UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ........... to ..........
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 (Zip Code)
(Registrant's telephone number, including area code) (804) 354-7000
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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. [x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Title of each class Outstanding at November 13, 1998
------------------- --------------------------------
Class A Common Stock, $0.01 par value 42,300,022 shares
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
THIRD QUARTER 1998 FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 1
Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 1998 and 1997 2
Consolidated Statements of Comprehensive Income for the
Three Months and Nine Months Ended September 30, 1998 and 1997 3
Consolidated Statements of Changes in Shareholders' Equity for the
Three Months and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21 - 22
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
--------------- ----------------
<S> <C> <C>
Assets
Current assets
Cash $ 5,967 $ 7,010
Investment securities, at estimated fair value 1,529,047 1,363,858
Premiums and other receivables 399,729 360,941
Other 11,924 7,607
--------------- ----------------
Total current assets 1,946,667 1,739,416
Property and equipment, net 46,767 43,912
Deferred income taxes 56,227 45,185
Goodwill and other intangibles, net 64,244 68,354
Restricted investments, at estimated fair value 10,549 10,139
Other assets 23,681 21,814
--------------- ----------------
Total assets $ 2,148,135 $ 1,928,820
=============== ================
Liabilities and Shareholders' Equity
Current liabilities
Medical and other benefits payable $ 466,649 $ 412,710
Unearned premiums 101,802 93,157
Accounts payable and accrued expenses 64,066 53,240
Deferred income taxes 14,947 4,298
Other liabilities 224,396 184,414
--------------- ----------------
Total current liabilities 871,860 747,819
Obligations for employee benefits, noncurrent 69,578 59,467
Medical and other benefits payable, noncurrent 73,010 66,541
Long-term debt 89,339 90,147
Minority interest in subsidiary 7,826 6,109
--------------- ----------------
Total liabilities 1,111,613 970,083
--------------- ----------------
Shareholders' equity
Common stock 423 423
Capital in excess of par 839,712 842,035
Retained earnings 153,955 78,982
Accumulated other comprehensive income
Net unrealized gain on investment securities,
net of deferred income taxes of $22,848
and $20,083 42,432 37,297
--------------- ----------------
Total shareholders' equity 1,036,522 958,737
Commitments and contingencies (note 7)
--------------- ----------------
Total liabilities and shareholders' equity $ 2,148,135 $ 1,928,820
=============== ================
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months and nine months ended September 30, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------------------------------------------
1998 1997 1998 1997
----------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Premium and fee revenues
Commercial $ 385,998 $ 360,071 $ 1,137,119 $ 1,064,821
Federal Employee Program 100,673 95,153 303,018 285,638
Amounts attributable to self-funded arrangements 272,691 270,811 814,922 786,767
Less: amounts attributable to claims under
self-funded arrangements (243,276) (245,774) (732,960) (712,223)
---------------- ---------------- -------------- ---------------
516,086 480,261 1,522,099 1,425,003
Investment income 22,182 19,717 64,689 55,302
Net realized gains 541 18,112 34,760 45,929
Other revenues 6,109 6,025 17,514 19,686
---------------- ---------------- -------------- ---------------
Total revenues 544,918 524,115 1,639,062 1,545,920
Expenses
Medical and other benefit costs
Commercial 316,641 298,633 942,449 891,215
Federal Employee Program 96,441 91,617 289,315 272,680
---------------- ---------------- -------------- ---------------
413,082 390,250 1,231,764 1,163,895
Selling, general and administrative expenses 100,208 89,776 290,540 268,374
Interest expense 1,349 1,342 4,022 3,251
---------------- ---------------- -------------- ---------------
Total expenses 514,639 481,368 1,526,326 1,435,520
---------------- ---------------- -------------- ---------------
Income before income taxes 30,279 42,747 112,736 110,400
Income tax expense 10,066 14,781 37,763 37,859
---------------- ---------------- -------------- ---------------
Net income $ 20,213 $ 27,966 $ 74,973 $ 72,541
================ ================ ============== ===============
Net income after Demutualization and IPO (note 5) $ 56,470
===============
Earnings per share (note 5)
Basic net income after Demutualization and IPO $ 0.48 $ 0.66 $ 1.77 $ 1.33
================ ================ ============== ===============
Diluted net income after Demutualization and IPO $ 0.47 $ 0.66 $ 1.75 $ 1.33
================ ================ ============== ===============
Pro forma earnings per share (note 5)
Basic and diluted pro forma net income $ 1.70
===============
Weighted average number of common shares outstanding
