SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 001-12617
Trigon Healthcare, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1773225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2015 Staples Mill Road, Richmond, VA 23230
(Address of principal executive offices)
Registrant's telephone number, including area code (804) 354-7000
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $.01 Par Value New York Stock Exchange
(Title of Class) (Name of Exchange)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ ] Yes [ X ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1997 was approximately $743,243,000 (based on the last
reported sales price of $17.625 per share on March 25, 1997, on the New York
Stock Exchange).
As of March 25, 1997, 42,300,022 shares of the registrant's Class A Common
Stock, par value $.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of Trigon Healthcare, Inc.'s Annual Report to Shareholders for
the year ended December 31, 1996 into Part II of this Form 10-K.
Certain portions of Trigon Healthcare, Inc.'s definitive Proxy Statement dated
March 13, 1997 for the Annual Meeting of Shareholders into Part III of this Form
10-K.
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PART I
Item 1. Business.
GENERAL
Trigon Healthcare, Inc. ("Trigon" or the "Company") 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 December 31, 1996, the Company's network systems consisted of: HMO
networks which, with 257,651 members, are the Company's most tightly managed and
cost efficient networks; the preferred provider organization ("PPO") networks
which, with 791,670 members, offer greater choice of providers than Trigon's HMO
networks and may include a point of service ("POS") feature; and the
participating provider ("PAR") network which, with 598,342 members, is the
Company's broadest and most flexible network. As of December 31, 1996, the
Company served 212,886 additional members through Medicare supplemental plans
(128,015 members), third-party administration of health care claims (35,620
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 (49,251 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 December 31, 1996, 48.0% of members were covered
under at-risk arrangements and 41.4% were covered under self-funded
arrangements, with the remaining 10.6% covered under the Federal Employee
Program, administered under contract with the Blue Cross and Blue Shield
Association ("BCBSA"). Member enrollment informaiton for the Federal Employee
Program, Mid-South Insurance Company and certain national group accounts are not
maintained on the Company's systems. Member enrollment information presented
herein for such groups have been calculated based on policy counts provided to
the Company for these groups which have been converted to a membership number
through the use of actuarially determined conversion factors.
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 2.6% from December 31, 1991 through December 31,
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
257,651 members as of December 31, 1996, representing a compound annual growth
rate of 33.8%. 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 791,670 members as of December 31, 1996, representing a compound annual
growth rate of 14.8%. Membership in the Company's HMOs and PPOs increased from
27.9% of total enrollment at December 31, 1991 to 56.4% as of December 31, 1996.
Trigon's more traditional products are offered through its PAR network, which is
the Company's largest provider 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 598,342 members at December 31, 1996. Trigon also offers several
specialty health care and related products, such as dental, wellness, mental
health and life, accident and disability insurance coverage.
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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.
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.
The Company is 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 in 1995 of 80% of Priority Inc.,
which owns two HMO's located in the Eastern region. In the Northern region, the
Company has contractual arrangements 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, subject to approval by the Health Care Financing Administration.
Since 1972, the Company has provided health benefits to employees and retirees
of the Commonwealth of Virginia. In 1996, the Company recorded $378.1 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 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.
DEMUTUALIZATION AND INITIAL PUBLIC OFFERING
Effective February 5, 1997, Blue Cross and Blue Shield of Virginia converted
from a mutual insurance company to a stock insurance company in accordance with
a Plan of Demutualization (the "Demutalization"). In accordance with the
Demutualization, Blue Cross and Blue Shield of Virginia changed its name to
Trigon Insurance Company (d/b/a Trigon Blue Cross Blue Shield) and became a
wholly-owned subsidiary of Trigon Healthcare, Inc. The membership interests of
Trigon Insurance Company's eligible members were converted into common stock of
Trigon Healthcare, Inc., or in certain circumstances, cash. The Plan of
Demutualization also required an initial public offering to occur simultaneously
with the conversion. Accordingly, Trigon Healthcare, Inc. issued 17.8 million
shares of common stock at $13 per share in a public offering. In addition,
Virginia law required a payment to the Commonwealth of Virginia in the amount of
$175 million be made (the "Commonwealth Payment"). The
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Company used proceeds from the offering in conjunction with an $85.0 million
borrowing under a revolving credit agreement to pay the Commonwealth Payment.
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) 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. 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.
There are two Specialty Market Units designated to focus on customer segments
with special demands -- National Accounts and the Government and Individual
Business Unit. These Specialty Market Units distribute their products and
services across all of the Local Market regions.
NATIONAL ACCOUNTS. The National Account Unit focuses on selling and servicing
large and multi-state accounts. 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 Federal
Employee Program), and serves all of the individual lines of business. The
individual products are marketed principally through a 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 member services, underwriting, 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
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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
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 -- HMO, PPO (which includes an
optional POS feature) and PAR -- 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.
MEMBERSHIP BY NETWORK SYSTEM
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S><C>
Commercial:
HMO...................... 45,004 59,353 85,739 172,893 248,172
PPO...................... 102,247 131,052 155,433 212,322 230,675
PAR...................... 400,997 352,783 334,800 296,716 236,383
Other(1)................. 150,586 156,737 158,503 149,109 177,266
------- ------- ------- ------- -------
Subtotal.............. 698,834 699,925 734,475 831,040 892,496
</TABLE>
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<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S><C>
Self-funded:
HMO...................... 15,679 24,728 34,243 48,255 9,479
PPO...................... 283,716 313,744 321,863 336,414 363,754
PAR...................... 369,041 334,692 318,297 321,522 361,959
ASO...................... 78,163 78,903 77,481 63,826 35,620
------ ------ ------ ------ ------
Subtotal.............. 746,599 752,067 751,884 770,017 770,812
FEP (PPO network)........ 175,723 180,015 195,314 198,561 197,241
------- ------- ------- ------- -------
Total.................... 1,621,156 1,632,007 1,681,673 1,799,618 1,860,549
--------- --------- --------- --------- ---------
</TABLE>
(1) "Other" members include enrollment from Medicare supplement plans,
out-of-state student health care coverage (which was discontinued as of December
31, 1995) and Mid-South members for 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>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S><C>
Inpatient days per thousand
members............................... 329 299 278 266 240
Admissions per thousand members....... 69 64 64 66 64
</TABLE>
(1) Includes PAR, PPO and HMO network members (medical, surgical and maternity
admissions only).
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.
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.
The Company owns 80% of Priority Inc. ("Priority") (acquired in 1995), which
owns both a state qualified HMO and a federally qualified HMO operating in the
Tidewater area in Eastern Virginia. Membership in these six HMOs has grown from
60,154 members as of December 31, 1991 to 257,651 members as of December 31,
1996. As of December 31, 1996, the HMO networks included approximately 2,600
primary care physicians, 8,300 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
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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 additional out-of-pocket cost to the
member which includes a deductible and higher copayment obligation. The Company
believes that copayment obligations, out-of-network costs and other obligations
of these HMO plans enhance its ability to control costs by encouraging members
to take more responsibility for their health care decisions.
MEDICAID AND MEDICARE HMO PRODUCTS. HealthKeepers, PHC and Priority market a
Medicaid HMO product 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 late in
1997 within central Virginia, subject to approval by the Health Care Financing
Administration.
PPO NETWORKS
The Company's PPO network is a statewide PPO network, which as of December 31,
1996 included approximately 15,000 physicians and 151 hospitals. There were
791,670 members enrolled in these PPO health care plans as of December 31, 1996.
Approximately 24% of PPO members as of December 31, 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. Members 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 network 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 network and products provide choice and flexibility to all types of
customers in its markets. 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. 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.
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PAR NETWORK
Trigon's PAR network provides more traditional health coverage and included
approximately 16,600 physicians and 153 hospitals as of December 31, 1996. The
PAR network served 598,342 members as of December 31, 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
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 othewise. HMO network hospital provider contracts, typically two
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 is 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.
PPO and PAR network hospital provider contracts are generally based upon per
diem or per case or a percentage of covered charges arrangements that are
typically lower than the hospital's average standard billing rates. The PPO
provider contracts provide for rates that are generally more favorable than
rates for the Company's PAR network. The Company is able to obtain discounted
prices for services because of the volume of business it offers to healthcare
providers that are part of the network. Hospital
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reimbursement rates are generally negotiated for terms of two years. Physician
provider contracts also employ attractive fixed fee schedules which are below
standard billing rates with the PPO contracts typically more favorable than the
PAR network. Physician fee schedule payments are set by the Company using
Resource Based Relative Value System methodologies and are generally adjusted
annually. When considering whether to contract with a physician for its PPO or
PAR networks, the Company conducts a credentialing program to evaluate the
applicant's professional experience, including licensure.
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.
The Company also manages health care costs in its PPO and PAR 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 and PAR networks 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 and PAR network of providers and network contractual arrangements.
Physicians participating in the PPO network and in the POS program are required
to meet certain economic profiling criteria that indicate cost effective and
quality practice standards. Primary care and specialist providers in the POS
program are periodically given utilization, cost and quality profiles, or
"report cards." In the POS program, utilization management includes an
outpatient review program, with pre-authorization of high-cost outpatient care,
in addition to management of hospital care through precertification, concurrent
review, case management and discharge planning capacity. Outpatient care is
further controlled through claim edits designed to detect and correct
inappropriate provider billing patterns. All new medical technologies are
reviewed in advance in an attempt to ensure that only safe and effective new
medical procedures are covered. Additionally, the POS program also employs a
comprehensive case 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.
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<PAGE>
As with its HMO network, Trigon further manages health care costs by reviewing
monthly cost and utilization trends within its PPO and PAR networks.
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 --
PHC, PHP and the two Priority HMO's -- did not seek accreditation in 1994.
HealthKeepers, Trigon's largest HMO, applied for accreditation in 1996 and an
NCQA-review took place in early 1997. The Company will not know the results of
this review until later this year. The Company believes that the failure to
receive NCQA accreditation has not materially affected the market acceptance of
its HMO products.
The Company has an active program to evaluate the quality and appropriateness of
care provided by its PPO and PAR 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. 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.
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 December 31, 1996, combined enrollment in all pharmacy
programs totaled approximately 1.5 million members. Effective July 1, 1995, the
Commonwealth of Virginia employees became 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.
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<PAGE>
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 December 31, 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 December 31, 1996,
over 88,700 members were enrolled in pre-standardization products, all of which
are community rated. As of the same date, Trigon had enrolled more than 39,200
members into six "standardized" products which are underwritten and entry age
rated. Approximately 7,600 members enrolled in supplemental products are on
Medicare due to disability. These disability members are pooled separately and
community rated.
RELATED BUSINESSES
In addition to its core managed care business, the Company engages in several
other health-related businesses including employee benefits administration,
workers' compensation administration and health management services. Together,
these businesses generated $25.7 million in revenues for the year ended December
31, 1996 (excluding $21.5 million of revenue from Health Communication Services,
Inc., an electronic communication services subsidiary, 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 managing health care with such products as
Baby Benefits, Better Prepared and Healthy Returns. Baby Benefits provides
maternity risk management, Better Prepared provides education and 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 women's
health care company specializing in in-home post-maternity care and follow-up
care after gynecological surgery.
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
11
<PAGE>
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 primarily by MLIC.
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 basic workers'
compensation claims management services, this division actively manages each
case in order to control medical costs. Provider networks are used as a part of
this strategy. 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 35,620 members as of December
31, 1996. The employee benefits division is qualified to do business in 8 states
and the District of Columbia. Provider networks, case management and utilization
review programs are used to help employers contain medical claims costs.
GOVERNMENT PROGRAMS
Trigon acts as an intermediary and administrative agent in servicing
approximately 1.1 million Medicare Part A beneficiaries in Virginia and West
Virginia. In 1996, the Company processed 3,287,062 Medicare Part A claims
amounting to $2.9 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 1996, such expense reimbursements totaled $11.6
million. Trigon's Medicare program carries no underwriting risk.
Trigon also administers Virginia's portion of the BCBSA's national contract with
the U.S. Office of Personnel Management ("OPM") to provide benefits through its
PPO networks for approximately 200,000 federal employees and their dependents
living in Virginia. The 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 1996, Trigon recorded revenues of $356.7
million under this program, which represented 19% of total revenues. Under the
program, a special Federal Employee Program ("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, 1996, 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
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<PAGE>
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. The Company is facing this increased competition in the areas in which it
is licensed to use the Blue Cross and Blue Shield service marks and tradenames,
as well as the areas in which it operates without these service marks and
tradenames. In areas outside of its licensed territory, the Company's ability to
successfully compete may be adversely affected by its inability to use the Blue
Cross and Blue Shield service marks and tradenames, by the presence of
competitors that are able to use such service marks and tradenames in the areas,
and by the Company's lack of substantial market share or established provider
networks in these areas. The Company also faces competition from a trend among
health care providers to combine and form their own networks in order to
contract directly with employer groups and other prospective customers to
provide health care services. There is no assurance that such overall increased
competition will not exert strong pressures upon Trigon's profitability, its
ability to increase enrollment or its ability to successfully pursue growth in
areas both within and outside of Virginia.
The Company believes that it has effectively integrated its managed care
programs into its traditional business, principally through its PPO and HMO
networks and products. The trend in the health care industry is toward both
vertical and horizontal integration coupled with significant levels of managed
care, principally through HMOs. In the Company's principal geographic market
areas, HMOs have a smaller share of the health care market than in other areas
of the country, but the Company believes that HMOs will capture an increasing
share of the health care market. The Company believes that it will be necessary
to expand significantly its market share in the HMO market, in part by
successfully transitioning its PAR and PPO members into HMOs, if it is to
succeed in retaining a high overall market
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<PAGE>
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 internal and
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. During the first quarter of 1997, the Company reduced its
equity allocation from 27.8% of the total portfolio at December 31, 1996 to
approximately 15%. The Company currently plans to maintain the equity allocation
at levels generally no greater than 15%. As a result of this shift, 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 December 31, 1996, 25.5%
of the portfolio was invested to meet the liquidity needs of the Company with an
additional 46.7% in long-term fixed income (including derivative instruments)
and 27.8% in equity portfolios. At December 31, 1996, 7.0% of the fixed income
portfolio and 45.6% of the equity portfolio was invested internationally. The
exposure to securities denominated in any one currency (other than U.S. dollars)
was less than 3.8% at December 31, 1996.
At December 31, 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..................................... $305,016 25.5%
Mortgage-backed obligations of U.S.
government agencies.......................................... 70,756 5.9
Other mortgage-backed and asset-backed
securities................................................... 157,512 13.2
Domestic corporate bonds..................................... 103,924 8.7
Short-term debt securities with maturities of
less than one year........................................... 164,258 13.8
Foreign:
Debt securities issued by foreign
governments.................................................. 40,188 3.4
Foreign corporate bonds...................................... 7,503 0.6
Short-term debt securities with maturities of
less than one year........................................... 11,486 1.0
------ ---
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ESTIMATED PERCENT OF
FAIR VALUE PORTFOLIO
---------- ----------
<S><C>
Total fixed income........................................... 860,643 72.1
------- ----
Equities:
Domestic equity securities................................... 180,452 15.1
Foreign equity securities.................................... 151,284 12.7
------- ----
Total equities............................................... 331,736 27.8
Derivative Instruments....................................... 1,060 0.1
----- ---
Total investments............................................ $1,193,439 100.0%
---------- ------
</TABLE>
As of December 31, 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.......................................................... $706,676 82.1%
AA........................................................... 25,102 2.9
A............................................................ 24,013 2.8
BBB.......................................................... 61,944 7.2
BB........................................................... 37,110 4.3
B............................................................ 5,779 0.7
CCC or lower................................................. - -
Not rated.................................................... 19 0.0
-- ---
Total........................................................ $860,643 100.0%
-------- ------
</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 December 31, 1996, $210.5 million, or 17.6% of the Company's investment
portfolio, was invested internationally. This amount includes $20.2 million
invested in U.S. dollar-denominated investment funds that are invested in
international investment securities.
Derivative instruments consist of foreign currency forward contracts and foreign
currency options. The Company enters into these instruments 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 December 31, 1996, the
Company had forward exchange contracts outstanding to purchase approximately
$11.9 million in foreign currencies and to sell approximately $24.4 million in
foreign currencies (primarily German Mark, Japanese Yen, British Pound Italian
Lira and Netherland Guilder). The gross unrealized gains and losses related to
these contracts at December 31, 1996 aggregated $130,441 and $447,872,
respectively. The foreign currency options involve purchased options to sell
$34.2 million of foreign currencies (Japanese Yen and German Mark) at set
prices. These options generally expire within twelve months. The gross
unrealized gains related to these options at December 31, 1996 aggregated
$835,205. There were no gross unrealized losses at December 31, 1996.
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.
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<PAGE>
REGULATION
HEALTHCARE REFORM. During 1996, the Congress passed and the President signed
into law the Health Insurance Portability and Accountability Act of 1996, and
new federal mandates concerning mental health parity and maternity stays. Among
other things, the new insurance reform law addresses group and individual market
reforms (increasing the portability of health insurance), permits medical
savings accounts on a trial basis, and increases the deductibility of health
insurance for the self-employed. Although this legislation was recently adopted,
the Company does not believe it will have a material adverse impact on its
operations. In addition, many states, including states in which the Company does
business, have enacted or are considering various health care reform statutes.
The Virginia General Assembly has initiated health insurance market reform
measures with the general objective of encouraging greater access to health
insurance for small group employers and individuals. Those health insurance
market reforms require all insurer and HMO carriers doing business in the small
group employer market (employers with 2-99 employees) to limit waiting period
restrictions for preexisting conditions to 12 months, to give credit for prior
coverage, to guarantee the renewability of small employer group plans and to
require whole group underwriting of small employer groups which would prohibit
the exclusion from coverage or the charge of additional premiums for eligible
employees or dependents because of health status. The definition of small
employer will likely change to employers with 2-50 employees effective July 1,
1997, in accordance with legislation pending final action by the Virginia
General Assembly.
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. The "make available" requirements will likely apply to all small
employers starting July 1, 1997, in accordance with legislation pending final
action by the Virginia General Assembly.
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. Trigon has six HMO subsidiaries, three of which are federally
qualified HMOs. All of Trigon's 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.
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<PAGE>
In addition, Trigon's 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, Inc. is not 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, is
regulated as an insurance holding company and subject to the insurance holding
company acts of Virginia and North Carolina, the states in which the insurance
company subsidiaries are domiciled. These acts contain certain reporting
requirements as well as restrictions on transactions between an insurer and its
affiliates. The Virginia insurance holding company laws and regulations
generally require insurance companies within an insurance holding company system
to register with the State Corporation Commission, and to file with the State
Corporation Commission certain reports describing capital structure, ownership,
financial condition, certain intercompany transactions and general business
operations. In addition, various notice and reporting requirements generally
apply to transactions between insurance companies and their affiliates within an
insurance holding company system, depending on the size and nature of the
transactions. Virginia insurance holding company laws and regulations require
prior regulatory approval or, in certain circumstances, prior notice of, certain
material intercompany transfers of assets as well as certain transactions
between insurance companies, their parent holding companies and affiliates.
Additionally, holding company acts (including those of Virginia and North
Carolina) restrict the ability of any person to obtain control of an insurance
company without prior regulatory approval. Under Virginia insurance holding
company laws and regulations, the acquisition of control of a Virginia insurer
or a person controlling a Virginia insurer, including Trigon Healthcare, Inc.
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. Trigon Insurance and its subsidiaries are subject
to the insurance laws and regulations of the Commonwealth of Virginia, the
domiciliary state of Trigon Insurance and its subsidiaries (except Mid-South
which is domiciled in North Carolina and is subject to the laws and regulations
of that state). In addition, Trigon Insurance and its subsidiaries are subject
to the insurance laws and regulations of the other jurisdictions in which they
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 Insurance, Monticello Life, and
Mid-South are required to file periodic statutory financial statements in each
jurisdiction in which they are licensed. Additionally, Trigon Insurance,
Monticello Life, and Mid-South are periodically examined by the insurance
departments of the jurisdictions in which they are 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
17
<PAGE>
intends to expand and, if imposed, would likely apply equally to all non-Blue
Cross companies operating in the state.
RISK-BASED CAPITAL REQUIREMENTS. In 1994, Virginia adopted new statutory
risk-based capital ("RBC") requirements for health and other insurance
companies. Such requirements are intended to assess the capital adequacy of life
and health insurers, taking into account the risk characteristics of an
insurer's investments and products. The formula for calculating such RBC
requirements, set forth in instructions adopted by the NAIC, is designed to take
into account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to an individual insurance company's business. Under
these laws, an insurance company must submit a report of its RBC level to the
State Corporation Commission as of the end of the previous calendar year.
The Virginia RBC requirements categorize insurance companies according to the
extent to which they meet or exceed certain RBC thresholds. The law requires
increasing degrees of regulatory oversight and intervention as an insurance
company's RBC declines. These degrees of regulatory action are triggered by the
RBC level of an insurance company as follows: (i) a "Company Action Level Event"
(requiring the insurance company to inform and obtain approval from the Virginia
Insurance Commissioner of a comprehensive financial plan for increasing its
RBC), which would occur if, among other things, an insurance company's RBC falls
below 200% of its authorized control level RBC requirement, or if an insurance
company's RBC falls below 250% of its authorized control level RBC requirement
and has a negative trend; (ii) a "Regulatory Action Level Event" (resulting in,
in addition to the requirement of a financial plan, regulatory actions including
examination of an insurance company's assets, liabilities and operations
followed by an order specifying such corrective actions as the Virginia
Insurance Commissioner determines to be appropriate), which would occur if,
among other things, an insurance company's RBC falls below 150% of its
authorized control level RBC requirement; (iii) an "Authorized Control Level
Event" (resulting in, in addition to the regulatory actions specified above,
such actions as are necessary to cause an insurance company to be placed under
regulatory control in a rehabilitation or liquidation proceeding if deemed to be
in the best interests of policyholders, creditors and the public), which would
occur if, among other things, an insurance company's RBC 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, 1996, the RBC levels of Trigon Insurance, Monticello Life,
and Mid-South, 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.
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The maximum amount available during 1997 for payment of dividends by Trigon
Insurance to Trigon Healthcare without the prior approval of the State
Corporation Commission is $60.9 million.
North Carolina, Mid-South's domiciliary state, similarly restricts the payment
of dividends by their domiciliary insurance companies.
ASSESSMENTS AGAINST INSURERS. Under insolvency or guaranty association laws in
most states, insurance companies can be assessed for amounts paid by guaranty
funds for policyholder losses incurred by insolvent insurance companies. Most
state insolvency or guaranty association laws, including Virginia's, currently
provide for assessments based upon the amount of premiums received on insurance
underwritten within such state (with a minimum amount payable where Mid-South is
licensed even if no premium is received). Substantially all of Trigon's 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 Trigon Insurance, are made
retrospectively and are based (up to prescribed limits) upon the ratio of (i)
the insurance company's premiums received in Virginia over the previous three
calendar years on accident and sickness insurance, to (ii) the aggregate amount
of premiums received by all assessed member insurance companies over such three
calendar years on accident and sickness insurance. The guaranty fund and
assessments made under the act are administered by the Association, which has
its own board of directors selected by member insurers with the approval of the
State Corporation Commission. An assessment may be abated or deferred by the
Association if, in the opinion of the board, payment would endanger the ability
of the member to fulfill its contractual obligations, but the other member
insurers may be assessed for the amount of such abatement or deferral. Any such
assessment paid by a member insurance company may be offset against its premium
tax liability to the Commonwealth of Virginia in each succeeding year in an
amount not to exceed 0.05 (one twentieth) of one percent of the member's direct
gross premium income for the class of insurance for which the insurer is
assessed. The amount and timing of any future assessments, however, cannot be
reasonably estimated and are beyond the control of the Company. There is
currently legislation pending within Virginia that will change the methodology
by which these amounts are offset against the premium tax liability. Under the
proposed legislation, any assessments issued after January 1, 1998 will be
offset against the premium tax liability over the ten calendar years following
the year of the payment, in amounts equal to ten percent of the amount paid.
VIRGINIA'S OPEN ENROLLMENT PROGRAM. The Commonwealth of Virginia has an open
enrollment program, pursuant to which Trigon Insurance 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, Trigon Insurance 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 Trigon Insurance from certain small employers. To withdraw from the
open enrollment program, Trigon Insurance would be required to give 24 months
advance notice of withdrawal to the State Corporation Commission. Over the last
five years, the loss suffered by Trigon Insurance 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 Trigon Insurance on the health care insurance policies issued by it under the
open enrollment program would continue to be aligned with this premium tax
reduction.
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There is currently legislation pending within Virginia that would require all
carriers offering coverage to groups of fewer than 50 members to offer coverage
without imposition of certain underwriting criteria that would deny coverage on
the basis of medical conditions, age, or employment status. This would change
the open enrollment program such that the definition of open enrollment
contracts would include only individuals. If this legislation is enacted,
effective January 1, 1998, the Company would pay a premium tax rate of
three-fourths of one percent (0.75%) on individual business only and would pay a
rate of 2.25% on all group business. The Company does not expect this proposed
change to have a significant impact on its financial results.
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
The Company and its subsidiaries have 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 59
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 the 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 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. 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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The license agreements between BCBSA and its licensees 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 also 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
Trigon Insurance 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.
EMPLOYEES
As of December 31, 1996, the Company had 3,961 full-time employees. The
employees are primarily located in Richmond and Roanoke, Virginia, with
employees also located in Maryland, Missouri, Georgia, Texas, North Carolina,
South Carolina, West Virginia and Pennsylvania. The Company believes that its
relationship with its employees is good. No employees are subject to collective
bargaining agreements. In January 1997, the Company announced that it planned to
eliminate 276 positions during 1997.
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."
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of these safe harbor provisions. Certain information contained in
this Form 10-K is forward-looking within the meaning of the Act or Securities
and Exchange Commission rules. Words such as expects, anticipates, intends,
plans, believes, seeks or estimates, or variations of such words and similar
expressions are also intended to identify forward-looking statements. These
forward-looking statements are subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company. Set forth
below are certain important factors that, in addition to general economic
conditions and other factors, some of which are discussed elsewhere in this Form
10-K, may affect these forward-looking statements and the Company's business
generally.
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. Trigon continually
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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.
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.
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. See "Competition". There is no
assurance that the 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 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.
GOVERNMENT REGULATION. The Company and its subsidiaries are subject to federal
and state regulation. See "Government Regulation". Regulatory initiatives may be
undertaken in the future, either as 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.
POTENTIAL ADVERSE REACTION TO THE DEMUTUALIZATION. 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 did 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.
POTENTIAL RISKS ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS. 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
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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. 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.
POTENTIAL LOSS OF BLUE CROSS AND BLUE SHIELD SERVICE MARKS AND TRADENAMES.
Trigon and the BCBSA are parties to a license agreement pursuant to which the
Company and its subsidiaries have the exclusive right 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. See "The Blue Cross Blue Shield License". If the BCBSA license were to be
terminated, there would be no material adverse effect on the Company's business
and operations, which the Company does not believe it can meaningfully quantify.
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 the BCBSA and other BCBSA
licensees will not adversely affect the sales of the Company's managed care
products and the Company's operations.
Item 2. 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 435,000 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 59,000 square feet for regional offices throughout Virginia
and 27,600 square feet for office space in Maryland, North Carolina, West
Virginia, Pennsylvania, Missouri, Texas and South Carolina.
Item 3. Legal Proceedings.
(a) The Company is the defendant in one lawsuit that has been filed by a
self-funded employer group in connection with the Company's past practices
regarding provider discounts. The suit claims that the Company was obligated to
credit the self-funded plan with the full amount of the discounts that the
Company negotiated with facilities providing health care to members covered by
the plan. The suit seeks $1.2 million in compensatory damages plus unspecified
punitive damages. The Company is also presently the subject of 10 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. 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
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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.
(b) Termination of Proceedings. Since November 1993, the Company has been in
discussions with the United States Department of Labor (the "DOL") regarding the
manner in which the Company handled provider discounts for self-funded health
benefit plans. In September 1995, the DOL notified the Company that it viewed
the Company's retention of provider discounts during the period from 1990
through 1993 and its failure to disclose the amounts of those discounts as
violations of certain provisions of the Employee Retirement Income Security Act
("ERISA"). In March 1997, the DOL notified the Company that it had concluded its
investigation, and that it contemplated no further action at this time regarding
the Company's role as a service provider to ERISA covered self-funded health
benefit plans.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Class A Common Stock, $.01 par value (the "Common Stock), has been
traded on the New York Stock Exchange under the symbol TGH since January 31,
1997. As of March 25, 1997, the Company had 147,995 shareholders of record.
The high and low closing sales prices for the Common Stock for the period from
January 31, 1997 through March 25, 1997 were $19.50 and $16.00, respectively, as
reported on the New York Stock Exchange Composite Tape.
The Company has not paid cash dividends on its Common Stock and 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 "Part 1 - Business -- Regulation." In addition, under the terms
of the Company's $300 million revolving credit agreement, the Company may not
pay dividends on the Common Stock unless the aggregate of all dividends paid by
the Company plus payments to purchase, redeem or otherwise acquire capital stock
of the Company (other than the Commonwealth Payment) does not exceed the sum of
(i) $10,000,000 plus (ii) 50% of the consolidated net income (or minus 100% of
consolidated net loss) of the Company for the period from the effectiveness of
the Demutualization through the end of the most recently completed fiscal
quarter, plus (iii) an amount (not to exceed $50,000,000) equal to 50% of the
cumulative cash dividends paid out of income of certain subsidiaries of the
Company earned prior to January 1, 1997 and received by the Company after the
date of the revolving credit agreement and before December 31, 1997. The maximum
amount available during 1997 for payment of dividends by Trigon Insurance to
Trigon Healthcare without the prior approval of the State Corporation Commission
is $60.9 million. See "Part I - Regulation -- Restrictions on Dividends".
Item 6. Selected Financial Data.
Refer to pages 12 and 13 of Trigon Healthcare Inc.'s Annual Report to
Shareholders, which are incorporated herein by reference.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Refer to pages 14 through 19 of Trigon Healthcare Inc.'s Annual
Report to Shareholders, which are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
Refer to pages 20 through 41 of Trigon Healthcare Inc.'s Annual Report to
Shareholders, which are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Refer to pages 2 and 3 of the Company's definitive Proxy Statement dated March
13, 1997, which are incorporated herein by reference solely as they relate to
this item.
