AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1997
REGISTRATION NO. 333-09773
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4
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>
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>
J. CHRISTOPHER WILTSHIRE
SECRETARY
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
--------------------------------- ---------------------
<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 JANUARY 29, 1997
PROSPECTUS
11,540,000 SHARES
[Trigon Logo] TRIGON HEALTHCARE, INC.
COMMON STOCK
------------------------
All of the 11,540,000 shares of Common Stock offered hereby are being
offered by Trigon Healthcare, Inc. ("Trigon" or the "Company"). Of the
11,540,000 shares of Common Stock offered hereby, 9,232,000 shares are being
offered in the United States and Canada by the U.S. Underwriters and 2,308,000
shares are being offered in a concurrent offering outside the United States and
Canada by the International Managers. 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 $12.00 and $14.00 per share. For a discussion of the factors to be
considered in determining the initial public offering price, see "Underwriting."
The Common Stock has been approved for listing on the New York Stock Exchange
under the symbol "TGH," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE 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>
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 at $1,300,000.
(3) The Company has granted the U.S. Underwriters and the International Managers
options, exercisable within 30 days after the date of this Prospectus, to
purchase up to an additional 1,384,800 shares and 346,200 shares of Common
Stock, respectively, solely to cover over-allotments, if any. If such
options are 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, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. 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 , 1997.
------------------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
MORGAN STANLEY & CO.
INCORPORATED
WHEAT FIRST BUTCHER SINGER
------------------------
The date of this Prospectus is , 1997.
<PAGE>
<TABLE>
<CAPTION>
[Graphic here] [Graphic here] [Graphic here]
NET
SIZE WORKS DIVERSITY
Trigon is the largest Trigon offers a Trigon offers a
managed health care continum of managed wide variety of
company in Virginia: care networks: health-related services:
<S> <C>
o Current members: o Participating Provider o Managed care programs
1.9 million Network (PAR) o Comprehensive health
o 1995 revenues: $1.7 billion o Perferred Provider care financing
o VA Market Share: 26% Organization Network o Health and wellness
(PPO) programs
o Health Maintenance o Life, accident and
Organization (HMO) disability coverage
o Dental
o Mental health
o Pharmacy
[Trigon logo]
A Managed Health Care Company
<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 MORE THAN 10% 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 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 THE OFFERINGS, 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.
3
<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 AND THE RELATED SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES AND NOTES THERETO 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 AND 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. THE TERM "COMMON STOCK" MEANS CLASS A COMMON STOCK, PAR VALUE
$.01 PER SHARE, OF TRIGON HEALTHCARE. 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 within Virginia and 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 right to use the Blue Cross and Blue Shield service
marks and tradenames includes approximately 5.6 million of the Commonwealth's
population of 6.6 million. 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.
4
<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 has the largest number of HMO members in 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, such as dental, wellness, mental health and life, accident
and disability insurance coverage.
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, 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 increased competition and an increase in
medical costs, which, in part, reflects industry trends. See "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
GROWTH STRATEGY
The Company is pursuing the following growth strategy:
o 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.
o 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.
5
<PAGE>
o 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 HMOs, 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.
o 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 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") was approved on September 6, 1996 by the members
of Virginia BCBS entitled to vote. 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. 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. 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 in connection
with the Demutualization 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). The Company expects to use proceeds of
the Offerings to pay $65.0 million of the Commonwealth Payment and to fund the
balance from borrowings under a revolving credit agreement or other available
cash. Consequently, the Company does not expect to issue Class C Common Stock as
part of the Commonwealth Payment. However, the Company has not received any
binding commitments with respect to such revolving credit agreement and there
can be no assurance that the Company will be able to enter into such an
agreement in connection with the Offerings. In this event, the Company would
issue Class C Common Stock in payment of one-half of the Commonwealth Payment
and use proceeds of the Offerings and other available cash to fund the balance.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources."
6
<PAGE>
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 health care 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 health care industry; (iv) the
reaction to the Demutualization; (v) 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;
(vi) the potential adverse effect on the Company of economic factors specific to
Virginia due to the concentration of the Company's business in 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 adverse impact of certain legal proceedings; (ix) the potential
impact of certain charter provisions and state law provisions with respect to
change of control on the market for the Common Stock; (x) the Company's
dependence on dividends from its subsidiaries to meet its liquidity needs and
the restrictions under Virginia insurance law on the payment of such dividends;
(xi) 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 and (xii) the
potential adverse impact on the prevailing market price of the Common Stock as a
result of sales of substantial amounts of Common Stock or the perception that
such sales could occur. See "Risk Factors."
THE OFFERINGS
</TABLE>
<TABLE>
<S> <C>
Common Stock Offered by the Company:
U.S. Offering....................................... 9,232,000 shares
International Offering.............................. 2,308,000 shares
------------
Total............................................ 11,540,000 shares
------------
------------
Common Stock to be outstanding after the Offerings.... 40,698,114 shares (1)
</TABLE>
<TABLE>
<S> <C>
Use of Proceeds....................................... Of the $139.0 million estimated net proceeds of
the Offerings, $65.0 million of the net proceeds
is expected to be used to make a portion of the
Commonwealth Payment and $34.2 million of the
net proceeds is expected to be used to make cash
payments to Eligible Members in the
Demutualization in lieu of 2.8 million shares of
Common Stock. The balance of the net proceeds
(which will be approximately $39.8 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.
New York Stock Exchange Symbol........................ TGH
</TABLE>
- ---------------
(1) Includes 29,158,114 shares of Common Stock to be issued in the
Demutualization. See "The Demutualization" and "Unaudited Pro Forma
Consolidated Financial Information."
7
<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>
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>
8
<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>
PRO FORMA DATA (UNAUDITED) (5):
Income before extraordinary
items............................ $ 34,688 $ 58,478
Income before extraordinary items
per share........................ $ .85 $ 1.44
Shares used in calculating per
share amounts.................... 40,698 40,698
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
-------- ---------- ---------- ---------- ---------- ----------- ----------
(IN 000'S)
(UNAUDITED)
<S> <C>
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
Obligation for
Commonwealth Payment
Current............... -- -- -- -- -- -- 87,500
Noncurrent............ -- -- -- -- -- -- 87,500
Long-term debt............ -- -- -- -- -- -- --
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
----------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash and investments...... $1,158,050
Total assets.............. 1,768,507
Obligation for
Commonwealth Payment
Current............... --
Noncurrent............ --
Long-term debt............ 110,000
Surplus (9)...............
Stockholders' equity...... 785,420
</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) as reflected in its consolidated financial statements
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
9
<PAGE>
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 29.2 million shares of Common
Stock to Eligible Members pursuant to the Demutualization, which is based
on the assumption that certain Eligible Members receive $34.2 million in
cash in lieu of 2.8 million shares of Common Stock that would otherwise be
issued to such Eligible Members pursuant to the Demutualization, (ii) the
interest at 6% per annum on the long-term debt obligation under a revolving
credit agreement related to the borrowing of $110.0 million in connection
with the Commonwealth Payment, (iii) the sale of 11.5 million 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, income before extraordinary items does not include any rate
of return on the net proceeds of the Offerings nor does it include the
effect of the planned reduction in the Company's equity portfolio and
reinvestment of such amounts in a fixed income portfolio with a higher
current yield. The Company has not received any binding commitments with
respect to borrowings to fund one-half of the Commonwealth Payment and
there can be no assurance that the Company will be able to obtain such
borrowings concurrently with the Offerings. In this event, the Company
would issue Class C Common Stock in payment of one-half of the Commonwealth
Payment. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources," and
"Business -- Investments."
(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 million 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, after its acquisition in
February 1996.
(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 29.2 million
shares of Common Stock to Eligible Members pursuant to the Demutualization,
(ii) the payment of $34.2 million to certain Eligible Members in lieu of
2.8 million shares of Common Stock that would otherwise be issued to such
Eligible Members pursuant to the Demutualization, (iii) the payment of $175
million in cash and the incurrence of a long-term debt obligation under a
revolving credit agreement related to the borrowing of $110.0 million in
connection with the Commonwealth Payment, (iv) the payment of $6.0 million
for the remaining expenses of the Demutualization and (v) the sale of 11.5
million shares of Common Stock in the Offerings at an offering price of $13
per share, less underwriting discount and estimated offering expenses
payable by the Company, as if such transactions had occurred as of
September 30, 1996.
10
<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 and
adjusts 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 health 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, as well as
existing health care companies, 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
11
<PAGE>
other things, limits on the amount of dividends and other distributions that can
be paid to the Company by its operating 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."
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 health 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 Company has no significant experience in
expanding its managed health care 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.
CONCENTRATION OF BUSINESS IN VIRGINIA
The Company primarily conducts business within the Commonwealth of
Virginia. While the Company's growth strategy includes expansion outside
Virginia, for the foreseeable future a significant portion of the Company's
revenues may be subject to economic factors specific to Virginia. Therefore,
there can be no assurance that a downturn in the Virginia economy would not
adversely affect the Company.
12
<PAGE>
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 supermajority 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.
LEGAL PROCEEDINGS
The Company is the subject of various legal actions arising out of the
conduct of its business. These include an inquiry from the United States
Department of Labor (the "DOL") regarding 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,
and claims and litigation brought by self-funded employer groups related to
these practices. See "Legal Proceedings." Due to the early stages of these
actions, the Company's management cannot make an estimate of loss, if any (and
has not established any liability with respect to the DOL inquiries), or predict
whether or not such actions will result in a material adverse effect on the
Company's results of operations in any particular period. While the ultimate
resolution of the DOL inquiries and the discount-related claims and litigation
cannot be estimated, the Company believes that these actions should not have a
material adverse effect on the Company's financial position.
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
Company's Articles), 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
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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.
Virginia insurance holding company laws and regulations, as well as similar
laws and regulations in North Carolina where an insurance company subsidiary of
the Company is 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 Common
Stock has been approved for listing on the New York Stock Exchange under the
symbol "TGH," subject to official notice of issuance. 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 29.2 million 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.
Local Virginia governments and school boards are expected to receive
approximately 3.1 million shares of Common Stock in the Demutualization. Under
current Virginia law, the Treasurer of each of these entities may be held
strictly liable for any decrease in value of the Common Stock held by such
entities after the end of the lockup period. Consequently, unless the Virginia
law is revised before the end of the lockup period, the Company expects that
substantially all these shares will be sold on the day the lockup period ends.
The Virginia General Assembly is currently considering legislation to relax the
strict liability standard with regard to Common Stock held by the Treasurer of
each of these entities; however, there can be no assurance that such legislation
will be enacted. In addition, Eligible Members subject to ERISA are expected to
receive approximately 15.7 million shares of Common Stock in the
Demutualization. ERISA plan fiduciaries have a duty to diversify the investments
of the ERISA plan to minimize the risk of large losses, unless it is clearly
prudent not to do so. For many ERISA plans, the Common Stock will be the only
asset of the plan. If an ERISA plan has no assets other than Common Stock, the
plan also may incur additional expenses for government reporting if the Common
Stock is not sold by the end of the plan year in which
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the lockup period ends. Consequently, ERISA plans may be more likely than other
Eligible Members to sell Common Stock in the near term after the lockup period
ends.
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, subject to certain limited
exceptions.
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."
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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 within Virginia and 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 has the largest number of HMO members in 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, such as dental, wellness, mental
health and life, accident and disability insurance coverage.
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.
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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 "Risk
Factors -- 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. The Plan of Demutualization provides that the Company may issue
shares of Class C Common Stock to the Commonwealth of Virginia in connection
with the Demutualization; however, the Company does not expect to issue any
Class C Common Stock. 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. At least $25 million
in net proceeds of the Offerings will be used 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. 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 will not make any such additional
offerings at this time; however, the Company does expect to enter into a
revolving credit agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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.
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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 Stock to the public in the Offerings). The Company expects to use
proceeds of the Offerings to pay $65.0 million of the Commonwealth Payment and
to fund the balance from borrowings under a revolving credit agreement or other
available cash. The Company has not received any binding commitments with
respect to such revolving credit agreement and there can be no assurance that
the Company will be able to enter into such an agreement in connection with the
Offerings. In this event, the Company would issue Class C Common Stock in
payment of one-half of the Commonwealth Payment and use proceeds of the
Offerings and other available cash to fund the balance.
Pursuant to the Plan of Demutualization the Virginia Attorney General and
the Joint Rules Committee of the Virginia General Assembly have each identified
to the Company three proposed nominees to the Board of the Company. Under the
Plan of Demutualization 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. See "Management -- Directors and Executive Officers."
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.
As a Blue Cross and Blue Shield organization, the Company has been entitled
to certain federal income tax benefits, which have had the effect of reducing
its effective tax rate below the statutory federal income tax rate of 35%. The
Company believes that because of the Demutualization or other factors, its
effective tax rate in future years is likely to be equal to the statutory
federal income tax rate of 35%. 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 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
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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. The amount
of cash consideration that will be payable in lieu of each share of Common Stock
will be equal to the net proceeds per share of the Offerings. Based on an
initial public offering price of $13 per share, the Company expects that $34.2
million will be paid to Eligible Members in lieu of issuing 2.8 million shares
of Common Stock. See "Unaudited Pro Forma Consolidated Financial Information."
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 period following the 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. See "Shares Eligible
for Future Sale."
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 either to 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
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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. The Company will determine after the Demutualization and at
least 30 days before the program begins the maximum number of shares of Common
Stock, 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 $13 per share, the net
proceeds to the Company from the Offerings are estimated to be approximately
$139.0 million ($160.0 million if the Underwriters' over-allotment options are
exercised in full), after deducting the underwriting discount and estimated
offering expenses payable by the Company. The Company intends to use $65.0
million of the net proceeds of the Offerings to make a portion of the
Commonwealth Payment, $34.2 million of the net proceeds of the Offerings to make
cash payments to Eligible Members in the Demutualization and the balance (which
amount will be approximately $39.8 million, or $60.8 million if the
Underwriters' over-allotment options are exercised in full) 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.
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
dividends by health care insurance companies, such as Trigon Insurance, in a
holding company structure. See "Business -- Regulation." In addition, under the
terms of the Company's proposed $300 million revolving credit agreement, the
Company may not pay dividends on the Common Stock unless the aggregate of all
dividends paid by the Company plus payments to purchase, redeem or otherwise
acquire capital stock of the Company (other than the Commonwealth Payment) does
not exceed the sum of (i) $10,000,000 plus (ii) 50% of the consolidated net
income (or minus 100% of consolidated net loss) of the Company for the period
from the effectiveness of the Demutualization through the end of the most
recently completed fiscal quarter, plus (iii) an amount (not to exceed
$50,000,000) equal to 50% of the cumulative cash dividends paid out of income of
certain subsidiaries of the Company earned prior to January 1, 1997 and received
by the Company after the date of the revolving credit agreement and before
December 31, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
20
<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 11.5 million shares of Common Stock in the Offerings at an offering
price of $13 per share, less the underwriting discount and estimated offering
expenses payable by the Company, (ii) the issuance of 29.2 million shares of
Common Stock to Eligible Members pursuant to the Demutualization, (iii) the use
of net proceeds of the Offerings to pay $34.2 million to certain Eligible
Members in lieu of 2.8 million shares of Common Stock that would otherwise be
issued to such Eligible Members pursuant to the Demutualization, (iv) the use of
net proceeds of the Offerings to pay $65.0 million of the Commonwealth Payment
and the borrowing of $110.0 million under a revolving credit agreement to fund
the balance of the Commonwealth Payment and (v) the payment of $6.0 million for
the remaining expenses of the Demutualization. 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. See "Unaudited Pro Forma Consolidated Financial
Information."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
(DOLLARS IN 000'S,
EXCEPT PER SHARE DATA)
<S> <C>
LIABILITIES:
Obligation for Commonwealth Payment, current............................. $ 87,500 $ --
-------- -----------
-------- -----------
Obligation for Commonwealth Payment, noncurrent.......................... $ 87,500 --(1)
Long-term debt........................................................... -- $ 110,000(1)
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 per share par value, 300,000,000 shares authorized;
42,599,435 shares issued and outstanding (2)........................... 407(3)(4)
Capital in excess of par................................................. 754,315(3)(4)
Retained earnings........................................................ 655,952 --(4)
Net unrealized gain on investment securities, net of deferred income
taxes of $16,517....................................................... 30,698 30,698
-------- -----------
Total surplus....................................................... 686,650
Total stockholders' equity.......................................... 785,420
-------- -----------
Total capitalization.............................................. $774,150 $ 895,420
-------- -----------
-------- -----------
</TABLE>
- ---------------
(1) Reflects the borrowing of $110.0 million under a revolving credit agreement
to fund a portion of the Commonwealth Payment. The Company has not received
any binding commitments with respect to such revolving credit agreement and
there can be no assurance that the Company will be able to enter into such
an agreement in connection with the Offerings. In this event, the Company
would issue Class C Common Stock in payment of one-half of the Commonwealth
Payment and use proceeds of the Offerings and other available cash to fund
the balance.
(2) No shares of the Company's Class B non-voting Common Stock, $.01 par value
or Class C Common Stock are expected to be outstanding upon completion of
the Offerings.
(3) Reflects the issuance of 29.2 million shares of Common Stock to Eligible
Members in the Demutualization and the proceeds from the sale of 11.5
million shares of Common Stock in the Offerings at $13 per share, less the
underwriting discount and estimated offering expenses.
(4) Reflects the reclassification of the retained earnings of the mutual
insurance company after the effect of the Commonwealth Payment and the
payment of $34.2 million to certain Eligible Members in lieu of 2.8 million
shares of Common Stock that would otherwise be issued to such Eligible
Members in the Demutualization.
21
<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>
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>
22
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
------------------------------------------------------------------ -----------
1991 1992 1993 1994 1995 1995
---------- ---------- ---------- ---------- ---------- -----------
<S> <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>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ---------- ----------- ----------
(IN 000'S)
(UNAUDITED)
<S> <C>
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
Obligation for
Commonwealth Payment
Current......................... -- -- -- -- -- -- 87,500
Noncurrent...................... -- -- -- -- -- -- 87,500
Surplus (8)......................... 350,333 444,271 606,146 655,875 740,071 743,501 686,650
</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) as reflected in its consolidated financial statements 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
23
<PAGE>
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 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
elimination of the $63.9 million 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, after its acquisition in
February 1996.
(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.
24
<PAGE>
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 29.2 million shares of Common Stock in connection therewith to
Eligible Members, (ii) the use of net proceeds of the Offerings to pay $65.0
million of the Commonwealth Payment and the borrowing of $110.0 million under a
revolving credit agreement to fund the balance of the Commonwealth Payment (iii)
the sale of 11.5 million shares of Common Stock in the Offerings at an assumed
initial public offering price of $13 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.
Prior to the Demutualization, "Stockholders' Equity" represents consolidated
surplus of Virginia BCBS.
The Pro Forma Information reflects estimated gross and net proceeds of the
Offerings of $150.0 million and $139.0 million, respectively. The Pro Forma
Information also assumes that, of the estimated net proceeds, (i) $34.2 million
will be paid to certain Eligible Members in lieu of 2.8 million shares of Common
Stock that would otherwise be issued to such Eligible Members in the
Demutualization, (ii) $65.0 million will be used to make a portion of the
Commonwealth Payment and (iii) the balance will be retained by the Company for
general corporate purposes. See "Use of Proceeds." In addition, the Pro Forma
Information assumes the payment of $6.0 million for the remaining expenses of
the Demutualization.
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."
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
(IN 000'S)
<S> <C>
ASSETS:
Current assets
Cash............................................................................. $ 33,303 $ 104,770 (1) $ 67,073
110,000 (2)
(175,000)(2)
(6,000)(3)
Investment securities, at estimated fair value................................... 1,090,977 1,090,977
Premiums and other receivables................................................... 369,406 369,406
Deferred income taxes............................................................ 18,474 18,474
Other assets..................................................................... 9,717 9,717
---------- ----------- -----------
Total current assets.......................................................... 1,521,877 33,770 1,555,647
Property and equipment, net........................................................ 51,514 51,514
Deferred income taxes.............................................................. 58,108 58,108
Goodwill and other intangibles, net................................................ 77,372 77,372
Restricted investments, at estimated fair value.................................... 10,314 10,314
Other assets....................................................................... 15,552 15,552
---------- ----------- -----------
Total assets................................................................ $1,734,737 $ 33,770 $ 1,768,507
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities
Medical and other benefits payable............................................... $ 444,200 $ 444,200
Unearned premiums................................................................ 98,558 98,558
Accounts payable and accrued expenses............................................ 80,896 80,896
Deferred income taxes............................................................ -- --
Other liabilities................................................................ 153,103 153,103
Obligation for Commonwealth Payment.............................................. 87,500 $ (87,500)(2) --
---------- ----------- -----------
Total current liabilities..................................................... 864,257 (87,500) 776,757
Obligation for Commonwealth Payment, noncurrent.................................... 87,500 (87,500)(2) --
Obligations for employee benefits, noncurrent...................................... 57,539 57,539
Medical and other benefits payable, noncurrent..................................... 34,734 34,734
Long-term debt..................................................................... -- 110,000 (2) 110,000
Minority interest in subsidiary.................................................... 4,057 4,057
---------- ----------- -----------
Total liabilities............................................................. 1,048,087 (65,000) 983,087
---------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common stock..................................................................... -- 292 (4) 407
-- 115 (1)
Capital in excess of par......................................................... -- 104,655 (1) 754,315
649,660 (4)
Retained earnings................................................................ 655,952 (649,952)(4) --
(6,000)(3)
Net unrealized gain on investment securities, net of deferred income taxes of
$16,517....................................................................... 30,698 30,698
---------- ----------- -----------
Total stockholders' equity.................................................... 686,650 98,770 785,420
---------- ----------- -----------
Total liabilities and stockholders' equity.................................. $1,734,737 $ 33,770 $ 1,768,507
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------- --------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------- ---------- ----------- ----------
(IN 000'S, EXCEPT PER SHARE DATA)
<S> <C>
Revenues
Premium and fee revenues
Commercial.............................. $1,157,899 $1,157,899 $ 985,127 $ 985,127
Federal Employee Program................ 329,243 329,243 265,587 265,587
Amounts attributable to self-funded
arrangements.......................... 981,741 981,741 798,358 798,358
Less: amounts attributable to claims
under self-funded arrangements........ (897,954) (897,954) (731,062) (731,062)
---------- ----------- ---------- ---------- ----------- ----------
1,570,929 1,570,929 1,318,010 1,318,010
Investment income.......................... 45,861 45,861 34,081 34,081
Net realized gains......................... 52,976 52,976 50,685 50,685
Other revenues............................. 55,176 55,176 37,666 37,666
---------- ----------- ---------- ---------- ----------- ----------
Total revenues.......................... 1,724,942 1,724,942 1,440,442 1,440,442
Operating expenses
Medical and other benefit costs
Commercial.............................. 959,328 959,328 809,344 809,344
Federal Employee Program................ 312,222 312,222 252,478 252,478
---------- ----------- ---------- ---------- ----------- ----------
1,271,550 1,271,550 1,061,822 1,061,822
Selling, general and administrative
expenses................................ 346,353 346,353 283,704 283,704
Interest expense........................... -- $ 6,600(2) 6,600 -- $ 4,950(2) 4,950
Copayment refund program................... 47,073 47,073 -- --
---------- ----------- ---------- ---------- ----------- ----------
Total operating expenses................ 1,664,976 6,600 1,671,576 1,345,526 4,950 1,350,476
---------- ----------- ---------- ---------- ----------- ----------
Income before income taxes and extraordinary
items (operating income)................... 59,966 (6,600) 53,366 94,916 (4,950) 89,966
Income tax expense (benefit)................. 8,264 10,414(5) 18,678 (46,751) 78,239(5) 31,488
---------- ----------- ---------- ---------- ----------- ----------
Income before extraordinary items (6)... $ 51,702 $ (17,014) $ 34,688 $ 141,667 $ (83,189) $ 58,478
---------- ----------- ---------- ---------- ----------- ----------
---------- ----------- ---------- ---------- ----------- ----------
Income before extraordinary items per common
share...................................... $ .85 $ 1.44
Shares used in calculating per common share
amount (7)................................. 40,698 40,698
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(1) Represents gross proceeds of $150.0 million from the issuance of 11.5
million shares of Common Stock in the Offerings at an assumed initial
offering price of $13 per share less underwriting discounts and offering
expenses of $11.1 million. Also represents the payment of $34.2 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: (i) on the
Unaudited Pro Forma Consolidated Balance Sheet (A) the $175.0 million in
cash payment funded with $65.0 million from net proceeds of the Offerings
and $110.0 million in borrowings under a revolving credit facility and (B)
the long-term debt obligation under a revolving credit agreement related to
the borrowing of $110.0 million to fund a portion of the Commonwealth
Payment, with offsetting reductions to the obligation for the Commonwealth
Payment and (ii) on the Unaudited Pro Forma Consolidated Statements of
Operations, the interest on the $110.0 million borrowing under the revolving
credit agreement at 6% per annum. The Company has not received any binding
commitments with respect to such revolving credit agreement and there can be
no assurance that the Company will be able to enter into such an agreement
in connection with the Offerings. In this event, the Company would issue
Class C Common Stock in payment of one-half of the Commonwealth Payment and
use proceeds of the Offerings and other available cash to fund the balance.
27
<PAGE>
(3) Represents estimated additional nonrecurring expenses of $6.0 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.
(4) Represents the reclassification of the retained earnings of the mutual
insurance company to reflect conversion to a stock company.
(5) 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.
(6) The unaudited pro forma income before extraordinary items does not include
investment income related to the balance of the net proceeds from the sale
of the Common Stock in the Offerings nor does it include the effect of the
planned reduction in the Company's equity portfolio and reinvestment of such
amounts in a fixed income portfolio with a higher current yield.
(7) The number of shares used in the calculation of unaudited pro forma income
before extraordinary items per common share is as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
----------
<S> <C>
Shares allocated to Eligible Members................................. 32,000,000
Less: shares allocated to Eligible Members who receive cash (a)...... 2,841,886
----------
Shares issued to Eligible Members.................................... 29,158,114
Shares issued in the Offerings....................................... 11,540,000
----------
Total shares of Common Stock outstanding............................. 40,698,114
----------
----------
</TABLE>
- ---------------
(a) Assumes that $34.2 million is paid to certain Eligible Members who
receive cash in lieu of shares of Common Stock.
28
<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 toward 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
females comprise 39.3%, adult males comprise 34.7% and children comprise 26.0%
of total membership.
As a result of the Company's emphasis on utilization management and cost
control, the Company has achieved improvements across all its networks in its
inpatient days per thousand members from 356 in 1991 to 245 for the twelve
months ended September 30, 1996, a 31.2% reduction, and an improvement in
admissions per thousand members from 76 in 1991 to 63 for the twelve months
ended September 30, 1996, a 17.1% 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: (i) a higher degree of competition for market share and (ii) 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. ("Priority") (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 9.5% 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 levels. 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
29
<PAGE>
selected groups and product lines while exiting certain unprofitable accounts to
improve the Company's overall risk profile. The 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
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
<S> <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.
30
<PAGE>
MEMBERSHIP BY NETWORK SYSTEM
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
------------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C>
Commercial:
HMO...................... 48,661 45,004 59,353 85,739 172,893 157,811 236,127
PPO...................... 75,522 102,247 131,052 155,433 212,322 207,968 216,937
PAR...................... 441,687 400,997 352,783 334,800 296,716 304,060 252,774
Other(1)................. 147,479 150,586 156,737 158,503 149,109 146,456 178,431
---------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal............ 713,349 698,834 699,925 734,475 831,040 816,295 884,269
Self-funded:
HMO...................... 11,493 15,679 24,728 34,243 48,255 52,246 15,272
PPO...................... 148,291 283,716 313,744 321,863 336,414 303,462 359,701
PAR...................... 509,333 369,041 334,692 318,297 321,522 325,153 362,881
ASO...................... 84,235 78,163 78,903 77,481 63,826 65,576 40,383
---------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal............ 753,352 746,599 752,067 751,884 770,017 746,437 778,237
FEP (PPO network).......... 172,771 175,723 180,015 195,314 198,561 198,935 197,835
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total...................... 1,639,472 1,621,156 1,632,007 1,681,673 1,799,618 1,761,667 1,860,341
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- ---------------
(1) "Other" members include enrollment from Medicare supplemental plans,
out-of-state student health care coverage and Mid-South members, after its
acquisition in February 1996.
PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C>
Commercial:
HMO...................... $ 58,933 $ 63,801 $ 75,939 $ 106,060 $ 181,052 $ 125,790 $ 233,126
PPO...................... 112,476 139,866 175,539 215,596 271,252 192,584 240,011
PAR...................... 682,382 660,007 590,571 537,543 485,412 376,292 320,693
Other(1)................. 170,275 194,147 208,108 222,621 220,183 162,782 191,297
---------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal............ 1,024,066 1,057,821 1,050,157 1,081,820 1,157,899 857,448 985,127
Self-funded:
HMO...................... 10,450 17,378 28,087 42,209 60,639 45,360 17,702
PPO...................... 217,202 313,335 439,960 457,281 482,779 350,215 410,667
PAR...................... 549,768 540,388 437,482 408,744 438,323 323,492 369,989
---------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal............ 777,420 871,101 905,529 908,234 981,741 719,067 798,358
FEP (PPO network).......... 206,878 254,102 279,058 303,250 329,243 248,109 265,587
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total...................... $2,008,364 $2,183,024 $2,234,744 $2,293,304 $2,468,883 $1,824,624 $2,049,072
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- ---------------
(1) "Other" members include enrollment from Medicare supplemental plans,
out-of-state student health care coverage and Mid-South members, after its
acquisition in February 1996.
31
<PAGE>
PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM AS A PERCENT OF TOTAL
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
<S> <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 (1)............... 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>
- ---------------
(1) "Other" members include enrollment from Medicare supplemental plans,
out-of-state student health care coverage and Mid-South members, after its
acquisition in February 1996.
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.
RECENT DEVELOPMENTS
The Company's preliminary unaudited financial results for the year ended
December 31, 1996, reflect income before income taxes and extraordinary items,
excluding the effect of a non-operating gain on the sale of a subsidiary in the
fourth quarter of 1996, of $120.6 million as compared to $107.0 million,
excluding the effect of the Copayment Program, for the year ended December 31,
1995. The $120.6 million for 1996 is composed of realized gains of $59.4
million, investment income of $47.3 million, and income from operations of $13.9
million. This compares to the $107.0 million for 1995 which is composed of
realized gains of $53.0 million, investment income of $45.8 million and income
from operations, excluding the Copayment Program, of $8.2 million.
Premium and fee revenues increased 12.4% from $1.571 billion for the year
ended December 31, 1995 to $1.766 billion for the year ended December 31, 1996.
Medical costs increased 12.1% from $1.272 billion for the year ended December
31, 1995 to $1.426 billion for the year ended December 31, 1996. These increases
are primarily due to the growth in membership in the Company's HMO and PPO
networks as well as the acquisition of Mid-South. The Company's commercial
medical loss ratio improved to 82.3% for the year ended December 31, 1996 as
compared to 82.9% for the year ended December 31, 1995. Selling, general and
administrative expenses were $376.4 million in 1996 compared with $346.4 million
in 1995. This increase is primarily related to the acquisition of Mid-South as
well as continued investment in managed care infrastructure and technology. In
addition, the Company's preliminary unaudited financial results reflect a
non-operating gain of $62.3 million ($40.0 million after tax) on the sale of its
electronic communication services subsidiary, Health Communication Services,
Inc. ("HCS") on December 31, 1996.
The Company's commercial enrollment grew from 831,040 members in 1995 to
892,496 members in 1996, an increase of 7.4%. This growth is primarily the
result of growth in the Company's HMOs, from 172,893 members in 1995 to 248,172
members in 1996, growth in the PPO networks (approximately 18,000 members) and
the acquisition of Mid-South in February 1996 (approximately 50,000 members),
partially offset by declines in the PAR network and losses in the out of state
student product. The Company's total enrollment increased from 1,799,618 members
in 1995 to 1,860,549 members in 1996.
The information above for the year ended December 31, 1996 is based on
preliminary unaudited data prepared by the Company and is subject to adjustment.
The Virginia General Assembly is currently considering legislation which
would change the Virginia open enrollment program. See
"Business -- Regulation -- Virginia's Open Enrollment Program." If this
legislation were enacted, the Company would pay a premium rate of 2.25% on all
group business effective January 1, 1998. The Company does not expect this
proposed change to have a significant impact on its financial results.
32
<PAGE>
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 an estimated $44
million of the increase), the Priority acquisition (an estimated $39 million),
the conversion of 31,000 members from self-funded products to commercial
products (an estimated $19 million) and a 3.8% increase in the average revenue
per member (an estimated $5 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 50,425 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 as reflected on the Company's balance sheet 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 sold its electronic
communication services subsidiary HCS, on December 31, 1996 and expects to
recognize an after tax gain of approximately $40 million as a result of this
sale. 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 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 SG&A expense ratio for the nine months ended September
30, 1996 was 13.6% versus 13.2% for the nine months ended September 30, 1995.
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 $11.6 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. For the nine months
ended September 30, 1996 the Company incurred a one-time charge of $1.5 million
for signing bonuses, relocation and employment agreement adjustments.
33
<PAGE>
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 the effect of
competitive pricing pressure and increased medical costs on commercial business
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.
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).
34
<PAGE>
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 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. The increase in medical costs,
which in part reflects industry trends, was primarily due to higher cost per
hospital inpatient day and higher hospital outpatient utilization and cost per
encounter. In addition, the higher medical costs in 1995 reflect the recognition
of $15.0 million for unfavorable hospital contractual settlements, some of which
relate to periods as far back as 1993. These increases were partially offset by
improvements in inpatient days per thousand members.
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. These increases were partially offset by a $5.0 million
favorable adjustment to eliminate a liability for potential losses associated
with the financial difficulties of other insurance companies. In addition, the
Company recorded $7.5 million of selling, general and administrative expenses in
the fourth quarter of 1995 for regulatory settlements, an adjustment to the
pension liability discount rate assumption, the cost of terminating certain
long-term equipment and facility leases, and additional liabilities for
potential legal matters. The SG&A expense ratio for the year ended December 31,
1995 was 13.7%. Eliminating both the favorable and unfavorable impacts of the
$5.0 million and $7.5 million adjustments, respectively, described above would
decrease the ratio to 13.6% 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. As a result of re-opening the Copayment Program, the
Company anticipates making a cash payment of approximately $22 million to the
Commonwealth of Virginia in the second quarter of 1997, which has been
previously accrued.
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 the effect of competitive pricing pressure and increased medical costs
on commercial business 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% (as reflected in its
consolidated financial statements) 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 was
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 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
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$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.
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 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
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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.
QUARTERLY RESULTS
The following table sets forth the unaudited quarterly results of
operations for each of the quarters in fiscal 1995 and the first three quarters
in 1996. In management's opinion, this unaudited quarterly information includes
all adjustments which are necessary for a fair presentation of the quarters
presented. The operating results in any quarter are not necessarily indicative
of the results which may be expected for any other interim period or for the
year ending December 31, 1996. The Company has experienced, and in the future
expects that it will experience, quarterly variations in its operating margins
due to a number of factors; however management does not believe that these
factors have indicated a trend toward seasonal fluctuations in health care
costs.
OPERATING STATISTICS BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
-------------------------------------------- --------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR.
-------- -------- -------- -------- -------- -------- --------
(IN 000'S)
<S> <C>
Revenue from operations (1)............. $391,921 $402,146 $415,922 $416,116 $443,800 $456,272 $455,604
Investment income....................... 10,900 12,676 11,305 10,980 11,193 11,726 11,162
Net realized gains...................... 4,667 13,598 16,568 18,143 15,214 19,020 16,451
Operating income (loss) (2)............. 38,901 41,710 27,363 (935) 30,814 34,329 29,773
Commercial medical loss ratio........... 77.7% 79.7% 83.6% 89.7% 83.2% 80.8% 82.5%
</TABLE>
- ---------------
(1) Revenue from operations includes premium and fee revenues and other
revenues.
(2) Operating income excludes the effects of the Copayment Program.
For 1995, operating income decreased in the third and fourth quarters
primarily as a result of more intense competition and from increases in medical
costs. The commercial medical loss ratio during 1995 increased from 77.7% in the
first quarter to 83.6% and 89.7% in the third and fourth quarters of the year,
respectively. The increase reflects both a $2.41 decrease in commercial premiums
per member from $124.26 in the first quarter of 1995 to $121.85 in the fourth
quarter and an increase of $12.74 in the medical cost per member from $96.61 in
the first quarter of 1995 to $109.35 in the fourth quarter. Contributing to the
high medical costs and the operating income decline in the third and fourth
quarters of 1995 was the recognition of $15.0 million ($6.0 million in the third
quarter and $9.0 million in the fourth quarter) for unfavorable hospital
contractual settlements some of which related to periods as far back as 1993 and
the impact of approximately $6 million in adverse claims adjustments
attributable to the first and second quarters. In addition, the Company recorded
$7.5 million of selling, general and administrative expenses in the fourth
quarter of 1995 for regulatory settlements, an adjustment to the pension
liability discount rate assumption, the cost of terminating certain long-term
equipment and facility leases, and additional liabilities for potential legal
matters.
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 and preserve capital. 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
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<PAGE>
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.
The Company expects to reduce its equity portfolio from 27.4% at September
30, 1996 to approximately 15% of the total portfolio in the first quarter of
1997. The Company currently plans to maintain the equity portfolio at levels
generally no greater than 15%. As a result of this change, the Company expects
greater than normal realized gains in the first quarter of 1997 and thereafter
lower realized gains and a more consistent contribution to income from the
investment portfolio.
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.
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." The Company expects to use
proceeds of the Offerings to pay $65.0 million of the Commonwealth Payment and
to fund the balance from borrowings under a revolving credit facility or other
available cash. The Commonwealth Payment has been accrued as an extraordinary
charge as of September 30, 1996.
The Company is pursuing a $300 million revolving credit agreement which the
Company plans to enter into in connection with the Offerings. The Company
intends to use borrowings under the revolving credit agreement to fund $65.0
million of the Commonwealth Payment. See "The Demutualization -- the
Commonwealth Payment." The Company has not received any binding commitments with
respect to such agreement and there can be no assurance that the Company will be
able to enter into such agreement in connection with the Offerings. In this
event, the Company would issue
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<PAGE>
Class C Common Stock in payment of one-half of the Commonwealth Payment and use
proceeds of the Offerings and other available cash to fund the balance; however,
at least $25 million of the net proceeds of the Offerings will be used for
general corporate purposes. See "The Demutualization -- The Commonwealth
Payment" and "Description of Capital Stock."
The proposed revolving credit agreement is expected to contain certain
covenants, customary for transactions of this type, including (i) limitations on
the incurrence of liens by the Company or its subsidiaries, (ii) limitations on
the incurrence of indebtedness by the Company or its subsidiaries, (iii)
limitations on dividends and other restricted payments by the Company or its
subsidiaries in respect of their capital stock (See "Dividend Policy"), (iv)
required maintenance of consolidated net worth, (v) required levels of
regulatory capital, and (vi) limits on the amount of leverage incurred. In
addition, under the terms of the proposed revolving credit agreement, certain
change of control events involving the Company will result in an event of
default thereunder.
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.
Virginia BCBS' claims paying ability has been rated "AA-(Excellent)" by
Standard & Poor's ("S&P") since 1992, and the rating was re-affirmed in January
1997. 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 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 has been unclear whether the Company would 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
39
<PAGE>
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.
40
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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 within Virginia and 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 has the largest number of HMO members in 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, such as dental, wellness, mental
health and life, accident and disability insurance coverage.
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.
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
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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 59.1 million as of January 1, 1996, an
increase in market penetration from 13.3% in 1990 to 22.3% as of January 1,
1996.
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 1.9 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 3% from 1994
to 1995, with the service sector growing at approximately 6%.
Trigon's membership constituted approximately 26% 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, 1996, HMO penetration throughout the state was 20.5%,
compared to a national average of 22.3% at January 1, 1996. Trigon's HMO
membership represents 17.9% of Virginia's total HMO market with a higher
concentration in the Central and Eastern regions.
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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 late 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 27,000 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 is pursuing 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
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
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(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 health care
business outside of Virginia. Consequently, there can be no assurance that the
Company's efforts to expand outside Virginia will be successful.
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, and short-term and long-term disability insurance.
Trigon and its subsidiaries serve 34 states and the District of Columbia. 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.
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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
large and multi-state 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 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 help
ensure that their health care practice patterns and outcomes are consistent with
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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.
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MEMBERSHIP BY NETWORK SYSTEM
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
------------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C>
Commercial:
HMO.............................. 48,661 45,004 59,353 85,739 172,893 157,811 236,127
PPO.............................. 75,522 102,247 131,052 155,433 212,322 207,968 216,937
PAR.............................. 441,687 400,997 352,783 334,800 296,716 304,060 252,774
Other(1)......................... 147,479 150,586 156,737 158,503 149,109 146,456 178,431
--------- --------- --------- --------- --------- --------- ---------
Subtotal...................... 713,349 698,834 699,925 734,475 831,040 816,295 884,269
Self-funded:
HMO.............................. 11,493 15,679 24,728 34,243 48,255 52,246 15,272
PPO.............................. 148,291 283,716 313,744 321,863 336,414 303,462 359,701
PAR.............................. 509,333 369,041 334,692 318,297 321,522 325,153 362,881
ASO.............................. 84,235 78,163 78,903 77,481 63,826 65,576 40,383
--------- --------- --------- --------- --------- --------- ---------
Subtotal...................... 753,352 746,599 752,067 751,884 770,017 746,437 778,237
FEP (PPO network).................. 172,771 175,723 180,015 195,314 198,561 198,935 197,835
--------- --------- --------- --------- --------- --------- ---------
Total.............................. 1,639,472 1,621,156 1,632,007 1,681,673 1,799,618 1,761,667 1,860,341
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ---------------
(1) "Other" members include enrollment from Medicare supplement plans,
out-of-state student health care coverage and Mid-South members, after its
acquisition in February 1996.
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 YEARS ENDED DECEMBER 31,
------------------------------------ TWELVE MONTHS ENDED
1991 1992 1993 1994 1995 SEPTEMBER 30, 1996 (2)
---- ---- ---- ---- ---- ----------------------
<S> <C>
Inpatient days per thousand
members......................... 356 329 299 278 266 245
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 October 1, 1995 through September 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.
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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 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
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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.
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 600,000 Medicare eligibles in
the areas where the Company has the exclusive rights to use the Blue Cross and
Blue Shield service marks and tradenames.
49
<PAGE>
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 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-
50
<PAGE>
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.
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.
51
<PAGE>
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, 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, 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 an 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.
52
<PAGE>
RELATED BUSINESSES
In addition to its core managed care business, the Company engages in
several other health-related businesses including employee benefits
administration, workers' compensation administration and health management
services. Together, these businesses generated $20.5 million in revenues for the
nine months ended September 30, 1996 (excluding $16.1 million of revenue from
HCS, which was sold on December 31, 1996), included in "Other Revenues" in the
Company's financial statements. These businesses represent approximately 1% 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 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.
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 qualified 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.
53
<PAGE>
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 contract renews 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.
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.
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 analytic needs. This includes operational and financial
performance, underwriting and marketing analysis, utilization management and
actuarial reporting.
COMPETITION
The health 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, as well as
existing health care companies, 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.
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<PAGE>
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.
INVESTMENTS
The Company's investment policies are designed to provide liquidity to meet
anticipated payment obligations and preserve capital 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. The Company expects to reduce its equity portfolio from 27.4% at
September 30, 1996 to approximately 15% of the total portfolio in the first
quarter of 1997. The Company currently plans to maintain the equity portfolio at
levels generally no greater than 15%. As a result of this change, the Company
expects greater than normal realized gains in the first quarter of 1997 and
thereafter lower realized gains and a more consistent contribution to income
from the investment portfolio.
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>
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
-------------- ----------
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED PERCENT OF
FAIR VALUE PORTFOLIO
-------------- ----------
Equities:
<S> <C>
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>
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>
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>
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
56
<PAGE>
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.
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
57
<PAGE>
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 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 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 Mid-South
which is domiciled in North Carolina and is subject to the laws and regulations
of that state). 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
58
<PAGE>
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 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. 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. The Company
expects that this amount will be substantially less for 1997 as a result of
lower expected statutory earnings for 1996.
North Carolina, Mid-South's domiciliary state, similarly restricts 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.
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<PAGE>
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 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. Trigon
uses other BCBSA licensees to provide certain health care services to its
members outside Virginia and provides service in Virginia to customers of other
BCBSA licensees.
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
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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.
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. In January
1997, the Company announced that it planned to eliminate 276 positions from its
workforce.
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."
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<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. The Company and the DOL have entered
into a tolling agreement with respect to this matter pursuant to which the
parties have agreed that no litigation will be instituted before February 1,
1997 and the applicable statute of limitations will be tolled until May 1, 1997.
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. Due to the early stage of the DOL inquiries, the
Company cannot make an estimate of loss, if any (and has not established any
liability with respect thereto), or predict whether or not such inquiries will
result in a material adverse effect on the Company's results of operations in
any particular period. Although the ultimate resolution of this matter cannot be
estimated, the Company believes that it should not have a material adverse
effect on the Company's financial position.
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 16 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. Due to the early
stages of these claims and litigation, however, the Company cannot make an
estimate of loss, if any, or predict whether or not such claims and litigation
will result in a material adverse effect on the Company's results of operations
in any particular period.
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of December 31, 1996
concerning the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ---- ---------
<S> <C>
Norwood H. Davis, Jr. 56 Chairman of Trigon Healthcare; Chairman of the Board of
Directors and Chief Executive Officer of Virginia BCBS
Lenox D. Baker, Jr., M.D. 55 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, 61 Director
Jr.
Phyllis L. Cothran 49 President of Trigon Healthcare; President and Chief Operating
Officer of Virginia BCBS
Ronald H. Bargatze 46 Executive Vice President and Chief Operating Officer,
Integrated Health Systems of Virginia BCBS
John C. Berry 59 Executive Vice President and Chief Operating Officer,
Government and Individual Business of Virginia BCBS
Manuel Deese 55 Executive Vice President and Chief Operating Officer, Major
Accounts of Virginia BCBS
Elmond A. Kenyon 48 Senior Vice President, Local Markets of Virginia BCBS
Paul F. Nezi 49 Senior Vice President, Marketing and Underwriting of Virginia
BCBS
Thomas G. Snead, Jr. 43 Treasurer of Trigon Healthcare; Senior Vice President and Chief
Financial Officer of Virginia BCBS
J. Christopher Wiltshire 42 Secretary of Trigon Healthcare; Senior Vice President, General
Counsel and Corporate Secretary of Virginia BCBS
</TABLE>
The Company's Board of Directors is divided into three classes, referred to
herein as 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 are Hunter B. Andrews and Hubert R.
