPOs
and HMOs, the Company is utilizing physician profiling techniques, risk-sharing
arrangements, ancillary networks for high volume or high cost services, wellness
programs and more aggressive fee scheduling to reduce health care costs.
Growing its Business in Virginia. Trigon intends to capitalize on its
extensive provider networks, continuum of health care products and broad
services to increase the Company's share of health care business in Virginia. To
increase market share, Trigon intends to focus on increasing utilization of its
HMO products, entering into new product markets such as Medicaid and
Medicare-risk, increasing utilization of the Company's managed care products in
rural communities and acquiring other managed care companies.
To increase rural utilization of its managed care networks, the Company is
utilizing its PPO and POS products to transition rural communities, primarily in
western Virginia, which have been slow to embrace managed care, particularly
HMOs, into managed care. The Company believes that its PPO and POS product
offerings give it an advantage in attracting rural populations over other
managed care companies which do not offer less restrictive managed care products
such as PPOs and POS. The Company believes it has an additional competitive
advantage in rural areas as most other managed care companies do not include
these regions in their networks.
Trigon also intends to increase market share in Virginia by acquiring other
managed care companies or traditional indemnity companies, whose customers can
be transitioned into managed care and by entering into new product markets. In
addition to expanding health care market share, Trigon will pursue in-state
growth opportunities related to cross-selling its specialty products.
Expanding Outside of Virginia. The Company believes that it has developed
expertise in marketing, underwriting, network development and cost control which
is transferable to attractive markets outside of Virginia. The Company considers
attractive those markets that have the following characteristics: reasonably
large populations, low market penetration of managed care products and a
reasonable regulatory environment. The Company considers the mid-Atlantic and
southeastern United States to be attractive. The Company intends to expand its
out-of-state managed care business primarily through a combination of
acquisitions and strategic alliances with managed care companies, traditional
indemnity companies whose customers can be transitioned to managed care, other
health care providers and other Blue Cross/Blue Shield companies. The Company
also intends to capitalize on its specialty products to achieve entry into new
markets. In line with this expansion strategy, Trigon acquired Mid-South for
approximately $85.6 million in February 1996. Mid-South is a Fayetteville, North
Carolina-based company that provides health insurance coverage to 50,425 members
primarily in rural and suburban markets in North Carolina, South Carolina,
Georgia, Virginia and Tennessee. Trigon believes benefits from the acquisition
will include administrative economies, additional experience in developing
PPO-type health products in rural areas, and expansion into Southeastern target
states. The Company currently has no other commitments or agreements with
respect to expansion outside of Virginia; however, the Company is in the process
of evaluating several potential acquisition opportunities outside of Virginia.
The Company has no significant experience in expanding its managed healthcare
business outside of Virginia. Consequently, there can be no assurance that the
Company's efforts to expand outside Virginia will be successful.
<PAGE>
Offering Specialty Products. Trigon's strategy includes offering specialty
health care and related products including Medicare supplemental products,
third-party administration for health care plans and workers' compensation,
illness and disease prevention products, dental managed care, Medicare Part A
claims processing, student insurance, life insurance, and group life, accidental
death and dismemberment, short-term and long-term disability insurance and
electronic data interchange. Trigon's subsidiaries serve 38 states, the District
of Columbia and the United Kingdom. The Company's strategy is to continue
marketing these products on a stand-alone basis, as enhancements to its core
product line, and as avenues for entry into new markets within and outside of
Virginia.
Managed Care Marketing and Operations
The Company's managed care and specialty managed care products as well as
certain of its life, health and wellness products are marketed through five
Local Market Units and two Specialty Market Units. Each Market Unit focuses on
the needs of its respective markets and has operating profit responsibility for
its products and services.
Local Markets. Each of the five Local Market Units is geographic in scope
and focused on its local markets. Market managers are responsible for fully
understanding the dynamics of their respective region. The defined regions are
Central Virginia, Eastern Virginia, Western Virginia, Mid-Atlantic and Southeast
United States. Each market includes large, medium and small group employers. The
large employers (generally greater than 500 employees) often engage consultants
to assist in the design and procurement of benefit plans. The majority of these
large employers are fully or partially self-funded. The medium size employers
(generally ranging in size from 50 to 499 employees) may use consultants to
assist in the tailoring of benefits and networks. The smaller employers
(generally having fewer than 50 employees) generally use insurance brokers to
assist in the selection of products and analysis of the actual cost of competing
plans. Approximately 60% of the employers with more than 50 employees are fully
insured. These groups are experience rated with premiums based on the group's
specific medical claims experience. All of the business with employers of less
than 50 employees are fully insured with premiums based on community rating
principles modified by the individual medical characteristics of the persons
covered.
There are two Specialty Market Units designated to focus on customer
segments with special demands -- Major Accounts and the Government and
Individual Business Unit. These Specialty Market Units distribute their products
and services across all of the Local Market regions.
Major Accounts. The Major Account Unit focuses on selling and servicing
"multi-market accounts." These customers are generally sophisticated with
knowledgeable staffs and often engage consultants to work with the Trigon sales
staff to tailor benefits and networks to the needs of the customer. The Trigon
sales representative markets the product first to the employer and then directly
to the employees. Trigon believes that offering tailored benefits and network
options, as well as low cost products, is essential to success in this market.
The majority of groups in this market are fully or partially self-funded.
Government and Individual Business. The Government and Individual Business
Unit administers federal government programs (Medicare Part A and the FEP), and
serves all of the individual lines of business. The individual products are
marketed principally through a 39-person telemarketing unit. Brokers are also
used in this line of business. Products include fee-for-service, managed care
and specialty managed care. Medicare Supplemental products are marketed to
individuals over age 65. Long-term care products are offered through this
business unit, both to individuals and members of groups. Individual products
are fully insured.
The Market Units are supported by Shared Service Units comprised of
functions that have been centralized to leverage expertise and economies of
scale to add value to the Market Units. Included in the Shared Service Units is
the Health Delivery Unit, which encompasses provider contracting (including
development of provider partnerships), provider selection, quality management
(NCQA, HEDIS), utilization management, provider credentialing and profiling,
medical policy, disease management and health outcomes research. Shared Service
Units also include such functions as finance, actuarial, human resources and
information services.
Network Systems
The Company's extensive managed health care provider networks enable it to
offer a comprehensive array of managed health care programs throughout Virginia.
These networks include its HMO, PPO and PAR networks, as well as specialty
managed care networks. In establishing these networks, the Company enters into
contracts with qualified providers in each geographic area to serve its members.
These contracts are intended to control the cost of health care through both
control of
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unit cost and utilization management. As a result, the Company reduces the need
to utilize out-of-network providers that are not subject to the Company's cost
controls.
With the largest membership base in Virginia, the Company is generally able
to negotiate provider contracts with favorable rates and effective utilization
management and other cost control measures. The Company's networks consist of
contractual relationships with primary care physicians, specialists, hospitals
and ancillary providers who are selected to meet customers' geographic access
needs and to be attractive to the Company's customers. Pursuant to these
contracts, hospitals and ancillary providers are paid on a discounted charges
basis or a per case or per diem basis, and physician providers are paid either
on a capitated or fixed fee schedule basis. Once credentialed and admitted to
the applicable network, physicians are reviewed on a periodic basis to ensure
that their health care practice patterns and outcomes are consistent with
quality and cost-effectiveness guidelines established by the Company. In
selecting physicians for its networks, the Company uses its credentialing and
profiling programs to evaluate the applicant's professional qualifications and
experience, including license and malpractice claims history and hospital
affiliations. In addition, the applicant's cost and quality profiles are
assessed using the Company's extensive claims database and utilization review
history. The physician's ability to satisfy expected enrollment demands is
evaluated as well.
In developing its three main network systems -- PAR, PPO (which includes an
optional POS feature) and HMO -- the Company's strategy has been twofold: to
offer the market a wide choice of prices and benefits; and to control health
care costs more effectively by moving customers through a progressively more
controlled series of benefit and network designs. This product continuum offers
the most choice at the PAR level, followed by PPO and HMO. All networks contain
provider fee discounts and utilization management controls. Overlayed upon each
network is a range of benefit and pricing designs which exert greater controls
upon members in return for greater premium rate reductions, as well as stronger
utilization and unit price controls upon providers in return for larger numbers
of members directed to their businesses. The PAR network, the most traditional,
is differentiated by the greatest number of participating providers, generally
the lowest percentage of provider fee discounts and the ability of members to
exercise the greatest freedom within and outside the PAR network. The PPO
network, by contrast, is smaller and more restrictive in allowing for
non-network provider usage. The optional POS feature adds greater utilization
controls to the Company's PPO networks by requiring members to coordinate all
health care and referral decisions through a primary care physician or
gatekeeper. At the most restrictive -- and least expensive -- level is the HMO,
which has the smallest number of providers, capitates primary care physicians,
and exercises the greatest degree of management of utilization and referrals of
members through coordination by the primary care physician. In addition to these
network options, the Company's "Blue Advantage" product uses whole group
underwriting to provide both the PPO and HMO products to groups desiring only
one health care administrator and the ability to transition employees gradually
into more restrictive managed care.
The following table sets forth the number of members in each of the
Company's product groups for the last five years and for the nine month periods
ended September 30, 1995 and 1996.
<PAGE>
MEMBERSHIP BY NETWORK SYSTEM
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
HMO................................ 60,154 60,683 84,081 119,982 221,148 210,057 251,399
PPO................................ 396,584 561,686 624,811 672,610 747,297 710,365 774,473
PAR................................ 951,020 770,038 687,475 653,097 618,238 629,213 615,655
Other.............................. 231,714 228,749 235,640 235,984 212,935 212,032 218,814
--------- --------- --------- --------- --------- --------- ---------
Total.............................. 1,639,472 1,621,156 1,632,007 1,681,673 1,799,618 1,761,667 1,860,341
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
As a result of the Company's increased emphasis on utilization management
and cost control, the Company has achieved improvements in medical management
statistics as set forth in the table below. The Company believes it has the
opportunity for further improvement in these statistics through continued
implementation of utilization management, illness and disease prevention
programs and cost control programs.
NETWORK SYSTEMS UTILIZATION STATISTICS (1)
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------ Period Ended
1991 1992 1993 1994 1995 June 30, 1996 (2)
---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C>
Inpatient days per thousand
members............................ 356 329 299 278 266 247
Admissions per thousand members...... 76 69 64 64 66 63
</TABLE>
- ---------------
(1) Includes PAR, PPO and HMO network members (medical, surgical and maternity
admissions only).
(2) Calculated using total number of inpatient days and inpatient admissions
from July 1, 1995 through June 30, 1996 divided by average enrollment, in
thousands, for the same period.
Within the Company's network product offerings, employer groups may choose
various funding options ranging from at-risk to partially or fully self-funded
financial arrangements. While self-funded customers participate in Trigon's
networks, the claims are not underwritten by Trigon but are funded by the
groups. Self-funded arrangements are typically utilized by large and mid-size
groups. In addition, most self-funded groups purchase aggregate and/or claim
specific stop loss coverage. In exchange for a premium, the group's aggregate
liability is capped for the year or the group's liability on any one episode of
care is capped. Trigon charges self-funded groups an administrative fee which is
based on the number of members in a group or the group's claims experience.
Under the Company's self-funded arrangements, amounts due are recognized based
on incurred claims plus administrative and other fees and any stop-loss
premiums.
The Company's underwriting methodologies for plans offered in its HMO, PPO
and PAR networks vary by market segment. In the individual and small group
markets, community rating principles modified by the individual medical
characteristics of the persons covered are used in establishing premium rates.
In larger group markets, group specific claims experience is used in
establishing the appropriate premium rates. The Company's underwriting practices
with respect to certain members are subject to state regulation. See
"Regulation."
The Company believes that its success in managing network health care costs
is related to its efforts to maintain the health and well being of its members.
As a result, the Company offers a variety of programs to promote wellness and to
prevent disease. One of these programs, comprehensive case management, seeks to
educate members about the importance of following recommended treatments for
diseases such as asthma, diabetes and cancer and to suggest lifestyle changes.
The Company also offers a variety of wellness educational programs, such as Baby
Benefit, Better Prepared and Healthy Returns. These programs seek to identify
members at high risk for certain health care problems and to institute lifestyle
changes prior to the onset of illness. In addition, Trigon has adopted
network-wide prevention guidelines which set treatment standards in such areas
as immunization, mammograms, cholesterol and cancer screenings. Other wellness
and prevention programs available through Trigon's network offerings include
smoking cessation programs, well baby programs, and health-related newsletters.
Academic studies have found generally that the benefits of specific quality
control programs (such as improvements in mortality and morbidity rates) are
difficult to measure. However, the Company believes that its overall commitment
to both
<PAGE>
cost and quality control programs have contributed to the reduction over time of
the Company's network system utilization and medical loss ratios as well as to
its increasing member enrollment.
Trigon has adopted treatment guidelines for many diseases and procedures.
These treatment guidelines are based upon generally accepted medical practice
and are derived from medical literature developed by such experts as the
American College of Obstetrics and Gynecology and the National Institute of
Health. In line with nationally accepted standards, the guidelines reflect
recommendations by committees of independent local physicians as part of
Trigon's quality improvement program. These guidelines do not mandate specific
treatments, but are designed to be used by the Company's network physicians to
confirm diagnoses and design treatments.
The following is a more detailed description of the principal features of
the Company's networks and the health care plans based on these networks.
HMO Networks
Trigon established its first HMO in 1984 and now operates six separate
HMOs. HMO Virginia, Inc. is a federally qualified HMO that operates in the
Richmond and Norfolk areas. HealthKeepers, Inc. is a state qualified HMO that
operates primarily in the central, eastern, and southwestern areas of Virginia.
Physicians Health Plan, Inc. ("PHP") is a federally qualified HMO operating in
Northern Virginia, Washington D.C. and the surrounding Maryland counties.
Peninsula Health Care, Inc. ("PHC"), a joint venture owned 51% by Trigon, is a
state qualified HMO operating primarily on the Peninsula in Eastern Virginia. On
May 12, 1995 the Company completed the acquisition of 80% of Priority, which
owns both a state qualified HMO and a federally qualified HMO operating in the
Tidewater area. Membership in these six HMOs has grown from 60,154 members as of
December 31, 1991 to 251,399 members as of September 30, 1996. As of June 30,
1996, the HMO networks included approximately 2,300 primary care physicians,
7,700 specialist physicians and 63 hospitals throughout Virginia. All six of the
HMOs are individual practice association ("IPA") models. In IPAs, physicians
practicing in their own offices participate in a prepaid health care plan. The
physicians are paid agreed-upon rates either through a fixed fee schedule or on
a capitated basis. Each of Trigon's HMOs uses the Blue Cross and Blue Shield
service mark except for PHP, which operates outside the area covered by the
Company's license to use the service mark.
The Company's HMOs are able to provide for the delivery of health care
services at lower costs than traditional health insurance plans due to their
network provider arrangements which specify favorable rates and require
utilization management and other cost control measures. Members choose a primary
care physician who is responsible for coordinating health care services for the
member. The HMO product portfolio is presented to customers as a stand alone HMO
offering, or through "Blue Advantage," a program which includes HMO and PPO
options administered and priced as a single program and which can only be
utilized by groups that contract with Trigon on an exclusive basis.
Most HMO products have a copayment provision under which the member bears a
portion of health care costs. Certain of the Company's HMOs offer a feature
which permits the member to receive health care services from providers that are
not part of the Company's HMO network at a substantial out-of-pocket cost to the
member which includes a deductible and higher copayment obligation. The Company
believes that copayment obligations, out-of-network costs and other obligations
of these HMO plans enhance its ability to control costs by encouraging members
to take more responsibility for their health care decisions.
Provider Arrangements. Trigon's HMO networks have contracts with hospitals,
physicians and other professionals at reduced rates, which are typically more
favorable than rates for the Company's PPO and PAR networks. Almost all of the
primary care physicians in the HMO networks are reimbursed on a capitated basis,
while specialists are reimbursed based on a fee schedule. Some ancillary
services, lab services, mental health and vision services are also capitated.
These arrangements provide the incentive to control utilization and cost. The
Company has not experienced any material problems involving the inability of
physicians to perform their obligations under capitation arrangements because of
physician insolvency or otherwise. HMO network hospital provider contracts,
normally two to five years in duration, are on a nonexclusive basis and are
generally paid on the basis of per diems (fixed fee schedules where the daily
rate is based on the type of service), per case per admission (fixed fee
schedules for all services during a member's hospitalization), or a percentage
of covered charges with limits on the subsequent year increases. The average
rate negotiated with hospitals under this arrangement are lower than the
hospital's average standard retail charges. Services not subject to special per
case or per diem payment arrangements are generally paid according to a fee
schedule or as a percentage of billed charges. Based on these payment
arrangements, physicians and hospitals in the HMO networks have financial
incentives to control health care costs. Additionally, in the case of PHC, the
joint venture interest of the hospital system partner provides an added
financial incentive to minimize unnecessary or marginal health care in this HMO.
<PAGE>
Utilization Management. Trigon also manages health care costs in its HMO
networks by using utilization management systems guidelines for the HMO network
that are intended to address quality of care and help to ensure that only
appropriate services are rendered, and that such services are provided in the
most cost-effective manner. The primary care physicians are considered to be the
overall manager of the individual's health care needs. Primary care physicians
manage and optimize care through the use of referrals and by approving all
specialty care before it is rendered. In addition, under a utilization review
program, the HMO reviews all high cost services needed by individual members
which are not provided by the primary care physician. This review program is
intended to ensure that all enrollees receive necessary, appropriate and
cost-effective care. Focused case management techniques are used on all high
cost cases. New medical technologies are reviewed in advance through Trigon's
participation in a new technology evaluation program sponsored by the BCBSA and
a large HMO company. Such review of new medical technologies attempts to ensure
that only safe and effective new medical procedures are covered.
The Company also manages health care costs and quality by reviewing monthly
cost and utilization trends within its HMO networks. Utilization rates and cases
are reviewed in the aggregate and by service type to identify opportunities for
better cost and quality control. In addition, the highest cost services are
studied to determine if costs can be reduced by using new, less expensive
technologies or by creating additional networks or contracts, such as networks
for ambulatory care, to reduce provider costs.
Quality Management. Trigon's HMO quality assurance standards are modeled on
those of the National Committee on Quality Assurance ("NCQA"), an independent,
nonprofit institution that reviews and accredits health maintenance and managed
care organizations. The quality improvement program instituted by the Company's
HMOs provides for the review of medical care, service, outcomes of care, and the
initial and ongoing review of the credentials of all network providers. This
credentialing process includes a review of whether the provider has the
necessary licenses, is qualified in the specialty indicated, and meets standards
for safety, sanitation, and accessibility. The HMO reviews the findings with a
quality improvement committee, which includes leading physicians from the HMO
network. In addition, quality of care outcomes are monitored through profiling
and data analysis, member satisfaction surveys, and problem case review. Two of
Trigon's HMOs -- HealthKeepers and HMO Virginia -- sought NCQA accreditation in
late 1994, but were denied accreditation in mid-1995, primarily because of a
lack of NCQA-formatted documentation and tracking processes, and not due to any
specific issues related to quality of care or service. The remaining Trigon HMO
plans -- Priority, PHC and PHP -- did not seek accreditation in 1994.
HealthKeepers, Trigon's largest HMO, has applied for accreditation in 1996, with
NCQA-review expected to occur in early 1997. The Company believes that the
failure to receive NCQA accreditation has not materially affected the market
acceptance of its HMO products.
Medicaid and Medicare HMO Products. HealthKeepers, PHC and Priority have
begun marketing Medicaid services to participants in the Aid to Families with
Dependent Children ("AFDC") program in the Peninsula, Tidewater and Central
regions of Virginia. The Company also plans to introduce a Medicare HMO product
in 1997 within Virginia, which has approximately 800,000 Medicare eligibles.
PPO Networks
The Company's PPO networks include a statewide PPO network, which as of
June 30, 1996 included approximately 14,400 physicians and 151 hospitals, as
well as a smaller, more restrictive regional network in the Richmond and Norfolk
areas which included approximately 3,200 physicians. The Company anticipates
establishing additional regional networks in other areas of Virginia. There were
774,473 members enrolled in these PPO health care plans as of September 30,
1996. Approximately 27% of PPO members as of September 30, 1996 were employees
of the Commonwealth of Virginia, whose plan includes the POS feature discussed
below.
The Company's PPO products are similar to its HMO products in that they are
able to provide for health care delivery at lower costs than traditional health
insurance due to network provider arrangements which specify favorable rates and
employ utilization management and other cost control measures. Services are
provided to customers based on periodic, prepaid charges or are provided under a
variety of self-funded financial arrangements. Members also have copayment or
coinsurance obligations for services rendered by network providers that are
similar to those of the Company's HMO products. Trigon includes as part of its
PPO networks the option of including a POS feature in which each member chooses
a primary care physician who is responsible for coordinating all health care
services for the member. Unlike the HMO and PPO products electing the POS
feature, members with the standard PPO products may seek care from any PPO
network physician in the appropriate PPO network depending on services required.
Appropriate copayments are charged at the time of services. PPO members have the
option to receive health care services from providers that are not a part of the
network, typically at
<PAGE>
substantial out-of-pocket costs. Trigon believes that copayments and
out-of-network obligations of its PPO products enhance its ability to control
costs by encouraging members to take more responsibility for their health care
decisions.
Trigon's PPO networks and products provide choice and flexibility to all
types of customers in its markets. In the statewide PPO network, providers
accept payments for covered services which generally are lower than the
allowance in the broader PAR network. For PPO products including the POS feature
providers also receive reimbursement incentives for controlling unnecessary
utilization costs. In the regional network, primary care physicians are
reimbursed at the same rate as those in the statewide PPO networks, and
specialists are generally reimbursed at a lower rate than in the statewide PPO
network. In both the statewide and regional networks, providers do not bill the
members for the difference between the provider charges and the PPO payment. If
a member chooses to receive out-of-network services, the member will be required
to bear a larger portion of the total expenses for services.
The cost control methods used by the Company for its PPO products are
similar to those the Company utilizes for its HMO products. Trigon endeavors to
manage and control costs for its PPO products by negotiating favorable fee
schedules with physicians and hospitals and through utilization management and
other cost control measures. In addition, Trigon manages costs through pricing
and product design decisions intended to influence the behavior of both
providers and members, as well as by applying specific underwriting criteria to
employer groups and individuals.
Provider Arrangements. Like the Company's HMO products, the Company's PPO
products provide for the delivery of specified health care services to members
by contracting with physicians and other professional providers. PPO network
hospital provider contracts are generally based upon per diem or per case or a
percentage of covered charges arrangements that provide for rates that are
typically lower than the hospital's average standard billing rates and generally
more favorable than rates for the Company's PAR network. Physician provider
contracts also employ attractive fixed fee schedules which are below standard
billing rates and more favorable than rates for the Company's PAR network.
Physician fee schedule payments are set by the Company using Resource Based
Relative Value System methodologies and are generally adjusted annually.
Hospital rates are generally negotiated for terms of from two to three years.
When considering whether to contract with a physician for its PPO networks, the
Company conducts a credentialing program to evaluate the applicant's
professional experience, including licensure.
Utilization Management. The Company also manages health care costs in its
PPO networks by adopting utilization management systems that are intended to
reduce unnecessary procedures, admissions and other medical costs. The Company's
utilization management systems guidelines for the PPO network help to ensure
that only appropriate services are rendered and that such services are provided
in the most cost-effective manner. Trigon utilizes medical guidelines and
requires pre-admission approvals of all hospital stays and concurrent review of
length of stay. Trigon also retrospectively reviews physician practice patterns.
Review of physician practice patterns may result in modifications and
refinements to the PPO network of providers and network contractual
arrangements. Physicians participating in the regional PPO network and in the
POS program are required to meet certain economic profiling criteria that
indicate cost effective and quality practice standards. Primary care and
specialist providers in the POS program are periodically given utilization, cost
and quality profiles, or "report cards." In the POS program, utilization
management includes an outpatient review program, with pre-authorization of
high-cost outpatient care, in addition to management of hospital care through
precertification, concurrent review, case management and discharge planning
capacity. Outpatient care is further controlled through claim edits designed to
detect and correct inappropriate provider billing patterns. All new medical
technologies are reviewed in advance in an attempt to ensure that only safe and
effective new medical procedures are covered. Additionally, the Company also
employs a comprehensive care management program. In this program, the Company
identifies those members having certain chronic diseases (such as asthma,
hypertension and cancer) and proactively works with the member and the physician
to facilitate appropriate treatment, help to ensure compliance with recommended
therapies and educate members on lifestyle modifications to manage the disease.
The Company believes that the program promotes the delivery of efficient care
and helps to improve the quality of health care delivered.
As with its HMO network, Trigon further manages health care costs by
reviewing monthly cost and utilization trends within its PPO networks.
Quality Management. The Company has an active program to evaluate the
quality and appropriateness of care provided by its PPO networks. Provider
credentialing, profiling and member satisfaction, along with monitoring of
outcomes, and clinical studies are all performed to monitor and manage quality
of care. Network physicians and other providers participate in quality
management programs overseen by medical advisory panels. Using the Company's
computerized medical information database, these programs involve profiles of
the tests, types of treatment and procedures performed for specific diagnoses by
these physicians, as well as reviews of aggregate data.
<PAGE>
PAR Network
Trigon's PAR network provides more traditional health coverage and included
approximately 16,200 physicians and 153 hospitals as of June 30, 1996. The PAR
network served 615,655 members as of September 30, 1996. The PAR network offers
members more providers to choose from, greater customization of benefit design,
and fewer restrictions in the use of non-network providers than the PPO network.
The Company's strategy is to transition members from the PAR network to the more
tightly managed PPO and HMO networks. However, Trigon expects that its PAR
network and products will continue to be an important offering for groups
desiring greater flexibility and choice in networks and benefits, as well as a
source of new PPO and HMO members.
The Company's PAR network and products are able to provide for health care
delivery at lower costs than many other traditional health plans due to network
arrangements which specify favorable rates and encourage utilization management
and other cost control measures. Members may choose any physician from the PAR
network depending on services required, and are generally subject to annual
deductible requirements and coinsurance. Trigon believes that annual deductibles
and higher out-of-network costs of its PAR products enhance its ability to
control costs by encouraging members to take more responsibility for their
health care decisions.
In the PAR network, physicians accept payments for covered services and do
not bill the members for the difference between the provider charges and the
Company reimbursements. If a member chooses to receive out-of-network services
under a PAR health plan, the member will be required to bear a larger portion of
the total expenses for such services since the provider is able to bill the
member for the difference between the provider's charge and the Company payment.
The cost control methods used by the Company for its PAR products are
substantially similar to those the Company utilizes for its other managed care
networks. Trigon endeavors to manage and control costs for its PAR products by
negotiating favorable arrangements with physicians and hospitals, which include
utilization management and other cost control measures. In addition, Trigon
controls costs through pricing and product design decisions intended to
influence the behavior of both providers and members, as well as by applying
specific underwriting criteria to employer groups and individuals.
Provider Arrangements. Like the Company's PPO products, the Company's PAR
products provide for the delivery of specified health care services to members
through contracts with physicians and other professional providers. PAR network
hospital and physician contracts are generally paid on the basis of per diems,
per case, fixed fee schedule or percentage of covered charges and provide for
rates that are typically below standard billing rates but which are less
favorable than rates for the Company's HMO and PPO networks. The Company is able
to obtain discounted prices for services because of the volume of business it
offers to health care providers that are part of the network. Hospital
reimbursement rates are generally negotiated for terms of one to three years.
Physician reimbursements renew automatically, with a ninety-day notification
period required for any change by the Company. When considering whether to
contract with a physician for its PAR network, the Company conducts a
credentialing program to evaluate the applicant's professional experience,
including licensure.
Utilization Management. The Company also manages health care costs in its
PAR network by adopting utilization management systems guidelines that help to
ensure that only appropriate services are rendered and that such services are
provided in the most cost-effective manner. The Company's utilization management
systems seek to ensure that medical services provided are based on medical
necessity and are covered under the benefit design. The Company utilizes medical
guidelines and offers targeted pre-admission approvals of hospital stays and
concurrent review for targeted admissions, and retrospectively reviews physician
practice patterns.
Quality Management. The Company has an active program to evaluate the
quality and appropriateness of care provided by its PAR network. Physicians and
other providers participate in quality management programs overseen by the
Company's medical policy area. Using the Company's computerized medical
information database, these programs involve reviews of the tests, types of
treatment and procedures performed for specific diagnoses by these physicians,
as well as reviews of aggregate data.
Specialty Managed Health Care Plans
Trigon also offers specialty managed health care services through a number
of specialized networks. The Company believes that these specialty networks and
plans complement and facilitate the Company's marketing plans and enable the
Company to attract employer groups and other members that are increasingly
seeking a variety of options and services.
Trigon Pharmacy Plans. The Company offers several network-based retail card
pharmacy programs administered by PAID Prescriptions, Inc., a subsidiary of
Merck-Medco. Pharmacy network options include a broad "traditional" network,
<PAGE>
two PPO networks, and an HMO network. The HMO offers the tightest network with
the deepest discounts. A mail order option with substantial discounts is also
available. All managed pharmacy programs incorporate cost containment and
quality assurance features including a drug formulary, manufacturer's rebates
and both concurrent and retrospective drug utilization review programs. Future
initiatives are expected to include pharmacy profiling, continued pharmacy
audits, further integration of medical and pharmacy programs and provider
risk-sharing. As of September 30, 1996, combined enrollment in all pharmacy
programs totalled approximately 1.4 million members. Effective July 1, 1995, the
Commonwealth of Virginia state employees have become participants in these
pharmacy programs, in addition to their participation in the Company's managed
care plans.
Trigon Dental Plans. The Company offers three network-based dental programs
in most areas of the state -- PAR, a PPO and HMO. The PAR and PPO programs are
the broadest and most flexible, with more than 52% statewide provider
participation. The HMO utilizes a smaller number of physicians under capitated
arrangements. The programs are sold either as stand-alone products or in
conjunction with the Company's medical plans.
Mental Health Plans. The Company has developed a mental health managed care
program designed to enhance the quality and cost-effectiveness of mental health
and substance abuse services for its customers. The program pre- authorizes
treatment that is medically necessary, appropriate to the patient's condition
and delivered in the most efficient manner. This is accomplished using Trigon's
network of credentialed providers and a case management approach to care.
Providers must meet credentialing standards for network participation and are
monitored for quality and cost-effectiveness. Contracts with preferred payment
rates are in place for facilities and professional providers. The Company has
risk-sharing arrangements with providers and has future plans to develop
clinical practice guidelines, mental health provider profiling and outcomes
studies.
Ancillary Networks. The Company evaluates emerging high volume or high cost
outpatient services to determine whether ancillary service networks will yield
cost control benefits. Per diem and discounted fee for service contracts have
been negotiated with participating home health care, home infusion and durable
medical equipment providers. Cost and appropriateness of care are monitored
through medical policy and pre-authorization on major home health visits.
Senior Plans. Trigon offers numerous Medicare supplemental plans, which
typically pay the difference between the health care cost incurred and the
amount paid by Medicare. As of September 30, 1996, all of these Medicare
supplemental plans were fee-for-service in nature. In 1992, the Commonwealth of
Virginia adopted a National Association of Insurance Commissioners ("NAIC")
proposal to standardize Medicare supplemental products. As of September 30,
1996, over 90,400 members were enrolled in pre-standardization products, all of
which are community rated. As of the same date, Trigon had enrolled more than
37,500 members into six "standardized" products which are underwritten and entry
age rated. Approximately 7,500 members enrolled in supplemental products are on
Medicare due to disability. These disability members are pooled separately and
community rated.
Related Businesses
In addition to its core managed care business, the Company engages in
several other health-related businesses including electronic claims
communication services, employee benefits administration, workers' compensation
administration and health management services. Together, these businesses
generated $49.5 million in revenues in 1995 and $36.6 million in revenues for
the nine months ended September 30, 1996, included in "Other Revenues" in the
Company's financial statements. These businesses represent approximately 2.5% of
the Company's total revenues, a trend which is expected to remain consistent in
the next several years. Aside from their direct contribution to revenue, the
Company believes these related businesses also provide Trigon with competitive
advantages from single-source product offerings, cross-selling, market presence
and as avenues into new markets.
Health Management Corporation ("HMC") provides health management and
promotion and data analysis services to both Trigon and to third parties.
Through its health promotion services, HMC assists organizations to manage their
own health risks with innovative solutions to health care issues with such
products as Baby Benefits, Better Prepared and Healthy Returns. Baby Benefits
provides maternity risk management, Better Prepared provides lifestyle case
management targeting those individuals with high cost chronic illnesses and
Healthy Returns reinforces and financially rewards program participants for
positive lifestyle choices. HMC products are currently marketed by the Trigon
sales force as well as through direct sales to other organizations nationally.
HMC continues to enhance its direct sales efforts as well as the development of
alternative distribution channels to increase penetration of other markets
nationally. In July 1995, HMC acquired Healthy Homecomings, Inc., a St. Louis,
Missouri based women's health care company. It gives HMC added capability to
serve the
<PAGE>
special health care needs of women, including preconception planning, prenatal
and maternity services, gynecological surgery education and post-operative
support, menopause education and treatment options, and breast cancer prevention
and treatment education. Healthy Homecomings, Inc. has extensive experience in
specialized, in-home maternity and gynecological follow-up care.
Health Communication Services, Inc. ("HCS") is one of the nation's largest
suppliers of health care electronic data interchange services for hospitals,
physicians, insurance companies and other health care organizations. HCS
operates in 20 states, the District of Columbia and the United Kingdom, serving
more than 500 hospitals and 6,000 physicians. The number of transactions
processed by HCS was approximately 15.6 million in 1992, 18.0 million in 1993,
46.0 million in 1994 and 49.1 million in 1995. The volume of transactions has
grown principally as a result of the 1993 acquisitions of two electronic data
interchange companies. The Company is currently pursuing the sale of this
subsidiary.
Monticello Life Insurance Company ("MLIC") began operations in 1993 with
the sale of student health products in several states followed by the marketing
of group life and disability products to Trigon groups. MLIC is currently
licensed to do business in 47 states and the District of Columbia. MLIC provides
the necessary vehicle for the marketing of managed care products outside the
Virginia market. Currently, life products are sold primarily through the Trigon
sales force to Virginia customers; managed care products are sold by a
telemarketing staff as well as through a selected broker network.
Monticello Service Agency ("MSA") was established in 1972 for the purpose
of marketing group life, accidental death, and disability products to Trigon
groups. MSA concentrates its activity primarily on the small and regional lines
of business where the packaging of group term life and disability with a health
product is common. MSA products are currently underwritten by several large
carriers with American Bankers Life and MLIC as the primary carriers.
Trigon Administrators, Inc. provides claims processing and third-party
administrative services for employee benefit programs and property and casualty
programs to employers in the mid-Atlantic states pursuant to an administrative
services arrangement. Trigon Administrators, Inc. has two operational divisions,
a property and casualty division and an employee benefits division. It has been
conducting business since 1986, and currently has five claims offices located in
Maryland, Virginia and North Carolina.
The property and casualty division handles workers' compensation and
liability programs and currently has 73 customers. In addition to providing the
basic workers' compensation administrative services, this division actively
manages each case in order to control medical costs. Provider networks are also
used to help control these costs. In 1992, this division began offering these
cost containment services to self-administered workers compensation accounts as
well as insurance companies. The employee benefits division handles group
health, flexible benefits plans and COBRA administration and has 40,383 members
as of September 30, 1996. The employee benefits division is licensed to do
business in 8 states and the District of Columbia. Provider networks, case
management and utilization review programs are used to help employers contain
medical claims costs.
Government Programs
Trigon acts as an intermediary and administrative agent in servicing
approximately 1.1 million Medicare Part A beneficiaries in Virginia and West
Virginia. In 1995, the Company processed 3,189,700 Medicare Part A claims
amounting to $2.7 billion of charges. Claims processed and the reimbursement for
these claims are not included in the Company's consolidated statements of
operations. However, the Company is reimbursed for operating expenses related to
administering this business. In 1995, such expense reimbursements totaled $11.6
million. Trigon's Medicare program carries no underwriting risk.
Trigon also administers Virginia's portion of the BCBSA's national contract
with the U.S. Office of Personnel Management ("OPM") to provide benefits through
its PPO networks for approximately 200,000 federal employees and their
dependents living in Virginia. The contracts renew automatically for a term of
one year each January 1, unless written notice is given by either party at least
60 days prior to the date of renewal. In 1995, Trigon recorded revenues of
$329.2 million under this program, which represented 19% of total revenue. Under
the program, a special FEP reserve is maintained at the national level as
protection against adverse claims trends. However, if the contract should
terminate with a negative balance in the FEP special reserve, the losses would
be allocated to participating plans or subcontractors based on a ratio of the
Company's past five year claims experience as a percent of the total program's
experience. As of December 31, 1995, the national reserve amounted to $3.6
billion or 6.5 months of program income. The national reserve, overall, has not
been in a deficit position since the inception of the contract in 1960.
<PAGE>
Information Systems
The Company develops and maintains its own information systems. Information
systems have played and will continue to play a key role in ongoing plans to
continually improve quality, lower costs and increase benefit flexibility for
the Company's customers. Trigon's centralized, common database and analytical
technologies allow for increasingly more sophisticated methods of managing costs
and quality of care. The database includes comprehensive information on
virtually all physicians and hospitals and one third of the population in
Virginia, which assists Trigon in analyzing the medical and economic performance
of providers and the medical and economic experience of specific customer groups
and individuals. The Company believes that its information systems are a
competitive advantage and are sufficient to meet its current needs and future
expansion plans.
The majority of the Company's hardware has been acquired through staggered
operating leases with terms of from two to four years. This allows the Company
to take advantage of the declining cost of hardware and new technical
capabilities without subjecting itself to residual value risk. The systems run
on various platforms, the largest being a Hitachi Data Systems 8724 series
mainframe computer. A strategy has been developed to take advantage of
distributed processing platforms as they stabilize and can be shown to deliver
value.
The Company uses an integrated set of applications software to support
marketing and underwriting, eligibility and billing, electronic claims
submission, claims administration, managed care programs and corporate financial
management. A combination of custom developed and licensed systems are used to
meet the unique needs of different products and markets. An overall systems
architecture is maintained to promote consistency of data, processing rules and
flexibility. Different systems serving the unique products or markets feed data
to a corporate information and decision support system. This decision support
system provides a single source of information for all of the Company's data
reporting and analyses needs. This includes operational and financial
performance, underwriting and marketing analysis, utilization management and
actuarial reporting.
Competition
The managed care industry is highly competitive both in Virginia and in
other states in the southeastern and mid-Atlantic United States into which the
Company principally intends to expand. Managed care companies, including large,
well-capitalized companies which market managed care products nationwide, have
targeted the southeastern and mid-Atlantic regions of the United States as being
favorable for expansion, and have begun entering Virginia and markets targeted
by Trigon in increasing numbers. In some cases, new market entrants have
competed with the Company for business by offering very favorable pricing terms
to customers. This increased pricing pressure has adversely affected the
Company's medical loss ratio during 1995 and 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- General." The
Company is facing this increased competition in the areas in which it is
licensed to use the Blue Cross and Blue Shield service marks and tradenames, as
well as the areas in which it operates without these service marks and
tradenames. In areas outside of its licensed territory, the Company's ability to
successfully compete may be adversely affected by its inability to use the Blue
Cross and Blue Shield service marks and tradenames, by the presence of
competitors that are able to use such service marks and tradenames in the areas,
and by the Company's lack of substantial market share or established provider
networks in these areas. The Company also faces competition from a trend among
health care providers to combine and form their own networks in order to
contract directly with employer groups and other prospective customers to
provide health care services. There is no assurance that such overall increased
competition will not exert strong pressures upon Trigon's profitability, its
ability to increase enrollment or its ability to successfully pursue growth in
areas both within and outside of Virginia.
The Company believes that it has effectively integrated its managed care
programs into its traditional business, principally through its PPO and HMO
networks and products. The trend in the health care industry is toward both
vertical and horizontal integration coupled with significant levels of managed
care, principally through HMOs. In the Company's principal geographic market
areas, HMOs have a smaller share of the health care market than in other areas
of the country, but the Company believes that HMOs will capture an increasing
share of the health care market. The Company believes that it will be necessary
to expand significantly its market share in the HMO market, in part by
successfully transitioning its PAR and PPO members into HMOs, if it is to
succeed in retaining a high overall market share in its existing geographic
markets. There can be no assurance that the Company will succeed in
significantly expanding its market share in HMOs.
<PAGE>
Investments
The Company's investment policies are designed to provide liquidity to meet
anticipated payment obligations, preserve capital and maximize returns within
acceptable levels of risk. The Company believes that concentration of
investments in any one asset class is unwise due to constantly changing interest
rates, market and economic conditions. A portion of the portfolio has been
designated to meet the operating and liquidity needs of the Company. The
liquidity portfolio is invested in short- to intermediate-term fixed income
instruments with an average portfolio duration of three years or less and an
average quality of AA or higher. Additional funds not required for liquidity
needs are invested by external money managers in fixed income and equity
securities with the dual objective of generating income and safeguarding
principal. The long-term fixed income portfolio is invested in governmental and
corporate securities, both domestic and international, with a minimum average
quality rating of AA or higher. The equity portfolio contains readily marketable
investment securities (domestic and international) ranging from small growth to
well-established Fortune 500 companies.
Each external manager invests within certain guidelines established by the
Company designed to fit into the overall investment strategy. These guidelines
establish minimum quality and diversification requirements which, among other
things, provide that no more than 5% of the individual manager's portfolio may
be invested in securities of a single issuer. In addition, for those managers
investing in international securities, there are additional guidelines to
provide limitations on exposure to any one currency. At September 30, 1996,
45.1% of the portfolio was invested to meet the liquidity needs of the Company
with an additional 27.5% in long-term fixed income (including derivative
instruments) and 27.4% in equity portfolios. At September 30, 1996, 8.1% of the
fixed income portfolio and 49.9% of the equity portfolio was invested
internationally. The exposure to securities denominated in any one currency
(other than U.S. dollars) was less than 5.0% at September 30, 1996.
At September 30, 1996 the investment portfolio was comprised of the
following (in thousands):
<TABLE>
<CAPTION>
Estimated Percent of
Fair Value Portfolio
-------------- ----------
<S> <C> <C>
Fixed Income:
Domestic:
U.S. Treasury securities and obligations of
U.S. government agencies................... $ 117,112 10.6%
Mortgage-backed obligations of U.S.
government agencies........................ 40,423 3.7
Other mortgage-backed and asset-backed
securities................................. 284,688 25.8
Domestic corporate bonds..................... 140,994 12.8
Short-term debt securities with maturities of
less than one year......................... 149,359 13.6
Foreign:
Debt securities issued by foreign
governments................................ 48,424 4.4
Foreign corporate bonds...................... 6,484 0.6
Short-term debt securities with maturities of
less than one year......................... 9,751 0.9
-------------- ----------
Total fixed income......................... 797,235 72.4
-------------- ----------
Equities:
Domestic equity securities...................... 151,102 13.7
Foreign equity securities....................... 150,716 13.7
-------------- ----------
Total equities............................. 301,818 27.4
Derivative Instruments............................ 2,238 0.2
-------------- ----------
Total investments.......................... $1,101,291 100.0%
-------------- ----------
-------------- ----------
</TABLE>
<PAGE>
As of September 30, 1996, the composition of the Company's fixed income
investment securities by rating is as follows (in thousands):
<TABLE>
<CAPTION>
Estimated Percent of
Rating (1) Fair Value Total
- -------------------------------------------------- -------------- ----------
<S> <C> <C>
AAA............................................... $476,468 59.8%
AA................................................ 33,636 4.2
A................................................. 105,580 13.2
BBB............................................... 144,087 18.1
BB................................................ 32,393 4.1
B................................................. 5,071 0.6
CCC or lower...................................... 0 0.0
Not rated......................................... 0 0.0
-------------- ----------
Total........................................ $797,235 100.0%
-------------- ----------
-------------- ----------
</TABLE>
- ---------------
(1) Ratings are assigned primarily by Standard & Poor's Corporation when
available, with the remaining ratings assigned by Moody's Investor Service,
Inc.
At September 30, 1996, $215.4 million, or 19.6% of the Company's investment
portfolio, was invested internationally. This amount includes $21.9 million
invested in U.S. dollar-denominated investment funds that are invested in
international investment securities. The geographic concentration of the
Company's foreign investments was as follows at September 30, 1996 (in
thousands):
<TABLE>
<CAPTION>
Percent
of
Total Percent of Estimated Fair
Country Portfolio Foreign Portfolio Value
- ----------------------------------------- --------- ----------------- --------------
<S> <C> <C> <C>
Japan.................................... 4.3% 21.9% $ 47,142
U.S. Dollar-denominated investment funds
(1).................................... 2.0 10.2 21,930
United Kingdom........................... 1.9 9.8 21,016
France................................... 1.6 8.3 17,982
Germany.................................. 1.6 8.1 17,503
Netherlands 1.3 6.8 14,704
Canada................................... 1.3 6.7 14,490
All others............................... 5.6 28.2 60,608
--------- -------- --------------
Total............................... 19.6% 100.0% $215,375
--------- -------- --------------
--------- -------- --------------
</TABLE>
- ---------------
(1) Represents investments in six U.S. dollar-denominated investment funds which
invest primarily in investment securities of non-U.S. companies.
The Company enters into foreign currency forward transactions and foreign
currency options to manage its exposure to fluctuations in foreign currency
exchange rates. The forward contracts involve the exchange of one currency for
another at a future date and typically have maturities of six months or less. At
September 30, 1996, the Company had forward exchange contracts outstanding to
purchase approximately $25.8 million in foreign currencies and to sell
approximately $12.3 million in foreign currencies (primarily German Mark,
Japanese Yen, Danish Krone, Swedish Krona and British Pound). The gross
unrealized gains and losses related to these contracts at September 30, 1996
aggregated $447,848 and $211,436, respectively. The foreign currency options
involve purchased options to sell $35.9 million of foreign currencies (Japanese
Yen and German Mark) at set prices. These options expire within twelve months.
The gross unrealized gains and losses related to these options at September 30,
1996 aggregated $1,741,287 and $11,360, respectively.
The Company has no investment in real estate or mortgage loans, other than
through mortgage-backed securities. The Company does not enter into any
derivative instruments other than the forward currency contracts, foreign
currency options, and covered call options.
<PAGE>
Regulation
Healthcare Reform. During 1996, the Congress passed and the President
signed into law the Health Insurance Portability and Accountability Act of 1996,
and new federal mandates concerning mental health parity and maternity stays.
Among other things, the new insurance reform law addresses group and individual
market reforms (increasing the portability of health insurance), permits medical
savings accounts on a trial basis, and increases the deductibility of health
insurance for the self-employed. Although this legislation was recently adopted,
the Company does not believe it will have a material adverse impact on its
operations. In addition, many states, including states in which the Company does
business, have enacted or are considering various health care reform statutes.
The Virginia General Assembly has initiated health insurance market reform
measures with the general objective of encouraging greater access to health
insurance for small group employers and individuals. Those health insurance
market reforms require all insurer and HMO carriers doing business in the small
group employer market (employers with 2-99 employees) to limit waiting period
restrictions for preexisting conditions to 12 months, to give credit for prior
coverage, to guarantee the renewability of small employer group plans and to
require whole group underwriting of small employer groups which would prohibit
the exclusion from coverage or the charge of additional premiums for eligible
employees or dependents because of health status.
The reforms also require all insurers and HMOs doing business in the
primary small group market (employers with 2-25 employees) to offer and make
available both an essential and a standard benefit plan to primary small group
employers in addition to other insurance plans which they now market. Rating
requirements apply to the two benefit plans, which will allow carriers to use
the demographic risk classification factors of age, gender and geographic area.
Variations in premiums charged by a small employer carrier based on claim
experience, health status and duration are limited to a range of 20% above or
20% below the community rate filed by the carrier, defined as the average rate
charged for the same or similar coverage to all of that carrier's primary small
employer group business.
In addition, legislative reform in the individual health insurance market
requires that all insurers and HMOs doing business in the individual market in
Virginia limit the waiting period for preexisting conditions to 12 months, that
credit toward waiting periods be given for prior coverage and that every
individual insurance policy provide for renewability of coverage subject to
certain exceptions.
Based on the Company's experience in both the small group and individual
markets, its experience with existing reform measures in the small group
employer market, and the accumulated actuarial data, the Company believes that
those insurance reform measures will have no material adverse effect on the
results of its operations. There can be no assurance, however, that additional
regulatory initiatives will not be undertaken in the future, either at the
federal or state level, to engage in structural reform of the health care
industry in order to reduce the escalation in health care costs or to make
health care more accessible. Such reform, if it occurs, could adversely affect
Trigon's results of operations or financial condition.
HMO Regulation. Virginia BCBS has six HMO subsidiaries, three of which are
federally qualified HMOs. All of Virginia BCBS' HMO subsidiaries are licensed by
the Commonwealth of Virginia and are subject to regulation and review by the
State Corporation Commission, with which they must file periodic reports. In
addition, one of the HMO subsidiaries is licensed by and subject to regulation
and review by the State of Maryland, with which it must file periodic reports.
Among the areas regulated by Virginia and Maryland law are policy forms, market
conduct, quality assurance, covered benefits, contracts between the HMO and its
health care providers, the HMO's financial condition, including net worth
requirements, and the geographic service area of an HMO.
In addition, Virginia BCBS' federally qualified HMOs are also subject to
regulation and review by the U.S. Department of Health and Human Services and
certain other federal authorities, with which they must file periodic reports.
Areas covered by federal law are similar to those covered by state law and
regulation.
Insurance Holding Company Regulation. Trigon Healthcare will not be
regulated as an insurance company, but as the direct or indirect owner of all
the capital stock of Trigon Insurance, Monticello Life Insurance Company and
Mid-South, will be regulated as an insurance holding company and subject to the
insurance holding company acts of Virginia, Wisconsin and North Carolina, the
states in which the insurance company subsidiaries are domiciled. These acts
contain certain reporting requirements as well as restrictions on transactions
between an insurer and its affiliates. The Virginia insurance holding company
laws and regulations generally require insurance companies within an insurance
holding company system to register with the State Corporation Commission, and to
file with the State Corporation Commission 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
their affiliates within an insurance holding company system, depending on the
size and nature of the transactions. Virginia insurance
<PAGE>
holding company laws and regulations require prior regulatory approval or, in
certain circumstances, prior notice of, certain material intercompany transfers
of assets as well as certain transactions between insurance companies, their
parent holding companies and affiliates.
Additionally, holding company acts (including those of Virginia, Wisconsin
and North Carolina) restrict the ability of any person to obtain control of an
insurance company without prior regulatory approval. Under Virginia insurance
holding company laws and regulations, the acquisition of control of a Virginia
insurer or a person controlling a Virginia insurer, including Trigon Healthcare,
requires the prior approval of the State Corporation Commission. Without such
approval (or an exemption), no person may acquire any voting security of an
insurance holding company which controls a Virginia insurance company, or merge
with such a holding company, if as a result of such transaction such person
would "control" the insurance holding company. "Control" is 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.
Insurance Company Regulation. Virginia BCBS and its subsidiaries are
subject to the insurance laws and regulations of the Commonwealth of Virginia,
the domiciliary state of the Company and its subsidiaries (except Monticello
Life Insurance Company which is domiciled in Wisconsin and Mid-South which is
domiciled in North Carolina and are subject to the laws and regulations of those
states; however, Monticello Life Insurance Company is seeking regulatory
approval to redomicile to Virginia). In addition, the Company and its
subsidiaries are subject to the insurance laws and regulations of the other
jurisdictions in which the Company and its subsidiaries are licensed or
authorized to do business. These insurance laws and regulations generally give
state regulatory authorities broad supervisory, regulatory and administrative
powers over insurance companies and insurance holding companies with respect to
most aspects of their insurance businesses. This regulation is intended
primarily for the benefit of the policyholders and members of insurance
companies and not investors. Regulatory authorities exercise extensive
supervisory power over health and life insurance companies with respect to the
licensing of insurance companies; the approval of forms and insurance policies
used; the nature of, and limitations on, an insurance company's investments; the
periodic examination of the operations of insurance companies; the form and
content of annual statements and other reports required to be filed on the
financial condition of insurance companies; and the establishment of capital
requirements for insurance companies. Trigon is required to file periodic
statutory financial statements in each jurisdiction in which it is licensed.
Additionally, Trigon is periodically examined by the insurance departments of
the jurisdictions in which it is licensed to do business. Some states impose
surcharges on all insurance companies operating in the state except for the Blue
Cross plan or plans operating there. The Company does not believe that these
surcharges will materially affect its ability to expand outside of Virginia
because the surcharges have generally not been imposed in the states in which
the Company principally intends to expand and, if imposed, would likely apply
equally to all non-Blue Cross companies operating in the state.
Risk-Based Capital Requirements. In 1994, Virginia adopted new statutory
risk-based capital ("RBC") requirements for health and other insurance
companies. Such 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 formula for calculating such RBC
requirements, set forth in instructions adopted by the NAIC, is designed to take
into account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to an individual insurance company's business. Under
these laws, an insurance company must submit a report of its RBC level to the
State Corporation Commission as of the end of the previous calendar year.
The Virginia RBC requirements categorize insurance companies according to
the extent to which they meet or exceed certain RBC thresholds. The law requires
increasing degrees of regulatory oversight and intervention as an insurance
company's RBC declines. These degrees of regulatory action are triggered by the
RBC level of an insurance company as follows: (i) a "Company Action Level Event"
(requiring the insurance company to inform and obtain approval from the Virginia
Insurance Commissioner of a comprehensive financial plan for increasing its
RBC), which would occur if, among other things, an insurance company's RBC falls
below 200% of its authorized control level RBC requirement, or if an insurance
company's RBC falls below 250% of its authorized control level RBC requirement
and has a negative trend; (ii) a "Regulatory Action Level Event" (resulting in,
in addition to the requirement of a financial plan, regulatory actions including
examination of an insurance company's assets, liabilities and operations
followed by an order specifying such corrective actions as the Virginia
Insurance Commissioner determines to be appropriate), which would occur if,
among other things, an insurance company's RBC falls below 150% of its
authorized control level RBC requirement; (iii) an "Authorized Control Level
Event" (resulting in, in addition to the regulatory actions specified above,
such actions as are necessary to cause an insurance company to be placed under
regulatory control in a rehabilitation or liquidation proceeding if deemed to be
in the best interests of policyholders, creditors and the public), which would
occur if, among other things, an insurance company's RBC
<PAGE>
falls below 100% of its authorized RBC level; and (iv) a "Mandatory Control
Level Event" (resulting in, on a mandatory basis, such actions as are necessary
to cause an insurance company to be placed under regulatory control in a
rehabilitation or liquidation proceeding), which would occur if, among other
things, an insurance company's RBC falls below 70% of its authorized control
level RBC requirement.
As of December 31, 1995, Virginia BCBS' RBC level as calculated in
accordance with the NAIC RBC instructions exceeded all RBC thresholds.
Restrictions on Dividends. In the event Trigon Healthcare determines to pay
dividends, the principal source of funds to pay dividends to stockholders would
be dividends received by Trigon Healthcare from its subsidiaries, including
Trigon Insurance. Virginia insurance laws and regulations restrict the payment
of extraordinary dividends declared by insurance companies, including health
care insurers such as Trigon Insurance, in a holding company system. An
insurance company is prohibited from paying an extraordinary dividend unless it
obtains the approval of the State Corporation Commission. The State Corporation
Commission must approve or disapprove the dividend within thirty days after
receiving notice of the declaration of the dividend. If the State Corporation
Commission does not disapprove the dividend within thirty days, the distribution
is considered approved. An extraordinary dividend is one which, together with
the amount of dividends and distributions paid by the insurance company during
the immediately preceding 12 months, exceeds the lesser of (i) 10% of the
insurance company's surplus to policyholders as of the preceding December 31st
or (ii) the insurance company's net income (not including realized capital
gains) for the preceding calendar year. In determining whether a dividend is
extraordinary, an insurer may carry forward net income (not including realized
capital gains) from the second and third preceding years less dividends paid in
the second and immediately preceding years. 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. The State Corporation Commission may bring an action to enjoin
or rescind the payment of any dividend or distribution that would cause the
insurance company's statutory surplus to be unreasonable or inadequate.
Assuming that the Demutualization had occurred on December 31, 1995 and not
giving effect to the Offerings, Trigon Insurance would have had statutory
surplus of $478.2 million. The maximum amount available during 1996 for payment
of dividends by Trigon Insurance to Trigon Healthcare without the prior approval
of the State Corporation Commission would have been $47.8 million.
Wisconsin, Monticello Life Insurance Company's domiciliary state, and North
Carolina, Mid-South's domiciliary state, similarly restrict the payment of
dividends by their domiciliary insurance companies.
Assessments Against Insurers. Under insolvency or guaranty association laws
in most states, insurance companies can be assessed for amounts paid by guaranty
funds for policyholder losses incurred by insolvent insurance companies. Most
state insolvency or guaranty association laws, including Virginia's, currently
provide for assessments based upon the amount of premiums received on insurance
underwritten within such state (with a minimum amount payable in some states
where Monticello Life Insurance Company and Mid-South are licensed even if no
premium is received). Substantially all of Virginia BCBS' premiums are currently
derived from insurance underwritten in Virginia.
Under the Virginia Life, Accident and Sickness Insurance Guaranty
Association (the "Association") Act, assessments against insurance companies
which issue policies of accident or sickness insurance, such as Virginia BCBS,
are made retrospectively and are based (up to prescribed limits) upon the ratio
of (i) the insurance company's premiums received in Virginia 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 and
assessments made under the act are administered by the Association, which has
its own board of directors selected by member insurers with the approval of the
State Corporation Commission. An assessment may be abated or deferred by the
Association if, in the opinion of the board, payment would endanger the ability
of the member to fulfill its contractual obligations, but the other member
insurers 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 Commonwealth of Virginia in each succeeding year in an
amount not to exceed 0.05 (one twentieth) of one percent of the member's direct
gross premium income for the class of insurance for which the insurer is
assessed. The amount and timing of any future assessments, however, cannot be
reasonably estimated and are beyond the control of the Company.
Virginia's Open Enrollment Program. The Commonwealth of Virginia has an
open enrollment program, pursuant to which Virginia BCBS is required to offer
comprehensive accident and sickness insurance contracts to individuals and to
groups of fewer than 50 members without imposition of certain underwriting
criteria that would deny coverage on the basis of medical condition, age or
employment status. As an incentive for participating in the open enrollment
program, Virginia
<PAGE>
BCBS pays Virginia premium tax of three-fourths of one percent (0.75%) on
premiums received from accident and sickness insurance, (other than insurance
issued to certain small employers) rather than the general Virginia premium tax
of two and one fourth percent (2.25%). This general Virginia premium tax applies
to accident and sickness insurance premiums received by Virginia BCBS from
certain small employers. To withdraw from the open enrollment program, Virginia
BCBS would be required to give 24 months advance notice of withdrawal to the
State Corporation Commission. Trigon Healthcare's present intention is to
maintain Trigon Insurance's participation in the open enrollment program
indefinitely. Over the last five years, the loss suffered by Virginia BCBS on
the health care insurance policies issued by it under its open enrollment
program to uninsurable risks has been covered by the premium tax reduction
received by it for participating in the open enrollment program. There can be no
assurance that any losses suffered by Virginia BCBS on the health care insurance
policies issued by it under the open enrollment program would continue to be
aligned with this premium tax reduction.