Basic 42,300 42,300 42,300 42,300
================ ================ ============== ===============
Diluted 42,735 42,402 42,735 42,337
================ ================ ============== ===============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the three months and nine months ended September 30, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
1998 1997
--------------- ------------
<S> <C> <C>
Net Income $ 20,213 $ 27,966
Other comprehensive income
Net unrealized gains on investment securities, net of income taxes
Net unrealized holding gains arising during the
period, net of income taxes of $3,310 6,147 21,278
and $11,456
Less reclassification adjustment for net gains included
in net income, net of income taxes of $189
and $6,339 (352) (11,773)
---------------- -------------
Other comprehensive income 5,795 9,505
---------------- -------------
Comprehensive income $ 26,008 $ 37,471
================ =============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1998 1997
----------- ----------
<S> <C> <C>
Net Income $ 74,973 $ 72,541
Other comprehensive income
Net unrealized gains on investment securities, net of income taxes
Net unrealized holding gains arising during the period,
net of income taxes of $14,931 and $16,572 27,729 30,745
Less reclassification adjustment for net gains included
in net income, net of income taxes of $12,166
and $16,075 (22,594) (29,854)
---------------- ------------
Other comprehensive income 5,135 891
---------------- ------------
Cmprehensive income $ 80,108 $ 73,432
================ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
For the three months and nine months ended September 30, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
Balance at July 1 $ 1,010,905 $ 899,802
Net income 20,213 27,966
Net unrealized gains on investment
securities, net of income taxes 5,795 9,505
---------------- ---------------
Comprehensive income 26,008 37,471
---------------- ---------------
Purchase and reissuance of common stock under
Employee benefit plans (72) (70)
Stock option plans, net of income taxes of $50 (92) -
Common stock held by consolidated grantor trusts (227) (3,614)
---------------- ---------------
Balance at September 30 $ 1,036,522 $ 933,589
================ ===============
Balance at January 1 $ 958,737 $ 739,780
Net income before Demutualization - 16,071
Net income after Demutualization 74,973 56,470
Net unrealized gains on investment
securities, net of income taxes 5,135 891
---------------- ---------------
Comprehensive income 80,108 73,432
---------------- ---------------
Issuance of 24,475 shares to eligible
policyholders in the Demutualization and
cash payments to eligible policyholders in
lieu of shares of common stock - (91,144)
Adjustment to cash payments to eligible
policyholders in lieu of shares of common
stock in the Demutualization (705) -
Issuance of 17,825 shares in the Initial
Public Offering, net of expenses - 215,205
Purchase and reissuance of common stock under
Employee benefit plans (333) (70)
Stock option plans, net of income taxes of $325 (604) -
Common stock held by consolidated grantor trusts (681) (3,614)
---------------- ---------------
Balance at September 30 $ 1,036,522 $ 933,589
================ ===============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------
1998 1997
-------------------- ---------------------
<S> <C> <C>
Net income $ 74,973 $ 72,541
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 13,220 12,524
Accretion of discounts and amortization of premiums, net (17,304) (8,279)
Change in allowance for doubtful accounts receivable (1,045) 614
(Increase) decrease in premiums and other receivables (22,757) 3,961
Increase in other assets (7,966) (4,543)
Increase in medical and other benefits payable 60,408 15,921
Increase in unearned premiums 8,645 903
Increase (decrease) in accounts payable and accrued expenses 10,826 (31,543)
Increase (decrease) in other liabilities 21,553 (5,531)
Change in deferred income taxes (3,158) 14,772
Decrease in obligation for Commonwealth Payment - (175,000)
Increase in minority interest 1,717 1,280
Increase in obligations for employee benefits 10,111 2,346
(Gain) loss on disposal of property and equipment and other assets (26) 100
Net realized gains (34,760) (45,929)
-------------------- ---------------------
Net cash provided by (used in) operating activities 114,437 (145,863)
-------------------- ---------------------
Cash flows from investing activities
Proceeds from sale of property and equipment and other assets 101 575
Capital expenditures (12,299) (6,303)
Investment securities purchased (2,745,408) (3,815,252)
Proceeds from investment securities sold 2,021,235 2,986,885
Maturities of fixed income securities 629,608 757,047
-------------------- ---------------------
Net cash used in investing activities (106,763) (77,048)
-------------------- ---------------------
Cash flows from financing activities
Proceeds from long-term debt - 85,439
Payments on long-term debt (808) -
Payments to members in lieu of common stock
pursuant to Plan of Demutualization (705) (91,144)
Net proceeds from issuance of common stock - 215,205
