As filed with the Securities and Exchange Commission on January 6, 1997
Registration No. 333-09773
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
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
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<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 6, 1997
PROSPECTUS
11,540,000 Shares
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>
[Graphic] [Graphic] [Graphic]
SIZE NET WORKS DIVERSITY
Trigon is the largest Trigon offers a Trigon offers a
managed health care continuum of managed wide variety of
company in Virginia: care networks: health-related services:
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 Preferred Provider care financing
Organization Network
o VA Market Share: 26% (PPO) o Health and wellness
programs
o Health Maintenance
Organization (HMO) o Life, accident and
disability coverage
o Dental
o Mental Health
o Pharmacy
[Trigon logo here]
Trigon Healthcare, Inc.
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 10% OR MORE OF ANY
CLASS OF THE COMPANY'S VOTING SECURITIES TO ENGAGE IN CERTAIN TRANSACTIONS WITH
THE COMPANY WITHOUT THE APPROVAL OF THE COMPANY'S STOCKHOLDERS OR THE BOARD OF
DIRECTORS. BENEFICIAL OWNERSHIP INCLUDES DIRECT OR INDIRECT OWNERSHIP INCLUDING
THE RIGHT TO VOTE SUCH SHARES PURSUANT TO IRREVOCABLE PROXIES AND THE RIGHT TO
ACQUIRE SUCH SHARES. SEE "RISK FACTORS -- CERTAIN CHARTER AND STATE LAW
PROVISIONS."
STATE INSURANCE HOLDING COMPANY STATUTES APPLICABLE TO THE COMPANY AND ITS
INSURANCE SUBSIDIARIES GENERALLY PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL OF
THE COMPANY, AND THUS INDIRECT CONTROL OF ITS INSURANCE SUBSIDIARIES, WITHOUT
THE PRIOR APPROVAL OF THE APPROPRIATE INSURANCE REGULATORS. GENERALLY, ANY
PERSON WHO ACQUIRES DIRECT OR INDIRECT OWNERSHIP OF 10% OR MORE OF THE
OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK (INCLUDING THE RIGHT TO VOTE
SUCH SHARES THROUGH PROXIES) WOULD BE PRESUMED TO HAVE ACQUIRED SUCH CONTROL,
UNLESS THE APPROPRIATE INSURANCE REGULATORS UPON APPLICATION DETERMINE
OTHERWISE. FOLLOWING THE DEMUTUALIZATION, THE COMPANY WILL HAVE INSURANCE
SUBSIDIARIES DOMICILED IN VIRGINIA, WISCONSIN AND NORTH CAROLINA.
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA NOR
HAS SUCH COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
IN CONNECTION WITH 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(R) and Blue Shield(R) 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.
o 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 $87.5 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 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 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>
<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.... 42,599,435 shares (1)
</TABLE>
<TABLE>
<S> <C>
Use of Proceeds....................................... Of the $139.0 million estimated net proceeds of
the Offerings, $87.5 million of the net proceeds
is expected to be used to make a portion of the
Commonwealth Payment and $11.3 million of the
net proceeds is expected to be used to make cash
payments to Eligible Members in the
Demutualization in lieu of 0.9 million shares of
Common Stock. The balance of the net proceeds
(which will be approximately $40.1 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 31,059,435 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............................ $ 35,565 $ 59,135
Income before extraordinary items
per share........................ $ .83 $ 1.39
Shares used in calculating per
share amounts.................... 42,599 42,599
OPERATING STATISTICS:
Medical loss ratio (6)
Commercial....................... 80.7% 79.0% 75.8% 74.2% 82.9% 80.4% 82.2%
Federal Employee Program......... 93.5 94.1 94.0 93.5 94.8 94.7 95.1
Total.......................... 82.8 81.9 79.6 78.4 85.5 83.6 84.9
Selling, general and administrative
expenses ratio (7)............... 12.1 12.7 13.6 13.8 13.7 13.2 13.6
Operating margin (7)............... 9.1 8.5 9.5 9.9 6.2 8.4 6.6
Net margin (7)..................... 7.0 6.3 7.1 7.9 5.4 7.3 5.4
Members at end of period
(unaudited)
HMO.............................. 60,154 60,683 84,081 119,982 221,148 210,057 251,399
PPO.............................. 396,584 561,686 624,811 672,610 747,297 710,365 774,473
PAR.............................. 951,020 770,038 687,475 653,097 618,238 629,213 615,655
Other (8)........................ 231,714 228,749 235,640 235,984 212,935 212,032 218,814
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.......................... 1,639,472 1,621,156 1,632,007 1,681,673 1,799,618 1,761,667 1,860,341
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C>
(in 000's)
<CAPTION>
(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............ -- -- -- -- 4,145 3,400 4,880
Surplus (9)............... 350,333 444,271 606,146 655,875 740,071 743,501 686,650
Stockholders' equity......
<CAPTION>
Pro Forma
As Adjusted (10)
----------------
September 30,
1996
----------------
<S> <C>
(unaudited)
<S> <C>
BALANCE SHEET DATA:
Cash and investments...... $1,158,424
Total assets.............. 1,768,881
Obligation for
Commonwealth Payment
Current............... --
Noncurrent............ --
Long-term debt............ 92,380
Surplus (9)...............
Stockholders' equity...... 808,294
</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 31.1 million shares of Common
Stock to Eligible Members pursuant to the Demutualization, which is based
on the assumption that certain Eligible Members receive $11.3 million in
cash in lieu of 0.9 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 $87.5 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 31.1 million
shares of Common Stock to Eligible Members pursuant to the Demutualization,
(ii) the payment of $11.3 million to certain Eligible Members in lieu of
0.9 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 $87.5 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
13
<PAGE>
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 Wisconsin and North Carolina where insurance company
subsidiaries of the Company are domiciled, prohibit acquisition of control of
the Company unless the applicable state regulator has approved the acquisition.
Under the laws and regulations of these states, control would be presumed to
exist if a person directly or indirectly has beneficial ownership of 10% or more
of the Common Stock. See "Business -- Regulation -- Insurance Holding Company
Regulation."
The Virginia Stock Corporation Act (the "VSCA") contains provisions
governing "Affiliated Transactions" which are designed to deter certain
takeovers of Virginia corporations. These provisions, with several exceptions,
require approval of material transactions between a Virginia corporation and any
holder of more than 10% of any class of its outstanding voting shares by the
holders of at least two-thirds of the remaining voting shares. See "Description
of Capital Stock -- Virginia Anti-Takeover Law."
The VSCA also contains provisions governing "Control Share Acquisitions."
These provisions provide that shares of a Virginia public issuer acquired in a
transaction that would cause the voting strength of the acquiring person and its
associates to meet or exceed any of three thresholds (20%, 33 1/3% or 50%) have
no voting rights unless granted by a majority vote of shares not owned by the
acquiring person or any officer or employee-director of the Virginia public
issuer. See "Description of Capital Stock -- Virginia Anti-Takeover Law."
Generally, beneficial ownership of shares of Common Stock includes direct
or indirect ownership, including the right to vote such shares pursuant to
irrevocable proxies and the right to acquire such shares.
Limitation on Dividends; Liquidity of the Holding Company
As a holding company, the Company will depend principally upon dividends
received from its subsidiaries to meet its liquidity needs (including any future
dividends). The Virginia insurance laws limit the payment of dividends by
insurers, such as Trigon Insurance, the Company's principal operating
subsidiary. See "Dividend Policy" and "Business -- Regulation."
No Prior Public Market
Prior to the distribution of Common Stock in the Demutualization and the
Offerings, there has been no public market for the Common Stock. The 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 31.1 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.
In addition, Eligible Members subject to ERISA are expected to receive
approximately 15.4 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.
14
<PAGE>
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."
15
<PAGE>
THE COMPANY
Trigon is the largest managed health care company in Virginia, serving
approximately 1.9 million members primarily through statewide and regional
provider networks. The Company's membership represents approximately 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.
16
<PAGE>
THE DEMUTUALIZATION
History
The Company's Blue Cross predecessors were first established in Virginia in
1935 as prepaid health service plans by groups of hospitals. Originally, several
such hospital plans existed in the Company's service area. These plans
ultimately consolidated into two plans based in Richmond and Roanoke,
respectively, and these two plans later merged in 1986. The Company's Blue
Shield predecessors were first established in Virginia in 1944 as prepaid health
service plans by groups of physicians, later becoming the Virginia Blue Shield
plan. In 1982, the Blue Cross plan based in Richmond and the Blue Shield plan
merged to form Blue Cross and Blue Shield of Virginia, a nonstock corporation.
In 1991, the Company became a mutual company.
Background of the Demutualization
As a mutual company, Trigon is not able to issue stock. The Company is
therefore generally unable to raise capital through the equity capital markets
or effect acquisitions through the issuance of equity securities, as stock
corporations are able to do. The Company believes that if it is to enhance its
strategic position in the consolidating managed care industry and finance its
expansion plans, it will be necessary for the Company to access the equity
capital markets, as well as to effect acquisitions and other strategic alliances
through the issuance of equity securities. Additionally, by creating a holding
company structure through demutualization, the Company will no longer be subject
to the regulatory limitations on subsidiary investments that currently restrict
its ability to effect acquisitions. See "Risk Factors -- Competition" and "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. 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.
17
<PAGE>
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 $87.5 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 concurrently with the
Offerings. In this event, the Company would issue Class C Common Stock in
payment of one-half of the Commonwealth Payment.
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
18
<PAGE>
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 $11.3
million will be paid to Eligible Members in lieu of issuing 0.9 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
19
<PAGE>
program will commence no earlier than six months after the Demutualization and
no later than 18 months after the Demutualization. The Company expects that the
odd-lot program will continue for 90 days, but may be extended by the Company at
its discretion. Only stockholders who received fewer than a specified number of
shares in the Demutualization will be eligible to participate in either the
selling or round-up features of the program. The Company will determine after
the Demutualization and at least 30 days before the program begins the maximum
number of shares of Common Stock received in the Demutualization, not to exceed
99, that will entitle such holder to participate in either the selling or
round-up features of the program. The expenses of the program will be borne by
the Company. Purchases and sales under the program will be matched at the then
prevailing market prices of Common Stock, and any excess purchases or sales
needed to fulfill the program will be made in the market. Details of the odd-lot
program will be mailed by the Company to holders eligible to participate
following the Demutualization and prior to the commencement of the program.
USE OF PROCEEDS
Assuming an initial public offering price of $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 $87.5
million of the net proceeds of the Offerings to make a portion of the
Commonwealth Payment, $11.3 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 $40.1 million, or $61.1 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."
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 31.1 million shares of
Common Stock to Eligible Members pursuant to the Demutualization, (iii) the use
of net proceeds of the Offerings to pay $11.3 million to certain Eligible
Members in lieu of 0.9 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 $87.5 million of the Commonwealth Payment
and the borrowing of $87.5 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........................................................... 4,880 $ 92,380(1)
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 per share par value, 300,000,000 shares authorized;
42,599,435 shares issued and outstanding (2)........................... 426(3)(4)
Capital in excess of par................................................. 777,170(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.......................................... 808,294
-------- -----------
Total capitalization.............................................. $779,030 $ 900,674
-------- -----------
-------- -----------
</TABLE>
- ---------------
(1) Reflects the borrowing of $87.5 million under a revolving credit agreement
to fund one-half 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 concurrently with the Offerings. In this event, the Company
would issue Class C Common Stock in payment of one-half of the Commonwealth
Payment.
(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 31.1 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 $11.3 million to certain Eligible Members in lieu of 0.9 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
---------- ---------- ---------- ---------- ---------- -----------
(unaudited)
<S> <C>
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
Long-term debt...................... -- -- -- -- 4,145 3,400 4,880
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
23
<PAGE>
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 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 31.1 million shares of Common Stock in connection therewith to
Eligible Members, (ii) the use of net proceeds of the Offerings to pay $87.5
million of the Commonwealth Payment and the borrowing of $87.5 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) $11.3 million
will be paid to certain Eligible Members in lieu of 0.9 million shares of Common
Stock that would otherwise be issued to such Eligible Members in the
Demutualization, (ii) $87.5 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 $ 127,644 (1) $ 67,447
87,500 (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 34,144 1,556,021
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 $ 34,144 $ 1,768,881
---------- ----------- -----------
---------- ----------- -----------
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................................................................ 148,223 148,223
Obligation for Commonwealth Payment.............................................. 87,500 $ (87,500 )(2) --
---------- ----------- -----------
Total current liabilities..................................................... 859,377 (87,500 ) 771,877
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..................................................................... 4,880 87,500 (2) 92,380
Minority interest in subsidiary.................................................... 4,057 4,057
---------- ----------- -----------
Total liabilities............................................................. 1,048,087 (87,500 ) 960,587
---------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common stock..................................................................... -- 311 (4) 426
-- 115 (1)
Capital in excess of par......................................................... -- 127,529 (1) 777,170
649,641 (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.................................................... 686,650 121,644 808,294
---------- ----------- -----------
Total liabilities and stockholders' equity.................................. $1,734,737 $ 34,144 $ 1,768,881
---------- ----------- -----------
---------- ----------- -----------
</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........................... -- $ 5,250(2) 5,250 -- $ 3,938(2) 3,938
Copayment refund program................... 47,073 47,073 -- --
---------- ----------- ---------- ---------- ----------- ----------
Total operating expenses................ 1,664,976 5,250 1,670,226 1,345,526 3,938 1,349,464
---------- ----------- ---------- ---------- ----------- ----------
Income before income taxes and extraordinary
items (operating income)................... 59,966 (5,250) 54,716 94,916 (3,938) 90,978
Income tax expense (benefit)................. 8,264 10,887(5) 19,151 (46,751) 78,594(5) 31,843
---------- ----------- ---------- ---------- ----------- ----------
Income before extraordinary items (6)... $ 51,702 $ (16,137) $ 35,565 $ 141,667 $ (82,532) $ 59,135
---------- ----------- ---------- ---------- ----------- ----------
---------- ----------- ---------- ---------- ----------- ----------
Income before extraordinary items per common
share...................................... $ .83 $ 1.39
Shares used in calculating per common share
amount (7)................................. 42,599 42,599
</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 $11.3 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 $87.5 million from net proceeds of the Offerings
and $87.5 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 $87.5 million to fund one-half 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 $87.5 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
concurrently with the Offerings. In this event, the Company would issue
Class C Common Stock in payment of one-half of the Commonwealth Payment.
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)...... 940,565
----------
Shares issued to Eligible Members.................................... 31,059,435
Shares issued in the Offerings....................................... 11,540,000
----------
Total shares of Common Stock outstanding............................. 42,599,435
----------
----------
</TABLE>
- ---------------
(a) Assumes that $11.3 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 9.7% on a per member basis comparing the
twelve months ended December 31, 1994 period average to the nine months ended
September 30, 1996 period average. The increases in medical costs reflect a
higher cost per hospital inpatient day, increased outpatient utilization and
cost per encounter and higher pharmacy costs. These increases were partially
offset by continued improvements in hospital inpatient utilization 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.
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 51,321 members and the Priority
acquisition added 24,767 initial members.
Investment income decreased 2.3% from $34.9 million for the nine months
ended September 30, 1995 to $34.1 million for the nine months ended September
30, 1996. Realized gains increased 45.5% from $34.8 million for the nine months
ended September 30, 1995 to $50.7 million for the nine months ended September
30, 1996. The decline in investment income and the increase in realized gains
are both due primarily to the sale of investment securities to fund the
Mid-South acquisition. Net realized gains have also increased due to the sale of
investment securities in an effort to shorten bond maturity levels. Net
unrealized gains 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 Health Communication Services, Inc.
32
<PAGE>
("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.
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
33
<PAGE>
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).
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.
34
<PAGE>
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 $215.6 million in 1994, a 22.8%
growth rate. Commercial PAR revenues declined from $590.6 million in 1993 to
$537.5 million in 1994 as a result of the Company's greater emphasis on its HMO
and PPO networks as its customers transitioned to its more tightly managed
networks. FEP revenues increased 8.7% from $279.1 million in 1993 to $303.3
million in 1994 as a result of increased medical costs reimbursed by OPM. While
the number of members served by the Company's networks and products increased by
3.0% during 1994, the number of HMO members grew 42.7% and at December 31, 1994
accounted for 7.1% of the Company's total enrollment. PPO membership grew by
7.7% during 1994 and at December 31, 1994 represented 40.0% of the Company's
total enrollment. The number of PAR members dropped 5.0% and such members
represented 38.8% of the Company's total members at December 31, 1994. Premium
revenue increases, on a per member basis, for the Company's commercial business
averaged 1.6%, reflecting the Company's efforts to control claims utilization,
minimal medical inflation and increasing competitive pricing pressure.
Investment income increased 16.6% from $34.3 million in 1993 to $40.0
million in 1994. Net realized gains decreased $13.4 million from $26.2 million
in 1993 to $12.8 million in 1994. The increase in investment income was driven
primarily by an increase in fixed income securities held. With regard to
realized gains, the 1994 net realized gain on equities was $20.0 million, an
improvement of $4.6 million over 1993. The 1994 net realized loss on fixed
income securities was $7.2 million, a decrease of $18.0 million from the
previous year. Much of the decrease in net realized investment gains was a
result of interest rate increases throughout 1994 which resulted in realized
losses on the sale of fixed income securities.
Other revenues increased by 48.8% from $30.6 million in 1993 to $45.5
million in 1994. The increase was primarily attributable to the addition of
revenues from two electronic data interchange companies acquired in late 1993.
After giving effect to these acquisitions, the Company, through a subsidiary, is
one of the largest suppliers of electronic data processing for hospitals,
physicians, insurance companies and other health care organizations. In
addition, revenues from third-party administration for workers' compensation
increased from $7.0 million in 1993 to $9.9 million in 1994, a 41.8% increase.
Medical costs increased by 2.7% from $1.058 billion in 1993 to $1.086
billion in 1994. The increase was primarily a result of growth in business sold
through the HMO and PPO networks. As a result of the Company's continued
emphasis on managing utilization and medical inflation, medical costs per member
were essentially unchanged from 1993. The total medical loss ratio improved from
79.6% in 1993 to 78.4% in 1994. The medical loss ratio for commercial business
fell from 75.8% to 74.2% over the same period.
Selling, general and administrative expenses increased by 4.5% from $308.4
million in 1993 to $322.4 million in 1994. The Company incurred $6.4 million of
additional costs related to the Company's growing HMO business and the workers'
compensation processing unit. To enhance its managed care products, the Company
spent an additional $3.3 million to further its provider alliance strategy and
to improve its managed care information systems and related programs. This
expenditure was largely offset by savings created through a reduction in
overhead and an increase in operational efficiencies through
35
<PAGE>
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 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.
-------- -------- -------- -------- -------- -------- --------
<S> <C>
(in 000's)
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.
36
<PAGE>
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 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."
37
<PAGE>
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 $87.5 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 $350 million revolving credit agreement which the
Company plans to enter into concurrently with the closing of the Offerings. The
Company is also pursuing a $100 million bridge financing in the event a
revolving credit facility cannot be closed concurrently with the Offerings. The
Company intends to use borrowings under the revolving credit agreement or bridge
financing to fund $87.5 million of the Commonwealth Payment. See "The
Demutualization -- the Commonwealth Payment." The Company has not received any
binding commitments with respect to these agreements and there can be no
assurance that the Company will be able to enter into such agreements
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 "The
Demutualization -- The Commonwealth Payment" and "Description of Capital Stock."
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 February
1996. The claims-paying ability represents S&P's opinion of an assessment of an
operating insurance company's financial capacity to meet the obligations of its
insurance policies in accordance with their terms. This opinion is not a rating
of the Company's securities, including those covered by this registration
statement. The rating scale is divided into two main categories. Ratings from
"AAA' to "BBB' are classified as "secure" claims-paying ability and ratings from
"BB' to "CCC' are classified as "vulnerable" claims-paying ability. Plus (+) and
minus (-) signs show relative standing within a category. The "AA-' rating means
excellent financial security; i.e., the capacity to meet policyholders
obligations is strong under a variety of economic and underwriting conditions.
As a holding company, the Company will depend principally upon dividends
received from its subsidiaries to meet its liquidity needs (including any future
dividends). The Virginia insurance laws limit the payment of dividends by
insurers such as Trigon Insurance, the Company's principal operating subsidiary.
See "Business -- Regulation."
Income Taxes
Prior to 1987, the Company was exempt from United States federal income
taxation. The Tax Reform Act of 1986 (the "Act") eliminated the tax exemption
for Blue Cross and Blue Shield organizations, and since 1987 the Company has
been subject to federal income tax. Under the Act, however, certain Blue Cross
and Blue Shield organizations that were in existence on August 16, 1986, are
entitled to certain special tax provisions, including special tax deductions.
The most important of these provisions is a deduction (the "Section 833(b)
deduction"), which, if otherwise available, is equal to the amount by which 25%
of the Company's claims and claims-related expenses incurred during the year
exceeds its adjusted surplus as of the beginning of the year. Because of these
special provisions, the Company was not subject to regular tax for the years
1990
38
<PAGE>
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 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.
39
<PAGE>
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
40
<PAGE>
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.
41
<PAGE>
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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<PAGE>
(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's subsidiaries serve 38 states, the District of Columbia and the United
Kingdom. The Company's strategy is to continue marketing these products on a
stand-alone basis, as enhancements to its core product line, and as avenues for
entry into new markets within and outside of Virginia.
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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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<PAGE>
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.
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<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-
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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.
50
<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.
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<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 licensed to do
business in 8 states and the District of Columbia. Provider networks, case
management and utilization review programs are used to help employers contain
medical claims costs.
Government Programs
Trigon acts as an intermediary and administrative agent in servicing
approximately 1.1 million Medicare Part A beneficiaries in Virginia and West
Virginia. In 1995, the Company processed 3,189,700 Medicare Part A claims
amounting to $2.7 billion of charges. Claims processed and the reimbursement for
these claims are not included in the Company's consolidated statements of
operations. However, the Company is reimbursed for operating expenses related to
administering this business. In 1995, such expense reimbursements totaled $11.6
million. Trigon's Medicare program carries no underwriting risk.
52
<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>
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<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
55
<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
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<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, Wisconsin
and North Carolina) restrict the ability of any person to obtain control of an
insurance company without prior regulatory approval. Under Virginia insurance
holding company laws and regulations, the acquisition of control of a Virginia
insurer or a person controlling a Virginia insurer, including Trigon Healthcare,
requires the prior approval of the State Corporation Commission. Without such
approval (or an exemption), no person may acquire any voting security of an
insurance holding company which controls a Virginia insurance company, or merge
with such a holding company, if as a result of such transaction such person
would "control" the insurance holding company. "Control" is defined as the
direct or indirect power to direct or cause the direction of the management and
policies of a person and is presumed to exist if a person directly or indirectly
owns or controls 10% or more of the voting securities of another person.
Insurance Company Regulation. Virginia BCBS and its subsidiaries are
subject to the insurance laws and regulations of the Commonwealth of Virginia,
the domiciliary state of the Company and its subsidiaries (except Monticello
Life Insurance Company which is domiciled in Wisconsin and Mid-South which is
domiciled in North Carolina and are subject to the laws and regulations of those
states; however, Monticello Life Insurance Company is seeking regulatory
approval to redomicile to Virginia). In addition, the Company and its
subsidiaries are subject to the insurance laws and regulations of the other
jurisdictions in which the Company and its subsidiaries are licensed or
authorized to do business. These insurance laws and regulations generally give
state regulatory authorities broad supervisory, regulatory and administrative
powers over insurance companies and insurance holding companies with respect to
most aspects of their insurance businesses. This regulation is intended
primarily for the benefit of the policyholders and members of insurance
companies and not investors. Regulatory authorities exercise extensive
supervisory power over health and life insurance companies with respect to the
licensing of insurance companies; the approval of forms and insurance policies
used; the nature of, and limitations on, an insurance company's investments; the
periodic examination of the operations of insurance companies; the form and
content of annual statements and other reports required to be filed on the
financial condition of insurance companies; and the establishment of capital
requirements for insurance companies. Trigon is required to file periodic
statutory financial statements in each jurisdiction in which it is licensed.
Additionally, Trigon is periodically examined by the insurance departments of
the jurisdictions in which it is licensed to do business. Some states impose
surcharges on all insurance companies operating in the state except for the Blue
Cross plan or plans operating there. The Company does not believe that these
surcharges will materially affect its ability to expand outside of Virginia
because the surcharges have generally not been imposed in the states in which
the Company principally intends to expand and, if imposed, would likely apply
equally to all non-Blue Cross companies operating in the state.
Risk-Based Capital Requirements. In 1994, Virginia adopted new statutory
risk-based capital ("RBC") requirements for health and other insurance
companies. Such requirements are intended to assess the capital adequacy of life
and health insurers, taking into account the risk characteristics of an
insurer's investments and products. The formula for calculating such RBC
requirements, set forth in instructions adopted by the NAIC, is designed to take
into account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to an individual insurance company's business. Under
these laws, an insurance company must submit a report of its RBC level to the
State Corporation Commission as of the end of the previous calendar year.
The Virginia RBC requirements categorize insurance companies according to
the extent to which they meet or exceed certain RBC thresholds. The law requires
increasing degrees of regulatory oversight and intervention as an insurance
company's RBC declines. These degrees of regulatory action are triggered by the
RBC level of an insurance company as follows: (i) a "Company Action Level Event"
(requiring the insurance company to inform and obtain approval from the Virginia
Insurance Commissioner of a comprehensive financial plan for increasing its
RBC), which would occur if, among other things, an insurance company's RBC falls
below 200% of its authorized control level RBC requirement, or if an insurance
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company's RBC falls below 250% of its authorized control level RBC requirement
and has a negative trend; (ii) a "Regulatory Action Level Event" (resulting in,
in addition to the requirement of a financial plan, regulatory actions including
examination of an insurance company's assets, liabilities and operations
followed by an order specifying such corrective actions as the Virginia
Insurance Commissioner determines to be appropriate), which would occur if,
among other things, an insurance company's RBC falls below 150% of its
authorized control level RBC requirement; (iii) an "Authorized Control Level
Event" (resulting in, in addition to the regulatory actions specified above,
such actions as are necessary to cause an insurance company to be placed under
regulatory control in a rehabilitation or liquidation proceeding if deemed to be
in the best interests of policyholders, creditors and the public), which would
occur if, among other things, an insurance company's RBC 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.
Wisconsin, Monticello Life Insurance Company's domiciliary state, and North
Carolina, Mid-South's domiciliary state, similarly restrict the payment of
dividends by their domiciliary insurance companies.
Assessments Against Insurers. Under insolvency or guaranty association laws
in most states, insurance companies can be assessed for amounts paid by guaranty
funds for policyholder losses incurred by insolvent insurance companies. Most
state insolvency or guaranty association laws, including Virginia's, currently
provide for assessments based upon the amount of premiums received on insurance
underwritten within such state (with a minimum amount payable in some states
where Monticello Life Insurance Company and Mid-South are licensed even if no
premium is received). Substantially all of Virginia BCBS' premiums are currently
derived from insurance underwritten in Virginia.
Under the Virginia Life, Accident and Sickness Insurance Guaranty
Association (the "Association") Act, assessments against insurance companies
which issue policies of accident or sickness insurance, such as Virginia BCBS,
are made retrospectively and are based (up to prescribed limits) upon the ratio
of (i) the insurance company's premiums received in Virginia over the previous
three calendar years on accident and sickness insurance, to (ii) the aggregate
amount of premiums received by all assessed member insurance companies over such
three calendar years on accident and sickness insurance. The guaranty fund and
assessments made under the act are administered by the Association, which has
its own board of directors selected by member insurers with the approval of the
State Corporation Commission. An assessment may be abated or deferred by the
Association if, in the opinion of the board, payment would endanger the ability
of the member to fulfill its contractual obligations, but the other member
insurers may be assessed for the amount of such abatement or deferral. Any such
assessment paid by a member insurance company may be offset against its premium
tax liability to the Commonwealth of Virginia
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in each succeeding year in an amount not to exceed 0.05 (one twentieth) of one
percent of the member's direct gross premium income for the class of insurance
for which the insurer is assessed. The amount and timing of any future
assessments, however, cannot be reasonably estimated and are beyond the control
of the Company.
Virginia's Open Enrollment Program. The Commonwealth of Virginia has an
open enrollment program, pursuant to which Virginia BCBS is required to offer
comprehensive accident and sickness insurance contracts to individuals and to
groups of fewer than 50 members without imposition of certain underwriting
criteria that would deny coverage on the basis of medical condition, age or
employment status. As an incentive for participating in the open enrollment
program, Virginia 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.
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In June 1996 the license agreements between BCBSA and its licensees,
including the Company, were amended to prohibit a licensee from entering into
certain transactions which would result in an unlicensed entity obtaining
control of the licensee or acquiring a substantial portion of the licensee's
assets related to services provided under the Blue Cross or Blue Shield service
marks. The license agreements were also amended to require that a licensee pay
to BCBSA a specific amount upon termination of the license agreement, subject to
certain limited exceptions. The amount payable upon termination of the license
agreement is equal to $25 multiplied by the number of the licensee's members
receiving products or services sold or administered under the Blue Cross or Blue
Shield service marks, subject to reduction to the extent the payment of such fee
would cause such licensee to fall below certain capital requirements established
by the BCBSA.
Rating
Virginia BCBS is presently assigned a claims paying ability rating of
"AA-(Excellent)" by Standard & Poor's Rating Group. Standard & Poor's ratings
are based on an analysis of the financial condition and operations of an
insurance company and its ability to pay future claims. Such ratings are not
directed to the protection of investors and are subject to review and change
over time.
Properties
The Company is headquartered in Richmond, Virginia, where it owns a
four-story building with 265,000 square feet. The Company also owns an office
facility and warehouse in Roanoke, Virginia with 201,000 square feet and an
office facility in Fayetteville, North Carolina with 71,000 square feet. The
Company leases an additional 454,000 square feet at various other locations in
Richmond, Virginia. The Company also leases space at two other facilities in
Roanoke, Virginia comprising 52,000 square feet.
The Company leases 57,000 square feet for regional offices throughout
Virginia and 55,000 square feet for office space in Maryland, North Carolina,
Oregon, Illinois, Florida, West Virginia, Indiana, Pennsylvania, Missouri, New
Jersey, Texas and South Carolina.
Employees
As of September 30, 1996, the Company had 4,173 full-time employees. The
employees are primarily located in Richmond and Roanoke, Virginia, with
employees also located in Maryland, Missouri, New Jersey, Texas, North Carolina,
South Carolina, Oregon, Illinois, Florida, West Virginia, Indiana and
Pennsylvania. The Company believes that its relationship with its employees is
good. No employees are subject to collective bargaining agreements.
Service Marks
The Company has registered and maintains several service marks, trademarks
and tradenames at the federal level, in the Commonwealth of Virginia and in
certain other states. "Trigon," "Keycare" and "HealthKeepers" are included among
these marks. Although the Company considers its registered service marks,
trademarks and tradenames important in the operation of its business, the
business of the Company is not dependent on any individual service mark,
trademark or tradename. For a discussion of the Company's license to use certain
Blue Cross and Blue Shield service marks and tradenames, see "The Blue Cross
Blue Shield License."
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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 the Board of Directors and Chief Executive
Officer
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, Jr. 61 Director
Phyllis L. Cothran 49 President and Chief Operating Officer
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 and Chief Financial Officer 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, designated
Class I, Class II and Class III. John Cole, Jr., M.D., Robert M. Freeman,
Elizabeth G. Helm, Jackie M. Ward and Stirling L. Williamson, Jr. are Class I
directors, with their terms expiring at the Company's Annual Meeting of
Stockholders (the "Annual Meeting") in 1999. Lenox D. Baker, Jr., M.D., John L.
Colley, Jr., Norwood H. Davis, Jr., Frank C. Martin, Donald B. Nolan, M.D. and
R. Gordon Smith are Class II directors, with their terms expiring at the Annual
Meeting in 1997. James K. Candler, William R. Harvey, Gary A. Jobson, William N.
Powell and J. Carson Quarles are Class III directors, with their terms expiring
at the Annual Meeting in 1998. Directors of each Class serve until their
successors are duly elected and qualified. Pursuant to the Plan of
Demutualization, the Company will cause one nominee from a list submitted by the
Virginia Attorney General and one nominee from a list submitted by the Joint
Rules Committee of the Virginia General Assembly to be elected directors of the
Company before or within seven days after the effective date of the
Demutualization. These two nominees 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. 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 Hampton University which is expected to receive 9,245 shares in
the Demutualization. Mr. Martin is Chairman and Chief
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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) ($)(3) ($)(4)
- ------------------------------- ----- -------- ------- ------------ ------------ ------------
<S> <C>
Norwood H. Davis, Jr. 1996 $650,000 $ 0 $9,327 $ $ 32,869
Chairman & CEO
Phyllis L. Cothran 1996 370,000 0 658 15,647
President & COO
Ronald H. Bargatze 1996 233,700 0 1,393 10,967
Executive VP & COO,
Integrated Health Systems
Manuel Deese 1996 211,800 0 828 8,673
Executive VP & COO
Major Accounts
John C. Berry 1996 200,700 0 1,478 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 gross-up
paid by the Company for named executives on the present value of their
vested non-qualified Supplemental
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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 amounts of $106 for Mr. Davis.
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 policy growth over the
three-year period. The awards are paid in a single lump sum at the end of
three years depending on the achievement of specified performance measures.
Each three-year cycle provides target awards between 10% and 40% of a
participant's salary. Each objective will have a performance range and
potential payout from Threshold to Maximum.
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, $319,600.
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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<PAGE>
without cause. Mr. Davis is entitled to receive an annual base salary of an
amount determined by the Board of Directors which can be adjusted upward each
year as determined by the Board of Directors. He is also eligible for an award
of incentive compensation each year. While employed by the Company, Mr. Davis is
entitled to Company benefits offered to all employees. In addition, the Company
will provide an automobile allowance, tax and financial planning services and
reimbursement for other business expenses. Also, if Mr. Davis becomes disabled
and is entitled to receive benefits under the Company's Long-Term Disability
Program, the Company will make supplemental monthly payments so that the entire
benefit is equal to 60% of his base salary. Under this agreement, Mr. Davis
agrees not to compete as an equity owner or employee with the Company or its
affiliates for three years after his resignation as an employee or his
termination with cause. The agreement also provides that upon termination of Mr.
Davis's employment for any reason (other than a termination resulting from his
resignation if he fails to give the Company at least six months' prior written
notice of the resignation), Mr. Davis is entitled to receive a severance payment
equal to three times the highest annual cash compensation received by him during
the three calendar years preceding the termination of his employment.
The employment agreement also sets forth an enhanced retirement benefit for
Mr. Davis. Under the enhanced benefit, the Company agrees to pay Mr. Davis an
amount equal to the difference between (i) the benefit Mr. Davis would receive
under the Retirement Plan and the Supplemental 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 31.1 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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<PAGE>
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.
Any Transfer (as defined below) that, if effective, would result in any
person Beneficially Owning shares of a class of Capital Stock in excess of the
Ownership Limit will be void. If this restriction is held to be unenforceable,
shares of such class of Capital Stock in excess of the Ownership Limit
automatically become "Excess Securities" as described below. In addition, the
Board will have the right to convert Common Stock held by any person and that
person's associates that equals or exceeds the Ownership Limit into Non-Voting
Common Stock which will have no voting rights (except and only as conferred by
law) but which will otherwise have rights identical to the Common Stock.
These provisions are sometimes referred to in this Prospectus as the
"Ownership and Transfer Restrictions." The Articles will provide that the
Ownership and Transfer Restrictions will not impair the settlement of
transactions on the New York Stock Exchange or any other exchange or quotation
system over which the Common Stock is traded. The Articles will provide that a
person will be deemed the "Beneficial Owner" of and will be deemed to
"Beneficially Own" (subject to certain exclusions) any Capital Stock: (i) which
such person or any of such person's associates beneficially owns, directly or
indirectly, (ii) which such person or such person's associates has the right to
acquire or dispose of (either immediately or only after the passage of time),
(iii) which such person or such person's associates have the right to vote or
(iv) which is Beneficially Owned (under the concepts provided in the preceding
clauses) by any other person with whom such person (or such person's associates)
has any agreement, arrangement or understanding (other than customary
arrangements with and between underwriters and selling group members with
respect to a bona fide public offering of Capital Stock) relating to the
acquisition, holding, voting or disposition of any Capital Stock. The Articles
will also provide that the Company may require that Beneficial Owners of Capital
Stock provide the Company with such information as the Company may reasonably
request in order to ascertain whether any facts or circumstances which would or
might cause such person to be considered an associate for purposes of the
Articles of any other Beneficial Owner of Capital Stock.
If there is a purported Transfer or other change in capital structure of
the Company such that any person would Beneficially Own shares of a class of
Capital Stock in excess of the Ownership Limit (a "Purported Owner") and the
provisions of the Articles voiding such Transfers or prohibiting such ownership
are held to be unenforceable, then such shares in excess of the Ownership Limit
will be "Excess Securities." Excess Securities are automatically deemed to have
been converted into a separate class of Capital Stock and transferred to the
Company as trustee of a trust to hold such Excess Securities until disposition
as provided in the Articles. The Purported Owner has no rights in the Excess
Securities, except that the Purported Owner may designate a beneficiary of an
interest in the trust if (a) the Excess Securities would not be Excess
Securities in the hands of such beneficiary and (b) the price paid for such
interest does not exceed the price paid by the Purported Owner or the market
price for the Capital Stock on the date of the purported Transfer that resulted
in the Excess Securities. The Company will have a call on the Excess Securities
generally for 90 days after the purported Transfer that resulted in the Excess
Securities. The exercise price for this call is generally the lesser of (a) the
price per share in the transaction which created the Excess Securities or (b)
the market price for the Capital Stock to which the Excess Securities relate on
the date the Company exercises its call.
If the Company at any time determines in good faith that a purported
Transfer has taken place in violation of the Ownership and Transfer Restrictions
or that a person intends to acquire or Transfer or has attempted to acquire or
Transfer Beneficial Ownership of Capital Stock in violation of the Ownership and
Transfer Restrictions, the Company may take such action as it deems advisable to
refuse to give effect to such Transfer, including, but not limited to, refusing
to give effect to such Transfer on the books of the Company or instituting
proceedings to enjoin such Transfer.
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"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 10% of the outstanding voting shares, a Virginia corporation cannot
engage in an Affiliated Transaction with such Interested Shareholder without the
approval of two-thirds of the voting shares other than those shares beneficially
owned by the Interested Shareholder, and the approval of a majority of the
"Disinterested Directors." A Disinterested Director means, with respect to a
particular Interested Shareholder, a member of the Company's Board of Directors
who was (1) a member on the date on which an Interested Shareholder became an
Interested Shareholder and (2) recommended for election by, or was elected to
fill a vacancy and received the affirmative vote of, a majority of the
Disinterested Directors then on the Board. At the expiration of the three-year
period, the statute requires approval of Affiliated Transactions by two-thirds
of the voting shares other than those beneficially owned by the Interested
Shareholder or by a majority of the Disinterested Directors. Such approval is
not required, however, if the transaction satisfies the fair price requirements
of the statute. In general, the fair price requirements provide that the
shareholders, other than the Interested Shareholder, must receive per share
consideration that is not less than the price paid by the Interested Shareholder
for its shares, the fair market value of the shares, or an amount based upon
these two amounts.
None of the foregoing limitations and special voting requirements applies
to a transaction with an Interested Shareholder whose acquisition of shares
making such person an Interested Shareholder was approved by a majority of the
corporation's Disinterested Directors.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the statute provides that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation
71
<PAGE>
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 31.1 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. In addition, Eligible Members subject to ERISA
are expected to receive approximately 15.4 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.
72
<PAGE>
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.
73
<PAGE>
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.
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 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.
74
<PAGE>
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.
75
<PAGE>
GLOSSARY
Capitation. A fixed amount per individual that is paid periodically
(usually monthly) to a provider as compensation for providing comprehensive
health care service during the period. The fee is set by contract between a
prepaid health care plan and the provider.
Coinsurance. Payment by a member of a fixed percent of liability for care
up to a fixed maximum limit.
Community Rating. The practice of pooling the medical claims costs of
similar classes of insured groups, such as small business or individuals, as a
way of developing premium rates for a specific individual or business within
each pooled category.
Copayments. Payments by a member of a fixed amount for each service.
Deductible. Payment by a member of a specified initial portion of annual
medical costs incurred by the member.
Diagnostic Related Groups (DRG). A classification method that categorizes
services with respect to primary and secondary diagnosis, age and complications.
Discounted Fee-for-Service. A payment program in which providers agree to
receive less than their standard fee for providing medical services to members.
Eligible Member. An individual or entity holding a membership interest in
Virginia BCBS as of December 31, 1995.
Fee Schedule Payment Program. A payment program in which providers receive
no more than a specified fixed payment for any given covered service.
Health Maintenance Organization (HMO). An organization that arranges the
delivery of comprehensive health care services for its members at a fixed
periodic payment.
Independent Practice Association (IPA) Model HMO. An HMO that contracts
directly with physicians in independent practices.
Inpatient Services. Services rendered in a hospital to a member who has
been admitted and occupies a hospital bed for the purpose of receiving medical
services.
Managed Care. A health care financing and delivery arrangement designed to
provide health care through organized relationships with health care providers.
Medical Loss Ratio. The expression of medical claim expenses as a
percentage of premium revenues. Considered to be one measure of a managed care
company's effectiveness in controlling health care costs.
Medicare HMO. Managed care organizations that have entered into certain
contracts with the Health Care Financing Administration 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.
76
<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
------------------------
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 $ 67,447
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 1,556,021
---------- ---------- ------------- -------------
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 $ 1,768,881
---------- ---------- ------------- -------------
---------- ---------- ------------- -------------
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..................................................... -- -- -- 87,500
Minority interest in subsidiary.................................... 4,657 3,954 4,057 4,057
---------- ---------- ------------- -------------
TOTAL LIABILITIES........................................... 747,229 825,260 1,048,087 960,587
---------- ---------- ------------- -------------
SURPLUS
Common stock..................................................... -- -- -- 426
Capital in excess of par......................................... 777,170
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............................................... 655,875 740,071 686,650 808,294
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 $ 1,768,881
---------- ---------- ------------- -------------
---------- ---------- ------------- -------------
</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................. $ .83 $ 1.39
---------- ----------
---------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 42,599,435 42,599,435
</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>
Statutory surplus at:
<S> <C>
December 31, 1994....................................................... $538,000
December 31, 1995....................................................... 478,000
September 30, 1996 (unaudited).......................................... 600,000
Statutory net income for the periods ended:
December 31, 1993....................................................... $102,000
December 31, 1994....................................................... 113,000
December 31, 1995....................................................... 83,000
September 30, 1995 (unaudited).......................................... 80,000
September 30, 1996 (unaudited).......................................... 54,000
</TABLE>
The Company is required by the Commonwealth of Virginia, Bureau of Insurance
to maintain a statutory surplus balance of at least $4,000,000.
In addition, the Commonwealth of Virginia adopted the National Association of
Insurance Commissioners (NAIC) Risk Based Capital Act in 1995. Under this
Act, a company's risk-based capital (RBC) is calculated by applying certain
factors to various asset, premium and reserve items. If a company's
calculated RBC falls below certain thresholds, regulatory intervention or
oversight is required. The Company's RBC level as calculated in accordance
with the NAIC RBC Instructions at December 31, 1995 exceeds all RBC
thresholds.
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
------- ------- ------- ----------- -------
<S> <C>
(unaudited)
Gross realized gains
Fixed income securities........................................ $16,864 $ 7,611 $13,890 $ 9,406 $ 7,566
Equity securities.............................................. 34,259 43,384 58,938 47,666 63,493
Derivative instruments......................................... -- -- 11,430 2,544 528
------- ------- ------- ----------- -------
51,123 50,995 84,258 59,616 71,587
------- ------- ------- ----------- -------
Gross realized losses
Fixed income securities........................................ 6,073 14,821 9,081 8,481 8,661
Equity securities.............................................. 18,851 23,381 15,520 12,413 12,208
Derivative instruments......................................... -- -- 6,681 3,889 33
------- ------- ------- ----------- -------
24,924 38,202 31,282 24,783 20,902
------- ------- ------- ----------- -------
Net realized gains............................................. $26,199 $12,793 $52,976 $34,833 $50,685
------- ------- ------- ----------- -------
------- ------- ------- ----------- -------
</TABLE>
Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for fixed income securities or cost for equity
securities. A summary of the net increase (decrease) in unrealized gains,
less deferred income taxes, is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------- September 30,
1994 1995 1996
-------- -------- -------------
<S> <C>
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
------- ------- -------- ----------- --------
<S> <C>
(unaudited)
Current.................................................. $40,025 $21,160 $ 19,206 $10,864 $ 20,393
Deferred................................................. (4,222) 3,404 (10,942) (2,389) (67,144)
------- ------- -------- ----------- --------
$35,803 $24,564 $ 8,264 $ 8,475 $(46,751)
------- ------- -------- ----------- --------
------- ------- -------- ----------- --------
</TABLE>
The differences between the statutory federal income tax rate and the
actual tax rate applied to income before income taxes, cumulative effects
of changes in accounting principles and extraordinary items are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------- --------------------
1993 1994 1995 1995 1996
----- ----- ----- ----------- -----
<S> <C>
(unaudited)
Statutory federal tax rate............................................. 35.0% 35.0% 35.0% 35.0% 35.0%
Tax exempt investment income........................................... (1.0) (0.9) (1.2) (0.9) (0.6)
Section 833 deduction.................................................. (34.1) (2.4) -- -- --
Change in valuation allowance.......................................... 22.8 (13.5) (19.4) (19.9) (84.8)
Other, net............................................................. 2.2 2.5 (0.6) (0.4) 1.1
----- ----- ----- ----------- -----
Effective tax rate..................................................... 24.9% 20.7% 13.8% 13.8% (49.3)%
----- ----- ----- ----------- -----
----- ----- ----- ----------- -----
</TABLE>
The Company qualifies for a federal income tax deduction under IRC Section
833. This deduction is equal to the amount by which 25% of the sum of
claims and expenses exceeds tax basis adjusted surplus. Prior to 1994, the
effect of this deduction was to significantly reduce regular taxable income
and subject the Company to alternative minimum tax.
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
------ ------ ------ ----------- ------
(unaudited)
<S> <C>
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 31.1 million shares of common stock to eligible
members pursuant to the Demutualization.
o Payment of $11.3 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 $87.5 million under a revolving credit facility
to fund one-half 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 31.1 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 $87.5 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
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
Underwriting.............................................. 73
Legal Matters............................................. 74
Experts................................................... 75
Additional Information.................................... 75
Glossary.................................................. 76
Index to Consolidated Financial Statements................ F-1
</TABLE>
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 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 6, 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.
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 Offering, 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 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 it will not offer or sell, in the United Kingdom, by means of any document,
any shares of Common Stock other than to persons whose ordinary business it is
to buy or sell shares or debentures whether as principal or agent or in
circumstances that do not constitute an offer to the public within the meaning
of the Companies Act of 1985, (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act of 1986 in respect of
anything done by it in relation to the Common Stock in, from, or otherwise
76
<PAGE>
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
involving the United Kingdom, and (iii) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issuance of Common Stock if that person is of a
kind described in Article 9(3) of the Financial Services Act of 1986 (Investment
Advertisements) (Exceptions) Order 1988 or is a person to whom the document may
lawfully be issued or passed on.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase, in addition to the offering price set forth on the cover page hereof.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by McGuire, Woods,
Battle & Boothe, L.L.P., Richmond, Virginia. McGuire, Woods, Battle & Boothe,
L.L.P. provides health care coverage to its members and employees through Trigon
and certain of Trigon's subsidiaries, and McGuire, Woods, Battle & Boothe,
L.L.P. is expected to receive 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.
77
<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.
78
<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.
In this Prospectus, references to "dollars" and "$" are to United States
dollars.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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.................................................. 78
Index to Consolidated Financial Statements................ F-1
</TABLE>
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 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.
21 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP.**
23.2 -- Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included in opinion filed as Exhibit 5).
24 -- Power of Attorney.**
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
Item 17. Undertakings.
The undersigned registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) for the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
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 6, 1997.
TRIGON HEALTHCARE, INC.
By: /S/ THOMAS G. SNEAD, JR.
------------------------
Thomas G. Snead, Jr.
Title: Treasurer and Chief Financial
Officer
-----------------------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------------------ ---------------------------------------------- -----------------
<S> <C>
* Chairman of the Board and January 6, 1997
- ------------------------------------------------------ Chief Executive Officer
Norwood H. Davis, Jr.
* Director January 6, 1997
- ------------------------------------------------------
Lenox D. Baker, Jr., M.D.
* Director January 6, 1997
- ------------------------------------------------------
James K. Candler
* Director January 6, 1997
- ------------------------------------------------------
John Cole, Jr., M.D.
* Director January 6, 1997
- ------------------------------------------------------
John L. Colley, Jr., Ph.D.
* Director January 6, 1997
- ------------------------------------------------------
Robert M. Freeman
* Director January 6, 1997
- ------------------------------------------------------
William R. Harvey
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------------------ ---------------------------------------------- -----------------
<S> <C>
* Director January 6, 1997
- ------------------------------------------------------
Elizabeth G. Helm
* Director January 6, 1997
- ------------------------------------------------------
Gary A. Jobson
* Director January 6, 1997
- ------------------------------------------------------
Frank C. Martin, Jr.
* Director January 6, 1997
- ------------------------------------------------------
Donald B. Nolan, M.D.
* Director January 6, 1997
- ------------------------------------------------------
William N. Powell
* Director January 6, 1997
- ------------------------------------------------------
J. Carson Quarles
* Director January 6, 1997
- ------------------------------------------------------
R. Gordon Smith
* Director January 6, 1997
- ------------------------------------------------------
Jackie M. Ward
* Director January 6, 1997
- ------------------------------------------------------
Stirling L. Williamson, Jr.
/S/ THOMAS G. SNEAD, JR. Treasurer and Chief Financial Officer January 6, 1997
- ------------------------------------------------------ (Principal Financial and Accounting Officer)
Thomas G. Snead, Jr.
</TABLE>
*By: /S/ THOMAS G. SNEAD, JR.
------------------------
Thomas G. Snead, Jr.
Attorney-in-fact
II-4
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
doing business as
TRIGON BLUE CROSS BLUE SHIELD
AMENDED AND RESTATED PLAN OF DEMUTUALIZATION
DATED OCTOBER 31, 1996
This Plan of Demutualization constitutes:
- a Plan of Conversion under ss.ss.38.2-1005 and 38.2-1005.1 of
Title 38.2 of the Code of Virginia; and
- a Plan of Merger under ss.ss. 13.1-722.1 and 13.1-898.1 of
Title 13.1 of the Code of Virginia.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
INTRODUCTION
ARTICLE I
DEFINITIONS
Section 1.1 Definitions.......................................................................1
ARTICLE II
BACKGROUND AND PURPOSE
Section 2.1 Parties to the Plan.........................................................................6
Section 2.2 Purposes of the Plan........................................................................6
Section 2.3 The Demutualization.........................................................................6
Section 2.4 Legal Effect of Plan........................................................................7
ARTICLE III
HEARING, COMMISSION APPROVAL
Section 3.1 Hearing.....................................................................................7
Section 3.2 Commission Approval.........................................................................7
ARTICLE IV
MEMBER APPROVAL, CORPORATE ACTIONS
Section 4.1 Special Meeting.............................................................................8
Section 4.2 Member Approval.............................................................................8
Section 4.3 Determination of Members' Votes.............................................................8
ARTICLE V
THE DEMUTUALIZATION AND THE MERGER
Section 5.1 Filing of Approved Plan.....................................................................8
Section 5.2 Effective Date..............................................................................8
Section 5.3 The Demutualization and Merger..............................................................9
Section 5.4 Directors and Officers......................................................................9
Section 5.5 Miscellaneous...............................................................................9
ARTICLE VI
ELIGIBLE MEMBERS AND POLICIES IN FORCE
Section 6.1 Determination of Membership................................................................10
Section 6.2 In Force...................................................................................10
ARTICLE VII
ALLOCATION AND FORM OF CONSIDERATION TO ELIGIBLE MEMBERS
Section 7.1 Allocation of Consideration to Eligible Members............................................11
PLAN OF DEMUTUALIZATION Page (i)
<PAGE>
Section 7.2 Cash or Common Stock as Consideration to Eligible Members..................................13
Section 7.3 Payment of Consideration to Eligible Members...............................................14
ARTICLE VIII
INITIAL PUBLIC OFFERING
Section 8.1 Initial Public Offering....................................................................14
Section 8.2 Terms of the Initial Public Offering.......................................................14
Section 8.3 Other Sales of Securities..................................................................15
ARTICLE IX
CASH CONSIDERATION TO ELIGIBLE MEMBERS: AMOUNT AND PRORATION
Section 9.1 Cash: Amount per Allocated Share...........................................................15
Section 9.2 Cash: Total Cash for Preferred Cash Members................................................15
Section 9.3 Cash: Proration............................................................................15
ARTICLE X
POST-DEMUTUALIZATION LOCKUP, ISSUANCE OF COMMON STOCK
Section 10.1 Need for Lockup...........................................................................16
Section 10.2 The Lockup, Duration......................................................................16
Section 10.3 No Sales or Transfers During Lockup.......................................................16
Section 10.4 Uncertificated Securities During Lockup...................................................17
Section 10.5 Distribution of Certificates After Lockup.................................................17
ARTICLE XI
THE COMMONWEALTH PAYMENT
Section 11.1 The Commonwealth Payment..................................................................17
Section 11.2 Redemption of Class C Stock. .............................................................18
Section 11.3 Class C Stock.............................................................................18
Section 11.4 Commonwealth Directors....................................................................18
ARTICLE XII
ADDITIONAL PROVISIONS
Section 12.1 Restriction on Acquisition of Securities..................................................19
Section 12.2 Commission-Free Sales and Round Up Program................................................19
Section 12.3 Employee Benefit Plans....................................................................20
Section 12.4 Restriction on Management Options.........................................................21
Section 12.5 Market for Common Stock...................................................................21
ARTICLE XIII
ADJUSTMENTS TO COMMON STOCK
Section 13.1 Adjustment to Allocable Shares............................................................22
Section 13.2 Authority to Remedy Errors................................................................22
PLAN OF DEMUTUALIZATION Page (ii)
<PAGE>
ARTICLE XIV
OPEN ENROLLMENT
Section 14.1 Open Enrollment...........................................................................22
ARTICLE XV
EFFECT OF MERGER
Section 15.1 Continuity of Corporate Existence.........................................................23
Section 15.2 Effect on Membership......................................................................23
Section 15.3 No Effect on Policies.....................................................................23
ARTICLE XVI
MISCELLANEOUS PROVISIONS
Section 16.1 Abandonment of Plan.......................................................................23
Section 16.2 Amendment of Plan.........................................................................23
Section 16.3 Subsequent Corporate Actions..............................................................24
Section 16.4 Interpretation of Plan....................................................................24
PLAN OF DEMUTUALIZATION Page (iii)
</TABLE>
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
doing business as
Trigon Blue Cross Blue Shield
AMENDED AND RESTATED PLAN OF DEMUTUALIZATION
- -------------------------------------------------------------------------------
INTRODUCTION
Blue Cross and Blue Shield of Virginia, doing business as Trigon Blue
Cross Blue Shield, is a Virginia mutual insurance company. As a mutual insurance
company, it is owned by its policyholders. For the reasons stated herein and on
the terms set forth herein, it wishes to convert to a stock corporation, to
separate the policyholders' interests as members from their rights as insureds,
and to issue shares of stock to its policyholders in consideration for their
membership interests, including their interests in the surplus of Blue Cross and
Blue Shield of Virginia.
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. As used in this Plan of Demutualization,
the following capitalized terms have the following meanings:
"Actuarial Calculation Memorandum" means the calculation of actuarial
contribution attached as Exhibit 2 hereto.
"Aggregate Fixed Component" has the meaning specified in Section
7.1(c)(i).
"Aggregate Variable Component" has the meaning specified in Section
7.1(c)(ii).
"Allocable Shares" means 64,000,000 (sixty four million) shares of
Common Stock as the same may be adjusted pursuant to Section 13.1 or Section
7.1(e).
"Articles of Merger" means Articles of Merger substantially in the form
of those attached hereto as Exhibit 1.
"Board of Trigon Healthcare" means the board of directors of Trigon
Healthcare.
"Board of Trigon Insurance Company" means the board of directors of
Trigon Insurance Company.
"Board of Virginia BCBS" means the board of directors of Virginia BCBS.
PLAN OF DEMUTUALIZATION Page 1
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"Cash Shares" means the Mandatory Cash Shares and the Preferred Cash
Shares.
"Class C Stock" means the Class C redeemable voting Common Stock, par
value $0.01, of Trigon Healthcare which shall solely be owned by the
Commonwealth.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Virginia State Corporation Commission.
"Common Stock" means the Class A voting Common Stock, par value $0.01,
of Trigon Healthcare.
"Commonwealth" means the Commonwealth of Virginia.
"Commonwealth Nominees" has the meaning specified in Section 11.4.
"Commonwealth Payment" has the meaning specified in Section 11.1.
"Consideration" means the Common Stock and/or cash to be received by
Eligible Members in the Demutualization in consideration for their Membership
Interests in Virginia BCBS, including their interests in the surplus of Virginia
BCBS.
"Demutualization" means the transactions contemplated by this Plan
whereby Virginia BCBS shall be converted from a Virginia mutual insurance
company to a Virginia stock corporation through the Merger.
"Effective Date" means the date and time on which the Commission issues
a certificate of merger with respect to the Merger in accordance with Virginia
law.
"Eligible Member" means a Person who held a policy of insurance of
Virginia BCBS which was In Force (and through which such Person was therefore a
Member) on December 31, 1995, as determined under Article VI hereof.
"Employee Benefit Plan" means an employee benefit plan (as defined in
Section 3(3) of ERISA) that is subject to ERISA or that would be subject to
ERISA absent an exemption from ERISA, part or all of the benefits of which are
provided under a policy of insurance of Virginia BCBS.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
PLAN OF DEMUTUALIZATION Page 2
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"Hearing" means the public hearing called by the Commission to consider
the Plan.
"In Force" has the meaning specified in Section 6.2.
"Initial Public Offering" has the meaning specified in Section 8.1.
"Initial Stock Price" means the price per share at which the Common
Stock is sold to the public in the Initial Public Offering but without taking
into account any underwriting discounts, costs or expenses incurred in
connection therewith.
"Initial Per Share Stock Proceeds" means the net proceeds per share of
Common Stock obtained by Trigon Healthcare from the sale of Common Stock to the
public in the Initial Public Offering, and is equal to the Initial Stock Price
minus an amount equal to all underwriting discounts and costs and expenses
incurred in connection therewith determined on a per share basis.
"Joint Rules Committee" means the Joint Rules Committee as defined in
Virginia Code ss. 51.1-124.3.
"Lockup" has the meaning specified in Section 10.2.
"Lockup Period" has the meaning specified in Section 10.2.
"Mandatory Cash Members" has the meaning specified in Section 7.2(d).
"Mandatory Cash Shares" has the meaning specified in Section 7.2(d).
"Member" means a Person who holds a policy of insurance of Virginia
BCBS as defined in Article 1, Section 1 of the bylaws of Virginia BCBS.
"Membership Interest" means all the rights or interests of each Member
of Virginia BCBS, including, but not limited to, any right to vote, any rights
with regard to the earnings, surplus or assets of Virginia BCBS, and any other
rights in liquidation, dissolution, merger, reorganization or conversion of
Virginia BCBS, but shall not include any other right as an insured conferred by
any insurance policy or contract of insurance.
"Merger" means the merger of TMSI with and into Virginia BCBS.
"Minimum Amount" means $25,000,000 plus the amount needed to pay cash
Consideration in the Demutualization to the Mandatory Cash Members.
"MPL" means a major product line of Virginia BCBS as defined in the
Actuarial Calculation Memorandum.
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"MRI" has the meaning set forth in Section 11.2.
"Non-Voting Common Stock" means the Class B non-voting Common Stock,
par value $0.01, of Trigon Healthcare.
"Nominee Lists" has the meaning specified in Section 11.4.
"Odd Lot Holders" means Eligible Members to whom more than zero and
fewer than 100 shares of Common Stock are allocated as Consideration.
"Offerings" has the meaning specified in Section 8.1.
"Open Enrollment Program" has the meaning set forth in Article XIV of
this Plan.
"Person" includes, without limitation, an individual, corporation,
partnership, association, joint stock company, trust, unincorporated
organization, government or political subdivision thereof or any other entity
not specifically listed in this definition.
"Plan" means this Plan of Demutualization, including all Exhibits
hereto, as this Plan of Demutualization may be amended from time to time in
accordance with its provisions.
"Preferred Cash Members" has the meaning specified in Section 7.2(e).
"Preferred Cash Shares" has the meaning specified in Section 7.2(e).
"Proration Provisions" has the meaning specified in Section 9.3.
"Record Date" means the date established by the Board of Virginia BCBS
pursuant to Section 13.1-844 of the Virginia Nonstock Corporation Act and the
bylaws of Virginia BCBS as the record date for the Special Meeting in order to
determine the Members entitled to vote at the Special Meeting.
"Redemption Price" has the meaning specified in Section 11.2.
"Restated Articles" means the articles of incorporation of Virginia
BCBS as they will be restated in the Merger in the form attached as Exhibit 3A
hereto.
"Restated Bylaws" means the bylaws of Virginia BCBS as they will be
restated in the Merger in the form attached as Exhibit 3B hereto.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Management" means the "executive officers" (within the meaning
of Rule 3b-7 under the Exchange Act) of Trigon Healthcare from time to time,
whether such persons are
PLAN OF DEMUTUALIZATION Page 4
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officers of Trigon Healthcare or of one of its subsidiaries, including without
limitation Trigon Insurance. For a period of one year after the Effective Date,
the individuals identified as executive officers in Trigon Healthcare's
registration statement under the Securities Act relating to the Initial Public
Offering shall be considered members of Senior Management regardless of any
change in titles or duties, provided that such individuals remain in the employ
of Trigon Healthcare or any of its subsidiaries.
"Small Holders Program" has the meaning set forth in Section 12.2(a) of
this Plan.
"Special Meeting" means the Special Meeting of Voting Members,
including adjournments thereof, called by Virginia BCBS to consider and approve
this Plan.
"State" means the District of Columbia and any state of the United
States of America, but does not include any territory or insular possession of
the United States of America.
"TMSI" means Trigon Merger Sub, Inc., a Virginia stock corporation and
a wholly owned subsidiary of Trigon Healthcare which is to be merged into
Virginia BCBS in the Merger.
"Transfer" of shares of stock or other securities shall include,
without limitation, any sale, disposition, pledge, alienation or other transfer
of any such share of stock or other security or any right or interest therein.
"Trigon Healthcare" means Trigon Healthcare, Inc., a Virginia stock
corporation and a wholly owned subsidiary of Virginia BCBS before the
Demutualization and the parent corporation of Trigon Insurance after the
Demutualization.
"Trigon Insurance Company" or "Trigon Insurance" means Virginia BCBS
after the Demutualization and after being renamed Trigon Insurance Company, a
Virginia stock corporation.
"Virginia BCBS" means Blue Cross and Blue Shield of Virginia, a
Virginia nonstock corporation licensed as a mutual insurer and carrying on
business as Trigon Blue Cross Blue Shield.
"Voting Member" means a Person who holds a policy or policies of
insurance with Virginia BCBS which policy is or which policies are In Force, and
which Person is therefore a Member, at the Record Date, as determined under
Article VI hereof.
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ARTICLE II
BACKGROUND AND PURPOSE
Section 2.1 Parties to the Plan. This Plan is submitted by Virginia
BCBS and its wholly owned subsidiaries, Trigon Healthcare and TMSI, with respect
to the Demutualization of Virginia BCBS and the conversion of Virginia BCBS to a
stock corporation.
Section 2.2 Purposes of the Plan. The Demutualization to be effected by
this Plan will provide Eligible Members with Consideration in the form of Common
Stock and/or cash in consideration for their Membership Interests, including
their interests in the surplus of Virginia BCBS.
The Demutualization will also allow Virginia BCBS, as a stock
corporation through its parent Trigon Healthcare, to access the equity capital
markets and raise capital to permit it and Trigon Healthcare to expand their
existing business and to enhance their strategic position in the consolidating
managed care industry.
At present, Virginia BCBS can increase its capital primarily through
retained surplus contributed by its operating businesses, which Virginia BCBS
believes to be an inadequate long term source of the capital necessary for the
growth of Virginia BCBS's business. In the Demutualization, Virginia BCBS will
become a wholly owned subsidiary of Trigon Healthcare and through Trigon
Healthcare will have access to the equity capital markets.
The Demutualization will also make it possible to effect acquisitions
through the issuance of equity securities of Trigon Healthcare. Trigon
Healthcare will not be subject to regulatory limitations on subsidiary
investments that currently restrict Virginia BCBS's ability to effect
acquisitions, because Trigon Healthcare will be making those acquisitions from
its own resources as a holding company rather than from the resources of a
regulated insurer. Consequently, as a result of the Demutualization and
acquisition strategies implemented thereafter, growth may occur through
acquisitions by Trigon Healthcare and its other affiliates, rather than through
acquisitions by Trigon Insurance.
Section 2.3 The Demutualization. Subject to the terms of this Plan and
as more fully set forth in this Plan, on the Effective Date, the following
actions will be effected to demutualize Virginia BCBS:
(i) TMSI will be merged with and into Virginia BCBS,
the separate existence of TMSI will cease, Virginia BCBS will become a
wholly owned subsidiary of Trigon Healthcare, Virginia BCBS will change
its name to Trigon Insurance Company, its articles of incorporation and
bylaws will be restated in the form of the Restated Articles and the
Restated Bylaws, and Virginia BCBS will become a stock corporation
incorporated under and governed by the Virginia Stock Corporation Act,
ss.13.1-601 et seq.;
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(ii) 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 Trigon Healthcare and/or cash from Trigon Insurance pursuant
to and in accordance herewith;
(iii) each issued and outstanding share of common
stock of TMSI owned by Trigon Healthcare immediately prior to the
Effective Date shall, as a result of the Merger and without any action
on the part of Trigon Healthcare, be cancelled and converted into one
share of stock of Trigon Insurance, and all issued and outstanding
shares of capital stock in Trigon Healthcare owned by Virginia BCBS
shall be cancelled;
(iv) Trigon Healthcare will effect the Initial Public
Offering to generate net proceeds from the Initial Public Offering at
least equal to the Minimum Amount; and
(v) Trigon Healthcare shall make the Commonwealth
Payment pursuant to and in accordance with Article XI hereof.
After the Demutualization, Trigon Insurance may continue to do business in its
service area in Virginia as Trigon Blue Cross Blue Shield.
Section 2.4 Legal Effect of Plan. This Plan shall constitute:
(i) a plan of conversion within the meaning of
Virginia Code ss.ss. 38.2-1005 and 38.2-1005.1; and
(ii) a plan of merger within the meaning of Virginia
Code ss.ss. 13.1-722.1 and 13.1-898.1.
ARTICLE III
HEARING, COMMISSION APPROVAL
Section 3.1 Hearing. The Hearing may be held by the Commission with
respect to this Plan at such time and place as the Commission may determine.
Virginia BCBS, its Members, directors, officers, and employees, and any other
interested parties, may appear and be heard at the Hearing. The Commission may
specify limitations and procedures to govern the Hearing, including with respect
to who may participate in the Hearing and the submission of written and oral
testimony. Notice of such Hearing shall be given by Virginia BCBS by mailing or
publication as contemplated by Virginia Code ss. 13.1-842.A.2 or as otherwise
required by the Commission.
Section 3.2 Commission Approval. This Plan shall be subject to the
approval of the Commission following the Hearing.
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ARTICLE IV
MEMBER APPROVAL, CORPORATE ACTIONS
Section 4.1 Special Meeting. Virginia BCBS shall submit this Plan to
Voting Members for their approval. Virginia BCBS shall hold a Special Meeting of
its Voting Members for the purpose of voting on this Plan and on any other
matters which the Board of Virginia BCBS determines to submit at the Special
Meeting. The Board of Virginia BCBS shall establish the Record Date for the
Special Meeting. Notice of the Special Meeting shall be given by Virginia BCBS
to Voting Members as contemplated by Virginia Code ss. 13.1-842 or as otherwise
required by the Commission. Such notice may (but need not) be given
simultaneously with notice of the Hearing. The Special Meeting shall be held at
the home office of Virginia BCBS or at such other location as may be determined
by Virginia BCBS.
Section 4.2 Member Approval. This Plan shall be approved by the Members
if more than two-thirds of the Voting Members present at the Special Meeting in
person or by proxy vote to approve the Plan, and if a quorum is present at the
Special Meeting.
Section 4.3 Determination of Members' Votes. The votes which Voting
Members shall be entitled to cast at the Special Meeting shall be determined in
accordance with the bylaws of Virginia BCBS in a manner consistent with Article
VI hereof. Under the bylaws of Virginia BCBS, no Voting Member is entitled to
vote by separate voting group or class.
ARTICLE V
THE DEMUTUALIZATION AND THE MERGER
Section 5.1 Filing of Approved Plan. Following the Hearing, the
approval of this Plan by the Commission, and the approval of this Plan by the
Voting Members at the Special Meeting, Virginia BCBS shall file with the
Commission in accordance with Virginia law the Articles of Merger together with
a copy of this Plan as so approved. Such filing shall be effected by Virginia
BCBS within twelve (12) months after the later of the Hearing or approval of
this Plan by the Voting Members at the Special Meeting. In the event that this
Plan or any action contemplated by this Plan becomes the subject of one or more
legal or equitable proceedings in any state or federal court or administrative
agency in the United States, then the twelve-month (12) period referred to in
this Section 5.1 shall be lengthened by a period of time equal to the pendency
of such proceeding or proceedings plus twelve (12) months. In addition, the
twelve-month (12) period referred to in the last two sentences may be lengthened
to a period of time approved by a vote of the members of Virginia BCBS.
Section 5.2 Effective Date. The Plan and the Merger shall become
effective upon the issuance by the Commission of a certificate of merger with
respect to the Merger. The date and time on which such certificate of merger
with respect to the Merger is issued by the Commission shall be the Effective
Date.
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Section 5.3 The Demutualization and Merger. Upon the Effective Date
and pursuant to the Merger:
(i) 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 Trigon Healthcare;
(ii) the articles of incorporation and bylaws of
Virginia BCBS will be restated in the form of the Restated Articles and
the Restated Bylaws, and Virginia BCBS will become a stock corporation
incorporated under and governed by the Virginia Stock Corporation Act,
ss.13.1-601 et seq.;
(iii) each issued and outstanding share of common
stock of TMSI owned by Trigon Healthcare immediately prior to the
Effective Date shall, as a result of the Merger and without any action
on the part of Trigon Healthcare, be cancelled and converted into one
share of stock of Trigon Insurance;
(iv) the name of Virginia BCBS will be changed to
Trigon Insurance Company;
(v) all Membership Interests of all Members in
Virginia BCBS shall be cancelled, 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 Trigon Healthcare and/or cash from Trigon Insurance pursuant
to and in accordance with this Plan; and
(vi) all issued and outstanding shares of capital
stock in Trigon Healthcare owned by Virginia BCBS shall be cancelled.
Immediately following the receipt of the proceeds of the Offerings, Trigon
Healthcare shall contribute to Trigon Insurance the total amount to be
distributed to Eligible Members as cash Consideration. Trigon Healthcare shall
make the Commonwealth Payment pursuant to and in accordance with Article XI
hereof.
Section 5.4 Directors and Officers. The directors and officers of
Virginia BCBS immediately before the Effective Date shall continue to serve as,
and shall constitute, the directors and officers of Trigon Insurance Company
immediately following the Merger and until new directors and officers have been
duly elected or appointed pursuant to the Restated Articles and the Restated
Bylaws.
Section 5.5 Miscellaneous. TMSI and Trigon Insurance Company are
empowered to adopt further rules and regulations, not inconsistent with the
provisions of this Plan, regarding the termination of Membership Interests and
the distribution of the Consideration.
PLAN OF DEMUTUALIZATION Page 9
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ARTICLE VI
ELIGIBLE MEMBERS AND POLICIES IN FORCE
Section 6.1 Determination of Membership.
(a) Pursuant to Article I, Section 1(a) of the bylaws of
Virginia BCBS as they exist at the time hereof, a Member shall be any
policyholder of Virginia BCBS. Unless otherwise stated herein, the status of a
Person as a Member as of any date shall be determined on the basis of the
records of Virginia BCBS as of such date in accordance with the following
provisions. For these purposes, the term "policyholder" shall mean any of the
following: (A) an individual who holds an individual policy of insurance with
Virginia BCBS (including, but not limited to, (1) an individual who holds a
Medicare supplement policy and (2) an individual who holds an individual policy
of insurance with Virginia BCBS whose premiums and policy terms are set by
virtue of that individual's participation in a larger affinity group); and (B) a
group that holds a group policy of insurance with Virginia BCBS. In the case of
a group policy of insurance, the group as a whole shall be considered one
policyholder, such policyholder's voting rights as a Member shall be exercised
by the person designated by the group to act for the group for that purpose, and
individual members of the group shall not be considered Members of Virginia
BCBS. The term "policyholder" does not include a customer of Virginia BCBS under
any contract which is not a policy of insurance and does not include a customer
of a subsidiary of Virginia BCBS under any contract with such subsidiary.
(b) The identity of an Eligible Member and the right of an
Eligible Member to receive Consideration shall be determined without giving
effect to any interest of any other Person in the policy of insurance pursuant
to which the Membership Interest exists or is conferred.
(c) The mailing address of a Member as of any date for
purposes of the Plan shall be the Members' last known address as shown on the
records of Virginia BCBS as of such date.
(d) Any dispute as to the determination of a Member or the
right of a Member to vote at the Special Meeting or to receive Consideration
shall be resolved in accordance with the foregoing and with such other
procedures as may be acceptable to the Commission.
Section 6.2 In Force.
(a) A policy of insurance issued by Virginia BCBS shall be
considered to be in force ("In Force") in accordance with the following
provisions.
(b) For the purposes of determining whether a Member is a
Voting Member and thus entitled to vote at the Special Meeting, a policy shall
be In Force on the Record Date if, as shown on Virginia BCBS's records as such
records exist at the close of business on the Record Date, such policy has been
issued and is effective on that date.
PLAN OF DEMUTUALIZATION Page 10
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(c) For the purposes of determining whether a Member is an
Eligible Member and thus entitled to receive Consideration, a policy shall be In
Force and held by such Member if a policy was in force and held by such Member
on December 31, 1995 as shown by the records of Virginia BCBS. Such
determination shall be made in accordance with Virginia BCBS's usual procedures.
For this purpose,
(i) any policy which is added on a retroactive basis,
in accordance with Virginia BCBS's normal underwriting procedures on or
before February 29, 1996 with the effect that such policy is in force
on December 31, 1995, shall be considered to be In Force on December
31, 1995;
(ii) any policy which was in force on December 31,
1995 and which is subsequently cancelled on a retroactive basis, on or
before February 29, 1996, by the Member holding such policy or Virginia
BCBS, in accordance with Virginia BCBS's normal underwriting procedures
with the effect that such policy is not in force on December 31, 1995
after taking into account such cancellation, shall not be considered to
be In Force on December 31, 1995; and
(iii) Virginia BCBS and the Bureau of Insurance of
the Commission shall determine a mutually acceptable date through which
(x) any policy added after February 29, 1996 on a retroactive basis in
accordance with Virginia BCBS's normal underwriting procedures with the
effect that such policy is in force on December 31, 1995 may be
considered In Force on December 31, 1995, and (y) any policy after
February 29, 1996 canceled on a retroactive basis in accordance with
Virginia BCBS's normal underwriting procedures with the effect that
such policy is not in force on December 31, 1995 may not be considered
to be In Force on December 31, 1995.
ARTICLE VII
ALLOCATION AND FORM OF CONSIDERATION TO ELIGIBLE MEMBERS
Section 7.1 Allocation of Consideration to Eligible Members.
(a) The Consideration to be received by Eligible Members
in the Demutualization shall be Common Stock and/or cash.
(b) Solely for the purposes of calculating the amount of the
Consideration to be received by each Eligible Member, each Eligible Member will
be allocated a specific number of shares of Common Stock in accordance herewith.
(c) The Allocable Shares to be allocated to all of the
Eligible Members in the Demutualization shall consist of 64,000,000 shares of
Common Stock, which may be adjusted pursuant to Section 13.1 or Section 7.1(e).
The Allocable Shares shall be divided into two categories, the Aggregate Fixed
Component and the Aggregate Variable Component.
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(i) The Aggregate Fixed Component is to be allocated
in consideration of the voting rights associated with the Membership
Interests of the Eligible Members. The Aggregate Fixed Component shall
consist of 15% (fifteen percent) of the Allocable Shares, or 9,600,000
(nine million six hundred thousand) shares of Common Stock, and shall
be allocated to the Eligible Members in accordance with Section
7.1(d)(i).
(ii) The Aggregate Variable Component is to be
allocated in consideration of the economic interest associated with the
Membership Interests of the Eligible Members, including their interests
in the surplus of Virginia BCBS. The Aggregate Variable Component shall
consist of 85% (eighty-five percent) of the Allocable Shares, or
54,400,000 (fifty-four million four hundred thousand) shares of Common
Stock, and shall be allocated to the Eligible Members in accordance
with Section 7.1(d)(ii).