Bankruptcy and Insolvency. In the event of a default on any debt incurred
by Trigon Healthcare or the bankruptcy of Trigon Healthcare, the creditors and
stockholders of Trigon Healthcare would have no right to proceed against the
assets of Trigon Insurance or any other subsidiary of Trigon Healthcare. If
Trigon Insurance were subject to a rehabilitation or liquidation proceeding,
such proceeding would be brought by the State Corporation Commission which would
act as the receiver with respect to such insurance company's property and
business. All creditors of Trigon Insurance, including, without limitation,
members and, if applicable, the various state guaranty associations, would be
entitled to payment in full from such assets before Trigon Healthcare, as a
stockholder, would be entitled to receive any distributions therefrom.
The Blue Cross Blue Shield License
In connection with the Demutualization, Trigon Healthcare and BCBSA will
enter into a new license agreement, pursuant to which the Company and its
subsidiaries have, and will continue to have after the Demutualization, the
exclusive right to use certain Blue Cross and Blue Shield service marks and
tradenames for all of their plans and products throughout Virginia other than a
small portion of the northern Virginia suburbs adjacent to Washington, D.C. The
license requires a fee to be paid to BCBSA equal to total association expenses
allocated to members 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 name and service marks as well as provide certain coordination among plan
and provider services. BCBSA has 62 primary licensee members, each of which
holds exclusive rights to use the Blue Cross and/or Blue Shield name and service
mark in specific geographic areas, subject to annual licensing fees and certain
other guidelines. Each BCBSA licensee is an independent legal organization and
is not responsible for obligations of other BCBSA member organizations.
The Company has no right to use the Blue Cross and Blue Shield service
marks and tradenames outside of its designated territory within the Commonwealth
of Virginia. The Company and its subsidiaries intend to conduct their businesses
outside of Virginia under the name "Trigon" without reference to the Blue Cross
and Blue Shield service marks and tradenames.
The Company's license from BCBSA will terminate if any person, without the
prior approval of a majority of the disinterested members of BCBSA, acquires
securities representing 20% or more of the voting control of the Company. In
addition, BCBSA may terminate the license if any person acquires securities
representing 5% or more of the outstanding voting stock of the Company, BCBSA
concludes that such stock ownership is detrimental to the Blue Cross and Blue
Shield service marks and tradenames and a supermajority of the disinterested
members of BCBSA vote for termination.
Trigon Healthcare's Articles will contain certain provisions which are
intended to prevent any holder from acquiring shares in excess of the limits set
forth in the Company's license agreement. See "Description of Common
Stock -- Certain Provisions of the Charter and Plan." However, there can be no
assurance that a court would enforce these provisions, or that if these
provisions were not enforced that the Company would retain the license from
BCBSA. If the BCBSA license were to be terminated, there would be a material
adverse effect on the Company's business and operations, which the Company does
not believe it can meaningfully quantify.
In June 1996 the license agreements between BCBSA and its licensees,
including the Company, were amended to prohibit a licensee from entering into
certain transactions which would result in an unlicensed entity obtaining
control of the licensee or acquiring a substantial portion of the licensee's
assets related to services provided under the Blue Cross or Blue Shield service
marks. The license agreements were also amended to require that a licensee pay
to BCBSA a specific amount upon termination of the license agreement, subject to
certain limited exceptions. The amount payable upon termination of the license
agreement is equal to $25 multiplied by the number of the licensee's members
receiving products or services sold or administered under the Blue Cross or Blue
Shield service marks, subject to reduction to the extent the payment of such fee
would cause such licensee to fall below certain capital requirements established
by the BCBSA.
<PAGE>
Rating
Virginia BCBS is presently assigned a claims paying ability rating of
"AA-(Excellent)" by Standard & Poor's Rating Group. Standard & Poor's ratings
are based on an analysis of the financial condition and operations of an
insurance company and its ability to pay future claims. Such ratings are not
directed to the protection of investors and are subject to review and change
over time.
Properties
The Company is headquartered in Richmond, Virginia, where it owns a
four-story building with 265,000 square feet. The Company also owns an office
facility and warehouse in Roanoke, Virginia with 201,000 square feet and an
office facility in Fayetteville, North Carolina with 71,000 square feet. The
Company leases an additional 454,000 square feet at various other locations in
Richmond, Virginia. The Company also leases space at two other facilities in
Roanoke, Virginia comprising 52,000 square feet.
The Company leases 57,000 square feet for regional offices throughout
Virginia and 55,000 square feet for office space in Maryland, North Carolina,
Oregon, Illinois, Florida, West Virginia, Indiana, Pennsylvania, Missouri, New
Jersey, Texas and South Carolina.
Employees
As of September 30, 1996, the Company had 4,173 full-time employees. The
employees are primarily located in Richmond and Roanoke, Virginia, with
employees also located in Maryland, Missouri, New Jersey, Texas, North Carolina,
South Carolina, Oregon, Illinois, Florida, West Virginia, Indiana and
Pennsylvania. The Company believes that its relationship with its employees is
good. No employees are subject to collective bargaining agreements.
Service Marks
The Company has registered and maintains several service marks, trademarks
and tradenames at the federal level, in the Commonwealth of Virginia and in
certain other states. "Trigon," "Keycare" and "HealthKeepers" are included among
these marks. Although the Company considers its registered service marks,
trademarks and tradenames important in the operation of its business, the
business of the Company is not dependent on any individual service mark,
trademark or tradename. For a discussion of the Company's license to use certain
Blue Cross and Blue Shield service marks and tradenames, see "The Blue Cross
Blue Shield License."
<PAGE>
LEGAL PROCEEDINGS
In November 1993, the Company met with officials from the United States
Department of Labor (the "DOL") in response to the DOL's request for information
concerning the Company's policies on passing through the benefits of provider
discounts to self-funded employer groups whose health care plans are subject to
the Employee Retirement Income Security Act ("ERISA") and are administered by
the Company. The DOL advised the Company that the inquiry was part of a larger
review of Blue Cross and Blue Shield organizations that provide services to
self-funded plans. The Company responded in March and April 1994 to informal
requests from the DOL seeking additional information on the Company's handling
of provider discounts. In September 1995, the DOL notified the Company that the
DOL is of the view that the Company's retention of provider discounts during the
period from 1990 through 1993 and its failure to disclose the amount of these
discounts violated the applicable provisions of ERISA. The amount of the
provider discounts retained during this period is approximately $58.6 million.
Under applicable provisions of ERISA, the DOL may also assess a civil penalty
equal to 20% of any amounts recovered as a result of an ERISA violation. No
lawsuit has been filed by the DOL and the Company intends to continue
discussions with the DOL about this matter. While the ultimate resolution of the
DOL's inquiries cannot be predicted, the Company believes that its handling of
provider discounts has been in accordance with the terms of its agreements with
self-funded employer groups and applicable ERISA requirements.
The Company is also the defendant in two lawsuits that have been filed by
self-funded employer groups in connection with the Company's past practices
regarding provider discounts. The suits claim that the Company was obligated to
credit the self-funded plans with the full amount of the discounts that the
Company negotiated with facilities providing health care to members covered by
the plans. One suit seeks $750,000 in compensatory damages plus unspecified
punitive damages. The other suit seeks $1.1 million in damages. The Company is
also presently the subject of 15 other claims by self-funded employer groups
related to the Company's past practices regarding provider discounts, some of
which involve larger amounts of withheld discounts. The Company is communicating
with these groups, and lawsuits have not been filed in connection with these
claims. The Company believes that additional discount-related claims may be made
against it. Although the ultimate outcome of such claims and litigation cannot
be estimated, the Company believes that the discount-related claims and
litigation brought by these self-funded employer groups will not have a material
adverse effect on the financial condition of the Company.
In August 1994, three of the Company's members filed a complaint against
the Company in the United States District Court for the Eastern District of
Virginia contending that when the Company negotiated discounts with hospitals,
it should have shared those discounts with its members through lower copayments
and deductibles. The plaintiffs also sought certification of a class consisting
of all of the Company's members who paid copayments and deductibles. The
complaint sought damages under various theories of state law, treble damages
under the Racketeer Influenced and Corrupt Organizations Act, and attorneys'
fees. The Company filed a motion to dismiss the complaint, which was granted by
the District Court. The plaintiffs appealed the ruling to the United States
Fourth Circuit Court of Appeals which affirmed the ruling of the District Court.
Plaintiffs have the right to petition the United States Supreme Court for a writ
of certiorari. Although the ultimate resolution of this suit cannot be predicted
with certainty, the Company believes that, in view of the refunds made by the
Company under the Copayment Program, the resolution of this litigation should
not result in losses that would have a material adverse effect on the financial
condition of the Company.
The Company and certain of its subsidiaries are involved in various other
legal actions occurring in the normal course of its business. While the ultimate
outcome of such litigation cannot be predicted with certainty, in the opinion of
Company management, after consultation with counsel responsible for such
litigation, the outcome of those actions is not expected to have a material
adverse effect on the financial condition of the Company. In general, the
Company believes that the increase in the managed care content of its products
has not materially affected its exposure to litigation relating to health care
coverage provided to its members.
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information as of September 30, 1996
concerning the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------- ---- ----------------------------------------------------------
<S> <C> <C>
Norwood H. Davis, Jr. 56 Chairman of the Board & Chief Executive Officer
Lenox D. Baker, Jr., M.D. 54 Director
James K. Candler 61 Director
John Cole, Jr., M.D. 64 Director
John L. Colley, Jr., Ph.D. 66 Director
Robert M. Freeman 55 Director
William R. Harvey, Ph.D. 55 Director
Elizabeth G. Helm 65 Director
Gary A. Jobson 46 Director
Frank C. Martin, Jr. 64 Director
Donald B. Nolan, M.D. 56 Director
William N. Powell 52 Director
J. Carson Quarles 60 Director
R. Gordon Smith 58 Director
Jackie M. Ward 58 Director
Stirling L. Williamson, Jr. 60 Director
Phyllis L. Cothran 49 President & Chief Operating Officer
Ronald H. Bargatze 45 Executive Vice President & Chief Operating Officer,
Integrated Health Systems
Thomas G. Snead, Jr. 42 Senior Vice President & Chief Financial Officer
</TABLE>
The Company's Board of Directors is divided into three classes, designated
Class I, Class II and Class III. John Cole, Jr., M.D., Robert M. Freeman,
Elizabeth G. Helm, Jackie M. Ward and Stirling L. Williamson, Jr. are Class I
directors, with their terms expiring at the Company's Annual Meeting of
Stockholders (the "Annual Meeting") in 1999. Lenox D. Baker, Jr., M.D., John L.
Colley, Jr., Norwood H. Davis, Jr., Frank C. Martin, Donald B. Nolan, M.D. and
R. Gordon Smith are Class II directors, with their terms expiring at the Annual
Meeting in 1997. James K. Candler, William R. Harvey, Gary A. Jobson, William N.
Powell and J. Carson Quarles are Class III directors, with their terms expiring
at the Annual Meeting in 1998. Directors of each Class serve until their
successors are duly elected and qualified. Pursuant to the Plan of
Demutualization, the Company will cause one nominee from a list submitted by the
Virginia Attorney General and one nominee from a list submitted by the Joint
Rules Committee of the Virginia General Assembly to be elected directors of the
Company before or within seven days after the effective date of the
Demutualization. These two nominees will each be appointed to serve a three-year
term as a director of the Company. See "The Demutualization -- The Commonwealth
Payment."
Employment History of Directors and Executive Officers
NORWOOD H. DAVIS, JR. joined the Company in 1968, and was elected to the
Board of Directors in 1975. Since 1989, he has served as Chairman of the Board
and Chief Executive Officer of the Company. Mr. Davis is a director of Signet
Banking Corporation (Richmond) and Hilb, Rogal & Hamilton Co. (Richmond).
LENOX D. BAKER, JR., M.D. was elected to the Board in 1985. He has been a
Norfolk cardiac and thoracic surgeon, and has been affiliated with Mid-Atlantic
Cardiothoracic Surgeons, Ltd., since 1979. He is also chief of the Division of
Cardiac and Thoracic Surgery at Sentara Hospitals, and an assistant professor of
surgery at the Medical College of Hampton Roads. Dr. Baker is President of the
Medical Staff at Sentara Norfolk General Hospital.
JAMES K. CANDLER was elected to the Board in 1984. He has been President
and owner of Candler Oil Company in Lynchburg since 1960. Mr. Candler is a
director of Central Health, Inc. and First Federal Savings Bank of Lynchburg.
JOHN COLE, JR., M.D. was elected to the Board in 1972 and is a past
Chairman. He is a Roanoke ear, nose, and throat specialist, and has been
President of Roanoke Ear, Nose and Throat Clinic, Inc. since 1990, prior to
which he held the position of Vice President beginning in 1975.
<PAGE>
JOHN L. COLLEY, JR., PH.D. was elected to the Board in 1981. He is a past
Chairman. Dr. Colley has been the Almand R. Coleman Professor of Business
Administration at the University of Virginia's Darden School of Business
Administration since 1967.
ROBERT L. FREEMAN was elected to the Board in 1993. He has been Chairman of
Signet Banking Corporation since 1990 and served as Chief Executive Officer from
April 1989 to May 1996. Mr. Freeman is a director of MasterCard International
and Crown Central Petroleum.
WILLIAM R. HARVEY, PH.D. was elected to the Board in 1992. He has been
President of Hampton University in Hampton, Virginia, since 1978 and owner of
the Pepsi-Cola Bottling Company, Houghton, Michigan since 1986. Dr. Harvey is a
director of Signet Banking Corporation.
ELIZABETH G. HELM was elected to the Board in 1993. She has been President
of Glaize Developments, Inc. in Winchester, Virginia, since 1980. Ms. Helm is a
director of Signet Banking Corporation and Shenandoah Life Insurance Company.
GARY A. JOBSON was elected to the Board in 1987. He has been a marketing
and product development consultant through his company, Jobson Sailing, Inc.
since 1978. He is a director of the Blakeslee Group and Sunfish/Laser, Inc.
FRANK C. MARTIN, JR. was elected to the Board in 1975. He is Chairman,
Founder, and since 1970 has been Chief Executive Officer of Martin Research,
Inc., in Roanoke, Virginia.
DONALD B. NOLAN, M.D. was elected to the Board in 1983. He has been a
practicing neurologist in the Roanoke, Virginia area since 1971, and is
currently affiliated with the Roanoke Neurological Associates and is Director of
the Electro-Diagnostic Laboratory at Roanoke Memorial Hospital.
WILLIAM N. POWELL was elected to the Board in 1980. He has been President
of Salem Tools, Inc. since 1981, and is a director of Central Fidelity Bank
(regional) and the Mechanical Development Company, Inc.
J. CARSON QUARLES was elected to the Board in 1977. He has been Chairman of
the Board of Friendship Manor, Inc. in Roanoke, Virginia since 1981. At the end
of 1994 he retired from an eight-year term as President of the Southwestern
Region of Central Fidelity Bank.
R. GORDON SMITH was elected to the Board in 1995. He has been a partner
with McGuire, Woods, Battle & Boothe, L.L.P. in Richmond, Virginia since 1969.
Mr. Smith serves on the board of Scott & Stringfellow Financial, Inc.
JACKIE M. WARD was elected to the Board in 1993. She is a founder and has
served as Chief Executive Officer of Atlanta-based Computer Generation
Incorporated since 1970. Ms. Ward serves on the boards of NationsBank, Matria
Healthcare, Inc. and SCI Systems Inc.
STIRLING L. WILLIAMSON, JR. was elected to the Board in 1979. He has been
President of S.L. Williamson Company, Inc. in Charlottesville, Virginia since
1971. Mr. Williamson is a director of Jefferson National Bank.
PHYLLIS L. COTHRAN joined the Company in 1972. She held various positions
in the Finance Department prior to becoming the Chief Financial Officer in 1981.
She was elected to her current position as President and Chief Operating Officer
in November 1990. Ms. Cothran serves as a director of Ethyl Corporation,
Tredegar Industries, Inc. and Central Fidelity Banks, Inc.
RONALD H. BARGATZE has held a variety of positions since joining the
Company in 1974. From 1987 to 1990 he served as Vice President of Consolidated
Healthcare, Inc. until being named Senior Vice President and Chief Operating
Officer of the Small Business Unit of the Company in 1990. He became Executive
Vice President for Operations Support and Chief Operating Officer of the Small
Business Unit in 1992, and was appointed to his current position of Executive
Vice President and Chief Operating Officer of Integrated Health Systems in April
1994.
THOMAS G. SNEAD, JR. joined the Company in 1985. He served as Group
Financial Officer from 1989 to 1990, when he was appointed to his current
position of Senior Vice President and Chief Financial Officer.
Compensation of Directors
Directors who are officers or employees of the Company receive no
compensation as such for service as members of the Board of Directors or
committees thereof. Directors who are not officers or employees of the Company
receive a quarterly retainer of $3,500, a quarterly retainer of $250 to serve as
a Committee Chairman, a fee of $1,000 for each Board meeting
<PAGE>
attended, a fee of $250 for attending a Committee meeting on a day on which a
Board meeting is also held, a fee of $500 for attending a Committee meeting on a
day on which a Board meeting is not held, a fee of $350 for attendance at a
Board meeting held by conference call and a fee of $100 for attending other
Board related meetings. Fees paid to Directors may be deferred under the
Company's non-qualified deferred compensation plan. See "Deferred Compensation."
Compensation Committee Interlocks and Insider Participation
The Human Resource, Compensation and Employee Benefits Committee of the
Board of Directors includes: John L. Colley, Jr., Chairman, Lenox D. Baker, Jr.,
M.D., William R. Harvey, Elizabeth G. Helm, William N. Powell and Jackie M.
Ward. None of the Committee members is or was an officer or employee of the
Company. There are executives and directors of the Company that also serve on
the Board of Directors of other entities. However, there are no Compensation
Committee interlocks between the Company and other entities.
Compensation of Executive Officers
The following table sets forth the compensation paid by the Company to the
chief executive officer and the other four most highly compensated executive
officers of the Company for the year ended December 31, 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual Compensation Payouts
---------------------------------------------- ------------
Other Annual LTIP All Other
Name and Salary Bonus Compensation Payouts Compensation
Principal Position Year ($)(1) ($)(2) ($)(3) ($)(4) ($)(5)
- ------------------------------- ----- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Norwood H. Davis, Jr. 1995 $650,000 $ 0 $2,895 $ 85,000 $ 38,821
Chairman & CEO
Phyllis L. Cothran 1995 355,700 0 303 70,000 20,290
President & COO
Harlan F. Seymour (6) 1995 224,700 80,892 425 91,228 3,371
Executive VP & COO
Business Development
Ronald H. Bargatze 1995 224,700 40,633 309 91,228 10,550
Executive VP & COO,
Integrated Health Systems
C. Wyndham Kidd, Jr. (6) 1995 224,700 34,454 233 60,974 10,110
Executive VP & COO,
Virginia Business Unit
</TABLE>
- ---------------
(1) Includes amounts deferred under the Company's 401(k), 401(k) Restoration and
nonqualified deferred compensation plans.
(2) Annual cash award earned in 1995 and paid in 1996.
(3) None of the 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. Includes Medicare tax and related income tax gross-up paid
by the Company for named executives on the present value of their vested
non-qualified Supplemental Executive Retirement Program benefit earned in
1995 in the amounts of $1,988 for Mr. Davis, $174 for Mr. Bargatze and $117
for Mr. Kidd. Includes Medicare tax and related income tax gross-up paid by
the Company for named executives with respect to Company contributions under
the 401(k) non-qualified Restoration Plan in the amounts of $482 for Mr.
Davis, $303 for Ms. Cothran, $135 for Mr. Bargatze and $116 for Mr. Kidd.
Includes income tax gross-up on spousal travel paid by the Company for named
executives in the amounts of $425 each for Mr. Davis and Mr. Seymour.
(4) Long-term cash award earned in 1995 and paid in 1996 for the performance
period January 1, 1993 through December 31, 1995.
(5) Includes matching contributions under the Company's 401(k) and 401(k)
Restoration Plans in the amount of $26,038 for Mr. Davis, $18,023 for Ms.
Cothran, $3,371 for Mr. Seymour, $10,550 for Mr. Bargatze and $9,679 for Mr.
Kidd. Includes actuarial equivalent of the benefit to the executive from
payment of annual premiums by the Company under a
<PAGE>
split dollar life insurance program in the amounts of $11,093 for Mr. Davis
and $2,267 for Ms. Cothran. Includes above-market interest credited for
future payment on deferred compensation in the amounts of $1,690 for Mr.
Davis and $431 for Mr. Kidd.
(6) Mr. Kidd resigned his position with the Company in February 1996 and Mr.
Seymour resigned his position with the Company in June 1996.
The Long-Term Incentive Plan Table below provides information concerning
estimated award ranges for the cash plan initiated in 1995 based on the
performance period January 1, 1995 through December 31, 1997. The Company's
Long-Term Incentive Plan is based on 3-year overlapping performance cycles.
Long-term Incentive Plans -- Awards in Last Fiscal Year (1)
<TABLE>
<CAPTION>
Estimated Future Payouts
Number of Performance or Under Non-Stock Price Based Plans
Units or Other Other Period -----------------------------------
Rights Until Maturation Threshold Target Maximum
Name # or Payout $ $ $
- ---------------------- --------------- ----------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Norwood H. Davis, Jr. N/A 1995-1997 $ 130,000 $260,000 $520,000
Phyllis L. Cothran N/A 1995-1997 62,248 124,495 248,990
Harlan F. Seymour N/A 1995-1997 28,088 56,175 112,350
Ronald H. Bargatze N/A 1995-1997 28,088 56.175 112,350
C. Wyndham Kidd, Jr. N/A 1995-1997 28,088 56,175 112,350
</TABLE>
- ---------------
(1) Company strategic performance objectives are set in advance of the
three-year period and are measured at the end of the period. The current
performance objectives focus on earnings and policy growth over the
three-year period. The awards are paid in a single lump sum at the end of
three years depending on the achievement of specified performance measures.
Each three-year cycle provides target awards between 10% and 40% of a
participant's salary. Each objective will have a performance range and
potential payout from Threshold to Maximum.
Retirement Plan
The Company sponsors a non-contributory retirement program (the "Retirement
Plan") for certain employees that is qualified under Internal Revenue Code
(section mark) 401(a) and subject to ERISA. The Company also sponsors the
Supplemental Executive Retirement Program, which provides additional benefits,
payable out of general Company assets to certain employees. The benefits are
equal to the benefits these employees cannot receive under the qualified
retirement program because of Internal Revenue Code limits on benefits and
restrictions on participation by highly compensated employees.
<PAGE>
The following table shows the projected annual benefit (not including
offsets for primary social security) for the remuneration level and years of
credited service indicated that would be payable in the form of a straight life
annuity commencing at age 65 under the present benefit formula of the Retirement
Plan. The amounts shown include the benefits payable under the Retirement Plan
and the Supplemental Executive Retirement Plan.
Pension Plan Table (1)
<TABLE>
<CAPTION>
Years of Service
------------------------------------------------------------
Remuneration 15 20 25 30 35
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 300,000 $ 90,000 $120,000 $150,000 $180,000 $180,000
350,000 105,000 140,000 175,000 210,000 210,000
400,000 120,000 160,000 200,000 240,000 240,000
450,000 135,000 180,000 225,000 270,000 270,000
500,000 150,000 200,000 250,000 300,000 300,000
550,000 165,000 220,000 275,000 330,000 330,000
600,000 180,000 240,000 300,000 360,000 360,000
650,000 195,000 260,000 325,000 390,000 390,000
700,000 210,000 280,000 350,000 420,000 420,000
750,000 225,000 300,000 375,000 450,000 450,000
800,000 240,000 320,000 400,000 480,000 480,000
850,000 255,000 340,000 425,000 510,000 510,000
900,000 270,000 360,000 450,000 540,000 540,000
950,000 285,000 380,000 475,000 570,000 570,000
1,000,000 300,000 400,000 500,000 600,000 600,000
</TABLE>
- ---------------
(1) Compensation covered by the retirement plans includes: W-2 earnings,
deferred compensation, 401(k) plan and 401(k) Restoration plan contributions
and amounts excluded from income under Section 125 of the Code (flexible
spending accounts and flex benefit amounts). Under the Retirement Plan's
formula, a participant's annual retirement benefit at normal retirement age
(65 years) is equal to 60% of the average of the participant's highest five
consecutive years' salary in the last ten years, minus 50% of the
participant's primary social security benefit, all multiplied by years of
credited service and divided by 30. Participants become vested in the plans
with five years of credited service. The Pension Plan Table and Summary
Compensation Table may be used to estimate pension benefits for each of the
named executive officers based on their credited years of service as of
December 31, 1995: Mr. Davis, 28 years; Ms. Cothran, 24 years; Mr. Seymour,
1 year; Mr. Bargatze, 19 years and Mr. Kidd, 19 years. The Retirement Plan
covered compensation for 1995 was: Mr. Davis, $913,250; Ms. Cothran,
$622,438; Mr. Seymour, $371,760; Mr. Bargatze, $367,681 and Mr. Kidd,
$351,833.
Deferred Compensation
The Company offers a non-qualified deferred compensation plan to all board
members and officers at or above the level of Vice President. Interest credited
to plan participants is funded through Company-owned life insurance. The plan is
called The Limited Fixed Return Plan. Interest rates are guaranteed in four-year
increments and are initially set at the dividend reinvestment rate specified by
the life insurance carrier. Those electing to defer may begin receiving benefit
payouts no sooner than age 55. As of December 31, 1995, 26 Officers have
deferred a balance of $878,902. Interest credited in 1995 to the various
participants equaled $64,312. As of December 31, 1995, seven directors and three
past directors have deferred a balance of $1,392,004 and interest credited to
the various participants in 1995 equaled $107,891.
Mr. Davis also has a separately defined salary deferral plan established in
1989. To date $43,000 of his compensation has been deferred. No amounts were
deferred for 1995. Amounts deferred are invested by the Company in investments
selected by a Company-appointed investment manager. Mr. Davis bears all risk of
gain or loss with respect to the investments made. Distribution of plan assets
will be at the later of age 55 or termination of employment.
Employment Agreements
Norwood H. Davis, Jr., Chairman of the Board and Chief Executive Officer,
entered into an employment agreement with the Company as of March 13, 1996. This
agreement supersedes all prior agreements. Under Mr. Davis' agreement, his
employment is at will and he may resign at any time. Also, the Company may
discharge Mr. Davis at any time, with or
<PAGE>
without cause. Mr. Davis is entitled to receive an annual base salary of an
amount determined by the Board of Directors which can be adjusted upward each
year as determined by the Board of Directors. He is also eligible for an award
of incentive compensation each year. While employed by the Company, Mr. Davis is
entitled to Company benefits offered to all employees. In addition, the Company
will provide an automobile allowance, tax and financial planning services and
reimbursement for other business expenses. Also, if Mr. Davis becomes disabled
and is entitled to receive benefits under the Company's Long-Term Disability
Program, the Company will make supplemental monthly payments so that the entire
benefit is equal to 60% of his base salary. Under this agreement, Mr. Davis
agrees not to compete as an equity owner or employee with the Company or its
affiliates for three years after his resignation as an employee or his
termination with cause. The agreement also provides that upon termination of Mr.
Davis's employment for any reason (other than a termination resulting from his
resignation if he fails to give the Company at least six months' prior written
notice of the resignation), Mr. Davis is entitled to receive a severance payment
equal to three times the highest annual cash compensation received by him during
the three calendar years preceding the termination of his employment.
The employment agreement also sets forth an enhanced retirement benefit for
Mr. Davis. Under the enhanced benefit, the Company agrees to pay Mr. Davis an
amount equal to the difference between (i) the benefit Mr. Davis would receive
under the Retirement Plan and the Supplemental Retirement Plan if Mr. Davis had
remained in the employ of the Company receiving credited service until age 65
(3/10/2005) (assuming continued annual compensation at a rate equal to his
highest annual compensation during the three calendar years immediately
preceding retirement) and (ii) the benefit Mr. Davis actually receives under the
Retirement Plan and Supplemental Retirement Plan. If retirement occurs at or
after age 61 (3/10/2001) 100% of the enhanced benefit is payable. If retirement
occurs at age 60 (3/10/2000) 96% of the difference between the enhanced and
basic benefit is payable. For each additional year of retirement earlier than
age 61 the percentage difference between the enhanced and basic benefit
decreases by four percentage points.
Phyllis L. Cothran, President and Chief Operating Officer, also has an
employment agreement which is similar to Mr. Davis', with the exception of the
special retirement benefits. Base salary for Ms. Cothran is determined annually
by the Chief Executive Officer and the Human Resources, Compensation and
Employee Benefits Committee of the Board of Directors. Ms. Cothran is eligible
to participate in the Company's Annual Incentive Program, Long-Term Incentive
Program, and in any similar incentive plans that are made available to senior
executives of the Company.
Severance Agreements
Certain executive officers of the Company, including Messrs. Seymour,
Bargatze and Kidd are provided severance agreements. The agreements generally
provide for payments to selected officers who resign or terminate (other than
for cause or in the case of death) and agree not to compete as an equity owner
or employee with the Company or its affiliates for a period of one year (two
years in the case of Mr. Bargatze) after such resignation or termination. Under
the agreement, severance benefits for eligible officers with less than five
years of continuous service will be six months salary, payable monthly following
resignation or termination. For eligible officers with five or more years of
continuous service, severance benefits consist of twelve months salary, payable
monthly following resignation or termination. Mr. Seymour's agreement provides
for twelve months of severance benefits regardless of length of service. Mr.
Bargatze's agreement provides for twenty-four months of severance benefits. No
material changes are planned to the agreements for the named executive officers
following the Offerings, except that the severance agreements may be revised to
include change of control provisions customary for public companies.
DESCRIPTION OF CAPITAL STOCK
Description of Common Stock
The Company will have authorized 300 million shares of Common Stock, par
value $.01 per share, 300 million shares of Class B non-voting Common Stock, par
value $.01 per share ("Non-Voting Common Stock") and 75 million shares of Class
C Common Stock, par value $.01 per share. It is expected that shares
of Common Stock will be issued to Eligible Members in the Demutualization, and
that shares of Common Stock will be issued in the Offerings. See
"Market for Stock" and "Shares Eligible for Future Sale." Prior to the
Demutualization, no shares of stock of any class were outstanding other than
those held by Virginia BCBS. Holders of Common Stock are entitled to such
dividends as may be declared by the Board of Directors out of funds legally
available therefor after payment of dividends on any Preferred Stock
outstanding. See "Dividend Policy." Subject to the voting restrictions described
below, holders of Common Stock are entitled to one vote for each share of Common
Stock held by them on all matters upon which the Company's stockholders are
entitled to vote.
<PAGE>
Holders of Non-Voting Common Stock are not entitled to vote on any matter except
as otherwise required by law. In such circumstances, holders of Non-Voting
Common Stock will be entitled to one vote for each share of such stock held by
them.
Class C Common Stock may be issued to the Commonwealth of Virginia as part
of the Commonwealth Payment in connection with the Demutualization. See "The
Demutualization -- The Commonwealth Payment." The holder of the Class C Common
Stock will be entitled to a one-tenth vote per share on all matters upon which
the Company's stockholders are entitled to vote. Except as required by law, the
holders of Common Stock and the holder of Class C Common Stock will vote
together as one group. Any Class C Common Stock issued as a part of the
Commonwealth Payment will be redeemable by the Company at any time and, if not
sooner redeemed, must be redeemed on June 30, 1998. The redemption price for the
Class C Common Stock will be the Class C Redemption Price. The Class C Stock
will not be transferable and will not be convertible into any other capital
stock of the Company.
Under Virginia law, extraordinary matters, such as amendments to the
Articles, mergers, share exchanges, sales of assets or dissolution, must be
approved by more than two-thirds of the votes entitled to be cast at a meeting
at which a quorum is present unless otherwise provided in the articles of
incorporation. The Company's Articles also will contain a provision that reduces
the shareholder vote required for amending the Articles in certain circumstances
from the statutory two-thirds vote generally applicable to a simple majority
vote. The majority vote will be applicable except for amendments subject to the
Supermajority Vote Requirement (as defined below) and when the effect of the
amendment is (a) to reduce the shareholder vote required to approve a merger, a
statutory share exchange, a sale of all or substantially all of the assets of
the Company or the dissolution of the Company, or (b) to delete all or any part
of such provision. In addition, the vote required by the provisions of the
Articles is necessary if such provisions require the approval of more than a
majority of the votes entitled to be cast. These higher vote provisions include
the Supermajority Vote Requirement described below. See "Certain Provisions of
the Charter and Plan -- Supermajority Vote Requirement."
Preferred Stock
The Company will have authorized 50 million shares of Preferred Stock, no
par value. There are currently no shares of Preferred Stock outstanding, and
there are no agreements or understandings for the designation of any series of
Preferred Stock or the issuance of shares thereunder. The Board of Directors of
the Company, without further action by the stockholders, is authorized to
designate and issue in series Preferred Stock and to fix as to any series the
dividend rate, redemption rights and price, preference on dissolution, the terms
of any sinking fund, conversion rights, voting rights and any other preferences
or special rights and qualifications. Shares of Common Stock would be subject to
the preferences, rights and powers of any such shares of Preferred Stock as set
forth in the Company's Articles and the resolutions of the Board of Directors
establishing any such series of Preferred Stock. In addition to any voting
rights authorized by the Board of Directors, under Virginia law holders of
Preferred Stock, if and when issued, would be entitled to vote on certain
significant corporate actions, including amendments to the Articles, plans of
merger or plans of share exchange, if such actions would materially adversely
affect the holders of the Preferred Stock.
Certain Provisions of the Charter and Plan
The Company's Articles will contain certain provisions, described under
"Description of Ownership and Transfer Restrictions" and "Description of
Supermajority Vote Requirement" below, which are intended to prevent any holder
from acquiring shares in excess of the limits set forth in the Company's license
agreement with BCBSA. There can be no assurance that a court would enforce these
provisions, or that if these provisions were not enforced that Trigon Healthcare
would retain the license from BCBSA. See "Business -- The Blue Cross Blue Shield
License." In addition, the Plan of Demutualization provides that no stockholder
may, directly or indirectly, acquire beneficial ownership of 5% or more of the
Common Stock until 30 months after the Demutualization without the consent of
the Company's Board of Directors. This limitation will not prevent the issuance
to any Eligible Member of the shares of Common Stock to which such Eligible
Member is entitled under the Plan of Demutualization. However, any Eligible
Member who receives more than 5% of the Common Stock as a result of the
Demutualization may not acquire, directly or indirectly, any additional Common
Stock until 30 months after the Demutualization, unless at the time of such
acquisition and immediately following such acquisition, such Eligible Member
would not, directly or indirectly, own more than 5% of the Common Stock.
Description of Ownership and Transfer Restrictions. The Company's Articles
will provide that no person may "Beneficially Own" (as defined below) shares of
Capital Stock in excess of the Ownership Limit. Capital Stock means any class of
capital stock of Trigon Healthcare (other than Class C Common Stock), including
the Common Stock. For purposes of the Ownership and Transfer Restrictions the
Common Stock and Non-Voting Common Stock will be generally treated as a single
class of capital stock.
<PAGE>
The "Ownership Limit" is 5% of each class of the outstanding Capital Stock,
unless the Continuing Directors give prior written approval to a greater
percentage for a specified stockholder. Continuing Directors are directors not
associated with persons owning shares in excess of the Ownership Limit and who
were in office before the date a person becomes owner of shares in excess of the
Ownership Limit or who were thereafter recommended to succeed a Continuing
Director by a majority of the Continuing Directors then in office.
Any Transfer (as defined below) that, if effective, would result in any
person Beneficially Owning shares of a class of Capital Stock in excess of the
Ownership Limit will be void. If this restriction is held to be unenforceable,
shares of such class of Capital Stock in excess of the Ownership Limit
automatically become "Excess Securities" as described below. In addition, the
Board will have the right to convert Common Stock held by any person and that
person's associates that equals or exceeds the Ownership Limit into Non-Voting
Common Stock which will have no voting rights (except and only as conferred by
law) but which will otherwise have rights identical to the Common Stock.
These provisions are sometimes referred to in this Prospectus as the
"Ownership and Transfer Restrictions." The Articles will provide that the
Ownership and Transfer Restrictions will not impair the settlement of
transactions on the New York Stock Exchange or any other exchange or quotation
system over which the Common Stock is traded. The Articles will provide that a
person will be deemed the "Beneficial Owner" of and will be deemed to
"Beneficially Own" (subject to certain exclusions) any Capital Stock: (i) which
such person or any of such person's associates beneficially owns, directly or
indirectly, (ii) which such person or such person's associates has the right to
acquire or dispose of (either immediately or only after the passage of time),
(iii) which such person or such person's associates have the right to vote or
(iv) which is Beneficially Owned (under the concepts provided in the preceding
clauses) by any other person with whom such person (or such person's associates)
has any agreement, arrangement or understanding (other than customary
arrangements with and between underwriters and selling group members with
respect to a bona fide public offering of Capital Stock) relating to the
acquisition, holding, voting or disposition of any Capital Stock. The Articles
will also provide that the Company may require that Beneficial Owners of Capital
Stock provide the Company with such information as the Company may reasonably
request in order to ascertain whether any facts or circumstances which would or
might cause such person to be considered an associate for purposes of the
Articles of any other Beneficial Owner of Capital Stock.
If there is a purported Transfer or other change in capital structure of
the Company such that any person would Beneficially Own shares of a class of
Capital Stock in excess of the Ownership Limit (a "Purported Owner") and the
provisions of the Articles voiding such Transfers or prohibiting such ownership
are held to be unenforceable, then such shares in excess of the Ownership Limit
will be "Excess Securities." Excess Securities are automatically deemed to have
been converted into a separate class of Capital Stock and transferred to the
Company as trustee of a trust to hold such Excess Securities until disposition
as provided in the Articles. The Purported Owner has no rights in the Excess
Securities, except that the Purported Owner may designate a beneficiary of an
interest in the trust if (a) the Excess Securities would not be Excess
Securities in the hands of such beneficiary and (b) the price paid for such
interest does not exceed the price paid by the Purported Owner or the market
price for the Capital Stock on the date of the purported Transfer that resulted
in the Excess Securities. The Company will have a call on the Excess Securities
generally for 90 days after the purported Transfer that resulted in the Excess
Securities. The exercise price for this call is generally the lesser of (a) the
price per share in the transaction which created the Excess Securities or (b)
the market price for the Capital Stock to which the Excess Securities relate on
the date the Company exercises its call.
If the Company at any time determines in good faith that a purported
Transfer has taken place in violation of the Ownership and Transfer Restrictions
or that a person intends to acquire or Transfer or has attempted to acquire or
Transfer Beneficial Ownership of Capital Stock in violation of the Ownership and
Transfer Restrictions, the Company may take such action as it deems advisable to
refuse to give effect to such Transfer, including, but not limited to, refusing
to give effect to such Transfer on the books of the Company or instituting
proceedings to enjoin such Transfer.
"Transfer" will be defined in the Articles as any sale, transfer, gift,
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 such stock, (ii) the sale, transfer, assignment or other
disposition of any securities or rights convertible into or exchangeable for
such stock or (iii) any transfer or other disposition as a result of a change in
marital status), whether directly or indirectly, voluntary or involuntary, and
whether by operation of law or otherwise.
Pursuant to the Articles, each certificate for Capital Stock will bear a
legend with respect to the Ownership and Transfer Restrictions.
The Ownership and Transfer Restrictions and the Supermajority Vote
Requirement (defined below) will terminate on the earlier of (i) the date on
which the Company ceases to be subject to any license agreement with the BCBSA
or (ii) the date on which the Company's license agreement with BCBSA no longer
contains provisions permitting termination if a person
<PAGE>
becomes Beneficial Owner of a specified percentage of the Company's securities.
These termination provisions also apply to any future restriction added to the
Company's Articles to comply with the license agreement with BCBSA or any
guideline or restriction imposed by the BCBSA that limits the number of shares
of the Company that may be acquired or owned by any person or imposes a voting
requirement higher than Virginia law.
Description of Supermajority Vote Requirement. The Articles will require
the affirmative vote of more than 75% (the "Supermajority Vote Requirement") of
each class of the outstanding shares of the Company entitled to vote to approve
the following amendments to the Articles: (i) amendments to the Ownership and
Transfer Restrictions, (ii) any amendments to the provisions of the Articles
providing for the Board of Directors to be divided into three classes, (iii) any
amendment permitting cumulative voting by the shareholders of the Company and
(iv) any amendment to the Supermajority Vote Requirement. The Supermajority Vote
Requirement will not, however, apply to any amendment to conform to a change to
the terms of the Company's license agreement with the BCBSA or to any amendment
required or permitted by the BCBSA. The Supermajority Vote Requirement will
become ineffective and of no further force and effect if the Company's license
agreement with the BCBSA is terminated and the Company and the BCBSA do not
enter into a replacement license agreement at such time. In addition, the
Supermajority Vote Requirement will also become ineffective and of no further
force and effect if the BCBSA ceases to require the Supermajority Vote
Requirement as a condition of the Company's license agreement.
Virginia Anti-Takeover Law
Restrictions on Affiliated Transactions. The VSCA requires the approval of
certain material transactions (an "Affiliated Transaction") between a Virginia
corporation and any beneficial holder of more than 10% of any class of its
outstanding voting shares (an "Interested Shareholder") by the other holders of
voting shares. Affiliated Transactions include any merger, share exchange or
material disposition of corporate assets not in the ordinary course of business
involving an Interested Shareholder, any dissolution of the corporation proposed
by or on behalf of an Interested Shareholder, or any reclassification, including
reverse stock splits, recapitalization or merger of the corporation with its
subsidiaries which increases the percentage of voting shares owned beneficially
by an Interested Shareholder by more than 5%.
For three years following the time that an Interested Shareholder becomes
an owner of 10% of the outstanding voting shares, a Virginia corporation cannot
engage in an Affiliated Transaction with such Interested Shareholder without the
approval of two-thirds of the voting shares other than those shares beneficially
owned by the Interested Shareholder, and the approval of a majority of the
"Disinterested Directors." A Disinterested Director means, with respect to a
particular Interested Shareholder, a member of the Company's Board of Directors
who was (1) a member on the date on which an Interested Shareholder became an
Interested Shareholder and (2) recommended for election by, or was elected to
fill a vacancy and received the affirmative vote of, a majority of the
Disinterested Directors then on the Board. At the expiration of the three-year
period, the statute requires approval of Affiliated Transactions by two-thirds
of the voting shares other than those beneficially owned by the Interested
Shareholder or by a majority of the Disinterested Directors. Such approval is
not required, however, if the transaction satisfies the fair price requirements
of the statute. In general, the fair price requirements provide that the
shareholders, other than the Interested Shareholder, must receive per share
consideration that is not less than the price paid by the Interested Shareholder
for its shares, the fair market value of the shares, or an amount based upon
these two amounts.
None of the foregoing limitations and special voting requirements applies
to a transaction with an Interested Shareholder whose acquisition of shares
making such person an Interested Shareholder was approved by a majority of the
corporation's Disinterested Directors.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the statute provides that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation can adopt an amendment to its articles of
incorporation or bylaws providing that the Affiliated Transactions provisions
shall not apply to the corporation. The Company has not "opted out" of the
Affiliated Transactions provisions.
Voting Restrictions Arising from Control Share Acquisitions. The VSCA also
contains provisions governing "Control Share Acquisitions." These provide that
shares of a Virginia public issuer acquired in a transaction that would cause
the voting strength of the acquiring person and its associates to meet or exceed
any of three thresholds (20%, 33 1/3% or 50%) have no voting rights unless
granted by a majority vote of shares not owned by the acquiring person or any
officer or employee-director of the Virginia public issuer. An acquiring person
may require the Virginia public issuer to hold a special meeting of shareholders
to consider the matter within 50 days of the request.
Transfer Agent and Registrar
The Company has appointed First Chicago Trust Company of New York as the
transfer agent and registrar for its Common Stock.
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The shares of Common Stock distributed in the Demutualization to Eligible
Members will be subject to a six-month lockup. See "The
Demutualization -- Lockup Period." After expiration of the lockup period, the
shares of Common Stock distributed in the Demutualization will be eligible for
resale in the public market without restriction by Eligible Members who are not
"affiliates" of Virginia BCBS or Trigon Healthcare within the meaning of Rule
144 under the Securities Act of 1933. Moreover, in accordance with the Plan of
Demutualization, the Company will for a period of 90 days, which may be extended
by the Company, commencing no earlier than six months and no later than 18
months after the Effective Date provide for the public sale, at market prices
and without brokerage commissions or similar fees, of odd lot shares of Common
Stock received pursuant to the Plan of Demutualization by certain Eligible
Members. In the alternative, these Eligible Members will be able to purchase
sufficient shares of Common Stock to round up their holding to 100 shares. The
Company will determine after the Demutualization and at least 30 days before the
program begins the maximum number of shares of Common Stock received in the
Demutualization, not to exceed 99, that will entitle such holder to participate
in the program. See "The Demutualization -- Commission-Free Sales and Round-Up
Program." The Company also will agree not to offer, sell or otherwise dispose of
any shares of Common Stock (or securities convertible into Common Stock) for a
period of 180 days after the date of this Prospectus without the prior written
consent of the Underwriters. No prediction can be made as to the effect, if any,
such future sales of shares, or the availability of shares for future sales,
will have on the market price of the Common Stock prevailing from time to time.
Sales of substantial amounts of Common Stock, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement"), and concurrently with the sale of shares
of Common Stock to the International Underwriters (as defined below), the
Company has agreed to sell, and the underwriters named below (the "U.S.
Underwriters"), acting through their representatives, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, [and list others] (the "U.S. Representatives"),
have severally agreed to purchase, the aggregate number of shares of Common
Stock set forth below opposite their respective names. Under certain
circumstances, the commitments of non-defaulting U.S. Underwriters may be
increased as set forth in the U.S. Purchase Agreement.
<TABLE>
<CAPTION>
Number of
U.S. Underwriters Shares
- --------------------------------------------------------------------------------------------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................................................
[Others].................................................................................................
----------
Total........................................................................................
----------
----------
</TABLE>
The Company has also entered into a purchase agreement (the "International
Purchase Agreement") with certain underwriters outside the United States and
Canada (the "International Underwriters"), for whom Merrill Lynch International,
[list others] are acting as representatives (the "International
Representatives"). Subject to the terms and conditions set forth in the
International Purchase Agreement, and concurrently with the sale of
shares of Common Stock to the U.S. Underwriters, the Company has agreed to sell
to the International Underwriters, and the International Underwriters have
severally agreed to purchase, an aggregate of shares of Common Stock.
Under certain circumstances as set forth in the International Purchase
Agreement, the commitments of non-defaulting International Underwriters may be
increased. The initial public offering price per share and the underwriting
discount per share are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Underwriters
(collectively, the "Underwriters"), respectively, have agreed, subject to the
terms and conditions set forth therein, including the delivery of opinions of
counsel and other customary conditions, to purchase all of the shares of Common
Stock being sold pursuant to each such Purchase Agreement if any of the shares
of Common Stock being sold pursuant to each such Purchase Agreement are
purchased. The closing with respect to the sale of the shares of Common Stock
sold pursuant to each Purchase Agreement is also a condition to the closing with
respect to the sale of shares of Common Stock sold pursuant to the other
Purchase Agreement.
The U.S. Underwriters and the International Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Under the terms of the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to each
other for purposes of resale at the initial public offering price, less an
amount not greater than the selling concession.
The U.S. Underwriters propose to offer the shares of Common Stock to the
public initially at the public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a concession not in
excess of $ per share. The U.S. Underwriters may allow, and such dealers
may re-allow, a discount not in excess of $ per share on sales to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Company has granted the U.S. Underwriters and the International
Underwriters an option to purchase up to and additional
shares of Common Stock, respectively, at the initial public offering price, less
the underwriting discount. Such option, which expires 30 days after the date of
this Prospectus, may be exercised solely to cover over-allotments. To the extent
the U.S. Underwriters exercise such option, each of the U.S. Underwriters will
have a firm commitment, subject to certain conditions, to purchase approximately
the same percentage of the option shares that the number of shares to be
purchased initially by that U.S. Underwriter bears to the total number of shares
to be purchased initially by the U.S. Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Company has agreed that it will not, without the prior written consent
of the U.S. Representatives and the International Representatives, offer, sell
or otherwise dispose of any shares of Common Stock or securities convertible
into or
<PAGE>
exchangeable or exercisable for shares of Common Stock, other than the issuance
of Common Stock pursuant to the Plan of Demutualization and the sale to the
Underwriters of the shares of Common Stock in the Offerings, for a period of 180
days after the date of this Prospectus. See "Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price was determined through negotiations
between the Company and the U.S. Representatives and the International
Representatives. Among the factors considered in such negotiations were an
assessment of the financial information contained herein, an evaluation of the
Company's management, the future prospects of the Company and the health care
industry in general, market prices of securities of companies engaged in
activities similar to those of the Company and the prevailing conditions in the
securities market. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the Offerings at or above the initial public offering
price.
Application will be made to list the Common Stock on the New York Stock
Exchange under the symbol TGH. In order to meet the requirements for the listing
of the Common Stock on such exchange, the U.S. Representatives and the
International Representatives, on behalf of the Underwriters, have undertaken to
sell lots of 100 or more shares to a minimum of 2,000 beneficial owners.
Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and
any dealer to whom they sell shares of Common Stock will not offer to sell or
sell shares of Common Stock to persons who are non-United States or non-Canadian
persons or to persons they believe intend to resell to persons who are
non-United States or non-Canadian persons, and the International Underwriters
and any dealer to whom they sell shares of Common Stock will not offer to sell
or sell shares of Common Stock to United States or Canadian persons or to
persons they believe intend to resell to United States or Canadian persons,
except in each case for transactions pursuant to the Intersyndicate Agreement
which, among other things, permits the Underwriters to purchase from each other
and offer for resale such number of shares of Common Stock as the selling
Underwriter or Underwriters and the purchasing Underwriter or Underwriters may
agree.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by McGuire, Woods,
Battle & Boothe, L.L.P., Richmond, Virginia. McGuire, Woods, Battle & Boothe,
L.L.P. provides health care coverage to its members and employees through Trigon
and certain of Trigon's subsidiaries, and McGuire, Woods, Battle & Boothe,
L.L.P. is expected to receive 22,341 shares of Common Stock of Trigon in the
Demutualization. R. Gordon Smith, a director of the Company, is a partner of
McGuire, Woods, Battle & Boothe, L.L.P. Certain legal matters relating to this
Offering will be passed upon for the Underwriters by Debevoise & Plimpton, New
York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1994 and 1995 and September 30, 1996 and for each of the years in the three-year
period ended December 31, 1995 and the nine months ended September 30, 1996 have
been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP refers to changes in accounting
for investment securities, income taxes and postemployment benefits in 1993.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement on Form S-1 (herein
together with all amendments and exhibits thereto called the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Common Stock offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement,
and the exhibits and schedules thereto. Statements contained in the Prospectus
as to the contents of any contract or other document are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement and exhibits thereto filed by the Company with the Commission may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission located at Room 1400, 75 Park Place, New York, New
York 10007 and at Northwest Atrium Center, 500 West Madison Street (Suite 1400),
Chicago, Illinois 60661. The Commission maintains a World Wide Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission. Copies of such material may also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
The Company will register under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), at the time of or prior to the Offerings, and, in
accordance with the Exchange Act, thereafter will be required to file reports,
proxy statements and other information with the Commission. The Company intends
to furnish its stockholders with annual reports containing consolidated
financial statements audited by its certified public accountants and with
quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year.
<PAGE>
GLOSSARY
Capitation. A fixed amount per individual that is paid periodically
(usually monthly) to a provider as compensation for providing comprehensive
health care service during the period. The fee is set by contract between a
prepaid health care plan and the provider.
Coinsurance. Payment by a member of a fixed percent of liability for care
up to a fixed maximum limit.
Community Rating. The practice of pooling the medical claims costs of
similar classes of insured groups, such as small business or individuals, as a
way of developing premium rates for a specific individual or business within
each pooled category.
Copayments. Payments by a member of a fixed amount for each service.
Deductible. Payment by a member of a specified initial portion of annual
medical costs incurred by the member.
Diagnostic Related Groups (DRG). A classification method that categorizes
services with respect to primary and secondary diagnosis, age and complications.
Discounted Fee-for-service. A payment program in which providers agree to
receive less than their standard fee for providing medical services to members.
Eligible Member. An individual or entity holding a membership interest in
Virginia BCBS as of December 31, 1995.
Fee Schedule payment program. A payment program in which providers receive
no more than a specified fixed payment for any given covered service.
Health Maintenance Organization (HMO). An organization that arranges the
delivery of comprehensive health care services for its members at a fixed
periodic payment.
Independent Practice Association (IPA) Model HMO. An HMO that contracts
directly with physicians in independent practices.
Inpatient Services. Services rendered in a hospital to a member who has
been admitted and occupies a hospital bed for the purpose of receiving medical
services.
Managed Care. A health care financing and delivery arrangement designed to
provide health care through organized relationships with health care providers.
Medical Loss Ratio. The expression of medical claim expenses as a
percentage of premium revenues. Considered to be one measure of a managed care
company's effectiveness in controlling health care costs.
Medicare HMO. Managed care organizations that have entered into certain
contracts with the Health Care Financing Administration agree to provide
enrolled beneficiaries with Medicare benefits in exchange for predetermined and
fixed monthly payments.
member. An individual or group covered by any of the Company's products.
Participating Provider (PAR). A provider who has signed an agreement with
the Company to provide health care services to members, usually at a discount.
Point of Service (POS) Program. An option available on PPO network products
in which each member chooses a primary care physician who is responsible for
coordinating all health care services for the member.
Preferred Provider Organization. A network system in which selected
providers furnish health care services to enrolled members. Medical services in
the PPO network are typically provided at a greater discount than the PAR
network.
Primary care physician. Under managed care programs, a designated general
practice provider who is responsible for coordinating the total health care
services of patients assigned to the provider by the managed care company.
Provider Profiling. The collection and analysis of claims and benefits
management data for the identification of cost, utilization and quality of care
characteristics of physicians, health care facilities and allied health
providers.
Stop-loss coverage. Insurance which limits a company's liability to pay
health care costs above a designated amount.
Traditional indemnity insurance. A method for providing health care
services which does not generally attempt to control health care costs through
such techniques as contracted provider networks and utilization management.
Utilization Management. Activities, including admission review, second
surgical opinion and provider profiling, that are intended to manage the use of
medical services by members to promote the efficient use of medical care.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 and 1995 and September 30, 1996
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors......................................................................................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996.................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995
and nine-month periods ended September 30, 1995 (unaudited) and 1996.............................................. F-4
Consolidated Statements of Changes in Surplus for the years ended December 31, 1993, 1994 and 1995 and nine months
ended September 30, 1996.......................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995
and nine-month periods ended September 30, 1995 (unaudited) and 1996.............................................. F-6
Summary of Significant Accounting Policies............................................................................. F-7
Notes to Consolidated Financial Statements............................................................................. F-10
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
BLUE CROSS AND BLUE SHIELD OF VIRGINIA:
We have audited the accompanying consolidated balance sheets of Blue Cross
and Blue Shield of Virginia and subsidiaries as of December 31, 1994 and 1995
and September 30, 1996, and the related consolidated statements of operations,
changes in surplus and cash flows for each of the years in the three-year period
ended December 31, 1995 and the nine months ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Blue Cross
and Blue Shield of Virginia and subsidiaries as of December 31, 1994 and 1995
and September 30, 1996 and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1995 and the
nine months ended September 30, 1996 in conformity with generally accepted
accounting principles.
Effective December 31, 1993, the Company adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Effective January 1, 1993, the Company adopted the provisions of
SFAS No. 109, "Accounting for Income Taxes," and SFAS No. 112, "Employers'
Accounting for Postemployment Benefits."
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
November 6, 1996
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1995 and September 30, 1996
<TABLE>
<CAPTION>
Unaudited
pro forma
December 31, September 30,
----------------------- September 30, 1996 (note
1994 1995 1996 18)
---------- --------- ------------- -------------
<S> <C> <C> <C> <C>
(In thousands)
ASSETS
CURRENT ASSETS
Cash.............................................................. $ 11,102 29,263 33,303
Investment securities, at estimated fair value (note 3)........... 990,469 1,090,389 1,090,977
Premiums and other receivables (note 4)........................... 326,769 332,878 369,406
Deferred income taxes (note 10)................................... 3,218 -- 18,474
Other assets...................................................... 9,362 9,369 9,717
---------- --------- ------------- -------------
TOTAL CURRENT ASSETS......................................... 1,340,920 1,461,899 1,521,877
---------- --------- ------------- -------------
Property and equipment, net (note 5)................................ 43,914 44,794 51,514
Deferred income taxes (note 10)..................................... 7,347 15,229 58,108
Goodwill and other intangibles, net (note 13)....................... -- 22,847 77,372
Restricted investments, at estimated fair value (note 3)............ 7,575 6,918 10,314
Other assets........................................................ 3,348 13,644 15,552
---------- --------- ------------- -------------
TOTAL ASSETS................................................. $1,403,104 1,565,331 1,734,737
---------- --------- ------------- -------------
---------- --------- ------------- -------------
LIABILITIES AND SURPLUS
CURRENT LIABILITIES
Medical and other benefits payable (note 6)....................... $ 312,381 372,815 444,200
Unearned premiums................................................. 102,240 97,789 98,558
Accounts payable and accrued expenses............................. 78,747 82,853 80,896
Deferred income taxes (note 10)................................... -- 13,968 --
Other liabilities (note 8)........................................ 176,530 170,711 153,103
Obligation for Commonwealth Payment (note 17)..................... -- -- 87,500
---------- --------- ------------- -------------
TOTAL CURRENT LIABILITIES.................................... 669,898 738,136 864,257
---------- --------- ------------- -------------
Obligation for Commonwealth Payment, noncurrent (note 17)........... -- -- 87,500
Obligations for employee benefits, noncurrent (note 11)............. 50,764 51,548 57,539
Medical and other benefits payable, noncurrent (note 6)............. 21,910 31,622 34,734
Minority interest in subsidiary..................................... 4,657 3,954 4,057
---------- --------- ------------- -------------
TOTAL LIABILITIES............................................ 747,229 825,260 1,048,087
---------- --------- ------------- -------------
SURPLUS
Retained earnings................................................. 653,570 700,565 655,952
Net unrealized gain on investment securities, net of deferred
income taxes of $1,100, $21,242 and $16,517 (note 3)........... 2,305 39,506 30,698
---------- --------- ------------- -------------
TOTAL SURPLUS................................................ 655,875 740,071 686,650
Commitments and contingencies (notes 7, 11, 13, 14, 15, 16 and
17)...............................................................