Item 11. Executive Compensation.
Refer to pages 7 through 12, "Compensation of Executive Officers", of the
Company's definitive Proxy Statement dated March 13, 1997, which are
incorporated herein by reference solely as they relate to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Refer to pages 4 and 5, "Beneficial Ownership of Securities", of the Company's
definitive Proxy Statement dated March 13, 1997, which are incorporated herein
by reference solely as they relate to this item.
Item 13. Certain Relationships and Related Transactions.
R. Gordon Smith, a director of the Company, is a partner of McGuire, Woods,
Battle & Boothe, L.L.P., a law firm which regularly provides legal services to
the Company and its subsidiaries.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report.
1.Financial Statements from Trigon Healthcare Inc.'s Annual Report to
Shareholders
-- Consolidated Balance Sheets as of December 31, 1995 and 1996
(page 20)
-- Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 (page 21)
-- Consolidated Statements of Changes in Surplus for the years ended
December 31, 1994, 1995 and 1996 (page 22)
--Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 (page 23)
-- Summary of Significant Accounting Policies (pages 24 through 26)
-- Notes to Consolidated Financial Statements (pages 27 through 39)
-- Independent Auditors' Report (page 40)
2.Financial Statement Schedules. Not applicable
3.Exhibits. The following is a list of exhibits to this Form 10-K.
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Exhibit
Number Description
- ------- -----------
2 -- Amended and Restated Plan of Demutualization. *
3.1 -- Amended and Restated Articles of Incorporation of Trigon
Healthcare, Inc.*
3.2 -- Amended and Restated Bylaws of Trigon Healthcare, Inc.
4 -- Form of Stock Certificate (other Instruments Defining the
Rights of Security-Holders).*
10.1 -- License Agreement by and between the Blue Cross and Blue
Shield Association and the Company.
(a) Blue Cross License
(b) Blue Shield License
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 -- First Amendment to the Employee Thrift Plan of the Company,
dated as of February 19, 1997.
10.12 -- Employment Agreement dated as of December 12, 1990 by and
between the Company and John C. Berry. *
10.13 -- Employment Agreement dated as of May 30, 1996 by and between
the Company and Ronald H. Bargatze.
10.14 -- Credit Agreement dated as of February 5, 1997 among Trigon
Healthcare, Inc., the banks party thereto and Morgan Guaranty
Trust Company of New York, as Agent.
10.15 -- 1997 Stock Incentive Plan (incorporated by reference to
Exhibit A of the Company's Proxy Statement dated March 13,
1997).
10.16 -- Employee Stock Purchase Plan (incorporated by reference to
Exhibit B of the Company's Proxy Statement dated March 13,
1997).
10.17 -- Non-Employee Directors Stock Incentive Plan (incorporated by
reference to Exhibit C of the Company's Proxy Statement dated
March 13, 1997).
13 -- Excerpts from the Company's Annual Report to Shareholders for
the fiscal year ended December 31, 1996.
21 -- Subsidiaries of the Registrant. *
23 -- Consent of KPMG Peat Marwick LLP.
27 -- Financial Data Schedule.
* Incorporated by reference to the Company's Registration Statement on Form S-1
(registration number 333-09773).
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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the County of Henrico,
Commonwealth of Virginia, on March 27, 1997.
TRIGON HEALTHCARE, INC.
By: /s/ THOMAS G. SNEAD, JR.
------------------------
THOMAS G. SNEAD, JR.
Title: TREASURER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S><C>
/s/ NORWOOD H. DAVIS, JR. Chairman (Principal March 27, 1997
- ------------------------------ Executive Officer)
NORWOOD H. DAVIS, JR.
/s/ THOMAS G. SNEAD, JR. Treasurer (Principal March 27, 1997
- ------------------------------ Financial and
THOMAS G. SNEAD, JR. Accounting Officer)
/s/ HUNTER B. ANDREWS
- ------------------------------ Director March 21, 1997
HUNTER B. ANDREWS, ESQ.
/s/ LENOX D. BAKER, JR.
- ------------------------------ Director March 24, 1997
LENOX D. BAKER, JR., M.D.
/s/ JAMES K. CANDLER
- ------------------------------ Director March 27, 1997
JAMES K. CANDLER
/s/ JOHN COLE, JR.
- ------------------------------ Director March 29, 1997
JOHN COLE, JR., M.D.
/s/ JOHN L. COLLEY, JR.
- ------------------------------ Director March 27, 1997
JOHN L. COLLEY, JR., PH.D.
/s/ ROBERT M. FREEMAN
- ------------------------------ Director March 25, 1997
ROBERT M. FREEMAN
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S><C>
/s/ WILLIAM R. HARVEY
- ------------------------------ Director March 27, 1997
WILLIAM R. HARVEY
/s/ ELIZABETH G. HELM
- ------------------------------ Director March 21, 1997
ELIZABETH G. HELM
/s/ GARY A. JOBSON
- ------------------------------ Director March 25, 1997
GARY A. JOBSON
/s/ FRANK C. MARTIN, JR.
- ------------------------------ Director March 21, 1997
FRANK C. MARTIN, JR.
/s/ DONALD B. NOLAN
- ------------------------------ Director March 21, 1997
DONALD B. NOLAN, M.D.
/s/ WILLIAM N. POWELL
- ------------------------------ Director March 24, 1997
WILLIAM N. POWELL
/s/ J. CARSON QUARLES
- ------------------------------ Director March 25, 1997
J. CARSON QUARLES
/s/ R. GORDON SMITH
- ------------------------------ Director March 27, 1997
R. GORDON SMITH
/s/ HUBERT R. STALLARD
- ------------------------------ Director March 24, 1997
HUBERT R. STALLARD
/s/ JACKIE M. WARD
- ------------------------------ Director March 21, 1997
JACKIE M. WARD
/s/ STIRLING L. WILLIAMSON, JR.
- ------------------------------ Director March 21, 1997
STIRLING L. WILLIAMSON, JR.
</TABLE>
28
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.2 -- Amended and Restated Bylaws of Trigon Healthcare,
Inc.
10.1 -- License Agreements by and between the Blue Cross
and Blue Shield Association and the Company.
(a) Blue Cross License
(b) Blue Shield License
10.11 -- First Amendment to the Employee Thrift Plan of the
Company, dated as of February 19, 1997.
10.13 -- Employment Agreement dated as of May 30, 1996 by
and between the Company and Ronald H. Bargatze.
10.14 -- Credit Agreement dated as of February 5, 1997
among Trigon Healthcare, Inc., the banks party
thereto and Morgan Guaranty Trust Company of New
York, as Agent.
10.15 -- 1997 Stock Incentive Plan (incorporated by
reference to Exhibit A of the Company's Proxy
Statement dated March 13, 1997).
10.16 -- Employee Stock Purchase Plan (incorporated by
reference to Exhibit B of the Company's Proxy
Statement dated March 13, 1997).
10.17 -- Non-Employee Directors Stock Incentive Plan
(incorporated by reference of Exhibit C to the
Company's Proxy Statement dated March 13, 1997).
13 -- Excerpts from the Company's Annual Report to
Shareholders for the fiscal year ended December
31, 1996.
23 -- Consent of KPMG Peat Marwick LLP.
27 -- Financial Data Schedule.
29
Exhibit 3.2
TRIGON HEALTHCARE, INC.
AMENDED AND RESTATED BYLAWS
FEBUARY 19, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I.
MEETINGS OF STOCKHOLDERS
<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..................................................................................6
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.....................................................................8
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.............................................................................9
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..............................................................10
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page (i)
<PAGE>
3.4 Executive Committee............................................................................10
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...............................................................11
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.......................................................................................12
4.2 Election; Term.................................................................................12
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........................................................................13
4.8 Duties of Other Officers.......................................................................13
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.......................................................................14
5.4 Lost or Destroyed Share Certificates...........................................................14
ARTICLE VI.
MISCELLANEOUS PROVISIONS
6.1 Corporate Seal.................................................................................14
6.2 Fiscal Year....................................................................................14
6.3 Amendments.....................................................................................14
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page (ii)
</TABLE>
<PAGE>
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 third Wednesday in April 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.
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 1
<PAGE>
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 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
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 2
<PAGE>
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.
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
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 3
<PAGE>
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.
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
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 4
<PAGE>
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.
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.
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 5
<PAGE>
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.
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
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 6
<PAGE>
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 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
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 7
<PAGE>
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 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
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 8
<PAGE>
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.
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.
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 9
<PAGE>
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 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
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 10
<PAGE>
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 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.
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 11
<PAGE>
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. 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.
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 12
<PAGE>
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 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
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 13
<PAGE>
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
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.
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 14
<PAGE>
TRIGON HEALTHCARE, INC.: AMENDED AND RESTATED BYLAWS Page 15
Exhibit 10.1 (a)
BLUE CROSS LICENSE AGREEMENT
This agreement by and between Blue Cross and Blue Shield Association
("BCBSA") and The Blue Cross Plan, known as Trigon Healthcare, Inc. (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-
<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-
(The next page is page 3)
<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>
(The next page is page 6)
10. This License Agreement shall remain in effect: (a) until terminated
as provided herein; or (b) until this and all such other License Agreements are
terminated by the affirmative vote of three-fourths of the Plans and
three-fourths of the total then current weighted vote of all the Plans; 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-
(The next page is page 9)
<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 /s/ PATRICK G. HAYS
-------------------
PATRICK G. HAYS
Title President
Date February 5, 1997
TRIGON HEALTHCARE, INC.
By /s/ PHYLLIS L. COTHRAN
----------------------
PHYLLIS L. COTHRAN
Title President
Date January 28, 1997
-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
<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-
(The next page is page 5)
<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. BCBSA Membership Information Request;
B. Biennial trade name and service mark usage material,
including disclosure material under Standard 7;
C. Changes in the governance of the Plan, including changes
in a Plan's Charter, Articles of Incorporation, or Bylaws,
changes in a Plan's Board composition, or changes in the
identity of the Plan's Principal Officers;
Amended as of November 21, 1996
<PAGE>
EXHIBIT 2
Membership Standards
Page 2 of 3
D. 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;
E. 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 November 21, 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
Exhibit 10.1 (b)
BLUE SHIELD LICENSE AGREEMENT
This agreement by and between Blue Cross and Blue Shield Association
("BCBSA") and The Blue Shield Plan, known as Trigon Healthcare, Inc. (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-
(The next page is page 3)
<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-
(The next page is page 6)
<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-
(The next page is page 9)
<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 /s/ PATRICK G. HAYS
-------------------
PATRICK G. HAYS
Title President
Date February 5, 1997
TRIGON HEALTHCARE, INC.
By /s/ PHYLLIS L. COTHRAN
----------------------
PHYLLIS L. COTHRAN
Title President
Date January 28, 1997
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<PAGE>
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.
-1-
<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;
-2-
<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
-3-
<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.
-4-
<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
-5-
<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.
-6-
<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.
-7-
<PAGE>
THIS PAGE IS INTENTIONALLY BLANK.
-8-
<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:_____________________________________
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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?
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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:
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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.
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*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).
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EXHIBIT A (continued)
STANDARDS FOR LICENSED AFFILIATES
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<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.
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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.
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<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;
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<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.
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<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.
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<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.
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<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.
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<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
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<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
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<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:
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<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
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<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.
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(The next page is page 5)
<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: _________________________________
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<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).
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<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.
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<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. BCBSA Membership Information Request;
B. Biennial trade name and service mark usage
material, including disclosure material under
Standard 7;
C. Changes in the governance of the Plan, including
changes in a Plan's Charter, Articles of
Incorporation, or Bylaws, changes in a Plan's
Board composition, or changes in the identity of
the Plan's Principal Officers;
Amended as of November 21, 1996
<PAGE>
EXHIBIT 2
Membership Standards
Page 2 of 3
D. 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;
E. 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 November 21, 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.
<PAGE>
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.
<PAGE>
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.
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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.
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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.
<PAGE>
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
Exhibit 10.11
FIRST AMENDMENT TO THE
EMPLOYEES' THRIFT PLAN OF
TRIGON BLUE CROSS BLUE SHIELD
FIRST AMENDMENT, dated as of February 19, 1997, to the Employees' Thrift Plan of
Trigon Blue Cross Blue Shield (the "Plan"), by Trigon Insurance Company
(formerly, Blue Cross and Blue Shield of Virginia) (the "Corporation").
The Corporation maintains the Plan, as amended and restated effective January 1,
1996. The Corporation has the power to amend the Plan and now wishes to do so.
NOW, THEREFORE, the Plan is amended as follows:
Section 1.09 is amended in its entirety to read as follows:
1.09 Corporation means Trigon Insurance Company and any successor
thereto. The Corporation is the sponsor, named fiduciary and
administrator of the plan as it relates to the Employees of
participating Employers. Before March 7, 1997, the Corporation
was Blue Cross and Blue Shield of Virginia, a Virginia
corporation doing business as Trigon Blue Cross Blue Shield.
Section 1.43 is amended in its entirety to read as follows:
1.43 Plan means the "Employees' Thrift Plan of Trigon Insurance
Company." Before March 7, 1997, the name of the Plan was
"Employees' Thrift Plan of Trigon Blue Cross Blue Shield."
Article I is amended by adding new Sections 1.58, 1.59 and 1.60 to read as
follows:
1.58 Parent means Trigon Healthcare, Inc., the parent corporation
of the Corporation.
1.59 Trigon Stock means common stock issued by Trigon Healthcare,
Inc.
1.60 Trigon Stock Fund means the investment fund maintained under
the Plan for the investment of Participants' Individual
Accounts in Trigon Stock.
Effective January 1, 1996, Section 3.04 is amended by revising the 12th
paragraph to read as follows:
For purpose of this Section, the actual deferral percentage is the average of
the ratios, calculated separately for each Employee who is eligible to
participate in the Plan, of (i) the amount of Pre-Tax Contributions that are
credited under the Plan on behalf of the eligible Employee for the Plan Year
(including excess Pre-Tax Contributions returned to the Employee and excluding
Pre-Tax Contributions taken into account in the actual contribution percentage
test, provided that the
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actual deferral percentage test is satisfied both with and without the exclusion
of the Pre-Tax Contributions allocated to each Employee) to (ii) the Employee's
Compensation as determined pursuant to IRC Regulation 1.401(k)-1(g)(2)(i),
uniformly applied for a given Plan Year.
Effective January 1, 1996, Section 3.05 is amended by replacing the word
"Participant" with the word "Employee" each time it appears in paragraph 9 of
that Section, and by replacing subsection (ii) with the following:
the Employee's Compensation as determined pursuant to IRC Regulation
1.401(m)-1(f)(2), uniformly applied for a given Plan Year.
Section 4.01 is amended in its entirety to read as follows:
4.01 Investment Options
(a) The following investment funds shall be established
for purposes of the Plan:
(i) Trigon Stock Fund The Trigon Stock Fund
shall be invested primarily in Trigon Stock
and such additional assets as directed by
the Investment Committee from time to time.
The Trustee may purchase and sell Trigon
Stock on the open market, from and to the
Parent, and in any other manner as the
Trustee deems appropriate, consistent with
applicable securities laws, ERISA and the
IRC. The Trigon Stock Fund shall be
established as of March 7, 1997, or such
later date as directed by the Investment
Committee.
(ii) Other Investment Funds The Investment
Committee shall designate other investment
funds from time to time for investment of
Participants' Individual Accounts. The
Investment Committee shall select the
investment funds in accordance with Section
404(c) of ERISA and the regulations
thereunder. Special investment funds with
respect to assets of plans that are merged
into the Plan may be designated pursuant to
an applicable Appendix.
(b) All Contributions credited to a Participant's
Individual Accounts shall be invested in the
investment funds elected by the Participant on forms
or other means provided for that purpose by the
Administrative Committee.
(c) Plan assets may be invested in a short term
investment fund or in any other manner deemed
appropriate by the Trustee, pending investment in the
appropriate investment fund.
(d) If investments are to be made among the investment
funds, investments shall be made in increments of no
less than one percent (1%) in each investment fund.
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(e) The Investment Committee may impose upon any
investment fund such restrictions as may be necessary
or appropriate. For example, the Investment Committee
may restrict transfers to or from an investment fund,
and the Investment Committee may limit the amount of
a Participant's Individual Account that may be
transferred to or from an investment fund during a
specified period of time.
(f) If a Participant obtains a loan pursuant to Section
7.07, the Administrative Committee shall establish a
segregated account for that Participant. Interest and
principal payments by the Participant shall be
invested pursuant to the Participant's election.
Section 4.03 is amended in its entirety to read as follows:
4.03 Investment Accounts
(a) All net income that is earned on investments in an
investment fund described in Section 4.01 shall be
reinvested by the Trustee in that investment fund.
As of each Valuation Date, the Trustee shall
determine the current fair market value of each
investment fund. As of each Valuation Date, before
making adjustments for withdrawals, loans and
transfers, the Administrative Committee shall adjust
the Individual Accounts invested in that investment
fund to reflect the unit value of the investment fund
as of that date. The adjustments shall be based on
each Participant's closing Individual Account balance
invested in the investment fund as of the preceding
Valuation Date. The outstanding balance of a
Participant's loans described in Section 7.07 will
not be included as part of his Account balance for
purposes of allocations under this Section 4.03.
(b) Separate records for each investment fund shall be
maintained for accounting purposes only. A
segregation of assets shall not be required, nor
shall any Participant have title to any specific
assets of investment funds.
Article IV is amended by adding new Sections 4.04, 4.05, 4.06, 4.07 and 4.08 to
read as follows:
4.04 Investment Information To the extent required by applicable
law, each Participant shall be provided information for each
investment fund in accordance with Section 404(c) of ERISA and
the corresponding regulations. With respect to the Trigon
Stock Fund, Participants shall be provided with all
information generally required to be provided to shareholders
of the Parent.
4.05 Limitations on Directed Investments The Trustee may decline to
implement a Participant's investment directions if such
directions would:
(a) Result in a prohibited transaction as described in
ERISA section 406 or Internal Revenue Code section
4975;
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(b) Generate taxable income to the Plan or jeopardize its
tax qualified status;
(c) Not be in accordance with the documents and
instruments governing the Plan;
(d) Cause a fiduciary to maintain the indicia of
ownership in an asset outside jurisdiction of the
United States district courts;
(e) Result in a loss greater than the balance in the
Participant's Individual Account; or
(f) Result in certain transactions between the Plan and
the Employer or an affiliate of the Employer as
designated by the Corporation.
4.06 Application to Beneficiaries and Alternate Payees All
Beneficiaries of deceased Participants who have Individual
Account balances in the Plan may direct the investment of
their Individual Accounts into any one or more of the
investment funds offered pursuant to Section 4.01. After an
Alternate Payee's interest in a Participant's Individual
Accounts has been finally determined pursuant to Section
13.05, the Alternate Payee may direct the investment of the
Alternate Payee's Accounts into one or more of the investment
funds offered pursuant to Section 4.01, to the same extent
that the Participant could have directed the investment of the
Individual Accounts.
4.07 Voting, Tender and Exercise of Similar Rights with Respect to
Trigon Stock
(a) A Participant may instruct the Trustee (or its agent)
how to vote, tender, or exercise similar rights with
respect to the shares of Trigon Stock allocable to
the Participant's Individual Account. The Trustee (or
its agent) shall hold any voting, tender, or similar
instructions it receives from a Participant in the
strictest confidence and shall implement and follow
procedures sufficient to safeguard the
confidentiality of such instructions, except to the
extent necessary to comply with Federal or state laws
not preempted by ERISA.
(b) The Trustee shall vote, tender or exercise similar
rights with respect to Trigon Stock for which timely
instructions are received according to the
Participants' instructions. The Trustee shall vote
with respect to shares of Trigon Stock for which
timely instructions are not received from
Participants in the same proportion as the Trigon
Stock for which it has received timely instructions.
The Trustee shall not tender or exercise similar
rights with respect to shares of Trigon Stock for
which timely instructions are not received from
Participants, provided that Participants have been
instructed that failure to respond shall be deemed to
be a direction not to tender or exercise similar
rights. In all other circumstances, the
Administrative Committee (or its agent) shall direct
the
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Trustee to tender or exercise similar rights with
respect to shares of Trigon Stock for which timely
instructions are not received from Participants in
such manner as the Administrative Committee (or its
agent) deems appropriate.
(c) The Administrative Committee (or its agent) may
assist the Trustee to ensure that all notices, forms,
and other information regarding the exercise of
voting, tender, or similar rights are distributed to
Participants within a reasonable time before voting,
tender, or similar rights are to be exercised.
Instructions from a Participant must be received by
the Trustee in time for the Trustee to act with
respect to them.
4.08 Management of the Trigon Stock Fund
(a) The Administrative Committee shall implement and
follow procedures sufficient to safeguard the
confidentiality of information relating to the
purchase, holding, and sale of Trigon Stock by
Participants, except to the extent necessary to
comply with Federal or state laws not preempted by
ERISA.
(b) If required by law, the Administrative Committee
shall appoint an independent fiduciary (within the
meaning of applicable Department of Labor
regulations) to perform certain functions with
respect to the Trigon Stock Fund if the
Administrative Committee determines that appointment
of an independent fiduciary is necessary because of a
potential for undue Employer influence upon
Participants with regard to the indirect exercise of
shareholder rights with respect to the Trigon Stock
Fund.
(c) The Trustee shall manage the Trigon Stock Fund in a
manner consistent with ERISA, the IRC and applicable
securities laws. Consistent with these laws, the
Administrative Committee (or its agent) shall
implement appropriate procedures, restrictions and
limitations with respect to the purchase and sale of
Trigon Stock. If the Administrative Committee (or its
agent) is not able to execute fully Participants'
investment directions at a particular time, the
Administrative Committee (or its agent) shall execute
the instructions, to the extent possible, in a pro
rata manner.
Section 6.08 is amended by adding new subsections (e) and (f) to read
as follows:
(e) A Participant may elect to have the portion of his
Individual Account that is invested in the Trigon
Stock Fund paid in whole shares of Trigon Stock, with
the value of fractional shares paid in cash, or
entirely in cash. For purposes of determining the
amount of a cash distribution, Trigon Stock will be
valued as of the Valuation Date as of which the
distribution is made.
If a Participant fails to make an election to be paid
in Trigon Stock or cash, the Participant shall be
paid in cash. If part or all of a Participant's
Account
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is invested in any investment fund other than the
Trigon Stock Fund, that portion of the Account shall
be paid in cash and shall be valued as of the
Valuation Date as of which the distribution is made.
(f) The Corporation does not guarantee that the market
value of the Trigon Stock when it is distributed will
be equal to its purchase price or that the total
amount distributable or withdrawable under the Plan
will be equal to or greater than the amount of the
Participant's contributions and loans. Each
Participant assumes all risk of any decrease in the
market value of the Trigon Stock and other assets
allocable to his Individual Account in accordance
with the provisions of the Plan.
Section 6.08 is amended by changing all references to Section "5.05(e)" to
Section "6.08(g)."
Sections 7.02 and 7.03 are amended by adding the following paragraph immediately
after the second paragraph:
A Participant may elect to have the portion of his Individual Account withdrawn
hereunder that is invested in the Trigon Stock Fund paid in whole shares of
Trigon Stock, with the value of fractional shares paid in cash, or entirely in
cash. For purposes of determining the amount of a cash distribution, Trigon
Stock will be valued as of the Valuation Date as of which the distribution is
made. If a Participant fails to make an election to be paid in Trigon Stock or
cash, the Participant shall be paid in cash. If part or all of a Participant's
Individual Account is invested in any investment fund other than the Trigon
Stock Fund, that portion of the Account shall be paid in cash and shall be
valued as of the Valuation Date as of which the distribution is made.
Sections 7.05 and 7.06 are renumbered as Sections 7.06 and 7.07, respectively,
and the following sentence is added to the end of the second paragraph of
renumbered Section 7.06:
Amounts withdrawn for Hardship from the portion of the Participant's Individual
Account that is invested in the Trigon Stock Fund shall be paid in cash.
A new Section 7.05 is added to the Plan to read as follows:
7.05 Withdrawals at Age 59 1/2 Effective March 7, 1997, a
Participant who has attained the age of fifty-nine and
one-half (59 1/2) may request a withdrawal of all or a portion
of his vested Individual Account.
Any withdrawal under this Section 7.05 shall be made so that
the withdrawal reduces the Current Balance of the
Participant's sub-accounts in the following order:
(1) After-Tax Contribution Account;
(2) Rollover Account;
(3) vested portion of the Participant's Transfer
Account;
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(4) vested portion of the Participant's Employer
Contribution Account; and
(5) Pre-Tax Contribution Account.
If a Participant's Individual Account is invested in more than one of the
investment funds, any partial withdrawal under this Section 7.05 from the
Participant's After-Tax Contribution Account, Rollover Account, Transfer
Account, Employer Contribution Account, and Pre-Tax Contribution Account shall
be taken from each such investment 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 is taken.
A Participant may elect to have the portion of his Individual Account withdrawn
hereunder that is invested in the Trigon Stock Fund paid in whole shares of
Trigon Stock, with the value of fractional shares paid in cash, or entirely in
cash. For purposes of determining the amount of a cash distribution, Trigon
Stock will be valued as of the Valuation Date as of which the distribution is
made. If a Participant fails to make an election to be paid in Trigon Stock or
cash, the Participant shall be paid in cash. If part or all of a Participant's
Individual Account is invested in any investment fund other than the Trigon
Stock Fund, that portion of the Account shall be paid in cash and shall be
valued as of the Valuation Date as of which the distribution is made.
Amounts withdrawn pursuant to this Section 7.05 may not be repaid to the Trust
Fund.
Unless otherwise provided, this Amendment shall be effective March 7, 1997. In
all respects not amended, the Plan is hereby ratified and confirmed.
* * * * *
WITNESS the following signature this 28th day of February, 1997.
TRIGON INSURANCE COMPANY
By: /s/ RONALD M. NASH
-------------------
Ronald M. Nash
Senior Vice President, Corporate Services
7
Exhibit 10.13
EMPLOYMENT AGREEMENT
THIS AGREEMENT made this 30th day of May, 1996, between TRIGON BLUE
CROSS BLUE SHIELD, a Virginia nonstock corporation ("Blue Cross") and RONALD H.
BARGATZE ("Executive").
RECITALS
Executive is currently employed in an executive position with Blue
Cross and the parties desire to enter into the following agreement relating to
that employment.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties agree:
1. Employment. Blue Cross hereby employs Executive, and
Executive accepts such employment. Executive's employment
hereunder is at will. Executive may resign at any time, and Blue
Cross may discharge Executive at any time, with or without cause.
2. Severance. If Executive resigns or if Blue Cross
terminates Executive's employment for any reason other than for
cause, then Blue Cross will pay to Executive severance pay as
follows:
(a) If at the time of resignation or termination
Executive has been employed with Blue Cross or any of
its affiliates for a continuous period of less than
five (5) years, Executive will be paid severance pay
equal to six (6) full months following resignation or
<PAGE>
termination; or
(b) If at the time of resignation or termination
Executive has been employed with Blue Cross or any of
its affiliates for a continuous period of five (5)
years or more, Executive will be paid severance pay
equal to twenty-four (24) months salary, payable
monthly at the end of each of the first twenty-four
(24) full months following resignation or
termination.
For purposes of this Agreement, affiliates of Blue Cross shall include any
entity controlled by, controlling, or under common control with Blue Cross. In
computing the continuous period of employment for purposes of this Agreement,
there shall be taken into account continuous employment both before and after
the date of this Agreement. If Executive's employment hereunder is terminated by
reason of death or for cause, that its, neglect by Executive of his duties or
willful misconduct by Executive, Executive shall not be entitled to any
severance pay.
3. Confidential Information. Executive will not, either during
his employment with Blue Cross or thereafter, disclose to any person any trade
secret or confidential commercial information of Blue Cross or its affiliates,
make any derogatory or disparaging statement about Blue Cross, its affiliates,
or any officer or director of Blue Cross or its affiliates, or knowingly take
any other action with intent to inure Blue Cross or any affiliate of Blue Cross
in its trade or business.