(d) Each Eligible Member shall be paid Consideration based on
the allocation to such Eligible Member of a number of shares of Common Stock
equal to the sum of:
(i) a fixed component of Consideration representing
the portion of the Aggregate Fixed Component allocable to such Eligible
Member, being equal to the product of the number of votes exercisable
by such Eligible Member as of December 31, 1995 multiplied by a
fraction, the numerator of which is the total number of shares of
Common Stock in the Aggregate Fixed Component, and the denominator of
which is the aggregate number of votes exercisable by all Eligible
Members as of December 31, 1995, each as determined in accordance with
the bylaws of Virginia BCBS and taking in account the provisions of
Section 6.2(c) and the Actuarial Calculation Memorandum; and
(ii) a variable component of Consideration
representing the portion (if any) of the Aggregate Variable Component
allocable to such Eligible Member, which shall not be less than zero
and shall be on the basis of the past and future contribution to the
surplus of Virginia BCBS that was made and is expected to be made by
each policy held by such Eligible Member based on the profitability of
the MPL to which such policy belongs, as determined on the basis of the
books and records of Virginia BCBS and in accordance with the Actuarial
Calculation Memorandum.
(e) Trigon Healthcare will not issue fractional shares in the
Demutualization. If the total number of shares of Common Stock allocated to an
Eligible Member includes a fraction of a share of Common Stock (after taking
into account the allocable portions of both the Aggregate Fixed Component and of
the Aggregate Variable Component), then the fraction of a share of Common Stock
shall be rounded to the nearest whole number of shares of Common Stock, with one
half being rounded upwards to the next higher whole number. In the event the
rounding provisions of the foregoing sentence result in an aggregate number of
shares to be issued in the Demutualization which is different than 64 million
(or such other number as results from adjustment pursuant to Section 13.1), then
the Allocable Shares shall be adjusted accordingly.
PLAN OF DEMUTUALIZATION Page 12
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Section 7.2 Cash or Common Stock as Consideration to Eligible Members.
(a) This Section 7.2 specifies the circumstances in which, and
the Eligible Members to whom, Consideration shall be paid in the form of shares
of Common Stock, cash, or both.
(b) The Common Stock allocated to each Eligible Member shall
be issued to each such Eligible Member as that Eligible Member's Consideration
unless and to the extent that such Eligible Member is permitted or required to
receive cash instead of and in lieu of some or all of the Common Stock allocated
to that Eligible Member.
(c) The time at which, the manner in which, and the conditions
subject to which Common Stock and/or cash shall be issued and distributed to
Eligible Members, and in the case of cash Consideration the determination of the
amount of cash Consideration, shall be governed by the provisions of Articles
VII, IX, X and XII.
(d) Shares of Common Stock shall not be issued and distributed
to any of the following Eligible Members as Consideration, and Consideration
shall be paid by Virginia BCBS to the following Eligible Members only in the
form of cash, in lieu of and to the complete exclusion of the issuance of any
and all shares of Common Stock:
(i) any Eligible Member who is known to Virginia BCBS
to be the subject of a lien or bankruptcy proceeding, or any Eligible
Member with respect to whom the Consideration will, to the knowledge of
Virginia BCBS, be the subject of a lien or bankruptcy proceeding; and
(ii) any Eligible Member whose address for mailing
purposes as shown on the records of Virginia BCBS as not being located
within any State; and
(iii) any Eligible Member whose address for mailing
purposes as shown on the records of Virginia BCBS as being located
within any State in which, according to the records of Virginia BCBS,
there are thirty or fewer Eligible Members; and
(iv) any Eligible Member whose address for mailing
purposes as shown on the records of Virginia BCBS as being located
within any State in which, in the reasonable determination of Virginia
BCBS prior to the Effective Date or Trigon Healthcare after the
Effective Date, the requirements necessary to qualify Common Stock for
issuance to such Eligible Member in that State are excessively
burdensome or expensive or are likely to be subject to unreasonable
delays.
The shares of Common Stock allocated to these Eligible Members shall be referred
to as "Mandatory Cash Shares" and these Eligible Members shall be referred to as
"Mandatory Cash Members."
PLAN OF DEMUTUALIZATION Page 13
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(e) If any Eligible Member, other than a Mandatory Cash
Member, has, on a form provided to such Eligible Member that has been properly
completed and signed by the Eligible Member and received by Virginia BCBS on or
prior to a date set by Virginia BCBS, affirmatively elected a preference to
receive cash in lieu of Common Stock, then cash may be paid to such Eligible
Member in lieu of some or all of the Common Stock to be issued to such Eligible
Member as Consideration. To the extent that such cash is less than the full
Consideration payable to such Eligible Member, shares of Common Stock shall be
issued to such Eligible Member as the remaining Consideration to such Eligible
Member. The shares of Common Stock allocated to the Eligible Members who have
made this election but in lieu of which they will receive cash shall be referred
to as "Preferred Cash Shares" and the Eligible Members who have made this
election shall be referred to as "Preferred Cash Members."
Section 7.3 Payment of Consideration to Eligible Members. Both the
payment of cash Consideration by Trigon Insurance and the issuance of Common
Stock by Trigon Healthcare as Consideration shall occur as soon as reasonably
practicable following the Effective Date. Both the payment of cash Consideration
and the issuance of Common Stock as Consideration shall be subject to Section
12.3. All Common Stock issued as Consideration shall be issued by Trigon
Healthcare subject to the Lockup. All cash Consideration shall be paid by Trigon
Insurance by check net of any applicable withholding or other applicable tax and
without the accrual of interest from and after the Effective Date.
ARTICLE VIII
INITIAL PUBLIC OFFERING
Section 8.1 Initial Public Offering. Trigon Healthcare shall conclude
an initial public offering (the "Initial Public Offering") of the Common Stock
at the Effective Date in connection with the Demutualization. Simultaneously,
Trigon Healthcare may, at its discretion, sell, in a public offering or by
placement, debt securities and other equity securities (including without
limitation preferred stock and securities convertible into Common Stock) of
Trigon Healthcare or incur other debt obligations (including without limitation
debt obligations to banks or other financial institutions)(collectively with the
Initial Public Offering, the "Offerings").
Section 8.2 Terms of the Initial Public Offering.
(a) The maximum number of shares of Common Stock that may be
offered and sold in the Offerings (including the number of shares of Common
Stock issuable upon the conversion of any securities convertible into Common
Stock) shall not exceed 49% (forty-nine percent) of the aggregate number of
shares of Common Stock that will be issued and outstanding, or that will be
issuable upon the conversion of any outstanding securities convertible into
Common Stock, immediately following the Offerings and the issuance to Eligible
Members of all Common Stock that will be issued to them as Consideration in the
Demutualization.
(b) The minimum size of the Initial Public Offering shall be
such as will generate net proceeds from the Initial Public Offering equal to the
Minimum Amount.
PLAN OF DEMUTUALIZATION Page 14
<PAGE>
(c) Subject to Sections 8.2(a) and 8.2(b), the public offering
price, the number of shares of Common Stock to be sold and, if other securities
are to be sold, the number and terms of such other securities to be sold, and
other terms on which the Offerings shall be conducted shall be determined by the
Board of Virginia BCBS and the Board of Trigon Healthcare.
Section 8.3 Other Sales of Securities. After the Effective Date, Trigon
Healthcare may offer, issue and sell Common Stock, other equity securities
(including without limitation preferred stock and securities convertible into
Common Stock) and debt securities of Trigon Healthcare or incur debt or other
obligations without restriction hereunder other than under Section 12.4.
ARTICLE IX
CASH CONSIDERATION TO ELIGIBLE MEMBERS: AMOUNT AND PRORATION
Section 9.1 Cash: Amount per Allocated Share. If all or any part of the
Consideration to be paid to an Eligible Member will be in cash pursuant hereto,
the amount of such cash Consideration shall be equal to the number of shares of
Common Stock allocable to such Eligible Member in respect of which cash will be
distributed instead of such Common Stock, multiplied by the Initial Per Share
Stock Proceeds.
Section 9.2 Cash: Total Cash for Preferred Cash Members. The total
amount of funds available to be distributed as cash Consideration to Preferred
Cash Members shall be an amount determined by Virginia BCBS in its sole
discretion on or immediately preceding the Effective Date. Such amount shall not
exceed the aggregate net proceeds of the Offerings minus the Minimum Amount.
Section 9.3 Cash: Proration. If the cash available to Trigon Insurance
under Section 9.2 to distribute as cash Consideration is insufficient to pay
cash Consideration to all Preferred Cash Members in lieu of all shares of Common
Stock which have been allocated to them, then the cash amount available shall be
distributed among Preferred Cash Members in accordance with the following
provisions (the "Proration Provisions"):
(i) first, cash Consideration will be paid to all
Preferred Cash Members who are Odd Lot Holders in lieu of all shares of
Common Stock allocated to them, and if the cash available to pay cash
Consideration to the Preferred Cash Members who are Odd Lot Holders is
insufficient to make such payment, then the cash available to Preferred
Cash Members who are Odd Lot Holders will be distributed to them pro
rata to the number of shares of Common Stock allocated to each of them;
and
(ii) second, cash Consideration will be paid to all
other Preferred Cash Members in lieu of all Shares of Common Stock
allocated to them, and if the cash remaining after paying cash
Consideration to the Preferred Cash Members who are Odd Lot Holders is
insufficient to make such payment, then the cash available to such
other
PLAN OF DEMUTUALIZATION Page 15
<PAGE>
Preferred Cash Members will be distributed to them pro rata to the
number of shares of Common Stock allocated to each of them.
ARTICLE X
POST-DEMUTUALIZATION LOCKUP, ISSUANCE OF COMMON STOCK
Section 10.1 Need for Lockup. In order to enhance the value of the
Common Stock and achieve orderly trading following the Initial Public Offering,
sales by Eligible Members of Common Stock issued as Consideration must be
limited for a period of time through a lockup. The lockup is intended to provide
for the development of an orderly trading market in the Common Stock, the
development of an adequate investment research following of Trigon Healthcare,
and the promotion of institutional demand for the Common Stock, to facilitate
the absorption of probable sales of Common Stock by Eligible Members.
Section 10.2 The Lockup, Duration. The Common Stock to be issued as
Consideration will be subject to a lockup (the "Lockup") for the following
period, during which such Common Stock shall, as described below, be issued in
uncertificated form and will be subject to the restrictions on Transfer
described in Section 10.3. The Lockup period (the "Lockup Period") will
terminate on the six-month anniversary of the Effective Date.
Section 10.3 No Sales or Transfers During Lockup.
(a) Except as hereinafter set forth, during the Lockup Period
no Eligible Member shall Transfer, and Trigon Healthcare shall not be obligated
to recognize any Transfer of, any right or interest in or to any Common Stock or
other securities subject to the Lockup.
(b) During the Lockup Period, Trigon Healthcare shall
recognize the following Transfers by Eligible Members of rights or interests in
or to the Common Stock subject to the Lockup:
(i) a transfer by or on behalf of an Eligible Member
to a trust, plan or other arrangement established in connection with an
Employee Benefit Plan of the Eligible Member;
(ii) the granting of a revocable proxy granted in
compliance with all applicable provisions of the articles of
incorporation and bylaws of Trigon Healthcare, this Plan and Virginia
law;
(iii) a transfer by operation of law in consequence
of the bankruptcy or insolvency of an Eligible Member or the granting
of relief to an Eligible Member under the federal bankruptcy laws;
PLAN OF DEMUTUALIZATION Page 16
<PAGE>
(iv) a transfer of ownership of Common Stock from the
estate of a deceased Eligible Member to an heir taking by operation of
law or pursuant to testamentary succession; and
(v) upon the merger or consolidation of an Eligible
Member, a transfer by operation of law to the surviving corporation in
the merger or consolidation.
Section 10.4 Uncertificated Securities During Lockup. Common Stock
issued as Consideration shall be issued in uncertificated form pursuant to
Virginia Code ss. 13.1-648, an appropriate notice shall be sent to each Eligible
Member in compliance with Virginia Code ss. 13.1-648, and no certificates shall
be issued for any such Common Stock during the Lockup Period. The issuance and
distribution of certificates therefor shall be deferred until the termination of
the Lockup Period. All distributions of Common Stock, or of securities
convertible into or exchangeable for Common Stock, as dividends or distributions
on account of such uncertificated Common Stock subject to the Lockup may, at the
discretion of Trigon Healthcare, also be subject to the Lockup.
Section 10.5 Distribution of Certificates After Lockup. As soon as
reasonably practicable after the expiration of the Lockup Period, Trigon
Healthcare shall issue to each Eligible Member other than Odd Lot Holders, and
shall issue to any Odd Lot Holder upon request, a certificate for the Common
Stock being released from the Lockup, whereupon such Common Stock shall cease to
be in uncertificated form pursuant to Virginia Code ss. 13.1-648 and shall be
represented by such certificate pursuant to Virginia Code ss. 13.1-647. Such
certificates shall be mailed by Trigon Healthcare to Eligible Members or, with
respect to Transfers of such Common Stock during the Lockup which Trigon
Healthcare has recognized pursuant to Section 10.3, to the transferees, in each
case at their addresses as they appear in the records of Trigon Healthcare. Any
Odd Lot Holder who does not then request a certificate and who subsequently
wishes to obtain a certificate for such shares of Common Stock may obtain a
certificate therefor from Trigon Healthcare's transfer agent.
ARTICLE XI
THE COMMONWEALTH PAYMENT
Section 11.1 The Commonwealth Payment. As part of the Demutualization,
Trigon Healthcare will make a payment in cash or a combination of cash and
shares of Class C Stock to the Treasurer of the Commonwealth (the "Commonwealth
Payment"), 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. Within five (5)
business days after the Effective Date, Trigon Healthcare will advise the
Treasurer of the Commonwealth of the amount of the Commonwealth Payment to be
made in cash, which shall not be less than one-half (1/2) of the Commonwealth
Payment, and the amount of the Commonwealth Payment to be made through issuance
of Class C Stock. Within ten (10) business days of the Effective Date, Trigon
shall make the Commonwealth Payment. In the event Trigon Healthcare elects to
make part of the Commonwealth Payment through the
PLAN OF DEMUTUALIZATION Page 17
<PAGE>
issuance of Class C Stock, Trigon Healthcare shall issue to the Commonwealth
such number of shares of Class C Stock as shall equal the amount of the
Commonwealth Payment to be made through the issuance of Class C Stock divided by
the Initial Stock Price.
Section 11.2 Redemption of Class C Stock. The Class C Stock shall be
redeemable by Trigon Healthcare at any time and if not sooner redeemed will be
subject to mandatory redemption on June 30, 1998. The redemption price per share
(the "Redemption Price") will equal the Initial Stock Price plus an amount equal
to interest calculated on the Initial Stock Price from the Effective Date
through the date of payment at a rate per annum equal to an appropriate market
rate of interest ("MRI") determined by procedures agreed upon by Trigon
Healthcare, the Attorney General of the Commonwealth and the Bureau of Insurance
of the Commission. In the case of any redemption before June 30, 1998, the
Redemption Price may be paid by delivery to the Commonwealth of an unsecured
promissory note of Trigon Healthcare, in form and substance reasonably
acceptable to the Commonwealth, in an amount equal to the Redemption Price with
a due date of June 30, 1998 and bearing interest at the MRI. Any such promissory
note may be prepaid in whole or in part by Trigon Healthcare at any time without
penalty.
Section 11.3 Class C Stock. (a) The Commonwealth shall not Transfer the
Class C Stock, and without limitation thereto shall not grant any revocable or
irrevocable proxy or other right to vote the Class C Stock to any Person other
than the chairman or the president of Trigon Healthcare, except in accordance
with this Section, and Trigon Healthcare shall not be bound by or obligated to
recognize any Transfer not expressly authorized by this Section.
(b) Pursuant to the terms of the Class C Stock, each share of
Class C Stock shall (i) have a vote equal to one-tenth (1/10) of the vote of a
share of Common Stock and (ii) not be Transferable.
Section 11.4 Commonwealth Directors. Within fifteen (15) days after an
order of the Commission approving the Plan, each of the Attorney General of the
Commonwealth and the Joint Rules Committee will identify to Trigon Healthcare
three (3) nominees for election or appointment to the Board of Trigon Healthcare
(the "Nominee Lists") in accordance with procedures acceptable to Trigon
Healthcare, and each of the Attorney General of the Commonwealth and the Joint
Rules Committee. The persons on the Nominee Lists shall be citizens who do not
hold public office and have no direct or indirect financial interest, except as
a consumer, in Virginia BCBS. Before or within seven days after the Effective
Date, Trigon Healthcare shall select two nominees (the "Commonwealth Nominees")
from the Nominee Lists (one from the list submitted by the Attorney General of
the Commonwealth and one from the list submitted by the Joint Rules Committee)
and shall then cause them to become directors of Trigon Healthcare with
immediate effect. Each of the Commonwealth Nominees shall be appointed to serve
a three (3) year term as a director of Trigon Healthcare.
PLAN OF DEMUTUALIZATION Page 18
<PAGE>
ARTICLE XII
ADDITIONAL PROVISIONS
Section 12.1 Restriction on Acquisition of Securities.
(a) Subject to Section 12.1(b), no Person (or Persons acting
in concert) may, directly or indirectly, without prior written consent of the
Board of Trigon Healthcare, directly or indirectly offer to acquire or acquire
the beneficial ownership of five (5) percent or more of the Common Stock or of
any other class of capital stock of Trigon Healthcare entitled to vote in the
election of directors generally, until the expiration of thirty (30) months
after the Effective Date. No Person other than the Commonwealth shall acquire or
own any shares of Class C Stock.
(b) Section 12.1(a) shall not be construed as preventing the
payment or issuance to any Eligible Member of Common Stock issuable to such
Eligible Member as Consideration to which such Eligible Member is entitled under
the Plan if such Consideration comprises five (5) percent or more of the total
number of shares of Common Stock that will be issued and outstanding immediately
after the Demutualization; provided that any Eligible Member who receives as
Consideration a number of shares of Common Stock equal to or greater than five
(5) percent of the total number of shares of Common Stock that will be issued
and outstanding immediately after the Demutualization (whether or not subject to
any obligations under ERISA or any other law, regulation, or other obligation)
may not, either alone or in concert with any other Person, offer to acquire or
acquire the beneficial ownership of, or control over the acquisition or
disposition of, or voting control over, any Common Stock other than Common Stock
received as Consideration until the expiration of thirty (30) months after the
Effective Date unless, at the time of such offer or acquisition and immediately
following such offer or acquisition, such Person would not, either alone or in
concert with any other Persons, beneficially own, or have control over the
acquisition or disposition of or voting control over, five (5) percent or more
of the Common Stock.
(c) This Section 12.1 shall be without prejudice to, and shall
not effect the enforcement of, any provision of the articles of incorporation of
Trigon Healthcare or any provision of law which may impose any other restriction
by any Person (or Persons acting in concert) on the acquisition of Common Stock.
Section 12.2 Commission-Free Sales and Round Up Program.
(a) Trigon Healthcare shall establish a commission-free sales
and round up program for small holders (the "Small Holders Program") which will
begin at such time as may be determined by the Board of Trigon Healthcare, which
time shall be no sooner than six months after the Effective Date and no later
than eighteen months after the Effective Date. The Small Holders Program will
allow eligible participants either to sell all of their Common Stock or to
purchase sufficient Common Stock to round up their holding to 100 shares of
Common Stock. The Small Holders Program shall continue for ninety days, and may
be extended by the Board
PLAN OF DEMUTUALIZATION Page 19
<PAGE>
of Trigon Healthcare for such longer period as the Board of Trigon Healthcare
determines to be appropriate.
(b) The Board of Trigon Healthcare shall, not later than 30
days prior to the commencement of the Small Holders Program, determine:
(i) the maximum number of shares, not to exceed 99
shares, received by an Eligible Member as Consideration as will entitle
an Eligible Member to sell all of its Common Stock in the Small Holders
Program; and
(ii) the maximum number of shares, not to exceed 99
shares, received by an Eligible Member as Consideration as will entitle
an Eligible Member to purchase in the Small Holders Program sufficient
Common Stock to round up its holding to 100 shares of Common Stock.
(c) All purchases and sales under the Small Holders Program
will be at prevailing market prices and free of brokerage commissions, mailing
charges, registration fees or other administrative or similar expenses.
(d) Only Common Stock received by an Eligible Member as
Consideration may be sold by such Eligible Member through the Small Holders
Program. In determining the number of shares of Common Stock received by an
Eligible Member as Consideration for the purpose of allowing such Eligible
Member to participate in the Small Holders Program, shares of Common Stock
otherwise allocable to such Eligible Member but in respect of which such
Eligible Member receives cash Consideration in lieu of such shares of Common
Stock shall be ignored.
Section 12.3 Employee Benefit Plans.
(a) To the extent, if any, that ERISA is applicable to an
Eligible Member with respect to the receipt or disposition of the Consideration,
all decisions made with respect to the Consideration shall be made by the
Eligible Member (or by a fiduciary appointed by such Eligible Member) as a
fiduciary independent of Virginia BCBS and Virginia BCBS shall not have any
authority, responsibility or liability for such decisions. For any Employee
Benefit Plan that is not subject to ERISA, all decisions made with respect to
the Consideration shall be made solely by the Eligible Member (or by an agent of
such Eligible Member) and Virginia BCBS shall not have any authority,
responsibility or liability for such decisions.
(b) Virginia BCBS has applied to the Department of Labor for
an exemption from Sections 406 and 407(a) of the ERISA and Section 4975 of the
Code with respect to the receipt of Consideration pursuant to the Plan by
employee welfare plans subject to the provisions of such sections.
Notwithstanding any other provision of the Plan, if such exemption is not
received prior to the Effective Date, Virginia BCBS may delay payment of any
cash Consideration to such Eligible Members and any dividends or other cash
distributions on account
PLAN OF DEMUTUALIZATION Page 20
<PAGE>
of the Common Stock Consideration, and if not received prior to the end of the
Lockup Period, may delay the distribution of shares of Common Stock to such
Eligible Member, and may place such Consideration in an escrow or similar
arrangement subject to terms and conditions approved by the Commission. Such
escrow or similar arrangement shall provide for payment to Eligible Members of
such Consideration not later than the third anniversary of the Effective Date.
All costs and expenses of such escrow or similar arrangement shall be borne by
Trigon Healthcare. Trigon Healthcare shall not be liable to any Eligible Member
for interest on any cash amount to be escrowed, but, if the escrow is in an
interest bearing account, then the interest accruing on any cash amount in such
account (if any) shall first be used to offset costs and expenses of such escrow
or similar arrangement or reimburse Trigon Healthcare for the costs and expenses
of such escrow or similar arrangement incurred or paid by Trigon Healthcare, and
thereafter shall accrue for the benefit of such Eligible Member.
Section 12.4 Restriction on Management Options.
(a) Virginia BCBS shall not adopt prior to the Effective Date
any stock-based compensation plan providing for awards to directors of Virginia
BCBS, Trigon Healthcare or Trigon Insurance or to Senior Management including,
without limitation, any restricted stock, stock option or stock appreciation
right plan.
(b) Prior to the Effective Date, neither Trigon Insurance nor
Trigon Healthcare shall grant to any person any awards under any stock-based
compensation plan adopted by Trigon Insurance or Trigon Healthcare, including,
without limitation, any restricted stock, stock option or stock appreciation
right; and no such grant may be exercised until after ninety (90) days following
the expiration of the Lockup Period.
(c) Prior to three (3) months after the expiration of the
Lockup Period, neither Trigon Insurance nor Trigon Healthcare shall grant any
restricted stock, stock option or stock appreciation right with an exercise
price which is less than the greater of (i) the average closing price during the
twenty (20) trading days immediately preceding the date of grant or (ii) the
closing price on the date of grant.
Section 12.5 Market for Common Stock. Trigon Healthcare shall arrange
for the listing of the Common Stock on a national securities exchange (or for
the Common Stock to be quoted on the National Association of Securities Dealers
automated quotation system), and shall use its best efforts to maintain such
listing (or quotation) for so long as Trigon Healthcare is a publicly traded
company.
PLAN OF DEMUTUALIZATION Page 21
<PAGE>
ARTICLE XIII
ADJUSTMENTS TO COMMON STOCK
Section 13.1 Adjustment to Allocable Shares.
(a) Virginia BCBS may adjust, by vote of the Board of Virginia
BCBS or a duly authorized committee thereof at any time before the Effective
Date, the number of shares of Common Stock which comprise the Allocable Shares
in order to effect a price per share in the Initial Public Offering which
Virginia BCBS and the managing underwriters of the Initial Public Offering deem
appropriate. Upon such adjustment, the number of shares of Common Stock which
comprise the Aggregate Variable Component and the Aggregate Fixed Component
shall be adjusted proportionately such that the number of shares of Common Stock
which comprise the Aggregate Fixed Component shall continue to constitute 15%
(fifteen percent) of the Allocable Shares and the number of shares of Common
Stock which comprise the Aggregate Variable Component shall continue to
constitute 85% (eighty-five percent) of the Allocable Shares.
(b) Virginia BCBS may make de minimis adjustments to the
allocation of shares of Common Stock between the Aggregate Fixed Component of
Consideration and the Aggregate Variable Component of Consideration to take
account of and compensate for rounding adjustments.
Section 13.2 Authority to Remedy Errors. Subject to the terms hereof,
Trigon Healthcare may issue additional shares of Common Stock and take such
other action as it considers appropriate to remedy errors and miscalculations
made in connection with this Plan.
ARTICLE XIV
OPEN ENROLLMENT
Section 14.1 Open Enrollment. Virginia BCBS currently conducts an Open
Enrollment Program pursuant to Virginia Code ss.ss. 38.2-4216.1 and
38.2-4229.1.D. Virginia Code ss. 38.2- 4229.1.D provides, among other things,
that Trigon Insurance shall continue to conduct an Open Enrollment Program
pursuant to the provisions of Virginia Code ss. 38.2-4216.1 after the Effective
Date and shall not discontinue such Open Enrollment Program after the Effective
Date without first giving the Commission twenty-four (24) months prior written
notice in accordance with Virginia Code ss. 38.2-4229.1.D.
PLAN OF DEMUTUALIZATION Page 22
<PAGE>
ARTICLE XV
EFFECT OF MERGER
Section 15.1 Continuity of Corporate Existence. Upon the
Demutualization and the Merger of TMSI into Virginia BCBS as provided for in
this Plan, all rights, franchises, licenses and interests of Virginia BCBS in
and to every type of property, real, personal and mixed, and all choses in
action, shall continue unaffected and uninterrupted by this transaction. This
Plan shall not be construed to result in any reinsurance or in any real or
constructive issuance or exchange of any insurance policy or contract or any
other transfer of any assets, rights or obligations by Virginia BCBS. All
obligations and liabilities of Virginia BCBS shall continue unaffected and
uninterrupted by this Plan. No action or proceeding pending at the Effective
Date to which Virginia BCBS is a party shall be abated or discontinued by reason
of this transaction, but may be prosecuted to final judgment in the same manner
as if this Plan had not been implemented. For all purposes, Trigon Insurance
shall be deemed to have been organized on October 14, 1935, the initial date of
incorporation of its ultimate predecessor.
Section 15.2 Effect on Membership. As of the Effective Date, all
Membership Interests in Virginia BCBS shall terminate, and all membership,
residual, distributive, liquidating or analogous interests in Virginia BCBS as a
nonstock corporation shall be extinguished on the Effective Date.
Section 15.3 No Effect on Policies. This Plan will not alter the terms
of insurance coverage provided by any insurance policies or contracts of
insurance and will have no effect upon the insurance benefits or premiums
payable under such policies or contracts.
ARTICLE XVI
MISCELLANEOUS PROVISIONS
Section 16.1 Abandonment of Plan. The Board of Directors of Virginia
BCBS or TMSI may abandon this Plan at any time before the Effective Date
notwithstanding prior approval at the Special Meeting, approval by the
Commission or approval by the sole shareholder of TMSI. No Person shall have any
rights or claims against Virginia BCBS, TMSI, the Board of Directors of either
Virginia BCBS or TMSI or their respective officers, directors, employees, or
agents as a result of any abandonment of the Plan.
Section 16.2 Amendment of Plan. Virginia BCBS and TMSI may amend this
Plan and any filing made pursuant to this Plan at any time before or after the
Effective Date. No amendment made after the Hearing shall change the Plan in a
way which the Commission determines is materially adverse to the Members, unless
a further public hearing is held on the amendment at which the Plan as amended
shall be approved if the Plan with such amendment would have been approved at
the Hearing. Unless the Commission determines that such amendment is materially
adverse to the Members, the Plan as amended need not be submitted for
reconsideration by Members if the amendment is made after this Plan has been
approved by Voting Members at the Special Meeting.
PLAN OF DEMUTUALIZATION Page 23
<PAGE>
Section 16.3 Subsequent Corporate Actions. The Restated Articles and
Restated Bylaws may be amended or further amended after the Effective Date in
accordance with applicable Virginia law.
Section 16.4 Interpretation of Plan. This Plan and any filing made
pursuant to this Plan shall be interpreted in good faith by Virginia BCBS and
TMSI, and such interpretations shall be binding upon all Members and other
Persons.
* * * * * * *
PLAN OF DEMUTUALIZATION Page 24
<PAGE>
Exhibit 1
ARTICLES OF MERGER
MERGING TRIGON MERGER SUB, INC. WITH AND INTO
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
DOING BUSINESS AS TRIGON BLUE CROSS BLUE SHIELD1
Article 1.
Section 1.1 Plan of Merger. A true copy of the Amended and Restated
Plan of Demutualization (hereinafter called the "Plan") is attached as Appendix
1 and made a part of this instrument. The Plan is styled "Blue Cross and Blue
Shield of Virginia - Amended and Restated Plan of Demutualization" and
constitutes a plan of merger within the meaning of Virginia Code ss. 13.1-722.1
and Virginia Code ss. 13.1-898.1. As more fully set forth in the Plan, Trigon
Merger Sub, Inc. ("TMSI"), a Virginia stock corporation and a wholly owned
subsidiary of Trigon Healthcare, Inc., a Virginia stock corporation, is hereby
merged (the "Merger") with and into Blue Cross and Blue Shield of Virginia, a
Virginia nonstock corporation ("Virginia BCBS"). In the Merger, and as more
fully set forth in the Plan, Virginia BCBS shall be the surviving corporation,
shall become a Virginia stock corporation, the Articles of Incorporation and
Bylaws of Virginia BCBS shall be restated in the form of those attached as
Exhibits 3A and 3B, respectively, to the Plan, and the name of Virginia BCBS
shall be changed to Trigon Insurance Company.
Article 2.
Section 2.1 Commission Approval. The Plan constitutes a plan
of conversion within the meaning of Virginia Code ss.ss. 38.2-1005 and
38.2-1005.1 and accordingly requires Commission approval. On __________, 1996,
the Virginia State Corporation Commission (the "Commission") issued an order
approving the Plan.
Article 3.
Section 3.1 Approval by Board of TMSI. The Plan was approved
by the Board of Directors of TMSI on ____________________.
- --------
(1)The dates that have been left blank in these pro forma Articles of
Merger will be completed after the relevant information has become available and
prior to filing.
Exhibit 1 - Page 1
<PAGE>
Section 3.2 Approval by Shareholder. The Plan was adopted by
the unanimous written consent of the sole shareholder of TMSI on
__________________.
Article 4.
Section 4.1 Approval by Board of Directors of Virginia BCBS. The Plan
was approved by the Board of Directors of Virginia BCBS on _______________.
Section 4.2 Meeting of Members of Virginia BCBS. The Plan was submitted
to the members of Virginia BCBS by the Board of Directors of Virginia BCBS in
accordance with the Virginia Nonstock Corporation Act. The Plan was adopted by
the members of Virginia BCBS at the Meeting on ____________, 1996.
Section 4.3 Votes Entitled to be Cast by Members. The members of
Virginia BCBS were entitled to cast ____ votes upon the Plan at the Meeting. No
members of Virginia BCBS were entitled to vote on the Plan as a separate class
or voting group.
Section 4.4 Quorum at Meeting. The bylaws of Virginia BCBS provide that
at any annual or special meeting of members of Virginia BCBS, members holding 5%
of the votes entitled to be cast represented in person or by proxy shall
constitute a quorum. At the Meeting, members holding ____ votes entitled to be
cast were represented in person or by proxy at the Meeting, constituting a
quorum pursuant to the Virginia Nonstock Corporation Act and the bylaws of
Virginia BCBS.
Section 4.5 Adoption of Plan by Members. At the Meeting ____ votes were
cast in favor of the Plan, ____ votes were cast against the Plan and ____ votes
abstained. The Virginia Nonstock Corporation Act requires that the Plan be
approved by more than two-thirds of the votes cast on the Plan at the Meeting.
The votes cast in favor of the Plan constitute ____% of the votes cast at the
Meeting. Accordingly, the total number of undisputed votes cast for the Plan was
sufficient for approval of the Plan by the members of Virginia BCBS.
Exhibit 1 - Page 2
<PAGE>
In Witness Whereof, these Articles of Merger have been executed by
Virginia BCBS and TMSI as of this ____ day of __________________ 1996.
Blue Cross and Blue Shield of Virginia
By: ________________________
Name:
Title:
Trigon Merger Sub, Inc.
By: ________________________
Name:
Title:
Exhibit 1 - Page 3
TRIGON HEALTHCARE, INC.
AMENDED AND RESTATED ARTICLES OF INCORPORATION
ARTICLE I.
NAME
The name of the Corporation is Trigon Healthcare, Inc.
ARTICLE II.
PURPOSE
The purpose of the Corporation is to act as a holding company for
subsidiaries doing business as managed care companies, providing health care
insurance, and providing other services related to health care. In addition, the
corporation shall have the power to engage in any lawful business not required
by the Virginia Stock Corporation Act to be stated in the Articles of
Incorporation.
ARTICLE III.
AUTHORIZED SHARES
3.1 Number and Designation. The number and designation of shares that
the Corporation shall have authority to issue and the par value per share are as
follows:
<TABLE>
<CAPTION>
Class Number of Shares Par Value
----- ---------------- ---------
<S> <C>
Class A Common 300,000,000 $.01
Class B Common 300,000,000 $.01
Class C Common 75,000,000 $.01
Preferred 50,000,000 None
</TABLE>
3.2 Preemptive Rights. No holder of outstanding shares shall have any
preemptive right with respect to, or to subscribe for or purchase (i) any shares
of any class of the Corporation, whether now or hereafter authorized, including
without limitation shares issued for cash, property or services or as a dividend
or otherwise, (ii) any warrants, rights or options to purchase any such shares,
or (iii) any obligations convertible into any such shares or into warrants,
rights or options to purchase any such shares.
-1-
<PAGE>
3.3 Shareholder Approval. (a) The following actions shall require
approval by the affirmative vote of more than three quarters of all the votes
entitled to be cast at a meeting of shareholders of the Corporation, and shall
require the approval by the affirmative vote of more than three quarters of the
votes entitled to be cast by each voting group entitled to vote thereon as a
separate voting group:
(i) any amendment to Article VI, Article VII, Article
VIII, Article XI or this Section 3.3 of the Amended and Restated
Articles of Incorporation of the Corporation; or
(ii) any amendment to the Amended and Restated
Articles of Incorporation of the Corporation permitting cumulative
voting by the shareholders of the Corporation.
Notwithstanding the foregoing, the provisions of Section 3.3(b) shall apply to
any amendment specified in clauses (i) and (ii) of this Section 3.3(a) necessary
to conform these Amended and Restated Articles of Incorporation to the terms of
the License Agreement or to any amendment specified in clauses (i) and (ii) of
this Section 3.3(a) approved by the Continuing Directors and required or
permitted by the Blue Association (whether or not constituting a change to the
terms of the License Agreement). The provisions of this Section 3.3(a) shall
become ineffective and of no further force and effect in the event that, after
the Demutualization, (i) the Corporation ceases to be subject to any License
Agreement or (ii) the Blue Association ceases to require the vote provisions of
this Section 3.3(a) as a condition of the License Agreement.
(b) Amendments to the Amended and Restated Articles of
Incorporation of the Corporation shall require approval by the affirmative vote
of a majority of all the votes entitled to be cast at a meeting of shareholders
of the Corporation, and shall require approval by the affirmative vote of a
majority of the votes entitled to be cast by each voting group entitled to vote
thereon as a separate voting group, except (i) as otherwise provided in Section
3.3(a) and (ii) that the affirmative vote of more than two-thirds of all the
votes entitled to be cast at a meeting of shareholders of the Corporation, and
the affirmative vote of more than two-thirds of all votes entitled to be cast by
each voting group entitled to vote thereon as a separate voting group, shall be
required for approval of any amendment if the effect of such amendment is (A) to
reduce the shareholder vote required to approve a merger, statutory share
exchange, a sale of all or substantially all the assets of the Corporation or
the dissolution of the Corporation or (B) to delete all or any part of clause
(ii) of this sentence.
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ARTICLE IV.
PREFERRED SHARES
4.1 Issuance in Series. The Board of Directors is authorized to issue
Preferred Shares from time to time in one or more series and to provide for the
designation, preferences, limitations and relative rights of the shares of each
series by the adoption of Articles of Amendment to the Articles of Incorporation
of the Corporation setting forth:
(a) The maximum number of shares in the series and the
designation of the series, which designation shall distinguish the shares
thereof from the shares of any other series or class;
(b) Whether shares of the series shall have special,
conditional or limited voting rights, or no right to vote except to the extent
required by law;
(c) Whether shares of the series are redeemable or convertible
(x) at the option of the Corporation, a shareholder or another person or upon
the occurrence of a designated event, (y) for cash, indebtedness, securities or
other property, and (z) in a designated amount or in an amount determined in
accordance with a designated formula or by reference to extrinsic data or
events;
(d) Any right of holders of shares of the series to
distributions, calculated in any manner, including the rate or rates of
dividends, and whether dividends shall be cumulative, noncumulative or partially
cumulative;
(e) The amount payable upon the shares of the series in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation;
(f) Any preference of the shares of the series over the shares
of any other series or class with respect to distributions, including dividends,
and with respect to distributions upon the liquidation, dissolution or winding
up of the affairs of the Corporation; and
(g) Any other preferences, limitations or specified rights
(including a right that no transaction of a specified nature shall be
consummated while any shares of such series remain outstanding except upon the
assent of all or a specified portion of such shares) now or hereafter permitted
by the laws of the Commonwealth of Virginia and not inconsistent with the
provisions of this Section 4.1.
4.2 Articles of Amendment For Issuance. Before the issuance of any
shares of a series, Articles of Amendment establishing such series shall be
filed with and made effective by the State Corporation Commission of Virginia,
as required by law.
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ARTICLE V.
COMMON SHARES
5.1 Respective Rights and Privileges. Except as otherwise provided
herein or as otherwise required by applicable law, all shares of Class A Common,
Class B Common and Class C Common will be identical and will entitle the holders
thereof to the same rights and privileges and shall rank equally, share ratably,
and be identical in all respects as to all matters. The holders of Class A
Common, the holders of Class B Common and the holder of the Class C Common shall
have the respective rights and preferences set forth in this Article V.
5.2 Voting Rights. Except as otherwise required by law, (i) the holders
of Class A Common will, except as set forth in Articles VII and VIII, be
entitled to one vote per share on all matters to be voted on by the
Corporation's shareholders, (ii) the holders of Class B Common will have no
right to vote on any matters to be voted on by the Corporation's shareholders
and (iii) the holder of Class C Common will be entitled to one-tenth (1/10) vote
per share on all matters to be voted on by the Corporation's shareholders.
Except as otherwise required by law or Section 9.4, the holders of Class A
Common and Class C Common shall vote together as one group.
5.3 Dividends. Subject to Articles VII and VIII, when and as dividends
are declared thereon, whether payable in cash, property or securities of the
Corporation, the holders of Class A Common and the holders of Class B Common
will be entitled to share equally, share for share, in such dividends; provided
that if dividends are declared which are payable in shares of Class A Common or
Class B Common, dividends will be declared which are payable at the same rate
per share on each such class of shares and the dividends payable in shares of
Class A Common will be payable to holders of Class A Common and, the dividends
payable in shares of Class B Common will be payable to holders of Class B
Common. The holder of the Class C Common shall not be entitled to dividends.
5.4 Liquidation. Subject to the provisions of the Preferred Shares and
subject to Articles VII and VIII, the holders of the Class A Common, Class B
Common and Class C Common shall be entitled to participate ratably on a per
share basis in all distributions to the holders of the Common Shares in any
liquidation, dissolution or winding up of the Corporation, as though all shares
of Common Shares were of a single class.
5.5 Limitation on Stock Splits, Combinations or Reclassifications. The
Corporation shall not (i) subdivide its outstanding Class A Common by stock
dividend or otherwise, or (ii) combine its outstanding Class A Common into a
smaller number of shares, or (iii) reclassify its Class A Common (including any
reclassification in connection with a merger, consolidation or other business
combination in which the Corporation is the surviving corporation) unless at the
same time the Corporation subdivides, combines or reclassifies, as applicable,
the shares of Class B Common on the same basis as the Corporation so subdivides,
combines or reclassifies the Class A Common.
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5.6 Restriction on Transfer of Class A Common Stock Issued in
Demutualization. The shares of Class A Common issued in the Demutualization
shall be subject to the restrictions on transfer contained in the Plan of
Demutualization.
ARTICLE VI.
GENERAL PROVISIONS APPLICABLE TO SHARES
The provisions of this Article VI shall be applicable to Articles III,
VII and VIII, and the definitions in Section 6.1 shall be applicable to Articles
V, IX and XIV.
6.1 Certain Definitions.
(a) Certain Defined Terms. The following terms shall have
the following meaning:
"Associate" of any Person includes each of the
following: (i) any other Person who directly or indirectly Controls, or
is Controlled by or under common Control with, such Person or who is
acting or intends to act jointly or in concert with any such Person in
connection with the acquisition of or exercise of Beneficial Ownership
over shares; (ii) any other Person of which any such Person is an
officer, director or partner or as to which any such Person performs a
similar function; (iii) any other Person who is an officer, director or
partner of any such Person or who performs a similar function for such
Person; (iv) any other Person having direct or indirect Beneficial
Ownership of five percent or more of any class of equity securities of
any such Person; (v) any estate in which any such Person has a
beneficial interest or any trust or estate as to which any such Person
serves as trustee or in a similar fiduciary capacity; (vi) any relative
or spouse of any such Person, or any relative of such spouse, any one
of whom has the same residence as any such Person; and (vii) any Person
who is an "affiliate" or "associate" of such Person within the meaning
of Rule 12b-2 of the General Rules and Regulations under the Exchange
Act, as such Rule is amended and in effect on November 17, 1993 or at
any subsequent date.
"Beneficiary" means the beneficiary of the Trust as
determined pursuant to Section 8.5.
"Blue Association" means the Blue Cross Blue Shield
Association, from whom the Corporation and certain of its subsidiaries
license the right to use the Blue Cross and Blue Shield trademarks and
trade names, or any successor entity or entities thereto from whom the
Corporation or its subsidiaries license the right to use the Blue Cross
or Blue Shield trademarks and trade names.
"Board" means the board of directors of the
Corporation.
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"Capital Stock" means shares of capital stock of the
Corporation (other than Class C Common), including without limitation
Common Shares (other than Class C Common), Preferred Shares or any
class or series thereof, or any other class of capital stock of the
Corporation classified or reclassified pursuant to these Articles of
Incorporation.
"Class A Common" means Class A Common Shares of the
Corporation.
"Class B Common" means Class B Common Shares of the
Corporation.
"Class C Common" means Class C Common Shares of the
Corporation.
"Common Shares" means common shares of the
Corporation, including without limitation Class A Common, Class B
Common, Class C Common and any other class of common shares that may
exist at any time hereafter.
"Commonwealth" means Commonwealth of Virginia.
"Commonwealth Payment" means the distribution to the
Treasurer of the Commonwealth required in connection with the
Demutualization pursuant to Virginia Code ss.38.2-1005.1B.4.
"Continuing Director" means any member of the Board
who is not an Associate of an Interested Shareholder and who was a
member of the Board prior to the time that the Interested Shareholder
became an Interested Shareholder, and any successor of a Continuing
Director who is not an Associate of an Interested Shareholder and who
is recommended to succeed a Continuing Director by a majority of the
Continuing Directors then on the Board, provided, however, that any
Person who was a director of the Corporation immediately following the
Demutualization shall be a Continuing Director notwithstanding that
such director may be an Associate of a Person who became an Interested
Shareholder in the Demutualization.
"Control" means the possession, direct or indirect,
of the power to direct or to cause the direction of the management or
policies of a Person, whether through the ownership of voting
securities, by contract, arrangement or understanding, or otherwise,
and "Controls" and "Controlled" shall have correlative meanings.
"Demutualization" means the conversion of Blue Cross
and Blue Shield of Virginia, a Virginia mutual insurer, to a Virginia
stock corporation.
"Excess Securities" shall have the meaning set forth
in Section 8.3 hereof.
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"Exchange Act" means the Securities Exchange Act of
1934, as amended, or any successor legislation thereto.
"Interested Shareholder" means any Person who,
together with such Person's Associates, is the Beneficial Owner of 5%
or more of any class of Capital Stock, for which purpose the Class A
Common and the Class B Common shall be considered a single class of
Capital Stock.
"License Agreement" means the license agreements
between the Corporation and the Blue Association with respect to, among
other things, the use of the Blue Cross or Blue Shield trade marks and
trade names, as such licenses may be amended, modified, superseded
and/or replaced from time to time.
"Market Price" for any class of Capital Stock or
Warrants shall mean the last reported sales price reported on the NYSE
of such Capital Stock or Warrants, on the trading day immediately
preceding the relevant date, or if not then traded on the NYSE, the
last reported sales price of such Capital Stock or Warrants on the
trading day immediately preceding the relevant date as reported on any
exchange or quotation system over which such Capital Stock or Warrants
may be traded, or if not then traded over any exchange or quotation
system, then the market price of the Capital Stock or Warrants on the
relevant date as determined in good faith by the Board of Directors of
the Corporation.
"NYSE" shall mean the New York Stock Exchange.
"Offerings" means the initial public offering of
Class A Common at the effective date of the Demutualization, together
with any simultaneous public offering or placement of debt securities
or other equity securities of the Corporation or incurrence of other
debt obligations as contemplated by Section 8.1 of the Plan of
Demutualization.
"Person" means an individual, firm, partnership,
estate, domestic corporation, foreign corporation, trust, charity,
private foundation, association, joint venture, unincorporated
association, government or any department, agency or subdivision
thereof, or other entity, and shall include any successor (by merger or
otherwise) of such entity.
"Plan of Demutualization" means the Amended and
Restated Plan of Demutualization dated October 31, 1996, as it may be
amended thereafter, pursuant to which the Demutualization will occur.
"Purported Transferee" shall mean, with respect to
any purported Transfer which results in Excess Securities, the
purported transferee who would have acquired shares of Capital Stock or
Warrants, if such Transfer had been valid under Section 8.1.
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"Securities Act" means the Securities Act of 1933, as
amended, or any successor legislation thereto.
"Threshold" means the maximum percentage, in number
of shares or value, of shares of Capital Stock of any class of which
any Person and such Person's Associates may be or become the Beneficial
Owner pursuant to Section 6.2.
"Transfer" means any sale, transfer, gift,
assignment, devise or other disposition of Beneficial Ownership of
Capital Stock, Warrants or Class C Common, whether directly or
indirectly, voluntarily or involuntarily, or by operation of law or
otherwise, including without limitation (A) the granting of any option
or entering into any agreement for the sale, transfer or other
disposition of Capital Stock, Warrants or Class C Common, (B) the sale,
transfer, assignment or other disposition of Warrants or any other
securities or rights convertible into or exchangeable for Capital
Stock, but exclud ing the actual conversion or exchange of such
securities or rights into Capital Stock, (C) any transfer or other
disposition of any interest in Capital Stock, Warrants or Class C
Common as a result of a change in the marital status of the holder
thereof, and (D) an indirect transfer of ownership through transfer of
an ownership interest in or control of any Person that Beneficially
Owns any Capital Stock or Class C Common. The terms "Transfers" and
"Transferred" shall have the correlative meanings.
"Transferee Undertaking" means an undertaking given
pursuant to Section 6.2(b).
"Trust" means the trust created pursuant to Section
8.4.
"Trustee" shall mean the Corporation as trustee for
the Trust, and any successor trustee appointed by the Corporation.
"Warrants" shall mean warrants to acquire shares of
Capital Stock.
(b) Beneficial Ownership.
(i) Except as otherwise provided in paragraphs (iii)
though (v) below, a Person shall be deemed the "Beneficial Owner" of
and shall be deemed to "Beneficially Own" any Capital Stock:
(1) which such Person or any of such
Person's Associates beneficially owns, directly or indirectly;
or
(2) which such Person or any of such
Person's Associates has the right or power (A) to acquire or
dispose of, or to direct the acquisition or disposition of
(whether such right or power is exercisable immediately or
only
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after the passage of time), including without limitation upon
the exercise of conversion rights, exchange rights, warrants
or options, or otherwise; or (B) to vote or to direct the
voting of; or
(3) which are beneficially owned, directly
or indirectly, by any other Person (or any Associate thereof)
with which such Person (or any of such Person's Associates)
has any agreement, arrangement or understanding (other than
customary agreements with and between underwriters and selling
group members with respect to a bona fide public offering of
Capital Stock) relating to the acquisition, holding, voting
(except to the extent contemplated by (iv) below) or disposing
of any Capital Stock;
whether the foregoing shall be sole or shared, shall be direct or
indirect, or shall be through any contract, arrangement, understanding,
relationship or otherwise. The terms "Beneficial Owner," "Beneficially
Owning," "Beneficially Own" and "Beneficially Owned" shall have
correlative meanings.
(ii) Notwithstanding anything in this definition of
Beneficial Ownership to the contrary, the percentage of any class of
Capital Stock which any Person Beneficially Owns shall be determined by
dividing (A) the number of shares of such class of Capital Stock which
such Person and such Person's Associates Beneficially Own (including
all shares then issued and outstanding and all shares not then issued
and outstanding which such Person and such Person's Associates have the
present or future right (directly or indirectly and whether contingent
or otherwise) to acquire or otherwise become the Beneficial Owner of)
by (B) the aggregate number of shares of such class of Capital Stock
then issued and outstanding and all shares of such class of Capital
Stock not then issued and outstanding which such Person and such
Person's Associates have the present or future right (directly or
indirectly and whether contingent or otherwise) to acquire or otherwise
become the Beneficial Owner of, but not any other shares of such class
of Capital Stock not then issued and outstanding, and expressing the
quotient as a percentage.
(iii) A Person shall not be deemed to be a Beneficial
Owner of shares of Capital Stock tendered pursuant to a tender or
exchange offer made by such Person until the tendered shares are
accepted for purchase or exchange.
(iv) A Person shall not be deemed to be the
Beneficial Owner of, or to Beneficially Own, shares of Capital Stock as
to which such Person may exercise voting power solely by virtue of a
revocable proxy conferring the right to vote if the agreement,
arrangement or understanding to vote such security (1) arises solely
from a revocable proxy or consent given to such Person in response to a
public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations
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promulgated under the Exchange Act and (2) is not also then reportable
on Schedule 13D under the Exchange Act (or any comparable or successor
report).
(v) A member of a national securities exchange shall
not be deemed to be a Beneficial Owner of shares of Capital Stock held
directly or indirectly by it on behalf of another Person solely because
such member is the record holder of such securities and, pursuant to
the rules of such exchange, may direct the vote of such shares, without
instructions, on other than contested matters or matters that may
affect substantially the rights or privileges of the holders of the
shares of Capital Stock to be voted but is otherwise precluded by the
rules of such exchange from voting without instructions.
6.2 Establishment of Threshold.
(a) Absent any prior written approval of a greater percentage
by the Continuing Directors, the Threshold for each Person together with such
Person's Associates shall be 5%.
(b) The Continuing Directors may approve a Threshold greater
than 5% for any Person and that Person's Associates, at their own initiative or
upon the request of such Person. Before the Continuing Directors shall consider
such a request by such Person, the Continuing Directors may require that such
Person and such Person's Associates furnish the Corporation with the following
written disclosure, undertaking and agreement (a "Transferee Undertaking") for
the benefit of the Corporation:
(i) disclosure to the Corporation of such information
as the Corporation may request with respect to (1) the identity of that
Person and that Person's Associates, (2) the Capital Stock Beneficially
Owned by such Person and by each Associate of such Person, (3) the
relationships, agreements and understandings between that Person and
that Person's Associates, between and among that Person's Associates,
and between that Person and that Person's Associates and any third
parties, as such relationships, agreements and understandings may at
that time or thereafter be relevant to the Corporation or its Capital
Stock, (4) the intentions of such Person and such Person's Associates
to Transfer or exercise Beneficial Ownership of any Capital Stock or to
seek control of or participate in the management or decision making of
the Corporation or be represented on the Board, or to engage in
transactions with, or that effect, the Corporation or its competitors;
(ii) such agreements, covenants and undertakings as
the Continuing Directors in their complete discretion may request from
such Person and such Person's Associates in favor of the Corporation
with respect to the matters disclosed in paragraph (i); and
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(iii) an agreement, covenant and undertaking by such
Person that such Person and each and every Associate of such Person (1)
will not take any of the following actions without the prior consent of
the Board: (A) acquire Beneficial Ownership of any additional Capital
Stock, (B) Transfer any Capital Stock in violation of Article VIII, or
(C) be or become an Associate of any other Person who Beneficially Owns
any Capital Stock except as disclosed in paragraph (i), (2) upon
request by the Corporation, will furnish or cause to be furnished to
the Corporation all certificates representing Capital Stock held of
record by such Person or by any Associate of such Person or which such
Person or any Associate of such Person Beneficially Owns, for the
purpose of placing a legend on such certificates to reflect the
undertakings described herein, (3) will acknowledge that stop transfer
orders may be entered with the transfer agent (or agents) and the
registrar (or registrars) of Capital Stock against the transfer of
Capital Stock subject to the Transferee Undertaking except in
compliance with the provisions and requirements thereof, and (4) will
agree to such other actions and remedies as the Corporation may
reasonably request in order to preserve or protect the Corporation's or
its subsidiaries' continued status as licensees or members of the Blue
Association.
(c) In considering any greater Threshold with respect to any
Person and that Person's Associates, the Continuing Directors may require that:
(i) any and all information submitted to the
Continuing Directors in the Transferee Undertaking shall be confirmed
by affidavit given under penalties of perjury; and
(ii) such Person shall furnish to the Continuing
Directors such evidence as the Continuing Directors may require
evidencing the right and ability of such Person to bind such Person's
Associates to the Transferee Undertaking and to render the Transferee
Undertaking enforceable against each such Associate, together with an
opinion in form and substance acceptable to the Continuing Directors
given by independent legal counsel reasonably acceptable to the
Continuing Directors in which such legal counsel gives the Continuing
Directors and the Corporation an unqualified opinion that the
Transferee Undertaking is enforceable against both such Person and also
each Associate of such Person.
(d) Any approval of a greater Threshold given by the
Continuing Directors with respect to any Person and that Person's Associates
shall be valid only with respect to the facts and circumstances disclosed by
that Person with respect to that Person and that Person's Associates in the
Transferee Undertaking. If any material change should occur therein (including
without limitation a change that does not constitute a breach or violation of
any applicable Transferee Undertaking) without the prior written approval of the
Continuing Directors, then the Threshold for that Person and that Person's
Associates shall thereupon immediately become 5% notwithstanding any prior
approval of a greater Threshold by the
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Continuing Directors. In giving approval of any greater Threshold, the
Continuing Directors may specify which facts and circumstances are, or what
changes in any facts and circumstances will be, material, but the absence of any
such specification with respect to any facts and circumstances shall not
constitute an implication that such facts and circumstances are not material.
(e) Any approval of a greater Threshold given by the
Continuing Directors with respect to any Person and that Person's Associates
shall only constitute an approval with respect to that Person and the Associates
of that Person identified to and specifically approved by the Continuing
Directors. If any other Person should acquire Control over such Person or over
any such Associate without the approval of the Continuing Directors, then the
Threshold for that Person and that Person's Associates shall thereupon
immediately become 5% notwithstanding any prior approval of a greater Threshold
by the Continuing Directors.
(f) After approving a greater Threshold for any Person and
that Person's Associates, the Continuing Directors may, on request of such
Person, further raise the Threshold.
(g) After approving a Threshold greater than 5% for any Person
and that Person's Associates, the Continuing Directors may, at their complete
discretion and without being required to have or to give any reasons therefore,
reduce the Threshold which they have so approved to a percentage not less than
the percentage which such Person and such Person's Associates have disclosed to
the Continuing Directors as being the percentage Beneficially Owned by them at
the time the Continuing Directors act on such reduction. Any such reduction
shall not invalidate or affect the right and ability of the Corporation to
enforce any Transferee Undertaking.
6.3 Notice to Corporation. Any Person who, together with that Person's
Associates, acquires shares of Capital Stock or Warrants in excess of the
Threshold applicable to such Person and that Person's Associates or in violation
of Section 8.1, or any Person who, together with that Person's Associates, is a
Purported Transferee such that Excess Securities results under Section 8.3,
shall immediately give written notice or, in the event of a proposed or
attempted Transfer that would violate Section 8.1, give at least 15 days prior
written notice to the Corporation of such event and shall provide to the
Corporation such other information as the Corporation may request in order to
ascertain or ensure the Corporation's or its subsidiaries' continued status as a
licensee or member of, or the effect on the license from or membership of, the
Blue Association.
6.4 Information for Corporation.
(a) Every record owner (other than a member of a national
securities exchange or a registered depositary) of more than five percent (5%)
of the number or value of the outstanding shares of Capital Stock of the
Corporation shall, within 30 days after January 1 of
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each year, give written notice to the Corporation stating the name and address
of such record owner, the number of shares Beneficially Owned, and a description
of how such shares are held. Each such record owner shall also provide to the
Corporation such additional information as the Corporation may reasonably
request in connection with any facts or circumstances which would or might cause
such Person to be an Associate of any other Person who is a Beneficial Owner of
any Capital Stock.
(b) Each Person who is a Beneficial Owner of Capital Stock and
each Person (including the shareholder of record) who is holding Capital Stock
for a Beneficial Owner shall provide to the Corporation such information that
the Corporation may reasonably request in order to ascertain any facts or
circumstances which would or might cause such Person or such Beneficial Owner to
be an Associate of any other Person who is a Beneficial Owner of any Capital
Stock.
6.5 Legend. All certificates for shares of Capital Stock and Warrants
shall bear a legend referencing the restrictions on ownership and transfer as
set forth in these Articles of Incorporation.
6.6 Other Action by Board. Subject to Section 8.1(d), nothing contained
in Articles VI, VII or VIII shall limit the authority of the Board of Directors
to take such other action as it deems necessary or advisable to preserve or
protect the status of the Corporation's or any of its subsidiaries as a licensee
or member of, or the effect on the license from or membership of, the Blue
Association.
6.7 Ambiguities. Subject to Section 8.1(d), in the case of an ambiguity
in the application of any of the provisions of Articles VI, VII, or VIII,
including any definition contained in Section 6.1, the Board of Directors shall
have the power to determine the application of the provisions of these Articles
VI, VII and VIII with respect to any situation based on the facts known to it.
6.8 Severability. If any provision of these Articles VI, VII or VIII or
any application of any such provision is determined to be void, invalid or
unenforceable by any court having jurisdiction over the issue, the validity and
enforceability of the remaining provisions shall be affected only to the extent
necessary to comply with the determination of such court.
6.9 Presumptions.
(a) Any facts disclosed in any filing made by any Person other
than the Corporation, including without limitation by an Associate of such
Person, under the Securities Act or under the Exchange Act, including without
limitation pursuant to Sections 13 or 14 of the Exchange Act, shall constitute a
rebuttable presumption against such Person, including without limitation against
any Associate of such Person, of any facts disclosed in such filing with respect
to the relationship between such Person and any apparent Associate of such
Person and
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with respect to any securities Beneficially Owned by such Person or any
Associate of such Person.
(b) The number and value of shares of Capital Stock of any
class then outstanding shall be determined by the Board of Directors in good
faith, which determination shall be conclusive for all purposes hereunder.
ARTICLE VII.
CONVERSION OF CLASS A COMMON TO CLASS B COMMON
7.1 Conversion Of Class A Common to Class B Common.
(a) Any provision herein to the contrary notwithstanding, if
at any time any Person and that Person's Associates should acquire, or should
come to have, or should have, Beneficial Ownership of such percentage of Class A
Common as equals or exceeds the Threshold, then all shares of Class A Common as
equal or exceed the Threshold of which such Person and such Person's Associates
are the Beneficial Owners shall thereupon be and become convertible at the
option of the Continuing Directors into the same number of shares of Class B
Common as the number of shares of Class A Common so being converted. Such Class
B Common shall thereupon not be or become convertible into Class A Common for so
long as such shares are Beneficially Owned by such Person or any other Person
who was an Associate of such Person at that time or at any time while the
percentage of Class A Common Beneficially Owned by such Person and such Person's
Associates exceeded 5%.
(b) Upon the transfer of any shares of Class B Common to any
Person other than either a Person who, or whose Associates, are Beneficial
Owners of Class B Common or a Person who, together with that Person's
Associates, would come to hold a percentage of Class A Common that equals or
exceeds the Threshold for such Person and such Person's Associates, then the
Corporation shall, at the request of the transferee and with the consent of the
Continuing Directors, convert such shares of Class B Common into the same number
of shares of Class A Common as the number of shares of Class B Common so being
transferred, provided, however, that before effecting such conversion, the
Corporation may request from the transferee such information as the Corporation,
in its absolute discretion, considers relevant to the entitlement of the
transferee to require the conversion of such Class B Common to Class A Common,
and may further require that any such information shall be confirmed by
affidavit given under penalties of perjury.
7.2 Conversion Procedure.
(a) Each conversion of Class A Common to Class B Common shall
be deemed to have been effected immediately when notice of conversion is
transmitted or delivered by the Corporation to the record holder of such shares,
and at such time the rights of the holder of the
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converted Class A Common as such holder shall cease and the Person or Persons in
whose name or names the certificate or certificates for shares of Class B Common
are to be issued upon such conversion shall be deemed to have become the holder
or holders of record of the shares of Class B Common to be represented thereby.
The record holder of such shares shall promptly surrender the certificate or
certificates representing the shares so converted at the principal office of the
Corporation at any time during normal business hours.
(b) Each conversion of shares of Class B Common into shares of
Class A Common shall be effected by the surrender of the certificate or
certificates representing the shares to be converted at the principal office of
the Corporation at any time during normal business hours, together with a
written notice by the holder of such Class B Common stating that (1) such holder
desires to convert the shares, or a stated number of the shares, of Class B
Common represented by such certificate or certificates into Class A Common and
(2) upon such conversion such Person and its Associates will not Beneficially
Own a greater quantity of securities of any kind issued by the Corporation than
such Person and its Associates are permitted to Beneficially Own under any
applicable law, regulation, rule or other governmental requirement or under
these Articles of Incorporation. Each conversion of Class B Common to Class A
Common shall be deemed to have been effected as of the close of business on the
date on which the certificate or certificates in respect of such Class B Common
have been surrendered and the Corporation has satisfied itself of the
eligibility of the Beneficial Owner of such Class B Common to require the
conversion of such Class B Common into Class A Common.
(c) Promptly after such surrender and, in the case of
conversion of Class B Common to Class A Common, after the Corporation has
satisfied itself of the eligibility of the Beneficial Owner of such Class B
Common to require the conversion of such Class B Common into Class A Common, the
Corporation will issue and deliver in accordance with the surrendering holder's
instructions (1) the certificate or certificates for the Class A Common or Class
B Common, as applicable, issuable upon such conversion and (2) a certificate
representing any Class B Common or Class A Common, as applicable, which was
represented by the certificate or certificates delivered to the Corporation in
connection with such conversion but which was not converted.
(d) The issuance of certificates for Class A Common or Class B
Common upon conversion, as applicable, will be made without charge to the
holders of such shares for any issuance tax in respect thereof or other cost
incurred by the Corporation in connection with such conversion and the related
issuance of Class A Common or Class B Common, as applicable; provided that the
Corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of any certificate in a name
other than that of the holder of the Class A Common converted or the holder of
the Class B Common converted, as the case may be.
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(e) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Class A Common and Class
B Common solely for the purpose of issuance upon the conversion of the Class A
Common and Class B Common, as applicable, as provided in sections 7.1 and 7.2,
such number of shares of Class A Common and Class B Common issuable upon the
conversion of all outstanding shares of Class A Common or Class B Common. All
shares of Class A Common and Class B Common which are so issuable in exchange
for the other shall, when issued, be duly and validly issued, fully paid and
nonassessable if the shares in exchange for which they are issued were duly and
validly issued, fully paid and nonassessable. The Corporation shall not take any
action which would affect the number of shares of Class A Common or Class B
Common outstanding or issuable for any purposes unless immediately following
such action the Corporation would have authorized but unissued shares of Class A
Common and Class B Common, not then reserved or required to be reserved for any
purpose other than the purpose of issue upon conversion of Class B Common or
Class A Common, as the case may be, sufficient to meet the reservation
requirements of the first two sentences of this paragraph (e).
(f) Any share of Class A Common or Class B Common which is
converted into a share of such other class shall become an authorized but
unissued share of Common Stock of the class so converted from.
7.3 Registration of Transfer. The Corporation will keep at its
principal office (or such other place as the Corporation reasonably designates)
a register for the registration of shares of Common Shares. In addition to the
requirements of Section 7.2, upon the surrender of any certificate representing
shares of any class of Common Shares at such place, the Corporation will, at the
request of the registered holder of such certificate, execute and deliver a new
certificate or certificates in exchange therefor representing in the aggregate
the number of shares of such class represented by the surrendered certificate,
and the Corporation forthwith will cancel such surrendered certificate. Each
such new certificate will be registered in such name and will represent such
number of shares of such class as is requested by the holder of the surrendered
certificate and will be substantially identical in form to the surrendered
certificate. The issuance of new certificates will be made without charge to the
holders of the surrendered certificates for any issuance tax in respect thereof
or other cost incurred by the Corporation in connection with such issuance;
provided, that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery of any
certificate in a name other than that of the holder of the surrendered
certificate.
7.4 Replacement. Upon receipt of evidence reasonably satisfactory to
the Corporation of the ownership and the loss, theft, destruction or mutilation
of any certificate evidencing one or more shares of any class of Common Shares,
and in the case of any such loss, theft or destruction, upon receipt of
indemnity reasonably satisfactory to the Corporation (provided that if the
holder is an institutional investor its own agreement will be satisfactory), or,
in the case of any such mutilation upon surrender of such certificate, the
Corporation will (at its expense) execute and deliver in lieu of such
certificate a new certificate of like kind representing the
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number of shares of such class represented by such lost, stolen, destroyed or
mutilated certificate and dated the date of such lost, stolen, destroyed or
mutilated certificate.
ARTICLE VIII.
RESTRICTIONS ON TRANSFER AND OWNERSHIP OF SHARES
8.1 Limitation on Ownership.
(a) From and after the Demutualization, no Person shall,
together with that Person's Associates, Beneficially Own shares of outstanding
Capital Stock of any class of in excess of the Threshold applicable to such
Person and such Person's Associates. For the purposes hereof, the Class A Common
and Class B Common shall be treated as a single class.
(b) From and after the Demutualization, any Transfer that, if
effective, would result in any Person and that Person's Associates Beneficially
Owning shares of Capital Stock of any class in excess of the Threshold
applicable to such Person and such Person's Associates shall be void ab initio
as to the Transfer of such shares of Capital Stock or Warrants representing
Beneficial Ownership of shares of any class of Capital Stock in excess of the
Threshold applicable to such Person and such Person's Associates; and the
intended transferee shall acquire no rights in such shares of Capital Stock or
Warrants. For the purposes hereof, the Class A Common and Class B Common shall
be treated as a single class.
(c) No Person who has delivered a Transferee Undertaking
shall:
(i) Transfer any Capital Stock, and no Person shall
Transfer any Capital Stock to a Person who has delivered a Transferee
Undertaking, if, in either case, such Transfer would result in a
violation of such Transferee Undertaking; or
(ii) take or allow any action, inaction, or
circumstance that would be or result in a violation of such Transferee
Undertaking.
(d) Nothing contained herein shall impair the settlement of
transactions entered into on the facilities of the NYSE or any other exchange or
quotation system over which shares of Capital Stock or Warrants are traded.
8.2 Prevention of Transfer. If the Board or its designee shall at any
time determine in good faith that a purported Transfer has taken place in
violation of Section 8.1 (whether or not such Transfer is a result of a
transaction entered into through the facilities of the NYSE or any other
exchange or quotation system over which shares of Capital Stock or Warrants are
traded) or that a Person, either alone or with such Person's Associates, intends
to acquire or Transfer or has attempted to acquire or Transfer Beneficial
Ownership of Capital Stock of the Corporation in violation of Section 8.1, the
Board of Directors or its designee shall take such
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action as it deems advisable to refuse to give effect to or to prevent such
Transfer, including, but not limited to, refusing to give effect to such
Transfer on the books of the Corporation or instituting proceedings to enjoin
such Transfer; provided, however, that any purported Transfers in violation of
Section 8.1 shall automatically result in the designation and treatment
described in this Article VIII, irrespective of any action (or non-action) by
the Board.
8.3 Excess Securities. If at any time after the Demutualization there
is a purported Transfer, or other change in the capital structure of the
Corporation such that (x) any Person would, together with that Person's
Associates, Beneficially Own Capital Stock in excess of the Threshold applicable
to such Person and such Person's Associates (for which purpose, the Class A
Common and Class B Common shall be treated as a single class) and (y) any
provision of Section 8.1 or any application of such provision is determined to
be void, invalid, or unenforceable by any court having jurisdiction over the
issue, then such shares of Capital Stock or Warrants representing Beneficial
Ownership of shares of Capital Stock in excess of such Threshold (rounded up to
the nearest whole share) shall constitute "Excess Securities" and be treated as
provided this Article VIII. Such designation and treatment shall be effective as
of the close of business on the business day prior to the date of the purported
Transfer or change in capital structure. Where both Class A Common and Class B
Common are Beneficially Owned by a Person and such Person's Associates and
become subject to the provisions of this section, then the Class B Common so
Beneficially Owned shall first constitute "Excess Securities," and Class A
Common shall constitute "Excess Securities" to the extent that Common Stock
continues to be so Beneficially Owned in excess such Threshold.
8.4 Trust for Excess Securities.
(a) Upon any purported Transfer of Capital Stock that results
in Excess Securities, such Excess Securities shall be deemed automatically to
have been converted into a class separate and distinct from the class or series
from which converted and from any other shares of Capital Stock. All Excess
Securities shall 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 later be transferred pursuant to
Section 8.5. The Purported Transferee shall have no rights in any Excess
Securities except the right to designate a transferee of such Excess Securities
upon the terms specified in Section 8.5.
(b) The Trustee, as holder of Excess Securities, shall not be
entitled to any distributions (including dividends or distributions upon
liquidation, dissolution or winding up). Any dividend or distribution paid prior
to the discovery by the Corporation that the shares of Capital Stock or Warrants
have been purportedly Transferred so as to be deemed Excess Securities shall be
repaid to the Corporation upon demand.
(c) The Trustee, as holder of Excess Securities, shall not be
entitled to vote on any matter and shall not be entitled to exercise or convert
any such securities into shares of Capital Stock.
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8.5 Transfer of Excess Securities.
(a) The Purported Transferee may freely designate a
beneficiary (a "Beneficiary") of an interest in the Trust (representing the
number of shares or warrants (as the case may be) of Excess Securities held by
the Trust attributable to a purported Transfer that resulted in the Excess
Securities), if (A) the Excess Securities held in the Trust would not be Excess
Securities in the hands of such Beneficiary and (B) the Purported Transferee
does not receive a price for designating such Beneficiary that reflects a price
per share or per warrant for such Excess Securities that exceeds (i) the price
per share or per warrant such Purported Transferee paid for the Capital Stock or
Warrants in the purported Transfer that resulted in the Excess Securities, or
(ii) if the Purported Transferee did not give value for such Excess Securities
(through a gift, devise or other transaction), a price per share or per warrant
equal to the Market Price for the shares or warrants of the Excess Securities on
the date of the purported Transfer that resulted in the Excess Securities. Upon
such transfer of an interest in the Trust, the corresponding shares or warrants
of Excess Securities in the Trust shall be automatically exchanged for an equal
number of shares of Capital Stock or Warrants and such shares of Capital Stock
or Warrants shall be transferred of record to the transferee of the interest in
the Trust if such shares of Capital Stock or Warrants would not be Excess
Securities in the hands of such transferee. Prior to any transfer of any
interest in the Trust, the Purported Transferee must give advance notice to the
Corporation of the intended transfer and the Corporation must have waived in
writing its purchase rights under Section 8.6.
(b) Notwithstanding the foregoing, if a Purported Transferee
receives a price for designating a Beneficiary of an interest in the Trust that
exceeds the amounts allowable under this Section 8.5, such Purported Transferee
shall pay, or cause such Beneficiary to pay, such excess to the Corporation.
(c) If any of the foregoing restrictions on transfer of Excess
Securities are determined to be void, invalid or unenforceable by any court of
competent jurisdiction, then the Purported Transferee may be deemed, at the
option of the Company, to have acted as an agent of the Company in acquiring
such Excess Securities and to hold such Excess Securities on behalf of the
Company.
8.6 Call by Corporation on Excess Securities. Excess Securities shall
be deemed to have been offered for sale to the Corporation, or its designee, at
a price per share or per warrant equal to the lesser of (a) the price per share
in the transaction that created such Excess Securities (or, in the case of a
devise or gift, the Market Price at the time of such devise or gift), reduced by
the amount of any distributions received in violation of Section 8.4(b) that
have not been repaid to the Corporation, and (b) the Market Price of the Capital
Stock or Warrants to which such Excess Securities relate on the date the
Corporation, or its designee, accepts such offer, reduced by the amount of any
distributions received in violation of Section 8.4(b) that have not been repaid
to the Corporation. The Corporation shall have the right to accept such offer
for
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a period of ninety days after the later of (x) the date of the purported
Transfer which resulted in such Excess Securities, (y) the date the Board of
Directors determines in good faith that a purported Transfer resulting in Excess
Securities has occurred, if the Corporation does not receive notice of such
Transfer pursuant to Section 6.3, but in no event later than a permitted
transfer pursuant to and in compliance with the terms of Section 8.5, or (z) if
the enforceability of Article VIII is the subject of any legal proceeding within
such ninety day period, the date on which a final nonappealable judgment with
respect to such enforceability becomes effective.
ARTICLE IX.
PROVISIONS APPLICABLE TO CLASS C COMMON
9.1 Issuance of Class C Common. Class C Common may be issued to the
Commonwealth pursuant to Section 11.1 of the Plan of Demutualization. The
Corporation shall not issue Class C Common to any Person other than the
Commonwealth and no Person other than the Commonwealth shall hold Class C
Common.
9.2 Redemption.
(a) The Corporation may, at its option and at any time and
from time to time, redeem all or any portion of the Class C Common at a price
per share equal to the Redemption Price. If not sooner redeemed, the Corporation
shall redeem at the Redemption Price any remaining outstanding Class C Common on
June 30, 1998. The Redemption Price shall be equal to the price per share of
Class A Common sold to the public in the initial public offering of Class A
Common but without taking into account any underwriting discounts, costs, or
expenses incurred in connection therewith (the "Initial Stock Price"), plus an
amount equal to interest calculated on the Initial Stock Price from the
effective date of the Demutualization through the date of payment at a rate of
interest per annum (the "Class C Interest Rate") which shall be fixed by the
Board prior to the issuance of any Class C Common at the rate of interest per
annum determined by the Virginia Attorney General and the Virginia Bureau of
Insurance in accordance with the Plan of Demutualization. The Board shall adopt
an amendment to these Amended and Restated Articles of Incorporation setting
forth the Class C Interest Rate. In the case of any redemption before June 30,
1998, the Redemption Price may be paid by delivery to the holder of the Class C
Common of an unsecured promissory note of the Corporation, in form and substance
reasonably acceptable to the holder of the Class C Common, in an amount equal to
the Redemption Price with a due date of June 30, 1998 and bearing interest the
at Class C Interest Rate. Any such promissory note may be prepaid in whole or in
part by the Corporation at any time without penalty.
(b) Notice of redemption shall be given by hand delivery,
facsimile transmission, or first class mail, postage prepaid, to the holder of
record of the outstanding shares of Class C Common to be redeemed at its last
known addresses shown on the share transfer records of the Corporation. The
notice of redemption shall set forth the paragraph in these Amended and
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Restated Articles of Incorporation pursuant to which the shares are being
redeemed, the number of shares to be redeemed, the date fixed for redemption,
the applicable redemption price or prices and the place or places where
certificates representing shares to be redeemed may be surrendered. If less than
all of the outstanding shares of Class C Common are to be redeemed the notice of
redemption shall also set forth the numbers of the certificates representing
shares to be redeemed and, if less than all shares represented by any such
certificate are to be redeemed, the number of shares represented by such
certificate to be redeemed.