---------- --------- ------------- -------------
TOTAL LIABILITIES AND SURPLUS................................ $1,403,104 1,565,331 1,734,737
---------- --------- ------------- -------------
---------- --------- ------------- -------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1993, 1994 and 1995 and nine-month periods ended
September 30, 1995 (unaudited) and 1996
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------ ----------------------
1993 1994 1995 1995 1996
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(unaudited)
<CAPTION>
(In thousands)
<S> <C> <C> <C> <C> <C>
REVENUES
Premium and fee revenues
Commercial............................................. $1,050,157 1,081,820 1,157,899 857,448 985,127
Federal Employee Program............................... 279,058 303,250 329,243 248,109 265,587
Amounts attributable to self-funded arrangements....... 905,529 908,234 981,741 719,067 798,358
Less: amounts attributable to claims under self-funded
arrangements......................................... (815,488) (827,869) (897,954) (655,731) (731,062)
---------- --------- --------- --------- ---------
1,419,256 1,465,435 1,570,929 1,168,893 1,318,010
Investment income (note 3)................................ 34,279 39,962 45,861 34,881 34,081
Net realized gains (note 3)............................... 26,199 12,793 52,976 34,833 50,685
Other revenues (note 9)................................... 30,555 45,467 55,176 41,096 37,666
---------- --------- --------- --------- ---------
TOTAL REVENUES....................................... 1,510,289 1,563,657 1,724,942 1,279,703 1,440,442
---------- --------- --------- --------- ---------
OPERATING EXPENSES
Medical and other benefit costs (note 6)
Commercial............................................. 795,921 802,666 959,328 689,705 809,344
Federal Employee Program............................... 262,295 283,645 312,222 234,965 252,478
---------- --------- --------- --------- ---------
1,058,216 1,086,311 1,271,550 924,670 1,061,822
Selling, general and administrative expenses (note 1)..... 308,412 322,391 346,353 247,059 283,704
Copayment refund program (note 14)........................ -- 36,432 47,073 46,702 --
---------- --------- --------- --------- ---------
TOTAL OPERATING EXPENSES............................. 1,366,628 1,445,134 1,664,976 1,218,431 1,345,526
---------- --------- --------- --------- ---------
Income before income taxes, cumulative effects of changes in
accounting principles and extraordinary items............. 143,661 118,523 59,966 61,272 94,916
Income tax expense (benefit) (note 10)...................... 35,803 24,564 8,264 8,475 (46,751)
---------- --------- --------- --------- ---------
Income before cumulative effects of changes in accounting
principles and extraordinary items........................ 107,858 93,959 51,702 52,797 141,667
Cumulative effect at January 1, 1993 of change in accounting
for income taxes (note 10)................................ 12,928 -- -- -- --
Cumulative effect at January 1, 1993 of change in accounting
for postemployment benefits, net of income taxes of $1,200
(note 11)................................................. (4,802) -- -- -- --
Extraordinary items -- demutualization costs and
Commonwealth Payment, net of income taxes of $347, $2,535,
$1,615 and $594 (note 17)................................. -- (644) (4,707) (2,999) (186,280)
---------- --------- --------- --------- ---------
NET INCOME (LOSS)........................................... $ 115,984 93,315 46,995 49,798 (44,613)
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
UNAUDITED PRO FORMA INFORMATION (NOTE 18):
NET INCOME BEFORE EXTRAORDINARY ITEMS PER SHARE............. $
---------
---------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS
Years ended December 31, 1993, 1994 and 1995 and nine months ended September 30,
1996
<TABLE>
<CAPTION>
Unrealized
gains
(losses) on
investment
Retained securities, Total
earnings net surplus
-------- ------------- --------
<S> <C> <C> <C>
(In thousands)
BALANCE AT JANUARY 1, 1993............................................................. $444,271 -- 444,271
Net income............................................................................. 115,984 -- 115,984
Adoption of SFAS No. 115............................................................... -- 45,891 45,891
-------- ------------- --------
BALANCE AT DECEMBER 31, 1993........................................................... 560,255 45,891 606,146
Net income............................................................................. 93,315 -- 93,315
Change in unrealized gains (losses) on investment securities, net...................... -- (43,586) (43,586)
-------- ------------- --------
BALANCE AT DECEMBER 31, 1994........................................................... 653,570 2,305 655,875
Net income............................................................................. 46,995 -- 46,995
Change in unrealized gains (losses) on investment securities, net...................... -- 37,201 37,201
-------- ------------- --------
BALANCE AT DECEMBER 31, 1995........................................................... 700,565 39,506 740,071
Net loss............................................................................... (44,613) -- (44,613)
Change in unrealized gains (losses) on investment securities, net...................... -- (8,808) (8,808)
-------- ------------- --------
BALANCE AT SEPTEMBER 30, 1996.......................................................... $655,952 30,698 686,650
-------- ------------- --------
-------- ------------- --------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1993, 1994 and 1995 and nine-month periods ended
September 30, 1995 (unaudited) and 1996
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
--------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(unaudited)
<CAPTION>
(In thousands)
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES
(note 12)............................................. $ 147,922 122,646 34,118 55,444 32,252
----------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.......... 2,252 89 25 16 35
Capital expenditures.................................. (9,506) (12,543) (13,293) (10,847) (10,819)
Investment securities purchased....................... (1,836,934) (1,844,039) (2,694,188) (2,378,838) (2,180,759)
Proceeds from investment securities sold.............. 1,355,573 1,192,725 1,531,862 1,432,200 2,133,101
Maturities of fixed income securities................. 350,398 538,413 1,178,232 947,622 136,853
Cash paid for purchase of subsidiaries, net of cash
acquired........................................... (8,876) -- (26,762) (26,762) (82,496)
Cash paid for other investments....................... -- -- (7,500) -- --
----------- ---------- ---------- ---------- ----------
Net cash used by investing activities................... (147,093) (125,355) (31,624) (36,609) (4,085)
----------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in outstanding checks in excess of bank
balance............................................ (3,628) 5,809 15,667 (10,645) (24,127)
Investment in subsidiary by minority shareholder...... 4,900 -- -- -- --
----------- ---------- ---------- ---------- ----------
Net cash provided (used) by financing activities........ 1,272 5,809 15,667 (10,645) (24,127)
----------- ---------- ---------- ---------- ----------
NET INCREASE IN CASH.................................... 2,101 3,100 18,161 8,190 4,040
CASH -- beginning of period............................. 5,901 8,002 11,102 11,102 29,263
----------- ---------- ---------- ---------- ----------
CASH -- end of period................................... $ 8,002 11,102 29,263 19,292 33,303
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1994 and 1995 and September 30, 1996
General
Blue Cross and Blue Shield of Virginia (dba Trigon Blue Cross Blue Shield)
(the Company) is a mutual insurance company organized for the purpose of
managing and financing hospitalization, medical and other health benefits. The
Company is currently pursuing conversion to a stock insurance company as
described in note 17. The Company also processes claims for Medicare and
participates in a national contract with the U.S. Office of Personnel Management
to provide benefits to Federal employees within Virginia through the Federal
Employee Program (FEP). The Company owns 100% of HMO Virginia, Inc.,
HealthKeepers, Inc., Physicians Health Plan Inc., Mid-South Insurance Company,
Healthcare Support Corporation, Consolidated Healthcare, Inc., Consolidated
Holdings Corporation, Consolidated Investment Corporation, Trigon
Administrators, Inc., Health Communication Services, Inc., Health Management
Corporation, Monticello Life Insurance Company, Inc., Monticello Service Agency,
Inc. and Trigon Health Ventures, Inc. The Company owns 80% of Priority, Inc. and
51% of Peninsula Health Care, Inc. These subsidiaries include health maintenance
organizations (HMOs) and other companies which provide complementary products
and services to customers and non-customers of Blue Cross and Blue Shield of
Virginia. These products and services include third-party administration for
medical and workers' compensation, life and disability insurance, health
promotion, electronic data interchange and other products.
The Company follows Statement of Financial Accounting Standards (SFAS) No.
60, "Accounting and Reporting by Insurance Enterprises" as it relates to its
insurance business and Statement of Position 89-5, "Financial Accounting and
Reporting by Providers of Prepaid Healthcare Services" as it relates to its HMO
business. The significant accounting policies and practices followed by the
Company and its subsidiaries are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company's profitability depends in large part on accurately predicting
and effectively managing health care costs. The Company continually reviews its
premium and benefit structure to reflect its underlying claims experience and
revised actuarial data; however, several factors could adversely affect the
medical loss ratios. Certain of these factors, which include changes in health
care practices, inflation, new technologies, major epidemics, natural disasters
and malpractice litigation, are beyond any health plan's control and could
adversely affect the Company's ability to accurately predict and effectively
control health care costs. Costs in excess of those anticipated could have a
material adverse effect on the Company's results of operations.
In addition, the managed care industry is highly competitive in both
Virginia and in other states in the Southeastern and Mid-Atlantic United States
where the Company principally intends to expand. There is no assurance that such
competition will not exert strong pressures on the Company's profitability, its
ability to increase enrollment, or its ability to successfully attain its
expansion plans. Also, there can be no assurance that regulatory initiatives
will not be undertaken at the state or federal level to reform the health care
industry in order to reduce the escalation in health care costs or to make
health care more accessible. Such reform could adversely affect the Company's
profitability.
Investment Securities
Effective December 31, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." All investment securities
are considered available for sale and are recorded at estimated fair value,
based on quoted market prices. The net unrealized gain or loss on investment
securities, net of deferred income taxes, is included as a separate component of
surplus. A decline in the fair
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
value of any investment security below cost, that is deemed other than
temporary, is charged to earnings resulting in a new cost basis for the
security. Costs of investments sold are determined on the first in, first out
basis.
Certain of the Company's investment securities are denominated in foreign
currencies. The Company enters into forward currency contracts and foreign
currency options to hedge the effect of fluctuations in foreign currency
exchange rates. Realized and unrealized gains and losses on these contracts are
recognized consistent with and offset foreign exchange gains and losses on the
underlying investments being hedged. Accordingly, forward currency contracts and
foreign currency options are recorded at fair value.
Software Development Costs
The Company expenses as incurred substantially all costs associated with
the development of computer software for internal use, other than the initial
purchase price of software packages.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed by the straight-line
method over the estimated useful lives of the assets, which are 40 to 50 years
for buildings and 3 to 10 years for furniture and equipment. Leasehold
improvements are amortized on the straight-line method over the shorter of the
lease term or estimated useful life of the asset. Any gain or loss realized upon
retirement or disposal is reflected in selling, general and administrative
expenses.
Goodwill and Other Intangibles
Costs in excess of fair value of net tangible and identified intangible
assets of businesses acquired are amortized using the straight-line method over
periods from 15 to 25 years. Recoverability is reviewed annually or sooner if
events or changes in circumstances indicate that the carrying amount may exceed
fair value. Recoverability is then determined by comparing the undiscounted net
cash flows of the assets to which the goodwill applies to the net book value
including goodwill of those assets.
Amortization charged to operations was $1,399,000 for the year ended
December 31, 1995 and $730,000 (unaudited) and $2,915,000 for the nine-month
periods ended September 30, 1995 and 1996, respectively. Accumulated
amortization at December 31, 1995 and September 30, 1996 was $1,399,000 and
$4,314,000, respectively.
Medical and Other Benefits Payable
The Company establishes liabilities for claims in process of review and
claims incurred but not reported. These liabilities are based on historical
payment patterns using actuarial techniques. In addition, processing costs are
accrued as operating expenses based on an estimate of the costs necessary to
process these claims. The methods for making these estimates and for
establishing the resulting liabilities are continually reviewed and updated, and
any adjustments resulting therefrom are reflected in current operations. While
the ultimate amount of claims and the related expenses paid are dependent on
future developments, management is of the opinion that the liabilities for
claims and claims processing costs are adequate to cover such claims and
expenses. A liability or receivable for hospital settlements is also maintained,
which represents the estimate of the amount to be paid to or received from
hospitals upon the annual settlement of their contracts with the Company.
Revenues
All of the Company's individual and certain of the Company's group
contracts provide for the individual or the group to be fully insured. Premiums
for these contracts are billed in advance of the respective coverage periods and
are initially recorded as premium receivables and as unearned income. Unearned
premiums are recognized as earned in the period of coverage.
Certain other groups have contracts that provide for the group to be at
risk for all or a portion of their claims experience. Most of these self-funded
groups purchase aggregate and/or specific stop-loss coverage. In exchange for a
premium, the group's aggregate liability is capped for the year or the group's
liability on any one participant is capped for the year. The Company charges
self-funded groups an administrative fee which is based on the number of members
in a group or the
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
group's claims experience. Under the Company's self-funded arrangements, amounts
due are recognized based on incurred claims plus administrative and other fees
and any stop-loss premiums. In addition, accounts for certain self-funded groups
are charged or credited with interest expense or income as provided by the
groups' contracts.
Agency Contracts
As fiscal intermediary and administrative agent for Medicare and other
plans, the Company allocates operating expenses to these lines of business to
determine reimbursement due for services rendered in accordance with the
contracts in force. The claims processed under these arrangements are not
included in the accompanying consolidated statements of operations and the
reimbursement of operating expenses has been recorded as a reduction of the
Company's operating expenses.
Postretirement/Postemployment Benefits
Pension costs are accrued in accordance with Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for Pensions" and are funded
based on the minimum contribution requirements of the Employee Retirement Income
Security Act of 1974. The actuarial cost method used is the projected unit
credit method.
The Company provides certain health and life insurance benefits to retired
employees. These benefits are accrued in accordance with Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions."
The Company also provides certain disability related postemployment
benefits. These benefits are accrued in accordance with Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits."
Income Taxes
The Company is subject to Federal income tax as a stock property and
casualty insurance company under the provisions of the Tax Reform Act of 1986.
The Company is not subject to state income taxes; however, certain subsidiaries
of the Company are subject to state income taxes.
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes"
and has reported the cumulative effect of that change in the method of
accounting for income taxes in the 1993 consolidated statement of operations.
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Reclassifications
Certain amounts for 1994 and 1995 have been reclassified to conform with
classifications adopted for 1996.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and September 30, 1996
Consistent with the financial statement presentation, the following notes
include information related to the consolidated balance sheets as of December
31, 1994 and 1995, and September 30, 1996 and information related to the
consolidated statements of operations and cash flows for each of the years in
the three-year period ended December 31, 1995 and the nine-month periods ended
September 30, 1995 (unaudited) and 1996.
(1) AGENCY CONTRACTS
The Company acts as an administrative agent for processing claims for certain
agencies and other plans. Claims processed for others and the related
reimbursed operating expenses, which are subject to their audit, were as
follows for the years ended December 31, 1993, 1994 and 1995 and the
nine-month periods ended September 30, 1995 (unaudited) and 1996 (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------ ----------------------
1993 1994 1995 1995 1996
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(unaudited)
Claims processed for:
Medicare.............................................. $2,304,267 2,456,766 2,654,580 1,986,392 2,156,759
Inter-Plan Bank and other plans....................... 17,685 12,890 37,046 26,343 38,262
---------- --------- --------- --------- ---------
$2,321,952 2,469,656 2,691,626 2,012,735 2,195,021
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Operating expenses reimbursed by:
Medicare.............................................. 12,135 11,816 11,605 8,756 8,650
Intera-Plan Bank and other plans...................... 61 44 807 576 948
---------- --------- --------- --------- ---------
$ 12,196 11,860 12,412 9,332 9,598
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
(2) STATUTORY FINANCIAL STATEMENTS
The Company is required to file financial statements with, and is subject to
audit by, the Commonwealth of Virginia, Bureau of Insurance. Such financial
statements are prepared in accordance with statutory accounting practices
prescribed or permitted by the Commonwealth of Virginia, Bureau of Insurance
which differ from generally accepted accounting principles under which the
accompanying consolidated financial statements have been prepared.
Significant differences resulting from these accounting practices include
certain investment valuation reserves recognized under statutory accounting
as well as certain assets (primarily property and equipment) and deferred
income taxes not recognized under statutory accounting practices. While the
Bureau of Insurance has the authority to permit insurers to deviate from
prescribed statutory accounting practices, the Company has not received, nor
requested, approval to adopt any such deviations. In accordance with the
Insurance Code of Virginia (the Code), the Company's statutory surplus is
reduced by excess Category 2 investments. The Company's Category 2
investments consist primarily of domestic equity investments that exceed a
specified percentage of admitted assets and all foreign denominated
investments. At December 31, 1994 and 1995, this reduction in statutory
surplus due to excess Category 2 investments approximated $35,000,000 and
$92,000,000, respectively. There were no excess Category 2 investments at
September 30, 1996.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(2) STATUTORY FINANCIAL STATEMENTS -- Continued
The Company's statutory surplus and net income approximated (in thousands):
<TABLE>
<CAPTION>
Statutory surplus at:
<S> <C>
December 31, 1994....................................................... $538,000
December 31, 1995....................................................... 478,000
September 30, 1996 (unaudited).......................................... 600,000
Statutory net income for the periods ended:
December 31, 1993....................................................... $102,000
December 31, 1994....................................................... 113,000
December 31, 1995....................................................... 83,000
September 30, 1995 (unaudited).......................................... 80,000
September 30, 1996 (unaudited).......................................... 54,000
</TABLE>
The Company is required by the Commonwealth of Virginia, Bureau of Insurance
to maintain a statutory surplus balance of at least $4,000,000.
In addition, the Commonwealth of Virginia adopted the National Association of
Insurance Commissioners (NAIC) Risk Based Capital Act in 1995. Under this
Act, a company's risk-based capital (RBC) is calculated by applying certain
factors to various asset, premium and reserve items. If a company's
calculated RBC falls below certain thresholds, regulatory intervention or
oversight is required. The Company's RBC level as calculated in accordance
with the NAIC RBC Instructions at December 31, 1995 exceeds all RBC
thresholds.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(3) INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of investment securities were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed income
Domestic
U.S. Treasury securities and obligations of U.S. government
agencies............................................................ $174,592 59 2,191 172,460
Mortgage-backed obligations of U.S. government agencies............... 40,945 23 1,878 39,090
Other mortgage-backed and asset-backed securities..................... 158,667 442 6,724 152,385
Domestic corporate bonds.............................................. 89,246 630 4,829 85,047
Short-term debt securities with maturities of less than one year...... 18,101 -- 98 18,003
Foreign
Debt securities issued by foreign governments......................... 91,581 1,112 4,820 87,873
Foreign corporate bonds............................................... 14,591 331 893 14,029
Short-term debt securities with maturities of less than one year...... 1,486 -- 24 1,462
-------- ---------- ---------- ---------
Total fixed income......................................................... 589,209 2,597 21,457 570,349
-------- ---------- ---------- ---------
Equities
Domestic equity securities............................................... 219,735 18,812 9,652 228,895
Foreign equity securities................................................ 185,695 26,461 13,356 198,800
-------- ---------- ---------- ---------
Total equities............................................................. 405,430 45,273 23,008 427,695
-------- ---------- ---------- ---------
$994,639 47,870 44,465 998,044
-------- ---------- ---------- ---------
-------- ---------- ---------- ---------
Unrestricted............................................................... $987,038 47,853 44,422 990,469
Restricted................................................................. 7,601 17 43 7,575
-------- ---------- ---------- ---------
$994,639 47,870 44,465 998,044
-------- ---------- ---------- ---------
-------- ---------- ---------- ---------
</TABLE>
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(3) INVESTMENT SECURITIES -- Continued
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed income
Domestic
U.S. Treasury securities and obligations of U.S. government
agencies......................................................... $ 95,110 1,686 -- 96,796
Mortgage-backed obligations of U.S. government agencies............ 27,001 1,317 9 28,309
Other mortgage-backed and asset-backed securities.................. 177,137 2,590 688 179,039
Domestic corporate bonds........................................... 117,258 2,394 206 119,446
Short-term debt securities with maturities of
less than one year............................................... 114,452 472 737 114,187
Foreign
Debt securities issued by foreign governments...................... 88,924 6,676 765 94,835
Foreign corporate bonds............................................ 12,249 441 45 12,645
Short-term debt securities with maturities of
less than one year............................................... 7,835 38 103 7,770
---------- ---------- ---------- ---------
Total fixed income...................................................... 639,966 15,614 2,553 653,027
---------- ---------- ---------- ---------
Equities
Domestic equity securities............................................ 168,735 37,496 4,645 201,586
Foreign equity securities............................................. 226,278 35,902 21,437 240,743
---------- ---------- ---------- ---------
Total equities.......................................................... 395,013 73,398 26,082 442,329
---------- ---------- ---------- ---------
Derivative instruments.................................................. 1,580 696 325 1,951
---------- ---------- ---------- ---------
$1,036,559 89,708 28,960 1,097,307
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Unrestricted............................................................ $1,029,656 89,693 28,960 1,090,389
Restricted.............................................................. 6,903 15 -- 6,918
---------- ---------- ---------- ---------
$1,036,559 89,708 28,960 1,097,307
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(3) INVESTMENT SECURITIES -- Continued
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed income
Domestic
U.S. Treasury securities and obligations of U.S. government
agencies......................................................... $ 117,132 233 253 117,112
Mortgage-backed obligations of U.S. government agencies............ 40,148 580 305 40,423
Other mortgage-backed and asset-backed securities.................. 284,717 712 741 284,688
Domestic corporate bonds........................................... 141,050 622 678 140,994
Short-term debt securities with maturities of
less than one year............................................... 149,346 52 39 149,359
Foreign
Debt securities issued by foreign governments...................... 45,769 2,983 328 48,424
Foreign corporate bonds............................................ 6,287 278 81 6,484
Short-term debt securities with maturities of
less than one year............................................... 9,785 1 35 9,751
---------- ---------- ---------- ---------
Total fixed income...................................................... 794,234 5,461 2,460 797,235
---------- ---------- ---------- ---------
Equities
Domestic equity securities............................................ 121,763 30,468 1,129 151,102
Foreign equity securities............................................. 137,815 22,077 9,176 150,716
---------- ---------- ---------- ---------
Total equities.......................................................... 259,578 52,545 10,305 301,818
---------- ---------- ---------- ---------
Derivative instruments.................................................. 264 2,202 228 2,238
---------- ---------- ---------- ---------
$1,054,076 60,208 12,993 1,101,291
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Unrestricted............................................................ $1,043,760 60,208 12,991 1,090,977
Restricted.............................................................. 10,316 -- 2 10,314
---------- ---------- ---------- ---------
$1,054,076 60,208 12,993 1,101,291
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
Short-term investments consist principally of commercial paper and money
market investments. Derivative instruments consist of foreign currency
forward transactions, foreign currency options and covered call options.
The amortized cost and estimated fair value of fixed income securities at
September 30, 1996, by contractual maturity, are shown below (in thousands).
Maturities of mortgage-backed securities and collateralized mortgage
obligations have been included below based upon estimated cash flows,
assuming no change in the current interest rate environment.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
-------- ---------
<S> <C> <C>
Due in one year or less....................................................... $334,172 334,431
Due after one year through five years......................................... 326,865 327,590
Due after five years through ten years........................................ 102,464 104,772
Due after ten years........................................................... 30,733 30,442
-------- ---------
$794,234 797,235
-------- ---------
-------- ---------
</TABLE>
Included in investment securities at September 30, 1996 are $4,421,905, at
estimated fair value, of U.S. Treasury securities held by the Commonwealth of
Virginia to meet security deposit requirements related to the Company and its
HMO subsidiaries. In addition, U.S. Treasury and other high quality
securities in the amount of $5,891,898, at estimated fair value, are held by
various states to meet security deposit requirements related to Monticello
Life Insurance Company, Inc. and Mid-South Insurance Company.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(3) INVESTMENT SECURITIES -- Continued
The major components of investment income were as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
--------------------------- ---------------------
1993 1994 1995 1995 1996
------- ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C>
(unaudited)
Interest on bonds.................................................... $26,444 31,980 37,789 27,482 26,827
Interest on short-term investments................................... 2,947 6,557 9,764 7,986 5,336
Dividends............................................................ 11,345 9,629 7,652 6,232 9,187
------- ------ ------ ----------- ------
40,736 48,166 55,205 41,700 41,350
Investment expenses.................................................. 5,176 5,546 5,757 4,051 4,591
Group interest credits............................................... 1,281 2,658 3,587 2,768 2,678
------- ------ ------ ----------- ------
Investment income.................................................... $34,279 39,962 45,861 34,881 34,081
------- ------ ------ ----------- ------
------- ------ ------ ----------- ------
</TABLE>
Gross realized gains and losses are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
--------------------------- ---------------------
1993 1994 1995 1995 1996
------- ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C>
(unaudited)
Gross realized gains
Fixed income securities............................................ $16,864 7,611 13,890 9,406 7,566
Equity securities.................................................. 34,259 43,384 58,938 47,666 63,493
Derivative instruments............................................. -- -- 11,430 2,544 528
------- ------ ------ ----------- ------
51,123 50,995 84,258 59,616 71,587
------- ------ ------ ----------- ------
Gross realized losses
Fixed income securities............................................ 6,073 14,821 9,081 8,481 8,661
Equity securities.................................................. 18,851 23,381 15,520 12,413 12,208
Derivative instruments............................................. -- -- 6,681 3,889 33
------- ------ ------ ----------- ------
24,924 38,202 31,282 24,783 20,902
------- ------ ------ ----------- ------
Net realized gains................................................. $26,199 12,793 52,976 34,833 50,685
------- ------ ------ ----------- ------
------- ------ ------ ----------- ------
</TABLE>
Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for fixed income securities or cost for equity
securities. A summary of the net increase (decrease) in unrealized gains,
less deferred income taxes, is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1994 1995 1996
-------- ------- -------------
<S> <C> <C> <C>
Fixed income securities......................................... $(27,877) 31,921 (10,060)
Equity securities............................................... (39,319) 25,051 (5,076)
Foreign currency instruments.................................... -- 371 1,603
Provision for deferred income taxes............................. 23,610 (20,142) 4,725
-------- ------- -------------
$(43,586) 37,201 (8,808)
-------- ------- -------------
-------- ------- -------------
</TABLE>
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(4) PREMIUMS AND OTHER RECEIVABLES
Premiums and other receivables were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1994 1995 1996
-------- ------- -------------
<S> <C> <C> <C>
Premiums........................................................ $ 63,059 71,369 70,989
Self-funded group receivables................................... 88,917 110,564 150,832
Federal Employee Program........................................ 155,444 126,258 122,348
Medicare........................................................ 1,524 1,154 77
Investment income receivable.................................... 8,718 8,534 8,643
Other........................................................... 9,107 14,999 16,517
-------- ------- -------------
$326,769 332,878 369,406
-------- ------- -------------
-------- ------- -------------
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1994 1995 1996
-------- ------- -------------
<S> <C> <C> <C>
Land and improvements........................................... $ 973 973 2,977
Buildings and improvements...................................... 30,384 30,586 37,790
Furniture and equipment......................................... 64,036 67,440 73,717
Computer software............................................... 9,934 12,641 14,300
-------- ------- -------------
105,327 111,640 128,784
Less accumulated depreciation and amortization.................. 61,413 66,846 77,270
-------- ------- -------------
$ 43,914 44,794 51,514
-------- ------- -------------
-------- ------- -------------
</TABLE>
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(6) MEDICAL AND OTHER BENEFITS PAYABLE
Medical and other benefits payable were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1994 1995 1996
-------- ------- -------------
<S> <C> <C> <C>
Medical and other benefits payable -- current
Commercial and FEP
Claims reported but not paid............................... $ 20,045 20,730 21,595
Claims incurred but not reported........................... 179,222 208,129 256,431
-------- ------- -------------
199,267 228,859 278,026
Self-funded
Claims reported but not paid............................... 13,606 14,334 15,420
Claims incurred but not reported........................... 121,053 127,661 154,292
-------- ------- -------------
134,659 141,995 169,712
Medical and other benefits payable -- noncurrent (all
commercial)................................................... 21,910 31,622 34,734
-------- ------- -------------
355,836 402,476 482,472
Liability for claims processing costs........................... 16,023 16,582 17,335
Receivable for hospital settlements............................. (37,568) (14,621) (20,873)
-------- ------- -------------
334,291 404,437 478,934
Less medical and other benefits payable -- noncurrent........... (21,910) (31,622) (34,734)
-------- ------- -------------
$312,381 372,815 444,200
-------- ------- -------------
-------- ------- -------------
</TABLE>
A summary of the activity for commercial and FEP medical and other benefits
payable is as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------ ----------------------
1993 1994 1995 1995 1996
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(unaudited)
Medical and other benefits payable at beginning of
period................................................ $ 345,492 359,355 355,836 355,836 402,476
Self-funded............................................. (139,654) (138,344) (134,659) (134,659) (141,995)
---------- --------- --------- --------- ---------
Balance at beginning of period.......................... 205,838 221,011 221,177 221,177 260,481
---------- --------- --------- --------- ---------
Liabilities acquired with Mid-South..................... -- -- -- -- 33,828
Incurred related to
Current year.......................................... 1,103,941 1,095,014 1,275,583 931,536 1,069,752
Prior years........................................... (45,725) (8,703) (4,033) (6,866) (7,930)
---------- --------- --------- --------- ---------
Total incurred.......................................... 1,058,216 1,086,311 1,271,550 924,670 1,061,822
---------- --------- --------- --------- ---------
Paid related to
Current year.......................................... 900,025 948,660 1,083,170 752,455 851,748
Prior years........................................... 143,018 137,485 149,076 149,790 191,623
---------- --------- --------- --------- ---------
Total paid.............................................. 1,043,043 1,086,145 1,232,246 902,245 1,043,371
---------- --------- --------- --------- ---------
Balance at end of period................................ 221,011 221,177 260,481 243,602 312,760
Self-funded at end of period............................ 138,344 134,659 141,995 136,495 169,712
---------- --------- --------- --------- ---------
Medical and other benefits payable at end of period..... $ 359,355 355,836 402,476 380,097 482,472
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
The Company uses paid claims and completion factors based on historical
payment patterns to estimate incurred claims. Changes in payment patterns and
claims trends can result in changes to prior years' claims estimates. During
1992, the Company experienced a change in the payment patterns as a result of
its migration to a new claims processing system.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(6) MEDICAL AND OTHER BENEFITS PAYABLE -- Continued
The ultimate effect of the migration on the completion factors differed from
the effect estimated by the Company, resulting in a change in the Company's
original estimate of incurred claims in 1992. The change in estimate was
recorded in 1993.
(7) LEASES
The Company has noncancelable operating leases for real estate and equipment
that expire over the next nine years and provide for purchase or renewal
options. Future minimum lease payments under noncancelable operating leases
as of December 31, 1995 are (in thousands):
<TABLE>
<CAPTION>
Years ending December 31
- -------------------------------------------------------------------------------
<S> <C>
1996........................................................................... $10,545
1997........................................................................... 7,575
1998........................................................................... 5,138
1999........................................................................... 3,629
2000........................................................................... 2,639
Later years through 2004....................................................... 7,277
-------
Total minimum lease payments................................................... $36,803
-------
-------
</TABLE>
Total rental expense for operating leases for the years ended December 31,
1993, 1994 and 1995 and the nine-month periods ended September 30, 1995 and
1996 was $15,746,000, $14,979,000, $15,243,000, $10,502,000 (unaudited) and
$10,325,000, respectively. There were no significant changes in operating
lease commitments as of September 30, 1996.
(8) OTHER LIABILITIES
Other liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1994 1995 1996
-------- ------- -------------
<S> <C> <C> <C>
Outstanding checks in excess of bank balance.................... $ 34,878 50,545 26,418
Subscriber related liabilities.................................. 2,998 4,732 1,993
Unearned premium income -- Federal Employee Program............. 103,862 70,541 74,006
Self-funded group deposits...................................... 19,136 18,315 17,094
Current income taxes payable.................................... 9,050 2,704 12,116
Other........................................................... 6,606 23,874 21,476
-------- ------- -------------
$176,530 170,711 153,103
-------- ------- -------------
-------- ------- -------------
</TABLE>
The FEP unearned premium reserve represents the Company's share of the FEP
premium stabilization reserve. These funds are actually held by the Blue
Cross and Blue Shield Association on behalf of each Blue Cross and Blue
Shield Plan participating in the Federal Employee Program. An offsetting
receivable is recorded in premiums and other receivables.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(9) OTHER REVENUES
Other revenues include those revenues earned by the Company's non-core
subsidiaries. A summary by type of revenue is included below (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
--------------------------- ---------------------
1993 1994 1995 1995 1996
------- ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C>
(unaudited)
Electronic communication services.................................... $ 9,388 18,881 20,583 15,224 16,101
Employee benefits administration..................................... 8,028 8,913 9,435 6,947 5,356
Workers' compensation administration................................. 6,226 8,490 9,707 6,998 7,346
Health management services........................................... 3,675 4,128 6,970 4,656 6,877
Other................................................................ 3,238 5,055 8,481 7,271 1,986
------- ------ ------ ----------- ------
$30,555 45,467 55,176 41,096 37,666
------- ------ ------ ----------- ------
------- ------ ------ ----------- ------
</TABLE>
(10) INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." As
permitted under SFAS No. 109, prior years' financial statements have not
been restated. The cumulative effect of this change, as of January 1, 1993,
increased net income by $12,928,000 and is reported separately in the
consolidated statement of operations.
Income tax expense (benefit) attributable to income before income taxes,
cumulative effects of changes in accounting principles and extraordinary
items substantially all of which is federal, consists of (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
---------------------------- ----------------------
1993 1994 1995 1995 1996
------- ------ ------- ----------- -------
<S> <C> <C> <C> <C> <C>
(unaudited)
Current...................................................... $40,025 21,160 19,206 10,864 20,393
Deferred..................................................... (4,222) 3,404 (10,942) (2,389) (67,144)
------- ------ ------- ----------- -------
$35,803 24,564 8,264 8,475 (46,751)
------- ------ ------- ----------- -------
------- ------ ------- ----------- -------
</TABLE>
The differences between the statutory federal income tax rate and the
actual tax rate applied to income before income taxes, cumulative effects
of changes in accounting principles and extraordinary items are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------- --------------------
1993 1994 1995 1995 1996
----- ----- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
(unaudited)
Statutory federal tax rate............................................. 35.0% 35.0% 35.0% 35.0% 35.0%
Tax exempt investment income........................................... (1.0) (0.9) (1.2) (0.9) (0.6)
Section 833 deduction.................................................. (34.1) (2.4) -- -- --
Change in valuation allowance.......................................... 22.8 (13.5) (19.4) (19.9) (84.8)
Other, net............................................................. 2.2 2.5 (0.6) (0.4) 1.1
----- ----- ----- ----------- -----
Effective tax rate..................................................... 24.9% 20.7% 13.8% 13.8% (49.3)%
----- ----- ----- ----------- -----
----- ----- ----- ----------- -----
</TABLE>
The Company qualifies for a federal income tax deduction under IRC Section
833. This deduction is equal to the amount by which 25% of the sum of
claims and expenses exceeds tax basis adjusted surplus. Prior to 1994, the
effect of this deduction was to significantly reduce regular taxable income
and subject the Company to alternative minimum tax.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(10) INCOME TAXES -- Continued
The components of the deferred tax assets and deferred tax liabilities at
December 31, 1994 and 1995 and September 30, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1994 1995 1996
-------- ------- -------------
<S> <C> <C> <C>
Deferred tax assets
Employee benefits plans......................................................... $ 19,818 20,595 22,992
Insurance reserves.............................................................. 21,915 27,132 26,474
Alternative minimum tax credit carryforward..................................... 58,532 48,494 34,019
Property and equipment.......................................................... 2,793 6,187 6,280
Other........................................................................... 1,491 1,623 4,164
-------- ------- -------------
Total deferred tax assets......................................................... 104,549 104,031 93,929
Less valuation allowance........................................................ 92,085 80,476 --
-------- ------- -------------
Net deferred tax assets........................................................... 12,464 23,555 93,929
-------- ------- -------------
Deferred tax liabilities
Investment securities........................................................... 1,214 21,482 16,792
Other........................................................................... 685 812 555
-------- ------- -------------
Total deferred tax liabilities.................................................... 1,899 22,294 17,347
-------- ------- -------------
Net deferred tax asset............................................................ $ 10,565 1,261 76,582
-------- ------- -------------
-------- ------- -------------
</TABLE>
Net deferred tax assets as of December 31, 1994 and 1995 included a
valuation allowance of $92.1 million and $80.5 million, respectively. This
valuation allowance reflected the uncertainty as to the realizability of
the alternative minimum tax credit carryforward and the tax effect of
deductible temporary differences that management believed might not be
offset by future taxable income. The Company had sufficient taxable income
in the available carryback periods and future taxable income from reversing
taxable temporary differences to realize the recorded net deferred tax
assets.
The valuation allowance consisted principally of two components. The first
component related to the corporate alternative minimum tax credit
carryforward. The corporate minimum tax credit can only be used to reduce
regular corporate income tax, and then can only be utilized to reduce the
regular tax amount to the corporate minimum tax amount. The Section 833
deduction may reduce regular tax so that the corporate minimum tax is being
paid in the future. In this case the corporate minimum tax credit cannot be
utilized and consequently may not be realized. It is difficult to predict
the amount of Section 833 deduction which will be available in the future
because it is determined by the interplay of several factors. Accordingly,
the Company has been recognizing the corporate minimum tax credit when it
is actually utilized on the corporate income tax return.
The other component of the valuation allowance related to deductible
temporary differences which will not be deductible until well into the
future. Primarily, these temporary differences related to retiree medical
obligations and certain medical cost reserves. As of September 30, 1996 the
valuation allowance was eliminated as the Demutualization (note 17) makes
it more likely than not that the assets will be realized.
(11) EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan which is
funded through the Blue Cross National Retirement Trust (the Trust), a
collective investment trust for the retirement programs of its
participating employers. An employee may become eligible for participation
after one year of continuous service and attainment of age 21.
The Company's funding policy is to annually contribute amounts to the Trust
sufficient to meet the minimum funding requirements outlined in the
Employee Retirement Income Security Act of 1974, plus any additional
amounts the Company may contribute from time to time. For the years ended
December 31, 1993, 1994 and 1995 and the nine-month periods ended September
30, 1995 and 1996, the Company made contributions to the Trust in the
amounts of
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(11) EMPLOYEE BENEFIT PLANS -- Continued
$6,818,000, $8,096,000, $7,716,000, $4,133,000 (unaudited) and $3,970,000,
respectively. Assets in the Trust are primarily equity securities, U.S.
Treasury Bonds and Notes, U.S. Government Agency securities, corporate
bonds, real estate funds and short-term investments.
Pension expense included the following components (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
---------------------------- ---------------------
1993 1994 1995 1995 1996
------- ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C>
(unaudited)
Service cost -- benefits earned during the period................... $ 5,501 6,063 6,705 5,029 5,665
Interest cost on projected benefit obligation....................... 4,781 5,501 6,507 4,880 5,574
Actual return on plan assets........................................ (3,879) (4,817) (12,194) (9,146) (4,602)
Net amortization and deferral....................................... 405 355 6,926 5,195 (110)
------- ------ ------- ----------- ------
Net periodic pension expense........................................ $ 6,808 7,102 7,944 5,958 6,527
------- ------ ------- ----------- ------
------- ------ ------- ----------- ------
</TABLE>
The following table sets forth the pension plan's funded status at December
31, 1994 and 1995 and September 30, 1996 (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------- September 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Accumulated benefit obligation, including vested benefits of $46,181, $57,652, and
$59,638......................................................................... $(55,219) (68,015) (70,297)
-------- -------- -------------
-------- -------- -------------
Projected benefit obligation for service rendered to date......................... (84,412) (103,766) (101,471)
Plan assets at fair value......................................................... 59,163 77,948 87,929
-------- -------- -------------
Excess of projected benefit obligation over assets................................ (25,249) (25,818) (13,542)
Unrecognized net asset at January 1, 1987 being recognized over 17 years.......... (1,005) (895) (812)
Unrecognized prior service cost................................................... 870 784 719
Unrecognized net loss............................................................. 16,651 16,968 2,116
-------- -------- -------------
Accrued pension cost.............................................................. $ (8,733) (8,961) (11,519)
-------- -------- -------------
-------- -------- -------------
</TABLE>
The weighted average discount rate was 7.5%, 7.25% and 7.75% at December
31, 1994 and 1995 and September 30, 1996, respectively. The expected long
term rate of return on assets was 9.0% at December 31, 1994 and 1995 and
September 30, 1996. Age-related rates ranging from 3.5% to 7.0% were used
for the rate of increase in future compensation levels at December 31, 1994
and 1995 and September 30, 1996.
The Company also has an Employee Thrift Plan under which employees who have
completed six months of service may elect to contribute up to 16% of their
salaries. Participants have the option of investing in several
international and domestic investment funds. The Company contributes an
amount equal to 50% of the participant's contributions limited to 3% of the
employee's compensation. The Company's contributions are fully vested to
the participant after three years of contributing participation. For the
years ended December 31, 1993, 1994 and 1995 and the nine-month periods
ended September 30, 1995 and 1996, the Company's contribution to the
Employee Thrift Plan approximated $2,658,000, $2,954,000, $3,153,000,
$2,412,000 (unaudited) and $2,547,000, respectively.
In addition to providing pension benefits, the Company provides certain
health and life insurance benefits for retired employees. All of the
Company's retirees with fifteen years of service are eligible for these
benefits. This postretirement benefit plan is funded through the Blue Cross
National Retirement Trust (the Trust). For the years ended December 31,
1993, 1994 and 1995, the Company made contributions to the Trust in the
amounts of $4,100,000, $2,700,000 and $2,500,000, respectively. No
contributions were made to the Trust for the nine-month period ended
September 30, 1996.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(11) EMPLOYEE BENEFIT PLANS -- Continued
The following table presents the funded status of the plan including the
accumulated postretirement benefit obligation by type of participant at
December 31, 1994 and 1995 and September 30, 1996 (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1994 1995 1996
-------- ------- -------------
<S> <C> <C> <C>
Retirees........................................................................... $ (6,606) (6,033) (7,367)
Fully eligible active plan participants............................................ (3,816) (4,605) (4,305)
Other active plan participants..................................................... (15,528) (17,592) (19,664)
-------- ------- -------------
Accumulated postretirement benefit obligation...................................... (25,950) (28,230) (31,336)
Plan assets at fair value.......................................................... 7,066 10,036 11,967
-------- ------- -------------
Excess of accumulated postretirement benefit obligation over plan assets........... (18,884) (18,194) (19,369)
Unrecognized net (gain) loss....................................................... (1,369) (2,282) (3,137)
Unrecognized prior service cost.................................................... (7,094) (6,433) (5,937)
-------- ------- -------------
Accrued postretirement benefit cost................................................ $(27,347) (26,909) (28,443)
-------- ------- -------------
-------- ------- -------------
</TABLE>
Postretirement benefit expense for the years ended December 31, 1993, 1994
and 1995 and the nine-month periods ended September 30, 1995 (unaudited)
and 1996 included the following components (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------ --------------------
1993 1994 1995 1995 1996
------ ----- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
(unaudited)
Service cost -- benefits attributed to service during the period........ $2,398 2,078 2,128 1,596 1,780
Interest cost on accumulated postretirement benefit obligation.......... 1,841 1,688 1,843 1,382 1,533
Expected return on plan assets.......................................... -- (266) (622) (467) (757)
Amortization of prior service cost...................................... (661) (661) (661) (496) (496)
Amortization of (gains) losses.......................................... 80 -- -- -- (22)
------ ----- ----- ----------- -----
Net periodic postretirement benefit expense............................. $3,658 2,839 2,688 2,015 2,038
------ ----- ----- ----------- -----
------ ----- ----- ----------- -----
</TABLE>
For measurement purposes, a 5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for September 30, 1996.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost
trend rates by 1 percentage point would increase the accumulated
postretirement benefit obligation as of September 30, 1996 by $5,550,000
and the aggregate of the service and interest cost components of net
periodic postretirement benefit expense would increase by $709,000 for
September 30, 1996.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at December 31, 1994 and 1995
and 7.25% at September 30, 1996. The rate of increase in future
compensation levels used in determining the accumulated postretirement
benefit obligation ranged from 3.5% to 7.0% at December 31, 1994 and 1995
and September 30, 1996.
The Company also provides certain disability related postemployment
benefits. In 1993, the Company adopted the provisions of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The cumulative effect
as of January 1, 1993 of this change in accounting was to decrease net
income by $4,802,000. For the year ended December 31, 1993, the effect of
SFAS No. 112 on net income was not material. Prior to 1993, the Company
recognized the cost of providing these benefits on a cash basis. Under the
new method of accounting, the Company accrues the benefits when it becomes
probable that such benefits will be paid and when sufficient information
exists to make reasonable estimates of the amounts to be paid.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(12) ADDITIONAL CASH FLOW INFORMATION
The reconciliation of net income to net cash provided by operating
activities and supplemental disclosures of cash flow information for the
years ended December 31, 1993, 1994 and 1995 and for the nine-month periods
ended September 30, 1995 (unaudited) and 1996 were as follows (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------ ----------------------
1993 1994 1995 1995 1996
-------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
(unaudited)
Net income (loss).............................................. $115,984 93,315 46,995 49,798 (44,613)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities,
net of effects from purchase of subsidiaries:
Depreciation and amortization................................ 18,158 12,226 10,960 6,954 12,991
Increase (decrease) in allowance for doubtful accounts
receivable................................................ (758) (673) 468 (160) (1,018)
Increase in accounts receivable.............................. (831) (64,064) (5,989) (21,627) (31,652)
Increase in other assets..................................... (676) (4,926) (2,531) (667) (1,745)
Increase (decrease) in medical and other benefits
payable................................................... 4,291 (2,604) 68,945 46,250 40,669
Increase (decrease) in unearned premiums..................... 1,830 (4,198) (5,252) 180 (3,484)
Increase (decrease) in accounts payable and accrued
expenses.................................................. 5,954 26,393 4,106 (19,175) (5,347)
Increase (decrease) in other liabilities..................... 28,859 74,839 (22,774) 28,189 6,623
Increase (decrease) in deferred income taxes................. (15,070) 3,403 (8,030) (2,659) (70,597)
Increase in obligation for Commonwealth Payment.............. -- -- -- -- 175,000
Increase (decrease) in minority interest..................... -- (243) (703) (341) 103
Increase in obligations for employee benefits................ 9,083 2,007 784 3,511 5,991
(Gain) loss on disposal of assets............................ 7,297 (36) 115 24 16
Realized investment gains, net............................... (26,199) (12,793) (52,976) (34,833) (50,685)
-------- ------- ------- ----------- -------
Net cash provided by operating activities...................... $147,922 122,646 34,118 55,444 32,252
-------- ------- ------- ----------- -------
Cash paid during the period for:
Interest..................................................... $ 1,380 6,930 15,390 5,013 3,129
Income taxes................................................. 33,245 26,672 20,061 20,051 12,184
-------- ------- ------- ----------- -------
-------- ------- ------- ----------- -------
</TABLE>
(13) ACQUISITION ACTIVITY
In May 1995, the Company acquired 80% of the outstanding stock of Priority
Health Care, Inc. (subsequently renamed Priority, Inc.) (Priority) for
approximately $24.2 million including acquisition related costs. The
acquisition has been accounted for as a purchase and, accordingly, the
results of operations of Priority, which are not material to the Company,
are included in the consolidated financial statements since the date of
acquisition. Goodwill arising from the acquisition amounted to $21.1
million. No proforma information has been provided since Priority's results
of operations prior to the Company's acquisition were not material to the
Company.
In November 1995, the Company paid $5,500,000 for a 50% interest in Primary
Care First, L.L.C. (PCF) and related assets. PCF was formed for the purpose
of managing and developing primary care physician networks in the Richmond
and South Hampton Roads areas of Virginia. The Company has also committed
to provide up to $3,500,000 to PCF for development of additional primary
care physician networks. This investment is accounted for under the equity
method and is included in other assets. The excess of the Company's cost
over its underlying equity in PCF and related assets amounted to $5,500,000
and is being amortized over 15 years.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(13) ACQUISITION ACTIVITY -- Continued
In February 1996, the Company purchased all of the outstanding shares of
Mid-South Insurance Company (Mid-South) for approximately $85.6 million.
Mid-South is a Fayetteville, North Carolina based life and health insurance
company. The acquisition was accounted for as a purchase and, accordingly,
the results of operations of Mid-South are included in the consolidated
financial statements since the date of acquisition. Goodwill and other
intangible assets arising from the transaction amounted to $56.7 million
and are being amortized over periods not exceeding 25 years. No proforma
information has been provided since Mid-South's results of operations prior
to the Company's acquisition were not material to the Company.
(14) COPAYMENT REFUND PROGRAM
The Company conducted a Copayment Refund Program (the Copayment Program) in
accordance with an agreement with the State Corporation Commission dated
September 22, 1994. During the Copayment Program, members who had paid
coinsurance on services rendered at the Company's network facilities from
January 1, 1984 through December 31, 1993 were eligible for a refund.
Refunds represented the difference between the member's original
coinsurance payment, which had been based on the facility's undiscounted
charges, and an adjusted coinsurance payment calculated using the Company's
average discount percentage at the facility. The Company changed its
methodology on January 1, 1994, to calculate coinsurance payments using the
average percentage discount. Costs incurred under the Copayment Program
included refunds, interest and administrative costs associated with the
Copayment Program that the Company would not otherwise have incurred. In
addition, the Company agreed to pay a $5,000,000 civil forfeiture to the
Commonwealth of Virginia which has been included in the cost of the
Copayment Program. The cost of the Copayment Program in 1994 was $36.4
million or $30.0 million, net of income taxes.
The Virginia General Assembly enacted legislation, effective July 1, 1994,
that requires all insurers and HMOs to calculate coinsurance payments on
the basis of their negotiated reimbursement rates with facilities.
In accordance with an agreement with the State Corporation Commission dated
November 17, 1995, the Company re-opened the Copayment Program. As part of
the re-opening of the Copayment Program, the Company mailed refunds to
approximately 300,000 members who had not filed a claim under the original
program and for whom the Company had an address. In addition, the Company
announced that it has determined that there are approximately 200,000
former members for whom the Company does not have an address who are
eligible for refunds. Under this new agreement, any amounts not paid by
December 31, 1996 will be escheated to the Commonwealth of Virginia as
unclaimed property. The cost of the re-opening of the Copayment Program was
$47.1 million or $40.6 million, net of income taxes.
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF
CREDIT RISK
The carrying amounts of cash, premiums receivable, medical costs payable,
unearned premiums and other liabilities approximate fair value because of
the short maturity of these instruments. The fair values of investment
securities are estimated based on quoted market prices.
The Company enters into foreign currency forward transactions and foreign
currency options to manage its exposure to fluctuations in foreign currency
exchange rates. The forward contracts involve the exchange of one currency
for another at a future date and typically have maturities of six months or
less. The counterparties to these transactions are major international
financial institutions. The Company may incur a loss with respect to these
transactions to the extent that a counterparty fails to perform under a
contract and exchange rates have changed since the inception of the
contract. At September 30, 1996, the Company had forward exchange contracts
outstanding to purchase approximately $25.8 million in foreign currencies
and to sell approximately $12.3 million in foreign currencies (primarily
German Mark, Japanese Yen, Danish Krone, Swedish Krona and British Pound).
All of these contracts have maturities of six months or less. The gross
unrealized gains and losses related to these contracts at September 30,
1996 aggregated $447,848 and $211,436, respectively. Foreign currency
options to sell approximately $35.9 million of foreign currencies (Japanese
Yen and German Mark) at set prices were outstanding at September 30, 1996.
These options expire within twelve months. The
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF
CREDIT RISK -- Continued
gross unrealized gains and losses related to these options at September 30,
1996 aggregated $1,741,287 and $11,360, respectively.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of investment securities
and premiums receivable. All of the investment securities are managed
within established guidelines which limit the amounts which may be invested
with one issue. The Company primarily conducts business within the
Commonwealth of Virginia; therefore premiums receivable are concentrated
with companies and individuals within Virginia.
(16) LEGAL PROCEEDINGS
In November 1993, the Company met with officials from the United States
Department of Labor (the DOL) in response to the DOL's request for
information concerning the Company's policies on passing through the
benefits of provider discounts to self-funded employer groups whose health
care plans are subject to the Employee Retirement Income Security Act
(ERISA) and are administered by the Company. The DOL advised the Company
that the inquiry was part of a larger review of Blue Cross and Blue Shield
organizations that provide services to self-funded plans. The Company
responded in March and April 1994 to informal requests from the DOL seeking
additional information on the Company's handling of provider discounts. In
September 1995, the DOL notified the Company that the DOL is of the view
that the retention of provider discounts during the period from 1990
through 1993 and its failure to disclose the amount of these discounts by
the Company violated the applicable provisions of ERISA. The amount of the
provider discounts retained during this period is approximately $58.6
million. Under applicable provisions of ERISA, the DOL may also assess a
civil penalty equal to 20% of any amounts recovered as a result of an ERISA
violation. No lawsuit has been filed by the DOL and the Company intends to
continue discussions with the DOL about this matter. While the ultimate
resolution of the DOL's inquiries cannot be predicted, the Company believes
that its handling of provider discounts has been in accordance with the
terms of its agreements with self-funded employer groups and applicable
ERISA requirements. Accordingly, no amounts have been accrued related to
this matter.
The Company is also the defendant in two lawsuits that have been filed by
self-funded employer groups in connection with the Company's past practices
regarding provider discounts. The suits claim that the Company was
obligated to credit these self-funded plans with the full amount of the
discounts that the Company negotiated with facilities providing health care
to their groups. One suit seeks $750,000 in compensatory damages plus
unspecified punitive damages. The other suit seeks $1.1 million in damages.
The Company is also presently the subject of 15 other claims by self-funded
employer groups related to the Company's past practices regarding provider
discounts, some of which involve larger amounts of withheld discounts. The
Company is communicating with these groups, and lawsuits have not been
filed in connection with these claims. The Company believes that additional
discount-related claims may be made against it. Although the ultimate
outcome of such claims and litigation cannot be estimated, the Company
believes that the discount-related claims and litigation will not have a
material adverse effect on the financial condition of the Company.
In August 1994, three of the Company's members filed a complaint against
the Company in the United States District Court for the Eastern District of
Virginia contending that when the Company negotiated discounts with
hospitals, it should have shared those discounts with its members through
lower copayments and deductibles. The plaintiffs also sought certification
of a class consisting of all of the Company's members who paid copayments
and deductibles. The complaint sought damages under various theories of
state law, treble damages under the Racketeer Influenced and Corrupt
Organizations Act, and attorney's fees. The Company filed a motion to
dismiss the complaint, which was granted by the District Court. The
plaintiffs appealed the ruling to the United States Fourth Circuit Court of
Appeals which affirmed the ruling of the District Court. Plaintiffs have
the right to petition the United States Supreme Court for a writ of
certiorari. Although the ultimate resolution of this suit cannot be
predicted with certainty, the Company believes that, in view of the refunds
made by the Company under the Copayment Program, the resolution of this
litigation should not result in losses that would have material adverse
effect on the financial condition of the Company.
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
December 31, 1994, 1995 and September 30, 1996
(16) LEGAL PROCEEDINGS -- Continued
The Company and certain of its subsidiaries are involved in various legal
actions occurring in the normal course of its business. While the ultimate
outcome of such litigation cannot be predicted with certainty, in the
opinion of Company management, after consultation with counsel responsible
for such litigation, adequate provision has been made for losses that may
result from those actions and, accordingly, the outcome of those actions is
not expected to have a material adverse effect on the consolidated
financial condition of the Company.
(17) PLAN OF DEMUTUALIZATION
The Company is currently pursuing conversion from a mutual insurance
company to a stock insurance company under a Plan of Demutualization (the
Demutualization). Under the Demutualization, the Company will be converted
to a stock insurance corporation, will change its name to Trigon Insurance
Company and will become a wholly-owned subsidiary of Trigon Healthcare,
Inc., a newly formed holding company. The membership interest of the
Company's eligible members will be converted in the Demutualization into
common stock of Trigon Healthcare, Inc., or in certain circumstances, cash.
To demutualize, the Company is required by Virginia law to obtain approval
from those individuals or entities holding membership interests in the
Company as of a specified record date (voting members) and to obtain
approval from the Virginia State Corporation Commission, which regulates
the Company. The Company's voting members approved the Plan of
Demutualization at a special meeting of voting members held on September 6,
1996. On November 5, 1996, the State Corporation Commission entered a final
order approving the Plan of Demutualization after a public hearing was held
to consider the Plan of Demutualization. The Company expects that the
Demutualization will be effective in early 1997.
The Plan of Demutualization requires, simultaneously with the
Demutualization, an initial public offering of common stock. In addition,
under Virginia law a payment to the Commonwealth of Virginia in the amount
of $175 million must be made (the Commonwealth Payment). At least one-half
of this amount must be made in cash and the remainder will be made in cash
or shares of Class C Common Stock. Any Class C Common Stock issued as part
of the Commonwealth Payment will be redeemable at any time and, if not
sooner redeemed, must be redeemed on June 30, 1998 at the initial per share
price of the Common Stock in the initial public offering, plus interest
from the date of the Demutualization through the date of payment at a rate
per annum set by the Virginia Commissioner of Insurance and the Virginia
Attorney General. The Commonwealth Payment has been accrued as an
extraordinary charge as of September 30, 1996.
(18) UNAUDITED PRO FORMA INFORMATION
The pro forma balance sheet information gives effect to the following
transactions as if such transactions had occurred on September 30, 1996:
(Bullet) Issuance of shares of common stock to eligible members pursuant
to the Demutualization.
(Bullet) Payment of $ to certain eligible members in lieu of shares of
common stock.
(Bullet) Issuance of shares of common stock in a public offering.
(Bullet) Payment of $ in cash as part of the Commonwealth Payment and
the issuance of shares of redeemable Class C common stock
to the Commonwealth of Virginia as part of the Commonwealth
Payment.
(Bullet) Recognition of the obligation to redeem all outstanding redeemable
Class C common stock at the initial per share price.
The pro forma earnings per share information reflected in the statement of
operations gives effect to the following transactions as if such
transactions had occurred on January 1, 1996:
(Bullet) Issuance of shares of common stock to eligible members pursuant
to the Demutualization.
(Bullet) Issuance of shares of common stock in a public offering.
(Bullet) Adjustment of tax expense to reflect the Company's 35% federal
statutory tax rate.
(Bullet) Adjustment to reflect the interest on the obligation to redeem all
outstanding redeemable Class C common stock at % per annum.
<PAGE>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the Common Stock in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that there has
not been any change in the facts set forth in this Prospectus or in the affairs
of the Company since the date hereof.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 10
The Company.......................................... 15
The Demutualization.................................. 16
Use of Proceeds...................................... 19
Dividend Policy...................................... 20
Capitalization....................................... 21
Selected Consolidated Financial and Operating Data... 22
Unaudited Pro Forma Consolidated Financial
Information........................................ 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 28
Business............................................. 37
Legal Proceedings.................................... 58
Management........................................... 59
Description of Capital Stock......................... 64
Shares Eligible for Future Sale...................... 68
Underwriting......................................... 69
Legal Matters........................................ 70
Experts.............................................. 70
Additional Information............................... 71
Glossary............................................. 72
Audited Financial Statements......................... F-1
</TABLE>
Until , 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This delivery requirement
is in addition to the obligation of dealers to deliver a Prospectus when acting
as Underwriters and with respect to their unsold allotments or subscriptions.