4. Noncompetition. If Executive's employment with Blue
- 2 -
<PAGE>
Cross terminates for any reason, for a period of two (2) years following such
termination Executive will not, without the prior written consent of Blue Cross:
(a) Become an officer, director, or employee of,
consultant to, or ten percent (10%) or more owner of
any entity that, as of the date of termination of
employment, is then competing with Blue Cross or any
affiliate of Blue Cross in any business activity in
Virginia; or
(b) Employ or seek to employ any employee of Blue Cross
or its affiliates.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
By: /s/ Phyllis Cothran
--------------------------------
Title: President & Chief Operating Officer
-----------------------------------
/s/ Ronald H. Bargatze
--------------------------------------
("Executive")
- 3 -
Exhibit 10.14
CONFORMED COPY
$300,000,000
CREDIT AGREEMENT
dated as of
February 5, 1997
among
Trigon Healthcare, Inc.,
The Banks Party Hereto
and
Morgan Guaranty Trust Company of New York,
as Agent
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
DEFINITIONS
1.1. Definitions......................................... 1
1.2. Accounting Terms and Determinations................. 15
1.3. Types of Borrowings................................. 16
ARTICLE 2
THE CREDITS
2.1. Commitments to Lend................................. 16
2.2. Notice of Committed Borrowing....................... 17
2.3. Money Market Borrowings............................. 17
2.4. Notice to Banks; Funding of Loans................... 21
2.5. Maturity of Loans................................... 22
2.6. Interest Rates...................................... 22
2.7. Method of Electing Interest Rates................... 26
2.8. Facility Fee........................................ 27
2.9. Termination or Reduction of Commitments............. 28
2.10. Optional Prepayments................................ 28
2.11. General Provisions as to Payments................... 29
2.12. Funding Losses...................................... 30
2.13. Computation of Interest and Fees.................... 30
2.14. Notes............................................... 30
2.15. Regulation D Compensation........................... 31
2.16. Increased Commitments; Additional Banks ............ 32
ARTICLE 3
CONDITIONS
3.1. Closing............................................. 33
3.2. Borrowings.......................................... 34
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1. Corporate Existence and Power....................... 35
4.2. Corporate and Governmental Authorization; No
Contravention............................................. 35
4.3. Binding Effect...................................... 35
4.4. Financial Information............................... 35
4.5. Litigation.......................................... 36
i
<PAGE>
Page
4.6. Compliance with Laws; ERISA......................... 37
4.7. Environmental Matters............................... 37
4.8. Taxes............................................... 37
4.9. Subsidiaries........................................ 38
4.10. Regulatory Restrictions on Borrowing................ 38
4.11. Full Disclosure..................................... 38
ARTICLE 5
COVENANTS
5.1. Information......................................... 38
5.2. Payment of Obligations.............................. 41
5.3. Maintenance of Property; Insurance.................. 42
5.4. Conduct of Business and Maintenance of
Existence........................................... 42
5.5. Compliance with Laws................................ 42
5.6. Inspection of Property, Books and Records........... 43
5.7. Company Action Level Ratio.......................... 43
5.8. Mergers and Sales of Assets......................... 43
5.9. Use of Proceeds..................................... 44
5.10. Negative Pledge..................................... 44
5.11. Consolidated Debt to Consolidated Total
Capitalization...................................... 45
5.12. Minimum Adjusted Consolidated Tangible Net
Worth............................................... 45
5.13. Subsidiary Debt .................................... 45
5.14. Restricted Payments................................. 45
5.15. Investments......................................... 46
5.16. Transactions with Affiliates........................ 46
ARTICLE 6
DEFAULTS
6.1. Events of Default................................... 46
6.2. Notice of Default................................... 49
ARTICLE 7
THE AGENT
7.1. Appointment and Authorization...................... 50
7.2. Agent and Affiliates............................... 50
7.3. Action by Agent.................................... 50
7.4. Consultation with Experts.......................... 50
7.5. Liability of Agent................................. 50
7.6. Indemnification.................................... 51
7.7. Credit Decision.................................... 51
7.8. Successor Agent.................................... 51
7.9. Agent's Fee........................................ 52
ii
<PAGE>
Page
ARTICLE 8
CHANGE IN CIRCUMSTANCES
8.1. Basis for Determining Interest Rate
Inadequate or Unfair............................... 52
8.2. Illegality......................................... 53
8.3. Increased Cost and Reduced Return.................. 53
8.4. Taxes.............................................. 55
8.5. Base Rate Loans Substituted for Affected
Fixed Rate Loans................................... 57
8.6. Substitution of Bank............................... 58
ARTICLE 9
MISCELLANEOUS
9.1. Notices........................................... 59
9.2. No Waivers........................................ 59
9.3. Expenses; Indemnification......................... 59
9.4. Sharing of Set-Offs............................... 60
9.5. Amendments and Waivers ........................... 60
9.6. Successors and Assigns............................ 61
9.7. No Reliance on Margin Stock....................... 62
9.8. Governing Law; Submission to Jurisdiction......... 63
9.9. Counterparts; Integration; Effectiveness.......... 63
9.10. WAIVER OF JURY TRIAL.............................. 63
COMMITMENT SCHEDULE....................................................... 67
PRICING SCHEDULE.......................................................... 68
EXHIBIT A - Note........................................ 1
EXHIBIT B - Money Market Quote Request.................. 1
EXHIBIT C - Invitation for Money Market Quotes.......... 1
EXHIBIT D - Money Market Quote.......................... 1
EXHIBIT E - Opinion of Counsel for the Borrower......... 1
EXHIBIT F - Opinion of Special Counsel for the
Agent....................................... 1
EXHIBIT G - Assignment and Assumption Agreement......... 1
iii
<PAGE>
AGREEMENT dated as of February 5, 1997 among TRIGON
HEALTHCARE, INC., the BANKS party hereto and MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Agent.
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1. Definitions. The following terms, as used
herein, have the following meanings:
"Absolute Rate Auction" means a solicitation of Money Market
Quotes setting forth Money Market Absolute Rates pursuant to Section 2.3.
"Additional Bank" has the meaning set forth in Section
2.16(b).
"Adjusted CD Rate" has the meaning set forth in Section 2.6
(b).
"Adjusted Consolidated Tangible Net Worth" means at any date
the consolidated stockholders' equity of the Borrower and its Consolidated
Subsidiaries (I) plus the amount of any unrealized losses (or less the amount of
any unrealized gains) related, directly or indirectly, to securities, as
determined in accordance with Statement of Financial Accounting Standards No.
115 (or any successor statements or amendments thereto) (in each case as
affected by any subsequent relevant pronouncements of the Financial Accounting
Standards Board), to the extent reflected in the determination of such
consolidated stockholders' equity (II) less their consolidated Intangible
Assets, all determined as of such date. For purposes of this definition,
"Intangible Assets" of the Borrower and its Consolidated Subsidiaries means the
amount (to the extent reflected in determining the consolidated stockholders'
equity of the Borrower and its Consolidated Subsidiaries) of (i) all write-ups
(other than write-ups resulting from foreign currency translations and write-ups
of assets of a going concern business made on the date of or within twelve
months after the acquisition of such business) subsequent to September 30, 1996
in the book value of any asset owned by the Borrower or a Consolidated
Subsidiary and (ii) all unamortized debt discount and
<PAGE>
expense, unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, organization or developmental expenses and other
intangible assets.
"Administrative Questionnaire" means, with respect to each
Bank, an administrative questionnaire in the form prepared by the Agent,
completed by such Bank and returned to the Agent (with a copy to the Borrower).
"Admitted Assets" means, with respect to any Regulated Entity,
assets which are "admitted assets" (or a substantially similar concept) under
the relevant state insurance laws and rules and regulations promulgated
thereunder applicable to such Regulated Entity.
"Affiliate" means (i) any Person that directly, or indirectly
through one or more intermediaries, controls the Borrower (a "Controlling
Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is
controlled by or is under common control with a Controlling Person. As used
herein, the term "control" means possession, directly or indirectly, of the
power to vote 20% or more of any class of voting securities of a Person or to
direct or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.
"Agent" means Morgan Guaranty Trust Company of New York in its
capacity as agent for the Banks hereunder, and its successors in such capacity.
"Annual Statement" means Trigon Insurance's duly completed
annual report to the insurance department or other comparable regulatory
authority of the Commonwealth of Virginia, prepared and filed in conformity with
the Commonwealth of Virginia's applicable regulations.
"Applicable Lending Office" means, with respect to any Bank,
(i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the
case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the
case of its Money Market Loans, its Money Market Lending Office.
"Assessment Rate" has the meaning set forth in Section 2.6
(b).
"Assignee" has the meaning set forth in Section 9.6(c).
2
<PAGE>
"Bank" means each bank listed on the signature pages hereof,
each Additional Bank which becomes a Bank pursuant to Section 2.16, each
Assignee which becomes a Bank pursuant to Section , and their respective
successors.
"Base Rate" means, for any day, a rate per annum equal to the
higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the
Federal Funds Rate for such day.
"Base Rate Loan" means a Committed Loan which bears interest
at the Base Rate pursuant to the applicable Notice of Committed Borrowing or
Notice of Interest Rate Election or the provisions of Section or Article 8.
"Borrower" means Trigon Healthcare, Inc., a Virginia
corporation, and its successors.
"Borrower's Registration Statement" means the Borrower's
Registration Statement as filed with the SEC on November 12, 1996 pursuant to
the Securities Act of 1933, as amended as of the date hereof.
"Borrowing" has the meaning set forth in Section 1.3.
"CD Base Rate" has the meaning set forth in
Section 2.6(b).
"CD Loan" means a Committed Loan which bears interest at a CD
Rate pursuant to the applicable Notice of Committed Borrowing or Notice of
Interest Rate Election.
"CD Margin" means a rate per annum determined in accordance
with the Pricing Schedule.
"CD Rate" means a rate of interest determined pursuant to
Section 2.6(b) on the basis of an Adjusted CD Rate.
"CD Reference Banks" means The Bank of New York, The First
National Bank of Chicago and Morgan Guaranty Trust Company of New York.
"Closing Date" means the date on or after the Effective Date
on which each of the conditions specified in Section 3.1 have been satisfied.
"Commitment" means (i) with respect to each Bank listed on the
Commitment Schedule, the amount set forth
3
<PAGE>
opposite the name of such Bank on the Commitment Schedule and (ii) with respect
to each Additional Bank or Assignee which becomes a Bank pursuant to Section
2.16 or 9.6(c), the amount of the Commitment thereby assumed by it, in each case
as such amount may be changed from time to time pursuant to Section 2.9, 2.16 or
9.6(c).
"Commitment Schedule" means the Commitment
Schedule attached hereto.
"Committed Loan" means a loan made by a Bank pursuant to
Section 2.1; provided that, if any such loan or loans (or portions thereof) are
combined or subdivided pursuant to a Notice of Interest Rate Election, the term
Committed Loan shall refer to the combined principal amount resulting from such
combination or to each of the separate principal amounts resulting from such
subdivision, as the case may be.
"Commonwealth Payment" has the meaning set forth
in the Plan of Demutualization.
"Consolidated Debt" means, at any date, the Debt of the
Borrower and its Consolidated Subsidiaries, determined on a consolidated basis
as of such date.
"Consolidated Net Income" means, for any period, the net
income of the Borrower and its Consolidated Subsidiaries, determined on a
consolidated basis for such period.
"Consolidated Net Worth" means, at any date, the Consolidated
stockholders' equity of the Borrower and its Consolidated Subsidiaries as of
such date.
"Consolidated Subsidiary" means, at any date, any Subsidiary
or other entity the accounts of which would be consolidated with those of the
Borrower in its consolidated financial statements if such statements were
prepared as of such date.
"Consolidated Total Capitalization" means, at any date, the
sum of Consolidated Debt and Consolidated Net Worth, each determined as of such
date.
"Debt" of any Person means, at any date, without duplication,
(i) all obligations of such Person for borrowed money, (ii) all obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable
4
<PAGE>
arising in the ordinary course of business, (iv) all obligations of such Person
as lessee which are capitalized in accordance with GAAP, (v) all non-contingent
obligations (and, for purposes of Section 5.10 and the definitions of Material
Debt and Material Financial Obligations, all contingent obligations) of such
Person to reimburse any bank or other Person in respect of amounts paid under a
letter of credit or similar instrument, (vi) all Debt secured by a Lien on any
asset of such Person, whether or not such Debt is otherwise an obligation of
such Person, (vii) all Guarantees by such Person of Debt of another Person (each
such Guarantee to constitute Debt in an amount equal to the amount of such other
Person's Debt Guaranteed thereby) and (viii) in the case of the Borrower, (x)
any unpaid amount of the Commonwealth Payment and (y) with respect to any
capital stock of the Borrower which is redeemable other than at the sole option
of the Borrower, the redemption price thereof, provided that any such capital
stock evidencing, or delivered in payment of, the Commonwealth Payment shall be
excluded from this clause (y).
"Default" means any condition or event which constitutes an
Event of Default or which with the giving of notice or lapse of time or both
would, unless cured or waived, become an Event of Default.
"Demutualization" has the meaning set forth in the
Plan of Demutualization.
"Derivatives Obligations" of any Person means all obligations
of such Person in respect of any rate swap transaction, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
currency swap transaction, cross-currency rate swap transaction, currency option
or any other similar transaction (including any option with respect to any of
the foregoing transactions) or any combination of the foregoing transactions.
"Domestic Business Day" means any day except a Saturday,
Sunday or other day on which commercial banks in New York City are authorized or
required by law to close.
"Domestic Lending Office" means, as to each Bank, its office
located at its address set forth in its Administrative Questionnaire (or
identified in its Administrative Questionnaire as its Domestic Lending Office)
or such other office as such Bank may hereafter designate as its Domestic
Lending Office by notice to the Borrower and
5
<PAGE>
the Agent; provided that any Bank may so designate separate Domestic Lending
Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other
hand, in which case all references herein to the Domestic Lending Office of such
Bank shall be deemed to refer to either or both of such offices, as the context
may require.
"Domestic Loans" means CD Loans or Base Rate Loans
or both.
"Domestic Reserve Percentage" has the meaning set
forth in Section 2.6 (b).
"Effective Date" means the date this Agreement becomes
effective in accordance with Section 9.9.
"Environmental Laws" means any and all federal, state, local
and foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
the environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment, including (without limitation) ambient air, surface
water, ground water or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, Hazardous Substances or wastes or the
clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, or any successor statute.
"ERISA Group" means the Borrower, any Subsidiary and all
members of a controlled group of corporations and all trades or businesses
(whether or not incorporated) under common control which, together with the
Borrower or any Subsidiary, are treated as a single employer under Section 414
of the Internal Revenue Code.
"Euro-Dollar Business Day" means any Domestic Business Day on
which commercial banks are open for international business (including dealings
in dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its
office, branch or affiliate located at its address set forth in its
Administrative Questionnaire (or identified in its Administrative Questionnaire
as its Euro-Dollar
6
<PAGE>
Lending Office) or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower
and the Agent.
"Euro-Dollar Loan" means a Committed Loan which bears interest
at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing
or Notice of Interest Rate Election.
"Euro-Dollar Margin" means a rate per annum determined in
accordance with the Pricing Schedule.
"Euro-Dollar Rate" means a rate of interest determined
pursuant to Section 2.6(c) on the basis of a London Interbank Offered Rate.
"Euro-Dollar Reference Banks" means the principal London
offices of The Bank of New York, The First National Bank of Chicago and Morgan
Guaranty Trust Company of New York.
"Euro-Dollar Reserve Percentage" means, for any day, that
percentage (expressed as a decimal) which is in effect on such day, as
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement for a member bank of
the Federal Reserve System in New York City with deposits exceeding five billion
dollars in respect of "Eurocurrency liabilities" (or in respect of any other
category of liabilities which includes deposits by reference to which the
interest rate on Euro-Dollar Loans is determined or any category of extensions
of credit or other assets which includes loans by a non-United States office of
any Bank to United States residents).
"Event of Default" has the meaning set forth in
Section 6.1.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
"Federal Funds Rate" means, for any day, the rate per annum
(rounded upward, if necessary, to the nearest 1/100 of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business
7
<PAGE>
Day as so published on the next succeeding Domestic Business Day and (ii) if no
such rate is so published on such next succeeding Domestic Business Day, the
Federal Funds Rate for such day shall be the average rate quoted to Morgan
Guaranty Trust Company of New York on such day on such transactions as
determined by the Agent.
"Fiscal Quarter" means a fiscal quarter of the
Borrower.
"Fiscal Year" means a fiscal year of the Borrower.
"Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or
Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the
Base Rate pursuant to Section 8.1) or any combination of the foregoing.
"GAAP" means generally accepted accounting principles as in
effect from time to time, applied on a basis consistent (except for changes
concurred in by the Borrower's independent public accountants) with the initial
audited consolidated financial statements of the Borrower and its Consolidated
Subsidiaries to be delivered to the Banks pursuant to Section 5.1(a).
"Group of Loans" means, at any time, a group of Loans
consisting of (i) all Committed Loans which are Base Rate Loans at such time,
(ii) all Euro-Dollar Loans having the same Interest Period at such time or (iii)
all CD Loans having the same Interest Period at such time, provided that, if a
Committed Loan of any particular Bank is converted to or made as a Base Rate
Loan pursuant to Article 8, such Loan shall be included in the same Group or
Groups of Loans from time to time as it would have been in if it had not been so
converted or made.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt (whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise), (ii) to reimburse a
bank for amounts drawn under a letter of credit for the purpose of paying such
Debt or (iii) entered into for the purpose of assuring in any other manner the
holder of such Debt of the payment thereof or to protect such holder against
loss in
8
<PAGE>
respect thereof (in whole or in part), provided that the term Guarantee shall
not include endorsements for collection or deposit in the ordinary course of
business. The term Guarantee used as a verb has a corresponding meaning.
"Hazardous Substances" means any toxic, radioactive, caustic
or otherwise hazardous substance, including petroleum, its derivatives,
by-products and other hydrocarbons, or any substance having any constituent
elements displaying any of the foregoing characteristics.
"Increased Commitments" has the meaning set forth
in Section 2.16(a).
"Indemnitee" has the meaning set forth in Section 9.3(b).
"Initial Public Offering" has the meaning set
forth in the Plan of Demutualization.
"Interest Period" means: (1) with respect to each Euro-Dollar
Loan, the period commencing on the date of borrowing specified in the applicable
Notice of Borrowing or on the date specified in an applicable Notice of Interest
Rate Election and ending one, two, three or six months thereafter, as the
Borrower may elect in such notice; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business
Day falls in another calendar month, in which case such Interest Period
shall end on the next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
(c) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date;
(2) with respect to each CD Loan, the period commencing on the
date of borrowing specified in the applicable Notice of Borrowing or on the date
specified in an applicable Notice of Interest Rate Election and ending
9
<PAGE>
30, 60, 90 or 180 days thereafter, as the Borrower may elect in such notice;
provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day; and
(b) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date;
(3) with respect to each Money Market LIBOR Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such whole number of months thereafter as the Borrower may
elect in accordance with Section 2.3; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business
Day falls in another calendar month, in which case such Interest Period
shall end on the next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
(c) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date; and
(4) with respect to each Money Market Absolute Rate Loan, the
period commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such number of days thereafter (but not less than seven
days) as the Borrower may elect in accordance with Section 2.3; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day; and
10
<PAGE>
(b) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended, or any successor statute.
"Investment" means any investment in any Person, whether by
means of share purchase, capital contribution, loan, Guarantee, time deposit or
otherwise (but not including any demand deposit).
"LIBOR Auction" means a solicitation of Money Market Quotes
setting forth Money Market Margins based on the London Interbank Offered Rate
pursuant to Section 2.3.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind, or any other type
of preferential arrangement that has substantially the same practical effect as
a security interest, in respect of such asset. For purposes hereof, the Borrower
or any Subsidiary shall be deemed to own subject to a Lien any asset which it
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such asset.
"Loan" means a Committed Loan or a Money Market Loan and
"Loans" means Committed Loans or Money Market Loans or any combination of the
foregoing.
"London Interbank Offered Rate" has the meaning
set forth in Section 2.6(c).
"Material Adverse Effect" means a material adverse effect upon
(i) the business, results of operations, financial condition or prospects of the
Borrower and its Consolidated Subsidiaries taken as a whole, (ii) the ability of
the Borrower to perform its obligations under this Agreement or (iii) the
ability of any of the Banks to enforce their rights and remedies against the
Borrower under this Agreement.
"Material Debt" means Debt (except Debt outstanding hereunder)
of the Borrower and/or one or more of its Subsidiaries, arising in one or more
related or unrelated transactions, in an aggregate principal or face amount
exceeding $25,000,000.
"Material Financial Obligations" means a principal or face
amount of Debt and/or payment or collateralization
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obligations in respect of Derivatives Obligations of the Borrower and/or one or
more of its Subsidiaries, arising in one or more related or unrelated
transactions, exceeding in the aggregate $25,000,000.
"Material Plan" means, at any time, a Plan or Plans having
aggregate Unfunded Liabilities in excess of $10,000,000.
"Money Market Absolute Rate" has the meaning set
forth in Section 2.3(d).
"Money Market Absolute Rate Loan" means a loan to be made by a
Bank pursuant to an Absolute Rate Auction.
"Money Market Lending Office" means, as to each Bank, its
Domestic Lending Office or such other office, branch or affiliate of such Bank
as it may hereafter designate as its Money Market Lending Office by notice to
the Borrower and the Agent; provided that any Bank may from time to time by
notice to the Borrower and the Agent designate separate Money Market Lending
Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market
Absolute Rate Loans, on the other hand, in which case all references herein to
the Money Market Lending Office of such Bank shall be deemed to refer to either
or both of such offices, as the context may require.
"Money Market LIBOR Loan" means a loan to be made by a Bank
pursuant to a LIBOR Auction (including such a loan bearing interest at the Base
Rate pursuant to Section 8.1).
"Money Market Loan" means a Money Market LIBOR
Loan or a Money Market Absolute Rate Loan.
"Money Market Margin" has the meaning set forth in
Section 2.3(d)(ii)(C).
"Money Market Quote" means an offer by a Bank to make a Money
Market Loan in accordance with Section 2.3.
"Multiemployer Plan" means, at any time, an employee pension
benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any
member of the ERISA Group is then making or accruing an obligation to make
contributions or has within the preceding five plan years made contributions,
including for these purposes any Person which ceased to be a member of the ERISA
Group during such five year period.
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"NAIC" means the National Association of Insurance
Commissioners and any successor Person thereto.
"Net Proceeds", with respect to the Initial Public Offering,
means the actual proceeds to the Borrower therefrom (after deducting, inter
alia, all underwriting discount and offering expenses) less all mandatory cash
payments to be made pursuant to Section 7.2(d) of the Plan of Demutualization.
"Non-Admitted Assets" means, with respect to any Regulated
Entity, assets which are not Admitted Assets.
"Notes" means promissory notes of the Borrower, substantially
in the form of Exhibit A hereto, evidencing the Borrower's obligation to repay
the Loans, and "Note" means any one of such promissory notes issued hereunder.
"Notice of Borrowing" means a Notice of Committed Borrowing
(as defined in Section 2.2) or a Notice of Money Market Borrowing (as defined in
Section 2.3(f).
"Notice of Interest Rate Election" has the meaning set forth
in Section 2.7.
"Parent" means, with respect to any Bank, any
Person controlling such Bank.
"Participant" has the meaning set forth in Section 9.6(b).
"PBGC" means the Pension Benefit Guaranty
Corporation or any entity succeeding to any or all of its
functions under ERISA.
"Person" means an individual, a corporation, a limited
liability company, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
"Plan" means, at any time, an employee pension benefit plan
(other than a Multiemployer Plan) which is covered by Title IV of ERISA or
subject to the minimum funding standards under Section 412 of the Internal
Revenue Code and either (i) is maintained, or contributed to, by any member of
the ERISA Group for employees of any member of the ERISA Group or (ii) has at
any time within the preceding five years been maintained, or contributed to, by
any Person which was at such time a member of the ERISA Group for
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employees of any Person which was at such time a member of
the ERISA Group.
"Plan of Demutualization" means the Amended and Restated Plan
of Demutualization of Blue Cross and Blue Shield of Virginia, dated as of May
31, 1996 and as amended as of October 31, 1996.
"Pricing Schedule" means the Pricing Schedule
attached hereto.
"Prime Rate" means the rate of interest publicly announced by
Morgan Guaranty Trust Company of New York in New York City from time to time as
its Prime Rate.
"Quarterly Payment Dates" means each March 31, June 30,
September 30 and December 31.
"Reference Banks" means the CD Reference Banks or the
Euro-Dollar Reference Banks, as the context may require, and "Reference Bank"
means any one of such Reference Banks.
"Regulated Entity" means a Subsidiary subject to regulation
under the insurance laws of any state of the United States.
"Regulation U" means Regulation U of the Board of Governors of
the Federal Reserve System, as in effect from time to time.
"Required Banks" means, at any time, Banks having at least a
majority of the aggregate amount of the Commitments or, if the Commitments shall
have terminated, holding at least a majority of the aggregate unpaid principal
amount of the Loans.
"Restricted Payment" means (i) any dividend or other
distribution on any shares of the Borrower's capital stock (except dividends
payable solely in shares of its capital stock other than mandatorily redeemable
preferred stock) or (ii) any payment on account of the purchase, redemption,
retirement or acquisition of (a) any shares of the Borrower's capital stock or
(b) any option, warrant or other right to acquire shares of the Borrower's
capital stock (but not including payments of principal, premium (if any) or
interest made pursuant to the terms of convertible debt securities prior to
conversion); provided that the Commonwealth Payment shall not be deemed a
Restricted Payment.
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"Revolving Credit Period" means the period from and including
the Effective Date to but not including the Termination Date.
"Risk-Based Capital Act" means the Risk-Based Capital (RBC)
For Insurers Model Act in the form attached as Annex I hereto and as modified
from time to time by the NAIC.
"SEC" means the Securities and Exchange Commission.
"Subsidiary" means, as to any Person, any corporation or other
entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by such Person.
Unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower.
"Termination Date" means February 5, 2002, or, if such day is
not a Euro-Dollar Business Day, the next succeeding Euro-Dollar Business Day
unless such Euro-Dollar Business Day falls in another calendar month, in which
case the Termination Date shall be the next preceding Euro-Dollar Business Day.
"Trigon Insurance" means Trigon Insurance Company, a wholly
owned Subsidiary of the Borrower.
"Unfunded Liabilities" means, with respect to any Plan at any
time, the amount (if any) by which (i) the value of all benefit liabilities
under such Plan, determined on a plan termination basis using the assumptions
prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the
fair market value of all Plan assets allocable to such liabilities under Title
IV of ERISA (excluding any accrued but unpaid contributions), all determined as
of the then most recent valuation date for such Plan, but only to the extent
that such excess represents a potential liability of a member of the ERISA Group
to the PBGC or any other Person under Title IV of ERISA.
"United States" means the United States of America.
SECTION 1.2. Accounting Terms and Determinations. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
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accordance with GAAP; provided that, if the Borrower notifies the Agent that the
Borrower wishes to amend any covenant in Article 5 or the definition of any term
used therein to eliminate the effect of any change in GAAP on the operation of
such covenant (or if the Agent notifies the Borrower that the Required Banks
wish to amend Article 5 or any such definition for such purpose), then the
Borrower's compliance with such covenant shall be determined on the basis of
GAAP in effect immediately before the relevant change in GAAP became effective,
either until such notice is withdrawn by the Person delivering such notice or
such covenant or definition is amended in a manner satisfactory to the Borrower
and the Required Banks.
SECTION 1.3. Types of Borrowings. The term "Borrowing" denotes
the aggregation of Loans to be made to the Borrower by one or more Banks
pursuant to Article 2 on the same day, all of which Loans are of the same type
(subject to Article 8) and, except in the case of Base Rate Loans, have the same
initial Interest Period. Borrowings are classified for purposes hereof either
(i) by reference to the pricing of Loans comprising such Borrowing (e.g., a
"Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or (ii)
by reference to the provisions of Article 2 under which participation therein is
determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.1 in
which all Banks participate in proportion to their Commitments, while a "Money
Market Borrowing" is a Borrowing under Section 2.3 in which one or more Banks
participate on the basis of their bids).
ARTICLE 2
THE CREDITS
SECTION 2.1. Commitments to Lend. Each Bank severally agrees,
on the terms and conditions set forth in this Agreement, to make loans to the
Borrower pursuant to this Section from time to time during the Revolving Credit
Period; provided that, immediately after each such loan is made, the aggregate
outstanding principal amount of all Committed Loans by such Bank shall not
exceed its Commitment. Each Borrowing under this Section shall be in an
aggregate principal amount of $10,000,000 or any larger multiple of $1,000,000
(except that any such Borrowing may be in the aggregate amount available in
accordance with Section 3.2) and shall be made from the several Banks ratably in
proportion to their respective Commitments. Within the foregoing limits, the
Borrower may borrow under
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this Section, prepay Loans to the extent permitted by Section 2.10 and reborrow
at any time during the Revolving Credit Period under this Section.
SECTION 2.2. Notice of Committed Borrowing. The Borrower shall
give the Agent notice (a "Notice of Committed Borrowing") not later than 10:30
A.M. (New York City time) on (x) the date of each Base Rate Borrowing, (y) the
second Domestic Business Day before each CD Borrowing and (z) the third
Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying:
(i) the date of such Borrowing, which shall be a Domestic
Business Day in the case of a Domestic Borrowing or a Euro-Dollar
Business Day in the case of a Euro-Dollar Borrowing;
(ii) the aggregate amount of such Borrowing;
(iii) whether the Loans comprising such Borrowing are to bear
interest initially at the Base Rate, a CD Rate or a Euro-Dollar Rate;
and
(iv) in the case of a CD Borrowing or a Euro- Dollar
Borrowing, the duration of the initial Interest Period applicable
thereto, subject to the provisions of the definition of Interest
Period.
SECTION 2.3. Money Market Borrowings. (a) The Money Market
Option. In addition to Committed Borrowings pursuant to Section 2.1, the
Borrower may, as set forth in this Section, request the Banks to make offers to
make Money Market Loans to the Borrower from time to time during the Revolving
Credit Period. The Banks may, but shall have no obligation to, make such offers
and the Borrower may, but shall have no obligation to, accept any such offers in
the manner set forth in this Section.
(b) Money Market Quote Request. When the Borrower wishes to
request offers to make Money Market Loans under this Section, it shall transmit
to the Agent by telex or facsimile a Money Market Quote Request substantially in
the form of Exhibit B hereto so as to be received not later than 10:30 A.M. (New
York City time) on (x) the fifth Euro-Dollar Business Day before the date of
Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic
Business Day next preceding the date of Borrowing proposed therein, in the case
of an Absolute Rate Auction (or, in either case, such other time or date as the
Borrower and the Agent shall have mutually agreed and shall have notified to the
Banks not later than the date of the Money
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Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for
which such change is to be effective) specifying:
(i) the proposed date of Borrowing, which shall be a
Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic
Business Day in the case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be
$10,000,000 or a larger multiple of $1,000,000,
(iii) the duration of the Interest Period applicable thereto,
subject to the provisions of the definition of Interest Period, and
(iv) whether the Money Market Quotes requested are to set
forth a Money Market Margin or a Money Market Absolute Rate.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request. No Money Market Quote
Request shall be given within five Euro-Dollar Business Days (or such other
number of days as the Borrower and the Agent may agree) of any other Money
Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly after
receiving a Money Market Quote Request, the Agent shall send to the Banks by
telex or facsimile an Invitation for Money Market Quotes substantially in the
form of Exhibit C hereto, which shall constitute an invitation by the Borrower
to each Bank to submit Money Market Quotes offering to make the Money Market
Loans to which such Money Market Quote Request relates in accordance with this
Section.
(d) Submission and Contents of Money Market Quotes. (i) Each
Bank may submit a Money Market Quote containing an offer or offers to make Money
Market Loans in response to any Invitation for Money Market Quotes. Each Money
Market Quote must comply with the requirements of this subsection (d) and must
be submitted to the Agent by telex or facsimile at its address specified in or
pursuant to Section 9.1 not later than (x) 2:00 P.M. (New York City time) on the
fourth Euro-Dollar Business Day before the proposed date of Borrowing, in the
case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed
date of Borrowing, in the case of an Absolute Rate Auction (or, in either case,
such other time or date as the Borrower and the Agent shall have mutually agreed
and shall have notified
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to the Banks not later than the date of the Money Market Quote Request for the
first LIBOR Auction or Absolute Rate Auction for which such change is to be
effective); provided that Money Market Quotes submitted by the Agent (or any
affiliate of the Agent) in the capacity of a Bank may be submitted, and may only
be submitted, if the Agent or such affiliate notifies the Borrower of the terms
of the offer or offers contained therein not later than (x) one hour before the
deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes
before the deadline for the other Banks, in the case of an Absolute Rate
Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall not
be revocable except with the written consent of the Agent given on the
instructions of the Borrower.