(c) If notice of redemption of any outstanding shares of Class
C Common shall have been duly mailed as herein provided, then on or before the
date fixed for redemption the Corporation shall (i) upon delivery of
certificates representing the outstanding shares of Class C Common to be
redeemed, pay the Redemption Price by wire transfer to an account designated by
the holder of Class C Common by written notice to the Corporation received at
least one business day before the date fixed for redemption or, (ii) if the
certificates or notice contemplated by the preceding clause (i) are not
delivered, deposit cash sufficient to pay the redemption price of such shares in
trust for the benefit of the holder of such shares with any bank or trust
company in the City of Richmond, State of Virginia, having capital and surplus
aggregating at least $50,000,000 as of the date of its most recent report of
financial condition and named in such notice, to be applied to the redemption of
the shares so called for redemption against surrender for cancellation of the
certificates representing such shares. From and after the time of such deposit
all shares for the redemption of which such deposit shall have been made shall,
whether or not the certificates therefor shall have been surrendered for
cancellation, no longer be deemed to be outstanding for any purpose, and all
rights with respect to such shares shall thereupon cease and terminate except,
in the event of deposit in trust, the right to receive payment of the Redemption
Price, but without interest from the date of redemption. Any interest earned on
funds so deposited shall be paid to the Corporation from time to time.
(d) Class C Common purchased, redeemed or otherwise acquired
by the Corporation shall not thereafter be reissued.
9.3 Restriction on Transfer. After initial issuance by the
Corporation, the Class C Common may not be Transferred except to the
Corporation.
9.4 Voting as Separate Group. The affirmative vote of the holder of the
outstanding Class C Common voting as a separate voting group, shall be required
for the adoption of any amendment, alteration or repeal of any provision of
these Amended and Restated Articles of Incorporation, that adversely changes the
preferences, limitations or relative rights of Class C Common or the holder
thereof, (it being understood that an increase in the number of Directors of the
Corporation is not such an adverse change).
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ARTICLE X.
CONTROL SHARE ACQUISITIONS
The provisions of Article 14.1 of Title 13.1 of the Virginia Code,
Control Share Acquisitions, shall be applicable to direct or indirect
acquisitions by any person of beneficial ownership (as such terms are defined in
Article 14.1) of shares of the Corporation.
ARTICLE XI.
DIRECTORS
The number of directors of the Corporation shall be fixed in the
bylaws. The number of directors shall be divided into three groups with each
group containing one third of the total, as nearly equal in number as possible.
The terms of the directors in the first group shall expire at the first annual
meeting of shareholders. The terms of the directors in the second group shall
expire at the second annual meeting of shareholders and the terms of directors
in the third group shall expire at the third annual meeting of shareholders. At
each annual meeting of shareholders, one group of directors shall be elected for
a term of three years to succeed those whose terms expire. A director may be
removed from office as a director by the shareholders of the Corporation only
with cause.
ARTICLE XII.
LIMIT ON LIABILITY AND INDEMNIFICATION
12.1 Definitions. For purposes of this Article the following
definitions shall apply:
(a) "Corporation" means this Corporation only and no
predecessor entity or other legal entity;
(b) "expenses" include counsel fees, expert witness
fees, and costs of investigation, litigation and appeal, as well as any
amounts expended in asserting a claim for indemnification;
(c) "liability" means the obligation to pay a
judgment, settlement, penalty, fine, or other such obligation,
including, without limitation, any excise tax assessed with respect to
an employee benefit plan;
(d) "legal entity" means a corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise;
(e) "predecessor entity" means a legal entity the
existence of which ceased upon its acquisition by the Corporation in a
merger or otherwise; and
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(f) "proceeding" means any threatened, pending, or
completed action, suit, proceeding or appeal whether civil, criminal,
administrative or investigative and whether formal or informal.
12.2 Limit on Liability. In every instance in which the Virginia Stock
Corporation Act, as it exists on the date hereof or may hereafter be amended,
permits the limitation or elimination of liability of directors or officers of a
corporation to the corporation or its shareholders, the directors and officers
of this Corporation shall not be liable to the Corporation or its shareholders.
12.3 Indemnification of Directors and Officers. The Corporation shall
indemnify any individual who is, was or is threatened to be made a party to a
proceeding (including a proceeding by or in the right of the Corporation)
because such individual is or was a director or officer of the Corporation or
because such individual is or was serving the Corporation, or any other legal
entity in any capacity at the request of the Corporation while a director or
officer of the Corporation, against all liabilities and reasonable expenses
incurred in the proceeding except such liabilities and expenses as are incurred
because of such individual's willful miscon duct or knowing violation of the
criminal law. Service as a director or officer of a legal entity controlled by
the Corporation shall be deemed service at the request of the Corporation. The
determination that indemnification under this Section 12.3 is permissible and
the evaluation as to the reasonableness of expenses in a specific case shall be
made, in the case of a director, as provided by law, and in the case of an
officer, as provided in Section 12.4 of this Article; provided, however, that if
a majority of the directors of the Corporation has changed after the date of the
alleged conduct giving rise to a claim for indemnification, such determination
and evaluation shall, at the option of the Person claiming indemnification, be
made by special legal counsel agreed upon by the Board of Directors and such
Person. Unless a determination has been made that indemnification is not
permissible, the Corporation shall make advances and reimbursements for expenses
incurred by a director or officer in a proceeding upon receipt of an undertaking
from such director or officer to repay the same if it is ultimately determined
that such director or officer is not entitled to indemnification. Such
undertaking shall be an unlimited, unsecured general obligation of the director
or officer and shall be accepted without reference to such director's or
officer's ability to make repayment. The termination of a proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent shall not of itself create a presumption that a director or
officer acted in such a manner as to make such director or officer ineligible
for indemnification. The Corporation is authorized to contract in advance to
indemnify and make advances and reimbursements for expenses to any of its
directors or officers to the same extent provided in this Section 12.3.
12.4 Indemnification of Others. The Corporation may, to a lesser extent
or to the same extent that it is required to provide indemnification and make
advances and reimbursements for expenses to its directors and officers pursuant
to Section 12.3, provide indemnification and make advances and reimbursements
for expenses to its employees and agents, the directors, officers, employees and
agents of its subsidiaries and predecessor entities, and any Person
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serving any other legal entity in any capacity at the request of the
Corporation, and may contract in advance to do so. The determination that
indemnification under this Section 12.4 is permissible, the authorization of
such indemnification and the evaluation as to the reasonableness of expenses in
a specific case shall be made as authorized from time to time by general or
specific action of the Board of Directors, which action may be taken before or
after a claim for indemnification is made, or as otherwise provided by law. No
Person's rights under Section 12.3 of this Article shall be limited by the
provisions of this Section 12.4.
12.5 Miscellaneous. The rights of each Person entitled to
indemnification under this Article shall inure to the benefit of such Person's
heirs, executors and administrators. Special legal counsel selected to make
determinations under this Article may be counsel for the Corporation.
Indemnification pursuant to this Article shall not be exclusive of any other
right of indemnification to which any Person may be entitled, including
indemnification pursuant to a valid contract, indemnification by legal entities
other than the Corporation and indemnification under policies of insurance
purchased and maintained by the Corporation or others. However, no Person shall
be entitled to indemnification by the Corporation to the extent such Person is
indemnified by another, including an insurer. The Corporation is authorized to
purchase and maintain insurance against any liability it may have under this
Article or to protect any of the Persons named above against any liability
arising from their service to the Corporation or any other legal entity at the
request of the Corporation regardless of the Corporation's power to indemnify
against such liability. The provisions of this Article shall not be deemed to
preclude the Corporation from entering into contracts otherwise permitted by law
with any individuals or legal entities, including those named above. If any
provision of this Article or its application to any Person or circumstance is
held invalid by a court of competent jurisdiction, the invalidity shall not
affect other provisions or applications of this Article, and to this end the
provisions of this Article are severable.
12.6 Application; Amendments. The provisions of this Article shall be
applicable from and after its adoption even though some or all of the underlying
conduct or events relating to a proceeding may have occurred before its
adoption. No amendment, modification or repeal of this Article shall diminish
the rights provided hereunder to any Person arising from conduct or events
occurring before the adoption of such amendment, modification or repeal.
ARTICLE XIII.
REGISTERED OFFICE AND REGISTERED AGENT
The address of the initial registered office of the Corporation, which
is located in Henrico County, Virginia, is Blue Cross and Blue Shield of
Virginia, 2015 Staples Mill Road, Richmond, Virginia 23230. The initial
registered agent of the Corporation is Jeanette D. Rogers, whose business office
is identical with the registered office and who is a resident of Virginia and a
member of the Virginia State Bar.
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ARTICLE XIV.
EXPIRATION OF NAME AND MARK RESTRICTIONS
14.1 Certain Defined Terms. The following terms shall have the
following meanings:
"Current Name and Mark Restrictions" means Articles
VI (other than Section 6.1), VII, and VIII of these Articles.
"Future Name and Mark Restrictions" means any
provision (i) that is added to these Articles in the future by
amendment to these Articles for the purpose of complying with the
License Agreement or with any guideline or other restriction adopted or
imposed by the Blue Association, and (ii) that either limits the number
of shares of the Corporation that may be acquired or owned by any
Person or imposes any voting requirement higher than is otherwise
required by Virginia law.
14.2 Change to or Expiration of Restrictions.
(a) If the Corporation and the Blue Association agree in
writing, through an amendment to the License Agreement, the guidelines, or
otherwise, to a Threshold percentage that is higher than 5%, then the references
to 5% in the definition of "Interested Shareholder" in Section 6.1 and in
Sections 6.2, 6.4 and 7.1 of these Articles shall automatically be changed to
such higher percentage.
(b) Notwithstanding any other provision of these Articles, the
Current Name and Mark Restrictions shall expire and become ineffective upon the
earlier of (i) the date on which the Corporation ceases to be subject to any
License Agreement, or (ii) the date on which the License Agreement no longer
contains provisions that permit termination of the License Agreement if a Person
becomes the Beneficial Owner of a specified percentage of securities of the
Corporation. Upon expiration of the Current Name and Mark Restrictions, each
share of Class B Common then outstanding shall be converted into one share of
Class A Common.
(c) Notwithstanding any other provision of these Articles, any
Future Name and Mark Restriction shall expire and become ineffective upon the
earlier of (i) the date on which the Corporation ceases to be subject to any
License Agreement, or (ii) the date on which that Future Name and Mark
Restriction is no longer required to comply with the License Agreement or with
any guideline or other restriction adopted or imposed by the Blue Association.
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TRIGON HEALTHCARE, INC.
BYLAWS
<PAGE>
TABLE OF CONTENTS
ARTICLE I.
MEETINGS OF STOCKHOLDERS
<TABLE>
<CAPTION>
<S> <C>
1.1 Place and Time of Meetings........................................................................ 1
1.2 Organization and Order of Business................................................................ 1
1.3 Annual Meeting.................................................................................... 1
1.4 Substitute Annual Meeting......................................................................... 2
1.5 Special Meetings.................................................................................. 2
1.6 Record Dates...................................................................................... 2
1.7 Notice of Meetings................................................................................ 3
1.8 Waiver of Notice; Attendance at Meeting........................................................... 4
1.9 Quorum and Voting Requirements.................................................................... 4
1.10 Proxies.......................................................................................... 4
1.12 Action Without Meeting........................................................................... 5
ARTICLE II.
DIRECTORS
2.1 General Powers.................................................................................... 5
2.2 Number and Term................................................................................... 6
2.3 Nomination of Directors........................................................................... 6
2.4 Election.......................................................................................... 7
2.5 Removal; Vacancies................................................................................ 7
2.6 Annual and Regular Meetings....................................................................... 7
2.7 Special Meetings.................................................................................. 8
2.8 Notice of Meetings................................................................................ 8
2.9 Waiver of Notice; Attendance at Meeting........................................................... 8
2.10 Quorum; Voting.................................................................................... 8
2.11 Telephonic Meetings............................................................................... 8
2.12 Action Without Meeting............................................................................ 9
2.13 Compensation...................................................................................... 9
ARTICLE III.
COMMITTEES OF DIRECTORS
3.1 Committees........................................................................................ 9
3.2 Limitation on Authority of Committees............................................................. 9
3.3 Committee Meetings; Miscellaneous................................................................. 9
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3.4 Executive Committee............................................................................... 9
3.5 Authority of Executive Committee.................................................................. 10
3.6 Standing Committees............................................................................... 10
3.7 Audit Committee................................................................................... 10
3.8 Nominating Committee.............................................................................. 10
3.9 Finance and Investment Committee.................................................................. 10
3.10 Human Resources, Compensation, and Employee Benefits Committee.................................... 11
3.11 Provider Policy Committee......................................................................... 11
3.12 Other Committees.................................................................................. 11
ARTICLE IV.
OFFICERS
4.1 Officers.......................................................................................... 11
4.2 Election; Term.................................................................................... 11
4.3 Removal of Officers............................................................................... 12
4.4 Duties of the Chairman............................................................................ 12
4.5 Duties of the President........................................................................... 12
4.6 Duties of the Secretary........................................................................... 12
4.7 Duties of the Treasurer........................................................................... 12
4.8 Duties of Other Officers.......................................................................... 12
4.9 Voting Securities of Other Corporations........................................................... 13
4.10 Bonds............................................................................................. 13
ARTICLE V.
SHARE CERTIFICATES
5.1 Form.............................................................................................. 13
5.2 Transfer.......................................................................................... 13
5.3 Restrictions on Transfer.......................................................................... 13
5.4 Lost or Destroyed Share Certificates.............................................................. 13
ARTICLE VI.
MISCELLANEOUS PROVISIONS
6.1 Corporate Seal.................................................................................... 14
6.2 Fiscal Year....................................................................................... 14
6.3 Amendments........................................................................................ 14
Page (ii)
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TRIGON HEALTHCARE, INC.
BYLAWS
ARTICLE I.
MEETINGS OF STOCKHOLDERS
1.1 Place and Time of Meetings. Meetings of stockholders shall be held
at such place, either within or without the Commonwealth of Virginia, and at
such time, as may be provided in the notice of the meeting and approved by the
Chairman of the Board of Directors (the "Chairman"), the President, or the Board
of Directors.
1.2 Organization and Order of Business. The Chairman or, in his or her
absence, the President shall serve as chairman at all meetings of the
stockholders. In the absence of both of the foregoing officers or if both of
them decline to serve, a majority of the shares entitled to vote at a meeting,
may appoint any person entitled to vote at the meeting to act as chairman. The
secretary of the Corporation or, in his or her absence, an assistant secretary,
shall act as secretary at all meetings of the stockholders. In the event that
neither the secretary nor any assistant secretary is present, the chairman of
the meeting may appoint any person to act as secretary of the meeting.
The Chairman shall have the authority to make such rules and
regulations, to establish such procedures and to take such steps as he or she
may deem necessary or desirable for the proper conduct of each meeting of the
stockholders, including, without limitation, the authority to make the agenda
and to establish procedures for (i) dismissing of business not properly
presented, (ii) maintaining of order and safety, (iii) placing limitations on
the time allotted to questions or comments on the affairs of the Corporation,
(iv) placing restrictions on attendance at a meeting by persons or classes of
persons who are not stockholders or their proxies, (v) restricting entry to a
meeting after the time prescribed for the commencement thereof and (vi)
commencing, conducting and closing voting on any matter.
1.3 Annual Meeting. The annual meeting of stockholders shall be held on
the second Wednesday in May of each year, if not a legal holiday, and if a legal
holiday, then on the next succeeding business day.
At each annual meeting of stockholders, only such business shall be
conducted as is proper to consider and has been brought before the meeting (i)
pursuant to the Corporation's notice of the meeting, (ii) by or at the direction
of the Board of Directors or (iii) by a stockholder who is a stockholder of
record of a class of shares entitled to vote on the business such stockholder is
proposing, both at the time of the giving of the stockholder's notice
hereinafter described in this Section 1.3 and on the record date for such annual
meeting, and who complies with the notice procedures set forth in this Section
1.3.
In order to bring before an annual meeting of stockholders any business
which may properly be considered and which a stockholder has not sought to have
included in the
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Corporation's proxy statement for the meeting, a stockholder who meets the
requirements set forth in the preceding paragraph must give the Corporation
timely written notice. To be timely, a stockholder's notice must be given,
either by personal delivery to the Secretary or an Assistant Secretary of the
Corporation at the principal office of the Corporation, or by first class United
States mail, with postage thereon prepaid, addressed to the Secretary of the
Corporation at the principal office of the Corporation. Any such notice must be
received (i) on or after the first day of February and before first day of March
of the year in which the meeting will be held, if clause (ii) is not applicable,
or (ii) not less than 60 days before the date of the meeting if the date of such
meeting, as prescribed in these bylaws, has been changed by more than 30 days.
Each such stockholder's notice shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (i) the name and
address, as they appear on the Corporation's stock transfer books, of the
stockholder proposing business, (ii) the class and number of shares of stock of
the Corporation beneficially owned by such stockholder, (iii) a representation
that such stockholder is a stockholder of record at the time of the giving of
the notice and intends to appear in person or by proxy at the meeting to present
the business specified in the notice, (iv) a brief description of the business
desired to be brought before the meeting, including the complete text of any
resolutions to be presented and the reasons for wanting to conduct such
business, and (v) any interest which the stockholder may have in such business.
The Secretary or Assistant Secretary of the Corporation shall deliver
each stockholder's notice that has been timely received to the Chairman for
review.
Notwithstanding the foregoing provisions of this Section 1.3, a
stockholder seeking to have a proposal included in the Corporation's proxy
statement for an annual meeting of stockholders shall comply with the
requirements of Regulation 14A under the Securities Exchange Act of 1934, as
amended from time to time, or with any successor regulation.
1.4 Substitute Annual Meeting. If an annual meeting of stockholders is
not held on the day designated in these Bylaws, a substitute annual meeting
shall be called as promptly as is practicable by the Chairman, the President, or
the Board of Directors. Any meeting so called shall be designated and treated
for all purposes as the annual meeting.
1.5 Special Meetings. Special meetings of the stockholders may be
called only by the Chairman, the President, or the Board of Directors. Only
business within the purpose or purposes described in the notice for a special
meeting of stockholders may be conducted at the meeting.
1.6 Record Dates. The Board of Directors shall fix, in advance, a
record date to make a determination of stockholders entitled to notice of, or to
vote at, any meeting of stockholders, to receive any dividend or for any
purpose, such date to be not more than 70 days before the meeting or action
requiring a determination of stockholders.
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When a determination of stockholders entitled to notice of or to vote
at any meeting of stockholders has been made, such determination shall be
effective for any adjournment of the meeting unless the Board of Directors fixes
a new record date, which it shall do if the meeting is adjourned to a date more
than 120 days after the date fixed for the original meeting.
1.7 Notice of Meetings. Written notice stating the place, day and hour
of each meeting of stockholders and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be given not less
than ten nor more than 60 days before the date of the meeting (except when a
different time is required in these Bylaws or by law) either personally or by
mail, telephone, telegraph, teletype, telecopy or other form of wire or wireless
communication, or by private courier, to each stockholder of record entitled to
vote at such meeting and to such nonvoting stockholders as may be required by
law. If mailed, such notice shall be deemed to be effective when deposited in
first class United States mail with postage thereon prepaid, addressed to the
stockholder at his or her address as it appears on the share transfer books of
the Corporation. If given in any other manner, such notice shall be deemed
effective when (i) given personally or by telephone, (ii) sent by telegraph,
teletype, telecopy or other form of wire or wireless communication or (iii)
given to a private courier to be delivered.
Notice of a stockholder's meeting to act on (i) an amendment of the
Articles of Incorporation; (ii) a plan of merger or share exchange; (iii) the
sale, lease, exchange or other disposition of all or substantially all the
property of the Corporation otherwise than in the usual and regular course of
business, or (iv) the dissolution of the Corporation, shall be given, in the
manner provided above, not less than 25 nor more than 60 days before the date of
the meeting. Any notice given pursuant to this section shall state that the
purpose, or one of the purposes, of the meeting is to consider such action and
shall be accompanied by (x) a copy of the proposed amendment, (y) a copy of the
proposed plan of merger or share exchange, or (z) a summary of the agreement
pursuant to which the proposed transaction will be effected. If only a summary
of the agreement is sent to the stockholders, the Corporation shall also send a
copy of the agreement to any stockholder who requests it.
If a meeting is adjourned to a different date, time or place, notice
need not be given if the new date, time or place is announced at the meeting
before adjournment. However, if a new record date for an adjourned meeting is
fixed, notice of the adjourned meeting shall be given to stockholders as of the
new record date, unless a court provides otherwise.
Notwithstanding the foregoing, no notice of a meeting of stockholders
need be given to a stockholder if (i) an annual report and proxy statements for
two consecutive annual meetings of stockholders or (ii) all, and at least two,
checks in payment of dividends or interest on securities during a 12-month
period, have been sent by first-class United States mail, with postage thereon
prepaid, addressed to the stockholder at his or her address as it appears on the
share transfer books of the Corporation, and returned undeliverable. The
obligation of the Corporation to give notice of meetings of stockholders to any
such stockholder shall be reinstated once the Corporation has received a new
address for such stockholder for entry on its share transfer books.
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1.8 Waiver of Notice; Attendance at Meeting. A stockholder may waive
any notice required by law, the Articles of Incorporation or these Bylaws before
or after the date and time of the meeting that is the subject of such notice.
The waiver shall be in writing, be signed by the stockholder entitled to the
notice, and be delivered to the Secretary of the Corporation for inclusion in
the minutes or filing with the corporate records.
A stockholder's attendance at a meeting (i) waives objection to lack of
notice or defective notice of the meeting, unless the stockholder at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting, and (ii) waives objection to consideration of a particular
matter at the meeting that is not within the purpose or purposes described in
the meeting notice, unless the stockholder objects to considering the matter
when it is presented.
1.9 Quorum and Voting Requirements. Unless otherwise required by law, a
majority of the votes entitled to be cast on a matter constitutes a quorum for
action on that matter. Once a share is represented for any purpose at a meeting,
it is deemed present for quorum purposes for the remainder of the meeting and
for any adjournment of that meeting unless a new record date is or shall be set
for that adjourned meeting. If a quorum exists, action on a matter, other than
the election of directors, is approved if the votes cast favoring the action
exceed the votes cast opposing the action, unless a greater number of
affirmative votes is required by law. Directors shall be elected by a plurality
of the votes cast by the shares entitled to vote in the election at a meeting at
which a quorum is present. Less than a quorum may adjourn a meeting.
1.10 Proxies. A stockholder may vote his or her shares in person or by
proxy. A stockholder may appoint a proxy to vote or otherwise act for him or her
by signing an appointment form, either personally or by his or her
attorney-in-fact. An appointment of a proxy is effective when received by the
Secretary or other officer or agent authorized to tabulate votes and is valid
for eleven (11) months unless a longer period is expressly provided in the
appointment form. An appointment of a proxy is revocable by the stockholder
unless the appointment form conspicuously states that it is irrevocable and the
appointment is coupled with an interest.
The death or incapacity of the stockholder appointing a proxy does not
affect the right of the Corporation to accept the proxy's authority unless
notice of the death or incapacity is received by the Secretary or other officer
or agent authorized to tabulate votes before the proxy exercises his or her
authority under the appointment. An irrevocable appointment is revoked when the
interest with which it is coupled is extinguished. A transferee for value of
shares subject to an irrevocable appointment may revoke the appointment if he or
she did not know of its existence when he or she acquired the shares and the
existence of the irrevocable appointment was not noted conspicuously on the
certificate representing the shares. Subject to any legal limitations on the
right of the Corporation to accept the vote or other action of a proxy and to
any express limitation on the proxy's authority appearing on the face of the
appointment form, the Corporation is entitled to accept the proxy's vote or
other action as that of the stockholder making the appointment. Any fiduciary
who is entitled to vote any shares may vote such shares by proxy.
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1.11 Voting List. The officer or agent having charge of the share
transfer books of the Corporation shall make, at least ten days before each
meeting of stockholders, a complete list of the stockholders entitled to vote at
such meeting or any adjournment thereof, with the address of and the number of
shares held by each. For a period of ten days prior to the meeting such list
shall be kept on file at the registered office of the Corporation or at its
principal office or at the office of its transfer agent or registrar and shall
be subject to inspection by any stockholder at any time during usual business
hours. Such list shall also be produced and kept open at the time and place of
the meeting and shall be subject to the inspection of any stockholder during the
whole time of the meeting for the purpose thereof. The original share transfer
books shall be prima facia evidence as to who are the stockholders entitled to
examine such list or transfer books or to vote at any meeting of the
stockholders. The right of a stockholder to inspect such list prior to the
meeting shall be subject to the conditions and limitations set forth by law. If
the requirements of this section have not been substantially complied with, the
meeting shall, on the demand of any stockholder in person or by proxy, be
adjourned until such requirements are met. Refusal or failure to prepare or make
available the stockholders' list does not affect the validity of action taken at
the meeting prior to the making of any such demand, but any action taken by the
stockholders after the making of any such demand shall be invalid and of no
effect.
1.12 Action Without Meeting. Action required or permitted to be taken
at a meeting of stockholders may be taken without a meeting and without action
by the Board of Directors if the action is taken by all the stockholders
entitled to vote on the action. The action shall be evidenced by one or more
written consents describing the action taken, signed by all the stock holders
entitled to vote on the action, and delivered to the Secretary of the
Corporation for inclusion in the minutes or filing with the corporate records.
Action taken by unanimous written consent shall be effective according to its
terms when all consents are in the possession of the Corporation, unless the
consent specifies a different effective date, in which event the action taken
under this section shall be effective as of the date specified therein, provided
the consent states the date of execution by each stockholder. A stockholder may
withdraw a consent only by delivering a written notice of withdrawal to the
Corporation prior to the time that all consents are in the possession of the
Corporation.
If not otherwise fixed pursuant to the provisions of Section 1.6 the
record date for determining stockholders entitled to take action without a
meeting is the date the first stockholder signs the consent described in the
preceding paragraph.
ARTICLE II.
DIRECTORS
2.1 General Powers. The Corporation shall have a Board of Directors.
All corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Corporation managed under the direction of, its
Board of Directors, subject to any limitation set forth in the Articles of
Incorporation.
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2.2 Number and Term. The number of directors of the Corporation shall
be fixed by the board of directors, but shall not be less than eleven (11) nor
more than twenty (20). Only the stockholders may increase or decrease such
minimum or maximum number of directors. No decrease in number shall have the
effect of shortening the term of any incumbent director.
The number of directors shall be divided into three groups with each
group containing one third of the total, as nearly equal in number as possible.
The terms of the directors in the first group shall expire at the first annual
meeting of shareholders. The terms of the directors in the second group shall
expire at the second annual meeting of shareholders and the terms of directors
in the third group shall expire at the third annual meeting of shareholders. At
each annual meeting of shareholders, one group of directors shall be elected for
a term of three years to succeed those whose terms expire.
A director may be removed from office as a director by the shareholders
of the Corporation only with cause. Each director shall hold office until his or
her death, resignation or removal for cause or until his or her successor is
elected.
2.3 Nomination of Directors. No person shall be eligible for election
as a director at a meeting of stockholders unless nominated (i) by the Board of
Directors upon recommendation of the Nominating Committee or otherwise or (ii)
by a stockholder who is a stockholder of record of a class of shares entitled to
vote for the election of directors, both at the time of the giving of the
stockholder's notice hereinafter described in this Section 2.3 and on the record
date for the meeting at which directors will be elected, and who complies with
the notice procedures set forth in this Section 2.3.
In order to nominate for election as directors at a meeting of
stockholders any persons who are not listed as nominees in the Corportion's
proxy statement for the meeting, a stockholder who meets the requirements set
forth in the preceding paragraph must give the Corporation timely written
notice. To be timely, a stockholder's notice must be given, either by personal
delivery to the Secretary or an Assistant Secretary of the Corporation at the
principal office of the Corporation, or by first class United States mail, with
postage thereon prepaid, addressed to the Secretary of the Corporation at the
principal office of the Corporation. Any such notice must be received (i) on or
after the first day of February and before the first day of March of the year in
which the meeting will be held if the meeting is to be an annual meeting and
clause (ii) is not applicable, or (ii) not less than 60 days before an annual
meeting, if the date of the applicable annual meeting, as prescribed in these
Bylaws, has been changed by more than 30 days, or (iii) not later than the close
of business on the tenth day following the day on which notice of a special
meeting of stockholders called for the purpose of electing directors is first
given to stockholders.
Each such stockholder's notice shall set forth the following: (i) as to
the stockholder giving the notice, (a) the name and address of such stockholder
as they appear on the Corporation's stock transfer books, (b) the class and
number of shares of the Corporation beneficially owned by such stockholder, (c)
a representation that such stockholder is a
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stockholder of record at the time of giving the notice and intends to appear in
person or by proxy at the meeting to nominate the person or persons specified in
the notice, and (d) a description of all arrangements or understandings, if any,
between such stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made; and (ii) as to each person whom the stockholder wishes to
nominate for election as a director, (a) the name, age, business address and
residence address of such person, (b) the principal occupation or employment of
such person, (c) the class and number of shares of the Corporation which are
beneficially owned by such person, and (d) all other information that is
required to be disclosed about nominees for election as directors in
solicitations of proxies for the election of directors under the rules and
regulations of the Securities and Exchange Commission. In addition, each such
notice shall be accompanied by the written consent of each proposed nominee to
serve as a director if elected and such consent shall contain a statement from
the proposed nominee to the effect that the information about him or her
contained in the notice is correct.
2.4 Election. Except as provided in Section 2.5 and in the Articles of
Incorporation, the directors shall be elected by the holders of the Common
shares at each annual meeting of stockholders and those persons who receive the
greatest number of votes shall be deemed elected even though they do not receive
a majority of the votes cast. No individual shall be named or elected as a
director without his or her prior consent.
2.5 Removal; Vacancies. The stockholders may remove one or more
directors only with cause. If a director is elected by a voting group, only the
stockholders of that voting group may elect to remove him or her. Unless the
Articles of Incorporation require a greater vote, a director may be removed if
the number of votes cast to remove him or her constitutes a majority of the
votes entitled to be cast at an election of directors of the voting group or
voting groups by which such director was elected. A director may be removed by
the stockholders only at a meeting called for the purpose of removing him or her
and the meeting notice must state that the purpose, or one of the purposes of
the meeting, is removal of the director.
A vacancy on the Board of Directors, including a vacancy resulting from
the removal of a director or an increase in the number of directors, may be
filled by (i) the stockholders, (ii) the Board of Directors or (iii) the
affirmative vote of a majority of the remaining directors though less than a
quorum of the Board of Directors, and may, in the case of a resignation that
will become effective at a specified later date, be filled before the vacancy
occurs but the new director may not take office until the vacancy occurs.
2.6 Annual and Regular Meetings. An annual meeting of the Board of
Directors, which shall be considered a regular meeting, shall be held
immediately following each annual meeting of stockholders, for the purpose of
electing officers and carrying on such other business as may properly come
before the meeting. The Board of Directors may also adopt a schedule of
additional meetings which shall be considered regular meetings. Regular meetings
shall be held at such times and at such places, within or without the
Commonwealth of Virginia, as the
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Chairman, the President or the Board of Directors shall designate from time to
time. If no place is designated, regular meetings shall be held at the principal
office of the Corporation.
2.7 Special Meetings. Special meetings of the Board of Directors may be
called by the Chairman, the President or a majority of the Directors of the
Corporation, and shall be held at such times and at such places, within or
without the Commonwealth of Virginia, as the person or persons calling the
meetings shall designate. If no such place is designated in the notice of a
meeting, it shall be held at the principal office of the Corporation.
2.8 Notice of Meetings. No notice need be given of regular meetings
of the Board of Directors.
Notices of special meetings of the Board of Directors shall be given to
each director in person or delivered to his or her residence or business address
(or such other place as he or she may have directed in writing) not less than
twenty-four (24) hours before the meeting by mail, messenger, telecopy,
telegraph, or other means of written communication or by telephoning such notice
to him or her. Any such notice shall set forth the time and place of the meeting
and state the purpose for which it is called.
2.9 Waiver of Notice; Attendance at Meeting. A director may waive any
notice required by law, the Articles of Incorporation, or these Bylaws before or
after the date and time stated in the notice, and such waiver shall be
equivalent to the giving of such notice. Except as provided in the next
paragraph of this section, the waiver shall be in writing, signed by the
director entitled to the notice and filed with the minutes or corporate records.
A director's attendance at or participation in a meeting waives any
required notice to him or her of the meeting unless the director at the
beginning of the meeting or promptly upon his or her arrival objects to holding
the meeting or transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
2.10 Quorum; Voting. A majority of the number of directors fixed in
these Bylaws shall constitute a quorum for the transaction of business at a
meeting of the Board of Directors. If a quorum is present when a vote is taken,
the affirmative vote of a majority of the directors present is the act of the
Board of Directors. A director who is present at a meeting of the Board of
Directors or a committee of the Board of Directors when corporate action is
taken is deemed to have assented to the action taken unless (i) he or she
objects at the beginning of the meeting, or promptly upon his or her arrival, to
holding it or transacting specified business at the meeting; or (ii) he or she
votes against, or abstains from, the action taken.
2.11 Telephonic Meetings. The Board of Directors may permit any or all
directors to participate in a regular or special meeting by, or conduct the
meeting through the use of, any means of communication by which all directors
participating may simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.
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2.12 Action Without Meeting. Action required or permitted to be taken
at a meeting of the Board of Directors may be taken without a meeting if the
action is taken by all members of the Board. The action shall be evidenced by
one or more written consents stating the action taken, signed by each director
either before or after the action taken, and included in the minutes or filed
with the corporate records reflecting the action taken. Action taken under this
section shall be effective when the last director signs the consent unless the
consent specifies a different effective date in which event the action taken is
effective as of the date specified therein provided the consent states the date
of execution by each director.
2.13 Compensation. The Board of Directors may fix the compensation of
directors and may provide for the payment of all expenses incurred by them in
attending meetings of the Board of Directors.
ARTICLE III.
COMMITTEES OF DIRECTORS
3.1 Committees. The Board of Directors may create one or more
committees and appoint members of the Board of Directors to serve on them.
Unless otherwise provided in these Bylaws, each committee shall have two or more
members who serve at the pleasure of the Board of Directors. The creation of a
committee and appointment of members to it shall be approved by a majority of
all of the directors in office when the action is taken.
3.2 Limitation on Authority of Committees. To the extent specified by
the Board of Directors, each committee may exercise the authority of the Board
of Directors, except that a committee may not (i) approve or recommend to
stockholders action that is required by law to be approved by stockholders; (ii)
fill vacancies on the Board of Directors or on any of its committees; (iii)
amend the Articles of Incorporation; (iv) adopt, amend, or repeal these Bylaws;
(v) approve a plan of merger not requiring stockholder approval; (vi) authorize
or approve a distribution, except according to a general formula or method
prescribed by the Board of Direc tors; or (vii) authorize or approve the
issuance or sale or contract for sale of shares, or determine the designation
and relative rights, preferences, and limitations of a class or series of
shares, except that the Board of Directors may authorize a committee, or a
senior executive officer of the Corporation, to do so within limits specifically
prescribed by the Board of Directors.
3.3 Committee Meetings; Miscellaneous. The provisions of these Bylaws
which govern meetings, action without meetings, notice and waiver of notice, and
quorum and voting requirements of the Board of Directors shall apply to
committees of directors and their members as well.
3.4 Executive Committee. The Board of Directors shall appoint an
Executive Committee having not less than three (3) members to be annually
elected by the Board from its own membership. The Chairman of the Board of
Directors shall be among those elected. The Board shall designate the Chairman
(or Co-Chairmen) of the Executive Committee at the time
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the Executive Committee is elected. The Chairman of the Executive Committee
shall not be a salaried employee of the Corporation or any of its affiliates.
Vacancies occurring in the Executive Committee prior to any annual election may
be filled by the Board.
3.5 Authority of Executive Committee. Between meetings of the Board,
the Executive Committee shall have and exercise the authority of the Board,
except (i) to the extent such authority is limited by the provisions of Section
3.2, (ii) to take action prohibited by Section 13.1-689 of the Code of Virginia,
or (iii) to employ or terminate the employment of the Corporation's chief
executive officer. One or more vacancies at any time existing in the Executive
Committee shall not affect its authority.
3.6 Standing Committees. The Board of Directors shall have the
following standing committees: Audit; Finance and Investment; Human Resources,
Compensation and Employee Benefits; Nominating and Corporate Governance; and
Provider Policy.
3.7 Audit Committee. The Board of Directors shall appoint an Audit
Committee consisting of not less than three directors, none of whom shall be
salaried officers or employees of the Corporation. The Chairman of the Audit
Committee will be elected by the members of the Audit Committee from among its
members. The Audit Committee shall at all times have authority to investigate
the financial reporting processes and internal controls of the Corporation and
to report thereon and make its recommendations to the Board of Directors and to
the Executive Committee, or to either of them. The Audit Committee shall
regularly review the adequacy of internal financial controls, insure that
sufficient and proper audits, both internal and external, are conducted of the
Corporation's financial affairs and control systems, review with the
Corporation's independent public accountants their reports, and recommend the
selection of the Corporation's independent public accountants.
3.8 Nominating Committee. The Board of Directors shall appoint a
Nominating and Corporate Governance Committee consisting of not less than three
directors. The Chairman of the Committee will not be a salaried officer or
employee of the Corporation and will be elected by the Board of Directors from
among the members of the Committee. A majority of the members of the Committee
shall not be salaried officers or employees of the Corporation. The Nominating
and Corporate Governance Committee shall recommend to the Board of Directors
those persons to be elected as directors of the Corporation, chairmen and
members of the Executive Committee and standing Board committees (except
Chairman of the Audit Committee), and officers of the Corporation. The Committee
may also recommend to the Board of Directors general guidelines for the Board
and Board committee structure, composition, and criteria for board membership,
frequency of meetings, conflicts of interest, and Board compensation. The
Nominating and Corporate Governance Committee shall review any actual or
potential conflicts of interest involving any officer or director of the
Corporation and shall make recommendations to the Board as may be appropriate.
3.9 Finance and Investment Committee. The Finance and Investment
Committee shall oversee the financial affairs and investments of the Corporation
and its affiliates and will
Page 10
<PAGE>
periodically report to the Board of Directors on these affairs and investments.
The Finance and Investment Committee will have not less than three members, all
of whom shall be members of the Board of Directors. The Chairman of the
Committee will not be a salaried officer or employee of the Corporation and will
be elected by the Board of Directors from among the members of the Committee.
3.10 Human Resources, Compensation, and Employee Benefits Committee.
The Human Resources, Compensation, and Employee Benefits Committee shall
consider management proposals, make recommendations to the Board of Directors
and, where express authority is conferred, approve the compensation and benefits
programs for the officers and employees of the Corporation and its affiliates.
The Committee will have not less than three members, all of whom shall be
members of the Board of Directors. No salaried officer or employee will serve as
a member of the Committee. The Chairman of the Committee will be elected by the
Board of Directors from among the members of the Committee.
3.11 Provider Policy Committee. The Provider Policy Committee shall
gather information, review management proposals, and make recommendations to the
Board of Directors with respect to the Corporation's policies and procedures
that have or will have a substantial impact upon institutional and professional
providers of health care services. The Provider Policy Committee will have not
less than three members, all of whom shall be members of the Board of Directors.
The Chairman of the Committee will not be a salaried officer or employee of the
Corporation and will be elected by the Board of Directors from among the members
of the Committee.
3.12 Other Committees. The Board of Directors, by resolutions adopted
by a majority of directors in office, may designate and appoint one or more
other committees, each of which shall include two or more directors. Such
committees shall have authority to the extent provided for in the resolution of
the Board of Directors. The Chairman may also appoint special or ad hoc
committees which shall have such duties as may be specified in the Chairman's
charge to the committee.
ARTICLE IV.
OFFICERS
4.1 Officers. The officers of the Corporation shall be a Chairman of
the Board of Directors, a President, a Secretary, a Treasurer, and, in the
discretion of the Board of Directors or the Chairman and the President, one or
more Vice-Presidents and such other officers as may be deemed necessary or
advisable to carry on the business of the Corporation. Any two or more offices
may be held by the same person.
4.2 Election; Term. The Chairman, the President, the Secretary and the
Treasurer shall be elected by the Board of Directors. The Chairman may from time
to time appoint other officers. Officers elected by the Board of Directors shall
hold office, unless sooner removed, until the next annual meeting of the Board
of Directors or until their successors are elected.
Page 11
<PAGE>
Officers appointed by the Chairman shall hold office, unless sooner removed,
until their successors are appointed. The action of the Chairman in appointing
officers shall be reported to the next regular meeting of the Board of Directors
after it is taken. Any officer may resign at any time upon written notice to the
Board of Directors or the officer or officers appointing him or her, and such
resignation shall be effective when notice is delivered unless the notice
specifies a later effective date.
4.3 Removal of Officers. The Board of Directors may remove any officer
at any time, with or without cause. The Chairman may remove any officer he
appoints at any time, with or without cause. Such action shall be reported to
the next regular meeting of the Board of Directors after it is taken.
4.4 Duties of the Chairman. The Chairman shall be the Chief Executive
Officer of the Corporation. He or she shall have general charge of, and be
charged with the duty of supervision of, the business of the Corporation and
shall perform such duties as may, from time to time, be assigned to him or her
by the Board of Directors.
4.5 Duties of the President. The President shall have such powers and
perform such duties as generally pertain to that position or as may from time to
time, be assigned to him or her by the Chairman or Board of Directors.
4.6 Duties of the Secretary. The Secretary shall have the duty to see
that a record of the proceedings of each meeting of the stockholders and the
Board of Directors, and any committee of the Board of Directors, is properly
recorded and that notices of all such meetings are duly given in accordance with
the provisions of these Bylaws or as required by law; he or she may affix the
corporate seal to any document the execution of which is duly authorized, and
when so affixed may attest the same; and, in general, he or she shall perform
all duties incident to the office of secretary of a corporation, and such other
duties as, from time to time, may be assigned to him or her by the Chairman, the
President or the Board of Directors, or as may be required by law.
4.7 Duties of the Treasurer. The Treasurer shall have charge of and be
responsible for all securities, funds, receipts and disbursements of the
Corporation, and shall deposit or cause to be deposited, in the name of the
Corporation, all monies or valuable effects in such banks, trust companies or
other depositories as shall, from time to time, be selected by or under
authority granted by the Board of Directors; he or she shall be custodian of the
financial records of the Corporation; he or she shall keep or cause to be kept
full and accurate records of all receipts and disbursements of the Corporation
and shall render to the Chairman, the President or the Board of Directors,
whenever requested, an account of the financial condition of the Corporation. In
addition he or she shall perform such duties as may be assigned to him or her by
the Chairman, the President, or the Board of Directors.
4.8 Duties of Other Officers. The other officers of the Corporation
shall have such authority and perform such duties as shall be prescribed by the
Board of Directors or by officers
Page 12
<PAGE>
authorized by the Board of Directors to appoint them to their respective
offices. To the extent that such duties are not so stated, such officers shall
have such authority and perform the duties which generally pertain to their
respective offices, subject to the control of the Chairman, the President or the
Board of Directors.
4.9 Voting Securities of Other Corporations. Any one of the Chairman,
the President or the Treasurer shall have the power to act for and vote on
behalf of the Corporation at all meetings of the stockholders of any corporation
in which this Corporation holds stock, or in connection with any consent of
stockholders in lieu of any such meeting.
4.10 Bonds. The Board of Directors may require that any or all
officers, employees and agents of the Corporation give bond to the Corporation,
with sufficient sureties, conditioned upon the faithful performance of the
duties of their respective offices or positions.
ARTICLE V.
SHARE CERTIFICATES
5.1 Form. Shares of the Corporation shall, when fully paid, be either
uncertificated or evidenced by certificates containing such information as is
required by law and approved by the Board of Directors. Any certificates shall
be signed by the Chairman and the Secretary and may (but need not) be sealed
with the seal of the Corporation. The seal of the Corporation and any or all of
the signatures on a share certificate may be facsimile. If any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued it may be issued by the Corporation
with the same effect as if he or she were such officer, transfer agent or
registrar on the date of issue.
5.2 Transfer. The Board of Directors may make rules and regulations
concerning the issue, registration and transfer of certificates representing the
shares of the Corporation. Transfers of shares and of the certificates
representing such shares shall be made upon the books of the Corporation by
surrender of the certificates representing such shares accompanied by written
assignments given by the owners or their attorneys-in-fact.
5.3 Restrictions on Transfer. A lawful restriction on the transfer or
registration of transfer of shares is valid and enforceable against the holder
or a transferee of the holder if the restriction complies with the requirements
of law and its existence is noted conspicuously on the front or back of the
certificate representing the shares. Unless so noted a restriction is not
enforceable against a person without knowledge of the restriction.
5.4 Lost or Destroyed Share Certificates. The Corporation may issue a
new share certificate in the place of any certificate theretofore issued which
is alleged to have been lost or destroyed and may require the owner of such
certificate, or his or her legal representative, to give the Corporation a bond,
with or without surety, or such other agreement, undertaking or security as the
Board of Directors shall determine is appropriate, to indemnify the Corporation
Page 13
<PAGE>
against any claim that may be made against it on account of the alleged loss or
destruction or the issuance of any such new certificate.
ARTICLE VI.
MISCELLANEOUS PROVISIONS
6.1 Corporate Seal. The corporate seal of the Corporation shall be
circular and shall have inscribed thereon, within and around the circumference
"TRIGON HEALTHCARE, INC." In the center shall be the word "SEAL".
6.2 Fiscal Year. The fiscal year of the Corporation shall be
determined in the discretion of the Board of Directors, but in the absence of
any such determination it shall be the end of the calendar year.
6.3 Amendments. These Bylaws may be amended or repealed, and new Bylaws
may be made, at any regular or special meeting of the Board of Directors. Bylaws
made by the Board of Directors may be repealed or changed and new Bylaws may be
made by the stockholders, and the stockholders may prescribe that any Bylaw made
by them shall not be altered, amended or repealed by the Board of Directors.
Page 14
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 are 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--______Custodial______
(Seal) (Seal)
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 (Seal)
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.
[MCGUIRE, WOODS, BATTLE & BOOTHE L.L.P. LETTERHEAD]
One James Center
901 East Cary Street
Richmond, Virginia 23219-4030
Telephone/TDD (804) 775-1000 * Fax (804) 775-1061
January 6, 1997
Trigon Healthcare, Inc.
2015 Staples Mill Road
Richmond, Virginia 23230
Trigon Healthcare, Inc. (the "Company")
Ladies and Gentlemen:
We are acting as your counsel in connection with the Registration
Statement No. 333-09773 on Form S-1 (as amended, the "Registration Statement")
filed with the Securities and Exchange Commission with respect to 13,271,000
shares (the "Shares") of your Class A Common Stock, $.01 par value, which
are proposed to be offered for sale as described in the Registration
Statement.
We are of the opinion that:
1. The Company is duly incorporated and validly existing under the laws of
the Commonwealth of Virginia; and
2. The Shares covered by the Registration Statement have been duly authorized
and, when issued and paid for as described in the Registration Statement,
will be validly issued, fully paid and nonassessable.
In arriving at the foregoing opinion, we have relied, among other
things, upon our examination of such corporate records of the Company
and certificates of officers of the Company and of public officials
as we have deemed appropriate.
We hereby consent to the filing of this opinion with the Securities
and Exchange Commission as an exhibit to the Registration Statement and to
the statement made in reference to our firm under the caption "Legal Matters"
in the Prospectus which is made a part of the Registration Statement.
We do not admit by giving this consent that we are in the category
of persons whose consent is required by Section 7 of the Securities
Act of 1933, as amended.
Very truly yours,
BLUE CROSS LICENSE AGREEMENT
This agreement by and between Blue Cross and Blue Shield Association
("BCBSA") and The Blue Cross Plan, known as ________________ (the "Plan").
Preamble
WHEREAS, the Plan and/or its predecessor(s) in interest
(collectively the "Plan") had the right to use the BLUE CROSS and BLUE CROSS
Design service marks (collectively the "Licensed Marks") for health care plans
in its service area, which was essentially local in nature;
WHEREAS, the Plan was desirous of assuring nationwide protection of
the Licensed Marks, maintaining uniform quality controls among Plans,
facilitating the provision of cost effective health care services to the public
and otherwise benefiting the public;
WHEREAS, to better attain such ends, the Plan and the predecessor of
BCBSA in 1972 simultaneously executed the BCA License Agreement (s) and the
Ownership Agreement; and
WHEREAS, BCBSA and the Plan desire to supercede said Agreement(s) to
reflect their current practices and to assure the continued integrity of the
Licensed Marks and of the BLUE CROSS system;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
<PAGE>
Agreement
1. BCBSA hereby grants to the Plan, upon the terms and conditions of
this License Agreement, the right to use BLUE CROSS in its trade and/or
corporate name (the "Licensed Name"), and the right to use the Licensed Marks,
in the sale, marketing and administration of health care plans and related
services in the Service Area set forth and defined in paragraph 5 below. As used
herein, health care plans and related services shall include acting as a
nonprofit health care plan, a for-profit health care plan, or mutual health
insurer operating on a not-for-profit or for-profit basis, under state law;
financing access to health care services; providing health care management and
administration; administering, but not underwriting, non-health portions of
Worker's Compensation insurance; and delivering health care services.
2. The Plan may use the Licensed Marks and Name in connection with
the offering of: a) health care plans and related services in the Service Area
through Controlled Affiliates, provided that each such affiliate is separately
licensed to use the Licensed Marks and Name under the terms and conditions
contained in the Agreement attached as Exhibit 1 hereto (the "Controlled
Affiliate License Agreement"); and: b) insurance coverages offered by life
insurers under the applicable law in the Service Area, other than those which
the Plan may offer in its own name, provided through Controlled Affiliates,
provided that each such affiliate is separately licensed to use the Licensed
Marks and Name under the terms and conditions contained in the Agreement
attached as Exhibit 1A hereto (the "Controlled Affiliate License Agreement
Applicable to Life Insurance Companies") and further provided that the offering
of such services does not and will not dilute or tarnish the unique value of the
Licensed Marks and Name; and c) administration and underwriting of Workers'
Compensation Insurance Controlled Affiliates, provided that each such Affiliate
is separately licensed to use the Licensed Marks and Name under the terms and
conditions contained in the Agreement attached as Exhibit 1 hereto (the
"Controlled Affiliate License.") With respect to any HMO previously sublicensed
as provided in a License Addendum between BCBSA and the Plan, the Plan shall
have one (1) year from the date hereof to obtain execution of the direct license
required herein. As used herein, a Controlled Affiliate is defined as an entity
organized and operated in such a manner that it is subject to the bona fide
control of a Plan or Plans. Absent written approval by BCBSA of an alternative
method of control, bona fide control shall mean:
A. The legal authority, directly or indirectly through
wholly-owned subsidiaries: (a) to select members of
the Controlled Affiliate's governing body having not
less than 51% voting control thereof; (b) to exercise
operational control with respect to the governance
thereof; and (c) to prevent any change in its articles
of incorporation, bylaws or other governing documents
deemed inappropriate. In addition, a Plan or Plans
shall own at least 51% of any for-profit Controlled
Affiliate; or
B. The legal authority directly or indirectly through
wholly-owned subsidiaries (a) to select members of the
Affiliate's governing body having not less than 50%
voting control; (b) the legal ability to prevent any
change in the articles of incorporation, bylaws or
other establishing or governing documents of the
Affiliate with which it does not concur; (c) at least
equal control over the operations of the Affiliate;
and (d) to concur before the Affiliate can:
Amended as of November 16, 1995
-2-
1. Change its legal and/or trade name;
2. Change the geographic area in which it operates;
3. Change the types of businesses in which it engages;
4. Take any action that Plan or BCBSA reasonably believes will adversely affect
the Licensed Marks or Names.
Amended as of November 17, 1994
-2a-
<PAGE>
3. The Plan may engage in activities not required by BCBSA to be
directly licensed through Controlled Affiliates and may indicate its
relationship thereto by use of the Licensed Name as a tag line, provided that
the engaging in such activities does not and will not dilute or tarnish the
unique value of the Licensed Marks and Name and further provided that such tag
line use is not in a manner likely to cause confusion or mistake. Consistent
with the avoidance of confusion or mistake, each tag line use of the Plan's
Licensed Name: (a) shall be in the style and manner specified by BCBSA from
time-to-time; (b) shall not include the design service marks; (c) shall not be
in a manner to import more than the Plan's mere ownership of the affiliate; and
(d) shall be restricted to the Service Area. No rights are hereby created in any
Controlled Affiliate to use the Licensed Name in its own name or otherwise. At
least annually, the Plan shall provide BCBSA with representative samples of each
such use of its Licensed Name pursuant to the foregoing conditions.
4. The Plan recognizes the importance of a comprehensive national
network of independent BCBSA licensees which are committed to strengthening the
Licensed Marks and Name. The Plan further recognizes that its actions within its
Service Area may affect the value of the Licensed Marks and Name nationwide. The
Plan agrees (a) to maintain in good standing its membership in BCBSA; (b)
promptly to pay its dues to BCBSA, said dues to represent the royalties for this
License Agreement; (c) materially to comply with all applicable laws; (d) to
comply with the Membership Standards of BCBSA, a current copy of which is
attached as Exhibit 2 hereto; and (e) reasonably to permit BCBSA, upon a
written, good faith request and during reasonable business hours, to inspect the
Plan's books and records necessary to ascertain compliance herewith. As to other
Plans and third parties, BCBSA shall maintain the confidentiality of all
documents and information furnished by the Plan pursuant hereto, or pursuant to
the Membership Standards, and clearly designated by the Plan as containing
proprietary information of the Plan.
5. The rights hereby granted are exclusive to the Plan within the
geographical area(s) served by the Plan on June 30, 1972, and/or as to which the
Plan has been granted a subsequent license, which is hereby defined as the
"Service Area," except that BCBSA reserves the right to use the Licensed Marks
in said Service Area, and except to the extent that said Service Area may
overlap areas served by one or more other licensed Blue Shield Plans as of said
date or subsequent license, as to which overlapping areas the rights hereby
granted are nonexclusive as to such other Plan or Plans only.
Amended as of September 19, 1996
-3-
<PAGE>
6. Except as expressly provided by BCBSA with respect to National
Accounts, Government Programs and certain other necessary and collateral uses,
the current rules and regulations governing which are attached as Exhibit 3 and
Exhibit 4 hereto, or as expressly provided herein, the Plan may not use the
Licensed Marks and Name outside the Service Area or in connection with other
goods and services, nor may the Plan use the Licensed Marks or Name in a manner
which is intended to transfer in the Service Area the goodwill associated
therewith to another mark or name. Nothing herein shall be construed to prevent
the Plan from engaging in lawful activity anywhere under other marks and names
not confusingly similar to the Licensed Marks and Name, provided that engaging
in such activity does and will not dilute or tarnish the unique value of the
Licensed Marks and Name.
7. The Plan agrees that it will display the Licensed Marks and Name
only in such form, style and manner as shall be specifically prescribed by BCBSA
from time-to-time in regulations of general application in order to prevent
impairment of the distinctiveness of the Licensed Marks and Name and the
goodwill pertaining thereto. The Plan shall cause to appear on all materials on
or in connection with which the Licensed Marks or Name are used such legends,
markings and notices as BCBSA may reasonably request in order to give
appropriate notice of service mark or other proprietary rights therein or
pertaining thereto.
8. BCBSA agrees that: (a) it will not grant any other license
effective during the term of this License Agreement for the use of the Licensed
Marks or Name which is inconsistent with the rights granted to the Plan
hereunder; and (b) it will not itself use the Licensed Marks in derogation of
the rights of the Plan or in a manner to deprive the Plan of the full benefits
of this License Agreement. The Plan agrees that it will not attack the title of
BCBSA in and to the Licensed Marks or Name or attack the validity of the
Licensed Marks or of this License Agreement. The Plan further agrees that all
use by it of the Licensed Marks and Name or any similar mark or name shall inure
to the benefit of BCBSA, and the Plan shall cooperate with BCBSA in effectuating
the assignment to BCBSA of any service mark or trademark registrations of the
Licensed Marks or any similar mark or name held by the Plan or a Controlled
Affiliate of the Plan, all or any portion of which registration consists of the
Licensed Marks.
-4-
<PAGE>
9. (a). Should the Plan fail to comply with the provisions of
paragraphs 2-4, 6, 7 and/or 12, and not cure such failure within thirty (30)
days of receiving written notice thereof (or commence curing such failure within
such thirty day period and continue diligent efforts to complete the curing of
such failure if such curing cannot reasonably be completed within such thirty
day period), BCBSA shall have the right to issue a notice that the Plan is in a
state of noncompliance. Except as to the termination of a Plan's License
Agreement or the merger of two or more Plans, disputes as to noncompliance, and
all other disputes between or among BCBSA, the Plan, other Plans and/or
Controlled Affiliates, shall be submitted promptly to mediation and mandatory
dispute resolution pursuant to the rules and regulations of BCBSA, a current
copy of which is attached as Exhibit 5 hereto, and shall be timely presented and
resolved. The mandatory dispute resolution panel shall have authority to issue
orders for specific performance and assess monetary penalties. If a state of
noncompliance as aforesaid is undisputed by the Plan or is found to exist by a
mandatory dispute resolution panel and is uncured as provided above, BCBSA shall
have the right to seek judicial enforcement of the License Agreement and/or to
issue a notice of termination thereof. Except, however, as provided in paragraph
15(a)(i)-(viii) below, no Plan's license to use the Licensed Marks and Name may
be finally terminated for any reason without the affirmative vote of
three-fourths of the Plans and three-fourths of the total then current weighted
vote of all the Plans.
(b). Notwithstandng any other provision of this
License Agreement, a Plan's license to use the Licensed Marks and Name may be
forthwith terminated by the affirmative vote of three-fourths of the Plans and
three-fourths of the total then current weighted vote of all the Plans at a
special meeting expressly called by BCBSA for the purpose on ten (10) days
written notice for: (i) failure to comply with any minimum capital or liquidity
requirement under the Membership Standard on Financial Responsibility; or (ii)
impending financial insolvency; or (iii) such other reason as is determined in
good faith immediately and irreparably to threaten the integrity and reputation
of BCBSA, the Plans and/or the Licensed Marks.
(c). To the extent not otherwise provided therein,
neither: (i) the Membership Standards; nor (ii) the rules and regulations
governing National Accounts, Government Programs and certain other uses; nor
(iii) the rules and regulations governing mediation and mandatory dispute
resolution, may be amended unless and until each such amendment is first adopted
by the affirmative vote of three-fourths of the Plans and of three-fourths of
the total then current weighted vote of all the Plans.
Amended as of November 17, 1994
-5-
<PAGE>
9. (d). The Plan may operate as a for-profit company on the
following conditions:
(i) The Plan shall discharge all responsibilities which it has to
the Association and to other Plans by virtue of this Agreement and the Plan's
membership in BCBSA.
(ii) The Plan shall not use the licensed Marks and Name, or any
derivative thereof, as part of its legal name or any symbol used to identify the
Plan in any securities market. The Plan shall use the licensed Marks and Name as
part of its trade name within its service area for the sale, marketing and
administration of health care and related services in the service area.
(iii) The Plan's license to use the Licensed Marks and Name shall
automatically terminate effective ten business days after: (a) any Person,
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of securities representing 20% or more of the voting power of
the Plan, unless such Person shall cease to be such a Beneficial Owner prior to
such automatic termination becoming effective; (b) individuals who at the time
the Plan went public constituted the Board of Directors of the Plan (together
with any new directors whose election to the Board was approved by a vote of 2/3
of the directors then still in office who were directors at the time the Plan
went public or whose election or nomination was previously so approved) (the
"Continuing Directors") cease for any reason to constitute a majority of the
Board of Directors; or (c) the Plan consolidates with or merges with or into any
person or conveys, assigns, transfers or sells all or substantially all of its
assets to any person other than a merger in which the Plan is the surviving
entity and immediately after which merger, no person or group beneficially owns
securities representing 20% or more of the voting power of the Plan: provided
that, if requested by the affected Plan prior to such automatic termination
becoming effective, the provisions of this paragraph 9(d)(iii) may be waived or
made conditional, in whole or in part, upon the affirmative vote of a majority
of the disinterested Plans and a majority of the total then current weighted
vote of the disinterested Plans.
In the event that the Plan's license to use the Licensed Marks and Name is
terminated pursuant to this Paragraph 9(d)(iii), the license may be reinstated
by BCBSA if, within 30 days of the date of such termination, the Plan
demonstrates that the Person referred to in the preceding sentence is no longer
the Beneficial Owner of securities representing 20% or more of the voting power
of the Plan.
Amended as of September 29, 1994
-5a-
<PAGE>
The Plan's license to use the Licensed Marks and Name may be terminated if any
Person, together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of securities representing 5% or more of the voting power of
the Plan and such Person's Beneficial Ownership is deemed in BCBSA's absolute
discretion, detrimental to the best interest of the Name and Marks; provided,
however that such termination shall become effective only upon the affirmative
vote of three-fourths of the disinterested Plans and three-fourths of the total
then current weighted vote of the disinterested Plans.
(iv) For purposes of paragraph 9(d)(iii), the following definitions
shall apply:
(a) "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule
12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended and in
effect on November 17, 1993 (the "Exchange Act").
(b) A Person shall be deemed the "Beneficial Owner" of
and shall be deemed to "beneficially own" any
securities:
(i) which such Person or any of such Person's
Affiliates or Associates beneficially owns, directly
or indirectly;
(ii) which such Person or any of such Person's
Affiliates or Associates has (A) the right to
acquire (whether such right is exercisable
immediately or only after the passage of time)
pursuant to any agreement, arrangement or
understanding, or upon the exercise of conversion
rights, exchange rights, warrants or options, or
otherwise; or (B) the right to vote pursuant to any
agreement, arrangement or understanding; provided,
however, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, any
security if the agreement, arrangement or
understanding to vote such security (1) arises
solely from a revocable proxy or consent given to
such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance
with, the applicable rules and regulations
promulgated under the Exchange Act and (2) is not
also then reportable on Schedule 13D under the
Exchange Act (or any comparable or successor
report); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or
Associate thereof) with which such Person (or any of
such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (other than
customary agreements with and between
Amended as of September 29, 1994
-5b-
<PAGE>
underwriters and selling group members with respect
to a bona fide public offering of securities)
relating to the acquisition, holding, voting (except
to the extent contemplated by the proviso to
(b)(ii)(B) above) or disposing of any securities of
the Plan.
Notwithstanding anything in this definition of
Beneficial Ownership to the contrary, the phrase
"then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the
Plan, shall mean the number of such securities then
issued and outstanding together with the number of
such securities not then actually issued and
outstanding which such Person would be deemed to own
beneficially hereunder.
(c) "Person" shall mean any individual, firm,
partnership, corporation, trust, association, joint
venture or other entity, and shall include any
successor (by merger or otherwise) or such entity.
Amended as of September 29, 1994
-5c-
<PAGE>
10. This License Agreement shall remain in effect: (a) until
terminated as provided herein; or (b) until this and all such other License
Agreements are terminated by the affirmative vote of three-fourths of the Plans
and three-fourths of the total then current weighted vote of all the Plans; or
(c) until termination of the aforesaid Ownership Agreement; or (d) until
terminated by the Plan upon six (6) months written notice to BCBSA.
11. Except as otherwise provided in paragraph 15 below or by the
affirmative vote of three-fourths of the Plans and three-fourths of the total
then current weighted vote of all the Plans, or unless this and all such other
License Agreements are simultaneously terminated by force of law, the
termination of this License Agreement for any reason whatsoever shall cause the
reversion to BCBSA of all rights in and to the Licensed Marks and Name, and the
Plan agrees that it will promptly discontinue all use of the Licensed Marks and
Name, will not use them thereafter, and will promptly, upon written notice from
BCBSA, change its corporate name so as to eliminate the Licensed Name therefrom.
12. The license hereby granted to Plan to use the Licensed Marks and
Name is and shall be personal to the Plan so licensed and shall not be
assignable by any act of the Plan, directly or indirectly, without the written
consent of BCBSA. Said license shall not be assignable by operation of law, nor
shall Plan mortgage or part with possession or control of this license or any
right hereunder, and the Plan shall have no right to grant any sublicense to use
the Licensed Marks and Name.
13. BCBSA shall maintain appropriate service mark registrations of
the Licensed Marks and BCBSA shall take such lawful steps and proceedings as may
be necessary or proper to prevent use of the Licensed Marks by any person who is
not authorized to use the same. Any actions or proceedings undertaken by BCBSA
under the provisions of this paragraph shall be at BCBSA's sole cost and
expense. BCBSA shall have the sole right to determine whether or not any legal
action shall be taken on account of unauthorized use of the Licensed Marks, such
right not to be unreasonably exercised. The Plan shall report any unlawful usage
of the Licensed Marks to BCBSA in writing and agrees, free of charge, to
cooperate fully with BCBSA's program of enforcing and protecting the service
mark rights, trade name rights and other rights in the Licensed Marks.
-6-
<PAGE>
14. The Plan hereby agrees to save, defend, indemnify and hold BCBSA
and any other Plan(s) harmless from and against all claims, damages, liabilities
and costs of every kind, nature and description which may arise exclusively and
directly as a result of the activities of the Plan. BCBSA hereby agrees to save,
defend, indemnify and hold the Plan and any other Plan(s) harmless from and
against all claims, damages, liabilities and costs of every kind, nature and
description which may arise exclusively and directly as a result of the
activities of BCBSA.
15. (a). This Agreement shall automatically terminate upon the
occurrence of any of the following events: (i) a voluntary petition shall be
filed by the Plan or by BCBSA seeking bankruptcy, reorganization, arrangement
with creditors or other relief under the bankruptcy laws of the United States or
any other law governing insolvency or debtor relief, or (ii) an involuntary
petition or proceeding shall be filed against the Plan or BCBSA seeking
bankruptcy, reorganization, arrangement with creditors or other relief under the
bankruptcy laws of the United States or any other law governing insolvency or
debtor relief and such petition or proceeding is consented to or acquiesced in
by the Plan or BCBSA or is not dismissed within sixty (60) days of the date upon
which the petition or other document commencing the proceeding is served upon
the Plan or BCBSA respectively, or(iii) an order for relief is entered against
the Plan or BCBSA in any case under the bankruptcy laws of the United States, or
the Plan or BCBSA is adjudged bankrupt or insolvent (as that term is defined in
the Uniform Commercial Code as enacted in the state of Illinois) by any court of
competent jurisdiction, or (iv) the Plan or BCBSA makes a general assignment of
its assets for the benefit of creditors, or (v) the Department of Insurance or
other regulatory agency assumes control of the Plan or delinquency proceedings
(voluntary or involuntary) are instituted, or (vi) an action is brought by the
Plan or BCBSA seeking its dissolution or liquidation of its assets or seeking
the appointment of a trustee, interim trustee, receiver or other custodian for
any of its property or business, or (vii) an action is instituted against the
Plan or BCBSA seeking its dissolution or liquidation of its assets or seeking
appointment of a trustee, interim trustee, receiver or other custodian for any
of its property or business and such action is consented to or acquiesced in by
the Plan or BCBSA or is not dismissed within sixty (60) days of the date upon
which the pleading or other document commencing the action is served upon the
Plan or BCBSA respectively, or(viii) a trustee, interim trustee, receiver or
other custodian for any of the Plan's or BCBSA's property or business is
appointed, or (ix) the Plan shall fail to pay its dues and shall not cure such
failure within thirty (30) days of receiving written notice thereof.
Amended November 21, 1996
-7-
<PAGE>
(b). BCBSA, or the Plans (as provided and in addition to the rights
conferred in Paragraph 10(b) above), may terminate this Agreement immediately
upon written notice upon the occurrence of either of the following events: (a)
the Plan or BCBSA becomes insolvent (as that term is defined in the Uniform
Commercial Code enacted in the state of Illinois), or (b) any final judgment
against the Plan or BCBSA remains unsatisfied or unbonded of record for a period
of sixty (60) days or longer.
(c). If this License Agreement is terminated as to BCBSA for any
reason stated in subparagraphs 15(a) and (b) above, the ownership of the
Licensed Marks shall revert to each of the Plans as provided in the Ownership
Agreement.
(d). Upon termination of this License Agreement or any Controlled
Affiliate License Agreement of a Larger Affiliate, as defined in Exhibit 1 to
this License Agreement:
(i) The terminated entity shall send
a notice through the U.S. mails,
with first class postage affixed,
to all individual and group
customers, providers, brokers and
agents of products or services
sold, marketed, underwritten or
administered by the terminated
entity or its Controlled
Affiliates under the Licensed
Marks and Name. The form and
content of the notice shall be
specified by BCBSA and shall, at
a minimum, notify the recipient
of the termination of the
license, the consequences
thereof, and instructions for
obtaining alternate products or
services licensed by BCBSA. This
notice shall be mailed within 15
days after termination or, if
termination is pursuant to
paragraph 10(d) of this
Agreement, within 15 days after
the written notice to BCBSA
described in paragraph 10(d).
(ii) The terminated entity shall
deliver to BCBSA within five days
of a request by BCBSA a listing
of national accounts in which the
terminated entity is involved (in
a Control, Participating or
Servicing capacity), identifying
the national account and the
terminated entity's role therein.
For those accounts where the
terminated entity is the Control
Plan, the Plan must also indicate
the Participating and Servicing
Plans in the national account
syndicate.
Amended as of September 19, 1996
-8-
<PAGE>
(iii) Unless the cause of termination
is an event stated in paragraph
15(a) or (b) above respecting
BCBSA, the Plan and its Licensed
Controlled Affiliates shall be
jointly liable for payment to
BCBSA of an amount equal to $25
multiplied by the number of
Licensed Enrollees of the
terminated entity and its
Licensed Controlled Affiliates;
provided that if any other Plan
is permitted by BCBSA to use
marks or names licensed by BCBSA
in the Service Area established
by this Agreement, the payment
shall be multiplied by a
fraction, the numerator of which
is the number of Licensed
Enrollees of the terminated
entity and its Licensed
Controlled Affiliates and the
denominator of which is the total
number of Licensed Enrollees in
the Service Area. Licensed
Enrollee means each and every
person and covered dependent who
is enrolled as an individual or
member of a group receiving
products or services sold,
marketed or administered under
marks or names licensed by BCBSA
as determined at the earlier of
(a) the end of the last fiscal
year of the terminated entity
which ended prior to termination
or (b) the fiscal year which
ended before any transactions
causing the termination began.
Notwithstanding the foregoing,
the amount payable pursuant to
this subparagraph (d)(iii) shall
be due only to the extent that,
in BCBSA's opinion, it does not
cause the net worth of the Plan
to fall below 100% of the capital
benchmark formula or its
equivalent under any successor
formula, as set forth in the
applicable financial
responsibility standards
established by BCBSA, measured as
of the date of termination and
adjusted for the value of any
transactions not made in the
ordinary course of business.
(iv) BCBSA shall have the right to
audit the books and records of
the terminated entity and its
Licensed Controlled Affiliates to
verify compliance with this
paragraph 15(d).
Amended as of September 19, 1996
-8a-
<PAGE>
(v) As to a breach of 15 (d) (i),
(ii), (iii) or (iv), the parties
agree that the obligations are
immediately enforceable in a
court of competent jurisdiction.
As to a breach of 15 (d) (i),
(ii) or (iv) by the Plan, the
parties agree there is no
adequate remedy at law and BCBSA
is entitled to obtain specific
performance.
(e). BCBSA shall be entitled to enjoin the Plan or any related
party in a court of competent jurisdiction from entry into any transaction which
would result in a termination of this License Agreement unless the License
Agreement has been terminated pursuant to paragraph 10 (d) of this Agreement
upon the required six (6) month written notice.
(f). BCBSA acknowledges that it is not the owner
of assets of the Plan.
16. This Agreement supersedes any and all other agreements between
the parties with respect to the subject matter herein, and contains all of the
covenants and agreements of the parties as to the licensing of the Licensed
Marks and Name. This Agreement may be amended only by a signed writing, the form
of which shall have been approved by the affirmative vote of three-fourths of
the Plans and three-fourths of the total then current weighted vote of all the
Plans.
17. If any provision or any part of any provision of this Agreement
is judicially declared unlawful, each and every other provision, or any part of
any provision, shall continue in full force and effect notwithstanding such
judicial declaration.
18. No waiver by BCBSA or the Plan of any breach or default in
performance on the part of BCBSA or the Plan or any other licensee of any of the
terms, covenants or conditions of this Agreement shall constitute a waiver of
any subsequent breach or default in performance of said terms, covenants or
conditions.
19. All notices provided for hereunder shall be in writing and shall
be sent in duplicate by regular mail to BCBSA or the Plan at the address
currently published for each by BCBSA and shall be marked respectively to the
attention of the President and, if any, the General Counsel, of BCBSA or the
Plan.
Amended as of September 19, 1996
-8b-
<PAGE>
20. Nothing herein contained shall be construed to constitute the
parties hereto as partners or joint venturers, or either as the agent of the
other, and Plan shall have no right to bind or obligate BCBSA in any way, nor
shall it represent that it has any right to do so. BCBSA shall have no liability
to third parties with respect to any aspect of the business, activities,
operations, products, or services of the Plan.
21. This Agreement shall be governed, construed and interpreted in
accordance with the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties have caused this License Agreement to be
executed, effective as of the date of last signature written below.
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By____________________________________
Title_________________________________
Date__________________________________
______________________________________
By____________________________________
Title_________________________________
Date__________________________________
-9-
<PAGE>
EXHIBIT 1
BLUE CROSS
AFFILIATE LICENSE AGREEMENT
This Agreement by and among Blue Cross and Blue Shield Association
("BCBSA") and __________________ ("Affiliate"), an affiliate of the Blue Cross
Plan(s), known as _______________________ ("Plan"), which is also a Party
signatory hereto.
WHEREAS, BCBSA is the owner of the BLUE CROSS and BLUE CROSS Design
service marks;
WHEREAS, Plan and Affiliate desire that the latter be entitled to
use the BLUE CROSS and BLUE CROSS Design service marks (collectively the
"Licensed Marks") as service marks and be entitled to use the term BLUE CROSS in
a trade name ("Licensed Name");
NOW THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. GRANT OF LICENSE
Subject to the terms and conditions of this Agreement, BCBSA hereby
grants to Affiliate the right to use the Licensed Marks and Name in connection
with, and only in connection with: (i) health care plans and related services
and administering the non-health portion of workers' compensation insurance, and
(ii) underwriting the indemnity portion of workers' compensation insurance,
provided that Affiliate's total premium revenue comprises less than 15 percent
of the sponsoring Plan's net subscription revenue.
This grant of rights is non-exclusive and is limited to the Service Area served
by the Plan. Affiliate may not use the Licensed Marks and Name in its legal name
and may use the Licensed Marks and Name in its Trade Name only with the prior
consent of BCBSA.
2. QUALITY CONTROL
A. Affiliate agrees to use the Licensed Marks and Name only in
connection with the licensed services and further agrees to be bound by the
conditions regarding quality control shown in attached Exhibit A as they may be
amended by BCBSA from time-to-time.
<PAGE>
B. Affiliate agrees to comply with all applicable federal, state and
local laws.
C. Affiliate agrees that it will provide on an annual basis (or more
often if reasonably required by Plan or by BCBSA) a report or reports to Plan
and BCBSA demonstrating Affiliate's compliance with the requirements of this
Agreement including but not limited to the quality control provisions of this
paragraph and the attached Exhibit A.
D. Affiliate agrees that Plan and/or BCBSA may, from time-to-time,
upon reasonable notice, review and inspect the manner and method of Affiliate's
rendering of service and use of the Licensed Marks and Name.
E. As used herein, an Affiliate is defined as an entity organized
and operated in such a manner, that it meets the following requirements:
(1) If the Plan has 50 percent of the voting control of the Affiliate:
(a) the Plan must have the legal ability to prevent any change in
the articles of incorporation, bylaws or other establishing or
governing documents of the Affiliate with which it does not concur;
(b) the Plan must have at least equal control over the operations
of the Affiliate;
(c) the Plan must concur in writing before the Affiliate can:
(i) change its legal and/or trade names;
(ii) change the geographic area in which it
operates;
(iii) change the fundamental type(s) of business
in which it engages;
(iv) take any action that Plan or BCBSA
reasonably believes will adversely affect
the Licensed Marks and Name.
(2) If the Plan has more than 50 percent voting control of the
Affiliate:
(a) the Plan must have the legal ability to prevent any change in
the articles of incorporation, bylaws or other establishing or governing
documents of the Affiliate with which it does not concur;
<PAGE>
(b) the Plan must have control over the policy and operations of the
Affiliate.
3. SERVICE MARK USE
A. Affiliate shall at all times make proper service mark use of the
Licensed Marks and Name, including but not limited to use of such symbols or
words as BCBSA shall specify to protect the Licensed Marks and Name and shall
comply with such rules (generally applicable to Affiliates licensed to use the
Licensed Marks and Name) relative to service mark use, as are issued from
time-to-time by BCBSA. Affiliate recognizes and agrees that all use of the
Licensed Marks and Name by Affiliate shall inure to the benefit of BCBSA.
B. Affiliate may not directly or indirectly use the Licensed Marks
and Name in a manner that transfers or is intended to transfer in the Service
Area the goodwill associated therewith to another mark or name, nor may
Affiliate engage in activity that may dilute or tarnish the unique value of the
Licensed Marks and Name.
C. If Affiliate meets the standards of 2E(1) but not 2E(2) above and
any of Affiliate's advertising or promotional material is reasonably determined
by BCBSA and/or the Plan to be in contravention of rules and regulations
governing the use of the Licensed Marks and Name, Affiliate shall for ninety
(90) days thereafter obtain prior approval from BCBSA of advertising and
promotional efforts using the Licensed Marks and Name, approval or disapproval
thereof to be forthcoming within five (5) business days of receipt of same by
BCBSA or its designee. In all advertising and promotional efforts, Affiliate
shall observe the Service Area limitations applicable to Plan.
D. Affiliate shall use its best efforts in the Service Area to
promote and build the value of the Licensed Marks and Name.