Shares
Trigon Healthcare, Inc.
Common Stock
----------------
PROSPECTUS
---------------
[List Managing Underwriters]
, 1996
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any State.
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 12, 1996
[LOGO]
PROSPECTUS
Shares
Trigon Healthcare, Inc.
Common Stock
------------------------
All of the shares of Class A Common Stock ("Common Stock") offered hereby
are being offered by Trigon Healthcare, Inc. ("Trigon" or the "Company"). Of the
shares of Common Stock offered hereby, shares are being offered
outside the United States and Canada and shares are being offered in a
concurrent offering in the United States and Canada. The initial public offering
price and the underwriting discount per share will be identical for both
offerings (together, the "Offerings"). See "Underwriting."
Prior to the Offerings, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
Application will be made to list the Common Stock on the New York Stock
Exchange.
See "Risk Factors" Commencing On Page Herein For A Discussion Of
Certain Factors That Should Be Considered By Prospective Purchasers Of The
Shares Of Common Stock Offered Hereby.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION, THE VIRGINIA STATE
CORPORATION COMMISSION OR ANY STATE INSURANCE REGULATORY AGENCY, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION, THE VIRGINIA STATE CORPORATION COMMISSION OR ANY STATE
INSURANCE REGULATORY AGENCY PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
<S> <C> <C> <C>
Per Share........................................... $ $ $
Total (3)........................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted to the several Underwriters an option, exercisable
within 30 days after the date of this Prospectus, to purchase up to an
additional shares of Common Stock, on the same terms as set forth
above, to cover over-allotments, if any. If the over-allotment option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. See "Underwriting." The Underwriters reserve the right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of the shares of Common Stock will be made in
New York, New York on or about , 1996.
------------------------
[List International Managing Underwriters]
------------------------
The date of this Prospectus is , 1996
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a non-U.S. holder. For purposes of this discussion, the term "non-U.S.
holder" means any beneficial owner of Common Stock that is, for United States
federal income tax purposes, (i) a nonresident alien individual, (ii) a foreign
corporation, (iii) a foreign estate or trust, or (iv) a foreign partnership.
This discussion does not address all aspects of United States federal
income and estate taxation nor does it consider any specific facts and
circumstances that may apply to a particular non-U.S. holder or address any
state, local or non-U.S. tax considerations that may be relevant to a non-U.S.
holder. Furthermore, the following discussion is based on current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and administrative and judicial interpretations as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. ACCORDINGLY, EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT ITS OWN TAX
ADVISER WITH RESPECT TO THE UNITED STATES FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES OF OWNING AND DISPOSING OF COMMON STOCK, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION TO WHICH
SUCH HOLDER MAY BE SUBJECT.
Dividends
Dividends paid to a non-U.S. holder of Common Stock generally will be
subject to withholding of United States federal income tax at a 30% rate (or a
lower rate if prescribed by an applicable tax treaty), unless the dividends are
effectively connected with the conduct of a trade or business in the United
States by the non-U.S. holder. To determine the applicability of a tax treaty
providing for a lower rate of (or an exemption from) United States withholding
tax, dividends paid to an address in a foreign country are presumed, under
current Treasury Regulations, to be paid to a resident of that country, absent
knowledge to the contrary.
To take advantage of the exemption from withholding tax for "effectively
connected dividends" provided in the preceding paragraph, under current Treasury
Regulations the non-U.S. holder must comply with certain certification and
disclosure requirements (including filing an Internal Revenue Service ("IRS")
Form 4224 with the payor of the dividend). Dividends that are effectively
connected with the conduct of a trade or business in the United States and
exempt from withholding generally will be taken into account in determining the
non-U.S. holder's United States federal income tax on a net income basis in the
same manner as if such holder were a resident of the United States. A non-U.S.
holder that is a corporation may also be subject to a "branch profits" tax at a
rate of 30% (or such lower rate as may be specified by an applicable tax treaty)
on the repatriation from the United States of the earnings and profits
attributable to its income that is effectively connected to a United States
trade or business, subject to certain adjustments and the relevant provisions of
any applicable tax treaty.
In April 1996, Treasury Regulations were proposed that would change certain
of the certification and disclosure requirements described in the preceding two
paragraphs (the "1996 Proposed Regulations"). The changes set forth in the 1996
Proposed Regulations would not materially affect a non-U.S. holder's ability to
qualify for an exemption from withholding tax with respect to distributions paid
on the Common Stock that are "effectively connected" with its conduct of a trade
or business in the United States. However, under the 1996 Proposed Regulations,
a non-U.S. holder would be required to file certain certifications under
penalties of perjury to obtain the benefit of any applicable tax treaty
providing for a lower rate (or an exemption from) the United States withholding
tax on dividends. The 1996 Proposed Regulations would generally apply to
distributions paid on Common Stock made after December 31, 1997.
Gain on Disposition
Generally, a non-U.S. holder will not be subject to United States federal
income tax on any gain realized upon the disposition of such holder's Common
Stock unless (i) the non-U.S. holder is engaged in a trade or business within
the United States and the gain is effectively connected with such business (and,
if an applicable tax treaty so provides, is attributable to a permanent
establishment maintained by the non-U.S. holder in the United States); (ii) the
non-U.S. holder is an individual who holds the Common Stock as a capital asset
and is present in the United States for 183 days or more in the taxable year of
the disposition and who meets certain other conditions; (iii) the non-U.S.
holder is an individual who is subject to tax pursuant to the provisions of U.S.
tax law applicable to certain United States expatriates; or (iv) the Company is
or has been a "United States real property holding corporation" as defined in
Section 897 of the Code and the non-U.S. holder 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. The Company does not believe that it is, has been
or is likely to become a U.S. real property holding corporation.
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
Estate Tax
Shares of Common Stock owned by an individual non-U.S. holder at the time
of his or her death, including shares that the non-U.S. holder previously
transferred by gift while retaining certain rights and powers, will be
includible in his or her gross estate for United States federal estate tax
purposes unless an applicable estate tax treaty provides otherwise.
Backup Withholding and Information Reporting
Dividends. Under current Treasury Regulations, generally, distributions
paid on Common Stock to a non-U.S. holder at an address outside the United
States will be exempt from United States federal backup withholding tax and
United States information reporting requirements (other than the reporting of
dividend payments subject to the withholding tax discussed under "Dividends"
above). Under the 1996 Proposed Regulations, generally, distributions paid on
Common Stock will be exempt from such backup withholding and information
reporting requirements only if the non-U.S. holder provides certain
certifications under penalties of perjury.
Broker Sales. Payments of proceeds from the sale of Common Stock by a
non-U.S. holder made to or through a foreign office of a broker generally will
not be subject to information reporting or backup withholding. Payments of
proceeds from the sale of Common Stock by a non-U.S. holder to or through a
United States office of a broker (and, with respect to information reporting,
certain foreign offices, including the foreign office of a United States broker)
are currently subject to information reporting and backup withholding unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes its entitlement to an exemption.
Refunds. A non-U.S. holder may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing an appropriate claim for
refund with the IRS.
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"International Purchase Agreement"), and concurrently with the sale of
shares of Common Stock to the U.S. Underwriters (as defined below), the Company
has agreed to sell, and the underwriters named below (the "International
Underwriters"), acting through their representatives, Merrill Lynch
International, [and list others] (the "International Representatives"), have
severally agreed to purchase, the aggregate number of shares of Common Stock set
forth below opposite their respective names. Under certain circumstances, the
commitments of non-defaulting International Underwriters may be increased as set
forth in the International Purchase Agreement.
<TABLE>
<CAPTION>
Number of
International Underwriters Shares
- ------------------------------------------------------------------------------------------ ---------
<S> <C>
Merrill Lynch International...............................................................
[Others]..................................................................................
---------
Total.........................................................................
---------
---------
</TABLE>
The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement") with certain underwriters in the United States and Canada (the "U.S.
Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
[list others] are acting as representatives (the "U.S. Representatives").
Subject to the terms and conditions set forth in the U.S. Purchase Agreement,
and concurrently with the sale of shares of Common Stock to the
International Underwriters, the Company has agreed to sell to the U.S.
Underwriters, and the U.S. Underwriters have severally agreed to purchase, an
aggregate of shares of Common Stock. Under certain circumstances as set
forth in the U.S. Purchase Agreement, the commitments of non-defaulting U.S.
Underwriters may be increased. The initial public offering price per share and
the underwriting discount per share are identical under the International
Purchase Agreement and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Underwriters and the several U.S. Underwriters
(collectively, the "Underwriters"), respectively, have agreed, subject to the
terms and conditions set forth therein, including the delivery of opinions of
counsel and other customary conditions, to purchase all of the shares of Common
Stock being sold pursuant to each such Purchase Agreement if any of the shares
of Common Stock being sold pursuant to each such Purchase Agreement are
purchased. The closing with respect to the sale of the shares of Common Stock
sold pursuant to each Purchase Agreement is also a condition to the closing with
respect to the sale of shares of Common Stock sold pursuant to the other
Purchase Agreement.
The International Underwriters and the U.S. Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Under the terms of the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to each
other for purposes of resale at the initial public offering price, less an
amount not greater than the selling commission.
The International Underwriters propose to offer the shares of Common Stock
to the public initially at the public offering price set forth on the cover page
of this Prospectus, and to certain dealers at such price less a concession not
in excess of $ per share. The International Underwriters may allow, and such
dealers may re-allow, a discount not in excess of $
per share on sales to certain other dealers. After the initial public offering,
the public offering price, concession and discount may be changed.
The Company has granted the International Underwriters and the U.S.
Underwriters an option to purchase up to and additional shares of
Common Stock, respectively, at the initial public offering price, less the
underwriting discount. Such option, which expires 30 days after the date of this
Prospectus, may be exercised solely to cover over-allotments. To the extent the
International Underwriters exercise such option, each of the International
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of the option shares that the number
of shares to be purchased initially by that International Underwriter bears to
the total number of shares to be purchased initially by the International
Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Company has agreed that it will not, without the prior written consent
of the International Representatives and the U.S. Representatives, offer, sell
or otherwise dispose of any shares of Common Stock or securities convertible
into or exchangeable or exercisable for shares of Common Stock, other than the
issuance of Common Stock pursuant to the Plan of
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
Demutualization and the sale to the Underwriters of the shares of Common Stock
in the Offering, for a period of 180 days after the date of this Prospectus. See
"Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price was determined through negotiations
between the Company and the International Representatives and the U.S.
Representatives. Among the factors considered in such negotiations were an
assessment of the financial information contained herein, an evaluation of the
Company's management, the future prospects of the Company and the health care
industry in general, market prices of securities of companies engaged in
activities similar to those of the Company and the prevailing conditions in the
securities market. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the Offerings at or above the initial public offering
price.
Application will be made to list the Common Stock on the New York Stock
Exchange under the symbol TGH. In order to meet the requirements for the listing
of the Common Stock on such exchange, the International Representatives and the
U.S. Representatives, on behalf of the Underwriters, have undertaken to sell
lots of 100 or more shares to a minimum of 2,000 beneficial owners.
Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and
any dealer to whom they sell shares of Common Stock will not offer to sell or
sell shares of Common Stock to persons who are non-United States or non-Canadian
persons or to persons they believe intend to resell to non-United States or
non-Canadian persons, and the International Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to United States or Canadian persons or to persons they believe intend to
resell to United States or Canadian persons, except in each case for
transactions pursuant to the Intersyndicate Agreement which, among other things,
permits the Underwriters to purchase from each other and offer for resale such
number of shares of Common Stock as the selling Underwriter or Underwriters and
the purchasing Underwriter or Underwriters may agree.
Each International Underwriter has agreed that (i) it has not offered or
sold, and it will not offer or sell, in the United Kingdom, by means of any
document, any shares of Common Stock other than to persons whose ordinary
business it is to buy or sell shares or debentures whether as principal or agent
or in circumstances that do not constitute an offer to the public within the
meaning of the Companies Act of 1985, (ii) it has complied and will comply with
all applicable provisions of the Financial Services Act of 1986 in respect of
anything done by it in relation to the Common Stock in, from, or otherwise
involving the United Kingdom, and (iii) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issuance of Common Stock if that person is of a
kind described in Article 9(3) of the Financial Services Act of 1986 (Investment
Advertisements) (Exceptions) Order 1988 or is a person to whom the document may
lawfully be issued or passed on.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase, in addition to the offering price set forth on the cover page hereof.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by McGuire, Woods,
Battle & Boothe, L.L.P., Richmond, Virginia. McGuire, Woods, Battle & Boothe,
L.L.P. provides health care coverage to its members and employees through Trigon
and certain of Trigon's subsidiaries, and McGuire, Woods, Battle & Boothe,
L.L.P. is expected to receive 22,341 shares of common stock of Trigon in the
Demutualization. R. Gordon Smith, a director of the Company, is a partner of
McGuire, Woods, Battle & Boothe, L.L.P. Certain legal matters relating to this
Offering will be passed upon for the Underwriters by Debevoise & Plimpton, New
York, New York.
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
EXPERTS
The consolidated financial statements of the Company as of December 31,
1994 and 1995 and September 30, 1996 and for each of the years in the three-year
period ended December 31, 1995 and the nine months ended September 30, 1996 have
been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP refers to changes in accounting
for investment securities, income taxes and postemployment benefits in 1993.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement on Form S-1 (herein
together with all amendments and exhibits thereto called the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Common Stock offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement,
and the exhibits and schedules thereto. Statements contained in the Prospectus
as to the contents of any contract or other document are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement and exhibits thereto filed by the Company with the Commission may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission located at Room 1400, 75 Park Place, New York, New
York 10007 and at Northwest Atrium Center, 500 West Madison Street (Suite 1400),
Chicago, Illinois 60661. The Commission maintains a World Wide Web site at
htt://www.sec.gov containing reports, proxy and information statements and other
information regarding registrants, such as the Company, that file electronically
with the Commission. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
The Company will register under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") at the time of or prior to the Offerings, and, in
accordance with the Exchange Act, thereafter will be required to file reports,
proxy statements and other information with the Commission. The Company intends
to furnish its stockholders with annual reports containing consolidated
financial statements audited by its certified public accountants and with
quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year.
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
GLOSSARY
Capitation. A fixed amount per individual that is paid periodically
(usually monthly) to a provider as compensation for providing comprehensive
health care service during the period. The fee is set by contract between a
prepaid health care plan and the provider.
Coinsurance. Payment by a member of a fixed percent of liability for care
up to a fixed maximum limit.
Community Rating. The practice of pooling the medical claims costs of
similar classes of insured groups, such as small business or individuals, as a
way of developing premium rates for a specific individual or business within
each pooled category.
Copayments. Payments by a member of a fixed amount for each service.
Deductible. Payment by a member of a specified initial portion of annual
medical costs incurred by the member.
Diagnostic Related Groups (DRG). A classification method that categorizes
services with respect to primary and secondary diagnosis, age and complications.
Discounted Fee-for-service. A payment program in which providers agree to
receive less than their standard fee for providing medical services to members.
Eligible Member. An individual or entity holding a membership interest in
Virginia BCBS as of December 31, 1995.
Fee Schedule payment program. A payment program in which providers receive
no more than a specified fixed payment for any given covered service.
Health Maintenance Organization (HMO). An organization that arranges the
delivery of comprehensive health care services for its members at a fixed
periodic payment.
Independent Practice Association (IPA) Model HMO. An HMO that contracts
directly with physicians in independent practices.
Inpatient Services. Services rendered in a hospital to a member who has
been admitted and occupies a hospital bed for the purpose of receiving medical
services.
Managed Care. A health care financing and delivery arrangement designed to
provide health care through organized relationships with health care providers.
Medical Loss Ratio. The expression of medical claim expenses as a
percentage of premium revenues. Considered to be one measure of a managed care
company's effectiveness in controlling health care costs.
Medicare HMO. Managed care organizations that have entered into certain
contracts with the Health Care Financing Administration agree to provide
enrolled beneficiaries with Medicare benefits in exchange for predetermined and
fixed monthly payments.
member. An individual covered by any of the Company's managed care
products.
Participating Provider (PAR). A provider who has signed an agreement with
the Company to provide health care services to members, usually at a discount.
Point of Service (POS) Program. An option available on PPO network products
in which each member chooses a primary care physician who is responsible for
coordinating all health care services for the member.
Preferred Provider Organization. A network system in which selected
providers furnish health care services to enrolled members. Medical services in
the PPO network are typically provided at a greater discount than the PAR
network.
Primary care physician. Under managed care programs, a designated general
practice provider who is responsible for coordinating the total health care
services of patients assigned to the provider by the managed care company.
Provider Profiling. The collection and analysis of claims and benefits
management data for the identification of cost, utilization and quality of care
characteristics of physicians, health care facilities and allied health
providers.
Stop-loss coverage. Insurance which limits a company's liability to pay
health care costs above a designated amount.
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
Traditional indemnity insurance. A method for providing health care
services which does not generally attempt to control health care costs through
such techniques as contracted provider networks and utilization management.
Utilization Management. Activities, including admission review, second
surgical opinion and provider profiling, that are intended to manage the use of
medical services by members to promote the efficient use of medical care.
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the Common Stock in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that there has
not been any change in the facts set forth in this Prospectus or in the affairs
of the Company since the date hereof.
There are restrictions on the offer and sale of the Common Stock offered hereby
in the United Kingdom. All applicable provisions of the Financial Services Act
of 1986 and the Companies Act of 1985 in respect of anything done by any person
in relation to the Common Stock in, from or otherwise involving the United
Kingdom must be complied with. See "Underwriting."
In this Prospectus, references to "dollars" and "$" are to United States dollars
unless stated otherwise.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 10
The Company.......................................... 15
The Demutualization.................................. 16
Use of Proceeds...................................... 19
Dividend Policy...................................... 20
Capitalization....................................... 21
Selected Consolidated Financial and Operating Data... 22
Unaudited Pro Forma Consolidated Financial
Information........................................ 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 28
Business............................................. 37
Legal Proceedings.................................... 58
Management........................................... 59
Description of Capital Stock......................... 64
Shares Eligible for Future Sale...................... 68
Underwriting......................................... 69
Legal Matters........................................ 70
Experts.............................................. 70
Additional Information............................... 71
Glossary............................................. 72
Audited Financial Statements......................... F-1
</TABLE>
Until , 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This delivery requirement
is in addition to the obligation of dealers to deliver a Prospectus when acting
as Underwriters and with respect to their unsold allotments or subscriptions.
Shares
Trigon Healthcare, Inc.
Common Stock
----------------
PROSPECTUS
---------------
[List International Managing Underwriters]
, 1996
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The table below sets forth the expenses to be incurred by the Registrant in
connection with the issuance and distribution of the shares registered for offer
and sale hereby, other than underwriting discounts and commissions. All amounts
shown represent estimates except the Securities and Exchange Commission
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee -- Securities and Exchange Commission.................................... $83,276
National Association of Securities Dealers, Inc. Fee...................................... 24,650
New York Stock Exchange listing fee....................................................... *
Printing and engraving expenses........................................................... *
Blue sky fees and expenses (including counsel)............................................ *
Accounting fees and expenses.............................................................. *
Legal fees and expenses................................................................... *
Transfer agent's and registrar's fees..................................................... *
Miscellaneous............................................................................. *
--------
Total................................................................................ $ *
--------
--------
</TABLE>
- ---------------
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers.
Article 10 of the Virginia Stock Corporation Act allows, in general, for
indemnification, in certain circumstances, by a corporation of any person
threatened with or made a party to any action, suit or proceeding by reason of
the fact that he or she is, or was, a director, officer, employee or agent of
such corporation. Indemnification is also authorized with respect to a criminal
action or proceeding where the person had no reasonable cause to believe that
his conduct was unlawful. Article 9 of the Virginia Stock Corporation Act
provides limitations on damages payable by officers and directors, except in
cases of willful misconduct or knowing violation of criminal law or any federal
or state securities law.
Section 8.3 of the Company's Articles of Incorporation provides for
mandatory indemnification of any director or officer of the Company who is, was,
or is threatened to be made a party to a proceeding (including a proceeding by
or in the right of the Company) because he is or was a director or officer of
the Company or because he is or was serving the Company or other legal entity in
any capacity at the request of the Company while a director or officer of the
Company, against all liabilities and expenses as are incurred because of such
director's or officer's willful misconduct or knowing violation of the criminal
law.
The Company maintains a standard policy of officers' and directors'
liability insurance.
In the Purchase Agreements attached as Exhibits 1.1 and 1.2 hereto, the
Underwriters will agree to indemnify, under certain conditions, the Company, its
directors, certain of its officers and persons who control the Company within
the meaning of the Securities Act, against certain liabilities.
Item 15. Recent Sales of Unregistered Securities.
In connection with the Demutualization, the Company intends to issue
approximately 64 million shares of Common Stock to Eligible Members. The Company
intends to issue such securities in reliance on an exemption from registration
under the Securities Act contained in Section 3(a)(10) of the Act. In addition,
in connection with the Demutualization, the Company may issue shares of Class C
Common Stock to the Commonwealth of Virginia with a value of up to $87.5 million
(valued at the initial per share price of the Common Stock to the public in the
Offerings). The Company intends to issue such securities in reliance upon an
exemption from registration under the Securities Act contained in Section 4(2)
of the Act.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits. The following is a list of exhibits to this Registration
Statement.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Purchase Agreement (U.S. Version).*
1.2 -- Form of Purchase Agreement (International Version).*
2.1 -- Plan of Demutualization.**
3.1 -- Articles of Incorporation of the Registrant.*
3.2 -- Bylaws of the Registrant.*
4.1 -- Form of Stock Certificate* (other Instruments Defining the Rights of Security-Holders included in Exhibits
3.1 and 3.2).
5 -- Opinion of McGuire, Woods, Battle & Boothe, L.L.P.*
10.1 -- License Agreement dated as of , 1996 by and between the Blue Cross and Blue Shield Association
and the Company.*
10.2 -- Limited Fixed Return Plan for Certain Officers and Directors of the Company.
10.3 -- Long-Term Incentive Plan for Certain Officers and Directors of the Company.
10.4 -- Non-Contributory Retirement Program for Certain Employees of the Company.
10.5 -- Supplemental Executive Retirement Program for Certain Employees of the Company.
10.6 -- Salary Deferral Plan for Norwood H. Davis, Jr.
10.7 -- Employment Agreement dated as of March 13, 1996 by and between the Company and Norwood H. Davis, Jr.
10.8 -- Employment Agreement dated as of August 4, 1995 by and between the Company and Phyllis L. Cothran.
11 -- Statement re computation of per share earnings.*
21 -- Subsidiaries of the Registrant.*
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2 -- Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included in opinion filed as Exhibit 5).*
24 -- Power of Attorney.**
</TABLE>
- ---------------
* To be filed by Amendment.
** Previously filed.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
Item 17. Undertakings.
The undersigned registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act, 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 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,
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.
Insofar as indemnification for liabilities arising under the Securities Act
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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
<PAGE>
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 County of Henrico, Commonwealth
of Virginia, on November 7, 1996.
TRIGON HEALTHCARE, INC.
By: _______/S/ THOMAS G. SNEAD, JR.____
Thomas G. Snead, Jr.
Title: ___Treasurer and Chief Financial
Officer_________________________
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
* Chairman of the Board and November 7, 1996
- ------------------------------------------------------ Chief Executive Officer
Norwood H. Davis, Jr.
* Director November 7, 1996
- ------------------------------------------------------
Lenox D. Baker, Jr., M.D.
* Director November 7, 1996
- ------------------------------------------------------
James K. Candler
* Director November 7, 1996
- ------------------------------------------------------
John Cole, Jr., M.D.
* Director November 7, 1996
- ------------------------------------------------------
John L. Colley, Jr., Ph.D.
* Director November 7, 1996
- ------------------------------------------------------
Robert M. Freeman
* Director November 7, 1996
- ------------------------------------------------------
William R. Harvey
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
* Director November 7, 1996
- ------------------------------------------------------
Elizabeth G. Helm
* Director November 7, 1996
- ------------------------------------------------------
Gary A. Jobson
* Director November 7, 1996
- ------------------------------------------------------
Frank C. Martin, Jr.
* Director November 7, 1996
- ------------------------------------------------------
Donald B. Nolan, M.D.
* Director November 7, 1996
- ------------------------------------------------------
William N. Powell
* Director November 7, 1996
- ------------------------------------------------------
J. Carson Quarles
* Director November 7, 1996
- ------------------------------------------------------
R. Gordon Smith
* Director November 7, 1996
- ------------------------------------------------------
Jackie M. Ward
* Director November 7, 1996
- ------------------------------------------------------
Stirling L. Williamson, Jr.
/S/ THOMAS G. SNEAD, JR. Treasurer and November 7, 1996
- ------------------------------------------------------ Chief Financial Officer
Thomas G. Snead, Jr.
/S/ ROBERT S. WATSON Vice President and Controller November 7, 1996
- ------------------------------------------------------
Robert S. Watson
</TABLE>
*By: _________/S/ THOMAS G. SNEAD, JR.______
Thomas G. Snead, Jr.
Attorney-in-fact
TRIGON BLUE CROSS BLUE SHIELD
LIMITED FIXED RETURN DEFERRAL FOR 1996
1996 DEFERRED BENEFIT AGREEMENT
FOR AN OFFICER
AGREEMENT between (the "Officer") and Trigon Blue
Cross Blue Shield (the "Company").
1. Purpose and Effective Date. The Officer, who is a member of a
select group of management and highly compensated employees, has
deferred payment of part of his unearned compensation. This
Agreement sets forth the understanding of the Company and the
Officer with respect to the deferred compensation. This Agreement
supersedes the Distribution Election Form previously executed by the
Officer. The effective date of this Agreement is January 1, 1996.
The Board has determined that the benefits to be paid to the Officer
under this Agreement constitute reasonable compensation for the
services rendered and to be rendered by the Officer.
2. Definitions.
(a) Affiliate. A parent or subsidiary corporation of the
Company or an entity that is otherwise related to the Company and is
designated by the Committee as an Affiliate.
(b) Agreement. This Trigon Blue Cross Blue Shield Deferred
Benefit Agreement for an Officer.
(c) Beneficiary. A person or persons or other entity
designated by the Officer to receive payment of the Officer's benefits
under this Agreement. If there is no valid designation by the Officer,
or if the designated Beneficiary is not living or, if a trust is not in
existence at the time of the Officer's death, the Officer's Beneficiary
is the personal representative of the Officer's estate.
(d) Board. The Board of Directors of the Company.
(e) Committee. The Human Resources Compensation and Employee
Benefits Committee of the Board.
(f) Company. Trigon Blue Cross Blue Shield.
(g) Deferral Period. The period beginning on January 1, 1996
and ending on December 31, 1997.
(h) Deferred Benefit. The balance credited to the Officer's
bookkeeping account from time to time pursuant to Section 4 of this
Agreement.
(i) Officer. .
<PAGE>
3. Administration. This Agreement is administered by the Committee.
Subject to the Agreement's provisions, the Committee may adopt rules
and regulations necessary to carry out the Agreement's purposes.
The Committee's determinations, interpretation and construction of
Agreement provisions are final and conclusive. If the Officer is a
member of the Committee, he shall not participate in any decisions
regarding this Agreement.
4. Deferral Elections and Earnings on Deferrals.
(a) The Officer has elected to defer payment of $
of the compensation that he otherwise would be entitled to
receive during the Deferral Period. The compensation shall be deferred
at a rate of $ a year (approximately $ a month) over the Deferral
Period. The Company shall credit the Officer's deferred compensation to
a bookkeeping account as of the last day of the calendar month in which
the Officer would have received his compensation but for the deferral
election.
(b) Earnings shall be credited to the bookkeeping account
established for the Officer until the entire account balance has been
paid to the Officer. Earnings shall be credited as of the last day of
each calendar month based on the balance credited to the bookkeeping
account as of the last day of the prior calendar month.
Except as provided in subsection (c) below:
(i) For the four-year period ending December 31, 1999,
earnings shall be credited to the bookkeeping account at the rate of
8.5% per annum, compounded monthly (which is a rate of approximately
0.7083% per month).
(ii) The Committee shall determine the rate of earnings to be
credited to the bookkeeping account after December 31, 1999, and shall
have complete discretion to specify whatever rates it deems appropriate
from time-to-time. However, the interest rate shall not be less than
the rate at which interest would have been earned on the amounts
credited to the bookkeeping account if such amounts had earned interest
at a rate equal to the average Federal Funds rate as published in the
Wall Street Journal plus .65 percent, compounded monthly.
(c) If the Officer's employment with the Company and its
Affiliates terminates before the end of the Deferral Period, other than
on account of his death, the rate at which earnings have been credited
to his bookkeeping account shall be recomputed as follows:
(i) The earnings credited to the Bookkeeping account shall be
recomputed for the entire period since the bookkeeping account was
established. The interest rate used to recompute the earnings shall be
determined as of the end of each calendar quarter and shall be the rate
at which interest would have been earned on the amounts credited to the
bookkeeping account if such amounts had earned interest at a rate equal
to the average Federal Funds rate as published in the Wall Street
Journal plus .65 percent, compounded monthly. Earnings at this interest
rate shall be credited as of the last day of each calendar month based
on the balance credited to the bookkeeping account as of the last day
of the prior calendar month.
(ii) Any earnings credited to the bookkeeping account pursuant
to subsection (b) that exceed the recomputed earnings under this
subsection (c) shall be withdrawn from the Officer's bookkeeping
account upon his termination of employment. If the earnings recomputed
under this subsection (c) exceed the earnings credited to the
bookkeeping account pursuant to subsection (b), no adjustment shall be
made to the bookkeeping account.
-2-
<PAGE>
5. Deferred Benefit.
(a) Payment of Deferred Benefit At Age 55.
(i) Except as provided in subsections (b) and (c) below, the
Officer's Deferred Benefit will begin to be paid to him on the first
day of the month coinciding with or immediately following the date the
Officer attains age 55. The Officer will receive his Deferred Benefit
in annual installments over a -year period.
(ii) If the Officer begins receiving his Deferred Benefit and
then dies before he has received Deferred Benefit payments for a year
period, the balance of any payments due him shall be paid to the
Officer's Beneficiary. Payments to the Officer's Beneficiary shall be
made in annual installments over the remainder of the year period.
(b) Death before Commencement of Benefit.
(i) Except as provided below and except as provided in
subsection (c) below, if the Officer dies before he begins receiving
his Deferred Benefit and before January 1, 2006, the Officer's
Beneficiary will receive an annual survivor benefit equal to $ a year
for a 15-year period. This survivor benefit will be paid in lieu of the
Officer's Deferred Benefit. Payment shall begin within 60 days after
the Officer's death. However, if the Officer dies by suicide before
July 1, 1997, the amount payable to his Beneficiary will be limited to
the deferrals made and interest earned using the method outlined in
subsection 4(b) above.
(ii) Except as provided in subsection (c) below, if the
Officer dies before he begins receiving his Deferred Benefit but on or
after January 1, 2006, his Beneficiary will receive a survivor benefit
equal to his Deferred Benefit, provided that the Committee, in its sole
discretion, may determine that a greater survivor benefit shall be
paid. The survivor benefit will be paid in annual installments over a
15-year period. Payment shall begin within 60 days after the Officer's
death.
(c) Termination of Employment Before the End of the Deferral
Period. If the Officer's employment with the Company and its Affiliates
terminates before the end of the Deferral Period, other than on account
of his death, the Officer's Deferred Benefit (determined pursuant to
subsection 4(c) above) will be paid to him in a lump sum payment within
five days after he terminates employment. If the Officer's employment
terminates before the end of the Deferral Period and the Officer dies
before he receives his Deferred Benefit, the Officer's Beneficiary will
receive a survivor benefit equal to the Officer's Deferred Benefit
(determined pursuant to subsection 4(c) above). The survivor benefit
will be paid in a lump sum payment within five days after the Officer's
death.
(d) Installment Payments. When annual installments are paid
under this Agreement, each installment payment will be an amount equal
to the Deferred Benefit (or survivor benefit under subsection 4(b) (ii)
above, as the case may be) divided by the number of remaining payments
to be made.
-3-
<PAGE>
(e) Alternate Payment Forms. The Committee shall have
discretion to distribute an Officer's Deferred Benefit over a shorter
or earlier period of time than the term described above, if the
Committee determines that the Officer has incurred financial hardship
that necessitates a shorter or earlier payment or if the Committee
determines that a shorter or earlier payment is in the best interest of
the Company. The Committee shall have no obligation whatsoever to
authorize distribution over a shorter or earlier period of time, and
the Committee's decision shall be binding on all persons for all
purposes.
6. Designation of Beneficiary.
(a) The Officer may designate a Beneficiary to receive any
benefits due under the Agreement upon the Officer's death. The
Beneficiary designation shall be made by executing a Beneficiary
designation form provided by the Committee.
(b) The Officer may change a previous Beneficiary designation
by executing another Beneficiary designation form. A Beneficiary
designation is not binding on the Company until the Committee receives
the Beneficiary designation form.
7. Obligation of the Company. This Agreement is unfunded. The amounts
payable under the Agreement are to be satisfied solely out of the
general assets of the Company, which shall remain subject to the claims
of its creditors. A benefit is at all times a mere contractual
obligation of the Company. The Company will not segregate any funds for
benefits or issue any notes as security for the payment of any
benefits.
8. Obligation of the Officer. The Officer agrees to provide certain
personal information and pass certain health examinations necessary for
participation in the Limited Fixed Return Deferred Benefit Program.
9. Restrictions on Transfer. Any benefits to which the Officer or his
Beneficiary may become entitled under this Agreement are not subject
in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge, and any attempt to do so
is void. Benefits are not subject to attachment or legal process
for the debts, contracts, liabilities, engagements, or torts of the
Officer or his Beneficiary. This Agreement does not give the
Officer any interest, lien, or claim against any specific asset of
the Company. The Officer and his Beneficiary have only the rights
of a general creditor of the Company.
10. Claims Procedure. If for any reason a benefit due under this
Agreement is not paid when due, the individual entitled to such
benefit may file a written claim with the Committee. If the claim
is denied or no response is received within 90 days (in which case
the claim will be deemed to have been denied), the individual may
appeal the denial to the Committee within 60 days of the denial. In
pursuing an appeal, an individual may request that a responsible
Officer review the denial, may review pertinent documents, and may
submit issues and comments in writing. A decision on appeal will be
made within 60 days after the appeal is made, unless special
circumstances require the Committee to extend the period for another
60 days.
-4-
<PAGE>
11. Amendment or Termination. The Board may amend or terminate this
Agreement at any time. However, no amendment or termination of the
Plan shall divest the Officer or his Beneficiary of deferred
compensation or a survivor benefit earned as of the date of the
modification or termination.
12. Construction. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Virginia. The headings in this
Agreement have been inserted for convenience or reference only and
are to be ignored in any construction of the provisions. If a
provision of this Agreement is not valid, that invalidity does not
affect other provisions.
13. Successors and Assigns. This Agreement shall be binding on the
Company and its successors and assigns and on the Officer, his
Beneficiary and their personal representatives.
WITNESS the following signatures:
- --------------------------------------
(NAME OF OFFICER)
- --------------------------------------
(SIGNATURE)
- --------------------------------------
(DATE)
TRIGON BLUE CROSS BLUE SHIELD
(NAME OF COMPANY)
BY: __________________________________
- --------------------------------------
(DATE)
-5-
=============================================================================
LONG-TERM
PERFORMANCE PLAN
for
Trigon Blue Cross Blue Shield
1996
===============================================================================
<PAGE>
AN OVERVIEW OF THE LONG-TERM
PERFORMANCE PLAN
<PAGE>
===============================================================================
As a key contributor to Trigon Blue Cross Blue Shield future success, you have
been selected to participate in the Long-Term Performance Plan. The Plan
provides highly competitive earnings opportunities when your leadership
decisions and actions, and those of your fellow officers, accomplish our
critical Showcase objectives.
This booklet describes the key components of the Plan. It should answer your
questions about the mechanics of the Plan and provide the information you need
to improve performance, achieve our Showcase objectives, and increase your
earnings opportunities.
THE PLAN IN BRIEF
The Plan is based on Trigon BCBS performance over a
three-year cycle. At the start of each cycle,
performance measures are established. These measures
relate directly to the different elements of Showcase.
At the same time, three performance goals are set for
each measure. These goals are the threshold, or minimum
level of performance, the target, or expected level of
performance, and the maximum - the level of performance
that yields the highest award under the Plan.
Performance is assessed at the end of the three-year
cycle. If results for each measure achieve target
performance, you receive your guideline incentive
(calculated as a percent of your salary). If results are
below or above target, your incentive could range from
50 to 200% of your guideline amount. Incentives, if
earned, would be paid shortly after the close of the
third year of the performance period, once results
against the goals have been determined.
<PAGE>
===============================================================================
A CLOSER LOOK AT THE PLAN
===============================================================================
GUIDELINE AWARDS ARE HIGHLY COMPETITIVE
Your guideline award in any year is calculated as a percent of your January 1
salary in that year. The guideline award represents the earnings opportunity
available when targets for each performance measures are exactly achieved. Your
guideline award is established according to your responsibility level; together
with your salary and annual incentive, it reflects a highly competitive level of
earnings for your position, based on an analysis of competitors in our industry
and selected other companies of comparable size in the insurance and financial
services industries.
Actual awards can range from 50 to 200 percent of the guideline award, once the
threshold performance level is exceeded. The percentage depends on actual
performance results over the performance cycle. Performance below the threshold
level, for all measures, will result in no award.
PAYOUT FOLLOWS PERFORMANCE CYCLE
The Plan's performance cycle extends for three years, with a new cycle beginning
each year. The three-year cycle captures a meaningful portion of our
underwriting cycle.
LONG-TERM INCENTIVE CYCLES
<TABLE>
<S> <C>
|
Long-Term |
Incentive | ----------------------------
Cycle 1 | G | | $
| | |
| |----------------------------
| | | | |
| | |-----------------------------
2 | | G | | $
| | | |
| | |-----------------------------
| | | | | |
| | | | | |
| | | |------------------------------
3 | | | G | | $
| | | | |
| | | |------------------------------
| | | | | | |
---------------------------------------------------------------- --
1994 1995 1996 1997 1998
</TABLE>
--------------------
| |
| G Goals set |
| $ Payout |
| |
---------------------
<PAGE>
PERFORMANCE MEASURES LINKED TO SHOWCASE OBJECTIVES
We have established several Showcase objectives, both for the corporation and
each business unit. These objectives are critical to our long-term growth,
profitability and financial stability. The Long-Term Performance Plan is a means
of rewarding you for the results achieved by your work toward our Showcase
objectives. Thus, the performance measures for each performance cycle will be
derived from Showcase. These measures include both Corporate and Strategic
Business Unit (SBU) indicators. (If you are a Corporate officer, you will be
measured on Corporate results; if you are a SBU officer, you will be measured on
both Corporate and SBU results.) The measures may change from cycle to cycle
depending on the elements of Showcase that must be emphasized during the new
performance cycle. Examples of possible performance measures are shown below.
RELATION OF PERFORMANCE MEASURE TO SHOWCASE OBJECTIVE
("X" Indicates Direct Relationship)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Effective Highly
EXAMPLES OF Benefits Strong Strong Effective
PERFORMANCE Customer- Strong Cost Market Provider Information Effective
MEASURES Focused Financially Management Position Relations Systems Communication
- ----------------------------- ---------- --------- ---------------- ------------ -------------- ----------------- ----------------
<S> <C>
Trigon BCBS
Months in Reserve X
- ----------------------------- ----------- --------- --------------- ------------ -------------- ----------------- ----------------
Average Claims Trend X X
- ----------------------------- ----------- --------- --------------- ------------ -------------- ----------------- ----------------
Customer Survey X X X X
- ----------------------------------------- ------------------------- ------------ -------------- ----------------- ----------------
Market Share X
============================= =========== ========= =============== ============ ============== ================= ================
SBU
Contribution to Margin X
- ----------------------------- ----------- ---------- ------------- ------------- -------------- ------------------ ----------------
Net Policy Growth X X X
- ----------------------------- ----------- ---------- ------------- ------------- -------------- ------------------ ----------------
COB and Medical Review Savings X X
======================================= ================ ========== ============== ================== ============== =============
</TABLE>
<PAGE>
Each of the performance measures selected for a given cycle will receive a
different "weight" or emphasis. The weight specifies what percent of the
guideline award can be earned for that measure. When the weights for each
measure are added together, they equal 100 percent of your guideline incentive
amount.
As an example, the chart below illustrates how weights might be assigned to
an SBU Vice President's measures. In total, the weights add up to 100
percent of the guideline award for this position (e.g., 10 percent of the
position's salary during the last year of the cycle).
===============================================================================
EXAMPLES OF PERFORMANCE MEASURES AND WEIGHTS
WEIGHT
MEASURES (as a % of guideline)
- ---------------------------------------- ---------------------
SBU Performance
SBU Contribution Margin 20%
COB, Recovery & Medical Review Savings 10
Cummulative Net Policy Growth 20
Corporate Performance
Average Annual Net Income 20
Cummulative Net Policy Growth 20
Customer Survey 10
100%
Percent of Guideline Incentive
Award
============================================================================
<PAGE>
EARNINGS ARE LINKED TO PERFORMANCE RESULTS
At the start of each cyle, performance goals are established for each
performance measure. Each measure has three goals: target, threshold and
maximum. Target is the level Trigon BCBS and the SBU needs to achieve to
ultimately meet its Showcase objectives. Threshold is the lowest level of
acceptable performance. No award will be paid for a measure if performance
results fall below threshold for that measure. Performance below threshold for
all measures would result in no award. Maximum signifies the level of
performance that yields the Plan's highest award. The chart below illustrates
the payout schedule for each measure. The sum of the results for each measure
equals the total award.
Prior to the start of each plan cycle, you will receive a personalized Incentive
Plan specifying the following:
o your performance measures for the cycle o the weight assigned to
each measure o the goals (threshold, target, maximum) for each
measure o your guideline award percentage and minimum and maximum
earnings opportunities for each measure.
The incentive plan will help you direct your actions to achieve the performance
objectives for the cycle.
<PAGE>
EXAMPLE OF EARNINGS
================================================================================
The following example illustrates the earnings potential under the Plan for a
Vice President whose January 1 salary in the last year of the cycle is $100,000
and whose guideline incentive is 10 percent, or $10,000.
For the purpose of this illustration, performance goals for each measure are as
follows:
% OF
PERFORMANCE GOAL
GOAL AWARD
----------- -----
Below Threshold Less Than 80% of Plan Yields--->> 0
Threshold 80% 50%
Target 100% 100%
Maximum 120% 200%
EXAMPLE OF EARNINGS FOR VICE PRESIDENT
<TABLE>
<CAPTION>
WEIGHT ACTUAL
PERCENT OF OF LONG TERM
ACTUAL GUIDELINE MEASURE AWARD
LONG-TERM PERFORMANCE INCENTIVE (% of Base (% of Guideline
PERFORMANCE MEASURES % of Target EARNED Guideline) Award)
- -------------------- ------------ ---------- ---------- ---------------
<S> <C>
Strategic Business Unit
SBU Contribution Margin 90% 75% x 20% = 22.5%
COB and Medical Review Savings 100 100 x 10 = 20.00
Cummulative Net Policy Growth 85 62.5 x 20 = 12.50
Corporate
Annual Net Income Growth 80 50 x 20 = 10.00
Cummulative Net Policy Growth 105 125 x 20 = 25.00
Customer Survey 80 50 x 10 = 5.00
----------
95.0%
Guideline Award x$10,000
----------
Actual Incentive $9,500
</TABLE>
<PAGE>
ADMINISTRATIVE DETAILS
=========================================================================
ELIGIBILITY
Eligibility to participate in the Long-Term Performance Plan is at the
discretion of the Chief Executive Officer and Board of Directors. Eligibility
may be extended to the President and Chief Operating Officer, SBU Presidents and
Executive Vice President, Corporate Senior Vice Presidents, and Corporate and
SBU Vice Presidents.
To receive an award, participants must have been employed in an eligible
position for at least 6 months of the calendar year.
Awards for less than 12 months, but at least 6 months, will be granted on a
prorata basis to the closest month. The salary at the time the participant first
assumes an eligible position will be used to calculate incentive opportunity.
Award eligibility is further clarified below under "Changes in Employment
Status".
CHANGES IN EMPLOYMENT STATUS
The Board will decide all matters of payment eligibility on an individual basis,
but generally, the following guidelines apply:
<TABLE>
<CAPTION>
================================== =================================================
EVENT AWARD ELIGIBILITY
<S> <C>
================================== =================================================
Termination of Employment Not eligible to receive an award
================================== =================================================
Death Pro rata distribution at the end of the
performance cycle if deceased was a Plan
participant for at least 6 months
================================== =================================================
Total and Permanent Disability Pro rata distribution at the end of the
performance cycle if employee was a Plan
participant for at least 6 months
================================== =================================================
Retirement Pro rata distribution at the end of the
performance cycle if employee was a Plan
participant for at least 6 months
================================== =================================================
Change in Position CEO or President discretion
================================== =================================================
</TABLE>
TRIGON BLUE CROSS BLUE SHIELD
1996 LONG TERM PERFORMANCE PLAN
APPROVALS
/s/ SIGNATURE ILLEGIBLE 3/2/96
- --------------------------------- -------------------
Manager, Incentive Compensation Date
/s/ SIGNATURE ILLEGIBLE 4/3/96
- ----------------------------------------- --------------------
Senior Vice President, Corporate Services Date
NON-CONTRIBUTORY
RETIREMENT PROGRAM
FOR
CERTAIN EMPLOYEES
OF
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
The undersigned certifies that Blue Cross and Blue Shield Of Virginia,
incorporated in the state of Virginia with its principal office in Richmond
(herein referred to as the "Employer") has adopted a retirement program for
certain of its employees, or has amended said program, in the form set forth
herein and subject to the elections made herein, effective with respect to
Participants who are Employees on or after the 1st day of January, 1994, except
to the extent that the context of a provision herein indicates that it is
applicable to a Participant who is not an Employee on or after said date.
(CORPORATE
SEAL)
/s/ Ronald M. Nash
------------------
Signature
Ronald M. Nash
/s/ J. David Brittingham Senior Vice President
------------------------- ----------------------
Attest Title
J. David Brittingham
Manager, Employee Benefits December 21, 1994
--------------------------- -----------------------
Title Date
(Amended through 1/1/94)
<PAGE>
i
TABLE OF CONTENTS
Page
ARTICLE 1 -- DEFINITIONS 1-1
1.01 -- Actuarial Equivalent 1-1
1.01A -- Annuity Starting Date 1-2
1.02 -- Beneficiary 1-2
1.03 -- Break in Service 1-2
1.04 -- Committee 1-3
1.05 -- Early Retirement Age 1-3
1.06 -- Earnings 1-3
1.07 -- Effective Date 1-5
1.08 -- Employee 1-5
1.09 -- Employer 1-6
1.10 -- Employment 1-6
1.11 -- Entry Date 1-7
1.12 -- Final Average Earnings 1-7
1.12A - Maximum Annual Social Security Covered
Compensation 1-8
1.13 -- Normal Retirement Age 1-8
1.13A - Social Security Retirement Age 1-8
1.14 -- Participant 1-9
1.15 -- Participating Plan 1-9
1.16 -- Plan 1-9
1.17 -- Primary Social Security Benefit 1-9
1.18 -- Program 1-10
1.19 -- Program Year 1-10
1.20 -- Spouse 1-10
1.21 -- Total and Permanent Disability 1-10
1.22 -- Trust Agreement 1-11
1.23 -- Trustee 1-11
1.24 -- Trust Fund or Fund 1-12
1.25 -- Year of Employer Service 1-12
1.26 -- Year of Participation Service 1-12
1.27 -- Year of Plans and Association
Service 1-13
1.28 -- Year of Vesting Service 1-13
1.29 -- Hour of Service 1-14
1.30 -- Initial Computation Period and
Subsequent Computation Period 1-15
ARTICLE 2 -- PARTICIPATION 2-1
2.01 -- Conditions of Participation 2-1
2.02 -- Participation 2-1
2.03 -- Acceptance 2-1
ARTICLE 3 -- FINANCING OF PROGRAM 3-1
3.01 -- Medium of Financing the Program 3-1
3.02 -- Employer Contributions 3-1
3.03 -- Employee Contributions 3-2
<PAGE>
i
ARTICLE 4 -- BENEFITS 4-1
4.01 -- General Conditions 4-1
4.02 -- Normal Retirement 4-8
4.03 -- Delayed Retirement 4-15
4.04 -- Early Retirement 4-19
4.05 -- Special Early Retirement Benefit 4-21
4.06 -- Pre-Retirement Death Benefit 4-23
4.07 -- No Death Benefits Except as
Specified 4-30
4.08 -- Vesting 4-31
4.09 -- Other Termination of Employment 4-35
4.10 -- Cost-of-Living Adjustment 4-35
4.11 -- Non-duplication of Benefits 4-37
4.12 -- Limitations on Benefits 4-39
4.13 -- Suspension of Benefits 4-49
4.14 -- Leaves of Absence 4-54
4.15 -- Small Benefits 4-54
4.16 -- Granting Credit for Accrued Benefits
for a Period of Total and
Permanent Disability 4-55
ARTICLE 5 -- FORMS OF BENEFITS 5-1
5.01 -- Joint and Survivor Benefit 5-1
5.02 -- Distribution Requirements and
Election of Optional Retirement
Benefits 5-3
5.03 -- Determination of Optional
Benefit 5-7
5.04 -- Description of Options 5-12
5.05 -- Cancellation of Election or
Beneficiary Change 5-13
5.06 -- Direct Rollover Rules 5-14
ARTICLE 6 -- ADMINISTRATION OF PROGRAM 6-1
6.01 -- Administration 6-1
6.02 -- Records 6-2
6.03 -- Liability of the
Committee 6-2
6.04 -- Procedure for Funding Policy 6-3
6.05 -- Legal Incompetence 6-3
6.06 -- Correction of Errors 6-3
ARTICLE 7 -- AMENDMENT AND TERMINATION
OF PROGRAM 7-1
7.01 -- Amendment of Program 7-1
7.02 -- Termination of Program 7-1
7.03 -- Rights Non-forfeitable 7-5
7.04 -- Distribution on Termination 7-5
7.05 -- Liquidation of Assets 7-9
7.06 -- Purchase of Benefits 7-9
7.07 -- Restriction of Benefits 7-9
<PAGE> ii
ARTICLE 8 -- MISCELLANEOUS 8-1
8.01 -- Action by Employer 8-1
8.02 -- Liability of Employer 8-1
8.03 -- Successor to Business of Employer 8-1
8.04 -- Dissolution of the Employer 8-1
8.05 -- Interest in the Fund 8-1
8.06 -- Claims 8-2
8.07 -- Mergers, Consolidations and
Transfers of Assets 8-2
8.08 -- Non-assignment of Benefits 8-2
8.09 -- Definition of Words 8-4
8.10 -- Titles 8-4
8.11 -- Construction 8-4
8.12 -- Execution of the Program 8-4
ARTICLE 9 -- TOP-HEAVY PROVISIONS 9-1
9.01 -- Application of Article 9-1
9.02 -- Definitions 9-1
9.03 -- Vesting 9-4
9.04 -- Minimum Benefits 9-6
9.05 -- Limitation on Compensation 9-7
9.06 -- Limits on Benefits and Contri-
butions 9-7
<PAGE>
1-1
ARTICLE 1
DEFINITIONS
As used herein, the following words and phrases shall have the
meaning indicated unless otherwise defined or unless a different meaning is
required by the context:
1.01 "Actuarial Equivalent" shall mean, with respect to a
benefit payable under the Program, a benefit of equivalent value thereto
determined on the basis of the following actuarial assumptions:
(a) The interest rate shall be that which is used by the
Pension Benefit Guaranty Corporation (PBGC) to value immediate annuities for
terminating pension plans except that this rate will be changed only on every
other January 1 beginning January 1, 1984, and will be set equal to the PBGC
interest rate which was in effect on the prior July 1, except that no change
will be made unless the values differ by at least one percentage point; and (b)
The mortality rates shall be unisex rates constructed based upon the 1986
Projected Experience Table, assuming the following distribution of male and
female employees: For early retirement factors, 48.9 percent males and 51.1
percent females; for period certain and life thereafter option factors, 77.8
percent males and 22.2 percent females; and for joint and contingent option
factors, 86.9 percent males and 13.1 percent females.
If this box is checked / /, the Program (and/or any
predecessor program qualified under ss.401 of the Internal Revenue Code)
specified the actuarial assumptions used to determine a Participant's benefits,
and an amendment(s) (including the adoption of this Program or a restated
version of the Program) changed those actuarial assumptions; accordingly, any
benefit payable under the
<PAGE>
1-2
Program to the Participant thereafter shall be no less than the benefit
otherwise payable to the Participant, determined as of the day immediately prior
to the effective date of the amendment(s) (_____) and computed on the basis of
the actuarial assumptions in effect on such date(s).
1.01A "Annuity Starting Date" is the benefit commencement date
which is the first date for which an amount is paid under the Program.
1.02 "Beneficiary" shall mean the person or persons last
designated by a Participant in writing on forms provided by the Committee to
receive benefits (if any) payable under the Program upon his death; provided
that any such designation shall be subject to the spousal consent rules of
Section 5.02(b). If no such designation of Beneficiary has been received by the
Committee prior to the date of death of the Participant or if there is no
surviving Beneficiary and a benefit is due and payable that is a lump sum or
may, under the terms of the Program, be computed and payable as a lump sum, such
benefit shall be payable to the estate of the Participant.
1.03 A "Break in Service" occurs on the last day of a twelve
consecutive month period (immediately following a period of Employment by a
Plan) during which an Employee is not in the Employment of a Plan.
Notwithstanding the foregoing, in determining whether an Employee who is absent
from work for maternity or paternity reasons has incurred a Break in Service,
for purposes of Sections 2.01 and 4.08, a "Break in Service" occurs on the last
day of a twelve consecutive month period (beginning immediately after the first
anniversary of his last day of Employment by a Plan) during which the Employee
is not in the Employment of a Plan. For this purpose, an absence for maternity
<PAGE>
1-3
or paternity reasons means an absence (i) by reason of the pregnancy of the
Employee, (ii) by reason of the birth of a child of the Employee, (iii) by
reason of the placement of a child with the Employee in connection with the
adoption of such child by the Employee, or (iv) for purposes of caring for such
child for a period immediately following such birth or placement. An Employee
shall not be deemed to be absent from work for maternity or paternity reasons
unless the Employee furnishes the Committee such timely information as the
Committee may reasonably require to establish that the absence is for maternity
or paternity reasons and the number of days for which there was such an absence.
1.04 "Committee" shall mean the National Employee Benefits
Committee appointed by the Blue Cross and Blue Shield Association and any
successor committee appointed by the Blue Cross and Blue Shield Association
pursuant to an agreement between the Employer and the Blue Cross and Blue Shield
Association referred to as Exhibit B.
1.05 "Early Retirement Age" shall mean the day on which an
individual attains his 55th birthdate.
1.06 "Earnings" shall mean the following as selected by
the Employer:
(a) For a year beginning prior to January 1, 1988, the
Participant's compensation rate as specified in / X / the Program or / / the
predecessor program of the Employer in effect on such date.
(b) For a year beginning on or after N/A , but prior to N/A;
(1), (2) or (3) as checked below:
/ / (1) The Participant's basic compensation rate on January 1
of such year, exclusive of bonuses, overtime, and other extra
compensation, or
<PAGE>
1-4
/ / (2) The Participant's basic compensation rate on January 1
of such year, and the Participant's / / bonuses, / / overtime, / /
other extra compensation, for the year preceding such year, or
/ / (3) The Participant's compensation which is subject to
Federal Income Tax Withholding in such year, plus any amount which the
Participant elected pursuant to a salary reduction agreement to have
contributed by the Employer to a retirement program having a qualified
cash or deferred arrangement (under Section 401(k) of the Internal
Revenue Code) provided such contribution is not then subject to Federal
Income Tax under Internal Revenue Code Section 402(e)(3).
(c) For a year beginning on or after January 1, 1988, (1) or
(2) as checked below:
/ / (1) The Participant's basic compensation rate on January 1
of such year, and the Participant's bonuses, overtime, and other extra
compensation, paid in the year preceding such year, but disregarding
such amounts earned on or after the Employee's Early Retirement Date or
last date of Employment, or
/ X / (2) The Participant's compensation which is subject to
Federal Income Tax Withholding in such year, plus any amount which the
Participant elected pursuant to a salary reduction agreement to have
contributed by the Employer to a qualified cash or deferred arrangement
(under Section 401(k) of the Internal Revenue Code) provided such
contribution is not then subject to Federal Income Tax under Internal
Revenue Code Section 402(e)(3), plus any additional amounts contributed
or deferred at the election of the Participant
<PAGE>
1-5
under Internal Revenue Code Section 125, 402(h), 403(b), 414(h) or
457(b) but, subject to Federal Income Tax provided the Participant
could have had such amounts paid in cash or otherwise contributed
towards a currently taxable benefit, plus, if this box is checked / /,
amounts of compensation that are not subject to Federal Income Tax
Withholding that are includable in income and are reported on Form W-2
in such year. However, such amounts earned after the last complete
calendar year prior to the earlier of the Employee's Early Retirement
Date or last date of Employment shall be disregarded. (In no event,
however, will the benefit of an Employee who was a Participant on the
date prior to ______________________, be less than the benefit would
have been under the terms of the Earnings definition in effect under
the Program on the day prior to that date and in accordance with: / /
Section 1.06 (b)(1) or (2), assuming no changes in the Participant's
Earnings after that date; or / / Section 1.06 (b)(3), assuming no
changes in the Participant's basic compensation rate on that date plus
the Participant's projected annual bonuses, overtime, and other extra
compensation based on the amount of such extra compensation for the
prior year.)
(d) Notwithstanding the foregoing, for purposes of calculating
benefits in Program Years beginning on or after January 1, 1994, the amount of
Earnings taken into account for any Program Year shall not exceed $150,000, as
adjusted by the Secretary of the Treasury to reflect cost of living increases.
Any cost of living increase in effect for a particular Program Year applies only
with respect to Earnings for that Program Year taken into account in determining
benefits.
<PAGE>
1-6
1.07 "Effective Date" shall mean February 1, 1948, the date on
which the Employer initially adopted the Program.
1.08 "Employee" shall mean any person employed by the Employer
except: (a) a person who is included in a unit of employees covered by an
agreement which is a collective bargaining agreement between employee
representatives and one or more employers if retirement benefits were the
subject of good faith bargaining between such employee representatives and such
employer or employers unless the collective bargaining agreement provides that
said employees are covered by this Program and (b)
<PAGE>
1-7
a person who is a leased employee (within the meaning of ss.414 (n) of the
Internal Revenue Code) of the Employer.
1.09 "Employer" shall mean Blue Cross and Blue Shield Of
Virginia, which is a Plan as defined in Section 1.16.