(ii) Each Money Market Quote shall be substantially in the
form of Exhibit D hereto and shall in any case specify:
(A) the proposed date of Borrowing,
(B) the principal amount of the Money Market Loan for which
each such offer is being made, which principal amount (w) may be
greater than or less than the Commitment of the quoting Bank, (x) must
be $5,000,000 or a larger multiple of $1,000,000, (y) may not exceed
the principal amount of Money Market Loans for which offers were
requested and (z) may be subject to an aggregate limitation as to the
principal amount of Money Market Loans for which offers being made by
such quoting Bank may be accepted,
(C) in the case of a LIBOR Auction, the margin above or below
the applicable London Interbank Offered Rate (the "Money Market
Margin") offered for each such Money Market Loan, expressed as a
percentage (specified to the nearest 1/10,000 of 1%) to be added to or
subtracted from such base rate,
(D) in the case of an Absolute Rate Auction, the rate of
interest per annum (specified to the nearest 1/10,000 of 1%) (the
"Money Market Absolute Rate") offered for each such Money Market Loan,
and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
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(iii) Any Money Market Quote shall be disregarded if it:
(A) is not substantially in conformity with Exhibit D hereto
or does not specify all of the information required by subsection
(d)(ii) above;
(B) contains qualifying, conditional or similar language;
(C) proposes terms other than or in addition to those set
forth in the applicable Invitation for Money Market Quotes; or
(D) arrives after the time set forth in subsection (d)(i).
(e) Notice to Borrower. The Agent shall promptly notify the
Borrower of the terms of (i) any Money Market Quote submitted by a Bank that is
in accordance with subsection (d) and (ii) any Money Market Quote that amends,
modifies or is otherwise inconsistent with a previous Money Market Quote
submitted by such Bank with respect to the same Money Market Quote Request. Any
such subsequent Money Market Quote shall be disregarded by the Agent unless such
subsequent Money Market Quote is submitted solely to correct a manifest error in
such former Money Market Quote. The Agent's notice to the Borrower shall specify
(A) the aggregate principal amount of Money Market Loans for which offers have
been received for each Interest Period specified in the related Money Market
Quote Request, (B) the respective principal amounts and Money Market Margins or
Money Market Absolute Rates, as the case may be, so offered and (C) if
applicable, limitations on the aggregate principal amount of Money Market Loans
for which offers in any single Money Market Quote may be accepted.
(f) Acceptance and Notice by Borrower. Not later than 10:30
A.M. (New York City time) on (x) the third Euro-Dollar Business Day before the
proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed
date of Borrowing, in the case of an Absolute Rate Auction (or, in either case,
such other time or date as the Borrower and the Agent shall have mutually agreed
and shall have notified to the Banks not later than the date of the Money Market
Quote Request for the first LIBOR Auction or Absolute Rate Auction for which
such change is to be effective), the Borrower shall notify the Agent of its
acceptance or non-acceptance of the offers so notified to it pursuant to
subsection (e). In the case of acceptance, such notice (a "Notice of Money
Market Borrowing") shall specify
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the aggregate principal amount of offers for each Interest Period that are
accepted. The Borrower may accept any Money Market Quote in whole or in part;
provided that:
(i) the aggregate principal amount of each Money Market
Borrowing may not exceed the applicable amount set forth in the related
Money Market Quote Request;
(ii) the principal amount of each Money Market Borrowing must be
$10,000,000 or a larger multiple of $1,000,000;
(iii) acceptance of offers may only be made on the basis of
ascending Money Market Margins or Money Market Absolute Rates, as the
case may be; and
(iv) the Borrower may not accept any offer that is described in
subsection (d)(iii) or that otherwise fails to comply with the
requirements of this Agreement.
(g) Allocation by Agent. If offers are made by two or more
Banks with the same Money Market Margins or Money Market Absolute Rates, as the
case may be, for a greater aggregate principal amount than the amount in respect
of which such offers are accepted for the related Interest Period, the principal
amount of Money Market Loans in respect of which such offers are accepted shall
be allocated by the Agent among such Banks as nearly as possible (in multiples
of $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate
principal amounts of such offers. Determinations by the Agent of the amounts of
Money Market Loans shall be conclusive in the absence of manifest error.
SECTION 2.4. Notice to Banks; Funding of Loans. (a) Promptly
after receiving a Notice of Borrowing, the Agent shall notify each Bank of the
contents thereof and of such Bank's share (if any) of such Borrowing and such
Notice of Borrowing shall not thereafter be revocable by the Borrower.
(b) Not later than 12:00 Noon (New York City time) on the date
of each Borrowing, each Bank participating therein shall make available its
share of such Borrowing, in Federal or other funds immediately available in New
York City, to the Agent at its address specified in or pursuant to Section 9.1.
Unless the Agent determines that any applicable condition specified in Article
has not been satisfied, the Agent will make the funds so received from
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the Banks available to the Borrower at the Agent's aforesaid address.
(c) Unless the Agent shall have received notice from a Bank
before the date of any Borrowing that such Bank will not make available to the
Agent such Bank's share of such Borrowing, the Agent may assume that such Bank
has made such share available to the Agent on the date of such Borrowing in
accordance with subsection (b) of this Section and the Agent may, in reliance
upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such share available to the Agent, such Bank and the Borrower severally agree to
repay to the Agent forthwith on demand such corresponding amount together with
interest thereon, for each day from the date such amount is made available to
the Borrower until the date such amount is repaid to the Agent, at (i) in the
case of the Borrower, a rate per annum equal to the interest rate applicable
thereto pursuant to Section 2.6 and (ii) in the case of such Bank, the Federal
Funds Rate. If such Bank shall repay to the Agent such corresponding amount,
such amount so repaid shall constitute such Bank's Loan included in such
Borrowing for purposes of this Agreement.
SECTION 2.5. Maturity of Loans. (a) Each Committed Loan
shall mature, and the principal amount thereof shall be due and payable
(together with interest accrued thereon), on the Termination Date.
(b) Each Money Market Loan included in any Money Market
Borrowing shall mature, and the principal amount thereof shall be due and
payable (together with interest accrued thereon), on the last day of the
Interest Period applicable to such Borrowing.
SECTION 2.6. Interest Rates. (a) Each Base Rate Loan shall
bear interest on the outstanding principal amount thereof, for each day from the
date such Loan is made until it becomes due, at a rate per annum equal to the
Base Rate for such day. Such interest shall be payable in arrears on each
Quarterly Payment Date and, with respect to the principal amount of any Base
Rate Loan converted to a CD Loan or a Euro-Dollar Loan, on the date such amount
is so converted. Any overdue principal of or interest on any Base Rate Loan
shall bear interest, payable on demand, for each day until paid at a rate per
annum equal to the sum of 2% plus the Base Rate for such day.
(b) Each CD Loan shall bear interest on the outstanding
principal amount thereof, for each day during
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each Interest Period applicable thereto, at a rate per annum equal to the sum of
the CD Margin for such day plus the Adjusted CD Rate applicable to such Interest
Period; provided that if any CD Loan shall, as a result of clause (2)(b) of the
definition of Interest Period, have an Interest Period of less than 30 days,
such CD Loan shall bear interest for each day during such Interest Period at the
Base Rate for such day. Such interest shall be payable for each Interest Period
on the last day thereof and, if such Interest Period is longer than 90 days, at
intervals of 90 days after the first day thereof. Any overdue principal of or
interest on any CD Loan shall bear interest, payable on demand, for each day
until paid at a rate per annum equal to the sum of 2% plus the higher of (i) the
Base Rate for such day and (ii) the sum of the CD Margin plus the Adjusted CD
Rate applicable to such Loan on the day before such payment was due.
The "Adjusted CD Rate" applicable to any Interest Period means
a rate per annum determined pursuant to the following formula:
[ CDBR ]*
ACDR = [ ---------- ] + AR
[ 1.00 - DRP ]
ACDR = Adjusted CD Rate
CDBR = CD Base Rate
DRP = Domestic Reserve Percentage
AR = Assessment Rate
----------
* The amount in brackets being rounded upward, if necessary, to the
next higher 1/100 of 1%
The "CD Base Rate" applicable to any Interest Period is the
rate of interest determined by the Agent to be the average (rounded upward, if
necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid
at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the
first day of such Interest Period by two or more New York certificate of deposit
dealers of recognized standing for the purchase at face value from each CD
Reference Bank of its certificates of deposit in an amount comparable to the
principal amount of the CD Loan of such CD Reference Bank to which such Interest
Period applies and having a maturity comparable to such Interest Period.
"Domestic Reserve Percentage" means for any day that
percentage (expressed as a decimal) which is in effect
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on such day, as prescribed by the Board of Governors of the Federal Reserve
System (or any successor) for determining the maximum reserve requirement
(including without limitation any basic, supplemental or emergency reserves) for
a member bank of the Federal Reserve System in New York City with deposits
exceeding five billion dollars in respect of new non-personal time deposits in
dollars in New York City having a maturity comparable to the related Interest
Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be
adjusted automatically on and as of the effective date of any change in the
Domestic Reserve Percentage.
"Assessment Rate" means for any day the annual assessment rate
in effect on such day which is payable by a member of the Bank Insurance Fund
classified as adequately capitalized and within supervisory subgroup "A" (or a
comparable successor assessment risk classification) within the meaning of 12
C.F.R. ss. 327.4(a) (or any successor provision) to the Federal Deposit
Insurance Corporation (or any successor) for such Corporation's (or such
successor's) insuring time deposits at offices of such institution in the United
States. The Adjusted CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Assessment Rate.
(c) Each Euro-Dollar Loan shall bear interest on the
outstanding principal amount thereof, for each day during each Interest Period
applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar
Margin for such day plus the London Interbank Offered Rate applicable to such
Interest Period. Such interest shall be payable for each Interest Period on the
last day thereof and, if such Interest Period is longer than three months, at
intervals of three months after the first day thereof.
The "London Interbank Offered Rate" applicable to any Interest
Period means the average (rounded upward, if necessary, to the next higher 1/16
of 1%) of the respective rates per annum at which deposits in dollars are
offered to each of the Euro-Dollar Reference Banks in the London interbank
market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days
before the first day of such Interest Period in an amount approximately equal to
the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank
to which such Interest Period is to apply and for a period of time comparable to
such Interest Period.
(d) Any overdue principal of or interest on any Euro-Dollar
Loan shall bear interest, payable on demand, for each day until paid at a rate
per annum equal to the higher
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of (i) the sum of 2% plus the Euro-Dollar Margin for such day plus the London
Interbank Offered Rate applicable to such Loan on the day before such payment
was due and (ii) the sum of 2% plus the Euro-Dollar Margin for such day plus the
average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the
respective rates per annum at which one day (or, if such amount due remains
unpaid more than three Euro-Dollar Business Days, then for such other period of
time not longer than three months as the Agent may select) deposits in dollars
in an amount approximately equal to such overdue payment due to each of the
Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in
the London interbank market for the applicable period determined as provided
above (or, if the circumstances described in clause (a) or (b) of Section shall
exist, at a rate per annum equal to the sum of 2% plus the Base Rate for such
day).
(e) Subject to Section 8.1, each Money Market LIBOR Loan shall
bear interest on the outstanding principal amount thereof, for the Interest
Period applicable thereto, at a rate per annum equal to the sum of the London
Interbank Offered Rate for such Interest Period (determined in accordance with
Section 2.6(c) as if the related Money Market LIBOR Borrowing were a Committed
Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the
Bank making such Loan. Each Money Market Absolute Rate Loan shall bear interest
on the outstanding principal amount thereof, for the Interest Period applicable
thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by
the Bank making such Loan. Such interest shall be payable for each Interest
Period on the last day thereof and, if such Interest Period is longer than three
months, at intervals of three months after the first day thereof. Any overdue
principal of or interest on any Money Market Loan shall bear interest, payable
on demand, for each day until paid at a rate per annum equal to the sum of 2%
plus the Base Rate for such day.
(f) The Agent shall determine each interest rate applicable to
the Loans hereunder. The Agent shall promptly notify the Borrower and the
participating Banks of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of manifest error.
(g) Each Reference Bank agrees to use its best efforts to
furnish quotations to the Agent as contemplated by this Section. If any
Reference Bank does not furnish a timely quotation, the Agent shall determine
the relevant interest rate on the basis of the quotation or quotations furnished
by the remaining Reference Bank or Banks or, if
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none of such quotations is available on a timely basis, the provisions of
Section 8.1 shall apply.
SECTION 2.7. Method of Electing Interest Rates. (a) The Loans
included in each Committed Borrowing shall bear interest initially at the type
of rate specified by the Borrower in the applicable Notice of Committed
Borrowing. Thereafter, the Borrower may from time to time elect to change or
continue the type of interest rate borne by each Group of Loans (subject to
subsection (d) of this Section and the provisions of Article 8), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may elect
to convert such Loans to CD Loans as of any Domestic Business Day or to
Euro-Dollar Loans as of any Euro-Dollar Business Day;
(ii) if such Loans are CD Loans, the Borrower may elect to
convert such Loans to Base Rate Loans or Euro-Dollar Loans or elect to
continue such Loans as CD Loans for an additional Interest Period,
subject to Section 2.12 if any such conversion is effective on any day
other than the last day of an Interest Period applicable to such Loans;
and
(iii) if such Loans are Euro-Dollar Loans, the Borrower may
elect to convert such Loans to Base Rate Loans or CD Loans or elect to
continue such Loans as Euro-Dollar Loans for an additional Interest
Period, subject to Section 2.12 if any such conversion is effective on
any day other than the last day of an Interest Period applicable to
such Loans.
Each such election shall be made by delivering a notice (a "Notice of Interest
Rate Election") to the Agent not later than 10:30 A.M. (New York City time) on
the third Euro-Dollar Business Day before the conversion or continuation
selected in such notice is to be effective (unless the relevant Loans are to be
converted from Domestic Loans of one type to Domestic Loans of the other type or
are CD Loans to be continued as CD Loans for an additional Interest Period, in
which case such notice shall be delivered to the Agent not later than 10:30 A.M.
(New York City time) on the second Domestic Business Day before such conversion
or continuation is to be effective). A Notice of Interest Rate Election may, if
it so specifies, apply to only a portion of the aggregate principal amount of
the relevant Group of Loans; provided that (i) such portion is allocated ratably
among the Loans comprising such Group and (ii) the portion to which such Notice
applies, and the remaining portion to which it does not apply, are each at
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least $10,000,000 (unless such portion is comprised of Base Rate Loans). If no
such notice is timely received before the end of an Interest Period for any
Group of CD Loans or Euro-Dollar Loans, the Borrower shall be deemed to have
elected that such Group of Loans be converted to Base Rate Loans at the end of
such Interest Period.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such
notice applies;
(ii) the date on which the conversion or continuation selected in
such notice is to be effective, which shall comply with the applicable
clause of subsection (a) above;
(iii) if the Loans comprising such Group are to be converted, the
new type of Loans and, if the Loans resulting from such conversion are
to be CD Loans or Euro-Dollar Loans, the duration of the next
succeeding Interest Period applicable thereto; and
(iv) if such Loans are to be continued as CD Loans or Euro-Dollar
Loans for an additional Interest Period, the duration of such
additional Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Promptly after receiving a Notice of Interest Rate
Election from the Borrower pursuant to subsection (a) above, the Agent shall
notify each Bank of the contents thereof and such notice shall not thereafter be
revocable by the Borrower.
(d) The Borrower shall not be entitled to elect to convert any
Committed Loans to, or continue any Committed Loans for an additional Interest
Period as, CD Loans or Euro-Dollar Loans if (i) the aggregate principal amounts
of any Group of CD Loans or Euro-Dollar Loans created or continued as a result
of such election would be less than $10,000,000 or (ii) a Default shall have
occurred and be continuing when the Borrower delivers notice of such election to
the Agent.
SECTION 2.8. Facility Fee. (a) The Borrower shall pay to
the Agent, for the account of the Banks, a facility fee at the Facility Fee Rate
(determined daily in
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accordance with the Pricing Schedule). Such facility fee shall accrue (i) from
and including the Effective Date to but excluding the date on which the
Commitments terminate in their entirety, on the daily aggregate amount of the
Commitments (whether used or unused) and (ii) from and including such date of
termination to but excluding the date on which the Loans shall be repaid in
their entirety, on the daily aggregate outstanding principal amount of the
Loans. Such facility fee shall be allocated among the Banks ratably in
proportion to their Commitments; provided that any facility fee accruing after
the Commitments terminate in their entirety shall be allocated among the Banks
ratably in proportion to the unpaid principal amounts of their respective Loans.
(b) Fees accrued under subsection (a) of this Section shall be
payable quarterly in arrears on each Quarterly Payment Date and on the date on
which the Commitments terminate in their entirety (and, if later, the date on
which the Loans shall be repaid in their entirety).
SECTION 2.9. Termination or Reduction of Commitments. (a) The
Borrower may, upon at least three Domestic Business Days' notice to the Agent,
(i) terminate the Commitments at any time, if no Loans are outstanding at such
time, or (ii) ratably reduce from time to time by an aggregate amount of at
least $10,000,000, the aggregate amount of the Commitments in excess of the
aggregate outstanding principal amount of the Loans. Promptly after receiving a
notice pursuant to this subsection, the Agent shall notify each Bank of the
contents thereof.
(b) Unless previously terminated, the Commitments shall
terminate in their entirety on the Termination Date.
SECTION 2.10. Optional Prepayments. (a) Subject in the case of
Fixed Rate Loans to Section 2.12, the Borrower may, upon at least one Domestic
Business Day's notice to the Agent, prepay any Group of Domestic Loans (or any
Money Market Borrowing bearing interest at the Base Rate pursuant to Section
8.1), or upon at least three Euro-Dollar Business Days' notice to the Agent,
prepay any Group of Euro-Dollar Loans, in each case in whole at any time, or
from time to time in part in amounts aggregating $10,000,000 by paying the
principal amount to be prepaid together with interest accrued thereon to the
date of prepayment. Each such optional prepayment shall be applied to prepay
ratably the Loans of the several Banks included in such Group of Loans (or such
Money Market Borrowing).
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(b) Except as provided in subsection (a) above, the Borrower
may not prepay all or any portion of the principal amount of any Money Market
Loan before the maturity thereof.
(c) Promptly after receiving a notice of prepayment pursuant
to this Section, the Agent shall notify each Bank of the contents thereof and of
such Bank's ratable share (if any) of such prepayment, and such notice shall not
thereafter be revocable by the Borrower.
SECTION 2.11. General Provisions as to Payments. (a) The
Borrower shall make each payment of principal of, and interest on, the Loans and
of fees hereunder not later than 12:00 Noon (New York City time) on the date
when due, in Federal or other funds immediately available in New York City, to
the Agent at its address specified in or pursuant to Section 9.1. The Agent will
promptly distribute to each Bank its ratable share of each such payment received
by the Agent for the account of the Banks. Whenever any payment of principal of,
or interest on, the Domestic Loans or of fees shall be due on a day which is not
a Domestic Business Day, the date for payment thereof shall be extended to the
next succeeding Domestic Business Day. Whenever any payment of principal of, or
interest on, the Euro-Dollar Loans shall be due on a day which is not a
Euro-Dollar Business Day, the date for payment thereof shall be extended to the
next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day
falls in another calendar month, in which case the date for payment thereof
shall be the next preceding Euro-Dollar Business Day. Whenever any payment of
principal of, or interest on, the Money Market Loans shall be due on a day which
is not a Euro-Dollar Business Day, the date for payment thereof shall be
extended to the next succeeding Euro-Dollar Business Day. If the date for any
payment of principal is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.
(b) Unless the Borrower notifies the Agent before the date on
which any payment is due to the Banks hereunder that the Borrower will not make
such payment in full, the Agent may assume that the Borrower has made such
payment in full to the Agent on such date and the Agent may, in reliance on such
assumption, cause to be distributed to each Bank on such due date an amount
equal to the amount then due such Bank. If and to the extent that the Borrower
shall not have so made such payment, each Bank shall repay to the Agent
forthwith on demand such amount distributed to such Bank together with interest
thereon, for each day from the date such amount is distributed to such Bank
until the date such Bank repays such amount to the Agent, at the Federal Funds
Rate.
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SECTION 2.12. Funding Losses. If the Borrower makes any
payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan
is converted to a different type of Loan (whether such payment or conversion is
pursuant to Article 2, 6 or 8 or otherwise, but excluding any prepayment
required pursuant to Section 2.4(c)) on any day other than the last day of an
Interest Period applicable thereto, or the last day of an applicable period
fixed pursuant to Section 2.6(d), or if the Borrower fails to borrow, prepay,
convert or continue any Fixed Rate Loans after notice has been given to any Bank
in accordance with Section 2.4(a), 2.7(c) or 2.10(c), the Borrower shall
reimburse each Bank within 15 days after demand for any resulting loss or
expense incurred by it (or by an existing or prospective Participant in the
related Loan), including (without limitation) any loss incurred in obtaining,
liquidating or employing deposits from third parties, but excluding loss of
margin for the period after such payment or conversion or failure to borrow,
prepay, convert or continue; provided that such Bank shall have delivered to the
Borrower a certificate as to the amount of such loss or expense, which
certificate shall be conclusive in the absence of manifest error.
SECTION 2.13. Computation of Interest and Fees. Interest based
on the Prime Rate hereunder shall be computed on the basis of a year of 365 days
(or 366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
fees shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
SECTION 2.14. Notes. (a) The Borrower's obligation to repay
the Loans of each Bank shall be evidenced by a single Note payable to the order
of such Bank for the account of its Applicable Lending Office.
(b) Each Bank may, by notice to the Borrower and the Agent,
request that the Borrower's obligation to repay such Bank's Loans of a
particular type be evidenced by a separate Note. Each such Note shall be in
substantially the form of Exhibit A hereto with appropriate modifications to
reflect the fact that it relates solely to Loans of the relevant type. Each
reference in this Agreement to the "Note" of such Bank shall be deemed to refer
to and include any or all of such Notes, as the context may require.
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(c) Promptly after it receives each Bank's Note pursuant to
Section 3.1(a), the Agent shall forward such Note to such Bank. Each Bank shall
record the date, amount and type of each Loan made by it and the date and amount
of each payment of principal made by the Borrower with respect thereto, and may,
if such Bank so elects in connection with any transfer or enforcement of its
Note, endorse on the schedule forming a part thereof appropriate notations to
evidence the foregoing information with respect to each such Loan then
outstanding; provided that a Bank's failure to make any such recordation or
endorsement shall not affect the Borrower's obligations hereunder or under the
Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse
its Note and to attach to and make a part of its Note a continuation of any such
schedule as and when required.
SECTION 2.15. Regulation D Compensation. Each Bank may require
the Borrower to pay, contemporaneously with each payment of interest on the
Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such
Bank at a rate per annum determined by such Bank up to but not exceeding the
excess of (i) (A) the applicable London Interbank Offered Rate divided by (B)
one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London
Interbank Offered Rate. Any Bank wishing to require payment of such additional
interest (x) shall so notify the Borrower and the Agent, in which case such
additional interest on the Euro-Dollar Loans of such Bank shall be payable to
such Bank at the place indicated in such notice with respect to each Interest
Period commencing at least three Euro-Dollar Business Days after such Bank gives
such notice and (y) shall notify the Borrower at least five Euro-Dollar Business
Days before each date on which interest
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is payable on the Euro-Dollar Loans of the amount then due it under this
Section.
SECTION 2.16. Increased Commitments; Additional Banks. (a)
Subsequent to the Effective Date, the Borrower may, upon at least 30 days'
notice to the Agent (which shall promptly provide a copy of such notice to the
Banks), propose to increase the aggregate amount of the Commitments by an amount
not to exceed $50,000,000 (the amount of any such increase, the "Increased
Commitments"). Each Bank party to this Agreement at such time shall have the
right (but no obligation), for a period of 15 days following receipt of such
notice, to elect by notice to the Borrower and the Agent to increase its
Commitment by a principal amount which bears the same ratio to the Increased
Commitments as its then Commitment bears to the aggregate Commitments then
existing.
(b) If any Bank party to this Agreement shall not elect to
increase its Commitment pursuant to subsection (a) of this Section, the Borrower
may designate another bank or other banks (which may be, but need not be, one or
more of the existing Banks) which at the time agree to (i) in the case of any
such bank that is an existing Bank, increase its Commitment and (ii) in the case
of any other such bank (an "Additional Bank"), become a party to this Agreement.
The sum of the increases in the Commitments of the existing Banks pursuant to
this subsection (b) plus the Commitments of the Additional Banks shall not in
the aggregate exceed the unsubscribed amount of the Increased Commitments.
(c) An increase in the aggregate amount of the Commitments
pursuant to this Section 2.16 shall become effective upon the receipt by the
Agent of an agreement in form and substance satisfactory to the Agent signed by
the Borrower, by each Additional Bank and by each other Bank whose Commitment is
to be increased, setting forth the new Commitments of such Banks and setting
forth the agreement of each Additional Bank to become a party to this Agreement
and to be bound by all the terms and provisions hereof, together with such
evidence of appropriate corporate authorization on the part of the Borrower with
respect to the Increased Commitments and such opinions of counsel for the
Borrower with respect to the Increased Commitments as the Agent may reasonably
request.
ARTICLE 3
CONDITIONS
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SECTION 3.1. Closing. The closing hereunder shall occur on
the date on which each of the following conditions shall have been satisfied:
(a) receipt by the Agent of a duly executed Note for the
account of each Bank dated on or before the Closing Date and complying
with the provisions of Section 2.14;
(b) receipt by the Agent of an opinion of McGuire, Woods,
Battle & Boothe, L.L.P., counsel for the Borrower, dated the Closing
Date and substantially in the form of Exhibit E-1 hereto and covering
such additional matters relating to the transactions contemplated
hereby or by the Plan of Demutualization as the Required Banks may
reasonably request;
(c) receipt by the Agent of an opinion of Davis Polk &
Wardwell, special counsel for the Agent, dated the Closing Date and
substantially in the form of Exhibit F hereto and covering such
additional matters relating to the transactions contemplated hereby or
by the Plan of Demutualization as the Required Banks may reasonably
request;
(d) receipt by the Agent of a letter from McGuire, Woods,
Battle & Boothe, L.L.P., dated the Closing Date and substantially in
the form of Exhibit E-2 hereto stating that a portion of the opinion
delivered by it pursuant to the underwriting agreement among the
Borrower, Blue Cross and Blue Shield of Virginia and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Alex. Brown & Sons Incorporated,
Dean Witter Reynolds Inc., Morgan Stanley & Co. Incorporated and Wheat,
First Securities, Inc., as underwriters, pursuant to which the Initial
Public Offering has been made) may be relied on by the Banks and the
Agent as if such opinion had been addressed to them;
(e) the Demutualization shall have been consummated in
accordance with the Plan of Demutualization and the Plan of
Demutualization shall not have been amended or otherwise modified since
October 31, 1996;
(f) the Initial Public Offering shall have been consummated in
accordance with the Plan of Demutualization and the Net Proceeds
therefrom shall be at least $100,000,000;
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(g) receipt by the Agent of a certificate from an authorized
officer of the Borrower to the effect set forth in clauses (e) and (f)
above; and
(h) receipt by the Agent of all documents the Agent may
reasonably request relating to the existence of the Borrower and its
Subsidiaries, the authority for and the validity of this Agreement and
the Notes, and any other matters relevant hereto or to the
Demutualization, all in form and substance satisfactory to the Agent.
Promptly after the Closing Date occurs, the Agent shall notify the Borrower and
the Banks thereof, and such notice shall be conclusive and binding on all
parties hereto.
SECTION 3.2. Borrowings. The obligation of any Bank to make
a Loan on the occasion of any Borrowing is subject to the satisfaction of the
following conditions:
(a) the fact that the Closing Date shall have occurred on or
before March 31, 1997;
(b) receipt by the Agent of a Notice of Borrowing as required
by Section 2.2 or 2.3, as the case may be;
(c) the fact that, immediately after such Borrowing, the
aggregate outstanding principal amount of the Loans will not exceed the
aggregate amount of the Commitments;
(d) the fact that, immediately before and after such
Borrowing, no Default shall have occurred and be continuing; and
(e) the fact that the representations and warranties of the
Borrower contained in this Agreement shall be true on and as of the
date of such Borrowing.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in clauses
(c), (d)
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and (e) of this Section and clauses (e) and (f) of Section 3.1.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
SECTION 4.1. Corporate Existence and Power. The Borrower is a
corporation duly incorporated, validly existing and in good standing under the
laws of the Commonwealth of Virginia, and has all powers and all governmental
licenses, consents, authorizations and approvals required to carry on its
business as now conducted.
SECTION 4.2. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by the Borrower of this
Agreement and the Notes are within the Borrower's powers, have been duly
authorized by all necessary action, require no action by or in respect of, or
filing with, any governmental body, agency or official (other than those set
forth in the Plan of Demutualization, each of which has been taken or made) and
do not contravene, or constitute a default under, any provision of applicable
law or regulation or of the Borrower's articles of incorporation or bylaws or of
any agreement, judgment, injunction, order, decree or other instrument binding
upon the Borrower or any Subsidiary or result in the creation or imposition of
any Lien on any asset of the Borrower or any Subsidiary.
SECTION 4.3. Binding Effect. This Agreement constitutes a
valid and binding agreement of the Borrower and each Note, when executed and
delivered in accordance with this Agreement, will constitute a valid and binding
obligation of the Borrower, in each case enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally and general principles of equity.
SECTION 4.4. Financial Information. (a) The consolidated
balance sheet of Blue Cross and Blue Shield of Virginia and its Consolidated
Subsidiaries as of December 31, 1995 and September 30, 1996 and the related
consolidated statements of operations, changes in surplus and cash flows for the
year ended December 31, 1995 and the nine months ended September 30, 1996,
reported on by KPMG Peat Marwick,
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LLP and set forth in the Borrower's Registration Statement, a copy of which has
been delivered to each of the Banks, fairly present, in conformity with GAAP,
the consolidated financial position of Blue Cross and Blue Shield of Virginia
and its Consolidated Subsidiaries as of such dates and their consolidated
results of operations, changes in surplus and cash flows for such year and
nine-month period.