4. SUBLICENSING AND ASSIGNMENT
Affiliate shall not sublicense, transfer, hypothecate, sell,
encumber or mortgage, by operation of law or otherwise, the rights granted
hereunder and any such act shall be voidable at the sole option of Plan or
BCBSA. This Agreement and all rights and duties hereunder are personal to
Affiliate.
5. INFRINGEMENT
Affiliate shall promptly notify Plan and Plan shall promptly notify
BCBSA of any suspected acts of infringement, unfair competition or passing off
that may occur in relation to the Licensed Marks and Name. Affiliate shall not
be entitled
<PAGE>
to require Plan or BCBSA to take any actions or institute any proceedings to
prevent infringement, unfair competition or passing off by third parties.
Affiliate agrees to render to Plan and BCBSA, without charge, all reasonable
assistance in connection with any matter pertaining to the protection of the
Licensed Marks and Name by BCBSA.
6. LIABILITY INDEMNIFICATION
Affiliate and Plan hereby agree to save, defend, indemnify and hold
BCBSA harmless from and against all claims, damages, liabilities and costs of
every kind, nature and description (except those arising solely as a result of
BCBSA's negligence) that may arise as a result of or related to Affiliate's
rendering of services under the Licensed Marks and Name.
7. LICENSE TERM
A. Except as otherwise provided herein, the license granted by this
Agreement shall remain in effect for a period of one (1) year and shall be
automatically extended for additional one (1) year periods upon evidence
satisfactory to the Plan and BCBSA that Affiliate meets the then applicable
quality control standards.
B. This Agreement and all of Affiliate's rights hereunder shall
immediately terminate without any further action by any party or entity in the
event that Plan ceases to be authorized to use the Licensed Marks and Name.
C. Notwithstanding any other provision of this Agreement, this
license to use the Licensed Marks and Name may be forthwith terminated by the
Plan or the affirmative vote of the majority of the Board of Directors of BCBSA
present and voting at a special meeting expressly called by BCBSA for the
purpose on ten (10) days written notice for: (1) failure to comply with any
applicable minimum capital or liquidity requirement under the quality control
standards of this Agreement; or (2) failure to comply with the "Organization and
Governance" quality control standard of this Agreement; or (3) impending
financial insolvency; or (4) for a Smaller Affiliate (as defined in Exhibit A),
failure to comply with any of the applicable requirements of Standards 2, 3, 4,
5 or 7 of attached Exhibit A; or (5) such other reason as is determined in good
faith immediately and irreparably to threaten the integrity and reputation of
BCBSA, the Plans, any other licensee including Affiliate and/or the Licensed
Marks and Name.
<PAGE>
D. Except as otherwise provided in Paragraphs 7(B), 7(C) or 7(E)
herein, should Affiliate fail to comply with the provisions of this Agreement
and not cure such failure within thirty (30) days of receiving written notice
thereof (or commence a cure within such thirty day period and continue diligent
efforts to complete the cure if such curing cannot reasonably be completed
within such thirty day period) BCBSA or the Plan shall have the right to issue a
notice that the Affiliate is in a state of noncompliance. If a state of
noncompliance as aforesaid is undisputed by the Affiliate or is found to exist
by a mandatory dispute resolution panel and is uncured as provided above, BCBSA
shall have the right to seek judicial enforcement of the Agreement or to issue a
notice of termination thereof. Notwithstanding any other provisions of this
Agreement, any disputes as to the termination of this License pursuant to
Paragraphs 7(B), 7(C) or 7(E) of this Agreement shall not be subject to
mediation and mandatory dispute resolution. All other disputes between BCBSA,
the Plan and/or Affiliate shall be submitted promptly to mediation and mandatory
dispute resolution. The mandatory dispute resolution panel shall have authority
to issue orders for specific performance and assess monetary penalties. Except,
however, as provided in Paragraphs 7(B) and 7(E) of this Agreement, this license
to use the Licensed Marks and Name may not be finally terminated for any reason
without the affirmative vote of a majority of the present and voting members of
the Board of Directors of BCBSA.
E. This Agreement and all of Affiliate's rights hereunder
shall immediately terminate without any further action by any party or entity in
the event that:
(1) Affiliate shall no longer comply with item 2(E) above;
(2) Appropriate dues, royalties and other payments for Affiliate
pursuant to paragraph 9 hereof, which are the royalties for this License
Agreement, are more than sixty (60) days in arrears to BCBSA; or
(3) Any of the following events occur: (i) a voluntary petition
shall be filed by Affiliate seeking bankruptcy, reorganization, arrangement with
creditors or other relief under the bankruptcy laws of the United States or any
other law governing insolvency or debtor relief, or (ii) an involuntary petition
or proceeding shall be filed against Affiliate seeking bankruptcy,
reorganization, arrangement with creditors or other relief under the bankruptcy
laws of the United States of any other law governing insolvency or debtor relief
and such petition or proceeding is consented to or acquiesced in by Affiliate or
is not dismissed within sixty (60) days of the date upon which it was filed, or
(iii) an order for relief is entered against Affiliate in any case under the
bankruptcy laws of the United States, or Affiliate is adjudged bankrupt or
insolvent as those terms are defined in the Uniform Commercial Code as enacted
in the State of Illinois
<PAGE>
by any court of competent jurisdiction, or (iv) Affiliate makes a general
assignment of its assets for the benefit of creditors, or (v) the Department of
Insurance or other regulatory agency assumes control of Affiliate or delinquency
proceedings (voluntary or involuntary) are instituted, or (vi) an action is
brought by Affiliate seeking its dissolution or liquidation of its assets or
seeking the appointment of a trustee, interim trustee, receiver or other
custodian for any of its property or business, or (vii) an action is instituted
against Affiliate seeking its dissolution or liquidation of its assets or
seeking the appointment of a trustee, interim trustee, receiver or other
custodian for any of its property or business and such action is consented to or
acquiesced in by Affiliate or is not dismissed within sixty (60) days of the
date upon which it was instituted, or (viii) a trustee, interim trustee,
receiver or other custodian for any of Affiliate's property or business is
appointed.
F. Upon termination of this Agreement for cause or otherwise,
Affiliate agrees that it shall immediately discontinue all use of the Licensed
Marks and Name, including any use in its trade name.
G. Upon termination of this Agreement, Affiliate shall immediately
notify all of its customers that it is no longer a licensee of BCBSA and, if
directed by the Association's Board of Directors, shall provide instruction on
how the customer can contact BCBSA or a designated licensee to obtain further
information on securing coverage. The notification required by this paragraph
shall be in writing and in a form approved by BCBSA. The BCBSA shall have the
right to audit the terminated entity's books and records to verify compliance
with this paragraph.
H. In the event that the Plan has more than 50 percent voting
control of the Affiliate under Paragraph 2(E)(2) above and is a Larger Affiliate
(as defined in Exhibit A), then the vote called for in Paragraphs 7(C) and 7(D)
above shall require the affirmative vote of three-fourths of the Blue Cross
Plans which are Regular Members of BCBSA and three-fourths of the total then
current weighted vote of all the Blue Cross Plans which are Regular Member Plans
of BCBSA.
8. DISPUTE RESOLUTION
The parties agree that any disputes between them or between or among
either of them and one or more Plans or Affiliates of Plans that use in any
manner the Blue Cross and Blue Shield Marks and Name are subject to the
Mediation and Mandatory Dispute Resolution process attached to and made a part
of Plan's License from BCBSA to use the Licensed Marks and Name as Exhibits 5,
5A and 5B as amended from time-to-time, which documents are incorporated herein
by reference as though fully set forth herein.
<PAGE>
9. LICENSE FEE
Affiliate will pay to BCBSA a fee for this License determined
pursuant to the formula(s) set forth in Exhibit B.
10. JOINT VENTURE
Nothing contained in the Agreement shall be construed as creating a
joint venture, partnership, agency or employment relationship between Plan and
Affiliate or between either and BCBSA.
11. NOTICES AND CORRESPONDENCE
Notices regarding the subject matter of this Agreement or breach or
termination thereof shall be in writing and shall be addressed in duplicate to
the last known address of each other party, marked respectively to the attention
of its President and, if any, its General Counsel.
12. COMPLETE AGREEMENT
This Agreement contains the complete understandings of the parties
in relation to the subject matter hereof. This Agreement may only be amended by
a writing executed by all parties hereto or by the vote of three-fourths of the
Plans and three-fourths of the total then current weighted vote of all the
Plans.
13. SEVERABILITY
If any term of this Agreement is held to be unlawful by a court of
competent jurisdiction, such findings shall in no way affect the remaining
obligations of the parties hereunder and the court may substitute a lawful term
or condition for any unlawful term or condition so long as the effect of such
substitution is to provide the parties with the benefits of this Agreement.
14. NONWAIVER
No waiver by BCBSA of any breach or default in performance on the
part of Affiliate or any other licensee of any of the terms, covenants or
conditions of this Agreement shall constitute a waiver of any subsequent breach
or default in performance of said terms, covenants or conditions.
<PAGE>
15. GOVERNING LAW
This Agreement shall be governed by, and construed and interpreted
in accordance with, the laws of the State of Illinois.
16. HEADINGS
The headings inserted in this agreement are for convenience only and
shall have no bearing on the interpretation hereof.
IN WITNESS WHEREOF, the parties have caused this License Agreement
to be executed and effective as of the date of last signature written below.
Affiliate ________________________________
By:______________________________________
Date:____________________________________
Plan ____________________________________
By:______________________________________
Date:____________________________________
Blue Cross and Blue Shield Association
By:_______________________________________
Date:_____________________________________
<PAGE>
EXHIBIT A
AFFILIATE LICENSE STANDARDS
June 1996
PREAMBLE
The standards for licensing affiliates are established by BCBSA and are subject
to change from time-to-time upon the affirmative vote of three-fourths (3/4) of
the Plans and three-fourths (3/4) of the total weighted vote. Each licensed Plan
is required to use a standard affiliate license form provided by BCBSA and to
cooperate fully in assuring that the licensed affiliate maintains compliance
with the license standards.
The Affiliate License provides a flexible vehicle to accommodate the potential
range of health and workers' compensation related products and services Plan
affiliates provide. The Affiliate License collapses former health affiliate
licenses (HCC, HMO, PPO, TPA, and IDS) into a single license using the following
business-based criteria to provide a framework for license standards:
o Percent of affiliate controlled by parent: Greater than 50 percent or 50
percent?
o Risk assumption: yes or no?
o Medical care delivery: yes or no?
o Importance of the affiliate to the parent: If the affiliate has health or
workers' compensation administration business, does such business
constitute 15 percent or more (referred to as a "larger" affiliate) of the
parent's and other licensed health subsidiaries' contract enrollment?
<PAGE>
EXHIBIT A (continued)
For purposes of definition:
o A "smaller affiliate:" (1) comprises less than fifteen percent (15%) of
Plan's and its licensed affiliates' total contract enrollment (as reported
on the BCBSA Quarterly Enrollment Report, excluding rider and freestanding
coverage, and treating an entity seeking licensure as licensed);* or (2)
underwrites the indemnity portion of workers' compensation insurance and
has total premium revenue less than 15 percent of the sponsoring Plan's
net subscription revenue.
o A "larger affiliate" comprises fifteen percent (15%) or more of Plan's and
its licensed affiliates' total contract enrollment (as reported on the
BCBSA Quarterly Enrollment Report, excluding rider and freestanding
coverage, and treating an entity seeking licensure as licensed.)*
Conversion to the new license shall be:
o For smaller affiliates:
- immediately for new applicants, and
- January 1, 1996 for existing HMO, PPO, TPA and IDS licensees under
fifteen percent (15%).
o For larger affiliates:
- immediately for new applicants,
- July 1, 1995 for existing health coverage carrier licensees, and
- June 1996, for all other currently licensed affiliates presently at
or over fifteen percent(15%).
Changes in affiliate status:
If any affiliate's status changes regarding: its Plan ownership level, its risk
acceptance or direct delivery of medical care, the affiliate shall notify BCBSA
within thirty (30) days of such occurrence in writing and come into compliance
with the applicable standards within six (6) months.
If a smaller affiliate's health and workers' compensation administration
business surpasses fifteen percent (15%) of the total contract enrollment of the
Plan and licensed affiliates, the affiliate shall:
<PAGE>
EXHIBIT A (continued)
1. Within thirty (30) days, notify BCBSA of this fact in writing, including
evidence that the affiliate meets the minimum liquidity and capital (BCBSA
Capital Benchmark and state-established minimum reserve) requirements of
the larger affiliate Financial Responsibility standard; and
2. Within six (6) months after surpassing the fifteen percent (15%)
threshold, demonstrate compliance with all license requirements for a
larger affiliate.
If an affiliate that underwrites the indemnity portion of workers' compensation
insurance receives a change in rating or proposed change in rating, the
affiliate shall notify BCBSA within 30 days of notification by the external
rating agency.
- -----------
*For purposes of this calculation,
The numerator equals:
Applicant affiliate's contract enrollment, as defined in BCBSA's Quarterly
Enrollment Report (excluding rider and freestanding coverage).
The denominator equals:
Numerator PLUS Plan and all other licensed affiliates' contract enrollment, as
reported in BCBSA's Quarterly Enrollment Report (excluding rider and
freestanding coverage).
<PAGE>
EXHIBIT A (continued)
STANDARDS FOR LICENSED AFFILIATES
Each affiliate seeking licensure must answer all four questions. Depending
on the affiliate's answers, certain standards apply:
1. What percent of the affiliate is controlled by the parent Plan?
More than 50% 50%
(arrow down) (arrow down)
Standard 1A, 4 Standard 1B, 4
IN ADDITION,
2. Is risk being assumed?
<TABLE>
<CAPTION>
Yes No
(arrows down) (arrows down)
<S> <C>
Affiliate Affiliate Affiliate Affiliate comprises Affiliate
underwrites comprises (less than)15% comprises (greater than (less than)15% of total comprises (greater
any indemnity of total contract or equal to)15% contract than or equal to)15%
portion of enrollment of of total contract enrollment of Plan of total contract
workers' Plan and its enrollment of and its licensed enrollment of
compensation licensed affiliates, Plan and its affiliates Plan and its
insurance and does not licensed affiliates, (arrow down) licensed affiliates
(arrow down) underwrite the and does not Standard 2 (arrow down)
Standards indemnity portion underwrite the (Guidelines 2.1, 2.3) Standard 6H
7A-7E of workers' indemnity portion
compensation of workers'
insurance compensation
(arrow down) insurance
Standard 2 (arrow down)
(Guidelines 2.1, 2.2) Standard 6H
</TABLE>
IN ADDITION,
3. Is medical care being directly provided?
Yes No
(arrow down) (arrow down)
Standard 3A Standard 3B
IN ADDITION,
4. If the affiliate has health or workers' compensation administration
business, does such business comprise 15% or more of the total contract
enrollment of Plan and its licensed affiliates?
Yes No
(arrow down) (arrows down)
Standards 6A-6I Affiliate is a Affiliate is
former primary not a former
licensee primary licensee
(arrow down) (arrow down)
Standards 5,8,9 Standards 5,8
<PAGE>
EXHIBIT A (continued)
Standard 1 - Organization and Governance
1A.) The Standard for more than 50% Plan ownership is:
An affiliate shall be organized and operated in such a manner that it is
controlled by a licensed Plan or Plans which have, directly or indirectly: 1)
more than 50% of the voting control of the affiliate; and 2) the legal ability
to prevent any change in the articles of incorporation, bylaws or other
establishing or governing documents of the affiliate with which it does not
concur; and 3) operational control of the affiliate.
1B.) The Standard for 50% Plan ownership is:
An affiliate shall be organized and operated in such a manner that a licensed
Plan or Plans have directly or indirectly:
1) not less than 50% of the voting control of the affiliate; and
2) the legal ability to prevent any change in the articles of
incorporation, bylaws or other establishing or governing documents
of the affiliate with which it does not concur; and
3) at least equal direct or indirect control over the operations of the
affiliate; and
4) sufficient authority so that changes in the following require the
approval of the Licensed Plan or Plans:
o geographic operating area of the affiliate
o the legal and trade names of the affiliate
o the types of activity in which the affiliate engages
o any action which would cause the affiliate to be in
violation of the Standards applicable to Licensure by
BCBSA.
<PAGE>
EXHIBIT A (continued)
Standard 2 - Financial Responsibility
An affiliate shall be operated in a manner that provides reasonable financial
assurance that it can fulfill all of its contractual obligations to its
customers. If a risk-assuming affiliate ceases operations for any reason, Blue
Cross and/or Blue Shield Plan coverage will be offered to all affiliate
subscribers without exclusions, limitations or conditions based on health
status. If a nonrisk-assuming affiliate ceases operations for any reason,
sponsoring Plan(s) will provide for services to its (their) customers.
Standard 3 - State Licensure/Certification
3A.) The Standard for an affiliate that employs, owns or contracts on a
substantially exclusive basis for medical services is:
An affiliate shall maintain unimpaired licensure or certification for its
medical care providers to operate under applicable state laws.
3B.) The Standard for an affiliate that does not employ, own or contract on a
substantially exclusive basis for medical services is:
An affiliate shall maintain unimpaired licensure or certification to operate
under applicable state laws.
Standard 4 - Certain Disclosures
An affiliate shall make adequate disclosure in contracting with third parties
and in disseminating public statements of 1) the structure of the Blue Cross and
Blue Shield System; and 2) the independent nature of every licensee; and 3) the
affiliate's financial condition.
Standard 5 - Reports and Records for Certain Smaller Affiliates
For a smaller affiliate that does not underwrite the indemnity portion of
workers' compensation insurance, the Standard is:
An affiliate and/or its licensed Plan(s) shall furnish, on a timely and accurate
basis, reports and records relating to these Standards and the License
Agreements between BCBSA and affiliate.
<PAGE>
EXHIBIT A (continued)
Standard 6 - Other Standards for Larger Affiliates
Standards 6(A) - (I) that follow apply to larger affiliates.
Standard 6(A): Board of Directors
An affiliate Governing Board shall act in the interest of its Corporation in
providing cost-effective health care services to its customers. An affiliate
shall maintain a governing Board, which shall control the affiliate, composed of
a majority of persons other than providers of health care services, who shall be
known as public members. A public member shall not be an employee of or have a
financial interest in a health care provider, nor be a member of a profession
which provides health care services.
Standard 6(B): Responsiveness to Customers
An affiliate shall be operated in a manner responsive to customer needs and
requirements.
Standard 6(C): Participation in National Programs
An affiliate shall effectively and efficiently participate in each national
program as from time to time may be adopted by the Member Plans for the purposes
of providing portability of membership between the licensees and ease of claims
processing for customers receiving benefits outside of the affiliate's Service
Area.
Such programs are applicable to licensees, and include:
A. Inter-Plan Transfer Agreement;
B. National Account Equalization Program;
C. BlueCard Program;
<PAGE>
EXHIBIT A (continued)
D. Inter-Plan Teleprocessing System (ITS); and
E. Inter-Plan Data Reporting (IPDR) Program.
Standard 6(D): Financial Performance Requirements
In addition to requirements under the national programs listed in
Standard 6C: Participation in National Programs, an affiliate shall take such
action as required to ensure its financial performance in programs and contracts
of an inter-licensee nature or where BCBSA is a party.
Standard 6(E): Cooperation with Plan Performance Response Process
An affiliate shall cooperate with BCBSA's Board of Directors and its Plan
Performance and Financial Standards Committee in the administration of the Plan
Performance Response Process and in addressing affiliate performance problems
identified thereunder.
Standard 6(F): Independent Financial Rating
An affiliate shall obtain a rating of its financial strength from an independent
rating agency approved by BCBSA's Board of Directors for such purpose.
Standard 6(G): Best Efforts
During each year, an affiliate shall use its best efforts in the designated
Service Area to promote and build the value of the Blue Cross Mark.
Standard 6(H): Financial Responsibility
An affiliate shall be operated in a manner that provides reasonable financial
assurance that it can fulfill all of its contractual obligations to its
customers.
<PAGE>
EXHIBIT A (continued)
Standard 6(I): Reports and Records
An affiliate shall furnish to BCBSA on a timely and accurate basis reports and
records relating to compliance with these Standards and the License Agreements
between BCBSA and affiliate. Such reports and records are the following:
A) Annual Application for Renewal of Standard Affiliate
License for affiliates, including trade name and service
mark usage material;
B) Changes in the ownership and governance of the
affiliate, including changes in its charter, articles of
incorporation, or bylaws, changes in an affiliate's
Board composition, or changes in the identity of the
affiliate's Principal Officers, and changes in risk
acceptance, contract growth, or direct delivery of
medical care; and
C) Quarterly Financial Report including the Capital
Benchmark Worksheet, Annual Financial Forecast, Annual
Certified Audit Report, Insurance Department Examination
Report, Annual Statement filed with State Insurance
Department (with all attachments); and
D) Quarterly Utilization Report, Quarterly Enrollment
Report, Cost Containment Report, NMIS Quarterly Report.
Standard 7 - Other Standards for Risk-Assuming Workers' Compensation Affiliates
Standards 7(A) - (E) that follow apply to affiliates that underwrite the
indemnity portion of workers' compensation insurance.
Standard 7 (A): Financial Responsibility
An affiliate shall be operated in a manner that provides reasonable financial
assurance that it can fulfill all of its contractual obligations to its
customers.
<PAGE>
EXHIBIT A (continued)
Standard 7(B): Reports and Records
An affiliate shall furnish, on a timely and accurate basis, reports and records
relating to compliance with these Standards and the License Agreements between
BCBSA and the affiliate. Such reports and records are the following:
A. Annual Application for Renewal of Standard Affiliate License for
affiliates, including trade name and service mark usage materials; and
B. Annual Certified Audit Report, Annual Statement as filed with the State
Insurance Department (with all attachments), Annual NAIC's Risk-Based
Capital Worksheets for Property and Casualty Insurers, and Annual
Financial Forecast; and
C. Quarterly Financial Report, Quarterly Estimated Risk-Based Capital for
Property and Casualty Insurers, Insurance Department Examination Report,
and Quarterly NMIS Report (for licensed health business only); and
D. Notification of all changes and proposed changes to independent ratings
within 30 days of receipt and submission of a copy of all rating
reports; and
E. Changes in the ownership and governance of the affiliate including changes
in its charter, articles of incorporation, or bylaws, changes in an
affiliate's Board composition, Plan control, state license status,
operating area, the affiliate's Principal Officers or direct delivery of
medical care.
Standard 7(C): Loss Prevention
An affiliate shall apply loss prevention protocol to both new and existing
business.
<PAGE>
EXHIBIT A (continued)
Standard 7(D): Claims Administration
An affiliate shall maintain an effective claims administration process that
includes all the necessary functions to assure prompt and proper resolution of
medical and indemnity claims.
Standard 7(E): Disability and Provider Management
An affiliate shall arrange for the provision of appropriate and necessary
medical and rehabilitative services to facilitate early intervention by medical
professionals and timely and appropriate return to work.
Standard 8 - Cooperation with Affiliate License Performance Response Process
Protocol
An affiliate and its Sponsoring Plan(s) shall cooperate with BCBSA's Board of
Directors and its Plan Performance and Financial Standards Committee in the
administration of the Affiliate License Performance Response Process Protocol
(ALPRPP) and in addressing affiliate compliance problems identified thereunder.
Standard 9: Participation in National Programs by Smaller Affiliates
A smaller affiliate for which this standard applies pursuant to the Preamble
section of Exhibit A of the Affiliate License Agreement shall effectively and
efficiently participate in certain national programs from time to time as may be
adopted by Member Plans for the purposes of providing ease of claims processing
for customers receiving benefits outside of the affiliate's service area and be
subject to certain relevant financial and reporting requirements.
<PAGE>
EXHIBIT B
ROYALTY FORMULA FOR SECTION 9 OF THE
AFFILIATE LICENSE AGREEMENT
Affiliate will pay BCBSA a fee for this license in accordance with the following
formula:
FOR RISK PRODUCTS:
For affiliates not underwriting the indemnity portion of workers' compensation
insurance:
An amount equal to its pro rata share of each sponsoring Plan's dues payable to
BCBSA computed with the addition of the affiliate's subscription revenue and
contracts arising from products using the marks. The payment by each sponsoring
Plan of its dues to BCBSA, including that portion described in this paragraph,
will satisfy the requirement of this paragraph, and no separate payment will be
necessary.
For affiliates underwriting the indemnity portion of workers' compensation
insurance:
An amount equal to 0.35 percent of the gross revenue per annum of affiliate
arising from products using the marks; plus, an annual fee of $5,000 per license
for an affiliate subject to Standard 7.
FOR NONRISK PRODUCTS:
An amount equal to 0.24 percent of the gross revenue per annum of affiliate
arising from products using the marks; plus:
1) An annual fee of $5,000 per license for an affiliate subject to
Standard 6.
2) An annual fee of $2,000 per license for all other affiliates.
The foregoing shall be reduced by one-half where both a BLUE CROSS(R) and BLUE
SHIELD(R) License are issued to the same affiliate. In the event that any
license period is greater or less than one (1) year, any amounts due shall be
prorated. Royalties under this formula will be calculated, billed and paid in
arrears.
<PAGE>
EXHIBIT 1A
CONTROLLED AFFILIATE LICENSE AGREEMENT
APPLICABLE TO LIFE INSURANCE COMPANIES
This agreement by and among Blue Cross and Blue Shield Association
("BCBSA") _______________________________("Controlled Affiliate"), a controlled
affiliate of the Blue Cross Plan(s), known as
_______________________________________("Plan").
WHEREAS, BCBSA is the owner of the BLUE CROSS and BLUE CROSS Design service
marks;
WHEREAS, the Plan and the Controlled Affiliate desire that the latter be
entitled to use the BLUE CROSS and BLUE CROSS Design service marks (collectively
the "Licensed Marks") as service marks and be entitled to use the term BLUE
CROSS in a trade name ("Licensed Name");
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
hereinafter set forth and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. GRANT OF LICENSE
Subject to the terms and conditions of this Agreement, BCBSA
hereby grants to the Controlled Affiliate the exclusive right to use the
licensed Marks and Names in connection with and only in connection with those
life insurance and related services authorized by applicable state law, other
than health care plans and related services (as defined in the Plan's License
Agreements with BCBSA) which services are not separately licensed to Controlled
Affiliate by BCBSA, in the Service Area served by the Plan, except that BCBSA
reserves the right to use the Licensed Marks and Name in said Service Area, and
except to the extent that said Service Area may overlap the area or areas served
by one or more other licensed Blue Shield Plans as of the date of this License
as to which overlapping areas the rights hereby granted are non-exclusive as to
such other Plan or Plans and their respective Licensed Controlled Affiliates
only. Controlled Affiliate cannot use the Licensed Marks or Name outside the
Service Area or, anything in any other license to Controlled Affiliate
notwithstanding, in its legal or trade name.
2. QUALITY CONTROL
A. Controlled Affiliate agrees to use the Licensed Marks and
Name only in relation to the sale, marketing and rendering of authorized
products and further agrees to be bound by the conditions regarding quality
control shown in Exhibit A as it may be amended by BCBSA from time-to-time.
Amended as of November 17, 1994
-1-
<PAGE>
B. Controlled Affiliate agrees that Plan and/or BCBSA may, from
time-to-time, upon reasonable notice, review and inspect the manner and method
of Controlled Affiliate's rendering of service and use of the Licensed Marks and
Name.
C. Controlled Affiliate agrees that it will provide on an annual
basis (or more often if reasonably required by Plan or by BCBSA) a report to
Plan and BCBSA demonstrating Controlled Affiliate's compliance with the
requirements of this Agreement including but not limited to the quality control
provisions of Exhibit A.
D. As used herein, a Controlled Affiliate is defined as an entity
organized and operated in such a manner that it is subject to the bona fide
control of a Plan or Plans. Absent written approval by BCBSA of an alternative
method of control, bona fide control shall mean the legal authority, directly or
indirectly through wholly-owned subsidiaries: (a) to select members of the
Controlled Affiliate's governing body having not less than 51% voting control
thereof; (b) to exercise operational control with respect to the governance
thereof; and (c) to prevent any change in its articles of incorporation, bylaws
or other governing documents deemed inappropriate. In addition, a Plan or Plans
shall own at least 51% of any for-profit Controlled Affiliate. If the Controlled
Affiliate is a mutual company, the Plan or its designee(s) shall have and
maintain, in lieu of the requirements of items (a) and (c) above, proxies
representing 51% of the votes at any meeting of the policyholders and shall
demonstrate that there is no reason to believe this such proxies shall be
revoked by sufficient policyholders to reduce such percentage below 51%.
3. SERVICE MARK USE
Controlled Affiliate shall at all times make proper
service mark use of the Licensed Marks, including but not limited to use of such
symbols or words as BCBSA shall specify to protect the Licensed Marks, and shall
comply with such rules (applicable to all Controlled Affiliates licensed to use
the Marks) relative to service mark use, as are issued from time-to-time by
BCBSA. If there is any public reference to the affiliation between the Plan and
the Controlled Affiliate, all of the Controlled Affiliate's licensed services in
the Service Area of the Plan shall be rendered under the Licensed Marks.
Controlled Affiliate recognizes and agrees that all use of the Licensed Marks by
Controlled Affiliate shall inure to the benefit of BCBSA.
4. SUBLICENSING AND ASSIGNMENT
Controlled Affiliate shall not sublicense, transfer,
hypothecate, sell, encumber or mortgage, by operation of law or otherwise, the
rights granted hereunder and any such act shall be
-2-
<PAGE>
voidable at the option of Plan or BCBSA. This Agreement and all rights and
duties hereunder are personal to Controlled Affiliate.
5. INFRINGEMENTS
Controlled Affiliate shall promptly notify Plan and
BCBSA of any suspected acts of infringement, unfair competition or passing off
which may occur in relation to the Licensed Marks. Controlled Affiliate shall
not be entitled to require Plan or BCBSA to take any actions or institute any
proceedings to prevent infringement, unfair competition or passing off by third
parties. Controlled Affiliate agrees to render to Plan and BCBSA, free of
charge, all reasonable assistance in connection with any matter pertaining to
the protection of the Licensed Marks by BCBSA.
6. LIABILITY INDEMNIFICATION
Controlled Affiliate hereby agrees to save, defend,
indemnify and hold Plan and BCBSA harmless from and against all claims, damages,
liabilities and costs of every kind, nature and description which may arise as a
result of Controlled Affiliate's rendering of health care services under the
Licensed Marks.
7. LICENSE TERM
The license granted by this Agreement shall remain in
effect for a period of one (1) year and shall be automatically extended for
additional one (1) year periods upon evidence satisfactory to the Plan and BCBSA
that Controlled Affiliate meets the then applicable quality control standards,
unless one of the parties hereto notifies the other party of the termination
hereof at least sixty (60) days prior to expiration of any license period.
This Agreement may be terminated by the Plan or by
BCBSA for cause at any time provided that Controlled Affiliate has been given a
reasonable opportunity to cure and shall not effect such a cure within thirty
(30) days of receiving written notice of the intent to terminate (or commence a
cure within such thirty day period and continue diligent efforts to complete the
cure if such curing cannot reasonably be completed within such thirty day
period). By way of example and not for purposes of limitation, Controlled
Affiliate's failure to abide by the quality control provisions of Paragraph 2,
above, shall be considered a proper ground for cancellation of this Agreement.
This Agreement and all of Controlled Affiliate's
rights hereunder shall immediately terminate without any further action by any
party or entity in the event that:
-3-
<PAGE>
A. Controlled Affiliate shall no longer comply with Standard No. 1
(Organization and Governance) of Exhibit A or, following an opportunity to cure,
with the remaining quality control provisions of Exhibit A, as it may be amended
from time-to-time; or
B. Plan ceases to be authorized to use the Licensed Marks; or
C. Appropriate dues for Controlled Affiliate pursuant to item 8
hereof, which are the royalties for this License Agreement are more than sixty
(60) days in arrears to BCBSA.
Upon termination of this Agreement for cause or otherwise,
Controlled Affiliate agrees that it shall immediately discontinue all use of the
Licensed Marks including any use in its trade name.
In the event of any disagreement between Plan and BCBSA as to
whether grounds exist for termination or as to any other term or condition
hereof, the decision of BCBSA shall control, subject to provisions for mediation
or mandatory dispute resolution in effect between the parties.
Upon termination of this Agreement, Licensed Controlled Affiliate
shall immediately notify all of its customers that it is no longer a licensee of
the Blue Cross and Blue Shield Association and provide instruction on how the
customer can contact the Blue Cross and Blue Shield Association or a designated
licensee to obtain further information on securing coverage. The written
notification required by this paragraph shall be in writing and in a form
approved by the Association. The Association shall have the right to audit the
terminated entity's books and records to verify compliance with this paragraph.
8. DUES
Controlled Affiliate will pay to BCBSA a fee for this license in
accordance with the following formula:
o An annual fee of five thousand dollars ($5,000) per license, plus
o .05 percent of gross revenue per annum of Licensee arising from
group products using the Marks, plus
o .5 percent of gross revenue per annum of Licensee arising from
individual products using the Marks
The foregoing percentages shall be reduced by one-half where both a
BLUE CROSS(R) and BLUE SHIELD(R) license are issued to the same
entity. In the event that any License period is greater or less than
one (1) year, any amounts due shall be prorated. Royalties under
this formula will be calculated, billed and paid in arrears.
Amended as of September 29, 1994
-4-
<PAGE>
Plan will promptly and timely transmit to BCBSA all dues owed by
Controlled Affiliate as determined by the above formula and if Plan shall fail
to do so, Controlled Affiliate shall pay such dues directly.
9. JOINT VENTURE
Nothing contained in this Agreement shall be construed as creating a
joint venture, partnership, agency or employment relationship between Plan and
Controlled Affiliate or between either and BCBSA.
-4a-
<PAGE>
10. NOTICES AND CORRESPONDENCE
Notices regarding the subject matter of this Agreement or breach or
termination thereof shall be in writing and shall be addressed in duplicate to
the last known address of each other party, marked respectively to the attention
of its President and, if any, its General Counsel.
11. COMPLETE AGREEMENT
This Agreement contains the complete understandings of the parties
in relation to the subject matter hereof. This Agreement may only be amended by
a writing executed by all parties.
12. SEVERABILITY
If any term of this Agreement is held to be unlawful by a court of
competent jurisdiction, such finding shall in no way effect the remaining
obligations of the parties hereunder and the court may substitute a lawful term
or condition for any unlawful term or condition so long as the effect of such
substitution is to provide the parties with the benefits of this Agreement.
13. NONWAIVER
No waiver by BCBSA of any breach or default in performance on the
part of the Controlled Affiliate or any other licensee of any of the terms,
covenants or conditions of this Agreement shall constitute a waiver of any
subsequent breach or default in performance of said terms, covenants or
conditions.
14. GOVERNING LAW
This Agreement shall be governed by, and construed and interpreted
in accordance with, the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties have caused this License Agreement to be
executed, effective as of the date of last signature written below.
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By:___________________________________
Date:_________________________________
______________________________________
Controlled Affiliate
By:___________________________________
Date:_________________________________
Plan:_________________________________
-5-
<PAGE>
EXHIBIT A
CONTROLLED AFFILIATE LICENSE STANDARDS
LIFE INSURANCE COMPANIES
Page 1 of 2
PREAMBLE
The standards for licensing Life Insurance Companies (Life and Health Insurance
companies, as defined by state statute) are established by BCBSA and are subject
to change from time-to-time upon the affirmative vote of three-fourths (3/4) of
the Plans and three-fourths (3/4) of the total weighted vote of all Plans. Each
Licensed Plan is required to use a standard controlled affiliate license form
provided by BCBSA and to cooperate fully in assuring that the licensed Life
Insurance Company maintains compliance with the license standards.
An organization meeting the following standards shall be eligible for a license
to use the Licensed Marks within the service area of its sponsoring Licensed
Plan to the extent and the manner authorized under the Controlled Affiliate
License applicable to Life Insurance Companies and the principal license to the
Plan.
Standard 1 - Organization and Governance
The LIC shall be organized and operated in such a manner that it is controlled
by a licensed Plan or Plans which have, directly or indirectly: 1) not less than
51% of the voting control of the LIC; and 2) the legal ability to prevent any
change in the articles of incorporation, bylaws or other establishing or
governing documents of the LIC with which it does not concur; and 3) operational
control of the LIC.
If the LIC is a mutual company, the Plan or its designee(s) shall have and
maintain, in lieu of the requirements of items 1 and 2 above, proxies
representing at least 51% of the votes at any policyholder meeting and shall
demonstrate that there is no reason to believe such proxies shall be revoked by
sufficient policyholders to reduce such percentage below 51%.
Standard 2 - State Licensure
The LIC must maintain unimpaired licensure or certificate of authority to
operate under applicable state laws as a life and health insurance company in
each state in which the LIC does business.
Standard 3 - Records and Examination
The LIC and its sponsoring licensed Plan(s) shall maintain and furnish, on a
timely and accurate basis, such records and reports regarding the LIC as may be
required in order to establish compliance with the license agreement. The LIC
and its sponsoring licensed Plan(s) shall permit BCBSA to examine the affairs of
the LIC and shall agree that BCBSA's board may submit a written report to the
chief executive officer(s) and the board(s) of directors of the sponsoring
Plan(s).
-1-
<PAGE>
CONTROLLED AFFILIATE LICENSE STANDARDS
LIFE INSURANCE COMPANIES
Page 2 of 2
Standard 4 - Mediation
The LIC and its sponsoring Plan(s) shall agree to use the then-current BCBSA
mediation and mandatory dispute resolution processes, in lieu of a legal action
between or among another licensed controlled affiliate, a licensed Plan or
BCBSA.
Standard 5 - Financial Responsibility
The LIC shall maintain adequate financial resources to protect its customers and
meet its business obligations.
-2-
<PAGE>
EXHIBIT 2
Membership Standards
Page 1 of 3
Preamble
The Membership Standards apply to all organizations seeking to become or to
continue as Regular Members of the Blue Cross and Blue Shield Association. Any
organization seeking to become a Regular Member must be found to be in
substantial compliance with all Membership Standards at the time membership is
granted and the organization must be found to be in substantial compliance with
all Membership Standards for a period of two (2) years preceding the date of its
application. If Membership is sought by an entity which controls or is
controlled by one or more Plans, such compliance shall be determined on the
basis of compliance by such Plan or Plans.
The Regular Member Plans shall have authority to interpret these Standards.
Compliance with any Membership Standard may be excused, at the Plans'
discretion, if the Plans agree that compliance with such Standard would require
the Plan to violate a law or governmental regulation governing its operation or
activities.
Standard 1: A Plan's Board shall not be controlled by any
special interest group, and shall act in the
interest of its Corporation in providing
cost-effective health care services to its
customers. A Plan shall maintain a governing
Board, which shall control the Plan, composed
of a majority of persons other than providers
of health care services, who shall be known as
public members. A public member shall not be an
employee of or have a financial interest in a
health care provider, nor be a member of a
profession which provides health care services.
Standard 2: A Plan shall furnish to the Association on a
timely and accurate basis reports and records
relating to compliance with these Standards and
the License Agreements between the Association
and the Plans. Such reports and records are the
following:
A. Annual Application for Renewal of
BCBSA Membership, including trade
name and service mark usage material;
B. Changes in the governance of the Plan,
including changes in a Plan's Charter,
Articles of Incorporation, or Bylaws,
changes in a Plan's Board composition,
or changes in the identity of the
Plan's Principal Officers;
Amended as of June 24, 1994
<PAGE>
EXHIBIT 2
Membership Standards
Page 2 of 3
C. Quarterly Financial Report including
the Plan Capital Benchmark Worksheet,
Annual Financial Forecast, Annual
Certified Audit Report, Insurance
Department Examination Report, Annual
Statement filed with State Insurance
Department (with all attachments), and
Consolidating Financial Statement;
D. Quarterly Utilization Report,
Quarterly Enrollment Report, Cost
Containment Report, and NMIS Quarterly
Report.
Standard 3: A Plan shall be operated in a manner that
provides reasonable financial assurance that it
can fulfill its contractual obligations to its
customers.
Standard 4: A Plan shall be operated in a manner responsive
to customer needs and requirements.
Standard 5: A Plan shall effectively and efficiently
participate in each national program as from
time to time may be adopted by the Member Plans
for the purposes of providing portability of
membership between the Plans and ease of claims
processing for customers receiving benefits
outside of the Plan's Service Area.
Such programs are applicable to Blue Cross and Blue Shield
Plans, and include:
A. Inter-Plan Transfer Agreement;
B. National Account Equalization Program;
C. Inter-Plan Data Reporting (IPDR) Program;
D. Inter-Plan Teleprocessing System (ITS); and
E. BlueCard Program.
Amended as of August 2, 1996
<PAGE>
EXHIBIT 2
Membership Standards
Page 3 of 3
Standard 6: In addition to requirements under the national programs listed in
Standard 5: Participation in National Programs, a Plan shall take such action as
required to ensure its financial performance in programs and contracts of an
inter-Plan nature or where the Association is a party.
Standard 7: A Plan shall make adequate disclosure in contracting with third
parties and in disseminating public statements of (i) the structure of the Blue
Cross and Blue Shield System, (ii) the independent nature of every Plan, and
(iii) the Plan's financial condition.
Standard 8: A Plan shall cooperate with the Association's Board of Directors and
its Plan Performance and Financial Standards Committee in the administration of
the Plan Performance Response Process and in addressing Plan performance
problems identified thereunder.
Standard 9: A Plan shall obtain a rating of its financial strength from an
independent rating agency approved by the Association's Board of Directors for
such purpose.
Standard 10: During each year, a Plan and its Controlled Affiliate(s) engaged in
providing licensable services (excluding Life Insurance and Charitable
Foundation Services) shall use their best efforts in the designated Service Area
to promote and build the value of the Blue Cross and Blue Shield Marks.
Standard 11 Neither a Plan nor any Larger Affiliate shall cause or permit an
unlicensed entity to obtain control of the Plan or Larger Affiliate or to
acquire a substantial portion of its assets related to licensable services.
Amended as of September 19, 1996
<PAGE>
EXHIBIT 3
GUIDELINES WITH RESPECT TO USE OF
LICENSED NAME AND MARKS IN CONNECTION WITH NATIONAL ACCOUNTS
Page 1 of 3
1. The strength of the Blue Cross/Blue Shield National Accounts mechanism, and
the continued provision of cost effective, quality health care benefits to
National Accounts, are predicated on locally managed provider networks
coordinated on a national scale in a manner consistent with effective service to
National Account customers and consistent with the preservation of the integrity
of the Blue Cross/Blue Shield system and the Licensed Marks. These guidelines
shall be interpreted in keeping with such ends.
2. A National Account is an entity with employee and/or retiree locations in
more than one Plan's Service Area. Unless otherwise agreed, a National Account
is deemed located in the Service Area in which the corporate headquarters of the
National Account is located. The Control Plan of a National Account is the Plan
in whose Service Area the National Account is located. A participating ("Par")
Plan is a Plan in whose Service Area the National Account has employee and/or
retiree locations, but in which the National Account is not located.
3. The National Account Guidelines enunciated herein below shall be applicable
only with respect to the business of new National Accounts acquired after
January 1, 1991.
4. Control Plans shall utilize National Account identification cards complying
with then currently effective BCBSA graphic standards in connection with all
National Accounts business to facilitate administration thereof, to minimize
subscriber and provider confusion, and to reflect a commitment to cooperation
among Plans.
5. Disputes among Plans and/or BCBSA as to the interpretation or implementation
of these Guidelines or as to other National Accounts issues shall be submitted
to mediation and mandatory dispute resolution as provided in the License
Agreement. For two years from the effective date of the License Agreement,
however, such disputes shall be subject to mediation only, with the results of
such mediation to be collected and reported in order to establish more
definitive operating parameters for National Accounts business and to serve as
ground rules for future binding dispute resolution.
<PAGE>
EXHIBIT 3
Page 2 of 3
6. The Control Plan may use the BlueCard Program (as defined by IPOC) to deliver
benefits to employees and non-Medicare eligible retirees in a Participating
Plan's service area if an alternative arrangement with the Participating Plan
cannot be negotiated. The Participating Plan's minimum servicing requirement for
those employees and non-Medicare retirees in its service area is to deliver
benefits using the BlueCard Program. Account delivery is subject to the
policies, provisions and procedures of the BlueCard Program.
7. For provider payments in a Participating Plan's area (on non-BlueCard
claims), payment to the provider may be made by the Participating Plan or the
Control Plan at the Participating Plan's option. If the Participating Plan
elects to pay the provider, it may not withhold payment of a claim verified by
the Control Plan or its designated processor, and payment must be in conformity
with service criteria established by the Board of Directors of BCBSA (or an
authorized committee thereof) to assure prompt payment, good service and minimum
confusion with providers and subscribers. The Control Plan, at the Participating
Plan's request, will also assure that measures are taken to protect the
confidentiality of the data pertaining to provider reimbursement levels and
profiles.
8. For claim payments in a Participating Plan's area (on non-BlueCard claims),
Participating Plans are strongly encouraged, but not required, to pass along to
the Control Plan part or all of local provider discounts and differentials for
use by the Control Plan in negotiating financial arrangements with National
Accounts. However, since the size, basis, form and use of local differentials
can vary substantially among Plans and also by individual National Account
characteristics, the degree and form of any discount or differential passed
along to the Control Plan shall be strictly a matter of negotiated contractual
agreement between a Participating Plan and the Control Plan and may also vary
from one National Account to another. In order to facilitate the quotation of
national account pricing and the offering of a variety of National Account
delivery systems, all Plans are strongly encouraged to periodically publish to
other Plans and the BCBSA their National Account contracting policies with
respect to the handling of differentials.
The Control Plan, in its financial agreements with a National Account,
is expected to reasonably reflect the aggregate amount of differentials passed
along to the Control Plan by all Participating Plans in a National Account. The
exact form and substance of this may vary from one National Account to another
and shall be a matter of
Amended as of June 14, 1996
<PAGE>
EXHIBIT 3
Page 3 of 3
explicit negotiation and contractual relationship between the National Account
and the Control Plan. The specifics in an agreement between the Control Plan and
the National Account may vary in form (e.g., a guaranteed offset against
retentions, or a direct pass through, or a guaranteed aggregate percentage
discount, or no pass back at all, etc.), and the Control Plan has the
responsibility and the Authority to negotiate precise arrangements. However,
irrespective of the final arrangements between the Control Plan and the National
Account, a Participating Plan's liability for passing along differentials shall
be limited to the contractual agreement the Participating Plan has with the
Control Plan on a specific National Account.
9. Other than in contracting with health care providers or soliciting such
contracts in areas contiguous to a Plan's Service Area in order to serve its
subscribers or those of its licensed Controlled Affiliate residing or working in
its Service Area, a Control Plan may not use the Licensed Marks and/or Name, as
a tag line or otherwise, to negotiate directly with providers outside its
Service Area.
<PAGE>
EXHIBIT 4
GOVERNMENT PROGRAMS AND CERTAIN OTHER USES
Page 1 of 2
1. A Plan and its licensed Controlled Affiliate may use the Licensed Marks and
Name in bidding on and executing a contract to serve a Government Program, and
in thereafter communicating with the Government concerning the Program. With
respect, however, to such contracts entered into after the 1st day of January,
1991, the Licensed Marks and Name will not be used in communications or
transactions with beneficiaries or providers in the Government Program located
outside a Plan's Service Area, unless the Plan can demonstrate to the
satisfaction of BCBSA's governing body that such a restriction on use of the
Licensed Marks and Name will jeopardize its ability to procure the contract for
the Government Program. As to both existing and future contracts for Government
Programs, Plans will discontinue use of the Licensed Marks and Name as to
beneficiaries and Providers outside their Service Area as expenditiously as
circumstances reasonably permit. Effective January 1, 1995, except as provided
in the first sentence above, all use by a Plan of the Licensed Marks and Name in
Government Programs outside of the Plan's Service Area shall be discontinued.
Incidental communications outside a Plan's Service Area with resident or former
resident beneficiaries of the Plan, and other categories of necessary incidental
communications approved by BCBSA, are not prohibited.
2. In connection with activity otherwise in furtherance of the License
Agreement, a Plan may use the Licensed Marks and Name outside its Service Area
in the following circumstances which are deemed legitimate and necessary and not
likely to cause consumer confusion:
a. sending letterhead, envelopes, and similar items for
administrative purposes which do not solicit the sale of
health care plans and related services;
b. distributing business cards other than in marketing and
selling;
c. contracting with health care providers or soliciting
such contracts in areas contiguous to a Plan's Service
Area in order to serve its subscribers or those of its
licensed Controlled Affiliate residing or working in its
service area;
d. issuing a small sign containing the legal name or trade
name of the Plan or its licensed Controlled Affiliate
for display by a provider to identify the latter as a
participating provider of the Plan or Controlled
Affiliate;
<PAGE>
EXHIBIT 4
Page 2 of 2
e. advertising in publications or electronic media solely
to persons for employment;
f. advertising in print, electronic or other media which
serve, as a substantial market, the Service Area of the
Plan or licensed Controlled Affiliate, provided that no
Plan may advertise outside its Service Area on the
national broadcast and cable networks and that
advertisements in national print media are limited to
the smallest regional edition encompassing the Service
Area;
g. advertising by direct mail where the addressee's zip
code plus 4 includes, at least in part, the Plan's
Service Area or that of a licensed Controlled Affiliate.
<PAGE>
EXHIBIT 5
MEDIATION AND MANDATORY DISPUTE RESOLUTION (MMDR) RULES
The Blue Cross and Blue Shield Plans ("Plans") and the Blue Cross
Blue Shield Association ("BCBSA") recognize and acknowledge that the Blue Cross
and Blue Shield system is a unique nonprofit and for-profit system offering cost
effective health care financing and services. The Plans and BCBSA desire to
utilize Mediation and Mandatory Dispute Resolution ("MMDR") to avoid expensive
and time-consuming litigation that may otherwise occur in the federal and state
judicial systems. Even MMDR should be viewed, however, as methods of last
resort, all other procedures for dispute resolution having failed. Except as
otherwise provided in the License Agreements, the Plans, their Controlled
Affiliates and BCBSA agree to submit all disputes to MMDR pursuant to these
Rules and in lieu of litigation.
1. Initiation of Proceedings
A. Pre-MMDR Efforts
Before filing a Complaint to invoke the MMDR process, the CEO of a
complaining party, or his/her designated representative, shall undertake good
faith efforts with the other side(s) to try to resolve any dispute.
B. Complaint
To commence a proceeding, the complaining party (or parties) shall
provide by certified mail, return receipt requested, a written Complaint to the
BCBSA Corporate Secretary (which shall also constitute service on BCBSA if it is
a respondent) and to any Plan(s) and/or Controlled Affiliate(s) named therein.
The Complaint shall contain:
i. identification of the complaining party (or
parties) requesting the proceeding;
ii. identification of the respondent(s);
iii. identification of any other persons or entities
who are interested in a resolution of the
dispute;
iv. a full statement describing the nature of the
dispute;
v. identification of all of the issues that are
being submitted for resolution;
Amended as of November 21, 1996
<PAGE>
vi. the remedy sought;
vii. a statement as to whether the complaining party
(or parties) elect(s) first to pursue Mediation;
viii. any request, if applicable, that one or more
members of the Mediation Committee be disqualified
from the proceeding and the grounds for such
request;
ix. any request, if applicable, that the matter be
handled on an expedited basis and the reasons
therefor; and
x. a statement signed by the CEO of the complaining
party affirming that the CEO has undertaken
efforts, or has directed efforts to be undertaken,
to resolve the dispute before resorting to the
MMDR process.
The complaining party (or parties) shall file and serve with the Complaint
copies of all documents which the party (or parties) intend(s) to offer at the
Arbitration Hearing and a statement identifying the witnesses the party (or
parties) intend(s) to present at the Hearing, along with a summary of each
witness' expected testimony.
C. Answer
Within twenty (20) days after receipt of the Complaint, each
respondent shall serve on the BCBSA and on the complaining party (or parties)
and on the Chairman of the Mediation Committee;
i. a full Answer to the aforesaid Complaint;
ii. a statement of any Counterclaims against the
complaining party (or parties), providing with
respect thereto the information specified in
Paragraph 1.B., above;
iii. a statement as to whether the respondent elects to
first pursue Mediation;
iv. any request, if applicable, that one or more
members of the Mediation Committee be disqualified
from the proceeding and the grounds for such
request; and
v. any request, if applicable, that the matter be
handled on an expedited basis and the reasons
therefor.
<PAGE>
The respondent(s) shall file and serve with the Answer or by the date of the
Initial Conference set forth in Paragraph 3.B., below, copies of all documents
which the respondent(s) intend(s) to offer at the Arbitration Hearing and a
statement identifying the witnesses the party (or parties) intend(s) to present
at the Hearing, along with a summary of each witness' expected testimony.
D. Reply To Counterclaim
Within ten (10) days after receipt of any Counterclaim, the
complaining party (or parties) shall serve on BCBSA and on the responding party
(or parties) and on the Chairman of the Mediation Committee, a Reply to the
Counterclaim. Such Reply must provide the same information required by Paragraph
1.C.
2. Mediation
A. Mediation Committee
To facilitate the mediation of disputes between or among BCBSA, the
Plans and/or their Controlled Affiliates, the BCBSA Board has established a
Mediation Committee. Mediation may be pursued in lieu of or in an effort to
obviate the Mandatory Dispute Resolution process, and all parties are strongly
urged to exhaust the mediation procedure.
B. Election To Mediate
If any party elects first to pursue Mediation, and if it appears to
the Corporate Secretary that the dispute falls within the jurisdiction of the
Mediation Committee, as set forth in Exhibit 5-A hereto, then the Corporate
Secretary will promptly furnish the Mediation Committee with copies of the
Complaint, Answer, Counterclaim and Reply to Counterclaim, and other documents
referenced in Paragraph 1, above.
C. Selection of Mediators
The parties shall promptly attempt to agree upon: (i) the number of
mediators desired, not to exceed three mediators; and (ii) the selection of the
mediator(s) who may include members of the Mediation Committee and/or
experienced mediators from an independent entity to mediate all disputes set
forth in the Complaint and Answer (and Counterclaim and Reply, if any). In the
event the parties cannot agree upon the number of mediators desired, that number
shall default to three. In the event the parties cannot agree upon the selection
of mediator(s), the Chairman will select the mediator(s), at least one of which
shall be an experienced mediator from an independent entity, consistent with the
provisions set forth in this Paragraph. No member of the Mediation Committee who
is a representative of any party to the Mediation may be selected to mediate the
dispute. The Chairman shall also endeavor not to select as a mediator any member
of the Mediation Committee whom a party has requested to be disqualified. If,
after due regard for availability, expertise, and such other considerations as
may best promote an expeditious Mediation, the Chairman
<PAGE>
believes that he or she must consider for selection a member of the Mediation
Committee whom a party has requested to be disqualified, the other members of
the Committee eligible to be selected to mediate the dispute shall decide the
request for disqualification. By agreeing to participate in the Mediation of a
dispute, a member of the Mediation Committee represents to the party (or
parties) thereto that he or she knows of no grounds which would require his or
her disqualification.
D. Binding Decision
Before the date of the Mediation Hearing described below, the
Corporate Secretary will contact the party (or parties) to determine whether
they wish to be bound by any recommendation of the selected mediators for
resolution of the disputes. If all wish to be bound, the Corporate Secretary
will send appropriate documentation to them for their signatures before the
Mediation Hearing begins.
E. Mediation Procedure
The Chairman shall promptly advise the parties of a scheduled
Mediation Hearing date. Unless a party requests an expedited procedure, or
unless all parties to the proceeding agree to one or more extensions of time,
the Mediation Hearing set forth below shall be completed within forty (40) days
of BCBSA's receipt of the Complaint. The selected mediators, unless the parties
otherwise agree, shall adhere to the following procedure:
i. Each party must be represented by its CEO or other
representative who has been delegated full
authority to resolve the dispute. However,
parties may send additional representatives as
they see fit.
ii. By no later than five (5) days prior to the date
designated for the Mediation Hearing, each party
shall supply and serve a list of all persons who
will be attending the Mediation Hearing, and
indicate who will have the authority to resolve
the dispute.
iii. Each party will be given one-half hour to present
its case, beginning with the complaining party (or
parties), followed by the other party or parties.
The parties are free to structure their
presentations as they see fit, using oral
statements or direct examination of witnesses.
However, neither cross-examination nor questioning
of opposing representatives will be permitted. At
the close of each presentation, the selected
mediators will be given an opportunity to ask
questions of the presenters and witnesses. All
parties must be present throughout the Mediation
Hearing. The selected mediators may extend the
time allowed for each party's presentation at the
Mediation Hearing. The selected mediators may
meet in executive session, outside the presence of
the parties, or may meet with the parties
separately, to discuss the controversy.
<PAGE>
iv. After the close of the presentations, the parties
will attempt to negotiate a settlement of the
dispute. If the parties desire, the selected
mediators, or any one or more of the selected
mediators, will sit in on the negotiations.
v. After the close of the presentations, the selected
mediators may meet privately to agree upon a
recommendation for resolution of the dispute which
would be submitted to the parties for their
consideration and approval. If the parties have
previously agreed to be bound by the results of
this procedure, this recommendation shall be
binding upon the parties.
vi. The purpose of the Mediation Hearing is to assist
the parties to settle their grievances short of
mandatory dispute resolution. As a result, the
Mediation Hearing has been designed to be as
informal as possible. Rules of evidence shall not
apply. There will be no transcript of the
proceedings, and no party may make a tape
recording of the Mediation Hearing.
vii. In order to facilitate a free and open discussion,
the Mediation proceeding shall remain
confidential. A "Stipulation to Confidentiality"
which prohibits future use of settlement offers,
all position papers or other statements furnished
to the selected mediators, and decisions or
recommendations in any Mediation proceeding shall
be executed by each party.
viii. Upon request of the selected mediators, or one of
the parties, BCBSA staff may also submit
documentation at any time during the proceedings.
F. Notice Of Termination Of Mediation
If the Mediation cannot be completed within the prescribed or agreed
time period due to the lack of cooperation of any party, as determined by the
selected mediators, or if the Mediation does not result in a final resolution of
all disputes at the Mediation Hearing or within forty (40) days after the
Complaint was served, whichever comes first, any party or any one of the
selected mediators may so notify the Corporate Secretary, who shall promptly
issue a Notice of termination of mediation to all parties, to the selected
mediators, and to the MDR Administrator, defined below. Such notice shall serve
to bring the Mediation to an end and to initiate Mandatory Dispute Resolution.
Upon agreement of all parties and the selected mediators, the Mediation process
may continue at the same time the MDR process is invoked. The Notice described
above would serve to initiate the MDR proceeding and would not terminate the
proceedings.
<PAGE>
3. Mandatory Dispute Resolution (MDR)
If all parties elect not to first pursue Mediation, or if a notice
of termination of Mediation is issued as set forth in Paragraph 2.F., above,
then the unresolved disputes set forth in any Complaint and Answer (and
Counterclaim and Reply, if any) shall be subject to MDR.
A. MDR Administrator
The Administrator shall be an independent entity such as the Center
for Public Resources, Inc. or Endispute, Inc., specializing in alternative
dispute resolution. The Administrator shall be designated initially, and may be
changed from time to time, by the affirmative vote of fifty-one (51) percent of
the Plans and fifty-one (51) percent of the total then current weighted vote of
all the Plans.
B. Initial Conference
Within five (5) days after a Notice of Termination has issued, or
within five (5) days after the time for filing and serving the Reply to any
Counterclaim if the parties elect first not to mediate, the parties shall confer
with the Administrator to discuss selecting a dispute resolution panel ("the
Panel"). This Initial Conference may be by telephone. The parties are encouraged
to agree to the composition of the Panel and to present that agreement to the
Administrator at the Initial Conference. If the parties do not agree on the
composition of the Panel by the time of the Initial Conference, or by any
extension thereof agreed to by all parties and the Administrator, then the Panel
Selection Process set forth in subparagraph C shall be followed.
C. Panel Selection Process
The Administrator shall designate at least seven potential
arbitrators. The exact number designated shall be sufficient to give each party
at least two peremptory strikes. Each party shall be permitted to strike any
designee for cause and the Administrator shall determine the sufficiency thereof
in its sole discretion. The Administrator will designate a replacement for any
designee so stricken. Each party shall then be permitted two peremptory strikes.
From the remaining designees, the Administrator shall select a three member
Panel. The Administrator shall set the dates for exercising all strikes and
shall complete the Panel Selection Process within fifteen (15) days of the
Initial Conference. Each Arbitrator shall be compensated at his or her normal
hourly rate or, in the absence of an established rate, at a reasonable hourly
rate to be promptly fixed by the Administrator for all time spent in connection
with the proceedings and shall be reimbursed for any travel and other reasonable
expenses.
<PAGE>
D. Duties Of The Arbitrators
The Panel shall promptly designate a Presiding Arbitrator for the
purposes reflected below, but shall retain the power to review and modify any
ruling or other action of said Presiding Arbitrator. Each Arbitrator shall be an
independent Arbitrator, shall be governed by the Code of Ethics for Arbitrators
in Commercial Disputes, appended as Exhibit "5-B" hereto, and shall at or prior
to the commencement of any Arbitration Hearing take an oath to that effect. Each
Arbitrator shall promptly disclose in writing to the Panel and to the parties
any circumstances, whenever arising, that might cause doubt as to such
Arbitrator's compliance, or ability to comply, with said Code of Ethics, and,
absent resignation by such Arbitrator, the remaining Arbitrators shall determine
in their sole discretion whether the circumstances so disclosed constitute
grounds for disqualification and for replacement. With respect to such
circumstances arising or coming to the attention of a party after an
Arbitrator's selection, a party may likewise request the Arbitrator's
resignation or a determination as to disqualification by the remaining
Arbitrators. With respect to a sole Arbitrator, the determination as to
disqualification shall be made by the Administrator.
There shall be no ex parte communication between the parties or
their counsel and any member of the Panel.
E. Panel's Jurisdiction And Authority
The Panel's jurisdiction and authority shall extend to all disputes
between or among the Plans, their Controlled Affiliates, and/or BCBSA, except
for those disputes excepted from these MMDR procedures as set forth in the
License Agreements.
With the exception of punitive or treble damages, the Panel shall
have full authority to award the relief it deems appropriate to resolve the
parties' disputes, including monetary awards and injunctions, mandatory or
prohibitory. The Panel has no authority to award punitive or treble damages
except that the Panel may allocate or assess responsibility for punitive or
treble damages assessed by another tribunal. Subject to the above limitations,
the Panel may, by way of example, but not of limitation:
i. interpret or construe the meaning of any terms,
phrase or provision in any license between BCBSA
and a Plan or a Controlled Affiliate relating to
the use of the BLUE CROSS(R) or BLUE SHIELD(R)
service marks.
ii. determine whether BCBSA, a Plan or a Controlled
Affiliate has violated the terms or conditions of
any license between the BCBSA and a Plan or a
Controlled Affiliate relating to the use of the
BLUE CROSS(R) or BLUE SHIELD(R) service marks.
iii. decide challenges as to its own jurisdiction.
iv. issue such orders for interim relief as it deems
appropriate pending Hearing and Award in any
Arbitration.
It is understood that the Panel is expected to resolve
issues based on governing principles of law, preserving to the
maximum extent legally possible the continued integrity of the Licensed Marks
and the BLUE CROSS/BLUE SHIELD system. The Panel shall apply federal law to all
issues which, if asserted in the United States District Court, would give rise
to federal question jurisdiction, 28 U.S.C. ss. 1331. The Panel shall apply
Illinois law to all issues involving interpretation, performance or construction
of any License Agreement or Controlled Affiliate License Agreement unless the
agreement otherwise provides. As to other issues, the Panel shall choose the
applicable law based on conflicts of law principles of the State of Illinois.
F. Administrative Conference And Preliminary Arbitration
Hearing
Within ten (10) days of the Panel being selected, the Presiding
Arbitrator will schedule an Administrative Conference to discuss scheduling of
the Arbitration Hearing and any other matter appropriate to be considered
including: any written discovery in the form of requests for production of
documents or requests to admit facts; the identity of any witness whose
deposition a party may desire and a showing of exceptional good cause for the
taking of any such deposition; the desirability of bifurcation or other
separation of the issues; the need for and the type of record of conferences and
hearings, including the need for transcripts; the need for expert witnesses and
how expert testimony should be presented; the appropriateness of motions to
dismiss and/or for full or partial summary judgment; consideration of
stipulations; the desirability of presenting any direct testimony in writing;
and the necessity for any on-site inspection by the Panel.
G. Discovery
i. Requests for Production of Documents: All requests
for the production of documents must be served as
of the date of the Administrative Conference as
set forth in Paragraph 3.F., above. Within twenty
(20) days after receipt of a request for
documents, a party shall produce all relevant and
non-privileged documents to the requesting party.
In his or her discretion, the Presiding Arbitrator
may require the parties to provide lists in such
detail as is deemed appropriate of all documents
as to which privilege is claimed and may further
require in-camera inspection of the same.
<PAGE>
ii. Requests for Admissions: Requests for Admissions
may be served up to 21 days prior to the
Arbitration Hearing. A party served with Requests
For Admissions must respond within twenty (20)
days of receipt of said request. The good faith
use of and response to Requests for Admissions is
encouraged, and the Panel shall have full
discretion, with reference to the Federal Rules of
Civil Procedure, in awarding appropriate sanctions
with respect to abuse of the procedure.
iii. Depositions As a general rule, the parties will
not be permitted to take deposition testimony for
discovery purposes. The Presiding Arbitrator, in
his or her sole discretion, shall have the
authority to permit a party to take such
deposition testimony upon a showing of exceptional
good cause, provided that no deposition, for
discovery purposes or otherwise, shall exceed
three (3) hours, excluding objections and colloquy
of counsel.
iv. Expert witness(es): If a party intends to present
the testimony of an expert witness during the oral
hearing, it shall provide all other parties with a
written statement setting forth the information
required to be provided by Fed. R. Civ. P.
26(b)(4)(A)(i) prior to the expiration of the
discovery period.
v. Discovery cut-off: The Presiding Arbitrator shall
determine the date on which the discovery period
will end, but the discovery period shall not
exceed forty-five (45) days from its commencement,
without the agreement of all parties.
vi. Additional discovery: Any additional discovery
will be at the discretion of the Presiding
Arbitrator. The Presiding Arbitrator is
authorized to resolve all discovery disputes,
which resolution will be binding on the parties
unless modified by the Arbitration Panel. If a
party refuses to comply with a decision resolving
a discovery dispute, the Panel, in keeping with
Fed. R. Civ. P. 37, may refuse to allow that party
to support or oppose designated claims or
defenses, prohibit that party from introducing
designated matters into evidence or, in extreme
cases, decide an issue submitted for resolution
adversely to that party.
H. Panel Suggested Settlement/Mediation
At any point during the proceedings, the Panel at the request of any
party or on its own initiative, may suggest that the parties explore settlement
and that they do so at or before the conclusion of the Arbitration Hearing, and
the Panel shall give such assistance in settlement negotiations as the parties
may request and the Panel may deem appropriate. Alternatively, the Panel may
direct the parties to endeavor to mediate their disputes as provided above, or
to explore a mini-trial proceeding, or to have an independent party render a
neutral evaluation of the parties' respective positions. The Panel shall enter
such sanctions as it deems appropriate with respect to any party failing to
pursue in good faith such Mediation or other alternate dispute resolution
methods.
I. Subpoenas On Third Parties
Pursuant to, and consistent with, the Federal Arbitration Act, 9
U.S.C. ss. 9 et seq., a party may request the issuance of a subpoena on a third
party, to compel testimony or documents, and, if good and sufficient cause is
shown, the Panel shall issue such a subpoena.
J. Arbitration Hearing
An Arbitration Hearing will be held within thirty (30) days after
the Administrative Conference if no discovery is taken, or within thirty (30)
days after the close of discovery, unless all parties and the Panel agree to
extend the Arbitration Hearing date, or unless the parties agree in writing to
waive the Arbitration Hearing. The parties may mutually agree on the location of
the Arbitration Hearing. If the parties fail to agree, the Arbitration Hearing
shall be held in Chicago, Illinois, or at such other location determined by the
Presiding Arbitrator to be most convenient to the participants. The Panel will
determine the date(s) and time(s) of the Arbitration Hearing(s) after
consultation with all parties and shall provide reasonable notice thereof to all
parties or their representatives.
K. Arbitration Hearing Memoranda
Twenty (20) days prior to the Arbitration Hearing, each party shall
submit to the other party (or parties) and to the Panel an Arbitration Hearing
Memorandum which sets forth the applicable law and any argument as to any
relevant issue. The Arbitration Hearing Memorandum will supplement, and not
repeat, the allegations, information and documents contained in or with the
Complaint, Answer, Counterclaim and Reply, if any. Ten (10) days prior to the
Arbitration Hearing, each party may submit to the other party (or parties) and
to the Panel a Response Arbitration Hearing Memorandum which sets forth any
response to another party's Arbitration Hearing Memorandum.
L. Notice For Testimony
Ten (10) days prior to the Arbitration Hearing, any party may serve
a Notice on any other party (or parties) requesting the attendance at the
Arbitration Hearing of any officer, employee or director of the other party (or
parties) for the purpose of providing noncumulative testimony. If a party fails
to produce one of its officers, employees or directors whose noncumulative
testimony during the Arbitration Hearing is reasonably requested by an adverse
party, the Panel may refuse to allow that party to support or oppose designated
claims or defenses, prohibit that party from introducing designated matters into
evidence or, in extreme cases, decide an issue submitted for mandatory dispute
resolution adversely to that party. This Rule may not be used for the purpose of
burdening or harassing any party, and the Presiding Arbitrator may impose such
orders as are appropriate so as to prevent or remedy any such burden or
harassment.
M. Arbitration Hearing Procedures
i. Attendance at Arbitration Hearing: Any person
having a direct interest in the proceeding is
entitled to attend the Arbitration Hearing. The
Presiding Arbitrator shall otherwise have the
power to require the exclusion of any witness,
other than a party or other essential person,
during the testimony of any other witness. It
shall be discretionary with the Presiding
Arbitrator to determine the propriety of the
attendance of any other person.
ii. Confidentiality: The Panel and all parties shall
maintain the privacy of the Arbitration
Proceeding. The parties and the Panel shall treat
the Arbitration Hearing and any discovery or other
proceedings or events related thereto, including
any award resulting therefrom, as confidential
except as otherwise necessary in connection with a
judicial challenge to or enforcement of an award
or unless otherwise required by law.
iii. Stenographic Record: Any party, or if the parties
do not object, the Panel, may request that a
stenographic or other record be made of any
Arbitration Hearing or portion thereof. The costs
of the recording and/or of preparing the
transcript shall be borne by the requesting party
and by any party who receives a copy thereof. If
the Panel requests a recording and/or a
transcript, the costs thereof shall be borne
equally by the parties.
iv. Oaths: The Panel may require witnesses to testify
under oath or affirmation administered by any duly
qualified person and, if requested by any party,
shall do so.
<PAGE>
v. Order of Arbitration Hearing: An Arbitration
Hearing shall be opened by the recording of the
date, time, and place of the Arbitration Hearing,
and the presence of the Panel, the parties, and
their representatives, if any. The Panel may, at
the beginning of the Arbitration Hearing, ask for
statements clarifying the issues involved.
Unless otherwise agreed, the complaining party (or
parties) shall then present evidence to support
their claim(s). The respondent(s) shall then
present evidence supporting their defenses and
Counterclaims, if any. The complaining party (or
parties) shall then present evidence supporting
defenses to the Counterclaims, if any, and
rebuttal.
Witnesses for each party shall submit to questions
by adverse parties and/or the Panel.
The Panel has the discretion to vary these
procedures, but shall afford a full and equal
opportunity to all parties for the presentation of
any material and relevant evidence .
vi. Evidence: The parties may offer such evidence as
is relevant and material to the dispute and shall
produce such evidence as the Panel may deem
necessary to an understanding and resolution of
the dispute. Unless good cause is shown, as
determined by the Panel or agreed to by all other
parties, no party shall be permitted to offer
evidence at the Arbitration Hearing which was not
disclosed prior to the Arbitration Hearing by that
party. The Panel may receive and consider the
evidence of witnesses by affidavit upon such terms
as the Panel deems appropriate.
The Panel shall be the judge of the relevance and
materiality of the evidence offered, and
conformity to legal rules of evidence, other than
enforcement of the attorney-client privilege and
the work product protection, shall not be
necessary. The Federal Rules of Evidence shall be
considered by the Panel in conducting the
Arbitration Hearing but those rules shall not be
controlling. All evidence shall be taken in the
presence of the Panel and all of the parties,
except where any party is in default or has waived
the right to be present.
Settlement offers by any party in connection with
Mediation or MDR proceedings, decisions or
recommendations of the selected mediators, and a
party's position papers or statements furnished to
the selected mediators shall not be admissible
evidence or considered by the Panel without the
consent of all parties.
<PAGE>
vii. Closing of Arbitration Hearing: The Presiding
Arbitrator shall specifically inquire of all
parties whether they have any further proofs to
offer or witnesses to be heard. Upon receiving
negative replies or if he or she is satisfied that
the record is complete, the Presiding Arbitrator
shall declare the Arbitration Hearing closed with
an appropriate notation made on the record.
Subject to being reopened as provided below, the
time within which the Panel is required to make
the award shall commence to run, in the absence of
contrary agreement by the parties, upon the
closing of the Arbitration Hearing.
With respect to complex disputes, the Panel may,
in its sole discretion, defer the closing of the
Arbitration Hearing for a period of up to thirty
(30) days after the presentation of proofs in
order to permit the parties to submit post-hearing
briefs and argument, as the Panel deems
appropriate, prior to making an award.
For good cause, the Arbitration Hearing may be
reopened for up to thirty (30) days on the Panel's
initiative, or upon application of a party, at any
time before the award is made
. N. Awards
An Award must be in writing and shall be made promptly by the Panel
and, unless otherwise agreed by the parties or specified by law, no later than
thirty (30) days from the date of closing the Arbitration Hearing. If all
parties so request, the Award shall contain findings of fact and conclusions of
law. The Award, and all other rulings and determinations by the Panel, may be by
a majority vote.
Parties shall accept as legal delivery of the Award the placing of
the Award or a true copy thereof in the mail addressed to a party or its
representative at its last known address or personal service of the Award on a
party or its representative.
Awards are binding only on the parties to the Arbitration and are
not binding on any non-parties to the Arbitration and may not be used or cited
as precedent in any other proceeding.
After the expiration of twenty (20) days from initial delivery, the
Award (with corrections, if any) shall be final and binding on the parties, and
the parties shall undertake to carry out the Award without delay.
Proceedings to confirm, modify or vacate an Award shall be conducted
in conformity with and controlled by the Federal Arbitration Act. 9 U.S.C.ss.1,
et seq.
<PAGE>
O. Return Of Documents
Within sixty (60) days after the Award and the conclusion of any
judicial proceedings with respect thereto, each party and the Panel shall return
any documents produced by any other party, including all copies thereof. If a
party receives a discovery request in any other proceeding which would require
it to produce any documents produced to it by any other party in a proceeding
hereunder, it shall not produce such documents without first notifying the
producing party and giving said party reasonable time to respond, if
appropriate, to the discovery request.
4. Miscellaneous
A. Expedited Procedures
Any party to a Mediation may direct a request for an expedited
Mediation Hearing to the Chairman of the Mediation Committee, to the selected
Mediators, and to all other parties at any time. The Chairman of the Mediation
Committee, or at his or her direction, the then selected Mediators, shall grant
any request which is supported by good and sufficient reasons. If such a request
is granted, the Mediation shall be completed within as short a period as
practicable, as determined by the Chairman of the Mediation Committee or, at his
or her direction, the then selected Mediators.
Any party to an Arbitration may direct a request for expedited
proceedings to the Administrator, to the Panel, and to all other parties at any
time. The Administrator, or the Presiding Arbitrator if the Panel has been
selected, shall grant any such request which is supported by good and sufficient
reasons. If such a request is granted, the Arbitration shall be completed within
as short a time as practicable, as determined by the Administrator and/or the
Presiding Arbitrator.
B. Temporary Or Preliminary Injunctive Relief
Any party may seek temporary or preliminary injunctive relief with
the filing of a Complaint or at any time thereafter. If such relief is sought
prior to the time that an Arbitration Panel has been selected, then the
Administrator shall select a single Arbitrator who is a lawyer who has no
interest in the subject matter of the dispute, and no connection to any of the
parties, to hear and determine the request for temporary or preliminary
injunction. If such relief is sought after the time that an Arbitration Panel
has been selected, then the Arbitration Panel will hear and determine the
request. The request for temporary or preliminary injunctive relief will be
determined with reference to the temporary or preliminary injunction standards
set forth in Fed. R. Civ. P. 65.
<PAGE>
C. Defaults And Proceedings In The Absence Of A Party
Whenever a party fails to comply with the MDR Rules in a manner
deemed material by the Panel, the Panel shall fix a reasonable time for
compliance and, if the party does not comply within said period, the Panel may
enter an Order of default or afford such other relief as it deems appropriate.
Arbitration may proceed in the event of a default or in the absence of any party
who, after due notice, fails to be present or fails to obtain an extension. An
Award shall not be made solely on the default or absence of a party, but the
Panel shall require the party who is present to submit such evidence as the
Panel may require for the making of findings, determinations, conclusions, and
Awards.
D. Notice
Each party shall be deemed to have consented that any papers,
notices, or process necessary or proper for the initiation or continuation of a
proceeding under these rules or for any court action in connection therewith may
be served on a party by mail addressed to the party or its representative at its
last known address or by personal service, in or outside the state where the MDR
proceeding is to be held.
The Corporate Secretary and the parties may also use facsimile
transmission, telex, telegram, or other written forms of electronic
communication to give the notices required by these rules.