1.10 "Employment" shall mean service as an employee, within
the meaning of the Federal Insurance Contribution Act, of an employer, beginning
when such service first commences and ending on the earlier of (a) the date on
which the employee quits, retires, is discharged or dies, (b) the first
anniversary of the first date on which an employee is absent from service (with
or without pay) for any other reason, such as vacation, holiday, sickness,
disability, leave of absence, or layoff, or (c) the date on which the employee
quits, retires, is discharged or dies after the employee is absent from service
(with or without pay) for any other reason, such as vacation, holiday, sickness,
disability, leave of absence, or layoff, provided, however, that if severance
from service resulted from a quit, retirement or discharge and the employee
returns to the service of the employer within 12 months of the severance from
service, or if the employee severed from service as a result of a quit,
retirement or discharge during an absence for any other reason and the employee
returns to the service of the employer within 12 months of the date on which he
was first absent from service, the period of absence shall be included in
Employment.
The period of Employment also includes those periods of the
employee's active service in the Armed Forces of the United States which give
rise to reemployment rights under federal law; provided that the employee
complies with the relevant provisions of federal law establishing such
reemployment rights and is, in fact, reemployed by his Employer.
<PAGE>
1-8
Solely for purposes of determining an Employee's level of
vesting, his participation service under Section 2.01(b), and whether benefits
may commence because he has terminated service or retired from the Employer,
(and not for the purpose of benefit calculation) the period of Employment (and
Hours of Service) shall also include service with (1) any corporation that is a
member of a controlled group of corporations (as defined in ss.414(b) of the
Internal Revenue Code) that includes the Employer, (2) any trade or business
(whether or not incorporated) that is under common control (as defined in
ss.414(c) of the Internal Revenue Code) with the Employer, (3) any organization
(whether or not incorporated) that is a member of an affiliated service group
(as defined in ss.414(m) of the Internal Revenue Code) that includes the
Employer, (4) except to the extent otherwise provided in regulations prescribed
by the Secretary of the Treasury under ss.414(n) of the Internal Revenue Code
with respect to periods of service required under ss.414(n)(4) of the Internal
Revenue Code to be credited to a leased employee (as defined in ss.414(n) of the
Internal Revenue Code) or a common-law employee, the leasing organization, and
(5) any other entity required to be aggregated with the Employer pursuant to
regulations under ss.414(o) of the Internal Revenue Code.
1.11 "Entry Date" shall mean January 1 or July 1 of a Program
Year beginning on or after January 1, 1976, provided, however, that "Entry Date"
shall mean the date of Employment by the Employer in the case of an Employee who
satisfies the Conditions of Participation set forth in Section 2.01 on the date
of his Employment by the Employer, and shall mean the first day following the
completion of a Year of Participation Service in the case of an Employee who
satisfies the Conditions of Participation set forth in
<PAGE>
1-9
Section 2.01 and whose prior Years of Participation Service were disregarded
because of a Break in Service.
1.12 "Final Average Earnings" means the highest average of an
Employee's Earnings for the five consecutive years (or his total years of
Employment by a Plan or Plans if less than five) out of the last 10 years of
Employment by a Plan or Plans ending with the last year of Employment for which
Earnings are included pursuant to Section 1.06.
1.12A "Maximum Annual Social Security Covered Compensation"
means the average (without indexing) of the Social Security taxable wage base in
effect for each calendar year during the 35-year period ending with the last day
of the calendar year in which an employee attains (or will attain) Social
Security Retirement Age. In determining a Participant's Maximum Annual Social
Security Covered Compensation for a Program Year, the Social Security taxable
wage base in effect for the Program Year for which the determination is being
made shall be assumed to remain in effect for subsequent Program Years. A
Participant's Maximum Annual Social Security Covered Compensation shall be
adjusted each Program Year.
1.13 "Normal Retirement Age" shall mean the later of (a) the
date on which an individual attains his 65th birthdate, or (b) the date on which
the Participant completes 5 Years of Vesting Service, but in no event later than
the date which marks the fifth anniversary of a Participant's participation in
the Program.
1.13A "Social Security Retirement Age" shall mean the age used
as the retirement age for the Participant under ss.216(1) of the Social Security
Act, except that such section shall be modified for this purpose, in accordance
with regulations prescribed by the Secretary of the Treasury, by treating age 62
as the "early
<PAGE>
1-10
retirement age" and by rounding up, as described below, any part-year increase
in the Social Security Retirement Age to the next whole year. Accordingly, under
this definition, the Social Security Retirement Age is 65 for a Participant who
was born before January 1, 1938; 66 for a Participant born after
<PAGE>
1-11
December 31, 1937, but before January 1, 1955; and 67 for a Participant born
after December 31, 1954.
1.14 "Participant" shall mean any individual who has become a
Participant pursuant to the provisions of Article 2 and is in the Employment of
a Plan or is entitled to a benefit under this Program.
1.15 "Participating Plan" shall mean the Employer which has
adopted this Program and a Plan which has adopted a similar program under the
National Retirement Trust.
1.16 "Plan" means a corporation which is approved or licensed
as a Blue Cross Plan; a corporation which is approved or licensed as a Blue
Shield Plan; Blue Cross and Blue Shield Association; each corporation which is
wholly owned or controlled by a Blue Cross Plan, a Blue Shield Plan or Blue
Cross and Blue Shield Association or is jointly owned or controlled by Blue
Cross and Blue Shield Association and/or Plans; and any other organization which
the National Employee Benefits Committee approves for participation in a program
under the National Retirement Trust.
1.17 "Primary Social Security Benefit" means the estimated
"Primary Insurance Amount" of a Participant calculated as of his Normal
Retirement Age, as set forth in the Social Security Act in effect on January 1
of the year the Participant's Employment with the Employer is terminated. The
Participant's Primary Insurance Amount shall be estimated by the Committee in a
uniform manner assuming the Participant's wages subject to the Federal Insurance
Contribution Act for years prior to the final year of Earnings from the Employer
had increased at the same rate as the national averages for such wages based on
data published by the U.S. Department of Health and Human Services. It also will
be
<PAGE>
1-12
assumed that after the Participant's termination of Employment with the Employer
he will not receive any wages subject to the Federal Insurance Contribution Act,
except that in the case of a Participant who terminates Employment with the
Employer prior to eligibility for Early Retirement Benefits, it will be assumed
that wages after such termination will be equal to the final rate of Earnings on
an annual basis. If a Participant provides evidence satisfactory to the
Committee that his actual Primary Insurance Amount at his Normal Retirement Age
is less than the Primary Social Security benefit as estimated, the Primary
Social Security Benefit shall be reduced accordingly. (In no event, however,
will the accrued benefit of a Participant, who was also a Participant on June
30, 1979, be less by reason of this definition of Primary Social Security
Benefit than the benefit amount which the Participant had accrued through June
30, 1979, under the terms of the Program as of such date.)
1.18 "Program" shall mean the Non-Contributory Retirement
Program for Certain Employees of Blue Cross and Blue Shield Of Virginia, as
restated herein and as amended from time to time.
1.19 "Program Year" shall mean the period beginning with the
Effective Date and ending on December 31 of said year and each calendar year
thereafter.
1.20 "Spouse" shall mean a person who is married to the
Participant on the Annuity Starting Date or, if earlier, at the time of his
death, provided that a Participant's former spouse shall be treated as his
Spouse or surviving Spouse to the extent provided in a "qualified domestic
relations order" (as defined in ss.414(p) of the Internal Revenue Code).
1.21 "Total and Permanent Disability" shall have the same
meaning as the term, or a term of a similar import, has under the
<PAGE>
1-13
long-term disability program of the Employer if said program applied to a broad
cross section of employees of the Employer on a non-discriminatory basis. In the
event the term "Total and Permanent Disability" is not determined pursuant to
the preceding sentence, the term shall mean the condition of a Participant,
determined on the basis of medical evidence satisfactory to the Committee,
whereby a Participant is found to be wholly prevented from engaging in any
occupation comparable to that which he held at the time his disability occurred.
The date when a Participant's disability occurred shall be determined by the
Committee. A Participant shall not be considered disabled if the Committee
determined that his disability resulted from or arose out of:
(a) service in the armed forces of any country;
(b) intentionally self-inflicted injury;
(c) wrongful use of narcotics; or
(d) participation in a felonious criminal act which
results in the Participant's conviction in a court of law.
The Participant shall be required by the Committee to
submit to a medical examination on the second anniversary of the date the
disability occurred to determine whether he is in fact so disabled as to be
prevented from engaging in any occupation comparable to that which he held at
the time of disability. A Participant may be required by the Committee to submit
to a medical examination at any time, whether prior or subsequent to the
required medical examination on the second anniversary of the date his
disability occurred, to determine whether he is disabled so as to be prevented
from engaging in any occupation comparable to that which he held at the time his
disability occurred.
1.22 "Trust Agreement" shall mean the agreement attached
hereto entered into by the Blue Cross Association and the Bankers
<PAGE>
1-14
Trust Company on the 1st day of September 1974, as amended effective January 1,
1979, to vest the authority of the Blue Cross Association with respect to the
Agreement in the Blue Cross Association and Blue Shield Association jointly, and
as further amended from time to time.
1.23 "Trustee" shall mean the party or parties designated as
such pursuant to the Trust Agreement.
1.24 "Trust Fund" or "Fund" shall mean the assets, consisting
of cash and such other property as shall be paid or delivered to the Trustee by
the Employer or the Committee on behalf of the Employer, including earnings
thereon, while held by the Trustee.
1.25 "Year of Employer Service" shall mean a Program Year
beginning on or after January 1, 1976, in which an Employee is in the Employment
of the Employer for the entire Program Year (an Employee who is in the
Employment of the Employer for less than an entire Program Year shall be given
credit for the period of his Employment by the Employer during the Program Year)
and shall mean a year of service or part thereof prior to January 1, 1976,
determined under the provisions of the Program then in effect with respect to
determining service for benefit accrual purposes, provided that "Year of
Employer Service" shall not include service subsequent to his termination of
Employment with the Employer, and provided further that "Year of Employer
Service" shall not include service prior to a Break in Service unless the
Employee has a Year of Participation Service subsequent to said Break in
Service. An appropriate adjustment, however, shall be made to the amount of
service prior to January 1, 1976, credited hereunder in order to take into
account periods of military service which would otherwise qualify as
"Employment" under this Program but which were
<PAGE>
1-15
disregarded under the terms of the Program in effect prior to
January 1, 1976.
1.26 "Year of Participation Service" shall mean a twelve
consecutive month period of Employment with a Plan or Plans, provided, however,
that a period of Employment with a Plan or Plans prior to a Break in Service
shall be disregarded until the Employee has completed a Year of Participation
Service subsequent to said Break in Service. An appropriate adjustment, however,
shall be made to the amount of service prior to January 1, 1976, credited
hereunder in order to take into account periods of military service which would
otherwise qualify as "Employment" under this Program but which were disregarded
under the terms of the Program in effect prior to January 1, 1976.
1.27 "Year of Plans and Association Service" shall mean a
Program Year beginning on or after January 1, 1976, in which an Employee is in
the Employment of a Plan or Plans for the entire Program Year (an Employee who
is in the Employment of a Plan or Plans for less than an entire Program Year
shall be given credit for the period of his employment by the Plan or Plans
during the Program Year) and shall mean a year of service or part thereof prior
to January 1, 1976, in the Employment of a Plan or Plans except periods of said
service which were disregarded under the provisions of the Program then in
effect (with respect to determining service for benefit accrual purposes)
regarding leaves of absence, layoffs, and part-time employment, provided that
"Year of Plans and Association Service" shall not include service subsequent to
his termination of Employment with the Employer, except as provided in Section
4.16, and provided further that "Year of Plans and Association Service" shall
not include service prior to a Break in Service unless the Employee has a Year
of
<PAGE>
1-16
Participation Service subsequent to said Break in Service. An appropriate
adjustment, however, shall be made to the amount of service prior to January 1,
1976, credited hereunder in order to take into account periods of military
service which would otherwise qualify as "Employment" under this Program but
which were disregarded under the terms of the Program in effect prior to January
1, 1976.*
1.28 "Year of Vesting Service" shall mean a Program Year
beginning on or after January 1, 1976, in which an Employee is in the Employment
of a Plan or Plans for the entire Program Year (an Employee who is in the
Employment of a Plan or Plans for less than an entire Program Year shall be
given credit for the period of his Employment by the Plan or Plans during the
Program Year), whether that service is before or after a period of Employment
with the Employer, provided, however, that Years of Vesting Service prior to a
Break in Service shall be disregarded until the Employee has completed a Year of
Vesting Service after a Break in Service, and shall mean a year of service or
part thereof prior to January 1, 1976, in the Employment of a Plan or Plans
except periods of said service which were disregarded under the provisions of
the Program then in effect (with respect to determining whether an Employee was
entitled to a vested benefit) regarding leaves of absence, layoffs, and
part-time employment. An appropriate adjustment, however, shall be made to the
amount of service prior to January 1, 1976, credited hereunder in order to take
into account periods of military service which would otherwise qualify as
"Employment"
- --------
*Notwithstanding the foregoing, the Participants who were Employees on
January 1, 1994, Year of Plans and Association Service shall also include
periods of part-time service with the Employer which occurred prior to January
1, 1976.
<PAGE>
1-17
under this Program but which were disregarded under the terms of the Program in
effect prior to January 1, 1976.
1.29 "Hour of Service" shall mean each hour for which an
Employee is directly or indirectly paid or entitled to be paid by the Employer
for the performance of duties or on account of a period of time during which no
duties are performed due to vacation, holiday, illness, incapacity, layoff, jury
duty, military duty or leave of absence; provided that:
(1) no more than 501 Hours of Service shall be
credited to an Employee on account of a single continuous period during
which the Employee performed no duties;
(2) no credit shall be given for payment made or due
under a plan maintained solely for the purpose of complying with the
applicable worker's compensation or unemployment compensation or
disability insurance laws or payments which solely reimburse an
Employee for medically related expenses incurred by the Employee; and,
(3) Hours of Service shall be credited for back pay,
irrespective of mitigation of damages, either awarded or agreed to by
the Employer to the extent such back pay represents payment for hours
which are required to be taken into account. However, no Hours of
Service shall be credited for back pay if such hours were previously
credited.
The determination of Hours of Service for reasons other than
the performance of duties shall be made in accordance with the applicable rules
of the regulations prescribed by the Secretary of Labor under 29 C.F.R. Part
2530.200b-2(b).
1.30 "Initial Computation Period" and "Subsequent Computation
Period", shall have the following meanings:
<PAGE>
1-18
(a) the Initial Computation Period shall be the period
beginning on the date the Employee first performs an Hour of Service for the
Employer and ending on the day preceding the first anniversary of such date; and
(b) the Subsequent Computation Period or Periods shall be
Program Years beginning with the Program Year which includes the first
anniversary of the date the Employee first performs an Hour of Service for the
Employer.
In the case of an Employee whose Employment terminates and who
completes no more than 500 Hours of Service during the Initial or Subsequent
Computation Periods prior to becoming a Participant in the Program, such
Employee shall be treated as a new Employee with a new Initial Computation
Period on the date the Employee first performs an Hour of Service for the
Employer after such Initial or Subsequent Computation Period. Solely for
purposes of the preceding sentence, in determining whether an Employee has
completed 500 Hours of Service, an Employee who is absent from work for
maternity or paternity reasons (as defined in Section 1.03) shall be credited
with the number of Hours of Service which otherwise would normally have been
credited to such individual but for such absence (or, if such number is
indeterminable, 8 Hours of Service per day of such absence), except that the
total number of Hours of Service credited to an Employee under this special rule
shall not exceed 501 Hours of Service. The hours described in the preceding
sentence shall be treated as Hours of Service only in the Computation Period in
which the absence from work begins, if the Employee would be credited with more
than 500 Hours of Service solely because such hours are treated as Hours of
Service, or, in any other case, in the immediately following Computation Period;
provided, however, that no credit shall be given for such hours
<PAGE>
1-19
unless the Employee furnishes the Committee with the information
described in Section 1.03.
"Computation Period" shall mean the Initial Computation Period
or the Subsequent Computation Period, as the case may be.
<PAGE>
2-1
ARTICLE 2
PARTICIPATION
2.01 Conditions of Participation.
(a) Each Employee on January 1, 1988, who was a
Participant in the Program on December 31, 1987, is a Participant on January 1,
1988.
(b) Each other individual who is an Employee on or after
January 1, 1988 --
(i) who is regularly employed on a full-time basis
shall become a Participant on the first Entry Date on or after
attainment of his 21st birthdate (not later than his 21st birthdate)
and the completion of one (one or zero) Year of Participation Service,
provided he is in the Employment of the Employer on said Entry Date, or
(ii) who is not regularly employed on a full-time
basis but who completes 1,000 Hours of Service during the Employee's
Initial Computation Period or Subsequent Computation Period shall
become a Participant on the first Entry Date which is on or after
attainment of his 21st birthdate (not later than his 21st birthdate)
and which (check one) / / coincides with or immediately precedes the
first day of the Computation Period during which the Employee completes
1,000 Hours of Service or / X / (if the second blank in 2.01 (b)(i) is
completed by the insertion of the number "one") immediately follows the
completion of said Computation Period, provided he is in the Employment
of the Employer on said Entry Date.
2.02 Participation. Participation in the Program by an
eligible Employee shall be a condition of Employment.
<PAGE>
2-2
2.03 Acceptance. No provisions of the Program shall be
construed as abridging or limiting any managerial right of the Employer, or to
give an Employee or Participant the right to be retained in Employment with the
Employer, or to interfere with the right of the Employer to discharge any
Employee or Participant at any time regardless of the effect which such
discharge may have upon him as a Participant. The rights and interests under the
Program of each Participant, his heirs, assigns, and Beneficiary, shall be
determined by the terms and conditions of the Program as interpreted by the
Committee.
<PAGE>
3-3
ARTICLE 3
FINANCING OF PROGRAM
3.01 Medium of Financing the Program. Investment of all
contributions made to the Program and payment of benefits to Participants will
be accomplished in accordance with the terms of the Trust Agreement as amended
from time to time.
3.02 Employer Contributions. The entire cost of the Program
shall be paid by the Employer. For the purpose of determining the financial
requirements of the Program, as of January 1 of each year, an actuarial
evaluation will be made by the Program actuary based upon such mortality tables,
rates of interest and other actuarial assumptions as may be adopted on the
recommendation of said actuary to the Committee to determine amounts which are
sufficient to provide sound actuarial funding of the benefits payable under the
Program.
Employer contributions to the Program shall be used solely for
the benefit of Participants and Beneficiaries, and except as discussed below in
this Section 3.02 and in Section 7.04, Employer contributions shall be
irrevocable.
Notwithstanding the second paragraph of this Section 3.02, all
amounts contributed by an Employer, except for any amounts the Employer has
advised the Committee are intended to be nondeductible contributions, are
conditioned on their current deductibility under Section 404 of the Internal
Revenue Code of 1986 and, to the extent not so deductible with respect to the
tax year for which made, the contributions shall be returned to the Employer if
the Employer requests the return and the return is made no later than one year
after the disallowance of the deduction. In addition, if an Employer makes a
contribution by a mistake of fact,
<PAGE>
3-4
such contribution shall be returned to the Employer if the Employer requests the
return and the return is made within one year of the mistaken payment.
The amount which may be returned under the third paragraph
shall not be more than the excess of the amount actually contributed over the
amount which would have been contributed without the mistake of fact or mistake
in determining the deduction. Earnings attributable to the excess contribution
may not be returned to the Employer, but losses attributable thereto shall
reduce the amount so returned.
Notwithstanding the second paragraph of this Section 3.02, if
the Internal Revenue Service makes a final determination that the Program is not
a qualified program described in ss.401(a) of the Internal Revenue Code of 1986
at the time of the Program's adoption, then all assets in the Trust Fund shall
be returned to the Employer and not allocated to any Participant, unless the
Program is amended so as to permit it to be qualified from its inception.
Any forfeiture arising under the Program shall not be applied
to increase the benefits any Participant would otherwise receive under the
Program but shall be applied actuarially to reduce contributions by the Employer
under the Program.
3.03 Employee Contributions. Employees shall not
contribute to the Program.
<PAGE>
4-1
ARTICLE 4
BENEFITS
4.01 General Conditions.
(a) Entitlement to Benefits. Entitlement to benefits under the
Program shall be determined as of the earlier to occur of the date of a
Participant's termination of Employment by the Employer or the Participant's
Normal Retirement Age, except that, effective January 1, 1988, such entitlement
shall be determined as of the date of the Participant's termination of
Employment by the Employer, on the basis of:
(1) The terms of the Program as in effect as of such
date (except that effective January 1, 1989, a former Participant who
is in the Employment of a Plan on or after January 1, 1989, must have
only 5 Years of Vesting Service in order to obtain a Vested Benefit);
(2) The Participant's age and years of service as of
such date (except to the extent that service is credited for periods
after termination of Employment by the Employer as provided in Sections
1.28 and 4.16); and
(3) The Participant's history of Earnings as of such
date.
(b) Distribution Limitations.
(1) In the case of any benefit payable under this
Article 4 which is subject to reduction for early commencement, if the
present value of such benefit exceeds $3,500, then notwithstanding any
early commencement provision in Section 4.04, 4.05, 4.06, and 4.08 to
the contrary, in no event shall such benefit commence prior to the
first day of the month coincident with or next following the date on
which
<PAGE>
4-2
the Participant attains (or would have attained) his Normal Retirement
Age (or such earlier age at which the benefit is no longer subject to
reduction for early commencement), unless the consent of the
Participant (or his surviving Spouse, in the case of a Pre-Retirement
Death Benefit payable under Section 4.06) is obtained no more than 90
days prior to the Annuity Starting Date. In the absence of such
consent, it shall be presumed that such commencement is deferred until
the Participant's Normal Retirement Age (or such earlier age at which
the benefit is no longer subject to reduction for early commencement).
If a Participant (or his surviving Spouse, in the case of a
Pre-Retirement Death Benefit payable under Section 4.06) elects, in
accordance with the terms of the Program, an earlier benefit
commencement date, such date shall be prospective only. Such an
election must be made during the 90-day period ending on the Annuity
Starting Date.
(2) Effective January 1, 1989, except as provided in
Section 4.15, benefits to which the Participant has become entitled
under this Program due to the satisfaction of the conditions specified
in Sections 4.02, 4.03, 4.04, 4.05, or 4.08 shall commence no earlier
than the first day of the month that follows by more than 30 days the
provision of the notice required in Section 5.02(b). Notwithstanding
the foregoing, however, in no event shall the 30-day notice requirement
of this Section 4.01(b)(2) be applied to preclude a Participant from
being paid retroactively to a particular date if such payment would
otherwise be made under the Program, and if such retroactive payment is
necessary to avoid a forfeiture of benefits.
<PAGE>
4-3
(c) Limitation on Extent of Integration with Social Security.
This subsection (c) applies only to a Program that is an offset Program in the
manner specified in paragraph (1) or (2) below, whichever is applicable, subject
to the general provisions of paragraph (3).
/ X /(1) Grandfathered Limitation. This subsection (c)(1)
applies only to a Participant who has one Hour of Service on or after
January 1, 1989 and before January 1, 1995, and affects only that part
of the Participant's benefit that accrues under the Program with
respect to Employment in Program Years beginning on or after January 1,
1989. In no event does this subsection (c)(1) apply to that part of a
Participant's accrued benefit under the Program that is attributable to
Employment prior to January 1, 1989. For these purposes, a
Participant's benefit under the Program shall be determined by adding
the sum of (i) the Participant's accrued benefit, determined as of
December 31, 1988, as if the Participant had terminated Employment with
the Employer and without regard to this subsection (c) and (ii) the
Participant's accrued benefit, determined solely with respect to
Employment after December 31, 1988, taking into account this subsection
(c)(1). The amount in clause (ii) above shall be calculated by reducing
the Participant's accrued benefit (calculated without regard to the
offset based on the Participant's Primary Social Security Benefit) by
the amount of the Participant's accrued benefit (calculated without
regard to the offset based on the Participant's Primary Social Security
Benefit) as of December 31, 1988, and then applying the offset based on
the Participant's Primary Social Security
<PAGE>
4-4
Benefit, taking into account this subsection (c)(1). In the case of a
Participant who terminates Employment after December 31, 1993, the
Participant's benefit hereunder shall not be less than the
Participant's benefit determined under this subsection (c)(1) as of
December 31, 1993, as if the Participant had terminated Employment with
the Employer on that date.
Under this subsection (c)(1), the reduction in a Participant's
benefit amount based on the Participant's Primary Social Security
Benefit for benefit amounts accrued subsequent to December 31, 1988,
shall not be greater than the lesser of (a) or (b), times the benefit
that would have accrued subsequent to December 31, 1988, without regard
to such offset, where (a) is 50% and (b) is the ratio of (i) 3/4 of 1
percent, adjusted for commencement before the Social Security
Retirement Age, times the Participant's Final Average Compensation
multiplied by the lesser of the Participant's Years of Plans and
Association Service or the maximum number of years over which benefits
accrue in the Program (not to exceed 35) to (ii) the benefit that would
have accrued based on all of the Participant's Years of Plans and
Association Service without regard to the offset based on the
Participant's Primary Social Security Benefit. For this purpose, "Final
Average Compensation" means the average of an Employee's Earnings for
the three consecutive years (or his total years of employment by a Plan
or Plans if less than three) ending with the last year of Employment
for which Earnings are included pursuant to Section 1.06.
<PAGE>
4-5
Effective December 30, 1994, the limitation provided in
paragraph (1) shall cease to apply; provided, however, that in no event
shall such cessation of application cause the Participant's benefit
under the Program in the future to be less than what it would have been
if the Participant's benefit had been calculated by taking into account
this paragraph (1), but disregarding any increase in the amount of the
Participant's Earnings over and above the amount of Earnings which were
taken into account under the Program as of December 30, 1994.
<PAGE>
4-6
/___/ (2) Safe Harbor Limitation. This subsection (c)(2)
applies effective for benefits accruing on or after January 1, 1994,
with respect to a Participant's Employment in all Program Years. Under
this subsection (c)(2), the reduction in a Participant's benefit amount
based on the Participant's Primary Social Security Benefit shall not be
greater than the lesser of (a) or (b), times the Participant's Final
Average Compensation where (a) is 3/4 of 1 percent, adjusted, as
described below, in the event the Participant's benefit commences
before the Social Security Retirement Age, in the event the
Participant's Final Average Compensation exceeds the Participant's
Covered Compensation, and in the event the Program does not meet the
applicable demographic requirement referred to in subsection (c)(3)
below, and (b) is 50% of the gross benefit percentage rate (the rate at
which benefits are determined under the Program with respect to the
Participant's Final Average Earnings, expressed as a percentage of
Final Average Earnings, without regard to the offset), multiplied by a
fraction (not to exceed one), the numerator of which is the
Participant's Final Average Earnings and the denominator of which is
the Participant's Final Average Compensation. For these purposes,
"Final Average Compensation" means the average of the Employee's
Earnings for the three consecutive years (or his total years of
employment by a Plan or Plans if less than three) ending with the last
year of Employment for which Earnings are included pursuant to Section
1.06. In determining the Participant's Final Average Compensation, that
portion of the Participant's Earnings for a year that is in excess of
the Social Security taxable wage
<PAGE>
4-7
base in effect at the beginning of the year shall be
disregarded.
<PAGE>
4-8
(3) General Rules. If a Participant's Final Average
Compensation is greater than his Covered Compensation, then the 3/4 of
1 percent factor shall be reduced in accordance with the following
table:
<TABLE>
<CAPTION> Then the
3/4 of 1%
If the Final Average factor is
Compensation is more than but not more than reduced to
- ------------------------- ----------------- ----------
<S> <C>
Covered Compensation 125% of Covered Compensation .69%
125% of Covered Compensation 150% of Covered Compensation .60%
150% of Covered Compensation 175% of Covered Compensation .53%
175% of Covered Compensation 200% of Covered Compensation .47%
200% of Covered Compensation .42%
</TABLE>
"Covered Compensation" means the average (without indexing) of the Social
Security taxable wage base in effect for each calendar year during the 35-year
period ending with (i) the last day of the calendar year preceding the calendar
year in which an employee attains (or will attain) Social Security Retirement
Age, or (ii) in the event paragraph (2) applies, effective January 1, 1995, the
last day of the calendar year in which employee attains (or will attain) Social
Security Retirement Age. In determining a Participant's Covered Compensation for
a Program Year, the Social Security taxable wage base in effect for the Program
Year for which the determination is being made shall be assumed to remain in
effect for subsequent Program Years. A Participant's Social Security Retirement
Age is the earliest age at which he is eligible for unreduced Social Security
retirement benefits.
<PAGE>
4-9
The reduction in the 3/4 of 1 percent factor for early
commencement shall be 5/9 of 1 percent for each of the first 60
calendar months by which commencement precedes the Social Security
Retirement Age, 5/18 of 1 percent for each calendar month in excess of
60 and less than 120 months, and on an Actuarial Equivalent basis for
any additional months.
The demographic requirement referred to in subsection (c)(2)
above is satisfied only if the average attained age (determined as of
the beginning of the Program Year) of the nonhighly compensated
employees in the Program is not greater than the greater of (i) age 50,
or (ii) 5 plus the average attained age of the highly compensated
employees in the Program. If this demographic requirement is not
satisfied, the 3/4 of 1 percent factor shall be reduced to the lesser
of the amount determined under the first paragraph of this subsection
(c)(3) or 80 percent of the 3/4 of 1 percent factor, as adjusted (but
without regard to the adjustment prescribed under the first paragraph
of this subsection (c)(3)).
(d) Fresh-Start Rule. The following fresh-start rule
shall apply under this Program:
(1) If this box /___/ is checked, then
notwithstanding any provision of the Program to the contrary, with
respect to a Participant who is a ss. 401(a)(17) employee as that term
is defined herein, a ss. 401(a)(17) employee's accrued benefit under
the Program shall not be less than the sum of --
(i) such Participant's frozen accrued benefit as of
December 31, 1993, and
<PAGE>
4-10
(ii) such Participant's accrued benefit determined
under the Program's formula applicable to benefit accruals in the
current Program Year as applied to the Participant's years of service
after December 31, 1993.
<PAGE>
4-11
For these purposes, a ss. 401(a)(17) employee is a Participant
whose current accrued benefit under the Program is based on Earnings
for a year prior to January 1, 1994 that exceeded the annual
compensation limit for the 1994 Program Year.
(2) If this box / X / is checked, then
notwithstanding any provision of the Program to the contrary, a
Participant's accrued benefit under the Program shall not be less than
the sum of --
(i) such Participant's frozen accrued benefit as of
December 31, 1993, and
(ii) such Participant's accrued benefit determined
under the Program's formula applicable to benefit accruals in the
current Program Year to the Participant's years of service after
December 31, 1993.
4.02 Normal Retirement.
(a) Condition. A Participant in the Employment of the Employer
upon the attainment of his Normal Retirement Age shall retire on his Normal
Retirement Date (unless Delayed Retirement is elected pursuant to Section 4.03)
which is the first day of the month coincident with or next following the day on
which he attains his Normal Retirement Age and shall be entitled to receive a
Normal Retirement Benefit in a form permitted under the Program commencing on
his Normal Retirement Date. A Participant shall also meet the condition of this
Section 4.02(a) if he remains in the Employment of the Employer beyond this
Normal Retirement Date and his benefit is required to commence as of his Normal
Retirement Date under Section 4.13.
<PAGE>
4-12
(b) Normal Retirement Benefit. The Normal Retirement Benefit
payable to a Participant who satisfies the condition in Section 4.02(a) shall be
in a form permitted under the Program as provided in Article 5, determined on
the basis of a benefit which shall commence on the Participant's Normal
Retirement Date and which shall be payable on the first day of each month
thereafter during his lifetime, provided, however, that commencement shall be
subject to the restrictions of Section 4.01(b), if applicable. Such benefit is
equal to one-twelfth of the annual benefit specified in (1), (2), (3), (4) or
(5) which is checked below:
/ / (1) Career Earnings Benefit. An amount equal to
the sum of the amounts determined pursuant to (i), (ii), (iii), (iv),
(v), (vi), (vii), and (viii), (in each case disregarding Years of
Employer Service and Years of Plans and Association Service prior to
1976 which would have been disregarded under the break-in-service
provisions of the Program prior to 1976, unless otherwise indicated),
if checked below:
/ X / (i) Credit for Service with Employer After
Eligibility to Participate. With respect to Years of Employer
Service after the Effective Date and after the Employee is
eligible to participate in the Program, 1% of the Employee's
Earnings (for each such year) not in excess of $3,600 and 2%
of the Employee's Earnings (for each such year) which are in
excess of $3,600.
/ X / (ii) Credit for Service with Employer Prior to
the Effective Date but After Satisfaction of Requirements for
Eligibility to Participate if Eligible on the Effective Date.
With respect to Years of Employer
<PAGE>
4-13
Service, prior to the Effective Date but after the Employee
completed the eligibility requirements for participation in
the Program, in the case of an Employee who is eligible to
participate in the Program on the Effective Date, 1% of the
Employee's Earnings, as of the Effective Date, for each such
year.
/ X / (iii) Credit for Plans and Association Service
Before Effective Date and Before Eligibility to Participate if
Eligible on the Effective Date. With respect to Years of Plans
and Association Service before the Effective Date and before
the Employee has completed the requirements for eligibility to
participate in the Program, in the case of an Employee who is
eligible to participate in the Program on the Effective Date,
1% of the Employee's Earnings, as of the later of the
Effective Date or the date of the Employer's adoption of this
benefit for each such year.
/ / (iv) Credit for Service with Employer Prior to
Eligibility to Participate if Eligible After the Effective
Date and Prior to the Employer's Adoption of the Benefit
Specified in Section 4.02(b)(3). With respect to Years of
Employer Service before the Employee is eligible to
participate in the Program, in the case of an Employee who is
eligible to participate in the Program after the Effective
Date, and prior to the Employer's adoption of a benefit
specified in Section 4.02(b)(3), 1% of the Employee's
Earnings, as of the date of first participation in the
Program, for each such year.
<PAGE>
4-14
/ / (v) Credit for Employer Service Prior to a Break
in Service Prior to 1976. With respect to Years of Employer
Service prior to a Break in Service prior to 1976, 1% of the
Employee's Earnings, as of the date the employee became
eligible to participate following his last Break in Service
prior to 1976, for each such year, excluding the Years of
Employer Service before the Employee completed the eligibility
requirements for participation in the Program, except if the
Employer has adopted the credit specified in 4.02(b)(iv).
/ X / (vi) Credit for Plans and Association Service
Prior to Eligibility to Participate. With respect to Years of
Plans and Association Service before the Employee is eligible
to participate in the Program in the case of an Employee who
first was eligible to participate in the Program after the
Effective Date and immediately upon completion of the
eligibility requirements, 1% of the Employee's Earnings not in
excess of $3,600 and 2% of the Employee's Earnings which are
in excess of $3,600 (for this purpose the Employee's Earnings
shall be determined as of the date this benefit was adopted by
the Employer or as of the date the Employee first became
eligible to participate, whichever is later), for each such
year.
/ X / (vii) Credit for Plans and Association Service
Prior to 1976 with Plans which are not Participating Plans.
With respect to Years of Plans and Association Service with a
Plan which is not a Participating Plan, in the case of an
Employee who transferred to the Employer
<PAGE>
4-15
prior to 1976 after having satisfied the eligibility
requirements for participating in the Program as adopted by
the Employer, 1% of the Employee's Earnings determined as of
the date of transfer or as of the date this benefit was
adopted by the Employer, whichever is later, for each such
year.
/ / (viii) Credit for Plans and Association Service
Prior to Eligibility if Participation Began Immediately upon
Completion of the Eligibility Requirements and After the
Employer's Adoption of the Benefit Specified in Section
4.02(b)(3). With respect to Years of Plans and Association
Service before the Employee is eligible to participate in the
Program in the case of an Employee who first was eligible to
participate in the Program on or after the date the Employer
adopted a benefit specified in Section 4.02(b)(3), 1% of the
Employee's Earnings not in excess of $ and 2% of the
Employee's Earnings which are in excess of $ (for this purpose
the Employee's Earnings shall be determined as of the date the
Employee first became eligible to participate in the Program),
for each such year.
/ / (2) Final Average Earnings Benefit. An amount
equal to the greater of (a) ____% of the Participant's Final Average
Earnings reduced by ____% of the Participant's Primary Social Security
Benefit and multiplied by a fraction, the denominator of which is ____
and the numerator of which is the Participant's Years of Plans and
Association Service (but the fraction shall not be greater than one),
or (b) in the case of an Employee who was a Participant on the day
preceding the
<PAGE>
4-16
date on which this provision is effective (check one: (i) / /
a benefit determined as of the date preceding the date as
of which this provision is effective, pursuant to the terms of the
Program (or any predecessor program qualified under ss.401(a) of the
Internal Revenue Code of 1986) in effect on the date preceding the date
as of which this provision is effective; or (ii) / / a benefit
determined as of the earlier of the Employee's termination of
Employment with the Employer or ______, pursuant to the terms of the
Program (or predecessor program qualified under ss.401(a) of the
Internal Revenue Code of 1986) in effect on the date preceding the date
as of which this provision is effective, and assuming that there is no
increase in the Employee's Earnings from his Employer after the
effective date of this provision. If this box / / is checked, for
purposes of this provision, the amount determined under (a) above shall
be further increased by an amount equal to ____% of the Participant's
Final Average Earnings for each of the Participant's Years of Plans and
Association Service in excess of _____. / / (3) Sum of Career Earnings
Benefit and a Final Average Earnings Benefit with a Career Earnings
Benefit Offset. (a) An amount equal to the sum of the amounts
determined pursuant to (i), (ii) (iii), (iv), (v), (vi), (vii), and
(viii) checked in (1) above, and (b) an amount, if any, equal to ___%
of Final Average Earnings reduced by the amount specified in (a) and by
___% of the Primary Social Security Benefit, multiplied by a fraction,
the denominator of which is ____ and the numerator of which is the
Participant's Years of Plans and Association Service (but
<PAGE>
4-17
the fraction shall not be greater than one). If this box / / is
checked, the amount determined under this provision shall be further
increased by an amount equal to ___% of the Participant's Final Average
Earnings for each of the Participant's Years of Plans and Association
Service in excess of ___.
/ X / (4) Sum of Career Earnings Benefit and a Final
Average Earnings Benefit with a Frozen Career Earnings Benefit Offset.
(a) An amount, in the case of an Employee who was a Participant on the
day preceding January 1, 1976, equal to the sum of the amounts
determined pursuant to (i), (ii), (iii), (iv), (v), (vi), (vii), and
(viii) checked in (1) above based upon the assumption that the
Participant's Earnings did not increase after January 1, 1976, and
excluding any Employer Service or Plans and Association Service after
the date referred to above which follows a termination of Employment
with the Employer, and (b) an amount, if any, equal to 60% of Final
Average Earnings reduced by the amount specified in (a) above, if any,
and by 50% of the Primary Social Security Benefit, multiplied by a
fraction the denominator of which is 30 and the numerator of which is
the Participant's Years of Plans and Association Service (but the
fraction shall not be greater than one). If this box / / is checked,
the amount determined under this provision shall be further increased
by an amount equal to ___% of the Participant's Final Average Earnings
for each of the Participant's Years of Plans and Association Service in
excess of ____.**
- ------------------------
**See amendments to Section 4.02(b)(4), attached.
<PAGE>
4-18
/ / (5) Step-Rate Excess Benefit. An amount equal to
the greater of: (a) (i) ___% of that part of the Participant's Final
Average Earnings up to the Maximum Annual Social Security Covered
Compensation, plus ___% of that part, if any, of his Final Average
Earnings which is in excess of the Maximum Annual Social Security
Covered Compensation, multiplied by (ii) the number of the
Participant's Years of Plans and Association Service, up to a maximum
of ___ years, or (b) in the case of an Employee who was a Participant
on the day preceding the date on which this provision is effective
(check one): (i) / / a benefit determined as of the date preceding the
date as of which this provision is effective, pursuant to the terms of
the Program (or any predecessor program qualified under ss.401(a) of
the Internal Revenue Code of 1986) in effect on the date preceding the
date as of which this provision is effective; or (ii) / / a benefit
determined as of the earlier of the Employee's termination of
Employment with the Employer or ___, pursuant to the terms of the
Program (or any predecessor program qualified
<PAGE>
4-14(a)
Amendment to Section 4.02(b)(4)
Sum of Career Earnings Benefit and a Final Average Earnings Benefit
with a Frozen Career Earnings Benefit offset.
1. Years of Plans and Association Service
With respect to Employees who became Retirement Program
Participants on or after March 1, 1989, for purposes of determining the benefit
payable under Section 4.02(b), Years of Plans and Association Service shall not
include service with a Plan that is directly or indirectly owned or controlled
by the Employer or Consolidated Healthcare, Inc. (CHI) prior to a date on which
such Plan may adopt the Retirement Program pursuant to the Employer's
authorization. In addition, for purposes of determining the benefit payable
under Section 4.02(b), Years of Plans and Association Service shall not include
service with a Plan that is directly or indirectly owned or controlled by the
Employer or CHI when such service occurs after July, 1, 1989, but prior to a
date on which such Plan may adopt the Retirement Program pursuant to the
Employer's authorization.
With respect to Employees who became eligible to become
Participants on January 1, 1991 and who were formerly employees of
Yeager and Company, Inc. and Consolidated Risk Management Services,
Inc. ("CRMS"), for purposes of determining the benefit under
Section 4.02(b), Years of Plans and Association Service shall not
include service with Yeager and Company, Inc. or CRMS, as the case
may be, prior to the merger of CRMS into Total Program
Administrators, Inc. on January 1, 1991.
2. Minimum Benefit (Prior Program).
<PAGE>
4-14(b)
For purposes of applying Section 4.02(b)(4)(b) of the Program
to a Participant, who was a former employee of Piedmont Hospital Service
Association and who was also a Participant in the Prior Retirement Program of
the Employer with Life of Virginia on January 31, 1971, the benefit shall not be
less than the benefit determined pursuant to the terms of the benefit formula of
the Prior Retirement Program in effect on January 31, 1971, assuming that there
is no increase in such Participant's earnings from the Employer after January
31, 1971 and that no further service after that date is credited.
3. Basic Benefit (Piedmont). For purposes of calculating the
amount under the Career Earnings Benefit in Section 4.02(b)(4)(a) for a
Participant in the Program, who was also a Participant in the Non-Contributory
Retirement Program for Certain Employees of Piedmont Hospital Service
Association on January 31, 1971, such amount shall be equal to the sum of (1)
the dollar amount such Participant's Career Earnings Benefit accrued to January
31, 1971 under the terms of the Piedmont Program in effect on that date, and (2)
the dollar amounts of such Participant's Career Earnings Benefit subsequent to
January 31, 1971 under the Program.
<PAGE>
4-15
under ss.401(a) of the Internal Revenue Code of 1986) in effect on the
date preceding the date as of which this provision is effective, and
assuming that there is no increase in the Employee's Earnings from his
Employer after the effective date of this provision.
(c) Computation of Normal Retirement Benefit. In no event
shall the Normal Retirement Benefit payable in accordance with Section 4.02(b)
be less than the largest periodic benefit that would have been payable to the
Participant under the terms of this Program upon separation from service at or
prior to Normal Retirement Age (based on his earnings and service at the time of
such separation from service). For purposes of comparing periodic benefits in
the same form, commencing prior to and at Normal Retirement Age, the greater
benefit is determined by converting the benefit payable prior to Normal
Retirement Age into the same form of annuity benefit payable at Normal
Retirement Age and comparing the amount of such annuity payments.
(d) Coordination with Section 4.13. Payment of benefits under
Section 4.02 shall be subject to the rules provided in Section 4.13 regarding
suspension of benefits. If a Participant having one Hour of Service on or after
January 1, 1988, is in the Employment of the Employer after his Normal
Retirement Date and is receiving his Normal Retirement Benefit pursuant to
Section 4.13, he shall accrue and be paid additional benefits under the Program
in accordance with Section 4.03(b)(1).
4.03 Delayed Retirement.
(a) Condition. A participant who is in the Employment of
the Employer, may elect to remain in the Employment of the Employer
beyond his Normal Retirement Date and shall retire on his Delayed
<PAGE>
4-16
Retirement Date which is the first day of the month coincident with or next
following the day of the month on which his Employment with the Employer
actually terminates for reasons other than death. Such participant shall be
entitled to receive a Delayed Retirement Benefit commencing on that Date. A
Participant shall also meet the condition of this Section 4.03(a) and be
entitled to a Delayed Retirement Benefit if he remains in the Employment of the
Employer beyond his Normal Retirement Date and if his benefit is required to
commence after his Normal Retirement Date under Section 4.13 or Section 5.02.
(b) Delayed Retirement Benefit. The Delayed Retirement Benefit payable
to a Participant who satisfies the condition in Section 4.03(a) shall be in a
form permitted under the Program which shall commence on the earliest of: (i)
the Participant's Delayed Retirement Date; (ii) the date required by Section
4.13 if payment is required by that Section; or (iii) if payment is required by
Section 5.02, April 1 of the calendar year following the calendar year in which
the Participant attains the age of 70 1/2. Such commencement shall be subject to
the restrictions of Section 4.01(b) if applicable. For Participants having one
Hour of Service on or after January 1, 1988, such benefit shall be computed in
the manner provided in Section 4.02(b) as of the Participant's benefit
commencement date; otherwise the rule of this Section as in effect on the date
of the Participant's termination of Employment will continue to apply.
(1) If a Participant is in the Employment of the
Employer after his Normal Retirement Date and is receiving payment of
his benefit as required under Section 5.02 or Section 4.13, he shall
continue to accrue benefits under the
<PAGE>
4-17
Program as follows: For each Program Year which includes or follows the
Participant's benefit commencement date and in which the Participant
was in the Employment of the Employer and an active Participant in the
Program, the Participant's Delayed Retirement Benefit shall be computed
or recomputed as of the end of such Program Year or the Participant's
Delayed Retirement Date, if earlier; provided, however, that any
additional benefit that would otherwise be accrued by the Participant
for such Program Year under this procedure shall be reduced, but not
below zero, by the Actuarial Equivalent of that portion of the total
Program distributions made to the Participant by the close of the
Program Year that may be taken into account for such purpose in
accordance with Treasury Regulations promulgated under Section
411(b)(1)(H) of the Internal Revenue Code. Payment of any additional
accruals resulting from this recomputation procedure (to the extent
required under Section 4.13(a) or Section 5.02) shall be made as a
separate identifiable component in the same form as the Normal or
Delayed Retirement Benefit, as applicable, beginning with the first
payment interval ending in the Program Year immediately following the
Year the amount accrues.
(2) Notwithstanding any other provision of this
Program, with regard to Participants having one Hour of Service on or
after January 1, 1988, for purposes of a computation under this
Subsection as of the benefit commencement date, the following rules
shall apply; for all other Participants, the rules of this Subsection
as in effect on the date of the Participant's termination of Employment
shall apply.
<PAGE>
4-18
(i) A Participant's Final Average Earnings shall be
calculated by taking into account Earnings after the
Participant's attainment of his Normal Retirement Date;
(ii) A Participant's Primary Social Security Benefit
shall be computed by reference to the Social Security Benefit
payable to the Participant in the year the Participant's
benefit commences;
(iii) A Participant's Years of Employer Service and
Years of Plans and Association Service shall be computed by
taking into account service subsequent to attainment of his
Normal Retirement Date; and
(iv) For purposes of Section 4.11(a) concerning
nonduplication of benefits, the offset shall be applied by
reducing the benefit payable under the Program for the life of
the Participant commencing at the benefit commencement date.
In the event the Participant's Delayed Retirement
Benefit is computed or recomputed after the benefit
commencement date, as provided in paragraph (b)(1), the above
factors shall be applied as of the recomputation date.
(c) Coordination with Section 4.13. Payment of benefits
under Section 4.03 shall be subject to the rules prescribed in Section 4.13
regarding suspension of benefits. If a Participant who is not receiving his
Normal Retirement Benefit is in the Employment of the Employer after his Normal
Retirement Age, is an active Participant, but does not work the Hours of Service
specified in Section 4.13(a), his benefits will be paid in
<PAGE>
4-19
accordance with Section 4.13(a). Those Participants having one Hour of Service
on or after January 1, 1988 shall in such case continue to accrue and be paid
benefits under the Program as provided in Section 4.03(b).
4.04 Early Retirement.
(a) Condition. A Participant whose Employment with the
Employer is terminated for reasons other than death on or after his Early
Retirement Age but prior to his Normal Retirement Date and upon completion of 5
Years of Plans and Association Service shall be entitled to receive an Early
Retirement Benefit, and his Early Retirement Date shall be the first day of the
month coincident with or next following the date on which said Employment
terminates.
(b) Early Retirement Benefit. The Early Retirement
Benefit payable to a Participant who satisfies the condition in
Section 4.04(a) shall be in a form permitted under the Program as
provided in Article 5, equal to either (1) or (2) below,
(1) An Early Retirement Benefit which is computed in
accordance with Section 4.02(b) and which shall commence on (check one)
/ / the Participant's Normal Retirement Date or / X / the later of the
first day of the month coincident with or next following the date on
which the Participant attains age 62 or the first day of the first
month coincident with or next following his termination of Employment
by a Plan, if he is then living; or
(2) a reduced Early Retirement Benefit, if requested
in writing to the Employer by the Participant, which shall commence on
the first day of the month coincident with or next following the
Participant's Early Retirement Date or, commencing on the first day of
a month specified by the
<PAGE>
4-20
Participant which is subsequent to his Early Retirement Date and prior
to the date selected in Section 4.04(b)(1) above, determined under the
provision checked below:
/ / (i) The Actuarial Equivalent of (check one) / /
the Early Retirement Benefit in (1) above commencing on the
Participant's Normal Retirement Date; or / / the Early
Retirement Benefit computed as if the benefit in (1) above
were payable at age 62 if the Participant has not attained age
62, or if the Participant has attained age 62, the amount of
the deferred Early Retirement Benefit computed in (1) above.
/ X / (ii) the Early Retirement Benefit in (1) above
reduced by as follows: for a Participant with at least 20
Years of Plans and Association Service whose benefit commences
on or after age 55 but prior to age 62, the benefit will be
reduced by 1/3 of 1% for each calendar month (which is 4% per
year), if any, by which the commencement of the benefit
precedes the first of the month coincident with or next
following the date the Participant would attain age 62; for a
Participant with less than 20 Years of Plans and Association
Service whose benefit commences on or after age 55 but prior
to age 62, the benefit will be reduced by .5% for each
calendar month (which is 6% per year), if any, by which the
commencement of the benefit precedes the first of the month
coincident with or next following the date the Participant
would attain age 62..
/ / (iii) the Early Retirement Benefit in (1) above
reduced as follows (check one): / / for a Participant
<PAGE>
4-21
whose benefit commences on or after age 60 but prior to age
65, the benefit will be reduced by 2/3 of 1% for each calendar
month (which is 8% per year) by which commencement of the
benefit precedes age 65, and for a Participant whose benefit
commences on or after age 55 but prior to age 60, the benefit
will be reduced by the sum of 40% and 1/3 of 1% for each
calendar month (which is 4% per year) by which commencement of
the benefit precedes age 60; or / / for a Participant whose
benefit commences on or after age 57 but prior to age 62, the
benefit will be reduced by 2/3 of 1% for each calendar month
(which is 8% per year) by which commencement of the benefit
precedes age 62; and for a Participant whose benefit commences
on or after age 55 but prior to age 57, the benefit will be
reduced by the sum of 40% and 1/3 of 1% for each calendar
month (which is 4% per year) by which commencement of the
benefit precedes age 57.
If this box is checked / X / the Program (and/or
predecessor program qualified under ss.401 of the Internal
Revenue Code) specified the actuarial assumptions or
conversion factors for determining a Participant's reduced
early retirement benefit and an amendment(s) (including the
adoption of this Program or a restated version of the Program)
changed the actuarial assumptions or conversion factors for
determining such Participant's benefit; therefore, any benefit
payable to the Participant under this provision shall be no
less than the reduced benefit as previously specified in
Section 4.04(b)(2) (and/or the predecessor program, if
<PAGE>
4-22
applicable), determined as of the day immediately prior to the
effective date of the amendment(s) (December 31, 1992) and
computed on the basis of the actuarial assumptions or
conversion factors in effect on such date(s).
A Participant whose benefits under the Program have
not commenced may change the date elected under (1) or (2)
above prospectively on a request in writing to the Employer.
Commencement of the Early Retirement Benefit shall be subject
to the restrictions of Section 4.01(b)
if applicable.
4.05 Special Early Retirement Benefit.
(a) Condition. If this box / / is checked, a
Participant with 30 Years of Plans and Association Service, who has attained ___
years of age and is in the Employment of the Employer, may elect to retire at
any time and shall receive, if he is then living, the Special Early Retirement
Benefit in lieu of any other benefit under this Program. Such Participant's
Special Early Retirement Date shall be the first day of the month coincident
with or next following the date on which said Employment terminates.
(b) Special Early Retirement Benefit.
/ / (1) The Special Early Retirement Benefit
payable to a Participant who satisfies the condition in Section
4.05(a) shall be in a form permitted under the Program as provided
in Article 5, payable as an immediate benefit commencing on the
Participant's Special Early Retirement Date and computed as of the
date of commencement of the benefit in the manner set forth in
Section 4.02(b). Commencement of the Special Early Retirement
<PAGE>
4-23
Benefit shall be subject to the restrictions of Section 4.01(b) if applicable.
/ / (2) The Special Early Retirement Benefit
payable to a Participant who satisfies the condition in Section 4.05(a) shall be
in a form permitted under the Program as provided in Article 5, equal to either
(i) or (ii) below:
(i) A Special Early Retirement Benefit which is computed in
accordance with Section 4.02(b), and which shall commence on
the later of the first day of the month coincident with or
next following the date on which the Participant attains age
____ or the first day of the first month coincident with or
next following the Participant's termination of Employment
with the Employer; or
(ii) A reduced Special Early Retirement Benefit, if
requested in writing to the Employer by the
Participant, which shall commence on the Participant's
Special Early Retirement Date or on the first day of a
month specified by the Participant which is subsequent
to the Participant's Special Early Retirement Date and
prior to the date referenced in Section 4.05(b)(2)(i)
above. The reduced Special Early Retirement Benefit
shall be a benefit computed in accordance with Section
4.02(b), reduced by ____ of 1% for each calendar month
(which is ____% per year), if any, by which the
commencement of the benefit precedes the first of the
month coincident with or next following the date the
Participant would attain the age specified in Section
4.05(b)(2)(i) above.
<PAGE>
4-24
A Participant whose benefits under the Program have not
commenced may change the date elected under (i) or (ii) above prospectively on a
request in writing to the Employer. Commencement of the Special Early Retirement
Benefit under Section 4.05(b)(2) shall be subject to the restrictions of Section
4.01(b) if applicable.
4.06 Pre-Retirement Death Benefit.
(a) Condition. A Participant's surviving Spouse shall be
entitled to a Pre-Retirement Death Benefit if one of the following
conditions is satisfied:
(1) The Participant's Employment with the Employer
terminates by reason of death:
(i) after the Participant has attained his 55th
birthdate and completed the number of Years of Plans and
Association Service that are required of the Participant under
Section 4.04(a), (if any); or
(ii) if this box / / is checked, after the
Participant has attained his _____ birthdate and
Years of Plans and Association Service; or
(2) The Participant has completed 5 Years of Vesting
Service (or otherwise has a nonforfeitable right to a benefit under the
Program) and dies before his Annuity Starting Date, irrespective of
whether he is then in the Employment of the Employer.
The Pre-Retirement Death Benefit may be waived pursuant to
paragraph (e).
(b) Commencement of Pre-Retirement Death Benefit. The
Pre-Retirement Death Benefit payable when the condition in Section
4.06(a) has been satisfied shall commence on the first day of the
<PAGE>
4-25
calendar month coincident with or next following the later of the Participant's
date of death or the date the Participant attained (or would have attained) his
Normal Retirement Age (or such earlier age at which the benefit is no longer
subject to reduction for early commencement). If a Participant dies before
attaining the Normal Retirement Age, his surviving Spouse may elect to
accelerate the commencement of the survivor annuity to the first day of any
month coincident with or next following the later of the Participant's date of
death or the date the Participant would have attained age 55. Notwithstanding
the foregoing, if this box / X /*** is checked, and a death benefit would have
been payable in accordance with Section 4.06 of the Program, as in effect on
December 31, 1984, with respect to a Participant who died prior to attaining age
55, then the Pre-Retirement Death Benefit payable with respect to a Participant
whose Spouse would have been eligible for such benefit if the Participant had
died on December 31, 1984, shall commence on the first day of the calendar month
coincident with or next following the Participant's date of death.
Pre-Retirement Death Benefit payments shall be made on the
first day of each month following the applicable commencement date, and the last
payment shall be the payment due in the month in which the Spouse's death
occurs.
(c) Amount of Pre-Retirement Death Benefit.
(1) In the case of a Participant who dies before
attaining the Normal Retirement Age, the surviving Spouse shall receive
monthly benefits equal to (check one):
- --------
***Applicable only with respect to Employees who were Participants in
the Non-Contributory Retirement Program for Certain Employees of Blue Cross and
Blue Shield of Southwestern Virginia on December 31, 1984 and who had attained
age 45 and 10 years of Plans and Association Service as of that date.
<PAGE>
4-26
/ / (i) the amount which would have been payable to
the Participant under Section 4.04(b)(1), without regard to
the conditions expressed in 4.04(a), as a deferred benefit
commencing at his Normal Retirement Date, computed as of his
date of termination of Employment with the Employer, assuming
in the case of a Participant who dies during such Employment
that Employment had terminated on the date prior to the date
of his death, multiplied by (aa) a percentage equal to 50%
reduced by _____ percentage points for each complete year by
which the commencement date for benefits under this Section
precedes his Normal Retirement Date or (bb) a full 50% in the
case of a Participant who was eligible for an immediate
unreduced Special Early Retirement Benefit under Section
4.05(b) on the day prior to the date of his death; or
/ X / (ii) 50% of the amount which would have been
payable to the Participant under Section 4.08(b)(1) as a
deferred benefit, without regard to the conditions expressed
in Section 4.08(a), computed as of his date of termination of
Employment with the Employer, assuming in the case of the
Participant who dies during such Employment that Employment
had terminated on the day prior to the date of his death.
(2) In the case of a Participant who dies on or after
attaining the Normal Retirement Age, but prior to his Annuity Starting
Date, his surviving Spouse shall receive monthly benefits equal to 50%
of the amount that would have been payable to the Participant had he
retired on the day
<PAGE>
4-27
before his death with an immediate straight life annuity computed in
accordance with Section 4.02 or 4.03.
(3) Notwithstanding paragraphs (1) and (2), in the
event a Participant dies, after having made a valid election of Option
C under Section 5.04 and designated his Spouse as the contingent
Beneficiary, but prior to his Annuity Starting Date, his surviving
Spouse shall receive the monthly benefit that would have been payable
to her under Option C if the Participant had retired and started to
receive benefits on the day before his death.