Purchase and reissuance of common stock under
employee benefit and stock option plans (937) (70)
Common stock purchased by consolidated grantor trusts (681) (3,614)
Change in outstanding checks in excess of bank balance (5,586) (7,535)
-------------------- ---------------------
Net cash provided by (used in) financing activities (8,717) 198,281
-------------------- ---------------------
Net decrease in cash (1,043) (24,629)
Cash - beginning of period 7,010 31,482
-------------------- ---------------------
Cash - end of period $ 5,967 $ 6,853
==================== =====================
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements prepared by Trigon
Healthcare, Inc. and its subsidiaries (collectively, "Trigon" or the
"Company") are unaudited, except for the balance sheet information as of
December 31, 1997, which is derived from the Company's audited consolidated
financial statements, pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the
information and the footnotes required by generally accepted accounting
principles for complete financial statements. These consolidated interim
financial statements should be read in conjunction with the audited
consolidated financial statements included in the Company's annual report on
Form 10-K for the year ended December 31, 1997.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such consolidated
financial statements have been included. The results of operations for the
three months and nine months ended September 30, 1998 are not necessarily
indicative of the results for the full year.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
2. PROPERTY AND EQUIPMENT
In the first quarter of 1998 the Company adopted AICPA Statement of Position
(SOP) 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. The SOP requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. The SOP may not be applied to
the costs associated with the Year 2000 conversion. In accordance with the
SOP, no prior year amounts were restated and no costs incurred prior to
January 1, 1998, the initial application of the SOP, for ongoing projects
were capitalized. Expenses incurred related to internal-use software of $1.4
million and $3.2 million were capitalized for the three months and nine
months ended September 30, 1998, respectively.
3. LONG TERM DEBT
In February 1997, the Company entered into a $300 million revolving credit
agreement with a syndicate of banks, which expires February 2002. The credit
agreement provides for various borrowing options and rates and requires the
Company to pay a facility fee on a quarterly basis. The credit agreement also
contains certain financial covenants and restrictions including minimum net
worth requirements as well as limitations on dividend payments. As of
September 30, 1998, $85 million had been borrowed and remained outstanding
under the credit agreement. The weighted average interest rate for the period
the borrowings were outstanding during the three months ended September 30,
1998 and 1997 was 5.88% and 5.84%, respectively, and 5.91% and 5.82% for the
nine months ended September 30, 1998 and 1997, respectively.
6
<PAGE>
4. INCOME TAXES
The effective tax rate for the three months ended September 30, 1998 and 1997
was 33.2% and 34.6%, respectively. The effective tax rate was 33.5% and 34.3%
for the nine months ended September 30, 1998 and 1997, respectively. During
1998, the Company increased its investment in tax exempt municipal bonds.
Accordingly, the effective tax rate was reduced by the effect of the
increased tax exempt investment income earned.
5. PRO FORMA FINANCIAL INFORMATION AND NET INCOME AND PRO FORMA NET INCOME PER
SHARE
Net income and net income per share after Demutualization and IPO reflect net
income and net income per share for the period after February 5, 1997, the
effective date of the Demutualization and IPO.
The following pro forma information for the nine months ended September 30,
1997 gives effect to the Demutualization and IPO as if they had occurred on
January 1, 1997, consistent with the Company's pro forma presentation in its
Form S-1 filed on January 29, 1997 in connection with its IPO (in thousands):
-------------------------------------------------------
As reported
Income before income taxes $ 110,400
Income tax expense 37,859
Pro forma adjustments
Pro forma interest expense 634
Pro forma income tax benefit (217)
-------------------------------------------------------
Pro forma net income $ 72,124
-------------------------------------------------------
The difference between the pro forma net income and actual net income in 1997
is due to interest expense, net of income taxes, assumed for the period prior
to the actual borrowing of funds using the actual weighted average rate of
5.675% per annum in effect during the first quarter of 1997. Actual interest
expense for the periods subsequent to the borrowings is included in income
before income taxes. Actual interest rates can vary on the current borrowing.
A 1/8 percent change in the interest rate of the current outstanding
borrowings would have changed interest expense by approximately $106,000 per
annum.