E. Expenses
The expenses of witnesses shall be paid by the party causing or
requesting the appearance of such witnesses. All expenses of the MDR proceeding,
including compensation, required travel and other reasonable expenses of the
Panel, and the cost of any proof produced at the direct request of the Panel,
shall be borne equally by the parties and shall be paid periodically on a timely
basis, unless they agree otherwise or unless the Panel in the Award assesses
such expenses, or any part thereof against any party (or parties). In
exceptional cases, the Panel may award reasonable attorneys' fees as an item of
expense, and the Panel shall promptly determine the amount of such fees based on
affidavits or such other proofs as the Panel deems sufficient.
F. Disqualification Or Disability Of A Panel Member
In the event that any Arbitrator of a Panel with more than one
Arbitrator should become disqualified, resign, die, or refuse or be unable to
perform or discharge his or her duties after the commencement of MDR but prior
to the rendition of an Award, and the parties are unable to agree upon a
replacement, the remaining Panel member(s):
i. shall designate a replacement, subject to the
right of any party to challenge such replacement for
cause.
ii. shall decide the extent to which previously held
hearings shall be repeated.
If the remaining Panel members consider the proceedings to have
progressed to a stage as to make replacement impracticable, the parties may
agree, as an alternative to the recommencement of the Mandatory Dispute
Resolution process, to resolution of the dispute by the remaining Panel members.
In the event that a single Arbitrator should become disqualified,
resign, die, or refuse or be unable to perform or discharge his or her duties
after the commencement of MDR but prior to the rendition of an Award, and the
parties are unable to agree upon a replacement, the Administrator shall appoint
a successor, subject to the right of any party to challenge such successor for
cause, and the successor shall decide the extent to which previously held
proceedings shall be repeated.
G. Amendments
These MMDR Rules may be altered or amended from time to time by the
affirmative vote of fifty-one (51) percent of the Plans and fifty-one (51)
percent of the total then current weighted vote of all the Plans.
H. Extensions of Time
Any time limit set forth in these Rules may be extended upon
agreement of the parties and approval of: (i) the Chairman of the Mediation
Committee if the proceeding is then in Mediation; (ii) the Administrator if the
proceeding is in Arbitration, but no Arbitration Panel has been selected; or
(iii) the Arbitration Panel, if the proceeding is in Arbitration and the
Arbitration Panel has been selected.
I. Intervention
The Plans, their Controlled Affiliates, and BCBSA, to the extent
subject to MMDR pursuant to their License Agreements, shall have the right to
move to intervene in any pending Arbitration. A written motion for intervention
shall be made to: (i) the Administrator, if the proceeding is in Arbitration,
but no Arbitration Panel has been selected; or (ii) the Arbitration Panel, if
the proceeding is in Arbitration and the Arbitration Panel has been selected.
The written motion for intervention shall be delivered to the BCBSA Corporate
Secretary (which shall also constitute service on the BCBSA if it is a
respondent) and to any Plan(s) and/or Controlled Affiliate(s) which are parties
to the proceeding. Any party to the proceeding can submit written objections to
the motion to intervene. The motion for intervention shall be granted upon good
cause shown. Intervention also may be allowed by stipulation of the parties to
the Arbitration proceeding. Intervention shall be allowed upon such terms as the
Arbitration Panel decides.
<PAGE>
J. BCBSA Assistance In Resolution of Disputes
The resources and personnel of the BCBSA may be requested by any
member Plan at any time to try to resolve disputes with another Plan.
K. Neutral Evaluation
The parties can voluntarily agree at any time to have an independent
party render a neutral evaluation of the parties' respective positions.
<PAGE>
EXHIBIT 5-A
MEDIATION COMMITTEE
REPORTS TO: Board of Directors
CHARGE: 1. Develop and implement processes for resolving misunderstandings
or disagreements between Plans or between Plans and
the Association under the following circumstances:
a. Matters at issue regarding relationships between
Plans or between Plans and the Association.
b. Matters at issue regarding relationships between
Plans or between Plans and the Association.
c. Matters at issue under the Inter-Plan Bank,
Reciprocity, and Transfer Programs.
d. Matters at issue regarding contractor selection or
performance under the Medicare Part A Program.
2. Determination of equalization allowances and/or cost allowances
under FEP shall not be considered by this Committee.
MEMBERSHIP: Six to Eight
STAFF: Senior Vice President and General Counsel
<PAGE>
BLUE SHIELD LICENSE AGREEMENT
This agreement by and between Blue Cross and Blue Shield Association
("BCBSA") and The Blue Shield Plan, known as ______________ (the "Plan").
Preamble
WHEREAS, the Plan and/or its predecessor(s) in interest
(collectively the "Plan") had the right to use the BLUE SHIELD and BLUE SHIELD
Design service marks (collectively the "Licensed Marks") for health care plans
in its service area, which was essentially local in nature;
WHEREAS, the Plan was desirous of assuring nationwide protection of
the Licensed Marks, maintaining uniform quality controls among Plans,
facilitating the provision of cost effective health care services to the public
and otherwise benefiting the public;
WHEREAS, to better attain such ends, the Plan and the predecessor of
BCBSA executed the Agreement(s) Relating to the Collective Service Mark "Blue
Shield"; and
WHEREAS, BCBSA and the Plan desire to supercede said Agreement(s) to
reflect their current practices and to assure the continued integrity of the
Licensed Marks and of the BLUE SHIELD system;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
<PAGE>
Agreement
1. BCBSA hereby grants to the Plan, upon the terms and conditions of
this License Agreement, the right to use BLUE SHIELD in its trade and/or
corporate name (the "Licensed Name"), and the right to use the Licensed Marks,
in the sale, marketing and administration of health care plans and related
services in the Service Area set forth and defined in paragraph 5 below. As used
herein, health care plans and related services shall include acting as a
nonprofit health care plan, a for-profit health care plan, or mutual health
insurer operating on a not-for-profit or for-profit basis, under state law;
financing access to health care services; providing health care management and
administration; administering, but not underwriting, non-health portions of
Worker's Compensation insurance; and delivering health care services.
2. The Plan may use the Licensed Marks and Name in connection with
the offering of: a) health care plans and related services in the Service Area
through Controlled Affiliates, provided that each such affiliate is separately
licensed to use the Licensed Marks and Name under the terms and conditions
contained in the Agreement attached as Exhibit 1 hereto (the "Controlled
Affiliate License Agreement"); and: b) insurance coverages offered by life
insurers under the applicable law in the Service Area, other than those which
the Plan may offer in its own name, provided through Controlled Affiliates,
provided that each such affiliate is separately licensed to use the Licensed
Marks and Name under the terms and conditions contained in the Agreement
attached as Exhibit 1A hereto (the "Controlled Affiliate License Agreement
Applicable to Life Insurance Companies") and further provided that the offering
of such services does not and will not dilute or tarnish the unique value of the
Licensed Marks and Name; and c) administration and underwriting of Workers'
Compensation Insurance Controlled Affiliates, provided that each such Affiliate
is separately licensed to use the Licensed Marks and Name under the terms and
conditions contained in the Agreement attached as Exhibit 1 hereto (the
"Controlled Affiliate License.") With respect to any HMO previously sublicensed
as provided in a License Addendum between BCBSA and the Plan, the Plan shall
have one (1) year from the date hereof to obtain execution of the direct license
required herein. As used herein, a Controlled Affiliate is defined as an entity
organized and operated in such a manner that it is subject to the bona fide
control of a Plan or Plans. Absent written approval by BCBSA of an alternative
method of control, bona fide control shall mean:
A. The legal authority, directly or indirectly through
wholly-owned subsidiaries: (a) to select members of
the Controlled Affiliate's governing body having not
less than 51% voting control thereof; (b) to exercise
operational control with respect to the governance
thereof; and (c) to prevent any change in its articles
of incorporation, bylaws or other governing documents
deemed inappropriate. In addition, a Plan or Plans
shall own at least 51% of any for-profit Controlled
Affiliate; or
B. The legal authority directly or indirectly through
wholly-owned subsidiaries (a) to select members of the
Affiliate's governing body having not less than 50%
voting control; (b) the legal ability to prevent any
change in the articles of incorporation, bylaws or
other establishing or governing documents of the
Affiliate with which it does not concur; (c) at least
equal control over the operations of the Affiliate;
and (d) to concur before the Affiliate can:
Amended as of November 16, 1995
-2-
<PAGE>
1. Change its legal and/or trade name;
2. Change the geographic area in which it operates;
3. Change the types of businesses in which it engages;
4. Take any action that Plan or BCBSA reasonably believes will adversely affect
the Licensed Marks or Names.
Amended as of November 17, 1994
-2a-
<PAGE>
3. The Plan may engage in activities not required by BCBSA to be
directly licensed through Controlled Affiliates and may indicate its
relationship thereto by use of the Licensed Name as a tag line, provided that
the engaging in such activities does not and will not dilute or tarnish the
unique value of the Licensed Marks and Name and further provided that such tag
line use is not in a manner likely to cause confusion or mistake. Consistent
with the avoidance of confusion or mistake, each tag line use of the Plan's
Licensed Name: (a) shall be in the style and manner specified by BCBSA from
time-to-time; (b) shall not include the design service marks; (c) shall not be
in a manner to import more than the Plan's mere ownership of the affiliate; and
(d) shall be restricted to the Service Area. No rights are hereby created in any
Controlled Affiliate to use the Licensed Name in its own name or otherwise. At
least annually, the Plan shall provide BCBSA with representative samples of each
such use of its Licensed Name pursuant to the foregoing conditions.
4. The Plan recognizes the importance of a comprehensive national
network of independent BCBSA licensees which are committed to strengthening the
Licensed Marks and Name. The Plan further recognizes that its actions within its
Service Area may affect the value of the Licensed Marks and Name nationwide. The
Plan agrees (a) to maintain in good standing its membership in BCBSA; (b)
promptly to pay its dues to BCBSA, said dues to represent the royalties for this
License Agreement; (c) materially to comply with all applicable laws; (d) to
comply with the Membership Standards of BCBSA, a current copy of which is
attached as Exhibit 2 hereto; and (e) reasonably to permit BCBSA, upon a
written, good faith request and during reasonable business hours, to inspect the
Plan's books and records necessary to ascertain compliance herewith. As to other
Plans and third parties, BCBSA shall maintain the confidentiality of all
documents and information furnished by the Plan pursuant hereto, or pursuant to
the Membership Standards, and clearly designated by the Plan as containing
proprietary information of the Plan.
5. The rights hereby granted are exclusive to the Plan within the
geographical area(s) served by the Plan on June 30, 1972, and/or as to which the
Plan has been granted a subsequent license, which is hereby defined as the
"Service Area," except that BCBSA reserves the right to use the Licensed Marks
in said Service Area, and except to the extent that said Service Area may
overlap areas served by one or more other licensed Blue Shield Plans as of said
date or subsequent license, as to which overlapping areas the rights hereby
granted are nonexclusive as to such other Plan or Plans only.
Amended as of September 19, 1996
-3-
<PAGE>
6. Except as expressly provided by BCBSA with respect to National
Accounts, Government Programs and certain other necessary and collateral uses,
the current rules and regulations governing which are attached as Exhibit 3 and
Exhibit 4 hereto, or as expressly provided herein, the Plan may not use the
Licensed Marks and Name outside the Service Area or in connection with other
goods and services, nor may the Plan use the Licensed Marks or Name in a manner
which is intended to transfer in the Service Area the goodwill associated
therewith to another mark or name. Nothing herein shall be construed to prevent
the Plan from engaging in lawful activity anywhere under other marks and names
not confusingly similar to the Licensed Marks and Name, provided that engaging
in such activity does and will not dilute or tarnish the unique value of the
Licensed Marks and Name.
7. The Plan agrees that it will display the Licensed Marks and
Name only in such form, style and manner as shall be specifically prescribed by
BCBSA from time-to-time in regulations of general application in order to
prevent impairment of the distinctiveness of the Licensed Marks and Name and the
goodwill pertaining thereto. The Plan shall cause to appear on all materials on
or in connection with which the Licensed Marks or Name are used such legends,
markings and notices as BCBSA may reasonably request in order to give
appropriate notice of service mark or other proprietary rights therein or
pertaining thereto.
8. BCBSA agrees that: (a) it will not grant any other license
effective during the term of this License Agreement for the use of the Licensed
Marks or Name which is inconsistent with the rights granted to the Plan
hereunder; and (b) it will not itself use the Licensed Marks in derogation of
the rights of the Plan or in a manner to deprive the Plan of the full benefits
of this License Agreement. The Plan agrees that it will not attack the title of
BCBSA in and to the Licensed Marks or Name or attack the validity of the
Licensed Marks or of this License Agreement. The Plan further agrees that all
use by it of the Licensed Marks and Name or any similar mark or name shall inure
to the benefit of BCBSA, and the Plan shall cooperate with BCBSA in effectuating
the assignment to BCBSA of any service mark or trademark registrations of the
Licensed Marks or any similar mark or name held by the Plan or a Controlled
Affiliate of the Plan, all or any portion of which registration consists of the
Licensed Marks.
-4-
<PAGE>
9. (a). Should the Plan fail to comply with the provisions of
paragraphs 2-4, 6, 7 and/or 12, and not cure such failure within thirty (30)
days of receiving written notice thereof (or commence curing such failure within
such thirty day period and continue diligent efforts to complete the curing of
such failure if such curing cannot reasonably be completed within such thirty
day period), BCBSA shall have the right to issue a notice that the Plan is in a
state of noncompliance. Except as to the termination of a Plan's License
Agreement or the merger of two or more Plans, disputes as to noncompliance, and
all other disputes between or among BCBSA, the Plan, other Plans and/or
Controlled Affiliates, shall be submitted promptly to mediation and mandatory
dispute resolution pursuant to the rules and regulations of BCBSA, a current
copy of which is attached as Exhibit 5 hereto, and shall be timely presented and
resolved. The mandatory dispute resolution panel shall have authority to issue
orders for specific performance and assess monetary penalties. If a state of
noncompliance as aforesaid is undisputed by the Plan or is found to exist by a
mandatory dispute resolution panel and is uncured as provided above, BCBSA shall
have the right to seek judicial enforcement of the License Agreement and/or to
issue a notice of termination thereof. Except, however, as provided in paragraph
15(a)(i)-(viii) below, no Plan's license to use the Licensed Marks and Name may
be finally terminated for any reason without the affirmative vote of
three-fourths of the Plans and three-fourths of the total then current weighted
vote of all the Plans.
(b). Notwithstandng any other provision of this
License Agreement, a Plan's license to use the Licensed Marks and Name may be
forthwith terminated by the affirmative vote of three-fourths of the Plans and
three-fourths of the total then current weighted vote of all the Plans at a
special meeting expressly called by BCBSA for the purpose on ten (10) days
written notice for: (i) failure to comply with any minimum capital or liquidity
requirement under the Membership Standard on Financial Responsibility; or (ii)
impending financial insolvency; or (iii) such other reason as is determined in
good faith immediately and irreparably to threaten the integrity and reputation
of BCBSA, the Plans and/or the Licensed Marks.
(c). To the extent not otherwise provided therein,
neither: (i) the Membership Standards; nor (ii) the rules and regulations
governing National Accounts, Government Programs and certain other uses; nor
(iii) the rules and regulations governing mediation and mandatory dispute
resolution, may be amended unless and until each such amendment is first adopted
by the affirmative vote of three-fourths of the Plans and of three-fourths of
the total then current weighted vote of all the Plans.
Amended as of November 17, 1994
-5-
<PAGE>
9. (d). The Plan may operate as a for-profit company on the
following conditions:
(i) The Plan shall discharge all responsibilities which it has to
the Association and to other Plans by virtue of this Agreement and the Plan's
membership in BCBSA.
(ii) The Plan shall not use the licensed Marks and Name, or any
derivative thereof, as part of its legal name or any symbol used to identify the
Plan in any securities market. The Plan shall use the licensed Marks and Name as
part of its trade name within its service area for the sale, marketing and
administration of health care and related services in the service area.
(iii) The Plan's license to use the Licensed Marks and Name shall
automatically terminate effective ten business days after: (a) any Person,
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of securities representing 20% or more of the voting power of
the Plan, unless such Person shall cease to be such a Beneficial Owner prior to
such automatic termination becoming effective; (b) individuals who at the time
the Plan went public constituted the Board of Directors of the Plan (together
with any new directors whose election to the Board was approved by a vote of 2/3
of the directors then still in office who were directors at the time the Plan
went public or whose election or nomination was previously so approved) (the
"Continuing Directors") cease for any reason to constitute a majority of the
Board of Directors; or (c) the Plan consolidates with or merges with or into any
person or conveys, assigns, transfers or sells all or substantially all of its
assets to any person other than a merger in which the Plan is the surviving
entity and immediately after which merger, no person or group beneficially owns
securities representing 20% or more of the voting power of the Plan: provided
that, if requested by the affected Plan prior to such automatic termination
becoming effective, the provisions of this paragraph 9(d)(iii) may be waived or
made conditional, in whole or in part, upon the affirmative vote of a majority
of the disinterested Plans and a majority of the total then current weighted
vote of the disinterested Plans.
In the event that the Plan's license to use the Licensed Marks and Name is
terminated pursuant to this Paragraph 9(d)(iii), the license may be reinstated
by BCBSA if, within 30 days of the date of such termination, the Plan
demonstrates that the Person referred to in the preceding sentence is no longer
the Beneficial Owner of securities representing 20% or more of the voting power
of the Plan.
Amended as of September 29, 1994
-5a-
<PAGE>
The Plan's license to use the Licensed Marks and Name may be terminated if any
Person, together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of securities representing 5% or more of the voting power of
the Plan and such Person's Beneficial Ownership is deemed in BCBSA's absolute
discretion, detrimental to the best interest of the Name and Marks; provided,
however that such termination shall become effective only upon the affirmative
vote of three-fourths of the disinterested Plans and three-fourths of the total
then current weighted vote of the disinterested Plans.
(iv) For purposes of paragraph 9(d)(iii), the following definitions
shall apply:
(a) "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule
12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended and in
effect on November 17, 1993 (the "Exchange Act").
(b) A Person shall be deemed the "Beneficial Owner" of
and shall be deemed to "beneficially own" any
securities:
(i) which such Person or any of such Person's
Affiliates or Associates beneficially owns, directly
or indirectly;
(ii) which such Person or any of such Person's
Affiliates or Associates has (A) the right to
acquire (whether such right is exercisable
immediately or only after the passage of time)
pursuant to any agreement, arrangement or
understanding, or upon the exercise of conversion
rights, exchange rights, warrants or options, or
otherwise; or (B) the right to vote pursuant to any
agreement, arrangement or understanding; provided,
however, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, any
security if the agreement, arrangement or
understanding to vote such security (1) arises
solely from a revocable proxy or consent given to
such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance
with, the applicable rules and regulations
promulgated under the Exchange Act and (2) is not
also then reportable on Schedule 13D under the
Exchange Act (or any comparable or successor
report); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or
Associate thereof) with which such Person (or any of
such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (other than
customary agreements with and between
Amended as of September 29, 1994
-5b-
<PAGE>
underwriters and selling group members with respect
to a bona fide public offering of securities)
relating to the acquisition, holding, voting (except
to the extent contemplated by the proviso to
(b)(ii)(B) above) or disposing of any securities of
the Plan.
Notwithstanding anything in this definition of
Beneficial Ownership to the contrary, the phrase
"then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the
Plan, shall mean the number of such securities then
issued and outstanding together with the number of
such securities not then actually issued and
outstanding which such Person would be deemed to own
beneficially hereunder.
(c) "Person" shall mean any individual, firm,
partnership, corporation, trust, association, joint
venture or other entity, and shall include any
successor (by merger or otherwise) or such entity.
Amended as of September 29, 1994
-5c-
<PAGE>
10. This License Agreement shall remain in effect: (a) until
terminated as provided herein; or (b) until this and all such other License
Agreements are terminated by the affirmative vote of three-fourths of the Plans
and three-fourths of the total then current weighted vote of all the Plans; or
(c) until terminated by the Plan upon six (6) months written notice to BCBSA.
11. Except as otherwise provided in paragraph 15 below or by the
affirmative vote of three-fourths of the Plans and three-fourths of the total
then current weighted vote of all the Plans, or unless this and all such other
License Agreements are simultaneously terminated by force of law, the
termination of this License Agreement for any reason whatsoever shall cause the
reversion to BCBSA of all rights in and to the Licensed Marks and Name, and the
Plan agrees that it will promptly discontinue all use of the Licensed Marks and
Name, will not use them thereafter, and will promptly, upon written notice from
BCBSA, change its corporate name so as to eliminate the Licensed Name therefrom.
12. The license hereby granted to Plan to use the Licensed Marks and
Name is and shall be personal to the Plan so licensed and shall not be
assignable by any act of the Plan, directly or indirectly, without the written
consent of BCBSA. Said license shall not be assignable by operation of law, nor
shall Plan mortgage or part with possession or control of this license or any
right hereunder, and the Plan shall have no right to grant any sublicense to use
the Licensed Marks and Name.
13. BCBSA shall maintain appropriate service mark registrations of
the Licensed Marks and BCBSA shall take such lawful steps and proceedings as may
be necessary or proper to prevent use of the Licensed Marks by any person who is
not authorized to use the same. Any actions or proceedings undertaken by BCBSA
under the provisions of this paragraph shall be at BCBSA's sole cost and
expense. BCBSA shall have the sole right to determine whether or not any legal
action shall be taken on account of unauthorized use of the Licensed Marks, such
right not to be unreasonably exercised. The Plan shall report any unlawful usage
of the Licensed Marks to BCBSA in writing and agrees, free of charge, to
cooperate fully with BCBSA's program of enforcing and protecting the service
mark rights, trade name rights and other rights in the Licensed Marks.
-6-
<PAGE>
14. The Plan hereby agrees to save, defend, indemnify and hold BCBSA
and any other Plan(s) harmless from and against all claims, damages, liabilities
and costs of every kind, nature and description which may arise exclusively and
directly as a result of the activities of the Plan. BCBSA hereby agrees to save,
defend, indemnify and hold the Plan and any other Plan(s) harmless from and
against all claims, damages, liabilities and costs of every kind, nature and
description which may arise exclusively and directly as a result of the
activities of BCBSA.
15. (a). This Agreement shall automatically terminate upon the
occurrence of any of the following events: (i) a voluntary petition shall be
filed by the Plan or by BCBSA seeking bankruptcy, reorganization, arrangement
with creditors or other relief under the bankruptcy laws of the United States or
any other law governing insolvency or debtor relief, or (ii) an involuntary
petition or proceeding shall be filed against the Plan or BCBSA seeking
bankruptcy, reorganization, arrangement with creditors or other relief under the
bankruptcy laws of the United States or any other law governing insolvency or
debtor relief and such petition or proceeding is consented to or acquiesced in
by the Plan or BCBSA or is not dismissed within sixty (60) days of the date upon
which the petition or other document commencing the proceeding is served upon
the Plan or BCBSA respectively, or(iii) an order for relief is entered against
the Plan or BCBSA in any case under the bankruptcy laws of the United States, or
the Plan or BCBSA is adjudged bankrupt or insolvent (as that term is defined in
the Uniform Commercial Code as enacted in the state of Illinois) by any court of
competent jurisdiction, or (iv) the Plan or BCBSA makes a general assignment of
its assets for the benefit of creditors, or (v) the Department of Insurance or
other regulatory agency assumes control of the Plan or delinquency proceedings
(voluntary or involuntary) are instituted, or (vi) an action is brought by the
Plan or BCBSA seeking its dissolution or liquidation of its assets or seeking
the appointment of a trustee, interim trustee, receiver or other custodian for
any of its property or business, or (vii) an action is instituted against the
Plan or BCBSA seeking its dissolution or liquidation of its assets or seeking
appointment of a trustee, interim trustee, receiver or other custodian for any
of its property or business and such action is consented to or acquiesced in by
the Plan or BCBSA or is not dismissed within sixty (60) days of the date upon
which the pleading or other document commencing the action is served upon the
Plan or BCBSA respectively, or(viii) a trustee, interim trustee, receiver or
other custodian for any of the Plan's or BCBSA's property or business is
appointed, or (ix) the Plan shall fail to pay its dues and shall not cure such
failure within thirty (30) days of receiving written notice thereof.
Amended November 21, 1996
-7-
<PAGE>
(b). BCBSA, or the Plans (as provided and in addition to the rights
conferred in Paragraph 10(b) above), may terminate this Agreement immediately
upon written notice upon the occurrence of either of the following events: (a)
the Plan or BCBSA becomes insolvent (as that term is defined in the Uniform
Commercial Code enacted in the state of Illinois), or (b) any final judgment
against the Plan or BCBSA remains unsatisfied or unbonded of record for a period
of sixty (60) days or longer.
(c). If this License Agreement is terminated as to BCBSA for any
reason stated in subparagraphs 15(a) and (b) above, the ownership of the
Licensed Marks shall revert to each of the Plans.
(d). Upon termination of this License Agreement or any Controlled
Affiliate License Agreement of a Larger Affiliate, as defined in Exhibit 1 to
this License Agreement:
(i) The terminated entity shall send a
notice through the U.S. mails, with
first class postage affixed, to all
individual and group customers,
providers, brokers and agents of
products or services sold, marketed,
underwritten or administered by the
terminated entity or its Controlled
Affiliates under the Licensed Marks and
Name. The form and content of the
notice shall be specified by BCBSA and
shall, at a minimum, notify the
recipient of the termination of the
license, the consequences thereof, and
instructions for obtaining alternate
products or services licensed by BCBSA.
This notice shall be mailed within 15
days after termination or, if
termination is pursuant to paragraph
10(d) of this Agreement, within 15 days
after the written notice to BCBSA
described in paragraph 10(d).
(ii) The terminated entity shall deliver to
BCBSA within five days of a request by
BCBSA a listing of national accounts in
which the terminated entity is involved
(in a Control, Participating or
Servicing capacity), identifying the
national account and the terminated
entity's role therein. For those
accounts where the terminated entity is
the Control Plan, the Plan must also
indicate the Participating and
Servicing Plans in the national account
syndicate.
Amended as of September 19, 1996
-8-
<PAGE>
(iii) Unless the cause of termination
is an event stated in paragraph
15(a) or (b) above respecting
BCBSA, the Plan and its Licensed
Controlled Affiliates shall be
jointly liable for payment to
BCBSA of an amount equal to $25
multiplied by the number of
Licensed Enrollees of the
terminated entity and its
Licensed Controlled Affiliates;
provided that if any other Plan
is permitted by BCBSA to use
marks or names licensed by BCBSA
in the Service Area established
by this Agreement, the payment
shall be multiplied by a
fraction, the numerator of which
is the number of Licensed
Enrollees of the terminated
entity and its Licensed
Controlled Affiliates and the
denominator of which is the total
number of Licensed Enrollees in
the Service Area. Licensed
Enrollee means each and every
person and covered dependent who
is enrolled as an individual or
member of a group receiving
products or services sold,
marketed or administered under
marks or names licensed by BCBSA
as determined at the earlier of
(a) the end of the last fiscal
year of the terminated entity
which ended prior to termination
or (b) the fiscal year which
ended before any transactions
causing the termination began.
Notwithstanding the foregoing,
the amount payable pursuant to
this subparagraph (d)(iii) shall
be due only to the extent that,
in BCBSA's opinion, it does not
cause the net worth of the Plan
to fall below 100% of the capital
benchmark formula or its
equivalent under any successor
formula, as set forth in the
applicable financial
responsibility standards
established by BCBSA, measured as
of the date of termination and
adjusted for the value of any
transactions not made in the
ordinary course of business.
(iv) BCBSA shall have the right to
audit the books and records of
the terminated entity and its
Licensed Controlled Affiliates to
verify compliance with this
paragraph 15(d).
Amended as of September 19, 1996
-8a-
<PAGE>
(v) As to a breach of 15 (d) (i),
(ii), (iii) or (iv), the parties
agree that the obligations are
immediately enforceable in a
court of competent jurisdiction.
As to a breach of 15 (d) (i),
(ii) or (iv) by the Plan, the
parties agree there is no
adequate remedy at law and BCBSA
is entitled to obtain specific
performance.
(e). BCBSA shall be entitled to enjoin the Plan or any related
party in a court of competent jurisdiction from entry into any transaction which
would result in a termination of this License Agreement unless the License
Agreement has been terminated pursuant to paragraph 10 (d) of this Agreement
upon the required six (6) month written notice.
(f). BCBSA acknowledges that it is not the owner
of assets of the Plan.
16. This Agreement supersedes any and all other agreements between
the parties with respect to the subject matter herein, and contains all of the
covenants and agreements of the parties as to the licensing of the Licensed
Marks and Name. This Agreement may be amended only by a signed writing, the form
of which shall have been approved by the affirmative vote of three-fourths of
the Plans and three-fourths of the total then current weighted vote of all the
Plans.
17. If any provision or any part of any provision of this Agreement
is judicially declared unlawful, each and every other provision, or any part of
any provision, shall continue in full force and effect notwithstanding such
judicial declaration.
18. No waiver by BCBSA or the Plan of any breach or default in
performance on the part of BCBSA or the Plan or any other licensee of any of the
terms, covenants or conditions of this Agreement shall constitute a waiver of
any subsequent breach or default in performance of said terms, covenants or
conditions.
19. All notices provided for hereunder shall be in writing and shall
be sent in duplicate by regular mail to BCBSA or the Plan at the address
currently published for each by BCBSA and shall be marked respectively to the
attention of the President and, if any, the General Counsel, of BCBSA or the
Plan.
Amended as of September 19, 1996
-8b-
<PAGE>
20. Nothing herein contained shall be construed to constitute the
parties hereto as partners or joint venturers, or either as the agent of the
other, and Plan shall have no right to bind or obligate BCBSA in any way, nor
shall it represent that it has any right to do so. BCBSA shall have no liability
to third parties with respect to any aspect of the business, activities,
operations, products, or services of the Plan.
21. This Agreement shall be governed, construed and interpreted in
accordance with the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties have caused this License Agreement to be
executed, effective as of the date of last signature written below.
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By_______________________________
Title____________________________
Date_____________________________
_________________________________
By_______________________________
Title____________________________
Date_____________________________
-9-
<PAGE>
-20-
EXHIBIT 1
BLUE SHIELD
AFFILIATE LICENSE AGREEMENT
This Agreement by and among Blue Cross and Blue Shield Association
("BCBSA") and _______________________________________________ ("Affiliate"), an
affiliate of the Blue Shield Plan(s), known as _____________________ ("Plan"),
which is also a Party signatory hereto.
WHEREAS, BCBSA is the owner of the BLUE SHIELD and BLUE SHIELD
Design service marks;
WHEREAS, Plan and Affiliate desire that the latter be entitled to
use the BLUE SHIELD and BLUE SHIELD Design service marks (collectively the
"Licensed Marks") as service marks and be entitled to use the term BLUE SHIELD
in a trade name ("Licensed Name");
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. GRANT OF LICENSE
Subject to the terms and conditions of this Agreement, BCBSA hereby
grants to Affiliate the right to use the Licensed Marks and Name in connection
with, and only in connection with: (i) health care plans and related services
and administering the non-health portion of workers' compensation insurance, and
(ii) underwriting the indemnity portion of workers' compensation insurance,
provided that Affiliate's total premium revenue comprises less than 15 percent
of the sponsoring Plan's net subscription revenue.
This grant of rights is non-exclusive and is limited to the Service Area served
by the Plan. Affiliate may not use the Licensed Marks and Name in its legal name
and may use the Licensed Marks and Name in its Trade Name only with the prior
consent of BCBSA.
2. QUALITY CONTROL
A. Affiliate agrees to use the Licensed Marks and Name only in
connection with the licensed services and further agrees to be bound by the
conditions regarding quality control shown in attached Exhibit A as they may be
amended by BCBSA from time-to-time.
<PAGE>
B. Affiliate agrees to comply with all applicable federal, state and
local laws.
C. Affiliate agrees that it will provide on an annual basis (or more
often if reasonably required by Plan or by BCBSA) a report or reports to Plan
and BCBSA demonstrating Affiliate's compliance with the requirements of this
Agreement including but not limited to the quality control provisions of this
paragraph and the attached Exhibit A.
D. Affiliate agrees that Plan and/or BCBSA may, from time-to-time,
upon reasonable notice, review and inspect the manner and method of Affiliate's
rendering of service and use of the Licensed Marks and Name.
E. As used herein, an Affiliate is defined as an entity organized
and operated in such a manner, that it meets the following requirements:
(1) If the Plan has 50 percent of the voting control of the Affiliate:
(a) the Plan must have the legal ability to prevent any change in
the articles of incorporation, bylaws or other establishing or
governing documents of the Affiliate with which it does not concur;
(b) the Plan must have at least equal control over the operations of
the Affiliate;
(c) the Plan must concur in writing before the Affiliate can:
(i) change its legal and/or trade names;
(ii) change the geographic area in which it
operates;
(iii) change the fundamental type(s) of business
in which it engages;
(iv) take any action that Plan or BCBSA
reasonably believes will adversely affect
the Licensed Marks and Name.
(2) If the Plan has more than 50 percent voting control of the
Affiliate:
(a) the Plan must have the legal ability to prevent any change in
the articles of incorporation, bylaws or other establishing or governing
documents of the Affiliate with which it does not concur;
<PAGE>
(b) the Plan must have control over the policy and operations of
the Affiliate.
3. SERVICE MARK USE
A. Affiliate shall at all times make proper service mark use of the
Licensed Marks and Name, including but not limited to use of such symbols or
words as BCBSA shall specify to protect the Licensed Marks and Name and shall
comply with such rules (generally applicable to Affiliates licensed to use the
Licensed Marks and Name) relative to service mark use, as are issued from
time-to-time by BCBSA. Affiliate recognizes and agrees that all use of the
Licensed Marks and Name by Affiliate shall inure to the benefit of BCBSA.
B. Affiliate may not directly or indirectly use the Licensed Marks
and Name in a manner that transfers or is intended to transfer in the Service
Area the goodwill associated therewith to another mark or name, nor may
Affiliate engage in activity that may dilute or tarnish the unique value of the
Licensed Marks and Name.
C. If Affiliate meets the standards of 2E(1) but not 2E(2) above and
any of Affiliate's advertising or promotional material is reasonably determined
by BCBSA and/or the Plan to be in contravention of rules and regulations
governing the use of the Licensed Marks and Name, Affiliate shall for ninety
(90) days thereafter obtain prior approval from BCBSA of advertising and
promotional efforts using the Licensed Marks and Name, approval or disapproval
thereof to be forthcoming within five (5) business days of receipt of same by
BCBSA or its designee. In all advertising and promotional efforts, Affiliate
shall observe the Service Area limitations applicable to Plan.
D. Affiliate shall use its best efforts in the Service Area to
promote and build the value of the Licensed Marks and Name.
4. SUBLICENSING AND ASSIGNMENT
Affiliate shall not sublicense, transfer, hypothecate, sell,
encumber or mortgage, by operation of law or otherwise, the rights granted
hereunder and any such act shall be voidable at the sole option of Plan or
BCBSA. This Agreement and all rights and duties hereunder are personal to
Affiliate.
5. INFRINGEMENT
Affiliate shall promptly notify Plan and Plan shall promptly notify
BCBSA of any suspected acts of infringement, unfair competition or passing off
that may occur in relation to the Licensed Marks and Name. Affiliate shall not
be entitled
<PAGE>
to require Plan or BCBSA to take any actions or institute any proceedings to
prevent infringement, unfair competition or passing off by third parties.
Affiliate agrees to render to Plan and BCBSA, without charge, all reasonable
assistance in connection with any matter pertaining to the protection of the
Licensed Marks and Name by BCBSA.
6. LIABILITY INDEMNIFICATION
Affiliate and Plan hereby agree to save, defend, indemnify and hold
BCBSA harmless from and against all claims, damages, liabilities and costs of
every kind, nature and description (except those arising solely as a result of
BCBSA's negligence) that may arise as a result of or related to Affiliate's
rendering of services under the Licensed Marks and Name.
7. LICENSE TERM
A. Except as otherwise provided herein, the license granted by this
Agreement shall remain in effect for a period of one (1) year and shall be
automatically extended for additional one (1) year periods upon evidence
satisfactory to the Plan and BCBSA that Affiliate meets the then applicable
quality control standards.
B. This Agreement and all of Affiliate's rights hereunder shall
immediately terminate without any further action by any party or entity in the
event that Plan ceases to be authorized to use the Licensed Marks and Name.
C. Notwithstanding any other provision of this Agreement, this
license to use the Licensed Marks and Name may be forthwith terminated by the
Plan or the affirmative vote of the majority of the Board of Directors of BCBSA
present and voting at a special meeting expressly called by BCBSA for the
purpose on ten (10) days written notice for: (1) failure to comply with any
applicable minimum capital or liquidity requirement under the quality control
standards of this Agreement; or (2) failure to comply with the "Organization and
Governance" quality control standard of this Agreement; or (3) impending
financial insolvency; or (4) for a Smaller Affiliate (as defined in Exhibit A),
failure to comply with any of the applicable requirements of Standards 2, 3, 4,
5 or 7 of attached Exhibit A; or (5) such other reason as is determined in good
faith immediately and irreparably to threaten the integrity and reputation of
BCBSA, the Plans, any other licensee including Affiliate and/or the Licensed
Marks and Name.
<PAGE>
D. Except as otherwise provided in Paragraphs 7(B), 7(C) or 7(E)
herein, should Affiliate fail to comply with the provisions of this Agreement
and not cure such failure within thirty (30) days of receiving written notice
thereof (or commence a cure within such thirty day period and continue diligent
efforts to complete the cure if such curing cannot reasonably be completed
within such thirty day period) BCBSA or the Plan shall have the right to issue a
notice that the Affiliate is in a state of noncompliance. If a state of
noncompliance as aforesaid is undisputed by the Affiliate or is found to exist
by a mandatory dispute resolution panel and is uncured as provided above, BCBSA
shall have the right to seek judicial enforcement of the Agreement or to issue a
notice of termination thereof. Notwithstanding any other provisions of this
Agreement, any disputes as to the termination of this License pursuant to
Paragraphs 7(B), 7(C) or 7(E) of this Agreement shall not be subject to
mediation and mandatory dispute resolution. All other disputes between BCBSA,
the Plan and/or Affiliate shall be submitted promptly to mediation and mandatory
dispute resolution. The mandatory dispute resolution panel shall have authority
to issue orders for specific performance and assess monetary penalties. Except,
however, as provided in Paragraphs 7(B) and 7(E) of this Agreement, this license
to use the Licensed Marks and Name may not be finally terminated for any reason
without the affirmative vote of a majority of the present and voting members of
the Board of Directors of BCBSA.
E. This Agreement and all of Affiliate's rights hereunder shall
immediately terminate without any further action by any party or entity in the
event that:
(1) Affiliate shall no longer comply with item 2(E) above;
(2) Appropriate dues, royalties and other payments for Affiliate
pursuant to paragraph 9 hereof, which are the royalties for this License
Agreement, are more than sixty (60) days in arrears to BCBSA; or
(3) Any of the following events occur: (i) a voluntary petition
shall be filed by Affiliate seeking bankruptcy, reorganization, arrangement with
creditors or other relief under the bankruptcy laws of the United States or any
other law governing insolvency or debtor relief, or (ii) an involuntary petition
or proceeding shall be filed against Affiliate seeking bankruptcy,
reorganization, arrangement with creditors or other relief under the bankruptcy
laws of the United States of any other law governing insolvency or debtor relief
and such petition or proceeding is consented to or acquiesced in by Affiliate or
is not dismissed within sixty (60) days of the date upon which it was filed, or
(iii) an order for relief is entered against Affiliate in any case under the
bankruptcy laws of the United States, or Affiliate is adjudged bankrupt or
insolvent as those terms are defined in the Uniform Commercial Code as enacted
in the State of Illinois
<PAGE>
by any court of competent jurisdiction, or (iv) Affiliate makes a general
assignment of its assets for the benefit of creditors, or (v) the Department of
Insurance or other regulatory agency assumes control of Affiliate or delinquency
proceedings (voluntary or involuntary) are instituted, or (vi) an action is
brought by Affiliate seeking its dissolution or liquidation of its assets or
seeking the appointment of a trustee, interim trustee, receiver or other
custodian for any of its property or business, or (vii) an action is instituted
against Affiliate seeking its dissolution or liquidation of its assets or
seeking the appointment of a trustee, interim trustee, receiver or other
custodian for any of its property or business and such action is consented to or
acquiesced in by Affiliate or is not dismissed within sixty (60) days of the
date upon which it was instituted, or (viii) a trustee, interim trustee,
receiver or other custodian for any of Affiliate's property or business is
appointed.
F. Upon termination of this Agreement for cause or otherwise,
Affiliate agrees that it shall immediately discontinue all use of the Licensed
Marks and Name, including any use in its trade name.
G. Upon termination of this Agreement, Affiliate shall immediately
notify all of its customers that it is no longer a licensee of BCBSA and, if
directed by the Association's Board of Directors, shall provide instruction on
how the customer can contact BCBSA or a designated licensee to obtain further
information on securing coverage. The notification required by this paragraph
shall be in writing and in a form approved by BCBSA. The BCBSA shall have the
right to audit the terminated entity's books and records to verify compliance
with this paragraph.
H. In the event that the Plan has more than 50 percent voting
control of the Affiliate under Paragraph 2(E)(2) above and is a Larger Affiliate
(as defined in Exhibit A), then the vote called for in Paragraphs 7(C) and 7(D)
above shall require the affirmative vote of three-fourths of the Blue Shield
Plans which are Regular Members of BCBSA and three-fourths of the total then
current weighted vote of all the Blue Shield Plans which are Regular Member
Plans of BCBSA.
8. DISPUTE RESOLUTION
The parties agree that any disputes between them or between or among
either of them and one or more Plans or Affiliates of Plans that use in any
manner the Blue Cross and Blue Shield Marks and Name are subject to the
Mediation and Mandatory Dispute Resolution process attached to and made a part
of Plan's License from BCBSA to use the Licensed Marks and Name as Exhibits 5,
5A and 5B as amended from time-to-time, which documents are incorporated herein
by reference as though fully set forth herein.
<PAGE>
9. LICENSE FEE
Affiliate will pay to BCBSA a fee for this License determined
pursuant to the formula(s) set forth in Exhibit B.
10. JOINT VENTURE
Nothing contained in the Agreement shall be construed as creating a
joint venture, partnership, agency or employment relationship between Plan and
Affiliate or between either and BCBSA.
11. NOTICES AND CORRESPONDENCE
Notices regarding the subject matter of this Agreement or breach or
termination thereof shall be in writing and shall be addressed in duplicate to
the last known address of each other party, marked respectively to the attention
of its President and, if any, its General Counsel.
12. COMPLETE AGREEMENT
This Agreement contains the complete understandings of the parties
in relation to the subject matter hereof. This Agreement may only be amended by
a writing executed by all parties hereto or by the vote of three-fourths of the
Plans and three-fourths of the total then current weighted vote of all the
Plans.
13. SEVERABILITY
If any term of this Agreement is held to be unlawful by a court of
competent jurisdiction, such findings shall in no way affect the remaining
obligations of the parties hereunder and the court may substitute a lawful term
or condition for any unlawful term or condition so long as the effect of such
substitution is to provide the parties with the benefits of this Agreement.
14. NONWAIVER
No waiver by BCBSA of any breach or default in performance on the
part of Affiliate or any other licensee of any of the terms, covenants or
conditions of this Agreement shall constitute a waiver of any subsequent breach
or default in performance of said terms, covenants or conditions.
<PAGE>
15. GOVERNING LAW
This Agreement shall be governed by, and construed and interpreted
in accordance with, the laws of the State of Illinois.
16. HEADINGS
The headings inserted in this agreement are for convenience only and
shall have no bearing on the interpretation hereof.
IN WITNESS WHEREOF, the parties have caused this License Agreement
to be executed and effective as of the date of last signature written below.
Affiliate
By:_______________________________________
Date:_____________________________________
Plan
By:_______________________________________
Date:_____________________________________
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By:_______________________________________
Date:_____________________________________
<PAGE>
EXHIBIT A
AFFILIATE LICENSE STANDARDS
June 1996
PREAMBLE
The standards for licensing affiliates are established by BCBSA and are subject
to change from time-to-time upon the affirmative vote of three-fourths (3/4) of
the Plans and three-fourths (3/4) of the total weighted vote. Each licensed Plan
is required to use a standard affiliate license form provided by BCBSA and to
cooperate fully in assuring that the licensed affiliate maintains compliance
with the license standards.
The Affiliate License provides a flexible vehicle to accommodate the potential
range of health and workers' compensation related products and services Plan
affiliates provide. The Affiliate License collapses former health affiliate
licenses (HCC, HMO, PPO, TPA, and IDS) into a single license using the following
business-based criteria to provide a framework for license standards:
o Percent of affiliate controlled by parent: Greater than 50 percent or 50
percent?
o Risk assumption: yes or no?
o Medical care delivery: yes or no?
o Importance of the affiliate to the parent: If the affiliate has health or
workers' compensation administration business, does such business
constitute 15 percent or more (referred to as a "larger" affiliate) of the
parent's and other licensed health subsidiaries' contract enrollment?
<PAGE>
EXHIBIT A (continued)
For purposes of definition:
o A "smaller affiliate:" (1) comprises less than fifteen percent (15%) of
Plan's and its licensed affiliates' total contract enrollment (as reported
on the BCBSA Quarterly Enrollment Report, excluding rider and freestanding
coverage, and treating an entity seeking licensure as licensed);* or (2)
underwrites the indemnity portion of workers' compensation insurance and
has total premium revenue less than 15 percent of the sponsoring Plan's
net subscription revenue.
o A "larger affiliate" comprises fifteen percent (15%) or more of Plan's and
its licensed affiliates' total contract enrollment (as reported on the
BCBSA Quarterly Enrollment Report, excluding rider and freestanding
coverage, and treating an entity seeking licensure as licensed.)*
Conversion to the new license shall be:
o For smaller affiliates:
- immediately for new applicants, and
- January 1, 1996 for existing HMO, PPO, TPA and IDS licensees
under fifteen percent (15%).
o For larger affiliates:
- immediately for new applicants,
- July 1, 1995 for existing health coverage carrier licensees, and
- June 1996, for all other currently licensed affiliates presently at
or over fifteen percent(15%).
Changes in affiliate status:
If any affiliate's status changes regarding: its Plan ownership level, its risk
acceptance or direct delivery of medical care, the affiliate shall notify BCBSA
within thirty (30) days of such occurrence in writing and come into compliance
with the applicable standards within six (6) months.
If a smaller affiliate's health and workers' compensation administration
business surpasses fifteen percent (15%) of the total contract enrollment of the
Plan and licensed affiliates, the affiliate shall:
<PAGE>
EXHIBIT A (continued)
1. Within thirty (30) days, notify BCBSA of this fact in writing, including
evidence that the affiliate meets the minimum liquidity and capital (BCBSA
Capital Benchmark and state-established minimum reserve) requirements of
the larger affiliate Financial Responsibility standard; and
2. Within six (6) months after surpassing the fifteen percent (15%)
threshold, demonstrate compliance with all license requirements for a
larger affiliate.
If an affiliate that underwrites the indemnity portion of workers' compensation
insurance receives a change in rating or proposed change in rating, the
affiliate shall notify BCBSA within 30 days of notification by the external
rating agency.
- -----------
*For purposes of this calculation,
The numerator equals:
Applicant affiliate's contract enrollment, as defined in BCBSA's Quarterly
Enrollment Report (excluding rider and freestanding coverage).
The denominator equals:
Numerator PLUS Plan and all other licensed affiliates' contract enrollment, as
reported in BCBSA's Quarterly Enrollment Report (excluding rider and
freestanding coverage).
<PAGE>
EXHIBIT A (continued)
STANDARDS FOR LICENSED AFFILIATES
Each affiliate seeking licensure must answer all four questions. Depending
on the affiliate's answers, certain standards apply:
1. What percent of the affiliate is controlled by the parent Plan?
More than 50% 50%
(arrow down) (arrow down)
Standard 1A, 4 Standard 1B, 4
IN ADDITION,
2. Is risk being assumed?
<TABLE>
<CAPTION>
Yes No
(arrows down) (arrows down)
<S> <C>
Affiliate Affiliate Affiliate Affiliate comprises Affiliate
underwrites comprises (less than)15% comprises (greater than (less than)15% of total comprises (greater
any indemnity of total contract or equal to)15% contract than or equal to)15%
portion of enrollment of of total contract enrollment of Plan of total contract
workers' Plan and its enrollment of and its licensed enrollment of
compensation licensed affiliates, Plan and its affiliates Plan and its
insurance and does not licensed affiliates, (arrow down) licensed affiliates
(arrow down) underwrite the and does not Standard 2 (arrow down)
Standards indemnity portion underwrite the (Guidelines 2.1, 2.3) Standard 6H
7A-7E of workers' indemnity portion
compensation of workers'
insurance compensation
(arrow down) insurance
Standard 2 (arrow down)
(Guidelines 2.1, 2.2) Standard 6H
</TABLE>
IN ADDITION,
3. Is medical care being directly provided?
Yes No
(arrow down) (arrow down)
Standard 3A Standard 3B
IN ADDITION,
4. If the affiliate has health or workers' compensation administration
business, does such business comprise 15% or more of the total contract
enrollment of Plan and its licensed affiliates?
Yes No
(arrow down) (arrows down)
Standards 6A-6I Affiliate is a Affiliate is
former primary not a former
licensee primary licensee
(arrow down) (arrow down)
Standards 5,8,9 Standards 5,8
<PAGE>
EXHIBIT A (continued)
Standard 1 - Organization and Governance
1A.) The Standard for more than 50% Plan ownership is:
An affiliate shall be organized and operated in such a manner that it is
controlled by a licensed Plan or Plans which have, directly or indirectly: 1)
more than 50% of the voting control of the affiliate; and 2) the legal ability
to prevent any change in the articles of incorporation, bylaws or other
establishing or governing documents of the affiliate with which it does not
concur; and 3) operational control of the affiliate.
1B.) The Standard for 50% Plan ownership is:
An affiliate shall be organized and operated in such a manner that a licensed
Plan or Plans have directly or indirectly:
1) not less than 50% of the voting control of the affiliate; and
2) the legal ability to prevent any change in the articles of
incorporation, bylaws or other establishing or governing documents
of the affiliate with which it does not concur; and
3) at least equal direct or indirect control over the operations of the
affiliate; and
4) sufficient authority so that changes in the following require the
approval of the Licensed Plan or Plans:
o geographic operating area of the affiliate
o the legal and trade names of the affiliate
o the types of activity in which the affiliate engages
o any action which would cause the affiliate to be in
violation of the Standards applicable to Licensure by
BCBSA.
<PAGE>
EXHIBIT A (continued)
Standard 2 - Financial Responsibility
An affiliate shall be operated in a manner that provides reasonable financial
assurance that it can fulfill all of its contractual obligations to its
customers. If a risk-assuming affiliate ceases operations for any reason, Blue
Cross and/or Blue Shield Plan coverage will be offered to all affiliate
subscribers without exclusions, limitations or conditions based on health
status. If a nonrisk-assuming affiliate ceases operations for any reason,
sponsoring Plan(s) will provide for services to its (their) customers.
Standard 3 - State Licensure/Certification
3A.) The Standard for an affiliate that employs, owns or contracts on a
substantially exclusive basis for medical services is:
An affiliate shall maintain unimpaired licensure or certification for its
medical care providers to operate under applicable state laws.
3B.) The Standard for an affiliate that does not employ, own or contract
on a substantially exclusive basis for medical services is:
An affiliate shall maintain unimpaired licensure or certification to operate
under applicable state laws.
Standard 4 - Certain Disclosures
An affiliate shall make adequate disclosure in contracting with third parties
and in disseminating public statements of 1) the structure of the Blue Cross and
Blue Shield System; and 2) the independent nature of every licensee; and 3) the
affiliate's financial condition.
Standard 5 - Reports and Records for Certain Smaller Affiliates
For a smaller affiliate that does not underwrite the indemnity portion of
workers' compensation insurance, the Standard is:
An affiliate and/or its licensed Plan(s) shall furnish, on a timely and accurate
basis, reports and records relating to these Standards and the License
Agreements between BCBSA and affiliate.
<PAGE>
EXHIBIT A (continued)
Standard 6 - Other Standards for Larger Affiliates
Standards 6(A) - (I) that follow apply to larger affiliates.
Standard 6(A): Board of Directors
An affiliate Governing Board shall act in the interest of its Corporation in
providing cost-effective health care services to its customers. An affiliate
shall maintain a governing Board, which shall control the affiliate, composed of
a majority of persons other than providers of health care services, who shall be
known as public members. A public member shall not be an employee of or have a
financial interest in a health care provider, nor be a member of a profession
which provides health care services.
Standard 6(B): Responsiveness to Customers
An affiliate shall be operated in a manner responsive to customer needs and
requirements.
Standard 6(C): Participation in National Programs
An affiliate shall effectively and efficiently participate in each national
program as from time to time may be adopted by the Member Plans for the purposes
of providing portability of membership between the licensees and ease of claims
processing for customers receiving benefits outside of the affiliate's Service
Area.
Such programs are applicable to licensees, and include:
A. Inter-Plan Transfer Agreement;
B. National Account Equalization Program;
C. BlueCard Program;
<PAGE>
EXHIBIT A (continued)
D. Inter-Plan Teleprocessing System (ITS); and
E. Inter-Plan Data Reporting (IPDR) Program.
Standard 6(D): Financial Performance Requirements
In addition to requirements under the national programs listed in
Standard 6C: Participation in National Programs, an affiliate shall take such
action as required to ensure its financial performance in programs and contracts
of an inter-licensee nature or where BCBSA is a party.
Standard 6(E): Cooperation with Plan Performance Response Process
An affiliate shall cooperate with BCBSA's Board of Directors and its Plan
Performance and Financial Standards Committee in the administration of the Plan
Performance Response Process and in addressing affiliate performance problems
identified thereunder.
Standard 6(F): Independent Financial Rating
An affiliate shall obtain a rating of its financial strength from an independent
rating agency approved by BCBSA's Board of Directors for such purpose.
Standard 6(G): Best Efforts
During each year, an affiliate shall use its best efforts in the designated
Service Area to promote and build the value of the Blue Shield Mark.
Standard 6(H): Financial Responsibility
An affiliate shall be operated in a manner that provides reasonable financial
assurance that it can fulfill all of its contractual obligations to its
customers.
<PAGE>
EXHIBIT A (continued)
Standard 6(I): Reports and Records
An affiliate shall furnish to BCBSA on a timely and accurate basis reports and
records relating to compliance with these Standards and the License Agreements
between BCBSA and affiliate. Such reports and records are the following:
A) Annual Application for Renewal of Standard Affiliate
License for affiliates, including trade name and service
mark usage material;
B) Changes in the ownership and governance of the
affiliate, including changes in its charter, articles of
incorporation, or bylaws, changes in an affiliate's
Board composition, or changes in the identity of the
affiliate's Principal Officers, and changes in risk
acceptance, contract growth, or direct delivery of
medical care; and
C) Quarterly Financial Report including the Capital
Benchmark Worksheet, Annual Financial Forecast, Annual
Certified Audit Report, Insurance Department Examination
Report, Annual Statement filed with State Insurance
Department (with all attachments); and
D) Quarterly Utilization Report, Quarterly Enrollment
Report, Cost Containment Report, NMIS Quarterly Report.
Standard 7 - Other Standards for Risk-Assuming Workers' Compensation Affiliates
Standards 7(A) - (E) that follow apply to affiliates that underwrite the
indemnity portion of workers' compensation insurance.
Standard 7 (A): Financial Responsibility
An affiliate shall be operated in a manner that provides reasonable financial
assurance that it can fulfill all of its contractual obligations to its
customers.
<PAGE>
EXHIBIT A (continued)
Standard 7(B): Reports and Records
An affiliate shall furnish, on a timely and accurate basis, reports and records
relating to compliance with these Standards and the License Agreements between
BCBSA and the affiliate. Such reports and records are the following:
A. Annual Application for Renewal of Standard Affiliate License for
affiliates, including trade name and service mark usage materials; and
B. Annual Certified Audit Report, Annual Statement as filed with the State
Insurance Department (with all attachments), Annual NAIC's Risk-Based
Capital Worksheets for Property and Casualty Insurers, and Annual
Financial Forecast; and
C. Quarterly Financial Report, Quarterly Estimated Risk-Based Capital for
Property and Casualty Insurers, Insurance Department Examination Report,
and Quarterly NMIS Report (for licensed health business only); and
D. Notification of all changes and proposed changes to independent ratings
within 30 days of receipt and submission of a copy of all rating
reports; and
E. Changes in the ownership and governance of the affiliate including
changes in its charter, articles of incorporation, or bylaws, changes in
an affiliate's Board composition, Plan control, state license status,
operating area, the affiliate's Principal Officers or direct delivery of
medical care.
Standard 7(C): Loss Prevention
An affiliate shall apply loss prevention protocol to both new and existing
business.
<PAGE>
EXHIBIT A (continued)
Standard 7(D): Claims Administration
An affiliate shall maintain an effective claims administration process that
includes all the necessary functions to assure prompt and proper resolution of
medical and indemnity claims.
Standard 7(E): Disability and Provider Management
An affiliate shall arrange for the provision of appropriate and necessary
medical and rehabilitative services to facilitate early intervention by medical
professionals and timely and appropriate return to work.
Standard 8 - Cooperation with Affiliate License Performance Response Process
Protocol
An affiliate and its Sponsoring Plan(s) shall cooperate with BCBSA's Board of
Directors and its Plan Performance and Financial Standards Committee in the
administration of the Affiliate License Performance Response Process Protocol
(ALPRPP) and in addressing affiliate compliance problems identified thereunder.
Standard 9: Participation in National Programs by Smaller Affiliates
A smaller affiliate for which this standard applies pursuant to the Preamble
section of Exhibit A of the Affiliate License Agreement shall effectively and
efficiently participate in certain national programs from time to time as may be
adopted by Member Plans for the purposes of providing ease of claims processing
for customers receiving benefits outside of the affiliate's service area and be
subject to certain relevant financial and reporting requirements.
<PAGE>
EXHIBIT B
ROYALTY FORMULA FOR SECTION 9 OF THE
AFFILIATE LICENSE AGREEMENT
Affiliate will pay BCBSA a fee for this license in accordance with the following
formula:
FOR RISK PRODUCTS:
For affiliates not underwriting the indemnity portion of workers' compensation
insurance:
An amount equal to its pro rata share of each sponsoring Plan's dues payable to
BCBSA computed with the addition of the affiliate's subscription revenue and
contracts arising from products using the marks. The payment by each sponsoring
Plan of its dues to BCBSA, including that portion described in this paragraph,
will satisfy the requirement of this paragraph, and no separate payment will be
necessary.
For affiliates underwriting the indemnity portion of workers' compensation
insurance:
An amount equal to 0.35 percent of the gross revenue per annum of affiliate
arising from products using the marks; plus, an annual fee of $5,000 per license
for an affiliate subject to Standard 7.
FOR NONRISK PRODUCTS:
An amount equal to 0.24 percent of the gross revenue per annum of affiliate
arising from products using the marks; plus:
1) An annual fee of $5,000 per license for an affiliate subject to
Standard 6.
2) An annual fee of $2,000 per license for all other affiliates.
The foregoing shall be reduced by one-half where both a BLUE CROSS(R) and BLUE
SHIELD(R) License are issued to the same affiliate. In the event that any
license period is greater or less than one (1) year, any amounts due shall be
prorated. Royalties under this formula will be calculated, billed and paid in
arrears.
<PAGE>
EXHIBIT 1A
CONTROLLED AFFILIATE LICENSE AGREEMENT
APPLICABLE TO LIFE INSURANCE COMPANIES
This agreement by and among Blue Cross and Blue Shield Association
("BCBSA") _______________________________("Controlled Affiliate"), a controlled
affiliate of the Blue Shield Plan(s), known as
_______________________________________("Plan").
WHEREAS, BCBSA is the owner of the BLUE SHIELD and BLUE SHIELD Design service
marks;
WHEREAS, the Plan and the Controlled Affiliate desire that the latter be
entitled to use the BLUE SHIELD and BLUE SHIELD Design service marks
(collectively the "Licensed Marks") as service marks and be entitled to use the
term BLUE SHIELD in a trade name ("Licensed Name");
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
hereinafter set forth and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. GRANT OF LICENSE
Subject to the terms and conditions of this Agreement, BCBSA
hereby grants to the Controlled Affiliate the exclusive right to use the
licensed Marks and Names in connection with and only in connection with those
life insurance and related services authorized by applicable state law, other
than health care plans and related services (as defined in the Plan's License
Agreements with BCBSA) which services are not separately licensed to Controlled
Affiliate by BCBSA, in the Service Area served by the Plan, except that BCBSA
reserves the right to use the Licensed Marks and Name in said Service Area, and
except to the extent that said Service Area may overlap the area or areas served
by one or more other licensed Blue Shield Plans as of the date of this License
as to which overlapping areas the rights hereby granted are non-exclusive as to
such other Plan or Plans and their respective Licensed Controlled Affiliates
only. Controlled Affiliate cannot use the Licensed Marks or Name outside the
Service Area or, anything in any other license to Controlled Affiliate
notwithstanding, in its legal or trade name.
2. QUALITY CONTROL
A. Controlled Affiliate agrees to use the Licensed Marks and
Name only in relation to the sale, marketing and rendering of authorized
products and further agrees to be bound by the conditions regarding quality
control shown in Exhibit A as it may be amended by BCBSA from time-to-time.
Amended as of November 17, 1994
-1-
<PAGE>
B. Controlled Affiliate agrees that Plan and/or BCBSA may, from
time-to-time, upon reasonable notice, review and inspect the manner and method
of Controlled Affiliate's rendering of service and use of the Licensed Marks and
Name.
C. Controlled Affiliate agrees that it will provide on an annual
basis (or more often if reasonably required by Plan or by BCBSA) a report to
Plan and BCBSA demonstrating Controlled Affiliate's compliance with the
requirements of this Agreement including but not limited to the quality control
provisions of Exhibit A.
D. As used herein, a Controlled Affiliate is defined as an entity
organized and operated in such a manner that it is subject to the bona fide
control of a Plan or Plans. Absent written approval by BCBSA of an alternative
method of control, bona fide control shall mean the legal authority, directly or
indirectly through wholly-owned subsidiaries: (a) to select members of the
Controlled Affiliate's governing body having not less than 51% voting control
thereof; (b) to exercise operational control with respect to the governance
thereof; and (c) to prevent any change in its articles of incorporation, bylaws
or other governing documents deemed inappropriate. In addition, a Plan or Plans
shall own at least 51% of any for-profit Controlled Affiliate. If the Controlled
Affiliate is a mutual company, the Plan or its designee(s) shall have and
maintain, in lieu of the requirements of items (a) and (c) above, proxies
representing 51% of the votes at any meeting of the policyholders and shall
demonstrate that there is no reason to believe this such proxies shall be
revoked by sufficient policyholders to reduce such percentage below 51%.
3. SERVICE MARK USE
Controlled Affiliate shall at all times make
proper service mark use of the Licensed Marks, including but not limited to use
of such symbols or words as BCBSA shall specify to protect the Licensed Marks,
and shall comply with such rules (applicable to all Controlled Affiliates
licensed to use the Marks) relative to service mark use, as are issued from
time-to-time by BCBSA. If there is any public reference to the affiliation
between the Plan and the Controlled Affiliate, all of the Controlled Affiliate's
licensed services in the Service Area of the Plan shall be rendered under the
Licensed Marks. Controlled Affiliate recognizes and agrees that all use of the
Licensed Marks by Controlled Affiliate shall inure to the benefit of BCBSA.
4. SUBLICENSING AND ASSIGNMENT
Controlled Affiliate shall not sublicense,
transfer, hypothecate, sell, encumber or mortgage, by operation of law or
otherwise, the rights granted hereunder and any such act shall be
-2-
<PAGE>
voidable at the option of Plan or BCBSA. This Agreement and all rights and
duties hereunder are personal to Controlled Affiliate.
5. INFRINGEMENTS
Controlled Affiliate shall promptly notify Plan and BCBSA of
any suspected acts of infringement, unfair competition or passing off which may
occur in relation to the Licensed Marks. Controlled Affiliate shall not be
entitled to require Plan or BCBSA to take any actions or institute any
proceedings to prevent infringement, unfair competition or passing off by third
parties. Controlled Affiliate agrees to render to Plan and BCBSA, free of
charge, all reasonable assistance in connection with any matter pertaining to
the protection of the Licensed Marks by BCBSA.
6. LIABILITY INDEMNIFICATION
Controlled Affiliate hereby agrees to save, defend, indemnify
and hold Plan and BCBSA harmless from and against all claims, damages,
liabilities and costs of every kind, nature and description which may arise as a
result of Controlled Affiliate's rendering of health care services under the
Licensed Marks.
7. LICENSE TERM
The license granted by this Agreement shall remain in effect
for a period of one (1) year and shall be automatically extended for additional
one (1) year periods upon evidence satisfactory to the Plan and BCBSA that
Controlled Affiliate meets the then applicable quality control standards, unless
one of the parties hereto notifies the other party of the termination hereof at
least sixty (60) days prior to expiration of any license period.
This Agreement may be terminated by the Plan or by BCBSA for
cause at any time provided that Controlled Affiliate has been given a reasonable
opportunity to cure and shall not effect such a cure within thirty (30) days of
receiving written notice of the intent to terminate (or commence a cure within
such thirty day period and continue diligent efforts to complete the cure if
such curing cannot reasonably be completed within such thirty day period). By
way of example and not for purposes of limitation, Controlled Affiliate's
failure to abide by the quality control provisions of Paragraph 2, above, shall
be considered a proper ground for cancellation of this Agreement.
This Agreement and all of Controlled Affiliate's rights
hereunder shall immediately terminate without any further action by any party or
entity in the event that:
-3-
<PAGE>
A. Controlled Affiliate shall no longer comply with Standard No. 1
(Organization and Governance) of Exhibit A or, following an opportunity to cure,
with the remaining quality control provisions of Exhibit A, as it may be amended
from time-to-time; or
B. Plan ceases to be authorized to use the Licensed Marks; or
C. Appropriate dues for Controlled Affiliate pursuant to item 8
hereof, which are the royalties for this License Agreement are more than sixty
(60) days in arrears to BCBSA.
Upon termination of this Agreement for cause or otherwise,
Controlled Affiliate agrees that it shall immediately discontinue all use of the
Licensed Marks including any use in its trade name.
In the event of any disagreement between Plan and BCBSA as to
whether grounds exist for termination or as to any other term or condition
hereof, the decision of BCBSA shall control, subject to provisions for mediation
or mandatory dispute resolution in effect between the parties.
Upon termination of this Agreement, Licensed Controlled Affiliate
shall immediately notify all of its customers that it is no longer a licensee of
the Blue Cross and Blue Shield Association and provide instruction on how the
customer can contact the Blue Cross and Blue Shield Association or a designated
licensee to obtain further information on securing coverage. The written
notification required by this paragraph shall be in writing and in a form
approved by the Association. The Association shall have the right to audit the
terminated entity's books and records to verify compliance with this paragraph.
8. DUES
Controlled Affiliate will pay to BCBSA a fee for this license in
accordance with the following formula:
o An annual fee of five thousand dollars ($5,000) per license, plus
o .05 percent of gross revenue per annum of Licensee arising from
group products using the Marks, plus
o .5 percent of gross revenue per annum of Licensee arising from
individual products using the Marks
The foregoing percentages shall be reduced by one-half where both a
BLUE CROSS(R) and BLUE SHIELD(R) license are issued to the same entity. In the
event that any License period is greater or less than one (1) year, any amounts
due shall be prorated. Royalties under this formula will be calculated, billed
and paid in arrears.
Amended as of September 29, 1994
-4-
<PAGE>
Plan will promptly and timely transmit to BCBSA all dues owed by
Controlled Affiliate as determined by the above formula and if Plan shall fail
to do so, Controlled Affiliate shall pay such dues directly.
9. JOINT VENTURE
Nothing contained in this Agreement shall be construed as creating a
joint venture, partnership, agency or employment relationship between Plan and
Controlled Affiliate or between either and BCBSA.
-4a-
<PAGE>
10. NOTICES AND CORRESPONDENCE
Notices regarding the subject matter of this Agreement or breach or
termination thereof shall be in writing and shall be addressed in duplicate to
the last known address of each other party, marked respectively to the attention
of its President and, if any, its General Counsel.
11. COMPLETE AGREEMENT
This Agreement contains the complete understandings of the parties
in relation to the subject matter hereof. This Agreement may only be amended by
a writing executed by all parties.
12. SEVERABILITY
If any term of this Agreement is held to be unlawful by a court of
competent jurisdiction, such finding shall in no way effect the remaining
obligations of the parties hereunder and the court may substitute a lawful term
or condition for any unlawful term or condition so long as the effect of such
substitution is to provide the parties with the benefits of this Agreement.
13. NONWAIVER
No waiver by BCBSA of any breach or default in performance on the
part of the Controlled Affiliate or any other licensee of any of the terms,
covenants or conditions of this Agreement shall constitute a waiver of any
subsequent breach or default in performance of said terms, covenants or
conditions.
14. GOVERNING LAW
This Agreement shall be governed by, and construed and interpreted
in accordance with, the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties have caused this License Agreement to be
executed, effective as of the date of last signature written below.
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By:___________________________________
Date:_________________________________
______________________________________
Controlled Affiliate
By:___________________________________
Date:_________________________________
Plan:_________________________________
-5-
<PAGE>
EXHIBIT A
CONTROLLED AFFILIATE LICENSE STANDARDS
LIFE INSURANCE COMPANIES
Page 1 of 2
PREAMBLE
The standards for licensing Life Insurance Companies (Life and Health Insurance
companies, as defined by state statute) are established by BCBSA and are subject
to change from time-to-time upon the affirmative vote of three-fourths (3/4) of
the Plans and three-fourths (3/4) of the total weighted vote of all Plans. Each
Licensed Plan is required to use a standard controlled affiliate license form
provided by BCBSA and to cooperate fully in assuring that the licensed Life
Insurance Company maintains compliance with the license standards.
An organization meeting the following standards shall be eligible for a license
to use the Licensed Marks within the service area of its sponsoring Licensed
Plan to the extent and the manner authorized under the Controlled Affiliate
License applicable to Life Insurance Companies and the principal license to the
Plan.
Standard 1 - Organization and Governance
The LIC shall be organized and operated in such a manner that it is controlled
by a licensed Plan or Plans which have, directly or indirectly: 1) not less than
51% of the voting control of the LIC; and 2) the legal ability to prevent any
change in the articles of incorporation, bylaws or other establishing or
governing documents of the LIC with which it does not concur; and 3) operational
control of the LIC.
If the LIC is a mutual company, the Plan or its designee(s) shall have and
maintain, in lieu of the requirements of items 1 and 2 above, proxies
representing at least 51% of the votes at any policyholder meeting and shall
demonstrate that there is no reason to believe such proxies shall be revoked by
sufficient policyholders to reduce such percentage below 51%.
Standard 2 - State Licensure
The LIC must maintain unimpaired licensure or certificate of authority to
operate under applicable state laws as a life and health insurance company in
each state in which the LIC does business.
Standard 3 - Records and Examination
The LIC and its sponsoring licensed Plan(s) shall maintain and furnish, on a
timely and accurate basis, such records and reports regarding the LIC as may be
required in order to establish compliance with the license agreement. The LIC
and its sponsoring licensed Plan(s) shall permit BCBSA to examine the affairs of
the LIC and shall agree that BCBSA's board may submit a written report to the
chief executive officer(s) and the board(s) of directors of the sponsoring
Plan(s).
-1-
<PAGE>
CONTROLLED AFFILIATE LICENSE STANDARDS
LIFE INSURANCE COMPANIES
Page 2 of 2
Standard 4 - Mediation
The LIC and its sponsoring Plan(s) shall agree to use the then-current BCBSA
mediation and mandatory dispute resolution processes, in lieu of a legal action
between or among another licensed controlled affiliate, a licensed Plan or
BCBSA.
Standard 5 - Financial Responsibility
The LIC shall maintain adequate financial resources to protect its customers and
meet its business obligations.
-2-
<PAGE>
EXHIBIT 2
Membership Standards
Page 1 of 3
Preamble
The Membership Standards apply to all organizations seeking to become or to
continue as Regular Members of the Blue Cross and Blue Shield Association. Any
organization seeking to become a Regular Member must be found to be in
substantial compliance with all Membership Standards at the time membership is
granted and the organization must be found to be in substantial compliance with
all Membership Standards for a period of two (2) years preceding the date of its
application. If Membership is sought by an entity which controls or is
controlled by one or more Plans, such compliance shall be determined on the
basis of compliance by such Plan or Plans.
The Regular Member Plans shall have authority to interpret these Standards.
Compliance with any Membership Standard may be excused, at the Plans'
discretion, if the Plans agree that compliance with such Standard would require
the Plan to violate a law or governmental regulation governing its operation or
activities.
Standard 1: A Plan's Board shall not be controlled by any special interest
group, and shall act in the interest of its Corporation in
providing cost-effective health care services to its customers.
A Plan shall maintain a governing Board, which shall control
the Plan, composed of a majority of persons other than
providers of health care services, who shall be known as public
members. A public member shall not be an employee of or have a
financial interest in a health care provider, nor be a member
of a profession which provides health care services.
Standard 2: A Plan shall furnish to the Association on a timely and accurate
basis reports and records relating to compliance with these
Standards and the License Agreements between the Association and
the Plans. Such reports and records are the following:
A. Annual Application for Renewal of
BCBSA Membership, including trade
name and service mark usage material;
B. Changes in the governance of the Plan,
including changes in a Plan's Charter,
Articles of Incorporation, or Bylaws,
changes in a Plan's Board composition,
or changes in the identity of the
Plan's Principal Officers;
Amended as of June 24, 1994
<PAGE>
EXHIBIT 2
Membership Standards
Page 2 of 3
C. Quarterly Financial Report including
the Plan Capital Benchmark Worksheet,
Annual Financial Forecast, Annual
Certified Audit Report, Insurance
Department Examination Report, Annual
Statement filed with State Insurance
Department (with all attachments), and
Consolidating Financial Statement;
D. Quarterly Utilization Report,
Quarterly Enrollment Report, Cost
Containment Report, and NMIS Quarterly
Report.
Standard 3: A Plan shall be operated in a manner that provides reasonable
financial assurance that it can fulfill its contractual obligations
to its customers.
Standard 4: A Plan shall be operated in a manner responsive to customer needs
and requirements.
Standard 5: A Plan shall effectively and efficiently participate in each
national program as from time to time may be adopted by the Member
Plans for the purposes of providing portability of membership
between the Plans and ease of claims processing for customers
receiving benefits outside of the Plan's Service Area.
Such programs are applicable to Blue Cross and Blue Shield Plans,
and include:
A. Inter-Plan Transfer Agreement;
B. National Account Equalization Program;
C. Inter-Plan Data Reporting (IPDR) Program;
D. Inter-Plan Teleprocessing System (ITS); and
E. BlueCard Program.
Amended as of August 2, 1996
<PAGE>
EXHIBIT 2
Membership Standards
Page 3 of 3
Standard 6: In addition to requirements under the national programs listed in
Standard 5: Participation in National Programs, a Plan shall take
such action as required to ensure its financial performance in
programs and contracts of an inter-Plan nature or where the
Association is a party.
Standard 7: A Plan shall make adequate disclosure in contracting with third
parties and in disseminating public statements of (i) the structure
of the Blue Cross and Blue Shield System, (ii) the independent
nature of every Plan, and (iii) the Plan's financial condition.
Standard 8: A Plan shall cooperate with the Association's Board of Directors and
its Plan Performance and Financial Standards Committee in the
administration of the Plan Performance Response Process and in
addressing Plan performance problems identified thereunder.
Standard 9: A Plan shall obtain a rating of its financial strength from an
independent rating agency approved by the Association's Board of
Directors for such purpose.
Standard 10: During each year, a Plan and its Controlled Affiliate(s) engaged in
providing licensable services (excluding Life Insurance and
Charitable Foundation Services) shall use their best efforts in the
designated Service Area to promote and build the value of the Blue
Cross and Blue Shield Marks.
Standard 11: Neither a Plan nor any Larger Affiliate shall cause or permit an
unlicensed entity to obtain control of the Plan or Larger Affiliate
or to acquire a substantial portion of its assets related to
licensable services.
Amended as of September 19, 1996
<PAGE>
EXHIBIT 3
GUIDELINES WITH RESPECT TO USE OF
LICENSED NAME AND MARKS IN CONNECTION WITH NATIONAL ACCOUNTS
Page 1 of 3
1. The strength of the Blue Cross/Blue Shield National Accounts mechanism, and
the continued provision of cost effective, quality health care benefits to
National Accounts, are predicated on locally managed provider networks
coordinated on a national scale in a manner consistent with effective service to
National Account customers and consistent with the preservation of the integrity
of the Blue Cross/Blue Shield system and the Licensed Marks. These guidelines
shall be interpreted in keeping with such ends.
2. A National Account is an entity with employee and/or retiree locations in
more than one Plan's Service Area. Unless otherwise agreed, a National Account
is deemed located in the Service Area in which the corporate headquarters of the
National Account is located. The Control Plan of a National Account is the Plan
in whose Service Area the National Account is located. A participating ("Par")
Plan is a Plan in whose Service Area the National Account has employee and/or
retiree locations, but in which the National Account is not located.
3. The National Account Guidelines enunciated herein below shall be applicable
only with respect to the business of new National Accounts acquired after
January 1, 1991.