Stallard. These two nominees will be elected as Class II directors and nominated
for election by the Company's stockholders at the Annual Meeting in 1997. In
order to keep the number of directors in each class as even as possible in
accordance with applicable Virginia law, Mr. Smith will be redesignated as a
Class III director and Mr. Davis will be redesignated as a Class I director.
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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 Virginia BCBS. He became Chairman of Trigon
Healthcare in June 1995. 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.
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, Maritime Productions
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.
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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
of Virginia BCBS in November 1990. She became President of Trigon Healthcare in
June 1995. 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.
JOHN C. BERRY joined the Company in 1987. He served as Chief Operating
Officer of Government and Individual Business from 1987 through 1989 and as
Senior Vice President and Chief Operating Officer of Government and Individual
Business during 1990. In 1991, he was appointed to his current position of
Executive Vice President and Chief Operating Officer of Government and
Individual Business of Virginia BCBS.
MANUEL DEESE joined the Company in 1986 and retired effective January 1997.
He served as Senior Vice President of The Computer Company (a former subsidiary
of the Company) from 1986 through 1988, as Chief Benefit Administration and
Customer Service Officer during 1988 and 1989, and as Senior Vice President and
Chief Operating Officer of Major Accounts during 1990. In 1991, he was appointed
to his current position of Executive Vice President and Chief Operating Officer
of Major Accounts of Virginia BCBS. Mr. Deese serves on the boards of Central
Fidelity Banks, Inc. and American Filtrona Corp.
ELMOND A. KENYON joined the Company in October 1996 as Senior Vice
President, Local Markets of Virginia BCBS. Prior to joining the Company he was
employed by CIGNA Corporation since 1986. Since July 1995, he served CIGNA
Corporation as Vice President/General Manager, Cigna Health Care of Ohio. From
September 1994 to July 1995 he served as General Manager, Cigna Health of Ohio.
From June 1990 to September 1994, he served as a CIGNA Regional Marketing and
Sales Officer.
PAUL F. NEZI joined the Company in October 1996 as Senior Vice President,
Marketing and Underwriting of Virginia BCBS. Prior to joining the Company, he
served as Executive Vice President, Marketing Sales and Product Development of
Choice Care in Cincinnati, Ohio since 1993. From 1991 through 1992, he served as
Vice President and General Manager for the Advanced Imaging Products group of AM
Graphics, a division of AM International in Dayton, Ohio.
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 of Virginia BCBS.
He became Treasurer and Chief Financial Officer of Trigon Healthcare in June
1995.
J. CHRISTOPHER WILTSHIRE joined the Company in October 1996 as Senior Vice
President, General Counsel and Corporate Secretary of Virginia BCBS. He also
became Secretary of Trigon Healthcare in October 1996. Prior to joining the
Company, he was employed by the law firm, McGuire, Woods, Battle & Boothe,
L.L.P. for 17 years, the last nine of them as partner.
EMPLOYMENT HISTORY OF NOMINEES FOR DIRECTOR
HUNTER B. ANDREWS has been an attorney in private practice for more than
five years. He was a member of the Virginia State Senate from 1964 to 1996. Mr.
Andrews is 75.
HUBERT R. STALLARD is President and Chief Executive Officer of Bell
Atlantic-Virginia, Inc., a position he has held for more than five years. He is
a director of NationsBank, N.A., Universal Corporation and Bell
Atlantic-Virginia, Inc. Mr. Stallard is 59.
OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
None of the Directors or Executive Officers will individually own any
shares of Common Stock as a result of the Demutualization. However, certain
Directors are officers or owners of entities that will receive Common Stock in
the Demutualization. The aggregate number of such shares is expected to be
45,560 (less than 1% of the Common Stock to be issued in the Demutualization).
Information with respect to these shares follows. Mr. Candler is President and
owner of Candler Oil Company which is expected to receive 1,718 shares in the
Demutualization. Dr. Cole is President of Roanoke Ear, Nose and Throat Clinic,
Inc. which is expected to receive 611 shares in the Demutualization. Dr. Harvey
is President of
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Hampton University which is expected to receive 9,245 shares in the
Demutualization. Mr. Martin is Chairman and Chief Executive Officer of Martin
Research, Inc. which is expected to receive 488 shares in the Demutualization.
Mr. Powell is President of Salem Tools, Inc. which is expected to receive 6,841
shares in the Demutualization. Mr. Quarles is Chairman of the Board of
Friendship Manor, Inc. which is expected to receive 7,018 shares in the
Demutualization. Mr. Smith is a partner of McGuire, Woods, Battle & Boothe,
L.L.P. which is expected to receive 11,098 shares in the Demutualization. Mr.
Williamson is President of S.L. Williamson Company, Inc. which is expected to
receive 8,541 shares in the Demutualization.
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 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 $100 for attending other Board related meetings.
Fees paid to Directors may be deferred under the Company's non-qualified
deferred compensation plan. See "Deferred Compensation."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Human Resource, Compensation and Employee Benefits Committee of the
Board of Directors includes: John L. Colley, Jr., Chairman, Lenox D. Baker, Jr.,
M.D., William R. Harvey, Elizabeth G. Helm, William N. Powell and Jackie M.
Ward. None of the Committee members is or was an officer or employee of the
Company. There are executives and directors of the Company that also serve on
the Board of Directors of other entities. However, there are no Compensation
Committee interlocks between the Company and other entities.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation paid by the Company to the
chief executive officer and the other four most highly compensated executive
officers of the Company for the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION PAYOUTS
---------------------------------------------- ------------
OTHER ANNUAL LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($)(1) ($) ($)(2) ($) ($)(4)
- ------------------------------- ----- -------- ------- ------------ ------------ ------------
<S> <C>
Norwood H. Davis, Jr. 1996 $650,000 $ 0 $9,327 $ 0 $ 32,869
Chairman & CEO
Phyllis L. Cothran 1996 370,000 0 658 0 15,647
President & COO
Ronald H. Bargatze 1996 233,700 0 1,393 0 10,967
Executive VP & COO,
Integrated Health Systems
Manuel Deese (5) 1996 211,800 0 828 (3) 8,673
Executive VP & COO
Major Accounts
John C. Berry 1996 200,700 0 1,478 (3) 9,086
Executive VP & COO
Government & Individual
Business
</TABLE>
- ---------------
(1) Includes amounts deferred under the Company's 401(k), 401(k) Restoration and
nonqualified deferred compensation plans.
(2) 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. Each named executive received a 1996 car allowance of
$9,400, which is not included above, but does exceed 25% of the aggregate
perquisite amount. Includes Medicare tax and related income tax
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gross-up paid by the Company for named executives on the present value of
their vested non-qualified Supplemental Executive Retirement Plan benefit
earned in 1996 in the amounts of $8,415 for Mr. Davis, $1,248 for Mr.
Bargatze, $735 for Mr. Deese, and $1,375 for Mr. Berry. 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 $393 for Mr. Davis, $195 for Ms. Cothran,
$145 for Mr. Bargatze, $93 for Mr. Deese, and $103 for Mr. Berry. Includes
income tax gross-up on spousal travel paid by the Company in the amount of
$463 for Ms. Cothran. Includes income tax gross-up paid by the Company on a
Company-sponsored non-cash Eagle Award of $519 for Mr. Davis.
(3) Long-term cash award earned in 1996 for the performance period January 1,
1994 through December 31, 1996 is not yet calculable.
(4) Includes matching contributions under the Company's 401(k) and 401(k)
Restoration Plans in the amount of $22,050 for Mr. Davis, $13,200 for Ms.
Cothran, $10,967 for Mr. Bargatze, $8,673 for Mr. Deese, and $9,086 for Mr.
Berry. Includes actuarial equivalent of the benefit to the executive from
payment of annual premiums by the Company under a split dollar life
insurance program in the amounts of $10,713 for Mr. Davis and $2,447 for Ms.
Cothran. Includes above-market interest credited for future payment on
deferred compensation in the amount of $106 for Mr. Davis.
(5) Mr. Deese retired from the Company effective January 1997.
The Long-Term Incentive Plan Table below provides information concerning
estimated award ranges for the cash plan initiated in 1996 based on the
performance period January 1, 1996 through December 31, 1998. 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>
Norwood H. Davis, Jr. N/A 1996-1998 $ 130,000 $260,000 $520,000
Phyllis L. Cothran N/A 1996-1998 64,750 129,500 259,000
Ronald H. Bargatze N/A 1996-1998 29,213 58,425 116,850
Manuel Deese N/A 1996-1998 26,475 52,950 105,900
John C. Berry N/A 1996-1998 25,088 50,175 100,350
</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 the commercial medical loss
ratio 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.
The Plan of Demutualization contains provisions generally prohibiting
Virginia BCBS and Trigon Healthcare from adopting any stock-based compensation
plan, including any restricted stock, stock option or stock appreciation rights
plan, for directors or senior management prior to the effective date of the Plan
of Demutualization, and imposes restrictions on stock rights granted before
three months after expiration of the six-month lockup period following the
Offerings. The Company has accordingly not adopted any stock-based compensation
plan for directors or senior management to date, but expects that a stock option
or other stock-based compensation plan will be proposed for adoption, subject to
any required director and shareholder approvals, in 1997.
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 Plan, 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.
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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>
$ 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, 1996: Mr. Davis, 29 years; Ms. Cothran, 25 years; Mr. Bargatze,
20 years; Mr. Deese, 11 years; and Mr. Berry, 10 years. The covered
compensation under both the Retirement Plan and the Supplemental Executive
Retirement Plan for 1996 was: Mr. Davis, $785,611; Ms. Cothran, $462,225;
Mr. Bargatze, $381,872; Mr. Deese, $305,296; and Mr. Berry, $321,100.
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, 1996, 26 officers have
deferred a balance of $1,054,059. Interest credited in 1996 to the various
participants equaled $83,358. As of December 31, 1996, eight directors and three
past directors have deferred a balance of $1,651,022 and interest credited to
the various participants in 1996 equaled $128,585.
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 1996. 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
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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 Executive 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 Executive 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. Bargatze,
Deese and Berry 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. Messrs. Bargatze, Deese and Berry
each have more than 5 years of continuous 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 Class A Common
Stock, par value $.01 per share ("Common Stock"), 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 29.2 million shares of Common Stock will be issued to Eligible
Members in the Demutualization, and that 11.5 million shares of Common Stock
will be issued in the Offerings. See "Shares Eligible for Future Sale." No
shares of Non-Voting Common Stock or Class C Common Stock are expected to be
outstanding after completion of the Offerings. The Non-Voting Common Stock has
been authorized in connection with certain ownership and transfer restrictions
included in the Company's Articles. See "Certain Provisions of the Charter and
Plan." Prior to the Demutualization, no shares of stock of any class were
outstanding other than those held by Virginia BCBS. Holders of Common Stock and
Non-Voting Common Stock are entitled to share equally, share for share, in 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." Holders of Common Stock and Non-Voting
Common
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Stock have no preemptive rights to maintain their percentage of ownership in
future offerings or sales of stock of the Company. 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. 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 is authorized to 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 would 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 would vote together as one group. Any Class C Common Stock issued
as a part of the Commonwealth Payment would 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") would 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 would 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 would be payable 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 would not be
transferable. The Commonwealth of Virginia also would not be able to 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 would
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
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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.
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. The Articles
will also provide that if the Company and the BCBSA agree in writing to a share
ownership limit in connection with the Company's license agreement with the
BCBSA greater than 5%, then the Ownership Limit in the Company's Articles will
automatically be increased to such higher percentage.
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
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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 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 more than 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 or (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.
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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.
SHARES ELIGIBLE FOR FUTURE SALE
The 29.2 million 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. Local Virginia governments and school
boards are expected to receive approximately 3.1 million shares of Common Stock
in the Demutualization. Under current Virginia law, the Treasurer of each of
these entities may be held strictly liable for any decrease in value of the
Common Stock held by such entities after the end of the lockup period.
Consequently, unless the Virginia law is revised before the end of the lockup
period, the Company expects that substantially all these shares will be sold on
the day the lockup period ends. The Virginia General Assembly is currently
considering legislation to relax the strict liability standard with regard to
Common Stock held by the Treasurer of each of these entities; however, there can
be no assurance that such legislation will be enacted. In addition, Eligible
Members subject to ERISA are expected to receive approximately 15.7 million
shares of Common Stock in the Demutualization. ERISA plan fiduciaries have a
duty to diversify the investments of the ERISA plan to minimize the risk of
large losses, unless it is clearly prudent not to do so. For many ERISA plans,
the Common Stock will be the only asset of the plan. If an ERISA plan has no
assets other than Common Stock, the plan also may incur additional expenses for
government reporting if the Common Stock is not sold by the end of the plan year
in which the lockup period ends. Consequently, ERISA plans may be more likely
than other Eligible Members to sell Common Stock in the near term after the
lockup period ends.
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,
subject to certain limited exceptions.
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.
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UNDERWRITING
Subject to the terms and conditions set forth in a U.S. purchase agreement
(the "U.S. Purchase Agreement"), and concurrently with the sale of 2,308,000
shares of Common Stock to the International Managers (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, Alex. Brown & Sons Incorporated, Dean Witter
Reynolds Inc., Morgan Stanley & Co. Incorporated and Wheat, First Securities,
Inc. (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................................................................................
Alex. Brown & Sons Incorporated.........................................................................
Dean Witter Reynolds Inc................................................................................
Morgan Stanley & Co. Incorporated.......................................................................
Wheat, First Securities, Inc............................................................................
----------
Total....................................................................................... 9,232,000
----------
----------
</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 Managers"), for whom Merrill Lynch International,
Alex. Brown & Sons Incorporated, Dean Witter International Ltd., Morgan Stanley
& Co. International Limited, and Wheat, First Securities, Inc. 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 9,232,000 shares of Common Stock to the U.S. Underwriters, the
Company has agreed to sell to the International Managers, and the International
Managers have severally agreed to purchase, an aggregate of 2,308,000 shares of
Common Stock. Under certain circumstances as set forth in the International
Purchase Agreement, the commitments of non-defaulting International Managers 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 Managers
(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 Managers 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.
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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
Managers options to purchase up to 1,384,800 and 346,200 additional shares of
Common Stock, respectively, at the initial public offering price, less the
underwriting discount. Such options, which expire 30 days after the date of this
Prospectus, may be exercised solely to cover over-allotments. To the extent the
U.S. Underwriters exercise their 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.
At the request of the Company, the U.S. Underwriters have reserved up to
230,800 shares of Common Stock for sale at the initial public offering price to
certain officers and directors of the Company and other persons. The number of
shares of Common Stock available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the U.S. Underwriters to the general public
on the same basis as the other shares offered hereby. Certain individuals
purchasing reserved shares may be required to agree not to sell, offer or
otherwise dispose of any shares of Common Stock for a period of three months
after the date of this Prospectus.
The Company has agreed that it will not, without the prior written consent
of Merrill Lynch, Pierce, Fenner & Smith Incorporated, 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 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, subject to certain limited exceptions.
See "Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Merrill Lynch & Co. has from time to time performed investment banking
services for Virginia BCBS and has received fees in connection with such
services. Merrill Lynch & Co. is currently acting as financial advisor to
Virginia BCBS in connection with the Demutualization. In this regard, Virginia
BCBS has agreed to indemnify Merrill Lynch & Co. against certain liabilities.
Wheat First Butcher Singer, Inc., an affiliate of one of the Underwriters,
is expected to receive 25,349 shares of Common Stock in the Demutualization.
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.
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "TGH," subject to official notice of issuance. 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 Managers 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
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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 11,098 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.
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.
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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 which 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 (PPO). 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.
77
<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>
F-1
<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
F-2
<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)
---------- ---------- ------------- -------------
(IN THOUSANDS)
<S> <C>
ASSETS
CURRENT ASSETS
Cash............................................................. $ 11,102 $ 29,263 $ 33,303 $ 67,073
Investment securities, at estimated fair value (note 3).......... 990,469 1,090,389 1,090,977 1,090,977
Premiums and other receivables (note 4).......................... 326,769 332,878 369,406 369,406
Deferred income taxes (note 10).................................. 3,218 -- 18,474 18,474
Other assets..................................................... 9,362 9,369 9,717 9,717
---------- ---------- ------------- -------------
TOTAL CURRENT ASSETS........................................ 1,340,920 1,461,899 1,521,877 1,555,647
---------- ---------- ------------- -------------
Property and equipment, net (note 5)............................... 43,914 44,794 51,514 51,514
Deferred income taxes (note 10).................................... 7,347 15,229 58,108 58,108
Goodwill and other intangibles, net (note 13)...................... -- 22,847 77,372 77,372
Restricted investments, at estimated fair value (note 3)........... 7,575 6,918 10,314 10,314
Other assets....................................................... 3,348 13,644 15,552 15,552
---------- ---------- ------------- -------------
TOTAL ASSETS................................................ $1,403,104 $1,565,331 $ 1,734,737 $ 1,768,507
---------- ---------- ------------- -------------
---------- ---------- ------------- -------------
LIABILITIES AND SURPLUS
CURRENT LIABILITIES
Medical and other benefits payable (note 6)...................... $ 312,381 $ 372,815 $ 444,200 $ 444,200
Unearned premiums................................................ 102,240 97,789 98,558 98,558
Accounts payable and accrued expenses............................ 78,747 82,853 80,896 80,896
Deferred income taxes (note 10).................................. -- 13,968 -- --
Other liabilities (note 8)....................................... 176,530 170,711 153,103 153,103
Obligation for Commonwealth Payment (note 17).................... -- -- 87,500 --
---------- ---------- ------------- -------------
TOTAL CURRENT LIABILITIES................................... 669,898 738,136 864,257 776,757
---------- ---------- ------------- -------------
Obligation for Commonwealth Payment, noncurrent (note 17).......... -- -- 87,500 --
Obligations for employee benefits, noncurrent (note 11)............ 50,764 51,548 57,539 57,539
Medical and other benefits payable, noncurrent (note 6)............ 21,910 31,622 34,734 34,734
Long-term debt..................................................... -- -- -- 110,000
Minority interest in subsidiary.................................... 4,657 3,954 4,057 4,057
---------- ---------- ------------- -------------
TOTAL LIABILITIES........................................... 747,229 825,260 1,048,087 983,087
---------- ---------- ------------- -------------
SURPLUS
Common stock..................................................... -- -- -- 407
Capital in excess of par......................................... 754,315
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 30,698
---------- ---------- ------------- -------------
TOTAL SURPLUS............................................... 655,875 740,071 686,650 785,420
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 $ 1,768,507
---------- ---------- ------------- -------------
---------- ---------- ------------- -------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-3
<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
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <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):
INCOME BEFORE EXTRAORDINARY ITEMS PER SHARE................. $ .85 $ 1.44
---------- ----------
---------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 40,698,114 40,698,114
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-4
<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
-------- ------------- ---------
(IN THOUSANDS)
<S> <C>
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.
F-5
<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
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <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.
F-6
<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
F-7
<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
F-8
<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.
F-9
<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
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C>
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.
F-10
<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>
<S> <C>
Statutory surplus at:
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.
F-11
<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>
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>
F-12
<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>
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>
F-13
<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>
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>
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.
F-14
<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>
(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
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C>
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>
Fixed income securities........................................ $(27,877) $ 31,921 $ (10,060)
Equity securities.............................................. (39,319) 25,051 (5,076)
Derivative instruments......................................... -- 371 1,603
Provision for deferred income taxes............................ 23,610 (20,142) 4,725
-------- -------- -------------
$(43,586) $ 37,201 $ (8,808)
-------- -------- -------------
-------- -------- -------------
</TABLE>
F-15
<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>
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>
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>
F-16
<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>
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
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C>
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
F-17
<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
Company experienced a change in the payment patterns as a result of its
migration to a new claims processing system. 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>
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.
F-18
<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
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C>
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
------- ------- -------- ----------- --------
(UNAUDITED)
<S> <C>
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
----- ----- ----- ----------- -----
(UNAUDITED)
<S> <C>
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.
F-19
<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>
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
F-20
<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
------- ------- -------- ----------- -------
(UNAUDITED)
<S> <C>
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>
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.
F-21
<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>
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>
(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.
F-22
<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
-------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C>
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.
F-23
<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
F-24
<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. The Company and the
DOL have entered into a tolling agreement with respect to this matter
pursuant to which the parties have agreed that no litigation will be
instituted before February 1, 1997 and the applicable statute of
limitations will be tolled until May 1, 1997. 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. Due to the early stage of the DOL inquiries, the Company
cannot make an estimate of loss, if any (and has not established any
liability with respect thereto), or predict whether or not such inquiries
will result in a material adverse effect on the Company's results of
operations in any particular period. Although the ultimate resolution of
this matter cannot be estimated, the Company believes that it should not
have a material adverse effect on the Company's financial position.
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 16 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. Due to
the early stages of these claims and litigation, however, the Company
cannot make an estimate of loss, if any, or predict whether or not such
claims and litigation will result in a material adverse effect on the
Company's results of operations in any particular period.
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
F-25
<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
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. 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 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. The Company expects to use
proceeds of the public offering to pay $87.5 million of the Commonwealth
Payment and to fund the balance from borrowings under a revolving credit
facility or other available cash.
(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:
o Issuance of 29.2 million shares of common stock to eligible
members pursuant to the Demutualization.
o Payment of $34.2 million to certain eligible members in lieu of
shares of common stock.
o Issuance of 11.5 million shares of common stock in a public
offering with estimated net proceeds of $139.0 million.
o Payment of $175 million in cash as the Commonwealth Payment.
o The borrowing of $110.0 million under a revolving credit facility
to fund a portion of the Commonwealth Payment.
o Estimated additional nonrecurring expenses of $6.0 million related
to the Demutualization.
F-26
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996
(18) UNAUDITED PRO FORMA INFORMATION -- Continued
The pro forma earnings per share information reflected in the statements of
operations gives effect to the following transactions as if such
transactions had occurred on January 1, 1995:
o Issuance of 29.2 million shares of common stock to eligible
members pursuant to the Demutualization.
o Issuance of 11.5 million shares of common stock in a public
offering.
o Adjustment of tax expense to reflect the Company's 35% federal
statutory tax rate.
o Adjustment to reflect the interest on the $110.0 million borrowing
under the revolving credit agreement at 6% per annum.
F-27
<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
PAGE
----
Prospectus Summary........................................ 4
Risk Factors.............................................. 11
The Company............................................... 16
The Demutualization....................................... 17
Use of Proceeds........................................... 20
Dividend Policy........................................... 20
Capitalization............................................ 21
Selected Consolidated Financial and Operating Data........ 22
Unaudited Pro Forma Consolidated Financial Information.... 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 29
Business.................................................. 41
Legal Proceedings......................................... 62
Management................................................ 63
Description of Capital Stock.............................. 69
Shares Eligible for Future Sale........................... 73
Underwriting.............................................. 74
Legal Matters............................................. 76
Experts................................................... 76
Additional Information.................................... 76
Glossary.................................................. 77
Index to Consolidated Financial Statements................ F-1
UNTIL , 1997 (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.
11,540,000 SHARES
[Trigon Logo here] TRIGON HEALTHCARE, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
MORGAN STANLEY & CO.
INCORPORATED
WHEAT FIRST BUTCHER SINGER
, 1997
<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.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 29, 1997
PROSPECTUS
11,540,000 SHARES
[Trigon Logo here] TRIGON HEALTHCARE, INC.
COMMON STOCK
------------------------
All of the 11,540,000 shares of Common Stock offered hereby are being
offered by Trigon Healthcare, Inc. ( "Trigon" or the "Company"). Of the
11,540,000 shares of Common Stock offered hereby, 2,308,000 shares are being
offered outside the United States and Canada by the International Managers and
9,232,000 shares are being offered in a concurrent offering in the United States
and Canada by the U.S. Underwriters. 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 $12.00 and $14.00 per share. For a discussion of the factors to be
considered in determining the initial public offering price, see "Underwriting."
The Common Stock has been approved for listing on the New York Stock Exchange
under the symbol "TGH," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE 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>
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 at $1,300,000.
(3) The Company has granted the U.S. Underwriters and the International Managers
options, exercisable within 30 days after the date of this Prospectus, to
purchase up to an additional 1,384,800 shares and 346,200 shares of Common
Stock, respectively, solely, to cover over-allotments, if any. If such
options are 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, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. 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 , 1997.
------------------------
MERRILL LYNCH INTERNATIONAL
ALEX. BROWN & SONS
INTERNATIONAL
DEAN WITTER INTERNATIONAL LTD.
MORGAN STANLEY & CO.
INTERNATIONAL
WHEAT FIRST BUTCHER SINGER
------------------------
The date of this Prospectus is , 1997.
<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.
73
<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.
74
<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 9,232,000
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
Managers"), acting through their representatives, Merrill Lynch International,
Alex. Brown & Sons Incorporated, Dean Witter International Ltd., Morgan Stanley
& Co., International Limited, Wheat, First Securities, Inc. (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 Managers
may be increased as set forth in the International Purchase Agreement.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ------
<S> <C>
Merrill Lynch International.........................................
Alex. Brown & Sons Incorporated.....................................
Dean Witter International Ltd. .....................................
Morgan Stanley & Co. International Limited..........................
Wheat, First Securities, Inc........................................
---------
Total................................................... 2,308,000
---------
---------
</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,
Alex. Brown & Sons Incorporated, Dean Witter Reynolds Inc., Morgan Stanley & Co.
Incorporated, and Wheat, First Securities, Inc. 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 2,308,000 shares
of Common Stock to the International Managers, the Company has agreed to sell to
the U.S. Underwriters, and the U.S. Underwriters have severally agreed to
purchase, an aggregate of 9,232,000 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 Managers 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 Managers 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.
75
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
The International Managers 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 Managers 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 Managers and the U.S.
Underwriters options to purchase up to 346,200 and 1,384,800 additional shares
of Common Stock, respectively, at the initial public offering price, less the
underwriting discount. Such options, which expire 30 days after the date of this
Prospectus, may be exercised solely to cover over-allotments. To the extent the
International Managers exercise their option, each of the International Managers
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 Managers bears to the total
number of shares to be purchased initially by the International Managers.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
At the request of the Company, the U.S. Underwriters have reserved up to
230,800 shares of Common Stock for sale at the initial public offering price to
certain officers and directors of the Company and other persons. The number of
shares of Common Stock available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the U.S. Underwriters to the general public
on the same basis as the other shares offered hereby. Certain individuals
purchasing reserved shares may be required to agree not to sell, offer or
otherwise dispose of any shares of Common Stock for a period of three months
after the date of this Prospectus.
The Company has agreed that it will not, without the prior written consent
of Merrill Lynch, Pierce, Fenner & Smith Incorporated, 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 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, subject to certain limited exceptions.
See "Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Merrill Lynch & Co. has from time to time performed investment banking
services for Virginia BCBS and has received fees in connection with such
services. Merrill Lynch & Co. is currently acting as financial advisor to
Virginia BCBS in connection with the Demutualization. In this regard, Virginia
BCBS has agreed to indemnify Merrill Lynch & Co. against certain liabilities.
Wheat First Butcher Singer, Inc., an affiliate of one of the Underwriters,
is expected to receive 25,349 shares of Common Stock in the Demutualization.
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.
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "TGH," subject to official notice of issuance. 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 Managers 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
76
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
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 Manager has agreed that (i) it has not offered or sold
and, for a period of six months following consummation of the Offerings, will
not offer or sell any shares of Common Stock in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purpose of their
businesses or otherwise in circumstances which do not constitute an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995, (ii) it has complied with and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
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 in the United Kingdom any document received by it in
connection with the issuance of the Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or to a person to whom the document may
otherwise 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 11,098 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.
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.
77
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
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.
78
<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 which 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 (PPO). 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.
79
<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.
IN THIS PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES
DOLLARS.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................................ 4
Risk Factors.............................................. 11
The Company............................................... 16
The Demutualization....................................... 17
Use of Proceeds........................................... 20
Dividend Policy........................................... 20
Capitalization............................................ 21
Selected Consolidated Financial and Operating Data........ 22
Unaudited Pro Forma Consolidated Financial Information.... 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 29
Business.................................................. 40
Legal Proceedings......................................... 61
Management................................................ 62
Description of Capital Stock.............................. 68
Shares Eligible for Future Sale........................... 72
Certain United States Tax Consequences to Non-U.S.
Holders................................................. 73
Underwriting.............................................. 75
Legal Matters............................................. 77
Experts................................................... 77
Additional Information.................................... 77
Glossary.................................................. 79
Index to Consolidated Financial Statements................ F-1
UNTIL , 1997 (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.
11,540,000 SHARES
[Trigon Logo here] TRIGON HEALTHCARE, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH INTERNATIONAL
ALEX. BROWN & SONS
INTERNATIONAL
DEAN WITTER INTERNATIONAL LTD.
MORGAN STANLEY & CO.
INTERNATIONAL
WHEAT FIRST BUTCHER SINGER
, 1997
<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..................................................... 217,600
Printing and engraving expenses......................................................... 178,500
Blue sky fees and expenses (including counsel).......................................... 15,000
Accounting fees and expenses............................................................ 409,000
Legal fees and expenses................................................................. 280,000
Transfer agent's and registrar's fees................................................... 75,000
Miscellaneous........................................................................... 16,974
----------
Total.............................................................................. $1,300,000
----------
----------
</TABLE>
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 12.3 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 31.1
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). If issued, such securities are intended to be issued in reliance
upon an exemption from registration under the Securities Act contained in
Section 4(2) of the Act.
II-1
<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>
1.1 -- Form of Purchase Agreement (U.S. Version).
1.2 -- Form of Purchase Agreement (International Version).
2.1 -- Amended and Restated Plan of Demutualization.*
3.1 -- Amended and Restated 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 -- Form of License Agreements 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.*
10.9 -- Employee Thrift Plan of the Company.*
10.10 -- 401(k) Restoration Plan of the Company.*
10.11 -- 1996 Annual Management Incentive Plan of the Company.*
10.12 -- Employment Agreement dated as of December 12, 1990 by and between the Company and
John C. Berry.
10.13 -- Employment Agreement dated as of May 30, 1996 by and between the Company and
Ronald H. Bargatze.
10.14 -- Form of Credit Agreement among Trigon Healthcare, Inc., the banks party thereto and Morgan Guaranty Trust
Company of New York, as Agent.
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>
- ---------------
* 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.
II-2
<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 January 29, 1997.
TRIGON HEALTHCARE, INC.
By: /S/ THOMAS G. SNEAD, JR.
----------------------------
THOMAS G. SNEAD, JR.
Title: TREASURER
--------------------------
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>
* Chairman (Chief Executive Officer) January 29, 1997
- ------------------------------------------------------
NORWOOD H. DAVIS, JR.
* Director January 29, 1997
- ------------------------------------------------------
LENOX D. BAKER, JR., M.D.
* Director January 29, 1997
- ------------------------------------------------------
JAMES K. CANDLER
* Director January 29, 1997
- ------------------------------------------------------
JOHN COLE, JR., M.D.
* Director January 29, 1997
- ------------------------------------------------------
JOHN L. COLLEY, JR., PH.D.
* Director January 29, 1997
- ------------------------------------------------------
ROBERT M. FREEMAN
* Director January 29, 1997
- ------------------------------------------------------
WILLIAM R. HARVEY
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C>
* Director January 29, 1997
- ------------------------------------------------------
ELIZABETH G. HELM
* Director January 29, 1997
- ------------------------------------------------------
GARY A. JOBSON
* Director January 29, 1997
- ------------------------------------------------------
FRANK C. MARTIN, JR.
* Director January 29, 1997
- ------------------------------------------------------
DONALD B. NOLAN, M.D.
* Director January 29, 1997
- ------------------------------------------------------
WILLIAM N. POWELL
* Director January 29, 1997
- ------------------------------------------------------
J. CARSON QUARLES
* Director January 29, 1997
- ------------------------------------------------------
R. GORDON SMITH
* Director January 29, 1997
- ------------------------------------------------------
JACKIE M. WARD
* Director January 29, 1997
- ------------------------------------------------------
STIRLING L. WILLIAMSON, JR.
/S/ THOMAS G. SNEAD, JR. Treasurer (Principal Financial and Accounting January 29, 1997
- ------------------------------------------------------ Officer)
THOMAS G. SNEAD, JR.
</TABLE>
*By: /S/ THOMAS G. SNEAD, JR.
--------------------------------------------------
THOMAS G. SNEAD, JR.
ATTORNEY-IN-FACT
II-4
EXHIBIT 1.1
Draft -- January 28, 1997
==============================================================================
TRIGON HEALTHCARE, INC.
(a Virginia corporation)
________ Shares of Common Stock
U.S. PURCHASE AGREEMENT
Dated: __________, 1997
==============================================================================
<PAGE>
Table of Contents
<TABLE>
<S> <C>
U.S. PURCHASE AGREEMENT...........................................................................................1
SECTION 1. Representations and Warranties................................................................4
(a) Representations and Warranties by the Company...........................................4
(i) Compliance with Registration Requirements..........................................4
(ii) Independent Accountants...........................................................5
(iii) Financial Statements.............................................................5
(iv) Statutory Financial Statements....................................................6
(v) No Material Adverse Change in Business.............................................6
(vi) Good Standing of the Company, Virginia BCBS and TMSI..............................6
(vii) Good Standing of Subsidiaries....................................................7
(viii) Capitalization..................................................................7
(ix) Demutualization and Merger........................................................7
(x) Authorization of Agreement.........................................................8
(xi) Authorization and Description of Securities.......................................8
(xii) Authorization of Capital Stock of TMSI and Trigon Insurance. ....................8
(xiii) Authorization and Description of Member Shares..................................8
(xiv) Exemption from 1933 Act..........................................................8
(xv) Absence of Defaults and Conflicts.................................................9
(xvi) Absence of Labor Dispute........................................................10
(xvii) Absence of Proceedings.........................................................10
(xviii) Accuracy of Exhibits..........................................................10
(xix) Possession of Intellectual Property.............................................10
(xx) Absence of Further Requirements..................................................11
(xxi) BCBSA License...................................................................11
(xxii) Possession of Licenses and Permits.............................................11
(xxiii) Insurance Licenses............................................................12
(xxiv) Title to Property..............................................................13
(xxv) Maintenance of Insurance........................................................13
(xxvi) Due Adoption of the Plan.......................................................13
(xxvii) Compliance with Tax Laws......................................................14
(xxviii) Investment Company Act.......................................................14
(xxix) Environmental Laws.............................................................14
(xxx) Registration Rights.............................................................15
(b) Officer's Certificates.................................................................15
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing..............................................15
(a) Initial U.S. Securities................................................................15
(b) U.S. Option Securities.................................................................15
(c) Payment................................................................................16
(d) Denominations; Registration............................................................16
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 3. Covenants of the Company and Virginia BCBS...................................................17
(a) Compliance with Securities Regulations and Commission Requests.........................17
(b) Filing of Amendments...................................................................17
(c) Delivery of Registration Statements....................................................17
(d) Delivery of Prospectuses...............................................................18
(e) Continued Compliance with Securities Laws..............................................18
(f) Blue Sky Qualifications................................................................18
(g) Rule 158...............................................................................19
(h) Use of Proceeds........................................................................19
(i) Listing................................................................................19
(j) Restriction on Sale of Securities......................................................19
(k) Reporting Requirements.................................................................20
(l) Compliance with Rule 463...............................................................20
(m) Consummation of the Plan...............................................................20
SECTION 4. Payment of Expenses..........................................................................20
(a) Expenses................................................................................20
(b) Termination of Agreement................................................................20
SECTION 5. Conditions of U.S. Underwriters' Obligations.................................................21
(a) Effectiveness of Registration Statement................................................21
(b) Opinion of Counsel for Company and Virginia BCBS.......................................21
(c) Opinion of Counsel for U.S. Underwriters...............................................21
(d) Officers' Certificates.................................................................22
(e) Accountant's Comfort Letter............................................................22
(f) Bring-down Comfort Letter..............................................................22
(g) Approval of Listing....................................................................22
(h) No Objection...........................................................................22
(i) License Agreement......................................................................22
(j) Opinion of Special Tax Counsel for Virginia BCBS.......................................22
(k) Effectiveness of the Plan..............................................................23
(l) Purchase of Initial International Securities...........................................23
(m) Conditions to Purchase of U.S. Option Securities.......................................23
(n) Additional Documents...................................................................24
(o) Termination of Agreement...............................................................24
SECTION 6. Indemnification..............................................................................24
(a) Indemnification of U.S. Underwriters...................................................24
(b) Indemnification of Company, Virginia BCBS, Directors and Officers......................25
(c) Actions against Parties; Notification..................................................26
(d) Settlement without Consent if Failure to Reimburse.....................................26
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 7. Contribution.................................................................................27
SECTION 8. Representations, Warranties and Agreements to Survive Delivery...............................28
SECTION 9. Termination of Agreement.....................................................................28
(a) Termination; General...................................................................28
(b) Liabilities............................................................................29
SECTION 10. Default by One or More of the U.S. Underwriters...............................................29
SECTION 11. Notices.......................................................................................30
SECTION 12. Parties.......................................................................................30
SECTION 13. GOVERNING LAW AND TIME........................................................................30
SECTION 14. Effect of Headings............................................................................30
SCHEDULES
Schedule A - List of Underwriters.......................................................Sch A-1
Schedule B - Pricing Information........................................................Sch B-1
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel............................................A-1
</TABLE>
<PAGE>
Draft -- January 28, 1997
TRIGON HEALTHCARE, INC.
(a Virginia corporation)
________ Shares of Class A Common Stock
(Par Value $.01 Per Share)
U.S. PURCHASE AGREEMENT
__________, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Alex. Brown & Sons Incorporated
Dean Witter Reynolds Inc.
Morgan Stanley & Co. Incorporated
Wheat, First Securities, Inc.
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Trigon Healthcare, Inc., a Virginia corporation (the "Company"),
proposes to issue shares of its Class A Common Stock, par value $.01 per share
(shares of which class of stock of the Company are hereinafter referred to as
"Common Stock"), in connection with the conversion (the "Demutualization") of
Blue Cross and Blue Shield of Virginia (doing business as Trigon Blue Cross Blue
Shield), a mutual insurance company organized under the laws of the Commonwealth
of Virginia ("Virginia BCBS"), into a Virginia stock corporation pursuant to
Virginia BCBS's Amended and Restated Plan of Demutualization dated October 31,
1996 (the "Plan"), as approved by the members of the Virginia BCBS on September
6, 1996 and approved after a public hearing by the Virginia State Corporation
Commission on November 5, 1996. Upon consummation of the Plan, Virginia BCBS
will convert into a stock insurance corporation, Trigon Merger Sub, Inc., a
Virginia corporation and a wholly-owned subsidiary of the Company ("TMSI"), will
merge with
<PAGE>
and into Virginia BCBS, in a merger in which Virginia BCBS will be the surviving
company (the "Merger") and Virginia BCBS will become a wholly owned subsidiary
of the Company and will be renamed Trigon Insurance Company ("Trigon
Insurance"). Pursuant to the Plan, the Company proposes to (i) issue to Eligible
Members (as defined in the Plan) shares of Common Stock (such shares allocated
to Eligible Members, exclusive of shares allocated to Eligible Members in
respect of which cash is paid in lieu of such shares, being referred to herein
as "Member Shares") in exchange for their Membership Interest (as defined in the
Plan) and (ii) subject to the terms and conditions stated herein, to issue and
sell to Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and each of the other U.S. Underwriters named in Schedule A
hereto (collectively, the "U.S. Underwriters", which term shall also include any
underwriter substituted as hereinafter provided in Section 10 hereof), for whom
Merrill Lynch, Alex. Brown & Sons Incorporated, Dean Witter Reynolds Inc.,
Morgan Stanley & Co. Incorporated and Wheat, First Securities, Inc. are acting
as representatives (in such capacity, the "U.S. Representatives"), with respect
to the issue and sale by the Company and the purchase by the U.S. Underwriters,
acting severally and not jointly, of the respective numbers of shares of Common
Stock of the Company set forth in said Schedule A, and with respect to the grant
by the Company to the U.S. Underwriters, acting severally and not jointly, of
the option described in Section 2(b) hereof to purchase all or any part of
________ additional shares of Common Stock to cover over-allotments, if any. The
aforesaid ________ shares of Common Stock (the "Initial U.S. Securities") to be
purchased by the U.S. Underwriters and all or any part of the ________ shares of
Common Stock subject to the option described in Section 2(b) hereof (the "U.S.
Option Securities") are hereinafter called, collectively, the "U.S. Securities".
On the Effective Date (as defined in the Plan), the Membership Interests of all
Members (as defined in the Plan) will be canceled and, as soon as reasonably
practicable thereafter, the Member Shares and cash will be issued to Eligible
Members. In addition, as required by the Plan, the Company will make a payment
in cash or a combination of cash and shares of its Class C redeemable voting
Common Stock, par value $.01 per share ("Class C Stock"), to the Treasurer of
the Commonwealth of Virginia, in addition to any shares of Common Stock that the
Commonwealth may be entitled to receive as an Eligible Member, in an amount
equal to the amount required to be paid by Virginia Code ss.38.2-1005.1B.4 (the
"Commonwealth Payment").
It is understood that the Company and Virginia BCBS are concurrently
entering into an agreement dated the date hereof (the "International Purchase
Agreement") providing for the offering by the Company of an aggregate of
________ shares of Common Stock (the "Initial International Securities") through
arrangements with certain underwriters outside the United States and Canada (the
"International Managers") for which Merrill Lynch International, Alex. Brown &
Sons Incorporated, Dean Witter International Ltd., Morgan Stanley & Co.
International Limited and Wheat, First Securities, Inc. are acting as lead
managers (the "Lead Managers") and the grant by the Company to the International
Managers, acting severally and not jointly, of an option to purchase all or any
part of the International Managers' pro rata portion of up to ________
additional shares of Common Stock solely to cover over allotments, if any (the
"International Option Securities" and, together with the U.S. Option Securities,
the "Option Securities"). The Initial International Securities and the
International Option Securities are hereinafter called the
<PAGE>
"International Securities". It is understood that the Company is not obligated
to sell and the U.S. Underwriters are not obligated to purchase, any Initial
U.S. Securities unless all of the Initial International Securities are
contemporaneously purchased by the International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters", the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities", and the U.S. Securities and the International Securities
are hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated (in such capacity, the "Global Coordinator").
The Company understands that the U.S. Underwriters propose to make a
public offering of the U.S. Securities as soon as the U.S. Representatives deem
advisable after this Agreement has been executed and delivered.
The Company and the U.S. Underwriters agree that up to _______ shares
of the Initial U.S. Securities to be purchased by the U.S. Underwriters (the
"Reserved Securities") shall be reserved for sale by the Underwriters to certain
eligible directors and officers of the Company, as part of the distribution of
the Securities by the Underwriters, subject to the terms of this Agreement, the
applicable rules, regulations and interpretations of the National Association of
Securities Dealers, Inc. and all other applicable laws, rules and regulations.
To the extent that such Reserved Securities are not orally confirmed for
purchase by such eligible directors and officers of the Company by the end of
the first business day after the date of this Agreement, such Reserved
Securities may be offered to the public as part of the public offering
contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-09773) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the U.S. Securities (the "Form of U.S.
Prospectus") and one relating to the International Securities (the "Form of
International Prospectus"). The Form of International Prospectus is identical to
the Form of U.S. Prospectus, except for the front cover and back cover pages and
the information under the caption "Underwriting" and the inclusion in the Form
of International Prospectus of a section under the
<PAGE>
caption "Certain United States Tax Considerations to Non-U.S. Holders." The
information included in any such prospectus or in any such Term Sheet, as the
case may be, that was omitted from such registration statement at the time it
became effective but that is deemed to be part of such registration statement at
the time it became effective (a) pursuant to paragraph (b) of Rule 430A is
referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule
434 is referred to as "Rule 434 Information." Each Form of U.S. Prospectus and
Form of International Prospectus used before such registration statement became
effective, and any prospectus that omitted, as applicable, the Rule 430A
Information or the Rule 434 Information, that was used after such effectiveness
and prior to the execution and delivery of this Agreement, is herein called a
"preliminary prospectus." Such registration statement, including the exhibits
thereto and schedules thereto at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final Form
of U.S. Prospectus and the final Form of International Prospectus in the forms
first furnished to the Underwriters for use in connection with the offering of
the Securities are herein called the "U.S. Prospectus" and the "International
Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is
relied on, the terms "U.S. Prospectus" and "International Prospectus" shall
refer to the preliminary U.S. Prospectus dated _____, 1997 and preliminary
International Prospectus dated ____, 1997, respectively, each together with the
applicable Term Sheet and all references in this Agreement to the date of such
Prospectuses shall mean the date of the applicable Term Sheet. For purposes of
this Agreement, all references to the Registration Statement, any preliminary
prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet
or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. Each of the Company
and Virginia BCBS, jointly and severally, represents and warrants to each U.S.
Underwriter as of the date hereof, as of the Closing Time referred to in Section
2(c) hereof, and as of each Date of Delivery (if any) referred to in Section
2(b), hereof and agrees with each U.S. Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company or Virginia BCBS, are contemplated by the
Commission, and any request on the part of the Commission for
additional information has been complied with.
<PAGE>
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any U.S. Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments
and supplements thereto complied and will comply in all material
respects with the re quirements of the 1933 Act and the 1933 Act
Regulations and did not and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
Neither of the Prospectuses nor any amendments or supplements thereto,
at the time the Prospectuses or any amendments or supplements thereto
were issued and at the Closing Time (and, if any U.S. Option Securities
are purchased, at the Date of Delivery), included or will include an
untrue statement of a material fact or omitted or will omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
If Rule 434 is used, the Company will comply with the requirements of
Rule 434 and the Prospectuses shall not be "materially different", as
such term is used in Rule 434, from the prospectuses included in the
Registration Statement at the time it became effective. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the U.S.
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any U.S. Underwriter through the
U.S. Representatives or any International Manager through the Lead
Managers expressly for use in the Registration Statement or the U.S.
Prospectus.
Each preliminary prospectus and the prospectuses filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectuses
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) Independent Accountants. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included
in the Registration Statement and the Prospectuses, together with the
related schedules and notes, present fairly the financial position of
Virginia BCBS and its consolidated subsidiaries at the dates indicated
and the results of operations and cash flows of Virginia BCBS and its
<PAGE>
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout
the periods involved. The supporting schedules included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data
and the summary financial information included in the Prospectuses
present fairly the information shown therein and have been compiled on
a basis consistent with that of the audited financial statements
included in the Registration Statement. The pro forma financial
statements and the related notes thereto included in the Registration
Statement and the Prospectuses present fairly the information shown
therein, have been prepared in accordance with the Commission's rules
and guidelines with respect to pro forma financial statements and have
been properly compiled on the bases described therein, and the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions and circumstances referred to therein.