7
<PAGE>
Net Income and Pro forma Net Income per Share
The following table sets forth the computation of basic and diluted earnings
per share for the three months ended September 30, 1998 and 1997 and for the
nine months ended September 30, 1998 and the period after the Demutualization
and IPO, February 5, 1997 through September 30, 1997 (in thousands, except
per share data):
<TABLE>
<CAPTION>
Nine Months Feb. 5, 1997
Three Months Ended Ended Through
September 30, September 30, September 30,
----------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per
share - net income $ 20,213 27,966 74,973 56,470
- -----------------------------------------------------------------------------------------
Denominator
Denominator for basic
earnings per share -
weighted average shares 42,300 42,300 42,300 42,300
Effect of dilutive securities
- employee and director
stock options 435 102 435 37
- -----------------------------------------------------------------------------------------
Denominator for diluted
earnings per share 42,735 42,402 42,735 42,337
- -----------------------------------------------------------------------------------------
Basic net income per share $ 0.48 0.66 1.77 1.33
- ------------------------------------------------------------------------------------------
Diluted net income per share $ 0.47 0.66 1.75 1.33
- -----------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the computation of basic and diluted pro forma
earnings per share for the nine months ended September 30, 1997 (in
thousands, except per share data):
- ---------------------------------------------------------
Numerator for basic and diluted pro
forma earnings per share - pro
forma net income $ 72,124
- -------------------------------------------------------
Denominator for basic pro forma
earnings per share -pro forma
weighted average shares 42,300
Effect of dilutive securities -
employee and director stock options 41
- ---------------------------------------------------------
Denominator for diluted pro forma
earnings per share 42,341
- ---------------------------------------------------------
Basic and diluted pro forma net income
per share $ 1.70
- ---------------------------------------------------------
The pro forma weighted average shares outstanding gives effect to the
Demutualization and IPO as if they had occurred on January 1, 1997,
consistent with the Company's pro forma presentation in its Form S-1 filed on
January 29, 1997, in connection with its IPO.
6. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income, for all periods presented. This statement establishes standards for
the reporting and display of comprehensive income and its components. The
purpose of comprehensive income is to report all changes in equity resulting
from recognized transactions and other economic events of the period. Other
comprehensive income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are included in comprehensive
income but are excluded from net income, such as unrealized gains and losses
on certain investments in debt and equity securities and foreign currency
items. The adoption of SFAS No. 130 had no impact on the Company's financial
condition or results of operations.
8
<PAGE>
7. LITIGATION
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 an audit and unspecified compensatory, punitive
and other damages. The Company is also presently the subject of three other
claims by self-funded employer groups related to the Company's past practices
regarding provider discounts. The Company is communicating with these groups,
and lawsuits have not been filed in connection with these claims. 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 and certain of its subsidiaries are involved in various other
legal actions occurring in the normal course of their business. While the
ultimate outcome of such litigation cannot be predicted with certainty, in
the opinion of Company management, after consultation with counsel
responsible for such litigation, the outcome of those actions is not expected
to have a material adverse effect on the financial condition of the Company.
8. SUBSEQUENT EVENTS
Effective October 1, 1998, the Company amended its defined benefit pension
plan. The amendment reduced the Company's projected benefit obligation by
$10.2 million which will be amortized as a reduction to net periodic pension
expense over the average remaining years of service to full eligibility for
benefits of the active plan participants of approximately 14.5 years.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
Substantially all of the revenues of Trigon Healthcare, Inc. and subsidiaries
(collectively, Trigon or the Company) are generated from premiums and fees
received for health care services provided to its members and from investment
income. Trigon's expenses are primarily related to health care services provided
which consist of payments to physicians, hospitals and other providers. A
portion of medical costs expense for each period consists of an actuarial
estimate of claims incurred but not reported to Trigon during the period. The
Company's results of operations depend in large part on its ability to
accurately predict and effectively manage health care costs.
The Company offers a diversified mix of managed care products, including health
maintenance organizations (HMO), preferred provider organizations (PPO),
point-of-service (POS) and traditional indemnity products with access to the
Company's participating provider network (PAR). The Company also provides a
broad array of Medicare supplement plans as well as specialty products including
pharmacy, dental, life, worker's compensation, preventive care, disability,
behavioral health, COBRA and flexible benefits account administration.
The Company 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 213,000 federal employees and their
dependents living in Virginia. FEP revenues represent the reimbursement by OPM
of medical costs incurred including the actual cost of administering the
program, as well as a performance-based share of the national program's overall
profit.
Within the Company's network product offerings, employer groups may choose
various funding options ranging from fully-insured 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.