(b) The unaudited pro forma consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries as of September 30, 1996 and the
related unaudited pro forma consolidated statements of operations for the year
ended December 31, 1995 and the nine-month period ended September 30, 1996, set
forth in the Borrower's Registration Statement, are complete and correct in all
material respects and, subject to the footnotes thereto, have been prepared on
the basis described therein and otherwise in conformity with GAAP applied on a
basis consistent with the financial statements referred to in subsection (a) of
this Section and show the consolidated financial position and results of
operations of the Borrower and its Consolidated Subsidiaries as if the
Demutualization had occurred as of September 30, 1996 for purposes of the
unaudited pro forma consolidated balance sheet and as of January 1, 1995 for
purposes of the unaudited pro forma consolidated statements of operations for
the year ended December 31, 1995 and the nine months ended September 30, 1996.
(c) The Annual Statement (Life and Accident and Health Form)
of Blue Cross and Blue Shield of Virginia as of December 31, 1995, in the form
submitted to the insurance department or other comparable regulatory authority
of the Commonwealth of Virginia, copies of which have been delivered to each of
the Banks, is a full and true statement, in all material respects, of all the
assets and liabilities and of the condition and affairs of Trigon Insurance as
of the date thereof, and of its income and deductions therefrom for the year
ended on that date, all in conformity with statutory accounting principles in
effect on the date thereof.
(d) Since September 30, 1996 there has been no material
adverse change in the business, financial position, results of operations or
prospects of the Borrower and its Consolidated Subsidiaries, considered as a
whole.
SECTION 4.5. Litigation. Except as disclosed in the
Borrower's Registration Statement, there is no action, suit or proceeding
pending against, or to the Borrower's knowledge threatened against or affecting,
the Borrower or any Subsidiary before any court or arbitrator or any
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governmental body, agency or official in which there is a reasonable possibility
of an adverse decision which could reasonably be expected to materially
adversely affect the business, consolidated financial position or consolidated
results of operations of the Borrower and its Consolidated Subsidiaries,
considered as a whole, or which in any manner draws into question the validity
or enforceability of this Agreement or the Notes or the legality or consummation
of the Demutualization.
SECTION 4.6. Compliance with Laws; ERISA. (a) The Borrower and
each Subsidiary of the Borrower is in compliance, in all material respects, with
all applicable laws, ordinances, rules, regulations and requirements of
governmental bodies, agencies and officials.
(b) Each member of the ERISA Group has fulfilled its
obligations under the minimum funding standards of ERISA and the Internal
Revenue Code with respect to each Plan and is in compliance in all material
respects with the presently applicable provisions of ERISA and the Internal
Revenue Code with respect to each Plan. No member of the ERISA Group has (i)
sought a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan, or made any amendment
to any Plan, which has resulted or could result in the imposition of a Lien or
the posting of a bond or other security under ERISA or the Internal Revenue Code
or (iii) incurred any liability under Title IV of ERISA other than a liability
to the PBGC for premiums under Section 4007 of ERISA.
SECTION 4.7. Environmental Matters. The Borrower has
reasonably concluded that the liabilities and costs associated with the effect
of Environmental Laws on the business, operations and properties of the Borrower
and its Subsidiaries, including the costs of complying with Environmental Laws,
are unlikely to have a Material Adverse Effect.
SECTION 4.8. Taxes. The Borrower and its Subsidiaries have
filed all United States Federal income tax returns and all other material tax
returns which are required to be filed by them and have paid all taxes due
pursuant to such returns or pursuant to any assessment received by the Borrower
or any Subsidiary. The charges, accruals and reserves on the books of the
Borrower and its Subsidiaries in respect of taxes or other governmental charges
are, in the Borrower's opinion, adequate.
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SECTION 4.9. Subsidiaries. Each of the Borrower's corporate
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all powers
and all governmental licenses, authorizations, consents and approvals required
to carry on its business as now conducted except for such powers, licenses,
authorizations, consents or approvals the absence of which could not reasonably
be expected to have a Material Adverse Effect.
SECTION 4.10. Regulatory Restrictions on Borrowing. The
Borrower is not an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, (ii) a "holding company" within the meaning of
the Public Utility Holding Company Act of 1935, as amended, or (iii) otherwise
subject to any regulatory scheme which restricts its ability to incur debt.
SECTION 4.11. Full Disclosure. All information (including,
without limitation, the Borrower's Registration Statement) heretofore furnished
by the Borrower to the Agent or any Bank for purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all such
information hereafter furnished by the Borrower to the Agent or any Bank will
be, true and accurate in all material respects on the date as of which such
information is stated or certified. The Borrower has disclosed to the Banks in
writing any and all facts which materially and adversely affect, or may affect
(to the extent the Borrower can now reasonably foresee), the business,
operations or financial condition of the Borrower and its Consolidated
Subsidiaries, taken as a whole, or the Borrower's ability to perform its
obligations under this Agreement. Information in the form of forecasts delivered
by the Borrower to the Agent or any Bank are based upon the best information
available to the Borrower at the time such forecasts were made and take into
consideration all information which, in the reasonable judgment of the Borrower
was believed to be material at the time, it being understood that such
statements and conclusions are necessarily based upon opinions, estimates and
projections, and the Borrower does not warrant that such opinions, estimates and
projections will ultimately prove to have been accurate.
ARTICLE 5
COVENANTS
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The Borrower agrees that, so long as any Bank has any
Commitment hereunder or any principal of or interest on any Loan remains unpaid:
SECTION 5.1. Information. The Borrower will deliver to each
of the Banks:
(a) as soon as available and in any event within 90 days after
the end of each Fiscal Year, a consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries as of the end of such Fiscal
Year and the related consolidated statements of income, cash flows and
changes in stockholders' equity for such Fiscal Year, setting forth in
each case (commencing with the Fiscal Year ending December 31, 1998) in
comparative form the figures for the previous Fiscal Year, all reported
on in a manner acceptable to the SEC by KPMG Peat Marwick or other
independent public accountants of nationally recognized standing;
(b) as soon as available and in any event within 45 days after
the end of each of the first three Fiscal Quarters of each Fiscal Year
(commencing with the Fiscal Quarter ending March 31, 1997), a
consolidated balance sheet of the Borrower and its Consolidated
Subsidiaries as of the end of such Fiscal Quarter, the related
consolidated statements of income for such Fiscal Quarter and the
related consolidated statements of cash flows and changes in
stockholders' equity for the portion of the Fiscal Year ended at the
end of such Fiscal Quarter, setting forth (commencing with the Fiscal
Quarter ending March 31, 1998) in the case of each such statement of
income and cash flows in comparative form the figures for the
corresponding period in the previous Fiscal Year, all certified
(subject to normal year-end adjustments) as to fairness of presentation
and (except for the financial statements at, and as of, March 31, 1997)
consistency with GAAP by the Borrower's chief financial officer or
chief accounting officer;
(c) as soon as available and in any event within 120 days
after the end of each fiscal year of Trigon Insurance, a duly completed
Annual Statement (Life and Accident and Health Form) for Trigon
Insurance, in the form submitted to the insurance department or other
comparable regulatory authority of the Commonwealth of Virginia;
(d) as soon as available and in any event within 60 days
after the end of each of the first three
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quarters of each fiscal year of Trigon Insurance, a duly completed
Quarterly Statement (Life and Accident and Health Form) for Trigon
Insurance in the form submitted to the insurance department or other
comparable regulatory authority of the Commonwealth of Virginia;
(e) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of
the Borrower's chief financial officer or chief accounting officer (i)
setting forth in reasonable detail the calculations required to
establish whether the Borrower was in compliance with the requirements
of Section 5.7 and Sections 5.10 through 5.15, inclusive, on the date
of such financial statements and (ii) stating whether any Default
exists on the date of such certificate and, if any Default then exists,
setting forth the details thereof and the action which the Borrower is
taking or proposes to take with respect thereto;
(f) simultaneously with the delivery of each set of financial
statements referred to in clause (a) above, a statement of the firm of
independent public accountants which reported on such statements (i)
stating whether anything has come to their attention to cause them to
believe that any Default existed on the date of such statements and
(ii) confirming the calculations set forth in the officer's certificate
delivered simultaneously therewith pursuant to clause (e) above;
(g) within five Domestic Business Days after any officer of
the Borrower obtains knowledge of any Default, if such Default is then
continuing, a certificate of the Borrower's chief financial officer or
chief accounting officer setting forth the details thereof and the
action which the Borrower is taking or proposes to take with respect
thereto;
(h) promptly after the mailing thereof to the Borrower's
shareholders generally, copies of all financial statements, reports and
proxy statements so mailed;
(i) promptly after the filing thereof, copies of all
registration statements (other than the exhibits thereto and any
registration statements on Form S-8 or its equivalent) and reports on
Forms 10-K, 10-Q and 8-K (or their equivalents) filed by the Borrower
with the SEC;
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(j) if and when any member of the ERISA Group (i) gives or is
required to give notice to the PBGC of any "reportable event" (as
defined in Section 4043 of ERISA) with respect to any Plan which might
constitute grounds for a termination of such Plan under Title IV of
ERISA, or knows that the plan administrator of any Plan has given or is
required to give notice of any such reportable event, a copy of the
notice of such reportable event given or required to be given to the
PBGC; (ii) receives notice of complete or partial withdrawal liability
under Title IV of ERISA or notice that any Multiemployer Plan is in
reorganization, is insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title IV of ERISA of
an intent to terminate, impose liability (other than for premiums under
Section 4007 of ERISA) in respect of, or appoint a trustee to
administer any Plan, a copy of such notice; (iv) applies for a waiver
of the minimum funding standard under Section 412 of the Internal
Revenue Code, a copy of such application; (v) gives notice of intent to
terminate any Plan under Section 4041(c) of ERISA, a copy of such
notice and other information filed with the PBGC; (vi) gives notice of
withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of
such notice; or (vii) fails to make any payment or contribution to any
Plan or Multiemployer Plan or makes any amendment to any Plan which has
resulted or could result in the imposition of a Lien or the posting of
a bond or other security, a certificate of the Borrower's chief
financial officer or chief accounting officer setting forth details as
to such occurrence and the action, if any, which the Borrower or
applicable member of the ERISA Group is required or proposes to take;
and
(k) from time to time such additional information regarding
the financial position or business of the Borrower and its Subsidiaries
as the Agent, at the request of any Bank, may reasonably request.
SECTION 5.2. Payment of Obligations. The Borrower will pay and
discharge, and will cause each Subsidiary to pay and discharge, at or before
maturity, all their respective material obligations and liabilities (including,
without limitation, tax liabilities and claims which if unpaid might by law give
rise to a Lien), except where the same are contested in good faith by
appropriate proceedings, and will maintain, and will cause each Subsidiary to
maintain, in accordance with GAAP, appropriate reserves for the accrual thereof.
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SECTION 5.3. Maintenance of Property; Insurance. (a) The
Borrower will keep, and will cause each Subsidiary to keep, all property useful
and necessary in its business in good working order and condition, ordinary wear
and tear excepted.
(b) The Borrower will, and will cause each Subsidiary to,
maintain (either in the Borrower's name or in such Subsidiary's own name) with
financially sound and responsible insurance companies, insurance on all their
respective properties in at least such amounts, against at least such risks and
with no greater risk retention as are usually maintained, insured against or
retained, as the case may be, in the same general area by companies of
established repute engaged in the same or a similar business. The Borrower will
furnish to the Banks, upon request from the Agent, information presented in
reasonable detail as to the insurance so carried.
SECTION 5.4. Conduct of Business and Maintenance of Existence.
The Borrower and its Subsidiaries will continue to engage in business of the
same general type as now conducted by the Borrower and its Subsidiaries, and
will preserve, renew and keep in full force and effect their respective
corporate existences and their respective rights, privileges and franchises
necessary or desirable in the normal conduct of business; provided that nothing
in this Section shall prohibit:
(i) the merger of a Subsidiary into the Borrower if, after
giving effect thereto, no Default shall have occurred and be
continuing;
(ii) the merger or consolidation of a Subsidiary with or into
a Person other than the Borrower if the corporation surviving such
consolidation or merger is a Subsidiary and, after giving effect
thereto, no Default shall have occurred and be continuing or
(iii) the termination of the corporate existence of a
Subsidiary if the Borrower in good faith determines that such
termination is in the best interest of the Borrower and is not
materially disadvantageous to the Banks.
SECTION 5.5. Compliance with Laws. The Borrower will comply,
and will cause each Subsidiary to comply with all applicable laws, ordinances,
rules, regulations and requirements of governmental authorities (including,
without limitation, Environmental Laws and ERISA and the rules and regulations
thereunder), except where the necessity of
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compliance therewith is contested in good faith by appropriate proceedings or
where noncompliance could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
SECTION 5.6. Inspection of Property, Books and Records. The
Borrower will keep, and will cause each Subsidiary to keep, proper books of
record and account in which full and correct entries shall be made of all
dealings and transactions in relation to its business and activities; and will
permit, and will cause each Subsidiary to permit, representatives of any Bank at
such Bank's expense to visit and inspect any of their respective properties, to
examine and make abstracts from any of their respective books and records and to
discuss their respective affairs, finances and accounts with their respective
officers, employees and independent public accountants, all at such reasonable
times and as often as may reasonably be requested.
SECTION 5.7. Company Action Level Ratio. The ratio of (x)
Total Adjusted Capital (as defined in the Risk- Based Capital Act or in the
rules and procedures prescribed from time to time by the NAIC with respect
thereto) to (y) the Company Action Level RBC (as defined in the Risk-Based
Capital Act or in the rules and procedures prescribed from time to time by the
NAIC with respect thereto) of Trigon Insurance will at no time be less than
150%; provided that, if the Borrower notifies the Agent that the Borrower wishes
to amend this Section 5.7 to eliminate the effect of any change in the
definition of Total Adjusted Capital or Company Action Level RBC under the
Risk-Based Capital Act (or in the rules and procedures prescribed from time to
time by the NAIC with respect thereto) on the operation of the covenant in this
Section 5.7 (or if the Agent notifies the Borrower that the Required Banks wish
to amend this Section 5.7 for such purpose), then the Borrower's compliance with
such covenant shall be determined on the basis of such definitions, rules and
procedures in effect immediately before the relevant change in such definitions,
rules and procedures became effective, either until such notice is withdrawn by
the Person that delivered such notice or until such covenant is amended in a
manner satisfactory to the Borrower and the Required Banks.
SECTION 5.8. Mergers and Sales of Assets. The Borrower will
not consolidate or merge with or into any other Person; provided that the
Borrower may merge with another Person if (i) the Borrower is the corporation
surviving such merger and (ii) after giving effect to such merger, no Default
shall have occurred and be continuing. The Borrower and its Subsidiaries will
not sell, lease or
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otherwise transfer, directly or indirectly, all or any substantial part of the
assets of the Borrower and its Subsidiaries, taken as a whole, to any other
Person.
SECTION 5.9. Use of Proceeds. The proceeds of the Loans will
be used by the Borrower for general corporate purposes. None of such proceeds
will be used, directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of buying or carrying any "margin stock" within the
meaning of Regulation U.
SECTION 5.10. Negative Pledge. Neither the Borrower nor any
Subsidiary will create, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired by it, except:
(a) Liens existing on the date of this Agreement (after taking
into account the Demutualization) securing Debt outstanding on the date
of this Agreement in an aggregate principal or face amount not
exceeding $2,000,000;
(b) any Lien existing on any asset of any Person at the time
such Person becomes a Subsidiary and not created in contemplation of
such event;
(c) any Lien on any asset securing Debt incurred or assumed
for the purpose of financing all or any part of the cost of acquiring
such asset, provided that such Lien attaches to such asset concurrently
with or within 90 days after the acquisition thereof;
(d) any Lien on any asset of any Person existing at the time
such Person is merged or consolidated with or into the Borrower or a
Subsidiary and not created in contemplation of such event;
(e) any Lien existing on any asset prior to the acquisition
thereof by the Borrower or a Subsidiary and not created in
contemplation of such acquisition;
(f) any Lien arising out of the refinancing, extension,
renewal or refunding of any Debt secured by any Lien permitted by any
of the foregoing clauses of this Section, provided that such Debt is
not increased and is not secured by any additional assets;
(g) Liens arising in the ordinary course of its business
which (i) do not secure Debt or Derivatives Obligations and (ii) do not
secure any single
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obligation (or class of obligations having a common cause) in an amount
exceeding $10,000,000;
(h) Liens on cash and cash equivalents securing Derivatives
Obligations, provided that the aggregate amount of cash and cash
equivalents subject to such Liens may at no time exceed $50,000,000;
and
(i) Liens not otherwise permitted by the foregoing clauses of
this Section securing Debt in an aggregate principal or face amount not
at any time exceeding 5% of Adjusted Consolidated Tangible Net Worth.
SECTION 5.11. Consolidated Debt to Consolidated Total
Capitalization. Consolidated Debt will at no time exceed 40% of Consolidated
Total Capitalization.
SECTION 5.12. Minimum Adjusted Consolidated Tangible Net
Worth. Adjusted Consolidated Tangible Net Worth will at no time be less than an
amount equal to the sum of (i) $540,000,000 and (ii) an amount equal to 50% of
Consolidated Net Income for each Fiscal Quarter ending after December 31, 1996
but before the date of determination, in each case, for which Consolidated Net
Income is positive (but with no deduction on account of negative Consolidated
Net Income for any Fiscal Quarter).
SECTION 5.13. Subsidiary Debt. The total Debt of all
Subsidiaries will at no time exceed $15,000,000; provided that (i) Debt owing to
the Borrower or another Subsidiary and (ii) Debt of a Regulated Entity which (x)
qualifies as capital under insurance regulations applicable to such Regulated
Entity and (y) has been funded pro rata by shareholders of such Regulated Entity
shall not be treated as Debt for purposes of this Section 5.13.
SECTION 5.14. Restricted Payments. Neither the Borrower nor
any Subsidiary will declare or make any Restricted Payment unless, after giving
effect thereto, the aggregate of all Restricted Payments does not exceed the sum
of (i) $10,000,000 plus (ii) 50% of Consolidated Net Income (or minus 100% of
consolidated net loss) of the Borrower and its Consolidated Subsidiaries for the
period from the Demutualization through the end of the then most recent Fiscal
Quarter (treated for this purpose as a single accounting period) plus (iii) an
amount (not to exceed $50,000,000) equal to 50% of the amount of Extraordinary
Dividends received by the Borrower after the date hereof and before December 31,
1997. For purposes of this Section 5.14 Extraordinary Dividends means cash
dividends paid by a
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Regulated Entity (or by a Subsidiary which is not a Regulated Entity but which
at January 1, 1997 was a Subsidiary of a Regulated Entity) to the Borrower out
of income earned by such Regulated Entity (or Subsidiary) prior to January 1,
1997.
SECTION 5.15. Investments. Neither the Borrower nor any
Consolidated Subsidiary will hold, make or acquire any Investment in any Person
other than:
(a) Investments in any Subsidiary whose principal business on
the date of making the such Investment or after giving effect to such
Investment is either (i) the same line or lines of business as the
Borrower or (ii) in the judgment of the Borrower reasonably related to
such line or lines of business;
(b) Investments in cash and marketable financial instruments;
(c) Investments by a Regulated Entity in Admitted Assets and,
up to 15% of total investment assets of such Regulated Entity, in
Non-Admitted Assets; and
(d) any Investment not otherwise permitted by the foregoing
clauses of this Section if, immediately after such Investment is made
or acquired, the aggregate net book value of all Investments permitted
by this clause (d) does not exceed $50,000,000.
SECTION 5.16. Transactions with Affiliates. The Borrower will
not, and will not permit any Subsidiary to, directly or indirectly, engage in
any transaction with any Affiliate which could reasonably be expected to have a
Material Adverse Effect.
ARTICLE 6
DEFAULTS
SECTION 6.1. Events of Default. If one or more of the
following events ("Events of Default") shall have occurred and be continuing:
(a) the Borrower shall fail to pay when due any principal of
any Loan, or shall fail to pay within five days of the due date thereof
any interest, fee or other amount payable hereunder;
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(b) the Borrower shall fail to observe or perform any covenant
contained in Article 5, other than those contained in Sections 5.1
through 5.6, inclusive;
(c) the Borrower shall fail to observe or perform any covenant
or agreement (other than those covered by clause (a) or (b) above)
contained in this Agreement or any amendment hereof for 10 days after
the Agent gives notice thereof to the Borrower at the request of any
Bank;
(d) any representation, warranty, certification or statement
made by the Borrower in this Agreement or any amendment hereof or in
any certificate, financial statement or other document delivered
pursuant to this Agreement shall prove to have been incorrect in any
material respect when made (or deemed made);
(e) the Borrower or any Subsidiary shall fail to make one or
more payments in respect of Material Financial Obligations when due or
within any applicable grace period;
(f) any event or condition shall occur which results in the
acceleration of the maturity of any Material Debt or enables (or, with
the giving of notice or lapse of time or both, would enable) the holder
of such Debt or any Person acting on such holder's behalf to accelerate
the maturity thereof;
(g) the Borrower or any Subsidiary shall commence a voluntary
case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking
the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or
shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its debts as
they become due, or shall take any corporate action to authorize any of
the foregoing;
(h) an involuntary case or other proceeding shall be commenced
against the Borrower or any Subsidiary seeking liquidation,
reorganization or other relief with respect to it or its debts under
any bankruptcy,
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insolvency or other similar law now or hereafter in effect or seeking
the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain undismissed and
unstayed for a period of 60 days; or an order for relief shall be
entered against the Borrower or any Subsidiary under the federal
bankruptcy laws as now or hereafter in effect;
(i) any member of the ERISA Group shall fail to pay when due
an amount or amounts aggregating in excess of $10,000,000 which it
shall have become liable to pay under Title IV of ERISA; or notice of
intent to terminate a Material Plan shall be filed under Title IV of
ERISA by any member of the ERISA Group, any plan administrator or any
combination of the foregoing; or the PBGC shall institute proceedings
under Title IV of ERISA to terminate, to impose liability (other than
for premiums under Section 4007 of ERISA) in respect of, or to cause a
trustee to be appointed to administer, any Material Plan; or a
condition shall exist by reason of which the PBGC would be entitled to
obtain a decree adjudicating that any Material Plan must be terminated;
or there shall occur a complete or partial withdrawal from, or a
default, within the meaning of Section 4219(c)(5) of ERISA, with
respect to, one or more Multiemployer Plans which could cause one or
more members of the ERISA Group to incur a current payment obligation
in excess of $25,000,000;
(j) judgments or orders for the payment of money exceeding
$25,000,000 in aggregate amount shall be rendered against the Borrower
or any Subsidiary and such judgments or orders shall continue
unsatisfied and unstayed for a period of 10 days; or
(k) any person or group of persons (within the meaning of
Section 13 or 14 of the Exchange Act) shall have acquired beneficial
ownership (within the meaning of Rule 13d-3 promulgated by the SEC
under said Act) of 30% or more of the outstanding shares of common
stock of the Borrower; or, during any period of 12 consecutive calendar
months, individuals who were directors of the Borrower on the first day
of such period shall cease to constitute a majority of the Borrower's
board of directors;
then, and in every such event, the Agent shall (i) if requested by Banks having
more than 50% in aggregate amount of the Commitments, by notice to the Borrower
terminate the
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Commitments and they shall thereupon terminate, and (ii) if requested by Banks
holding more than 50% of the aggregate unpaid principal amount of the Loans, by
notice to the Borrower declare the Loans (together with accrued interest
thereon) to be, and the Loans (together with accrued interest thereon) shall
thereupon become, immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Borrower; provided that, if any Event of Default specified in clause 6.1 (g) or
6.1(h) occurs with respect to the Borrower, then without any notice to the
Borrower or any other act by the Agent or the Banks, the Commitments shall
thereupon terminate and the Loans (together with accrued interest thereon) shall
become immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Borrower.
Notwithstanding anything contained in the foregoing paragraph,
if at any time within 60 days after the Notes have been declared due pursuant to
the preceding paragraph, the Borrower shall pay all arrears of interest and all
payments on account of principal which shall have become due otherwise than by
acceleration (with interest on overdue principal and interest at the rate
specified in this Agreement) and all Defaults (other than non-payment of the
principal of and accrued interest on the Loans due and payable solely by virtue
of acceleration) shall be remedied or waived pursuant to Section 9.5, then the
Banks holding at least 66-2/3% of the aggregate amount of Commitments by notice
to the Borrower may at their option rescind and annul the acceleration and its
consequences; but such action shall not affect any subsequent Default or impair
any right consequent thereon. The provisions of this paragraph are intended
merely to bind the Banks to a decision which may be made at the election of the
aforesaid percentage of the Banks and are not intended to benefit the Borrower
and do not grant the Borrower the right to require the Banks to rescind or annul
any acceleration hereunder, even if the conditions set forth herein are met.
SECTION 6.2. Notice of Default. The Agent shall give notice to
the Borrower under Section 6.1(c) promptly upon being requested to do so by any
Bank and shall thereupon notify all the Banks thereof.
ARTICLE 7
THE AGENT
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SECTION 7.1. Appointment and Authorization. Each Bank
irrevocably appoints and authorizes the Agent to take such action as agent on
its behalf and to exercise such powers under this Agreement as are delegated to
the Agent by the terms hereof or thereof, together with all such powers as are
reasonably incidental thereto.
SECTION 7.2. Agent and Affiliates. Morgan Guaranty Trust
Company of New York shall have the same rights and powers under this Agreement
as any other Bank and may exercise or refrain from exercising the same as though
it were not the Agent, and Morgan Guaranty Trust Company of New York and its
affiliates may accept deposits from, lend money to and generally engage in any
kind of business with the Borrower or any Subsidiary or affiliate of the
Borrower as if it were not the Agent.
SECTION 7.3. Action by Agent. The obligations of the Agent
hereunder are only those expressly set forth herein. Without limiting the
generality of the foregoing, the Agent shall not be required to take any action
with respect to any Default, except as expressly provided in Article 6.
SECTION 7.4. Consultation with Experts. The Agent may consult
with legal counsel (who may be counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
SECTION 7.5. Liability of Agent. Neither the Agent nor any of
its affiliates or any of their respective directors, officers, agents or
employees shall be liable for any action taken or not taken by it in connection
herewith (i) with the consent or at the request of the Required Banks (or such
different number of Banks as any provision hereof expressly requires for such
consent or request) or (ii) in the absence of its own gross negligence or
willful misconduct. Neither the Agent nor any of its affiliates nor any of their
respective directors, officers, agents or employees shall be responsible for or
have any duty to ascertain, inquire into or verify (i) any statement, warranty
or representation made in connection with this Agreement or any borrowing
hereunder; (ii) the performance or observance of any of the covenants or
agreements of the Borrower; (iii) the satisfaction of any condition specified in
Article 3, except receipt of items required to be delivered to the Agent; or
(iv) the validity, effectiveness or genuineness of this Agreement, the Notes or
any other
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instrument or writing furnished in connection herewith. The Agent shall not
incur any liability by acting in reliance upon any notice, consent, certificate,
statement or other writing (which may be a bank wire, telex, facsimile or
similar writing) believed by it to be genuine or to be signed by the proper
party or parties. Without limiting the generality of the foregoing, the use of
the term "agent" in this Agreement with reference to the Agent is not intended
to connote any fiduciary or other implied (or express) obligations arising under
agency doctrine of any applicable law. Instead, such term is used merely as a
matter of market custom and is intended to create or reflect only an
administrative relationship between independent contracting parties.
SECTION 7.6. Indemnification. The Banks shall, ratably in
proportion to their Commitments, indemnify the Agent, its affiliates and their
respective directors, officers, agents and employees (to the extent not
reimbursed by the Borrower) against any cost, expense (including counsel fees
and disbursements), claim, demand, action, loss or liability (except such as
result from such indemnitees' gross negligence or willful misconduct) that such
indemnitees may suffer or incur in connection with this Agreement or any action
taken or omitted by such indemnitees hereunder.
SECTION 7.7. Credit Decision. Each Bank acknowledges that it
has, independently and without reliance on the Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance on the Agent or
any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under this Agreement.
SECTION 7.8. Successor Agent. The Agent may resign at any time
by giving notice thereof to the Banks and the Borrower. Upon any such
resignation, the Required Banks shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Required Banks,
and shall have accepted such appointment, within 30 days after the retiring
Agent gives notice of resignation, then the retiring Agent may, on behalf of the
Banks, appoint a successor Agent, which shall be a commercial bank organized or
licensed under the laws of the United States or of any State thereof and having
a combined capital and surplus of at least $100,000,000. Upon the acceptance of
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its appointment as Agent hereunder by a successor Agent, such successor Agent
shall thereupon succeed to and become vested with all the rights and duties of
the retiring Agent, and the retiring Agent shall be discharged from its duties
and obligations hereunder. After any retiring Agent resigns as Agent hereunder,
the provisions of this Article shall inure to its benefit as to actions taken or
omitted to be taken by it while it was Agent.
SECTION 7.9. Agent's Fee. The Borrower shall pay
to the Agent for its own account fees in the amounts and at
the times previously agreed upon by the Borrower and the
Agent.
ARTICLE 8
CHANGE IN CIRCUMSTANCES
SECTION 8.1. Basis for Determining Interest Rate Inadequate or
Unfair. If on or before the first day of any Interest Period for any CD Loan,
Euro-Dollar Loan or Money Market LIBOR Loan:
(a) the Agent is advised by the Reference Banks that deposits
in dollars (in the applicable amounts) are not being offered to the
Reference Banks in the relevant market for such Interest Period, or
(b) in the case of CD Loans or Euro-Dollar Loans, Banks
holding 50% or more of the aggregate principal amount of the affected
Loans advise the Agent that the Adjusted CD Rate or the London
Interbank Offered Rate, as the case may be, as determined by the Agent
will not adequately and fairly reflect the cost to such Banks of
funding their CD Loans or Euro-Dollar Loans, as the case may be, for
such Interest Period,
the Agent shall forthwith give notice thereof to the Borrower and the Banks,
whereupon until the Agent notifies the Borrower that the circumstances giving
rise to such suspension no longer exist, (i) the obligations of the Banks to
make CD Loans or Euro-Dollar Loans, as the case may be, or to continue or
convert outstanding Loans as or into CD Loans or Euro-Dollar Loans, as the case
may be, shall be suspended and (ii) each outstanding CD Loan or Euro-Dollar
Loan, as the case may be, shall be converted into a Base Rate Loan on the last
day of the then current Interest Period applicable thereto. Unless the Borrower
notifies the Agent at least two Domestic Business Days before the date of
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any affected Borrowing for which a Notice of Borrowing has previously been given
that it elects not to borrow on such date, (i) if such affected Borrowing is a
CD Borrowing or Euro-Dollar Borrowing, such Borrowing shall instead be made as a
Base Rate Borrowing and (ii) if such affected Borrowing is a Money Market LIBOR
Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear
interest for each day from and including the first day to but excluding the last
day of the Interest Period applicable thereto at the Base Rate for such day.