(iv) Statutory Financial Statements. The statutory financial
statements of Virginia BCBS and its subsidiaries, from which certain
ratios and other statistical data contained in the Registration
Statement have been derived, have for each relevant period been
prepared in accordance with accounting practices prescribed or
permitted by the National Association of Insurance Commissioners and
the insurance department of the Common wealth of Virginia, and such
accounting practices have been applied on a consistent basis throughout
the periods involved, except as disclosed therein.
(v) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectuses, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business
prospects of Trigon considered as one enterprise, whether or not
arising in the ordinary course of business, (B) there have been no
transactions entered into by Trigon, other than those in the ordinary
course of business, which are material with respect to Trigon
considered as one enterprise, and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any
class of its capital stock. For purposes of this Agreement, "Trigon"
shall mean Virginia BCBS as a mutual insurance company and its
subsidiaries, including the Company, at all times prior to the
effectiveness of the Plan and the Company and its subsidiaries,
including Trigon Insurance as a stock corporation, at all times on and
after the effectiveness of the Plan.
(vi) Good Standing of the Company, Virginia BCBS and TMSI. The
Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the Commonwealth of
Virginia; Virginia BCBS has been duly organized and, since its
conversion to a mutual insurance company in 1991 until immediately
prior to the effectiveness of the Plan, has and will continue to be
validly existing as a mutual insurance company in good standing under
the laws of the Commonwealth of Virginia; upon the
<PAGE>
effectiveness of the Plan, Trigon Insurance will be validly existing as
a stock corporation in good standing under the laws of the Commonwealth
of Virginia; each of the Company and Virginia BCBS has corporate power
and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectuses and to enter into and
perform its obligations under this Agreement; and each of the Company
and Virginia BCBS is duly qualified as a foreign corporation to
transact business and is in good standing in each other jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing could not
reasonably be expected to result in a material adverse effect on the
condition, financial or otherwise, or in the earnings, business affairs
or business prospects of Trigon considered as one enterprise (a
"Material Adverse Effect"). TMSI has been duly incorporated and, until
immediately prior to the effectiveness of the Plan, will continue to be
duly incorporated and validly existing as a stock corporation in good
standing under the laws of the Commonwealth of Virginia.
(vii) Good Standing of Subsidiaries. Each of the subsidiaries
listed on Exhibit 21 to the Registration Statement, which are the only
subsidiaries of Virginia BCBS, has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing could not reasonably be expected to result in a Material
Adverse Effect; except as otherwise disclosed in the Registration
Statement, all of the issued and outstanding capital stock of each such
subsidiary has been duly authorized and validly issued, is fully paid
and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity; and none of the outstanding
shares of capital stock of any such subsidiary was issued in violation
of the preemptive or similar rights of any securityholder of such
subsidiary. Prior to the effectiveness of the Plan, the Company will
have no subsidiaries other than TMSI and, upon the effectiveness of the
Plan, will have no subsidiaries other than Trigon Insurance and
subsidiaries of Trigon Insurance.
(viii) Capitalization. Prior to the effectiveness of the Plan,
upon the filing with the State Corporation Commission of the
Commonwealth of Virginia ("the State Corporation Commission") of the
Articles of Incorporation of the Company in the form filed as an
Exhibit to the Registration Statement, the Company will have an
authorized capitalization as set forth in the Prospectus.
(ix) Demutualization and Merger. Upon the effectiveness of
the Plan and pursuant to the Merger: (a) TMSI will be merged with and
into Virginia BCBS, the separate existence of TMSI will cease, and
Virginia BCBS will become a wholly owned subsidiary
<PAGE>
of the Company; (b) Trigon Insurance will become a stock corporation
incorporated under and governed by the Virginia Stock Corporation Act,
ss.13.1-601 et seq.; (c) each issued and outstanding share of common
stock of TMSI owned by the Company immediately prior to the
effectiveness of the Plan shall, as a result of the Merger and without
any action on the part of the Company, be canceled and converted into
one share of stock of Trigon Insurance; (d) all Membership Interests of
all Members in Virginia BCBS shall be canceled, and in consideration
for their Membership Interests, including their interests in the
surplus of Virginia BCBS, Eligible Members shall be entitled to receive
Common Stock from the Company and/or cash from Trigon Insurance
pursuant to and in accordance with the Plan; and (e) all issued and
outstanding shares of capital stock in the Company owned by Virginia
BCBS shall be canceled. The Company shall make the Commonwealth Payment
in accordance with the Plan.
(x) Authorization of Agreement. This Agreement and the
International Purchase Agreement have been duly authorized, executed
and delivered by the Company and Virginia BCBS.
(xi) Authorization and Description of Securities. The
Securities to be purchased by the U.S. Underwriters and the
International Managers from the Company have been duly authorized for
issuance and sale to the U.S. Underwriters pursuant to this Agreement
and the International Managers pursuant to the International Purchase
Agreement, respectively, and, when issued and delivered by the Company
pursuant to this Agreement and the International Purchase Agreement,
respectively, against payment of the consideration set forth herein and
the International Purchase Agreement, respectively, will be validly
issued, fully paid and non-assessable; the Common Stock conforms to all
statements relating thereto contained in the Prospectuses and such
description conforms to the rights set forth in the instruments
defining the same; no holder of the Securities will be personally
liable for any debts, obligations, liabilities or losses of the Company
by reason of being such a holder; and the issuance of the Securities is
not subject to the preemptive or other similar rights of any
securityholder of the Company.
(xii) Authorization of Capital Stock of TMSI and Trigon
Insurance. As of the date hereof and at all times subsequent hereto up
to the effectiveness of the Plan, all of the issued and outstanding
shares of capital stock of TMSI shall have been duly authorized and
validly issued and shall be fully paid and non-assessable and shall be
owned by the Company, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity. Upon
effectiveness of the Plan, all of the outstanding shares of capital
stock of Trigon Insurance will have been duly authorized and, when
issued and delivered to the Company pursuant to the Plan, will be
validly issued, fully paid and non-assessable and will be owned by the
Company, free and clear of any security interest, mortgage, pledge,
lien, encumbrance claim or equity.
<PAGE>
(xiii) Authorization and Description of Member Shares. The
Member Shares have been duly authorized, and when issued and delivered
to Eligible Members in exchange for their Membership Interests pursuant
to the Plan, will be validly issued, fully paid and non-assessable; no
holder thereof will be personally liable for any debts, obligations,
liabilities or losses of the Company by reason of being such a holder;
such Member Shares are not subject to the preemptive or other similar
rights of any securityholder of the Company and all corporate action
required to be taken for the authorization and issuance of the Member
Shares has been validly and sufficiently taken.
(xiv) Exemption from 1933 Act. The issuance and delivery of
the Member Shares to Eligible Members in exchange for their Membership
Interests pursuant to the Plan is exempt from the registration
requirements of the 1933 Act.
(xv) Absence of Defaults and Conflicts. Neither the Company,
Virginia BCBS or any of its subsidiaries is in violation of its charter
or by-laws or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note,
lease or other agreement or instrument to which the Company, Virginia
BCBS or any of its subsidiaries is a party or by which it or any of
them may be bound, or to which any of the property or assets of the
Company, Virginia BCBS or any subsidiary is subject (collectively,
"Agreements and Instruments"), except for such defaults that could not
reasonably be expected to result in a Material Adverse Effect; and the
execution, delivery and performance of this Agreement, the
International Purchase Agreement and the Plan and the consummation of
the transactions contemplated in this Agreement, the International
Purchase Agreement, the Plan and the Registration Statement (including
the issuance of the Member Shares to Eligible Members in exchange for
their Membership Interests pursuant to the Plan, the issuance of cash
and Class C Stock to the Treasurer of the Commonwealth of Virginia in
satisfaction of the Commonwealth payment pursuant to the Plan, and the
issuance and sale of the Securities and the use of the proceeds from
the sale of the Securities as described in the Prospectuses under the
caption "Use of Proceeds") and compliance by the Company and Virginia
BCBS with their obligations under this Agreement, the International
Purchase Agreement and the Plan have been duly authorized by all
necessary corporate action and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with
or constitute a breach of, or default or Repayment Event (as defined
below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company,
Virginia BCBS or any subsidiary pursuant to, the Agreements and
Instruments (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that could not reasonably be expected to result
in a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter or by-laws of the Company,
Virginia BCBS or any subsidiary or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Company, Virginia BCBS or any
<PAGE>
subsidiary or any of their assets, properties or operations (other than
foreign or state securities, insurance securities or blue sky laws in
connection with the offering, issuance or sale of the Securities under
this Agreement and the International Purchase Agreement), except for
such violations resulting from the failure to make or obtain or comply
with such filings, authorizations, approvals, consents, licenses,
orders, registrations, qualifications or decrees in connection with the
Plan that could not reasonably be expected to have a Material Adverse
Effect or have a material adverse effect on the ability of the Company
or Virginia BCBS to perform their respective obligations under the Plan
or to consummate the transactions contemplated therein. As used herein,
a "Repayment Event" means any event or condition which gives the holder
of any note, debenture or other evidence of indebtedness (or any person
acting on such holder's behalf) the right to require the repurchase,
redemption or repayment of all or a portion of such indebtedness by the
Company, Virginia BCBS or any subsidiary.
(xvi) Absence of Labor Dispute. No labor dispute with the
employees of the Company, Virginia BCBS or any of its subsidiaries
exists or, to the knowledge of the Company or Virginia BCBS, is
imminent, and the Company and Virginia BCBS are not aware of any
existing or imminent labor disturbance by the employees of any of its
or any subsidiary's principal suppliers, customers or contractors,
which, in either case, may reasonably be expected to result in a
Material Adverse Effect.
(xvii) Absence of Proceedings. Except for matters disclosed in
the Registration Statement, there is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge
of the Company or Virginia BCBS, threatened, against or affecting the
Company, Virginia BCBS or any of its subsidiaries, which is required to
be disclosed in the Registration Statement, or which might reasonably
be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the
properties or assets thereof or the consummation of the transactions
contemplated in this Agreement, the International Purchase Agreement
and the Plan or the performance by the Company or Virginia BCBS of its
obligations hereunder or thereunder; and the aggregate of all pending
legal or governmental proceedings to which the Company, Virginia BCBS
or any subsidiary is a party or of which any of their respective
property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation
incidental to the business, could not reasonably be expected to result
in a Material Adverse Effect.
(xviii) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectuses or to be filed as exhibits thereto which
have not been so described and filed as required.
(xix) Possession of Intellectual Property. The Company,
Virginia BCBS and its subsidiaries own or possess, or can acquire on
reasonable terms, adequate patents, patent
<PAGE>
rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service
marks, trade names or other intellectual property (collectively,
"Intellectual Property") necessary to carry on the business now
operated by them, and neither the Company, Virginia BCBS nor any of its
subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect
to any Intellectual Property or of any facts or circumstances which
would render any Intellectual Property invalid or inadequate to protect
the interest of the Company, Virginia BCBS or any of its subsidiaries
therein, and which infringement or conflict (if the subject of any
unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, could not reasonably be expected to result
in a Material Adverse Effect.
(xx) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company or
Virginia BCBS of their respective obligations hereunder or under the
Plan, in connection with the offering, issuance or sale of the
Securities under this Agreement and the International Purchase
Agreement, in connection with the issuance of the Member Shares to
Eligible Members in exchange for their Membership Interests and of cash
and Class C Stock to the Treasurer of the Commonwealth of Virginia in
satisfaction of the Common wealth Payment pursuant to the Plan, or the
consummation of the transactions con templated by this Agreement, the
International Purchase Agreement and the Plan, except (a) such as have
been already obtained or as may be required under the 1933 Act or the
1933 Act Regulations and foreign or state securities, insurance
securities or blue sky laws in connection with the offering, issuance
or sale of the Securities under this Agreement and the International
Purchase Agreement and (b) such filings, authorizations, approvals,
consents, licenses, orders, registrations, qualifications or decrees in
connection with the Plan that, if not made or obtained or complied
with, could not reasonably be expected to have a Material Adverse
Effect or have a material adverse effect on the ability of the Company
or Virginia BCBS to perform their respective obligations under the Plan
or to consummate the transactions contemplated therein.
(xxi) BCBSA License. Virginia BCBS is in full compliance with
the requirements of the Blue Cross License Agreement, dated as of
November 16, 1995, between Virginia BCBS and the Blue Cross and Blue
Shield Association (the "BCBSA"), and the Virginia Blue Shield License
Agreement, dated as of November 16, 1995, between Virginia BCBS and the
BCBSA, except in each case where noncompliance could not reasonably be
expected to have a Material Adverse Effect. Upon execution thereof by
the Company on or prior to the Effective Date, the License Agreement
attached as Exhibit 10.1 to the Registration Statement (the "New
License Agreement") shall become effective and enforceable against the
Company and, to the best of the Company's and Virginia BCBS' knowledge,
the BCBSA in accordance with its terms. Each of Virginia BCBS's
<PAGE>
subsidiaries that is required by the BCBSA as of the date hereof, or
that will be required by the BCBSA as of the Closing Time, to be a
party to a Blue Cross Affiliate License Agreement is in full compliance
with the requirements of such agreement, except in each case where
noncompliance could not reasonably be expected to have a Material
Adverse Effect.
(xxii) Possession of Licenses and Permits. The Company,
Virginia BCBS and its subsidiaries each possess such permits, licenses,
approvals, consents and other author izations (collectively,
"Governmental Licenses") issued by the appropriate federal, state,
local or foreign regulatory agencies or bodies necessary to conduct the
business now operated by them, except where the failure to possess such
Government Licenses could not reasonably be expected to have a Material
Adverse Effect; the Company, Virginia BCBS and its subsidiaries each
are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply could not
reasonably be expected, singly or in the aggregate, to have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect could not reasonably be expected to have a Material
Adverse Effect; and neither the Company, Virginia BCBS nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, might reasonably be expected to result in a Material
Adverse Effect.
(xxiii) Insurance Licenses. The Company has made all required
filings under insurance holding company statutes applicable to it, and
is duly licensed or authorized as an insurance holding company in each
jurisdiction in which it is or will immediately after the effectiveness
of the Plan be required to be so licensed or authorized, except where
the failure to have made such filings or to be so licensed or
authorized in any such jurisdiction could not reasonably be expected to
have a Material Adverse Effect. Each of Virginia BCBS and its
subsidiaries which is engaged in the insurance business (the "Insurance
Subsidiaries") is duly licensed or authorized to conduct its insurance
business under the insurance laws of each jurisdiction in which it
conducts such business so as to require such licensing or
authorization, except where the failure to be so licensed or authorized
could not reasonably be expected to have a Material Adverse Effect; all
such licenses or authorizations are in full force and effect and
neither the Company, Virginia BCBS nor any Insurance Subsidiary has
received any notice of any event, inquiry, investigation or proceeding
that would reasonably be expected to result in the suspension,
revocation or limitation of any such licenses or authorizations or
otherwise impose any limitation on the conduct of the business of the
Company, Virginia BCBS or any Insurance Subsidiary, except any such
suspension, revocation or limitation which could not reasonably be
expected to have a Material Adverse Effect, and to the Company's,
Virginia BCBS's and the Insurance Subsidiaries' knowledge, there is no
sustainable basis under current law, regulation or judicial
interpretation for any such suspension, revocation or limitation; each
<PAGE>
of Virginia BCBS and the Insurance Subsidiaries is in compliance with,
and conducts its businesses in conformity with, all applicable
insurance laws and regulations, except where the failure to comply or
conform could not reasonably be expected to have a Material Adverse
Effect; and Virginia BCBS has disclosed in writing to the U.S.
Representatives all pending significant examinations, and all
significant examinations which have been completed and filed since the
fiscal year ending December 31, 1990, by any governmental authority
having jurisdiction to regulate the insurance operations of Virginia
BCBS or any Insurance Subsidiary. Each of the subsidiaries of Virginia
BCBS operating as a health maintenance organization (the "HMO
Subsidiaries") is duly licensed as a health maintenance organization
under the laws of each jurisdiction in which it conducts such business
so as to require such licensing, except where the failure to be so
licensed could not reasonably be expected to have a Material Adverse
Effect. Each of ____________, ____________ and _______________ is duly
qualified as a health maintenance organization under The Health
Maintenance Organization Act of 1973, as amended, and the rules and
regulations of the Department of Health and Human Services thereunder.
(xxiv) Title to Property. The Company, Virginia BCBS and its
subsidiaries have good and marketable title to all real property owned
by the Company, Virginia BCBS and its subsidiaries and good title to
all other properties owned by them, in each case, free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions or
en cumbrances of any kind except such as (a) are described in the
Prospectuses or (b) do not, singly or in the aggregate, materially
affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company, Virginia
BCBS or any of its subsidiaries; and all of the leases and subleases
material to the business of Trigon and its subsidiaries, considered as
one enterprise, and under which the Company, Virginia BCBS or any of
its subsidiaries holds properties described in the Prospectuses, are in
full force and effect, and neither the Company, Virginia BCBS nor any
subsidiary has any notice of any claim of any sort that has been
asserted by anyone adverse to the rights of the Company, Virginia BCBS
or any subsidiary under any of the leases or subleases mentioned above,
or affecting or questioning the rights of the Company, Virginia BCBS or
such subsidiary to the continued possession of the leased or subleased
premises under any such lease or sublease, and which if adversely
decided could reasonably be expected to have a Material Adverse Effect.
(xxv) Maintenance of Insurance. The Company, Virginia BCBS and
each of its subsidiaries maintain insurance policies with respect to
such insurable properties, potential liabilities and occurrences that
merit or require catastrophic insurance in amounts deemed adequate in
the reasonable opinion of the management for the Company and Virginia
BCBS or maintain a system or systems of self-insurance or assumption of
risk which accords with the practices of similar businesses; all such
insurance policies are in full force and effect.
<PAGE>
(xxvi) Due Adoption of the Plan. The Plan was duly adopted on
September 6, 1996 by a vote (the "Policyholder Vote") of more than
two-thirds of the votes validly cast by Voting Members (as defined in
the Plan) (which adoption complied with the applicable requirements of
Virginia Code ss.38.2-1005.1) and such adoption has not been rescinded
or otherwise withdrawn; on November 5, 1996 the State Corporation
Commission issued a final order approving the Plan in accordance with
the requirements of Virginia Code ss.38.2-1005.1 (the "Commission
Order"); the time period within which an appeal to the Commission Order
must be noted for an appeal to be validly made has expired and, to the
Company's and Virginia BCBS's knowledge, no appeals were so noted;
prior to the Effective Date, Virginia BCBS will have filed with the
State Corporation Commission in accordance with Virginia law the
Articles of Merger (as defined in the Plan) together with a copy of the
Plan so approved; no other approvals are required to be obtained under
Virginia law for the effectiveness of the Plan; on the Effective Date,
the Plan will become effective in accordance with its terms pursuant to
Virginia Code ss.38.2-1005.1 and the Demutualization will be completed
in accordance with the Plan and the laws of the Commonwealth of
Virginia applicable to the reorganization of mutual insurance companies
into stock corporations effected through a merger and any rules and
regulations of the State Corporation Commission in respect thereof, in
each case as administered or interpreted by the State Corporation
Commission in respect thereof; and prior to or contemporaneously with
the Closing Time each of the actions required to occur and conditions
required to be satisfied on or prior to the effectiveness of the Plan
pursuant to the Commission's Order or the Plan will have occurred or
been satisfied.
(xxvii) Compliance with Tax Laws. All material income, payroll
and sales tax returns required to have been filed prior to the date
hereof or the Closing Time by the Company, Virginia BCBS or any of its
subsidiaries, in any jurisdiction, shall have been so filed, and all
material taxes, including related withholding taxes, penalties and
interest, assessments and other charges due or claimed to be due from
such entities have been paid, other than those being contested in good
faith and for which adequate reserves have been provided or those
currently payable without penalty or interest.
(xxviii) Investment Company Act. The Company is not, and upon
the issuance of the Member Shares to Eligible Members in exchange for
their Membership Interests pursuant to the Plan and the issuance and
sale of the Securities as herein contemplated and the application of
the net proceeds therefrom as described in the Prospectuses will not
be, nor is Virginia BCBS or any of its subsidiaries, an "investment
company" or an entity "controlled" by an "investment company" as such
terms are defined in the Investment Company Act of 1940, as amended
(the "1940 Act").
(xxix) Environmental Laws. Except as described in the
Registration Statement and except as could not reasonably be expected,
singly or in the aggregate, to result in a Material Adverse Effect, (A)
neither the Company, Virginia BCBS nor any of its subsidiaries is in
violation of any federal, state, local or foreign statute, law, rule,
<PAGE>
regulation, ordinance, code, policy or rule of common law or any
judicial or ad ministrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating
to pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata) or wildlife, including, without
limitation, laws and regulations relating to the release or threatened
release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Hazardous Materials (collectively, "En vironmental
Laws"), (B) the Company, Virginia BCBS and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company, Virginia BCBS or
any of its subsidiaries and (D) there are no events or circumstances
that might reasonably be expected to form the basis of an order for
clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company, Virginia BCBS or any of its subsidiaries relating to Hazardous
Materials or any Environmental Laws.
(xxx) Registration Rights. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(b) Officer's Certificates. Any certificate signed by any officer
of the Company, Virginia BCBS or any of its subsidiaries delivered to the Global
Coordinator, the U.S. Representatives or to counsel for the U.S. Underwriters
shall be deemed a representation and warranty by the Company, Virginia BCBS to
each U.S. Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing.
(a) Initial U.S. Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each U.S. Underwriter, severally and not
jointly, and each U.S. Underwriter, severally and not jointly, agrees to
purchase from the Company, at the price per share set forth in Schedule B, the
number of Initial U.S. Securities set forth in Schedule A opposite the name of
such U.S. Underwriter, plus any additional number of Initial U.S. Securities
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 10 hereof.
(b) U.S. Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company
<PAGE>
hereby grants an option to the U.S. Underwriters, severally and not jointly, to
purchase up to an additional ________ shares of Common Stock at the price per
share set forth in Schedule B, less an amount per share equal to any dividends
or distributions declared by the Company and payable on the Initial U.S.
Securities but not payable on the U.S. Option Securities. The option hereby
granted will expire 30 days after the date hereof and may be exercised in whole
or in part from time to time only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the
Initial U.S. Securities upon notice by the Global Coordinator to the Company
setting forth the number of U.S. Option Securities as to which the several U.S.
Underwriters are then exercising the option and the time and date of payment and
delivery for such U.S. Option Securities. Any such time and date of delivery for
the U.S. Option Securities (a "Date of Delivery") shall be determined by the
Global Coordinator, but shall not be later than seven full business days after
the exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
U.S. Option Securities, each of the U.S. Underwriters, acting severally and not
jointly, will purchase that proportion of the total number of U.S. Option
Securities then being purchased which the number of Initial U.S. Securities set
forth in Schedule A opposite the name of such U.S. Underwriter bears to the
total number of Initial U.S. Securities, subject in each case to such
adjustments as the Global Coordinator in its discretion shall make to eliminate
any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Debevoise & Plimpton, 875 Third Avenue, New York, New York 10022, or at such
other place as shall be agreed upon by the Global Coordinator and the Company,
at 10:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after
4:30 P.M. (Eastern time) on any given day) business day after the date hereof
(unless postponed in accordance with the provisions of Section 10), or such
other time not later than ten business days after such date as shall be agreed
upon by the Global Coordinator and the Company (such time and date of payment
and delivery being herein called "Closing Time").
In addition, in the event that any or all of the U.S. Option Securities
are purchased by the U.S. Underwriters, payment of the purchase price for, and
delivery of certificates for, such U.S. Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Global Coordinator and the Company, on each Date of Delivery as specified in the
notice from the Global Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the U.S. Representatives for the respective accounts of the U.S. Underwriters of
certificates for the U.S. Securities to be purchased by them. It is understood
that each U.S. Underwriter has authorized the U.S. Representatives, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial U.S. Securities and the U.S. Option Securities, if any,
which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the
<PAGE>
Initial U.S. Securities or the U.S. Option Securities, if any, to be purchased
by any U.S. Underwriter whose funds have not been received by the Closing Time
or the relevant Date of Delivery, as the case may be, but such payment shall not
relieve such U.S. Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and packaging by the U.S. Representatives in The City of New
York not later than 10:00 A.M. (Eastern time) on the business day prior to the
Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company and Virginia BCBS. The Company, and
Virginia BCBS with respect to subsection (m) below, covenants with each U.S.
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify
the Global Coordinator immediately, and confirm the notice in writing,
(i) when any post-effective amendment to the Registration Statement,
shall become effective, or any supplement to the Prospectuses or any
amended Pro spectuses shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission
for any amendment to the Registration Statement or any amendment or
supplement to the Prospectuses or for additional information, and (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing
or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale
in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect
the filings necessary pursuant to Rule 424(b) and will take such steps
as it deems necessary to ascertain promptly whether the form of
prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order
is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to
the Registration Statement (including any filing under Rule 462(b)),
any Term Sheet or any amendment, supplement or revision to either the
prospectus included in the Registration Statement at the time it became
effective or to the Prospectuses, will furnish the Global Coordinator
with copies
<PAGE>
of any such documents a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file or use
any such document to which the Global Coordinator or counsel for the
U.S. Underwriters shall object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the U.S. Representatives and counsel for
the U.S. Underwriters, without charge, signed copies of the
Registration Statement as originally filed and of each amendment
thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates
of experts, and will also deliver to the U.S. Representatives, without
charge, a conformed copy of the Registration Statement as originally
filed and of each amendment thereto (without exhibits) for each of the
U.S. Underwriters. The copies of the Registration Statement and each
amendment thereto furnished to the U.S. Underwriters will be identical
to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to
each U.S. Underwriter, without charge, as many copies of each
preliminary prospectus as such U.S. Underwriter reasonably requested,
and the Company hereby consents to the use of such copies for purposes
permitted by the 1933 Act. The Company will furnish to each U.S.
Underwriter, without charge, during the period when the U.S. Prospectus
is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the
U.S. Prospectus (as amended or supplemented) as such U.S. Underwriter
may reasonably request. The U.S. Prospectus and any amendments or
supplements thereto furnished to the U.S. Underwriters will be
identical to the elec tronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company
will comply with the 1933 Act and the 1933 Act Regulations so as to
permit the completion of the distribution of the Securities as
contemplated in this Agreement, the International Purchase Agreement
and in the Prospectuses. If at any time when a prospectus is required
by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result
of which it is necessary, in the opinion of counsel for the U.S.
Underwriters or for the Company, to amend the Registration Statement or
amend or supplement any Prospectus in order that the Prospectuses will
not include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion
of such counsel, at any such time to amend the Registration Statement
or amend or supplement any Prospectus in order to comply with the
requirements of the 1933 Act or the 1933 Act Regulations, the Company
will promptly prepare and file with the Commission, subject to Section
3(b), such amendment or supplement as may be necessary to correct such
statement or omission
<PAGE>
or to make the Registration Statement or the Prospectuses comply with
such requirements, and the Company will furnish to the U.S.
Underwriters such number of copies of such amendment or supplement as
the U.S. Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the U.S. Underwriters, to qualify the
Securities for offering and sale under the applicable securities laws
of such states and other jurisdictions (domestic or foreign) as the
Global Coordinator may designate and to maintain such qualifications in
effect for a period of not less than one year from the later of the
effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not
be obligated to file any general consent to service of process or to
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it
is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such
statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of
not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated
by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified
in the Prospectuses under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect
the listing of the Common Stock (including the Member Shares and the
Securities) on the New York Stock Exchange.
(j) Restriction on Sale of Securities. During a period of 180
days from the date of the Prospectuses, the Company will not, without
the prior written consent of the Global Coordinator, (i) directly or
indirectly, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or
dispose of any share of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii)
above is to be settled
<PAGE>
by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Securities
to be sold hereunder or under the International Purchase Agreement, (B)
the Member Shares to Eligible Members in connection with the
consummation of the Demutualization pursuant to the Plan, (C) shares of
Common Stock issued pursuant to Articles VI, VII or VIII of the
Articles of Incorporation of the Company, (D) options for shares of
Common Stock granted to employees, officers and directors of the
Company or its subsidiaries pursuant to a stock option plan adopted by
the Company, (E) shares of Common Stock issued in a private placement
as consideration for any acquisition by the Company and (F) shares of
Common Stock issued to employees pursuant to the Company's Employees
Thrift Plan, 401(k) Restoration Plan or 1997 Employee Stock Purchase
Plan, provided, that, with respect to clause (E) above, the U.S.
Underwriters shall have first obtained from any recipient of shares of
Common Stock an agreement in writing to be bound to the same
restrictions set forth in this Section 3(j).
(k) Reporting Requirements. The Company, during the period
when the Prospectuses are required to be delivered under the 1933 Act
or the 1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the rules and regulations of the Commission
thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that
it will ensure that the Reserved Securities will be restricted as
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. The Underwriters will
notify the Company as to which persons will need to be so restricted.
At the request of the Underwriters, the Company will direct the
transfer agent to place a stop transfer restriction upon such
securities for such period of time. Should the Company release, or seek
to release, from such restrictions any of the Reserved Securities, the
Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(m) Compliance with Rule 463. The Company will file with the
Commission such reports on Form SR as may be required pursuant to Rule
463 of the 1933 Act Regulations.
(n) Consummation of the Plan. Prior to or contemporaneously
with the Closing Time, the Company and Virginia BCBS will take all
actions necessary in order to consummate the Plan and the transactions
contemplated thereby to have occurred at or prior to such date.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay
all expenses incident to the performance of its obligations under this
Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
<PAGE>
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters and the transfer of the Securities between the U.S. Underwriters
and the International Managers, (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors, (v) the qualification of the Securities
under securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus, any Term
Sheets and of the Prospectuses and any amendments or supplements thereto, (vii)
the preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities, (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities Dealers,
Inc. (the "NASD") of the terms of the sale of the Securities, (x) the fees and
expenses incurred in connection with the listing of the Securities on the New
York Stock Exchange and (xi) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters, in
connection with matters related to the Reserved Securities which are designated
by the Company for sale to directors and officers of the Company.
(b) Termination of Agreement. If this Agreement is terminated by the
U.S. Repre sentatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the U.S. Underwriters.
SECTION 5. Conditions of U.S. Underwriters' Obligations. The
obligations of the several U.S. Underwriters hereunder are subject to the
accuracy of the representations and warranties of the Company and Virginia BCBS
contained in Section 1 hereof or in certificates of any officer of the Company
or Virginia BCBS or any subsidiary of the Company or Virginia BCBS delivered
pursuant to the provisions hereof, to the performance by the Company and
Virginia BCBS of their respective covenants and other obligations hereunder, and
to the following further conditions:
(a) Effectiveness of Registration Statement. The
Registration Statement, including any Rule 462(b) Registration
Statement, has become effective and at Closing Time no stop order
suspending the effectiveness of the Registration Statement shall have
been issued under the 1933 Act or proceedings therefor initiated or
threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the U.S. Underwriters. A
prospectus containing the Rule 430A Information shall have been filed
<PAGE>
with the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the
Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company and Virginia BCBS. At
Closing Time, the U.S. Representatives shall have received the
favorable opinion, dated as of Closing Time, of McGuire, Woods, Battle
& Boothe, L.L.P., counsel for the Company and Virginia BCBS, in form
and substance satisfactory to counsel for the U.S. Underwriters,
together with signed or reproduced copies of such letter for each of
the other U.S. Underwriters to the effect set forth in Exhibit A hereto
and to such further effect as counsel to the U.S. Underwriters may
reasonably request.
(c) Opinion of Counsel for U.S. Underwriters. At Closing Time,
the U.S. Representatives shall have received the favorable opinion,
dated as of Closing Time, of Debevoise & Plimpton, counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter
for each of the other U.S. Underwriters with respect to the matters set
forth in clauses (viii), (ix), (x), (xii) (solely as to the
information in the Prospectus under "Description of Capital
Stock--Description of Common Stock") and the penultimate paragraph of
Exhibit A hereto. In giving such opinion such counsel may rely, as to
all matters governed by Virginia law, upon the opinions of McGuire,
Woods, Battle & Boothe, L.L.P., counsel for the Company and Virginia
BCBS. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of the Company, Virginia BCBS and
its subsidiaries and certificates of public officials.
(d) Officers' Certificates. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectuses, any material adverse
change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of Trigon considered as one
enterprise, whether or not arising in the ordinary course of business,
and the U.S. Representatives shall have received certificates of the
President or a Vice President of each of the Company and Virginia BCBS
and of the chief financial or chief accounting officer of each of the
Company and Virginia BCBS, dated as of Closing Time, to the effect that
(i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and
correct with the same force and effect as though expressly made at and
as of Closing Time, (iii) the Company and Virginia BCBS have complied
with all agreements and satisfied all conditions on their part to be
performed or satisfied at or prior to Closing Time, and (iv) no stop
order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or
are pending or are contemplated by the Commission.
<PAGE>
(e) Accountant's Comfort Letter. At the time of the execution
of this Agreement, the U.S. Representatives shall have received from
KPMG Peat Marwick LLP a letter dated such date, in form and substance
satisfactory to the U.S. Representatives, together with signed or
reproduced copies of such letter for each of the other U.S.
Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the
Prospectuses.
(f) Bring-down Comfort Letter. At Closing Time, the
Representatives shall have received from KPMG Peat Marwick LLP a
letter, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (e) of
this Section, except that the specified date referred to shall be a
date not more than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities and
the Member Shares shall have been approved for listing on the New York
Stock Exchange, subject only to official notice of issuance.
(h) No Objection. The NASD shall not have raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(i) License Agreement. At Closing Time, the New License
Agreement shall have been entered into by and between the BCBSA and the
Company.
(j) Opinion of Special Tax Counsel for Virginia BCBS. Virginia
BCBS shall have received an opinion of McGuire, Woods, Battle & Boothe,
L.L.P., special tax counsel for Virginia BCBS, in form and substance
satisfactory to counsel for the U.S. Underwriters, to the effect that
the summary of federal income tax consequences provided to Eligible
Members in the Member Information Statement dated August 2, 1996
remains accurate under the applicable federal income tax law and other
authorities in effect on the Effective Date, except for any
developments between the mailing date thereof and the Effective Date
that are specifically identified in such opinion, provided that (i) in
the opinion of such counsel, the principal federal income tax
consequences to Eligible Members and to Virginia BCBS of such
developments were anticipated and accurately described in all material
respects in such Member Information Statement, (ii) Virginia BCBS has
determined that the principal federal income tax consequences of such
developments are not materially adverse to the interests of the
Eligible Members or Virginia BCBS, or (iii) such developments are not
described in (i) or (ii) but have been described in a subsequent
communication approved by the Virginia Bureau of Insurance and
distributed to the Eligible Members and, in the opinion of counsel, any
further Member vote that is required has been obtained.
<PAGE>
(k) Effectiveness of the Plan. All actions and transactions
required by the Plan to be taken or to have occurred at or prior to the
effectiveness of the Plan (other than the offering of Securities as
herein contemplated) shall have been taken or shall have occurred; and
the Commission shall have issued the certificate of merger with respect
to the Merger and the Plan shall have thereupon become effective.
(l) Purchase of Initial International Securities.
Contemporaneously with the purchase by the U.S. Underwriters of the
Initial U.S. Securities under this Agreement, the International
Managers shall have purchased the Initial International Securities
under the International Purchase Agreement.
(m) Conditions to Purchase of U.S. Option Securities. In the
event that the U.S. Underwriters exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the U.S. Option
Securities, the representations and warranties of the Company and
Virginia BCBS contained herein and the statements in any certificates
furnished by the Company, Virginia BCBS or any subsidiary of the
Company hereunder shall be true and correct as of each Date of Delivery
and, at the relevant Date of Delivery, the U.S. Representatives shall
have received:
(i) Officers' Certificates. Certificates, dated such Date of
Delivery, of the President or a Vice President of each of the
Company and Virginia BCBS and of the chief financial or chief
accounting officer of each of the Company and Virginia BCBS
confirming that the certificates delivered at the Closing Time
pursuant to Section 5(d) hereof remain true and correct as of
such Date of Delivery.
(ii) Opinion of Counsel for Company and Virginia BCBS. The
favorable opinion of McGuire, Woods, Battle & Boothe, L.L.P.,
counsel for the Company and Virginia BCBS, in form and
substance satisfactory to counsel for the U.S. Underwriters,
dated such Date of Delivery, relating to the U.S. Option
Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by
Section 5(b) hereof.
(iii) Opinion of Counsel for U.S. Underwriters. The
favorable opinion of Debevoise & Plimpton, counsel for the
U.S. Underwriters, dated such Date of Delivery, relating to
the U.S. Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion
required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from KPMG Peat
Marwick LLP, in form and substance satisfactory to the U.S.
Representatives and dated such Date of Delivery, substantially
in the same form and substance as the letter furnished to the
U.S. Representatives pursuant to Section 5(f) hereof, except
that the "specified
<PAGE>
date" in the letter furnished pursuant to this paragraph shall
be a date not more than five days prior to such Date of
Delivery.
(n) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the U.S. Underwriters shall have been furnished with such documents
and opinions as they may require for the purpose of enabling them to pass upon
the issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the U.S.
Representatives and counsel for the U.S. Underwriters.
(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of U.S. Option
Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several U.S. Underwriters to purchase the relevant Option
Securities, may be terminated by the U.S. Representatives by notice to the
Company at any time at or prior to Closing Time or such Date of Delivery, as the
case may be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6, 7 and
8 shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of U.S. Underwriters. Each of the Company and
Virginia BCBS agrees, jointly and severally, to indemnify and hold harmless each
U.S. Underwriter and each person, if any, who controls any U.S. Underwriter
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus or
the Prospectuses (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of (A) the failure of
directors and officers of the Company to pay for and accept delivery of
Reserved Securities which, immediately following the effectiveness of
the Registration Statement, were subject to a properly confirmed
<PAGE>
agreement to purchase, (B) the violation of any securities laws of
foreign jurisdictions where Reserved Securities have been offered and
(C) any untrue statement or alleged untrue statement of a material fact
contained in the supplement or prospectus wrapper material distributed
in any foreign jursidiction in connection with the reservation and sale
of the Reserved Securities to directors and officers of the Company or
caused by any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein, when considered in conjunction with the Prospectuses or
preliminary prospectuses, not misleading;
(iii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission or in
connection with any failure or violation of the nature referred to in
Section 6(a)(ii)(A) and (B) hereof; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of
the Company or Virginia BCBS; and
(iv) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission or in connection with any
failure or violation of the nature referred to in Section 6(a)(ii)(A)
and (B) hereof, to the extent that any such expense is not paid under
(i), (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
U.S. Underwriter through the U.S. Representatives or any International Manager
through the Lead Managers expressly for use in the Registration Statement (or
any amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the U.S. Prospectus
(or any amendment or supplement thereto).
(b) Indemnification of Company, Virginia BCBS, Directors and Officers.
Each U.S. Underwriter severally agrees to indemnify and hold harmless the
Company, Virginia BCBS, their respective directors, each of the Company's
officers who signed the Registration Statement, and each person, if any, who
controls the Company or Virginia BCBS within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions,
<PAGE>
made in the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or any
preliminary U.S. prospectus or the U.S. Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with written information
furnished to the Company by such U.S. Underwriter through the U.S.
Representatives expressly for use in the Registration Statement (or any
amendment thereto) or such preliminary prospectus or the U.S. Prospectus (or any
amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or cir cumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel in accordance with this
Section 6, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6(a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) prior to the
date of such settlement neither of the following shall have occurred: (A) such
indemnifying party shall have reimbursed such indemnified party in accordance
with such request or (B) if such indemnifying party reasonably believes that the
indemnified party is not entitled under this Section 6 to any or all of the
requested amount, such indemnifying party shall have
<PAGE>
reimbursed such indemnified party of such lesser portion, if any, of the
requested amount and provided to such indemnified party a statement
substantiating the reasonableness of the amount, if any, so reimbursed.
SECTION 7. Contribution. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and
Virginia BCBS on the one hand and the U.S. Underwriters on the other hand from
the offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and Virginia
BCBS on the one hand and of the U.S. Underwriters on the other hand in
connection with the statements or omissions, or in connection with any failure
or violation of the nature referred to in Section 6(a)(ii)(A) and (B) hereof,
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.
The relative benefits received by the Company and Virginia BCBS on the
one hand and the U.S. Underwriters on the other hand in connection with the
offering of the U.S. Securities pursuant to this Agreement shall be deemed to be
in the same respective proportions as the total net proceeds from the offering
of the U.S. Securities pursuant to this Agreement (before deducting expenses)
received by the Company and Virginia BCBS and the total underwriting discount
received by the U.S. Underwriters, in each case as set forth on the cover of the
U.S. Prospectus, or, if Rule 434 is used, the corresponding location on the Term
Sheet, bear to the aggregate initial public offering price of the U.S.
Securities as set forth on such cover.
The relative fault of the Company and Virginia BCBS on the one hand and
the U.S. Underwriters on the other hand shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or Virginia BCBS on the one hand or by
the U.S. Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission or any failure or violation of the nature referred to in
Section 6(a)(ii)(A) and (B) hereof.
The Company, Virginia BCBS and the U.S. Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the U.S. Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating,
<PAGE>
preparing or defending against any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue or alleged untrue statement or
omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the U.S. Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such U.S. Underwriter has otherwise been required to pay by reason of any such
untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company or Virginia BCBS, each officer of
the Company who signed the Registration Statement, and each person, if any, who
controls the Company or Virginia BCBS within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Company and Virginia BCBS. The U.S. Underwriters' respective
obligations to contribute pursuant to this Section 7 are several in proportion
to the number of Initial U.S. Securities set forth opposite their respective
names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company, Virginia BCBS or any of
its subsidiaries submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of any
U.S. Underwriter or controlling person, or by or on behalf of the Company or
Virginia BCBS, and shall survive delivery of the Securities to the U.S.
Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The U.S. Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the U.S. Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of Trigon, considered as one
enterprise, whether or not arising in the ordinary course of business, or (ii)
if there has occurred any material adverse change in the financial markets in
the United States or the international financial markets, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the
<PAGE>
U.S. Representatives, impracticable to market the Securities or to enforce
contracts for the sale of the Securities, or (iii) if trading in any securities
of the Company has been suspended or materially limited by the Commission or the
New York Stock Exchange, or if trading generally on the American Stock Exchange
or the New York Stock Exchange or in the Nasdaq National Market has been
suspended or materially limited, or minimum or maximum prices for trading have
been fixed, or maximum ranges for prices have been required, by any of said
exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any other governmental authority, or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the U.S. Underwriters. If one or
more of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery
to purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the U.S. Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting U.S. Underwriters, or any other underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of U.S. Securities to be purchased on such date, each of
the non-defaulting U.S. Underwriters shall be obligated, severally and
not jointly, to purchase the full amount thereof in the proportions
that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of U.S. Securities to be purchased on such date, this Agreement
or, with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the U.S. Underwriters to purchase and of the
Company to sell the Option Securities to be purchased and sold on such
Date of Delivery shall terminate without liability on the part of any
non-defaulting U.S. Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
U.S. Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
U.S. Underwriters to purchase and the Company to sell the
<PAGE>
relevant U.S. Option Securities, as the case may be, either the U.S.
Representatives or the Company shall have the right to postpone Closing Time or
the relevant Date of Delivery, as the case may be, for a period not exceeding
seven days in order to effect any required changes in the Registration Statement
or Prospectus or in any other documents or arrangements. As used herein, the
term "U.S. Underwriter" includes any person substituted for a U.S. Underwriter
under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the U.S.
Underwriters shall be directed to the U.S. Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Syndicate
Operations (with a copy, which shall not constitute notice, to Debevoise &
Plimpton, 875 Third Avenue, New York, New York 10022-6225, attention of James C.
Scoville, Esq.); and notices to the Company shall be directed to it at 2015
Staples Mill Road, Richmond, Virginia 23230, attention of J. Christopher
Wiltshire, Esq. (with a copy, which shall not constitute notice, to McGuire,
Woods, Battle & Boothe, L.L.P., One James Center, 901 East Cary Street,
Richmond, Virginia 23219, attention of R. Gordon Smith, Esq.).
SECTION 12. Parties. This Agreement shall inure to the benefit of and
be binding upon each of the U.S. Underwriters, the Company and Virginia BCBS and
their respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the U.S. Underwriters, the Company and Virginia BCBS and their respective
successors and the controlling persons and officers and directors referred to in
Sections 6 and 7 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the U.S.
Underwriters, the Company and Virginia BCBS and their respective successors, and
said controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation. No
purchaser of Securities from any U.S. Underwriter shall be deemed to be a
successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and Virginia BCBS a counterpart
hereof, whereupon this instrument, along with all counterparts, will become a
binding agreement between the U.S. Underwriters, the Company and Virginia BCBS
in accordance with its terms.
Very truly yours,
TRIGON HEALTHCARE, INC.
By
------------------------
Title:
BLUE CROSS BLUE SHIELD OF VIRGINIA
(to be renamed Trigon Insurance Company)
By
-----------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
ALEX. BROWN & SONS INCORPORATED
DEAN WITTER REYNOLDS INC.
MORGAN STANLEY & CO. INCORPORATED
WHEAT, FIRST SECURITIES, INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By -----------------------------------
Authorized Signatory
For themselves and as U.S. Representatives of the
other U.S. Underwriters named in Schedule A hereto.
<PAGE>
SCHEDULE A
Number of
Initial U.S.
Name of U.S. Underwriter Securities
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................
Alex. Brown & Sons Incorporated.........................
Dean Witter Reynolds Inc................................
Morgan Stanley & Co. Incorporated.......................
Wheat, First Securities, Inc............................
Total................................................... ________
=============
<PAGE>
SCHEDULE B
TRIGON HEALTHCARE, INC.
________ Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be
$_______.
2. The purchase price per share for the U.S. Securities to be
paid by the several U.S. Underwriters shall be $_______, being an
amount equal to the initial public offering price set forth above less
$_______ per share; provided that the purchase price per share for any
U.S. Option Securities purchased upon the exercise of the
over-allotment option described in Section 2(b) shall be reduced by an
amount per share equal to any dividends or distributions declared by
the Company and payable on the Initial U.S. Securities but not payable
on the U.S. Option Securities.
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
Commonwealth of Virginia. Until immediately prior to the effectiveness
of the Plan, Virginia BCBS was, since its conversion to a mutual
insurance company in 1991, validly existing as a mutual insurance
company in good standing under the laws of the Commonwealth of
Virginia. Trigon Insurance is validly existing as a stock corporation
in good standing under the laws of the Commonwealth of Virginia. Until
immediately prior to the effectiveness of the Plan, TMSI was duly
incorporated and validly existing as a stock corporation in good
standing under the laws of the Commonwealth of Virginia.
(ii) Each of the Company and Virginia BCBS (now renamed Trigon
Insurance) has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the
U.S. Purchase Agreement and the International Purchase Agreement. Each
of the Company and Trigon Insurance is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing could
not reasonably be expected to result in a Material Adverse Effect.