ENROLLMENT
The following table sets forth the Company's enrollment data by network:
As of September 30,
1998 1997
- ----------------------------------------------------------
Commercial:
HMO 257,161 251,066
PPO 281,458 255,131
PAR 171,348 201,161
Medicaid HMO 31,651 32,956
Medicare Supplement 122,371 126,300
Non-Virginia 105,403 58,894
- ----------------------------------------------------------
Subtotal 969,392 925,508
Self-funded/ASO 664,837 677,643
Federal Employee Program 213,027 207,709
- ----------------------------------------------------------
Fully-Insured and Self-Funded
Enrollment 1,847,256 1,810,860
Processed for other Blue Cross
and Blue Shield Plans (ASO) 9,636 25,911
- ----------------------------------------------------------
Total 1,856,892 1,836,771
- ----------------------------------------------------------
10
<PAGE>
PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM
The following table sets forth the Company's premium and premium equivalents by
network (in thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
- -------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------
Commercial:
HMO $ 93,609 88,158 279,529 261,247
PPO 108,994 96,401 319,581 274,719
PAR 76,359 85,654 236,779 269,507
Medicaid HMO 16,177 15,217 44,500 42,170
Medicare Supplement 56,061 53,910 167,229 159,083
Non-Virginia 34,798 20,731 89,501 58,095
- -------------------------------------------------------------------------------
Subtotal 385,998 360,071 1,137,119 1,064,821
Self-funded/ASO 272,691 270,811 814,922 786,767
Federal Employee Program 100,673 95,153 303,018 285,638
- -------------------------------------------------------------------------------
Total $ 759,362 726,035 2,255,059 2,137,226
- -------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Premium and fee revenues increased 7.5% to $516.1 million in the third quarter
of 1998 from $480.3 million in the third quarter of 1997. The $35.8 million
increase is due to a combination of commercial rate increases and enrollment
growth in the Company's HMO, PPO and Non-Virginia networks, offset by expected
declines in PAR network enrollment. Total commercial HMO revenues grew to $109.8
million in the third quarter from $103.4 million last year, a 6.2% increase,
driven by average revenue per member increases of 4.8% and a 1.4% increase in
member months. Commercial PPO revenues increased 13.1% to $109.0 million in the
third quarter of 1998 from $96.4 million for the same period last year. The
$12.6 million increase in commercial PPO revenues is a result of increased
enrollment attributable to a shift in members from the PAR network and from
enrollment of new PPO members, as well as an increase of 2.7% in the average
revenue per member. Commercial PAR revenues declined to $76.4 million from $85.7
million in the third quarter of 1997 primarily as a result of the continued
transition of members to the more tightly managed HMO and PPO networks.
Non-Virginia revenues increased 67.9% to $34.8 million up from $20.7 million
last year. The $14.1 million increase is a result of growth in enrollment which
can be attributed to the positive acceptance of the Company's product designs by
both small group and individual market segments. Overall, premium revenues on a
per member per month basis for the Company's commercial business increased 3.5%
to $134.30 for the third quarter of 1998 from $129.76 for the third quarter of
1997. FEP revenues increased 5.8% to $100.7 million in the third quarter from
$95.2 million last year. The increase is due to increased medical costs to be
reimbursed by OPM and a 2.6% increase in enrollment.
11
<PAGE>
Total enrollment increased to 1,856,892 as of September 30, 1998 from 1,836,771
as of September 30, 1997. The increase was primarily the result of a 43,884
increase in commercial enrollment offset by a decline in self-funded/ASO members
of 29,081. Total commercial enrollment increased 4.7% to 969,392 members as of
September 30, 1998 from 925,508 members as of September 30, 1997. Excluding the
impact of exiting the Richmond Medicaid market, explained further below,
adjusted enrollment growth would have been 5.3% on commercial business.
Enrollment in the HMO network increased by 1.7% over the prior year and accounts
for 29.8% of total commercial enrollment. HMO enrollment growth was partially
impacted by the decision to withdraw from the Medicaid HMO program in the
Richmond, Virginia area effective December 31, 1997. The Company took action
because enrollment in an HMO was not mandatory for Medicaid recipients in the
Richmond area and business volumes were considered insufficient to sustain the
HMO as a viable, competitive program. As of September 30, 1997, the Company had
approximately 4,600 Medicaid members in the Richmond area. Enrollment in the PPO
network as of September 30, 1998 increased 10.3% over September 30, 1997 and
accounts for 29.0% of the Company's commercial enrollment. Non-Virginia
enrollment increased 79.0% over the prior year and now accounts for 10.9% of
total commercial enrollment. Growth in PPO and Non-Virginia enrollment was
offset by an expected decline of 14.8% in the Company's PAR network as members
migrate into more tightly managed networks. The PAR network enrollment
represents 17.7% of the Company's total commercial enrollment. The decline in
self-funded/ASO enrollment of 29,081 members partially reflects the Company's
efforts to increase fees to levels that appropriately reflect the value
delivered through the Company's network design and medical management
techniques. The decline also reflects the migration of approximately 16,000
national account members (ASO only) from the Company's systems to an interplan
system where the Company continues to process claims for other Blue Cross and
Blue Shield Plans.