(4) Notwithstanding paragraphs (1) and (2), in no
event will the benefits received by a surviving Spouse under the
Pre-Retirement Death Benefit be less than the benefit the Spouse would
have received as the survivor portion of the Joint and Survivor Benefit
payable under the Program (i) where the Participant's death occurs
after the date he attained age 55, as if the Participant had retired on
the day before his death; or (ii) where the Participant's death occurs
on or before the date he attained age 55, as if the Participant had
terminated Employment on the day of his death (or if earlier, the date
the Participant actually terminated Employment), survived until age 55,
retired, and died on the day thereafter.
(d) Cost of Coverage. If this box / / is checked, the amount
otherwise payable to a Participant (or his surviving Spouse) under the Program
shall be reduced by the applicable percentage for each complete month that the
Pre-Retirement Death Benefit coverage was in effect after July 1, 1985. For
purposes of the preceding sentence, the "applicable percentage" means the
percentage
<PAGE>
4-28
specified in the following table, based on the Participant's age on
the last day of each month of coverage:
Participant's Age Applicable Percentage
- ------------------------------ ---------------------------------
55 and older .0400%
50 to 54 .0200%
45 to 49 .0100%
40 to 44 .0067%
35 to 39 .0050%
under 35 .0040%
Pre-Retirement Death Benefit coverage shall remain in effect
until the date on which the earliest of the following occurs: the death of the
Participant's Spouse, the entry of a final divorce decree dissolving the
Participant's marriage, the date on which the spouse is no longer treated as the
Participant's Spouse pursuant to regulations issued under ss.401 and ss.417 of
the Internal Revenue Code, the Participant's Annuity Starting Date, or the
waiver of coverage pursuant to paragraph (e). In addition, the Participant shall
not be treated as having Pre-Retirement Death Benefit coverage for purposes of
calculating the foregoing coverage charges prior to the later of the month in
which the Participant is allowed to waive the coverage in accordance with
paragraph (e) or the month in which the Participant receives Notice in
accordance with paragraph (f); provided, however, that this limitation shall not
apply for purposes of determining the charges for periods of coverage in Program
Years beginning before January 1, 1989.
With respect to a Participant who retired on his Early
Retirement Date, but elected to defer commencement of his Early
<PAGE>
4-29
Retirement Benefit and was covered by the Spouse's benefit described in Section
5.01(b) of the Program as in effect on December 31, 1984, the amount otherwise
payable to such Participant upon retirement shall also be reduced to take into
account the charge imposed for survivor coverage up to December 31, 1984.
(e) Waiver of Pre-Retirement Death Benefit. If the box in
paragraph (d) is checked, then at any time during the election period, a
Participant may elect to waive the Pre-Retirement Death Benefit coverage or
revoke such waiver. Any election or revocation shall be made in writing on a
form filed with the Employer in such manner as the Committee may determine. A
Participant's election to waive the Pre-Retirement Death Benefit shall be
ineffective unless the Participant's Spouse consents in writing to such election
and the Spouse's consent acknowledges the effect of such election and is
witnessed by an Employer representative of the Program or a notary public. The
preceding sentence shall not apply if it is established to the satisfaction of
the Program representative that the Spouse's consent cannot be obtained because
there is no Spouse, because the Spouse cannot be located, or because of any
other circumstances described in regulations issued under ss.401 and ss.417 of
the Internal Revenue Code. The consent of a Participant's Spouse (or the
establishment that such consent cannot be obtained) shall be effective only with
respect to that particular Spouse. A Participant may revoke his election to
waive the Pre-Retirement Death Benefit without the consent of his Spouse.
For purposes of this paragraph (e), the election period shall
begin on the first day of the Program Year in which the Participant attains age
35, or, if earlier, on the date a Participant terminates his Employment prior to
attaining age 35,
<PAGE>
4-30
and shall end on the date of the Participant's death. If an active Employee
becomes a vested Participant prior to attaining age 35, such an Employee may,
with spousal consent, in accordance with this paragraph (e), make a temporary
election to waive the PreRetirement Death Benefit at any time beginning with the
month in which he acquires a vested right under the Program, and ending on the
day before the first day of the Program Year in which he attains age 35;
provided, however, that such temporary election, if not revoked earlier, shall
become invalid on the first day of the Program Year in which the Participant
attains age 35.
(f) Notice Requirements. If the box in paragraph (d) is
checked, then within the applicable notice period, the Employer shall furnish
each Participant with a written explanation of the terms and conditions of the
Pre-Retirement Death Benefit and the rights of the Participant and his Spouse
with respect thereto. Such explanation shall be provided in a manner consistent
with the regulations prescribed under ss.401 and ss.417 of the Internal Revenue
Code. In the case of an Employee who becomes a Participant on or before the
first day of the Program Year in which he attains age 32, the notice period
shall begin on the first day of the Program Year in which the Participant
attains age 32, and shall end on the last day of the Program Year preceding the
Program Year in which the Participant attains age 35. In the case of an Employee
who becomes a Participant after the first day of the Program Year in which he
attains age 32, the notice period shall begin on the day he becomes a
Participant and shall end twelve months later. In the case of an Employee who
terminates his Employment prior to attaining age 35, the notice period shall
begin one year prior to such date of termination and shall end one year after
such date.
<PAGE>
4-31
Should such Participant return to the Employment of the Employer, the applicable
notice requirements of this paragraph shall be observed. Additionally, in the
case of an Employee who becomes a Participant before the first day of the Plan
Year in which he attains age 32, the notice period with respect to the temporary
election in Section 4.06(e) shall begin on the day the Participant first
acquires a vested right under the Program.
(g) Transition Rules. The provisions of this Section 4.06
shall apply to any Participant who is credited with at least one Hour of Service
or one hour of paid leave on or after August 23, 1984. In addition, any other
Participant may elect to have the provisions of this Section 4.06 apply if such
Participant has completed at least 10 Years of Vesting Service, including at
least one Hour of Service after December 31, 1975, and such Participant was
alive but not yet receiving benefits under the Program as of August 23, 1984.
Every Participant eligible to make such election shall be notified of this right
at such time and in such manner as the Secretary of the Treasury shall
prescribe. If any such Participant elects to be covered by Section 4.06 of this
Program, then, to the extent provided in paragraph (d) above, a coverage charge
shall be applied against his retirement benefits for the period of coverage
beginning on the date the election is made; and if any such Participant had
elected death benefit coverage under the terms of the Program in effect prior to
January 1, 1985, any coverage charge arising under the terms of such Program
shall also be applied against his retirement benefits for the period of coverage
prior to the date the Participant elects to be covered under Section 4.06 of
this Program. The relevant provisions of the Program in effect prior to January
1, 1985, shall apply with
<PAGE>
4-32
respect to any other Participant who was alive but not yet receiving benefits
under the Program as of August 23, 1984.
4.07 No Death Benefits Except As Specified. Death benefits
shall not be payable hereunder except as specifically provided in Section 4.06
or under the terms of an optional form of benefit selected by the Participant.
This exclusion applies to, but is not limited to, the following:
(a) A death benefit shall not be payable under the Program if
a Participant dies after benefit payments to the Participant have commenced
unless the form of benefit specifically provides for a death benefit.
(b) Except as provided in Section 4.06 hereof, a death benefit
shall not be payable under the Program if a Participant dies while not in the
Employment of a Plan and at a time when benefit payments to the Participant
never had commenced.
(c) A death benefit shall not be payable under the Program if
a Participant dies prior to termination of Employment with a Plan except as
provided in Section 4.06 hereof.
4.08 Vesting.
(a) Condition. A Participant whose Employment with the
Employer is terminated and who is not entitled to an Early Retirement Benefit
under Section 4.04(a) shall be entitled to a Vested Benefit if he completes 10
years of Vesting Service which may include service subsequent to said
termination of Employment as provided in Section 1.28. Effective January 1,
1989, a Participant who is in the Employment of a Plan on or after such date
shall be entitled to a Vested Benefit upon termination of Employment if he
completes 5 Years of Vesting Service which service may also include
<PAGE>
4-33
service subsequent to the Participant's termination of Employment
as provided in Section 1.28.
(b) Vested Benefit. The Vested Benefit payable to a
Participant who satisfies the condition in Section 4.08(a) shall be in a form
permitted under the Program and determined as specified in (1) or (2) below:
(1) A benefit specified in (i), (ii), or (iii) below,
whichever is checked:
/ X / (i) a benefit, which shall commence at (check
one) / X / the first day of the month coincident with or next
following the Participant's attainment of his Normal
Retirement Age or / / the first day of the month coincident
with or next following the date on which the Participant
attains his 62nd birthdate, if he is then living, computed as
of his date of termination of Employment with the Employer in
the manner set forth in Section 4.02(b); or
/ / (ii) a benefit which shall commence at (check
one) / / the first day of the month coincident with or next
following the Participant's attainment of his Normal
Retirement Age or / / the first day of the month coincident
with or next following the date on which the Participant
attains his 62nd birthdate, if he is then living, computed as
of his date of termination of Employment with the Employer in
the manner set forth in Section 4.02(b) except that the
denominator of the fraction specified in Section 4.02(b) (2),
(3), or (4) is the greater of the number of Years of Plans and
Association Service which the Employee would have had if
<PAGE>
4-34
he had remained an Employee to his Normal Retirement Age or
the denominator specified in Section 4.02(b) (2), (3), or (4),
whichever is applicable (but the fraction shall not be greater
than one).
/ / (iii) a benefit which shall commence at (check
one) / / the first day of the month coincident with or next
following the Participant's attainment of his Normal
Retirement Age or / / the first day of the month coincident
with or next following the date on which the Participant
attains his 62nd birthdate, if he is then living, computed as
of the first day of the month coincident with or next
following attainment of his Normal Retirement Age in the
manner set forth in Section 4.02(b) (2), (3) or (4), except
that the resultant fraction shall be equal to one, and based
on his Final Average Earnings and his Earnings as of his date
of termination of Employment with the Employer and then
multiplied by a fraction the numerator of which is the
Participant's Years of Plans and Association Service as of his
date of termination of Employment with the Employer and the
denominator of which is the greater of the number of Years of
Plans and Association Service which the Employee would have
had if he had remained an Employee to his Normal Retirement
Age or the denominator specified in Section 4.02(b)(2), (3),
or (4), whichever is applicable (but the fraction shall not be
greater than one).
(2) A reduced Vested Benefit if requested in writing
to the Employer by the Participant, commencing on the first
<PAGE>
4-35
day of the month coincident with or next following the Participant's
Early Retirement Age or on the first day of a month specified by the
Participant which is subsequent to his Early Retirement Age and prior
to the date selected in Section 4.08(b)(1)(i), (ii), or (iii) above,
determined under the provision checked below:
/ / (i) a benefit which is the Actuarial Equivalent
of the benefit specified in / / (1)(i), / / (1)(ii), or / /
(1)(iii) of this Section 4.08, as checked above, or
/ X / (ii) a benefit specified in / X / (1)(i), / /
(1)(ii), or / / (1)(iii) of this Section 4.08, as checked
above, reduced by .5% for each calendar month (which is 6% per
year) by which the date of commencement of the benefit
precedes the date selected in Section 4.08(b)(1)(i), (ii), or
(iii) above, or
/ / (iii) a benefit specified in / / (1)(i), / /
(1)(ii) or / / (1)(iii) of this Section 4.08, as checked
above, reduced as follows (check one):
/ / for a Participant whose benefit commences on or
after age 60 but prior to age 65, the benefit will be reduced
by 2/3 of 1% for each calendar month (which is 8% per year) by
which commencement of the benefit precedes age 65, and for a
Participant whose benefit commences on or after age 55 but
prior to age 60, the benefit will be reduced by the sum of 40%
and 1/3 of 1% for each calendar month (which is 4% per year)
by which commencement of the benefit precedes age 60; or
<PAGE>
4-36
/ / for a Participant whose benefit commences on or
after age 57 but prior to age 62, the benefit will be reduced
by 2/3 of 1% for each calendar month (which is 8% per year) by
which commencement of the benefit precedes age 62; and for a
Participant whose benefit commences on or after age 55 but
prior to age 57, the benefit will be reduced by the sum of 40%
and 1/3 of 1% for each calendar month (which is 4% per year)
by which commencement of the benefit precedes age 57.
If this box is checked / X / the Program (and/or
predecessor program qualified under ss.401 of the Internal Revenue Code)
specified the actuarial assumptions or conversion factors for
determining a Participant's reduced vested benefit, and an amendment(s)
(including the adoption of this Program or a restated version of the
Program) changed the actuarial assumptions or conversion factors for
determining such Participant's benefit; therefore, any benefit payable
to the Participant under this provision shall be no less than the
reduced benefit as previously specified in Section 4.08(b)(2) (and/or
the predecessor program, if applicable), determined as of the day
immediately prior to the effective date of the amendment(s) (December
31, 1992) and computed on the basis of the actuarial assumptions or
adjustment factors in effect on such date(s).
A Participant whose benefits under the Program have not
commenced may change the date elected under (1) or (2) above prospectively on a
request in writing to the Employer. Commencement of the Vested Benefit shall be
subject to the restrictions of Section 4.01(b) if applicable.
<PAGE>
4-37
4.09 Other Termination of Employment. If a Participant's
Employment by a Plan is terminated and he or his Beneficiary is not eligible to
receive a benefit under any preceding Section of Article 4 or under Section
4.16, no benefit shall be payable under the Program.
4.10 Cost-of-Living Adjustment. If an amendment is adopted as
provided below and submitted to the Committee, the benefit payable to a
Participant who has one Hour of Service on or after January 1, 1988, or to such
Participant's Beneficiary, or to such Participant's alternate payee who becomes
entitled to such adjustment pursuant to the provisions of a qualified domestic
relations order (such alternate payee shall be referred to as an "eligible
alternate payee") shall be adjusted in accordance with the method selected
below; otherwise the adjustment shall be in accordance with this Section as in
effect on December 31, 1987.
/ / (a) Increase Related to the Consumer Price Index. The
benefit of a Participant, Beneficiary or eligible alternate payee shall be
increased by a percentage of said benefit as of the first month designated by
the Employer of the year for which the Employer adopts an amendment invoking
this Section 4.10(a). Such percentage shall equal the excess of the Annual
Consumer Price Index percentage (the Index for all Urban Consumers issued by the
Department of Labor) for the year preceding that for which such amendment is
adopted over the prior Consumer Price Index percentage for the year in which the
benefit hereunder commenced or was last adjusted pursuant to this Section 4.10,
whichever occurred later.
/ / (b) Periodic Percentage Increase. The benefit of a
Participant, Beneficiary or eligible alternate payee which has
commenced at least twelve months prior to the effective date of the
<PAGE>
4-38
amendment hereunder shall be increased by % as of the first month designated by
the Employer of the year for which the Employer adopts an amendment invoking
this Section 4.10(b).
/ / (c) Percentage Increase Related to Years of Retirement.
The benefit of a Participant, Beneficiary or eligible alternate payee which has
commenced at least twelve months prior to the effective date of the amendment
hereunder shall be increased by a percentage figure as of the first month of the
year for which the Employer adopts an amendment invoking this Section 4.10(c).
This percentage shall equal ___% multiplied by the number of complete years
which have elapsed since the Participant's, Beneficiary's or eligible alternate
payee's benefit commenced or since the Participant's, Beneficiary's or eligible
alternate payee's benefit was last increased under this Section 4.10, whichever
occurred later. In no event shall the increase for a Participant, Beneficiary or
eligible alternate payee be less than ___ nor more than ___.
For purposes of this Section 4.10, if the amount of
the benefit being paid to a Participant is limited by the Defined Benefit Dollar
Limit (as defined in Section 4.12(a)), any cost-of-living adjustment adopted by
an Employer under this Section 4.10 shall be applied to the amount of benefit
being paid, but only to the extent permitted under Section 4.12.
4.11 Non-duplication of Benefits. Benefits are provided under
this Program for prior service with the Employer and other Plans, but it is the
intent of this Program to avoid duplication of benefits provided under this
Program and the pension programs of such Plans with respect to such prior
service. The term "pension program" refers to a program which satisfies the
requirements of
<PAGE>
4-39
ss.401(a) of the Internal Revenue Code of 1986. The following rules
shall apply for the purpose of eliminating duplication:
(a) A benefit payable under this Program, including a
pre-retirement death benefit, shall be offset by the amount of employer-paid
benefits earned under a pension program of a Plan for a period of service for
which credit is given under this Program. Generally the offset shall be applied
by reducing the benefit payable to the Participant under the Program for the
life of the Participant commencing at age 65 by the benefit payable under the
pension program of the other Plan in the same form and commencing at the same
time; the resulting benefit shall be paid at the time and in the form determined
under the provisions of the Program. If the other Plan was merged with the
Employer, or if the Employer and the other Plan conducted joint operations at
the same principal place of business, the offset shall be applied by reducing
the benefit payable to the Participant under this Program at the time of
commencement by the Actuarial Equivalent of the benefit payable under the
pension program of the other Plan if the benefit under this Program commences
prior to the Participant's Normal Retirement Age. The offset shall be made if
the Participant's benefit under the other program is or was nonforfeitable,
regardless of whether the Participant has taken his prior benefit in a form
other than the form in which benefits are payable under this Program or, in the
case of an offset applied to a pre-retirement death benefit, has failed to
elect, or has waived, an optional form of benefit which would have provided a
death benefit to his spouse. Further, the offset shall be made if this Program
is terminated based on the benefit credited to the Participant under the other
Plan's pension program at the time of this Program's termination if the
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Participant has vested in that benefit, regardless of whether that benefit is
ultimately paid to the Participant. However, a Participant's benefit under this
Program shall not be less than the benefit would have been if credit had not
been given for the prior service with the other Plan.
(b) A benefit payable under this Program shall be offset by
any benefit previously earned and payable to the Participant or his Beneficiary
under this Program. The offset shall be applied by reducing the current benefit
payable to the Participant under this Program at the time such benefit commences
by the prior benefit, including the value of any applicable cost of living
adjustment and excluding any special early retirement supplement, payable under
the Program (expressed in the form of a comparable lifetime only benefit in
accordance with the relevant actuarial conversion factors specified in the
Program).
(c) If prior to January 1, 1974, the Employer maintained a
Disability Retirement Program under a Trust administered by the same Trustee as
this Program, jointly with this Trust, an Employee who was disabled prior to
January 1, 1974, and who is entitled to a benefit under the Disability
Retirement Program, shall be entitled to a benefit from this Program reduced by
the amount of the benefit payable to the Participant under the Employer's
Disability Retirement Program.
4.12 Limitations on Benefits.
(a) Basic Limitation. Subject to the adjustments
hereinafter set forth, the maximum annual amount of retirement benefit payable
to a Participant under this Program, when expressed as an annual benefit, shall
not exceed the lesser of:
(1) the Defined Benefit Dollar Limit or
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(2) 100% of the Participant's average compensation
for the three consecutive calendar years during which he was a
Participant and had the greatest aggregate compensation from the
Employer.
Such amount is referred to herein as the Maximum Permissible
Amount.
For purposes of this Section, the term "annual benefit" means
the benefit that is payable annually to a Participant in the form of a straight
lifetime benefit with no ancillary benefits, and the term "compensation"
includes a Participant's wages, salaries, and other amounts received for
personal services actually rendered in the course of employment with the
Employer (including, but not limited to, commissions paid to salesmen,
compensation for services on the basis of a percentage of profits, commissions
on insurance premiums, and bonuses). The term "compensation" does not, however,
include contributions made by the Employer to a program of deferred compensation
to the extent that (before the application of the limitations of ss.415 of the
Internal Revenue Code to that program) the contributions are not includable in
the gross income of the Employee for the taxable year in which contributed, or
other amounts which receive special tax benefits (such as premiums for group
term life insurance, but only to the extent that the premiums are excludable
from the gross income of the Employee). Nevertheless, any amounts received by an
employee pursuant to an unfunded non-qualified program shall be considered as
"compensation" in the year such amounts are includable in the gross income of
the Employee. The term "Defined Benefit Dollar Limit" shall mean the dollar
limit specified in ss.415(b)(1)(A) of the Internal Revenue Code.
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(b) Adjustments to Basic Limitation. For purposes of
applying the limitation described in Section 4.12(a), the Maximum
Permissible Amount shall be adjusted under the following
circumstances:
(1) Adjustments for Other Forms of Benefit. When a
benefit is payable in any form other than a straight lifetime
benefit or a qualified joint and survivor benefit with the
Employee's Spouse, the Maximum Permissible Amount shall be
adjusted to the actuarial equivalent of an annual benefit. For
purposes of adjusting the Maximum Permissible Amount in order
to test other forms of benefit, the assumed interest rate shall
be 5 percent, except that -- (i) when the benefit is payable as
a lump sum benefit under Option E, Section 5.04 of the Program,
the assumed interest rate shall be the greater of 5 percent or
the interest rate specified in 5.03(b); and (ii) when the
benefit is payable under Options A, B or C, Section 5.04 of the
Program, and the box in Section 5.03(a)(1) is checked, the
assumed interest rate shall be the greater of 5 percent or the
rate specified in Section 1.01. (2) Adjustment for Commencement
Before Social Security Retirement Age. If the benefit payable
to a Participant under the Program begins before the
Participant attains his Social Security Retirement Age, then
the Defined Benefit Dollar Limit shall be adjusted, in
accordance with such rules as the Secretary of the Treasury may
prescribe, so that it is actuarially equivalent to an annual
benefit in the amount of the Defined Benefit Dollar Limit
commencing at his
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Social Security Retirement Age. The adjustment shall be consistent with
the reduction for old-age insurance benefits commencing before the
Social Security Retirement Age under the Social Security Act, and the
Defined Benefit Dollar limit for benefits commencing before age 62
shall be the actuarial equivalent of the limit for benefits commencing
at age 62. For these purposes, the assumed interest rate shall be 5
percent, except that --
(i) when the participant satisfies the Early
Retirement condition in Section 4.04(a) and the box in Section
4.04(b)(2)(i) is checked, the assumed interest rate shall be
the greater of 5 percent or the interest rate specified in
Section 1.01; and
(ii) when the Participant satisfies the vesting
condition in Section 4.08(a) and the box in Section
4.08(b)(2)(i) is checked, the assumed interest rate shall be
the greater of 5 percent or the interest rate specified in
Section 1.01.
(3) Adjustment for Commencement After Social Security
Retirement Age. If the benefit payable to a Participant under the
Program begins after the Participant attains his Social Security
Retirement Age, then the Defined Benefit Dollar Limit shall be adjusted
so that it is actuarially equivalent to an annual benefit in the amount
of the Defined Benefit Dollar Limit commencing at the Social Security
Retirement Age. For these purposes, the assumed interest rate shall be
5 percent.
(c) Cost-of-Living Adjustments. The Defined Benefit
Dollar Limit will be automatically adjusted for increases in the
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4-44
cost of living in accordance with regulations prescribed by the Secretary of the
Treasury pursuant to the provisions of ss.415(d) of the Internal Revenue Code.
Such adjustments to the Defined Benefit Dollar Limit shall be applicable to the
benefit of a Participant who is in the Employment of the Employer. Such
adjustments shall also be applicable to the benefit of a Participant whose
Employment with the Employer has terminated, but whose benefit has not yet
commenced, and the particular Defined Benefit Dollar Limit that shall apply to
the benefit of such a Participant shall be the Limit in effect in the year of
the benefit commencement date. Such adjustments to the Defined Benefit Dollar
Limit shall be applicable to a Participant whose benefit under the Program has
commenced prior to the calendar year of the adjustment and who is no longer
accruing benefits under the Program; provided, however, that in no event shall
the amount of benefit paid to the Participant following such adjustment exceed
the amount payable to the Participant upon benefit commencement, plus any
cost-of-living adjustment provided under Section 4.10 of the Program.
(d) Preservation of Accrued Benefit. If any Participant's
accrued benefit under the Program at the close of the last calendar year
beginning before January 1, 1983, when expressed as an annual benefit, exceeds
the limitation in effect under Section 4.12(a)(1) for any subsequent year, then
the limitation of Section 4.12(a)(1) with respect to such Participant shall be
equal to the amount of such accrued benefit. In determining the amount of any
Participant's accrued benefit for the purposes of this paragraph, such accrued
benefit shall include optional benefit forms; and no change in the terms of the
Program after July 1, 1982, and no cost-of-living adjustment occurring after
July 1,
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1982, shall be taken into account. The transitional rule described in this
paragraph shall not apply to any Participant if the Program was not in existence
on July 1, 1982.
In addition, for those Employees who were Participants as of
January 1, 1987, if any such Participant's current accrued benefit under the
Program exceeds the limitations described in Section 4.12(b)(2) or 4.12(g)(1),
then for purposes of ss.415(b) and (e) of the Internal Revenue Code, the Defined
Benefit Dollar Limit with respect to such Participant shall be equal to such
current accrued benefit. For purposes of this paragraph, the term "current
accrued benefit" shall mean a Participant's accrued benefit under the Program,
determined as if the Participant had separated from service as of December 31,
1986, when expressed as an annual benefit within the meaning of ss.415(b)(2) of
the Internal Revenue Code. In determining such benefit, any change in the terms
and conditions of the Program, and any cost of living adjustment made after May
5, 1986, shall be disregarded.
Finally, the restrictions in this Section 4.12 shall be
modified as provided in ss.415(b)(2)(F) of the Internal Revenue Code with
respect to Participants employed by organizations exempt from tax under Subtitle
A of the Internal Revenue Code.
(e) Participation in Other Defined Benefit Programs. The
limitations in this Section with respect to any Participant who at
any time has participated in any other defined benefit program
maintained by the Employer shall apply as if the total benefits
payable under all such defined benefit programs were payable from
one program. For purposes of this paragraph and paragraph (h), the
Employer shall include (1) any corporation that is a member of a
controlled group of corporations (as defined in ss.414(b), as
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4-46
modified by ss.415(h), of the Internal Revenue Code) that includes the Employer,
(2) any trade or business (whether or not incorporated) that is under common
control (as defined in ss.414(c), as modified by ss.415(h), of the Internal
Revenue Code) that includes the Employer, (3) any organization (whether or not
incorporated) that is a member of an affiliated service group (as defined in
ss.414(m) of the Internal Revenue Code) that includes the Employer, (4) to the
extent required in regulations prescribed by the Secretary of the Treasury under
ss.414(n) of the Internal Revenue Code, with respect to benefits attributable to
the Employer under ss.414(n)(1)(B), the leasing organization, and any other
entity required to be aggregated with the Employer pursuant to regulations under
ss.414(o) of the Internal Revenue Code.
(f) Benefits Not in Excess of $10,000. The provisions of this
Section shall not apply to any Participant who has not at any time participated
in any defined contribution program maintained by the Employer if his total
annual benefit payable in accordance with this Section in any year is not in
excess of $10,000.
(g) Less than 10 Years of Participation or Service.
(1) In applying the Defined Benefit Dollar Limit of
Section 4.12(a), the maximum annual retirement benefit payable to any
Participant who has completed less than 10 years of participation in
the Program shall be the Defined Benefit Dollar Limit multiplied by a
fraction, the numerator of which is the number of years of the
Participant's participation and the denominator of which is 10. To the
extent provided by the Secretary of the Treasury in regulations, this
fraction shall be applied separately with respect to each change in the
benefit structure of the Program. Notwithstanding the
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4-47
preceding sentence, this fraction shall not be applied with respect to
changes in the benefit structure of the Program that are adopted on or
after August 3, 1992.
(2) In applying the Section 4.12(a) percent of
compensation limit or the limit in Section 4.12(f), the maximum annual
retirement benefit payable to any Participant who has completed less
than 10 Years of Employer Service shall be the amount determined under
Section 4.12(a) or Section 4.12(f), as the case may be, multiplied by a
fraction, the numerator of which is the number of the Participant's
Years of Employer Service and the denominator of which is 10.
(3) In no event shall the preceding Sections
4.12(g)(1) or (2) reduce the limitations provided under ss.415(b)(1)
and (4) of the Internal Revenue Code to an amount less than one-tenth
of the applicable limitation (as determined without regard to this
Section 4.12(g)).
(h) Limitations for Participants in a Combination of
Programs.
(1) Basic Limitation. In the case of a Participant
who also has participated in a defined contribution program maintained
by the Employer, the sum of the defined benefit program fraction and
the defined contribution program fraction for any Program Year shall
not exceed 1.0. In the event the sum of such fractions would exceed
1.0, the annual benefit payable under this Program shall be adjusted,
or if this box / / is checked, the annual additions under the defined
contribution program shall be limited, in order that the sum of the
defined benefit program fraction and the defined
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4-48
contribution program fraction for any Program Year shall not
exceed 1.0.
(2) Definitions. For purposes of applying the
limitations of this Section 4.12(h), the following terms shall have the
meanings indicated:
(i) The term "defined benefit program fraction" for a
Program Year shall mean the projected annual benefit of the
Participant under the Program (determined as of the close of
the year), divided by the lesser of:
(aa) 1.25, multiplied by the Defined Benefit
Dollar Limit in effect under Section 4.12(a)(1); or
(bb) 1.4, multiplied by the amount which may
be taken into account under Section 4.12(a)(2) with
respect to such Participant for such year.
(ii) The term "defined contribution program
fraction" shall mean a fraction, the numerator of which is the
sum of the annual additions to the Participant's account under
all qualified defined contribution programs of the Employer
for the current and all prior Program Years (including any
amount allocated after December 31, 1985, to a key employee's
post-retirement medical benefit account, as described in
ss.419A(d) of the Internal Revenue Code), plus the sum of the
annual additions attributable to the Participant's Employee
contributions to any qualified defined benefit programs of the
Employer for the current and all prior Program years, and the
denominator of which is the sum of the lesser of the following
amounts determined for the current and for each prior Program
Year:
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4-49
(aa) 1.25, multiplied by the dollar
limitation in effect under ss.415(c)(1)(A) of the
Internal Revenue Code for such Program Year; or
(bb) 1.4, multiplied by 25 percent of the
Participant's compensation for such Program Year.
With respect to Program Years beginning before January 1,
1976, the aggregate amount taken into account in the numerator of the
fraction shall not exceed the aggregate amount taken into account in
the denominator.
(iii) The term "annual addition" shall mean the sum for any
Program Year of the following amounts:
(aa) Employer contributions;
(bb) Forfeitures; and
(cc) Nondeductible Participant
contributions.
With respect to any Program Year beginning prior to
January 1, 1976, the amount of the Participant's contributions for such
year shall be deemed to be an amount equal to the aggregate of the
Participant's contributions to the program prior to January 1, 1976
(without regard to contributions made on or after October 2, 1973,
which exceed the rate of Employee contributions prescribed under the
terms of the program as of such date), in excess of 10 percent of his
aggregate compensation for each Program Year of his participation prior
to such date, multiplied by a fraction, the numerator of which is 1 and
the denominator of which is the number of the Employee's years of
participation in the program prior to January 1, 1976.
<PAGE>
4-50
The annual additions for any Program Year beginning before
January 1, 1987, shall not be recomputed to treat all nondeductible
Participant contributions as annual additions.
If the applicable requirements of ss.415 of the Internal
Revenue Code as in effect for all Program Years beginning before
January 1, 1987, were satisfied, an amount shall be subtracted from the
numerator of the defined contribution program fraction (not exceeding
such numerator) as prescribed by the Secretary of the Treasury so that
the sum of the defined benefit program fraction and the defined
contribution program fraction as computed under this section does not
exceed 1.0 for such Program Year.
(3) Special Procedure for Years After 1982. Unless
this box / / is checked, in applying the limitation of Section
4.12 (h)(1) with respect to any year ending after December 31,
1982, the amount taken into account in the denominator of the
defined contribution program fraction with respect to each
Participant for all years ending before January 1, 1983, shall
be an amount equal to the aggregate of the maximum additions
which could have been made under the program on the
Participant's behalf for each Program Year ending before
January 1, 1983, multiplied by the transition fraction. For
purposes of the preceding sentence, the term "transition
fraction" means a fraction,
(i) The numerator of which is the lesser of --
(aa) $51,875, or
(bb) 1.4, multiplied by 25 percent of the Participant's
compensation for the Program Year ending in 1981; and
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4-51
(ii) the denominator of which is the lesser of --
(aa) $41,500, or
(bb) 25 percent of the Participant's
compensation for the year ending in 1981.
The procedure described in this paragraph (3) shall apply
only to defined contribution programs that were in existence on or
before July 1, 1982.
4.13 Suspension of Benefits. Payment of benefits under
the Program shall be suspended in accordance with the following
provisions.
(a) Employment with the Employer.
(1) Conditions for Suspension. If a Participant who
is receiving benefits under the Program resumes Employment with the
Employer, or if the Participant attains his Normal Retirement Age and
remains in the Employment of the Employer, the Benefits otherwise
payable to the Participant under the Program shall be suspended (and
permanently withheld) as provided herein for any calendar month during
which the Participant completes 84 or more Hours of Service or, in the
case of any calendar month which precedes the Participant's Normal
Retirement Date, during which the Participant completes 84 or more
Hours of Service or completes 40 or more Hours of Service and is an
active Participant in the Program.
(2) Termination of Suspension. If benefit payments
are suspended pursuant to this paragraph (a), benefit payments will
resume or start (in the case of a Participant who previously never
received benefits) no later than the first day of the third calendar
month after the calendar month in which the conditions for suspension
in paragraph (a)(1) are
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not satisfied or, for Participants who attain the age of 70 1/2 after
December 31, 1987, unless otherwise permitted by law, April 1 of the
calendar year following the calendar year in which the Participant
attains the age of 70 1/2, if earlier. The initial payment upon the
resumption or start of benefits hereunder shall include any amounts
withheld during the period beginning with the first month in which the
conditions for suspension are not met and the month in which payments
resume or start, less any amounts which are subject to offset as
described below.
(3) Amount of Benefits Payable. In the case of a
Participant who continues in the Employment of the Employer beyond his
Normal Retirement Age and whose benefit then commences under paragraph
(a)(1), upon the start of such payments, the amount of the
Participant's benefit will be determined under Section 4.02 or Section
4.03 as applicable. In the case of a Participant who is receiving
benefit payments and whose payments are suspended under paragraph
(a)(1), upon resumption of payments the amount of the Participant's
benefit shall only be adjusted as provided below:
(i) If any Cost-of-Living Adjustments have been made
under the Program during the Participant's suspension of
benefits, the amount of the Participant's benefit, which was
previously payable, shall be recalculated to take into account
such Cost-of-Living Adjustments, but the Participant shall not
be entitled to be compensated for Adjustments which would have
been paid during any month his benefit was suspended under
paragraph (a)(1).
<PAGE>
4-53
(ii) In the case of a Participant who, prior to the
suspension was receiving benefits under the Social Security
Adjustment Option in Section 5.04 (Option D), there shall be
an actuarial adjustment in the amount of the Participant's
benefit to compensate the Participant for that portion of any
benefit payment previously withheld which was in excess of the
amount of benefit payment which the Participant would have
received had he elected a Life Benefit under Section 5.04
(Option A).
Where a Participant's most recent Annuity Starting
Date precedes his Normal Retirement Age, any additional
benefits earned by the Participant under the Program during
his subsequent Employment with the Employer shall be treated
as a separate benefit payable to the Participant under the
Program. Where the most recent Annuity Starting Date is
coincident with or follows a Participant's Normal Retirement
Age, additional accruals shall be payable in the same form as
the remaining portion of the benefit that commenced as of such
Annuity Starting Date.
(b) Employment with a Participating Plan.
(1) Conditions for Suspension. If a Participant who
is receiving (or is eligible to receive) benefits under Sections 4.04,
4.05 or 4.08 enters the Employment of a Participating Plan (other than
the Employer) prior to his Normal Retirement Date, the benefits
otherwise payable to the Participant under this Program shall be
suspended for any calendar month during which the Participant completes
84 or more Hours of Service. The payment of benefits under the
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4-54
Program shall not be suspended in the event a Participant who is
receiving (or is eligible to receive) benefits under the Program enters
the Employment of a Participating Plan (other than the Employer) on or
after his Normal Retirement Date.
(2) Termination of Suspension. Except as provided
below, benefit payments which are suspended pursuant to this paragraph
(b) will resume or start no later than the earlier of (i) the first day
of the third calendar month after the calendar month in which the
Participant worked less than 84 Hours of Service or (ii) the
Participant's Normal Retirement Date.
(3) Amount of Benefits Payable. The amount of the
benefits payable to a Participant who is eligible for benefits under
Section 4.04, 4.05 or 4.08 shall be determined under Section 4.04, 4.05
or 4.08, based on the terms of the Program in existence at the time the
Participant terminated Employment with the Employer and using the
Participant's new retirement date (the first month benefits are to
resume or start) as the date benefits commence under Section 4.04, 4.05
or 4.08, as the case may be; but such amount shall be offset by the
Actuarial Equivalent of that portion of any benefit previously paid to
the Participant under the Program which was not attributable to an
early retirement subsidy. For these purposes, an "early retirement
subsidy" is that portion of the benefit previously payable to the
Participant which was in excess of the benefit the Participant would
have received if he had received the Actuarial Equivalent of the
deferred benefit payable at the Normal Retirement Age. In no event will
this offset reduce the amount of the Participant's
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benefit below the amount which was payable to the Participant
prior to the suspension.
In the case of a Participant who is receiving benefit
payments and whose payments are suspended under paragraph (b)(1), the
amount of the Participant's benefits, upon resumption of payments shall
also be adjusted to take into account any Cost-of-Living Adjustments
which have been made under the Program during the Participant's
suspension of benefits, but the Participant shall not be entitled to be
compensated for Adjustments which would have been paid during any month
his benefit was suspended under paragraph (b)(i).
(c) Other Employment. The payment of benefits under this
Program shall not be suspended in the event a Participant who is receiving
benefits under the Program, or is otherwise eligible to commence receiving
benefits, enters the Employment of a Plan which is not the Employer or a
Participating Plan.
(d) Recovery of Certain Overpayments. Upon resumption of
benefit payments, the amount of the Participant's benefit shall be reduced by
the amount of any payments previously made to the Participant for a calendar
month in which conditions for suspension were satisfied. The amount of the
offset or reduction which shall be made against any month's payment shall not
exceed 25 percent of the benefit payment which would have been due the
Participant but for the offset, except that in the case of the initial payment
due the Participant upon resumption of payments, the offset or reduction may be
applied without regard to the 25 percent limitation.
(e) Notice. During the first calendar month in which the
suspension of a Participant's benefits is implemented under this
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Section, the Committee will furnish to such Participant by personal delivery or
first class mail a notice that his benefits are being suspended. In the case of
a Participant whose benefits are suspended under paragraph (a), the notice to
the Participant will also contain such other information as is required by the
regulations prescribed by the Secretary of Labor under 29 C.F.R.
Part 2530.203-3(b)(4).
(f) Definitions. For purposes of this Section, the term
"Employer" as it applies with respect to a Participant shall not include any
Plan which was not included in the definition of "Employer" at the time payment
of benefits to the Participant commenced, or would have commenced if the
Participant had not remained in or returned to Employment; but such Plan shall
be treated hereunder with respect to such Participant as a Participating Plan.
In addition, for purposes of this Section, the term "Hour of Service" shall be
determined in accordance with Section 1.29, exclusive of paragraph (3) of that
Section.
4.14 Leaves of Absence. See Section 1.10 regarding
unpaid Leaves of Absence.
4.15 Small Benefits. In the event that the lump sum present
value of any benefit payable to a Participant hereunder is less than or equal to
$3,500, then the present value of such benefit is to be paid to the Participant
in a single sum at the time the benefit would otherwise commence. Effective
January 1, 1989, if the lump sum present value of any benefit payable to the
Participant determined as of the Annuity Starting Date specified herein is less
than or equal to $3,500, the present value of such benefit is to be paid to the
Participant as of the first day of the month coincident with or next following
the date of termination of
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Employment, which shall be the Annuity Starting Date for purposes of this
calculation. Payment shall be made as soon thereafter as is reasonably
practicable, but in no event later than 180 days after the Annuity Starting
Date. If a Participant who has received the lump sum present value of his
benefit is subsequently reemployed by the Employer, any benefit subsequently
accrued shall be offset, in accordance with Section 4.11, by the value of the
benefit previously paid. In the event that the present value of a Pre-Retirement
Death Benefit payable to a Participant's surviving Spouse under Section 4.06 is
less than or equal to $3,500, then the present value of such benefit is to be
paid to the surviving Spouse in a single sum as of the first day of the calendar
month next following the Participant's date of death. If any single sum payment
is made in accordance with this Section 4.15, no further benefit will be payable
to the Participant, his Beneficiary, or his surviving Spouse. For purposes of
this Section 4.15, the lump sum present value of a benefit shall be computed
according to the interest rate and mortality assumptions used to calculate the
Lump Sum payment under Section 5.03(b).
4.16 Granting Credit Toward Accrued Benefits For A Period of
Total and Permanent Disability. If this box is checked /__/ and a Participant is
Totally and Permanently Disabled while he is in the Employment of the Plan, the
Participant's Years of Plans and Association Service and Years of Vesting
Service shall include, for all Program purposes except for Section 4.05, the
period immediately following said termination of Employment during which the
Participant is continuously Totally and Permanently Disabled. The Participant's
Employment with the Employer shall be deemed not to have ceased until the
earlier to occur of (i) the first day of
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the month in which the Participant no longer is Totally and Permanently
Disabled, (ii) the date of the Participant's death, or (iii) the first day of
the first month for which the Participant no longer receives long-term
disability payments from a long-term disability program of the Employer.
Notwithstanding the foregoing, in no event shall credit be given under this
Subsection (a) during any period in which the Employer does not maintain a long
term disability program covering any active Participant, except that a
Participant who is already disabled and who continues to receive long term
disability payments shall continue to receive credit in accordance with the
preceding sentence.
<PAGE>
5-1
ARTICLE 5
FORMS OF BENEFITS
5.01 Joint and Survivor Benefit.
(a) The benefit to which a Participant is entitled
normally shall be payable in equal monthly installments in accordance with
paragraph (1) or (2) hereof, subject to the conditions set forth therein unless
the Participant elects, in the manner provided in Section 5.02, to have the
benefit paid in another form permitted under Section 5.04.
(1) The benefit payable to a Participant who has a
Spouse on the date the Participant's benefit commences shall be payable
for the lifetime of the Participant, with one-half of the amount
payable to the Participant continued thereafter for the lifetime of his
Spouse. Such joint and survivor form shall be (check one):
/ / (i) The Actuarial Equivalent of the benefit which
would have been payable only for the lifetime of the
Participant.
/ X / (ii) A form of benefit in which the Participant
receives 95% of the benefit which would have been payable only
for the lifetime of the Participant reduced by .48 of 1
percentage point for each year by which the Participant's age
exceeds age 55 and further reduced by .48 of 1 percentage
point for each year by which his Spouse's age is less than the
Participant's age or, when his Spouse's age exceeds the
Participant's age, increased by .48 of 1 percentage point for
each year by which his Spouse's age exceeds the Participant's
age. In no event shall the amount of the benefit payable to
the
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Participant exceed the benefit that otherwise would have been
payable to him for his life only.
/ / (iii) A form of benefit in which the Participant
receives % of the benefit which would have been payable only
for the lifetime of the Participant.
In no event shall the joint and survivor
form designated above be less valuable than any other optional
form of benefit payable under the Program at the same time.
If this box is checked / X / the Program (and/or any
predecessor program qualified under ss.401 of the Internal Revenue
Code) specified the actuarial assumptions or conversion factors for
determining the joint and survivor form of benefit, and an amendment(s)
(including the adoption of this Program or a restated version of the
Program) changed the actuarial assumptions or conversion factors for
determining such Participant's benefit, therefore, any benefit payable
to the Participant under such joint and survivor form shall be no less
than the joint and survivor benefit otherwise payable, determined as of
the day immediately prior to the effective date of the amendment(s)
(December 31, 1986) and computed on the basis of the actuarial
assumptions or conversion factors in effect on such date(s).
(2) The benefit payable to any Participant who does
not have a Spouse on the date the Participant's benefit commences shall
be a benefit payable only for the lifetime of the Participant.
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(b) Except as provided in Section 4.06, no benefit shall be
payable under the Program with respect to a Participant who retires or otherwise
terminates Employment, and then dies prior to the Annuity Starting Date.
5.02 Distribution Requirements and Election of Optional
Retirement Benefits.
(a) Required Distributions.
(1) General Limitations. Any distribution pursuant to
a form of benefit provided under the Program shall be made in
accordance with ss.401(a)(9) of the Internal Revenue Code and
regulations prescribed by the Secretary of the Treasury under that
section. Distributions made pursuant to any option elected by a
Participant that provides for payments to a Beneficiary after the death
of a Participant shall be made in accordance with regulations under
ss.401(a)(9) of the Internal Revenue Code, including Treas.
Reg.ss.1.401(a)(9)-2. Any distributions required by the terms of a
"qualified domestic relations order" under Section 8.08 shall also be
in accordance with ss.401(a)(9) of the Internal Revenue Code and the
regulations issued thereunder.
(2) Distributions Prior to Participant's Death.
Notwithstanding any provision of the Program to the contrary (other
than Section 5.02(a)(4)), the entire interest of a Participant will be
distributed in accordance with regulations prescribed by the Secretary
of the Treasury under ss.401(a)(9) of the Internal Revenue Code over
the life of the Participant, over the joint lives of the Participant
and his Beneficiary, over a period not extending beyond the life
expectancy of the Participant or over a period not extending beyond the
joint
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5-4
life expectancy of the Participant and his Beneficiary. Under no
circumstances shall payment hereunder commence later than April 1 of
the calendar year following the calendar year in which the Participant
attains the age of 70 1/2, unless to the extent permitted by law, the
Participant attains the age of 70 1/2 before January 1, 1988 (and was
not a 5-percent owner during any Program Year since the Participant
attained the age of 66 1/2), in which case the rule in this paragraph
as in effect on December 31, 1988, will continue to apply, or unless
otherwise permitted by law.
(3) Distribution After a Participant's Death.
Notwithstanding any provision of the Program to the contrary (other
than Section 5.02(a)(4)), any distribution following a Participant's
death shall be subject to the following limitations. In the event a
Participant dies after the distribution of his interest has commenced,
the remaining portion of such interest (if any) shall be distributed at
least as rapidly as under the method of distribution in effect prior to
the Participant's death. In the event a Participant dies before the
distribution of his interest has commenced, payments (if any) shall be
made in accordance with Section 4.06.
(4) Transition Rule. Subject to the provisions of
Section 5.02(a)(1) and 5.02(b), a Participant's interest shall be
distributed in accordance with any valid, unrevoked election that was
made or deemed to be made pursuant to Section 242(b)(2) of the Tax
Equity and Fiscal Responsibility Act of 1982, notwithstanding the other
limitations in paragraphs (2) and (3) above.
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5-5
(b) Election of Optional Retirement Benefits. A Participant
who is entitled to receive a benefit payable under Section 4.02, 4.03, 4.04,
4.05 or 4.08 may elect to receive a benefit payable in accordance with the
options set forth in Section 5.04 in lieu of all other benefits that he is
entitled to receive from the Program. The election of any option (or the
revocation thereof in accordance with paragraph (3) below) shall not be subject
to the Committee's approval, but shall be made in writing on a form filed with
the Committee in such manner as the Committee may determine and shall be subject
to the limitations described in Section 5.02(a) and the following terms and
conditions:
(1) No more than 90 days and no less than 30 days
prior to a Participant's Annuity Starting Date, the Employer shall
provide the Participant with a written explanation of:
(i) the terms and conditions of the joint and
survivor benefit described in Section 5.01(a)(1), and a
general description of the material features (including
relative values and deferral rights, if any) of the optional
forms of benefit under the Program;
(ii) the Participant's right to make, and the effect
of making, an election to waive such joint and survivor
benefit;
(iii) the rights of the Participant's Spouse with
respect to such election; and
(iv) the right of the Participant to revoke, and the
effect of revoking, a prior election to waive such joint and
survivor benefit.
(2) A Participant may elect an optional form of
benefit payment at any time following the receipt of the above
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explanation and within 90 days of the Annuity Starting Date, but if the
Participant has a Spouse, such election shall be ineffective without
the consent of such Spouse. The Spouse's consent must acknowledge the
effect of such election, the optional form of benefit elected, and, if
applicable, the specific nonspouse beneficiary designated, and must be
witnessed by an Employer representative or a notary public.
Notwithstanding the foregoing, a Participant's election shall be
effective without the consent of his Spouse if (i) the Participant
elects Option C and designates his Spouse as the contingent
Beneficiary, inasmuch as the benefits provided under Option C are
qualified joint and survivor annuities (within the meaning of ss.417(b)
of the Internal Revenue Code) and are actuarially equivalent to the
benefit described in Section 5.01(a)(1) of the Program, or (ii) it is
established to the satisfaction of the Employer representative that
such consent cannot be obtained because there is no Spouse, because the
Spouse cannot be located, or because of any other circumstances
described in regulations issued under ss.401 and ss.417 of the Internal
Revenue Code. Any consent by a Spouse (or any establishment that such
consent cannot be obtained) shall be effective only with respect to
such Spouse.
(3) A Participant, in his sole discretion, may revoke
his election to waive the joint and survivor form of benefit at any
time prior to his Annuity Starting Date. If a Participant divorces his
Spouse prior to his Annuity Starting Date, any valid elections made
when the Participant was married shall remain valid unless the
Participant makes a new election or is remarried.
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5-7
(4) The provisions of Section 5.02(b) shall apply
after December 31, 1984, to any Participant who is credited with at
least one Hour of Service or one hour of paid leave with the Employer
on or after August 23, 1984. The relevant provisions of the Program, as
in effect prior to December 31, 1984, shall continue to apply with
respect to all other Participants. In addition, any Participant
described in the following sentence may elect, at any time prior to the
date his benefits begin, to have his benefits paid in accordance with
the provisions of Section 5.02(b), as in effect on December 31, 1984. A
Participant shall be eligible to make such election if he was credited
with at least one Hour of Service under the Program on or after
September 2, 1974, he was not credited with any Hours of Service after
December 31, 1975, and he was still alive but not receiving benefits
under the Program as of August 23, 1984. Every Participant eligible to
make such election shall be notified of this right at such time and in
such manner as the Secretary of the Treasury may prescribe. Such
election shall be made no later than the date the Participant's
benefits begin (or the date of the Participant's death, if earlier). No
death benefits shall be payable with respect to such a Participant if
he dies prior to his Annuity Starting Date.
5.03 Determination of Optional Benefit.
(a) For Options A, B, C or D. Any benefit payable in
accordance with Options A, B, C or D provided in Section 5.04 shall be
determined as of the date benefits are to commence and in an amount determined
pursuant to one of the following (check one):
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5-8
/ / (1) A benefit that is the Actuarial Equivalent of
the benefit that otherwise would be payable to the Participant for his
life only, or
/ X / (2) A benefit that shall be equal to:
(i) Under Option A, Life Benefit: the benefit
payable to the Participant for life only.
(ii) Under Option B, Life Benefit with 120 or 240
Payments Guaranteed: (aa) 98% of the amount of the benefit
that otherwise would be payable to the Participant for his
life reduced by .5 of 1 percentage point for each year (5/120
of 1 percentage point for each calendar month) by which the
Participant's age exceeds age 55 when the first 120 monthly
payments are guaranteed, or (bb) 90% of the amount of the
benefit that otherwise would be payable to the Participant for
his life only reduced by 1 percentage point for each year
(1/12 of 1 percentage point for each calendar month) by which
the Participant's age exceeds age 55 when the first 240
monthly payments are guaranteed, whichever is elected.
(iii) Under Option C, Joint and Contingent Benefit:
the form of benefit elected by the Participant and calculated
as (aa) a benefit under which the Participant receives 95% of
the benefit which would have been payable only for the
lifetime of the Participant reduced by .48 of 1 percentage
point for each year by which the Participant's age exceeds age
55 and further reduced by .48 of 1 percentage point for each
year by which the Beneficiary's age is less than the
Participant's age or,
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5-9
when the Beneficiary's age exceeds the Participant's age,
increased by .48 of 1 percentage point for each year by which
the Beneficiary's age exceeds the Participant's age with 50%
of that amount continued thereafter for the lifetime of his
Beneficiary; or (bb) a benefit under which the Participant
receives 92.6% of the benefit which would have been payable
only for the lifetime of the Participant reduced by .48 of 1
percentage point for each year by which the Participant's age
exceeds age 55 and further reduced by .48 of 1 percentage
point for each year by which the Beneficiary's age is less
than the Participant's age or, when the Beneficiary's age
exceeds the Participant's age, increased by .48 of 1
percentage point for each year by which the Beneficiary's age
exceeds the Participant's age with 66-2/3% of that amount
continued thereafter for the lifetime of his Beneficiary; or
(cc) a benefit under which the Participant receives 87.8% of
the benefit which would have been payable only for the
lifetime of the Participant reduced by .48 of 1 percentage
point for each year by which the Participant's age exceeds age
55 and further reduced by .48 of 1 percentage point for each
year by which the Beneficiary's age is less than the
Participant's age or, when the Beneficiary's age exceeds the
Participant's age, increased by .48 of 1 percentage point for
each year by which the Beneficiary's age exceeds the
Participant's age with 100% of that amount continued
thereafter for the lifetime of his Beneficiary. In no event,
however, shall the amount of the benefit payable to the
Participant
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5-10
exceed the benefit that otherwise would have been payable to
him for his life only.
(iv) Under Option D, Social Security Adjustment. The
amount of the benefit that otherwise would be payable to the
Participant for his life only where the amount of the increase
in monthly benefit payable to the Participant until the
earliest age of eligibility for Social Security Benefits is
equal to the estimated Primary Social Security Benefit at that
age reduced as follows:
(aa) for a Participant whose benefit
commences on or after five years prior to the
earliest age of eligibility for Social Security
Benefits, the benefit will be reduced by 2/3 of 1%
for each calendar month (which is 8% per year) by
which commencement of the benefit precedes the
earliest age of eligibility for Social Security
Benefits, or
(bb) for a Participant whose benefit
commences on or after age 55 but prior to five years
preceding the earliest age of eligibility for Social
Security Benefits, the benefit will be reduced by the
sum of the amount calculated in (aa) above and 1/3 of
1% for each calendar month (which is 4% per year) by
which commencement of the benefit precedes five years
prior to the earliest age of eligibility for Social
Security Benefits.
Notwithstanding the foregoing, if the Employer has elected
Section 5.01(a)(1)(iii), the amounts payable under Option C shall be the greater
of the amounts determined in a manner
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5-11
consistent with Section 5.01(a)(1)(iii) or the amounts determined under Section
5.01(a)(1)(i) or (ii), whichever is elected.
(b) For Option E, Lump Sum. Any benefit payable in accordance
with Option E provided in Section 5.04 shall be determined as of the date
benefits are to commence as the equivalent value of the benefit that otherwise
would be payable to the Participant for his life only. The amount of the benefit
shall be based on: (1) unisex mortality rates based upon the 1976 Projected
Experience Table, assuming a distribution of 55.3 per cent males and 44.7 per
cent females, and (2) the Applicable Interest Rate, provided, however, that
effective July 1, 1987, if the present value of a benefit exceeds $25,000 (as
determined using the Applicable Interest Rate), then the amount of benefit shall
be determined by using 120 percent of the Applicable Interest Rate; and provided
further that in no event shall the benefit determined using 120 percent of the
Applicable Interest Rate be less than $25,000. Any benefit payable to the
Participant in accordance with Option E shall be no less than the benefit
otherwise payable in accordance with Option E, based solely on his Employment
and Compensation up to January 1, 1985, and computed on the basis of the
actuarial assumptions in effect immediately prior to such date.
For purposes of this Section, "Applicable Interest Rate" shall
mean the interest rate or rates which would be used (as of the reference date
specified herein) by the Pension Benefit Guaranty Corporation ("PBGC") for
purposes of determining the present value of a Participant's benefit under the
Program if the Program had terminated with insufficient assets to provide
benefits guaranteed by the PBGC. For this purpose, the reference date for a
Program payment made between January 1 and June 30, inclusive,
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5-12
shall be the prior October 1, and for a Program payment made between July 1 and
December 31, inclusive, shall be the prior April 1. Effective January 1, 1989,
for this purpose, the reference date for a Program payment made at any time
during a Program Year shall be January 1 of the Program Year; provided, however
that, with respect to individuals receiving Lump Sum distributions on January 1
and February 1, 1989, the reference date shall be the date under the terms of
this Section as in effect on December 31, 1988. Program payments made between
March 1, 1989, and February 28, 1990, inclusive, shall be determined using the
January 1 reference date specified above or the reference date as specified in
this Section as of December 31, 1988, whichever provides the greatest accrued
benefit.
In no event shall the amount of this Option E, Lump Sum be
less than the present value (determined as of the Annuity Starting Date on the
basis of the mortality table and interest rate specified herein) of the Normal
Retirement Benefit determined under Section 4.02(b).
(c) Change in Actuarial Assumptions or Conversion Factors. If
this box is checked / X / the Program**** (and/or predecessor program qualified
under ss.401 of the Internal Revenue Code) specified the actuarial assumptions
or conversion factors for determining an optional form of benefit described in
Section 5.04, and an amendment(s) (including the adoption of this Program or a
restated version of the Program) changed the actuarial assumptions or conversion
factors for determining such optional form of
- ------------------
****The Non-Contributory Retirement Program for Certain Employees of
Blue Cross and Blue Shield of Southwestern Virginia.
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5-13
benefit; therefore, any benefit payable to the Participant in such optional form
shall be no less than the benefit otherwise payable in such optional form,
determined as of the day immediately prior to the effective date of the
amendment(s) (September 31, 1986) and computed on the basis of the actuarial
assumptions or conversion factors in effect on such date(s).
5.04 Description of Options.
Option A. Life Benefit. This form of benefit is payable
monthly to the Participant for life.
Option B. Life Benefit with 120 or 240 Payments Guaranteed.
This form of benefit is payable monthly to the Participant for life with the
first 120 or 240 monthly payments guaranteed, as elected by the Participant. Any
guaranteed payments due after the death of the Participant shall be payable to
his Beneficiary, if any, who survives the Participant, or if there is no
surviving Beneficiary, the commuted value of any remaining guaranteed payments
shall be payable to the estate of said Participant. Such commuted value shall be
determined by the Committee on the basis of an interest rate described in
Section 5.03(b)(2).
Option C. Joint and Contingent Benefit. This optional benefit
is payable monthly to the Participant for life and a percentage (50%, 66-2/3% or
100%) of such amount, as elected by the Participant, shall continue after his
death to his surviving Beneficiary for life.
Option D. Social Security Adjustment. This optional
benefit may be elected only upon commencement of benefits under
Section 4.04(b), 4.05(b) or 4.08(b), if such commencement is prior
to the earliest age of eligibility for Social Security Benefits. It
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5-14
provides an increased retirement benefit payable monthly to the Participant
during his lifetime until the earliest age for Social Security Benefits, and
then a reduced retirement benefit payable each month thereafter for life, in
order to provide an approximately level retirement income when such reduced
benefit is added to his Primary Social Security Benefit. This option shall be
determined according to an estimated amount of Primary Social Security Benefit
payable at the earliest age of eligibility for Social Security Benefits in
accordance with the Social Security law as it exists on the date his retirement
benefit is to commence.