(iii) The Company has an authorized capitalization as set
forth in the Prospectus.
(iv) The Securities to be purchased by the U.S. Underwriters
and the International Managers from the Company have been duly
authorized for issuance and sale to the Underwriters pursuant to the
U.S. Purchase Agreement and the International Purchase Agreement,
respectively, and, when issued and delivered by the Company pursuant to
the U.S. Purchase Agreement and the International Purchase Agreement,
respectively, against payment of the consideration set forth in the
U.S. Purchase Agreement and the International Purchase Agreement, will
be validly issued and fully paid and non-assessable; the Common Stock
conforms in all material respects to all statements relating thereto
contained in the Prospectuses and such description conforms in all
material respects to the rights set forth in the instruments defining
the same; and no holder of the Securities is or will be personally
liable for any debts, obligations, liabilities or losses of the Company
by reason of being such a holder.
<PAGE>
(v) The issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the
Company, except as may be provided in Articles VI, VII and VIII of the
Articles of Incorporation of the Company in the form filed as an
Exhibit to the Registration Statement.
(vi) Each of the subsidiaries listed on Exhibit 21 to the
Registration Statement, which to the best of our knowledge are the only
subsidiaries of Trigon Insurance, has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing could not reasonably be expected to result in a Material
Adverse Effect; except as otherwise disclosed in the Registration
Statement, all of the issued and outstanding capital stock of each such
subsidiary has been duly authorized and validly issued, is fully paid
and non-assessable and, to the best of our knowledge, is owned by the
Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
equity; and, to the best of our knowledge, none of the outstanding
shares of capital stock of any such subsidiary was issued in violation
of the preemptive or similar rights of any securityholder of such
subsidiary.
(vii) The U.S. Purchase Agreement and the International
Purchase Agreement have been duly authorized, executed and delivered by
the Company and Virginia BCBS.
(viii) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act;
any required filing of the Prospectuses pursuant to Rule 424(b) has
been made in the manner and within the time period required by Rule
424(b); and, to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or
threatened by the Commission.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectuses and each amendment or
supplement to the Registration Statement and the Prospectuses as of
their respective effective or issue dates (other than the financial
statements and supporting schedules and other financial information
included therein or omitted therefrom, as to which we express no
opinion) complied as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations.
(x) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory
requirements, with any applicable
<PAGE>
requirements of the Articles of Incorporation and by-laws of the
Company and the requirements of the New York Stock Exchange.
(xi) To the best of our knowledge, except for matters
disclosed in the Registration Statement, there is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, now pending or threatened, against or
affecting the Company, Trigon Insurance or any of its subsidiaries,
which is required to be disclosed in the Registration Statement, or
which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation
of the transactions contemplated in the U.S. Purchase Agreement, the
International Purchase Agreement and the Plan or the performance by the
Company or Trigon Insurance of their respective obligations thereunder.
(xii) The information in the Prospectuses under "The
Demutualization", "Business - Regulation", "Business - The Blue Cross
and Blue Shield License", "Legal Proceedings", "Management",
"Description of Capital Stock" and, in the International Prospectus,
"Certain United States Tax Consequences to Non-U.S. Holders" and in the
Registration Statement under Item 14, to the extent that such
information constitutes matters of law, summaries of legal matters, the
Company's Articles of Incorporation and bylaws or legal proceedings, or
legal conclusions, has been reviewed by us and is accurate in all
material respects.
(xiii) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that
are not described as required.
(xiv) All descriptions in the Prospectuses of contracts and
other documents to which the Company, Trigon Insurance or any of its
subsidiaries are a party are accurate in all material respects; to the
best of our knowledge, there are no franchises, contracts, indentures,
mortgages, loan agreements, notes, leases or other instruments required
to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to
therein or filed or incorporated by reference as exhibits thereto.
(xv) To the best of our knowledge, (a) neither the Company,
Trigon Insurance nor any of its subsidiaries is in violation of its
charter or by-laws and (b) no default by the Company or any subsidiary
exists in the due performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other agreement or instrument
that is described or referred to in the Registration Statement or the
Prospectuses or filed or incorporated by reference as an exhibit to the
Registration Statement, except for such defaults that could not
reasonably be expected to have a Material Adverse Effect and except
that no opinion is
<PAGE>
given under this paragraph (xv) with respect to the Blue Cross License
Agreement and Virginia Blue Shield License Agreement referred to in
paragraph (xxiv) herein.
(xvi) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency is necessary or required for the
performance by the Company of its obligations under the U.S. Purchase
Agreement or under the Plan, in connection with the offering, issuance
or sale of the Securities under the U.S. Purchase Agreement and the
International Purchase Agreement, in connection with the issuance of
the Member Shares to Eligible Members in exchange for their Membership
Interests and of cash and Class C Stock to the Treasurer of the
Commonwealth of Virginia in satisfaction of the Commonwealth Payment
pursuant to the Plan, or the consummation of the transactions
contemplated by the U.S. Purchase Agreement, the International Purchase
Agreement and the Plan, except (a) such as have been already obtained
or as may be required under the 1933 Act or the 1933 Act Regulations
and foreign or state securities, insurance securities or blue sky laws
in connection with the offering, issuance or sale of the Securities
under the U.S. Purchase Agreement and the International Purchase
Agreement, as to which we express no opinion, and (b) such filings,
authorizations, approvals, consents, licenses, orders, registrations,
qualifications or decrees in connection with the Plan that, if not made
or obtained or complied with, could not reasonably be expected to have
a Material Adverse Effect or have a material adverse effect on the
ability of the Company or Virginia BCBS to perform their respective
obligations under the Plan or to consummate the transactions
contemplated therein.
(xvii) The execution, delivery and performance of the U.S.
Purchase Agreement, the International Purchase Agreement and the Plan
and the consummation of the transactions contemplated in the U.S.
Purchase Agreement, the International Purchase Agreement, the Plan and
in the Registration Statement (including the issuance of the Member
Shares to Eligible Members in exchange for their Membership Interests
pursuant to the Plan, the issuance of cash and Class C Stock to the
Treasurer of the Commonwealth of Virginia in satisfaction of the
Commonwealth Payment pursuant to the Plan, and the issuance and sale of
the Securities, and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use Of
Proceeds") and compliance by the Company and Trigon Insurance with
their obligations under the U.S. Purchase Agreement, the International
Purchase Agreement and the Plan do not and will not, whether with or
without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in
the Purchase Agreements) under or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company, Trigon Insurance or any subsidiary pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note,
lease or any other agreement or instrument, listed on a schedule
attached to such opinion (which schedule shall be satisfactory in form
and substance to counsel for the U.S. Underwriters), to which the
Company, Trigon Insurance or any subsidiary is a
<PAGE>
party or by which it or any of them may be bound, or to which any of
the property or assets of the Company, Trigon Insurance or any
subsidiary is subject (except for such conflicts, breaches or defaults
or liens, charges or encumbrances that would not have a Material
Adverse Effect), nor will such action result in any violation of the
provisions of the charter or by-laws of the Company, Trigon Insurance
or any subsidiary, or any applicable law, statute, rule, regulation,
judgment, order, writ or decree, known to us, including, without
limitation, Virginia Code ss. 38.2-1005.1 and the insurance laws and
regulations of Virginia, of any government, government instrumentality
or court having jurisdiction over the Company, Trigon Insurance or any
subsidiary or any of their respective properties, assets or operations
(other than state securities, insurance securities or blue sky laws in
connection with the offering, issuance or sale of the Securities under
this Agreement and the International Purchase Agreement), except for
such violations resulting from the failure to make or obtain or comply
with such filings, authorizations, approvals, consents, licenses,
orders, registrations, qualifications or decrees in connection with the
Plan that could not reasonably be expected to have a Material Adverse
Effect or have a material adverse effect on the ability of the Company
or Virginia BCBS to perform their respective obligations under the Plan
or to consummate the transactions contemplated therein.
(xviii) To the best of our knowledge, there are no persons
with registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(xix) The Company is not, nor is Trigon Insurance or any of
its subsidiaries, an "investment company" or an entity "controlled" by
an "investment company," as such terms are defined in the 1940 Act.
(xx) Pursuant to the Merger: (a) TMSI has merged with and
into Virginia BCBS, the separate existence of TMSI has ceased, and
Virginia BCBS has become a wholly owned subsidiary of the Company; (b)
Virginia BCBS has become a stock corporation incorporated under and
governed by the Virginia Stock Corporation Act, ss.13.1-601 et seq. and
by the Virginia Insurance Code; (c) each issued and outstanding share
of common stock of TMSI owned by the Company immediately prior to the
effectiveness of the Plan has, as a result of the Merger and without
any action on the part of the Company, been canceled and converted into
one share of stock of Trigon Insurance; (d) all Membership Interests of
all Members in Virginia BCBS have been canceled, and in consideration
for their Membership Interests, including their interests in the
surplus of Virginia BCBS, Eligible Members are entitled to receive
Common Stock from the Company and/or cash from Trigon Insurance
pursuant to and in accordance with the Plan; and (e) all issued and
outstanding shares of capital stock in the Company owned by Virginia
BCBS have been canceled.
<PAGE>
(xxi) Until immediately prior to the effectiveness of the
Plan, all of the issued and outstanding shares of capital stock of TMSI
were duly authorized and validly issued and were fully paid and
non-assessable and, to the best of our knowledge, were owned by the
Company, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity. All of the outstanding shares of
capital stock of Trigon Insurance are duly authorized and validly
issued and are fully paid and non-assessable and, to the best of our
knowledge, are owned by the Company, free and clear of any security
interest, mortgage, pledge, lien, encumbrance claim or equity.
(xxii) The Member Shares have been duly authorized, and when
issued and delivered to Eligible Members in exchange for their
Membership Interests pursuant to the Plan, will be validly issued,
fully paid and non-assessable; no holder thereof will be personally
liable for any debts, obligations, liabilities or losses of the Company
by reason of being such a holder; such Member Shares are not subject to
the preemptive or other similar rights of any securityholder of the
Company (except as may be provided in Articles VI, VII and VIII of the
Articles of Incorporation of the Company in the form filed as an
Exhibit to the Registration Statement) and all corporate action
required to be taken for the authorization and issuance of the Member
Shares has been validly and sufficiently taken.
(xxiii) The issuance and delivery of the Member Shares to
Eligible Members in exchange for their Membership Interests pursuant to
the Plan is exempt from the registration requirements of the 1933 Act.
(xxiv) To the best of our knowledge, the Blue Cross and Blue
Shield Association (the "BCBSA") has not asserted noncompliance by
Virginia BCBS or any of its subsidiaries that is required by the BCBSA
as of the date hereof to be a party to a Blue Cross Affiliate License
Agreement with the requirements of the Blue Cross License Agreement,
dated as of November 16, 1995, between Virginia BCBS and the BCBSA, and
the Virginia Blue Shield License Agreement, dated as of November 16,
1995, between Virginia BCBS and the BCBSA, except in each case where
such noncompliance could not reasonably be expected to have a Material
Adverse Effect.
(xxv) To the best of our knowledge, (a) the Company, Trigon
Insurance and its subsidiaries each possess such permits, licenses,
approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate federal, state or
local regulatory agencies or bodies necessary to conduct the business
now operated by them, except where the failure to possess such
Government Licenses could not reasonably be expected to have a Material
Adverse Effect; (b) all of the Governmental Licenses are valid and in
full force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect could not reasonably be expected to have a Material
Adverse Effect; and (c) neither the Company, Trigon Insurance nor any
of its subsidiaries has received any notice of proceedings relating to
the revocation or modification of any such Governmental
<PAGE>
Licenses which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could reasonably be expected
to result in a Material Adverse Effect.
(xxvi) To the best of our knowledge, (a) the Company has made
all required filings under insurance holding company statutes
applicable to it, and is duly licensed or authorized as an insurance
holding company in each jurisdiction in which it is required to be so
licensed or authorized, except where the failure to have made such
filings or to be so licensed or authorized in any such jurisdiction
could not reasonably be expected to have a Material Adverse Effect; (b)
each of Trigon Insurance and its subsidiaries which is engaged in the
insurance business (the "Insurance Subsidiaries") is duly licensed or
authorized to conduct its insurance business under the insurance laws
of each jurisdiction in which it conducts such business so as to
require such licensing or authorization, except where the failure to be
so licensed or authorized could not reasonably be expected to have a
Material Adverse Effect; (c) all such licenses or authorizations are in
full force and effect, except where the invalidity of such licenses and
authorization or failure to be in full force and effect could not
reasonably be expected to have a Material Adverse Effect; (d) neither
the Company, Trigon Insurance nor any Insurance Subsidiary has received
any notice of any event, inquiry, investigation or proceeding that
would reasonably be expected to result in the suspension, revocation or
limitation of any such licenses or authorizations or otherwise impose
any limitation on the conduct of the business of the Company, Trigon
Insurance or any Insurance Subsidiary, except any such suspension,
revocation or limitation which could not reasonably be expected to have
a Material Adverse Effect; (e) each of the subsidiaries of Trigon
Insurance operating as a health maintenance organization (the "HMO
Subsidiaries") is duly licensed as a health maintenance organization
insurer under the laws of each jurisdiction in which it conducts such
business so as to require such licensing, except where the failure to
be so licensed could not reasonably be expected to have a Material
Adverse Effect; and (f) each of ______________, ______________ and
___________ is duly qualified as a health maintenance organization
under The Health Maintenance Organization Act of 1973, as amended, and
the rules and regulations of the Department of Health and Human
Services thereunder.
(xxvii) In accordance with Virginia Code ss. 38.2-1005.1, the
Plan has been duly adopted by the required vote of the Members and all
necessary approvals under Virginia Code ss. 38.2-1005.1 for the Plan to
become effective have been obtained, all such approvals are in full
force and effect and no other approvals are required to be obtained
under Virginia Code ss. 38.2-1005.1 for the effectiveness of the Plan;
the time period within which an appeal to the Commission Order must be
noted in order for an appeal to be validly made has expired and, to our
knowledge, no appeals were so noted; and upon the issuance by the State
Corporation Commission of the certificate of merger with respect to the
Merger (as defined in the Plan), the Plan will have become effective in
accordance with its terms.
<PAGE>
While we have not ourselves checked the accuracy and
completeness of, or otherwise verified, and are not passing upon and
assume no responsibility for the accuracy or completeness of, the
statements contained in the Registration Statement or the Prospectuses,
except to the limited extent stated in paragraph (xii), in the course
of our review and discussion of the contents of the Registration
Statement and the Prospectuses with certain officers and employees of
the Company and Trigon Insurance and their independent accountants, but
without independent check or verification, nothing has come to our
attention that would lead us to believe that the Registration Statement
or any amendment thereto, including the Rule 430A Information and Rule
434 Information (if applicable), (except for financial statements and
schedules and other financial data included therein or omitted
therefrom, as to which we make no statement), at the time such
Registration Statement or any such amendment became effective,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectuses or any
amendment or supplement thereto (except for financial statements and
schedules and other financial data included therein or omitted
therefrom, as to which we make no statement), at the time the
Prospectuses were issued, at the time any such amended or supplemented
prospectus was issued or at the Closing Time, included or includes an
untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of the laws of North Carolina,
Wisconsin and Texas, upon the opinions of special counsel to the
Company acceptable to the U.S. Representatives (which opinions shall be
dated and furnished to the U.S. Representatives at the Closing Time,
shall be satisfactory in form and substance to counsel for the U.S.
Underwriters and shall expressly state that the U.S. Underwriters may
rely on such opinions as if they were addressed to them, provided that
McGuire, Woods, Battle & Boothe, L.L.P. shall state in their opinion
that they believe that they and the U.S. Underwriters are justified in
relying upon such opinions, and (B) as to matters of fact (but not as
to legal conclusions), to the extent they deem proper, on certificates
of responsible officers of the Company and Trigon Insurance and public
officials. Such opinion may state that to the extent that the opinions
rendered therein (i) relating to the issuance of the Member Shares to
Eligible Members in exchange for their Membership Interests involve
state securities, insurance securities or blue sky laws or (ii) involve
insurance laws, statutes, rules or regulations other than those of
Virginia and states as to which such counsel is relying upon opinions
of special counsel, such opinions are subject to the qualifications and
limitations contained in a schedule to such opinion, which shall be
satisfactory in form and substance to counsel for the U.S.
Underwriters. Such opinion shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written
policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law
(1991).
EXHIBIT 1.2
Draft -- January 28, 1997
==============================================================================
TRIGON HEALTHCARE, INC.
(a Virginia corporation)
________ Shares of Common Stock
INTERNATIONAL PURCHASE AGREEMENT
Dated: __________, 1997
==============================================================================
<PAGE>
Table of Contents
<TABLE>
<S> <C>
PURCHASE AGREEMENT...............................................................................................1
SECTION 1. Representations and Warranties..........................................................4
(a) Representations and Warranties by the Company...........................................4
(i) Compliance with Registration Requirements..........................................4
(ii) Independent Accountants...........................................................5
(iii) Financial Statements.............................................................5
(iv) Statutory Financial Statements....................................................6
(v) No Material Adverse Change in Business.............................................6
(vi) Good Standing of the Company, Virginia BCBS and TMSI..............................6
(vii) Good Standing of Subsidiaries....................................................7
(viii) Capitalization..................................................................7
(ix) Demutualization and Merger........................................................7
(x) Authorization of Agreement.........................................................8
(xi) Authorization and Description of Securities.......................................8
(xii) Authorization of Capital Stock of TMSI and Trigon Insurance. ....................8
(xiii) Authorization and Description of Member Shares..................................8
(xiv) Exemption from 1933 Act..........................................................8
(xv) Absence of Defaults and Conflicts.................................................9
(xvi) Absence of Labor Dispute........................................................10
(xvii) Absence of Proceedings.........................................................10
(xviii) Accuracy of Exhibits..........................................................10
(xix) Possession of Intellectual Property.............................................10
(xx) Absence of Further Requirements..................................................11
(xxi) BCBSA License...................................................................11
(xxii) Possession of Licenses and Permits.............................................11
(xxiii) Insurance Licenses............................................................12
(xxiv) Title to Property..............................................................13
(xxv) Maintenance of Insurance........................................................13
(xxvi) Due Adoption of the Plan.......................................................13
(xxvii) Compliance with Tax Laws......................................................14
(xxviii) Investment Company Act.......................................................14
(xxix) Environmental Laws.............................................................14
(xxx) Registration Rights.............................................................15
(c) Officer's Certificates.................................................................15
SECTION 2. Sale and Delivery to International Managers; Closing...................................15
(a) Initial International Securities.......................................................15
(b) International Option Securities........................................................15
(c) Payment................................................................................16
(d) Denominations; Registration............................................................17
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 3. Covenants of the Company and Virginia BCBS.............................................17
(a) Compliance with Securities Regulations and Commission Requests.........................17
(b) Filing of Amendments...................................................................17
(c) Delivery of Registration Statements....................................................18
(d) Delivery of Prospectuses...............................................................18
(e) Continued Compliance with Securities Laws..............................................18
(f) Blue Sky Qualifications................................................................19
(g) Rule 158...............................................................................19
(h) Use of Proceeds........................................................................19
(i) Listing................................................................................19
(j) Restriction on Sale of Securities......................................................19
(k) Reporting Requirements.................................................................20
(l) Compliance with Rule 463...............................................................20
(m) Consummation of the Plan...............................................................20
SECTION 4. Payment of Expenses....................................................................20
(a) Expenses................................................................................20
(b) Termination of Agreement................................................................21
SECTION 5. Conditions of International Managers' Obligations......................................21
(a) Effectiveness of Registration Statement................................................21
(b) Opinion of Counsel for Company and Virginia BCBS.......................................21
(c) Opinion of Counsel for International Managers..........................................22
(d) Officers' Certificates.................................................................22
(e) Accountant's Comfort Letter............................................................22
(f) Bring-down Comfort Letter..............................................................22
(g) Approval of Listing....................................................................23
(h) No Objection...........................................................................23
(i) License Agreement......................................................................23
(j) Opinion of Special Tax Counsel for Virginia BCBS.......................................23
(k) Effectiveness of the Plan..............................................................23
(l) Purchase of Initial U.S. Securities....................................................23
(m) Conditions to Purchase of International Option Securities..............................23
(n) Additional Documents...................................................................24
(o) Termination of Agreement...............................................................24
SECTION 6. Indemnification........................................................................25
(a) Indemnification of International Managers..............................................25
(b) Indemnification of Company, Virginia BCBS, Directors and Officers......................26
(c) Actions against Parties; Notification..................................................26
(d) Settlement without Consent if Failure to Reimburse.....................................27
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 7. Contribution.................................................................................27
SECTION 8. Representations, Warranties and Agreements to Survive Delivery...............................28
SECTION 9. Termination of Agreement.....................................................................29
(a) Termination; General...................................................................29
(b) Liabilities............................................................................29
SECTION 10. Default by One or More of the International Managers..........................................29
SECTION 11. Notices.......................................................................................30
SECTION 12. Parties.......................................................................................30
SECTION 13. GOVERNING LAW AND TIME........................................................................31
SECTION 14. Effect of Headings............................................................................31
SCHEDULES
Schedule A - List of International Managers.............................................Sch A-1
Schedule B - Pricing Information........................................................Sch B-1
EXHIBITS
Exhibit A- Form of Opinion of Company's Counsel...........................................A-1
</TABLE>
<PAGE>
Draft -- January 28, 1997
TRIGON HEALTHCARE, INC.
(a Virginia corporation)
________ Shares of Class A Common Stock
(Par Value $.01 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
__________, 1997
MERRILL LYNCH INTERNATIONAL
Merrill Lynch International
Alex. Brown & Sons Incorporated
Dean Witter International Ltd.
Morgan Stanley & Co. International Limited
Wheat, First Securities, Inc.
as Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
Trigon Healthcare, Inc., a Virginia corporation (the "Company"),
proposes to issue shares of its Class A Common Stock, par value $.01 per share
(shares of which class of stock of the Company are hereinafter referred to as
"Common Stock"), in connection with the conversion (the "Demutualization") of
Blue Cross and Blue Shield of Virginia (doing business as Trigon Blue Cross Blue
Shield), a mutual insurance company organized under the laws of the Commonwealth
of Virginia ("Virginia BCBS"), into a Virginia stock corporation pursuant to
Virginia BCBS's Amended and Restated Plan of Demutualization dated October 31,
1996 (the "Plan"), as approved by the members of the Virginia BCBS on September
6, 1996 and approved after a public hearing by the Virginia State Corporation
Commission on November 5, 1996. Upon consummation of the Plan, Virginia BCBS
will convert into a stock insurance corporation, Trigon Merger Sub, Inc., a
Virginia corporation and a wholly-owned subsidiary of the Company ("TMSI"), will
merge with and into Virginia BCBS, in a merger in which Virginia BCBS will be
the surviving company (the "Merger") and Virginia BCBS will become a wholly
owned subsidiary of the Company and will
<PAGE>
be renamed Trigon Insurance Company ("Trigon Insurance"). Pursuant to the Plan,
the Company proposes to (i) issue to Eligible Members (as defined in the Plan)
shares of Common Stock (such shares allocated to Eligible Members, exclusive of
shares allocated to Eligible Members in respect of which cash is paid in lieu of
such shares, being referred to herein as "Member Shares") in exchange for their
Membership Interest (as defined in the Plan) and (ii) subject to the terms and
conditions stated herein, to issue and sell to Merrill Lynch International
("Merrill Lynch") and each of the other international managers named in Schedule
A hereto (collectively, the "International Managers", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Alex. Brown & Sons Incorporated, Dean Witter
International Ltd., Morgan Stanley & Co. International Limited and Wheat, First
Securities, Inc. are acting as representatives (in such capacity, the "Lead
Managers"), with respect to the issue and sale by the Company and the purchase
by the International Managers, acting severally and not jointly, of the
respective numbers of shares of Common Stock of the Company set forth in said
Schedule A, and with respect to the grant by the Company to the International
Managers, acting severally and not jointly, of the option described in Section
2(b) hereof to purchase all or any part of ________ additional shares of Common
Stock to cover over-allotments, if any. The aforesaid ________ shares of Common
Stock (the "Initial International Securities") to be purchased by the
International Managers and all or any part of the ________ shares of Common
Stock subject to the option described in Section 2(b) hereof (the "International
Option Securities") are hereinafter called, collectively, the "International
Securities". On the Effective Date (as defined in the Plan), the Membership
Interests of all Members (as defined in the Plan) will be canceled and, as soon
as reasonably practicable thereafter, the Member Shares and cash will be issued
to Eligible Members. In addition, as required by the Plan, the Company will make
a payment in cash or a combination of cash and shares of its Class C redeemable
voting Common Stock, par value $.01 per share ("Class C Stock"), to the
Treasurer of the Commonwealth of Virginia, in addition to any shares of Common
Stock that the Commonwealth may be entitled to receive as an Eligible Member, in
an amount equal to the amount required to be paid by Virginia Code
ss.38.2-1005.1B.4 (the "Commonwealth Payment").
It is understood that the Company and Virginia BCBS are concurrently
entering into an agreement dated the date hereof (the "U.S. Purchase Agreement")
providing for the offering by the Company of an aggregate of ________ shares of
Common Stock (the "Initial U.S. Securities") through arrangements with certain
underwriters in the United States and Canada (the "U.S. Underwriters") for which
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Alex.
Brown & Sons Incorporated, Dean Witter Reynolds Inc., Morgan Stanley & Co.
Incorporated and Wheat, First Securities, Inc. are acting as representatives
(the "U.S. Representatives") and the grant by the Company to the U.S.
Underwriters, acting severally and not jointly, of an option to purchase all or
any part of the U.S. Underwriters' pro rata portion of up to ________ additional
shares of Common Stock solely to cover over allotments, if any (the "U.S. Option
Securities" and, together with the International Option Securities, the "Option
Securities"). The Initial U.S. Securities and the U.S. Option Securities are
hereinafter called the "U.S. Securities". It is understood that the Company is
not obligated to sell and the International
<PAGE>
Managers are not obligated to purchase, any Initial International Securities
unless all of the Initial U.S. Securities are contemporaneously purchased by the
U.S. Underwriters.
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters", the Initial International Securities and
the Initial U.S. Securities are hereinafter collectively called the "Initial
Securities", and the International Securities and the U.S. Securities are
hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated (in such capacity, the "Global Coordinator").
The Company understands that the International Managers propose to make
an offering of the International Securities as soon as the Lead Managers deem
advisable after this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-09773) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the International Securities (the "Form of
International Prospectus") and one relating to the U.S. Securities (the "Form of
U.S. Prospectus"). The Form of International Prospectus is identical to the Form
of U.S. Prospectus, except for the front cover and back cover pages and the
information under the caption "Underwriting" and the inclusion in the Form of
International Prospectus of a section under the caption "Certain United States
Tax Considerations to Non-U.S. Holders." The information included in any such
prospectus or in any such Term Sheet, as the case may be, that was omitted from
such registration statement at the time it became effective but that is deemed
to be part of such registration statement at the time it became effective (a)
pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information"
or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434
Information." Each Form of International Prospectus and Form of U.S. Prospectus
used before such registration statement became effective, and any prospectus
that omitted, as applicable, the Rule 430A Information or the Rule 434
Information, that was used after such effectiveness and prior to the execution
and delivery of this Agreement, is herein called a "preliminary prospectus."
Such registration statement, including the exhibits thereto and schedules
thereto at the time it became effective and including the Rule 430A Information
and the
<PAGE>
Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933
Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final Form of International
Prospectus and the final Form of U.S. Prospectus in the forms first furnished to
the Underwriters for use in connection with the offering of the Securities are
herein called the "International Prospectus" and the "U.S. Prospectus,"
respectively, and collectively, the "Prospectuses." If Rule 434 is relied on,
the terms "International Prospectus" and "U.S. Prospectus" shall refer to the
preliminary International Prospectus dated _____, 1997 and preliminary U.S.
Prospectus dated ____, 1997, respectively, each together with the applicable
Term Sheet and all references in this Agreement to the date of such Prospectuses
shall mean the date of the applicable Term Sheet. For purposes of this
Agreement, all references to the Registration Statement, any preliminary
prospectus, the International Prospectus, the U.S. Prospectus or any Term Sheet
or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. Each of the Company
and Virginia BCBS, jointly and severally, represents and warrants to each
International Manager as of the date hereof, as of the Closing Time referred to
in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in
Section 2(b), hereof and agrees with each International Manager, as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company or Virginia BCBS, are contemplated by the
Commission, and any request on the part of the Commission for
additional information has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any International
Option Securities are purchased, at the Date of Delivery), the
Registration Statement, the Rule 462(b) Registration Statement and any
amendments and supplements thereto complied and will comply in all
material respects with the re quirements of the 1933 Act and the 1933
Act Regulations and did not and will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
Neither of the Prospectuses nor any amendments or supplements thereto,
at the time the Prospectuses or any amendments or supplements thereto
were issued and at the Closing Time (and, if any
<PAGE>
International Option Securities are purchased, at the Date of
Delivery), included or will include an untrue statement of a material
fact or omitted or will omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. If Rule 434 is used, the
Company will comply with the requirements of Rule 434 and the
Prospectuses shall not be "materially different", as such term is used
in Rule 434, from the prospectuses included in the Registration
Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or the International
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any International Manager
through the Lead Managers or any U.S. Underwriter through the U.S.
Representatives expressly for use in the Registration Statement or the
International Prospectus.
Each preliminary prospectus and the prospectuses filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectuses
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) Independent Accountants. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included
in the Registration Statement and the Prospectuses, together with the
related schedules and notes, present fairly the financial position of
Virginia BCBS and its consolidated subsidiaries at the dates indicated
and the results of operations and cash flows of Virginia BCBS and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout
the periods involved. The supporting schedules included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data
and the summary financial information included in the Prospectuses
present fairly the information shown therein and have been compiled on
a basis consistent with that of the audited financial statements
included in the Registration Statement. The pro forma financial
statements and the related notes thereto included in the Registration
Statement and the Prospectuses present fairly the information shown
therein, have been prepared in accordance with the Commission's rules
and guidelines with respect to pro forma financial statements and have
been properly compiled on the bases described therein, and the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions and circumstances referred to therein.
<PAGE>
(iv) Statutory Financial Statements. The statutory financial
statements of Virginia BCBS and its subsidiaries, from which certain
ratios and other statistical data contained in the Registration
Statement have been derived, have for each relevant period been
prepared in accordance with accounting practices prescribed or
permitted by the National Association of Insurance Commissioners and
the insurance department of the Common wealth of Virginia, and such
accounting practices have been applied on a consistent basis throughout
the periods involved, except as disclosed therein.
(v) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectuses, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business
prospects of Trigon considered as one enterprise, whether or not
arising in the ordinary course of business, (B) there have been no
transactions entered into by Trigon, other than those in the ordinary
course of business, which are material with respect to Trigon
considered as one enterprise, and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any
class of its capital stock. For purposes of this Agreement, "Trigon"
shall mean Virginia BCBS as a mutual insurance company and its
subsidiaries, including the Company, at all times prior to the
effectiveness of the Plan and the Company and its subsidiaries,
including Trigon Insurance as a stock corporation, at all times on and
after the effectiveness of the Plan.
(vi) Good Standing of the Company, Virginia BCBS and TMSI. The
Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the Commonwealth of
Virginia; Virginia BCBS has been duly organized and, since its
conversion to a mutual insurance company in 1991 until immediately
prior to the effectiveness of the Plan, has and will continue to be
validly existing as a mutual insurance company in good standing under
the laws of the Commonwealth of Virginia; upon the effectiveness of the
Plan, Trigon Insurance will be validly existing as a stock corporation
in good standing under the laws of the Commonwealth of Virginia; each
of the Company and Virginia BCBS has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its
obligations under this Agreement; and each of the Company and Virginia
BCBS is duly qualified as a foreign corporation to transact business
and is in good standing in each other jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing could not reasonably be
expected to result in a material adverse effect on the condition,
financial or otherwise, or in the earnings, business affairs or
business prospects of Trigon considered as one enterprise (a "Material
Adverse Effect"). TMSI has been duly incorporated and, until
immediately prior to the effectiveness of the Plan, will continue to be
duly incorporated and validly existing as a stock corporation in good
standing under the laws of the Commonwealth of Virginia.
<PAGE>
(vii) Good Standing of Subsidiaries. Each of the subsidiaries
listed on Exhibit 21 to the Registration Statement, which are the only
subsidiaries of Virginia BCBS, has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing could not reasonably be expected to result in a Material
Adverse Effect; except as otherwise disclosed in the Registration
Statement, all of the issued and outstanding capital stock of each such
subsidiary has been duly authorized and validly issued, is fully paid
and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity; and none of the outstanding
shares of capital stock of any such subsidiary was issued in violation
of the preemptive or similar rights of any securityholder of such
subsidiary. Prior to the effectiveness of the Plan, the Company will
have no subsidiaries other than TMSI and, upon the effectiveness of the
Plan, will have no subsidiaries other than Trigon Insurance and
subsidiaries of Trigon Insurance.
(viii) Capitalization. Prior to the effectiveness of the Plan,
upon the filing with the State Corporation Commission of the
Commonwealth of Virginia ("the State Corporation Commission") of the
Articles of Incorporation of the Company in the form filed as an
Exhibit to the Registration Statement, the Company will have an
authorized capitalization as set forth in the Prospectus.
(ix) Demutualization and Merger. Upon the effectiveness of the
Plan and pursuant to the Merger: (a) TMSI will be merged with and into
Virginia BCBS, the separate existence of TMSI will cease, and Virginia
BCBS will become a wholly owned subsidiary of the Company; (b) Trigon
Insurance will become a stock corporation incorporated under and
governed by the Virginia Stock Corporation Act, ss.13.1-601 et seq.;
(c) each issued and outstanding share of common stock of TMSI owned by
the Company immediately prior to the effectiveness of the Plan shall,
as a result of the Merger and without any action on the part of the
Company, be canceled and converted into one share of stock of Trigon
Insurance; (d) all Membership Interests of all Members in Virginia BCBS
shall be canceled, and in consideration for their Membership Interests,
including their interests in the surplus of Virginia BCBS, Eligible
Members shall be entitled to receive Common Stock from the Company
and/or cash from Trigon Insurance pursuant to and in accordance with
the Plan; and (e) all issued and outstanding shares of capital stock in
the Company owned by Virginia BCBS shall be canceled. The Company shall
make the Commonwealth Payment in accordance with the Plan.
<PAGE>
(x) Authorization of Agreement. This Agreement and the U.S.
Purchase Agreement have been duly authorized, executed and delivered by
the Company and Virginia BCBS.
(xi) Authorization and Description of Securities. The
Securities to be purchased by the International Managers and the U.S.
Underwriters from the Company have been duly authorized for issuance
and sale to the International Managers pursuant to this Agreement and
the U.S. Underwriters pursuant to the U.S. Purchase Agreement,
respectively, and, when issued and delivered by the Company pursuant to
this Agreement and the U.S. Purchase Agreement, respectively, against
payment of the consideration set forth herein and the U.S. Purchase
Agreement, respectively, will be validly issued, fully paid and
non-assessable; the Common Stock conforms to all statements relating
thereto contained in the Prospectuses and such description conforms to
the rights set forth in the instruments defining the same; no holder of
the Securities will be personally liable for any debts, obligations,
liabilities or losses of the Company by reason of being such a holder;
and the issuance of the Securities is not subject to the preemptive or
other similar rights of any securityholder of the Company.
(xii) Authorization of Capital Stock of TMSI and Trigon
Insurance. As of the date hereof and at all times subsequent hereto up
to the effectiveness of the Plan, all of the issued and outstanding
shares of capital stock of TMSI shall have been duly authorized and
validly issued and shall be fully paid and non-assessable and shall be
owned by the Company, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity. Upon
effectiveness of the Plan, all of the outstanding shares of capital
stock of Trigon Insurance will have been duly authorized and, when
issued and delivered to the Company pursuant to the Plan, will be
validly issued, fully paid and non-assessable and will be owned by the
Company, free and clear of any security interest, mortgage, pledge,
lien, encumbrance claim or equity.
(xiii) Authorization and Description of Member Shares. The
Member Shares have been duly authorized, and when issued and delivered
to Eligible Members in exchange for their Membership Interests pursuant
to the Plan, will be validly issued, fully paid and non-assessable; no
holder thereof will be personally liable for any debts, obligations,
liabilities or losses of the Company by reason of being such a holder;
such Member Shares are not subject to the preemptive or other similar
rights of any securityholder of the Company and all corporate action
required to be taken for the authorization and issuance of the Member
Shares has been validly and sufficiently taken.
(xiv) Exemption from 1933 Act. The issuance and delivery of
the Member Shares to Eligible Members in exchange for their Membership
Interests pursuant to the Plan is exempt from the registration
requirements of the 1933 Act.
<PAGE>
(xv) Absence of Defaults and Conflicts. Neither the Company,
Virginia BCBS or any of its subsidiaries is in violation of its charter
or by-laws or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note,
lease or other agreement or instrument to which the Company, Virginia
BCBS or any of its subsidiaries is a party or by which it or any of
them may be bound, or to which any of the property or assets of the
Company, Virginia BCBS or any subsidiary is subject (collectively,
"Agreements and Instruments"), except for such defaults that could not
reasonably be expected to result in a Material Adverse Effect; and the
execution, delivery and performance of this Agreement, the U.S.
Purchase Agreement and the Plan and the consummation of the
transactions contemplated in this Agreement, the U.S. Purchase
Agreement, the Plan and the Registration Statement (including the
issuance of the Member Shares to Eligible Members in exchange for their
Membership Interests pursuant to the Plan, the issuance of cash and
Class C Stock to the Treasurer of the Commonwealth of Virginia in
satisfaction of the Commonwealth payment pursuant to the Plan, and the
issuance and sale of the Securities and the use of the proceeds from
the sale of the Securities as described in the Prospectuses under the
caption "Use of Proceeds") and compliance by the Company and Virginia
BCBS with their obligations under this Agreement, the U.S. Purchase
Agreement and the Plan have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined
below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company,
Virginia BCBS or any subsidiary pursuant to, the Agreements and
Instruments (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that could not reasonably be expected to result
in a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter or by-laws of the Company,
Virginia BCBS or any subsidiary or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Company, Virginia BCBS or any subsidiary or any
of their assets, properties or operations (other than foreign or state
securities, insurance securities or blue sky laws in connection with
the offering, issuance or sale of the Securities under this Agreement
and the U.S. Purchase Agreement ), except for such violations resulting
from the failure to make or obtain or comply with such filings,
authorizations, approvals, consents, licenses, orders, registrations,
qualifications or decrees in connection with the Plan that could not
reasonably be expected to have a Material Adverse Effect or have a
material adverse effect on the ability of the Company or Virginia BCBS
to perform their respective obligations under the Plan or to consummate
the transactions contemplated therein. As used herein, a "Repayment
Event" means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on
such holder's behalf) the right to require the repurchase, redemption
or repayment of all or a portion of such indebtedness by the Company,
Virginia BCBS or any subsidiary.
<PAGE>
(xvi) Absence of Labor Dispute. No labor dispute with the
employees of the Company, Virginia BCBS or any of its subsidiaries
exists or, to the knowledge of the Company or Virginia BCBS, is
imminent, and the Company and Virginia BCBS are not aware of any
existing or imminent labor disturbance by the employees of any of its
or any subsidiary's principal suppliers, customers or contractors,
which, in either case, may reasonably be expected to result in a
Material Adverse Effect.
(xvii) Absence of Proceedings. Except for matters disclosed in
the Registration Statement, there is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge
of the Company or Virginia BCBS, threatened, against or affecting the
Company, Virginia BCBS or any of its subsidiaries, which is required to
be disclosed in the Registration Statement, or which might reasonably
be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the
properties or assets thereof or the consummation of the transactions
contemplated in this Agreement, the U.S. Purchase Agreement and the
Plan or the performance by the Company or Virginia BCBS of its
obligations hereunder or thereunder; and the aggregate of all pending
legal or governmental proceedings to which the Company, Virginia BCBS
or any subsidiary is a party or of which any of their respective
property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation
incidental to the business, could not reasonably be expected to result
in a Material Adverse Effect.
(xviii) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectuses or to be filed as exhibits thereto which
have not been so described and filed as required.
(xix) Possession of Intellectual Property. The Company,
Virginia BCBS and its subsidiaries own or possess, or can acquire on
reasonable terms, adequate patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, and neither the Company,
Virginia BCBS nor any of its subsidiaries has received any notice or is
otherwise aware of any infringement of or conflict with asserted rights
of others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company, Virginia BCBS or any
of its subsidiaries therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity
or inadequacy, singly or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect.
<PAGE>
(xx) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company or
Virginia BCBS of their respective obligations hereunder or under the
Plan, in connection with the offering, issuance or sale of the
Securities under this Agreement and the U.S. Purchase Agreement, in
connection with the issuance of the Member Shares to Eligible Members
in exchange for their Membership Interests and of cash and Class C
Stock to the Treasurer of the Commonwealth of Virginia in satisfaction
of the Commonwealth Payment pursuant to the Plan, or the consummation
of the transactions contemplated by this Agreement, the U.S. Purchase
Agreement and the Plan, except (a) such as have been already obtained
or as may be required under the 1933 Act or the 1933 Act Regulations
and foreign or state securities, insurance securities or blue sky laws
in connection with the offering, issuance or sale of the Securities
under this Agreement and the U.S. Purchase Agreement and (b) such
filings, authorizations, approvals, consents, licenses, orders,
registrations, qualifications or decrees in connection with the Plan
that, if not made or obtained or complied with, could not reasonably be
expected to have a Material Adverse Effect or have a material adverse
effect on the ability of the Company or Virginia BCBS to perform their
respective obligations under the Plan or to consummate the transactions
contemplated therein.
(xxi) BCBSA License. Virginia BCBS is in full compliance with
the requirements of the Blue Cross License Agreement, dated as of
November 16, 1995, between Virginia BCBS and the Blue Cross and Blue
Shield Association (the "BCBSA"), and the Virginia Blue Shield License
Agreement, dated as of November 16, 1995, between Virginia BCBS and the
BCBSA, except in each case where noncompliance could not reasonably be
expected to have a Material Adverse Effect. Upon execution thereof by
the Company on or prior to the Effective Date, the License Agreement
attached as Exhibit 10.1 to the Registration Statement (the "New
License Agreement") shall become effective and enforceable against the
Company and, to the best of the Company's and Virginia BCBS' knowledge,
the BCBSA in accordance with its terms. Each of Virginia BCBS's
subsidiaries that is required by the BCBSA as of the date hereof, or
that will be required by the BCBSA as of the Closing Time, to be a
party to a Blue Cross Affiliate License Agreement is in full compliance
with the requirements of such agreement, except in each case where
noncompliance could not reasonably be expected to have a Material
Adverse Effect.
(xxii) Possession of Licenses and Permits. The Company,
Virginia BCBS and its subsidiaries each possess such permits, licenses,
approvals, consents and other author izations (collectively,
"Governmental Licenses") issued by the appropriate federal, state,
local or foreign regulatory agencies or bodies necessary to conduct the
business now operated by them, except where the failure to possess such
Government Licenses could not reasonably be expected to have a Material
Adverse Effect; the Company, Virginia BCBS and its subsidiaries each
are in compliance with the terms and conditions of all such
<PAGE>
Governmental Licenses, except where the failure so to comply could not
reasonably be expected, singly or in the aggregate, to have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect could not reasonably be expected to have a Material
Adverse Effect; and neither the Company, Virginia BCBS nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, might reasonably be expected to result in a Material
Adverse Effect.
(xxiii) Insurance Licenses. The Company has made all required
filings under insurance holding company statutes applicable to it, and
is duly licensed or authorized as an insurance holding company in each
jurisdiction in which it is or will immediately after the effectiveness
of the Plan be required to be so licensed or authorized, except where
the failure to have made such filings or to be so licensed or
authorized in any such jurisdiction could not reasonably be expected to
have a Material Adverse Effect. Each of Virginia BCBS and its
subsidiaries which is engaged in the insurance business (the "Insurance
Subsidiaries") is duly licensed or authorized to conduct its insurance
business under the insurance laws of each jurisdiction in which it
conducts such business so as to require such licensing or
authorization, except where the failure to be so licensed or authorized
could not reasonably be expected to have a Material Adverse Effect; all
such licenses or authorizations are in full force and effect and
neither the Company, Virginia BCBS nor any Insurance Subsidiary has
received any notice of any event, inquiry, investigation or proceeding
that would reasonably be expected to result in the suspension,
revocation or limitation of any such licenses or authorizations or
otherwise impose any limitation on the conduct of the business of the
Company, Virginia BCBS or any Insurance Subsidiary, except any such
suspension, revocation or limitation which could not reasonably be
expected to have a Material Adverse Effect, and to the Company's,
Virginia BCBS's and the Insurance Subsidiaries' knowledge, there is no
sustainable basis under current law, regulation or judicial
interpretation for any such suspension, revocation or limitation; each
of Virginia BCBS and the Insurance Subsidiaries is in compliance with,
and conducts its businesses in conformity with, all applicable
insurance laws and regulations, except where the failure to comply or
conform could not reasonably be expected to have a Material Adverse
Effect; and Virginia BCBS has disclosed in writing to the Lead Managers
all pending significant examinations, and all significant examinations
which have been completed and filed since the fiscal year ending
December 31, 1990, by any governmental authority having jurisdiction to
regulate the insurance operations of Virginia BCBS or any Insurance
Subsidiary. Each of the subsidiaries of Virginia BCBS operating as a
health maintenance organization (the "HMO Subsidiaries") is duly
licensed as a health maintenance organization under the laws of each
jurisdiction in which it conducts such business so as to require such
licensing, except where the failure to be so licensed could not
reasonably be expected to have a Material Adverse Effect. Each of
____________, ____________ and _______________ is duly qualified as a
health maintenance
<PAGE>
organization under The Health Maintenance Organization Act of 1973, as
amended, and the rules and regulations of the Department of Health and
Human Services thereunder.
(xxiv) Title to Property. The Company, Virginia BCBS and its
subsidiaries have good and marketable title to all real property owned
by the Company, Virginia BCBS and its subsidiaries and good title to
all other properties owned by them, in each case, free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions or
en cumbrances of any kind except such as (a) are described in the
Prospectuses or (b) do not, singly or in the aggregate, materially
affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company, Virginia
BCBS or any of its subsidiaries; and all of the leases and subleases
material to the business of Trigon and its subsidiaries, considered as
one enterprise, and under which the Company, Virginia BCBS or any of
its subsidiaries holds properties described in the Prospectuses, are in
full force and effect, and neither the Company, Virginia BCBS nor any
subsidiary has any notice of any claim of any sort that has been
asserted by anyone adverse to the rights of the Company, Virginia BCBS
or any subsidiary under any of the leases or subleases mentioned above,
or affecting or questioning the rights of the Company, Virginia BCBS or
such subsidiary to the continued possession of the leased or subleased
premises under any such lease or sublease, and which if adversely
decided could reasonably be expected to have a Material Adverse Effect.