SECTION 8.2. Illegality. If, on or after the date hereof, the
adoption of any applicable law, rule or regulation, or any change in any
applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Bank (or its Euro-Dollar Lending Office) with any request or directive
(whether or not having the force of law) of any such authority, central bank or
comparable agency, shall make it unlawful or impossible for any Bank (or its
Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and
such Bank shall so notify the Agent, the Agent shall forthwith give notice
thereof to the other Banks and the Borrower, whereupon until such Bank notifies
the Borrower and the Agent that the circumstances giving rise to such suspension
no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to
continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be
suspended. Before giving any notice to the Agent pursuant to this Section, such
Bank shall designate a different Euro-Dollar Lending Office if such designation
will avoid the need for giving such notice and will not, in the judgment of such
Bank, be otherwise disadvantageous to such Bank. If such notice is given, each
Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate
Loan either (a) on the last day of the then current Interest Period applicable
to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund
such Loan as a Euro-Dollar Loan to such day or (b) immediately if such Bank
shall determine that it may not lawfully continue to maintain and fund such Loan
as a Euro-Dollar Loan to such day.
SECTION 8.3. Increased Cost and Reduced Return. (a) If on or
after (x) the date hereof, in the case of any Committed Loan or any obligation
to make Committed Loans or (y) the date of the related Money Market Quote, in
the case of any Money Market Loan, the adoption of any applicable law, rule or
regulation, or any change in any applicable
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law, rule or regulation, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by any Bank (or
its Applicable Lending Office) with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency, shall impose, modify or deem applicable any reserve (including, without
limitation, any such requirement imposed by the Board of Governors of the
Federal Reserve System, but excluding (i) with respect to any CD Loan any such
requirement included in an applicable Domestic Reserve Percentage and (ii) with
respect to any Euro-Dollar Loan any such requirement with respect to which such
Bank is entitled to compensation during the relevant Interest Period under
Section 2.15), special deposit, insurance assessment (excluding, with respect to
any CD Loan, any such requirement reflected in an applicable Assessment Rate) or
similar requirement against assets of, deposits with or for the account of, or
credit extended by, any Bank (or its Applicable Lending Office) or shall impose
on any Bank (or its Applicable Lending Office) or on the United States market
for certificates of deposit or the London interbank market any other condition
affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate
Loans and the result of any of the foregoing is to increase the cost to such
Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate
Loan, or to reduce the amount of any sum received or receivable by such Bank (or
its Applicable Lending Office) under this Agreement or under its Note with
respect thereto, by an amount deemed by such Bank to be material, then, within
15 days after demand by such Bank (with a copy to the Agent), the Borrower shall
pay to such Bank such additional amount or amounts as will compensate such Bank
for such increased cost or reduction.
(b) If any Bank shall have determined that, after the date
hereof, the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change in any such law, rule or regulation, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on capital of such Bank (or its Parent) as a consequence of such Bank's
obligations hereunder to a level below that which such Bank (or its Parent)
could have achieved but for such adoption, change, request or directive (taking
into consideration its policies
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<PAGE>
with respect to capital adequacy) by an amount deemed by such Bank to be
material, then from time to time, within 15 days after demand by such Bank (with
a copy to the Agent), the Borrower shall pay to such Bank such additional amount
or amounts as will compensate such Bank (or its Parent) for such reduction.
(c) Each Bank will promptly notify the Borrower and the Agent
of any event of which it has knowledge, occurring after the date hereof, which
will entitle such Bank to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate
of any Bank claiming compensation under this Section and setting forth the
additional amount or amounts to be paid to it hereunder shall be conclusive in
the absence of manifest error. In determining such amount, such Bank may use any
reasonable averaging and attribution methods.
SECTION 8.4. Taxes. (a) For the purposes of this
Section, the following terms have the following meanings:
"Taxes" means any and all present or future taxes, duties,
levies, imposts, deductions, charges or withholdings of any nature on or with
respect to any payment by the Borrower pursuant to this Agreement or under any
Note, and all liabilities with respect thereto, excluding (i) in the case of
each Bank and the Agent, taxes imposed on its net income, and franchise or
similar taxes imposed on it, by a jurisdiction under the laws of which such Bank
or the Agent (as the case may be) is organized or in which its principal
executive office is located or, in the case of each Bank, in which its
Applicable Lending Office is located and (ii) in the case of each Bank, any
United States withholding tax imposed on such payment at any rate up to (but not
exceeding) the rate at which United States withholding tax would have been
imposed on such a payment to such Bank under the laws and treaties in effect
when such Bank first became a party to this Agreement.
"Other Taxes" means any present or future stamp or documentary
taxes and any other excise or property taxes, or similar charges or levies,
which arise from any payment made pursuant to this Agreement or under any Note
or from the execution, delivery, registration or enforcement of, or otherwise
with respect to, this Agreement or any Note.
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(b) All payments by the Borrower to or for the account of any
Bank or the Agent hereunder or under any Note shall be made without deduction or
withholding for any Taxes or Other Taxes; provided that, if the Borrower shall
be required by law to deduct any Taxes or Other Taxes from any such payment, (i)
the sum payable shall be increased as necessary so that after making all
required deductions and withholdings (including deductions and withholdings
applicable to additional sums payable under this Section) such Bank or the Agent
(as the case may be) receives an amount equal to the sum it would have received
had no such deductions or withholdings been made, (ii) the Borrower shall make
such deductions or withholdings, (iii) the Borrower shall pay the full amount
deducted or withheld to the relevant taxation authority or other authority in
accordance with applicable law and (iv) the Borrower shall promptly furnish to
the Agent, at its address specified in Section 9.1, the original or a certified
copy of a receipt evidencing payment thereof.
(c) The Borrower agrees to indemnify each Bank and the Agent
for the full amount of Taxes and Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable
under this Section), whether or not correctly or legally imposed, paid by such
Bank or the Agent (as the case may be) and any liability (including penalties,
interest and expenses) arising therefrom or with respect thereto. This
indemnification shall be paid within 15 days after such Bank or the Agent (as
the case may be) makes demand therefor.
(d) Each Bank organized under the laws of a jurisdiction
outside the United States, as of the date of this Agreement in the case of each
Bank listed on the signature pages hereof and as of the time it becomes a Bank
in the case of each other Bank, and from time to time thereafter if requested in
writing by the Borrower (but only so long as such Bank remains lawfully able to
do so), shall provide each of the Borrower and the Agent with Internal Revenue
Service form 1001 or 4224 in duplicate, as appropriate, or any successor form
prescribed by the Internal Revenue Service, certifying that such Bank is
entitled to benefits under an income tax treaty to which the United States is a
party which exempts the Bank from United States withholding tax or reduces the
rate of withholding tax on payments of interest for the account of such Bank or
certifying that the income receivable pursuant to this Agreement is effectively
connected with the conduct of a trade or business in the United States.
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<PAGE>
(e) For any period with respect to which a Bank has failed to
provide the Borrower or the Agent with the appropriate form referred to in
Section 8.4(d) (unless such failure is due to a change in treaty, law or
regulation occurring after the date on which such form originally was required
to be provided), such Bank shall not be entitled to indemnification under
Section 8.4(b) or (c) with respect to Taxes imposed by the United States;
provided that if a Bank, that is otherwise exempt from or subject to a reduced
rate of withholding tax, becomes subject to Taxes because of its failure to
deliver a form required hereunder, the Borrower shall take such steps as such
Bank shall reasonably request to assist such Bank to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to
or for the account of any Bank pursuant to this Section as a result of a change
in law or treaty occurring after such Bank first became a party to this
Agreement, then such Bank will, at the Borrower's request, change the
jurisdiction of its Applicable Lending Office if, in the judgment of such Bank,
such change (i) will eliminate or reduce any such additional payment which may
thereafter accrue and (ii) is not otherwise disadvantageous to such Bank.
SECTION 8.5. Base Rate Loans Substituted for Affected Fixed
Rate Loans. If (i) the obligation of any Bank to make, or to continue or convert
outstanding Loans as or to, Euro-Dollar Loans has been suspended pursuant to
Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4
with respect to its CD Loans or Euro- Dollar Loans, and in any such case the
Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such
Bank through the Agent, have elected that the provisions of this Section shall
apply to such Bank, then, unless and until such Bank notifies the Borrower that
the circumstances giving rise to such suspension or demand for compensation no
longer exist, all Loans which would otherwise be made by such Bank as (or
continued as or converted to) CD Loans or Euro-Dollar Loans, as the case may be,
shall instead be Base Rate Loans (on which interest and principal shall be
payable contemporaneously with the related CD Loans or Euro-Dollar Loans of the
other Banks). If such Bank notifies the Borrower that the circumstances giving
rise to such suspension or demand for compensation no longer exist, the
principal amount of each such Base Rate Loan shall be converted into a CD Loan
or Euro-Dollar Loan, as the case may be, on the first day of the next succeeding
Interest Period applicable to the related CD Loans or Euro-Dollar Loans of the
other Banks.
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<PAGE>
SECTION 8.6. Substitution of Bank. If (i) the obligation of
any Bank to make or maintain Euro-Dollar Loans has been suspended pursuant to
Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4,
the Borrower shall have the right, if no Default then exists, to replace such
Bank (the "Replaced Bank") with one or more other banks (collectively, the
"Replacement Bank") reasonably acceptable to the Agent, provided that (i) at the
time of any replacement pursuant to this Section 8.6, the Replacement Bank shall
enter into one or more Assignment and Assumption Agreements, substantially in
the form of Exhibit G hereto, pursuant to which the Replacement Bank shall
acquire the aggregate Commitment and outstanding Loans of the Replaced Bank and,
in connection therewith, shall pay to the Replaced Bank in respect thereof an
amount equal to the sum of (A) an amount equal to the principal of, and all
accrued interest on, all outstanding Loans of the Replaced Bank, (B) an amount
equal to all accrued, but theretofore unpaid, fees under Section 2.8 owing to
the Replaced Bank and (C) an amount equal to the amount which would be payable
by the Borrower to the Replaced Bank pursuant to Section 2.12 if the Borrower
prepaid at the time of such replacement all of the Loans of such Replaced Bank
outstanding at such time and (ii) all obligations of the Borrower owing to the
Replaced Bank (other than those specifically described in clause (i) above in
respect of which the assignment purchase price has been, or is concurrently
being, paid) shall be paid in full to such Replaced Bank concurrently with such
replacement. Upon the execution of the respective Assignment and Assumption
Agreements, the payment of amounts referred to in clauses (i) and (ii) above
and, if so requested by the Replacement Bank, delivery to the Replacement Bank
of the appropriate Note or Notes executed by the Borrower, the Replacement Bank
shall become a Bank hereunder and the Replaced Bank shall cease to constitute a
Bank hereunder. The provisions of this Agreement shall continue to govern the
rights and obligations of a Replaced Bank with respect to any Loans made or any
other actions taken by such Bank while it was a Bank.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1. Notices. All notices, requests and other
communications to any party hereunder shall be in writing (including bank wire,
telex, facsimile or similar writing) and shall be given to such party: (a) in
the case of the Borrower or the Agent, at its address, facsimile
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<PAGE>
number or telex number set forth on the signature pages hereof, (b) in the case
of any Bank, at its address, facsimile number or telex number set forth in its
Administrative Questionnaire or (c) in the case of any party, at such other
address, facsimile number or telex number as such party may hereafter specify
for the purpose by notice to the Agent and the Borrower. Each such notice,
request or other communication shall be effective (i) if given by telex, when
transmitted to the telex number referred to in this Section and the appropriate
answerback is received, (ii) if given by facsimile, when transmitted to the
facsimile number referred to in this Section and confirmation of receipt is
received, (iii) if given by mail, 72 hours after such communication is deposited
in the mails with first class postage prepaid, addressed as aforesaid or (iv) if
given by any other means, when delivered at the address referred to in this
Section; provided that notices to the Agent under Article 2 or Article 8 shall
not be effective until received.
SECTION 9.2. No Waivers. No failure or delay by the Agent or
any Bank in exercising any right, power or privilege hereunder or under any Note
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.
SECTION 9.3. Expenses; Indemnification. (a) The Borrower
shall pay (i) all out-of-pocket expenses of the Agent, including fees and
disbursements of special counsel for the Agent, in connection with the
preparation and administration of this Agreement, any waiver or consent
hereunder or any amendment hereof or any Default or alleged Default hereunder
and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by
the Agent and each Bank, including (without duplication) the fees and
disbursements of outside counsel and the allocated cost of inside counsel, in
connection with such Event of Default and collection, bankruptcy, insolvency and
other enforcement proceedings resulting therefrom.
(b) The Borrower agrees to indemnify the Agent and each Bank,
their respective affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
harmless from and against any and all liabilities, losses, damages, costs and
expenses of any kind, including, without limitation, the reasonable fees and
disbursements of counsel, which may be incurred by such Indemnitee in
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connection with any investigative, administrative or judicial proceeding
(whether or not such Indemnitee shall be designated a party thereto) brought or
threatened relating to or arising out of this Agreement or any actual or
proposed use of proceeds of Loans hereunder; provided that no Indemnitee shall
have the right to be indemnified hereunder for such Indemnitee's own gross
negligence or willful misconduct as determined by a court of competent
jurisdiction.
SECTION 9.4. Sharing of Set-Offs. Each Bank agrees that if it
shall, by exercising any right of set-off or counterclaim or otherwise, receive
payment of a proportion of the aggregate amount of principal and interest then
due with respect to the Loans held by it which is greater than the proportion
received by any other Bank in respect of the aggregate amount of principal and
interest then due with respect to the Loans held by such other Bank, the Bank
receiving such proportionately greater payment shall purchase such
participations in the Loans held by the other Banks, and such other adjustments
shall be made, as may be required so that all such payments of principal and
interest with respect to the Loans held by the Banks shall be shared by the
Banks pro rata; provided that nothing in this Section shall impair the right of
any Bank to exercise any right of set-off or counterclaim it may have and to
apply the amount subject to such exercise to the payment of indebtedness of the
Borrower other than its indebtedness hereunder. The Borrower agrees, to the
fullest extent it may effectively do so under applicable law, that any holder of
a participation in a Loan, whether or not acquired pursuant to the foregoing
arrangements, may exercise rights of set-off or counterclaim and other rights
with respect to such participation as fully as if such holder of a participation
were a direct creditor of the Borrower in the amount of such participation.
SECTION 9.5. Amendments and Waivers . Any provision of this
Agreement or the Notes may be amended or waived if, but only if, such amendment
or waiver is in writing and is signed by the Borrower and the Required Banks
(and, if the rights or duties of the Agent are affected thereby, by the Agent);
provided that no such amendment or waiver shall, unless signed by all the Banks,
(i) except as contemplated in Section 2.16, increase or decrease the Commitment
of any Bank (except for a ratable decrease in the Commitments of all Banks) or
subject any Bank to any additional obligation, (ii) reduce the principal of or
rate of interest on any Loan or any fees hereunder, (iii) postpone the date
fixed for any payment of principal of or interest on any Loan or any fees
hereunder or for the
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termination of any Commitment or (iv) change the percentage of the Commitments
or of the aggregate unpaid principal amount of the Loans, or the number of
Banks, which shall be required for the Banks or any of them to take any action
under this Section or any other provision of this Agreement.
SECTION 9.6. Successors and Assigns. (a) The provisions of
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, except that the Borrower may
not assign or otherwise transfer any of its rights under this Agreement without
the prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or
other institutions (each a "Participant") participating interests in its
Commitment or any or all of its Loans. If a Bank grants any such participating
interest to a Participant, whether or not upon notice to the Borrower and the
Agent, such Bank shall remain responsible for the performance of its obligations
hereunder, and the Borrower and the Agent shall continue to deal solely and
directly with such Bank in connection with such Bank's rights and obligations
under this Agreement. Any agreement pursuant to which any Bank may grant such a
participating interest shall provide that such Bank shall retain the sole right
and responsibility to enforce the Borrower's obligations hereunder, including
(without limitation) the right to approve any amendment, modification or waiver
of any provision of this Agreement; provided that such participation agreement
may provide that such Bank will not agree to any modification, amendment or
waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.5
without the consent of the Participant. The Borrower agrees that each
Participant shall, to the extent provided in its participation agreement, be
entitled to the benefits of Section 2.15 and Article 8 with respect to its
participating interest. An assignment or other transfer which is not permitted
by subsection (c) or (d) below shall be given effect for purposes of this
Agreement only to the extent of a participating interest granted in accordance
with this subsection.
(c) Any Bank may at any time assign to one or more banks or
other institutions (each an "Assignee") all, or a proportionate part of all, of
its rights and obligations under this Agreement and the Notes, and such Assignee
shall assume such rights and obligations, pursuant to an Assignment and
Assumption Agreement substantially in the form of Exhibit G hereto signed by
such Assignee and such transferor Bank, with (and subject to) the subscribed
consent of the Borrower, which shall not be unreasonably
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withheld, and the Agent; provided that if an Assignee is an affiliate of such
transferor Bank or was a Bank immediately before such assignment, no such
consent shall be required; and provided further that such assignment may, but
need not, include rights of the transferor Bank in respect of outstanding Money
Market Loans. When such instrument has been signed and delivered by the parties
thereto and such Assignee has paid to such transferor Bank the purchase price
agreed between such transferor Bank and such Assignee, such Assignee shall be a
Bank party to this Agreement and shall have all the rights and obligations of a
Bank with a Commitment as set forth in such instrument of assumption, and the
transferor Bank shall be released from its obligations hereunder to a
corresponding extent, and no further consent or action by any party shall be
required. Upon the consummation of any assignment pursuant to this subsection,
the transferor Bank, the Agent and the Borrower shall make appropriate
arrangements so that, if required, a new Note is issued to the Assignee. In
connection with any such assignment, the transferor Bank shall pay to the Agent
an administrative fee for processing such assignment in the amount of $2,500. If
the Assignee is not incorporated under the laws of the United States or a State
thereof, it shall deliver to the Borrower and the Agent certification as to
exemption from deduction or withholding of any United States federal income
taxes in accordance with Section 8.4.
(d) Any Bank may at any time assign all or any portion of its
rights under this Agreement and its Note to a Federal Reserve Bank. No such
assignment shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's
rights shall be entitled to receive any greater payment under Section 8.3 or 8.4
than such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent or by reason of the provisions of Section 8.2, 8.3 or 8.4 requiring such
Bank to designate a different Applicable Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
SECTION 9.7. No Reliance on Margin Stock. Each of the Banks
represents to the Agent and each of the other Banks that it in good faith is not
relying upon any "margin stock" (as defined in Regulation U) as collateral in
the extension or maintenance of the credit provided for in this Agreement.
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SECTION 9.8. Governing Law; Submission to Jurisdiction. This
Agreement and each Note shall be governed by and construed in accordance with
the laws of the State of New York. The Borrower hereby submits to the
nonexclusive jurisdiction of the United States District Court for the Southern
District of New York and of any New York State court sitting in New York City
for purposes of all legal proceedings arising out of or relating to this
Agreement or the transactions contemplated hereby. The Borrower irrevocably
waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court has
been brought in an inconvenient forum.
SECTION 9.9. Counterparts; Integration; Effectiveness. This
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Agreement constitutes the entire agreement and
understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Agreement shall become effective when the Agent has received from
each of the parties hereto a counterpart hereof signed by such party or
facsimile or other written confirmation satisfactory to the Agent confirming
that such party has signed a counterpart hereof.
SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER,
THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
TRIGON HEALTHCARE, INC.
By /s/ Thomas Snead
-----------------
Title: Senior Vice
President & Chief
Financial Officer
Address: 2015 Staples Mill
Rd. P.O.Box 4021
Richmond, VA 23279
Facsimile: 804-354-2470
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By /s/ James E. Condon
-----------------------
Title: Vice President
Address: 60 Wall Street
New York, NY 10260
Facsimile: 212-648-5018
THE BANK OF NEW YORK
By /s/ Michael J. Barry
----------------------
Title: Assistant Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By /s/ Samuel W. Bridges
-----------------------
Title: First Vice President
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THE FUJI BANK, LIMITED
By /s/ Masanobu Kobayashi
-------------------------
Title: Vice President & Manager
WACHOVIA BANK OF NORTH CAROLINA, N.A.
By /s/ Haywood Edmundson
------------------------
Title: Vice President
THE ASAHI BANK, LTD.
By /s/ Shinichi Furukawa
------------------------
Title: Senior Deputy General Manager
CRESTAR BANK
By /s/ James B. Mallory
-----------------------
Title: Vice President
BANQUE NATIONALE DE PARIS
By /s/ Phil Truesdale
-----------------------
Title: Vice President
By /s/ Veronique Marcus
------------------------
Title: Assistant Vice President
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CENTRAL FIDELITY NATIONAL BANK
By /s/ Anthony J. Conte
--------------------------
Title: Vice President
SIGNET BANK
By /s/ James E. Tyler
---------------------------
Title: Vice President
THE SANWA BANK, LIMITED
By /s/ William M. Plough
----------------------------
Title: Vice President
By /s/ Mitsuo Veyami
------------------------------
Title: Deputy General Manager
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COMMITMENT SCHEDULE
Bank Commitment
------ -------------
Morgan Guaranty Trust Company of New York $ 45,400,000
The Bank of New York $ 33,000,000
The First National Bank of Chicago $ 33,000,000
The Fuji Bank, Limited. $ 33,000,000
Wachovia Bank of North Carolina, N.A. $ 33,000,000
The Asahi Bank, Ltd. $ 25,000,000
Crestar Bank $ 25,000,000
Banque Nationale de Paris $ 22,600,000
Central Fidelity National Bank $ 20,000,000
Signet Bank $ 20,000,000
The Sanwa Bank, Limited $ 10,000,000
------------
Total $300,000,000
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PRICING SCHEDULE
Each of the "Facility Fee Rate", "Euro-Dollar Margin" and
"CD Margin" means, for any day, the rate set forth below in the row opposite
such term and in the column corresponding to the Pricing Level that applies on
such day:
- -------------------------------------------------------------------------------
Pricing Level Level I Level II Level III Level IV
- -------------------------------------------------------------------------------
Facility Fee .075% .10% .125% .175%
Rate
- -------------------------------------------------------------------------------
Euro-Dollar .20% .20% .25% .375%
Margin
- -------------------------------------------------------------------------------
CD Margin .325% .325% .375% .50%
- -------------------------------------------------------------------------------
For purposes of this Schedule, the following terms have the
following meanings:
"Applicable Leverage Ratio" for purposes of determining what
Pricing Level exists at any date means (a) if at least three Domestic Business
Days prior to such date the Borrower has delivered all financial statements and
certificates required to be delivered on or before such date pursuant to
subsections (a), (b) and (e) of Section 5.1, the ratio of Consolidated Debt to
Consolidated Total Capitalization as of the last day of the period covered by
such financial statements and (b) in all other cases, a ratio greater than 0.35;
provided that Level I Pricing shall apply on any date after the Effective Date
and before the initial delivery by the Borrower of all financial statements and
certificates required to be delivered pursuant to subsections (a), (b) and (e)
of Section 5.1 or the date such financial statements are first required to be
delivered.
"Level I Pricing" applies at any date if the Applicable
Leverage Ratio is less than or equal to 0.10.
"Level II Pricing" applies at any date if the Applicable
Leverage Ratio is greater than 0.10 and less than or equal to 0.25.
"Level III Pricing" applies at any date if the Applicable
Leverage Ratio is greater than 0.25 and less than or equal to 0.35.
"Level IV Pricing" applies at any date if no other Pricing
Level applies for such date.
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EXHIBIT A - Note
Note
New York, New York
February 5, 1997
For value received, Trigon Healthcare, Inc., a Virginia
corporation (the "Borrower"), promises to pay to the order of
______________________ (the "Bank"), for the account of its Applicable Lending
Office, the unpaid principal amount of each Loan made by the Bank to the
Borrower pursuant to the Credit Agreement referred to below on the maturity date
provided for in the Credit Agreement. The Borrower promises to pay interest on
the unpaid principal amount of each such Loan on the dates and at the rate or
rates provided for in the Credit Agreement. All such payments of principal and
interest shall be made in lawful money of the United States in Federal or other
immediately available funds at the office of Morgan Guaranty Trust Company of
New York, 60 Wall Street, New York, New York.
All Loans made by the Bank, the respective types thereof and
all repayments of the principal thereof shall be recorded by the Bank and, if
the Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such Loan then outstanding may be endorsed by the Bank on the schedule attached
hereto, or on a continuation of such schedule attached to and made a part
hereof; provided that the failure of the Bank to make any such recordation or
endorsement shall not affect the Borrower's obligations hereunder or under the
Credit Agreement.
This note is one of the Notes referred to in the Credit
Agreement dated as of February 5, 1997 among Trigon Healthcare, Inc., the Banks
party thereto and Morgan Guaranty Trust Company of New York, as Agent (as the
same
<PAGE>
may be amended from time to time, the "Credit Agreement"). Terms defined in the
Credit Agreement are used herein with the same meanings. Reference is made to
the Credit Agreement for provisions for the prepayment hereof and the
acceleration of the maturity hereof.
TRIGON HEALTHCARE, INC.
By____________________
Name:
Title:
2
<PAGE>
Loans and Payments of Principal
- --------------------------------------------------------------------------
Amount Type Amount of
of of Principal Notation
Date Loan Loan Repaid Made By
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
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3
<PAGE>
EXHIBIT B - Money Market Quote Request
Form of Money Market Quote Request
[Date]
To: Morgan Guaranty Trust Company of New York
(the "Agent")
From: Trigon Healthcare, Inc. (the "Borrower")
Re: Credit Agreement (the "Credit Agreement") dated as of February 5,
1997 among the Borrower, the Banks party thereto and the Agent
We hereby give notice pursuant to Section of the Credit
Agreement that we request Money Market Quotes for the following proposed Money
Market Borrowing(s):
Date of Borrowing: __________________
Principal Amount (1) Interest Period (2)
- --------------------- --------------------
$
Such Money Market Quotes should offer a Money Market
[Margin] [Absolute Rate]. [The applicable base rate is the London
Interbank Offered Rate.]
Terms used herein have the meanings assigned to them in the
Credit Agreement.
- --------
(1) Amount must be $10,000,000 or a larger multiple of $1,000,000.
(2) Not less than one month (LIBOR Auction) or not less than 7 days
(Absolute Rate Auction), subject to the provisions of the definition of Interest
Period.
<PAGE>
TRIGON HEALTHCARE, INC.
By________________________
Name:
Title:
2
<PAGE>
EXHIBIT C - Invitation for Money Market Quotes
Form of Invitation for Money Market Quotes
To: [Name of Bank]
Re: Invitation for Money Market Quotes to Trigon
Healthcare, Inc. (the "Borrower")
Pursuant to Section 2.3 of the Credit Agreement dated as of February 5,
1997 among the Borrower, the Banks party thereto and the undersigned, as Agent,
we are pleased on behalf of the Borrower to invite you to submit Money Market
Quotes to the Borrower for the following proposed Money Market Borrowing(s):
Date of Borrowing: __________________
Principal Amount Interest Period
- ----------------- ----------------
$
Such Money Market Quotes should offer a Money Market [Margin] [Absolute
Rate]. [The applicable base rate is the London Interbank Offered Rate.]
Please respond to this invitation by no later than [2:00 P.M.]
[9:30 A.M.] (New York City time) on [date].
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By______________________
Authorized Officer
<PAGE>
EXHIBIT D - Money Market Quote
Form of Money Market Quote
To: Morgan Guaranty Trust Company of New York, as Agent
Re: Money Market Quote to Trigon Healthcare, Inc. (the
"Borrower")
In response to your invitation on behalf of the Borrower dated
_____________, 19__, we hereby make the following Money Market Quote on the
following terms:
1. Quoting Bank: ________________________________
2. Person to contact at Quoting Bank:
-----------------------------
3. Date of Borrowing: ____________________*
4. We hereby offer to make Money Market Loan(s) in the
following principal amounts, for the following
Interest Periods and at the following rates:
Principal Interest Money Market
Amount** Period*** [Margin****] [Absolute Rate*****]
- ----------- ---------- --------------------------------------
$
$
[Provided, that the aggregate principal amount of Money Market Loans for
which the above offers may be accepted shall not exceed $____________.]**
We understand and agree that the offer(s) set forth
above, subject to the satisfaction of the applicable
- ----------
* As specified in the related Invitation.
** Principal amount bid for each Interest Period may not exceed principal amount
requested. Specify aggregate limitation if the sum of the individual offers
exceeds the amount the Bank is willing to lend. Each bid must be made for
$5,000,000 or a larger multiple of $1,000,000.
<PAGE>
conditions set forth in the Credit Agreement dated as of February 5, 1997 among
the Borrower, the Banks party thereto and yourselves, as Agent, irrevocably
obligates us to make the Money Market Loan(s) for which any offer(s) are
accepted, in whole or in part.
Very truly yours,
[NAME OF BANK]
Dated:_______________ By:__________________________
Authorized Officer
- -------------
*** Not less than one month or not less than 7 days, as specified in the related
Invitation. No more than five bids are permitted for each Interest Period.
**** Margin over or under the London Interbank Offered Rate determined for the
applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%)
and specify whether "PLUS" or "MINUS".
***** Specify rate of interest per annum (to the nearest
1/10,000 of 1%).
2
<PAGE>
EXHIBIT E-1 - Opinion of Counsel for the Borrower
Opinion of
McGuire, Woods, Battle & Boothe, L.L.P.