4. Control Plans shall utilize National Account identification cards complying
with then currently effective BCBSA graphic standards in connection with all
National Accounts business to facilitate administration thereof, to minimize
subscriber and provider confusion, and to reflect a commitment to cooperation
among Plans.
5. Disputes among Plans and/or BCBSA as to the interpretation or implementation
of these Guidelines or as to other National Accounts issues shall be submitted
to mediation and mandatory dispute resolution as provided in the License
Agreement. For two years from the effective date of the License Agreement,
however, such disputes shall be subject to mediation only, with the results of
such mediation to be collected and reported in order to establish more
definitive operating parameters for National Accounts business and to serve as
ground rules for future binding dispute resolution.
<PAGE>
EXHIBIT 3
Page 2 of 3
6. The Control Plan may use the BlueCard Program (as defined by IPOC) to deliver
benefits to employees and non-Medicare eligible retirees in a Participating
Plan's service area if an alternative arrangement with the Participating Plan
cannot be negotiated. The Participating Plan's minimum servicing requirement for
those employees and non-Medicare retirees in its service area is to deliver
benefits using the BlueCard Program. Account delivery is subject to the
policies, provisions and procedures of the BlueCard Program.
7. For provider payments in a Participating Plan's area (on non-BlueCard
claims), payment to the provider may be made by the Participating Plan or the
Control Plan at the Participating Plan's option. If the Participating Plan
elects to pay the provider, it may not withhold payment of a claim verified by
the Control Plan or its designated processor, and payment must be in conformity
with service criteria established by the Board of Directors of BCBSA (or an
authorized committee thereof) to assure prompt payment, good service and minimum
confusion with providers and subscribers. The Control Plan, at the Participating
Plan's request, will also assure that measures are taken to protect the
confidentiality of the data pertaining to provider reimbursement levels and
profiles.
8. For claim payments in a Participating Plan's area (on non-BlueCard claims),
Participating Plans are strongly encouraged, but not required, to pass along to
the Control Plan part or all of local provider discounts and differentials for
use by the Control Plan in negotiating financial arrangements with National
Accounts. However, since the size, basis, form and use of local differentials
can vary substantially among Plans and also by individual National Account
characteristics, the degree and form of any discount or differential passed
along to the Control Plan shall be strictly a matter of negotiated contractual
agreement between a Participating Plan and the Control Plan and may also vary
from one National Account to another. In order to facilitate the quotation of
national account pricing and the offering of a variety of National Account
delivery systems, all Plans are strongly encouraged to periodically publish to
other Plans and the BCBSA their National Account contracting policies with
respect to the handling of differentials.
The Control Plan, in its financial agreements with a National Account,
is expected to reasonably reflect the aggregate amount of differentials passed
along to the Control Plan by all Participating Plans in a National Account. The
exact form and substance of this may vary from one National Account to another
and shall be a matter of
Amended as of June 14, 1996
<PAGE>
EXHIBIT 3
Page 3 of 3
explicit negotiation and contractual relationship between the National Account
and the Control Plan. The specifics in an agreement between the Control Plan and
the National Account may vary in form (e.g., a guaranteed offset against
retentions, or a direct pass through, or a guaranteed aggregate percentage
discount, or no pass back at all, etc.), and the Control Plan has the
responsibility and the Authority to negotiate precise arrangements. However,
irrespective of the final arrangements between the Control Plan and the National
Account, a Participating Plan's liability for passing along differentials shall
be limited to the contractual agreement the Participating Plan has with the
Control Plan on a specific National Account.
9. Other than in contracting with health care providers or soliciting such
contracts in areas contiguous to a Plan's Service Area in order to serve its
subscribers or those of its licensed Controlled Affiliate residing or working in
its Service Area, a Control Plan may not use the Licensed Marks and/or Name, as
a tag line or otherwise, to negotiate directly with providers outside its
Service Area.
<PAGE>
EXHIBIT 4
GOVERNMENT PROGRAMS AND CERTAIN OTHER USES
Page 1 of 2
1. A Plan and its licensed Controlled Affiliate may use the Licensed Marks and
Name in bidding on and executing a contract to serve a Government Program, and
in thereafter communicating with the Government concerning the Program. With
respect, however, to such contracts entered into after the 1st day of January,
1991, the Licensed Marks and Name will not be used in communications or
transactions with beneficiaries or providers in the Government Program located
outside a Plan's Service Area, unless the Plan can demonstrate to the
satisfaction of BCBSA's governing body that such a restriction on use of the
Licensed Marks and Name will jeopardize its ability to procure the contract for
the Government Program. As to both existing and future contracts for Government
Programs, Plans will discontinue use of the Licensed Marks and Name as to
beneficiaries and Providers outside their Service Area as expenditiously as
circumstances reasonably permit. Effective January 1, 1995, except as provided
in the first sentence above, all use by a Plan of the Licensed Marks and Name in
Government Programs outside of the Plan's Service Area shall be discontinued.
Incidental communications outside a Plan's Service Area with resident or former
resident beneficiaries of the Plan, and other categories of necessary incidental
communications approved by BCBSA, are not prohibited.
2. In connection with activity otherwise in furtherance of the License
Agreement, a Plan may use the Licensed Marks and Name outside its Service Area
in the following circumstances which are deemed legitimate and necessary and not
likely to cause consumer confusion:
a. sending letterhead, envelopes, and similar items for
administrative purposes which do not solicit the sale of
health care plans and related services;
b. distributing business cards other than in marketing and
selling;
c. contracting with health care providers or soliciting
such contracts in areas contiguous to a Plan's Service
Area in order to serve its subscribers or those of its
licensed Controlled Affiliate residing or working in its
service area;
d. issuing a small sign containing the legal name or trade
name of the Plan or its licensed Controlled Affiliate
for display by a provider to identify the latter as a
participating provider of the Plan or Controlled
Affiliate;
<PAGE>
EXHIBIT 4
Page 2 of 2
e. advertising in publications or electronic media solely
to persons for employment;
f. advertising in print, electronic or other media which
serve, as a substantial market, the Service Area of the
Plan or licensed Controlled Affiliate, provided that no
Plan may advertise outside its Service Area on the
national broadcast and cable networks and that
advertisements in national print media are limited to
the smallest regional edition encompassing the Service
Area;
g. advertising by direct mail where the addressee's zip
code plus 4 includes, at least in part, the Plan's
Service Area or that of a licensed Controlled Affiliate.
<PAGE>
EXHIBIT 5
MEDIATION AND MANDATORY DISPUTE RESOLUTION (MMDR) RULES
The Blue Cross and Blue Shield Plans ("Plans") and the Blue Cross
Blue Shield Association ("BCBSA") recognize and acknowledge that the Blue Cross
and Blue Shield system is a unique nonprofit and for-profit system offering cost
effective health care financing and services. The Plans and BCBSA desire to
utilize Mediation and Mandatory Dispute Resolution ("MMDR") to avoid expensive
and time-consuming litigation that may otherwise occur in the federal and state
judicial systems. Even MMDR should be viewed, however, as methods of last
resort, all other procedures for dispute resolution having failed. Except as
otherwise provided in the License Agreements, the Plans, their Controlled
Affiliates and BCBSA agree to submit all disputes to MMDR pursuant to these
Rules and in lieu of litigation.
1. Initiation of Proceedings
A. Pre-MMDR Efforts
Before filing a Complaint to invoke the MMDR process, the CEO of a
complaining party, or his/her designated representative, shall undertake good
faith efforts with the other side(s) to try to resolve any dispute.
B. Complaint
To commence a proceeding, the complaining party (or parties) shall
provide by certified mail, return receipt requested, a written Complaint to the
BCBSA Corporate Secretary (which shall also constitute service on BCBSA if it is
a respondent) and to any Plan(s) and/or Controlled Affiliate(s) named therein.
The Complaint shall contain:
i. identification of the complaining party (or
parties) requesting the proceeding;
ii. identification of the respondent(s);
iii. identification of any other persons or entities
who are interested in a resolution of the dispute;
iv. a full statement describing the nature of the
dispute;
v. identification of all of the issues that are being
submitted for resolution;
Amended as of November 21, 1996
<PAGE>
vi. the remedy sought;
vii. a statement as to whether the complaining party
(or parties) elect(s) first to pursue Mediation;
viii. any request, if applicable, that one or more
members of the Mediation Committee be
disqualified from the proceeding and the grounds
for such request;
ix. any request, if applicable, that the matter be
handled on an expedited basis and the reasons
therefor; and
x. a statement signed by the CEO of the complaining
party affirming that the CEO has undertaken
efforts, or has directed efforts to be
undertaken, to resolve the dispute before
resorting to the MMDR process.
The complaining party (or parties) shall file and serve with the Complaint
copies of all documents which the party (or parties) intend(s) to offer at the
Arbitration Hearing and a statement identifying the witnesses the party (or
parties) intend(s) to present at the Hearing, along with a summary of each
witness' expected testimony.
C. Answer
Within twenty (20) days after receipt of the Complaint, each
respondent shall serve on the BCBSA and on the complaining party (or parties)
and on the Chairman of the Mediation Committee;
i. a full Answer to the aforesaid Complaint;
ii. a statement of any Counterclaims against the
complaining party (or parties), providing with
respect thereto the information specified in
Paragraph 1.B., above;
iii. a statement as to whether the respondent elects
to first pursue Mediation;
iv. any request, if applicable, that one or more
members of the Mediation Committee be
disqualified from the proceeding and the grounds
for such request; and
v. any request, if applicable, that the matter be
handled on an expedited basis and the reasons
therefor.
<PAGE>
The respondent(s) shall file and serve with the Answer or by the date of the
Initial Conference set forth in Paragraph 3.B., below, copies of all documents
which the respondent(s) intend(s) to offer at the Arbitration Hearing and a
statement identifying the witnesses the party (or parties) intend(s) to present
at the Hearing, along with a summary of each witness' expected testimony.
D. Reply To Counterclaim
Within ten (10) days after receipt of any Counterclaim, the
complaining party (or parties) shall serve on BCBSA and on the responding party
(or parties) and on the Chairman of the Mediation Committee, a Reply to the
Counterclaim. Such Reply must provide the same information required by Paragraph
1.C.
2. Mediation
A. Mediation Committee
To facilitate the mediation of disputes between or among BCBSA, the
Plans and/or their Controlled Affiliates, the BCBSA Board has established a
Mediation Committee. Mediation may be pursued in lieu of or in an effort to
obviate the Mandatory Dispute Resolution process, and all parties are strongly
urged to exhaust the mediation procedure.
B. Election To Mediate
If any party elects first to pursue Mediation, and if it appears to
the Corporate Secretary that the dispute falls within the jurisdiction of the
Mediation Committee, as set forth in Exhibit 5-A hereto, then the Corporate
Secretary will promptly furnish the Mediation Committee with copies of the
Complaint, Answer, Counterclaim and Reply to Counterclaim, and other documents
referenced in Paragraph 1, above.
C. Selection of Mediators
The parties shall promptly attempt to agree upon: (i) the number of
mediators desired, not to exceed three mediators; and (ii) the selection of the
mediator(s) who may include members of the Mediation Committee and/or
experienced mediators from an independent entity to mediate all disputes set
forth in the Complaint and Answer (and Counterclaim and Reply, if any). In the
event the parties cannot agree upon the number of mediators desired, that number
shall default to three. In the event the parties cannot agree upon the selection
of mediator(s), the Chairman will select the mediator(s), at least one of which
shall be an experienced mediator from an independent entity, consistent with the
provisions set forth in this Paragraph. No member of the Mediation Committee who
is a representative of any party to the Mediation may be selected to mediate the
dispute. The Chairman shall also endeavor not to select as a mediator any member
of the Mediation Committee whom a party has requested to be disqualified. If,
after due regard for availability, expertise, and such other considerations as
may best promote an expeditious Mediation, the Chairman
<PAGE>
believes that he or she must consider for selection a member of the Mediation
Committee whom a party has requested to be disqualified, the other members of
the Committee eligible to be selected to mediate the dispute shall decide the
request for disqualification. By agreeing to participate in the Mediation of a
dispute, a member of the Mediation Committee represents to the party (or
parties) thereto that he or she knows of no grounds which would require his or
her disqualification.
D. Binding Decision
Before the date of the Mediation Hearing described below, the
Corporate Secretary will contact the party (or parties) to determine whether
they wish to be bound by any recommendation of the selected mediators for
resolution of the disputes. If all wish to be bound, the Corporate Secretary
will send appropriate documentation to them for their signatures before the
Mediation Hearing begins.
E. Mediation Procedure
The Chairman shall promptly advise the parties of a scheduled
Mediation Hearing date. Unless a party requests an expedited procedure, or
unless all parties to the proceeding agree to one or more extensions of time,
the Mediation Hearing set forth below shall be completed within forty (40) days
of BCBSA's receipt of the Complaint. The selected mediators, unless the parties
otherwise agree, shall adhere to the following procedure:
i. Each party must be represented by its CEO or other
representative who has been delegated full
authority to resolve the dispute. However,
parties may send additional representatives as
they see fit.
ii. By no later than five (5) days prior to the date
designated for the Mediation Hearing, each party
shall supply and serve a list of all persons who
will be attending the Mediation Hearing, and
indicate who will have the authority to resolve
the dispute.
iii. Each party will be given one-half hour to present
its case, beginning with the complaining party (or
parties), followed by the other party or parties.
The parties are free to structure their
presentations as they see fit, using oral
statements or direct examination of witnesses.
However, neither cross-examination nor questioning
of opposing representatives will be permitted. At
the close of each presentation, the selected
mediators will be given an opportunity to ask
questions of the presenters and witnesses. All
parties must be present throughout the Mediation
Hearing. The selected mediators may extend the
time allowed for each party's presentation at the
Mediation Hearing. The selected mediators may
meet in executive session, outside the presence of
the parties, or may meet with the parties
separately, to discuss the controversy.
<PAGE>
iv. After the close of the presentations, the parties
will attempt to negotiate a settlement of the
dispute. If the parties desire, the selected
mediators, or any one or more of the selected
mediators, will sit in on the negotiations.
v. After the close of the presentations, the selected
mediators may meet privately to agree upon a
recommendation for resolution of the dispute which
would be submitted to the parties for their
consideration and approval. If the parties have
previously agreed to be bound by the results of
this procedure, this recommendation shall be
binding upon the parties.
vi. The purpose of the Mediation Hearing is to assist
the parties to settle their grievances short of
mandatory dispute resolution. As a result, the
Mediation Hearing has been designed to be as
informal as possible. Rules of evidence shall not
apply. There will be no transcript of the
proceedings, and no party may make a tape
recording of the Mediation Hearing.
vii. In order to facilitate a free and open discussion,
the Mediation proceeding shall remain
confidential. A "Stipulation to Confidentiality"
which prohibits future use of settlement offers,
all position papers or other statements furnished
to the selected mediators, and decisions or
recommendations in any Mediation proceeding shall
be executed by each party.
viii. Upon request of the selected mediators, or one of
the parties, BCBSA staff may also submit
documentation at any time during the proceedings.
F. Notice Of Termination Of Mediation
If the Mediation cannot be completed within the prescribed or agreed
time period due to the lack of cooperation of any party, as determined by the
selected mediators, or if the Mediation does not result in a final resolution of
all disputes at the Mediation Hearing or within forty (40) days after the
Complaint was served, whichever comes first, any party or any one of the
selected mediators may so notify the Corporate Secretary, who shall promptly
issue a Notice of termination of mediation to all parties, to the selected
mediators, and to the MDR Administrator, defined below. Such notice shall serve
to bring the Mediation to an end and to initiate Mandatory Dispute Resolution.
Upon agreement of all parties and the selected mediators, the Mediation process
may continue at the same time the MDR process is invoked. The Notice described
above would serve to initiate the MDR proceeding and would not terminate the
proceedings.
<PAGE>
3. Mandatory Dispute Resolution (MDR)
If all parties elect not to first pursue Mediation, or if a notice
of termination of Mediation is issued as set forth in Paragraph 2.F., above,
then the unresolved disputes set forth in any Complaint and Answer (and
Counterclaim and Reply, if any) shall be subject to MDR.
A. MDR Administrator
The Administrator shall be an independent entity such as the Center
for Public Resources, Inc. or Endispute, Inc., specializing in alternative
dispute resolution. The Administrator shall be designated initially, and may be
changed from time to time, by the affirmative vote of fifty-one (51) percent of
the Plans and fifty-one (51) percent of the total then current weighted vote of
all the Plans.
B. Initial Conference
Within five (5) days after a Notice of Termination has issued, or
within five (5) days after the time for filing and serving the Reply to any
Counterclaim if the parties elect first not to mediate, the parties shall confer
with the Administrator to discuss selecting a dispute resolution panel ("the
Panel"). This Initial Conference may be by telephone. The parties are encouraged
to agree to the composition of the Panel and to present that agreement to the
Administrator at the Initial Conference. If the parties do not agree on the
composition of the Panel by the time of the Initial Conference, or by any
extension thereof agreed to by all parties and the Administrator, then the Panel
Selection Process set forth in subparagraph C shall be followed.
C. Panel Selection Process
The Administrator shall designate at least seven potential
arbitrators. The exact number designated shall be sufficient to give each party
at least two peremptory strikes. Each party shall be permitted to strike any
designee for cause and the Administrator shall determine the sufficiency thereof
in its sole discretion. The Administrator will designate a replacement for any
designee so stricken. Each party shall then be permitted two peremptory strikes.
From the remaining designees, the Administrator shall select a three member
Panel. The Administrator shall set the dates for exercising all strikes and
shall complete the Panel Selection Process within fifteen (15) days of the
Initial Conference. Each Arbitrator shall be compensated at his or her normal
hourly rate or, in the absence of an established rate, at a reasonable hourly
rate to be promptly fixed by the Administrator for all time spent in connection
with the proceedings and shall be reimbursed for any travel and other reasonable
expenses.
<PAGE>
D. Duties Of The Arbitrators
The Panel shall promptly designate a Presiding Arbitrator for the
purposes reflected below, but shall retain the power to review and modify any
ruling or other action of said Presiding Arbitrator. Each Arbitrator shall be an
independent Arbitrator, shall be governed by the Code of Ethics for Arbitrators
in Commercial Disputes, appended as Exhibit "5-B" hereto, and shall at or prior
to the commencement of any Arbitration Hearing take an oath to that effect. Each
Arbitrator shall promptly disclose in writing to the Panel and to the parties
any circumstances, whenever arising, that might cause doubt as to such
Arbitrator's compliance, or ability to comply, with said Code of Ethics, and,
absent resignation by such Arbitrator, the remaining Arbitrators shall determine
in their sole discretion whether the circumstances so disclosed constitute
grounds for disqualification and for replacement. With respect to such
circumstances arising or coming to the attention of a party after an
Arbitrator's selection, a party may likewise request the Arbitrator's
resignation or a determination as to disqualification by the remaining
Arbitrators. With respect to a sole Arbitrator, the determination as to
disqualification shall be made by the Administrator.
There shall be no ex parte communication between the parties or
their counsel and any member of the Panel.
E. Panel's Jurisdiction And Authority
The Panel's jurisdiction and authority shall extend to all disputes
between or among the Plans, their Controlled Affiliates, and/or BCBSA, except
for those disputes excepted from these MMDR procedures as set forth in the
License Agreements.
With the exception of punitive or treble damages, the Panel shall
have full authority to award the relief it deems appropriate to resolve the
parties' disputes, including monetary awards and injunctions, mandatory or
prohibitory. The Panel has no authority to award punitive or treble damages
except that the Panel may allocate or assess responsibility for punitive or
treble damages assessed by another tribunal. Subject to the above limitations,
the Panel may, by way of example, but not of limitation:
i. interpret or construe the meaning of any terms,
phrase or provision in any license between BCBSA
and a Plan or a Controlled Affiliate relating to
the use of the BLUE CROSS(R) or BLUE SHIELD(R)
service marks.
ii. determine whether BCBSA, a Plan or a Controlled
Affiliate has violated the terms or conditions of
any license between the BCBSA and a Plan or a
Controlled Affiliate relating to the use of the
BLUE CROSS(R) or BLUE SHIELD(R) service marks.
iii. decide challenges as to its own jurisdiction.
iv. issue such orders for interim relief as it deems
appropriate pending Hearing and Award in any
Arbitration.
It is understood that the Panel is expected to resolve
issues based on governing principles of law, preserving to the
maximum extent legally possible the continued integrity of the Licensed Marks
and the BLUE CROSS/BLUE SHIELD system. The Panel shall apply federal law to all
issues which, if asserted in the United States District Court, would give rise
to federal question jurisdiction, 28 U.S.C. ss. 1331. The Panel shall apply
Illinois law to all issues involving interpretation, performance or construction
of any License Agreement or Controlled Affiliate License Agreement unless the
agreement otherwise provides. As to other issues, the Panel shall choose the
applicable law based on conflicts of law principles of the State of Illinois.
F. Administrative Conference And Preliminary Arbitration
Hearing
Within ten (10) days of the Panel being selected, the Presiding
Arbitrator will schedule an Administrative Conference to discuss scheduling of
the Arbitration Hearing and any other matter appropriate to be considered
including: any written discovery in the form of requests for production of
documents or requests to admit facts; the identity of any witness whose
deposition a party may desire and a showing of exceptional good cause for the
taking of any such deposition; the desirability of bifurcation or other
separation of the issues; the need for and the type of record of conferences and
hearings, including the need for transcripts; the need for expert witnesses and
how expert testimony should be presented; the appropriateness of motions to
dismiss and/or for full or partial summary judgment; consideration of
stipulations; the desirability of presenting any direct testimony in writing;
and the necessity for any on-site inspection by the Panel.
G. Discovery
i. Requests for Production of Documents: All requests
for the production of documents must be served as
of the date of the Administrative Conference as
set forth in Paragraph 3.F., above. Within twenty
(20) days after receipt of a request for
documents, a party shall produce all relevant and
non-privileged documents to the requesting party.
In his or her discretion, the Presiding Arbitrator
may require the parties to provide lists in such
detail as is deemed appropriate of all documents
as to which privilege is claimed and may further
require in-camera inspection of the same.
<PAGE>
ii. Requests for Admissions: Requests for Admissions
may be served up to 21 days prior to the
Arbitration Hearing. A party served with Requests
For Admissions must respond within twenty (20)
days of receipt of said request. The good faith
use of and response to Requests for Admissions is
encouraged, and the Panel shall have full
discretion, with reference to the Federal Rules of
Civil Procedure, in awarding appropriate sanctions
with respect to abuse of the procedure.
iii. Depositions As a general rule, the parties will
not be permitted to take deposition testimony for
discovery purposes. The Presiding Arbitrator, in
his or her sole discretion, shall have the
authority to permit a party to take such
deposition testimony upon a showing of exceptional
good cause, provided that no deposition, for
discovery purposes or otherwise, shall exceed
three (3) hours, excluding objections and colloquy
of counsel.
iv. Expert witness(es): If a party intends to present
the testimony of an expert witness during the oral
hearing, it shall provide all other parties with a
written statement setting forth the information
required to be provided by Fed. R. Civ. P.
26(b)(4)(A)(i) prior to the expiration of the
discovery period.
v. Discovery cut-off: The Presiding Arbitrator shall
determine the date on which the discovery period
will end, but the discovery period shall not
exceed forty-five (45) days from its commencement,
without the agreement of all parties.
vi. Additional discovery: Any additional discovery
will be at the discretion of the Presiding
Arbitrator. The Presiding Arbitrator is
authorized to resolve all discovery disputes,
which resolution will be binding on the parties
unless modified by the Arbitration Panel. If a
party refuses to comply with a decision resolving
a discovery dispute, the Panel, in keeping with
Fed. R. Civ. P. 37, may refuse to allow that party
to support or oppose designated claims or
defenses, prohibit that party from introducing
designated matters into evidence or, in extreme
cases, decide an issue submitted for resolution
adversely to that party.
H. Panel Suggested Settlement/Mediation
At any point during the proceedings, the Panel at the request of any
party or on its own initiative, may suggest that the parties explore settlement
and that they do so at or before the conclusion of the Arbitration Hearing, and
the Panel shall give such assistance in settlement negotiations as the parties
may request and the Panel may deem appropriate. Alternatively, the Panel may
direct the parties to endeavor to mediate their disputes as provided above, or
to explore a mini-trial proceeding, or to have an independent party render a
neutral evaluation of the parties' respective positions. The Panel shall enter
such sanctions as it deems appropriate with respect to any party failing to
pursue in good faith such Mediation or other alternate dispute resolution
methods.
I. Subpoenas On Third Parties
Pursuant to, and consistent with, the Federal Arbitration Act, 9
U.S.C. ss. 9 et seq., a party may request the issuance of a subpoena on a third
party, to compel testimony or documents, and, if good and sufficient cause is
shown, the Panel shall issue such a subpoena.
J. Arbitration Hearing
An Arbitration Hearing will be held within thirty (30) days after
the Administrative Conference if no discovery is taken, or within thirty (30)
days after the close of discovery, unless all parties and the Panel agree to
extend the Arbitration Hearing date, or unless the parties agree in writing to
waive the Arbitration Hearing. The parties may mutually agree on the location of
the Arbitration Hearing. If the parties fail to agree, the Arbitration Hearing
shall be held in Chicago, Illinois, or at such other location determined by the
Presiding Arbitrator to be most convenient to the participants. The Panel will
determine the date(s) and time(s) of the Arbitration Hearing(s) after
consultation with all parties and shall provide reasonable notice thereof to all
parties or their representatives.
K. Arbitration Hearing Memoranda
Twenty (20) days prior to the Arbitration Hearing, each party shall
submit to the other party (or parties) and to the Panel an Arbitration Hearing
Memorandum which sets forth the applicable law and any argument as to any
relevant issue. The Arbitration Hearing Memorandum will supplement, and not
repeat, the allegations, information and documents contained in or with the
Complaint, Answer, Counterclaim and Reply, if any. Ten (10) days prior to the
Arbitration Hearing, each party may submit to the other party (or parties) and
to the Panel a Response Arbitration Hearing Memorandum which sets forth any
response to another party's Arbitration Hearing Memorandum.
L. Notice For Testimony
Ten (10) days prior to the Arbitration Hearing, any party may serve
a Notice on any other party (or parties) requesting the attendance at the
Arbitration Hearing of any officer, employee or director of the other party (or
parties) for the purpose of providing noncumulative testimony. If a party fails
to produce one of its officers, employees or directors whose noncumulative
testimony during the Arbitration Hearing is reasonably requested by an adverse
party, the Panel may refuse to allow that party to support or oppose designated
claims or defenses, prohibit that party from introducing designated matters into
evidence or, in extreme cases, decide an issue submitted for mandatory dispute
resolution adversely to that party. This Rule may not be used for the purpose of
burdening or harassing any party, and the Presiding Arbitrator may impose such
orders as are appropriate so as to prevent or remedy any such burden or
harassment.
M. Arbitration Hearing Procedures
i. Attendance at Arbitration Hearing: Any person
having a direct interest in the proceeding is
entitled to attend the Arbitration Hearing. The
Presiding Arbitrator shall otherwise have the
power to require the exclusion of any witness,
other than a party or other essential person,
during the testimony of any other witness. It
shall be discretionary with the Presiding
Arbitrator to determine the propriety of the
attendance of any other person.
ii. Confidentiality: The Panel and all parties shall
maintain the privacy of the Arbitration
Proceeding. The parties and the Panel shall treat
the Arbitration Hearing and any discovery or other
proceedings or events related thereto, including
any award resulting therefrom, as confidential
except as otherwise necessary in connection with a
judicial challenge to or enforcement of an award
or unless otherwise required by law.
iii. Stenographic Record: Any party, or if the parties
do not object, the Panel, may request that a
stenographic or other record be made of any
Arbitration Hearing or portion thereof. The costs
of the recording and/or of preparing the
transcript shall be borne by the requesting party
and by any party who receives a copy thereof. If
the Panel requests a recording and/or a
transcript, the costs thereof shall be borne
equally by the parties.
iv. Oaths: The Panel may require witnesses to testify
under oath or affirmation administered by any duly
qualified person and, if requested by any party,
shall do so.
<PAGE>
v. Order of Arbitration Hearing: An Arbitration
Hearing shall be opened by the recording of the
date, time, and place of the Arbitration Hearing,
and the presence of the Panel, the parties, and
their representatives, if any. The Panel may, at
the beginning of the Arbitration Hearing, ask for
statements clarifying the issues involved.
Unless otherwise agreed, the complaining party (or
parties) shall then present evidence to support
their claim(s). The respondent(s) shall then
present evidence supporting their defenses and
Counterclaims, if any. The complaining party (or
parties) shall then present evidence supporting
defenses to the Counterclaims, if any, and
rebuttal.
Witnesses for each party shall submit to questions
by adverse parties and/or the Panel.
The Panel has the discretion to vary these
procedures, but shall afford a full and equal
opportunity to all parties for the presentation of
any material and relevant evidence .
vi. Evidence: The parties may offer such evidence as
is relevant and material to the dispute and shall
produce such evidence as the Panel may deem
necessary to an understanding and resolution of
the dispute. Unless good cause is shown, as
determined by the Panel or agreed to by all other
parties, no party shall be permitted to offer
evidence at the Arbitration Hearing which was not
disclosed prior to the Arbitration Hearing by that
party. The Panel may receive and consider the
evidence of witnesses by affidavit upon such terms
as the Panel deems appropriate.
The Panel shall be the judge of the relevance and
materiality of the evidence offered, and
conformity to legal rules of evidence, other than
enforcement of the attorney-client privilege and
the work product protection, shall not be
necessary. The Federal Rules of Evidence shall be
considered by the Panel in conducting the
Arbitration Hearing but those rules shall not be
controlling. All evidence shall be taken in the
presence of the Panel and all of the parties,
except where any party is in default or has waived
the right to be present.
Settlement offers by any party in connection with
Mediation or MDR proceedings, decisions or
recommendations of the selected mediators, and a
party's position papers or statements furnished to
the selected mediators shall not be admissible
evidence or considered by the Panel without the
consent of all parties.
<PAGE>
vii. Closing of Arbitration Hearing: The Presiding
Arbitrator shall specifically inquire of all
parties whether they have any further proofs to
offer or witnesses to be heard. Upon receiving
negative replies or if he or she is satisfied that
the record is complete, the Presiding Arbitrator
shall declare the Arbitration Hearing closed with
an appropriate notation made on the record.
Subject to being reopened as provided below, the
time within which the Panel is required to make
the award shall commence to run, in the absence of
contrary agreement by the parties, upon the
closing of the Arbitration Hearing.
With respect to complex disputes, the Panel may,
in its sole discretion, defer the closing of the
Arbitration Hearing for a period of up to thirty
(30) days after the presentation of proofs in
order to permit the parties to submit post-hearing
briefs and argument, as the Panel deems
appropriate, prior to making an award.
For good cause, the Arbitration Hearing may be
reopened for up to thirty (30) days on the Panel's
initiative, or upon application of a party, at any
time before the award is made
. N. Awards
An Award must be in writing and shall be made promptly by the Panel
and, unless otherwise agreed by the parties or specified by law, no later than
thirty (30) days from the date of closing the Arbitration Hearing. If all
parties so request, the Award shall contain findings of fact and conclusions of
law. The Award, and all other rulings and determinations by the Panel, may be by
a majority vote.
Parties shall accept as legal delivery of the Award the placing of
the Award or a true copy thereof in the mail addressed to a party or its
representative at its last known address or personal service of the Award on a
party or its representative.
Awards are binding only on the parties to the Arbitration and are
not binding on any non-parties to the Arbitration and may not be used or cited
as precedent in any other proceeding.
After the expiration of twenty (20) days from initial delivery, the
Award (with corrections, if any) shall be final and binding on the parties, and
the parties shall undertake to carry out the Award without delay.
Proceedings to confirm, modify or vacate an Award shall be conducted
in conformity with and controlled by the Federal Arbitration Act. 9 U.S.C.ss.1,
et seq.
<PAGE>
O. Return Of Documents
Within sixty (60) days after the Award and the conclusion of any
judicial proceedings with respect thereto, each party and the Panel shall return
any documents produced by any other party, including all copies thereof. If a
party receives a discovery request in any other proceeding which would require
it to produce any documents produced to it by any other party in a proceeding
hereunder, it shall not produce such documents without first notifying the
producing party and giving said party reasonable time to respond, if
appropriate, to the discovery request.
4. Miscellaneous
A. Expedited Procedures
Any party to a Mediation may direct a request for an expedited
Mediation Hearing to the Chairman of the Mediation Committee, to the selected
Mediators, and to all other parties at any time. The Chairman of the Mediation
Committee, or at his or her direction, the then selected Mediators, shall grant
any request which is supported by good and sufficient reasons. If such a request
is granted, the Mediation shall be completed within as short a period as
practicable, as determined by the Chairman of the Mediation Committee or, at his
or her direction, the then selected Mediators.
Any party to an Arbitration may direct a request for expedited
proceedings to the Administrator, to the Panel, and to all other parties at any
time. The Administrator, or the Presiding Arbitrator if the Panel has been
selected, shall grant any such request which is supported by good and sufficient
reasons. If such a request is granted, the Arbitration shall be completed within
as short a time as practicable, as determined by the Administrator and/or the
Presiding Arbitrator.
B. Temporary Or Preliminary Injunctive Relief
Any party may seek temporary or preliminary injunctive relief with
the filing of a Complaint or at any time thereafter. If such relief is sought
prior to the time that an Arbitration Panel has been selected, then the
Administrator shall select a single Arbitrator who is a lawyer who has no
interest in the subject matter of the dispute, and no connection to any of the
parties, to hear and determine the request for temporary or preliminary
injunction. If such relief is sought after the time that an Arbitration Panel
has been selected, then the Arbitration Panel will hear and determine the
request. The request for temporary or preliminary injunctive relief will be
determined with reference to the temporary or preliminary injunction standards
set forth in Fed. R. Civ. P. 65.
<PAGE>
C. Defaults And Proceedings In The Absence Of A Party
Whenever a party fails to comply with the MDR Rules in a manner
deemed material by the Panel, the Panel shall fix a reasonable time for
compliance and, if the party does not comply within said period, the Panel may
enter an Order of default or afford such other relief as it deems appropriate.
Arbitration may proceed in the event of a default or in the absence of any party
who, after due notice, fails to be present or fails to obtain an extension. An
Award shall not be made solely on the default or absence of a party, but the
Panel shall require the party who is present to submit such evidence as the
Panel may require for the making of findings, determinations, conclusions, and
Awards.
D. Notice
Each party shall be deemed to have consented that any papers,
notices, or process necessary or proper for the initiation or continuation of a
proceeding under these rules or for any court action in connection therewith may
be served on a party by mail addressed to the party or its representative at its
last known address or by personal service, in or outside the state where the MDR
proceeding is to be held.
The Corporate Secretary and the parties may also use facsimile
transmission, telex, telegram, or other written forms of electronic
communication to give the notices required by these rules.
E. Expenses
The expenses of witnesses shall be paid by the party causing or
requesting the appearance of such witnesses. All expenses of the MDR proceeding,
including compensation, required travel and other reasonable expenses of the
Panel, and the cost of any proof produced at the direct request of the Panel,
shall be borne equally by the parties and shall be paid periodically on a timely
basis, unless they agree otherwise or unless the Panel in the Award assesses
such expenses, or any part thereof against any party (or parties). In
exceptional cases, the Panel may award reasonable attorneys' fees as an item of
expense, and the Panel shall promptly determine the amount of such fees based on
affidavits or such other proofs as the Panel deems sufficient.
F. Disqualification Or Disability Of A Panel Member
In the event that any Arbitrator of a Panel with more than one
Arbitrator should become disqualified, resign, die, or refuse or be unable to
perform or discharge his or her duties after the commencement of MDR but prior
to the rendition of an Award, and the parties are unable to agree upon a
replacement, the remaining Panel member(s):
i. shall designate a replacement, subject to the
right of any party to challenge such replacement
for cause.
ii. shall decide the extent to which previously held
hearings shall be repeated.
If the remaining Panel members consider the proceedings to have
progressed to a stage as to make replacement impracticable, the parties may
agree, as an alternative to the recommencement of the Mandatory Dispute
Resolution process, to resolution of the dispute by the remaining Panel members.
In the event that a single Arbitrator should become disqualified,
resign, die, or refuse or be unable to perform or discharge his or her duties
after the commencement of MDR but prior to the rendition of an Award, and the
parties are unable to agree upon a replacement, the Administrator shall appoint
a successor, subject to the right of any party to challenge such successor for
cause, and the successor shall decide the extent to which previously held
proceedings shall be repeated.
G. Amendments
These MMDR Rules may be altered or amended from time to time by the
affirmative vote of fifty-one (51) percent of the Plans and fifty-one (51)
percent of the total then current weighted vote of all the Plans.
H. Extensions of Time
Any time limit set forth in these Rules may be extended upon
agreement of the parties and approval of: (i) the Chairman of the Mediation
Committee if the proceeding is then in Mediation; (ii) the Administrator if the
proceeding is in Arbitration, but no Arbitration Panel has been selected; or
(iii) the Arbitration Panel, if the proceeding is in Arbitration and the
Arbitration Panel has been selected.
I. Intervention
The Plans, their Controlled Affiliates, and BCBSA, to the extent
subject to MMDR pursuant to their License Agreements, shall have the right to
move to intervene in any pending Arbitration. A written motion for intervention
shall be made to: (i) the Administrator, if the proceeding is in Arbitration,
but no Arbitration Panel has been selected; or (ii) the Arbitration Panel, if
the proceeding is in Arbitration and the Arbitration Panel has been selected.
The written motion for intervention shall be delivered to the BCBSA Corporate
Secretary (which shall also constitute service on the BCBSA if it is a
respondent) and to any Plan(s) and/or Controlled Affiliate(s) which are parties
to the proceeding. Any party to the proceeding can submit written objections to
the motion to intervene. The motion for intervention shall be granted upon good
cause shown. Intervention also may be allowed by stipulation of the parties to
the Arbitration proceeding. Intervention shall be allowed upon such terms as the
Arbitration Panel decides.
<PAGE>
J. BCBSA Assistance In Resolution of Disputes
The resources and personnel of the BCBSA may be requested by any
member Plan at any time to try to resolve disputes with another Plan.
K. Neutral Evaluation
The parties can voluntarily agree at any time to have an independent
party render a neutral evaluation of the parties' respective positions.
<PAGE>
EXHIBIT 5-A
MEDIATION COMMITTEE
REPORTS TO: Board of Directors
CHARGE: 1. Develop and implement processes for resolving misunderstandings
or disagreements between Plans or between Plans and
the Association under the following circumstances:
a. Matters at issue regarding relationships between Plans or
between Plans and the Association.
b. Matters at issue regarding relationships between Plans or
between Plans and the Association.
c. Matters at issue under the Inter-Plan Bank, Reciprocity, and
Transfer Programs.
d. Matters at issue regarding contractor selection or
performance under the Medicare Part A Program.
2. Determination of equalization allowances and/or cost allowances
under FEP shall not be considered by this Committee.
MEMBERSHIP: Six to Eight
STAFF: Senior Vice President and General Counsel
EMPLOYEES' THRIFT PLAN
OF
TRIGON BLUE CROSS BLUE SHIELD
Effective Date
July 1, 1980
As Amended and Restated
January 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
<S> <C>
INTRODUCTION......................................................................................................1
ARTICLE I.........................................................................................................2
DEFINITIONS....................................................................................................2
1.01 Administrative Committee...............................................................................2
1.02 Affiliate..............................................................................................2
1.03 After-Tax Contribution Account.........................................................................2
1.04 Annual Additions.......................................................................................2
1.05 Beneficiary............................................................................................3
1.06 Board..................................................................................................3
1.07 Compensation...........................................................................................3
1.08 Contributions..........................................................................................4
1.09 Corporation............................................................................................4
1.10 Current Balance........................................................................................4
1.11 Deductible Account.....................................................................................4
1.12 Deductible Current Balance.............................................................................4
1.13 Defined Benefit Plan...................................................................................5
1.14 Defined Contribution Plan..............................................................................5
1.15 Delayed Retirement Date................................................................................5
1.16 Disability Retirement Date.............................................................................5
1.17 Early Retirement Date..................................................................................5
1.18 Effective Date.........................................................................................5
1.19 Employee...............................................................................................5
1.20 Employer...............................................................................................6
1.21 Employer Contribution Account..........................................................................6
1.22 Employer Contributions.................................................................................6
1.23 Employment Date........................................................................................6
1.24 Entry Date.............................................................................................7
1.25 ERISA..................................................................................................7
1.26 Fiduciary..............................................................................................7
1.27 Forfeiture.............................................................................................7
1.28 Fund...................................................................................................7
1.29 Hardship...............................................................................................7
1.30 Highly Compensated Employee............................................................................9
1.31 Hour of Service.......................................................................................12
1.32 Individual Account....................................................................................14
1.33 IRC...................................................................................................14
1.34 Investment Committee..................................................................................14
1.35 Investment Manager....................................................................................14
1.36 Limited Participant...................................................................................14
1.37 Limitation Year.......................................................................................14
1.38 Maximum Compensation..................................................................................15
1.39 Non-Highly Compensated Employee.......................................................................16
1.40 Normal Retirement Age.................................................................................16
1.41 Normal Retirement Date................................................................................16
1.42 Participant...........................................................................................16
1.43 Plan..................................................................................................16
1.44 Plan Year.............................................................................................16
1.45 Pre-Tax Contribution Account..........................................................................16
1.46 Pre-Tax Contributions.................................................................................17
1.47 Reemployment Date.....................................................................................17
1.48 Rollover Account......................................................................................17
1.49 Rollover Contributions................................................................................17
1.50 Service...............................................................................................17
1.51 Severance from Service Date...........................................................................19
1.52 Severance Period......................................................................................21
1.53 Total and Permanent Disability........................................................................21
1.54 Transfer Account......................................................................................22
1.55 Trust Agreement.......................................................................................22
1.56 Trustee...............................................................................................23
ARTICLE II.......................................................................................................24
ELIGIBILITY AND PARTICIPATION.................................................................................24
2.01 Eligibility...........................................................................................24
2.02 Participation.........................................................................................24
2.03 Limited Participants..................................................................................25
2.04 Designation of Beneficiary............................................................................25
ARTICLE III......................................................................................................27
CONTRIBUTIONS.................................................................................................27
3.01 Pre-Tax Contributions.................................................................................27
3.02 Employer Contributions................................................................................28
3.03 Rollover Contributions................................................................................28
3.04 Testing of Pre-Tax Contributions......................................................................29
3.05 Testing of Employer Contributions.....................................................................33
3.06 Multiple Use Limitation...............................................................................37
3.07 Maximum Pre-Tax Contributions.........................................................................38
ARTICLE IV.......................................................................................................40
INVESTMENT OPTIONS AND FUNDS..................................................................................40
4.01 Investment Options....................................................................................40
4.02 Election Procedure....................................................................................40
4.03 Investment Accounts...................................................................................41
ARTICLE V........................................................................................................42
ALLOCATIONS TO INDIVIDUAL ACCOUNTS............................................................................42
5.01 Individual Accounts...................................................................................42
5.02 Allocation of After-Tax Contributions.................................................................42
5.03 Allocation of Pre-Tax Contributions...................................................................42
5.04 Allocation of Employer Contributions..................................................................42
5.05 Allocation of Deductible Contributions................................................................42
5.06 Allocation of Rollover Contributions..................................................................42
5.07 Allocation of Income, Gains and Losses................................................................43
5.08 Forfeitures...........................................................................................43
5.09 Maximum Additions.....................................................................................43
5.10 Multiple Plan Participation...........................................................................44
ARTICLE VI.......................................................................................................47
VESTING AND DISTRIBUTIONS.....................................................................................47
6.01 Vesting...............................................................................................47
6.02 Normal Retirement.....................................................................................53
6.03 Delayed Retirement....................................................................................53
6.04 Early Retirement......................................................................................53
6.05 Disability Retirement.................................................................................54
6.06 Death Prior to the Commencement of Benefits...........................................................55
6.07 Death After the Commencement of Benefits..............................................................57
6.08 Method of Payment.....................................................................................58
6.09 Maximum Option Payable................................................................................62
6.10 Benefits to Minors and Incompetents...................................................................62
6.11 Payment of Benefits...................................................................................63
6.12 Restriction on Distribution of Pre-Tax Contributions..................................................64
6.13 Special Retirement Opportunity........................................................................64
ARTICLE VII......................................................................................................66
WITHDRAWALS, REINSTATEMENTS AND LOANS.........................................................................66
7.01 Withdrawals Generally.................................................................................66
7.02 Withdrawal of After-Tax Contributions.................................................................66
7.03 Withdrawal of Rollover Account, Transfer Account and Vested Employer Contribution Account.............66
7.04 Withdrawal of Deductible Account......................................................................67
7.05 Hardship Withdrawal...................................................................................67
7.06 Loans.................................................................................................68
ARTICLE VIII.....................................................................................................75
FUNDING.......................................................................................................75
8.01 Contributions.........................................................................................75
8.02 Trustee...............................................................................................75
8.03 Exclusive Benefit.....................................................................................76
ARTICLE IX.......................................................................................................77
FIDUCIARIES...................................................................................................77
9.01 General...............................................................................................77
9.02 Corporation...........................................................................................77
9.03 Trustee...............................................................................................78
9.04 Administrative Committee..............................................................................78
9.05 Investment Committee..................................................................................80
9.06 Claims Procedures.....................................................................................80
9.07 Records...............................................................................................82
9.08 Missing Persons.......................................................................................82
9.09 Maintenance of Individual Accounts, Deductible Accounts and Plan Operations...........................83
9.10 Disclosure............................................................................................83
9.11 Annual Accountings....................................................................................84
9.12 Funding Policy........................................................................................84
9.13 Indemnification of Fiduciaries........................................................................85
9.14 Equitable Allocations.................................................................................85
ARTICLE X........................................................................................................87
AMENDMENT AND TERMINATION OF THE PLAN.........................................................................87
10.01 Amendment of The Plan................................................................................87
10.02 Termination of The Plan..............................................................................87
10.03 Allocation of Funds..................................................................................88
10.04 Application of Assets................................................................................88
10.05 Automatic Termination................................................................................89
10.06 Merger, Consolidation and Transfers of Assets or Liabilities.........................................89
ARTICLE XI.......................................................................................................90
PROVISIONS RELATIVE TO EMPLOYERS INCLUDED IN PLAN.............................................................90
11.01 Method of Participation..............................................................................90
11.02 Withdrawal...........................................................................................90
ARTICLE XII......................................................................................................92
TOP HEAVY PLAN PROVISIONS.....................................................................................92
12.01 General..............................................................................................92
12.02 Definitions..........................................................................................92
12.03 Minimum Top Heavy Contribution.......................................................................95
12.04 Defined Benefit Plan Minimum Accrued Benefit.........................................................96
12.05 Multiple Plan Participation..........................................................................96
12.06 No Duplication of Minimum Benefit....................................................................96
12.07 Top Heavy Assumptions................................................................................97
12.08 Minimum Vesting......................................................................................97
ARTICLE XIII.....................................................................................................98
MISCELLANEOUS.................................................................................................98
13.01 Governing Law........................................................................................98
13.02 Construction.........................................................................................98
13.03 Expenses.............................................................................................98
13.04 Participant's Rights; Acquittance....................................................................98
13.05 Spendthrift Clause...................................................................................98
13.06 Mistake of Fact.....................................................................................103
13.07 Counterparts........................................................................................104
ADOPTION OF THE PLAN............................................................................................105
APPENDIX A......................................................................................................106
PROVISIONS APPLICABLE TO CONSOLIDATED RISK MANAGEMENT SERVICES...............................................106
APPENDIX B......................................................................................................110
PROVISIONS APPLICABLE TO PRIORITY HEALTH CARE, INC...........................................................110
</TABLE>
<PAGE>
47
INTRODUCTION
The Employees' Thrift Plan of Blue Cross and Blue Shield of Virginia became
effective July 1, 1980, and was subsequently amended with the most recent
amendment and restatement being effective January 1, 1994.
The amended and restated Thrift Plan herein contained constitutes an
amendment effective January 1, 1996, to the earlier plan provisions, rather than
a replacement of such plan. The plan provisions as in effect immediately prior
to this January 1, 1996 amendment, modified by Section 10.02 of this amended and
restated Plan, shall remain in effect for those Participants who are not
actively employed by the participating Employers at any time after such date.
The assets held under the trust will continue to be held pursuant to the Plan as
herein amended. Any special provisions applicable to funds transferred to the
Plan from another qualified retirement plan in a plan-to-plan transfer shall be
contained in the appropriate adoption agreement or in an Appendix attached to
and made a part of the Plan.
It is intended that this Plan, together with the Trust Agreement, be
considered a profit sharing plan as defined in IRC Section 404(a)(3) and
regulations issued pursuant thereto, and meet all the requirements of the
Internal Revenue Code of 1986 ("IRC"), to the extent applicable, and the Plan
shall be interpreted, wherever possible, to comply with the terms of the IRC and
all formal regulations and rulings issued under the IRC and amendments thereto.
Effective January 1, 1996, the Plan as amended and restated has the terms and
provisions hereinafter set forth.
<PAGE>
ARTICLE I
DEFINITIONS
As used herein and in the Trust Agreement entered into pursuant hereto,
unless otherwise required by the context, the following words and phrases shall
have the meanings indicated:
1.01 Administrative Committee means the Administrative Committee provided
for in Section 9.04.
1.02 Affiliate means an organization which is a member of the same
controlled group of organizations as the Employer as determined
pursuant to IRC Sections 414(b), 414(c), 414(m) and 414(o) but which is
not an Employer.
1.03 After-Tax Contribution Account means that portion of a Participant's
Individual Account attributable to his After-Tax Basic Contributions
and After-Tax Additional Contributions made to the Plan for periods
through December 31, 1987, and the proportionate share of the
adjustment of the Fund determined in accordance with Section 5.07.
1.04 Annual Additions means for any Employee in any Limitation Year the sum
of (a) Contributions made by the Employer including excess Pre-Tax
Contributions returned pursuant to Sections 3.04 and 3.07 and any
Employer Contributions which are forfeited and used to reduce
Contributions of the Employer or distributed under the provisions of
Sections 3.04, 3.05 and 3.07, (b) Contributions made by the
Participant, (c) any Forfeitures allocated to his account in a given
Limitation Year, (d) amounts allocated after March 31, 1984, to an
individual medical account, as defined in IRC Section 415(l)(2), which
is part of a pension or annuity plan maintained by the Employer and (e)
amounts derived from contributions paid or accrued in taxable years
after December 31, 1985, which are attributable to post-retirement
medical benefits allocated to the separate account of a Key Employee
under a welfare benefit fund, as defined in IRC Section 419(e)
maintained by the Employer.
1.05 Beneficiary means any person designated by a Participant to receive
such benefits as may become payable after the death of such
Participant.
1.06 Board means the Board of Directors of the Corporation.
1.07 Compensation means, for a Participant, total earnings, prior to
withholding, paid to him by his Employer during a Plan Year, including
bonuses, extra compensation, overtime payments and any other amounts
which the Employee could have elected to receive as cash in the current
year as taxable income in lieu of a non-taxable benefit under a plan
which is maintained by the Employer pursuant to IRC Section 125.
Compensation shall exclude flex dollars, tax gross ups, relocation
expenses, referral bonuses, tuition reimbursement, the imputed value of
group life insurance, the economic value attributable to the Employee
under split dollar life insurance, car allowances, contest earnings
(other than marketing or sales incentives) and any Contributions by the
Employer (other than Pre-Tax Contributions) to this or any other
employee benefit programs. Reference herein to Compensation with
respect to any period of time shall mean the Compensation, as defined
in the preceding sentences, of a Participant for such period.
For purposes of determining Employer Contributions under Section
3.02, Compensation shall mean the Compensation as defined in the
preceding sentences, of a Participant during the applicable pay period.
Notwithstanding the preceding, in no event shall Compensation
during a Plan Year exceed one hundred fifty thousand dollars ($150,000)
or such legislated amount as may be determined pursuant to IRC Section
401(a)(17), provided that the increase determined as of any January 1
of a calendar year by the Secretary of the Treasury shall be effective
for Plan Years beginning in such calendar year. In determining the
Compensation of a Participant for purposes of this limit, the rules of
IRC Section 414(q)(6) shall apply, except in applying such rules, the
term "family" shall include only the spouse of the Participant and any
lineal descendants of the Participant who have not attained age
nineteen (19) before the close of the year. If, as a result of the
application of such rules, the adjusted one hundred fifty thousand
dollar ($150,000) limit is exceeded, then the limitation shall be
prorated among the affected individuals in proportion to each such
individual's Compensation as determined under this Section prior to the
application of the limit.
1.08 Contributions means payments made to the Plan which are provided for
herein by the Employer and/or by Participants and Employees pursuant to
Article III for the purpose of providing the benefits under this Plan.
1.09 Corporation means Blue Cross and Blue Shield of Virginia, a Virginia
corporation doing business as Trigon Blue Cross Blue Shield, or any
successor thereto. The Corporation is the sponsor, named Fiduciary and
administrator of the Plan as it relates to the Employees of
participating Employers.
1.10 Current Balance as used in regard to a Participant's Individual Account
or stipulated portion thereof, means, as of any date, the market value
of the Participant's Individual Account or portion thereof determined
as of the next following Valuation Date.
1.11 Deductible Account means the account established for a Participant to
hold voluntary Deductible Contributions made to the Plan for periods
prior to January 1, 1987, and the proportionate share of the adjustment
of the Fund determined in accordance with Section 5.07. All amounts
held in a Participant's Deductible Account shall at all times be one
hundred percent (100%) vested.
1.12 Deductible Current Balance as used in regard to a Participant's
Deductible Account or stipulated portion thereof means, as of any date,
the market value of the Participant's Deductible Account as of the next
following Valuation Date.
1.13 Defined Benefit Plan means a plan established and qualified under IRC
Section 401 or 403, except to the extent it is, or is treated as, a
Defined Contribution Plan.
1.14 Defined Contribution Plan means a plan established and qualified under
IRC Section 401 or 403, which provides for individual accounts for each
participant therein and for benefits based solely on the amount
contributed to each participant's account and any income and expenses
or gains or losses (both realized and unrealized) which may be
allocated to such accounts.
1.15 Delayed Retirement Date means the date of the Participant's termination
of employment after his Normal Retirement Date.
1.16 Disability Retirement Date means the date the Administrative Committee
determines that a Participant is Totally and Permanently Disabled.
1.17 Early Retirement Date means the date of the Participant's termination
of employment prior to his Normal Retirement Date provided that the
Participant has attained the age of fifty-five (55).
1.18 Effective Date means July 1, 1980, or such later date as of which an
Employer adopts the Plan for its Employees. The effective date of this
amended and restated Plan shall be January 1, 1996.
1.19 Employee means any person employed by the Employer excluding any person
(a) considered a leased employee within the meaning of IRC Section
414(n); (b) who is represented by a collective bargaining unit for
purposes of bargaining with the Employer with respect to wages, hours
of employment or other conditions of employment unless the resulting
bargaining agreement provides for participation in the Plan; and (c)
effective on and after January 1, 1992, any person deemed to be a
"temporary" employee in accordance with the Employer's established
human resource policy, and any employee holding the job "Homemaker",
job number 0068.
A leased employee is a person other than an employee of the
Employer who pursuant to an agreement between the Employer and any
other person (leasing organization) has performed services for the
Employer or for the Employer and related persons, determined in
accordance with IRC Section 414(n)(6), on a substantially full time
basis for a period of at least one year, and such services are of a
type historically performed by employees in the business field of the
Employer. Contributions or benefits provided a leased employee by the
leasing organization which are attributable to services performed for
the Employer shall be treated as provided by the Employer.
1.20 Employer means, collectively or individually as the context may
indicate, the Corporation and any other corporation which (a) is a
member of the same controlled group of corporations as the Corporation
[as determined pursuant to IRC Sections 414(b), 414(c), 414(m) and
414(o)], (b) the Board has authorized to adopt the Plan and (c) by
taking appropriate action has adopted the Plan and become signatory to
the Trust Agreement, or any successor to one or more of such entities.
1.21 Employer Contribution Account means that portion of a Participant's
Individual Account attributable to the matching Employer Contribution
allocated to such Participant pursuant to Section 5.04 and the
proportionate share of the adjustment of the Fund determined in
accordance with Section 5.07 attributable to his Employer Contribution
Account. The Employer Contribution Account may include amounts
transferred to this Plan in a plan-to-plan transfer as specified in an
Appendix and/or in an appropriate adoption agreement.
1.22 Employer Contributions means Contributions made by an Employer pursuant
to Section 3.02.
1.23 Employment Date means the date an Employee first performs an Hour of
Service for the Employer, except that with respect to an Employee who
was in the employ of the Employer on January 1, 1987, the term
"Employment Date" shall mean the most recent date coincident with or
immediately preceding January 1, 1987, on which such Employee first
performed an Hour of Service either for the first time or after being
reemployed.
1.24 Entry Date means January 1, 1987, and each January 1 and July 1
thereafter.
1.25 ERISA means the Employee Retirement Income Security Act of 1974, as
amended. Any reference to any Section of ERISA shall be deemed to
include any applicable regulations pertaining to such Section.
1.26 Fiduciary means the Corporation, Employer, Trustee, Administrative
Committee, Investment Committee and any individual, corporation, firm
or other entity which assumes, in accordance with Article IX,
responsibilities of the Corporation, Employer, Trustee, Administrative
Committee or Investment Committee respecting management of the Plan or
the disposition of its assets.
1.27 Forfeiture means any amount held upon termination of employment of a
Participant which he is not entitled to receive as a distribution in
accordance with the terms of Article VI.
1.28 Fund means the trust fund created in accordance with Article VIII.
1.29 Hardship means, with respect to the determination of certain withdrawal
rights hereunder, a withdrawal authorized by the Administrative
Committee based upon a finding that the following rules are satisfied.
1.29(a) The withdrawal is necessary to enable the Participant to meet
unusual or special situations in his financial affairs which
result in an immediate and heavy financial need.
1.29(b) The amount of the withdrawal is not available from other
resources of the Participant.
1.29(c) The amount distributed does not exceed the amount required to
meet the immediate financial need created.
1.29(d) In furtherance of Section 1.29(a), a financial Hardship shall
be deemed to be present if the withdrawal request is on account
of:
(i) Medical expenses described in IRC Section 213(d) incurred
by the Participant, the Participant's spouse or any
dependents of the Participant (as defined in IRC Section
152);
(ii) Purchase (excluding mortgage payments) of a principal
residence for the Participant;
(iii) Payment of tuition and related fees for the next twelve
(12) months of post-secondary education for the
Participant, his spouse, children or dependents (as
defined in IRC Section 152);
(iv) The need to prevent the eviction of the Participant from
his principal residence or foreclosure on the mortgage on
the Participant's principal residence;
(v) Payment of funeral expenses and unreimbursed medical
expenses related to the last illness of a member of the
Participant's immediate family;
(vi) Loss by the Participant or his spouse of more than fifty
percent (50%) of normal income;
(vii) Payment of an outstanding court ordered judgment greater
than five hundred dollars ($500); or
(viii) Such other events as may be determined by the Internal
Revenue Service.
1.29(e) The Administrative Committee shall make a determination of
Hardship on the basis of all relevant facts and circumstances
that the distribution is of an amount necessary to satisfy the
financial need and that it is not available from other
resources of the Participant. The Administrative Committee may
rely upon reasonable representations by the Participant that
the need cannot otherwise be satisfied by:
(i) Reimbursement or compensation by insurance or otherwise;
(ii) Reasonable liquidation of the Participant's assets to the
extent the liquidation would not itself cause an
immediate and heavy financial need;
(iii) The cessation of Pre-Tax Contributions under this Plan or
other plans maintained by the Employer;
(iv) By other distributions or nontaxable (at the time of the
loan) loans from this Plan and any other plans maintained
by the Employer or any other employer; or
(v) By borrowing from commercial sources on reasonable
commercial terms.
1.30 Highly Compensated Employee means:
1.30(a) Any employee who during the Plan Year or preceding twelve (12)
month period meets one of the following criteria --
(i) was at any time a Five Percent (5%) Owner of the Employer
or Affiliate;
(ii) received Maximum Compensation from the Employer or
Affiliate in excess of seventy-five thousand dollars
($75,000) (or such larger amount as may be determined by
the Secretary of Treasury);
(iii) received Maximum Compensation from the Employer or
Affiliate in excess of fifty thousand dollars ($50,000)
(or such larger amount as may be determined by the
Secretary of Treasury) and was in the top-paid group
consisting of the top twenty percent (20%) of the
employees (considering all employees of the Employer or
Affiliate) when ranked on the basis of Maximum
Compensation during such Plan Year; or
(iv) was at any time an officer and received Maximum
Compensation greater than fifty percent (50%) of the
amount in effect under IRC Section 415(b)(1)(A) for such
Plan Year. If, for any Plan Year, no officer of the
Employer or Affiliate is identified pursuant to this
subsection, the highest paid employee of the Employer or
Affiliate for such Plan Year shall be treated as a Highly
Compensated Employee. No more than fifty (50) employees,
or if lesser, the greater of three (3) employees or ten
percent (10%) of the employees, shall be treated as
officers.
An employee shall be considered a Highly
Compensated Employee for purposes of Section 1.30(a)(i) if
he was a Five Percent (5%) Owner of the Employer or
Affiliate in the Plan Year of determination or the
preceding Plan Year. An employee shall not be considered a
Highly Compensated Employee for purposes of Sections
1.30(a)(ii), 1.30(a)(iii) and 1.30(a)(iv) if he was a
Highly Compensated Employee in the current Plan Year but
was not a Highly Compensated Employee in the preceding
Plan Year unless such employee is a member of the group
consisting of the one hundred (100) employees paid the
greatest Maximum Compensation by the Employer or an
Affiliate during the Plan Year for which such
determination is being made.
If an employee is a Family Member of another
employee who is (i) a Five Percent (5%) Owner of the
Employer or Affiliate, or (ii) one (1) of the top ten (10)
highest paid employees of the Employer or Affiliate in the
current or preceding Plan Year, the Maximum Compensation
paid to and Contributions made on behalf of such Family
Member shall be deemed to have been made on behalf of such
employee. In calculating the Maximum Compensation paid to
such Family Member, the Maximum Compensation of the
Employee, the Employee's spouse and any lineal descendants
under the age of nineteen (19) shall be limited to one
hundred fifty thousand dollars ($150,000), as adjusted by
the Secretary of Treasury.
Any former employee shall be treated as a Highly
Compensated Employee if such employee was a Highly
Compensated Employee (i) when he terminated employment, or
(ii) in any year following attainment of age fifty-five
(55). In addition, an employee who works only a de minimis
amount of service may be considered a Highly Compensated
Employee.
1.30(b) The following employees shall be excluded for purposes of
determining who is in the top-paid group under Section
1.30(a)(iii):
(i) employees who have not completed six (6) months of
service;
(ii) employees who normally work less than seventeen and
one-half (17 1/2) hours per week;
(iii) employees who normally work not more than six (6)
months during any year;
(iv) employees who have not attained age twenty-one (21);
(v) except to the extent provided in regulations,
employees who are included in a collective
bargaining agreement between employee
representatives and an Employer or Affiliate; and
(vi) employees who are nonresident aliens and who receive
no earned income [within the meaning of IRC Section
911(d)(2)] from an Employer or Affiliate which
constitutes income from sources within the United
States [within the meaning of IRC Section
861(a)(3)].
1.30(c) For purposes of this Section 1.30 and Sections 3.04 and
3.05 the following definitions shall apply:
(i) The term "Family Member" shall mean with respect to
any employee, such employee's spouse and lineal
ascendants or descendants and the spouses of such
lineal ascendants or descendants.
(ii) The term "Five Percent (5%) Owner" shall have the
same meaning as specified in IRC Section 416(i).
1.30(d) The determination of Maximum Compensation for purposes of
determining who is a Highly Compensated Employee shall be
made without regard to IRC Sections 125, 402(a)(8), and
402(h)(1)(B), and in the case of contributions by the
Employer made pursuant to a salary reduction agreement,
without regard to IRC Section 403(b).
1.31 Hour of Service means the sum of Section 1.31(a), Section 1.31(b),
Section 1.31(c) and Section 1.31(d) following:
1.31(a) Each hour for which an Employee is paid, or entitled to
payment for the performance of duties for the Employer.
These hours shall be credited to the Employee for the
computation period in which the duties are performed.
1.31(b) Each hour for which an Employee is paid, or entitled to
payment, by the Employer on account of a period of time
during which no duties are performed (irrespective of
whether the employment relationship has terminated) due to
vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, or leave of absence. No
more than five hundred one (501) Hours of Service shall be
credited under this Section 1.36(b) for any single
continuous period (whether or not such period occurs in a
single computation period). Hours of Service under this
paragraph shall be calculated and credited pursuant to
Department of Labor Regulations Section 2530.200b-2 which
are incorporated herein by this reference; and
1.31(c) Each hour for which an Employee presumably would have
performed services for and been compensated by the
Employer but for the fact that the Employee was on a
military leave of absence for service in the armed forces
of the United States of America, provided that the
Employee entered such service directly from the employ of
the Employer and was discharged from such service and
reemployed by the Employer within the period during which
his employment rights as a veteran are protected by law.
1.31(d) Each hour for which back pay, irrespective of mitigation
of damages, is either awarded or agreed to by the
Employer. The same Hours of Service shall not be credited
both under Section 1.31(a) or Section 1.31(b), as the case
may be, and under this Section 1.31(d). These hours shall
be credited to the Employee for the computation period or
periods to which the award or agreement pertains rather
than the computation period in which the award, agreement
or payment is made; and
1.31(e) Hours of Service to be credited under the Plan shall be
determined on the basis of the actual hours for which an
Employee is paid or entitled to payment. However, any
Employee for whom no hourly employment records are kept by
the Employer shall be credited with ninety-five (95) Hours
of Service for each semi-monthly payroll period in which
he would have been credited with at least one (1) Hour of
Service under the foregoing provisions if hourly records
were available.
1.32 Individual Account means the detailed record kept of the amounts
credited or charged to each Participant in accordance with the terms of
this Plan. The Individual Account is comprised of a Pre-Tax
Contribution Account, an After-Tax Contribution Account, an Employer
Contribution Account, a Rollover Account and a Transfer Account, if
applicable. The Participant's Individual Account may include any
subaccounts deemed necessary to provide appropriate recordkeeping as
determined by the Administrative Committee.
1.33 IRC means the Internal Revenue Code of 1986, as amended. Any reference
to any section of the IRC shall be deemed to include any applicable
regulations and rulings pertaining to such section and shall also be
deemed a reference to comparable provisions of future laws.
1.34 Investment Committee means the Investment Committee provided for in
Section 9.05.
1.35 Investment Manager means a person or entity, as defined in ERISA
Section 3(38), which has the power to manage, acquire, or dispose of
Plan assets and which is either:
1.35(a) an investment advisor registered under the Investment
Advisors Act of 1940; or
1.35(b) a bank as defined in the Investment Advisors Act of 1940;
or
1.35(c) an insurance company qualified to manage assets of
retirement plans or perform similar functions under the
laws of more than one state; and which acknowledges in
writing that it is a Fiduciary with respect to the Plan.
1.36 Limited Participant means a Participant whose participation in the Plan
has ceased as a result of (i) his transfer of employment from a
participating Employer to the employment of an Affiliate or (ii) whose
employment status changes to a temporary employee or a collective
bargaining employee as specified in Section 1.19.
1.37 Limitation Year means the twelve (12) month period commencing on
January 1 and ending on December 31.
1.38 Maximum Compensation means a Participant's earned income, wages,
salaries, fees for professional services and other amounts received for
personal services actually rendered in the course of employment with an
Employer maintaining the Plan (including, but not limited to,
commissions paid salesmen, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips,
bonuses, fringe benefits, reimbursements and expense allowances) and
excluding the following:
1.38(a) Employer contributions to a plan of deferred compensation
to the extent contributions are not included in the gross
income of the Employee for the taxable year in which
contributed, Employer Contributions made on behalf of an
Employee pursuant to IRC Sections 125 and 401(k) or on
behalf of an Employee to a simplified employee pension plan
described in IRC Section 408(k) to the extent such
contributions are deductible under IRC Section 404(h), and
any distributions from a plan of deferred compensation
whether or not included in the gross income of the Employee
when distributed.
1.38(b) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by an
Employee becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
1.38(c) Amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock
option; and
1.38(d) Other amounts which receive special tax benefits, or
contributions made by an Employer (whether or not under a
salary reduction agreement) towards the purchase of an IRC
Section 403(b) annuity contract (whether or not the
contributions are excluded from the gross income of the
Employee).
Maximum Compensation for any Limitation Year is the compensation
actually paid or included in gross income during such year. Except for
purposes of Section 5.09, for Limitation Years commencing on and after
January 1, 1994, Maximum Compensation shall be limited to one hundred
fifty thousand dollars ($150,000) or such legislated amount as may be
determined by the Secretary of the Treasury pursuant to IRC Section
401(a)(17).
Maximum Compensation for purposes of determining who is a Key
Employee shall include Section 1.38(a) and 1.38(d).
This definition shall be interpreted consistent with IRC Section
415. Further, such law and regulations shall be controlling in all
determinations under this definition, inclusive of any provisions and
requirements stated thereunder but hereinabove absent.
1.39 Non-Highly Compensated Employee means any Employee who is not a Highly
Compensated Employee.
1.40 Normal Retirement Age means the date a Participant attains the age of
sixty-five (65).
1.41 Normal Retirement Date means the date on which a Participant attains
his Normal Retirement Age.
1.42 Participant means any Employee who becomes a Participant as provided in
Article II.
1.43 Plan means the Employees' Thrift Plan of Trigon Blue Cross Blue Shield
as contained herein or as duly amended.
1.44 Plan Year means initially the six (6) month period beginning July 1,
1980, and ending on December 31, 1980. Thereafter, Plan Year shall mean
the twelve (12) month period beginning on each January 1 and ending on
each December 31.
1.45 Pre-Tax Contribution Account means that portion of a Participant's
Individual Account attributable to Pre-Tax Contributions allocated to
such Participant pursuant to Section 5.03 and the proportionate share
of the adjustment of the Fund determined in accordance with Section
5.07 attributable to his Pre-Tax Contribution Account. The Pre-Tax
Contribution Account may include amounts transferred to this Plan in a
plan-to-plan transfer as specified in an Appendix and/or in an
applicable adoption agreement.
1.46 Pre-Tax Contributions means Contributions made by an Employer on the
Participant's behalf pursuant to Section 3.01.
1.47 Reemployment Date means the date, following a Severance Period, on
which an Employee again performs an Hour of Service.
1.48 Rollover Account means the portion of the Individual Account
established on behalf of an Employee to hold the amount he elects to
rollover into this Plan pursuant to IRC Section 402(c)(4) and the
Participant's proportionate share of the adjustment of the Fund
determined in accordance with Section 5.07 attributable to his Rollover
Account. The Administrative Committee may establish subaccounts within
the Rollover Account as it deems applicable. All amounts held in a
Participant's Rollover Account shall at all times be one hundred
percent (100%) vested.
1.49 Rollover Contributions means Rollover Contributions made to the Fund
pursuant to Section 3.03.
1.50 Service means, as of any date, the aggregate of an Employee's periods
of Service required to be recognized under this Plan commencing on the
Employee's Employment Date or any Reemployment Date subsequent thereto
and ending on a Severance from Service Date. For purposes of this
Section 1.50, each completed month shall be counted as Service
hereunder.
For purposes of determining Service for vesting under Section
6.01, the following provisions shall be applicable.
1.50(a) For purposes of Section 6.01(b), a full month of Service shall
be granted for any month or portion thereof in which a
Participant contributes pursuant to Section 3.01. If a
Participant does not make a Contribution pursuant to Section
3.01 for any month or portion thereof in order to preclude his
exceeding the seven thousand dollar ($7,000) all source limit
(as adjusted) provided for in IRC Section 402(g)(5), the
Participant shall receive credit for Service for any such
month as if he had made a Contribution pursuant to Section
3.01. Further, if a Participant is transferred to an Affiliate
and becomes a Limited Participant, the Limited Participant
shall receive credit for Service for any month he is a Limited
Participant as if he had made a Contribution pursuant to
Section 3.01.
1.50(b) The following rule shall be applicable to Employees employed
by Blue Cross and Blue Shield of Virginia on and/or before
December 31, 1986. If an Employee was a Participant in the
Employees' Thrift Plan of Blue Cross and Blue Shield of
Virginia on and/or before such date and is subsequently
eligible for a reinstatement of his Individual Account
applicable to Forfeitures occurring prior to January 1, 1987,
and elects to reinstate said amount pursuant to Section 6.01,
Service for purposes of Section 6.01 shall be applied to such
reinstated Employer Contributions by crediting twelve (12)
months of Service for each prior class year of forfeiture.
1.50(c) The following rule shall be applicable to Employees
participating in the Blue Cross and Blue Shield of
Southwestern Virginia Employee Appreciation Savings Plan on
and/or before December 31, 1986. If a Participant is
subsequently eligible for a reinstatement of his Individual
Account applicable to Forfeitures occurring prior to January
1, 1987, and elects to reinstate said amount pursuant to
Section 6.01, Service for purposes of Section 6.01 shall be
applied to such reinstated Employer Contributions by crediting
service as determined under the Blue Cross and Blue Shield of
Southwestern Virginia Employee Appreciation Savings Plan
through December 31, 1986. To this end, if a Participant has a
Plan Year of Service under the Employee Appreciation Savings
Plan, each such period shall be deemed to be twelve (12)
months of Service hereunder.
In addition, for purposes of determining Service for vesting
under Section 6.01, and effective for periods commencing on and after
January 1, 1992, for purposes of determining Service for eligibility
under Section 2.01, inclusive of any such Service prior to January 1,
1992, the following provisions shall be applicable.
1.50(d) Periods of employment with an Affiliate which would have
constituted Service had the Participant been employed by the
Employer shall be included as if such periods had been
performed for the Employer.
1.50(e) Periods of employment with the Employer other than as an
Employee which would have constituted Service had the
Participant been employed as an Employee shall be included
as if such periods had been performed as an Employee.
Further, effective for periods commencing on and after January 1,
1992, for purposes of determining Service for eligibility under Section
2.01, the following provision shall be applicable.
1.50(f) Periods of employment with any other Blue Cross and/or Blue
Shield organization shall be included as if such person had
been employed by the Employer provided that the Employee was
transferred or employed directly from such other Blue Cross
and/or Blue Shield organization to the Employer.
1.51 Severance from Service Date means the earlier of the following:
1.51(a) The date on which an Employee quits, retires, is
discharged or dies, provided he is not credited with an
Hour of Service within twelve (12) months of such date
with an Employer or Affiliate; or
1.51(b) The first anniversary date of the beginning of a period in
which an Employee remains absent from service (with or
without pay) with the Employer or Affiliate for any reason
other than quitting, retiring, being discharged or dying.
Such absence includes, by way of example without
limitation: vacation, holiday, sickness, leave of absence
or a period of paid or unpaid leave taken pursuant to the
Family and Medical Leave Act of 1993, or layoff or service
in the armed forces of the United States of America
required by law or during a period of war or national
emergency, provided that the Employee entered such service
directly from the employ of the Employer, and was
discharged from such service and reemployed by the
Employer within the period during which his employment
rights as a veteran are protected by law.
1.51(c) Notwithstanding anything in this Section 1.59 to the
contrary, effective for periods prior to January 1, 1985,
no Severance from Service Date shall occur and all
completed years and months of service shall be aggregated
if the Employee is rehired by the Employer prior to the
expiration of twelve (12) complete months following the
date the Employee quits, retires or is discharged.
Effective for periods on and after January 1, 1985, no
Severance from Service Date shall occur and all completed
years and months of service shall be aggregated if the
Employee is rehired by the Employer prior to the
expiration of five (5) consecutive Plan Years, beginning
with the Plan Year in which the Employee separates from
service.
For periods commencing on or after January 1, 1985, and to the
extent not already credited, Service shall be credited solely for
purposes of determining whether a Severance from Service Date has
occurred with respect to an Employee who is absent from work regardless
of whether the Employee is paid for such absence:
1.51(d) By reason of the pregnancy of the Employee,
1.51(e) By reason of the birth of a child of the Employee,
1.51(f) By reason of the placement of a child with the Employee in
connection with the adoption of such child by such
Employee, or
1.51(g) For purposes of caring for such child for a period
beginning immediately following such birth or placement.
For purposes of determining a Severance from Service Date of an
Employee who is absent from service beyond the first anniversary of the
first day of absence by reason of a maternity or paternity absence
described in Section 1.51(d), Section 1.51(e), Section 1.51(f) and
Section 1.51(g), such Severance from Service Date shall be the second
(2nd) anniversary of the date of such absence. The period between the
first and second anniversaries of the first day of absence from work is
neither a period of Service nor a Severance Period.
Further, the Administrative Committee may request that the
Employee furnish any information the Administrative Committee may
require to establish that the absence is for the reasons hereinbefore
provided and the number of days for which there was such an absence. If
such information is not submitted in a timely manner, no Hours of
Service shall be credited pursuant to this paragraph.
1.52 Severance Period means a period of time commencing on an Employee's
Severance from Service Date and ending on his subsequent Reemployment
Date.