(xxv) Maintenance of Insurance. The Company, Virginia BCBS and
each of its subsidiaries maintain insurance policies with respect to
such insurable properties, potential liabilities and occurrences that
merit or require catastrophic insurance in amounts deemed adequate in
the reasonable opinion of the management for the Company and Virginia
BCBS or maintain a system or systems of self-insurance or assumption of
risk which accords with the practices of similar businesses; all such
insurance policies are in full force and effect.
(xxvi) Due Adoption of the Plan. The Plan was duly adopted on
September 6, 1996 by a vote (the "Policyholder Vote") of more than
two-thirds of the votes validly cast by Voting Members (as defined in
the Plan) (which adoption complied with the applicable requirements of
Virginia Code ss.38.2-1005.1) and such adoption has not been rescinded
or otherwise withdrawn; on November 5, 1996 the State Corporation
Commission issued a final order approving the Plan in accordance with
the requirements of Virginia Code ss.38.2-1005.1 (the "Commission
Order"); the time period within which an appeal to the Commission Order
must be noted for an appeal to be validly made has expired and, to the
Company's and Virginia BCBS's knowledge, no appeals were so noted;
prior to the Effective Date, Virginia BCBS will have filed with the
State Corporation Commission in accordance with Virginia law the
Articles of Merger (as defined in the Plan) together with a copy of the
Plan so approved; no other approvals are required to be obtained under
Virginia law for the effectiveness of the Plan; on the Effective Date,
the Plan will become effective in accordance with its terms pursuant to
Virginia Code ss.38.2-1005.1 and the
<PAGE>
Demutualization will be completed in accordance with the Plan and the
laws of the Commonwealth of Virginia applicable to the reorganization
of mutual insurance companies into stock corporations effected through
a merger and any rules and regulations of the State Corporation
Commission in respect thereof, in each case as administered or
interpreted by the State Corporation Commission in respect thereof; and
prior to or contemporaneously with the Closing Time each of the actions
required to occur and conditions required to be satisfied on or prior
to the effectiveness of the Plan pursuant to the Commission's Order or
the Plan will have occurred or been satisfied.
(xxvii) Compliance with Tax Laws. All material income, payroll
and sales tax returns required to have been filed prior to the date
hereof or the Closing Time by the Company, Virginia BCBS or any of its
subsidiaries, in any jurisdiction, shall have been so filed, and all
material taxes, including related withholding taxes, penalties and
interest, assessments and other charges due or claimed to be due from
such entities have been paid, other than those being contested in good
faith and for which adequate reserves have been provided or those
currently payable without penalty or interest.
(xxviii) Investment Company Act. The Company is not, and upon
the issuance of the Member Shares to Eligible Members in exchange for
their Membership Interests pursuant to the Plan and the issuance and
sale of the Securities as herein contemplated and the application of
the net proceeds therefrom as described in the Prospectuses will not
be, nor is Virginia BCBS or any of its subsidiaries, an "investment
company" or an entity "controlled" by an "investment company" as such
terms are defined in the Investment Company Act of 1940, as amended
(the "1940 Act").
(xxix) Environmental Laws. Except as described in the
Registration Statement and except as could not reasonably be expected,
singly or in the aggregate, to result in a Material Adverse Effect, (A)
neither the Company, Virginia BCBS nor any of its subsidiaries is in
violation of any federal, state, local or foreign statute, law, rule,
regulation, ordinance, code, policy or rule of common law or any
judicial or ad ministrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating
to pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata) or wildlife, including, without
limitation, laws and regulations relating to the release or threatened
release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Hazardous Materials (collectively, "En vironmental
Laws"), (B) the Company, Virginia BCBS and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any
<PAGE>
Environmental Law against the Company, Virginia BCBS or any of its
subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company, Virginia
BCBS or any of its subsidiaries relating to Hazardous Materials or any
Environmental Laws.
(xxx) Registration Rights. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(b) Agreements of the International Mangers. Each International
Manager, severally and not jointly, agrees with each of the Company that such
International Manager will not offer or sell, directly or indirectly,
International Securities, nor distribute or publish the International Prospectus
or any other offering material or advertisements in connection with the
International Securities, in or from any country or jurisdiction except in
compliance in all material respects with any applicable rules and regulations of
any such county or jurisdiction. Each International Manager will comply with all
applicable laws and regulations, and make or obtain all necessary filings,
consents or approvals, in each jurisdiction in which such International Manager
offers, sells or delivers International Securities.
(c) Officer's Certificates. Any certificate signed by any officer of
the Company, Virginia BCBS or any of its subsidiaries delivered to the Global
Coordinator, the Lead Managers or to counsel for the International Managers
shall be deemed a representation and warranty by the Company, Virginia BCBS to
each International Manager as to the matters covered thereby.
SECTION 2. Sale and Delivery to International Managers; Closing.
(a) Initial International Securities. On the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company agrees to sell to each International
Manager, severally and not jointly, and each International Manager, severally
and not jointly, agrees to purchase from the Company, at the price per share set
forth in Schedule B, the number of Initial International Securities set forth in
Schedule A opposite the name of such International Manager, plus any additional
number of Initial International Securities which such International Manager may
become obligated to purchase pursuant to the provisions of Section 10 hereof.
(b) International Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
International Managers, severally and not jointly, to purchase up to an
additional ________ shares of Common Stock at the price per share set forth in
Schedule B, less an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial International Securities but
not payable on the International Option
<PAGE>
Securities. The option hereby granted will expire 30 days after the date hereof
and may be exercised in whole or in part from time to time only for the purpose
of covering over-allotments which may be made in connection with the offering
and distribution of the Initial International Securities upon notice by the
Global Coordinator to the Company setting forth the number of International
Option Securities as to which the several International Managers are then
exercising the option and the time and date of payment and delivery for such
International Option Securities. Any such time and date of delivery for the
International Option Securities (a "Date of Delivery") shall be determined by
the Global Coordinator, but shall not be later than seven full business days
after the exercise of said option, nor in any event prior to the Closing Time,
as hereinafter defined. If the option is exercised as to all or any portion of
the International Option Securities, each of the International Managers, acting
severally and not jointly, will purchase that proportion of the total number of
International Option Securities then being purchased which the number of Initial
International Securities set forth in Schedule A opposite the name of such
International Manager bears to the total number of Initial International
Securities, subject in each case to such adjustments as the Global Coordinator
in its discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Debevoise & Plimpton, 875 Third Avenue, New York, New York 10022, or at such
other place as shall be agreed upon by the Global Coordinator and the Company,
at 10:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after
4:30 P.M. (Eastern time) on any given day) business day after the date hereof
(unless postponed in accordance with the provisions of Section 10), or such
other time not later than ten business days after such date as shall be agreed
upon by the Global Coordinator and the Company (such time and date of payment
and delivery being herein called "Closing Time").
In addition, in the event that any or all of the International Option
Securities are purchased by the International Managers, payment of the purchase
price for, and delivery of certificates for, such International Option
Securities shall be made at the above-mentioned offices, or at such other place
as shall be agreed upon by the Global Coordinator and the Company, on each Date
of Delivery as specified in the notice from the Global Coordinator to the
Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Lead Managers for the respective accounts of the International Managers of
certificates for the International Securities to be purchased by them. It is
understood that each International Manager has authorized the Lead Managers, for
its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Initial International Securities and the International
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the International Managers, may (but
shall not be obligated to) make payment of the purchase price for the Initial
International Securities or the International Option Securities, if any, to be
purchased by any International Manager whose funds have not been received by the
Closing Time
<PAGE>
or the relevant Date of Delivery, as the case may be, but such payment shall not
relieve such International Manager from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the Lead Managers may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
International Securities and the International Option Securities, if any, will
be made available for examination and packaging by the Lead Managers in The City
of New York not later than 10:00 A.M. (Eastern time) on the business day prior
to the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company and Virginia BCBS. The Company, and
Virginia BCBS with respect to subsection (m) below, covenants with each
International Manager as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify
the Global Coordinator immediately, and confirm the notice in writing,
(i) when any post-effective amendment to the Registration Statement,
shall become effective, or any supplement to the Prospectuses or any
amended Pro spectuses shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission
for any amendment to the Registration Statement or any amendment or
supplement to the Prospectuses or for additional information, and (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing
or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale
in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect
the filings necessary pursuant to Rule 424(b) and will take such steps
as it deems necessary to ascertain promptly whether the form of
prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order
is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to
the Registration Statement (including any filing under Rule 462(b)),
any Term Sheet or any amendment, supplement or revision to either the
prospectus included in the Registration Statement at the time it became
effective or to the Prospectuses, will furnish the Global Coordinator
with copies of any such documents a reasonable amount of time prior to
such proposed filing or use,
<PAGE>
as the case may be, and will not file or use any such document to which
the Global Coordinator or counsel for the International Managers shall
object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Lead Managers and counsel for the
International Managers, without charge, signed copies of the
Registration Statement as originally filed and of each amendment
thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates
of experts, and will also deliver to the Lead Managers, without charge,
a conformed copy of the Registration Statement as originally filed and
of each amendment thereto (without exhibits) for each of the
International Managers. The copies of the Registration Statement and
each amendment thereto furnished to the International Managers will be
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to
each International Manager, without charge, as many copies of each
preliminary prospectus as such International Manager reasonably
requested, and the Company hereby consents to the use of such copies
for purposes permitted by the 1933 Act. The Company will furnish to
each International Manager, without charge, during the period when the
International Prospectus is required to be delivered under the 1933 Act
or the Securities Exchange Act of 1934 (the "1934 Act"), such number of
copies of the International Prospectus (as amended or supplemented) as
such International Manager may reasonably request. The International
Prospectus and any amendments or supplements thereto furnished to the
International Managers will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company
will comply with the 1933 Act and the 1933 Act Regulations so as to
permit the completion of the distribution of the Securities as
contemplated in this Agreement, the U.S. Purchase Agreement and in the
Prospectuses. If at any time when a prospectus is required by the 1933
Act to be delivered in connection with sales of the Securities, any
event shall occur or condition shall exist as a result of which it is
necessary, in the opinion of counsel for the International Managers or
for the Company, to amend the Registration Statement or amend or
supplement any Prospectus in order that the Prospectuses will not
include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion
of such counsel, at any such time to amend the Registration Statement
or amend or supplement any Prospectus in order to comply with the
requirements of the 1933 Act or the 1933 Act Regulations, the Company
will promptly prepare and file with the Commission, subject to Section
3(b), such amendment or supplement as may be necessary to correct such
<PAGE>
statement or omission or to make the Registration Statement or the
Prospectuses comply with such requirements, and the Company will
furnish to the International Managers such number of copies of such
amendment or supplement as the International Managers may reasonably
request.
(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the International Managers, to qualify the
Securities for offering and sale under the applicable securities laws
of such states and other jurisdictions (domestic or foreign) as the
Global Coordinator may designate and to maintain such qualifications in
effect for a period of not less than one year from the later of the
effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not
be obligated to file any general consent to service of process or to
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it
is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such
statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of
not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated
by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified
in the Prospectuses under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect
the listing of the Common Stock (including the Member Shares and the
Securities) on the New York Stock Exchange.
(j) Restriction on Sale of Securities. During a period of 180
days from the date of the Prospectuses, the Company will not, without
the prior written consent of the Global Coordinator, (i) directly or
indirectly, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or
dispose of any share of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
<PAGE>
whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not
apply to (A) the Securities to be sold hereunder or under the U.S.
Purchase Agreement, (B) the Member Shares to Eligible Members in
connection with the consummation of the Demutualization pursuant to the
Plan, (C) shares of Common Stock issued pursuant to Articles VI, VII or
VIII of the Articles of Incorporation of the Company, (D) options for
shares of Common Stock granted to employees, officers and directors of
the Company or its subsidiaries pursuant to a stock option plan adopted
by the Company, (E) shares of Common Stock issued in a private
placement as consideration for any acquisition by the Company and (F)
shares of Common Stock issued to employees pursuant to the Company's
Employees Thrift Plan, 401(k) Restoration Plan or 1997 Employee Stock
Purchase Plan, provided, that, with respect to clause (E) above, the
International Managers shall have first obtained from any recipient of
shares of Common Stock an agreement in writing to be bound to the same
restrictions set forth in this Section 3(j).
(k) Reporting Requirements. The Company, during the period
when the Prospectuses are required to be delivered under the 1933 Act
or the 1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the rules and regulations of the Commission
thereunder.
(l) Compliance with Rule 463. The Company will file with the
Commission such reports on Form SR as may be required pursuant to Rule
463 of the 1933 Act Regulations.
(m) Consummation of the Plan. Prior to or contemporaneously
with the Closing Time, the Company and Virginia BCBS will take all
actions necessary in order to consummate the Plan and the transactions
contemplated thereby to have occurred at or prior to such date.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Underwriters and such other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Securities, (iii) the preparation, issuance and
delivery of the certificates for the Securities to the Underwriters, including
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Securities to the Underwriters and the
transfer of the Securities between the U.S. Underwriters and the International
Managers, (iv) the fees and disbursements of the Company's counsel, accountants
and other advisors, (v) the qualification of the Securities under securities
laws in accordance with the provisions of Section 3(f) hereof, including filing
fees and the reasonable fees and disbursements of counsel for the Underwriters
in connection therewith and in connection with the preparation of the Blue Sky
Survey and any
<PAGE>
supplement thereto, (vi) the printing and delivery to the Underwriters of copies
of each preliminary prospectus, any Term Sheets and of the Prospectuses and any
amendments or supplements thereto, (vii) the preparation, printing and delivery
to the Underwriters of copies of the Blue Sky Survey and any supplement thereto,
(viii) the fees and expenses of any transfer agent or registrar for the
Securities, (ix) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. (the "NASD") of the terms
of the sale of the Securities and (x) the fees and expenses incurred in
connection with the listing of the Securities on the New York Stock Exchange.
(b) Termination of Agreement. If this Agreement is terminated by the
Lead Managers in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Company shall reimburse the International Managers for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the International Managers.
SECTION 5. Conditions of International Managers' Obligations. The
obligations of the several International Managers hereunder are subject to the
accuracy of the representations and warranties of the Company and Virginia BCBS
contained in Section 1 hereof or in certificates of any officer of the Company
or Virginia BCBS or any subsidiary of the Company or Virginia BCBS delivered
pursuant to the provisions hereof, to the performance by the Company and
Virginia BCBS of their respective covenants and other obligations hereunder, and
to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued
under the 1933 Act or proceedings therefor initiated or threatened by
the Commission, and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of counsel to the International Managers. A prospectus
containing the Rule 430A Information shall have been filed with the
Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the
Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company and Virginia BCBS. At
Closing Time, the Lead Managers shall have received the favorable
opinion, dated as of Closing Time, of McGuire, Woods, Battle & Boothe,
L.L.P., counsel for the Company and Virginia BCBS, in form and
substance satisfactory to counsel for the International Managers,
together with signed or reproduced copies of such letter for each of
the other International Managers to the effect set forth in Exhibit A
hereto and to such further effect as counsel to the International
Managers may reasonably request.
<PAGE>
(c) Opinion of Counsel for International Managers. At Closing
Time, the Lead Managers shall have received the favorable opinion,
dated as of Closing Time, of Debevoise & Plimpton, counsel for the
International Managers, together with signed or reproduced copies of
such letter for each of the other International Managers with respect
to the matters set forth in clauses (viii), (ix), (x), (xii) (solely
as to the information in the Prospectus under "Description of Capital
Stock--Description of Common Stock") and the penultimate paragraph of
Exhibit A hereto. In giving such opinion such counsel may rely, as to
all matters governed by Virginia law, upon the opinions of McGuire,
Woods, Battle & Boothe, L.L.P., counsel for the Company and Virginia
BCBS. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of the Company, Virginia BCBS and
its subsidiaries and certificates of public officials.
(d) Officers' Certificates. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectuses, any material adverse
change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of Trigon considered as one
enterprise, whether or not arising in the ordinary course of business,
and the Lead Managers shall have received certificates of the President
or a Vice President of each of the Company and Virginia BCBS and of the
chief financial or chief accounting officer of each of the Company and
Virginia BCBS, dated as of Closing Time, to the effect that (i) there
has been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same
force and effect as though expressly made at and as of Closing Time,
(iii) the Company and Virginia BCBS have complied with all agreements
and satisfied all conditions on their part to be performed or satisfied
at or prior to Closing Time, and (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or are
contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution
of this Agreement, the Lead Managers shall have received from KPMG Peat
Marwick LLP a letter dated such date, in form and substance
satisfactory to the Lead Managers, together with signed or reproduced
copies of such letter for each of the other International Managers
containing statements and information of the type ordinarily included
in accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectuses.
(f) Bring-down Comfort Letter. At Closing Time, the Lead
Managers shall have received from KPMG Peat Marwick LLP a letter, dated
as of Closing Time, to the effect that they reaffirm the statements
made in the letter furnished pursuant to subsection (e) of this
Section, except that the specified date referred to shall be a date not
more than three business days prior to Closing Time.
<PAGE>
(g) Approval of Listing. At Closing Time, the Securities and
the Member Shares shall have been approved for listing on the New York
Stock Exchange, subject only to official notice of issuance.
(h) No Objection. The NASD shall not have raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(i) License Agreement. At Closing Time, the New License
Agreement shall have been entered into by and between the BCBSA and the
Company.
(j) Opinion of Special Tax Counsel for Virginia BCBS. Virginia
BCBS shall have received an opinion of McGuire, Woods, Battle & Boothe,
L.L.P., special tax counsel for Virginia BCBS, in form and substance
satisfactory to counsel for the International Managers, to the effect
that the summary of federal income tax consequences provided to
Eligible Members in the Member Information Statement dated August 2,
1996 remains accurate under the applicable federal income tax law and
other authorities in effect on the Effective Date, except for any
developments between the mailing date thereof and the Effective Date
that are specifically identified in such opinion, provided that (i) in
the opinion of such counsel, the principal federal income tax
consequences to Eligible Members and to Virginia BCBS of such
developments were anticipated and accurately described in all material
respects in such Member Information Statement, (ii) Virginia BCBS has
determined that the principal federal income tax consequences of such
developments are not materially adverse to the interests of the
Eligible Members or Virginia BCBS, or (iii) such developments are not
described in (i) or (ii) but have been described in a subsequent
communication approved by the Virginia Bureau of Insurance and
distributed to the Eligible Members and, in the opinion of counsel, any
further Member vote that is required has been obtained.
(k) Effectiveness of the Plan. All actions and transactions
required by the Plan to be taken or to have occurred at or prior to the
effectiveness of the Plan (other than the offering of Securities as
herein contemplated) shall have been taken or shall have occurred; and
the Commission shall have issued the certificate of merger with respect
to the Merger and the Plan shall have thereupon become effective.
(l) Purchase of Initial U.S. Securities. Contemporaneously
with the purchase by the International Managers of the Initial
International Securities under this Agreement, the U.S. Underwriters
shall have purchased the Initial U.S. Securities under the U.S.
Purchase Agreement.
(m) Conditions to Purchase of International Option Securities.
In the event that the International Managers exercise their option
provided in Section 2(b) hereof to purchase all or any portion of the
International Option Securities, the representations and
<PAGE>
warranties of the Company and Virginia BCBS contained herein and the
statements in any certificates furnished by the Company, Virginia BCBS
or any subsidiary of the Company hereunder shall be true and correct as
of each Date of Delivery and, at the relevant Date of Delivery, the
Lead Managers shall have received:
(i) Officers' Certificates. Certificates, dated such Date of
Delivery, of the President or a Vice President of each of the
Company and Virginia BCBS and of the chief financial or chief
accounting officer of each of the Company and Virginia BCBS
confirming that the certificates delivered at the Closing Time
pursuant to Section 5(d) hereof remain true and correct as of
such Date of Delivery.
(ii) Opinion of Counsel for Company and Virginia BCBS. The
favorable opinion of McGuire, Woods, Battle & Boothe, L.L.P.,
counsel for the Company and Virginia BCBS, in form and
substance satisfactory to counsel for the International
Managers, dated such Date of Delivery, relating to the
International Option Securities to be purchased on such Date
of Delivery and otherwise to the same effect as the opinion
required by Section 5(b) hereof.
(iii) Opinion of Counsel for International Managers. The
favorable opinion of Debevoise & Plimpton, counsel for the
International Managers, dated such Date of Delivery, relating
to the International Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the
opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from KPMG Peat
Marwick LLP, in form and substance satisfactory to the Lead
Managers and dated such Date of Delivery, substantially in the
same form and substance as the letter furnished to the Lead
Managers pursuant to Section 5(f) hereof, except that the
"specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to
such Date of Delivery.
(n) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the International Managers shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated, or in
order to evidence the accuracy of any of the representations or warranties, or
the fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the Lead
Managers and counsel for the International Managers.
(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of International
Option Securities on a Date of Delivery which is after the Closing
<PAGE>
Time, the obligations of the several International Managers to purchase the
relevant Option Securities, may be terminated by the Lead Managers by notice to
the Company at any time at or prior to Closing Time or such Date of Delivery, as
the case may be, and such termination shall be without liability of any party to
any other party except as provided in Section 4 and except that Sections 1, 6, 7
and 8 shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of International Managers. Each of the Company and
Virginia BCBS agrees, jointly and severally, to indemnify and hold harmless each
International Manager and each person, if any, who controls any International
Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus or
the Prospectuses (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(d) below) any such settlement is effected
with the written consent of the Company or Virginia BCBS; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
International Manager through the Lead Managers or any U.S.
<PAGE>
Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the International Prospectus (or any amendment or supplement
thereto).
(b) Indemnification of Company, Virginia BCBS, Directors and Officers.
Each International Manager severally agrees to indemnify and hold harmless the
Company, Virginia BCBS, their respective directors, each of the Company's
officers who signed the Registration Statement, and each person, if any, who
controls the Company or Virginia BCBS within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary International
prospectus or the International Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such International Manager through the Lead Managers expressly
for use in the Registration Statement (or any amendment thereto) or such
preliminary prospectus or the International Prospectus (or any amendment or
supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or cir cumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation,
<PAGE>
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel in accordance with this
Section 6, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6(a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) prior to the
date of such settlement neither of the following shall have occurred: (A) such
indemnifying party shall have reimbursed such indemnified party in accordance
with such request or (B) if such indemnifying party reasonably believes that the
indemnified party is not entitled under this Section 6 to any or all of the
requested amount, such indemnifying party shall have reimbursed such indemnified
party of such lesser portion, if any, of the requested amount and provided to
such indemnified party a statement substantiating the reasonableness of the
amount, if any, so reimbursed.
SECTION 7. Contribution. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and
Virginia BCBS on the one hand and the International Managers on the other hand
from the offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and Virginia
BCBS on the one hand and of the International Managers on the other hand in
connection with the statements or omissions which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company and Virginia BCBS on the
one hand and the International Managers on the other hand in connection with the
offering of the International Securities pursuant to this Agreement shall be
deemed to be in the same respective proportions as the total net proceeds from
the offering of the International Securities pursuant to this Agreement (before
deducting expenses) received by the Company and Virginia BCBS and the total
underwriting discount received by the International Managers, in each case as
set forth on the cover of the International Prospectus, or, if Rule 434 is used,
the corresponding location on the Term Sheet, bear to the aggregate initial
public offering price of the International Securities as set forth on such
cover.
<PAGE>
The relative fault of the Company and Virginia BCBS on the one hand and
the International Managers on the other hand shall be determined by reference
to, among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or Virginia BCBS on the one hand or by
the International Managers on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, Virginia BCBS and the International Managers agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the International Managers were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 7. The aggregate amount of losses, liabilities, claims, damages and
expenses incurred by an indemnified party and referred to above in this Section
7 shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no International
Manager shall be required to contribute any amount in excess of the amount by
which the total price at which the International Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such International Manager has otherwise been required to pay
by reason of any such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company or Virginia BCBS, each
officer of the Company who signed the Registration Statement, and each person,
if any, who controls the Company or Virginia BCBS within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Company and Virginia BCBS. The International Managers'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial International Securities set forth opposite
their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company, Virginia BCBS or any of
its subsidiaries submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf
<PAGE>
of any International Manager or controlling person, or by or on behalf of the
Company or Virginia BCBS, and shall survive delivery of the Securities to the
International Managers.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Lead Managers may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the International
Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of Trigon,
considered as one enterprise, whether or not arising in the ordinary course of
business, or (ii) if there has occurred any material adverse change in the
financial markets in the United States or the international financial markets,
any outbreak of hostilities or escalation thereof or other calamity or crisis or
any change or development involving a prospective change in national or
international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Lead Managers,
impracticable to market the Securities or to enforce contracts for the sale of
the Securities, or (iii) if trading in any securities of the Company has been
suspended or materially limited by the Commission or the New York Stock
Exchange, or if trading generally on the American Stock Exchange or the New York
Stock Exchange or in the Nasdaq National Market has been suspended or materially
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by any of said exchanges or by such system
or by order of the Commission, the National Association of Securities Dealers,
Inc. or any other governmental authority, or (iv) if a banking moratorium has
been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the International Managers. If
one or more of the International Managers shall fail at Closing Time or a Date
of Delivery to purchase the Securities which it or they are obligated to
purchase under this Agreement (the "Defaulted Securities"), the Lead Managers
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting International Managers, or any other underwriters,
to purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth; if, however,
the Lead Managers shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of International Securities to be purchased on such date,
each of the non-defaulting International Managers shall be obligated,
severally and not jointly, to purchase the full
<PAGE>
amount thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all
non-defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of International Securities to be purchased on such date, this
Agreement or, with respect to any Date of Delivery which occurs after
the Closing Time, the obligation of the International Managers to
purchase and of the Company to sell the Option Securities to be
purchased and sold on such Date of Delivery shall terminate without
liability on the part of any non-defaulting International Manager.
No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either the Lead Managers or
the Company shall have the right to postpone Closing Time or the relevant Date
of Delivery, as the case may be, for a period not exceeding seven days in order
to effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements. As used herein, the term "International
Manager" includes any person substituted for an International Manager under this
Section 10.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to the Lead Managers at North Tower,
World Financial Center, New York, New York 10281-1201, attention of Syndicate
Operations (with a copy, which shall not constitute notice, to Debevoise &
Plimpton, 875 Third Avenue, New York, New York 10022-6225, attention of James C.
Scoville, Esq.); and notices to the Company shall be directed to it at 2015
Staples Mill Road, Richmond, Virginia 23230, attention of J. Christopher
Wiltshire, Esq. (with a copy, which shall not constitute notice, to McGuire,
Woods, Battle & Boothe, L.L.P., One James Center, 901 East Cary Street,
Richmond, Virginia 23219, attention of R. Gordon Smith, Esq.).
SECTION 12. Parties. This Agreement shall inure to the benefit of and
be binding upon each of the International Managers, the Company and Virginia
BCBS and their respective successors. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person, firm or
corporation, other than the International Managers, the Company and Virginia
BCBS and their respective successors and the controlling persons and officers
and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the International Managers, the Company and Virginia BCBS
and their
<PAGE>
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Securities from any International
Manager shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and Virginia BCBS a counterpart
hereof, whereupon this instrument, along with all counterparts, will become a
binding agreement between the International Managers, the Company and Virginia
BCBS in accordance with its terms.
Very truly yours,
TRIGON HEALTHCARE, INC.
By
Title:
BLUE CROSS BLUE SHIELD OF VIRGINIA
(to be renamed Trigon Insurance Company)
By
Title:
CONFIRMED AND ACCEPTED, as of the date first above written:
MERRILL LYNCH INTERNATIONAL
ALEX. BROWN & SONS INCORPORATED
DEAN WITTER INTERNATIONAL LTD.
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
WHEAT, FIRST SECURITIES, INC.
By: MERRILL LYNCH INTERNATIONAL
By _____________________________________________________
Authorized Signatory
For themselves and as Lead Managers of the other International Managers named in
Schedule A hereto.
<PAGE>
SCHEDULE A
Number of
Initial
International
Name of International Manager Securities
Merrill Lynch International....................
Alex. Brown & Sons Incorporated................
Dean Witter International Ltd..................
Morgan Stanley & Co. International Limited.....
Wheat, First Securities, Inc...................
_____________
Total..........................................
=============
<PAGE>
SCHEDULE B
TRIGON HEALTHCARE, INC.
________ Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be
$_______.
2. The purchase price per share for the International
Securities to be paid by the several International Managers shall be
$_______, being an amount equal to the initial public offering price
set forth above less $_______ per share; provided that the purchase
price per share for any International Option Securities purchased upon
the exercise of the over-allotment option described in Section 2(b)
shall be reduced by an amount per share equal to any dividends or
distributions declared by the Company and payable on the Initial
International Securities but not payable on the International Option
Securities.
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
Commonwealth of Virginia. Until immediately prior to the effectiveness
of the Plan, Virginia BCBS was, since its conversion to a mutual
insurance company in 1991, validly existing as a mutual insurance
company in good standing under the laws of the Commonwealth of
Virginia. Trigon Insurance is validly existing as a stock corporation
in good standing under the laws of the Commonwealth of Virginia. Until
immediately prior to the effectiveness of the Plan, TMSI was duly
incorporated and validly existing as a stock corporation in good
standing under the laws of the Commonwealth of Virginia.
(ii) Each of the Company and Virginia BCBS (now renamed Trigon
Insurance) has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the
U.S. Purchase Agreement and the International Purchase Agreement. Each
of the Company and Trigon Insurance is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing could
not reasonably be expected to result in a Material Adverse Effect.
(iii) The Company has an authorized capitalization as set
forth in the Prospectus.
(iv) The Securities to be purchased by the U.S. Underwriters
and the International Managers from the Company have been duly
authorized for issuance and sale to the Underwriters pursuant to the
U.S. Purchase Agreement and the International Purchase Agreement,
respectively, and, when issued and delivered by the Company pursuant to
the U.S. Purchase Agreement and the International Purchase Agreement,
respectively, against payment of the consideration set forth in the
U.S. Purchase Agreement and the International Purchase Agreement, will
be validly issued and fully paid and non-assessable; the Common Stock
conforms in all material respects to all statements relating thereto
contained in the Prospectuses and such description conforms in all
material respects to the rights set forth in the instruments defining
the same; and no holder of the Securities is or will be personally
liable for any debts, obligations, liabilities or losses of the Company
by reason of being such a holder.
<PAGE>
(v) The issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the
Company, except as may be provided in Articles VI, VII and VIII of the
Articles of Incorporation of the Company in the form filed as an
Exhibit to the Registration Statement.
(vi) Each of the subsidiaries listed on Exhibit 21 to the
Registration Statement, which to the best of our knowledge are the only
subsidiaries of Trigon Insurance, has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing could not reasonably be expected to result in a Material
Adverse Effect; except as otherwise disclosed in the Registration
Statement, all of the issued and outstanding capital stock of each such
subsidiary has been duly authorized and validly issued, is fully paid
and non-assessable and, to the best of our knowledge, is owned by the
Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
equity; and, to the best of our knowledge, none of the outstanding
shares of capital stock of any such subsidiary was issued in violation
of the preemptive or similar rights of any securityholder of such
subsidiary.
(vii) The U.S. Purchase Agreement and the International
Purchase Agreement have been duly authorized, executed and delivered by
the Company and Virginia BCBS.
(viii) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act;
any required filing of the Prospectuses pursuant to Rule 424(b) has
been made in the manner and within the time period required by Rule
424(b); and, to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or
threatened by the Commission.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectuses and each amendment or
supplement to the Registration Statement and the Prospectuses as of
their respective effective or issue dates (other than the financial
statements and supporting schedules and other financial information
included therein or omitted therefrom, as to which we express no
opinion) complied as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations.
(x) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory
requirements, with any applicable
<PAGE>
requirements of the Articles of Incorporation and by-laws of the
Company and the requirements of the New York Stock Exchange.
(xi) To the best of our knowledge, except for matters
disclosed in the Registration Statement, there is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, now pending or threatened, against or
affecting the Company, Trigon Insurance or any of its subsidiaries,
which is required to be disclosed in the Registration Statement, or
which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation
of the transactions contemplated in the U.S. Purchase Agreement, the
International Purchase Agreement and the Plan or the performance by the
Company or Trigon Insurance of their respective obligations thereunder.
(xii) The information in the Prospectuses under "The
Demutualization", "Business - Regulation", "Business - The Blue Cross
and Blue Shield License", "Legal Proceedings", "Management",
"Description of Capital Stock" and, in the International Prospectus,
"Certain United States Tax Consequences to Non-U.S. Holders" and in the
Registration Statement under Item 14, to the extent that such
information constitutes matters of law, summaries of legal matters, the
Company's Articles of Incorporation and bylaws or legal proceedings, or
legal conclusions, has been reviewed by us and is accurate in all
material respects.
(xiii) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that
are not described as required.
(xiv) All descriptions in the Prospectuses of contracts and
other documents to which the Company, Trigon Insurance or any of its
subsidiaries are a party are accurate in all material respects; to the
best of our knowledge, there are no franchises, contracts, indentures,
mortgages, loan agreements, notes, leases or other instruments required
to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to
therein or filed or incorporated by reference as exhibits thereto.
(xv) To the best of our knowledge, (a) neither the Company,
Trigon Insurance nor any of its subsidiaries is in violation of its
charter or by-laws and (b) no default by the Company or any subsidiary
exists in the due performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other agreement or instrument
that is described or referred to in the Registration Statement or the
Prospectuses or filed or incorporated by reference as an exhibit to the
Registration Statement, except for such defaults that could not
reasonably be expected to have a Material Adverse Effect and except
that no opinion is
<PAGE>
given under this paragraph (xv) with respect to the Blue Cross License
Agreement and Virginia Blue Shield License Agreement referred to in
paragraph (xxiv) herein.
(xvi) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency is necessary or required for the
performance by the Company of its obligations under the U.S. Purchase
Agreement or under the Plan, in connection with the offering, issuance
or sale of the Securities under the U.S. Purchase Agreement and the
International Purchase Agreement, in connection with the issuance of
the Member Shares to Eligible Members in exchange for their Membership
Interests and of cash and Class C Stock to the Treasurer of the
Commonwealth of Virginia in satisfaction of the Commonwealth Payment
pursuant to the Plan, or the consummation of the transactions
contemplated by the U.S. Purchase Agreement, the International Purchase
Agreement and the Plan, except (a) such as have been already obtained
or as may be required under the 1933 Act or the 1933 Act Regulations
and state securities, insurance securities or blue sky laws in
connection with the offering, issuance or sale of the Securities under
the U.S. Purchase Agreement and the International Purchase Agreement,
as to which we express no opinion, and (b) such filings,
authorizations, approvals, consents, licenses, orders, registrations,
qualifications or decrees in connection with the Plan that, if not made
or obtained or complied with, could not reasonably be expected to have
a Material Adverse Effect or have a material adverse effect on the
ability of the Company or Virginia BCBS to perform their respective
obligations under the Plan or to consummate the transactions
contemplated therein.
(xvii) The execution, delivery and performance of the U.S.
Purchase Agreement, the International Purchase Agreement and the Plan
and the consummation of the transactions contemplated in the U.S.
Purchase Agreement, the International Purchase Agreement, the Plan and
in the Registration Statement (including the issuance of the Member
Shares to Eligible Members in exchange for their Membership Interests
pursuant to the Plan, the issuance of cash and Class C Stock to the
Treasurer of the Commonwealth of Virginia in satisfaction of the
Commonwealth Payment pursuant to the Plan, and the issuance and sale of
the Securities, and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use Of
Proceeds") and compliance by the Company and Trigon Insurance with
their obligations under the U.S. Purchase Agreement, the International
Purchase Agreement and the Plan do not and will not, whether with or
without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in
the Purchase Agreements) under or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company, Trigon Insurance or any subsidiary pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note,
lease or any other agreement or instrument, listed on a schedule
attached to such opinion (which schedule shall be satisfactory in form
and substance to counsel for the U.S. Underwriters), to which the
Company, Trigon Insurance or any subsidiary is a party or by which it
or any of them may be bound, or to which any of the property or
<PAGE>
assets of the Company, Trigon Insurance or any subsidiary is subject
(except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not have a Material Adverse Effect), nor will
such action result in any violation of the provisions of the charter or
by-laws of the Company, Trigon Insurance or any subsidiary, or any
applicable law, statute, rule, regulation, judgment, order, writ or
decree, known to us, including, without limitation, Virginia Code ss.
38.2-1005.1 and the insurance laws and regulations of Virginia, of any
government, government instrumentality or court having jurisdiction
over the Company, Trigon Insurance or any subsidiary or any of their
respective properties, assets or operations (other than state
securities, insurance securities or blue sky laws in connection with
the offering, issuance or sale of the Securities under this Agreement
and the International Purchase Agreement), except for such violations
resulting from the failure to make or obtain or comply with such
filings, authorizations, approvals, consents, licenses, orders,
registrations, qualifications or decrees in connection with the Plan
that could not reasonably be expected to have a Material Adverse Effect
or have a material adverse effect on the ability of the Company or
Virginia BCBS to perform their respective obligations under the Plan or
to consummate the transactions contemplated therein.
(xviii) To the best of our knowledge, there are no persons
with registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(xix) The Company is not, nor is Trigon Insurance or any of
its subsidiaries, an "investment company" or an entity "controlled" by
an "investment company," as such terms are defined in the 1940 Act.
(xx) Pursuant to the Merger: (a) TMSI has merged with and into
Virginia BCBS, the separate existence of TMSI has ceased, and Virginia
BCBS has become a wholly owned subsidiary of the Company; (b) Virginia
BCBS has become a stock corporation incorporated under and governed by
the Virginia Stock Corporation Act, ss.13.1-601 et seq. and by the
Virginia Insurance Code; (c) each issued and outstanding share of
common stock of TMSI owned by the Company immediately prior to the
effectiveness of the Plan has, as a result of the Merger and without
any action on the part of the Company, been canceled and converted into
one share of stock of Trigon Insurance; (d) all Membership Interests of
all Members in Virginia BCBS have been canceled, and in consideration
for their Membership Interests, including their interests in the
surplus of Virginia BCBS, Eligible Members are entitled to receive
Common Stock from the Company and/or cash from Trigon Insurance
pursuant to and in accordance with the Plan; and (e) all issued and
outstanding shares of capital stock in the Company owned by Virginia
BCBS have been canceled.
(xxi) Until immediately prior to the effectiveness of the
Plan, all of the issued and outstanding shares of capital stock of TMSI
were duly authorized and validly issued and
<PAGE>
were fully paid and non-assessable and, to the best of our knowledge,
were owned by the Company, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity. All of the
outstanding shares of capital stock of Trigon Insurance are duly
authorized and validly issued and are fully paid and non-assessable
and, to the best of our knowledge, are owned by the Company, free and
clear of any security interest, mortgage, pledge, lien, encumbrance
claim or equity.
(xxii) The Member Shares have been duly authorized, and when
issued and delivered to Eligible Members in exchange for their
Membership Interests pursuant to the Plan, will be validly issued,
fully paid and non-assessable; no holder thereof will be personally
liable for any debts, obligations, liabilities or losses of the Company
by reason of being such a holder; such Member Shares are not subject to
the preemptive or other similar rights of any securityholder of the
Company (except as may be provided in Articles VI, VII and VIII of the
Articles of Incorporation of the Company in the form filed as an
Exhibit to the Registration Statement) and all corporate action
required to be taken for the authorization and issuance of the Member
Shares has been validly and sufficiently taken.
(xxiii) The issuance and delivery of the Member Shares to
Eligible Members in exchange for their Membership Interests pursuant to
the Plan is exempt from the registration requirements of the 1933 Act.
(xxiv) To the best of our knowledge, the Blue Cross and Blue
Shield Association (the "BCBSA") has not asserted noncompliance by
Virginia BCBS or any of its subsidiaries that is required by the BCBSA
as of the date hereof to be a party to a Blue Cross Affiliate License
Agreement with the requirements of the Blue Cross License Agreement,
dated as of November 16, 1995, between Virginia BCBS and the BCBSA, and
the Virginia Blue Shield License Agreement, dated as of November 16,
1995, between Virginia BCBS and the BCBSA, except in each case where
such noncompliance could not reasonably be expected to have a Material
Adverse Effect.
(xxv) To the best of our knowledge, (a) the Company, Trigon
Insurance and its subsidiaries each possess such permits, licenses,
approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate federal, state or
local regulatory agencies or bodies necessary to conduct the business
now operated by them, except where the failure to possess such
Government Licenses could not reasonably be expected to have a Material
Adverse Effect; (b) all of the Governmental Licenses are valid and in
full force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect could not reasonably be expected to have a Material
Adverse Effect; and (c) neither the Company, Trigon Insurance nor any
of its subsidiaries has received any notice of proceedings relating to
the revocation or modification of any such Governmental Licenses which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, could reasonably be expected to result in a Material
Adverse Effect.
<PAGE>
(xxvi) To the best of our knowledge, (a) the Company has made
all required filings under insurance holding company statutes
applicable to it, and is duly licensed or authorized as an insurance
holding company in each jurisdiction in which it is required to be so
licensed or authorized, except where the failure to have made such
filings or to be so licensed or authorized in any such jurisdiction
could not reasonably be expected to have a Material Adverse Effect; (b)
each of Trigon Insurance and its subsidiaries which is engaged in the
insurance business (the "Insurance Subsidiaries") is duly licensed or
authorized to conduct its insurance business under the insurance laws
of each jurisdiction in which it conducts such business so as to
require such licensing or authorization, except where the failure to be
so licensed or authorized could not reasonably be expected to have a
Material Adverse Effect; (c) all such licenses or authorizations are in
full force and effect, except where the invalidity of such licenses and
authorization or failure to be in full force and effect could not
reasonably be expected to have a Material Adverse Effect; (d) neither
the Company, Trigon Insurance nor any Insurance Subsidiary has received
any notice of any event, inquiry, investigation or proceeding that
would reasonably be expected to result in the suspension, revocation or
limitation of any such licenses or authorizations or otherwise impose
any limitation on the conduct of the business of the Company, Trigon
Insurance or any Insurance Subsidiary, except any such suspension,
revocation or limitation which could not reasonably be expected to have
a Material Adverse Effect; (e) each of the subsidiaries of Trigon
Insurance operating as a health maintenance organization (the "HMO
Subsidiaries") is duly licensed as a health maintenance organization
insurer under the laws of each jurisdiction in which it conducts such
business so as to require such licensing, except where the failure to
be so licensed could not reasonably be expected to have a Material
Adverse Effect; and (f) each of ______________, ______________ and
___________ is duly qualified as a health maintenance organization
under The Health Maintenance Organization Act of 1973, as amended, and
the rules and regulations of the Department of Health and Human
Services thereunder.
(xxvii) In accordance with Virginia Code ss. 38.2-1005.1, the
Plan has been duly adopted by the required vote of the Members and all
necessary approvals under Virginia Code ss. 38.2-1005.1 for the Plan to
become effective have been obtained, all such approvals are in full
force and effect and no other approvals are required to be obtained
under Virginia Code ss. 38.2-1005.1 for the effectiveness of the Plan;
the time period within which an appeal to the Commission Order must be
noted in order for an appeal to be validly made has expired and, to our
knowledge, no appeals were so noted; and upon the issuance by the State
Corporation Commission of the certificate of merger with respect to the
Merger (as defined in the Plan), the Plan will have become effective in
accordance with its terms.
While we have not ourselves checked the accuracy and
completeness of, or otherwise verified, and are not passing upon and
assume no responsibility for the accuracy or completeness of, the
statements contained in the Registration Statement or the Prospectuses,
except to the limited extent stated in paragraph (xii), in the course
of our
<PAGE>
review and discussion of the contents of the Registration Statement and
the Prospectuses with certain officers and employees of the Company and
Trigon Insurance and their independent accountants, but without
independent check or verification, nothing has come to our attention
that would lead us to believe that the Registration Statement or any
amendment thereto, including the Rule 430A Information and Rule 434
Information (if applicable), (except for financial statements and
schedules and other financial data included therein or omitted
therefrom, as to which we make no statement), at the time such
Registration Statement or any such amendment became effective,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectuses or any
amendment or supplement thereto (except for financial statements and
schedules and other financial data included therein or omitted
therefrom, as to which we make no statement), at the time the
Prospectuses were issued, at the time any such amended or supplemented
prospectus was issued or at the Closing Time, included or includes an
untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of the laws of North Carolina,
Wisconsin and Texas, upon the opinions of special counsel to the
Company acceptable to the Lead Managers (which opinions shall be dated
and furnished to the Lead Managers at the Closing Time, shall be
satisfactory in form and substance to counsel for the International
Managers and shall expressly state that the International Managers may
rely on such opinions as if they were addressed to them, provided that
McGuire, Woods, Battle & Boothe, L.L.P. shall state in their opinion
that they believe that they and the International Managers are
justified in relying upon such opinions, and (B) as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and Trigon
Insurance and public officials. Such opinion may state that to the
extent that the opinions rendered therein (i) relating to the issuance
of the Member Shares to Eligible Members in exchange for their
Membership Interests involve state securities, insurance securities or
blue sky laws or (ii) involve insurance laws, statutes, rules or
regulations other than those of Virginia and states as to which such
counsel is relying upon opinions of special counsel, such opinions are
subject to the qualifications and limitations contained in a schedule
to such opinion, which shall be satisfactory in form and substance to
counsel for the International Managers. Such opinion shall not state
that it is to be governed or qualified by, or that it is otherwise
subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord
of the ABA Section of Business Law (1991).
EXHIBIT 4.1
SHARES
NUMBER
TGH
[TRIGON LOGO]
[TRIGON HEALTHCARE, INC. SEAL]
SEE REVERSE FOR
CERTAIN DEFINITIONS
TRIGON HEALTHCARE, INC.
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF VIRGINIA
CLASS A COMMON STOCK CUSIP 000000 00 0
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS A COMMON STOCK OF
Trigon Healthcare, Inc., transferable on the books of the Corporation in person
or by duly authorized Attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered
by the Transfer Agent and Registrar. Witness the facsimile seal of the
Corporation and the facsimile signatures of its duly authorized officers.
DATED
COUNTERSIGNED AND REGISTERED: /s/ NORWOOD DAVIS
FIRST CHICAGO TRUST COMPANY OF NEW YORK CHAIRMAN OF THE BOARD
TRANSFER AGENT
AND REGISTRAR
BY: /s/ J. CHRISTOPHER WILTSHIRE
AUTHORIZED OFFICER SECRETARY
TRIGON HEALTHCARE, INC.