[Dated the Closing Date]
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have acted as counsel for Trigon Healthcare, Inc. (the
"Borrower") in connection with the Credit Agreement dated as of February 5, 1997
(the "Credit Agreement") among the Borrower, the Banks party thereto and Morgan
Guaranty Trust Company of New York, as Agent, and in connection with the other
matters relating to the Demutualization in which Virginia BCBS (as defined in
the Plan of Demutualization) has become a wholly owned Subsidiary of the
Borrower. This opinion is being rendered to you pursuant to Section 3.1(b) of
the Credit Agreement. Unless otherwise defined herein, terms defined in the
Credit Agreement are used herein as therein defined.
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of such documents, corporate records,
certificates of public officials and other instruments and have conducted such
other investigations of fact and law as we have deemed necessary or advisable
for purposes of this opinion.
Upon the basis of the foregoing, we are of the opinion that:
1. The Borrower is a corporation duly incorporated and validly
existing under the laws of the Commonwealth of Virginia and has all corporate
powers and all material governmental licenses, authorizations, consents and
<PAGE>
approvals required to carry on its business as now conducted.
2. The execution, delivery and performance by the Borrower of the
Credit Agreement and the Notes have been duly authorized by all necessary
corporate action, require no action by or in respect of, or filing with, any
governmental body, agency or official (other than those which have been taken or
made and, insofar as performance of the Credit Agreement entails consummation
and performance of the Plan of Demutualization, those required in connection
with the Plan of Demutualization that, if not taken or made, could not
reasonably be expected to have a material adverse effect on the business,
consolidated financial position or consolidated results of operations of the
Borrower and its Consolidated Subsidiaries, considered as a whole, or on the
ability of the Borrower to perform its obligations under the Plan of
Demutualization or to consummate the transactions contemplated therein) and do
not contravene, or constitute a default under any provision of applicable law or
regulation or of the articles of incorporation or by-laws of the Borrower, or,
to our knowledge after due inquiry, of any agreement, judgment, injunction,
order, decree or other instrument binding upon the Borrower or result in the
creation or imposition of any Lien on any revenues or assets of the Borrower.
3. The Credit Agreement constitutes a valid and binding agreement
of the Borrower and each Note issued thereunder constitutes a valid and binding
obligation of the Borrower, in each case enforceable in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
receivership, conservatorship, reorganization, moratorium or similar laws
affecting the enforceability of creditors' rights generally and by equitable
principles of general applicability (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
4. Except as disclosed in the Borrower's Registration Statement,
to the best of our knowledge, there is no action, suit or proceeding pending or
threatened against or affecting the Borrower or any Subsidiary before any court
or arbitrator or any governmental body, agency or official, in which there is a
reasonable possibility of an adverse decision which could materially adversely
affect the business, consolidated financial position or consolidated
2
<PAGE>
results of operations of the Borrower and its Consolidated Subsidiaries,
considered as a whole, or which in any manner draws into question the validity
of the Credit Agreement or the Notes or the Demutualization.
In rendering our opinion in paragraph 3 above, we express no
opinion as to (i) the effectiveness of service of process in any suit, action or
proceeding solely by mailing a copy thereof, (ii) the binding effect of any
provision of the Credit Agreement which provides for the accrual of interest
after judgment at a rate higher than the applicable judgment rate or (iii) the
effect (if any) of any law of any jurisdiction (except the State of New York) in
which any Bank is located which limits the rate of interest that such Bank may
charge or collect.
Our opinions are limited to matters governed by the laws of the
United States and the laws of the Commonwealth of Virginia and the State of New
York, and we express no opinion as to the laws of any other state or
jurisdiction.
This opinion is rendered solely to you in connection with the
above matters. This opinion may not be relied upon by you for any other purpose
or relied upon by any other Person without our prior written consent, except
that Davis Polk & Wardwell may rely upon this opinion to the same extent as if
it were addressed to it for purposes of rendering its opinion to you on the date
hereof.
Very truly yours,
3
<PAGE>
EXHIBIT E-2 - Letter from McGuire, Woods, Battle & Boothe, L.L.P.
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
Reference is hereby made to that certain opinion, of even date
herewith, that is being furnished by this Firm pursuant to Section 5(b) of (and
the form and substance of which is attached as Exhibit A hereto) the U.S.
Purchase Agreement dated January 30, 1997 among Trigon Healthcare, Inc., Blue
Cross Blue Shield of Virginia and Merrill Lynch & Co., Alex. Brown & Sons
Incorporated, Dean Witter Reynolds Inc., Morgan Stanley & Co. Incorporated and
Wheat, First Securities, Inc. as representatives of the several US Underwriters
named therein. You are hereby authorized to rely upon that portion of our
opinion [addressing the accuracy of the description of certain legal matters set
forth in the Borrower's Registration Statement] (subject to all of the
definitions, exceptions and qualifications pertinent thereto) to the same extent
as if it were originally addressed to you.
Very truly yours,
4
<PAGE>
EXHIBIT F - Opinion of Special Counsel for the Agent
Opinion of
Davis Polk & Wardwell, Special Counsel
for the Agent
[Dated the Closing Date]
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have participated in the preparation of the Credit Agreement
dated as of February 5, 1997 (the "Credit Agreement") among Trigon Healthcare,
Inc., a Virginia corporation (the "Borrower"), the Banks party thereto and
Morgan Guaranty Trust Company of New York, as Agent, and have acted as special
counsel for the Agent for the purpose of rendering this opinion pursuant to
Section 3.1(c) of the Credit Agreement. Terms defined in the Credit Agreement
are used herein as therein defined.
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of such documents, corporate records,
certificates of public officials and other instruments and have conducted such
other investigations of fact and law as we have deemed necessary or advisable
for purposes of this opinion.
Upon the basis of the foregoing, we are of the opinion that:
1. The execution, delivery and performance by the Borrower of the
Credit Agreement and the Notes are within
1
<PAGE>
the Borrower's corporate powers and have been duly authorized by all necessary
corporate action.
2. The Credit Agreement constitutes a valid and binding agreement
of the Borrower and each Note issued thereunder today constitutes a valid and
binding obligation of the Borrower, in each case enforceable in accordance with
its terms, subject to applicable bankruptcy, insolvency or similar laws
affecting creditors' rights generally and general principles of equity.
We are members of the Bar of the State of New York and the
foregoing opinion is limited to the laws of the State of New York and the
federal laws of the United States of America. To the extent that any portion of
the foregoing opinion depends on the law of the Commonwealth of Virginia, we
have, with your consent and without any independent investigation, relied on the
opinions of McGuire, Woods, Battle & Boothe, L.L.P., referred to in clauses (b)
and (d) of Section 3.1 of the Credit Agreement, and this opinion is subject to
all assumptions, limitations and qualifications set forth therein. In giving the
foregoing opinion, we express no opinion as to the effect (if any) of any law of
any jurisdiction (except the State of New York) in which any Bank is located
which limits the rate of interest that such Bank may charge or collect.
This opinion is rendered solely to you in connection with the
above matter. This opinion may not be relied upon by you for any other purpose
or relied upon by any other Person without our prior written consent.
Very truly yours,
<PAGE>
EXHIBIT G - Assignment and Assumption Agreement
Assignment and Assumption Agreement
AGREEMENT dated as of _________, 19__ among <NAME OF ASSIGNOR>
(the "Assignor"), <NAME OF ASSIGNEE> (the "Assignee")[, Trigon Healthcare, Inc.
(the "Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the
"Agent").]
WHEREAS, this Assignment and Assumption Agreement (the
"Agreement") relates to the Credit Agreement dated as of February 5, 1997 among
the Borrower, the Assignor and the other Banks party thereto and the Agent (as
amended from time to time, the "Credit Agreement");
WHEREAS, as provided under the Credit Agreement, the Assignor has
a Commitment to make Loans to the Borrower in an aggregate principal amount at
any time outstanding not to exceed $____________;
WHEREAS, Committed Loans made to the Borrower by the Assignor
under the Credit Agreement in the aggregate principal amount of $__________ are
outstanding at the date hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of
the rights of the Assignor under the Credit Agreement in respect of a portion of
its Commitment thereunder in an amount equal to $__________ (the "Assigned
Amount"), together with a corresponding portion of each of its outstanding
Committed Loans, and the Assignee proposes to accept assignment of such rights
and assume the corresponding obligations from the Assignor on such terms;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise
defined herein have the respective meanings set forth in the Credit Agreement.
<PAGE>
SECTION 2. Assignment. The Assignor hereby assigns and sells to
the Assignee all of the rights of the Assignor under the Credit Agreement to the
extent of the Assigned Amount, and the Assignee hereby accepts such assignment
from the Assignor and assumes all of the obligations of the Assignor under the
Credit Agreement to the extent of the Assigned Amount, including the purchase
from the Assignor of the corresponding portion of the principal amount of each
of the Committed Loans made by the Assignor outstanding at the date hereof. Upon
the execution and delivery hereof by the Assignor, the Assignee, [the Borrower
and the Agent] and the payment of the amounts specified in Section 3 required to
be paid on the date hereof (i) the Assignee shall, as of the date hereof,
succeed to the rights and be obligated to perform the obligations of a Bank
under the Credit Agreement with a Commitment in an amount equal to the Assigned
Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be
reduced by a like amount and the Assignor released from its obligations under
the Credit Agreement to the extent such obligations have been assumed by the
Assignee. The assignment provided for herein shall be without recourse to the
Assignor.
SECTION 3. Payments. As consideration for the assignment and sale
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the
date hereof in Federal funds the amount heretofore agreed between them.(1)
Commitment and/or facility fees accrued before the date hereof are for the
account of the Assignor and such fees accruing on and after the date hereof are
for the account of the Assignee. Each of the Assignor and the Assignee agrees
that if it receives any amount under the Credit Agreement which is for the
account of the other party hereto, it shall receive the same for the account of
such other party to the extent of such other party's interest therein and
promptly pay the same to such other party.
[SECTION 4. Consent of the Borrower and the Agent.
This Agreement is conditioned upon the consent of the
- --------
(1) Amount should combine principal together with accrued interest and breakage
compensation, if any, to be paid by the Assignee, net of any portion of any
upfront fee to be paid by the Assignor to the Assignee. It may be preferable in
an appropriate case to specify these amounts generically or by formula rather
than as a fixed sum.
2
<PAGE>
Borrower and the Agent pursuant to Section 9.6(c) of the Credit Agreement. The
execution of this Agreement by the Borrower and the Agent is evidence of their
consent. Pursuant to Section 9.6(c), the Borrower agrees to execute and deliver
a Note payable to the order of the Assignee to evidence the assignment and
assumption provided for herein.]
SECTION 5. Non-Reliance on Assignor. The Assignor makes no
representation or warranty in connection with, and shall have no responsibility
with respect to, the solvency, financial condition or statements of the
Borrower, or the validity and enforceability of the Borrower's obligations under
the Credit Agreement or any Note. The Assignee acknowledges that it has,
independently and without reliance on the Assignor, and based on such documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and will continue to be responsible for
making its own independent appraisal of the business, affairs and financial
condition of the Borrower.
SECTION 6. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed and delivered by their duly authorized officers as of the date
first above written.
<NAME OF ASSIGNOR>
By_________________________
Name:
Title:
<NAME OF ASSIGNEE>
By__________________________
Name:
Title:
3
<PAGE>
Trigon Healthcare, Inc.
By__________________________
Name:
Title:]
[MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By__________________________
Name:
Title:]
4
Exhibit 13
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Amounts in thousands, except per share data and operating ratios
<TABLE>
<CAPTION>
Years Ended December 31,
1992 1993 1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
STATEMENT OF OPERATIONS DATA
Revenues
Premium and fee revenues
Commercial $1,057,821 1,050,157 1,081,820 1,157,899 1,320,596
Federal Employee Program 254,102 279,058 303,250 329,243 356,741
Amounts attributable to self-funded
arrangements 871,101 905,529 908,234 981,741 1,077,478
Less: Amounts attributable to claims
under self-funded arrangements (786,252) (815,488) (827,869) (897,954) (988,353)
- ----------------------------------------------------------------------------------------------------------------------------------
1,396,772 1,419,256 1,465,435 1,570,929 1,766,462
Investment income 31,810 34,279 39,962 45,861 47,312
Net realized gains 25,584 26,199 12,793 52,976 59,410
Other revenues 27,946 30,555 45,467 55,176 49,356
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues 1,482,112 1,510,289 1,563,657 1,724,942 1,922,540
Operating expenses
Medical and other benefit costs
Commercial 835,777 795,921 802,666 959,328 1,086,388
Federal Employee Program 238,986 262,295 283,645 312,222 339,143
- -----------------------------------------------------------------------------------------------------------------------------------
1,074,763 1,058,216 1,086,311 1,271,550 1,425,531
Selling, general and
administrative expenses 281,191 308,412 322,391 346,353 376,374
Copayment refund program - - 36,432 47,073 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,355,954 1,366,628 1,445,134 1,664,976 1,801,905
- -----------------------------------------------------------------------------------------------------------------------------------
Income from operations 126,158 143,661 118,523 59,966 120,635
Gain on sale of subsidiary - - - - 62,253
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, cumulative
effects of changes in accounting
principles and extraordinary items 126,158 143,661 118,523 59,966 182,888
Income tax expense (benefit) 32,220 35,803 24,564 8,264 (13,626)
Income before cumulative effects of changes in
accounting principles and extraordinary items 93,938 107,858 93,959 51,702 196,514
Cumulative effects of changes in accounting
principles, net of income taxes - 8,126 - - -
Extraordinary items, net of income taxes - - (644) (4,707) (190,820)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 93,938 115,984 93,315 46,995 5,694
===================================================================================================================================
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S><C>
OPERATING STATISTICS
Medical loss ratio
Commercial 79.0% 75.8% 74.2% 82.9% 82.3%
Federal Employee Program 94.1% 94.0% 93.5% 94.8% 95.1%
Selling, general and administrative
expense ratio(1) 12.7% 13.6% 13.8% 13.7% 13.4%
Operating margin(2) 8.5% 9.5% 9.9% 6.2% 6.3%
Net margin(2) 6.3% 7.1% 7.9% 5.4% 4.8%
PRO FORMA DATA(3)
Income from operations(4) - - - $54,063 61,225
Income before extraordinary items - - - $35,663 115,562
Income from operations per share(4) - - - $ .83 .94
Income before extraordinary items per share - - - $ .84 2.73
Shares outstanding - - - 42,300 42,300
</TABLE>
<TABLE>
<CAPTION>
Pro Forma(3)
December 31, December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
BALANCE SHEET DATA
Cash and investments $ 714,827 940,914 1,001,571 1,119,652 1,213,902 1,247,935
Total assets 1,037,301 1,266,952 1,403,104 1,565,331 1,833,148 1,867,181
Obligation for
Commonwealth Payment - - - - 175,000 -
Long-term debt - - - - - 85,000
Total surplus 444,271 606,146 655,875 740,071 739,780 -
Total stockholders' equity - - - - - 863,813
</TABLE>
(1) The selling, general and administrative expense ratio is calculated as a
percentage of total revenues excluding amounts attributable to claims under
self-funded arrangements, investment income and net realized gains.
(2) The operating margin ratio is calculated by dividing income from operations
by total revenues. The net margin ratio is calculated by dividing income
before cumulative effects of changes in accounting principles and
extraordinary items by total revenues. These ratios have been calculated
exclusive of non-recurring items which include the Copayment Program in 1994
and 1995, the gain on sale of subsidiary in 1996 and the elimination of a
$63.9 million valuation allowance on deferred tax assets in 1996.
(3) The pro forma data gives effect to the demutualization and initial public
offering as if they had occurred on January 1, 1995 for statement of
operations data and as if they had occurred on December 31, 1996 for the
balance sheet data. The pro forma data reflects (i) net offering proceeds of
$215.5 million, (ii) $91.5 million of cash paid to certain eligible members
in lieu of shares of stock, (iii) the payment of $175 million to the
Commonwealth of Virginia, (iv) the borrowing of $85.0 million under a
revolving credit agreement at 6% per annum to fund a portion of the payment
to the Commonwealth of Virginia and (v) the adjustment of the effective tax
rate to the 35% federal statutory rate.
(4) The pro forma income from operations excludes net realized gains on sales of
investment securities. In addition, the 1995 income from operations excludes
the effect of costs incurred under the Copayment refund program.
13
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
GENERAL
Substantially all of the Company's revenues are generated from premium and fees
received for health care services provided to its members and from net
investment income. The Company's expenses are primarily related to health care
services provided which consist of payments to physicians, hospitals and other
providers.
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. The
Company also participates in the Federal Employee Program (FEP), a national
contract with the U.S. Office of Personnel Management (OPM), to provide benefits
through its PPO network for approximately 197,000 federal employees and their
dependents living in Virginia.
MEMBERSHIP
The following table sets forth the membership data by network:
As of December 31,
1994 1995 1996
- -------------------------------------------------------------------------
Commercial:
HMO 85,739 172,893 248,172
PPO 155,433 212,322 230,675
PAR 334,800 296,716 236,383
Other(1) 158,503 149,109 177,266
- -------------------------------------------------------------------------
Subtotal 734,475 831,040 892,496
Self-funded 751,884 770,017 770,812
FEP 195,314 198,561 197,241
- -------------------------------------------------------------------------
Total 1,681,673 1,799,618 1,860,549
=========================================================================
(1) Other members include enrollment from Medicare supplemental plans,
out-of-state student health care coverage (which was discontinued as of
December 31, 1995) and Mid-South members for 1996.
PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM
The following table sets forth the premium and premium equivalents by network:
YEARS ENDED DECEMBER 31,
1994 1995 1996
- -------------------------------------------------------------------------
Commercial:
HMO $ 106,060 181,052 320,217
PPO 215,596 271,252 328,291
PAR 537,543 485,412 410,074
Other(1) 222,621 220,183 262,014
- -------------------------------------------------------------------------
Subtotal 1,081,820 1,157,899 1,320,596
Self-funded 908,234 981,741 1,077,478
FEP (PPO network) 303,250 329,243 356,741
- -------------------------------------------------------------------------
Total $ 2,293,304 2,468,883 2,754,815
=========================================================================
(1) Other includes premiums from Medicare supplemental plans, out-of-state
student health care coverage and Mid-South members after its acquisition in
February 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED
TO YEAR ENDED DECEMBER 31, 1996
Premium and fee revenues increased 12.4% from $1.571 billion in 1995 to $1.766
billion 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 in February 1996.
Commercial HMO revenues grew from $181.1 million in 1995 to $320.2 million in
1996, a growth rate of 76.9%. The $139.1 million increase in commercial HMO
revenues is attributable to shift in members from PAR and PPO networks into the
HMO network and from enrollment of new HMO members (collectively accounting for
an estimated $61.7 million of the increase), the conversion of 38,540 members
from self - funded products to commercial products (an estimated $31.0 million)
and a 3.9% increase in the average revenue per member (an estimated $15.2
million). In addition, the Priority, Inc. HMO acquisition in May 1995 accounted
for approximately $28.0 million of the increased HMO revenues. Commercial PPO
revenues grew from $271.3 million to $328.3 million for the same periods, a
growth rate of 21.0%. Commercial PAR revenues declined from $485.4 million in
1995 to $410.1 million in 1996 as a result of groups transitioning into more
14
<PAGE>
tightly managed networks. Commercial revenues for 1996 also include $52.9
million of revenues from Mid-South, which was acquired on February 29, 1996.
Total commercial premium per member per month increased 1.5% from $123.48 in
1995 to $125.33 in 1996. FEP revenues increased 8.4% from $329.2 million in 1995
to $356.7 million in 1996 as a result of increased medical costs reimbursed by
the OPM.
The number of commercial members served by the Company increased 7.4%, or
61,456 members, from December 31, 1995 to December 31, 1996. The increase in
commercial enrollment is a result of growth in the HMOs (75,279 members), the
Mid-South acquisition (49,251 members), continued growth in the PPO network
(18,353 members) offset by declining enrollment in the PAR network and out of
state student and individual products (80,190 members). Total members served by
the Company increased 3.4%, or 60,931 members, from 1995 to 1996.
Investment income increased 3.2% from $45.9 million in 1995 to $47.3
million in 1996. Realized gains increased 12.1% from $53.0 million in 1995 to
$59.4 million in 1996. The increase in investment income is attributable to the
increased size of the investment portfolio. The increase in realized gains is
due primarily to the sale of investment securities to fund the Mid-South
acquisition as well as the sale of investment securities in an effort to shorten
bond maturity levels. Net unrealized gains on the Company's investment
securities at December 31, 1996 were $51.6 million as compared to $60.7 million
at December 31, 1995.
Other revenues decreased by 10.5% from $55.2 million in 1995 to $49.4
million in 1996. Increased revenues generated from health management services
were offset by declining revenues from third party administration of health care
claims. 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. (HCS), on December 31, 1996 and recognized
an after tax gain of approximately $40 million as a result of this sale. In
1996, HCS contributed $21.5 million in other revenues.
Medical costs increased 12.1% from $1.272 billion in 1995 to $1.426
billion in 1996. This increase is primarily the result of enrollment growth in
the HMO's and the Priority and Mid-South acquisitions. The Company's medical
loss ratio on commercial business improved from 82.9% in 1995 to 82.3% in 1996.
The medical cost per member per month for the Company's commercial business
increased .8% from $102.31 in 1995 to $103.10 in 1996.
Selling, general and administrative (SG&A) expenses increased 8.7% from
$346.4 million in 1995 to $376.4 million in 1996. The SG&A expense ratio in 1995
was 13.7% verses 13.4% for 1996. The Company incurred $14.4 million of
additional costs related to increased HMO enrollment including the impact of the
Priority acquisition in 1995. The acquisitions of Mid-South in 1996 and Healthy
Homecomings, Inc. and Healthcare Venture Associates in 1995 resulted in a $16.9
million increase in 1996. The Company continues to invest in managed care
infrastructure and technology, increasing SG&A $8.5 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. In 1996 the Company incurred one-time charges of $6.1 million for
severence costs, signing bonuses, relocation and employment agreement
adjustments.
Income from operations, excluding the effect of the Copayment Program in
1995, increased by 12.7% from $107.0 million in 1995 to $120.6 million in 1996.
The increase is a result of the effects of the improved medical loss ratio and
increased investment income and realized gains, partially offset by the decline
in other revenues.
15
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS (continued)
The Company's effective tax rate for 1996 (income tax benefit as a
percentage of income before income taxes, cumulative effects of changes in
accounting principles and extraordinary items) was a tax benefit of 7.5%. This
rate differs from the 35% statutory federal rate primarily due to the
realization of alternative minimum tax credits during 1996 and the elimination
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 27.5% for
1996. These items are not recurring and the Company believes that in the future
its effective tax rate reflected in its consolidated financial statements should
approximate the 35% federal statutory rate.
In 1996, the Company reflected the $175 million obligation to the
Commonwealth of Virginia as required by the Plan of Demutualization as an
extraordinary charge in the consolidated financial statements. The other
extraordinary items represent administrative costs associated with the
demutualization.
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 HMO
and PPO networks offset by declines in PAR network enrollment. Commercial HMO
revenues grew from $106.1 million in 1994 to $181.1 million in 1995, a growth
rate of 70.7%. The $75.0 million increase in commercial HMO revenues is
attributable to increased HMO enrollment as a result of a shift in members from
PAR and PPO networks into the HMO networks and from enrollment of new HMO
members (collectively accounting for $73.7 million of the increase) and the
Priority acquisition ($19.0 million) partially offset by a 9.8% decrease in the
average revenue per member, causing a decrease in revenue of $17.7 million.
Commercial PPO revenues grew from $215.6 million to $271.3 million during the
same period, a growth rate of 25.8%. Commercial PAR revenues declined from
$537.5 million in 1994 to $485.4 million in 1995 as a result of the Company's
greater emphasis on its HMO and PPO networks as customers transition to more
tightly managed networks. Premium revenues on a per member basis for the
Company's commercial business decreased 2.2%. FEP revenues increased 8.6% from
$303.3 million in 1994 to $329.2 million in 1995 as a result of increased
medical costs reimbursed by the OPM. The net impact of self-funded arrangements
increased 4.3% from $80.4 million in 1994 to $83.8 million in 1995. The increase
includes a non-recurring $6.0 million adjustment resulting from the favorable
settlement of a dispute 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 reallocation.
16
<PAGE>
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.
17
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS (continued)
Income for operations 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. Income from operations
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.
Income before extraordinary items 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 items would have been
$124.0 million in 1994 and $92.3 million in 1995.
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 generally 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 believes that
concentrations of investments in any one asset class is 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 December 31, 1996) government and corporate securities, both
domestic and international. The short-term fixed income portfolio had an average
contractual maturity of 6 years as of December 31, 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 December 31, 1996 of 11.1 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 and
country. 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. During the
first quarter of 1997, the Company reduced its equity allocation from 27.8% of
the total portfolio at December 31, 1996 to approximately 15%. The Company
18
<PAGE>
currently plans to maintain the equity allocation at levels generally no greater
than 15%.
As a result of this shift, the Company expects greater than normal
realized gains in the first quarter of 1997 and thereafter lower realized gains
and a more consistent and predictable income stream from the investment
portfolio.
Cash provided by operations for the years ended December 31, 1994, 1995
and 1996 was $122.6 million, $34.1 million and $22.6 million, respectively.
In February of 1996, the Company completed its acquisition of Mid-South
Insurance Company, a North Carolina based life and health insurance company, for
approximately $85.6 million in cash. On December 31, 1996, the Company completed
its disposition of Health Communications Services, Inc., its electronic
communication services subsidiary. The Company realized a $62.3 million gain
($40.0 million after tax) on this sale.
Effective February 5, 1997, the Company completed its conversion from a
mutual insurance company to a stock insurance company in accordance with a Plan
of Demutualization (the Demutualization). In accordance with the
Demutualization, Blue Cross and Blue Shield of Virginia changed its name to
Trigon Insurance Company, Inc. (dba Trigon Blue Cross Blue Shield) and became a
wholly owned subsidiary of Trigon Healthcare, Inc., a newly formed holding
company. The membership interests of the Company's eligible members were
converted into common stock of Trigon Healthcare, Inc., or in certain
circumstances, cash. The Plan of Demutualization also required the Company to
complete an initial public offering of stock simultaneously with the conversion.
Accordingly, Trigon Healthcare, Inc. issued 17.8 million shares of common stock
at $13 per share in a public offering generating net proceeds of $215.5 million.
In connection with the Demutualization, the Company was required to make a
payment of approximately $175 million to the Commonwealth of Virginia. The
Company used approximately $90 million of the net proceeds and $85 million in
borrowings under a revolving credit agreement to fund this payment.
Also simultaneous with the Demutualization and initial public offering,
the Company entered into a $300 million revolving credit agreement with a
syndicate of banks which expires in February 2002. The agreement provides for
various borrowing options and rates. The agreement also contains certain
financial covenants and restrictions including minimum net worth requirements as
well as limitations on dividend payments.
The Company believes that cash flow generated by operations and its cash
and investment balances will be sufficient to fund continuing operations,
capital expenditures and to service its debt 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.
19
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
<TABLE>
<CAPTION>
(In thousands) 1995 1996
- -----------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current assets
Cash $ 29,263 31,482
Investment securities, at estimated fair value (note 3) 1,090,389 1,182,420
Premiums and other receivables (note 4) 332,878 390,997
Deferred income taxes (note 10) - 16,572
Other assets 9,369 10,035
- -----------------------------------------------------------------------------------------------------
Total current assets 1,461,899 1,631,506
- -----------------------------------------------------------------------------------------------------
Property and equipment, net (note 5) 44,794 49,545
Deferred income taxes (note 10) 15,229 48,170
Goodwill and other intangibles, net (note 13) 22,847 76,043
Restricted investments, at estimated fair value (note 3) 6,918 11,019
Other assets 13,644 16,865
- -----------------------------------------------------------------------------------------------------
Total assets $1,565,331 1,833,148
=====================================================================================================
LIABILITIES AND SURPLUS
Current liabilities
Medical and other benefits payable (note 6) $ 372,815 421,440
Unearned premiums 97,789 91,164
Accounts payable and accrued expenses 82,853 86,966
Deferred income taxes (note 10) 13,968 -
Other liabilities (note 8) 170,711 203,773
Obligation for Commonwealth Payment (note 17) - 87,500
- -----------------------------------------------------------------------------------------------------
Total current liabilities 738,136 890,843
- -----------------------------------------------------------------------------------------------------
Obligation for Commonwealth Payment, noncurrent (note 17) - 87,500
Obligations for employee benefits, noncurrent (note 11) 51,548 57,679
Medical and other benefits payable, noncurrent (note 6) 31,622 53,107
Minority interest in subsidiaries 3,954 4,239
- -----------------------------------------------------------------------------------------------------
Total liabilities 825,260 1,093,368
- -----------------------------------------------------------------------------------------------------
Surplus
Retained earnings 700,565 706,259
Net unrealized gain on investment securities, net of deferred
income taxes of $21,242 and $18,032 (note 3) 39,506 33,521
- -----------------------------------------------------------------------------------------------------
Total surplus 740,071 739,780
Commitments and contingencies (notes 7, 11, 13, 14, 15, 16 and 17)
- -----------------------------------------------------------------------------------------------------
Total liabilities and surplus $1,565,331 1,833,148
=====================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
20
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
(In thousands) 1994 1995 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Revenues
Premium and fee revenues
Commercial $1,081,820 1,157,899 1,320,596
Federal Employee Program 303,250 329,243 356,741
Amounts attributable to self-funded arrangements 908,234 981,741 1,077,478
Less: amounts attributable to claims under
self-funded arrangements (827,869) (897,954) (988,353)
- --------------------------------------------------------------------------------------------------------------------------------
1,465,435 1,570,929 1,766,462
Investment income (note 3) 39,962 45,861 47,312
Net realized gains (note 3) 12,793 52,976 59,410
Other revenues (note 9) 45,467 55,176 49,356
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 1,563,657 1,724,942 1,922,540
- --------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Medical and other benefit costs (note 6)
Commercial 802,666 959,328 1,086,388
Federal Employee Program 283,645 312,222 339,143
- --------------------------------------------------------------------------------------------------------------------------------
1,086,311 1,271,550 1,425,531
Selling, general and administrative expenses (note 1) 322,391 346,353 376,374
Copayment refund program (note 14) 36,432 47,073 -
- --------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,445,134 1,664,976 1,801,905
- --------------------------------------------------------------------------------------------------------------------------------
Income from operations 118,523 59,966 120,635
Gain on sale of subsidiary (note 13) - - 62,253
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary items 118,523 59,966 182,888
Income tax expense (benefit) (note 10) 24,564 8,264 (13,626)
- --------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary items 93,959 51,702 196,514
Extraordinary items - demutualization costs and
Commonwealth Payment, net of income taxes
of $347, $2,535 and $833 (note 17) (644) (4,707) (190,820)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 93,315 46,995 5,694
================================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
21
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS
Years Ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Unrealized
gains (losses)
Retained on investment Total
earnings securities, net surplus
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance at January 1, 1994 $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 income 5,694 - 5,694
Change in unrealized gains (losses) on investment securities, net - (5,985) (5,985)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $706,259 33,521 739,780
===============================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
22
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
(In thousands) 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net cash provided by operating activities
(note 12) $ 122,646 34,118 22,554
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 89 25 45
Capital expenditures (12,543) (13,293) (14,147)
Investment securities purchased (1,844,039) (2,694,188) (2,759,974)
Proceeds from investment securities sold 1,192,725 1,531,862 2,585,033
Maturities of fixed income securities 538,413 1,178,232 186,420
Cash paid for purchase of subsidiaries, net of
cash acquired - (26,762) (84,497)
Proceeds from the sale of subsidiary - - 76,979
Cash paid for other investments - (7,500) -
- ------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (125,355) (31,624) (10,141)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities - Change in outstanding
checks in excess of bank balance 5,809 15,667 (10,194)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 5,809 15,667 (10,194)
Net increase in cash 3,100 18,161 2,219
Cash - beginning of year 8,002 11,102 29,263
- ------------------------------------------------------------------------------------------------------------------------
Cash - end of year $ 11,102 29,263 31,482
========================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
23
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1995 and 1996
GENERAL
Effective February 5, 1997, Blue Cross and Blue Shield of Virginia (dba Trigon
Blue Cross Blue Shield) completed its conversion from a mutual insurance company
to a stock insurance company, changed its name to Trigon Insurance Company (dba
Trigon Blue Cross Blue Shield) and became a wholly-owned subsidiary of Trigon
Healthcare, Inc. (Trigon Healthcare, Inc. and subsidiaries herein collectively
referred to as the Company) as described in note 17. The Company is organized
for the purpose of managing and financing hospitalization, medical and other
health benefits. 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). Trigon Blue Cross Blue Shield 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, Trigon Administrators, Inc., Health Management
Corporation, Monticello Life Insurance Company, Inc., Monticello Service Agency,
Inc. and Trigon Health Ventures, Inc. Trigon Blue Cross Blue Shield 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 Trigon
Blue Cross Blue Shield. These products and services include third-party
administration for medical and workers' compensation, life and disability
insurance, health promotion and other products.