1.53 Total and Permanent Disability means the incapacity of a Participant by
reason of bodily injury or physical or mental disease which prevents
the Participant from performing his customary duties with the Employer
and which, in the opinion of the Administrative Committee, will
continue to prevent the Participant from performing his customary
duties for the remainder of his lifetime. Total and Permanent
Disability shall be determined by the Administrative Committee in
accordance with uniform principles consistently. Total and Permanent
Disability is determined by the Administrative Committee in accordance
with uniform principles consistently applied on the basis of competent
medical evidence or such other evidence as the Administrative Committee
may deem sufficient or on the basis that the Participant is eligible
for disability benefits under the long term disability plan sponsored
by the Employer.
The date when a Participant's disability occurred shall be
determined by the Administrative Committee. A Participant shall not,
however, be considered disabled if the Administrative Committee
determines that his disability resulted from or arose as a result of:
1.53(a) service in the armed forces of any country;
1.53(b) intentionally self-inflicted injury;
1.53(c) participation in a felonious criminal act which results in
the Participant's conviction in a court of law.
1.54 Transfer Account means the account established for a Participant to
hold the value of funds directly transferred to the Plan from another
qualified retirement plan that is not considered a Rollover
Contribution. The Administrative Committee may establish subaccounts
within the Transfer Account as it deems appropriate. The Participant
shall be vested in his Transfer Account as provided in an appropriate
adoption agreement or an Appendix to the Plan.
1.55 Trust Agreement means the agreement entered into between the Employer
and the Trustee pursuant to Article VIII.
1.56 Trustee means such individual, individuals or financial institution, or
a combination of them as shall be designated in the Trust Agreement to
hold in trust any assets of the Plan for the purpose of providing
benefits under the Plan, and shall include any successor trustee to the
trustee initially designated thereunder.
1.57 Valuation Date means each business day in which the New York Stock
Exchange is open as of which the Fund shall be valued at fair market
value.
<PAGE>
ARTICLE II
ELIGIBILITY AND PARTICIPATION
2.01 Eligibility - Each person who was a Participant on December 31, 1995,
shall continue as a Participant after such date, subject to the
provisions hereinafter contained.
Each person who was not a Participant on December 31, 1995, and
each person who becomes an Employee after such date and who is not
already a Participant shall be eligible to become a Participant on the
Entry Date coinciding with or next following the completion of six (6)
months of service, subsequent to the date on which he completed his
first Hour of Service.
Employees of an Affiliate who have otherwise met the eligibility
requirements hereunder shall be eligible to participate on the date
they are employed by an Employer.
If an Employee ceases to be a Participant due to his termination
of employment and is later reemployed, he shall be eligible to
participate on his Reemployment Date.
2.02 Participation - Participation in the Plan is voluntary. In order to
become a Participant, an Employee must complete an application form
provided by the Administrative Committee on or before the fifteenth
(15th) day of the month preceding the Entry Date as of which it is to
be effective and as of which he is eligible. Each eligible Employee, in
order to become a Participant, must have Pre-Tax Contributions
contributed on his behalf to the Plan in accordance with Section 3.01.
If an Employee does not participate when initially eligible, he may
elect to participate effective with the Entry Date coinciding with or
next following his election to participate if he is then eligible. For
periods prior to January 1, 1987, any Employee meeting the eligibility
requirements of Section 2.01 was also a Participant by electing to make
Deductible Contributions pursuant to Section 5.05.
Once a Participant, an Employee shall remain a Participant until
such time that he has no balance in his Individual Account.
2.03 Limited Participants - A Participant whose employment status changes
due to (i) a transfer of his employment from that of a participating
Employer to the employment of an Affiliate or (ii) whose employment
status changes to a temporary employee or a collective bargaining
employee as specified in Section 1.19, shall become a Limited
Participant hereunder as of the date of the change in employment status
and such Limited Participant shall continue to earn Service under
Section 6.01 for each month he is a Limited Participant as if he had
made a Contribution pursuant to Section 3.01. A Limited Participant
shall continue to be eligible for withdrawals pursuant to the
provisions of Sections 7.01, 7.02, 7.03, 7.04 and 7.05 but shall not be
eligible for loans pursuant to Section 7.06. A Limited Participant who
had a loan outstanding at the time he became a Limited Participant
shall be required to continue repaying such loan under the provisions
of Section 7.06. A Limited Participant shall continue to be eligible to
make investment option elections pursuant to the provisions of Sections
4.01 and 4.02. If a Limited Participant subsequently transfers to the
employment of an Employer or changes employment status to that of an
Employee, he shall be eligible to participate in the Plan as of the
date he becomes an Employee of an Employer at which time he shall have
all the rights provided in accordance with this Plan.
2.04 Designation of Beneficiary - Upon commencing participation, each
Employee shall designate a Beneficiary on forms furnished by the
Administrative Committee. A Participant from time to time may change
his designated Beneficiary by written notice to the Administrative
Committee, and upon such change, the rights of all previously
designated Beneficiaries to receive any benefits under this Plan shall
cease. If, at the date of death of the Participant, no duly designated
Beneficiary exists, or if the Beneficiary designated had died prior to
the death of the Participant, or if the Participant has revoked a prior
designation by a writing filed with the Administrative Committee
without having filed a new designation, then any death benefits which
would have been payable to the Beneficiary shall be payable to the
Participant's spouse, if living at the time of the Participant's death,
if his spouse is not living, such death benefits shall be payable per
stirpes to the Participant's then living lawful issue, or if there is
no living lawful issue, then to the Participant's estate.
If a Beneficiary designated by a Participant is not the
Participant's spouse, then the spouse's written consent shall be
required for the designation of the alternate Beneficiary to become
effective and such consent must be limited to a benefit for a specific
alternate Beneficiary or form of benefits and acknowledges the effect
of the consent. The Spouse's consent shall be witnessed by a
representative of the Administrative Committee or a notary public. Any
change in the designation of an alternate Beneficiary shall also
require the written consent of the spouse for such change to become
effective. The Administrative Committee may accept an election other
than that provided hereunder without the written consent of the spouse
if there is no spouse, the spouse cannot be located, or such other
circumstances exist as may be prescribed by regulations. Any spousal
consent shall be applicable only to the spouse granting such consent
and shall only apply to the Beneficiary with respect to which such
consent was granted.
<PAGE>
ARTICLE III
CONTRIBUTIONS
3.01 Pre-Tax Contributions - Commencing July 1, 1984, a Participant may
elect to have Pre-Tax Contributions made to the Plan on his behalf. A
Participant shall make such an election by entering into a salary
reduction agreement with his Employer in which it is agreed that the
Participant's Employer will reduce the Participant's Compensation
during each pay period by a designated percentage and contribute the
amount so determined, expressed as a percentage of Compensation, to the
Plan on behalf of the Participant. The designated percentage elected by
the Participant to be contributed on his behalf may be any whole
percentage from two percent (2%) to not more than sixteen percent (16%)
of his Compensation otherwise payable to the Participant during the pay
period.
All Pre-Tax Contribution elections shall be made on or before
fifteen (15) days prior to the Entry Date as of which they are to be
effective on appropriate forms provided by the Administrative Committee
or through interactive voice response. Such forms shall authorize the
Employer to deduct from the Compensation thereafter payable to the
Participant the Pre-Tax Contribution amount so elected. A Participant's
Pre-Tax Contributions shall be made only by withholding from his
paychecks and no Participant may contribute cash to the Plan (other
than pursuant to a repayment under Section 6.01). Pre-Tax Contributions
shall commence for Participants on the first regular payday falling on
or after July 1, 1984, and thereafter, the payday falling on or after
the Entry Date subsequent to the acceptance of such salary reduction
agreement by the Employer. In the absence of an election to enter into
a salary reduction agreement by the Participant, an eligible Employee
shall nevertheless be considered a Participant hereunder for purposes
of Section 3.04.
A Participant's designation of Pre-Tax Contributions shall
continue in force for future Plan Years, provided, however, a
Participant may upon at least fifteen (15) days prior written notice,
on an appropriate form provided by and submitted to the Administrative
Committee or through interactive voice response, change his Pre-Tax
Contribution percentage to any percentage prescribed in this Section
3.01 to become effective as of any subsequent pay day, but not
retroactively.
With fifteen (15) days prior written notice to the Administrative
Committee or through interactive voice response, a Participant may
elect to cease future Pre-Tax Contributions to the Plan. Such election
shall become effective as of the first regular payday following such
fifteen (15) day notice. A Participant who has suspended Pre-Tax
Contributions may once again elect to have Pre-Tax Contributions made
on his behalf as of any subsequent Entry Date by making a timely and
proper application to the Administrative Committee or through
interactive voice response.
3.02 Employer Contributions - Concurrently with Pre-Tax Contributions, each
Employer shall contribute to the Plan for the account of each
Participant an amount equal to fifty percent (50%) of the Pre-Tax
Contributions made for a pay period up to a maximum Pre-Tax
Contribution of six percent (6%) of Compensation for such pay period
made to the Plan on the Participant's behalf. No Employer Contribution
shall be made for any pay period during which the Participant did not
make a Pre-Tax Contribution.
If an Employee does not receive an Employer Contribution due to
the absence of an election to make Pre-Tax Contributions, he shall
nevertheless be considered a Participant hereunder for purposes of
Section 3.05.
3.03 Rollover Contributions - An Employee may transfer to the Fund assets
initially distributed as a qualifying total distribution [determined
pursuant to IRC Section 402(c)(4)] within sixty (60) days of the date
the assets were distributed to the Employee. Nothing in this Section
3.03 shall be construed as requiring the transfer of the entire
qualifying total distribution and to that end an amount less than the
entire qualifying total distribution may be accepted as a Rollover
Contribution. The transfer of such assets shall not include (a) any
assets attributable to contributions made on his behalf under a
qualified retirement plan while he was an employee within the meaning
of IRC Section 401(c)(1), (b) any assets representing after-tax
employee contributions or (c) any assets which would cause this Plan to
become a transferee plan pursuant to IRC Section 401(a)(11)(B). The
Plan may accept rollover funds transferred from a rollover individual
retirement account and transfers from other qualified plans not
excluded in the preceding sentence. The Administrative Committee shall
determine the rules under which such distribution shall be accepted and
the procedures to be followed.
Any subsequent distribution of a Rollover Contribution shall be
subject to the terms of Article VI or Section 7.03 or 7.05.
3.04 Testing of Pre-Tax Contributions - Notwithstanding anything herein to
the contrary, in each Plan Year commencing on and after January 1,
1987, in which Pre-Tax Contributions not in excess of the maximum
additions set forth in IRC Section 415 are made to the Plan, such
Pre-Tax Contributions shall be subject to the following tests. For
purposes of these tests, all Pre-Tax Contributions made under any plans
that are aggregated for purposes of IRC Section 410(b) [without regard
to IRC Section 410(b)(2)(A)(ii)] shall be treated as made under a
single plan of the Employer and such aggregated plans must satisfy IRC
Section 401(k) as though they were a single plan. Effective for Plan
Years commencing on and after January 1, 1990, plans may be aggregated
only if they have the same plan year.
Pre-Tax Contributions under this Plan and pre-tax contributions
under all other cash or deferred arrangements of the Employer or
Affiliate with plan years ending with or within the same calendar year
made on behalf of Highly Compensated Employees shall be combined for
purposes of these tests. These tests shall apply to the Pre-Tax
Contributions made for the Plan Year as determined as of the end of the
Plan Year. The Employer, however, may apply these tests at any other
time during the Plan Year.
Upon the application of the tests prior to the end of the Plan
Year if neither test is met, the Administrative Committee may adjust
the Highly Compensated Employee's election to the extent necessary to
meet either test. The adjustment of Pre-Tax Contributions shall be done
in a uniform and nondiscriminatory manner.
Upon the application of the tests at the end of the Plan Year if
neither test is met, the Administrative Committee shall adjust the
Highly Compensated Employee's election to the extent necessary to meet
one of the tests. The adjustment of Pre-Tax Contributions shall be done
in descending order by reducing the highest deferral percentage for all
Highly Compensated Employees similarly situated to the next lowest
percentage, and if additional reduction is necessary, to again reduce
the highest deferral percentage for all Highly Compensated Employees
similarly situated to the next lowest percentage. This process shall be
used until one of the tests is met.
The amount of the adjustment of Pre-Tax Contributions, inclusive
of earnings or losses, necessary to meet either test shall be returned
to the Highly Compensated Employee, within twelve (12) months after the
end of the Plan Year. If amounts are returned after two and one-half (2
1/2) months after the end of the Plan Year, a ten percent (10%) excise
tax under IRC Section 4979 shall be imposed on the Employer maintaining
the Plan with respect to such amounts. For purposes of determining the
earnings or losses on Pre-Tax Contributions which will be returned to
the Highly Compensated Employee, such earnings or losses shall include
the earnings or losses of the Fund determined in accordance with
Section 5.07 attributable to such Pre-Tax Contributions for the Plan
Year during which the excess Pre-Tax Contributions were made.
The amount of excess Pre-Tax Contributions that may be
distributed shall be reduced by the amount of any excess Pre-Tax
Contributions previously distributed in the Participant's taxable year
ending with or within the applicable Plan Year.
It is specifically provided hereunder that any matching Employer
Contributions shall be conditioned upon permissible Pre-Tax
Contributions. Pre-Tax Contributions shall only be permissible to the
extent that they meet the nondiscrimination tests provided herein. If
such nondiscrimination tests require the return of excess Pre-Tax
Contributions, the corresponding matching Employer Contribution shall
not be made to the Plan. If matching Employer Contributions have
already been made to the Plan prior to the time the following tests are
performed, such matching Employer Contribution, inclusive of earnings
or losses, shall be forfeited and used to reduce the Employer
Contributions to the Plan. For purposes of determining the earnings or
losses on matching Employer Contributions which are forfeited hereunder
and used to reduce Employer Contributions, such earnings or losses
shall include the earnings or losses of the Fund determined in
accordance with Section 4.06 attributable to such matching Employer
Contributions for the Plan Year in which the matching Employer
Contributions were made.
The determination of which test shall be met shall be based upon
the test which requires the adjustment of the smallest amount of
Pre-Tax Contributions.
The Administrative Committee shall establish rules and procedures
for modifying the election with respect to the Highly Compensated
Employees to ensure, to the extent possible, that either of the tests
will be met.
As of the last day of each Plan Year or more frequently as
determined by the Administrative Committee, all eligible Employees
shall be separated into two (2) groups -- the Highly Compensated
Employee group and the Non-Highly Compensated Employee group.
Only one (1) of the following two (2) tests needs to be satisfied
for there not to be an adjustment to Pre-Tax Contributions as provided
in this Section 3.08.
Test I The actual deferral percentage for the eligible Highly
Compensated Employee group is not more than the actual
deferral percentage of the Non-Highly Compensated Employee
group multiplied by 1.25.
Test II The excess of the actual deferral percentage for the
Highly Compensated Employee group over the Non-Highly
Compensated Employee group is not more than two (2)
percentage points, and the actual deferral percentage for
the Highly Compensated Employee group is not more than the
actual deferral percentage of the Non-Highly Compensated
Employee group multiplied by 2.0.
For purposes of this Section, actual deferral percentage means,
with respect to the Highly Compensated Employee group and Non-Highly
Compensated Employee group for a Plan Year, the average of the ratios,
calculated separately for each Participant in such group of (i) the
amount of Pre-Tax Contributions (including excess Pre-Tax Contributions
returned to the Participant and excluding Pre-Tax Contributions taken
into account in the actual contribution percentage test provided that
the actual deferral percentage test is satisfied both with and without
the exclusion of the Pre-Tax Contributions allocated to each
Participant) to (ii) the Participant's Compensation for the Plan Year.
For any Plan Year in which an eligible Highly Compensated
Employee is considered a Five Percent (5%) Owner or is one (1) of the
ten (10) Highly Compensated Employees paid the greatest Maximum
Compensation during the current or preceding Plan Year, the actual
deferral percentage must be determined in aggregation with eligible
"Family Member" Employees. A Family Member of a Highly Compensated
Employee is the Employee's spouse, lineal ascendants or descendants,
and the spouses of such lineal ascendants or descendants who in the
aggregate shall be referred to as a "Family Group". For Plan Years
beginning after December 31, 1988, in calculating the combined
percentage for the Family Group, the Compensation of the Employee, the
Employee's spouse, and any lineal descendants under the age of nineteen
(19) shall be limited to one hundred fifty thousand dollars ($150,000)
as adjusted by the Secretary of the Treasury.
All rules of application with reference to Test I and Test II
shall be governed by IRC Section 401(k) and any rules or regulations
issued pursuant thereto.
3.05 Testing of Employer Contributions - In each Plan Year in which matching
Employer Contributions are made to the Plan, such matching Employer
Contributions shall be subject to the following tests. For purposes of
these tests, all matching Employer Contributions made under this Plan
and all matching employer contributions made under any plans that are
aggregated for purposes of IRC Section 410(b) [without regard to IRC
Section 410(b)(2)(A)(ii)] shall be treated as made under a single plan
of the Employer, and such aggregated plans must satisfy IRC Section
401(m) as though they were a single plan. Effective for Plan Years
commencing on and after January 1, 1990, plans may be aggregated only
if they have the same plan year.
The matching Employer Contributions under this Plan and matching
employer contributions under all other plans of the Employer or
Affiliate with plan years ending with or within the same calendar year
made on behalf of Highly Compensated Employees shall be combined for
purposes of these tests. These tests shall apply to the matching
Employer Contributions made for the Plan Year as determined as of the
end of the Plan Year. The Employer, however, may apply these tests at
any other time during the Plan Year.
Upon the application of the tests prior to the end of the Plan
Year if neither test is met, the Administrative Committee may adjust
the Highly Compensated Employee's matching Employer Contribution to the
extent necessary to meet either test. The adjustment of matching
Employer Contributions shall be done in a uniform and nondiscriminatory
manner.
Upon the application of the tests at the end of the Plan Year if
neither test is met, matching Employer Contributions made on behalf of
Highly Compensated Employees shall be reduced. The adjustment of
matching Employer Contributions shall be done in descending order by
reducing the highest actual contribution percentage for all Highly
Compensated Employees similarly situated to the next lowest percentage,
and if additional reduction is necessary, to again reduce the highest
actual contribution percentage for all Highly Compensated Employees
similarly situated to the next lowest contribution percentage. This
process shall be used until one of the tests is met. To the extent that
excess matching Employer Contributions were not vested, then the excess
matching Employer Contributions, inclusive of earnings or losses, shall
be forfeited and used to reduce Employer Contributions to the Plan. To
the extent that excess matching Employer Contributions would have been
considered vested under Section 6.01, then the excess matching Employer
Contributions inclusive of earnings or losses shall be distributed to
the Highly Compensated Employee within twelve (12) months after the end
of the Plan Year. If amounts are distributed after two and one-half (2
1/2) months after the close of the Plan Year, a ten percent (10%)
excise tax under IRC Section 4979 shall be imposed on the Employer
maintaining the Plan with respect to such amounts. For purposes of
determining the earnings or losses on matching Employer Contributions
which will be forfeited and used to reduce Employer Contributions or
distributed to the Highly Compensated Employee, such earnings or losses
shall include the earnings of the Fund determined in accordance with
Section 5.07 attributable to such matching Employer Contributions for
the Plan Year during which the excess matching Employer Contributions
were made.
The determination of which test shall be met shall be based upon
the test which requires the adjustment of the smallest amount of
matching Employer Contributions.
The Administrative Committee shall establish rules and procedures
for modifying the election with respect to the Highly Compensated
Employees to ensure, to the extent possible, that either of the tests
will be met.
As of the last day of each Plan Year or more frequently as
determined by the Administrative Committee, all eligible Employees
shall be separated into two (2) groups -- the Highly Compensated
Employee group and the Non-Highly Compensated Employee group.
Only one (1) of the following two (2) tests needs to be satisfied
for there not to be an adjustment as hereinabove provided in this
Section 3.09.
Test I The actual contribution percentage for the eligible Highly
Compensated Employee group is not more than the actual
contribution percentage of the Non-Highly Compensated
Employee group multiplied by 1.25.
Test II The excess of the actual contribution percentage for the
Highly Compensated Employee group over the Non-Highly
Compensated Employee group is not more than two (2)
percentage points, and the actual contribution percentage
for the Highly Compensated Employee group is not more than
the actual deferral percentage of the Non-Highly
Compensated Employee group multiplied by 2.0.
For purposes of this Section, actual contribution percentage
means, with respect to the Highly Compensated Employee group and
Non-Highly Compensated Employee group for a Plan Year, the average of
the ratios, calculated separately for each Participant in such group of
(i) the amount of Employer Contributions (to the extent not taken into
account in the actual deferral percentage test) and including, at the
election of the Employer, Pre-Tax Contributions provided the actual
deferral percentage test is met before the Pre-Tax Contributions are
used in the actual contribution percentage test and continues to be met
following the exclusion of the Pre-Tax Contributions that are used to
meet the actual contribution percentage test allocated to each
Participant) to (ii) the Participant's Compensation for the Plan Year.
For any Plan Year in which an eligible Highly Compensated
Employee is considered a Five Percent (5%) Owner or is one (1) of the
ten (10) Highly Compensated Employees paid the greatest Maximum
Compensation during the current or preceding Plan Year, the actual
contribution percentage must be determined in aggregation with eligible
"Family Member" Employees. A Family Member of a Highly Compensated
Employee is the Employee's spouse, lineal ascendants or descendants,
and the spouses of such lineal ascendants or descendants who in the
aggregate shall be referred to as a "Family Group." In calculating the
combined percentage for the Family Group, the Compensation of the
Employee, the Employee's spouse, and any lineal descendants under the
age of nineteen (19) shall be limited to one hundred fifty thousand
dollars ($150,000) as adjusted by the Secretary of the Treasury.
All rules of application with reference to Test I and Test II
shall be governed by IRC Section 401(m) and any rules or regulations
issued pursuant thereto.
3.06 Multiple Use Limitation - Effective for Plan Years beginning after
December 31, 1988, if the Employer or an Affiliate sponsors one (1) or
more qualified plan(s) to which IRC Sections 401(k) and 401(m) apply,
additional rules shall be applicable to prevent the multiple use of the
alternative tests described in IRC Sections 401(k)(3)(A)(ii)(II) and
401(m)(2)(A)(ii) with respect to any Participant.
The multiple use of the alternative tests occurs if (i) one or
more Highly Compensated Employees are eligible to participate in a plan
subject to IRC Sections 401(k) and 401(m) and (ii) the sum of the
actual deferral percentage of the entire group of eligible Highly
Compensated Employees subject to IRC Section 401(k) and the actual
contribution percentage of the entire group of eligible Highly
Compensated Employees under the plan subject to IRC Section 401(m)
exceeds the "Aggregate Limit".
The Aggregate Limit is the sum of:
3.06(a) One hundred twenty-five percent (125%) of the greater of
(i) the actual deferral percentage of the group of
Non-Highly Compensated Employees eligible under the plan
subject to IRC Section 401(k) for the plan year or (ii)
the actual contribution percentage of the group of
Non-Highly Compensated Employees eligible under the plan
subject to IRC Section 401(m) for the plan year beginning
with or within the plan year of the plan subject to IRC
Section 401(k).
3.06(b) Two (2) plus the lesser of Section 3.06(a)(i) or
3.06(a)(ii). However, in no event shall this amount exceed
two hundred percent (200%) of the lesser of Section
3.06(a)(i) or 3.06(a)(ii).
Notwithstanding the preceding, the Aggregate Limit shall be the
sum of the following alternate Aggregate Limit if such alternate
Aggregate Limit is greater than the Aggregate Limit set forth above.
The alternate Aggregate Limit is the sum of:
3.06(c) One hundred twenty-five percent (125%) of the lesser of
(i) the actual deferral percentage of the group of
Non-Highly Compensated Employees eligible under the plan
subject to IRC Section 401(k) for the plan year, or (ii)
the actual contribution percentage of the group of
Non-Highly Compensated Employees eligible under the plan
subject to IRC Section 401(m) for the plan year beginning
with or within the plan year of the plan subject to IRC
Section 401(k).
3.06(d) Two (2) plus the greater of Section 3.06(c)(i) or
3.06(c)(ii). However, in no event shall this amount exceed
two hundred percent (200%) of the greater of Section
3.06(c)(i) or 3.06(c)(ii).
If the Aggregate Limit is exceeded, the Employer may elect to
reduce the actual deferral ratios or the actual contribution ratios
either for all Highly Compensated Employees under the plan(s) or only
for those Highly Compensated Employees who are eligible in both
arrangements.
3.07 Maximum Pre-Tax Contributions - Notwithstanding anything herein to the
contrary, Pre-Tax Contributions contributed pursuant to this Plan shall
not exceed seven thousand dollars ($7,000) or such larger amount as may
be determined by the Secretary of Treasury for any Participant in any
calendar year.
If Pre-Tax Contributions are made to the Plan in excess of this
limit, the excess, inclusive of earnings or losses, shall be returned
to the Participant by April 15 of the calendar year following the
calendar year in which the Pre-Tax Contributions were made. Further, if
the Participant notifies the Administrative Committee by March 1 of the
calendar year following the calendar year in which he made Pre-Tax
Contributions, that he contributed in excess of the seven thousand
dollar ($7,000) limit (as adjusted) to all plans to which the seven
thousand dollar ($7,000) limit (as adjusted) applies and requests a
return of such excess, the Administrative Committee shall return the
excess inclusive earnings or losses by April 15.
In the event the return of excess Pre-Tax Contributions pursuant
to this Section 3.06 causes a reduction of Pre-Tax Contributions, the
corresponding matching Employer Contributions shall be forfeited and
used to reduce Employer Contributions. To this end, the vesting
provisions of this Plan applicable to matching Employer Contributions
are conditioned on Pre-Tax Contributions being permissible Pre-Tax
Contributions. Pre-Tax Contributions in excess of the seven thousand
dollar ($7,000) all source limit (as adjusted) provided for in IRC
Section 402(g)(5) are specifically prohibited hereunder and, as a
result, the Employer reserves the right for up to one (1) Plan Year
following the Plan Year in which matching Employer Contributions were
made to recapture any matching Employer Contributions, inclusive of
earnings or losses, mistakenly made to the Plan due to the Employee
exceeding the IRC Section 402(g) limit.
For purposes of determining the earnings or losses on Pre-Tax
Contributions which will be returned to the Participant or matching
Employer Contributions which are forfeited and used to reduce Employer
Contributions, such earnings or losses shall include the earnings or
losses of the Fund determined in accordance with Section 5.07
attributable to such Pre-Tax Contributions and matching Employer
Contributions for the calendar year during which the excess Pre-Tax
Contributions and matching Employer Contributions were made.
<PAGE>
ARTICLE IV
INVESTMENT OPTIONS AND FUNDS
4.01 Investment Options - All Contributions credited to a Participant's
account shall be invested in the investment funds as designated by the
Investment Committee and elected by the Participant. Investment Fund
elections shall be made on forms provided by the Administrative
Committee. If investments are to be made among the Funds, investments
shall be made in increments of no less than one percent (1%). It is
intended that the Plan shall comply with Section 404(c) of ERISA and
that each Participant should be furnished with appropriate disclosure
information to ensure compliance.
Further, in the event a Participant shall obtain a loan from the
Plan pursuant to Section 7.06, the Administrative Committee shall
establish a segregated account with respect to any such Participant and
any interest paid on such loan by the Participant shall be held for his
benefit and reinvested along with any principal payments pursuant to
the investment elections made hereunder.
4.02 Election Procedure - Upon commencing participation, each Participant
shall make an election before his initial Entry Date regarding the
investment options in Section 4.01. Further, an Employee electing to
make a Rollover Contribution or Transfer Contribution prior to the time
he is eligible to become a Participant shall make an election regarding
the investment options in Section 4.01 at the time the Rollover
Contribution or Transfer Contribution is made. Any such election shall
continue in effect until amended or revoked.
Any election may be amended or revoked with regard to future
Contributions as of any payday based on processing schedules and
procedures as adopted by the Administrative Committee and communicated
to Participants.
A Participant may change an investment election applicable to his
existing Individual Account as of any business day, based on processing
schedules and procedures as adopted by the Administrative Committee and
communicated to Participants.
4.03 Investment Accounts - The Investment Committee shall establish and
maintain investment funds as it deems appropriate. The Investment
Committee shall credit or charge all Contributions made to such Funds
by or on behalf of each such Participant, any distributions made from
such Funds to such Participant, and his share of the adjustment of the
unit value of such Funds. The maintenance of such accounts shall be for
accounting purposes only and separate records for each Fund shall be
maintained, but a segregation of assets to each account shall not be
required, nor shall any Participant have title to any specific assets
of such Funds. The Investment Committee shall compute the unit value of
each Fund as of each Valuation Date.
<PAGE>
ARTICLE V
ALLOCATIONS TO INDIVIDUAL ACCOUNTS
5.01 Individual Accounts - The Administrative Committee shall establish and
maintain an Individual Account in the name of each Participant to which
the Administrative Committee shall credit all amounts contributed by or
on behalf of each such Participant pursuant to Article III and shall
credit or debit the unit value for income, gains, losses or
distributions pursuant to Articles IV, V, VI and VII.
5.02 Allocation of After-Tax Contributions - A Participant's After-Tax
Contributions made to the Plan prior to July 1, 1984, were credited to
a Participant's After-Tax Contribution Account and shall not be subject
to withdrawal except as provided in Article VII.
5.03 Allocation of Pre-Tax Contributions - Pre-Tax Contributions, as
provided in Section 3.01, shall be credited to the Participant's
Pre-Tax Contribution Account as of the date received by the Trust and
shall not be subject to withdrawal except as provided in Article VII.
5.04 Allocation of Employer Contributions - The Employer Contribution
Account of each Participant shall be credited as of the date received
by the Trust with his allocable share of the Employer Contribution made
pursuant to Section 3.02.
5.05 Allocation of Deductible Contributions - Deductible Contributions made
to the Plan prior to January 1, 1987 were credited to the Participant's
Deductible Account and shall not be subject to withdrawal except as
provided in Section 7.04.
5.06 Allocation of Rollover Contributions - Rollover Contributions, as
provided in Section 3.03, shall be credited at fair market value to the
Participant's Rollover Account as of the date received by the Trust and
shall be fully vested at all times. Rollover Contributions shall share
in the investment experience of the Funds pursuant to Section 5.07.
5.07 Allocation of Income, Gains and Losses - Each Participant's account
shall be adjusted as of each Valuation Date to reflect the investment
experience of the Funds pursuant to Section 4.03.
5.08 Forfeitures - The Administrative Committee shall determine the amount
of Forfeitures applicable for Participants of each Employer as of each
Valuation Date by adding together all amounts relinquished through
terminations of employment pursuant to Section 6.01 since the last
preceding Valuation Date. From such Forfeitures shall then be
subtracted an amount necessary (to the extent Forfeitures are
sufficient) to reinstate a Participant's Employer Contribution Account
in accordance with Section 6.01. The balance shall then be held in a
suspense account until the Plan Year following the Valuation Date on
which the Forfeiture occurred and be used to reduce the applicable
Employer's Contribution to the Plan for such Plan Year.
Notwithstanding the application of Forfeitures as hereinabove
provided, a Forfeiture, if any, shall be deemed to occur upon
termination of employment pursuant to Section 6.01, subject to
reinstatement pursuant to Section 6.01.
5.09 Maximum Additions - Anything herein to the contrary notwithstanding,
the total Annual Additions made to the Individual Account of a
Participant for any Limitation Year commencing on and after January 1,
1983, when combined with any similar Annual Additions credited the
Participant for the same period from another qualified Defined
Contribution Plan maintained by the Employer or an Affiliate, shall not
exceed the lesser of Section 5.09(a) and Section 5.09(b) following:
5.09(a) Thirty thousand dollars ($30,000) or, if greater,
twenty-five percent (25%) of the dollar limitation in
effect under IRC Section 415(b)(1)(A); and
5.09(b) Twenty-five percent (25%) of the Participant's Maximum
Compensation received from the Employer for such Plan
Year.
If a Participant is covered by one or more Defined Contribution
Plans maintained by the Employer or an Affiliate, the maximum Annual
Additions as noted above shall be decreased as determined necessary by
the Employer, prior to the reduction of such other Defined Contribution
Plans, to ensure that all such plans will remain qualified under the
IRC.
If as of any December 31 Valuation Date corrective adjustments in
the Annual Additions to any Individual Account are required under this
Section 5.09, then the following adjustments shall be made. For
Participants who are employed on the December 31 Valuation Date, the
Pre-Tax Contribution Account and the Employer Contribution Account
shall be reduced on a pro-rata basis. For Participants who are not
employed on the December 31 Valuation Date, the Employer Contribution
Account shall be reduced first and then the Pre-Tax Contribution
Account.
If, (a) as a result of the allocation of forfeitures, (b) a
reasonable error is made in estimating a Participant's annual Maximum
Compensation, or (c) under other facts and circumstances which the
Internal Revenue Service finds justify the availability of these rules,
any amount withheld or taken from a Participant's Individual Account
pursuant to the above shall be segregated in the Fund in a separate
account and applied toward Contributions by the Employer for the next
Limitation Year in accordance with Section 1.415-6(b)(6)(ii) of the
regulations under IRC Section 415. Notwithstanding the above, any
reduction of a Participant's Pre-Tax Contribution Account shall be
returned to the Participant. Further, the Employer shall reimburse the
Employee for any reduction in the Employee's After-Tax Contribution
Account or After-Tax pursuant to this Section 5.09.
5.10 Multiple Plan Participation - If a Participant is a participant of a
Defined Benefit Plan maintained by the Employer or an Affiliate, the
sum of his defined benefit plan fraction and his defined contribution
plan fraction for any Limitation Year may not exceed 1.0.
For purposes of maximum Annual Additions to Defined Contribution
Plans, all Defined Contribution Plans, whether or not terminated, shall
be combined and treated as one (1) plan and all Defined Benefit Plans,
whether or not terminated, shall be combined and treated as one (1)
plan.
For purposes of this Section 5.10, the term "defined contribution
plan fraction" shall mean a fraction the numerator of which is the sum
of all of the Annual Additions to the Participant's Individual Account
under this Plan as of the close of the Limitation Year and the
denominator of which is the sum of the lesser of the following amounts
determined for such Limitation Year and for each prior Limitation Year
of employment with the Employer:
5.10(a) the product of 1.25 multiplied by the dollar limitation in
effect in Section 5.10(a) for such year determined without
regard to IRC Section 415(c)(6); or
5.10(b) the product of 1.4 multiplied by an amount determined
pursuant to Section 5.09(b) with respect to each
individual under the Plan for such Limitation Year.
For purposes of this Section 5.10, the term, "defined benefit
plan fraction" shall mean a fraction the numerator of which is the
Participant's projected annual benefit (as defined in the said defined
benefit plan) determined as of the close of the Limitation Year and the
denominator of which is the lesser of:
5.10(c) the product of 1.25 multiplied by the dollar limitation in
effect pursuant to IRC Section 415(b)(1)(A) for such
Limitation Year; or
5.10(d) the product of 1.4 multiplied by the amount which may be
taken into account pursuant to IRC Section 415(b)(1)(B)
with respect to each individual under the Plan for such
Limitation Year.
The limitation on aggregate benefits from a Defined Benefit Plan
and a Defined Contribution Plan which is contained in IRC Section
415(e) shall be complied with by a reduction (if necessary) in the
Participant's benefits under the Defined Benefit Plan(s) [in accordance
with the provisions of such plan(s)] before a reduction of any such
Defined Contribution Plan.
<PAGE>
ARTICLE VI
VESTING AND DISTRIBUTIONS
6.01 Vesting - A Participant shall at all times be fully vested in his
After-Tax Contribution Account, Pre-Tax Contribution Account, Rollover
Account, Deductible Account, and Transfer Account if provided in the
adoption agreement or Appendix to the Plan.
Further, effective January 1, 1987, any Participant maintaining a
credit balance in his Employer Contribution Account, who was actively
employed by an Employer or an Affiliate on December 31, 1986, shall
hereafter be one hundred percent (100%) vested in his Employer
Contribution Account.
An Employee initially becoming a Participant on and after January
1, 1987, shall have the vested percentage of his Employer Contribution
Account determined as hereinafter provided in this Section 6.01.
6.01(a) A Participant shall be fully vested in his Employer
Contribution Account when he dies, incurs a Total and
Permanent Disability, is eligible to retire pursuant to
the terms of the Plan or attains his Normal Retirement
Age.
6.01(b) Except as provided in Section 6.01(a), a Participant shall
be fully vested in his Employer Contribution Account upon
the earlier of (i) the completion of thirty-six (36)
months of Service as a Participant while making
Contributions pursuant to Section 3.01 or (ii) forty-eight
(48) months of Service with an Affiliate. Notwithstanding
the preceding, in the case of an Affiliate who becomes an
Employer hereunder or in the case of an Employee who
transfers from employment with an Affiliate to employment
with an Employer hereunder, such Employee shall be fully
vested in his Individual Account attributable to his
Employer Contribution Account upon the completion of
forty-eight (48) months of Service as a Participant while
making Contributions pursuant to Section 3.01 with such
Service deemed to include his Service while an Employee of
an Affiliate. For purposes of this Section 6.01(b), if a
Participant cannot make a Contribution pursuant to Section
3.02 for any month or portion thereof in order to preclude
his exceeding the seven thousand dollar ($7,000) all
source limit (as adjusted) provided for in IRC Section
402(g)(5), the Participant shall receive credit for
Service for any such month as if he had made a
Contribution pursuant to Section 3.01. Further, if a
Participant is transferred to an Affiliate and becomes a
limited Participant, the Limited Participant shall receive
credit for Service for each month he is a Limited
Participant as if he had made a Contribution pursuant to
Section 3.01.
6.01(c) Notwithstanding anything contained herein to the contrary,
if a Participant's termination of employment occurs
because the Employer has eliminated his job function and
no alternative job function for which the Participant is
reasonably suited by education, training and experience
has been offered to such Participant within ninety (90)
days thereafter, such Participant shall be deemed one
hundred percent (100%) vested in his Employer Contribution
Account.
For purposes of this Section 6.01, employment with any
participating Employer shall be deemed employment with any other
participating Employer. The transfer of an Employee from one
participating Employer to another participating Employer or to an
Affiliate shall not constitute a Severance from Service Date and such
Participant's Individual Account and Deductible Account shall be
maintained until he is thereafter eligible for a distribution in
accordance with the terms of the Plan.
Upon termination of employment if the vested portion of the
Current Balance of the Participant's Individual Account and the
Deductible Current Balance of the Deductible Account does not exceed
three thousand five hundred dollars ($3,500) (including any previous
distributions made to the Participant), the Administrative Committee
shall direct the Trustee to distribute to the Participant the vested
portion of the Current Balance of his Individual Account and the
Deductible Current Balance of his Deductible Account in a lump sum as
soon as reasonably possible following his termination of employment. If
the Current Balance of the Participant's Individual Account and
Deductible Current Balance of the Participant's Deductible Account
exceeds three thousand five hundred dollars ($3,500) (including any
previous distributions made to the Participant), the Participant's
consent shall be required for any distribution to be made due to his
termination of employment. If the Current Balance of a Participant's
Individual Account and the Deductible Current Balance of the
Participant's Deductible Account at the time of any distribution
exceeds three thousand five hundred dollars ($3,500) (including any
previous distributions made to the Participant), then the Current
Balance of his Individual Account and the Deductible Current Balance of
his Deductible Account at any time thereafter shall be deemed to exceed
three thousand five hundred dollars ($3,500) and the Participant's
consent shall be required for any distribution to be made due to his
termination of employment. If the Participant does not consent to a
distribution being made upon his termination of employment, the vested
portion of the Current Balance of his Individual Account and the
Deductible Current Balance of his Deductible Account shall continue to
be held as a part of the Fund until what would otherwise be the
Participant's Normal Retirement Date, at which time the Administrative
Committee shall direct the Trustee to distribute to the Participant the
Current Balance held in the Participant's Individual Account and the
Deductible Current Balance held in his Deductible Account in accordance
with Section 6.08. Notwithstanding the preceding, effective January 1,
1995, the Participant shall have the right at any time on or after his
termination of employment to elect to have the Current Balance held in
his Individual Account and the Deductible Current Balance held in his
Deductible Account paid to him in accordance with Section 6.08;
provided that any payment of the Deductible Current Balance of the
Participant's Deductible Account on or after his Disability Retirement
Date shall be subject to the provision of Section 6.05 related to such
payment. Further, if a terminated Participant dies prior to otherwise
electing to commence his benefit hereunder, his Beneficiary shall have
the right at any time after the Participant's death to have the Current
Balance held in the Participant's Individual Account and the Deductible
Current Balance held in the Participant's Deductible Account paid to
him in accordance with Section 6.08(b).
Notwithstanding anything contained in the previous paragraph to
the contrary, upon termination of employment, a Participant may request
the Administrative Committee to transfer the Deductible Current Balance
of his Deductible Account to a successor depository. In such event, the
Administrative Committee shall notify the Trustee to transfer the
Deductible Current Balance of the Participant's Deductible Account to
such successor depository as soon as reasonably possible following
receipt of such request from the Participant.
The vested portion of the Current Balance of the Participant's
Individual Account and the Deductible Current Balance of his Deductible
Account held on termination of employment shall be subject to the same
investment option elections as specified in Article IV. Amounts held
upon a Participant's termination of employment as hereinbefore provided
shall not be subject to withdrawals or loans in accordance with Article
VII. While such amount is being held, it shall share in the adjustment
of the unit value as provided in Section 5.07.
If the Participant is reemployed prior to receiving payment of
his Individual Account and Deductible Account being held hereunder and
again becomes a Participant, he shall not be entitled to a distribution
hereunder but shall be entitled to a distribution as determined under
this Article VI at his subsequent termination of employment for any
reason. Further, such a Participant shall once again be eligible for
withdrawals and loans as provided in Article VII and investment
elections in accordance with Section 4.02.
The non-vested portion of the Current Balance of the
Participant's Employer Contribution Account shall be held in the
Participant's Employer Contribution Account until the Valuation Date
coinciding with or next following the date the Participant receives a
distribution of the vested portion of his Employer Contribution Account
or would have received a distribution except for the fact that he did
not consent to the distribution being made to him at which time it
shall be treated as a Forfeiture, subject to the reinstatement
provisions hereinafter provided, and held in a suspense account until
the Plan Year following the Valuation Date in which the Forfeiture
occurred and be used to reduce the applicable Employer's Contribution
to the Plan for such Plan Year in accordance with Section 5.08.
If a Participant who received a distribution under this Section
6.01 was less than one hundred percent (100%) vested in his Individual
Account at his termination of employment, is reemployed prior to
incurring five (5) consecutive Severance Periods of twelve (12)
consecutive months, and repays the amount of the distribution
previously paid to him as a result of his termination of employment
prior to the earlier of the completion of five (5) years subsequent to
the Employee's Reemployment Date or the close of the first period of
five (5) consecutive Severance Periods of twelve (12) consecutive
months commencing after the distribution, the amount previously treated
as a Forfeiture shall be reinstated by the Employer to his Employer
Contribution Account. The amount previously treated as a Forfeiture
shall be restored, at the Employer's discretion, from the income or
gains of the Fund, Forfeitures or from Employer Contributions. A
distribution of the entire value of a Participant's Individual Account
that is one hundred percent (100%) vested shall not be subject to
repayment.
If a Participant who did not consent to receive a distribution as
a result of his termination of employment pursuant to this Section 6.01
is reemployed prior to incurring five (5) consecutive Severance Periods
of twelve (12) consecutive months, the amount previously treated as a
Forfeiture shall be reinstated by the Employer to his Employer
Contribution Account. The amount previously treated as a Forfeiture
shall be restored, at the Employer's discretion, from the income or
gains of the Fund, Forfeitures or from Employer Contributions.
If the vested portion of the Current Balance of a Participant's
Individual Account is zero at his date of termination, the Participant
shall be deemed to have received a distribution of the vested portion
of the Current Balance of his Individual Account and the non-vested
portion shall be treated as a Forfeiture as of the Valuation Date
coinciding with or next following the date of the deemed distribution.
If a Participant who was deemed to receive a distribution is reemployed
prior to the occurrence of five (5) consecutive Severance Periods of
twelve (12) consecutive months, the amount previously treated as a
Forfeiture shall be reinstated by the Employer. The amount previously
treated as a Forfeiture shall be restored, at the Employer's
discretion, from the income or gains of the Fund, Forfeitures or from
Employer Contributions.
If a Participant terminated his employment and the non-vested
portion of his Employer Contribution Account was transferred to a
suspense account is reemployed prior to such amount being used to
reduce Employer Contributions, then the amount previously transferred
to the suspense account as a result of his termination of employment
shall be transferred back to the Participant's Employer Contribution
Account as of the Valuation Date following his reemployment.
6.02 Normal Retirement - Upon the retirement of a Participant at his Normal
Retirement Date, the Participant shall be eligible to receive the
Current Balance of his Individual Account and the Deductible Current
Balance of his Deductible Account. The Administrative Committee shall
direct the Trustee to distribute to such Participant such amount in
accordance with Section 6.08.
6.03 Delayed Retirement - Upon the retirement of a Participant at his
Delayed Retirement Date, the Participant shall be eligible to receive
the Current Balance of his Individual Account and the Deductible
Current Balance of his Deductible Account. The Administrative Committee
shall direct the Trustee to distribute to such Participant such amount
in accordance with Section 6.08.
6.04 Early Retirement - Upon the retirement of a Participant at his Early
Retirement Date, the Current Balance of his Individual Account and the
Deductible Current Balance of his Deductible Account shall continue to
be held as a part of the Fund until what would otherwise be the
Participant's Normal Retirement Date at which time the Administrative
Committee shall direct the Trustee to distribute to such Participant
the Current Balance held in the Participant's Individual Account and
the Deductible Current Balance held in his Deductible Account in
accordance with Section 6.08.
Notwithstanding the preceding, a Participant who retires at his
Early Retirement Date shall have the right, at any time prior to his
Normal Retirement Date, to elect to have the Current Balance held in
his Individual Account and the Deductible Current Balance held in his
Deductible Account paid at an earlier date including the commencement
of his benefit as of his Early Retirement Date. If the Participant
makes such an election, the Administrative Committee shall direct the
Trustee to distribute to such Participant the Current Balance held in
the Participant's Individual Account and the Deductible Current Balance
held in his Deductible Account in accordance with Section 6.08.
All assets held on behalf of a Participant pursuant to this
Section shall continue to be invested pursuant to Article IV and shall
continue to share in the adjustment of the unit value of the Funds in
accordance with Section 5.07.
6.05 Disability Retirement - Upon the retirement of a Participant at his
Disability Retirement Date, the Current Balance of his Individual
Account and the Deductible Current Balance of his Deductible Account
shall continue to be held as a part of the Fund until what would
otherwise be the Participant's Normal Retirement Date at which time the
Administrative Committee shall direct the Trustee to distribute to such
Participant the Current Balance held in the Participant's Individual
Account and the Deductible Current Balance held in his Deductible
Account in accordance with Section 6.08.
Notwithstanding the preceding, a Participant who retires at his
Disability Retirement Date shall have the right, at any time prior to
his Normal Retirement Date, to elect to have the Current Balance held
in his Individual Account and the Deductible Current Balance of his
Deductible Account paid at an earlier date including commencement of
his benefit as of his Disability Retirement Date. If the Participant
makes such an election, the Administrative Committee shall direct the
Trustee to distribute to such Participant the Current Balance held in
the Participant's Individual Account and the Deductible Current Balance
held in his Deductible Account in accordance with Section 6.08.
Notwithstanding anything contained herein to the contrary, for
purposes of this Section 6.05 as it relates to distribution of a
Participant's Deductible Account, the term "disability" means an
incapacity which leaves the Participant unable to engage in any
substantially gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death
or to be of long-continued and indefinite duration. If the Participant
does not meet the definition of disability as provided in this
paragraph, his Deductible Account shall continue to be held until what
would otherwise be the Participant's Normal Retirement Date at which
time the Administrative Committee shall direct the Trustee to
distribute to the Participant the Deductible Current Balance held in
his Deductible Account in accordance with Section 6.08.
All assets held on behalf of a Participant pursuant to this
Section shall continue to be invested pursuant to Article IV and shall
continue to share in the adjustment of the unit value of the Funds in
accordance with Section 5.07.
6.06 Death Prior to the Commencement of Benefits - Upon the death of (a) a
Participant on or after attaining his Normal Retirement Age but prior
to the commencement of his benefit, (b) an active Participant, or (c) a
vested terminated Participant or retired Participant prior to the
commencement of his benefit, a death benefit shall be paid and the
Administrative Committee shall direct the Trustee to distribute the
benefit in accordance with the following provisions of this Section
6.06.
6.06(a) If the designated Beneficiary is the spouse of the
Participant, the Beneficiary may elect to commence the
benefit within a reasonable period of time after the
Participant's death. In no event may such election be made
later than the later of (i) or (ii) following:
(i) December 31 of the calendar year immediately
following the calendar year in which the Participant
died, or
(ii) December 31 of the calendar year in which the
Participant would have attained age seventy and
one-half (70 1/2).
The benefit may be paid over the life of the Beneficiary
or over a period certain not extending beyond the life expectancy
of the designated Beneficiary. At the time the election is made,
the Administrative Committee shall direct the Trustee to
distribute the Current Balance of the Participant's Individual
Account and the Deductible Current Balance of his Deductible
Account in accordance with Section 6.08. If the spouse dies
before the distribution begins, then the five (5) year
distribution requirement of Section 6.06(c) shall apply as if the
Beneficiary were the Participant.
6.06(b) If the benefit is paid to a designated Beneficiary, as
defined in IRC Section 401(a)(9)(E) inclusive of Section
1.401(a)(9)-1 D-1 and D-2 of the regulations, other than
the Participant's spouse, the distribution shall commence
no later than December 31 of the calendar year immediately
following the calendar year in which the Participant died.
The benefit may be paid over the life of the Beneficiary
or over a period certain not extending beyond the life
expectancy of the designated Beneficiary. The Beneficiary
may elect that the benefit be paid at an earlier date. At
the time the election is made or the benefit is required
to commence, the Administrative Committee shall direct the
Trustee to distribute the Current Balance of the
Participant's Individual Account and the Deductible
Current Balance of his Deductible Account to his
Beneficiary in accordance with Section 6.08.
6.06(c) If there is no designated Beneficiary, as defined in IRC
Section 401(a)(9) inclusive of Section 1.401(a)(9)-1 D-1
and D-2 of the regulations, at the death of the
Participant, then distribution of the Participant's entire
interest shall be completed by December 31 of the calendar
year containing the fifth (5th) anniversary of the
Participant's death. The Beneficiary may elect that the
benefit be paid at an earlier date. At the time the
election is made or the benefit is required to be
distributed, the Administrative Committee shall direct the
Trustee to distribute the Current Balance of the
Participant's Individual Account and the Deductible
Current Balance of his Deductible Account to the
Beneficiary in accordance with Section 6.08; provided,
that the benefit may not be paid in any manner or form
which would violate the required distribution requirements
of this Section 6.06(c).
6.06(d) The benefit payable under the provisions of this Section
6.06 may not be paid in any form which would violate the
required distribution requirements of Sections 6.06(a),
6.06(b) or 6.06(c).
6.06(e) Any amount held on a Participant's behalf under this
Section 6.06 shall continue to be invested pursuant to
Article IV and shall continue to share in the adjustment
of the unit value of the Funds in accordance with Section
5.07.
6.07 Death After the Commencement of Benefits - Upon the death of a
Participant who is receiving benefit payments in accordance with
Section 6.08(c) the provisions of Section 6.08(c) shall control
concerning any payments upon the death of such Participant. The
Beneficiary, however, shall have the right to elect that any remaining
benefit payments be paid under Section 6.08(b). Upon the death of a
Participant who is receiving benefits, the remaining portion of such
interest must be distributed at least as rapidly as under the method of
distribution being used at the date of the Participant's death.
6.08 Method of Payment
6.08(a) Application for Benefits - In order to receive a benefit
under the Plan, a Participant, his Beneficiary, committee,
or next of kin, must make written application therefor on
a form or forms provided by the Administrative Committee
or through interactive voice response. The Administrative
Committee may require that there be furnished to it in
connection with such application all information pertinent
to any question of eligibility and the amount of any
benefit. Benefit payment shall commence as soon as
reasonably possible following approval by the
Administrative Committee of the Participant's claim for
benefits, based on processing schedules and procedures
adopted by the Administrative Committee.
Each Participant who has attained his Normal
Retirement Date, Early Retirement Date or Disability
Retirement Date or who has terminated employment and met
the age and service requirements for Early Retirement,
either prior to or after his termination of employment,
shall have the right to request to have his benefit paid
under the option hereinafter set forth in Section 6.08(c)
in lieu of the benefit otherwise provided for in Section
6.08(b).
A Participant who desires to have his benefits paid
under the optional form provided in Section 6.08(c) shall
make such an election in writing to the Administrative
Committee on forms provided by the Administrative
Committee or through interactive voice response. An
election by a Participant to receive his benefit under
Section 6.08(c) may be revoked by such Participant and a
new election made in writing to the Administrative
Committee or through interactive voice response at any
time prior to the commencement of benefits.
6.08(b) Normal Form - In the absence of the election of the
optional method of payment provided in Section 6.08(c),
the benefit shall be paid in a lump sum.
6.08(c) Optional Form - In lieu of receiving payment in accordance
with Section 6.08(b), a Participant may elect that his
benefit be paid in approximately equal monthly, quarterly,
semi-annual, or annual installments from the Fund, over a
period of years not to exceed the lesser of (i) ten (10)
years or (ii) the life expectancy of the Participant and
his Beneficiary.
If the optional form of payment under this Section
6.08(c) is elected by the Participant, the Current Balance
of the Participant's Individual Account and Deductible
Current Balance of his Deductible Account from which such
installments are to be paid shall be invested pursuant to
an investment option as described in Article IV as elected
by the Participant to be applicable to such Individual
Account and Deductible Account and the Current Balance of
his Individual Account and Deductible Current Balance of
his Deductible Account shall be invested accordingly. All
assets held on behalf of a Participant pursuant to this
Section 6.08(c) shall continue to share in the adjustment
of the unit value of the Funds in accordance with Section
5.07.
Notwithstanding the preceding, if the optional form
of payment provided in Section 6.08(c) is elected, the
Participant may invest in the investment Funds as provided
in Section 4.02.
Notwithstanding anything contained herein to the
contrary, a Participant may elect at any time after the
commencement of benefit payments under the Section 6.08(c)
that any remaining payments be paid to him in a lump sum.
If a Participant makes this election, the lump sum payment
shall be made to the Participant as soon as reasonably
possible following such election.
5.05(e) Direct Rollover - Effective January 1, 1993, and
notwithstanding any provision of the Plan to the contrary
that would otherwise limit a Distributee's election under
this Section 5.05(e), a Distributee may elect, at the time
and in the manner prescribed by the Committee, to have any
portion of an Eligible Rollover Distribution paid directly
to an Eligible Retirement Plan specified by the
Distributee in a Direct Rollover. Such distribution may
commence less than thirty (30) days after the notice
required under Section 1.411(a)-11(c) of the Income Tax
Regulations is given, provided that (a) the Committee
clearly informs the Participant that the Participant has a
right to a period of at least thirty (30) days after
receiving the notice to consider the decision of whether
or not to elect a distribution (and, if applicable, a
particular distribution option), and (b) the Participant,
after receiving the notice, affirmatively elects a
distribution.
The Account of a Participant who has been
provided the notice specified in IRC Section 402(f) but
who makes no election with regard to an Eligible Rollover
Distribution within thirty (30) days of receiving such
notice shall be distributed directly to the Participant as
soon thereafter as is practicable, assuming that the value
of the vested Account of such Participant has never
exceeded three-thousand five hundred dollars ($3,500) at
any time after it was first distributable.
For purposes of this Section 5.05(e), the
following definitions shall apply:
(i) Eligible Rollover Distribution - An Eligible
Rollover Distribution is any distribution of all
or any portion of the balance to the credit of
the Distributee, except that an Eligible
Rollover Distribution does not include:
(A) any distribution that is one of a series of
substantially equal periodic payments (not
less frequently than annually) made for the
life (or life expectancy) of the
distributee or the joint lives (or joint
life expectancies) of the Distributee and
the Distributee's designated Beneficiary,
or for a specified period of ten (10) years
or more;
(B) any distribution to the extent
such distribution is required under IRC
Section 401(a)(9); and
(C) the portion of any distribution that is not
includible in gross income (determined
without regard to the exclusion for net
unrealized appreciation with respect to
employer securities).
(ii) Eligible Retirement Plan - An Eligible
Retirement Plan is an individual retirement
account described in IRC Section 408(a), an
individual retirement annuity described in IRC
Section 408(b), an annuity plan described in IRC
Section 403(a), or a qualified trust described
in IRC Section 401(a), that accepts the
Distributee's Eligible Rollover Distribution.
However, in the case of an Eligible Rollover
Distribution to the surviving spouse, an
Eligible Retirement Plan is an individual
retirement account or individual retirement
annuity.
(iii) Distributee - A Distributee includes an Employee
or former Employee. In addition, the Employee's
or former Employee's surviving spouse and the
Employee's or former Employee's spouse or former
spouse who is the alternate payee under a
qualified domestic relations order, as defined
in IRC Section 414(p), are Distributees with
regard to the interest of the spouse or former
spouse.
(iv) Direct Rollover - A Direct Rollover is a payment
by the Plan to the Eligible Retirement Plan
specified by the Distributee.
6.09 Maximum Option Payable - If a Participant elects to have his benefit
paid under Section 6.08(c) and the designated Beneficiary is not the
spouse of the Participant, the option elected shall be restricted so
that the minimum distribution incidental benefit requirements of IRC
Section 401(a)(9) and Treasury Regulation 1.401(a)(9)-2 are met.
6.10 Benefits to Minors and Incompetents - If any person entitled to receive
payment under the Plan shall be a minor, the Administrative Committee,
in its discretion, may dispose of such amount in any one or more of the
following ways:
(a) by payment thereof directly to such minor;
(b) by application thereof for benefit of such minor;
(c) by payment thereof to either parent of such minor or to any adult
person with whom such minor may at the time be living or to any
person who shall be legally qualified and acting as guardian of the
person or the property of such minor; provided only that the parent
or adult person to whom any amount is paid has advised the
Administrative Committee in writing that he will hold or use such
amount for the benefit of such minor.
If a person entitled to receive payment under the Plan is physically or
mentally incapable of personally receiving and giving a valid receipt
for any payment due (unless prior claim therefor shall have been made
by a duly qualified committee or other legal representative), such
payment may be made to the spouse, son, daughter, parent, brother,
sister or other person deemed by the Administrative Committee to have
incurred expense for such person otherwise entitled to payment.
6.11 Payment of Benefits - If a portion of a Participant's Individual
Account and Deductible Account which is due and payable under this
Article VI, and the Participant has not elected otherwise in accordance
with the provisions of the Plan, any payment of benefits or
commencement thereof to the Participant shall begin not later than
sixty (60) days after the close of the Plan Year in which occurs the
later of:
6.11 (a) the Participant's having attained his Normal Retirement Age;
and
6.11 (b) the termination of service of the Participant
Notwithstanding anything contained herein to the contrary, the
interest of each Participant shall begin to be distributed no later
than the April 1 of the calendar year following the calendar year in
which the Participant attains age seventy and one-half (70 1/2) in
accordance with IRC Section 401(a)(9) and the regulations issued
thereunder, inclusive of the minimum distribution incidental death
benefit requirement of Section 1.401(a)(9)-2 of the regulations. Life
expectancy of the Participant and the Participant's spouse (other than
for a life annuity) may be redetermined annually if the Participant so
elects.
6.12 Restriction on Distribution of Pre-Tax Contributions - Amounts
attributable to Pre-Tax Contributions shall not be distributed prior to
the earliest of one of the following events:
6.12(a) The Participant's retirement, death, Total and Permanent
Disability, or separation from service;
6.12(b) The termination of the Plan without establishment or
maintenance of a successor Defined Contribution Plan;
6.12(c) The date of the sale or disposition of substantially all
of the assets sale of eighty-five percent (85%) of the
assets shall be deemed to be substantially all) used by
the Employer in its trade or business to an unrelated
corporation provided the Employer continues to maintain
this Plan and the Participant continues employment with
the corporation acquiring such assets;
6.12(d) The date of sale or other disposition of the Employer of
its interest in a subsidiary to an unrelated entity
provided the Employer continues to maintain this Plan and
the Participant continues employment with the unrelated
entity;
6.12(e) The Participant's attainment of age fifty-nine and
one-half (59 1/2); or
6.12(f) The Participant's Hardship.
All distributions shall be subject to the Participant (and
spousal, if applicable) consent requirements pursuant to IRC Section
401(a)(11) and 417.
6.13 Special Retirement Opportunity - Notwithstanding the provisions of
Section 6.04, the following individuals shall be subject to the
provisions of Section 6.04 as if they had attained the age of
fifty-five (55) prior to retirement:
Wallace D. Brooks
Roderick D. Brown
Ann L. Burks
Joyce W. Davis
Mary D. Davis
Mary M. Duty
James L. Gore
A. Wayne Harris
John D. Kepliger
Peggy K. Mawyer
Floydie M. Peeples
Leon H. Shelton
Delores S. Thomas
Richard T. Willis
Lettie M. Cooke
<PAGE>
ARTICLE VII
WITHDRAWALS, REINSTATEMENTS AND LOANS
7.01 Withdrawals Generally - Subject to the terms and conditions set forth
below, a Participant may withdraw all or a part of the vested interest
in the Current Balance in his Individual Account. Withdrawal requests
are considered by the Administrative Committee once a week based on
processing schedules and procedures adopted by the Administrative
Committee. Payment of withdrawals shall be made in a lump sum as soon
as reasonably possible after the Administrative Committee's approval of
the withdrawal request. Amounts withdrawn may not be repaid. The
provisions of this Article VII are applicable to withdrawals from a
Participant's Individual Account. Withdrawals from a Participant's
Deductible Account are permitted pursuant to Section 7.05.
7.02 Withdrawal of After-Tax Contributions - A Participant may withdraw all
or a portion of his After-Tax Contribution Account attributable to
After-Tax Contributions by requesting such withdrawal on forms provided
by the Administrative Committee.
If a Participant's Individual Account attributable to his
After-Tax Contribution Account is invested in more than one of the
Funds, any partial withdrawal hereunder shall be taken from each such
Fund(s) in the same proportion that the total amount to be withdrawn
pursuant to this Section 7.02 bears to the total Current Balance of the
Participant's After Tax Contribution Account.
Amounts withdrawn pursuant to this Section 7.02 may not be repaid
to the Fund.
7.03 Withdrawal of Rollover Account, Transfer Account and Vested Employer
Contribution Account - A Participant may request a withdrawal of all or
a portion of his Rollover Account or the vested portion of his Employer
Contribution Account held on his behalf. A withdrawal from the
Participant's Transfer Account shall be allowed as provided in an
adoption agreement or an Appendix to the Plan. A Participant's
withdrawal request must identify the desired amount of the Current
Balance in such accounts that he wishes to withdraw. A Participant must
first exhaust his Rollover Account and then his Transfer Account, if
applicable, before making a withdrawal from his Employer Contribution
Account. Further, withdrawals from a Participant's Transfer Account or
Employer Contribution Account shall not include those employer
contributions under the transfer plan or Employer Contributions which
have been deposited in the Fund in the current Plan Year and the two
(2) previous Plan Years.
Any withdrawal under this Section 7.03 shall not be available
until the Participant has first exhausted by withdrawal the balance of
his entire account under the provisions of Section 7.02.
If a Participant's Individual Account attributable to his
Rollover Account, Transfer Account and Employer Contribution Account is
invested in more than one of the Funds as provided in Article IV, any
partial withdrawal hereunder shall be taken from each such Fund in the
same proportion that the total amount to be withdrawn pursuant to this
Section 7.03 bears to the total Current Balance of the Participant's
Rollover Account, Transfer Account and/or Employer Contribution
Account.
Amounts withdrawn pursuant to this Section 7.03 may not be repaid
to the Fund.
7.04 Withdrawal of Deductible Account - A Participant may request a
withdrawal of all of the Deductible Current Balance of his Deductible
Account. A withdrawal from a Participant's Deductible Account may be
made independent of and without interrupting a Participant's
participation in other aspects of the Plan. Payment of such amount
shall be in a lump sum and shall be made as soon as reasonably possible
after the Administrative Committee receives the withdrawal request.
7.05 Hardship Withdrawal - Upon the written request of a Participant with
proof of Hardship as determined by the Administrative Committee, a
Participant shall be allowed to withdraw all or a portion of the
Current Balance of his After-Tax Contribution Account, Pre-Tax
Contribution Account, Rollover Account, and the vested portions of his
Employer Contribution Account and Transfer Account.
Withdrawals made pursuant to this Section 7.05 shall be made so
that any distribution will first reduce a Participant's After-Tax
Contribution Account, Rollover Account, the vested portion of his
Transfer Account, if applicable, the vested portion of his Employer
Contribution Account and lastly, his Pre-Tax Contribution Account,
inclusive of the investment gains on Pre-Tax Contributions earned
through December 31, 1988. Notwithstanding the preceding, effective
January 1, 1989, any withdrawal hereunder from Pre-Tax Contribution
Accounts shall be limited to Employee deferrals attributable to such
Pre-Tax Contribution Accounts and not be available from investment
gains earned on and after January 1, 1989, on such Pre-Tax
Contributions. Withdrawals occasioned pursuant to this Section 7.05
shall not invoke a forfeiture of a Participant's Employer Contribution
Account or bar a Participant from future Pre-Tax Contributions
hereunder. If a Participant's Individual Account is invested in more
than one investment Fund as provided in Article IV, any partial
withdrawal hereunder from a Participant's After-Tax Contribution
Account, Rollover Account, the vested portion of his Employer
Contribution Account and Transfer Account, or his Pre-Tax Contribution
Account shall be taken from each such Fund in the same proportion that
the total amount to be withdrawn from such accounts bears to the total
Current Balance in the account from which the withdrawal arises.
Amounts withdrawn pursuant to this Section 7.05 may not be repaid
to the Fund.
7.06 Loans - Upon written application of a Participant, the Administrative
Committee may direct that a loan from the Fund be made to the
Participant. Loan requests shall be processed once a week based on
processing schedules and procedures as adopted by the Administrative
Committee and communicated to Participants. In order to apply for a
loan, a Participant shall complete a loan application form provided by
the Administrative Committee and provide any additional documentation
or financial information which the loan request form or Administrative
Committee requests. The application for a loan, approval or denial of
the loan and the resulting loan must be made in accordance with the
following requirements:
7.06(a) Loans shall be made available to Participants who are
parties in interest, as such term is defined in ERISA
Section 3(14), and who are Employees in a uniform and
nondiscriminatory manner with all Participants in similar
circumstances being treated alike. In no event shall any
discretionary power in granting or refusing a loan be
applied so as to discriminate in favor of any Highly
Compensated Employee or former Highly Compensated
Employee.
7.06(b) In approving or denying a loan request by a Participant,
consideration shall only be given to the factors which
would be considered in a normal commercial setting by an
entity in the business of making similar types of loans
based on the Participant's creditworthiness determined on
the basis that the Participant's wages have not be
garnished in the year preceding the date the loan is
requested and that the semi-monthly repayment amount on
any loan may not exceed fifteen percent (15%) of the
Participant's semi-monthly gross pay. Also, the
Administrative Committee will not approve any loan that
would exceed the sum of:
(i) forty-five percent (45%) of the last known vested
portion of the Current Balance of the Participant's
Individual Account invested in the Equity Fund and/or
Aggressive Growth Fund, and
(ii) fifty percent (50%) of the last known vested portion
of the Current Balance of the Participant's
Individual Account invested in the Fixed Income Fund.
Effective July 1, 1994, the requirement that
creditworthiness be determined on the basis that the
Participant's wages have not been garnished in the
year preceding that date of the request and
requirements specified in subparagraphs (i) and (ii),
shall no longer apply.
7.06(c) Upon receipt of a completed loan application, the
Administrative Committee shall review the application and
notify the Participant in a reasonable period of time
whether the loan has been approved or denied.
7.06(d) The amount of any such loan from the Fund shall be limited
to no more than the amount the Participant would be
entitled to receive from his Pre-Tax Contribution Account,
Rollover Account, and vested Employer Contribution Account
and Transfer Account pursuant to the provisions of Section
6.01 if he terminated his employment as of such date.
7.06(e) The maximum permissible loan available in any Plan Year
from all qualified plans of the Employer shall not exceed
the lesser of:
(i) fifty thousand dollars ($50,000) reduced by the
excess (if any) of:
(A) the highest outstanding balance of loans
from the Plan during the one (1) year
period ending on the day before the date on
which the loan was made, over
(B) the outstanding balance of loans from the
Plan on the date on which such loan was
made, or
(ii) fifty percent (50%) of the vested portion of the
Current Balance of the Participant's Individual
Account which he would have been entitled to pursuant
to the provisions of Section 6.01, assuming the
Participant terminated on the day the loan was
approved by the Administrative Committee.
7.06(f) Any loan made pursuant to this Section must generally be
repaid within a period not to exceed (5) years. However,
the Administrative Committee, in its discretion, may grant
a loan, the purpose of which is the acquisition of the
primary residence of the Participant. In such event, the
repayment period may be up to ten (10) years. The period
of repayment for any loan shall be arrived at by mutual
agreement between the Administrative Committee and the
Participant. Except as may be provided in regulations,
each loan to which this Section applies must provide for a
substantially level amortization of the loan with payments
being made not less frequently than quarterly.
7.06(g) The method of timing for repayment of any loan hereunder
shall be determined at the time the loan is made and a
copy shall be kept with the promissory note. Repayment of
any loan shall be by payroll deduction or by a lump sum
payment. Notwithstanding the preceding, if a Participant
is on a leave of absence and is not receiving Compensation
from the Employer, he shall be permitted to make loan
payments by personal check on the dates the loan payments
otherwise would be due. A Participant who is on a leave of
absence from the Employer, not longer than one (1) year,
either without compensation or with compensation (after
income and employment tax withholding) that is less than
the amount of his loan payment, does not have to make loan
payments while on the leave of absence. At the end of the
leave of absence (or, if earlier, after the first year of
leave), the Participant must make arrangements with the
Administrative Committee to repay the loan in full,
including accrued interest for the period during which
loan payments were not made, by the latest date permitted
in Section 7.06(b). Also, each loan payment due after the
end of the leave (or, if earlier, after the first year of
leave) must be at least equal to the amount of each loan
payment required under the terms of the original loan.
7.06(h) Interest on any loan hereunder shall be based on a
reasonable rate of interest being charged in Richmond,
Virginia, which shall be deemed to be one hundred (100)
basis points above the prime rate listed in the Wall
Street Journal, as determined by the Administrative
Committee as of the second to last business day of the
month preceding the month in which the loan application is
made. The interest rate, once fixed, shall remain in
effect for the duration of the loan.
7.06(i) All loans shall be evidenced by a promissory note and such
note shall be held as an asset of the Fund in a segregated
account applicable to the Participant to whom the loan is
granted. The loan shall be collateralized with the vested
portion of the Current Balance of the Participant's
Individual Account; however, in no event shall more than
fifty percent (50%) of the vested portion of the
Participant's Individual Account be used as collateral.
7.06(j) The Administrative Committee shall have the discretion to
establish a fair and equitable policy regarding the
administration of loan within the Plan. In establishing
this policy, to the extent practicable, the Participant's
Individual Account will be reduced in the following order,
with such account balances thereafter reflected in the
form of a promissory note held by the Trustee on behalf of
the Participant:
Order of Individual Account Reduction
Pre-Tax Contribution Account
Rollover Account
Transfer Account
Employer Contribution Account
Commencing on and after July 1, 1994, the
Participant's Individual Account shall be reduced in the
order shown above, and the investment funds within each
sub-account shall be reduced on a pro-rata basis.
7.06(k) All payments by a Participant representing interest shall
be considered as investment income of the Fund applicable
to the Participant.
7.06(l) All payments by a Participant representing principal shall
be used to reduce the outstanding balance of the loan and
principal and interest payments shall be credited to the
other investment accounts as may be chosen by the
Participant with respect to future Contributions to the
Plan.
7.06(m) No distribution shall be made to or by any Participant or
Beneficiary of a Participant unless and until all unpaid
loans, including accrued interest thereon, have been
liquidated. In the event of the death, retirement or
termination of employment of a Participant prior to the
time the loan is repaid, or failure to comply with any
terms of the loan, the loan shall be considered to be in
default and the balance of such loan shall become due and
payable with such repayment being satisfied (i) by
satisfying the indebtedness from the amount held in the
Participant's Individual Account before making payments to
the Participant or his Beneficiary, (ii) by an adjustment
to any outstanding payroll due to the Participant, and,
lastly, (iii) from any other assets of the Participant.
A loan shall be deemed to be in default as of the end
of a calendar year if at that time loan payments have not
been made on the scheduled due dates for a period of three
(3) or more consecutive calendar months. At the time the
loan is considered to be in default, the outstanding loan
balance and the interest thereon shall be treated as a
taxable distribution to the Participant and reported to
the Participant and the Internal Revenue Service for such
calendar year.
Commencing January 1, 1996, a loan shall be deemed to
be in default if, at the end of a calendar quarter, loan
repayments are three (3) or more months in arrears. The
outstanding balance and accrued interest thereon of a
defaulted loan shall be a "deemed distribution" to the
Participant and reported as taxable income to the
Participant and the Internal Revenue Service for such
calendar year.
7.06(n) No loan shall be granted to a Participant unless the
Participant consents, in writing, that in the event of
default of the loan, the outstanding loan balance and any
interest credited pursuant to the loan thereafter shall be
deemed a taxable distribution to the Participant. Such
written consent shall be of the type and manner intended
to satisfy the requirements of IRC Section 411(a)(11) and
shall be specified in the promissory note.
7.06(o) No more than one (1) Plan loan per Participant may be
outstanding at any time.
7.06(p) No loan shall be granted for less than one thousand
dollars ($1,000.00).
<PAGE>
ARTICLE VIII
FUNDING
8.01 Contributions - Contributions as provided for in Article III shall be
paid over to the Trustee within a reasonable time following the time
such Contributions were withheld from the Participant's Compensation or
made by the Employer. All Contributions by the Employer shall be
irrevocable, except as herein provided. On receipt of Contributions,
the Trustee shall manage and administer the funds so received in
accordance with the provisions of the Plan.
8.02 Trustee - The Corporation will enter into an agreement with the Trustee
whereunder the Trustee will receive, invest and administer as a trust
fund Contributions made under this Plan in accordance with the Trust
Agreement. The Trustee shall, in accordance with the terms of the Trust
Agreement, accept and receive all sums of money paid to it from time to
time by the Employer.
The Trust Agreement is attached hereto and incorporated by
reference as a part of the Plan, and the rights of all persons
hereunder are subject to the terms of the Trust Agreement. The Trust
Agreement specifically provides, among other things, for the investment
and reinvestment of the Fund and the income thereof, the management of
the Fund, the responsibilities and immunities of the Trustee, removal
of the Trustee and appointment of a successor, accounting by the
Trustee and the disbursement of the Fund.
The Trustee shall establish and maintain investment funds in
accordance with the provisions of Article IV. Contributions shall be
allocated to and invested as part of the appropriate investment funds
as directed by the Investment Committee. Assets shall be transferred
from one investment fund to another as directed by the Investment
Committee to maintain the investment division desired by the
Participants.
8.03 Exclusive Benefit - No part of the corpus or income of the Fund shall
be used for or diverted to purposes other than for the exclusive
benefit of Participants and their Beneficiaries or for payment of
expenses of operating the Plan and Fund as provided in Section 13.03,
nor shall any part thereof be recoverable to the Employee except as
provided in Section 13.06.
<PAGE>
ARTICLE IX
FIDUCIARIES
9.01 General - Each Fiduciary who is allocated specific duties or
responsibilities under the Plan or any Fiduciary who assumes such a
position with respect to the Plan shall discharge his duties solely in
the interest of Participants and Beneficiaries and for the purpose of
providing such benefits as stipulated herein to such Participants and
Beneficiaries, or defraying the operating expenses of the Plan and Fund
as provided in Section 13.03. Each Fiduciary in carrying out such
duties and responsibilities shall act with the care, skill, prudence,
and diligence under the circumstances then prevailing that a prudent
man acting in a like capacity and familiar with such matters would use
in exercising such authority or duties.
A Fiduciary may serve in more than one Fiduciary capacity and may
employ one or more persons to render advice with regard to his
Fiduciary responsibilities. All expenses reasonably incurred by a
Fiduciary on behalf of the Plan and Trust shall be reimbursed by the
Corporation or, at the Corporation's direction in accordance with
Section 13.03, from the Fund by the Trustee.
A Fiduciary may allocate any of his responsibilities for the
operation and administration of the Plan. In limitation of this right,
a Fiduciary may not allocate any responsibilities as contained herein
relating to the management or control of the Fund except through the
employment of an Investment Manager as provided in Section 9.03 and in
the Trust Agreement relating to the Fund.
9.02 Corporation - The Corporation established and maintains the Plan for
the benefit of its Employees and of necessity retains control of the
operation and administration of the Plan. The Corporation in accordance
with specific provisions of the Plan has, as herein indicated,
delegated certain of these rights and obligations to the Trustee the
Administrative Committee and the Investment Committee and these parties
shall be solely responsible for these, and only these, delegated rights
and obligations.
The Corporation shall supply such full and timely information for
all matters relating to the Plan as (a) the Investment Committee, (b)
the Administrative Committee, (c) the Trustee, and (d) the accountant
engaged on behalf of the Plan by the Corporation may require for the
effective discharge of their respective duties.