SEAL
VIRGINIA
<PAGE>
The Corporation will furnish without charge to each stockholder who so
requests the designations, relevant rights, preferences and limitations
applicable to each class of stock and the variations in rights, preferences
and limitations determined for each series within a class (and the authority
of the Board of Directors to determine variations for future series). Any
such requests should be addressed in writing to the Secretary of the Corporation
or to the Transfer Agent named on the back of the certificate.
The shares of stock represented by this certificate are subject to
restrictions on ownership and transfer. All capitalized terms in this legend
have the meanings ascribed to them in the Corporation's Amended and Restated
Articles of Incorporation, as the same may be amended from time to time (the
"Articles"), a copy of which, including the restrictions on ownership and
transfer, will be sent without charge to each shareholder who so requests.
Under Section 8.1 of the Articles, no Person shall, together with that Person's
Associates, Beneficially Own shares of outstanding Capital Stock of any class
in excess of the Threshold applicable to such Person and such Person's
Associates. Any Transfer that, if effective, would result in any Person and
that Person's Associates Beneficially Owning shares of Capital Stock in
excess of the Threshold applicable to such Person and such Person's
Associates shall be void ab Initio. Absent any prior written approval
of a greater percentage by the Continuing Directors, the Threshold for each
Person together with such Person's Associates is 5%. Any Person who purports or
attempts to acquire shares in violation of this limitation must notify the
Corporation as provided in the Articles. In the event that the provisions of
Section 8.1 of the Articles are found to be void, invalid or unenforceable by
any court having jurisdiction over the issue, and there is a purported Transfer
or other change in capital structure of the Corporation such that any Person
would, together with such Person's Associates, Beneficially Own Capital Stock in
excess of the applicable Threshold, all such shares in excess of the applicable
Threshold will automatically be deemed Excess Shares and be transferred by
operation of law to the Corporation, as Trustee of a Trust for the benefit of
such Beneficiary or Beneficiaries to whom an interest in such Excess Securities
may be transferred pursuant to the terms of the Articles. Under certain
circumstances specified in the Articles, the shares represented by this
certificate are convertible at the option of the Continuing Directors into Class
B Common Shares of the Corporation. The foregoing summary of the restrictions on
ownership and transfer is qualified in its entirety by reference to the
Articles. The Plan of Demutualization also contains a prohibition on the direct
or indirect acquisition of beneficial ownership of 5% or more of any class of
Capital Stock entitled to vote in the election of directors generally until the
expiration of 30 months after the effective date of the Demutualization, without
the prior written consent of the Corporation's Board of Directors. The foregoing
summary is qualified in its entirety by reference to the Plan of
Demutualization, a copy of which will be sent without charge to each shareholder
who so requests.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR
DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE
ISSUANCE OF A REPLACEMENT CERTIFICATE.
- -------------------------------------------------------------------------------
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM--as tenants in common UNIF GIFT MIN ACT--______Custodian______
(Cust) (Minor)
TEN ENT--as tenants by the entireties under Uniform Gifts to Minors
JT TEN--as joint tenants with right of Act_________________________
survivorship and not as tenants (State)
in common
Additional abbreviations may also be used though not in the above list.
- -------------------------------------------------------------------------------
For Value received, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[_______________________________]
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
shares of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint.
- -------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated_______________________
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the certificate in every particular, without
alteration or enlargement or any change whatever.
SIGNATURE GUARANTEED
By_____________________________________________________________________________
The signature(s) must be guaranteed by an eligible guarantor institution
(Banks, Stockbrokers, Savings and Loan Associations and Credit Unions
with membership in an approved signature guarantee Medallion Program), pursuant
to S.E.C. Rule 17Ad-15.
TRANSFER OF THIS CERTIFICATE IS SUBJECT TO RESTRICTIONS SET FORTH IN THE
CORPORATION'S ARTICLES OF INCORPORATION.
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
THIS AGREEMENT made this 30th day of May, 1990, between BLUE CROSS AND
BLUE SHIELD OF VIRGINIA, a Virginia nonstock corporation ("Blue Cross") and JOHN
C. BERRY ("Executive").
RECITALS
Executive is currently employed in an executive position with Blue
Cross and the parties desire to enter into the following agreement relating to
that employment.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties agree:
1. Employment. Blue Cross hereby employs Executive, and
Executive accepts such employment. Executive's employment
hereunder is at will. Executive may resign at any time, and Blue
Cross may discharge Executive at any time, with or without cause.
2. Severance. If Executive resigns or if Blue Cross
terminates Executive's employment for any reason other than for
cause, then Blue Cross will pay to Executive severance pay as
follows:
(a) If at the time of resignation or termination
Executive has been employed with Blue Cross or any of
its affiliates for a continuous period of less than
five (5) years, Executive will be paid severance pay
equal to six (6) months' salary, payable monthly at
the end of each of the first six (6) full months
following resignation or
<PAGE>
termination; or
(b) If at the time of resignation or termination
Executive has been employed with Blue Cross or any of
its affiliates for a continuous period of five (5)
years or more, Executive will be paid severance pay
equal to twelve (12) months' salary, payable monthly
at the end of each of the first twelve (12) full
months following resignation or termination.
For purposes of this Agreement, affiliates of Blue Cross shall include any
entity controlled by, controlling, or under common control with Blue Cross. In
computing the continuous period of employment for purposes of this Agreement,
there shall be taken into account continuous employment both before and after
the date of this Agreement. If Executive's employment hereunder is terminated by
reason of death or for cause, that its, neglect by Executive of his duties or
willful misconduct by Executive, Executive shall not be entitled to any
severance pay.
3. Confidential Information. Executive will not, either during his
employment with Blue Cross or thereafter, disclose to any person any trade
secret or confidential commercial information of Blue Cross or its affiliates,
make any derogatory or disparaging statement about Blue Cross, its affiliates,
or any officer or director of Blue Cross or its affiliates, or knowingly take
any other action with intent to inure Blue Cross or any affiliate of Blue Cross
in its trade or business.
4. Noncompetition. If Executive's employment with Blue
- 2 -
<PAGE>
Cross terminates for any reason, for a period of one (1) year following such
termination Executive will not, without the prior written consent of Blue Cross:
(a) Become an officer, director, or employee of,
consultant to, or ten percent (10%) or more owner of
any entity that, as of the date of termination of
employment, is then competing with Blue Cross or any
affiliate of Blue Cross in any business activity in
Virginia; or
(b) Employ or seek to employ any employee of Blue Cross
or its affiliates.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
By: /s/ John C. Berry
--------------------------------
Title: EVP & COO, GIBU
----------------------------
/s/ Phyllis C. Marsteller
--------------------------------
("Executive")
- 3 -
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
THIS AGREEMENT made this 12th day of December, 1996, between BLUE CROSS
AND BLUE SHIELD OF VIRGINIA, a Virginia nonstock corporation ("Blue Cross") and
RONALD H. BARGATZE ("Executive").
RECITALS
Executive is currently employed in an executive position with Blue
Cross and the parties desire to enter into the following agreement relating to
that employment.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties agree:
1. Employment. Blue Cross hereby employs Executive, and
Executive accepts such employment. Executive's employment
hereunder is at will. Executive may resign at any time, and Blue
Cross may discharge Executive at any time, with or without cause.
2. Severance. If Executive resigns or if Blue Cross
terminates Executive's employment for any reason other than for
cause, then Blue Cross will pay to Executive severance pay as
follows:
(a) If at the time of resignation or termination
Executive has been employed with Blue Cross or any of
its affiliates for a continuous period of less than
five (5) years, Executive will be paid severance pay
equal to six (6) months' salary, payable monthly at
the end of each of the first six (6) full months
following resignation or
<PAGE>
termination; or
(b) If at the time of resignation or termination
Executive has been employed with Blue Cross or any of
its affiliates for a continuous period of five (5)
years or more, Executive will be paid severance pay
equal to twelve (12) months' salary, payable monthly
at the end of each of the first twelve (12) full
months following resignation or termination.
For purposes of this Agreement, affiliates of Blue Cross shall include any
entity controlled by, controlling, or under common control with Blue Cross. In
computing the continuous period of employment for purposes of this Agreement,
there shall be taken into account continuous employment both before and after
the date of this Agreement. If Executive's employment hereunder is terminated by
reason of death or for cause, that its, neglect by Executive of his duties or
willful misconduct by Executive, Executive shall not be entitled to any
severance pay.
3. Confidential Information. Executive will not, either during his
employment with Blue Cross or thereafter, disclose to any person any trade
secret or confidential commercial information of Blue Cross or its affiliates,
make any derogatory or disparaging statement about Blue Cross, its affiliates,
or any officer or director of Blue Cross or its affiliates, or knowingly take
any other action with intent to inure Blue Cross or any affiliate of Blue Cross
in its trade or business.
4. Noncompetition. If Executive's employment with Blue
- 2 -
<PAGE>
Cross terminates for any reason, for a period of one (1) year following such
termination Executive will not, without the prior written consent of Blue Cross:
(a) Become an officer, director, or employee of,
consultant to, or ten percent (10%) or more owner of
any entity that, as of the date of termination of
employment, is then competing with Blue Cross or any
affiliate of Blue Cross in any business activity in
Virginia; or
(b) Employ or seek to employ any employee of Blue Cross
or its affiliates.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
By: /s/ Phyllis Cothran
--------------------------------
Title: President & Chief Operating Officer
-----------------------------------
/s/ Ronald H. Bargatze
--------------------------------------
("Executive")
- 3 -
EXHIBIT 10.14
$300,000,000
CREDIT AGREEMENT
dated as of
February 12, 1997
among
Trigon Healthcare, Inc.,
The Banks Party Hereto
and
Morgan Guaranty Trust Company of New York,
as Agent
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
DEFINITIONS
<TABLE>
<S> <C>
1.1. Definitions.................................................................... 1
1.2. Accounting Terms and Determinations............................................ 15
1.3. Types of Borrowings............................................................ 16
ARTICLE 2
THE CREDITS
2.1. Commitments to Lend............................................................ 16
2.2. Notice of Committed Borrowing.................................................. 16
2.3. Money Market Borrowings........................................................ 17
2.4. Notice to Banks; Funding of Loans.............................................. 21
2.5. Maturity of Loans.............................................................. 22
2.6. Interest Rates................................................................. 22
2.7. Method of Electing Interest Rates.............................................. 25
2.8. Facility Fee................................................................... 27
2.9. Termination or Reduction of Commitments........................................ 28
2.10. Optional Prepayments........................................................... 28
2.11. General Provisions as to Payments.............................................. 28
2.12. Funding Losses................................................................. 29
2.13. Computation of Interest and Fees............................................... 30
2.14. Notes.......................................................................... 30
2.15. Regulation D Compensation...................................................... 31
2.16. Increased Commitments; Additional Banks ...................................... 32
ARTICLE 3
CONDITIONS
3.1. Closing........................................................................ 31
3.2. Borrowings..................................................................... 32
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1. Corporate Existence and Power.................................................. 33
4.2. Corporate and Governmental Authorization; No
Contravention.................................................................. 33
4.3. Binding Effect................................................................. 34
4.4. Financial Information.......................................................... 34
4.5. Litigation..................................................................... 35
i
<PAGE>
Page
4.6. Compliance with Laws; ERISA.................................................... 35
4.7. Environmental Matters.......................................................... 36
4.8. Taxes.......................................................................... 36
4.9. Subsidiaries................................................................... 36
4.10. Regulatory Restrictions on Borrowing........................................... 36
4.11. Full Disclosure................................................................ 36
ARTICLE 5
COVENANTS
5.1. Information.................................................................... 37
5.2. Payment of Obligations......................................................... 40
5.3. Maintenance of Property; Insurance............................................. 40
5.4. Conduct of Business and Maintenance of
Existence...................................................................... 40
5.5. Compliance with Laws........................................................... 41
5.6. Inspection of Property, Books and Records...................................... 41
5.7. Company Action Level Ratio.................................................... 41
5.8. Mergers and Sales of Assets................................................... 42
5.9. Use of Proceeds................................................................ 42
5.10. Negative Pledge................................................................ 42
5.11. Consolidated Debt to Consolidated Total
Capitalization................................................................. 43
5.12. Minimum Adjusted Consolidated Tangible Net
Worth.......................................................................... 43
5.13. Subsidiary Debt ............................................................... 44
5.14. Restricted Payments............................................................ 44
5.15. Investments.................................................................... 44
5.16. Transactions with Affiliates................................................... 45
ARTICLE 6
DEFAULTS
6.1. Events of Default.............................................................. 45
6.2. Notice of Default.............................................................. 48
ARTICLE 7
THE AGENT
7.1. Appointment and Authorization.................................................. 48
7.2. Agent and Affiliates........................................................... 48
7.3. Action by Agent................................................................ 48
7.4. Consultation with Experts...................................................... 48
7.5. Liability of Agent............................................................. 49
7.6. Indemnification................................................................ 49
7.7. Credit Decision................................................................ 50
7.8. Successor Agent................................................................ 50
7.9. Agent's Fee.................................................................... 50
ii
<PAGE>
Page
ARTICLE 8
CHANGE IN CIRCUMSTANCES
8.1. Basis for Determining Interest Rate
Inadequate or Unfair........................................................... 50
8.2. Illegality..................................................................... 51
8.3. Increased Cost and Reduced Return.............................................. 52
8.4. Taxes.......................................................................... 53
8.5. Base Rate Loans Substituted for Affected
Fixed Rate Loans............................................................... 55
8.6. Substitution of Bank........................................................... 56
ARTICLE 9
MISCELLANEOUS
9.1. Notices........................................................................ 57
9.2. No Waivers..................................................................... 57
9.3. Expenses; Indemnification...................................................... 58
9.4. Sharing of Set-Offs............................................................ 58
9.5. Amendments and Waivers ........................................................ 59
9.6. Successors and Assigns......................................................... 59
9.7. No Reliance on Margin Stock.................................................... 61
9.8. Governing Law; Submission to Jurisdiction...................................... 61
9.9. Counterparts; Integration; Effectiveness....................................... 61
9.10. WAIVER OF JURY TRIAL........................................................... 62
COMMITMENT SCHEDULE.................................................................................... 64
PRICING SCHEDULE....................................................................................... 65
EXHIBIT A - Note..................................................................... 1
EXHIBIT B - Money Market Quote Request............................................... 1
EXHIBIT C - Invitation for Money Market Quotes....................................... 1
EXHIBIT D - Money Market Quote....................................................... 1
EXHIBIT E - Opinion of Counsel for the Borrower...................................... 1
EXHIBIT F - Opinion of Special Counsel for the
Agent.................................................................... 1
EXHIBIT G - Assignment and Assumption Agreement...................................... 1
</TABLE>
iii
<PAGE>
AGREEMENT dated as of February 12, 1997 among TRIGON
HEALTHCARE, INC., the BANKS party hereto and MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Agent.
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1. Definitions. The following terms,
as used herein, have the following meanings:
"Absolute Rate Auction" means a solicitation of
Money Market Quotes setting forth Money Market Absolute
Rates pursuant to Section 2.3.
"Additional Bank" has the meaning set forth in
Section 2.16(b).
"Adjusted CD Rate" has the meaning set forth in
Section 2.6(b).
"Adjusted Consolidated Tangible Net Worth" means at any date
the consolidated stockholders' equity of the Borrower and its Consolidated
Subsidiaries (I) plus the amount of any unrealized losses (or less the amount of
any unrealized gains) related, directly or indirectly, to securities, as
determined in accordance with Statement of Financial Accounting Standards No.
115 (or any successor statements or amendments thereto) (in each case as
affected by any subsequent relevant pronouncements of the Financial Accounting
Standards Board), to the extent reflected in the determination of such
consolidated stockholders' equity (II) less their consolidated Intangible
Assets, all determined as of such date. For purposes of this definition,
"Intangible Assets" of the Borrower and its Consolidated Subsidiaries means the
amount (to the extent reflected in determining the consolidated stockholders'
equity of the Borrower and its Consolidated Subsidiaries) of (i) all write-ups
(other than write-ups resulting from foreign currency translations and write-ups
of assets of a going concern business made on the date of or within twelve
months after the acquisition of such business) subsequent to September 30, 1996
in the book value of any asset owned by the Borrower or a Consolidated
Subsidiary and (ii) all unamortized debt discount and
<PAGE>
expense, unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, organization or developmental expenses and other
intangible assets.
"Administrative Questionnaire" means, with respect to each
Bank, an administrative questionnaire in the form prepared by the Agent,
completed by such Bank and returned to the Agent (with a copy to the Borrower).
"Admitted Assets" means, with respect to any Regulated Entity,
assets which are "admitted assets" (or a substantially similar concept) under
the relevant state insurance laws and rules and regulations promulgated
thereunder applicable to such Regulated Entity.
"Affiliate" means (i) any Person that directly, or indirectly
through one or more intermediaries, controls the Borrower (a "Controlling
Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is
controlled by or is under common control with a Controlling Person. As used
herein, the term "control" means possession, directly or indirectly, of the
power to vote 20% or more of any class of voting securities of a Person or to
direct or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.
"Agent" means Morgan Guaranty Trust Company of New York in its
capacity as agent for the Banks hereunder, and its successors in such capacity.
"Annual Statement" means Trigon Insurance's duly completed
annual report to the insurance department or other comparable regulatory
authority of the Commonwealth of Virginia, prepared and filed in conformity with
the Commonwealth of Virginia's applicable regulations.
"Applicable Lending Office" means, with respect to any Bank,
(i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the
case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the
case of its Money Market Loans, its Money Market Lending Office.
"Assessment Rate" has the meaning set forth in Section 2.6(b).
"Assignee" has the meaning set forth in Section 9.6(c).
2
<PAGE>
"Bank" means each bank listed on the signature pages hereof,
each Additional Bank which becomes a Bank pursuant to Section 2.16, each
Assignee which becomes a Bank pursuant to Section 9.6(c), and their respective
successors.
"Base Rate" means, for any day, a rate per annum equal to the
higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the
Federal Funds Rate for such day.
"Base Rate Loan" means a Committed Loan which bears interest
at the Base Rate pursuant to the applicable Notice of Committed Borrowing or
Notice of Interest Rate Election or the provisions of Section 2.7(a) or Article
8.
"Borrower" means Trigon Healthcare, Inc., a Virginia
corporation, and its successors.
"Borrower's Registration Statement" means the Borrower's
Registration Statement as filed with the SEC on November 12, 1996 pursuant to
the Securities Act of 1933, as amended as of the date hereof.
"Borrowing" has the meaning set forth in Section 1.3.
"CD Base Rate" has the meaning set forth in Section 2.6(b).
"CD Loan" means a Committed Loan which bears interest at a CD
Rate pursuant to the applicable Notice of Committed Borrowing or Notice of
Interest Rate Election.
"CD Margin" means a rate per annum determined in accordance
with the Pricing Schedule.
"CD Rate" means a rate of interest determined pursuant to
Section 2.6(b) on the basis of an Adjusted CD Rate.
"CD Reference Banks" means The Bank of New York,
The First National Bank of Chicago and Morgan Guaranty Trust
Company of New York.
"Closing Date" means the date on or after the Effective Date
on which each of the conditions specified in Section 3.1 have been satisfied.
"Commitment" means (i) with respect to each Bank
listed on the Commitment Schedule, the amount set forth
3
<PAGE>
opposite the name of such Bank on the Commitment Schedule and (ii) with respect
to each Additional Bank or Assignee which becomes a Bank pursuant to Section
2.16 or 9.6(c), the amount of the Commitment thereby assumed by it, in each case
as such amount may be changed from time to time pursuant to Section 2.9, 2.16 or
9.6(c).
"Commitment Schedule" means the Commitment
Schedule attached hereto.
"Committed Loan" means a loan made by a Bank pursuant to
Section 2.1; provided that, if any such loan or loans (or portions thereof) are
combined or subdivided pursuant to a Notice of Interest Rate Election, the term
Committed Loan shall refer to the combined principal amount resulting from such
combination or to each of the separate principal amounts resulting from such
subdivision, as the case may be.
"Commonwealth Payment" has the meaning set forth
in the Plan of Demutualization.
"Consolidated Debt" means, at any date, the Debt of the
Borrower and its Consolidated Subsidiaries, determined on a consolidated basis
as of such date.
"Consolidated Net Income" means, for any period, the net
income of the Borrower and its Consolidated Subsidiaries, determined on a
consolidated basis for such period.
"Consolidated Net Worth" means, at any date, the Consolidated
stockholders' equity of the Borrower and its Consolidated Subsidiaries as of
such date.
"Consolidated Subsidiary" means, at any date, any Subsidiary
or other entity the accounts of which would be consolidated with those of the
Borrower in its consolidated financial statements if such statements were
prepared as of such date.
"Consolidated Total Capitalization" means, at any date, the
sum of Consolidated Debt and Consolidated Net Worth, each determined as of such
date.
"Debt" of any Person means, at any date, without duplication,
(i) all obligations of such Person for borrowed money, (ii) all obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable
4
<PAGE>
arising in the ordinary course of business, (iv) all obligations of such Person
as lessee which are capitalized in accordance with GAAP, (v) all non-contingent
obligations (and, for purposes of Section 5.10 and the definitions of Material
Debt and Material Financial Obligations, all contingent obligations) of such
Person to reimburse any bank or other Person in respect of amounts paid under a
letter of credit or similar instrument, (vi) all Debt secured by a Lien on any
asset of such Person, whether or not such Debt is otherwise an obligation of
such Person, (vii) all Guarantees by such Person of Debt of another Person (each
such Guarantee to constitute Debt in an amount equal to the amount of such other
Person's Debt Guaranteed thereby) and (viii) in the case of the Borrower, (x)
any unpaid amount of the Commonwealth Payment and (y) with respect to any
capital stock of the Borrower which is redeemable other than at the sole option
of the Borrower, the redemption price thereof, provided that any such capital
stock evidencing, or delivered in payment of, the Commonwealth Payment shall be
excluded from this clause (y).
"Default" means any condition or event which constitutes an
Event of Default or which with the giving of notice or lapse of time or both
would, unless cured or waived, become an Event of Default.
"Demutualization" has the meaning set forth in the
Plan of Demutualization.
"Derivatives Obligations" of any Person means all obligations
of such Person in respect of any rate swap transaction, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
currency swap transaction, cross-currency rate swap transaction, currency option
or any other similar transaction (including any option with respect to any of
the foregoing transactions) or any combination of the foregoing transactions.
"Domestic Business Day" means any day except a Saturday,
Sunday or other day on which commercial banks in New York City are authorized or
required by law to close.
"Domestic Lending Office" means, as to each Bank, its office
located at its address set forth in its Administrative Questionnaire (or
identified in its Administrative Questionnaire as its Domestic Lending Office)
or such other office as such Bank may hereafter designate as its Domestic
Lending Office by notice to the Borrower and
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the Agent; provided that any Bank may so designate separate Domestic Lending
Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other
hand, in which case all references herein to the Domestic Lending Office of such
Bank shall be deemed to refer to either or both of such offices, as the context
may require.
"Domestic Loans" means CD Loans or Base Rate Loans
or both.
"Domestic Reserve Percentage" has the meaning set
forth in Section 2.6(b).
"Effective Date" means the date this Agreement becomes
effective in accordance with Section 9.9.
"Environmental Laws" means any and all federal, state, local
and foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
the environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment, including (without limitation) ambient air, surface
water, ground water or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, Hazardous Substances or wastes or the
clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, or any successor statute.
"ERISA Group" means the Borrower, any Subsidiary and all
members of a controlled group of corporations and all trades or businesses
(whether or not incorporated) under common control which, together with the
Borrower or any Subsidiary, are treated as a single employer under Section 414
of the Internal Revenue Code.
"Euro-Dollar Business Day" means any Domestic Business Day on
which commercial banks are open for international business (including dealings
in dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its
office, branch or affiliate located at its address set forth in its
Administrative Questionnaire (or identified in its Administrative Questionnaire
as its Euro-Dollar
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Lending Office) or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower
and the Agent.
"Euro-Dollar Loan" means a Committed Loan which bears interest
at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing
or Notice of Interest Rate Election.
"Euro-Dollar Margin" means a rate per annum determined in
accordance with the Pricing Schedule.
"Euro-Dollar Rate" means a rate of interest determined
pursuant to Section 2.6(c) on the basis of a London Interbank Offered Rate.
"Euro-Dollar Reference Banks" means the principal
London offices of The Bank of New York, The First National
Bank of Chicago and Morgan Guaranty Trust Company of New
York.
"Euro-Dollar Reserve Percentage" means, for any day, that
percentage (expressed as a decimal) which is in effect on such day, as
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement for a member bank of
the Federal Reserve System in New York City with deposits exceeding five billion
dollars in respect of "Eurocurrency liabilities" (or in respect of any other
category of liabilities which includes deposits by reference to which the
interest rate on Euro-Dollar Loans is determined or any category of extensions
of credit or other assets which includes loans by a non-United States office of
any Bank to United States residents).
"Event of Default" has the meaning set forth in
Section 6.1.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
"Federal Funds Rate" means, for any day, the rate per annum
(rounded upward, if necessary, to the nearest 1/100 of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business
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Day as so published on the next succeeding Domestic Business Day and (ii) if no
such rate is so published on such next succeeding Domestic Business Day, the
Federal Funds Rate for such day shall be the average rate quoted to Morgan
Guaranty Trust Company of New York on such day on such transactions
as determined by the Agent.
"Fiscal Quarter" means a fiscal quarter of the
Borrower.
"Fiscal Year" means a fiscal year of the Borrower.
"Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or
Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the
Base Rate pursuant to Section 8.1) or any combination of the foregoing.
"GAAP" means generally accepted accounting principles as in
effect from time to time, applied on a basis consistent (except for changes
concurred in by the Borrower's independent public accountants) with the initial
audited consolidated financial statements of the Borrower and its Consolidated
Subsidiaries to be delivered to the Banks pursuant to Section 5.1(a).
"Group of Loans" means, at any time, a group of Loans
consisting of (i) all Committed Loans which are Base Rate Loans at such time,
(ii) all Euro-Dollar Loans having the same Interest Period at such time or (iii)
all CD Loans having the same Interest Period at such time, provided that, if a
Committed Loan of any particular Bank is converted to or made as a Base Rate
Loan pursuant to Article 8, such Loan shall be included in the same Group or
Groups of Loans from time to time as it would have been in if it had not been so
converted or made.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt (whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise), (ii) to reimburse a
bank for amounts drawn under a letter of credit for the purpose of paying such
Debt or (iii) entered into for the purpose of assuring in any other manner the
holder of such Debt of the payment thereof or to protect such holder against
loss in
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respect thereof (in whole or in part), provided that the term Guarantee shall
not include endorsements for collection or deposit in the ordinary course of
business. The term Guarantee used as a verb has a corresponding meaning.
"Hazardous Substances" means any toxic, radioactive, caustic
or otherwise hazardous substance, including petroleum, its derivatives,
by-products and other hydrocarbons, or any substance having any constituent
elements displaying any of the foregoing characteristics.
"Increased Commitments" has the meaning set forth
in Section 2.16(a).
"Indemnitee" has the meaning set forth in Section 9.3(b).
"Initial Public Offering" has the meaning set
forth in the Plan of Demutualization.
"Interest Period" means: (1) with respect to each Euro-Dollar
Loan, the period commencing on the date of borrowing specified in the applicable
Notice of Borrowing or on the date specified in an applicable Notice of Interest
Rate Election and ending one, two, three or six months thereafter, as the
Borrower may elect in such notice; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business
Day falls in another calendar month, in which case such Interest Period
shall end on the next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
(c) any Interest Period which would otherwise end
after the Termination Date shall end on the Termination
Date;
(2) with respect to each CD Loan, the period commencing on the
date of borrowing specified in the applicable Notice of Borrowing or on the date
specified in an applicable Notice of Interest Rate Election and ending
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<PAGE>
30, 60, 90 or 180 days thereafter, as the Borrower may elect in such notice;
provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day; and
(b) any Interest Period which would otherwise end
after the Termination Date shall end on the Termination
Date;
(3) with respect to each Money Market LIBOR Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such whole number of months thereafter as the Borrower may
elect in accordance with Section 2.3; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business
Day falls in another calendar month, in which case such Interest Period
shall end on the next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
(c) any Interest Period which would otherwise end
after the Termination Date shall end on the Termination
Date; and
(4) with respect to each Money Market Absolute Rate Loan, the
period commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such number of days thereafter (but not less than seven
days) as the Borrower may elect in accordance with Section 2.3; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day; and
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(b) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended, or any successor statute.
"Investment" means any investment in any Person, whether by
means of share purchase, capital contribution, loan, Guarantee, time deposit or
otherwise (but not including any demand deposit).
"LIBOR Auction" means a solicitation of Money Market Quotes
setting forth Money Market Margins based on the London Interbank Offered Rate
pursuant to Section 2.3.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind, or any other type
of preferential arrangement that has substantially the same practical effect as
a security interest, in respect of such asset. For purposes hereof, the Borrower
or any Subsidiary shall be deemed to own subject to a Lien any asset which it
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such asset.
"Loan" means a Committed Loan or a Money Market
Loan and "Loans" means Committed Loans or Money Market Loans
or any combination of the foregoing.
"London Interbank Offered Rate" has the meaning
set forth in Section 2.6(c).
"Material Adverse Effect" means a material adverse effect upon
(i) the business, results of operations, financial condition or prospects of the
Borrower and its Consolidated Subsidiaries taken as a whole, (ii) the ability of
the Borrower to perform its obligations under this Agreement or (iii) the
ability of any of the Banks to enforce their rights and remedies against the
Borrower under this Agreement.
"Material Debt" means Debt (except Debt outstanding hereunder)
of the Borrower and/or one or more of its Subsidiaries, arising in one or more
related or unrelated transactions, in an aggregate principal or face amount
exceeding $25,000,000.
"Material Financial Obligations" means a principal
or face amount of Debt and/or payment or collateralization
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<PAGE>
obligations in respect of Derivatives Obligations of the Borrower and/or one or
more of its Subsidiaries, arising in one or more related or unrelated
transactions, exceeding in the aggregate $25,000,000.
"Material Plan" means, at any time, a Plan or Plans having
aggregate Unfunded Liabilities in excess of $10,000,000.
"Money Market Absolute Rate" has the meaning set
forth in Section 2.3(d).
"Money Market Absolute Rate Loan" means a loan to be made by a
Bank pursuant to an Absolute Rate Auction.
"Money Market Lending Office" means, as to each Bank, its
Domestic Lending Office or such other office, branch or affiliate of such Bank
as it may hereafter designate as its Money Market Lending Office by notice to
the Borrower and the Agent; provided that any Bank may from time to time by
notice to the Borrower and the Agent designate separate Money Market Lending
Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market
Absolute Rate Loans, on the other hand, in which case all references herein to
the Money Market Lending Office of such Bank shall be deemed to refer to either
or both of such offices, as the context may require.
"Money Market LIBOR Loan" means a loan to be made by a Bank
pursuant to a LIBOR Auction (including such a loan bearing interest at the Base
Rate pursuant to Section 8.1.
"Money Market Loan" means a Money Market LIBOR
Loan or a Money Market Absolute Rate Loan.
"Money Market Margin" has the meaning set forth in
Section 2.3(d)(ii)(c).
"Money Market Quote" means an offer by a Bank to make a Money
Market Loan in accordance with Section 2.3.
"Multiemployer Plan" means, at any time, an employee pension
benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any
member of the ERISA Group is then making or accruing an obligation to make
contributions or has within the preceding five plan years made contributions,
including for these purposes any Person which ceased to be a member of the ERISA
Group during such five year period.
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"NAIC" means the National Association of Insurance
Commissioners and any successor Person thereto.
"Net Proceeds", with respect to the Initial Public Offering,
means the actual proceeds to the Borrower therefrom (after deducting, inter
alia, all underwriting discount and offering expenses) less all mandatory cash
payments to be made pursuant to Section 7.2(d) of the Plan of Demutualization.
"Non-Admitted Assets" means, with respect to any Regulated
Entity, assets which are not Admitted Assets.
"Notes" means promissory notes of the Borrower, substantially
in the form of Exhibit A hereto, evidencing the Borrower's obligation to repay
the Loans, and "Note" means any one of such promissory notes issued hereunder.
"Notice of Borrowing" means a Notice of Committed
Borrowing (as defined in Section 2.2) or a Notice of Money
Market Borrowing (as defined in Section 2.3(f)).
"Notice of Interest Rate Election" has the meaning set forth
in Section 2.7.
"Parent" means, with respect to any Bank, any Person
controlling such Bank.
"Participant" has the meaning set forth in Section 9.6(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Person" means an individual, a corporation, a limited
liability company, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
"Plan" means, at any time, an employee pension benefit plan
(other than a Multiemployer Plan) which is covered by Title IV of ERISA or
subject to the minimum funding standards under Section 412 of the Internal
Revenue Code and either (i) is maintained, or contributed to, by any member of
the ERISA Group for employees of any member of the ERISA Group or (ii) has at
any time within the preceding five years been maintained, or contributed to, by
any Person which was at such time a member of the ERISA Group for
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<PAGE>
employees of any Person which was at such time a member of
the ERISA Group.
"Plan of Demutualization" means the Amended and Restated Plan
of Demutualization of Blue Cross and Blue Shield of Virginia, dated as of May
31, 1996 and as amended as of October 31, 1996.
"Pricing Schedule" means the Pricing Schedule
attached hereto.
"Prime Rate" means the rate of interest publicly announced by
Morgan Guaranty Trust Company of New York in New York City from time to time as
its Prime Rate.
"Quarterly Payment Dates" means each March 31, June 30,
September 30 and December 31.
"Reference Banks" means the CD Reference Banks or the
Euro-Dollar Reference Banks, as the context may require, and "Reference Bank"
means any one of such Reference Banks.
"Regulated Entity" means a Subsidiary subject to regulation
under the insurance laws of any state of the United States.
"Regulation U" means Regulation U of the Board of Governors of
the Federal Reserve System, as in effect from time to time.
"Required Banks" means, at any time, Banks having at least a
majority of the aggregate amount of the Commitments or, if the Commitments shall
have terminated, holding at least a majority of the aggregate unpaid principal
amount of the Loans.
"Restricted Payment" means (i) any dividend or other
distribution on any shares of the Borrower's capital stock (except dividends
payable solely in shares of its capital stock other than mandatorily redeemable
preferred stock) or (ii) any payment on account of the purchase, redemption,
retirement or acquisition of (a) any shares of the Borrower's capital stock or
(b) any option, warrant or other right to acquire shares of the Borrower's
capital stock (but not including payments of principal, premium (if any) or
interest made pursuant to the terms of convertible debt securities prior to
conversion); provided that the Commonwealth Payment shall not be deemed a
Restricted Payment.
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"Revolving Credit Period" means the period from and including
the Effective Date to but not including the Termination Date.
"Risk-Based Capital Act" means the Risk-Based Capital (RBC)
For Insurers Model Act in the form attached as Annex I hereto and as modified
from time to time by the NAIC.
"SEC" means the Securities and Exchange
Commission.
"Subsidiary" means, as to any Person, any corporation or other
entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by such Person.
Unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower.
"Termination Date" means February 12, 2002, or, if such day
is not a Euro-Dollar Business Day, the next succeeding Euro-Dollar Business Day
unless such Euro-Dollar Business Day falls in another calendar month, in which
case the Termination Date shall be the next preceding Euro-Dollar
Business Day.
"Trigon Insurance" means Trigon Insurance Company,
a wholly owned Subsidiary of the Borrower.
"Unfunded Liabilities" means, with respect to any Plan at any
time, the amount (if any) by which (i) the value of all benefit liabilities
under such Plan, determined on a plan termination basis using the assumptions
prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the
fair market value of all Plan assets allocable to such liabilities under Title
IV of ERISA (excluding any accrued but unpaid contributions), all determined as
of the then most recent valuation date for such Plan, but only to the extent
that such excess represents a potential liability of a member of the ERISA Group
to the PBGC or any other Person under Title IV of ERISA.
"United States" means the United States of
America.
SECTION 1.2. Accounting Terms and Determinations.
Unless otherwise specified herein, all accounting terms used
herein shall be interpreted, all accounting determinations
hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in
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accordance with GAAP; provided that, if the Borrower notifies the Agent that the
Borrower wishes to amend any covenant in Article 5 or the definition of any term
used therein to eliminate the effect of any change in GAAP on the operation of
such covenant (or if the Agent notifies the Borrower that the Required Banks
wish to amend Article 5 or any such definition for such purpose), then the
Borrower's compliance with such covenant shall be determined on the basis of
GAAP in effect immediately before the relevant change in GAAP became effective,
either until such notice is withdrawn by the Person delivering such notice or
such covenant or definition is amended in a manner satisfactory to the Borrower
and the Required Banks.
SECTION 1.3. Types of Borrowings. The term "Borrowing" denotes
the aggregation of Loans to be made to the Borrower by one or more Banks
pursuant to Article 2 on the same day, all of which Loans are of the same type
(subject to Article 8) and, except in the case of Base Rate Loans, have the same
initial Interest Period. Borrowings are classified for purposes hereof either
(i) by reference to the pricing of Loans comprising such Borrowing (e.g., a
"Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or (ii)
by reference to the provisions of Article 2 under which participation therein is
determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.1 in
which all Banks participate in proportion to their Commitments, while a "Money
Market Borrowing" is a Borrowing under Section 2.3 in which one or more Banks
participate on the basis of their bids).
ARTICLE 2
THE CREDITS
SECTION 2.1. Commitments to Lend. Each Bank severally agrees,
on the terms and conditions set forth in this Agreement, to make loans to the
Borrower pursuant to this Section from time to time during the Revolving Credit
Period; provided that, immediately after each such loan is made, the aggregate
outstanding principal amount of all Committed Loans by such Bank shall not
exceed its Commitment. Each Borrowing under this Section shall be in an
aggregate principal amount of $10,000,000 or any larger multiple of $1,000,000
(except that any such Borrowing may be in the aggregate amount available in
accordance with Section 3.2) and shall be made from the several Banks ratably in
proportion to their respective Commitments. Within the foregoing limits, the
Borrower may borrow under
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this Section, prepay Loans to the extent permitted by Section 2.10 and reborrow
at any time during the Revolving Credit Period under this Section.
SECTION 2.2. Notice of Committed Borrowing. The Borrower shall
give the Agent notice (a "Notice of Committed Borrowing") not later than 10:30
A.M. (New York City time) on (x) the date of each Base Rate Borrowing, (y) the
second Domestic Business Day before each CD Borrowing and (z) the third
Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying:
(i) the date of such Borrowing, which shall be a Domestic
Business Day in the case of a Domestic Borrowing or a Euro-Dollar
Business Day in the case of a Euro-Dollar Borrowing;
(ii) the aggregate amount of such Borrowing;
(iii) whether the Loans comprising such Borrowing are to bear
interest initially at the Base Rate, a CD Rate or a Euro-Dollar Rate;
and
(iv) in the case of a CD Borrowing or a EuroDollar Borrowing,
the duration of the initial Interest Period applicable thereto, subject
to the provisions of the definition of Interest Period.
SECTION 2.3. Money Market Borrowings. (a) The Money Market
Option. In addition to Committed Borrowings pursuant to Section 2.1, the
Borrower may, as set forth in this Section, request the Banks to make offers to
make Money Market Loans to the Borrower from time to time during the Revolving
Credit Period. The Banks may, but shall have no obligation to, make such offers
and the Borrower may, but shall have no obligation to, accept any such offers in
the manner set forth in this Section.
(b) Money Market Quote Request. When the Borrower wishes to
request offers to make Money Market Loans under this Section, it shall transmit
to the Agent by telex or facsimile a Money Market Quote Request substantially in
the form of Exhibit B hereto so as to be received not later than 10:30 A.M. (New
York City time) on (x) the fifth Euro-Dollar Business Day before the date of
Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic
Business Day next preceding the date of Borrowing proposed therein, in the case
of an Absolute Rate Auction (or, in either case, such other time or date as the
Borrower and the Agent shall have mutually agreed and shall have notified to the
Banks not later than the date of the Money
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Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for
which such change is to be effective) specifying:
(i) the proposed date of Borrowing, which shall be a
Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic
Business Day in the case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing,
which shall be $10,000,000 or a larger multiple of
$1,000,000,
(iii) the duration of the Interest Period
applicable thereto, subject to the provisions of the
definition of Interest Period, and
(iv) whether the Money Market Quotes requested are to set
forth a Money Market Margin or a Money Market Absolute Rate.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request. No Money Market Quote
Request shall be given within five Euro-Dollar Business Days (or such other
number of days as the Borrower and the Agent may agree) of any other Money
Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly after
receiving a Money Market Quote Request, the Agent shall send to the Banks by
telex or facsimile an Invitation for Money Market Quotes substantially in the
form of Exhibit C hereto, which shall constitute an invitation by the Borrower
to each Bank to submit Money Market Quotes offering to make the Money Market
Loans to which such Money Market Quote Request relates in accordance with this
Section.
(d) Submission and Contents of Money Market Quotes. (i) Each
Bank may submit a Money Market Quote containing an offer or offers to make Money
Market Loans in response to any Invitation for Money Market Quotes. Each Money
Market Quote must comply with the requirements of this subsection (d) and must
be submitted to the Agent by telex or facsimile at its address specified in or
pursuant to Section 9.1 not later than (x) 2:00 P.M. (New York City time) on the
fourth Euro-Dollar Business Day before the proposed date of Borrowing, in the
case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed
date of Borrowing, in the case of an Absolute Rate Auction (or, in either case,
such other time or date as the Borrower and the Agent shall have mutually agreed
and shall have notified
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to the Banks not later than the date of the Money Market Quote Request for the
first LIBOR Auction or Absolute Rate Auction for which such change is to be
effective); provided that Money Market Quotes submitted by the Agent (or any
affiliate of the Agent) in the capacity of a Bank may be submitted, and may only
be submitted, if the Agent or such affiliate notifies the Borrower of the terms
of the offer or offers contained therein not later than (x) one hour before the
deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes
before the deadline for the other Banks, in the case of an Absolute Rate
Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall not
be revocable except with the written consent of the Agent given on the
instructions of the Borrower.
(ii) Each Money Market Quote shall be substantially in the
form of Exhibit D hereto and shall in any case specify:
(A) the proposed date of Borrowing,
(B) the principal amount of the Money Market Loan for which
each such offer is being made, which principal amount (w) may be
greater than or less than the Commitment of the quoting Bank, (x) must
be $5,000,000 or a larger multiple of $1,000,000, (y) may not exceed
the principal amount of Money Market Loans for which offers were
requested and (z) may be subject to an aggregate limitation as to the
principal amount of Money Market Loans for which offers being made by
such quoting Bank may be accepted,
(C) in the case of a LIBOR Auction, the margin above or below
the applicable London Interbank Offered Rate (the "Money Market
Margin") offered for each such Money Market Loan, expressed as a
percentage (specified to the nearest 1/10,000 of 1%) to be added to or
subtracted from such base rate,
(D) in the case of an Absolute Rate Auction, the rate of
interest per annum (specified to the nearest 1/10,000 of 1%) (the
"Money Market Absolute Rate") offered for each such Money Market Loan,
and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
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(iii) Any Money Market Quote shall be disregarded
if it:
(A) is not substantially in conformity with Exhibit D hereto
or does not specify all of the information required by subsection
(d)(ii) above;
(B) contains qualifying, conditional or similar
language;
(C) proposes terms other than or in addition to those set
forth in the applicable Invitation for Money Market Quotes; or
(D) arrives after the time set forth in subsection (d)(i).
(e) Notice to Borrower. The Agent shall promptly notify the
Borrower of the terms of (i) any Money Market Quote submitted by a Bank that is
in accordance with subsection (d) and (ii) any Money Market Quote that amends,
modifies or is otherwise inconsistent with a previous Money Market Quote
submitted by such Bank with respect to the same Money Market Quote Request. Any
such subsequent Money Market Quote shall be disregarded by the Agent unless such
subsequent Money Market Quote is submitted solely to correct a manifest error in
such former Money Market Quote. The Agent's notice to the Borrower shall specify
(A) the aggregate principal amount of Money Market Loans for which offers have
been received for each Interest Period specified in the related Money Market
Quote Request, (B) the respective principal amounts and Money Market Margins or
Money Market Absolute Rates, as the case may be, so offered and (C) if
applicable, limitations on the aggregate principal amount of Money Market Loans
for which offers in any single Money Market Quote may be accepted.
(f) Acceptance and Notice by Borrower. Not later than 10:30
A.M. (New York City time) on (x) the third Euro-Dollar Business Day before the
proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed
date of Borrowing, in the case of an Absolute Rate Auction (or, in either case,
such other time or date as the Borrower and the Agent shall have mutually agreed
and shall have notified to the Banks not later than the date of the Money Market
Quote Request for the first LIBOR Auction or Absolute Rate Auction for which
such change is to be effective), the Borrower shall notify the Agent of its
acceptance or non-acceptance of the offers so notified to it pursuant to
subsection (e). In the case of acceptance, such notice (a "Notice of Money
Market Borrowing") shall specify
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the aggregate principal amount of offers for each Interest Period that are
accepted. The Borrower may accept any Money Market Quote in whole or in part;
provided that:
(i) the aggregate principal amount of each Money Market
Borrowing may not exceed the applicable amount set forth in the related
Money Market Quote Request;
(ii) the principal amount of each Money Market
Borrowing must be $10,000,000 or a larger multiple of
$1,000,000;
(iii) acceptance of offers may only be made on the basis of
ascending Money Market Margins or Money Market Absolute Rates, as the
case may be; and
(iv) the Borrower may not accept any offer that is described in
subsection (d)(iii) or that otherwise fails to comply with the
requirements of this Agreement.
(g) Allocation by Agent. If offers are made by two or more
Banks with the same Money Market Margins or Money Market Absolute Rates, as the
case may be, for a greater aggregate principal amount than the amount in respect
of which such offers are accepted for the related Interest Period, the principal
amount of Money Market Loans in respect of which such offers are accepted shall
be allocated by the Agent among such Banks as nearly as possible (in multiples
of $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate
principal amounts of such offers. Determinations by the Agent of the amounts of
Money Market Loans shall be conclusive in the absence of manifest error.
SECTION 2.4. Notice to Banks; Funding of Loans. (a) Promptly
after receiving a Notice of Borrowing, the Agent shall notify each Bank of the
contents thereof and of such Bank's share (if any) of such Borrowing and such
Notice of Borrowing shall not thereafter be revocable by the Borrower.
(b) Not later than 12:00 Noon (New York City time) on the date
of each Borrowing, each Bank participating therein shall make available its
share of such Borrowing, in Federal or other funds immediately available in New
York City, to the Agent at its address specified in or pursuant to Section 9.1.
Unless the Agent determines that any applicable condition specified in Article
3 has not been satisfied, the Agent will make the funds so received from
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the Banks available to the Borrower at the Agent's aforesaid
address.