The Company follows Statement of Financial Accounting Standards 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 are as
follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Trigon Healthcare,
Inc. 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
24
<PAGE>
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
Investment securities are accounted for in accordance with Statement of
Financial Accounting Standards 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 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 and $5,340,000 for the
years ended December 31, 1995 and 1996, respectively. Accumulated amortization
at December 31, 1995 and 1996 was $1,399,000 and $6,739,000, 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.
25
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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
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.
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.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. 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. 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.
26
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1996
Consistent with the financial statement presentation, the following notes
include information related to the consolidated balance sheets as of December
31, 1995 and 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, 1996.
NOTE 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, 1994, 1995 and 1996 (in thousands):
1994 1995 1996
- -----------------------------------------------------------------------------
Claims processed for:
Medicare $2,456,766 2,654,580 2,873,526
Other plans 12,890 37,046 55,480
- -----------------------------------------------------------------------------
$2,469,656 2,691,626 2,929,006
=============================================================================
Operating expenses reimbursed by:
Medicare $ 11,816 11,605 11,634
Other plans 44 807 1,376
- -----------------------------------------------------------------------------
$ 11,860 12,412 13,010
=============================================================================
NOTE 2. STATUTORY FINANCIAL STATEMENTS
Trigon Blue Cross Blue Shield 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, Trigon Blue Cross Blue Shield has not received,
nor requested, approval to adopt any such deviations. In accordance with the
Insurance Code of Virginia (the Code), Trigon Blue Cross Blue Shield's statutory
surplus is reduced by Category 2 investments that exceed a specified threshold.
Category 2 investments consist primarily of domestic equity investments that
exceed a specified percentage of admitted assets and foreign denominated
investments. At December 31, 1995, this reduction in statutory surplus due to
excess Category 2 investments approximated $92,000. There were no excess
Category 2 investments at December 31, 1996.
Trigon Blue Cross Blue Shield's Statutory Surplus and Net Income Approximated
(in thousands):
Statutory surplus at:
December 31, 1995 $ 478,000
December 31, 1996 (unaudited) 621,000
Statutory net income for the years ended:
December 31, 1994 $ 113,000
December 31, 1995 83,000
December 31, 1996 (unaudited) 99,000
Trigon Blue Cross Blue Shield is required by the Commonwealth of Virginia,
Bureau of Insurance to maintain statutory capital and surplus 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 expects Trigon Blue Cross Blue Shield's RBC level as
calculated in accordance with the NAIC RBC Instructions at December 31, 1996 to
exceed all RBC thresholds.
27
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Mid-South Insurance Company, Monticello Life Insurance Company, Inc. and
the Company's HMO subsidiaries are also required to file statutory financial
statements in each of the states in which they are licensed.
NOTE 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, 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
==================================================================================================================================
December 31, 1996
----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed income
Domestic
U.S. Treasury securities and obligations of U.S. government agencies $ 308,205 478 3,667 305,016
Mortgage-backed obligations of U.S. government agencies 70,194 977 415 70,756
Other mortgage-backed and asset-backed securities 156,901 842 231 157,512
Domestic corporate bonds 103,221 1,056 353 103,924
Short-term debt securities with maturities of less than one year 164,239 26 7 164,258
Foreign
Debt securities issued by foreign governments 38,496 1,941 249 40,188
Foreign corporate bonds 7,082 493 72 7,503
Short-term debt securities with maturities of less than one year 11,528 9 51 11,486
- ----------------------------------------------------------------------------------------------------------------------------------
Total fixed income 859,866 5,822 5,045 860,643
- ----------------------------------------------------------------------------------------------------------------------------------
Equities
Domestic equity securities 148,111 34,359 2,018 180,452
Foreign equity securities 133,366 26,580 8,662 151,284
- ----------------------------------------------------------------------------------------------------------------------------------
Total equities 281,477 60,939 10,680 331,736
- ----------------------------------------------------------------------------------------------------------------------------------
Derivative instruments 543 965 448 1,060
- ----------------------------------------------------------------------------------------------------------------------------------
$1,141,886 67,726 16,173 1,193,439
==================================================================================================================================
Unrestricted $1,130,808 67,718 16,106 1,182,420
Restricted 11,078 8 67 11,019
- ----------------------------------------------------------------------------------------------------------------------------------
$1,141,886 67,726 16,173 1,193,439
==================================================================================================================================
</TABLE>
28
<PAGE>
Short-term investments consist principally of commercial paper and money
market investments.
Derivative instruments consist of foreign currency forward contracts and
foreign currency options. The Company enters into these instruments 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 December 31, 1996, the Company had
forward exchange contracts outstanding to purchase approximately $11.9 million
in foreign currencies and to sell approximately $24.4 million in foreign
currencies (primarily German Mark, Japanese Yen, British Pound, Italian Lira and
Netherland Guilder). All of these contracts have maturities of six months or
less. The gross unrealized gains and losses related to these contracts at
December 31, 1996 aggregated $130,441 and $447,872, respectively. Foreign
currency options to sell approximately $34.2 million of foreign currencies
(Japanese Yen and German Mark) at set prices were outstanding at December 31,
1996. These options generally expire within twelve months. The gross unrealized
gains related to these options at December 31, 1996 aggregated $835,205. There
were no gross unrealized losses at December 31, 1996.
The amortized cost and estimated fair value of fixed income securities at
December 31, 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.
Amortized Estimated
cost fair value
- ----------------------------------------------------------------------------
Due in one year or less $260,112 260,869
Due after one year through five years 310,819 311,250
Due after five years through ten years 211,214 211,979
Due after ten years 77,721 76,545
- ----------------------------------------------------------------------------
$859,866 860,643
============================================================================
Included in investment securities at December 31, 1996 are $4,487,540, at
estimated fair value, of U.S. Treasury securities held by the Commonwealth of
Virginia to meet security deposit requirements related to Trigon Blue Cross Blue
Shield and its HMO subsidiaries. In addition, U.S. Treasury and other high
quality securities in the amount of $6,531,255, 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.
The major components of investment income were as follows (in thousands):
1994 1995 1996
- ---------------------------------------------------------------------------
Interest on bonds $31,980 37,789 36,985
Interest on short-
term investments 6,557 9,764 8,654
Dividends 9,629 7,652 10,701
- ---------------------------------------------------------------------------
48,166 55,205 56,340
Investment expenses 5,546 5,757 5,711
Group interest credits 2,658 3,587 3,317
- ---------------------------------------------------------------------------
Investment income $39,962 45,861 47,312
===========================================================================
29
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Gross realized gains and losses are summarized as follows (in thousands):
1994 1995 1996
- ----------------------------------------------------------------------------
Gross realized gains
Fixed income securities $ 7,611 13,890 12,697
Equity securities 43,384 58,938 70,421
Derivative instruments - 11,430 6,659
- ----------------------------------------------------------------------------
50,995 84,258 89,777
- ----------------------------------------------------------------------------
Gross realized losses
Fixed income securities 14.821 9.081 10.365
Equity securities 23,381 15,520 18,834
Derivative instruments - 6,681 1,168
- ----------------------------------------------------------------------------
38,202 31,282 30,367
- ----------------------------------------------------------------------------
Net realized gains $12,793 52,976 59,410
============================================================================
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 change in unrealized gains (losses), less deferred
income taxes, is as follows (in thousands):
1994 1995 1996
- ------------------------------------------------------------------------------
Fixed income securities $(27,877) 31,921 (12,284)
Equity securities (39,319) 25,051 2,943
Derivative instruments - 371 146
Provision for deferred
income taxes 23,610 (20,142) 3,210
- ------------------------------------------------------------------------------
$(43,586) 37,201 (5,985)
==============================================================================
NOTE 4. PREMIUMS AND OTHER RECEIVABLES
Premiums and other receivables were as follows (in thousands):
1995 1996
- ------------------------------------------------------------------------------
Premiums $ 71,369 72,687
Self-funded group receivables 110,564 156,076
Federal Employee Program 126,258 138,213
Medicare 1,154 145
Investment income receivable 8,534 7,886
Other 14,999 15,990
- -----------------------------------------------------------------------------
$332,878 390,997
=============================================================================
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment were as follows (in thousands):
1995 1996
- -----------------------------------------------------------------------------
Land and improvements $ 973 2,977
Buildings and improvements 30,586 35,721
Furniture and equipment 67,440 69,703
Computer software 12,641 14,403
- -----------------------------------------------------------------------------
111,640 122,804
Less accumulated depreciation
and amortization 66,846 73,259
- -----------------------------------------------------------------------------
$ 44,794 49,545
=============================================================================
NOTE 6. MEDICAL AND OTHER BENEFITS PAYABLE
Medical and other benefits payable were as follows (in thousands):
1995 1996
- ---------------------------------------------------------------------------
Medical and other benefits payable - current
Commercial and FEP
Claims reported but not paid $ 20,730 23,715
Claims incurred but not reported 208,129 230,087
- ---------------------------------------------------------------------------
228,859 253,802
Self-funded
Claims reported but not paid 14,334 15,383
Claims incurred but not reported 127,661 151,465
- ---------------------------------------------------------------------------
141,995 166,848
Medical and other benefits payable -
noncurrent (all commercial) 31,622 53,107
- ---------------------------------------------------------------------------
402,476 473,757
Liability for claims processing costs 16,582 17,283
Advances to providers (14,621) (16,493)
- ---------------------------------------------------------------------------
404,437 474,547
Less medical and other benefits payable -
noncurrent (31,622) (53,107)
- ---------------------------------------------------------------------------
$372,815 421,440
===========================================================================
30
<PAGE>
A summary of the activity for commercial and FEP medical and other
benefits payable is as follows (in thousands):
1994 1995 1996
- ---------------------------------------------------------------------------
Medical and other benefits
payable at beginning
of year $ 359,355 355,836 402,476
Self-funded at beginning
of year (138,344) (134,659) (141,995)
- ---------------------------------------------------------------------------
Balance at beginning of year 221,011 221,177 260,481
- ---------------------------------------------------------------------------
Liabilities acquired with
Mid-South - - 38,963
Incurred related to
Current year 1,095,014 1,275,583 1,427,859
Prior years (8,703) (4,033) (2,328)
- ---------------------------------------------------------------------------
Total incurred 1,086,311 1,271,550 1,425,531
- ---------------------------------------------------------------------------
Paid related to
Current year 948,660 1,083,170 1,227,599
Prior years 137,485 149,076 190,467
- ---------------------------------------------------------------------------
Total paid 1,086,145 1,232,246 1,418,066
- ---------------------------------------------------------------------------
Balance at end of year 221,177 260,481 306,909
Self-funded at end of year 134,659 141,995 166,848
- ---------------------------------------------------------------------------
Medical and other benefits
payable at end of year $ 355,836 402,476 473,757
===========================================================================
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.
NOTE 7. LEASES
The Company has noncancelable operating leases for real estate and equipment
that expire over the next ten years and provide for purchase or renewal options.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996 are (in thousands):
Years ending December 31,
- ---------------------------------------------------------------------------
1997 $ 8,920
1998 6,516
1999 5,548
2000 4,146
2001 3,584
Later years through 2006 8,863
- ---------------------------------------------------------------------------
Total minimum lease payments $37,577
===========================================================================
Total rental expense for operating leases for the years ended December 31,
1994, 1995 and 1996 was $14,979,000, $15,243,000 and $13,354,000, respectively.
NOTE 8. OTHER LIABILITIES
Other liabilities were as follows (in thousands):
1995 1996
- --------------------------------------------------------------------------
Outstanding checks in excess of
bank balance $ 50,545 40,351
Subscriber related liabilities 4,732 4,637
Unearned premium reserve -
Federal Employee Program 70,541 86,841
Self-funded group deposits 18,315 19,244
Current income taxes payable 2,704 29,023
Other 23,874 23,677
- --------------------------------------------------------------------------
$170,711 203,773
==========================================================================
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.
NOTE 9. OTHER REVENUES
Other revenues include those revenues earned by non-core subsidiaries. A summary
by type of revenue is included below (in thousands):
1994 1995 1996
- --------------------------------------------------------------------------
Electronic communication
services $18,881 20,583 21,474
Employee benefits
administration 8,913 9,435 6,957
Workers' compensation
administration 8,490 9,707 9,682
Health management services 4,128 6,970 9,039
Other 5,055 8,481 2,204
- --------------------------------------------------------------------------
$45,467 55,176 49,356
==========================================================================
31
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10. INCOME TAXES
Income tax expense (benefit) attributable to income before income taxes and
extraordinary items, substantially all of which is federal, consists of (in
thousands):
1994 1995 1996
- --------------------------------------------------------------------------
Current $21,160 19,206 45,857
Deferred 3,404 (10,942) (59,483)
- --------------------------------------------------------------------------
$24,564 8,264 (13,626)
==========================================================================
The differences between the statutory federal income tax rate and the
actual tax rate applied to income before income taxes and extraordinary items
are as follows:
1994 1995 1996
- --------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax exempt investment income (.9) (1.2) (.3)
Section 833 deduction (2.4) - -
Change in valuation allowance (13.5) (19.4) (44.0)
Other, net 2.5 (0.6) 1.8
- --------------------------------------------------------------------------
Effective tax rate 20.7% 13.8% (7.5)%
==========================================================================
The components of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1996 are as follows (in thousands):
1995 1996
- -------------------------------------------------------------------------
Deferred tax assets
Employee benefit plans $ 20,595 22,880
Insurance reserves 27,132 27,492
Alternative minimum tax credit
carryforward 48,494 21,658
Property and equipment 6,187 6,244
Other 1,623 4,302
- -------------------------------------------------------------------------
Gross deferred tax assets 104,031 82,576
Less valuation allowance 80,476 -
- -------------------------------------------------------------------------
Net deferred tax assets 23,555 82,576
Deferred tax liabilities
Investment securities 21,482 17,279
Other 812 555
- -------------------------------------------------------------------------
Gross deferred tax liabilities 22,294 17,834
- -------------------------------------------------------------------------
Net deferred tax asset $ 1,261 64,742
=========================================================================
Deferred tax assets (liabilities) are presented on the accompanying consolidated
balance sheets as follows:
1995 1996
- --------------------------------------------------------------------------
Deferred tax assets
Current $ - 16,572
Noncurrent 15,229 48,170
Deferred tax liabilities - Current (13,968) -
- --------------------------------------------------------------------------
Net deferred tax asset $ 1,261 64,742
==========================================================================
Trigon Blue Cross Blue Shield has qualified 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 Trigon Blue Cross Blue Shield to alternative minimum
tax. Trigon Blue Cross Blue Shield's ability to continue to qualify for the
deduction depends on whether the Demutualization (see note 17) 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 will generally result in a material change.
Because it has been unclear whether Trigon Blue Cross Blue Shield 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, Trigon Blue Cross Blue Shield 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
32
<PAGE>
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 were received, the valuation
allowance on the deferred tax assets relating to the AMT credits was eliminated
during 1996. The balance of the 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.
NOTE 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, 1994,
1995 and 1996, the Company made contributions to the Trust in the amounts of
$8,096,000, $7,716,000 and $7,933,000, 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.
The following table sets forth the pension plan's funded status at
December 31, 1995 and 1996 (in thousands):
1995 1996
- ---------------------------------------------------------------------------
Accumulated benefit obligation,
including vested benefits
of $57,652 in 1995 and
$59,656 in 1996 $ (68,015) (70,183)
============================================================================
Projected benefit obligation for
service rendered to date (103,766) (105,517)
Plan assets at fair value 77,948 99,352
- ----------------------------------------------------------------------------
Excess of projected benefit obligation
over assets (25,818) (6,165)
Unrecognized net asset at January 1,
1987 being recognized over 17 years(895) (783)
Unrecognized prior service cost 784 697
Unrecognized net loss (gain) 16,968 (3,988)
- -----------------------------------------------------------------------------
Accrued pension cost $ (8,961) (10,239)
=============================================================================
Pension expense included the following components (in thousands):
1994 1995 1996
- ----------------------------------------------------------------------------
Service cost - benefits earned
during the year $6,063 6,705 7,765
Interest cost on projected
benefit obligation 5,501 6,507 7,595
Actual return on plan assets (4,817) (12,194) (13,714)
Net amortization and deferral 355 6,926 7,565
- ----------------------------------------------------------------------------
Net periodic pension expense $7,102 7,944 9,211
============================================================================
The weighted average discount rate was 7.25% and 7.75% at December 31,
1995 and 1996, respectively. The expected long term rate of return on assets was
9.0% at December 31, 1995 and 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,
1995 and 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
33
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 1994, 1995 and
1996, the Company's contribution to the Employee Thrift Plan approximated
$2,954,000, $3,153,000 and $3,418,000, 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, 1994 and 1995, the Company
made contributions to the Trust in the amounts of $2,700,000 and $2,500,000,
respectively. The Company made no contribution to the Trust for the year ended
December 31, 1996.
The following table presents the funded status of the plan including the
accumulated postretirement benefit obligation by type of participant at December
31, 1995 and 1996 (in thousands):
1995 1996
- ---------------------------------------------------------------------------
Retirees $ (6,033) (7,069)
Fully eligible active plan participants (4,605) (3,825)
Other active plan participants (17,592) (18,861)
- ---------------------------------------------------------------------------
Accumulated postretirement
benefit obligation (28,230) (29,755)
Plan assets at fair value 10,036 12,218
- ---------------------------------------------------------------------------
Excess of accumulated postretirement
benefit obligation over plan assets (18,194) (17,537)
Unrecognized net gain (2,282) (5,646)
Unrecognized net reduction in
prior service cost (6,433) (5,772)
- ---------------------------------------------------------------------------
Accrued postretirement benefit cost $(26,909) (28,955)
===========================================================================
<PAGE>
Postretirement benefit expense for the years ended December 31, 1994, 1995
and 1996 included the following components (in thousands):
1994 1995 1996
- --------------------------------------------------------------------------------
Service cost - benefits
attributed to service
during the year $2,078 2,128 2,373
Interest cost on accumulated
postretirement benefit
obligation 1,688 1,843 2,044
Expected return on plan assets (266) (622) (1,009)
Amortization of prior
service cost (661) (661) (661)
Amortization of gains - - (29)
- --------------------------------------------------------------------------------
Net periodic postretirement
benefit expense $2,839 2,688 2,718
================================================================================
For measurement purposes, a 5% annual rate of increase in the per capita
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rate by 1
percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 1996 by $5,146,000 and the aggregate of the
service and interest cost components of net periodic postretirement benefit
expense would increase by $851,000 for the year ended December 31, 1996.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% and 7.75% at December 31, 1995 and
1996, respectively. 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, 1995 and 1996.
34
<PAGE>
NOTE 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, 1994, 1995 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net income $ 93,315 46,995 5,694
Adjustments to reconcile net income to net cash provided by operating activities,
net of effects from purchase of subsidiaries:
Depreciation and amortization 12,226 10,960 17,147
Increase (decrease) in allowance for doubtful accounts receivable (673) 468 402
Increase in premiums and other receivables (64,064) (5,989) (59,999)
Increase in other assets (4,926) (2,531) (3,740)
Increase (decrease) in medical and other benefits payable (2,604) 68,945 32,656
Decrease in unearned premiums (4,198) (5,252) (6,888)
Increase (decrease) in accounts payable and accrued expenses 26,393 4,106 (7,672)
Increase (decrease) in other liabilities 74,839 (22,774) 45,665
Change in deferred income taxes 3,403 (8,030) (60,678)
Increase in obligation for Commonwealth Payment - - 175,000
Increase (decrease) in minority interest (243) (703) 285
Increase in obligations for employee benefits 2,007 784 6,131
Gain on the sale of subsidiary - - (62,253)
(Gain) loss on disposal of assets (36) 115 214
Realized investment gains, net (12,793) (52,976) (59,410)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $122,646 34,118 22,554
===========================================================================================================================
Cash paid during the period for:
Interest $6,930 15,390 4,326
Income taxes 26,672 20,061 18,900
===========================================================================================================================
</TABLE>
NOTE 13. ACQUISITION AND DISPOSITION ACTIVITY
Acquisitions
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
was accounted for as a purchase and, accordingly, the results of operations of
Priority are included in the consolidated financial statements since the date of
acquisition. Goodwill arising from the acquisition amounted to $21.1 million. No
pro forma information has been provided since Priority's results of operations
prior to its 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, of which $1,050,000 was funded during
1996, 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.
35
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 pro forma information has been provided
since Mid-South's results of operations prior to its acquisition were not
material to the Company.
Disposition
Effective December 31, 1996, the Company sold its subsidiary, Health
Communications Services (HCS), to National Data Corporation for $77.0 million
cash. The Company recorded a pre-tax and after-tax gain on the sale of HCS of
$62.3 million and $40.0 million, respectively. The Company's earnings and cash
flows reflect the operations of HCS through December 31, 1996.
NOTE 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
million 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 on or
before May 1, 1997. The cost of the re-opening of the Copayment Program in 1995
was $47.1 million or $40.6 million, net of income taxes.
NOTE 15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND
CONCENTRATIONS OF CREDIT RISK
The carrying amounts of cash, premiums and other receivables, other current
assets, medical and other benefits payable, unearned premiums, accounts payable
and accrued expenses and other liabilities approximate fair value because of the
short-term nature of these instruments. The fair values of investment securities
are estimated based on quoted market prices.
36
<PAGE>
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 in one
issue. The Company primarily conducts business within the Commonwealth of
Virginia; therefore premiums receivable are concentrated with companies and
individuals within Virginia.
NOTE 16. LEGAL AND REGULATORY PROCEEDINGS
In November 1993, management of 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 condition.
The Company is also the defendant in three 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 members covered by
the plans. One suit sought $750,000 in compensatory damages and the second suit
sought $1.1 million in compensatory damages. Both of these suits have been
settled and the Company is awaiting entry of dismissal orders. A third suit has
been filed against the Company seeking $1.2 million in compensatory damages. The
Company is also presently the subject of 14 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
37
<PAGE>
discount-related claims and litigation brought by these self-funded employer
groups will not have a material adverse effect on the consolidated 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 is 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 matters, 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. 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.
The Virginia General Assembly is currently considering legislation which
would change the Virginia open enrollment program. If this legislation were
enacted, the Company would pay a premium tax rate of 2.25% on all group business
effective January 1, 1998. Management of the Company does not expect this
proposed change to have a significant impact on its consolidated results of
operations.
NOTE 17. DEMUTUALIZATION AND INITIAL PUBLIC OFFERING
Effective February 5, 1997, Blue Cross and Blue Shield of Virginia converted
from a mutual insurance company to a stock insurance company in accordance with
a Plan of Demutualization (the Demutualization). In accordance with the
Demutualization, Blue Cross and Blue Shield of Virginia changed its name to
Trigon Insurance Company (dba Trigon Blue Cross Blue Shield) and became a
wholly-owned subsidiary of Trigon Healthcare, Inc., a newly formed holding
company. The membership interests of the Company's eligible members were
converted into common stock of Trigon Healthcare, Inc., or in certain
circumstances, cash. The Plan of Demutualization also required an initial public
offering to occur simultaneously with the conversion. Accordingly, Trigon
Healthcare, Inc. issued 17.8 million shares of common stock at $13 per share in
a public offering with net proceeds of $215.5 million. 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
payment must be made in cash and the remainder in cash or shares of Class C
Common Stock. The Company expects to use proceeds from the offering in
conjunction with borrowings under a revolving credit agreement (discussed below)
to pay the Commonwealth Payment and does not anticipate issuing any Class C
Common Stock. The Commonwealth Payment is required to be made within ten
business days of the effective date of the Demutualization. The Commonwealth
Payment has been accrued and is reflected as an extraordinary charge in the
consolidated financial statements for 1996.
Simultaneous with the Demutualization and initial public offering, the
Company entered into a $300 million revolving credit agreement with a syndicate
of banks which expires in February 2002. The agreement provides for various
borrowing options and rates and requires the Company to pay a facility fee on a
quarterly basis. The agreement also contains certain financial covenants and
restrictions including minimum net worth requirements as well as limitations on
dividend payments.
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1996 as reported and on a pro forma basis to reflect
the Demutualization (including the effect of approximately $91.5 million of cash
paid to certain
38
<PAGE>
eligible members), initial public offering (net proceeds of $215.5 million), the
Commonwealth Payment ($175 million) and the borrowing under the revolving credit
agreement ($85 million) as if they had occurred on December 31, 1996:
<TABLE>
<CAPTION>
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 -
Long-term debt - 85,000
Stockholders' equity:
Common stock, $0.01 per share par value,
300,000,000 shares authorized;
42,300,022 shares issued and outstanding - 423
Capital in excess of par - 829,869
Retained earnings 706,259 -
Net unrealized gain on investment securities 33,521 33,521
- ------------------------------------------------------------------------------------------------------
Total surplus 739,780 -
Total stockholders' equity - 863,813
- ------------------------------------------------------------------------------------------------------
Total capitalization $827,280 948,813
======================================================================================================
</TABLE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Trigon Healthcare, Inc.:
We have audited the accompanying consolidated balance sheets of Trigon
Healthcare, Inc. and subsidiaries (formerly Blue Cross and Blue Shield of
Virginia and subsidiaries) as of December 31, 1995 and 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, 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 Trigon
Healthcare, Inc. and subsidiaries as of December 31, 1995 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
---------------------------
Richmond, Virginia
February 7, 1997
40
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
MANAGEMENT REPORT
The management of Trigon Healthcare, Inc. is responsible for the integrity
and objectivity of the consolidated financial statements. These statements have
been prepared in accordance with generally accepted accounting principles and
include some amounts that are based on management's best estimates and judgment.
The accounting systems and controls of the Company are designed to provide
reasonable assurance that financial records are reliable for use in preparing
financial statements and that assets are safeguarded. Management believes that
the Company's system of internal controls for the year ended December 31, 1996
was effective and adequate to accomplish the above described objectives.
The Board of Directors appoints to the Audit Committee members who are
neither officers nor employees of the Company. The committee meets periodically
with management, the internal auditors and the independent auditors to review
financial reports, internal accounting controls and the scope and results of
audit efforts. Both the internal auditors and the independent auditors have full
and free access to the Audit Committee, with and without management
representation.
/s/ Norwood H. Davis, Jr.
- -------------------------
Norwood H. Davis, Jr.
Chairman of the Board and
Chief Executive Officer
/s/ Thomas G. Snead, Jr.
- ------------------------
Thomas G. Snead, Jr.
Senior Vice President and
Chief Financial Officer
41
Exhibit 23
Consent of Independent Auditors
The Board of Directors
Trigon Healthcare, Inc.:
We consent to the incorporation by reference in the registration statement
(No. 333-22463) on Form S-8 of Trigon Healthcare, Inc. of our report dated
February 7, 1997, relating to the consolidated balance sheets of Trigon
Healthcare, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related statements of operations, changes in surplus and cash flows for each
of the years in the three-year period ended December 31, 1996, which report
is incorporated by reference in the annual report on Form 10-K of Trigon
Healthcare, Inc.
/s/ KPMG Peat Marwick LLP
----------------------------
Richmond, Virginia
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 31,482
<SECURITIES> 1,182,420
<RECEIVABLES> 390,997
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,631,506
<PP&E> 122,804
<DEPRECIATION> 73,259
<TOTAL-ASSETS> 1,833,148
<CURRENT-LIABILITIES> 890,843
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 739,780
<TOTAL-LIABILITY-AND-EQUITY> 1,833,148
<SALES> 1,863,130
<TOTAL-REVENUES> 1,922,540
<CGS> 1,425,531
<TOTAL-COSTS> 1,801,905
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 182,888
<INCOME-TAX> (13,626)
<INCOME-CONTINUING> 196,514
<DISCONTINUED> 0
<EXTRAORDINARY> (190,820)
<CHANGES> 0
<NET-INCOME> 5,694
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