9.03 Trustee - The Trustee, in accordance with the Trust Agreement, shall
have exclusive authority and discretion to manage and control the Fund,
except that the Corporation may in its discretion direct the Trustee
with regard to investments to be made or employ at any time and from
time to time an Investment Manager, with respect to all or a designated
portion of the assets comprising the Fund, in which case the
Corporation or Investment Manager, as may be applicable, shall have
complete control and responsibility over all matters pertaining to the
investment of such assets as so directed.
9.04 Administrative Committee - The Corporation shall appoint a committee of
not less than three (3) persons to hold office during the pleasure of
the Corporation, such committee to be known as the Administrative
Committee. The Administrative Committee shall choose from among its
members a chairman and a secretary. Any action of the Administrative
Committee shall be determined by the vote of a majority of its members.
Either the chairman or the secretary may execute any certificate or
other written direction on behalf of the Administrative Committee.
The Administrative Committee shall hold meetings upon such
notice, at such place or places and at such time or times as the
Administrative Committee may from time to time determine. Meetings may
be called by the chairman or any two (2) members. A majority of the
members of the Administrative Committee at the time in office shall
constitute a quorum for the transaction of business.
In accordance with the provisions hereof, the Administrative
Committee has been delegated certain administrative functions relating
to the Plan with all powers necessary to enable it to properly carry
out such duties. The Administrative Committee shall have no power in
any way to modify, alter, add to or subtract from, any provisions of
the Plan. The Administrative Committee shall have the duty and
discretionary authority to construe the Plan and to determine all
questions that may arise thereunder relating to (a) the eligibility of
individuals to participate in the Plan, (b) the amount of benefits to
which any Participant or Beneficiary may become entitled hereunder and
(c) any situation not specifically covered by the provisions of the
Plan. All disbursements by the Trustee, except for the payment of
operating expenses of the Plan and Fund at the direction of the
Corporation as provided in Section 13.03, shall be made upon, and in
accordance with, the written directions of the Administrative
Committee. When the Administrative Committee is required in the
performance of its duties hereunder to administer or construe, or to
reach a determination, under any of the provisions of the Plan, it
shall do so in a uniform, equitable and nondiscriminatory basis. The
Administrative Committee may delegate certain duties as specified
herein as provided in Section 9.01.
After the close of each calendar quarter in the Plan Year or more
frequently as determined by the Administrative Committee, the
Administrative Committee shall distribute to each Participant a
statement setting forth a summary of his and his Employer's
Contributions and the Current Balance in his Individual Account and
Deductible Current Balance of his Deductible Account.
The Administrative Committee shall establish rules and procedures
to be followed by Participants and Beneficiaries in filing applications
for benefits and for furnishing and verifying proofs necessary to
establish age, Service, Years of Service and any other matters required
in order to establish their rights to benefits in accordance with the
Plan.
9.05 Investment Committee - Investment Committee means the committee, as
specified in the Trust Agreement, as constituted from the time to time
which has the responsibility for allocating the assets of the Fund
among the separate accounts and any Trustee investment accounts, for
monitoring the diversification of the investment of the Fund in foreign
securities and of maintaining the custody of foreign investments
abroad, for assuring that the Plan does not violate any provisions of
ERISA limiting the acquisition or holding of "employer securities" or
"employer real property" and for the appointment and removal of
Investment Managers.
9.06 Claims Procedures - The Administrative Committee shall receive all
applications for benefits. Upon receipt by the Administrative Committee
of such an application, it shall determine all facts which are
necessary to establish the right of an applicant to benefits under the
provisions of the Plan and the amount thereof as herein provided. Upon
request, the Administrative Committee will afford the applicant the
right of a hearing with respect to any finding of fact or
determination. The applicant shall be notified in writing of any
adverse decision with respect to his claim within ninety (90) days
after its submission. The notice shall be written in a manner
calculated to be understood by the applicant and shall include:
9.06(a) the specific reason or reasons for the denial;
9.06(b) specific references to the pertinent Plan provisions on which
the denial is based;
9.06(c) a description of any additional material or information
necessary for the applicant to perfect the claim and an
explanation why such material or information is necessary; and
9.06(d) an explanation of the Plan's claim review procedures.
If special circumstances require an extension of time for
processing the initial claim, a written notice of the extension and the
reason therefor shall be furnished to the claimant before the end of
the initial ninety (90) day period. In no event shall such extension
exceed ninety (90) days.
In the event a claim for benefits is denied or if the applicant
has had no response to such claim within ninety (90) days of its
submission (in which case the claim for benefits shall be deemed to
have been denied), the applicant or his duly authorized representative,
at the applicant's sole expense, may appeal the denial to the
Administrative Committee within sixty (60) days of the receipt of
written notice of denial or sixty (60) days from the date such claim is
deemed to be denied. In pursuing such appeal the applicant or his duly
authorized representative:
9.06(e) may request in writing that the Administrative Committee review
the denial;
9.06(f) may review pertinent documents; and
9.06(g) may submit issues and comments in writing.
The decision on review shall be made within sixty (60) days of
receipt of the request for review, unless special circumstances require
an extension of time for processing, in which case a decision shall be
rendered as soon as possible, but not later than one hundred twenty
(120) days after receipt of a request for review. If such an extension
of time is required, written notice of the extension shall be furnished
to the claimant before the end of the original sixty (60) day period.
The decision on review shall be made in writing, shall be written in a
manner calculated to be understood by the claimant, and shall include
specific references to the provisions of the Plan on which such denial
is based. If the decision on review is not furnished within the time
specified above, the claim shall be deemed denied on review.
9.07 Records - All acts and determinations of the Administrative Committee
shall be duly recorded by the secretary thereof and all such records,
together with such other documents as may be necessary in exercising
its duties under the Plan shall be preserved in the custody of such
secretary. Such records and documents shall at all times be open for
inspection and for the purpose of making copies by any person
designated by the Corporation. The Administrative Committee shall
provide such timely information, resulting from the application of its
responsibilities under the Plan, as needed by the Trustee and the
accountant engaged on behalf of the Plan by the Corporation, for the
effective discharge of their respective duties.
9.08 Missing Persons - The Administrative Committee shall direct the Trustee
to make a reasonable effort to locate all persons entitled to benefits
under the Plan; however, notwithstanding any provision in the Plan to
the contrary, if, after a period of five (5) years from the date such
benefit shall be due, any such persons entitled to benefits have not
been located, their rights under the Plan shall be construed as if the
Participant had died. Before this provision becomes operative, the
Trustee shall send a certified letter to all such persons at their last
known address advising them that their interest or benefits under the
Plan shall be so construed. Any such amounts shall be held by the
Trustee for a period of three (3) additional years (or a total of eight
(8) years from the time the benefits first become payable). If no
distributee can be found, then any unclaimed benefits shall be dealt
with according to the laws of the Commonwealth of Virginia pertaining
to abandoned intangible personal property held in a fiduciary capacity.
9.09 Maintenance of Individual Accounts, Deductible Accounts and Plan
Operations - It shall be the duty of the Administrative Committee or
such person as it may designate to maintain an up-to-date record of all
transactions pursuant to each Participant's Individual Account and
Deductible Account and to process all other day-to-day operations of
the Plan including: the enrollment of Participants; the distribution of
booklets, notices and other information regarding the Plan; maintaining
Beneficiary designation forms; explaining the optional forms of benefit
payouts which may be elected by a Participant under the Plan; and
communicating all other matters relating to participation and
entitlement to benefits to the Participants, the accountant and other
entities performing services for the Plan as may be necessary to enable
them to discharge their duties in a uniform, equitable and
nondiscriminatory manner with regard to all Participants or
Beneficiaries under similar circumstances.
9.10 Disclosure - The Administrative Committee shall see that descriptions
of the Plan are prepared for filing with the Department of Labor and
shall make available to Participants and Beneficiaries receiving
benefits under the Plan a summary of the Plan at such place and at such
times as may be required by federal statutes and regulations issued
thereunder.
The Administrative Committee shall arrange for the preparation
and filing of such annual reports, including financial statements of
the Plan's assets and liabilities, schedules, receipts and
disbursements and changes in financial position in such form, at such
place and at such times as may be required by federal statutes and
regulations.
The Administrative Committee shall furnish annually to all
Participants and Beneficiaries receiving benefits under the Plan a copy
of a summary of the financial statement of the Plan's assets and
liabilities and schedules of receipts and disbursements and such other
material as is necessary to fairly summarize the latest annual report
at such times and to the extent required by federal statutes and
regulations.
The Administrative Committee shall also make available, at its
principal office, copies of the Plan, the Trust Agreement, copies of
any contracts relating to the Plan, descriptions of the Plan, and
annual reports for examination by any Participant or Beneficiary. Upon
written request of any Participant or Beneficiary receiving benefits
under the Plan, the Administrative Committee shall furnish him a copy
of the latest Plan description, summary plan description, latest annual
report and a copy of the Plan and Trust Agreement. The Administrative
Committee may make a reasonable charge for the costs of furnishing
copies of such documents.
9.11 Annual Accountings - The Corporation shall engage, on behalf of all
Participants, an independent qualified public accountant to certify and
render an opinion that the financial statements and schedules prepared
in conjunction with the Plan are presented fairly and are in conformity
with generally accepted accounting principles consistently applied.
Where assets of the Plan are held by a bank, supervised and subject to
periodic examination by a state or federal agency, which bank prepares
information concerning the assets of the Plan and certifies that such
information is accurate and the information is made a part of the
annual report, the accountant may rely on such statements as accurate.
If the assets are held by a bank, the Corporation may delegate the
responsibility for preparation of such statements to the bank and may
delegate the responsibility for the preparation of such other forms and
reports to such entity as it shall select.
9.12 Funding Policy - The Corporation in consultation with the Investment
Committee, Trustee and Investment Manager, where applicable, shall
establish a funding policy and method to carry out the objectives of
the Plan. To formulate and maintain such policy, the Corporation, the
Trustee, the Investment Committee, the Investment Manager, where
applicable, and such other persons as may be designated by the
Corporation shall consult at least annually and more frequently if
necessary, to review the short- and long-range financial needs of the
Plan, the anticipated level of annual contributions and any material
changes thereto occurring during the year. The results of such annual
consultations shall be documented by the Corporation or its designee.
9.13 Indemnification of Fiduciaries - Each member of the Board, and each
other employee of the Corporation who is determined to be a Fiduciary
under the terms of ERISA with respect to the Plan, shall be indemnified
by the Corporation against liability imposed on him and against all
expenses and costs which may be reasonably incurred by him in
connection with or resulting from any action, suit or proceeding, or
any claim against him, if he shall have been made a party to such
action, suit or proceeding, or such claim shall have been made by
reason of his being or having been a Fiduciary with respect to the
Plan. In the case of a settlement of any such action, proceeding or
claim before a final adjudication thereof, the right of indemnification
shall exist only to the extent that the Corporation shall have
consented to the settlement.
9.14 Equitable Allocations - The Administrative Committee shall establish
accounting procedures for the purpose of making allocations, valuations
and adjustments to Individual Accounts and Deductible Accounts. Should
the Administrative Committee determine that the strict application of
its accounting procedures will not result in an equitable and
nondiscriminatory allocation among Individual Accounts and Deductible
Accounts, or other circumstances arise which are not covered hereunder,
it may modify its procedures for the purposes of achieving an equitable
and nondiscriminatory allocation in accordance with the general
concepts of the Plan.
Further, notwithstanding anything contained herein to the
contrary, in order to administer the Plan in an equitable and
nondiscriminatory manner, the Administrative Committee may choose an
alternate date to value Individual Accounts and Deductible Accounts for
all purposes including distributions from the Plan, transfers among
funds within the plan, loans and any other transactions needing a
specific Valuation Date, provided such alternate Valuation Date is
within sixty (60) days after the date the Plan would otherwise value
Individual Accounts and Deductible Accounts.
<PAGE>
ARTICLE X
AMENDMENT AND TERMINATION OF THE PLAN
10.01 Amendment of The Plan - The Corporation shall have the right to modify,
alter or amend the Plan in whole or in part; provided, however, (a)
that any such action which affects Employer Contributions to the Plan
shall require approval of the Board of Directors and (b) that the
duties, powers and liabilities of any Trustee hereunder shall not be
increased without its written consent; and provided, further, that any
such action shall not, in any way, affect adversely the benefits of
persons who have retired under the Plan prior to the effective date of
such action, or of their Beneficiaries, nor shall it adversely affect
benefits accrued prior to the effective date of such action. No
amendment, modification or alteration shall have the effect of causing
a reversion to the Employer of any part of the principal or income of
the Fund. Notwithstanding anything contained herein to the contrary, no
amendment to the Plan shall decrease a Participant's Individual Account
and Deductible Account balance or eliminate an optional form of
distribution, except as permitted by law.
If the Plan's vesting schedule is amended or the Plan is amended
in any way that directly or indirectly affects the computation of a
Participant's vested benefit, each Participant with at least three (3)
years of Service may elect within a reasonable period of time after the
adoption of the amendment or change to have his vested percentage
computed under the Plan without regard to such amendment or change. The
period during which the election may be made shall commence with the
date the amendment is adopted or deemed to be made and shall end on the
latest of sixty (60) days after (a) the amendment is adopted, (b) the
amendment is effective or (c) the Participant is issued written notice
of the amendment by the Employer or Administrative Committee.
10.02 Termination of The Plan - While the Employer expects to continue the
Plan indefinitely, continuance of the Plan is not assumed as a
contractual obligation. Each Employer reserves the right to discontinue
its Contributions and to terminate the Plan as it relates to its
Employees without terminating the Plan with respect to any other
Employer by action of the Employer's Board of Directors. Any Employer
desiring to terminate the Plan as it relates to its Employees shall
give notice of such termination to the Corporation and the Trustee at
least six (6) months prior to the effective date thereof (unless a
shorter notice shall be agreed to by the Corporation). On termination
of the Plan or in the event of a partial termination or curtailment),
or discontinuance of Contributions, the rights of present Participants
(to the extent affected by such action) in their account balances held
pursuant to the Plan as of the date of such event shall be
nonforfeitable and the Trustee shall continue to administer the Fund in
accordance with the provisions of the Plan and the Trust Agreement for
the sole benefit of the then Participants or Beneficiaries then
receiving or entitled to receive future benefits. In the event of a
termination no further Contributions will be made to the Plan.
10.03 Allocation of Funds - In the event of termination of the Plan, the
Administrative Committee shall allocate to the terminating Employer's
Employees as of the date of termination any previously unallocated
Contributions, such Employer's share of the Forfeitures, realized and
unrealized appreciation or depreciation, income or loss of the Fund to
the accounts of the Participants of the Plan affected by the
termination and any income, losses, realized and unrealized
appreciation or depreciation to Participants of the Plan who have not
received their benefits under the Plan.
10.04 Application of Assets - After assets of the Fund pertaining to the
terminating Employer have been allocated as provided in Section 10.03,
such assets shall be applied to whichever of the following options is
specified by the terminating Employer:
10.04(a) Transfer to a separate trust and held therein to provide
benefits, to the extent such assets have been allocated,
to the persons entitled to benefits under the Plan as it
applies to the terminating Employer.
10.04(b) Distribution in a single lump sum, in cash or as a
rollover to each individual pursuant to Section 10.03,
provided such distribution is permitted in accordance with
IRC Section 401(k) and the regulations issued thereunder.
10.05 Automatic Termination - Unless otherwise provided for, the Plan shall
be deemed to have automatically terminated with respect to any Employer
who becomes insolvent, is adjudged bankrupt, or is dissolved. In the
event of such automatic termination, the provisions of Sections 10.03
and 10.04 shall govern.
10.06 Merger, Consolidation and Transfers of Assets or Liabilities - No
merger or consolidation with, or transfer of assets or liabilities to
this Plan or from this Plan to any other plan shall be made, unless
each Participant would receive immediately after such event, a benefit
(determined as if the Plan had terminated at that time) which is equal
to or greater than the benefit he would have been entitled to receive
under the Plan immediately before such event had the Plan terminated at
that time.
<PAGE>
ARTICLE XI
PROVISIONS RELATIVE TO EMPLOYERS INCLUDED IN PLAN
11.01 Method of Participation - Any organization which is a member of the
same controlled group of organizations as determined pursuant to IRC
Sections 414(b), 414(c), 414(m) and 414(o) as the Corporation which the
Corporation shall have authorized to adopt the Plan may, by taking
appropriate action, become a party to the Plan by adopting the Plan as
a thrift plan for its Employees. Any corporation which becomes a party
to the Plan shall thereafter promptly deliver to the Trustee provided
for in Article VIII a certified copy of the resolutions or other
documents evidencing its adoption of the Plan and also a written
instrument showing the Corporation's approval of such organization
becoming party to the Plan. The Plan shall be maintained as a single
Plan for all participating Employers.
11.02 Withdrawal - Any one or more of the Employers included in the Plan may
withdraw from the Plan at any time by giving six (6) months advance
notice in writing of its or their intention to withdraw to the
Corporation and the Administrative Committee (unless a shorter notice
shall be agreed to by the Corporation).
Upon receipt of notice of any such withdrawal, the Administrative
Committee shall certify to the Trustee the equitable share of such
withdrawing Employer in the Fund as applicable to be determined by the
Administrative Committee. The Trustee shall thereupon set aside from
the Fund then held by it such securities and other property as it
shall, in its sole discretion, deem to be equal in value to such
equitable share. If the Plan is to be terminated with respect to such
Employer, the amount set aside shall be dealt with in accordance with
the provisions of Article X. If the Plan is not to be terminated with
respect to such Employer, the Trustee shall turn over such amount to
such trustee as may be designated by such withdrawing Employer, and
such securities and other property shall thereafter be held and
invested as a separate trust of the Employer which has so withdrawn,
and shall be used and applied according to the terms of a new agreement
and declaration of trust between the Employer so withdrawing and the
trustee so designated.
Neither the segregation of the Fund assets upon the withdrawal of
an Employer, nor the execution of a new agreement and declaration of
trust pursuant to any of the provisions of this Section 11.02, shall
operate to permit any part of the corpus or income of the Fund to be
used for or diverted to purposes other than for the exclusive benefit
of Participants and Beneficiaries except as may be otherwise provided
in Section 13.03 and Section 13.06.
<PAGE>
ARTICLE XII
TOP HEAVY PLAN PROVISIONS
12.01 General - Notwithstanding anything contained herein to the contrary, in
the event that this Plan when combined with all other plans required to
be aggregated pursuant to IRC Section 416(g) is deemed to be a Top
Heavy Plan for any Plan Year, the following conditions shall become
operative.
12.02 Definitions - For purposes of this Article, the following definitions
shall be applicable:
12.02(a) Determination Date means the last day of the Plan Year
preceding the Plan Year in which the determination is
being made. In the case of the first Plan Year,
Determination Date means the last day of such Plan Year.
12.02(b) Key Employee means any employee, former employee or
beneficiary of a former employee in an Employer plan who,
at any time during the Plan Year or any of the four (4)
preceding Plan Years is:
(i) An officer of the Employer having annual
Maximum Compensation greater than fifty
percent (50%) of the amount in effect under
IRC Section 415(b)(1)(A) for any such Plan
Year;
(ii) One (1) of the ten (10) employees having
annual Maximum Compensation from the Employer
of more than the limitation in effect under
IRC Section 415(c)(1)(A) and owning (or
considered as owning within the meaning of IRC
Section 318) more than a one-half percent
(1/2%) interest and the largest interest in
the Employer;
(iii) A Five Percent (5%) Owner of the Employer; or
(iv) A one percent (1%) owner of the Employer
having annual Maximum Compensation from the
Employer of more than one hundred fifty
thousand dollars ($150,000).
For purposes of Section 12.02(b)(i), no more than
fifty (50) employees or, if lesser, the greater of three
(3) or ten percent (10%) of employees shall be treated as
officers. Further, for purposes of determining the number
of officers taken into account under Section 12.02(b)(i),
employees described in IRC Section 414(q)(8) shall be
excluded.
With respect to Section 12.02(b)(ii), if two (2)
employees have the same ownership interest in the
Employer, the employee having the greater annual Maximum
Compensation shall be treated as having a larger interest.
12.02(c) Non-Key Employee means an employee, former employee or
beneficiary of a former employee who is not a Key
Employee.
12.02(d) Top Heavy Plan generally means on or after January 1,
1984, any plan under which, as of any Determination Date,
the present value of the cumulative accrued benefits
(inclusive of Pre-Tax Contributions) under the plan for
Key Employees exceeds sixty percent (60%) of the present
value of the cumulative accrued benefits under the plan
for all employees.
For purposes of this definition:
(i) If such plan is a Defined Contribution Plan,
the present value of cumulative accrued
benefits shall be deemed to be the market
value of all employee accounts under the plan
as of the Top Heavy Valuation Date plus
contributions to the plan as of the
Determination Date. If the plan is a Defined
Benefit Plan, the present value of cumulative
accrued benefits shall be deemed to be the
lump sum present value of a participant's
accrued benefit under such plan calculated on
the basis of interest and mortality as set
forth in said plan as of the Top Heavy
Valuation Date plus contributions due under
the plan as of the Determination Date.
Notwithstanding the above, for purposes of
determining the present value of the
cumulative accrued benefits, distributions
made within a five (5) year period ending on
the Determination Date must be included. The
account balances and accrued benefits of a
Non-Key Employee who was previously a Key
Employee shall be excluded from the
computation hereunder.
(ii) Each plan of the Employer required to be
included in an "aggregation group" shall be
treated as a Top Heavy Plan if such group is a
top heavy group.
(iii) The term "aggregation group" means
(A) each plan of the Employer which is
currently effective or which has
terminated within the five (5) year
period ending on the Determination
Date in which a Key Employee is a
participant in the Plan Year
containing the Determination Date or
any of the four (4) preceding Plan
Years; and
(B) each other plan of the Employer
which enables any plan in (A) to
meet the requirements of IRC
Sections 401(a)(4) or 410.
A permissive aggregation group
consists of plans of the Employer
that are required to be aggregated,
plus one (1) or more plans of the
Employer that are not part of a
required aggregation group but that
satisfy the requirements of IRC
Sections 401(a)(4) and 410 when
considered together with the
required aggregation group.
(iv) If any individual has not performed any
service for the Employer at any time during
the five (5) year period ending on the
Determination Date, any accrued benefit for
such individual shall not be taken into
account in the testing procedure herein
described.
12.02(e) Top Heavy Valuation Date means the most recent Valuation
Date occurring within a twelve (12) month period ending on
the Determination Date.
These definitions shall be interpreted consistent with IRC
Section 416 and rules and regulations issued thereunder. Further, such
law and regulations shall be controlling in all determinations under
these definitions inclusive of any provisions and requirements stated
thereunder but hereinabove absent.
12.03 Minimum Top Heavy Contribution - In a Plan Year in which the Plan
becomes a Top Heavy Plan, inclusive of a Plan Year in which the Plan is
considered a Top Heavy Plan pursuant to the provisions of Section
1.416-1 T-5 of the regulations under IRC Section 416 but has not
terminated, and the aggregate Contributions by the Employer to all
Non-Key Employees allocated to their Individual Accounts are less than
three percent (3%) of Maximum Compensation (exclusive of Pre-Tax
Contributions for Plan Years beginning after December 31, 1988), then
the Employer shall contribute to the Plan an amount necessary to
provide a minimum Contribution including Forfeitures of at least three
percent (3%) of Maximum Compensation to such Non-Key Employees who are
employed as of the last day of the Plan Year regardless of (a) whether
such Non-Key Employee has completed one thousand (1,000) Hours of
Service, (b) whether such Non-Key Employee has made Pre-Tax
Contributions to the Plan, or (c) the level of the Non-Key Employee's
Compensation. The minimum Contribution required herein shall not be
forfeited in the event the Participant withdraws his Pre-Tax
Contributions. In no event, however, shall the allocation of the
minimum Contribution to the Individual Accounts of Non-Key Employees be
greater than the total allocation of Contributions by the Employer
(inclusive of Pre-Tax Contributions) to the Individual Accounts for Key
Employees. Any special Contribution or reallocation as herein provided
shall be made to the Employer Contribution Account on the basis of the
ratio that the Non-Key Employees' Maximum Compensation bears to the
total Maximum Compensation of all Non-Key Employees.
A Top Heavy Contribution of less than three percent (3%) shall
not be permissible if the Employer maintains a Defined Benefit Plan
which designates this Plan to satisfy IRC Section 401(a).
12.04 Defined Benefit Plan Minimum Accrued Benefit - If the Employer also
maintains a Defined Benefit Plan and the Defined Benefit Plan provides
the minimum accrued benefit determined pursuant to IRC Section
416(c)(1), then the adjustment provided in Section 12.03 shall not be
required.
12.05 Multiple Plan Participation - If Section 12.03 or Section 12.04 is
applicable, then the multiplier of 1.25 in Sections 5.10(a) and 5.10(c)
shall be reduced to 1.0.
12.06 No Duplication of Minimum Benefit - These Top Heavy Plan provisions
shall not require that the entire defined benefit minimum benefit and
the defined contribution minimum contribution be provided. To the
extent that there is a defined benefit accrued benefit, it shall be
controlling. To the extent that there shall be a contribution by the
Employer to a Defined Contribution Plan, then there shall be a
determination as to whether the defined contribution amount is
comparable to the difference between the defined benefit minimum
benefit and the minimum defined benefit accrued benefit required under
IRC Section 416. If the defined contribution amount is not comparable,
then the difference shall be provided in the Defined Benefit Plan.
12.07 Top Heavy Assumptions - For purposes of determining whether a Defined
Benefit Plan is a Top Heavy Plan, calculations shall be based upon
actuarial assumptions stipulated in such plan for this purpose. If no
assumptions are provided, the calculation shall be based upon The
UP-1984 Table of Mortality at six percent (6%) interest with such
determination being made on the Determination Date.
12.08 Minimum Vesting - If the vesting schedule provided in Section 6.01 is
less liberal than the vesting schedule hereinafter provided, then such
vesting schedule shall be substituted with the following for each
Participant with an Hour of Service after the Plan becomes a Top Heavy
Plan, and such schedule shall remain in effect in all future Plan
Years.
Vested
Service Percentage
Less than 3 year 0%
3 years or more 100%
<PAGE>
ARTICLE XIII
MISCELLANEOUS
13.01 Governing Law - The Plan shall be construed, regulated and administered
according to the laws of the Commonwealth of Virginia except in those
areas preempted by the laws of the United States of America.
13.02 Construction - The headings and subheadings in the Plan have been
inserted for convenience of reference only and shall not affect the
construction of the provisions hereof. In any necessary construction
the masculine shall include the feminine and the singular the plural,
and vice versa.
13.03 Expenses - The operating expenses of the Plan and Fund shall be paid by
the Employer or, upon the direction of the Corporation from the Fund to
the extent such expenses are permitted to be paid from the Fund. The
determination of whether expenses may be charged against the Fund shall
be made by the Corporation. No Employee shall be entitled to
compensation for his services with respect to the Plan other than his
normal compensation received as an Employee.
13.04 Participant's Rights; Acquittance - No Participant in the Plan shall
acquire any right to be retained in the Employer's employ by virtue of
the Plan, nor, upon his dismissal, or upon his voluntary termination of
employment, shall he have any right or interest in and to the Fund
other than as specifically provided herein. The Employer shall not be
liable for the payment of any benefit provided for herein; all benefits
hereunder shall be payable only from the Fund.
13.05 Spendthrift Clause - Except as provided in IRC Section 401(a)(13)(B)
relating to qualified domestic relations orders as defined in IRC
Section 414(p), none of the benefits, payments, proceeds or
distributions under this Plan shall be subject to the claim of any
creditor of the Participant or to the claim of any creditor of any
Beneficiary hereunder or to any legal process by any creditor of such
Participant of any such Beneficiary; and neither such Participant or
any such Beneficiary shall have any right to alienate, commute,
anticipate, or assign any of the benefits, payments, proceeds or
distributions under this Plan.
Notwithstanding anything contained herein to the contrary, upon
the receipt by the Plan of a Domestic Relations Order, the following
provisions of this Section 13.05 shall become effective.
13.05(a) Determination of Qualified Domestic Relations Order - Upon
receipt by the Plan of a Domestic Relations Order, the
Administrative Committee shall promptly notify the
Participant and any Alternate Payee of such receipt and
the Plan's procedures for determining if such order is a
Qualified Domestic Relations Order. In accordance with
reasonable procedures established by the Administrative
Committee, the Administrative Committee shall determine
whether such order is a Qualified Domestic Relations Order
and shall notify the Participant and Alternate Payee of
such determination within a reasonable time thereafter.
Notwithstanding anything contained herein to the contrary,
if a benefit is being paid pursuant to a Domestic
Relations Order on January 1, 1985, such order shall be
considered to be a Qualified Domestic Relations Order.
During the period of time in which the Administrative
Committee is making the determination of whether the
Domestic Relations Order is a Qualified Domestic Relations
Order, the Administrative Committee shall segregate in a
separate account in the Plan or in an escrow account the
amounts which would have been payable to the Alternate
Payee during such period if the order had been determined
to be a Qualified Domestic Relations Order.
In the case of any payment before a Participant has
separated from service with the Employer, a Domestic
Relations Order shall be a Qualified Domestic Relations
Order regardless of the fact that such order requires that
payment of benefits be made to an Alternate Payee
(i) on or after the date on which the Participant attains
or first would have attained his Early Retirement
Date,
(ii) as if the Participant had retired on the date on
which such payment is to begin under such order
taking into account only the present value of the
benefits actually accrued and not taking into account
the present value of any Employer subsidy for early
retirement based on the interest rate specified in
the Plan or, if no rate is specified, five percent
(5%), and
(iii)in any form in which such benefits may be paid under
the Plan to the Participant (other than in the form
of a joint and survivor annuity with respect to the
Alternate Payee and his or her subsequent spouse).
In the event a Qualified Domestic Relations Order
specifies that benefits commence immediately to the
Alternate Payee in one of the forms of payment provided
hereunder, payment from the Plan shall commence in
accordance with such Qualified Domestic Relations Order.
13.05(b) Payment to Alternate Payee - If the Domestic Relations
Order is determined to be a Qualified Domestic Relations
Order within eighteen (18) months, the Administrative
Committee shall pay the segregated amounts to the person
or persons entitled thereto.
If it is determined that the order is not a Qualified
Domestic Relations Order or the issue as to whether such
order is a Qualified Domestic Relations Order is not
resolved within eighteen (18) months, then the
Administrative Committee shall pay the segregated amount
to the person who would have been entitled to such amounts
as if there had been no order.
Any determination that an order is a Qualified
Domestic Relations Order which is made after the close of
the eighteen (18) month period shall be applied
prospectively only.
13.05(c) Definitions - For purposes of this Section 13.05, the
following definitions shall be applicable:
(i) Alternate Payee means any spouse, child or other
dependent of a Participant who is recognized by a
Domestic Relations Order as having a right to receive
all, or a portion of, the benefits payable under a
Plan with respect to such Participant.
(ii) Domestic Relations Order - Any judgment, decree or
order (including approval of a property settlement
agreement) which
(A) relates to the provisions of child
support, alimony payments, or
marital property rights to a spouse,
child or other dependent of a
Participant, and
(B) is made pursuant to a state domestic
relations law (including a community
property law).
(iii)Qualified Domestic Relations Order - A Domestic
Relations Order which creates or recognizes the
existence of an Alternate Payee's right to, or
assigns to an Alternate Payee the right to, receive
all or a portion of the benefits payable with respect
to a Participant under the Plan; provided that such
Domestic Relations Order clearly specifies
(A) the name and last known mailing
address (if any) of the Participant
and the name and mailing address of
each Alternate Payee covered by the
order,
(B) the amount or percentage of the
Participant's benefit to be paid by
the Plan to each Alternate Payee or
the manner in which such amount or
percentage is to be determined,
(C) the number of payments or period to
which such order applies, and
(D) each plan to which such order
applies.
A Domestic Relations Order meets the
requirements of this subsection only if such
order does not require the Plan
(E) to provide any type or form of
benefits, or any optional payment
form, not otherwise provided under
the Plan,
(F) to provide increased benefits
(determined on the basis of
Actuarial Equivalent value), or
(G) to make payment of benefits to an
Alternate Payee which are required
to be paid to another Alternate
Payee under another order previously
determined to be a Qualified
Domestic Relations Order.
13.05(d) Establishment of Plan Procedures - For purposes of this
Section 13.05, reasonable procedures shall be established
under the Plan to determine the qualified status of
Domestic Relations Orders and to administer distributions
under Qualified Domestic Relations Orders. The procedures
established by the Plan shall:
(i) be set forth in writing,
(ii) provide for the notification of each person specified
in a Domestic Relations Order as entitled to payment
of benefits under the Plan (at the address included
in the Domestic Relations Order) of such procedures
promptly upon receipt by the Plan of the Domestic
Relations Order, and
(iii)permit an Alternate Payee to designate a
representative for receipt of copies of notices that
are sent to the Alternate Payee with respect to a
Domestic Relations Order.
13.06 Mistake of Fact - Notwithstanding anything herein to the contrary,
there shall be returned to the Employer any Contribution which was made
as follows:
13.06(a) By mistake of fact, as determined by the Internal Revenue
Service or in such other manner as the Internal Revenue
Service may permit;
13.06(b) Prior to the receipt of initial qualification; provided
that such Contribution was conditioned on initial
qualification of the Plan, the Plan received an adverse
determination with respect to its initial qualification,
and the application for determination of initial
qualification was made by the time prescribed by law for
filing the Employer's tax return for the taxable year in
which the Plan was adopted, or such later date as the
Secretary of Treasury may prescribe; or
13.06(c) In an amount that exceeded the deductible limits on such
Contribution as set forth under IRC Section 404, as
determined by the Internal Revenue Service or in such
other manner as the Internal Revenue Service may permit,
provided such Contribution was conditioned on its
deductibility.
The return of any Contribution as hereinbefore provided shall be made
within one (1) year after the payment of the Contribution, denial of
the initial qualification of disallowance of the deduction (to the
extent disallowed, whichever is applicable. Any Contribution returned
due to mistake of fact under Section 13.06(a) or disallowance of a tax
deduction under Section 13.06(c) shall be reduced by its share of the
losses and expenses of the Fund but shall not be increased by income or
gains of the Fund, provided that the return of such Contribution shall
not be permitted to cause the balance of the Individual Account of any
Participant to be less than the balance that would have been in his
Individual Account had such Contribution not been made. Any
Contribution returned to the Employer due to denial of initial
qualification under Section 13.06(b) shall be equal to the entire
assets of the Plan attributable to Contributions by the Employer.
13.07 Counterparts - The Plan and the Trust Agreement may be executed in any
number of counterparts, each of which shall constitute but one and the
same instrument and may be sufficiently evidenced by any one
counterpart.
<PAGE>
ADOPTION OF THE PLAN
Anything herein to the contrary notwithstanding, this Plan is amended and
maintained under the condition that it shall continue to be approved and
qualified by the Internal Revenue Service under IRC Section 401(a) and that the
Trust hereunder is exempt under IRC Section 501(a), or under any comparable
sections of any future legislation which amends, supplements or supersedes such
sections. If it should be found by the Internal Revenue Service that the Plan as
amended and restated hereby is not qualified, the Corporation may modify the
Plan to meet Internal Revenue Service requirements.
As evidence of its adoption of the Plan, Blue Cross and Blue Shield of
Virginia has caused this instrument to be signed by its duly authorized
officers, and its corporate seal to be affixed hereto this day of , 19 .
BLUE CROSS AND BLUE SHIELD
OF VIRGINIA
By:
Senior Vice President, Corporate Services
ATTEST:
By:
Secretary
<PAGE>
APPENDIX A
PROVISIONS APPLICABLE TO CONSOLIDATED RISK MANAGEMENT SERVICES
Introduction - Effective as of December 31, 1990, Consolidated Risk Management
Services ("CRMS"), a subsidiary of Blue Cross and Blue Shield of Virginia became
a participating Employer by adoption of the Employees' Thrift Plan of Blue Cross
and Blue Shield of Virginia. CRMS had previously maintained the Consolidated
Risk Management Services Employee Retirement Plan ("CRMS Plan") and effective as
of December 31, 1990, the CRMS Plan was merged into the Employee Thrift Plan of
Blue Cross and Blue Shield of Virginia and assets of the CRMS Plan were
transferred to the Fund held pursuant to this Plan.
CRMS Employer Account means the account established for a Participant to hold
the value of discretionary and matching contributions made under the provisions
of the CRMS Plan through December 31, 1990, and the proportionate share of the
adjustment of the Fund determined in accordance with Section 5.07. All amounts
held in a Participant's CRMS Employer Account shall at all times be one hundred
percent (100%) vested.
CRMS Plan means the Consolidated Risk Management Services Employee Retirement
Plan as in effect through December 31, 1990, and which was merged into this Plan
as of December 31, 1990.
Rollover Account - The value of rollover contributions made pursuant to the
provisions of the CRMS Plan for periods through December 31, 1990 shall be
credited to the Participant's Rollover Account.
Pre-Tax Contribution Account - The value of pre-tax contributions made under the
provisions of the CRMS Plan through December 31, 1990 shall be credited to the
Participant's Pre-Tax Contribution Account.
CRMS Employer Account - Effective as of December 31, 1990, a CRMS Employer
Account shall be established for discretionary and matching contributions of
Participants who were participants of the CRMS Plan on December 31, 1990. A
Participant shall at all times be fully vested in his CRMS Employer Account.
Withdrawal of CRMS Employer Account - A Participant may request a withdrawal of
all or a portion of his CRMS Employer Account held on his behalf. A
Participant's withdrawal request must identify the desired amount of the Current
Balance in his CRMS Employer Account that he wishes to withdraw. A Participant
must first exhaust his Rollover Account, and then his CRMS Employer Account, if
applicable, before making a withdrawal from his Employer Contribution Account.
Further, withdrawals from a Participant's CRMS Employer Account shall not
include those employer contributions under the CRMS Plan which have been
deposited in the Fund in the current Plan Year and the two (2) previous Plan
Years.
Any withdrawal under this Appendix A shall not be available until the
Participant has first exhausted by withdrawal the balance of his entire account
under the provisions of Section 7.02.
If a Participant's Individual Account attributable to his CRMS Employer
Account is invested in more than one of the Funds as provided in Article IV, any
partial withdrawal hereunder shall be taken from each such Fund in the same
proportion that the total amount to be withdrawn pursuant to this Appendix bears
to the total Current Balance of the CRMS Employer Account. Amounts withdrawn
pursuant to this Appendix A may not be repaid to the Fund.
Hardship Withdrawal - Upon the written request of a Participant with proof of
Hardship as determined by the Administrative Committee, a Participant shall be
allowed to withdraw all or a portion of the Current Balance of his CRMS Employer
Account.
Withdrawals made pursuant to this Appendix A shall be made so that any
distribution will first reduce a Participant's After-Tax Contribution Account
and then his Rollover Account, inclusive of the investment gains on Pre-Tax
Contributions earned through December 31, 1988. Further any withdrawal from
Pre-Tax Contribution Accounts shall first be made from pre-tax contributions
made under the provisions of the CRMS Plan, if any, which are held in Pre-Tax
Contribution Accounts. Notwithstanding the preceding, effective January 1, 1989,
any withdrawal hereunder from Pre-Tax Contribution Accounts shall be limited to
Employee deferrals attributable to such Pre-Tax Contribution Accounts and not be
available from investment gains earned on and after January 1, 1989, on such
Pre-Tax Contributions. Withdrawals occasioned pursuant to this Appendix A shall
not invoke a forfeiture of a Participant's Employer Contribution Account or bar
a Participant from future Pre-Tax Contributions hereunder. If a Participant's
CRMS Account is invested in more than one Investment Fund, any partial
withdrawal hereunder from a Participant's CRMS Employer Account shall be taken
from each such Fund in the same proportion that the total amount to be withdrawn
from such account bears to the total Current Balance in the account from which
the withdrawal arises. Amounts withdrawn pursuant to this Appendix A may not be
repaid to the Fund.
Withdrawals While Employed - Applicable to CRMS Plan Participants - A
Participant who participated in the CRMS Plan may request a withdrawal of all or
a portion of the lesser of Section (a) or (b) at any time after attaining age
fifty-nine and one-half (59 1/2).
(a) The value as of December 31, 1990 of:
(i) his CRMS Employer account;
(ii) his pre-tax contributions made under the CRMS Plan which are
held in his Pre-Tax Contribution Account; and
(iii) his rollover contributions under the CRMS Plan which are held
in his Rollover Account.
(b) The balance held in:
(i) his CRMS Employer Account;
(ii) his Pre-Tax Contribution Account attributable to pre-tax
contributions made under the CRMS Plan; and
(iii) his Rollover Account attributable to rollover contributions
made under the CRMS Plan.
Withdrawals shall be made in a manner that the distribution will first
reduce the amount that is available from his Pre-Tax Contribution Account, then
his CRMS Employer Account and lastly, the amount available from his Rollover
Account.
Effective January 1, 1996, amounts withdrawn under this Appendix come from
investment funds on a pro-rata basis.
The Administrative Committee shall direct the Trustee to make the
distribution in a lump sum as soon as reasonably possible following the date the
withdrawal request is received. Amounts withdrawn under this Section may not be
repaid to the Fund.
Loans - The amount of any loan from the Fund shall be limited to no more than
the amount the Participant would be entitled to receive from his CRMS Employer
Account pursuant to the provisions of Section 6.01 if he terminated his
employment as of such date.
<PAGE>
APPENDIX B
PROVISIONS APPLICABLE TO PRIORITY HEALTH CARE, INC.
Introduction - Effective as of July 1, 1995, employees of Priority Health Care,
Inc. and its following subsidiaries - Priority Health Plan, Inc., Priority
Insurance Agency, Inc. and Health First, Inc., (hereinafter referred to as
Priority Employees) became employees of HealthKeepers, Inc. Prior to July 1,
1995, Priority Employees participated in the Tidewater Medical Group, Inc.
401(k) Plan (hereinafter referred to as the Tidewater Plan). Effective July 1,
1995, the value of the account balances of the Priority Employees were
transferred from the Tidewater Plan into the Transfer Account in the Plan.
Vesting - A Participant who was a Priority Employee shall be fully vested in his
Transfer Account attributable to funds transferred from the Tidewater Plan.
TRIGON BLUE CROSS BLUE SHIELD
401(k) RESTORATION PLAN
<PAGE>
TRIGON BLUE CROSS BLUE SHIELD
401(k) RESTORATION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
PURPOSE AND EFFECTIVE DATE
1.1 Title....................................................................... 1
1.2 Purpose..................................................................... 1
1.3 Effective Date.............................................................. 1
ARTICLE II
DEFINITIONS AND CONSTRUCTION OF THE PLAN DOCUMENT
2.1 Alternate Payee............................................................. 2
2.2 Beneficiary................................................................. 2
2.3 Board....................................................................... 2
2.4 Bookkeeping Account......................................................... 2
2.5 Change of Control........................................................... 2
2.6 Committee................................................................... 3
2.7 Company..................................................................... 3
2.8 Compensation................................................................ 3
2.9 Deferred Compensation....................................................... 3
2.10 Disability.................................................................. 3
2.11 Domestic Relations Order.................................................... 3
2.12 Election Date............................................................... 4
2.13 Employee.................................................................... 4
2.14 Enrollment/Change Form...................................................... 4
2.15 Participant................................................................. 4
2.16 Plan........................................................................ 4
2.17 Plan Administrator.......................................................... 4
2.18 Plan Year................................................................... 4
2.19 Qualified Plan.............................................................. 4
2.20 Termination of Service...................................................... 4
2.21 Valuation Date.............................................................. 4
2.22 Gender and Number........................................................... 4
2.23 Titles...................................................................... 5
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 Eligibility................................................................. 6
3.2 Participation............................................................... 6
i
<PAGE>
ARTICLE IV
PARTICIPANT DEFERRALS OF COMPENSATION AND COMPANY
MATCHING CONTRIBUTIONS
4.1 Compensation Deferral....................................................... 7
4.2 Matching Contribution....................................................... 7
4.3 Election to Participate, Modify, or Terminate Future
Contributions............................................................... 7
4.4 No Deferral Without Completion of Enrollment/Change Form.................... 7
4.5 Duration of Enrollment/Change Forms......................................... 7
4.6 Change in Status............................................................ 8
4.7 Deferrals on Change of Status of Participation.............................. 8
ARTICLE V
DEFERRAL ACCOUNT AND EARNINGS CREDITING RATE
5.1 Bookkeeping Account......................................................... 9
5.2 Deemed Investment of the Bookkeeping Account................................ 9
5.3 Earnings Crediting Rate..................................................... 9
ARTICLE VI
DISTRIBUTION
6.1 Distribution of Account Balance............................................. 10
6.2 Change in Distribution Method............................................... 10
6.3 Payment Upon Change of Control.............................................. 10
6.4 Nonforfeitable Right to Contributions....................................... 10
6.5 Form of Distribution........................................................ 11
6.6 Timing of Distribution...................................................... 11
ARTICLE VII
HARDSHIP DISTRIBUTIONS
7.1 Hardship.................................................................... 12
ARTICLE VIII
BENEFICIARY
8.1 Beneficiary Designation..................................................... 13
8.2 Proper Beneficiary.......................................................... 13
8.3 Minor or Incompetent Beneficiary............................................ 13
ARTICLE IX
ADMINISTRATION OF THE PLAN
9.1 Majority Vote............................................................... 14
9.2 Finality of Determination................................................... 14
9.3 Certificates and Reports.................................................... 14
9.4 Indemnification and Exculpation............................................. 14
9.5 Expenses.................................................................... 14
ii
<PAGE>
ARTICLE X
CLAIMS PROCEDURE
10.1 Written Claim............................................................... 15
10.2 Denied Claim................................................................ 15
10.3 Review Procedure............................................................ 15
10.4 Committee Review............................................................ 15
ARTICLE XI
GENERAL PROVISIONS
11.1 No Funding.................................................................. 16
11.2 No Contract of Employment................................................... 16
11.3 Withholding Taxes........................................................... 16
11.4 Restrictions on Transfer.................................................... 16
11.5 Domestic Relations Order/Alternate Payee.................................... 16
11.6 Construction................................................................ 17
11.7 Binding Upon Successors and Assigns......................................... 17
11.8 Life Insurance and Funding.................................................. 17
11.9 Form of Communication....................................................... 17
11.10 Right to Terminate.......................................................... 18
11.11 Right to Amend.............................................................. 18
</TABLE>
iii
<PAGE>
ARTICLE I
PURPOSE AND EFFECTIVE DATE
1.1 Title. This Plan shall be known as Trigon Blue Cross Blue Shield
401(k) Restoration Plan (hereinafter referred to as the "Plan").
1.2 Purpose. The purpose of the Plan is to permit a select group of
management or highly compensated employees of Blue Cross and Blue Shield of
Virginia to defer the receipt of compensation without regard to the limits
imposed by the Internal Revenue Code on tax-qualified plans that include a cash
or deferred arrangement. The Plan constitutes an unfunded "top hat" arrangement
under Title I of ERISA.
1.3 Effective Date. The effective date of this Plan shall be January
1, 1995.
<PAGE>
ARTICLE II
DEFINITIONS AND CONSTRUCTION OF THE PLAN DOCUMENT
2.1 Alternate Payee. "Alternate Payee" means any spouse, former
spouse, child or other dependent of a Participant who is recognized by a
Domestic Relations Order as having a right to receive all or a portion of the
benefits payable under the Plan with respect to such Participant.
2.2 Beneficiary. "Beneficiary" means the person or persons or the
estate of a Participant entitled to receive any benefits under this Plan in the
event of the Participant's death.
2.3 Board. "Board" means the Board of Directors of Blue Cross and
Blue Shield of Virginia.
2.4 Bookkeeping Account. "Bookkeeping Account" means the bookkeeping
record established by the Company for each Participant who elects to defer
Compensation under this Plan.
2.5 Change of Control. "Change of Control" means:
(a) The acquisition, other than from the Company, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended, of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Securities Exchange Act of 1934) of 20% or more of either the
then outstanding shares of common stock of the Company or the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors, but excluding
for this purpose, any such acquisition by the Company or any of its
subsidiaries, or any employee benefit plan (or related trust) of the
Company or its subsidiaries, or any corporation with respect to which,
following such acquisition, more than 50% of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by the individuals and
entities who were the beneficial owners, respectively, of the common
stock and voting securities of the Company immediately prior to such
acquisition in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the then outstanding shares
of common stock of the Company or the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally
in the election of directors, as the case may be; or
(b) Individuals who, as of January 1, 1996, constitute the
Board (as of the date hereof the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board, provided that
any individual becoming a director subsequent to January
-2-
<PAGE>
1, 1996 whose election or nomination for election by the Company's
shareholders was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the Directors of the
Company (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Securities Exchange Act of 1934); or
(c) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, in each case, with respect to
which the individuals and entities who were the respective beneficial
owners of the common stock and voting securities of the Company
immediately prior to such reorganization, merger or consolidation do
not, following such reorganization, merger or consolidation,
beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such reorganization, merger
or consolidation, or a complete liquidation or dissolution of the
Company or of its sale or other disposition of all or substantially all
of the assets of the Company.
2.6 Committee. "Committee" means the Human Resources, Compensation and
Employee Benefits Committee of the Board of Directors.
2.7 Company. "Company" means Blue Cross and Blue Shield of Virginia
d/b/a Trigon Blue Cross Blue Shield and any subsidiary or affiliated company
that adopts the Plan, with the Company's approval, for its Employees.
2.8 Compensation. "Compensation" shall have the same meaning as
provided in the Qualified Plan without regard to any limitations imposed by
Sections 401(a)(17), 402(g) and 415 of the Internal Revenue Code and without
regard to any deferrals made under the terms of this Plan.
2.9 Deferred Compensation. "Deferred Compensation" means the portion
of a Participant's Compensation earned after the effective date of the
Participant's Enrollment/Change Form for any calendar year, or part thereof,
that has been deferred pursuant to the Plan.
2.10 Disability. "Disability" means Total and Permanent Disability
for purposes of and determined under the terms of the Company's long-term
disability plan in effect at the time of such determination of Disability.
2.11 Domestic Relations Order. "Domestic Relations Order" means any
judgement, decree or order (including approval of a property settlement
agreement) which relates to the provision of child support, alimony payments or
marital property rights to a spouse, former spouse, child or other dependent of
a Participant made pursuant to a State domestic relations law (including a
community property law).
-3-
<PAGE>
2.12 Election Date. "Election Date" means the date established by this
Plan as the date before which an Employee must submit a valid Enrollment/Change
Form to the Committee. The applicable Election Dates are as follows: (a) 15 days
after adoption of the Plan for Employees who are eligible to participate at the
time the Plan is adopted, or (b) 15 days after a newly eligible Employee is
notified of the right to participate in the Plan.
2.13 Employee. "Employee" means any member of management or highly
compensated employee employed by the Company or subsidiary or affiliated company
who is selected for participation by the Committee.
2.14 Enrollment/Change Form. "Enrollment/Change Form" means the written
form submitted to the Plan Administrator prior to the applicable Election Date.
Each Enrollment/Change Form shall indicate (a) whether the Employee wishes to
defer a portion of Compensation and, (b) the percentage of compensation to be
deferred. No Enrollment/Change Form shall be effective until acknowledged by the
Company.
2.15 Participant. "Participant" means an Employee who has Deferred
Compensation pursuant to the terms of this Plan, and whose Bookkeeping Account
balance has not yet been fully distributed.
2.16 Plan. "Plan" means Trigon Blue Cross Blue Shield 401(k)
Restoration Plan as amended from time to time.
2.17 Plan Administrator. "Plan Administrator" means the Senior Vice
President, Corporate Services of the Company.
2.18 Plan Year. "Plan Year" means the twelve month period commencing
January 1 and ending December 31.
2.19 Qualified Plan. "Qualified Plan" means the Employees Thrift Plan
of Trigon Blue Cross Blue Shield, as in effect at the date of the adoption of
this Plan and as amended from time to time.
2.20 Termination of Service. "Termination of Service" or similar
expression means the termination of the Participant's employment as a common-law
employee of the Company or any subsidiary or affiliate thereof.
2.21 Valuation Date. "Valuation Date" means the date on which
Deferred Compensation would otherwise be credited with interest or earnings
pursuant to the Qualified Plan.
2.22 Gender and Number. Wherever the context so requires, masculine
pronouns include the feminine and singular words shall include the plural.
-4-
<PAGE>
2.23 Titles. Titles of the Articles of this Plan are included for ease
of reference only and are not to be used for the purpose of construing any
portion or provision of this Plan document.
-5-
<PAGE>
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 Eligibility. Eligibility for participation in this Plan shall be
determined by the Committee, in its sole discretion, but all Participants must
be a member of a select group of management or highly-compensated employees of
the Company and must be an eligible participant in the Qualified Plan.
3.2 Participation. In order to become a Participant, an Employee
selected for participation by the Committee shall complete and return to the
Plan Administrator a duly executed Enrollment/Change Form. A Bookkeeping Account
will be established by the Company for each Participant as provided in Section
5.1.
-6-
<PAGE>
ARTICLE IV
PARTICIPANT DEFERRALS OF COMPENSATION AND
COMPANY MATCHING CONTRIBUTIONS
4.1 Compensation Deferral. Each Participant in the Plan may elect to
have a percentage of Compensation deferred in accordance with the terms and
conditions of this Plan. The percentage of such Compensation to be deferred each
pay period shall be any whole percentage from 2% to 16% of Compensation, offset
by amounts actually deferred in the applicable pay period to the Company's
Qualified Plan.
4.2 Matching Contribution. The Company shall add to each Participant's
Bookkeeping Account as of the last day of each pay period with respect to
amounts deferred by a Participant under Section 4.1, an amount equal to the
difference between the amounts described in (a) and (b) as follows:
(a) The amount equal to the matching contribution the Company
would have made to the Qualified Plan based on the Participant's
Compensation for such pay period if the Participant had made a
contribution to the Qualified Plan in the amount of the contributions
under Section 4.1 above without regard to the offset for amounts
actually deferred during the applicable pay period under the Company's
Qualified Plan.
(b) The amount equal to the Company's actual matching
contribution to the Qualified Plan for such pay period.
4.3 Election to Participate, Modify, or Terminate Future Contributions.
An eligible Employee desiring to participate in the Plan, or a Participant who
desires to modify or terminate the amount of future Compensation being deferred
under the Plan, must notify the Plan Administrator at least 15 days before the
payroll date for which the deferral is effective in writing on an
Enrollment/Change Form provided by the Plan Administrator.
4.4 No Deferral Without Completion of Enrollment/Change Form. A
Participant who has not submitted a valid Enrollment/Change Form to the Plan
Administrator before the relevant Election Date may not defer any Compensation
under this Plan for the applicable pay period.
4.5 Duration of Enrollment/Change Forms. Enrollment/Change Forms shall
remain in effect until modified or terminated as provided in Section 4.3. Future
deferrals will be terminated automatically for any Participant who is deemed (by
the Plan Administrator) to no longer be eligible for participation in the Plan.
-7-
<PAGE>
4.6 Change in Status. If a Participant ceases to be eligible to
participate or elects not to be an active Participant but continues to be
employed by the Company, deferrals shall be suspended as provided in Section
4.7. All other provisions of the Plan shall remain in effect, and the
Participant shall continue to be entitled to credits under Section 5.2 of the
Plan until the Participant's Bookkeeping Account is fully distributed as
provided in Article VI.
4.7 Deferrals on Change of Status of Participation. Deferral credits
pursuant to Sections 4.1 and 4.2 for a Participant whose status changes will be
governed by the following provisions:
(a) A Participant who elects not to participate in the Plan
will be credited with deferrals through and ending with the payroll
period within which the Participant's Election/Change Form is received
by the Plan Administrator.
(b) A Participant who becomes an ineligible Participant
because he ceases to be within the group of employees determined by the
Committee to be eligible to participate in the Plan will be entitled to
Participant credits and Employer matching credits pursuant to Sections
4.1 and 4.2 through the end of the pay period within which the
Participant ceases to be eligible.
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<PAGE>
ARTICLE V
DEFERRAL ACCOUNT AND EARNINGS CREDITING RATE
5.1 Bookkeeping Account. Compensation deferred by a Participant under
Section 4.1 and matching contributions under Section 4.2, and earnings credited
pursuant to Section 5.2, shall be credited to a separate Bookkeeping Account for
each Participant. Distributions pursuant to Articles VI and VII shall be debited
against the Participant's Bookkeeping Account.
5.2 Deemed Investment of the Bookkeeping Account. Each Participant's
Bookkeeping Account, and Deferred Compensation and Matching Contributions
credited to his or her Bookkeeping Account for each pay period, shall be deemed
to be invested as the Participant directs from time to time the investment of
his account balance and future contributions to the Qualified Plan. No separate
election by the Participant with respect to deemed investments in the Plan is
permitted or required.
5.3 Earnings Crediting Rate. The amount in the Participants Bookkeeping
Account shall be credited or debited with earnings based on the adjustment of
the unit value of the participant's deemed investment funds on the date the
amounts are credited to the Participant's account balance in the Qualified Plan.
-9-
<PAGE>
ARTICLE VI
DISTRIBUTION
6.1 Distribution of Account Balance. Distribution of the value of a
Participant's Bookkeeping Account balance shall be in a lump sum or in up to 10
annual installments as specified by the Participant on the Participant's initial
Enrollment/Change Form. If the lump sum method has been specified by the
Participant, payment shall be made as soon as practicable after Termination of
Service for any reason. If the annual installment method has been selected and
the Participant has a Termination of Service prior to becoming eligible for
early retirement (other than Termination of Service due to death or Disability),
the Participant's Bookkeeping Account balance will nonetheless be distributed in
a lump sum. Annual installments may be selected in the event of death,
Disability, or Early Retirement. If a payment form is not specified on an
Enrollment/Change Form, a Participant's Bookkeeping Account balance shall be
distributed as a lump sum.
6.2 Change in Distribution Method. A Participant may change the method
of distribution under Section 6.1 by filing a new Enrollment/Change Form, but
such change shall be effective only with respect to amounts credited to the
Participant's Bookkeeping Account for the pay period beginning after the date
the new Enrollment/Change Form is received by the Plan Administrator and, except
as hereinafter provided, the balance in the Participant's Bookkeeping Account
will be frozen as of such date (the "Frozen Balance"). Distribution of the
Frozen Balance shall be governed by the terms of the elections specified in the
Enrollment/Change Form pursuant to which the Compensation was deferred. Earnings
adjustments attributable to the Frozen Balance made pursuant to Section 5.2 will
be governed by the terms of the new Enrollment/Change Form. A Participant may
make a special election to change the method of distribution of a Frozen Balance
by filing a form designed for that purpose with the Plan Administrator, but such
change shall become effective on a date that is twelve months after the date
such form is filed with the Plan Administrator. If the Participant becomes
entitled to a distribution from the Plan before such twelve-month period has
expired, the election shall be of no effect.
6.3 Payment Upon Change of Control. Notwithstanding any other provision
of the Plan to the contrary, and unless the Participant made and filed with the
Plan Administrator as soon as practicable after becoming a Participant, but in
any event not later than six months before the occurrence of a Change of
Control, an irrevocable election to defer receipt of payment to the date of his
or her retirement or earlier termination of employment, upon a Change of
Control, the Company shall pay to such Participant, Beneficiary or Alternate
Payee of the Participant, within 30 days of a Change of Control a lump sum in
cash in an amount equal to the amount credited to his or her Bookkeeping Account
as of the Change of Control.
6.4 Nonforfeitable Right to Contributions. The Participant shall have
a nonforfeitable right to the value of the Bookkeeping Account attributable to
the Participant's contributions plus deemed earnings on the Participant's
contributions under the terms of this Plan. The Participant shall have a
nonforfeitable right to the value of the Bookkeeping
-10-
<PAGE>
Account attributable to the Matching Contributions plus deemed earnings on the
Matching Contributions at the same time he or she becomes vested in the
Qualified Plan.
6.5 Form of Distribution. All distributions of a Participant's
Bookkeeping Account shall be made only in cash.
6.6 Timing of Distribution. Distributions shall commence, or be paid
in a lump sum if so elected, as soon as administratively feasible after the
Participant's last day of employment.
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<PAGE>
ARTICLE VII
HARDSHIP DISTRIBUTIONS
7.1 Hardship. At the request of a Participant or at the request of any
of the Participant's Beneficiaries after the Participant's death, the Committee
may, in its sole discretion, accelerate and pay all or part of the value of a
Participant's Bookkeeping Account due under this Plan. Accelerated distributions
at the request of the Participant or a Participant's Beneficiary may be allowed
only in the event of a financial emergency beyond the Participant's or
Beneficiary's control due to unforeseeable circumstances and only if
disallowance of a distribution would create a severe hardship for the
Participant or Beneficiary. An accelerated distribution must be limited to only
that amount necessary to relieve the financial emergency. The determination of
hardship and the amount of the hardship distribution by the Committee shall be
final and conclusive and binding on the Participant or Beneficiary making the
request.
-12-
<PAGE>
ARTICLE VIII
BENEFICIARY
8.1 Beneficiary Designation. A Participant shall designate a
Beneficiary to receive benefits under the Plan on appropriate forms provided by
and filed with the Plan Administrator. If more than one Beneficiary is named,
the shares and/or precedence of each Beneficiary shall be indicated. A
Participant shall have the right to change the Beneficiary by submitting to the
Plan Administrator a change of Beneficiary form. However, no change of
Beneficiary shall be effective until acknowledged in writing by the Plan
Administrator.
8.2 Proper Beneficiary. If the Plan Administrator has any doubt as to
the proper Beneficiary to receive payments hereunder, the Plan Administrator
shall have the right to withhold such payments until the matter is finally
adjudicated. However, any payment made by the Plan Administrator, in good faith
and in accordance with this Plan, shall fully discharge the Company from all
further obligations with respect to that payment.
8.3 Minor or Incompetent Beneficiary. In making any payments to or for
the benefit of any minor or an incompetent Beneficiary, the Plan Administrator,
in its sole and absolute discretion may make a distribution to a legal or
natural guardian or other relative of a minor or court appointed representative
of such incompetent. Or, it may make a payment to any adult with whom the minor
or incompetent temporarily or permanently resides. The receipt by a guardian,
representative, relative or other person shall be a complete discharge to the
Company. Neither the Company nor the Plan Administrator shall have any
responsibility to see to the proper application of any payments so made.
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<PAGE>
ARTICLE IX
ADMINISTRATION OF THE PLAN
9.1 Majority Vote. All resolutions or other actions taken by the
Committee shall be by vote of a majority of those present at a meeting at which
a majority of the members are present, or in writing by all the members at the
time in office if they act without a meeting.
9.2 Finality of Determination. Subject to the Plan, the Committee in
administering the Plan shall, from time to time, establish rules, forms and
procedures for the administration of the Plan. Except as herein otherwise
expressly provided, the Committee shall have the exclusive right to interpret
the Plan and to decide any and all matters arising thereunder or in connection
with the administration of the Plan, and it shall endeavor to act, whether by
general rules or by particular decisions, so as not to discriminate in favor of
or against any person. The decisions, actions and records of the Committee shall
be conclusive and binding upon the Company and all persons having or claiming to
have any right or interest in or under the Plan, and cannot be overruled by a
court of law unless arbitrary or capricious.
9.3 Certificates and Reports. The members of the Committee, the Plan
Administrator and the officers and directors of the Company shall be entitled to
rely on all certificates and reports made by any duly appointed accountants, and
on all opinions given by any duly appointed legal counsel, which legal counsel
may be counsel for the Company.
9.4 Indemnification and Exculpation. The Company shall indemnify and
hold harmless persons serving from time to time as Plan Administrator and each
current and former member of the Committee and each current and former member of
the Board ("Indemnitees") against any and all expenses and liabilities (to the
extent not indemnified under any liability insurance contract or other
indemnification agreement) which the person incurs on account of any act or
failure to act in connection with the good faith administration of the Plan.
Expenses against which an Indemnitee shall be indemnified hereunder shall
include, without limitation, the amount of any settlement or judgment, costs,
counsel fees, and related charges reasonably incurred in connection with a claim
asserted, or a proceeding brought or settlement thereof. The foregoing right of
indemnification shall be in addition to any other rights to which any such
Indemnitee may be entitled as a matter of law, but shall be conditioned upon the
person's notifying the Company of the claim of liability within 60 days of the
notice of that claim and offering the Company the right to participate in and
control the settlement and defense of the claim.
9.5 Expenses. The expenses of administering the Plan shall be borne by
the Company.
-14-
<PAGE>
ARTICLE X
CLAIMS PROCEDURE
10.1 Written Claim. Benefits shall be paid in accordance with the
provisions of this Plan. The Participant, or a designated recipient or any other
person claiming through the Participant shall make a written request for
benefits under this Plan. This written claim shall be mailed or delivered to the
Plan Administrator. Such claim shall be reviewed by the Plan Administrator or a
delegate.
10.2 Denied Claim. If the claim is denied, in full or in part, the Plan
Administrator shall provide a written notice within ninety (90) days setting
forth the specific reasons for denial, and any additional material or
information necessary to perfect the claim, and an explanation of why such
material or information is necessary, and appropriate information and
explanation of the steps to be taken if a review of the denial is desired.
10.3 Review Procedure. If the claim is denied and a review is desired,
the Participant (or Beneficiary) shall notify the Plan Administrator in writing
within sixty (60) days after receipt of the written notice of denial. In
requesting a review, the Participant or Beneficiary may request a review of the
Plan Document or other pertinent documents with regard to the employee benefit
Plan created under this agreement, may submit any written issues and comments,
may request an extension of time for such written submission of issues and
comments, and may request that a hearing be held, but the decision to hold a
hearing shall be within the sole discretion of the Committee.
10.4 Committee Review. The decision on the review of the denied claim
shall be rendered by the Committee within sixty (60) days after the receipt of
the request for review (if no hearing is held) or within sixty (60) days after
the hearing if one is held. The decision shall be written and shall state the
specific reasons for the decision including reference to specific provisions of
this Plan on which the decision is based.
-15-
<PAGE>
ARTICLE XI
GENERAL PROVISIONS
11.1 No Funding. Nothing contained in this Plan shall require the
Company or any subsidiary or affiliate to segregate any assets from its general
funds, or to create any trusts, or to make any special deposits for any amounts
to be paid to any Participant, former Participant, Beneficiary or Alternate
Payee. Participants, former Participants and any Beneficiary of a Participant or
Alternate Payee shall not have any right, title or interest in or to any
specific funds or property of the Company or any subsidiary or affiliate, and
their interest shall be those of a general creditor.
11.2 No Contract of Employment. The existence of this Plan does not
constitute a contract for continued employment between a Participant and the
Company or any subsidiary or affiliate.
11.3 Withholding Taxes. All payments under the Plan shall be subject
to and net of an amount sufficient to satisfy all federal, state or local
withholding tax requirements.
11.4 Restrictions on Transfer. Any benefits to which a Participant, his
Beneficiary or Alternate Payee may become entitled under this Plan are not
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, or encumbrance, and any attempt to do so is void. Benefits are not
subject to attachment or legal process for the debts, contracts, liabilities,
engagements or torts of a Participant, his Beneficiary or Alternate Payee. This
Plan does not give a Participant, his Beneficiary or Alternate Payee any
interest, lien, or claim against any specific assets of the Company or any
subsidiary or affiliate. Participants and their Beneficiaries have only the
rights of general creditors of the Company or any subsidiary or affiliate.
11.5 Domestic Relations Order/Alternate Payee.
(a) Notwithstanding the provisions of Section 11.4, an
Alternate Payee shall be entitled to receive a benefit under the Plan, computed
by reference to the Participant's benefit in accordance with the terms of the
Domestic Relations Order. Benefits shall be paid at the time and in the manner
benefits begin to be paid or are paid to the Participant unless the Domestic
Relations Order requires an earlier and/or different manner of payment. If the
Alternate Payee predeceases the Participant before payments begin to be paid or
are paid to the Participant, the Alternate Payee's interest in the Plan shall
begin to be paid or shall be paid (i) at the time and in the manner the
Alternate Payee would have received or began to receive payment had the
Alternate Payee survived, and (ii) if not inconsistent with the terms of the
Domestic Relations Order, to the person or persons designated by the Alternate
Payee in a writing filed with and acknowledged by the Company, or, if no writing
has been filed or if the person or persons designated predecease the Alternate
Payee, to the legal representative of the Alternate Payee.
-16-
<PAGE>
(b) The Domestic Relations Order shall clearly specify (i) the
name and last known mailing address of the Participant and the name and mailing
address of each Alternate Payee covered by the order, (ii) the amount or
percentage of the Participant's benefit to be paid by the Plan to each Alternate
Payee, or the manner in which such amount or percentage is to be determined, and
(iii) any limitation on the number of payments or period to which such order
applies. The Company shall not be required to make payments to an Alternate
Payee pursuant to a Domestic Relations Order that requires the Plan to (i)
provide any type or form of benefit, or payment option, not otherwise provided
under the Plan, (ii) provide increased benefits (determined on the basis of
actuarial value), or (iii) pay benefits to an Alternate Payee otherwise required
to be paid to another Alternate Payee under an order previously determined to be
a Domestic Relations Order.
(c) The Company shall have the right to delay any payment of a
benefit under the Plan to an Alternate Payee for up to 180 days if necessary to
determine whether the Domestic Relations Order complies with the provisions of
this section.
(d) If an Alternate Payee cannot be located after a diligent
search has been conducted, the interest of the Alternate Payee can be forfeited
at the direction of the Company at any time after a two-year period and restored
to the Participant on such conditions and terms as the Company shall determine.
11.6 Construction. For construction, one gender includes the other, and
the singular and plural include each other where the meaning would be
appropriate. This Plan is construed in accordance with the laws of the
Commonwealth of Virginia, except to the extent that the laws of the United
States of America have superseded those laws. The headings in this Plan have
been inserted for convenience of reference only and are to be ignored in any
construction of the provision. If a provision of this Plan is not valid, that
invalidity does not affect the remaining provisions.
11.7 Binding Upon Successors and Assigns. The provisions of the Plan
shall be binding upon the Participant and the Company and their successors,
assigns, heirs, executors and beneficiaries.
11.8 Life Insurance and Funding. The Company in its discretion may
apply for and procure as owner and for its own benefit insurance on the life of
the Participant, in such amounts and in such forms as the Company may choose.
The Participant shall have no interest whatsoever in any such policy or
policies, but, as a condition of participation and at the request of the
Company, the Participant shall submit to medical examinations and supply such
information and execute such documents as may be required by the insurance
company or companies to whom the Company has applied for insurance.
11.9 Form of Communication. Any election, application, claim, notice or
other communication required or permitted to be made by a Participant shall be
in writing and in such form as the Committee shall prescribe. Such communication
shall be effective upon mailing, if sent by first class mail, postage pre-paid,
and addressed to the Company's office at 2015 Staples Mill Road, Richmond,
Virginia 23230.
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<PAGE>
11.10 Right to Terminate. The Board may, in its sole discretion,
terminate this Plan at any time. If the Plan is terminated, each Participant,
former Participant or Beneficiary whose benefits are not in pay status shall be
entitled to (a) begin to receive installment payments as provided, in Section
6.1, or (b) receive a single lump sum payment equal to the balance in his
Bookkeeping Account (including the unpaid balance of the Bookkeeping Account of
a Participant whose benefits are in pay status), as determined by the Company.
The single lump sum payment shall be made as soon as practicable (but not later
than 60 days) following the date the Plan is terminated and shall be in lieu of
any other benefit which may be payable to the Participant, former Participant or
Beneficiary under the Plan.
11.11 Right to Amend. The Board may, in its sole discretion, amend this
Plan in any way, provided no amendment shall adversely affect the rights of a
Participant, former Participant or Beneficiary with respect to amounts credited
to a Participant's, former Participant's or Beneficiary's Bookkeeping Account as
of the date of the amendment.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its
duly authorized officer on this 2nd day of October, 1995, effective as of
January 1, 1995.
BLUE CROSS BLUE SHIELD OF VIRGINIA
BY___________________________________________
Ronald M. Nash
Senior Vice president, Corporate Services
-19-
TRIGON BLUE CROSS BLUE SHIELD
1996 ANNUAL MANAGEMENT INCENTIVE PLAN
PLAN OBJECTIVES o Promote the growth and profitability of Trigon BCBS
o Support the achievement of SBU and Corporate
strategic operational and financial goals
o Reward achievement of goals which directly support Showcase
ELIGIBILITY The following positions are eligible to participate in the
Plan:
1. Officers:
o President/COO Trigon BCBS
o SBU Presidents/Executive Vice
Presidents
o Senior Vice Presidents
2. Vice Presidents and Directors
o Identified by the Executive Staff and
approved by the President/COO and the
CEO or their designee.
o Qualified incumbents must be in a
leadership position whose performance
has a substantial impact and influence
on the business.
3. Managers
o Senior and Middle Managers identified
as having an impact on the business
with some external "stakeholder"
contact, including functional heads.
o May be in SBU's or Support Units
o Must be identified by the
Executive staff and approved by
the President/COO and CEO or their
designee.
PLAN YEAR Performance will be measured over the period January 1,
1996 through December 31, 1996
AWARD The incentive award opportunities are expressed as a
OPPORUNITIES percent of each participant's January 1, 1996 salary and
will vary with the level of accomplishment on each
objective.
1
<PAGE>
Threshold = Minimum acceptable performance
(67% x Target)
Target = Expected stretch performance
(100%)
Maximum = Exceeding expectations;
outstanding contributions (133% x
Target)
The Compensation Department will interpolate the
appropriate award opportunities for performance
levels that fall between Threshold, Target and
Maximum.
PERFORMANCE Performance measures from three organization levels
will be used MEASURES in the incentive awards.
These measures include Corporate, SBU, and
Business Projects. Combinations of performance
measures will vary by participant.
PAY OUT METHOD A. PARTICIPANT RESPONSIBILITIES
AND FREQUENCY
o All awards will be made after year-end
financial results have been finalized.
o Participation in the Plan necessitates the
timely and accurate submission of all
appropriate documentation to the Director,
Compensation and Benefits. This input is
critical to the administration of the
Program.
o Plan participants are responsible to work
with their management to keep incentive
objectives updated throughout the year, with
notification to Compensation should changes
occur.
B. PAYMENT DISTRIBUTION
The Director, Compensation and Benefits will be
responsible for administering the incentive
payment process. This process includes:
1. Calculating annual incentive payments
2. Securing approval for payments
3. Requesting checks
C. PAYMENT SCHEDULE
o Individual incentive payments will be
calculated and paid on an annual basis.
o Payments will be made as soon as possible after
the end of the calendar year.
2
o Accompanying the check will be an itemized
statement that details the payment.
o Payments will include all appropriate taxes
and deductions.
PLAN The Director, Compensation and Benefits, is
responsible for the ADMINISTRATION administration
of this Plan, including the calculation of awards,
with the support of Corporate Finance. The
Director, Compensation and Benefits, will maintain
accurate and complete records and administer the
Plan according to Plan guidelines. All incentive
results are subject to review by Corporate Audit.
AUTHORITY The President/COO will review and approve all final
awards; rule on differences as to performance
results; and approve exceptions and changes to this
Plan.
SPECIAL A. Participant Eligibility Dates:
ADMINISTRATIVE
CONSIDERATIONS New Hires, Transfers, Promotions or Demotions
o Participants must have been employed
in an eligible position for at least
six months of the Plan year to be
eligible to receive an award.
o Awards for less than the full Plan
year, but at least six months will
be granted on a prorated basis to
the closest month. The salary at the
time a participant first assumes an
eligible position will be used to
calculate the incentive opportunity.
o Participants promoted or demoted
from one eligible position to
another eligible position will
receive a prorated award based on
the time and salary of each
position. The January 1 salary is
used for all transfers.
B. Terminations
Participants must be fully employed as of
December 31, 1996 to be eligible to receive
an award.
C. Death, Disability, or Retirement
Inthe event of death, disability, or
retirement of a participant, a full or
prorated award at the discretion of the CEO
of Trigon BCBS will be made to the Executive
or the Executive's beneficiary at the time
when all awards are made.
"Disability" and "Retirement" are defined
in the long-term disability and retirement
programs of Trigon BCBS.
3
TRIGON BLUE CROSS BLUE SHIELD
1996 ANNUAL MANAGEMENT INCENTIVE PLAN
APPROVALS:
- ----------------------------------------------------- -----------------
Manager, Incentive Compensation Date
- ----------------------------------------------------- -----------------
Senior Vice President, Corporate Services Date
4
Subsidiaries of the Registrant
Before the Demutualization
None
After the Demutualization
Company Jurisdiction
Trigon Insurance Company (formerly known as
Blue Cross Blue Shield of Virginia) d/b/a Trigon
Blue Cross Blue Shield.......................................Virginia
Consolidated Healthcare, Inc...............................Virginia
Trigon Health Ventures, Inc................................Virginia
Consolidated Investment Corporation........................Virginia
Health Management Corporation..............................Virginia
Healthy Homecomings, Inc.................................Missouri
Monticello Service Agency, Inc.............................Virginia
Capitation Risk Management...............................Virginia
Consolidated Holdings Corporation..........................Delaware
Monticello Life Insurance Company..........................Wisconsin
Primary Care First, L.L.C....................................Virginia
Peninsula Health Care, Inc...................................Virginia
Healthcare Support Corporation...............................Virginia
Trigon Administrators, Inc.................................Virginia
Physicians Health Plan, Inc................................Virginia
HMO Virginia, Inc..........................................Virginia
Trigon Services, Inc.......................................Virginia
HealthKeepers, Inc.........................................Virginia
Priority, Inc................................................Virginia
Priority Health Care, Inc..................................Virginia
Health First, Inc..........................................Virginia
Priority Insurance Agency, Inc.............................Virginia
Mid-South Insurance Company..................................North Carolina