(c) Unless the Agent shall have received notice from a Bank
before the date of any Borrowing that such Bank will not make available to the
Agent such Bank's share of such Borrowing, the Agent may assume that such Bank
has made such share available to the Agent on the date of such Borrowing in
accordance with subsection (b) of this Section and the Agent may, in reliance
upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such share available to the Agent, such Bank and the Borrower severally agree to
repay to the Agent forthwith on demand such corresponding amount together with
interest thereon, for each day from the date such amount is made available to
the Borrower until the date such amount is repaid to the Agent, at (i) in the
case of the Borrower, a rate per annum equal to the interest rate applicable
thereto pursuant to Section and 2.6 (ii) in the case of such Bank, the Federal
Funds Rate. If such Bank shall repay to the Agent such corresponding amount,
such amount so repaid shall constitute such Bank's Loan included in such
Borrowing for purposes of this Agreement.
SECTION 2.5. Maturity of Loans. (a) Each
Committed Loan shall mature, and the principal amount
thereof shall be due and payable (together with interest
accrued thereon), on the Termination Date.
(b) Each Money Market Loan included in any Money Market
Borrowing shall mature, and the principal amount thereof shall be due and
payable (together with interest accrued thereon), on the last day of the
Interest Period applicable to such Borrowing.
SECTION 2.6. Interest Rates. (a) Each Base Rate Loan shall
bear interest on the outstanding principal amount thereof, for each day from the
date such Loan is made until it becomes due, at a rate per annum equal to the
Base Rate for such day. Such interest shall be payable in arrears on each
Quarterly Payment Date and, with respect to the principal amount of any Base
Rate Loan converted to a CD Loan or a Euro-Dollar Loan, on the date such amount
is so converted. Any overdue principal of or interest on any Base Rate Loan
shall bear interest, payable on demand, for each day until paid at a rate per
annum equal to the sum of 2% plus the Base Rate for such day.
(b) Each CD Loan shall bear interest on the
outstanding principal amount thereof, for each day during
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each Interest Period applicable thereto, at a rate per annum equal to the sum of
the CD Margin for such day plus the Adjusted CD Rate applicable to such Interest
Period; provided that if any CD Loan shall, as a result of clause (2)(b) of the
definition of Interest Period, have an Interest Period of less than 30 days,
such CD Loan shall bear interest for each day during such Interest Period at the
Base Rate for such day. Such interest shall be payable for each Interest Period
on the last day thereof and, if such Interest Period is longer than 90 days, at
intervals of 90 days after the first day thereof. Any overdue principal of or
interest on any CD Loan shall bear interest, payable on demand, for each day
until paid at a rate per annum equal to the sum of 2% plus the higher of (i) the
Base Rate for such day and (ii) the sum of the CD Margin plus the Adjusted CD
Rate applicable to such Loan on the day before such payment was due.
The "Adjusted CD Rate" applicable to any Interest Period means
a rate per annum determined pursuant to the following formula:
[ CDBR ]*
ACDR = [ ------ ] + AR
[ 1.00 - DRP ]
ACDR = Adjusted CD Rate
CDBR = CD Base Rate
DRP = Domestic Reserve Percentage
AR = Assessment Rate
----------
* The amount in brackets being rounded upward, if
necessary, to the next higher 1/100 of 1%
The "CD Base Rate" applicable to any Interest Period is the
rate of interest determined by the Agent to be the average (rounded upward, if
necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid
at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the
first day of such Interest Period by two or more New York certificate of deposit
dealers of recognized standing for the purchase at face value from each CD
Reference Bank of its certificates of deposit in an amount comparable to the
principal amount of the CD Loan of such CD Reference Bank to which such Interest
Period applies and having a maturity comparable to such Interest Period.
"Domestic Reserve Percentage" means for any day
that percentage (expressed as a decimal) which is in effect
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on such day, as prescribed by the Board of Governors of the Federal Reserve
System (or any successor) for determining the maximum reserve requirement
(including without limitation any basic, supplemental or emergency reserves) for
a member bank of the Federal Reserve System in New York City with deposits
exceeding five billion dollars in respect of new non-personal time deposits in
dollars in New York City having a maturity comparable to the related Interest
Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be
adjusted automatically on and as of the effective date of any change in the
Domestic Reserve Percentage.
"Assessment Rate" means for any day the annual assessment rate
in effect on such day which is payable by a member of the Bank Insurance Fund
classified as adequately capitalized and within supervisory subgroup "A" (or a
comparable successor assessment risk classification) within the meaning of 12
C.F.R. ss. 327.4(a) (or any successor provision) to the Federal Deposit
Insurance Corporation (or any successor) for such Corporation's (or such
successor's) insuring time deposits at offices of such institution in the United
States. The Adjusted CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Assessment Rate.
(c) Each Euro-Dollar Loan shall bear interest on the
outstanding principal amount thereof, for each day during each Interest Period
applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar
Margin for such day plus the London Interbank Offered Rate applicable to such
Interest Period. Such interest shall be payable for each Interest Period on the
last day thereof and, if such Interest Period is longer than three months, at
intervals of three months after the first day thereof.
The "London Interbank Offered Rate" applicable to any Interest
Period means the average (rounded upward, if necessary, to the next higher 1/16
of 1%) of the respective rates per annum at which deposits in dollars are
offered to each of the Euro-Dollar Reference Banks in the London interbank
market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days
before the first day of such Interest Period in an amount approximately equal to
the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank
to which such Interest Period is to apply and for a period of time comparable to
such Interest Period.
(d) Any overdue principal of or interest on any Euro-Dollar
Loan shall bear interest, payable on demand, for each day until paid at a rate
per annum equal to the higher
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of (i) the sum of 2% plus the Euro-Dollar Margin for such day plus the London
Interbank Offered Rate applicable to such Loan on the day before such payment
was due and (ii) the sum of 2% plus the Euro-Dollar Margin for such day plus the
average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the
respective rates per annum at which one day (or, if such amount due remains
unpaid more than three Euro-Dollar Business Days, then for such other period of
time not longer than three months as the Agent may select) deposits in dollars
in an amount approximately equal to such overdue payment due to each of the
Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in
the London interbank market for the applicable period determined as provided
above (or, if the circumstances described in clause (a) or (b) of Section 8.1
shall exist, at a rate per annum equal to the sum of 2% plus the Base Rate for
such day).
(e) Subject to Section 8.1, each Money Market LIBOR Loan shall
bear interest on the outstanding principal amount thereof, for the Interest
Period applicable thereto, at a rate per annum equal to the sum of the London
Interbank Offered Rate for such Interest Period (determined in accordance with
Section 2.6(c) as if the related Money Market LIBOR Borrowing were a Committed
Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the
Bank making such Loan. Each Money Market Absolute Rate Loan shall bear interest
on the outstanding principal amount thereof, for the Interest Period applicable
thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by
the Bank making such Loan. Such interest shall be payable for each Interest
Period on the last day thereof and, if such Interest Period is longer than three
months, at intervals of three months after the first day thereof. Any overdue
principal of or interest on any Money Market Loan shall bear interest, payable
on demand, for each day until paid at a rate per annum equal to the sum of 2%
plus the Base Rate for such day.
(f) The Agent shall determine each interest rate applicable to
the Loans hereunder. The Agent shall promptly notify the Borrower and the
participating Banks of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of manifest error.
(g) Each Reference Bank agrees to use its best efforts to
furnish quotations to the Agent as contemplated by this Section. If any
Reference Bank does not furnish a timely quotation, the Agent shall determine
the relevant interest rate on the basis of the quotation or quotations furnished
by the remaining Reference Bank or Banks or, if
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none of such quotations is available on a timely basis, the provisions of
Section 8.1 shall apply.
SECTION 2.7. Method of Electing Interest Rates. (a) The Loans
included in each Committed Borrowing shall bear interest initially at the type
of rate specified by the Borrower in the applicable Notice of Committed
Borrowing. Thereafter, the Borrower may from time to time elect to change or
continue the type of interest rate borne by each Group of Loans (subject to
subsection (d) of this Section and the provisions of Article 8), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may elect
to convert such Loans to CD Loans as of any Domestic Business Day or to
Euro-Dollar Loans as of any Euro-Dollar Business Day;
(ii) if such Loans are CD Loans, the Borrower may elect to
convert such Loans to Base Rate Loans or Euro-Dollar Loans or elect to
continue such Loans as CD Loans for an additional Interest Period,
subject to Section 2.12 if any such conversion is effective on any day
other than the last day of an Interest Period applicable to such Loans;
and
(iii) if such Loans are Euro-Dollar Loans, the Borrower may
elect to convert such Loans to Base Rate Loans or CD Loans or elect to
continue such Loans as Euro-Dollar Loans for an additional Interest
Period, subject to Section 2.12 if any such conversion is effective on
any day other than the last day of an Interest Period applicable to
such Loans.
Each such election shall be made by delivering a notice (a "Notice of Interest
Rate Election") to the Agent not later than 10:30 A.M. (New York City time) on
the third Euro-Dollar Business Day before the conversion or continuation
selected in such notice is to be effective (unless the relevant Loans are to be
converted from Domestic Loans of one type to Domestic Loans of the other type or
are CD Loans to be continued as CD Loans for an additional Interest Period, in
which case such notice shall be delivered to the Agent not later than 10:30 A.M.
(New York City time) on the second Domestic Business Day before such conversion
or continuation is to be effective). A Notice of Interest Rate Election may, if
it so specifies, apply to only a portion of the aggregate principal amount of
the relevant Group of Loans; provided that (i) such portion is allocated ratably
among the Loans comprising such Group and (ii) the portion to which such Notice
applies, and the remaining portion to which it does not apply, are each at
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least $10,000,000 (unless such portion is comprised of Base Rate Loans). If no
such notice is timely received before the end of an Interest Period for any
Group of CD Loans or Euro-Dollar Loans, the Borrower shall be deemed to have
elected that such Group of Loans be converted to Base Rate Loans at the end of
such Interest Period.
(b) Each Notice of Interest Rate Election shall
specify:
(i) the Group of Loans (or portion thereof) to
which such notice applies;
(ii) the date on which the conversion or continuation selected in
such notice is to be effective, which shall comply with the applicable
clause of subsection (a) above;
(iii) if the Loans comprising such Group are to be converted, the
new type of Loans and, if the Loans resulting from such conversion are
to be CD Loans or Euro-Dollar Loans, the duration of the next
succeeding Interest Period applicable thereto; and
(iv) if such Loans are to be continued as CD Loans or Euro-Dollar
Loans for an additional Interest Period, the duration of such
additional Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Promptly after receiving a Notice of Interest Rate
Election from the Borrower pursuant to subsection (a) above, the Agent shall
notify each Bank of the contents thereof and such notice shall not thereafter be
revocable by the Borrower.
(d) The Borrower shall not be entitled to elect to convert any
Committed Loans to, or continue any Committed Loans for an additional Interest
Period as, CD Loans or Euro-Dollar Loans if (i) the aggregate principal amounts
of any Group of CD Loans or Euro-Dollar Loans created or continued as a result
of such election would be less than $10,000,000 or (ii) a Default shall have
occurred and be continuing when the Borrower delivers notice of such election to
the Agent.
SECTION 2.8. Facility Fee. (a) The Borrower
shall pay to the Agent, for the account of the Banks, a
facility fee at the Facility Fee Rate (determined daily in
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accordance with the Pricing Schedule). Such facility fee shall accrue (i) from
and including the Effective Date to but excluding the date on which the
Commitments terminate in their entirety, on the daily aggregate amount of the
Commitments (whether used or unused) and (ii) from and including such date of
termination to but excluding the date on which the Loans shall be repaid in
their entirety, on the daily aggregate outstanding principal amount of the
Loans. Such facility fee shall be allocated among the Banks ratably in
proportion to their Commitments; provided that any facility fee accruing after
the Commitments terminate in their entirety shall be allocated among the Banks
ratably in proportion to the unpaid principal amounts of their respective Loans.
(b) Fees accrued under subsection (a) of this Section shall be
payable quarterly in arrears on each Quarterly Payment Date and on the date on
which the Commitments terminate in their entirety (and, if later, the date on
which the Loans shall be repaid in their entirety).
SECTION 2.9. Termination or Reduction of Commitments. (a) The
Borrower may, upon at least three Domestic Business Days' notice to the Agent,
(i) terminate the Commitments at any time, if no Loans are outstanding at such
time, or (ii) ratably reduce from time to time by an aggregate amount of at
least $10,000,000, the aggregate amount of the Commitments in excess of the
aggregate outstanding principal amount of the Loans. Promptly after receiving a
notice pursuant to this subsection, the Agent shall notify each Bank of the
contents thereof.
(b) Unless previously terminated, the Commitments shall
terminate in their entirety on the Termination Date.
SECTION 2.10. Optional Prepayments. (a) Subject in the case of
any Money Market Borrowing to Section 2.12, the Borrower may, upon at least one
Domestic Business Day's notice to the Agent, prepay any Group of Domestic Loans
(or any Money Market Borrowing bearing interest at the Base Rate pursuant to
Section 8.1), in each case in whole at any time, or from time to time in part in
amounts aggregating $10,000,000 by paying the principal amount to be prepaid
together with interest accrued thereon to the date of prepayment. Each such
optional prepayment shall be applied to prepay ratably the Loans of the several
Banks included in such Group of Loans (or such Money Market Borrowing).
(b) Except as provided in subsection (a) above,
the Borrower may not prepay all or any portion of the
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principal amount of any Money Market Loan before the
maturity thereof.
(c) Promptly after receiving a notice of prepayment pursuant
to this Section, the Agent shall notify each Bank of the contents thereof and of
such Bank's ratable share (if any) of such prepayment, and such notice shall not
thereafter be revocable by the Borrower.
SECTION 2.11. General Provisions as to Payments. (a) The
Borrower shall make each payment of principal of, and interest on, the Loans and
of fees hereunder not later than 12:00 Noon (New York City time) on the date
when due, in Federal or other funds immediately available in New York City, to
the Agent at its address specified in or pursuant to Section 9.1. The Agent will
promptly distribute to each Bank its ratable share of each such payment received
by the Agent for the account of the Banks. Whenever any payment of principal of,
or interest on, the Domestic Loans or of fees shall be due on a day which is not
a Domestic Business Day, the date for payment thereof shall be extended to the
next succeeding Domestic Business Day. Whenever any payment of principal of, or
interest on, the Euro-Dollar Loans shall be due on a day which is not a
Euro-Dollar Business Day, the date for payment thereof shall be extended to the
next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day
falls in another calendar month, in which case the date for payment thereof
shall be the next preceding Euro-Dollar Business Day. Whenever any payment of
principal of, or interest on, the Money Market Loans shall be due on a day which
is not a Euro-Dollar Business Day, the date for payment thereof shall be
extended to the next succeeding Euro-Dollar Business Day. If the date for any
payment of principal is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.
(b) Unless the Borrower notifies the Agent before the date on
which any payment is due to the Banks hereunder that the Borrower will not make
such payment in full, the Agent may assume that the Borrower has made such
payment in full to the Agent on such date and the Agent may, in reliance on such
assumption, cause to be distributed to each Bank on such due date an amount
equal to the amount then due such Bank. If and to the extent that the Borrower
shall not have so made such payment, each Bank shall repay to the Agent
forthwith on demand such amount distributed to such Bank together with interest
thereon, for each day from the date such amount is distributed to such Bank
until the date such Bank repays such amount to the Agent, at the Federal Funds
Rate.
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SECTION 2.12. Funding Losses. If the Borrower makes any
payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan
is converted to a different type of Loan (whether such payment or conversion is
pursuant to Article 2,6 or 8 or otherwise, but excluding any prepayment required
pursuant to Section 2.4(c)) on any day other than the last day of an Interest
Period applicable thereto, or the last day of an applicable period fixed
pursuant to Section 2.6(d), or if the Borrower fails to borrow, prepay, convert
or continue any Fixed Rate Loans after notice has been given to any Bank in
accordance with Section 2.4(a), 2.7(c) or 2.10(c), the Borrower shall reimburse
each Bank within 15 days after demand for any resulting loss or expense incurred
by it (or by an existing or prospective Participant in the related Loan),
including (without limitation) any loss incurred in obtaining, liquidating or
employing deposits from third parties, but excluding loss of margin for the
period after such payment or conversion or failure to borrow, prepay, convert or
continue; provided that such Bank shall have delivered to the Borrower a
certificate as to the amount of such loss or expense, which certificate shall be
conclusive in the absence of manifest error.
SECTION 2.13. Computation of Interest and Fees. Interest based
on the Prime Rate hereunder shall be computed on the basis of a year of 365 days
(or 366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
fees shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
SECTION 2.14. Notes. (a) The Borrower's obligation to repay
the Loans of each Bank shall be evidenced by a single Note payable to the order
of such Bank for the account of its Applicable Lending Office.
(b) Each Bank may, by notice to the Borrower and the Agent,
request that the Borrower's obligation to repay such Bank's Loans of a
particular type be evidenced by a separate Note. Each such Note shall be in
substantially the form of Exhibit A hereto with appropriate modifications to
reflect the fact that it relates solely to Loans of the relevant type. Each
reference in this Agreement to the "Note" of such Bank shall be deemed to refer
to and include any or all of such Notes, as the context may require.
(c) Promptly after it receives each Bank's Note pursuant to
Section 3.1(a), the Agent shall forward such
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Note to such Bank. Each Bank shall record the date, amount and type of each Loan
made by it and the date and amount of each payment of principal made by the
Borrower with respect thereto, and may, if such Bank so elects in connection
with any transfer or enforcement of its Note, endorse on the schedule forming a
part thereof appropriate notations to evidence the foregoing information with
respect to each such Loan then outstanding; provided that a Bank's failure to
make any such recordation or endorsement shall not affect the Borrower's
obligations hereunder or under the Notes. Each Bank is hereby irrevocably
authorized by the Borrower so to endorse its Note and to attach to and make a
part of its Note a continuation of any such schedule as and when required.
SECTION 2.15. Regulation D Compensation. Each Bank may require
the Borrower to pay, contemporaneously with each payment of interest on the
Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such
Bank at a rate per annum determined by such Bank up to but not exceeding the
excess of (i) (A) the applicable London Interbank Offered Rate divided by (B)
one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London
Interbank Offered Rate. Any Bank wishing to require payment of such additional
interest (x) shall so notify the Borrower and the Agent, in which case such
additional interest on the Euro-Dollar Loans of such Bank shall be payable to
such Bank at the place indicated in such notice with respect to each Interest
Period commencing at least three Euro-Dollar Business Days after such Bank gives
such notice and (y) shall notify the Borrower at least five Euro-Dollar Business
Days before each date on which interest
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is payable on the Euro-Dollar Loans of the amount then due
it under this Section.
SECTION 2.16. Increased Commitments; Additional Banks. (a)
Subsequent to the Effective Date, the Borrower may, upon at least 30 days'
notice to the Agent (which shall promptly provide a copy of such notice to the
Banks), propose to increase the aggregate amount of the Commitments by an amount
not to exceed $50,000,000 (the amount of any such increase, the "Increased
Commitments"). Each Bank party to this Agreement at such time shall have the
right (but no obligation), for a period of 15 days following receipt of such
notice, to elect by notice to the Borrower and the Agent to increase its
Commitment by a principal amount which bears the same ratio to the Increased
Commitments as its then Commitment bears to the aggregate Commitments then
existing.
(b) If any Bank party to this Agreement shall not elect to
increase its Commitment pursuant to subsection (a) of this Section, the Borrower
may designate another bank or other banks (which may be, but need not be, one or
more of the existing Banks) which at the time agree to (i) in the case of any
such bank that is an existing Bank, increase its Commitment and (ii) in the case
of any other such bank (an "Additional Bank"), become a party to this Agreement.
The sum of the increases in the Commitments of the existing Banks pursuant to
this subsection (b) plus the Commitments of the Additional Banks shall not in
the aggregate exceed the unsubscribed amount of the Increased Commitments.
(c) An increase in the aggregate amount of the Commitments
pursuant to this Section 2.16 shall become effective upon the receipt by the
Agent of an agreement in form and substance satisfactory to the Agent signed by
the Borrower, by each Additional Bank and by each other Bank whose Commitment is
to be increased, setting forth the new Commitments of such Banks and setting
forth the agreement of each Additional Bank to become a party to this Agreement
and to be bound by all the terms and provisions hereof, together with such
evidence of appropriate corporate authorization on the part of the Borrower with
respect to the Increased Commitments and such opinions of counsel for the
Borrower with respect to the Increased Commitments as the Agent may reasonably
request.
ARTICLE 3
CONDITIONS
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SECTION 3.1. Closing. The closing hereunder
shall occur on the date on which each of the following
conditions shall have been satisfied:
(a) receipt by the Agent of a duly executed Note for the
account of each Bank dated on or before the Closing Date and complying
with the provisions of Section 2.14;
(b) receipt by the Agent of an opinion of McGuire, Woods,
Battle & Boothe, L.L.P., counsel for the Borrower, dated the Closing
Date and substantially in the form of Exhibit E hereto and covering
such additional matters relating to the transactions contemplated
hereby or by the Plan of Demutualization as the Required Banks may
reasonably request;
(c) receipt by the Agent of an opinion of Davis Polk &
Wardwell, special counsel for the Agent, dated the Closing Date and
substantially in the form of Exhibit F hereto and covering such
additional matters relating to the transactions contemplated hereby or
by the Plan of Demutualization as the Required Banks may reasonably
request;
(d) receipt by the Agent of a letter, dated the Closing Date,
from each of McGuire, Woods, Battle & Boothe, L.L.P. and Debevoise and
Plimpton stating that each opinion delivered by it in connection with
the Demutualization (including, without limitation, pursuant to the
underwriting agreement between the Borrower and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Alex. Brown & Sons Incorporated, Dean
Witter Reynolds Inc., Morgan Stanley & Co. Incorporated and Wheat,
First Securities, Inc., as underwriters, pursuant to which the Initial
Public Offering has been made) may be relied on by the Banks and the
Agent as if such opinion had been addressed to them;
(e) the Demutualization shall have been consummated in
accordance with the Plan of Demutualization and the Plan of
Demutualization shall not have been amended or otherwise modified since
October 31, 1996;
(f) the Initial Public Offering shall have been consummated in
accordance with the Plan of Demutualization and the Net Proceeds
therefrom shall be at least $100,000,000;
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(g) receipt by the Agent of a certificate from
an authorized officer of the Borrower to the
effect set forth in clauses (e) and (f) above; and
(h) receipt by the Agent of all documents the Agent may
reasonably request relating to the existence of the Borrower and its
Subsidiaries, the authority for and the validity of this Agreement and
the Notes, and any other matters relevant hereto or to the
Demutualization, all in form and substance satisfactory to the Agent.
Promptly after the Closing Date occurs, the Agent shall notify the Borrower and
the Banks thereof, and such notice shall be conclusive and binding on all
parties hereto.
SECTION 3.2. Borrowings. The obligation of any
Bank to make a Loan on the occasion of any Borrowing is
subject to the satisfaction of the following conditions:
(a) the fact that the Closing Date shall have
occurred on or before March 31, 1997;
(b) receipt by the Agent of a Notice of Borrowing
as required by Section 2.2 or 2.3, as the case may be;
(c) the fact that, immediately after such Borrowing, the
aggregate outstanding principal amount of the Loans will not exceed the
aggregate amount of the Commitments;
(d) the fact that, immediately before and after
such Borrowing, no Default shall have occurred and be
continuing; and
(e) the fact that the representations and warranties of the
Borrower contained in this Agreement shall be true on and as of the
date of such Borrowing.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in clauses
(c), (d)
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and (e) of this Section and clauses (e) and (f) of Section
3.1.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
SECTION 4.1. Corporate Existence and Power. The Borrower is a
corporation duly incorporated, validly existing and in good standing under the
laws of the Commonwealth of Virginia, and has all powers and all governmental
licenses, consents, authorizations and approvals required to carry on its
business as now conducted.
SECTION 4.2. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by the Borrower of this
Agreement and the Notes are within the Borrower's powers, have been duly
authorized by all necessary action, require no action by or in respect of, or
filing with, any governmental body, agency or official (other than those set
forth in the Plan of Demutualization, each of which has been taken or made) and
do not contravene, or constitute a default under, any provision of applicable
law or regulation or of the Borrower's articles of incorporation or bylaws or of
any agreement, judgment, injunction, order, decree or other instrument binding
upon the Borrower or any Subsidiary or result in the creation or imposition of
any Lien on any asset of the Borrower or any Subsidiary.
SECTION 4.3. Binding Effect. This Agreement constitutes a
valid and binding agreement of the Borrower and each Note, when executed and
delivered in accordance with this Agreement, will constitute a valid and binding
obligation of the Borrower, in each case enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally and general principles of equity.
SECTION 4.4. Financial Information. (a) The consolidated
balance sheet of Blue Cross and Blue Shield of Virginia and its Consolidated
Subsidiaries as of December 31, 1995 and September 30, 1996 and the related
consolidated statements of operations, changes in surplus and cash flows for the
year ended December 31, 1995 and the nine months ended September 30, 1996,
reported on by KPMG Peat Marwick,
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LLP and set forth in the Borrower's Registration Statement, a copy of which has
been delivered to each of the Banks, fairly present, in conformity with GAAP,
the consolidated financial position of Blue Cross and Blue Shield of Virginia
and its Consolidated Subsidiaries as of such dates and their consolidated
results of operations, changes in surplus and cash flows for such year and
nine-month period.
(b) The unaudited pro forma consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries as of September 30, 1996 and the
related unaudited pro forma consolidated statements of operations for the year
ended December 31, 1995 and the nine-month period ended September 30, 1996, set
forth in the Borrower's Registration Statement, are complete and correct in all
material respects and, subject to the footnotes thereto, have been prepared on
the basis described therein and otherwise in conformity with GAAP applied on a
basis consistent with the financial statements referred to in subsection (a) of
this Section and show the consolidated financial position and results of
operations of the Borrower and its Consolidated Subsidiaries 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.
(c) The Annual Statement (Life and Accident and Health Form)
of Blue Cross and Blue Shield of Virginia as of December 31, 1995, in the form
submitted to the insurance department or other comparable regulatory authority
of the Commonwealth of Virginia, copies of which have been delivered to each of
the Banks, is a full and true statement, in all material respects, of all the
assets and liabilities and of the condition and affairs of Trigon Insurance as
of the date thereof, and of its income and deductions therefrom for the year
ended on that date, all in conformity with statutory accounting principles in
effect on the date thereof.
(d) Since September 30, 1996 there has been no material
adverse change in the business, financial position, results of operations or
prospects of the Borrower and its Consolidated Subsidiaries, considered as a
whole.
SECTION 4.5. Litigation. Except as disclosed in
the Borrower's Registration Statement, there is no action,
suit or proceeding pending against, or to the Borrower's
knowledge threatened against or affecting, the Borrower or
any Subsidiary before any court or arbitrator or any
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governmental body, agency or official in which there is a reasonable possibility
of an adverse decision which could reasonably be expected to materially
adversely affect the business, consolidated financial position or consolidated
results of operations of the Borrower and its Consolidated Subsidiaries,
considered as a whole, or which in any manner draws into question the validity
or enforceability of this Agreement or the Notes or the legality or consummation
of the Demutualization.
SECTION 4.6. Compliance with Laws; ERISA. (a) The Borrower and
each Subsidiary of the Borrower is in compliance, in all material respects, with
all applicable laws, ordinances, rules, regulations and requirements of
governmental bodies, agencies and officials.
(b) Each member of the ERISA Group has fulfilled its
obligations under the minimum funding standards of ERISA and the Internal
Revenue Code with respect to each Plan and is in compliance in all material
respects with the presently applicable provisions of ERISA and the Internal
Revenue Code with respect to each Plan. No member of the ERISA Group has (i)
sought a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan, or made any amendment
to any Plan, which has resulted or could result in the imposition of a Lien or
the posting of a bond or other security under ERISA or the Internal Revenue Code
or (iii) incurred any liability under Title IV of ERISA other than a liability
to the PBGC for premiums under Section 4007 of ERISA.
SECTION 4.7. Environmental Matters. The Borrower has
reasonably concluded that the liabilities and costs associated with the effect
of Environmental Laws on the business, operations and properties of the Borrower
and its Subsidiaries, including the costs of complying with Environmental Laws,
are unlikely to have a Material Adverse Effect.
SECTION 4.8. Taxes. The Borrower and its Subsidiaries have
filed all United States Federal income tax returns and all other material tax
returns which are required to be filed by them and have paid all taxes due
pursuant to such returns or pursuant to any assessment received by the Borrower
or any Subsidiary. The charges, accruals and reserves on the books of the
Borrower and its Subsidiaries in respect of taxes or other governmental charges
are, in the Borrower's opinion, adequate.
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SECTION 4.9. Subsidiaries. Each of the Borrower's corporate
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all powers
and all governmental licenses, authorizations, consents and approvals required
to carry on its business as now conducted except for such powers, licenses,
authorizations, consents or approvals the absence of which could not reasonably
be expected to have a Material Adverse Effect.
SECTION 4.10. Regulatory Restrictions on Borrowing. The
Borrower is not an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, (ii) a "holding company" within the meaning of
the Public Utility Holding Company Act of 1935, as amended, or (iii) otherwise
subject to any regulatory scheme which restricts its ability to incur debt.
SECTION 4.11. Full Disclosure. All information (including,
without limitation, the Borrower's Registration Statement) heretofore furnished
by the Borrower to the Agent or any Bank for purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all such
information hereafter furnished by the Borrower to the Agent or any Bank will
be, true and accurate in all material respects on the date as of which such
information is stated or certified. The Borrower has disclosed to the Banks in
writing any and all facts which materially and adversely affect, or may affect
(to the extent the Borrower can now reasonably foresee), the business,
operations or financial condition of the Borrower and its Consolidated
Subsidiaries, taken as a whole, or the Borrower's ability to perform its
obligations under this Agreement. Information in the form of forecasts delivered
by the Borrower to the Agent or any Bank are based upon the best information
available to the Borrower at the time such forecasts were made and take into
consideration all information which, in the reasonable judgment of the Borrower
was believed to be material at the time, it being understood that such
statements and conclusions are necessarily based upon opinions, estimates and
projections, and the Borrower does not warrant that such opinions, estimates and
projections will ultimately prove to have been accurate.
ARTICLE 5
COVENANTS
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The Borrower agrees that, so long as any Bank has any
Commitment hereunder or any principal of or interest on any Loan remains unpaid:
SECTION 5.1. Information. The Borrower will
deliver to each of the Banks:
(a) as soon as available and in any event within 90 days after
the end of each Fiscal Year, a consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries as of the end of such Fiscal
Year and the related consolidated statements of income, cash flows and
changes in stockholders' equity for such Fiscal Year, setting forth in
each case (commencing with the Fiscal Year ending December 31, 1998) in
comparative form the figures for the previous Fiscal Year, all reported
on in a manner acceptable to the SEC by KPMG Peat Marwick or other
independent public accountants of nationally recognized standing;
(b) as soon as available and in any event within 45 days after
the end of each of the first three Fiscal Quarters of each Fiscal Year
(commencing with the Fiscal Quarter ending March 31, 1997), a
consolidated balance sheet of the Borrower and its Consolidated
Subsidiaries as of the end of such Fiscal Quarter, the related
consolidated statements of income for such Fiscal Quarter and the
related consolidated statements of cash flows and changes in
stockholders' equity for the portion of the Fiscal Year ended at the
end of such Fiscal Quarter, setting forth (commencing with the Fiscal
Quarter ending March 31, 1998) in the case of each such statement of
income and cash flows in comparative form the figures for the
corresponding period in the previous Fiscal Year, all certified
(subject to normal year-end adjustments) as to fairness of presentation
and (except for the financial statements at, and as of, March 31, 1997)
consistency with GAAP by the Borrower's chief financial officer or
chief accounting officer;
(c) as soon as available and in any event within 120 days
after the end of each fiscal year of Trigon Insurance, a duly completed
Annual Statement (Life and Accident and Health Form) for Trigon
Insurance, in the form submitted to the insurance department or other
comparable regulatory authority of the Commonwealth of Virginia;
(d) as soon as available and in any event within
60 days after the end of each of the first three
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quarters of each fiscal year of Trigon Insurance, a duly completed
Quarterly Statement (Life and Accident and Health Form) for Trigon
Insurance in the form submitted to the insurance department or other
comparable regulatory authority of the Commonwealth of
Virginia;
(e) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of
the Borrower's chief financial officer or chief accounting officer (i)
setting forth in reasonable detail the calculations required to
establish whether the Borrower was in compliance with the requirements
of Section 5.7 and Sections 5.10 through 5.15, inclusive, on the date
of such financial statements and (ii) stating whether any Default
exists on the date of such certificate and, if any Default then exists,
setting forth the details thereof and the action which the Borrower is
taking or proposes to take with respect thereto;
(f) simultaneously with the delivery of each set of financial
statements referred to in clause (a) above, a statement of the firm of
independent public accountants which reported on such statements (i)
stating whether anything has come to their attention to cause them to
believe that any Default existed on the date of such statements and
(ii) confirming the calculations set forth in the officer's certificate
delivered simultaneously therewith pursuant to clause (e) above;
(g) within five Domestic Business Days after any officer of
the Borrower obtains knowledge of any Default, if such Default is then
continuing, a certificate of the Borrower's chief financial officer or
chief accounting officer setting forth the details thereof and the
action which the Borrower is taking or proposes to take with respect
thereto;
(h) promptly after the mailing thereof to the Borrower's
shareholders generally, copies of all financial statements, reports and
proxy statements so mailed;
(i) promptly after the filing thereof, copies of all
registration statements (other than the exhibits thereto and any
registration statements on Form S-8 or its equivalent) and reports on
Forms 10-K, 10-Q and 8-K (or their equivalents) filed by the Borrower
with the SEC;
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(j) if and when any member of the ERISA Group (i) gives or is
required to give notice to the PBGC of any "reportable event" (as
defined in Section 4043 of ERISA) with respect to any Plan which might
constitute grounds for a termination of such Plan under Title IV of
ERISA, or knows that the plan administrator of any Plan has given or is
required to give notice of any such reportable event, a copy of the
notice of such reportable event given or required to be given to the
PBGC; (ii) receives notice of complete or partial withdrawal liability
under Title IV of ERISA or notice that any Multiemployer Plan is in
reorganization, is insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title IV of ERISA of
an intent to terminate, impose liability (other than for premiums under
Section 4007 of ERISA) in respect of, or appoint a trustee to
administer any Plan, a copy of such notice; (iv) applies for a waiver
of the minimum funding standard under Section 412 of the Internal
Revenue Code, a copy of such application; (v) gives notice of intent to
terminate any Plan under Section 4041(c) of ERISA, a copy of such
notice and other information filed with the PBGC; (vi) gives notice of
withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of
such notice; or (vii) fails to make any payment or contribution to any
Plan or Multiemployer Plan or makes any amendment to any Plan which has
resulted or could result in the imposition of a Lien or the posting of
a bond or other security, a certificate of the Borrower's chief
financial officer or chief accounting officer setting forth details as
to such occurrence and the action, if any, which the Borrower or
applicable member of the ERISA Group is required or proposes to take;
and
(k) from time to time such additional information regarding
the financial position or business of the Borrower and its Subsidiaries
as the Agent, at the request of any Bank, may reasonably request.
SECTION 5.2. Payment of Obligations. The Borrower will pay and
discharge, and will cause each Subsidiary to pay and discharge, at or before
maturity, all their respective material obligations and liabilities (including,
without limitation, tax liabilities and claims which if unpaid might by law give
rise to a Lien), except where the same are contested in good faith by
appropriate proceedings, and will maintain, and will cause each Subsidiary to
maintain, in accordance with GAAP, appropriate reserves for the accrual thereof.
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SECTION 5.3. Maintenance of Property; Insurance. (a) The
Borrower will keep, and will cause each Subsidiary to keep, all property useful
and necessary in its business in good working order and condition, ordinary wear
and tear excepted.
(b) The Borrower will, and will cause each Subsidiary to,
maintain (either in the Borrower's name or in such Subsidiary's own name) with
financially sound and responsible insurance companies, insurance on all their
respective properties in at least such amounts, against at least such risks and
with no greater risk retention as are usually maintained, insured against or
retained, as the case may be, in the same general area by companies of
established repute engaged in the same or a similar business. The Borrower will
furnish to the Banks, upon request from the Agent, information presented in
reasonable detail as to the insurance so carried.
SECTION 5.4. Conduct of Business and Maintenance of Existence.
The Borrower and its Subsidiaries will continue to engage in business of the
same general type as now conducted by the Borrower and its Subsidiaries, and
will preserve, renew and keep in full force and effect their respective
corporate existences and their respective rights, privileges and franchises
necessary or desirable in the normal conduct of business; provided that nothing
in this Section shall prohibit:
(i) the merger of a Subsidiary into the Borrower
if, after giving effect thereto, no Default shall have
occurred and be continuing;
(ii) the merger or consolidation of a Subsidiary with or into
a Person other than the Borrower if the corporation surviving such
consolidation or merger is a Subsidiary and, after giving effect
thereto, no Default shall have occurred and be continuing or
(iii) the termination of the corporate existence of a
Subsidiary if the Borrower in good faith determines that such
termination is in the best interest of the Borrower and is not
materially disadvantageous to the Banks.
SECTION 5.5. Compliance with Laws. The Borrower will comply,
and will cause each Subsidiary to comply with all applicable laws, ordinances,
rules, regulations and requirements of governmental authorities (including,
without limitation, Environmental Laws and ERISA and the rules and regulations
thereunder), except where the necessity of
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compliance therewith is contested in good faith by appropriate proceedings or
where noncompliance could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
SECTION 5.6. Inspection of Property, Books and Records. The
Borrower will keep, and will cause each Subsidiary to keep, proper books of
record and account in which full and correct entries shall be made of all
dealings and transactions in relation to its business and activities; and will
permit, and will cause each Subsidiary to permit, representatives of any Bank at
such Bank's expense to visit and inspect any of their respective properties, to
examine and make abstracts from any of their respective books and records and to
discuss their respective affairs, finances and accounts with their respective
officers, employees and independent public accountants, all at such reasonable
times and as often as may reasonably be requested.
SECTION 5.7. Company Action Level Ratio. The ratio of (x)
Total Adjusted Capital (as defined in the RiskBased Capital Act or in the rules
and procedures prescribed from time to time by the NAIC with respect thereto) to
(y) the Company Action Level RBC (as defined in the Risk-Based Capital Act or in
the rules and procedures prescribed from time to time by the NAIC with respect
thereto) of Trigon Insurance will at no time be less than 150%; provided that,
if the Borrower notifies the Agent that the Borrower wishes to amend this
Section 5.7 to eliminate the effect of any change in the definition of Total
Adjusted Capital or Company Action Level RBC under the Risk-Based Capital Act
(or in the rules and procedures prescribed from time to time by the NAIC with
respect thereto) on the operation of the covenant in this Section 5.7 (or if the
Agent notifies the Borrower that the Required Banks wish to amend this Section
5.7 for such purpose), then the Borrower's compliance with such covenant shall
be determined on the basis of such definitions, rules and procedures in effect
immediately before the relevant change in such definitions, rules and procedures
became effective, either until such notice is withdrawn by the Person that
delivered such notice or until such covenant is amended in a manner satisfactory
to the Borrower and the Required Banks.
SECTION 5.8. Mergers and Sales of Assets. The Borrower will
not consolidate or merge with or into any other Person; provided that the
Borrower may merge with another Person if (i) the Borrower is the corporation
surviving such merger and (ii) after giving effect to such merger, no Default
shall have occurred and be continuing. The Borrower and its Subsidiaries will
not sell, lease or
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otherwise transfer, directly or indirectly, all or any substantial part of the
assets of the Borrower and its Subsidiaries, taken as a whole, to any other
Person.
SECTION 5.9. Use of Proceeds. The proceeds of the Loans will
be used by the Borrower for general corporate purposes. None of such proceeds
will be used, directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of buying or carrying any "margin stock" within the
meaning of Regulation U.
SECTION 5.10. Negative Pledge. Neither the Borrower nor any
Subsidiary will create, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired by it, except:
(a) Liens existing on the date of this Agreement (after taking
into account the Demutualization) securing Debt outstanding on the date
of this Agreement in an aggregate principal or face amount not
exceeding $2,000,000;
(b) any Lien existing on any asset of any Person
at the time such Person becomes a Subsidiary and not
created in contemplation of such event;
(c) any Lien on any asset securing Debt incurred or assumed
for the purpose of financing all or any part of the cost of acquiring
such asset, provided that such Lien attaches to such asset concurrently
with or within 90 days after the acquisition thereof;
(d) any Lien on any asset of any Person existing at the time
such Person is merged or consolidated with or into the Borrower or a
Subsidiary and not created in contemplation of such event;
(e) any Lien existing on any asset prior to the
acquisition thereof by the Borrower or a Subsidiary and
not created in contemplation of such acquisition;
(f) any Lien arising out of the refinancing, extension,
renewal or refunding of any Debt secured by any Lien permitted by any
of the foregoing clauses of this Section, provided that such Debt is
not increased and is not secured by any additional assets;
(g) Liens arising in the ordinary course of its
business which (i) do not secure Debt or Derivatives
Obligations and (ii) do not secure any single
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obligation (or class of obligations having a common
cause) in an amount exceeding $10,000,000;
(h) Liens on cash and cash equivalents securing Derivatives
Obligations, provided that the aggregate amount of cash and cash
equivalents subject to such Liens may at no time exceed $50,000,000;
and
(i) Liens not otherwise permitted by the foregoing clauses of
this Section securing Debt in an aggregate principal or face amount not
at any time exceeding 5% of Adjusted Consolidated Tangible Net
Worth.
SECTION 5.11. Consolidated Debt to Consolidated
Total Capitalization. Consolidated Debt will at no time
exceed 40% of Consolidated Total Capitalization.
SECTION 5.12. Minimum Adjusted Consolidated Tangible Net
Worth. Adjusted Consolidated Tangible Net Worth will at no time be less than an
amount equal to the sum of (i) $600,000,000 and (ii) an amount equal to 50% of
Consolidated Net Income for each Fiscal Quarter ending after December 31, 1996
but before the date of determination, in each case, for which Consolidated Net
Income is positive (but with no deduction on account of negative Consolidated
Net Income for any Fiscal Quarter).
SECTION 5.13. Subsidiary Debt. The total Debt of all
Subsidiaries will at no time exceed $15,000,000; provided that (i) Debt owing to
the Borrower or another Subsidiary and (ii) Debt of a Regulated Entity which (x)
qualifies as capital under insurance regulations applicable to such Regulated
Entity and (y) has been funded pro rata by shareholders of such Regulated Entity
shall not be treated as Debt for purposes of this Section 5.13.
SECTION 5.14. Restricted Payments. Neither the Borrower nor
any Subsidiary will declare or make any Restricted Payment unless, after giving
effect thereto, the aggregate of all Restricted Payments does not exceed the sum
of (i) $10,000,000 plus (ii) 50% of Consolidated Net Income (or minus 100% of
consolidated net loss) of the Borrower and its Consolidated Subsidiaries for the
period from the Demutualization through the end of the then most recent Fiscal
Quarter (treated for this purpose as a single accounting period) plus (iii) an
amount (not to exceed $50,000,000) equal to 50% of the amount of Extraordinary
Dividends received by the Borrower after the date hereof and before December 31,
1997. For purposes of this Section 5.14 Extraordinary Dividends means cash
dividends paid by a
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Regulated Entity (or by a Subsidiary which is not a Regulated Entity but which
at January 1, 1997 was a Subsidiary of a Regulated Entity) to the Borrower out
of income earned by such Regulated Entity (or Subsidiary) prior to January 1,
1997.
SECTION 5.15. Investments. Neither the Borrower nor any
Consolidated Subsidiary will hold, make or acquire any Investment in any Person
other than:
(a) Investments in any Subsidiary whose principal business on
the date of making the such Investment or after giving effect to such
Investment is either (i) the same line or lines of business as the
Borrower or (ii) in the judgment of the Borrower reasonably related to
such line or lines of business;
(b) Investments in cash and marketable financial
instruments;
(c) Investments by a Regulated Entity in Admitted
Assets and, up to 15% of total investment assets of
such Regulated Entity, in Non-Admitted Assets; and
(d) any Investment not otherwise permitted by the foregoing
clauses of this Section if, immediately after such Investment is made
or acquired, the aggregate net book value of all Investments permitted
by this clause (d) does not exceed $50,000,000.
SECTION 5.16. Transactions with Affiliates. The Borrower will
not, and will not permit any Subsidiary to, directly or indirectly, engage in
any transaction with any Affiliate which could reasonably be expected to have a
Material Adverse Effect.
ARTICLE 6
DEFAULTS
SECTION 6.1. Events of Default. If one or more
of the following events ("Events of Default") shall have
occurred and be continuing:
(a) the Borrower shall fail to pay when due any principal of
any Loan, or shall fail to pay within five days of the due date thereof
any interest, fee or other amount payable hereunder;
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(b) the Borrower shall fail to observe or perform any covenant
contained in Article 5, other than those contained in Sections through
5.6, inclusive;
(c) the Borrower shall fail to observe or perform any covenant
or agreement (other than those covered by clause (a) or (b) above)
contained in this Agreement or any amendment hereof for 10 days after
the Agent gives notice thereof to the Borrower at the request of any
Bank;
(d) any representation, warranty, certification or statement
made by the Borrower in this Agreement or any amendment hereof or in
any certificate, financial statement or other document delivered
pursuant to this Agreement shall prove to have been incorrect in any
material respect when made (or deemed made);
(e) the Borrower or any Subsidiary shall fail to make one or
more payments in respect of Material Financial Obligations when due or
within any applicable grace period;
(f) any event or condition shall occur which results in the
acceleration of the maturity of any Material Debt or enables (or, with
the giving of notice or lapse of time or both, would enable) the holder
of such Debt or any Person acting on such holder's behalf to accelerate
the maturity thereof;
(g) the Borrower or any Subsidiary shall commence a voluntary
case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking
the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or
shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its debts as
they become due, or shall take any corporate action to authorize any of
the foregoing;
(h) an involuntary case or other proceeding shall be commenced
against the Borrower or any Subsidiary seeking liquidation,
reorganization or other relief with respect to it or its debts under
any bankruptcy,
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insolvency or other similar law now or hereafter in effect or seeking
the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain undismissed and
unstayed for a period of 60 days; or an order for relief shall be
entered against the Borrower or any Subsidiary under the federal
bankruptcy laws as now or hereafter in effect;
(i) any member of the ERISA Group shall fail to pay when due
an amount or amounts aggregating in excess of $10,000,000 which it
shall have become liable to pay under Title IV of ERISA; or notice of
intent to terminate a Material Plan shall be filed under Title IV of
ERISA by any member of the ERISA Group, any plan administrator or any
combination of the foregoing; or the PBGC shall institute proceedings
under Title IV of ERISA to terminate, to impose liability (other than
for premiums under Section 4007 of ERISA) in respect of, or to cause a
trustee to be appointed to administer, any Material Plan; or a
condition shall exist by reason of which the PBGC would be entitled to
obtain a decree adjudicating that any Material Plan must be terminated;
or there shall occur a complete or partial withdrawal from, or a
default, within the meaning of Section 4219(c)(5) of ERISA, with
respect to, one or more Multiemployer Plans which could cause one or
more members of the ERISA Group to incur a current payment obligation
in excess of $25,000,000;
(j) judgments or orders for the payment of money exceeding
$25,000,000 in aggregate amount shall be rendered against the Borrower
or any Subsidiary and such judgments or orders shall continue
unsatisfied and unstayed for a period of 10 days; or
(k) any person or group of persons (within the meaning of
Section 13 or 14 of the Exchange Act) shall have acquired beneficial
ownership (within the meaning of Rule 13d-3 promulgated by the SEC
under said Act) of 30% or more of the outstanding shares of common
stock of the Borrower; or, during any period of 12 consecutive calendar
months, individuals who were directors of the Borrower on the first day
of such period shall cease to constitute a majority of the Borrower's
board of directors;
then, and in every such event, the Agent shall (i) if requested by Banks having
more than 50% in aggregate amount of the Commitments, by notice to the Borrower
terminate the
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Commitments and they shall thereupon terminate, and (ii) if requested by Banks
holding more than 50% of the aggregate unpaid principal amount of the Loans, by
notice to the Borrower declare the Loans (together with accrued interest
thereon) to be, and the Loans (together with accrued interest thereon) shall
thereupon become, immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Borrower; provided that, if any Event of Default specified in clause or occurs
with respect to the Borrower, then without any notice to the Borrower or any
other act by the Agent or the Banks, the Commitments shall thereupon terminate
and the Loans (together with accrued interest thereon) shall become immediately
due and payable without presentment, demand, protest or other notice of any
kind, all of which are hereby waived by the Borrower.