Option E. Lump Sum. This optional benefit is payment of
the present value of the Participant's benefit in a single lump sum
in full discharge of the benefit payable to the Participant.
5.05 Cancellation of Election or Beneficiary Change. The
election by a Participant of any option permitted under Section 5.04 shall be
null and void if his designated Beneficiary dies before benefits are to
commence, and in that event the Participant may elect another optional form of
benefit pursuant to this Article 5.
A Participant who has elected Option B, Life Benefit with 120
or 240 Payments Guaranteed, may change the Beneficiary, at any time before or
after benefits are payable, in writing on a form filed with the Committee in
such manner as the Committee may determine. A Participant whose benefits have
commenced under any other form of benefit may not change the beneficiary, unless
paragraph one of this Section applies.
In all other respects, the elections made by a Participant as
to form of benefit and Beneficiary shall be irrevocable.
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5-15
5.06 Direct Rollover Rules.
(a) This Section 5.06 applies to distributions made on or
after January 1, 1993. Notwithstanding any provision of the Program to the
contrary that would otherwise limit a distributee's election under this Section
5.06, a distributee may elect, at the time, in the manner, and subject to the
restrictions, all as prescribed by the Committee, to have any portion of an
eligible rollover distribution otherwise due the distributee paid directly to an
eligible retirement plan specified by the distributee in a direct rollover.
Payment to an eligible retirement plan shall be made in accordance with the
rules prescribed by the Committee.
(b) Definitions. For purposes of this Section 5.06, the
following definitions apply:
(1) An eligible rollover distribution is any
distribution of all or any portion of the balance to the credit of the
distributee, except that an eligible rollover distribution does not
include: any distribution that is one of a series of substantially
equal periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the distributee or the joint lives (or
joint life expectancies) of the distributee and the distributee's
designated beneficiary, or for a specified period of ten years or more;
any distribution to the extent such distribution is required under ss.
401(a)(9) of the Internal Revenue Code; and the portion of any
distribution that is not includible in gross income.
(2) An eligible retirement plan is an individual
retirement account described in ss. 408(a) of the Internal Revenue
Code, an individual retirement annuity described in
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5-16
ss. 408(b) of the Internal Revenue Code, an annuity plan described in
ss. 403(a) of the Internal Revenue Code, or a qualified trust described
in ss. 401(a) of the Internal Revenue Code, that accepts the
distributee's eligible rollover distribution. However, in the case of
an eligible rollover distribution to the surviving spouse, an eligible
retirement plan is an individual retirement account or individual
retirement annuity.
(3) A distributee includes an Employee or former
Employee. In addition, the Employee's or former Employee's surviving
spouse and the Employee's or former Employee's spouse or former spouse
who is the alternate payee under a qualified domestic relations order,
as defined in ss. 414(p) of the Internal Revenue Code, are distributees
with regard to the interest of the spouse or former spouse.
(4) A direct rollover is a payment by the Program to
the eligible retirement plan specified by the distributee.
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ARTICLE 6
ADMINISTRATION OF PROGRAM
6.01 Administration. The Committee is the named fiduciary and
the administrator of the Program and shall have the sole power, duty and
responsibility of directing the administration of the Program, except to the
extent that such duty and responsibility is specifically delegated herein to the
Employer. The Committee shall have the sole and absolute right and power to
construe and interpret the provisions of the Program and administer it for the
best interest of the Participants and Beneficiaries, including, but not limited
to, the following powers and duties:
(a) to construe any ambiguity and interpret any provision of
the Program or supply any omission or reconcile any inconsistencies in such
manner as it deems proper, decide all questions of eligibility and determine the
amount, manner, and time of payment of any benefits hereunder. All decisions of
the Committee shall be uniformly and consistently applied to all Participants
and Beneficiaries in similar circumstances;
(b) to make a determination as to the right of any person
to a benefit and to prescribe a procedure for claims review;
(c) to establish uniform rules and procedures to be followed
by Participants and Beneficiaries in filing applications for benefits, in
furnishing and verifying proofs necessary to determine age, and in any other
matters required to administer the Program;
(d) to receive and review the annual actuarial valuation
report on the Program;
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6-2
(e) to receive and review reports of the financial
condition and of the receipts and disbursements of the Fund from
the Trustee;
(f) to adopt such rules and actuarial tables as it deems
necessary or desirable;
(g) to maintain and preserve a record for each
Participant which shows all items of information required for the
administration of the Program;
(h) to establish written procedures (consistent with the
regulations prescribed under ss.ss.401(a)(13) and 414(p) of the Internal Revenue
Code and ss.206(d) of the Employee Retirement Income Security Act of 1974) to
determine the qualified status of domestic relations orders and to administer
distributions under qualified domestic relations orders; and
(i) to delegate some or all of its duties,
responsibilities and authorities to one or more specified parties.
All directions by the Committee shall be conclusive on all
parties concerned, including the Trustee, and all decisions of the Committee as
to the facts of any case and the meaning, intent, or proper construction of any
provision of the Program, or as to any rule or regulation in its application to
any case shall be final and conclusive, except as otherwise provided by law.
6.02 Records. All acts and determinations of the Committee
shall be duly recorded and all such records, together with such other documents
as may be necessary for the administration of the Program, shall be preserved in
the custody of the Committee. Copies of the Program, forms and procedures shall
be made available at all reasonable times for examination by the Participants.
<PAGE>
6-3
6.03 Liability of the Committee. The Employer shall indemnify
and save the members of the Committee, and each of them, harmless from the
effects and consequences of their acts, omissions and conduct in their official
capacity with respect to this Program, except to the extent that such effects
and consequences shall result from their own willful misconduct or gross
negligence.
When making a determination or calculation, the Committee
shall be entitled to rely conclusively upon, and shall be fully protected by the
Employer in any action it may take or suffer in reliance upon, information
furnished by the Employer.
The Employer and the Committee shall be entitled to rely upon
all certificates and reports furnished by any consultant and actuary and upon
all opinions given by legal counsel selected by the Employer or Committee.
6.04 Procedure for Funding Policy. The Committee from time to
time shall establish a funding policy and method for the Program which is
consistent with the objectives of the Program. The funding policy and method, as
established and amended from time to time, shall be stated to the Trustee in
order that the Trustee and each investment manager may coordinate the investment
policies of the Trust Fund with such funding policy and method.
6.05 Legal Incompetence. If any Participant or Beneficiary is
a minor, or is in the judgment of the Committee otherwise legally incapable of
personally receiving and giving a valid receipt for any payment due him
hereunder, the Committee may, unless and until a claim shall have been made by a
guardian or conservator of such person duly appointed by a court of competent
jurisdiction, direct the Trustee that payment be made to such person's Spouse,
child, parent, brother or sister, or other person
<PAGE>
deemed by the Committee to be a proper person to receive such payment. Any
payment so made shall be a complete discharge of any liability under the Program
for such payment.
6.06 Correction of Errors. If any change in records or error
results in any Participant or Beneficiary receiving from the Program more or
less than he would have been entitled to receive had the records been correct or
had the error not been made, the Committee, upon discovery of such error, shall
correct the error by adjustment, as far as practicable, of the payments in such
manner that the benefits to which such person was correctly entitled shall be
paid.
<PAGE>
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ARTICLE 7
AMENDMENT AND TERMINATION OF PROGRAM
7.01 Amendment of Program. The right to modify, alter or amend
the Program in whole or in part is specified in the agreement between the
Employer and the Blue Cross and Blue Shield Association pursuant to which this
Program is established (referred to as Exhibit B); provided, however, that no
amendment shall cause or permit any part of the Fund to be used for, or diverted
to, purposes other than for the exclusive benefit of the Participants and
Retired Participants, or their Beneficiaries or estates; that no amendment shall
have the effect of revesting in the Employer any portion of such assets, except
as provided in Section 7.04 and as provided by the Internal Revenue Code of
1986, ERISA, or other law; and that no amendment, unless it is necessary to meet
the requirements of any present, new or modified State or Federal law or
regulation, shall operate to deprive any Participant or Beneficiary of any
benefits which have vested in him prior to such amendment.
7.02 Termination of Program.
(a) Termination by the Employer. The Employer expects the
Program to be continued indefinitely, but the Employer reserves the right at any
time to terminate, partially terminate or withdraw from the Program or transfer
assets to an annuity carrier of its own selection (any of the aforementioned
referred to in this Section 7.02 as a "Termination"). The Employer also reserves
the right to suspend contributions from time to time and such suspension of
contributions shall not be deemed to be a Termination of the Program except as
provided in the agreement between the
<PAGE>
7-2
Employer and the Blue Cross and Blue Shield Association pursuant to which this
Program is established.
(b) Limitation on Duties of the Committee. The decision to
have a Termination ("Terminate the Program") being within the full discretion of
the Employer under subsection (a), above, upon the Committee's receipt of an
Employer's written notice of its intent to Terminate the Program given in
accordance with subsection (c), below, the power and duty of the Committee in
connection with such Termination shall be limited solely to the Committee's
handling of the administrative tasks necessary in order to assist such Employer
in the implementation of the Employer's decision to Terminate the Program,
except as specifically provided in this Section 7.02. The Employer shall
indemnify and hold harmless the Committee and the Blue Cross and Blue Shield
Association and the employees, officers, members and agents of each (each of the
aforementioned hereinafter referred to as an "Indemnified Party") from and
against any and all past, present or future losses, claims, damages, expenses,
court costs or liabilities ("Claims") incurred by any Indemnified Party that may
arise out of or result from the Employer's decision to Terminate the Program,
including but not limited to reasonable attorneys' fees and related expenses
(including the reasonable fees and related expenses of independent counsel of
any Indemnified Party) retained or employed in order to defend or respond to any
such Claim. Each Indemnified Party shall have the right to participate in any
proceeding, suit, hearing, action or investigation (a "Proceeding") brought in
connection to any such Claim and assume the defense of any Proceeding to the
extent determined by the Indemnified Party. Each Indemnified Party
<PAGE>
7-3
shall have the right to select and employ independent counsel in
any Proceeding.
(c) Notice of Termination. In the event that an Employer
desires to Terminate the Program, the Employer shall deliver a
written notice of intent to Terminate the Program to the Committee
no later than
(1) ninety days prior to the proposed date
of the Termination, in the case of a settlement of liabilities
through the purchase of annuities or transfer of assets to
another program, or
(2) one hundred twenty days prior to the
proposed date of the Termination, in the case of a termination
or partial termination of the Program, except that (i) if the
Committee determines that a partial termination of the Program
has occurred under applicable law, notification under this
Section 7.02(c) shall be waived, or (ii) if the Employer
determines that a partial termination has occurred or will
occur under applicable law, the Employer shall deliver written
notice thereof to the Committee immediately upon making such
determination.
(d) Secretary and Assistant Secretary of the Committee.
The Committee hereby delegates to the Secretary and the Assistant Secretary
appointed by the Committee the full power and duty, exercisable either by such
Secretary or such Assistant Secretary acting alone, to take such actions and
make such determinations, whether ministerial or discretionary, as are specified
to be undertaken by either such person in this Section 7.02.
(e) Segregation of Fund Assets. Upon the Committee's
receipt of an Employer's written notice of its intent to Terminate
<PAGE>
7-4
the Program given in accordance with this Section 7.02, the Secretary or the
Assistant Secretary of the Committee shall take all steps deemed necessary by
either such person to segregate the Fund assets which are attributable to the
Employer's Program from the remainder of the Master Retirement Fund, after
either such person has determined the amount so attributable and after the
determinations provided for in subsection (f), below, have been made. The
segregation of such assets shall be made effective as of the last day of the
month which immediately precedes the date of the Termination, except as provided
below. If such day precedes the date of the Termination by less than thirty
days, the segregation of such assets shall be made effective as of the last day
of the immediately prior month. Notwithstanding the foregoing, the segregation
of such assets shall be made effective on such other date as is mutually agreed
upon by the Employer and either the Secretary or the Assistant Secretary of the
Committee.
(f) Determination of Assets Upon a Termination. After the
Committee's receipt of an Employer's written notice of intent to Terminate the
Program given in accordance with this Section 7.02, the Secretary or the
Assistant Secretary of the Committee, in his or her sole discretion, after
consultation with the Employer and the Employer's successor investment advisor,
if any, shall determine which particular assets and the proportions thereof
which shall comprise the Fund assets attributable to the Employer's Program and
which shall be segregated (under subsection (e), above) and transferred (or
liquidated, with the cash proceeds thereof delivered) as of the date of the
Termination to the successor trustee (or annuity carrier) designated by the
Employer as transferee of such assets (or cash). Upon making such
<PAGE>
7-5
determination, the Secretary or the Assistant Secretary, as the case may be,
shall notify the Employer of such determination. In the event that the Employer
is dissatisfied by such determination of the assets to be so transferred, the
Employer may appeal to the Committee in order to request an alternative
selection of assets to be transferred. In the event that the Employer so appeals
the Secretary's or Assistant Secretary's selection of assets to be transferred,
the Committee's decision regarding the assets to be transferred, after due
consideration of the Employer's request, shall be final, conclusive and binding.
(g) Termination Expenses. An Employer which has given the
Committee its written notice of intent to Terminate the Program in accordance
with this Section 7.02 shall pay all expenses incurred by the Blue Cross and
Blue Shield Association and its agents or employees in connection with such
Employer's Termination of the Program ("Termination Expenses"), and all such
expenses shall be charged directly to such Employer. The term "Termination
Expenses" shall include any such expenses incurred prior to or as a part of the
Termination, as well as any such expenses incurred subsequent to the
Termination, such as but not limited to audit expenses or expenses incurred in
filing forms with the Internal Revenue Service or the PBGC. Notwithstanding the
foregoing, any such Termination Expenses which are expenses that are properly
chargeable to the Trust shall be charged to the Fund assets attributable to the
Employer's Program (rather than charged to the Employer), after segregation of
such assets under subsection (e), above.
7.03 Rights Non-forfeitable. The forfeitable rights to
accrued benefits (determined as of the date of termination of the
<PAGE>
7-6
Program) of Participants affected by a partial or complete termination of the
Program pursuant to Section 7.02 shall be nonforfeitable and shall be determined
in accordance with this Article 7. Distributions of assets to all Participants
and Beneficiaries shall be made in accordance with this Article 7. If annuities
are distributed, they shall be non-transferable.
7.04 Distribution on Termination. Upon partial or complete
termination pursuant to Section 7.02 of the Program, the assets of the Program
shall be allocated in the following order:
First, each Participant in receipt of a benefit shall be
entitled to a share equal to his contributions to the Program which were not
mandatory, if any, and each Participant, Spouse or Beneficiary in receipt of a
pension shall be entitled to a share equal to any excess of said contributions
at the time of retirement or prior death over the sum of benefits received; and
Second, each Participant not yet retired shall be entitled to
a share equal to his mandatory contributions, if any, to the Program, and each
Participant, Spouse or Beneficiary in receipt of a pension shall be entitled to
a share equal to any excess of said contributions at the time of retirement or
prior death over the sum of benefits received; and
Third, each Participant, Spouse or Beneficiary in receipt of a
benefit on the date three years prior to the date of termination, each
Participant who would have been in receipt of a benefit on the date three years
prior to such date of termination, if he had retired prior to that date, and
each Spouse or Beneficiary of a deceased Participant who was in receipt of a
benefit on the date three years prior to the date of termination or would have
been in receipt of a benefit had he retired prior to
<PAGE>
7-7
such date, shall be entitled to a share equal to the reserve computed to be
required for his benefit accrued under the Program as in effect at the time
during the five-year period ending on such date of termination when the said
benefit was or would have been the lowest, reduced by his share under
subparagraphs First and Second above; and
Fourth, each Participant, Spouse or Beneficiary in receipt of
a benefit and each Participant who is eligible to retire on the date of such
termination shall be entitled to a share equal to the reserve computed to be
required for his priority benefit credits, as hereinafter defined, reduced by
his shares under subparagraphs First, Second and Third above; and
Fifth, each Participant or former Employee not eligible to
retire who had met the eligibility requirements for, or is entitled to receive a
deferred vested pension shall be entitled to a share equal to the reserve
computed to be required to his priority benefit credits, as hereinafter defined,
reduced by his share under subparagraphs First and Second above; and
Sixth, each Participant, Spouse or Beneficiary in receipt of a
benefit and each Participant who is eligible to retire on the date of such
termination shall be entitled to a share equal to the reserve computed to be
required for his benefit credits, reduced by his shares under subparagraphs
First, Second, Third and Fourth above; and
Seventh, each Participant or former Employee not eligible to
retire who has met the eligibility requirements for, or is entitled to receive,
a deferred vested pension shall be entitled to a share equal to the reserve
computed to be required for such
<PAGE>
7-8
deferred vested pension, reduced by his shares under subparagraphs
First, Second and Fifth above; and
Eighth, each other Participant not included in the above
paragraphs on the date of such termination shall be entitled to a share equal to
the reserve computed to be required for his benefit credits, reduced by his
share, if any, under subparagraph First and Second above; provided that:
If the funds are insufficient to provide in full for
the shares under subparagraph First, each share thereunder shall be
reduced prorata; if the funds are insufficient to provide in full for
the shares under subparagraph Second, each share thereunder shall be
reduced prorata; and if the funds are insufficient to provide in full
for the shares under subparagraph Third, Fourth or Fifth after
provision for all shares under previous subparagraphs, each share under
such subparagraph Third, Fourth or Fifth shall be reduced prorata.
If the funds are insufficient to provide in full for
the shares under subparagraph Sixth, Seventh or Eighth after provisions
for all shares under previous subparagraphs, the funds available for
allocation under such subparagraph Sixth, Seventh or Eighth shall be
allocated first to provide the shares under such subparagraph without
regard to any benefits resulting from any amendments to the Program
which became effective within the 60 months preceding the date of such
termination and if the funds are insufficient to provide such shares in
full each such share shall be reduced prorata. If the funds are
sufficient to provide such shares in full, any remaining assets shall
be allocated to provide the shares under such subparagraphs based on
the benefits resulting from
<PAGE>
7-9
such amendments until the first such amendment as to which the funds
are insufficient, and the share with respect to such amendment shall be
reduced prorata.
Any assets remaining after provision in full for shares First
through Eighth inclusive shall be returned to the Employer.
"Priority benefit" for purposes of subparagraphs Fourth and
Fifth shall mean (a) the amount of a Participant's benefits accrued under the
Program which have not resulted from an amendment which was made, or became
effective, whichever is later, within the 60-month period ending on the said
date of termination, plus (b) 20% of the amount of his accrued benefits
resulting from each amendment made within the 60-month period prior to the date
of such termination, multiplied by the number of full years that such amendment
has been in effect, or a pension of $20 per month multiplied by such number of
full years, if greater, but not in excess of (c) the total accrued benefit under
the Program as of the said date of termination, or (d) the benefit which is the
actuarial equivalent of a monthly benefit payable to the Participant for life
commencing at age 65 equal to the lesser of (i) his average monthly compensation
during the five consecutive years of his employment with the Employer affording
the highest such average, or (ii) $750 multiplied by a fraction, the numerator
of which is the Social Security taxable wage base in effect on the date of such
termination and the denominator of which is $13,200.
7.05 Liquidation of Assets. The Committee will then arrange
for the liquidation of the Fund assets and secure from the Trustee a statement
of the liquidated value of such assets, and will disclose to the Internal
Revenue Service the method of
<PAGE>
7-10
distribution of such assets of the Program in accordance with
Section 7.06.
7.06 Purchase of Benefits. The Employer will then arrange for
the application of the assets to the purchase of benefits. Subject to the
provisions of Article 7, distribution of assets upon termination of the Program
shall be made in the form of a single sum cash payment if the present value of
the benefit is $3,500 or less, and otherwise in the form of an annuity. Such
present value shall be calculated on the basis of an interest rate no greater
than the interest rate described in Section 5.03(b)(2). Any annuity contract
issued in accordance with this Section 7.06 shall comply with the requirements
of ss.ss.401(a)(11), 411(d)(6), and 417 of the Internal Revenue Code.
7.07 Restriction of Benefits. Notwithstanding any other
provision of the Program to the contrary, benefits payable under
the Program shall be subject to the restrictions of Treas. Reg. ss.
1.401(a)(4)-5(b)(2) and (3), as provided herein. In no event shall
this Section be interpreted to impose requirements which are more
restrictive than those imposed by such regulations.
(a) Restrictions on Termination of the Program. In the event
that the Program is terminated, the benefit of any highly compensated employee
and any former highly compensated employee shall be limited to a benefit that is
nondiscriminatory under ss. 401(a)(4) of the Internal Revenue Code.
(b) Pre-Termination Restrictions.
(1) In any year, the payment of benefits to or on
behalf of a restricted employee shall not exceed an amount equal to the
payments that would be made to or on behalf of the restricted employee
in that year under --
<PAGE>
7-11
(i) a straight life annuity that is the actuarial
equivalent of the accrued benefit and other benefits to which
the restricted employee is entitled under the Program (other
than a social security supplement); and
(ii) a social security supplement, if any, that the
restricted employee is entitled to receive.
(2) A restricted employee is a highly compensated
employee or a former highly compensated employee but only if such
employee is one of the 25 nonexcludable employees and former employees
with the largest amount of compensation in the current or any prior
year.
(3) No restrictions on distributions shall apply if
any one of the following conditions is satisfied:
(i) After taking into account payment to or on behalf
of the restricted employee of all benefits payable to or on
behalf of such restricted employee under this Program, the
value of Program assets equals or exceeds 110 percent of the
value of current liabilities of this Program, as defined in
ss. 412(l)(7) of the Internal Revenue Code,
(ii) The value of the benefits payable to or on
behalf of the restricted employee under this Program is less
than 1 percent of the value of current liabilities of this
Program, as defined in ss. 412(l)(7) of the Internal Revenue
Code, before distribution, or
(iii) The value of the benefits payable to or on
behalf of the restricted employee under this Program does not
exceed $3,500.
<PAGE>
7-12
(4) In the event the pre-termination restrictions of
this Section 7.07(b) apply to a distribution, the Committee may
nevertheless permit payment in excess of the limitation in paragraph
(1) provided that an agreement has been established with the restricted
employee to secure repayment to the Program of any amount necessary for
the distribution of assets upon Program termination to satisfy ss.
401(a)(4) of the Internal Revenue Code. Such agreement shall comply
with applicable IRS rules and regulations.
<PAGE>
8-1
ARTICLE 8
MISCELLANEOUS
8.01 Action by Employer. Whenever under the terms of this
Program the Employer is permitted or required to perform any act, it shall be
done and performed by an officer thereunto duly authorized by its board of
directors unless the authority to perform the act has been otherwise delegated
pursuant to this Program.
8.02 Liability of Employer. The Employer shall have no
liability for payments under the Program or administration of the Fund except as
otherwise provided by law. Persons entitled to benefits shall look solely to the
Fund for any payments under the Program.
8.03 Successor to Business of Employer. Unless this Program is
sooner terminated, a successor to the business of the Employer shall continue
the Program and such successor shall thereupon succeed to all the rights, powers
and duties of the Employer hereunder. The Employment of any Employee who has
continued in the employ of such successor shall not be deemed to have been
terminated or severed for any purpose hereunder.
8.04 Dissolution of the Employer. In the event that the
Employer is dissolved by reason of bankruptcy or insolvency, without any
provision being made for the continuance of this Program by a successor to the
business of the Employer, the Program hereunder shall terminate and the Trustee
shall proceed in the same manner as though the Program were being terminated as
provided in Article 7.
8.05 Interest in the Fund. Except to the extent provided
herein, no Participant, Beneficiary, nor any dependent of a
<PAGE>
8-2
Participant, nor any person claiming by or through such Participant, nor any
other person, partnership, firm or corporation shall have any right, title or
interest in or to the Fund or any part thereof, and the Fund shall not be liable
for or subject to the debts, contracts, or liabilities of any such person,
partnerships, firms or corporations, and no such person, partnership, firm or
corporation shall have any right to any portion of the Fund.
8.06 Claims. Any payment of benefit to a Participant or
Beneficiary, or to their legal representatives, in accordance with the
provisions of the Program, shall, to the extent of the method of computation as
well as the amount thereof, constitute full satisfaction of all claims hereunder
against the Trustee, Committee and the Employer, who may require such
Participant or Beneficiary or legal representative, as a condition precedent to
such payment, to execute a receipt therefor in such forms as shall be determined
by the Trustee, Committee or the Employer, as the case may be.
8.07 Mergers, Consolidations and Transfers of Assets. In the
event that this Program merges or consolidates with, or transfers its assets or
liabilities to, any other program of deferred compensation qualified under
ss.401(a) of the Internal Revenue Code of 1986, no Participant herein shall,
solely on account of such merger, consolidation or transfer, be entitled to a
benefit immediately following such event which is less than the benefit to which
he was entitled immediately preceding such event. For the purpose of this
Section, the benefit to which a Participant is entitled shall be calculated
based upon the assumption that the Program termination and distribution of
assets occurred on the day
<PAGE>
8-3
as of which the amount of the Participant's entitlement is being
determined.
8.08 Non-assignment of Benefits. The benefits under this
Program shall not be assigned or alienated, except to the extent required by the
terms of a "qualified domestic relations order" (as defined in ss.414(p) of the
Internal Revenue Code) entered on or after January 1, 1985. The Committee shall
treat a domestic relations order entered before January 1, 1985, as a qualified
domestic relations order if payment of benefits pursuant to such order has
commenced as of such date. The Committee may, in its sole discretion, treat any
other domestic relations order entered before January 1, 1985, as a qualified
domestic relations order.
In the case of any domestic relations order received by the
Committee on or after January 1, 1985, the Committee shall promptly notify the
Participant and any other alternate payee (as defined in ss.414(p)(8) of the
Internal Revenue Code) of the receipt of such order and of the procedures for
determining the qualified status of domestic relations orders. Within a
reasonable period after receipt of such order, the Committee shall determine
whether such order is qualified and shall notify the Participant and each
alternate payee of such determination. During any period in which the qualified
status of a domestic relations order is being determined (by the Committee, a
court, or otherwise), the Committee shall direct the Trustee to segregate in a
separate account the amounts that would have been payable to each alternate
payee if the order had been determined to be a qualified domestic relations
order. If, within 18 months of the receipt of the order, the order (or
modification thereof) is determined to be a qualified domestic relations order,
the Committee shall direct the Trustee to pay the
<PAGE>
8-4
segregated amounts (plus any interest thereon) to the person or persons entitled
thereto. If, within 18 months of the receipt of the order, it is determined that
the order is not qualified, or the issue as to whether the order is qualified is
not resolved, then the Committee shall direct the Trustee to pay the segregated
amounts plus any interest thereon) to the person or persons who would have been
entitled to such amounts if there had been no order. Any determination that an
order is qualified which is made after the close of the 18-month period shall be
applied prospectively only.
8.09 Definition of Words. Feminine or neuter pronouns shall be
substituted for those of the masculine form, and the plural shall be substituted
for the singular, in any place or places herein where the context may require
such substitution or substitutions.
8.10 Titles. The titles of Articles and Sections are included
only for convenience and shall not be construed as part of the Program or in any
respect to affect or modify its provisions.
8.11 Construction. In any question of interpretation or other
matter of doubt, the Trustee, the Committee and the Employer may rely upon the
opinion of legal counsel. The provisions of the Program shall be construed,
administered and enforced according to the laws of the State of Illinois to the
extent that the application of state law to the Program has not been preempted
by ss.514 of the Employee Retirement Income Security Act of 1974. All
contributions to the Fund shall be deemed to take place in the State of
Illinois.
8.12 Execution of the Program. The execution of this
Program shall be accomplished by means of an agreement (referred to
<PAGE>
8-5
as Exhibit B) with the Blue Cross and Blue Shield Association which is attached
to and constitutes part of the Program. This document may be executed in any
number of counterparts and each fully executed counterpart shall be deemed an
original.
<PAGE>
9-1
ARTICLE 9
TOP-HEAVY PROVISIONS
9.01 Application of Article. Notwithstanding any provision of
the Program to the contrary, the provisions of this Article shall apply with
respect to any Program Year beginning on or after January 1, 1984, if, and only
if, the Program is deemed to be a "top-heavy plan" with respect to such Year
within the meaning of ss.416 of the Internal Revenue Code of 1986. The Program
shall constitute a "top-heavy plan" if --
(a) the Program is not part of an aggregation group and, as of
the determination date, the present value of the cumulative accrued benefits
under the Program for key employees exceeds 60 percent of the present value of
the cumulative accrued benefits under the Program for all employees, where such
ratio is computed in accordance with the provisions of ss.416(g) of the Internal
Revenue Code of 1986 and any regulations prescribed thereunder; or
(b) the Program must be included in an aggregation group
and such group is a top-heavy group.
9.02 Definitions. For purposes of this Article, the
following terms shall have the meaning indicated:
(a) Aggregation Group. The term "aggregation group"
means --
(1) each retirement program maintained by the
Employer which qualifies under ss.401(a) of the Internal Revenue Code
of 1986 and in which a key employee is a participant;
(2) each other program maintained by the Employer
which enables a program described in the preceding clause to meet the
non-discrimination requirements of ss.401(a)(4) or the
<PAGE>
9-2
participation requirements of ss.410 of the Internal Revenue
Code of 1986; and
(3) if the Employer so elects, any other program of
the Employer, if, after the inclusion of such program in the
aggregation group, such group would continue to meet the
non-discrimination requirements of ss.401(a)(4) and the participation
requirements of ss.410 of the Internal Revenue Code of 1986.
(b) Top-Heavy Group. The term "top-heavy group" means any
aggregation group if, as of the determination date, the sum of the present value
of the cumulative accrued benefits for key employees under all defined benefit
programs included in such group, and the aggregate of the accounts of key
employees under all defined contribution programs included in such group,
exceeds 60 percent of the analogous sum determined for all employees. The
present value of the cumulative accrued benefits for any employee and the value
of the account of any employee shall be computed in accordance with the
provisions of ss.416(g) of the Internal Revenue Code of 1986 and any regulations
prescribed thereunder.
(c) Key Employee. The term "key employee" means any individual
who is a key employee within the meaning of ss.416(i)(1) of the Internal Revenue
Code of 1986, and such regulations as the Secretary of the Treasury may
prescribe thereunder.
(d) Non-key Employee. The term "non-key employee" means
any Employee who is not a key employee.
(e) Determination Date. The term "determination date" means,
with respect to any Program Year, the last day of the preceding Program Year; in
the case of the initial Program Year, however, the determination date is the
last day of such year.
<PAGE>
9-3
(f) Valuation Date. The term "valuation date" means the
first day of the Program Year containing the determination date.
(g) Present Value of Cumulative Accrued Benefit.
(1) Accrued Benefit. The "accrued benefit" of a
Participant means --
(i) in the case of the initial Program Year,
the benefit accrued under Articles 4 and 9 of the Program,
determined as if the Participant terminated service as of the
determination date; and
(ii) in the case of any other Program Year,
the benefit accrued under Articles 4 and 9 of the Program,
determined as if the Participant terminated service as of the
valuation date.
(2) Present Value of Cumulative Accrued Benefit. The
present value of a Participant's cumulative accrued benefit shall be
computed based on an interest rate of 5 percent and the mortality rates
shall be unisex rates constructed based upon the 1986 Projected
Experience Table assuming a distribution of 46 percent males and 54
percent females. Each Participant's benefit shall be assumed to
commence at the age at which the benefit is most valuable to the
Participant.
Solely for the purpose of determining if the Program
and any other program included in a required aggregation group of which
this Program is a part, is topheavy (within the meaning of ss.416(g) of
the Internal Revenue Code) the accrued benefit of a Participant who is
a non-key employee shall be determined under (i) the method, if any,
that uniformly applies for accrual purposes under all programs
maintained by
<PAGE>
9-4
the Employer or (ii) if there is no such method, as if such benefit
accrued not more rapidly than the slowest accrual rate permitted under
the fractional accrual rate of ss.411(b)(1)(C) of the Internal Revenue
Code.
(h) Employer. To the extent required under ss.416 of the
Internal Revenue Code, the term Employer includes (1) any corporation that is a
member of a controlled group of corporations (as defined in ss.414(b) of the
Internal Revenue Code) that includes the Employer, (2) any trade or business
(whether or not incorporated) that is under common control (as defined in
ss.414(c) of the Internal Revenue Code) with the Employer, (3) any organization
(whether or not incorporated) that is a member of an affiliated service group
(as defined in ss.414(m) of the Internal Revenue Code) that includes the
Employer, (4) except to the extent otherwise provided in regulations prescribed
by the Secretary of the Treasury under ss.414(n) of the Internal Revenue Code
with respect to periods of service required under ss.414(n)(4) of the Internal
Revenue Code to be credited to a leased employee (as defined in ss.414(n) of the
Internal Revenue Code) or a common-law employee, the leasing organization, and
(5) any other entity required to be aggregated with the Employer pursuant to
regulations under ss.414(o) of the Internal Revenue Code.
9.03 Vesting
(a) Top-heavy Vesting Schedule. If, with respect to any
Program Year, the Program is deemed to be a top-heavy plan, then each
Participant shall have a nonforfeitable right to a percentage of his accrued
benefit under the Program (including benefits accrued before January 1, 1984,
and before the Program becomes top-heavy), determined under the following
schedule:
<PAGE>
9-5
Years of Vesting Services Nonforfeitable Percentage
2 20
3 40
4 60
5 80
6 or more 100
Notwithstanding the foregoing, the top-heavy vesting
schedule described above shall not apply to the accrued benefit of any
Participant who fails to complete an Hour of Service after the Program becomes a
top-heavy plan.
(b) Change in Vesting Schedule. In the event that the
Program ceases to be a top-heavy plan, then each Participant's
interest in his accrued benefit under the Program shall vest in
accordance with the following rules;
(1) Except as provided in paragraphs (2) and (3)
below, the nonforfeitable percentage of a Participant's accrued benefit
shall be determined under the terms of the Program without regard to
the provisions of Section 9.03(a).
(2) If a Participant has 3 or more Years of Vesting
Service, the nonforfeitable percentage of his accrued benefit shall be
determined in accordance with the provisions of Section 9.03(a) or
Section 9.03(b)(1), whichever produces the greater vested benefit.
Provided, however, that such a Participant's nonforfeitable percentage
shall not be greater than that which is determined under the Program
without regard to the provisions of Section 9.03(a) unless under
regulations or rulings interpreting Sections 411 and 416 of the
Internal Revenue Code of 1986, such a Participant would otherwise have
<PAGE>
9-6
the right to an election described in Section 411(1)(10)(B) of
such Code.
(3) In no event shall a change in the vesting
schedule resulting from a change in the Program's top-heavy status
reduce the nonforfeitable percentage of any Participant's accrued
benefit (determined as of the date the change in the vesting schedule
occurs).
9.04 Minimum Benefits.
(a) General Rule. If, with respect to any Program Year, the
Program is deemed to be a top-heavy plan, then the accrued benefit of each
Participant who is a non-key employee, when expressed as an annual retirement
benefit, shall be at least 2 percent of the average of the Participant's
compensation (as defined in Section 4.12(a)) for years in the "testing period",
multiplied by his number of Years of Employer Service (but not more than 10 such
years). For purposes of this Section, a Year of Employer Service shall not be
taken into account if the Program was not a top-heavy plan for any Program Year
ending during such Year of Employer Service, or if such Year of Employer Service
was completed in a Program Year beginning before January 1, 1984.
(b) Testing Period. For purposes of Section 9.04(a), a
Participant's "testing period" is the period of consecutive Years of Employer
Service (not exceeding 5) during which the Participant had the greatest
aggregate compensation from the Employer; provided, however, that a year shall
not be included in the testing period if such year ends in a Program Year
beginning before January 1, 1984, or such year begins after the close of the
last Program Year in which the Program was a top-heavy plan.
<PAGE>
9-7
(c) Annual Retirement Benefit. For purposes of Section
9.04(a), the term "annual retirement benefit" means a benefit payable annually
in the form of a single life annuity (with no ancillary benefits) beginning at
Normal Retirement Age. If the form of benefit is other than a single life
annuity or the benefit commences at a date before or after attainment of Normal
Retirement Age, each Participant who is a non-key employee must receive an
amount that is the actuarial equivalent of the minimum single life annuity
commencing at Normal Retirement Age. The minimum benefit described in Section
9.04(a) shall not be adjusted to take into consideration the availability of
preretirement ancillary benefits under the Program.
(d) Nonforfeitable Benefits. The minimum benefits required
under this Section shall vest in the same manner as any other benefits accrued
under the Program, except that the minimum benefits shall not be subject to
permanent suspension in accordance with the provisions of Section 4.13.
(e) Nonduplication of Benefits. If the Employer maintains a
defined contribution program in addition to this Program, the Employer shall
provide non-key employees who participate in both programs with a minimum
contribution under the defined contribution program in lieu of the minimum
benefit described in Section 9.04(a). Such minimum contribution shall be the
minimum amount required by regulations prescribed under ss.416(c) and (f) of the
Internal Revenue Code of 1986.
(f) Limitation on Minimum Benefit. This Section sets
forth the requirements imposed by ss.416(c) of the Internal Revenue
Code of 1986 and the regulations prescribed thereunder and shall
not be interpreted to impose any requirements other than, or
<PAGE>
9-8
provide any benefits greater than, those mandated by such
provisions of law.
9.05 Limitation on Compensation. The limitation on Earnings in
Section 1.06 shall be applied in determining compensation under the Program.
9.06 Limits on Benefits and Contributions.
(a) Basic Limitation. If, with respect to any Program
Year, the Program is deemed to be a top-heavy plan, then the limitation
described in Section 4.12(h) shall be applied by substituting "1.0" for "1.25"
wherever the latter appears in that Section.
(b) Exception. Paragraph (a) shall not apply, however, if the
Program is not a "super top-heavy plan" (as defined in paragraph (c)) and the
Program provides each non-key employee with the additional minimum benefit
described in paragraph (d).
(c) Super Top-heavy Plan. The Program shall constitute a
"super top-heavy plan" unless the Program would not be a topheavy plan if "90
percent" were substituted for "60 percent" wherever the latter appears in
Sections 9.01(a) and 9.02(b).
(d) Additional Minimum Benefit. The requirements of this
paragraph shall be satisfied if the Program would satisfy the minimum benefit
provisions of Section 9.04 if "3 percent" were substituted for "2 percent" in
paragraph (a) thereof, or, if an Employer is providing the minimum contribution
under the defined contribution program in accordance with Section 9.04(e), such
additional contributions are made to the defined contribution program as shall
be required under regulations prescribed under ss.416(f) and (h)(2)(A) of the
Internal Revenue Code of 1986.
<PAGE>
9-9
(e) Coordination With Section 4.12. If the basic limitation
described in paragraph (a) of this Section applies to the Program with respect
to any Program Year, and the procedure is adopted to compute the denominator of
the defined contribution program fraction in accordance with the transitional
rule of Section 4.12(h)(3), then Section 4.12(h)(3)(i)(aa) shall be applied by
substituting "$41,500" for "$51,875."
<PAGE>
9-10
AMENDMENT
of
NON-CONTRIBUTORY RETIREMENT PROGRAM
FOR CERTAIN EMPLOYEES
of
Blue Cross and Blue Shield of Virginia
WITNESSETH:
WHEREAS, this corporation maintains the Non-Contributory Retirement
Program for Certain Employees of Blue Cross and Blue Shield of Virginia (the
"Program") and the National Retirement Trust (the "Trust") which Program and
Trust have been amended
from time to time.
WHEREAS, this corporation maintains Employee Health Plan (the "Retiree
Health Program") under which retiree health benefits may be provided for the
benefits of certain of its present and former Employees and their spouses and
dependents;
WHEREAS, with appropriate amendments, the Program and the Trust may be
used to fund retiree health benefits to which retired Employees of this
corporation and their spouses and dependents may become entitled under the terms
of the Retiree Health Program;
<PAGE>
9-11
WHEREAS, this corporation has determined that it is desirable that a
portion or all of this corporation's costs of providing retiree health benefits
be paid in the form of contributions of this corporation to the Trustee under
the Trust for accumulation and investment thereunder and payment thereunder to
provide such retiree health benefits;
WHEREAS, this corporation and the National Employee Benefits Committee
(the "Committee") of Blue Cross and Blue Shield Association (the "Association")
have determined that the amendments necessary to provide such benefits under the
Program and the Trust constitute amendments which are applicable only to
Employees of this corporation which do not adversely affect the operation of the
Program with respect to other Participating Plans and such amendment will
facilitate this corporation's continued participation in the Program as provided
in Section 8 of the Exhibit B to the Agreement which implemented this
corporation's participation in the Program; and
WHEREAS, the undersigned has been authorized to prepare and adopt an
amendment to the Program which will permit this corporation to utilize the
Program to fund retiree health benefits to which former Employees and spouses
and dependents of former Employees of this corporation may become entitled under
the Retiree Health Program;
NOW, THEREFORE, pursuant to the authority delegated to the
undersigned and the consent of the Committee, the Program, as
<PAGE>
9-12
previously in effect, be and it is hereby amended effective as of January 1,
1991 in the following particulars:
1. By adding the following new sentence to the end Section
7.03 of the Program:
"Notwithstanding the foregoing or any other provision of this
Program to the contrary, the benefits described in Article 10
shall not become vested prior to actual distribution of assets
of the Program to provide such benefits."
2. By adding the following to the end of Section 7.04 of
the Program:
"The provisions of this Section 7.04 shall not be applicable
with respect to assets held under the Program for the purposes
of providing benefits described in Article 10."
3. By adding the following new Article 10 to the end of
the Program:
ARTICLE 10
Retiree Health Benefits
"10.01 Retiree Health Benefits. This Article 10
is intended to provide for the pre-funding of certain
<PAGE>
9-13
retiree health benefits provided under the terms of the Employee Health
Plan (the "Retiree Health Program") with respect to Eligible Retirees
and Eligible Dependents (as defined in Sections 10.02 and 10.03).
Except to the extent that benefits provided through this Article 10
have been previously paid under the Retiree Health Program through
other contributions of the Employer or disbursements from a trust
attributable to such contributions, it is intended that benefits
provided to Eligible Retirees and Eligible Dependents under the terms
of the Retiree Health Program shall be provided, first, by disbursement
from such a trust or trusts, if any, attributable to Employer
contributions, and, next, by disbursement of assets held in accordance
with this Article 10 to the Claims Administrator under the Retiree
Health Program (as defined in Section 10.08). Notwithstanding any
provision of the Program to the contrary, this Article 10 is only
intended to provide a source of payment for future benefits to which
Eligible Retirees and Eligible Dependents may be entitled under the
Retiree Health Program described in Section 10.07. Entitlement of any
Eligible Retiree or Eligible Dependent to benefits hereunder is
expressly limited to any such rights under the Retiree Health Program
and is subject to any limitations, including rights reserved by the
Employer to amend, terminate or otherwise change the Retiree Health
Program. This Article 10 is intended to meet the requirements of Code
Section 401(h) and shall be interpreted accordingly.
<PAGE>
9-14
10.02 Eligible Retirees, Eligible Dependents. The eligibility
of former Employees of the Employer and the eligibility of their
spouses and dependents to receive benefits under this Article 10 shall
be determined solely in accordance with the terms and conditions of the
Retiree Health Program, as amended from time to time. Each former
Employee of the Employer who satisfies the requirements of the Retiree
Health Program for entitlement for a retiree health benefit thereunder,
who is eligible to receive retirement benefits under this Program and
who is not excluded from the group of such former Employees for whom
contributions will be made under the Trust as provided in Section 10.03
below shall be considered an "Eligible Retiree". Each spouse and
dependent of such former Employee who satisfies the requirements of the
Retiree Health Program for entitlement for a retiree health benefit
thereunder, who is eligible to receive retirement benefits under this
Program and who is excluded from the group of such spouses and
dependents for whom contributions will be made under the Trust as
provided in Section 10.03 below shall be considered an "Eligible
Dependent". Except as expressly provided to the contrary herein with
respect to amounts actually disbursed under the Trust to or for the
benefit of an Eligible Retiree or Eligible Dependent, neither such
Eligible Retirees and Eligible Dependents, nor any medical care
providers or assignees shall have any right, title or interest with
respect to any assets of
<PAGE>
9-15
the Trust. All such Trust assets shall be held hereunder for the
benefit of all Eligible Retirees and Eligible Dependents covered by the
Retiree Health Program, and shall be available for disbursement in
accordance with Sections 10.08 and 10.09 to or for the benefit of any
Eligible Retirees or Eligible Dependents covered by the Retiree Health
Program, except that benefits that are paid to a Key Employee (as
defined in Code Section 401(h)) shall be limited to the amounts
credited to the Key Employee's Account as established under Section
10.06. The entitlement of specific Employees, former Employees,
spouses, dependents, medical providers or assignees (subject to Section
8.08, Code Section 401(a)(13) and ERISA Section 206(d)) to receive
disbursements of assets held in the Trust shall be determined solely
under the terms and conditions of the Retiree Health Program.
10.03 Limitation of Eligibility. The benefits payable under
this Article 10 shall not be utilized to provide benefits under the
Retiree Health Program for the following groups of otherwise Eligible
Retirees and Eligible Dependents:
Check as many boxes as are applicable:
<PAGE>
9-16
/x (i) Each Employee who is categorized
/ as a Key Employee as such term is
defined in Code Section 401(h) and the
spouse and dependents of such person.
/ (ii) Each Employee who is a member of
/ a collective bargaining unit and the
spouse and dependents of such person.
/ (iii) Each person who_________________
/ _________________________________________
________________________________ and the
spouse and dependents of such person.
10.04 No Employee Contributions. Eligible Retirees and their
Eligible Dependents may be required to pay a portion or all of the cost
of the coverages provided under the Retiree Health Program. Any such
contributions by Eligible Retirees or Eligible Dependents shall be made
and applied to provide benefits solely in the manner required by the
terms and conditions of such Retiree Health Program. No Eligible
Retirees or Eligible Dependents shall be permitted to make
contributions hereunder. The foregoing limitation shall not prevent the
Trustee or the Committee from seeking to recover from any person
amounts paid from the Trust in error or amounts which any such person
may owe to the Trust under principles of subrogation.
10.05 Employer Contributions. Each year the Employer
shall make a contribution to the Trust in an amount
<PAGE>
9-17
determined by the Employer on the advice of a qualified actuary. The
amount contributed each year by an Employer shall be determined in
accordance with the following rules:
(a) Actuarial Determination of Contribution Limits.
The amount of such contribution shall be
determined pursuant to a written report prepared
by a qualified actuary retained for this purpose.
The amount so determined for any Program Year
shall be reasonable and ascertainable as required
by Code Section 401(h) and shall not exceed the
amount of the maximum deduction which the Employer
is entitled to receive for such contribution for
the Program Year to which such contribution
relates as determined by such actuary;
(b) Coordination of Actuarial Funding With Funding
Under Other Programs. In determining the
actuarial cost of future retiree health benefits
in accordance with (a) above, the actuary shall
coordinate such determination with the actuary or
actuaries performing similar determinations under
any voluntary employees' beneficiary association
trusts qualified under Code Section 501(c)(9) or
other funding vehicles (in accordance with the
coordination method described in Section 10.01) to
which contributions have been made or are to be
made by the Employer for the benefit of Eligible
Retirees or Eligible Dependents with respect to
<PAGE>
9-18
benefits they are or may become entitled to under the
Retiree Health Program. The Employer shall notify the
Committee and the actuary performing the calculation
described in (a) above of any such parallel funding
arrangements. Unless so notified, the Committee and
such actuary shall assume that no such other funding
arrangements have been utilized by the Employer with
respect to Eligible Retirees or Eligible Dependents;
(c) Subordination of Benefits Under Retiree Health
Program. Retiree Health Program benefits are
intended to be subordinate to the Program's
retirement benefits. Accordingly, the aggregate
actual contributions to the Program made after
January 1, 1991 for the purpose of providing
Retiree Health Program benefits (when added to
actual contributions, if any, for life insurance
protection under the Program) shall not exceed 25
percent of the total actual contributions to the
Program since January 1, 1991, including the
aforementioned contributions and contributions for
retirement or survivors' benefits (other than
contributions to fund past service credits) after
the date on which this Article 10 originally
became effective. The term "life insurance
protection" as used in the prior sentence shall
not include any Program provision for a survivor's
benefit where the present value of the survivor's
<PAGE>
9-19
benefit does not exceed the present value of the
accrued benefit of the Employee to which the
survivor's benefit relates. For purposes of applying
this limitation, the Employer and the Committee may
conclusively rely on an actuarial certification
prepared by the Program's enrolled actuary
demonstrating compliance. If any amounts are
inadvertently or negligently contributed to the
Retiree Health Program in excess of the limitation
imposed by this Subsection, such excess allocation
shall be considered to have been contributed to the
Retiree Health Program by mistake and in violation of
this limit and shall be withdrawn from that Fund
promptly and returned to the Employer to the extent
permitted by ERISA, with the remainder, if any,
applied to provide retirement benefits then payable
under the Program;
(d) Deductibility. Neither the Association nor the
Committee makes any representations regarding the
deductibility of any contribution made in
accordance with this Article 10.
(e) Contribution Deadline. All contributions with
respect to a Program Year shall be made by payment
of such amount to the Trustee no later than the
time for filing the Employer's federal income tax
return for the Program Year to which such
<PAGE>
9-20
contributions relate, provided that any such
contributions made after the end of a fiscal year of
the Employer which are made before the due date for
its federal income tax return shall be deemed made
during such earlier fiscal year if they are
designated by the Employer as having been made for
that fiscal year;
(f) No Individual Employee Entitlement to Specific
Trust Assets. Although contributions of an
Employer may be calculated with reference to
specific Employees or groups of Employees, neither
the Committee nor the Trustee shall maintain
account records in the name of individual
Employees nor earmark any Employee's interest
hereunder until the time arrives for payment of
benefits hereunder by the Trustee or by a Claims
Administrator or other entity receiving Trust
assets from the Trustee for the purposes of making
benefit payments hereunder except as required by
Section 10.05(g) below;
(g) Key Employees. Notwithstanding the provisions of
Section 10.05(f) above, contributions which may be
used to provide benefits for Key Employees or their
Eligible Dependents shall be accompanied by detailed
calculations which reflect the portion of such
contributions which are intended to provide for the
payment of benefits with respect to
<PAGE>
9-21
Employees who constitute "Key Employees" for purposes
of Code Section 401(h), and which contributions shall
be reflected by Key Employee accounts described in
Section 10.06 below.
Employer contributions for Retiree Health Program benefits shall be
designated as being made for the Retiree Health Program at the time
they are made and shall be credited to the Retiree Health Program fund
described in Section 10.07. In determining how much may be deducted for
contributions to the Program to provide Retiree Health Program
benefits, the Program's enrolled actuary may take into account
reasonably projected increases in health care costs due to inflation
and other factors. Lump sum contributions may be made by the Employer
to satisfy past service costs or experience losses of the Retiree
Health Program without the need for amortization. In determining the
amount of Employer contributions necessary to fund Retiree Health
Program benefits, the Program's enrolled actuary shall reduce the
contributions that would otherwise be required for any period by the
full amount (i.e., without amortization) then credited to the Retiree
Health Program which, during the period in question, has become
unneeded for paying Retiree Health Program benefits for any reason,
including but not limited to termination of employment, death and any
other such event, determined in a reasonable manner selected by the
actuary.
<PAGE>
9-22
10.06 Key Employee Accounts. In order to comply with the
requirements of Code Sections 415 and 419A, whenever the Committee is
informed that a Key Employee within the meaning of Code Section 401(h)
is or may be an Eligible Retiree, the Committee shall establish a
separate bookkeeping Account in the name of such Key Employee. Such
bookkeeping account is solely intended to permit the preservation of
records necessary to assure compliance with Code Section 415 in the
event such Key Employee or his or her spouse and dependents actually
receive benefits hereunder. It is in no way intended that the
maintenance of such accounts shall create in such Key Employee a vested
interest in any portion of a Trust Fund prior to actual payment of
benefits hereunder to such Key Employee or his or her Eligible
Dependents.
10.07 Retiree Health Program Fund. A separate account (the
"Retiree Health Program Fund") shall be maintained on the books of the
Program to reflect assets held to fund benefits payable under this
Article 10. For all investment purposes, however, the assets
attributable to the Retiree Health Program Fund may be commingled with
other Program assets. The Retiree Health Program Fund shall be credited
with future Employer contributions specifically designated as being
made to the Program for the purpose of funding Retiree Health Program
benefits under this Section and all contributions made hereunder to the
Retiree Health Program by or on behalf of Eligible Retirees and their
Eligible Dependents and the gains and the losses credited on the
foregoing amounts under a reasonable investment accounting
<PAGE>
9-23
system established by the Committee. Benefits payable in accordance
with this Article 10 shall be payable only from the amounts credited to
the Retiree Health Program Fund, which shall be debited to reflect such
payments. Administrative expenses attributable to the Retiree Health
Program which are not directly paid by the Employer may be paid out of
the Retiree Health Program Fund. Thus, the assets of the Program (other
than those credited to the Retiree Health Program Fund) shall be used
solely for paying retirement benefits and the administrative expenses
incurred in connection with providing such benefits.
10.08 Distribution Directions From Retiree Health Program Plan
Administrator. It shall be the responsibility of the Plan Administrator
of the Retiree Health Program to direct the Committee with respect to
all distributions of Trust assets held on behalf of such Retiree Health
Program. Pursuant to such Retiree Health Program, a "Claims
Administrator" may be authorized to give such instructions to the
Committee or to receive such disbursements, provided that the Committee
is supplied with satisfactory evidence of delegation of such authority.
In connection with such distributions, it shall be the responsibility
of the Retiree Health Program Plan Administrator to prepare and file
with the Committee in advance of any distribution of Program benefits,
a certificate regarding its determination that such distributions
satisfy the requirements of the Retiree Health Program and of this
Program. In addition, no less frequently than once each year or at such
other times as the
<PAGE>
9-24
Committee shall reasonable request, the Retiree Health Program Plan
Administrator shall prepare and file with the Committee a list of all
distributions requested with respect to Eligible Retirees and Eligible
Dependents and such other information as may be required by the
Committee.
10.09 Distribution Instructions to Trustee. Upon receipt of
power directions from a Retiree Health Program Plan Administrator to
cause distributions to be made hereunder, the Committee shall notify
the Trustee of the amounts to be disbursed, the identity of the payee
of each such payment and of all other information which the Committee
deems advisable or the Trustee may reasonably require. If benefit
payments to Eligible Retirees and Eligible Dependents under the Retiree
Health Program are actually made by a Claims Administrator pursuant to
an agreement with the Employer or an appropriate representative of the
Retiree Health Program which is satisfactory to the Committee, the
Committee may direct the Trustee to disburse Trust assets to such
Claims Administrator for disbursement of such Trust assets to provide
benefits. In making such directions to the Trustee, the Committee may
rely upon any instructions from such Claims Administrator which the
Committee reasonably believes to be authentic based upon documents or
notifications previously received from the Retiree Health Program Plan
Administrator or the Employer regarding the identity and authority of
such Claims Administrator. A Plan described in Section 1.16, including
the Employer or an affiliate of the Employer, serving as a
<PAGE>
9-25
Claim Administrator, Insurer or Health Maintenance Organization may act
as a disbursing agent for the Trustee pursuant to this Section 10.09,
to the extent permitted by Sections 408(b)(2) or 408(b)(5) of ERISA, by
Prohibited Transaction Class Exemption 79-41 or by administrative
exemptions issued pursuant to Section 408(a) of ERISA or to the extent
that the Committee is otherwise satisfied that such actions are not
inconsistent with the requirements of ERISA.
10.10 No Vesting in Trust Assets Prior to Actual Distribution.
No Eligible Retiree or Eligible Dependent shall have any vested
interest in assets held on behalf of a Retiree Health Program under the
Trust until such assets have been disbursed to or on behalf of such
Eligible Retiree or Eligible Dependent by the Trustee, a Claims
Administrator or other similar entity in accordance with this Article
10. Benefits payable or which may become payable in accordance with
this Article 10 shall not be deemed for any reason to be a part of any
accrued benefit under this Program, nor shall such benefits be entitled
to the protections of Code Section 411(d)(6) or of any other statute.
The Employer expressly reserves the right prospectively or
retroactively to change, reduce or eliminate the benefits provided
under the Retiree Health Program at any time and in any fashion. No
person may rely on the future continuation of Retiree Health Program
benefits since the Employer has expressly reserved the right to change
or reduce benefits or terminate the program at any time. Whether or not
the Employer
<PAGE>
9-26
formally eliminates or reduces Retiree Health program benefits, such
benefits shall only be provided to the extent they can be paid from
assets then credited to the Retiree Health Program and the Employer
shall have no obligations to contribute additional amounts to fund such
benefits.
10.11 Termination of Retiree Health Program. If the Retiree
Health Program is ever terminated (even though the Program continues in
existence) or if the Program in its entirety (including the Retiree
Health Program) is ever terminated, after the payment of or provision
for all medical benefits promised under the Retiree Health Program for
expenses incurred prior to such termination, any surplus remaining in
the Retiree Health Program shall be returned to the Employer (even if
only the Retiree Health Program has been terminated), to the extent
required by Internal Revenue Code Section 401(h) and to the extent
permitted by ERISA.
10.12 Administration. The Retiree Health Program shall be
administered in accordance with its terms except to the extent the
Committee or the Employer has expressly been given administration
powers or duties under this Section. The Employer or the Committee may
delegate any such powers or duties to their counterparts under the
Retiree Health Program.
10.13 Inconsistent Program Provisions. This Article 10
shall supersede any previously adopted inconsistent
provisions of the Retiree Health Program, the Program and
<PAGE>
9-27
the Trust Agreement. Specifically, but without limiting the generality
of the foregoing, the Retiree Health Program is hereby amended to
provide that the Employer shall not pay benefits or expenses which are
paid for under this Article 10. Except as provided in this Section
10.13, all other provisions of the Retiree Health Program, the Program
and the Trust Agreement shall apply with respect to this Article 10.
10.14 Prohibition on Diversion. It shall be impossible, at any
time prior to the satisfaction of all liabilities under this Article 10
to provide the benefits set forth in Section 10.01, for any part of the
corpus or income of the separate account described in Section 10.07 to
be used for, or diverted to, any purpose other than the providing of
such benefits.
10.15 Nondiscrimination. In accordance with Treasury
Regulation ss. 1.401-14(b)(2), benefits under the Retiree Health
Program which are provided under this Article 10 shall not discriminate
in favor of persons who are highly compensated employees as defined in
Code Section 414(q) or their spouses or dependents. Benefits which are
provided under the Retiree Health Program, but which are not provided
under this Article 10, shall not be subject to this requirement."
IN WITNESS WHEREOF, Blue Cross and Blue Shield of Virginia has caused
this amendment to be signed on its behalf on this ______________________________
<PAGE>
9-28
day of _____________ , 19__ and has caused the Plan Administrator's
acknowledgment sets forth below to be signed by the person or entity properly
appointed and currently serving as Plan Administrator of the Retiree Health
Program, or its duly authorized representative.
Blue Cross and Blue Shield of Virginia
(Company Name)
By:
---------------------------
Its:
---------------------------
COMMITTEE CONSENT
On behalf of the National Employee Benefits Committee, the undersigned
acknowledges receipt of the above and foregoing amendment and, based upon the
representation provided to such Committee and pursuant to the authority
delegated to the undersigned by the Committee, consents on behalf of the
Committee to the adoption of such amendment.
IN WITNESS WHEREOF, the National Employee Benefits Committee has caused
this adoption instrument to be signed on its behalf this day of , 19 .
<PAGE>
9-29
NATIONAL EMPLOYEE BENEFITS COMMITTEE
By:
-------------------------------
-------------------------------
Title
PLAN ADMINISTRATOR ACKNOWLEDGMENT
The undersigned, as the Plan Administrator of the Retiree Health
Program, acknowledges receipt of a copy of the above and foregoing adoption
instrument and of the other documents referred to therein and agrees to fulfill
the duties of Plan Administrator set forth therein.
---------------------------------
---------------------------------
Title
THE SUPPLEMENTAL RETIREMENT PROGRAM
FOR CERTAIN EMPLOYEES OF
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
--------------------------------------
INTRODUCTION
Blue Cross and Blue Shield of Virginia (the "Employer") has established
this Supplemental Retirement Program for Certain Employees of the Employer and
its corporate affiliates (the "Supplemental Program") for the benefit of its
employees participating in the NonContributory Retirement Program for Certain
Employees of Blue Cross and Blue Shield of Virginia ("Retirement Program").
The purpose of the Supplemental Program is to provide benefits for
employees of the Employer whose benefits under the Retirement Program are
restricted by the limitations of sections 401(a)(17) and 415 of the Internal
Revenue Code ("Code"). Accordingly, that part of the Supplemental Program that
provides benefits in excess of the limitations on benefits in Code section 415
shall constitute an "Excess Benefit Plan," as defined by section 3(36) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and that
part of the Supplemental Program that provides benefits based on compensation in
excess of the compensation limitation in Code section 401(a)(17) shall
constitute a plan that is maintained primarily for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of
Title I of ERISA. It is intended that the Supplemental Program remain at all
times an unfunded program.
1
<PAGE>
ARTICLE I
DEFINITIONS
1.1 General. Except as otherwise indicted in this Article, or as may be
clearly required otherwise by the context, capitalized terms that are used in
this Supplemental Program shall have the meaning assigned to them in Article 1
of the Retirement Program. Feminine or neuter pronouns shall be substituted for
those of the masculine form, and the plural shall be substituted for the
singular, in any place or places herein where the context may require such
substitution or substitutions.
1.2 "Actuarial Equivalent" shall mean a benefit of equal value, based
on the relevant conversion factors specified in the Retirement Program.
1.3 "Administrator" shall mean the person or entity designated as
the administration of the Supplemental Program in Section 3.1.
1.4 "Death Benefit" shall mean the benefit payable under Section
2.3.
1.5 "Employer" shall mean the employer organization specified in
the Introduction.
1.6 "Excess Benefit" shall mean the benefit payable under Section
2.2.
1.7 "Forms of Benefit"
(a) "Normal Form" shall mean (i) in the case of a Participant
who is married on the applicable commencement date under Section 2.4,
the joint and survivor form of benefit payable under Section 5.01 of
the Retirement Program, and (ii) in the case of a Participate who is
not married on the applicable commencement date under Section 2.4, a
benefit payable only for the lifetime of the Participant;
2
<PAGE>
(b) "Optional Form" shall mean one of the benefit forms
described in Section 2.5(b).
1.8 "Participate" shall mean an employee of the Employer who is a
participate in the Retirement Program and whose benefits under the Retirement
Program are restricted by the limitations of either Code section 401(a)(17) or
Code section 415 or both. The term "Participant" shall include a former employee
of the Employer who is entitled to a benefit under the terms of this
Supplemental Program. The term "participant" shall not include the Chief
Executive Officer of Blue Cross and Blue Shield of Virginia if such Officer and
the Employer have made a separate agreement to restore the excess retirement
program benefits.
1.9 "Retirement Program" shall mean the funded retirement program
specified in the Introduction.
1.10 "Supplemental Program" shall mean the Supplement Retirement
Program for Certain Employees of Blue Cross and Blue Shield of Virginia.
ARTICLE II
BENEFITS
2.1 Eligibility for Benefits. Any Participant who is entitled to a
benefit under the Retirement Program and who is living as of the applicable
commencement date under Section 2.4, shall be eligible for an Excess Benefit as
provided in Section 2.2. If a Participant who is married dies before benefits
under the Supplemental Program commence, then the Participant's surviving spouse
shall be eligible for a Death Benefit as provided in Section 2.3.
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2.2 Amount of Excess Benefit. The amount of Excess Benefit payable
under the Program shall be determined under subsection (a) or subsection (b)
below, depending on whether the Participant's Retirement Program benefit
commences after the commencement of his Excess Benefit, and shall be subject to
the provisions of subsections (c) and (d).
(a) If the Participant's benefit under the Retirement Program
commences either before or at the same time as the commencement of his
Excess Benefit under the Supplemental Program, then the Excess Benefit
payable under the Program shall be the Actuarial Equivalent of a
benefit that is payable in the same manner and commencing at the same
time as the Retirement Program benefit that is payable to the
Participant, and is equal to the excess, if any, of (i) over (ii);
(i) The amount of benefit that would be payable to
the Participant under the Retirement Program, in the manner
and commencing at the time elected by the Participant, if the
limitations of Code sections 401(a)(17) and 415 did not apply
to the calculation and amount of such benefit, except that in
the calculation of such benefit, earnings used as final
average earnings shall include voluntary nonqualified deferred
compensation amounts in the year the amounts were deferred
rather than the year deferred amounts are paid out.
(ii) The amount of benefit actually payable to
the Participant under the Retirement Program in the manner and
commencing at the time elected by the Participant.
(b) If the Participant's benefit under the Retirement
Program commences after the commencement of his Excess Benefit under
the Program, then the Excess
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Benefit payable under the Program shall be the Actuarial Equivalent of
a benefit that is payable in the Normal Form, commencing on the
Participant's Normal Retirement Date (or such earlier date on which the
Participant's Retirement Program benefit is no longer subject to
actuarial reduction for early payment), where the amount of such
benefit is equal to the excess, if any, of (i) over (ii):
(i) The amount of benefit that would be payable to
the Participant in the Normal Form under the Retirement
Program, commencing on the Participant's Normal Retirement
Date (or such earlier date on which the Participant's
Retirement Program benefit is no longer subject to actuarial
reduction for early payment), if the limitations of Code
sections 401(a)(17) and 415 did not apply to the calculation
and amount of such benefit.
(ii) The amount of benefit that would be payable to
the Participant in the Normal Form under the Retirement
Program, commencing on the Participant's Normal Retirement
Date (or such earlier date on which the Participant's
Retirement Program benefit is no longer subject to actuarial
reduction for early payment), taking into account the
applicable limitations of Code sections 401(a)(17) and 415.
In determining the amount of benefit that would be payable under the Retirement
Program for purposes of (i) and (ii), it shall be conclusively presumed, in the
case of any participant who is married on the applicable commencement date under
Section 2.4, that the Pre-Retirement Death Benefit coverage available under the
Retirement Program has been in effect during the period beginning on the
applicable commencement date under Section 2.4 and ending on the
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participant's Normal Retirement Date or such earlier date on which the
Participant's Retirement Program benefit is no longer subject to reduction for
early payment). No adjustment shall be made to a Participant's Excess Benefit
merely because a participant elects to receive his Retirement Program benefits
in a form other than the Normal Form.
(c) An appropriate adjustment shall be made to a Participant's
Excess Benefit to the extent that a cost-of-living adjustment under the
Retirement Program cannot be paid because of the limitations of Code
section 415.
In addition, while benefits may be provided under the terms of
this Supplemental Program and the Retirement Program for prior service
with other Plans, it is the intent of this Supplement Program to avoid
duplication of benefits provided under this Supplemental Program (and
the related Retirement Program) and the supplemental pension programs
(and related pension programs) of such Plans with respect to such prior
service. The term "supplemental pension program" refers to a program or
individual arrangement (or that portion of a program or individual
arrangement) that is designed to provide employees of a Plan with
benefits that cannot be paid under the Plan's tax-qualified pension
program because of the limitations of sections 401(a)(17) and 415 of
the Internal Revenue Code. An excess Benefit payable under the
Supplemental Program shall be offset by the amount of employer-provided
benefits earned under the supplemental pension program of a prior Plan
for a period of service for which credit is given under this
Supplemental Program and the Retirement Program. Such offset shall be
applied by making the following adjustment in the calculation of the
amount specified in subsection (a)(i) or (b)(i), as the case may be.
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In determining such amount, the employer-provided benefit payable under
the other Plan's supplemental pension program shall be treated as being
payable under the other Plan's tax-qualified pension program for
purposes of the Retirement Program's nonduplication provision. The
Administrator shall make such other adjustments as the Administrator in
its sole discretion shall determine to be necessary or appropriate to
carry out the intent of this nonduplication provision.
(d) Payment of the Excess Benefit shall commence pursuant
to Section 2.4, and in the form specified in Section 2.5.
2.3 Amount of Death Benefit. The amount of any Death Benefit
payable under the Program shall be determined as follows:
(a) If a Participant dies before his benefit under the
Supplemental Program has commenced, but after his benefit under the
Retirement Program has commenced, the Death Benefit payable under the
Supplemental Program shall equal the survivor portion of the Excess
Benefit [payable in the normal form prescribed in Section 2.5(a)] to
which the surviving spouse of the Participant would have been entitled
under Sections 2.2 and 2.5 if the Participant had attained age 65,
begun to receive his Excess Benefit [payable in the normal form
prescribed in Section 2.5(a)], and died immediately thereafter.
(b) If a Participant dies before his benefits under the
Supplemental Program and the Retirement Program have commenced, the
Death Benefit payable to his surviving spouse hereunder shall be
determined under paragraph (i) or (ii), depending on whether the
Pre-Retirement Death Benefit payable under the Retirement Program
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commences after the commencement of the Death Benefit payable under the
Supplemental Program.
(i) If the Pre-Retirement Death Benefit payable under
the Retirement Program commences either before or at the same
time as the commencement of the Death Benefit payable
hereunder, the amount payable to the Participant's surviving
spouse as a Death Benefit hereunder shall be the Actuarial
Equivalent of a benefit that is payable in the same manner and
at the same time as the spouse's Pre-Retirement Death Benefit
under the Retirement Program and equal to the excess, if any,
of the Pre-Retirement Death Benefit that would be payable
under the Retirement Program if the limitations of Code
sections 401(a)(17) and 415 did not apply to the Retirement
Program, over the Pre-Retirement Death Benefit actually
payable under the Retirement Program.
(ii) If the Pre-Retirement Death Benefit payable
under the Retirement Program commences after the commencement
of the Death Benefit payable hereunder, the amount payable to
the Participant's surviving spouse as a Death Benefit
hereunder shall be the Actuarial Equivalent of a benefit that
is payable for the lifetime of the surviving spouse,
commencing on the Participant's Normal Retirement Date (or
such earlier date on which the PreRetirement Death Benefit
payable under the Retirement Program is no longer subject to
actuarial reduction for early payment), where the amount of
such benefit is equal to the excess, if any of (A) over (B):
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(A) The Pre-Retirement Death Benefit that
would be payable to the surviving spouse under the
Retirement Program, commencing on the Participant's
Normal Retirement Date (or such earlier date on which
such benefit is no longer subject to actuarial
reduction for early payment), if the limitations of
Code sections 401(a)(17) and 415 did not apply to the
Retirement Program.
(B) The Pre-Retirement Death Benefit that
would be payable to the surviving spouse under the
Retirement Program, commencing on the Participant's
Normal Retirement Date (or such earlier date on which
such benefit is no longer subject to actuarial
reduction for early payment), taking into the account
the applicable limitations of Code sections
401(a)(17) and 415.
A Death Benefit payable under the Supplemental Program shall
be offset by the amount of employer-provided benefit payable under a
supplemental pension program (as defined in Section 2.2(c) of the
Supplemental Program) of a Plan for a period of service of which credit
is given under this Supplemental Program and the Retirement Program.
Such offset shall be applied by making the following adjustment in the
calculation of: (I) the amount in subsection (b)(i) of the
Pre-Retirement Death Benefit that would be payable under the Retirement
Program if the limitations of Code sections 401(a)(17) and 415 did not
apply; and (II) the amount payable in subsection (b)(ii)(A). In
determining such amount, the employer-provided benefit payable under
the supplemental pension program (immediately prior to the
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Participant's death) shall be treated as being payable under the other
Plan's tax-qualified pension program for purposes of the Retirement
Program's nonduplication provision. This offset shall apply whether or
not the Participant has waived the relevant death benefit under the
other Plan's supplemental pension program. The Administrator shall make
such other adjustments as the Administrator in its sole discretion
shall determine to be necessary or appropriate to carry out the intent
of this nonduplication provision.
If the Participant has waived the Pre-Retirement Death Benefit
under the Retirement Program, no Death Benefit shall be payable under
this subsection (b).
(c) If a Participant dies after his benefit under the
Supplement Program has commenced, no Death Benefit shall be payable
under the Supplemental Program. In such case benefits, if any, shall be
payable in accordance with the form of payment for the Participant's
Excess Benefit under Section 2.5(a) or (b), as applicable.
2.4 Commencement. In the case of a Participant who terminates Employment
with the Employer on or after attaining age 55, his Excess Benefit shall
commence as of the first day of the first month coincident with or next
following the date the Participant terminates Employment with the Employer. In
the case of a Participant who terminates Employment with the Employer prior to
attaining age 55, his Excess Benefit shall commence as of the date the
Participant's Vested Benefit under the Retirement Program is first payable
without actuarial reduction for early commencement.
In the case of a Participant whose Employment with the Employer
terminates (for any reason, including death) on or after attaining age 55, any
Death Benefit payable under this
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Supplemental program shall commence as of the first day of the first month
coincident with or next following the date on which the Participant dies. In the
case of a Participant whose Employment with the Employer terminates (for any
reason, including death) prior to attaining age 55, any Death Benefit payable
under this Supplemental Program shall commence as of the first day of the first
month coincident with or next following the later of (i) the date on which the
Participant dies, or (ii) the date on which the Participant would have attained
age 65 (or such earlier age at which his Retirement Program benefit would no
longer be subject to actuarial reduction for early payment).
2.5 Form of Benefit. The Excess Benefit shall be payable in the form
set out in subsection (a) below unless the Participant elects payment in a
permitted Optional Form as described in subsection (b). In all instances, the
Excess Benefit payable under this Section 2.5 shall be the Actuarial Equivalent
of the Excess Benefit determined under Section 2.2. The Death Benefit shall be
payable as provided in subsection (c).
The election of an Optional Form of payment for the Excess Benefit is
subject to the approval of the Employer, and must be submitted to the Employer
for its consideration in the calendar year prior to the year in which the Excess
Benefit commences, at least 6 months prior to such date. If the Employer does
not approve the election within 60 days, it shall be deemed denied. If the
Employer does approve the election, such election shall be irrevocable;
provided, however, that if the Participant dies before the Excess Benefit
commences, no Excess Benefit shall be payable hereunder and, in lieu thereof, to
the extent the requirements of Section 2.3 are satisfied, a Death Benefit shall
be payable. The Participant's election of an Optional Form (and designation of a
Beneficiary, if applicable) shall be made in the manner
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prescribed by the Administrator, and shall be subject to spousal consent rules
comparable to those under the Retirement Program.
(a) If a Participant is married on the date the Excess Benefit
commences, the Excess Benefit shall be paid as a joint and 50% survivor
annuity and the survivor beneficiary shall be the person married to the
Participant on the date the Excess Benefit commences, if that person
survives the Participant. If the Participant is not married on the date
the Excess Benefit commences, the Excess Benefit shall be paid as an
annuity for the Participant's life only.
(b) The Option Forms of payment under the Supplemental
Program are as follows:
(i) Life Benefit. This form of benefit is
payable monthly to the Participant for life.
(ii) Life Benefit with 120 or 240 Payments
Guaranteed. This form of benefit is payable monthly to the
Participant for life with the first 120 or 240 monthly
payments guaranteed, as elected by the Participant. Any
guaranteed payments due after the death of the Participant
shall be payable to his Beneficiary, if any, who survives the
Participant, or if there is no surviving Beneficiary, the
commuted value of any remaining guaranteed payment shall be
payable to the estate of said Participant. Such commuted value
shall be determined by the Administrator on the basis of an
interest rate described in Section 5.03(b)(2) of the
Retirement Program.
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(iii) Joint and Contingent Benefit. This optional
benefit is payable monthly to the Participant for life and a
percentage (50%, 66-2/3% or 100% of such amount, as elected by
the Participant, shall continue after his death to his
surviving Beneficiary for life.
(c) Death Benefits shall be payable for the life of the
Participant's spouse only.
2.6 Suspension of Benefits. If a Participant's benefit under the
Retirement Program is suspended after such benefit has commenced (or would have
been suspended if the Participant had elected to receive his benefit early under
the Retirement Program), then the Participant's Excess Benefit shall be
suspended if it has already commenced. The Participant's Excess Benefit shall
commence again upon recommencement of the Participant's Retirement Program
benefit (or upon what would have been recommencement if, as above, the
Participant had elected to receive his benefit early under the Retirement
Program), and shall be redetermined as of such recommencement.
2.7 Payment of Benefits. Benefits payable under the Supplemental
Program shall be paid directly to the Participant, or to the Participant's
surviving spouse or Beneficiary, as applicable, from the general assets of the
Employer. Nothing contained herein shall be deemed to create a trust of any kind
or create any fiduciary relationship. To the extent that any person acquires a
right to receive payments from the Employer under this Supplemental Program,
such right shall be no greater than the right of any unsecured general creditor
of the Employer. In the event that the Employer establishes an advance accrual
reserve on its books against its future liability under the Supplemental
Program, such reserve shall not constitute
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an asset of the Supplement Program but shall at all times remain part of the
general assets of the Employer subject to the claims of the Employer's
creditors.
2.8 No Other Benefit. Benefits shall be paid to a Participant or
his surviving spouse or Beneficiary only to the extent provided in Article II.
2.9 Forfeiture of Benefit. Notwithstanding anything herein to the
contrary, any amounts to which a Participant or his surviving spouse or his
Beneficiary would be entitled under this Supplemental Program shall be forfeited
if (i) the Participant is discharged from Employment with the Employer for acts
which, in the sole judgment of the Administrator, constitute embezzlement of
funds, or (ii) the Participant's Employment terminates by dismissal for cause
and the circumstances surrounding such dismissal are such that the
Administrator, in its sole discretion, determines that forfeiture of the benefit
otherwise payable under the Supplemental Program is warranted.
ARTICLE III
ADMINISTRATION
3.1 Administrator. The Senior Vice President, Corporate Services
shall be the Administrator of the Supplemental Program.
3.2 Duties of the Administrator. The Administrator shall
administer the Supplement Program in accordance with its terms and purposes and
shall have authority to interpret the Supplement Program, to make any necessary
rules and regulations, and to determine benefits under the Supplemental Program.
The Administrator shall also be responsible for complying with statutory
reporting and disclosure requirements. The
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Administrator shall not be subject to liability with respect to the
administration of the Supplemental Program.
3.3 Claims Procedures/Decision of Administrator. In general,
distributions under this Supplemental Program are automatic and no claim for
benefits need to be filed. However, a Participant (or the Participant's
surviving spouse) may submit a claim for benefits under this Plan in writing to
the Administrator. The following procedures shall apply in such case:
(a) "If such claim for benefits is wholly or partially denied,
the Administrator shall notify the claimant of the denial of the claim
within a reasonable period of time, but no later than 90 days after
receipt of the written claim, unless special circumstances require an
extension of time for processing the claim. In such event, written
notice of the extension shall be furnished to the claimant prior to the
end of the 90-day period and shall indicate the special circumstances
requiring the extension and the date by which a final decision is
expected. In no event shall the extension period exceed 90 days from
the end of the initial 90-day period. The notice of denial: (i) shall
be in writing; (ii) shall be written in a manner calculated to be
understood by the claimant; and (iii) shall contain (A) the specific
reason or reasons for denial of the claim; (B) a specific reference to
the pertinent Supplemental Program provisions upon which the denial is
based; (C) a description of any additional material or information
necessary for the claimant to perfect the claim; and (D) an explanation
of the Supplement Program's claims review procedure."
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(b) "Within 60 days of the receipt by the claimant of the
written notice of denial of the claim, or if the claim has not been
granted within the applicable time period, the claimant may file a
written request with the Administrator that it conduct a full and fair
review of the denial of the claimant's claim for benefits. In
connection with the claimant's appeal of the denial of his benefit, the
claimant may review pertinent documents and may submit issues and
comments in writing."
(c) "The Administrator shall deliver to the claimant a written
decision on the claim promptly, but not later than 60 days after the
receipt of the claimant's request for review, except that if there are
special circumstances which require an extension of time for
processing, the 60-day period shall be extended to a maximum of 120
days, in which case written notice of the extension shall be furnished
to the claimant prior to the end of the 60-day period. The
Administrator's decision shall: (i) be written in a manner calculated
to be understood by the claimant, (ii) include specific reasons for the
decision; and (iii) contain specific references to the pertinent
Supplemental Program provisions upon which the decision is based. If a
written decision on review is not furnished to the claimant within the
applicable time period, the claim shall be deemed denied on review."
ARTICLE IV
AMENDMENT AND TERMINATION
4.1 Amendment and Termination of the Program. Although the
Employer intends to maintain the Supplemental Program for as long as necessary,
the Employer reserves the
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right to amend or terminate the Supplemental Program at any time for whatever
purpose it may deem appropriate.
4.2 Contractual Obligation. Notwithstanding Section 4.1, the Employer
hereby makes a contractual commitment to pay the benefits accrued under the
Supplemental Program as of the date of amendment or termination, but subject to
the terms of the Supplemental Program (including Section 2.9).
ARTICLE V
MISCELLANEOUS
5.1 Employment Rights. Nothing contained in the Supplemental Program
shall be construed as a contract of employment between the Employer and the
Participant, or as a right of any employee to be continued in the employment of
the Employer, or as a limitation of the right of the Employer to discharge any
of its employees, with or without cause.
5.2 Assignment. The benefits payable under the Supplemental
Program may not be assigned or alienated.
5.3 Applicable Law. The Supplemental Program shall be governed by
the laws of the Commonwealth of Virginia.
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RESOLUTION OF THE BOARD OF DIRECTORS OF
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
April 27, 1994
WHEREAS, on December 13, 1989, Blue Cross and Blue Shield of Virginia
("the Company") adopted a Supplemental Retirement Program for Certain Employees
of Blue Cross and Blue Shield of Virginia (the "Supplemental Retirement
Program");
WHEREAS, the Chief Executive Officer of the Company does not currently
participate in the Supplement Retirement Program;
WHEREAS, the Company desires to amend the Supplemental Retirement
Program to provide that the Chief Executive Officer will be a participant in the
Program;
NOW THEREFORE, BE IT RESOLVED that the Supplemental Retirement Program
is hereby amended to delete from Paragraph 1.8 the sentence that provides:
"The term 'participant' shall not include the Chief Executive
Officer of Blue Cross and Blue Shield of Virginia if such
Officer and the Employer have made a separate agreement to
restore the excess retirement program benefits."
AND FURTHER RESOLVED that a true and correct copy of the Supplemental
Retirement Program as so amended is attached hereto.
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AMENDMENT TO THE SUPPLEMENTAL RETIREMENT PROGRAM FOR
CERTAIN EMPLOYEES OF BLUE CROSS AND BLUE SHIELD OF VIRGINIA
WHEREAS, Blue Cross and Blue Shield of Virginia (the "Employer") maintains a
Supplemental Retirement Program for Certain Employees of the Employer and its
corporate affiliates (the Supplemental Program), and
WHEREAS, pursuant to Section 4.1 of the Supplemental Program, the Employer as
reserved the right to amend the Supplemental Program,
NOW, THEREFORE, effective January 1, 1996, the Employer hereby amends the
Supplemental Program in the following respects:
1. Form of Benefit. The following additional Optional Form of payment
shall be added at the end of paragraph 2.5(b):
(iv) Lump Sum. This form of payment shall be a single sum payment.
BLUE CROSS AND
BLUE SHIELD OF VIRGINIA
By: ___________________
Authorized Officer
_________________ _______________________
Attest Title
_________________ ______________________
Title Date
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AMENDMENT TO THE SUPPLEMENTAL RETIREMENT PROGRAM
FOR CERTAIN EMPLOYEES OF
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
WHEREAS, Blue Cross and Blue Shield of Virginia (the "Employer") maintains a
Supplemental Retirement Program for Certain Employees of the Employer and its
corporate affiliates (the Supplemental Program), and
WHEREAS, pursuant to Section 4.1 of the Supplemental Program, the Employer has
reserved the right to amend the Supplemental Program,
NOW, THEREFORE, effective May 1, 1996, the Employer hereby amends the
Supplemental Program in the following respects:
2.4 Commencement. The current section 2.4 shall be deleted in its entirety
and the following shall be substituted:
(a) Excess Benefit. In the case of a Participant who terminates
the Employment with the Employer on or after attaining age 55,
his Excess Benefit shall commence as of the first day of the
first month coincident with or next following the date the
Participant terminates Employment with the Employer. In the
case of a Participant who terminates Employment with the
Employer prior to attaining age 55, his Excess Benefit shall
commence as of the date the Participant's Vested Benefit under
the Retirement Program is first payable without actuarial
reduction for early commencement. Notwithstanding the
foregoing, such terminated Participant may elect an earlier
commencement date on a form prescribed by the Administrator
and filed with the Administrator; provided that such date is
subsequent to such termination and subsequent to the date of
which the Participant's benefit under the Retirement Program
commences and that such form is filed (i) in the calendar year
prior to the year in which the Participant's Excess Benefit is
to commence and (ii) at least six months prior to such
commencement date.
(b) Death Benefit. In the case of a Participant whose Employment
with the Employer terminates (for any reason, including death)
on or after attaining age 55, any Death Benefit payable under
this Supplemental Program shall commence as of the first day
of the first month coincident with or next following the date
on which the Participant dies. In the case of a participant
whose Employment with the Employer terminates (for any reason,
including death) prior to attaining age 55, any Death Benefit
payable under this Supplemental Program shall commence as of
the first day of the first month coincident with or next
following the later of (i) the date on which the Participant
dies, or (ii) the date on which the Participant would have
attained age 65 (or such earlier age at which his Retirement
Program benefit would no longer be subject to actuarial
reduction for early payment). Notwithstanding
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the foregoing, a surviving spouse of a terminated Participant
who is entitled to a Death Benefit may elect an earlier
commencement date on a form prescribed by the Administrator
and filed with the Administrator; provided that such date is
subsequent to the date as of which the Death Benefit under the
Retirement Program commences and that such form is filed (i)
in the calendar year prior to the year in which the Death
Benefit is to commence and (ii) at least six months prior to
such commencement date.
2.5 Form of Benefit. The following paragraph shall be added at the end of
section 2.5:
(d) Small Amounts. Notwithstanding any provision of the
Supplemental Program to the contrary, if the Administrator can
determine that, as of the date of termination of the
Participant's Employment with the Employer, the Actuarial
Equivalent of the final Excess Benefit or Death Benefit is
$3,500 or less, then such Excess Benefit or Death Benefit
shall be paid following such termination in a lump sum to the
Participant or surviving spouse entitled thereto.
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
By: _____________________________________
_________________ _________________________________________
Attest Senior Vice President, Corporate Services
__________________________ _________________________________________
Manager, Employee Benefits Date
SALARY DEFERRAL AGREEMENT
This SALARY DEFERRAL AGREEMENT is made as of the 13th day of December,
1989, between Blue Cross and Blue Shield of Virginia (the "Company") and Norwood
H. Davis, Jr. ("Executive").
RECITALS
Executive has been an employee of the Company for many years and has
accumulated valuable experience and knowledge about the management and affairs
of the Company. The Company wishes to induce Executive to continue his associate
with the Company by providing him with this Salary Deferral Agreement.
NOW, THEREFORE, in consideration of the premises, the parties agree as
follows:
1. Deferral Elections. In December of each year during the term
of this Agreement, Executive may elect to defer a portion of the salary that he
will earn from the Company for the following year by filing with the Secretary
of the Company a Notice of Salary Deferral insubstantially the form attached
hereto as Exhibit A. The amount deferred for any year shall be deferred at the
rate of 1/12th each moth during the year of deferral. The maximum amount
deferred for any year shall not exceed 50% of the Executive's salary for such
year.
2. Investment of Deferred Amounts. All amounts deferred by
Executive hereunder shall be credited by the Company to a bookkeeping account
designated as Executive's Deferred Salary Account (the "Account"). All amounts
credited to the Account shall be invested by the Company in investments selected
by James W. Copley, Jr., Vice President, Consolidated
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Investment Corporation, or by such other investment manager as the Company may
designate from time to time (the "Investment Manager"). Any earnings (or losses)
on such investment shall be credited (or debited) to the Account.
The Company, acting through the Investment Manager, shall have sole
discretion to selection investment under this Agreement. Annually, the
Investment Manger will report the investment made in the Account to the Chairman
of the Executive Committee and will confer with him about the investment policy
for the Account. The Company and the Investment Manager intend to invest the
Account aggressively. Executive shall have no right to have any particular
investment made in the Account and shall bear all risk of gain or loss with
respect to the investments made in the Account. Neither the Company nor the
Investment Manager shall have any liability to Executive for losses sustained in
the Account.
3. Expenses and Taxes. All fees, commissions, and expenses incurred by
the Company as the result of transactions made in the Account shall be paid from
assets held in the Account to the extent such assets are available, but if such
assets are insufficient to pay such sums, such sums shall be paid by the Company
from its other funds. Income taxes incurred by the Company as the result of
transactions made int he Account shall be paid by the Company and shall not be
charged to the Account.
4. Distribution of Account. The Distribution Date for the Account shall
be the later of (i) the date on which Executive obtains the age of 55 or (ii)
the date on which Executive's employment with the Company terminates. The
Company will, at its option, either (i) transfer all assets in the Account to
the Executive on the Distribution Date, or (ii) transfer the assets in the
Account to Executive in five (5) approximately equal annual installments, the
first such installment
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being transferred to Executive on the Distribution Date and the remaining
installments being transferred to Executive on each of the first four
anniversaries of the Distribution Date. Notwithstanding that the Company may
have initially elected the distribution option referred to in clause (ii) of the
preceding sentence, the Company may, at its option, on any anniversary of the
Distribution Date elect to transfer all of the remaining assets in the Account
to Executive.
In lieu of distributing the assets in the Account in kind, the Company
may, at its option, sell all or any part of the assets in the Account and
distribute the sales proceeds, net of applicable selling expenses, to Executive.
If any asset distributed to Executive in kind does not have a readily
ascertainable fair market value, the Company may at its expense have such asset
appraised by an independent appraiser, and the Company and Executive agree to be
bound by such appraisal for all purposes under this Agreement (including federal
and state income tax filings).
5. Designation of Beneficiary. Executive shall have the right to
designate one or more beneficiaries to receive distributions under Paragraph 4
if Executive dies before all of the distributions under Paragraph 4 have been
made. Any such designation shall be made by written instrument signed by
Executive and delivered to the Secretary of the Company. If Executive dies
before any or all of the distributions under Paragraph 4 have been made, then as
soon as practical following Executive's death, all assets remaining in the
Account shall be distributed to his designated beneficiary, or, if no
beneficiary has been designated, to his estate.
6. Term of Agreement. If Executive remains in the employ of the
Company, Executive shall have the right to make deferrals hereunder for each of
the years 1990, 1991, 1992, 1993, 1994 and 1995 by filing with the Secretary of
the Company a Notice of Salary Deferral in the December preceding each such
year.
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7. Miscellaneous.
a. This Agreement shall not give Executive any right to
continue as an employee of the Company.
b. Title to and beneficial ownership of all assets in
the Account shall remain with the Company, and Executive shall have no property
interest in any such assets.
c. Executive shall have no right to sell, assign, transfer,
alienate, pledge, or encumber any right under this Agreement, and no right under
this Agreement shall be subject to claims by Executive's creditors. This
Agreement shall not create a trust or asset segregation for the benefit of
Executive or create any form of fiduciary relationship between the Company and
Executive. Executive's only right against the Company with respect to this
Agreement is that of a general creditor.
d. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective heirs, representatives, and
successors, including, without limitation, any person acquiring directly or
indirectly all or substantially all of the assets of the Company, whether by
merger, consolidation, sale, or otherwise, but neither this Agreement nor any
right hereunder may be otherwise assigned or transferred by either party hereto.
e. This Agreement is an unfunded plan established for the
purpose of providing deferred compensation for a single management employee and
is intended to be exempt from the coverage, vesting, and funding requirements of
the Employee Retirement Income Security Act of 1974, as amended.
f. This Agreement shall be governed by and construed and
enforced in accordance with the laws of Virginia.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
BLUE CROSS AND BLUE SHIELD
OF VIRGINIA
By: /s/ David W. Branch
Title: Vice Chairman of
the Board
/s/ Norwood H. Davis, Jr.
Norwood H. Davis, Jr.
5
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EXHIBIT A
December ___, 19__
Secretary
Blue Cross and Blue Shield of Virginia
2015 Staples Mill Road
Post Office Box 27401
Richmond, Virginia 23279
Notice of Salary Deferral
Dear Sir:
Pursuant to the Salary Deferral Agreement dated December ___, 1989,
between the Company and me, this is to notify you that I elect to defer
$_____________ of the salary that I would otherwise earn from the Company during
the calendar year 199_ (the "Deferred Amount"). I understand that the Deferred
Amount will be deducted from my salary for next year at the rate of 1/12th each
month during the year.
Very truly yours,
Norwood H. Davis, Jr.
NORWOOD H. DAVIS, JR.
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
(As amended and restated March 13, 1996)
- -----------------------------------------------------------------------------
This Agreement is made as of the 13th day of March, 1996,
between BLUE CROSS AND BLUE SHIELD OF VIRGINIA, a Virginia nonstock corporation
(the "Company"), and NORWOOD H. DAVIS, JR., of Richmond, Virginia ("Executive").
R E C I T A L S
Executive has been employed by the Company or its affiliates
since April 1, 1968. Since April 1, 1981, Executive has served as Chief
Executive Officer of the Company or of its affiliate, Consolidated Healthcare,
Inc. The Company and Executive are parties to an agreement dated November 1,
1993 (the "Prior Agreement"). The parties desire to amend and restate the Prior
Agreement in the manner herein set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual promises herein contained, the parties agree as follows:
ARTICLE I
EMPLOYMENT
1.1 Employment. The Company hereby employs Executive as
Chairman of the Board and Chief Executive Officer of the Company. Executive
shall have the powers, duties, and responsibilities that are customary to the
position of Chief Executive Officer and shall preside at all meetings of the
Board of Directors of the Company. Subject to approval by the Board, Executive
shall select the officers of the Company and each of its affiliates. Executive
shall devote his full business time and efforts to the business and affairs of
the Company and its affiliates; provided, however, that this provision shall not
preclude Executive from serving as a director of any other corporation or other
organization involving no conflict of interest with the interests of the
Company. All such directorships shall be disclosed to and reviewed by
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the Executive Committee of the Company.
1.2 At Will Employment. Executive's employment hereunder
is at will. Executive may resign at any time, and the Company may discharge
Executive at any time, with or without cause.
ARTICLE II
COMPENSATION AND BENEFITS
2.1 Base Salary. Executive's base salary for 1995 has
been determined by the Board of Directors upon recommendation from the Chairmen
of the Executive and Human Resources Committees.
2.2 Incentive Compensation. Executive shall also be
eligible for an award of incentive compensation each year.
2.3 Annual Reviews. Effective each January 1 during the term
of this Agreement, the Chairmen of the Executive and Human Resources,
Compensation and Employee Benefits Committees will review Executive's
performance as Chief Executive Officer and will recommend to the Board (i) such
annual increase in base salary as may be appropriate and in accordance with the
Company's regular salary administration program and (ii) such award of incentive
compensation for the prior year as may be appropriate. The Board will determine
such annual increase in base salary and such award of incentive compensation.
2.4 Participation in Employee Benefit Plans. While employed by
the Company, Executive shall be entitled to participate in the Company's
Non-Contributory Retirement Program, the Employees' Thrift Plan, the
split-dollar life insurance program, the group health insurance program, the
group term life insurance program, and the disability insurance program. In
addition, the Company shall provide to Executive an automobile and gasoline
allowance, tax and financial planning services, and reimbursement for club dues
and other business expenses.
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ARTICLE III
DISABILITY
3.1 Supplemental Disability Payment. If Executive becomes
disabled while employed by the Company and is entitled to receive benefits under
the Company's Long-Term Disability Program, then the Company will pay to
Executive a Monthly Supplemental Disability Benefit (as hereinafter defined) for
so long as Executive is entitled to receive disability payments under the
Company's Long-Term Disability Program (or under any similar disability program
maintained by the Company). The amount of the Monthly Supplemental Disability
Benefit shall be equal to the difference between (i) one-twelfth (1/12) of sixty
percent (60%) of Executive's annual base salary for the year in which Executive
becomes disabled and (ii) the amount of the monthly disability benefit payable
to Executive under the Company's Long-Term Disability Program.
ARTICLE IV
SEVERANCE PAYMENT AND EMPLOYMENT BENEFIT TRUST
4.1 Severance Payment.
(a) Upon a Termination Event, as defined in Section
4.1(b) below, the Company will pay the Severance Payment, as defined in Section
4.1(c) below, to Executive.
(b) The term Termination Event shall mean the
following: (i) the termination of Executive's employment with the Company for
any reason other than by reason of Executive's resignation; and (ii) the
termination of Executive's employment with the Company by reason of Executive's
resignation but only if Executive shall have given the Company at least six (6)
months prior written notice of such resignation. The term Termination Event
shall not include the termination of Executive's employment with the Company by
reason of Executive's resignation if Executive shall not have given the Company
at least six (6) months prior written notice of such resignation.
(c) The term Severance Payment shall mean a payment
equal to three times the Annual Compensation of Executive as defined in Section
4.1(d) below.
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(d) The term Annual Compensation of Executive shall
mean the highest amount of cash compensation (including, without limitation,
salary and bonus) received by Executive with respect to one of the three
calendar years immediately preceding the Termination Event. The Annual
Compensation of Executive for a calendar year shall include (i) salary payments
paid to Executive during the calendar year in question, and (ii) bonus or other
incentive compensation payments which are based upon performance during the
calendar year in question, but which are paid after the calendar year in
question.
4.2 Establishment of Employment Benefit Trust. The Company has
established an Employment Benefit Trust (the "Trust") for the benefit of
Executive and other key executives of the Company. The form of Trust Agreement
is attached as Exhibit A. In order to provide benefits to Executive, the Company
has transferred to the Trust the assets and amounts specified in paragraph 4.3
and has instructed the trustee of the Trust to maintain such assets and amounts
in a separate account for the benefit of Executive (the "Account").
4.3 Assets and Amounts Transferred to the Trust.
(a) Prior to the execution of the Prior Agreement,
the Company transferred to the Trust all of the assets held in the account
established for Executive under the Agreement between the Company and Executive
dated December 12, 1990, and certain additional amounts that were authorized by
the Board of Directors on December 9, 1992, and were transferred to the Trust on
or about June 22, 1993.
(b) The strategy of the Company is to expand by
acquiring, merging, or affiliating with other Blue Cross and Blue Shield plans,
insurance companies, and managed care companies. If the Executive Committee or
the Board of Directors determines that Executive's duties have expanded because
of such acquisitions, mergers or affiliations or for other reasons, then the
Executive Committee or the Board of Directors may make additional contributions
to the Trust in recognition of such expanded duties.
4.4 Investment of Amounts Transferred to the Trust. The
Company shall from time to time appoint an investment manager (the "Investment
Manager") to invest and manage the assets of the Trust. The initial Investment
Manager will be James W. Copley, Jr., President, Consolidated Investment
Corporation. The Company, acting through the Investment Manager, shall have sole
discretion to select investments for the Trust. Annually, the Investment Manager
will report the investments made in the Trust
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to the Chairman of the Executive Committee and will confer with him about the
investment policy for the Trust. Executive shall have no right to have any
particular investment made in the Trust. The Company shall bear all risk of gain
or loss with respect to the investments made in the Trust. Such gains or losses
shall not affect the amount of the Severance Payment.
4.5 Fees, Expenses, and Taxes. The Company shall pay the fees
and expenses of the Investment Manager for its services and the fees and
expenses of the trustee of the Trust for its services. All fees, commissions,
and expenses resulting from transactions made in the Trust shall be paid from
assets held in the Trust to the extent such assets are available, but if such
assets are insufficient to pay such sums, such sums shall be paid by the Company
from its other funds. Income taxes incurred by the Company as the result of
transactions made in the Trust shall be paid by the Company and shall not be
charged to the Trust.
4.6 Distribution of the Assets in the Trust.
(a) Upon the happening of a Termination Event, the
trustee of the Trust may either (i) transfer assets held in the Trust for
Executive's Benefit to Executive in kind to the extent of the Severance Payment;
or (ii) sell all or any part of such assets and distribute the sales proceeds to
Executive to the extent of the Severance Payment. If any asset distributed to
Executive in kind does not have a readily ascertainable fair market value, the
Company may at its expense have such asset appraised by an independent
appraiser, and the Company and Executive agree to be bound by such appraisal for
all purposes under this Agreement (including federal and state income tax
filings). To the extent the value of such assets transferred to Executive in
kind or such proceeds distributed to Executive (as the case may be) is
insufficient to fund the Severance Payment, the Company shall pay the balance of
the Severance Payment to Executive in immediately available funds. To the extent
that the value of such assets or such proceeds distributed to Executive or such
proceeds (as the case may be) exceeds the Severance Payment, such assets or such
proceeds (as the case may be) shall be distributed to the Company. If the
Termination Event is the result of the death of Executive, then the distribution
under this paragraph shall be made to Executive's personal representative.
(b) In consideration of the Severance Payment to
Executive, Executive agrees that he will not, prior to the expiration of three
(3) years following the termination of his employment, become an officer,
director, or employee of, or consultant to, or 10% or more owner of, any entity
that competes with the Company in any business in which the Company is engaged
as of the date of the termination of
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<PAGE>
Executive's employment; provided, however, that if the Company terminates
Executive's employment without cause, then this covenant not to compete shall
not be applicable. For purposes of this Agreement, termination without cause
means termination for any reason other than continued neglect by Executive of
his duties hereunder or willful misconduct by Executive in the performance of
his duties hereunder. Executive agrees that in the event of a breach by
Executive of this covenant not to compete, the Company's remedies at law will be
inadequate and that the Company will be entitled to appropriate equitable
relief, including an injunction restraining such breach. If Executive so
requests, the Executive Committee is authorized to determine, by written
communication to Executive, that a particular activity that Executive proposes
to engage in does not constitute competition with the Company within the meaning
of this paragraph and such determination shall be conclusive and binding on the
parties to this Agreement.
4.7 Beneficial Ownership. Unless and until the assets held in
the Account are distributed to Executive pursuant to Section 4.6(a) of this
Agreement, beneficial ownership of all assets in the Account shall remain with
the Company, and Executive shall have no property interest in any such assets.
ARTICLE V
RETIREMENT AND SUPPLEMENTAL RETIREMENT BENEFITS
5.1 Normal Retirement. If Executive's employment with
the Company has not sooner terminated, then he shall retire as of the end of the
month in which he attains the age of 61 (that is to say, on March 31, 2001).
5.2 Early Retirement. Executive may at his option elect early
retirement effective as of the end of any month following the date on which he
attains the age of 56 (that is to say, beginning March 31, 1996) by giving the
Company written notice of such election at least one hundred twenty (120) days
before the effective date of such retirement.
5.3 Participation in Existing Retirement Programs. Executive
is a participant in the Company's Non-Contributory Retirement Program (herein
referred to as the "Retirement Program") and in the Company's Supplemental
Retirement Program for Certain Employees (herein referred to as the
"Supplemental Retirement Program").
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5.4 Enhanced Supplemental Retirement Benefit at Normal
Retirement. If Executive's continuous employment with the Company continues
until March 10, 2001, then in addition to the benefit that Executive receives
under the Supplemental Retirement Program, the Company shall pay to Executive a
nonqualified unfunded supplemental retirement benefit (the "Enhanced
Supplemental Retirement Benefit") in the amount described below. The amount of
the Enhanced Supplemental Retirement Benefit shall be equal to the difference
between (i) the retirement benefit that Executive would have received under the
Retirement Program if (a) earnings used in computing benefits under the
Retirement Program included nonqualified deferred compensation in the year in
which the amounts were deferred, (b) the limitations of Sections 401(a)(17) and
415 of the Internal Revenue Code did not apply to the calculation and amount of
such benefit, (c) Executive had remained in the employ of the Company and
received credited service until March 31, 2005, and (d) Executive had received
earnings from the Company from the date of termination of employment until March
31, 2005 at an annual rate equal to the Annual Compensation of Executive as
defined in Section 4.1(d) above, and (ii) the sum of the retirement benefits
that Executive actually receives under the Retirement Program and under the
Supplemental Retirement Program.
5.5 Reduced Enhanced Supplemental Retirement Benefit at Early
Retirement. If Executive's continuous employment with the Company terminates at
any time on or after March 10, 1996 but before March 10, 2001, then the Company
shall pay Executive that percentage of the Enhanced Supple mental Retirement
Benefit reflected in the following schedule:
Percentage of
Enhanced Supplemental
Retirement Date Retirement Benefit
--------------- ----------------------
March 10, 1996 - March 9, 1997 80%
March 10, 1997 - March 9, 1998 84%
March 10, 1998 - March 9, 1999 88%
March 10, 1999 - March 9, 2000 92%
March 10, 2000 - March 9, 2001 96%
March 10, 2001- or thereafter 100%
5.6 Calculation and Payment of Enhanced Supplemental
Retirement Benefits. The enhanced supplemental retirement benefits payable to
Executive pursuant to Sections 5.4 and 5.5 of this
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<PAGE>
Agreement shall be calculated and paid to Executive at the same time and in the
same manner that benefits are calculated and paid to Executive under the
Supplemental Retirement Program.
5.7 Other Retirement Benefits. If Executive retires from the
Company, then irrespective of when such retirement occurs, Executive shall be
entitled to all retirement benefits that are made generally available to retired
executive officers of the Company, including health care coverage and group term
life insurance benefits.
ARTICLE VI
MISCELLANEOUS
6.1 Termination of Prior Agreements. This Agreement supersedes
all prior agreements respecting the subject matter of Executive's employment,
written or oral; provided, however, that nothing herein shall affect the Salary
Deferral Agreement between the Company and Executive dated December 13, 1989.
6.2 Notices. Any notice required or permitted hereunder shall
be in writing and shall be deemed given if delivered personally or mailed,
registered or certified mail, as follows:
(a) If to the Company, to:
Chairman of the Executive Committee
Blue Cross and Blue Shield of Virginia
2015 Staples Mill Road
Post Office Box 27401
Richmond, Virginia 23279
(b) If to Executive, to his last address shown
on the records of the Company.
6.3 Successors. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective heirs,
representatives, and successors, including, without limitation, any person
acquiring directly or indirectly all or substantially all of the assets of the
Company, whether by merger, consolidation, sale, or otherwise, but neither this
Agreement nor any right hereunder may be otherwise assigned or transferred by
either party hereto.
6.4 Applicable Law. This Agreement shall be governed by
and construed and enforced in accordance with the laws of Virginia.
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6.5 Amendment. This Agreement may be amended only by a
written instrument signed by the parties hereto.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
By: /s/ J. Carson Quarles
---------------------------
J. Carson Quarles, Chairman
Executive Committee
/s/ Norwood H. Davis
------------------------------
Norwood H. Davis, Jr.
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PHYLLIS L. COTHRAN
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
(As amended and restated August 4, 1995)
This Agreement is made as of the 4th day of August, 1995,
between BLUE CROSS AND BLUE SHIELD OF VIRGINIA, a Virginia nonstock corporation
(the "Company"), and PHYLLIS L. COTHRAN, of Richmond, Virginia ("Executive").
R E C I T A L S
Executive has been employed by the Company or its affiliates
since January 31, 1972. Since November 9, 1990, Executive has served as
President and Chief Operating Officer of the Company. The Company and Executive
are parties to an agreement dated November 1, 1993 (the "Prior Agreement"). The
parties desire to amend the Prior Agreement in the manner herein set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual promises herein contained, the parties agree as follows:
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ARTICLE I
EMPLOYMENT
1.1 Employment. The Company hereby employs Executive as President and Chief
Operating Officer of the Company. Executive shall report to the Chief Executive
Officer of the Company. Executive shall have the powers, duties, and
responsibilities that are customary to the position of Chief Operating Officer
and such other duties as may be assigned to her by the Chief Executive Officer.
Executive shall devote her full business time and efforts to the business and
affairs of the Company and its affiliates; provided, however, that this
provision shall not preclude Executive from serving as a director of any other
corporation or other organization involving no conflict of interest with the
interests of the Company. All such director ships shall be disclosed to and
reviewed by the Chief Executive Officer of the Company.
1.2 At Will Employment. Executive's employment
hereunder is at will. Executive may resign at any time, and the
Chief Executive Officer of the Company may discharge Executive at
any time, with or without cause.
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ARTICLE II
COMPENSATION AND BENEFITS
2.1 Base Salary. Executive's base salary shall be determined from time to time
by the Human Resources, Compensation and Employee Benefits Committee (the
"Committee") upon recommendation from the Chief Executive Officer of the
Company.
2.2 Incentive Compensation. Executive will
participate in the Company's Annual Incentive Program for Officers and
in any similar incentive plans that are made available to senior
executives of the Company.
2.3 Annual Reviews. Effective each January 1
during the term of this Agreement, the Chief Executive Officer of the
Company will review Executive's performance as President and Chief
Operating Officer and will recommend to the Committee the amount of
Executive's annual increase in base salary, if any, as may be
appropriate and in accordance with the Company's regular salary
administration program. The Committee shall determine the amount of any
such annual increase.
2.4 Participation in Employee Benefit Plans.
While employed by the Company, Executive shall be entitled to partici
pate in the Company's Non-Contributory Retirement Program, the
Employees' Thrift Plan, the split-dollar life insurance program, the
group health insurance program, the group term life insurance program,
and the disability insurance program. In addition, the Company shall
provide to Executive an automobile and gasoline allowance, tax and
financial planning services, and reimbursement for club dues and other
business expenses.
ARTICLE III
DISABILITY
3.1 Supplemental Disability Payment. If Executive becomes disabled while
employed by the Company and is entitled to receive benefits under the Company's
Long-Term Disability Program, then the Company will pay to Executive a Monthly
Supplemental Disability Benefit (as hereinafter defined) for so long as
Executive is entitled to receive disability payments under the Company's
Long-Term Disability Program (or under any similar disability program maintained
by the Company). The amount of the Monthly Supplemental Disability Benefit shall
be equal to the difference between (i) one-twelfth (1/12) of sixty percent (60%)
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of Executive's annual base salary for the year in which Executive becomes
disabled and (ii) the amount of the monthly disability benefit payable to
Executive under the Company's Long-Term Disability Program.
ARTICLE IV
SEVERANCE PAYMENT AND EMPLOYMENT BENEFIT TRUST
4.1 Severance Payment.
(a) Upon a Termination Event, as defined in
Section 4.1(b) below, the Company will pay the Severance Payment, as defined in
Section 4.1(c) below to Executive.
(b) The term "Termination Event" shall mean the
following: (i) The termination of Executive's employment with the Company for
any reason other than by reason of Executive's resignation; and (ii) The
termination of Executive's employment with the Company by reason of Executive's
resignation, but only if Executive shall have given the Company at least six (6)
months prior written notice of such resignation. The term "Termination Event"
shall not include the termination of Executive's employment with the Company by
reason of Executive's resignation
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if Executive shall not have given the Company at least six (6) months prior
written notice of such resignation.
(c) The term "Severance Payment" shall mean a
payment equal to three times the Annual Compensation of Executive as defined in
Section 4.1(d) below.
(d) The term "Annual Compensation of Executive"
shall mean the highest amount of cash compensation (including, without
limitation, salary and bonus) received by Executive with respect to one of the
three calendar years immediately preceding the Termination Event. The Annual
Compensation of Executive for a calendar year shall include (i) salary payments
paid to Executive during the calendar year in question, and (ii) bonus or other
incentive compensation payments which are based upon performance during the
calendar year in question, but which are paid after the calendar year in
question.
4.2 Establishment of Employment Benefit Trust. The
Company has established an Employment Benefit Trust (the "Trust") for
the benefit of Executive and other key executives of the Company. The
form of Trust Agreement is attached as Exhibit A. In order to provide
benefits to Executive, the Company has transferred to the Trust the
assets and amounts specified in
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paragraph 4.3 and has instructed the trustee of the Trust to maintain such
assets and amounts in a separate account for the benefit of Executive (the
"Account").
4.3 Assets and Amounts Transferred to the Trust.
(a) Prior to the execution of the Prior Agreement,
the Company transferred to the Trust all of the assets held in the account
established for Executive under the Agreement between the Company and Executive
dated December 12, 1990, and certain additional amounts that were authorized by
the Board of Directors on December 9, 1992, and were transferred to the Trust on
or about July 27, 1993.
(b) The strategy of the Company is to expand by
acquiring, merging, or affiliating with other Blue Cross and Blue Shield plans,
insurance companies, and managed care companies. If the Executive Committee or
the Board of Directors determines that Executive's duties have expanded because
of such acquisitions, mergers or affiliations or for other reasons, then the
Executive Committee or the Board of Directors may make additional contributions
to the Trust in recognition of such expanded duties.
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<PAGE>
4.4 Investment of Amounts Transferred to the Trust. The
Company shall from time to time appoint an investment manager (the "Investment
Manager") to invest and manage the assets of the Trust. The initial Investment
Manager will be James W. Copley, Jr., President, Consolidated Investment
Corporation. The Company, acting through the Investment Manager, shall have sole
discretion to select investments for the Trust. Annually, the Investment Manager
will report the investments made in the Trust to the Chairman of the Executive
Committee and will confer with him about the investment policy for the Trust.
Executive shall have no right to have any particular investment made in the
Trust. The Company shall bear all risk of gain or loss with respect to the
investments made in the Trust. Such gains or losses shall not affect the amount
of the Severance Payment.
4.5 Fees, Expenses, and Taxes. The Company shall pay the fees
and expenses of the Investment Manager for its services and the fees and
expenses of the trustee of the Trust for its services. All fees, commissions,
and expenses resulting from transactions made in the Trust shall be paid from
assets held in the Trust to the extent such assets are available, but if such
assets are insufficient to pay such sums, such sums shall be paid
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by the Company from its other funds. Income taxes incurred by the Company as the
result of transactions made in the Trust shall be paid by the Company and shall
not be charged to the Trust.
4.6 Distribution of the Assets in the Trust.
(a) Upon a Termination Event, the trustee of the
Trust may either: (1) transfer the assets held in the trust for Executive's
benefit to Executive in kind to the extent of the Severance Payment; or (2) sell
all or part of such assets and distribute the sales proceeds to Executive to the
extent of the Severance Payment. If any asset distributed to Executive in kind
does not have a readily ascertainable fair market value, the Company may at its
expense have such asset appraised by an independent appraiser, and the Company
and Executive agree to be bound by such appraisal for all purposes under this
Agreement (including Federal and state income tax filings). To the extent the
value of such assets transferred to Executive in kind or such proceeds
distributed to Executive (as the case may be) is insufficient to fund the
Severance Payment, the Company shall pay the balance of the Severance Payment to
Executive in immediately available funds. To the extent that the value of such
assets or
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such proceeds (as the case may be) exceeds the Severance Payment, such assets or
such proceeds (as the case may be) shall be distributed to the Company. If the
Termination Event is the result of the death of Executive, then the distribution
under this paragraph shall be made to Executive's personal representative.
(b) In consideration of the Severance Payment to
Executive, Executive agrees that she will not, prior to the expiration of three
(3) years following the termination of her employment, become an officer,
director, or employee of, or consultant to, or 10% or more owner of, any entity
that competes with the Company in any business in which the Company is engaged
as of the date of the termination of Executive's employment; provided, however,
that if the Company terminates Executive's employment without cause, then this
covenant not to compete shall not be applicable. For purposes of this Agreement,
termination without cause means termination for any reason other than continued
neglect by Executive of her duties hereunder or willful misconduct by Executive
in the performance of her duties hereunder. Executive agrees that in the event
of a breach by Executive of this covenant not to compete, the Company's remedies
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at law will be inadequate and that the Company will be entitled to appropriate
equitable relief, including an injunction restraining such breach. If Executive
so requests, the Executive Committee is authorized to determine by written
communication to Executive, that a particular activity that Executive proposes
to engage in does not constitute competition with the Company within the meaning
of this paragraph and such determination shall be conclusive and binding on the
parties to this Agreement.
4.7 Beneficial Ownership. Unless and until the assets held in
the Account are distributed to Executive pursuant to Section 4.6(a) of this
Agreement, beneficial ownership of all assets in the Account shall remain with
the Company, and Executive shall have no property interest in any such assets.
ARTICLE V
MISCELLANEOUS
5.1 Termination of Prior Agreements. This Agreement
constitutes the entire agreement between the parties respecting
the subject matter of Executive's employment and supersedes all
prior agreements, written or oral.
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5.2 Notices. Any notice required or permitted here under shall
be in writing and shall be deemed given if delivered personally or mailed,
registered or certified mail, as follows:
(a) If to the Company, to: Chief Executive
Officer, Blue Cross and Blue Shield of
Virginia, 2015 Staples Mill Road, Post
Office Box 27401, Richmond, Virginia 23279.
(b) If to Executive, to her last address shown
on the records of the Company.
5.3 Successors. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respec tive heirs,
representatives, and successors, including, without limitation, any person
acquiring directly or indirectly all or substantially all of the assets of the
Company, whether by merger, consolidation, sale, or otherwise, but neither this
Agreement nor any right hereunder may be otherwise assigned or transferred by
either party hereto.
5.4 Applicable Law. This Agreement shall be governed
by and construed and enforced in accordance with the laws of
Virginia.
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<PAGE>
5.5 Amendment. This Agreement may be amended only by
a written instrument signed by the parties hereto.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the day and year first above written.
BLUE CROSS AND BLUE SHIELD OF
VIRGINIA
By: /s/ John L. Colley, Jr.
-----------------------------
John L. Colley, Jr.
Chairman of the Human
Resources, Compensation and
Employee Benefits Committee
/s/ Phyllis L. Cothran
-------------------------
Phyllis L. Cothran
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Consent of Independent Auditors
The Board of Directors
Blue Cross and Blue Shield of Virginia:
We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Financial Data" and "Experts" in the
prospectus. Our report refers to changes in accounting for investment
securities, income taxes and postemployment benefits.
/s/ KPMG Peat Marwick LLP
-----------------------------
Richmond, Virginia
November 6, 1996