Notwithstanding anything contained in the foregoing paragraph,
if at any time within 60 days after the Notes have been declared due pursuant to
the preceding paragraph, the Borrower shall pay all arrears of interest and all
payments on account of principal which shall have become due otherwise than by
acceleration (with interest on overdue principal and interest at the rate
specified in this Agreement) and all Defaults (other than non-payment of the
principal of and accrued interest on the Loans due and payable solely by virtue
of acceleration) shall be remedied or waived pursuant to Section 9.5, then the
Banks holding at least 66-2/3% of the aggregate amount of Commitments by notice
to the Borrower may at their option rescind and annul the acceleration and its
consequences; but such action shall not affect any subsequent Default or impair
any right consequent thereon. The provisions of this paragraph are intended
merely to bind the Banks to a decision which may be made at the election of the
aforesaid percentage of the Banks and are not intended to benefit the Borrower
and do not grant the Borrower the right to require the Banks to rescind or annul
any acceleration hereunder, even if the conditions set forth herein are met.
SECTION 6.2. Notice of Default. The Agent shall give notice to
the Borrower under Section promptly upon being requested to do so by any Bank
and shall thereupon notify all the Banks thereof.
ARTICLE 7
THE AGENT
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SECTION 7.1. Appointment and Authorization. Each Bank
irrevocably appoints and authorizes the Agent to take such action as agent on
its behalf and to exercise such powers under this Agreement as are delegated to
the Agent by the terms hereof or thereof, together with all such powers as are
reasonably incidental thereto.
SECTION 7.2. Agent and Affiliates. Morgan Guaranty Trust
Company of New York shall have the same rights and powers under this Agreement
as any other Bank and may exercise or refrain from exercising the same as though
it were not the Agent, and Morgan Guaranty Trust Company of New York and its
affiliates may accept deposits from, lend money to and generally engage in any
kind of business with the Borrower or any Subsidiary or affiliate of the
Borrower as if it were not the Agent.
SECTION 7.3. Action by Agent. The obligations of the Agent
hereunder are only those expressly set forth herein. Without limiting the
generality of the foregoing, the Agent shall not be required to take any action
with respect to any Default, except as expressly provided in Article 6.
SECTION 7.4. Consultation with Experts. The Agent may consult
with legal counsel (who may be counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
SECTION 7.5. Liability of Agent. Neither the Agent nor any of
its affiliates or any of their respective directors, officers, agents or
employees shall be liable for any action taken or not taken by it in connection
herewith (i) with the consent or at the request of the Required Banks (or such
different number of Banks as any provision hereof expressly requires for such
consent or request) or (ii) in the absence of its own gross negligence or
willful misconduct. Neither the Agent nor any of its affiliates nor any of their
respective directors, officers, agents or employees shall be responsible for or
have any duty to ascertain, inquire into or verify (i) any statement, warranty
or representation made in connection with this Agreement or any borrowing
hereunder; (ii) the performance or observance of any of the covenants or
agreements of the Borrower; (iii) the satisfaction of any condition specified in
Article 3, except receipt of items required to be delivered to the Agent; or
(iv) the validity, effectiveness or genuineness of this Agreement, the Notes or
any other
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instrument or writing furnished in connection herewith. The Agent shall not
incur any liability by acting in reliance upon any notice, consent, certificate,
statement or other writing (which may be a bank wire, telex, facsimile or
similar writing) believed by it to be genuine or to be signed by the proper
party or parties. Without limiting the generality of the foregoing, the use of
the term "agent" in this Agreement with reference to the Agent is not intended
to connote any fiduciary or other implied (or express) obligations arising under
agency doctrine of any applicable law. Instead, such term is used merely as a
matter of market custom and is intended to create or reflect only an
administrative relationship between independent contracting parties.
SECTION 7.6. Indemnification. The Banks shall, ratably in
proportion to their Commitments, indemnify the Agent, its affiliates and their
respective directors, officers, agents and employees (to the extent not
reimbursed by the Borrower) against any cost, expense (including counsel fees
and disbursements), claim, demand, action, loss or liability (except such as
result from such indemnitees' gross negligence or willful misconduct) that such
indemnitees may suffer or incur in connection with this Agreement or any action
taken or omitted by such indemnitees hereunder.
SECTION 7.7. Credit Decision. Each Bank acknowledges that it
has, independently and without reliance on the Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance on the Agent or
any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under this Agreement.
SECTION 7.8. Successor Agent. The Agent may resign at any time
by giving notice thereof to the Banks and the Borrower. Upon any such
resignation, the Required Banks shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Required Banks,
and shall have accepted such appointment, within 30 days after the retiring
Agent gives notice of resignation, then the retiring Agent may, on behalf of the
Banks, appoint a successor Agent, which shall be a commercial bank organized or
licensed under the laws of the United States or of any State thereof and having
a combined capital and surplus of at least $100,000,000. Upon the acceptance of
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its appointment as Agent hereunder by a successor Agent, such successor Agent
shall thereupon succeed to and become vested with all the rights and duties of
the retiring Agent, and the retiring Agent shall be discharged from its duties
and obligations hereunder. After any retiring Agent resigns as Agent hereunder,
the provisions of this Article shall inure to its benefit as to actions taken or
omitted to be taken by it while it was Agent.
SECTION 7.9. Agent's Fee. The Borrower shall pay
to the Agent for its own account fees in the amounts and at
the times previously agreed upon by the Borrower and the
Agent.
ARTICLE 8
CHANGE IN CIRCUMSTANCES
SECTION 8.1. Basis for Determining Interest Rate Inadequate or
Unfair. If on or before the first day of any Interest Period for any CD Loan,
Euro-Dollar Loan or Money Market LIBOR Loan:
(a) the Agent is advised by the Reference Banks that deposits
in dollars (in the applicable amounts) are not being offered to the
Reference Banks in the relevant market for such Interest Period, or
(b) in the case of CD Loans or Euro-Dollar Loans, Banks
holding 50% or more of the aggregate principal amount of the affected
Loans advise the Agent that the Adjusted CD Rate or the London
Interbank Offered Rate, as the case may be, as determined by the Agent
will not adequately and fairly reflect the cost to such Banks of
funding their CD Loans or Euro-Dollar Loans, as the case may be, for
such Interest Period,
the Agent shall forthwith give notice thereof to the Borrower and the Banks,
whereupon until the Agent notifies the Borrower that the circumstances giving
rise to such suspension no longer exist, (i) the obligations of the Banks to
make CD Loans or Euro-Dollar Loans, as the case may be, or to continue or
convert outstanding Loans as or into CD Loans or Euro-Dollar Loans, as the case
may be, shall be suspended and (ii) each outstanding CD Loan or Euro-Dollar
Loan, as the case may be, shall be converted into a Base Rate Loan on the last
day of the then current Interest Period applicable thereto. Unless the Borrower
notifies the Agent at least two Domestic Business Days before the date of
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any affected Borrowing for which a Notice of Borrowing has previously been given
that it elects not to borrow on such date, (i) if such affected Borrowing is a
CD Borrowing or Euro-Dollar Borrowing, such Borrowing shall instead be made as a
Base Rate Borrowing and (ii) if such affected Borrowing is a Money Market LIBOR
Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear
interest for each day from and including the first day to but excluding the last
day of the Interest Period applicable thereto at the Base Rate for such day.
SECTION 8.2. Illegality. If, on or after the date hereof, the
adoption of any applicable law, rule or regulation, or any change in any
applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Bank (or its Euro-Dollar Lending Office) with any request or directive
(whether or not having the force of law) of any such authority, central bank or
comparable agency, shall make it unlawful or impossible for any Bank (or its
Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and
such Bank shall so notify the Agent, the Agent shall forthwith give notice
thereof to the other Banks and the Borrower, whereupon until such Bank notifies
the Borrower and the Agent that the circumstances giving rise to such suspension
no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to
continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be
suspended. Before giving any notice to the Agent pursuant to this Section, such
Bank shall designate a different Euro-Dollar Lending Office if such designation
will avoid the need for giving such notice and will not, in the judgment of such
Bank, be otherwise disadvantageous to such Bank. If such notice is given, each
Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate
Loan either (a) on the last day of the then current Interest Period applicable
to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund
such Loan as a Euro-Dollar Loan to such day or (b) immediately if such Bank
shall determine that it may not lawfully continue to maintain and fund such Loan
as a Euro-Dollar Loan to such day.
SECTION 8.3. Increased Cost and Reduced Return. (a) If on or
after (x) the date hereof, in the case of any Committed Loan or any obligation
to make Committed Loans or (y) the date of the related Money Market Quote, in
the case of any Money Market Loan, the adoption of any applicable law, rule or
regulation, or any change in any applicable
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law, rule or regulation, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by any Bank (or
its Applicable Lending Office) with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency, shall impose, modify or deem applicable any reserve (including, without
limitation, any such requirement imposed by the Board of Governors of the
Federal Reserve System, but excluding (i) with respect to any CD Loan any such
requirement included in an applicable Domestic Reserve Percentage and (ii) with
respect to any Euro-Dollar Loan any such requirement with respect to which such
Bank is entitled to compensation during the relevant Interest Period under
Section 2.15), special deposit, insurance assessment (excluding, with respect to
any CD Loan, any such requirement reflected in an applicable Assessment Rate) or
similar requirement against assets of, deposits with or for the account of, or
credit extended by, any Bank (or its Applicable Lending Office) or shall impose
on any Bank (or its Applicable Lending Office) or on the United States market
for certificates of deposit or the London interbank market any other condition
affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate
Loans and the result of any of the foregoing is to increase the cost to such
Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate
Loan, or to reduce the amount of any sum received or receivable by such Bank (or
its Applicable Lending Office) under this Agreement or under its Note with
respect thereto, by an amount deemed by such Bank to be material, then, within
15 days after demand by such Bank (with a copy to the Agent), the Borrower shall
pay to such Bank such additional amount or amounts as will compensate such Bank
for such increased cost or reduction.
(b) If any Bank shall have determined that, after the date
hereof, the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change in any such law, rule or regulation, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on capital of such Bank (or its Parent) as a consequence of such Bank's
obligations hereunder to a level below that which such Bank (or its Parent)
could have achieved but for such adoption, change, request or directive (taking
into consideration its policies
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with respect to capital adequacy) by an amount deemed by such Bank to be
material, then from time to time, within 15 days after demand by such Bank (with
a copy to the Agent), the Borrower shall pay to such Bank such additional amount
or amounts as will compensate such Bank (or its Parent) for such reduction.
(c) Each Bank will promptly notify the Borrower and the Agent
of any event of which it has knowledge, occurring after the date hereof, which
will entitle such Bank to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate
of any Bank claiming compensation under this Section and setting forth the
additional amount or amounts to be paid to it hereunder shall be conclusive in
the absence of manifest error. In determining such amount, such Bank may use any
reasonable averaging and attribution methods.
SECTION 8.4. Taxes. (a) For the purposes of this
Section, the following terms have the following meanings:
"Taxes" means any and all present or future taxes, duties,
levies, imposts, deductions, charges or withholdings of any nature on or with
respect to any payment by the Borrower pursuant to this Agreement or under any
Note, and all liabilities with respect thereto, excluding (i) in the case of
each Bank and the Agent, taxes imposed on its net income, and franchise or
similar taxes imposed on it, by a jurisdiction under the laws of which such Bank
or the Agent (as the case may be) is organized or in which its principal
executive office is located or, in the case of each Bank, in which its
Applicable Lending Office is located and (ii) in the case of each Bank, any
United States withholding tax imposed on such payment at any rate up to (but not
exceeding) the rate at which United States withholding tax would have been
imposed on such a payment to such Bank under the laws and treaties in effect
when such Bank first became a party to this Agreement.
"Other Taxes" means any present or future stamp or documentary
taxes and any other excise or property taxes, or similar charges or levies,
which arise from any payment made pursuant to this Agreement or under any Note
or from the execution, delivery, registration or enforcement of, or otherwise
with respect to, this Agreement or any Note.
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(b) All payments by the Borrower to or for the account of any
Bank or the Agent hereunder or under any Note shall be made without deduction or
withholding for any Taxes or Other Taxes; provided that, if the Borrower shall
be required by law to deduct any Taxes or Other Taxes from any such payment, (i)
the sum payable shall be increased as necessary so that after making all
required deductions and withholdings (including deductions and withholdings
applicable to additional sums payable under this Section) such Bank or the Agent
(as the case may be) receives an amount equal to the sum it would have received
had no such deductions or withholdings been made, (ii) the Borrower shall make
such deductions or withholdings, (iii) the Borrower shall pay the full amount
deducted or withheld to the relevant taxation authority or other authority in
accordance with applicable law and (iv) the Borrower shall promptly furnish to
the Agent, at its address specified in Section 9.1, the original or a certified
copy of a receipt evidencing payment thereof.
(c) The Borrower agrees to indemnify each Bank and the Agent
for the full amount of Taxes and Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable
under this Section), whether or not correctly or legally imposed, paid by such
Bank or the Agent (as the case may be) and any liability (including penalties,
interest and expenses) arising therefrom or with respect thereto. This
indemnification shall be paid within 15 days after such Bank or the Agent (as
the case may be) makes demand therefor.
(d) Each Bank organized under the laws of a jurisdiction
outside the United States, as of the date of this Agreement in the case of each
Bank listed on the signature pages hereof and as of the time it becomes a Bank
in the case of each other Bank, and from time to time thereafter if requested in
writing by the Borrower (but only so long as such Bank remains lawfully able to
do so), shall provide each of the Borrower and the Agent with Internal Revenue
Service form 1001 or 4224 in duplicate, as appropriate, or any successor form
prescribed by the Internal Revenue Service, certifying that such Bank is
entitled to benefits under an income tax treaty to which the United States is a
party which exempts the Bank from United States withholding tax or reduces the
rate of withholding tax on payments of interest for the account of such Bank or
certifying that the income receivable pursuant to this Agreement is effectively
connected with the conduct of a trade or business in the United States.
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(e) For any period with respect to which a Bank has failed to
provide the Borrower or the Agent with the appropriate form referred to in
Section 8.4(d) (unless such failure is due to a change in treaty, law or
regulation occurring after the date on which such form originally was required
to be provided), such Bank shall not be entitled to indemnification under
Section 8.4(b) or (c) with respect to Taxes imposed by the United States;
provided that if a Bank, that is otherwise exempt from or subject to a reduced
rate of withholding tax, becomes subject to Taxes because of its failure to
deliver a form required hereunder, the Borrower shall take such steps as such
Bank shall reasonably request to assist such Bank to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to
or for the account of any Bank pursuant to this Section as a result of a change
in law or treaty occurring after such Bank first became a party to this
Agreement, then such Bank will, at the Borrower's request, change the
jurisdiction of its Applicable Lending Office if, in the judgment of such Bank,
such change (i) will eliminate or reduce any such additional payment which may
thereafter accrue and (ii) is not otherwise disadvantageous to such Bank.
SECTION 8.5. Base Rate Loans Substituted for Affected Fixed
Rate Loans. If (i) the obligation of any Bank to make, or to continue or convert
outstanding Loans as or to, Euro-Dollar Loans has been suspended pursuant to
Section or (ii) any Bank has demanded compensation under Section or with respect
to its CD Loans or EuroDollar Loans, and in any such case the Borrower shall, by
at least five Euro-Dollar Business Days' prior notice to such Bank through the
Agent, have elected that the provisions of this Section shall apply to such
Bank, then, unless and until such Bank notifies the Borrower that the
circumstances giving rise to such suspension or demand for compensation no
longer exist, all Loans which would otherwise be made by such Bank as (or
continued as or converted to) CD Loans or Euro-Dollar Loans, as the case may be,
shall instead be Base Rate Loans (on which interest and principal shall be
payable contemporaneously with the related CD Loans or Euro-Dollar Loans of the
other Banks). If such Bank notifies the Borrower that the circumstances giving
rise to such suspension or demand for compensation no longer exist, the
principal amount of each such Base Rate Loan shall be converted into a CD Loan
or Euro-Dollar Loan, as the case may be, on the first day of the next succeeding
Interest Period applicable to the related CD Loans or Euro-Dollar Loans of the
other Banks.
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SECTION 8.6. Substitution of Bank. If (i) the obligation of
any Bank to make or maintain Euro-Dollar Loans has been suspended pursuant to
Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4,
the Borrower shall have the right, if no Default then exists, to replace such
Bank (the "Replaced Bank") with one or more other banks (collectively, the
"Replacement Bank") reasonably acceptable to the Agent, provided that (i) at the
time of any replacement pursuant to this Section 8.6, the Replacement Bank shall
enter into one or more Assignment and Assumption Agreements, substantially in
the form of Exhibit G hereto, pursuant to which the Replacement Bank shall
acquire the aggregate Commitment and outstanding Loans of the Replaced Bank and,
in connection therewith, shall pay to the Replaced Bank in respect thereof an
amount equal to the sum of (A) an amount equal to the principal of, and all
accrued interest on, all outstanding Loans of the Replaced Bank, (B) an amount
equal to all accrued, but theretofore unpaid, fees under Section 2.8 owing to
the Replaced Bank and (C) an amount equal to the amount which would be payable
by the Borrower to the Replaced Bank pursuant to Section 2.12 if the Borrower
prepaid at the time of such replacement all of the Loans of such Replaced Bank
outstanding at such time and (ii) all obligations of the Borrower owing to the
Replaced Bank (other than those specifically described in clause (i) above in
respect of which the assignment purchase price has been, or is concurrently
being, paid) shall be paid in full to such Replaced Bank concurrently with such
replacement. Upon the execution of the respective Assignment and Assumption
Agreements, the payment of amounts referred to in clauses (i) and (ii) above
and, if so requested by the Replacement Bank, delivery to the Replacement Bank
of the appropriate Note or Notes executed by the Borrower, the Replacement Bank
shall become a Bank hereunder and the Replaced Bank shall cease to constitute a
Bank hereunder. The provisions of this Agreement shall continue to govern the
rights and obligations of a Replaced Bank with respect to any Loans made or any
other actions taken by such Bank while it was a Bank.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1. Notices. All notices, requests and other
communications to any party hereunder shall be in writing (including bank wire,
telex, facsimile or similar writing) and shall be given to such party: (a) in
the case of the Borrower or the Agent, at its address, facsimile
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number or telex number set forth on the signature pages hereof, (b) in the case
of any Bank, at its address, facsimile number or telex number set forth in its
Administrative Questionnaire or (c) in the case of any party, at such other
address, facsimile number or telex number as such party may hereafter specify
for the purpose by notice to the Agent and the Borrower. Each such notice,
request or other communication shall be effective (i) if given by telex, when
transmitted to the telex number referred to in this Section and the appropriate
answerback is received, (ii) if given by facsimile, when transmitted to the
facsimile number referred to in this Section and confirmation of receipt is
received, (iii) if given by mail, 72 hours after such communication is deposited
in the mails with first class postage prepaid, addressed as aforesaid or (iv) if
given by any other means, when delivered at the address referred to in this
Section; provided that notices to the Agent under Article 2 or Article 8 shall
not be effective until received.
SECTION 9.2. No Waivers. No failure or delay by the Agent or
any Bank in exercising any right, power or privilege hereunder or under any Note
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.
SECTION 9.3. Expenses; Indemnification. (a) The Borrower
shall pay (i) all out-of-pocket expenses of the Agent, including fees and
disbursements of special counsel for the Agent, in connection with the
preparation and administration of this Agreement, any waiver or consent
hereunder or any amendment hereof or any Default or alleged Default hereunder
and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by
the Agent and each Bank, including (without duplication) the fees and
disbursements of outside counsel and the allocated cost of inside counsel, in
connection with such Event of Default and collection, bankruptcy, insolvency and
other enforcement proceedings resulting therefrom.
(b) The Borrower agrees to indemnify the Agent and each Bank,
their respective affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
harmless from and against any and all liabilities, losses, damages, costs and
expenses of any kind, including, without limitation, the reasonable fees and
disbursements of counsel, which may be incurred by such Indemnitee in
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connection with any investigative, administrative or judicial proceeding
(whether or not such Indemnitee shall be designated a party thereto) brought or
threatened relating to or arising out of this Agreement or any actual or
proposed use of proceeds of Loans hereunder; provided that no Indemnitee shall
have the right to be indemnified hereunder for such Indemnitee's own gross
negligence or willful misconduct as determined by a court of competent
jurisdiction.
SECTION 9.4. Sharing of Set-Offs. Each Bank agrees that if it
shall, by exercising any right of set-off or counterclaim or otherwise, receive
payment of a proportion of the aggregate amount of principal and interest then
due with respect to the Loans held by it which is greater than the proportion
received by any other Bank in respect of the aggregate amount of principal and
interest then due with respect to the Loans held by such other Bank, the Bank
receiving such proportionately greater payment shall purchase such
participations in the Loans held by the other Banks, and such other adjustments
shall be made, as may be required so that all such payments of principal and
interest with respect to the Loans held by the Banks shall be shared by the
Banks pro rata; provided that nothing in this Section shall impair the right of
any Bank to exercise any right of set-off or counterclaim it may have and to
apply the amount subject to such exercise to the payment of indebtedness of the
Borrower other than its indebtedness hereunder. The Borrower agrees, to the
fullest extent it may effectively do so under applicable law, that any holder of
a participation in a Loan, whether or not acquired pursuant to the foregoing
arrangements, may exercise rights of set-off or counterclaim and other rights
with respect to such participation as fully as if such holder of a participation
were a direct creditor of the Borrower in the amount of such participation.
SECTION 9.5. Amendments and Waivers. Any provision of this
Agreement or the Notes may be amended or waived if, but only if, such amendment
or waiver is in writing and is signed by the Borrower and the Required Banks
(and, if the rights or duties of the Agent are affected thereby, by the Agent);
provided that no such amendment or waiver shall, unless signed by all the Banks,
(i) except as contemplated in Section 2.16, increase or decrease the Commitment
of any Bank (except for a ratable decrease in the Commitments of all Banks) or
subject any Bank to any additional obligation, (ii) reduce the principal of or
rate of interest on any Loan or any fees hereunder, (iii) postpone the date
fixed for any payment of principal of or interest on any Loan or any fees
hereunder or for the
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termination of any Commitment or (iv) change the percentage of the Commitments
or of the aggregate unpaid principal amount of the Loans, or the number of
Banks, which shall be required for the Banks or any of them to take any action
under this Section or any other provision of this Agreement.
SECTION 9.6. Successors and Assigns. (a) The provisions of
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, except that the Borrower may
not assign or otherwise transfer any of its rights under this Agreement without
the prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or
other institutions (each a "Participant") participating interests in its
Commitment or any or all of its Loans. If a Bank grants any such participating
interest to a Participant, whether or not upon notice to the Borrower and the
Agent, such Bank shall remain responsible for the performance of its obligations
hereunder, and the Borrower and the Agent shall continue to deal solely and
directly with such Bank in connection with such Bank's rights and obligations
under this Agreement. Any agreement pursuant to which any Bank may grant such a
participating interest shall provide that such Bank shall retain the sole right
and responsibility to enforce the Borrower's obligations hereunder, including
(without limitation) the right to approve any amendment, modification or waiver
of any provision of this Agreement; provided that such participation agreement
may provide that such Bank will not agree to any modification, amendment or
waiver of this Agreement described in clause (i), (ii) or (iii) of Section
9.5 without the consent of the Participant. The Borrower agrees that each
Participant shall, to the extent provided in its participation agreement, be
entitled to the benefits of Section 2.15 and Article 8 with respect to its
participating interest. An assignment or other transfer which is not permitted
by subsection (c) or (d) below shall be given effect for purposes of this
Agreement only to the extent of a participating interest granted in accordance
with this subsection.
(c) Any Bank may at any time assign to one or more banks or
other institutions (each an "Assignee") all, or a proportionate part of all, of
its rights and obligations under this Agreement and the Notes, and such Assignee
shall assume such rights and obligations, pursuant to an Assignment and
Assumption Agreement substantially in the form of Exhibit G hereto signed by
such Assignee and such transferor Bank, with (and subject to) the subscribed
consent of the Borrower, which shall not be unreasonably
61
<PAGE>
withheld, and the Agent; provided that if an Assignee is an affiliate of such
transferor Bank or was a Bank immediately before such assignment, no such
consent shall be required; and provided further that such assignment may, but
need not, include rights of the transferor Bank in respect of outstanding Money
Market Loans. When such instrument has been signed and delivered by the parties
thereto and such Assignee has paid to such transferor Bank the purchase price
agreed between such transferor Bank and such Assignee, such Assignee shall be a
Bank party to this Agreement and shall have all the rights and obligations of a
Bank with a Commitment as set forth in such instrument of assumption, and the
transferor Bank shall be released from its obligations hereunder to a
corresponding extent, and no further consent or action by any party shall be
required. Upon the consummation of any assignment pursuant to this subsection,
the transferor Bank, the Agent and the Borrower shall make appropriate
arrangements so that, if required, a new Note is issued to the Assignee. In
connection with any such assignment, the transferor Bank shall pay to the Agent
an administrative fee for processing such assignment in the amount of $2,500. If
the Assignee is not incorporated under the laws of the United States or a State
thereof, it shall deliver to the Borrower and the Agent certification as to
exemption from deduction or withholding of any United States federal income
taxes in accordance with Section 8.4.
(d) Any Bank may at any time assign all or any portion of its
rights under this Agreement and its Note to a Federal Reserve Bank. No such
assignment shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's
rights shall be entitled to receive any greater payment under Section 8.3 or 8.4
than such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent or by reason of the provisions of Section 8.2, 8.3, or 8.4 requiring
such Bank to designate a different Applicable Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
SECTION 9.7. No Reliance on Margin Stock. Each of the Banks
represents to the Agent and each of the other Banks that it in good faith is not
relying upon any "margin stock" (as defined in Regulation U) as collateral in
the extension or maintenance of the credit provided for in this Agreement.
62
<PAGE>
SECTION 9.8. Governing Law; Submission to Jurisdiction. This
Agreement and each Note shall be governed by and construed in accordance with
the laws of the State of New York. The Borrower hereby submits to the
nonexclusive jurisdiction of the United States District Court for the Southern
District of New York and of any New York State court sitting in New York City
for purposes of all legal proceedings arising out of or relating to this
Agreement or the transactions contemplated hereby. The Borrower irrevocably
waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court has
been brought in an inconvenient forum.
SECTION 9.9. Counterparts; Integration; Effectiveness. This
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Agreement constitutes the entire agreement and
understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Agreement shall become effective when the Agent has received from
each of the parties hereto a counterpart hereof signed by such party or
facsimile or other written confirmation satisfactory to the Agent confirming
that such party has signed a counterpart hereof.
SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE
BORROWER, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
63
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
TRIGON HEALTHCARE, INC.
By____________________
Name:
Title:
Address:
Facsimile:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By____________________
Name:
Title:
Address: 60 Wall Street
New York, NY 10260
Facsimile:
[BANK SIGNATURES PAGES]
64
<PAGE>
COMMITMENT SCHEDULE
Bank Commitment
Morgan Guaranty Trust Company of New York $45,000,000
The Bank of New York $33,000,000
The First National Bank of Chicago $33,000,000
The Fuji Bank, Limited. $33,000,000
Wachovia Bank of North Carolina, N.A. $33,000,000
The Asahi Bank, Ltd. $22,600,000
Banque Nationale de Paris $22,600,000
Central Fidelity National Bank $22,600,000
Crestar Bank $22,600,000
Signet Bank $22,600,000
The Sanwa Bank, Limited $10,000,000
--------------
Total $300,000,000
65
<PAGE>
PRICING SCHEDULE
Each of the "Facility Fee Rate", "Euro-Dollar Margin" and
"CD Margin" means, for any day, the rate set forth below in the row opposite
such term and in the column corresponding to the Pricing Level that applies on
such day:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Pricing Level Level I Level II Level III Level IV
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Facility Fee .075% .10% .125% .175%
Rate
- -----------------------------------------------------------------------------------------------------------------
Euro-Dollar .20% .20% .25% .375%
Margin
- -----------------------------------------------------------------------------------------------------------------
CD Margin .325% .325% .375% .50%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
For purposes of this Schedule, the following terms have the
following meanings:
"Applicable Leverage Ratio" for purposes of determining what
Pricing Level exists at any date means (a) if at least three Domestic Business
Days prior to such date the Borrower has delivered all financial statements and
certificates required to be delivered on or before such date pursuant to
subsections (a), (b) and (e) of Section 5.1, the ratio of Consolidated Debt to
Consolidated Total Capitalization as of the last day of the period covered by
such financial statements and (b) in all other cases, a ratio greater than 0.35;
provided that Level I Pricing shall apply on any date after the Effective Date
and before the initial delivery by the Borrower of all financial statements and
certificates required to be delivered pursuant to subsections (a), (b) and (e)
of Section 5.1 or the date such financial statements are first required to be
delivered.
"Level I Pricing" applies at any date if the Applicable
Leverage Ratio is less than or equal to 0.10.
"Level II Pricing" applies at any date if the Applicable
Leverage Ratio is greater than 0.10 and less than or equal to 0.25.
"Level III Pricing" applies at any date if the Applicable
Leverage Ratio is greater than 0.25 and less than or equal to 0.35.
"Level IV Pricing" applies at any date if no other Pricing
Level applies for such date.
66
<PAGE>
67
<PAGE>
EXHIBIT A - Note
Note
New York, New York
February 12, 1997
For value received, Trigon Healthcare, Inc., a Virginia
corporation (the "Borrower"), promises to pay to the order of
______________________ (the "Bank"), for the account of its Applicable Lending
Office, the unpaid principal amount of each Loan made by the Bank to the
Borrower pursuant to the Credit Agreement referred to below on the maturity date
provided for in the Credit Agreement. The Borrower promises to pay interest on
the unpaid principal amount of each such Loan on the dates and at the rate or
rates provided for in the Credit Agreement. All such payments of principal and
interest shall be made in lawful money of the United States in Federal or other
immediately available funds at the office of Morgan Guaranty Trust Company of
New York, 60 Wall Street, New York, New York.
All Loans made by the Bank, the respective types thereof and
all repayments of the principal thereof shall be recorded by the Bank and, if
the Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such Loan then outstanding may be endorsed by the Bank on the schedule attached
hereto, or on a continuation of such schedule attached to and made a part
hereof; provided that the failure of the Bank to make any such recordation or
endorsement shall not affect the Borrower's obligations hereunder or under the
Credit Agreement.
This note is one of the Notes referred to in the Credit
Agreement dated as of February 12, 1997 among Trigon Healthcare, Inc., the Banks
party thereto and Morgan Guaranty Trust Company of New York, as Agent (as the
same
<PAGE>
may be amended from time to time, the "Credit Agreement"). Terms defined in the
Credit Agreement are used herein with the same meanings. Reference is made to
the Credit Agreement for provisions for the prepayment hereof and the
acceleration of the maturity hereof.
TRIGON HEALTHCARE, INC.
By ____________________
Name:
Title:
2
<PAGE>
Loans and Payments of Principal
- --------------------------------------------------------------------------
Amount Type Amount of
of of Principal Notation
Date Loan Loan Repaid Made By
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
3
<PAGE>
EXHIBIT B - Money Market Quote Request
Form of Money Market Quote Request
[Date]
To: Morgan Guaranty Trust Company of New York
(the "Agent")
From: Trigon Healthcare, Inc. (the "Borrower")
Re: Credit Agreement (the "Credit Agreement") dated as
of February 12, 1997 among the Borrower, the Banks
party thereto and the Agent
We hereby give notice pursuant to Section 2.3 of the Credit
Agreement that we request Money Market Quotes for the following proposed Money
Market Borrowing(s):
Date of Borrowing: __________________
Principal Amount1 Interest Period2
$
Such Money Market Quotes should offer a Money Market
[Margin] [Absolute Rate]. [The applicable base rate is the London
Interbank Offered Rate.]
Terms used herein have the meanings assigned to them in the
Credit Agreement.
- --------
1 Amount must be $10,000,000 or a larger multiple of $1,000,000. 2 Not less than
one month (LIBOR Auction) or not less than 7 days (Absolute Rate Auction),
subject to the provisions of the definition of Interest Period.
<PAGE>
TRIGON HEALTHCARE, INC.
By________________________
Name:
Title:
2
<PAGE>
EXHIBIT C - Invitation for Money Market Quotes
Form of Invitation for Money Market Quotes
To: [Name of Bank]
Re: Invitation for Money Market Quotes to Trigon
Healthcare, Inc. (the "Borrower")
Pursuant to Section 2.3 of the Credit Agreement dated as of
February 12, 1997 among the Borrower, the Banks party thereto and the
undersigned, as Agent, we are pleased on behalf of the Borrower to invite you to
submit Money Market Quotes to the Borrower for the following proposed Money
Market Borrowing(s):
Date of Borrowing: __________________
Principal Amount Interest Period
$
Such Money Market Quotes should offer a Money Market
[Margin] [Absolute Rate]. [The applicable base rate is the
London Interbank Offered Rate.]
Please respond to this invitation by no later than [2:00 P.M.]
[9:30 A.M.] (New York City time) on [date].
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By______________________
Authorized Officer
<PAGE>
EXHIBIT D - Money Market Quote
Form of Money Market Quote
To: Morgan Guaranty Trust Company of New York, as Agent
Re: Money Market Quote to Trigon Healthcare, Inc. (the
"Borrower")
In response to your invitation on behalf of the Borrower dated
_____________, 19__, we hereby make the following Money Market Quote on the
following terms:
1. Quoting Bank: ________________________________
2. Person to contact at Quoting Bank:
-----------------------------
3. Date of Borrowing: ____________________*
4. We hereby offer to make Money Market Loan(s) in the
following principal amounts, for the following
Interest Periods and at the following rates:
Principal Interest Money Market
Amount** Period*** [Margin****] [Absolute Rate*****]
$
$
[Provided, that the aggregate principal amount of Money Market Loans for
which the above offers may be accepted shall not exceed $____________.]**
We understand and agree that the offer(s) set forth
above, subject to the satisfaction of the applicable
- ----------
* As specified in the related Invitation.
** Principal amount bid for each Interest Period may not exceed principal amount
requested. Specify aggregate limitation if the sum of the individual offers
exceeds the amount the Bank is willing to lend. Each bid must be made for
$5,000,000 or a larger multiple of $1,000,000.
<PAGE>
conditions set forth in the Credit Agreement dated as of February 12, 1997 among
the Borrower, the Banks party thereto and yourselves, as Agent, irrevocably
obligates us to make the Money Market Loan(s) for which any offer(s) are
accepted, in whole or in part.
Very truly yours,
[NAME OF BANK]
Dated:_______________ By:__________________________
Authorized Officer
- ----------
*** Not less than one month or not less than 7 days, as specified in the related
Invitation. No more than five bids are permitted for each Interest Period.
**** Margin over or under the London Interbank Offered Rate determined for the
applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%)
and specify whether "PLUS" or "MINUS".
***** Specify rate of interest per annum (to the nearest
1/10,000 of 1%).
2
<PAGE>
EXHIBIT E - Opinion of Counsel for the Borrower
Opinion of
McGuire, Woods, Battle & Boothe, L.L.P.
[Dated the Closing Date]
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have acted as counsel for Trigon Healthcare, Inc. (the
"Borrower") in connection with the Credit Agreement dated as of February 12,
1997 (the "Credit Agreement") among the Borrower, the Banks party thereto and
Morgan Guaranty Trust Company of New York, as Agent, and in connection with the
other matters relating to the Demutualization in which Virginia BCBS (as defined
in the Plan of Demutualization) has become a wholly owned Subsidiary of the
Borrower. This opinion is being rendered to you pursuant to Section 3.1(b) of
the Credit Agreement. Unless otherwise defined herein, terms defined in the
Credit Agreement are used herein as therein defined.
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of such documents, corporate records,
certificates of public officials and other instruments and have conducted such
other investigations of fact and law as we have deemed necessary or advisable
for purposes of this opinion.
Upon the basis of the foregoing, we are of the opinion that:
1. The Borrower is a corporation duly incorporated
and validly existing under the laws of the Commonwealth of
Virginia and has all corporate powers and all material
governmental licenses, authorizations, consents and
<PAGE>
approvals required to carry on its business as now
conducted.
2. The execution, delivery and performance by the Borrower of the
Credit Agreement and the Notes have been duly authorized by all necessary
corporate action, require no action by or in respect of, or filing with, any
governmental body, agency or official (other than those which have been taken or
made) and do not contravene, or constitute a default under any provision of
applicable law or regulation or of the articles of incorporation or by-laws of
the Borrower, or, to our knowledge after due inquiry, of any agreement,
judgment, injunction, order, decree or other instrument binding upon the
Borrower or result in the creation or imposition of any Lien on any revenues or
assets of the Borrower.
3. The Credit Agreement constitutes a valid and binding agreement
of the Borrower and each Note issued thereunder constitutes a valid and binding
obligation of the Borrower, in each case enforceable in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
receivership, conservatorship, reorganization, moratorium or similar laws
affecting the enforceability of creditors' rights generally and by equitable
principles of general applicability (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
4. Except as disclosed in the Borrower's Registration Statement,
to the best of our knowledge, there is no action, suit or proceeding pending or
threatened against or affecting the Borrower or any Subsidiary before any court
or arbitrator or any governmental body, agency or official, in which there is a
reasonable possibility of an adverse decision which could materially adversely
affect the business, consolidated financial position or consolidated results of
operations of the Borrower and its Consolidated Subsidiaries, considered as a
whole, or which in any manner draws into question the validity of the Credit
Agreement or the Notes or the Demutualization.
In rendering our opinion in paragraph 3 above, we express no
opinion as to (i) the effectiveness of service of process in any suit, action or
proceeding solely by mailing a copy thereof, (ii) the binding effect of any
provision of the Credit Agreement which provides for the accrual of
2
<PAGE>
interest after judgment at a rate higher than the applicable judgment rate or
(iii) the effect (if any) of any law of any jurisdiction (except the State of
New York) in which any Bank is located which limits the rate of interest that
such Bank may charge or collect.
Our opinions are limited to matters governed by the laws of the
United States and the laws of the Commonwealth of Virginia and the State of New
York, and we express no opinion as to the laws of any other state or
jurisdiction.
This opinion is rendered solely to you in connection with the
above matters. This opinion may not be relied upon by you for any other purpose
or relied upon by any other Person without our prior written consent, except
that Davis Polk & Wardwell may rely upon this opinion to the same extent as if
it were addressed to it for purposes of rendering its opinion to you on the date
hereof.
Very truly yours,
3
<PAGE>
EXHIBIT F - Opinion of Special Counsel for the Agent
Opinion of
Davis Polk & Wardwell, Special Counsel
for the Agent
[Dated the Closing Date]
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have participated in the preparation of the Credit Agreement
dated as of February 12, 1997 (the "Credit Agreement") among Trigon Healthcare,
Inc., a Virginia corporation (the "Borrower"), the Banks party thereto and
Morgan Guaranty Trust Company of New York, as Agent, and have acted as special
counsel for the Agent for the purpose of rendering this opinion pursuant to
Section of the Credit Agreement. Terms defined in the Credit Agreement are used
herein as therein defined.
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of such documents, corporate records,
certificates of public officials and other instruments and have conducted such
other investigations of fact and law as we have deemed necessary or advisable
for purposes of this opinion.
Upon the basis of the foregoing, we are of the opinion that:
1. The execution, delivery and performance by the Borrower of the
Credit Agreement and the Notes are within the Borrower's corporate powers and
have been duly authorized by all necessary corporate action.
1
<PAGE>
2. The Credit Agreement constitutes a valid and binding agreement
of the Borrower and each Note issued thereunder today constitutes a valid and
binding obligation of the Borrower, in each case enforceable in accordance with
its terms, subject to applicable bankruptcy, insolvency or similar laws
affecting creditors' rights generally and general principles of equity.
We are members of the Bar of the State of New York and the
foregoing opinion is limited to the laws of the State of New York and the
federal laws of the United States of America. To the extent that any portion of
the foregoing opinion depends on the law of the Commonwealth of Virginia, we
have, with your consent and without any independent investigation, relied on the
opinions of McGuire, Woods, Battle & Boothe, L.L.P., referred to in clauses (b)
and (d) of Section 3.1 of the Credit Agreement, and this opinion is subject to
all assumptions, limitations and qualifications set forth therein. In giving the
foregoing opinion, we express no opinion as to the effect (if any) of any law of
any jurisdiction (except the State of New York) in which any Bank is located
which limits the rate of interest that such Bank may charge or collect.
This opinion is rendered solely to you in connection with the
above matter. This opinion may not be relied upon by you for any other purpose
or relied upon by any other Person without our prior written consent.
Very truly yours,
2
<PAGE>
EXHIBIT G - Assignment and Assumption Agreement
Assignment and Assumption Agreement
AGREEMENT dated as of _________, 19__ among <NAME OF ASSIGNOR>
(the "Assignor"), <NAME OF ASSIGNEE> (the "Assignee")[, Trigon Healthcare, Inc.
(the "Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the
"Agent").]
WHEREAS, this Assignment and Assumption Agreement (the
"Agreement") relates to the Credit Agreement dated as of February 12, 1997 among
the Borrower, the Assignor and the other Banks party thereto and the Agent (as
amended from time to time, the "Credit Agreement");
WHEREAS, as provided under the Credit Agreement, the Assignor has
a Commitment to make Loans to the Borrower in an aggregate principal amount at
any time outstanding not to exceed $____________;
WHEREAS, Committed Loans made to the Borrower by the Assignor
under the Credit Agreement in the aggregate principal amount of $__________ are
outstanding at the date hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of
the rights of the Assignor under the Credit Agreement in respect of a portion of
its Commitment thereunder in an amount equal to $__________ (the "Assigned
Amount"), together with a corresponding portion of each of its outstanding
Committed Loans, and the Assignee proposes to accept assignment of such rights
and assume the corresponding obligations from the Assignor on such terms;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not
otherwise defined herein have the respective meanings set
forth in the Credit Agreement.
<PAGE>
SECTION 2. Assignment. The Assignor hereby assigns and sells to
the Assignee all of the rights of the Assignor under the Credit Agreement to the
extent of the Assigned Amount, and the Assignee hereby accepts such assignment
from the Assignor and assumes all of the obligations of the Assignor under the
Credit Agreement to the extent of the Assigned Amount, including the purchase
from the Assignor of the corresponding portion of the principal amount of each
of the Committed Loans made by the Assignor outstanding at the date hereof. Upon
the execution and delivery hereof by the Assignor, the Assignee, [the Borrower
and the Agent] and the payment of the amounts specified in Section 3 required to
be paid on the date hereof (i) the Assignee shall, as of the date hereof,
succeed to the rights and be obligated to perform the obligations of a Bank
under the Credit Agreement with a Commitment in an amount equal to the Assigned
Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be
reduced by a like amount and the Assignor released from its obligations under
the Credit Agreement to the extent such obligations have been assumed by the
Assignee. The assignment provided for herein shall be without recourse to the
Assignor.
SECTION 3. Payments. As consideration for the assignment and sale
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the
date hereof in Federal funds the amount heretofore agreed between them.1
Commitment and/or facility fees accrued before the date hereof are for the
account of the Assignor and such fees accruing on and after the date hereof are
for the account of the Assignee. Each of the Assignor and the Assignee agrees
that if it receives any amount under the Credit Agreement which is for the
account of the other party hereto, it shall receive the same for the account of
such other party to the extent of such other party's interest therein and
promptly pay the same to such other party.
[SECTION 4. Consent of the Borrower and the Agent.
This Agreement is conditioned upon the consent of the
- --------
1 Amount should combine principal together with accrued interest and breakage
compensation, if any, to be paid by the Assignee, net of any portion of any
upfront fee to be paid by the Assignor to the Assignee. It may be preferable in
an appropriate case to specify these amounts generically or by formula rather
than as a fixed sum.
2
<PAGE>
Borrower and the Agent pursuant to Section 9.6(c) of the Credit Agreement. The
execution of this Agreement by the Borrower and the Agent is evidence of their
consent. Pursuant to Section 9.6(c), the Borrower agrees to execute and deliver
a Note payable to the order of the Assignee to evidence the assignment and
assumption provided for herein.]
SECTION 5. Non-Reliance on Assignor. The Assignor makes no
representation or warranty in connection with, and shall have no responsibility
with respect to, the solvency, financial condition or statements of the
Borrower, or the validity and enforceability of the Borrower's obligations under
the Credit Agreement or any Note. The Assignee acknowledges that it has,
independently and without reliance on the Assignor, and based on such documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and will continue to be responsible for
making its own independent appraisal of the business, affairs and financial
condition of the Borrower.
SECTION 6. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
State of New York.
SECTION 7. Counterparts. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed and delivered by their duly authorized officers as of the date
first above written.
<NAME OF ASSIGNOR>
By_________________________
Name:
Title:
<NAME OF ASSIGNEE>
By__________________________
Name:
Title:
3
<PAGE>
Trigon Healthcare, Inc.
By__________________________
Name:
Title:]
[MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By__________________________
Name:
Title:]
4
<PAGE>
EXHIBIT 23.1
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
January 28, 1997