Investment income increased 12.5% to $22.2 million for the third quarter of 1998
from $19.7 million for the third quarter of 1997. Net realized gains decreased
to $0.5 million for the third quarter of 1998 from $18.1 million for the third
quarter of 1997. The increase in investment income is due to increased cash flow
from realized gains primarily during the first half of 1998, as well as positive
cash flow from operations. During 1998, the Company has increased its percentage
of tax-exempt municipal bonds, lengthened the duration for portions of the bond
portfolio and reduced investment expenses. The decrease in net realized gains
was primarily a result of an unfavorable equity market, offset by a favorable
government treasury market.
Medical costs increased 5.9% to $413.1 million in the third quarter of 1998 from
$390.3 million in the third quarter of 1997. The $22.8 million increase is
primarily the result of expected levels of medical cost inflation, growth in
commercial enrollment and an increase in FEP medical costs reimbursed by OPM.
The medical cost per member per month for the Company's commercial business
increased 2.4% to $110.17 for the third quarter of 1998 from $107.62 for the
same period last year. Combined with a 3.5% increase in commercial premium
revenues per member per month, the loss ratio on commercial business improved to
82.0% for the third quarter of 1998 from 82.9% for the same period last year.
The loss ratio improvement can be attributed to a combination of factors
including, the favorable impact on 1998 of a number of medical cost management
initiatives, pricing discipline, improved processing controls at one of the
Company's HMO subsidiaries partially offset by the negative impact of certain
products performing substantially behind plan at the Mid-South Insurance Company
subsidiary. Regarding medical cost management initiatives, the Company continues
to diligently work at negotiating lower reimbursement rates with facilities and
to better manage utilization. During the third quarter of 1998, inpatient days
per thousand were down 3.1% and the average length of stay was down 2.1% as
compared to last year. By the end of the third quarter, 85% of acute care
facilities in the Company's service area have been converted to a fixed fee
schedule for outpatient services. In addition, the Company is taking a more
active role in working with physicians, primarily specialists, to manage medical
costs, continuing to implement national medical management guidelines and
further refine a recently piloted program to improve both quality and costs by
strengthening the Company's pre-certification requirements for hospital
admissions.
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<PAGE>
Selling, general and administrative expenses (SG&A) increased by 11.6% to $100.2
million in the third quarter of 1998 from $89.8 million in the third quarter of
1997. The increase is a result of higher volumes and the incremental cost of
certain initiatives. SG&A expenses increased by $6.1 million as a result of
increased Non-Virginia volume and as a result of a higher broker commission
scale for business sold in Virginia. Medicare HMO start-up costs, development of
customer service "call center" technology and incremental costs associated with
preparing systems for the Year 2000 have increased expenses by $1.9 million in
the third quarter of 1998 compared to the same period in 1997. In the first
quarter of 1998 the Company adopted AICPA Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. The SOP requires the capitalization and amortization of certain costs
related to internal-use software but may not be applied to the costs associated
with the Year 2000 conversion. The adoption of the SOP resulted in a $1.4
million reduction in expenses in the third quarter of 1998 and, including the
first nine months of 1998, is expected to reduce SG&A expenses between $4 and $5
million during 1998. Overall, the SG&A ratio was 13.1% for the current quarter
as compared to 12.3% for the same quarter last year.
Interest expense remained constant at $1.3 million in the third quarter of 1998
and 1997 as a result of negligible changes in the weighted average interest rate
for the periods on the $85 million debt outstanding.
Income before income taxes decreased $12.5 million to $30.3 million in the third
quarter of 1998 from $42.7 million in the third quarter of 1997. The decrease is
a result of lower net realized gains of $17.6 million offset by a $2.6 million
increase in operating income and a $2.5 million increase in investment income.
Operating income increased primarily due to improving commercial margins
resulting from pricing and medical cost management efforts.
The effective tax rate for the three months ended September 30, 1998 decreased
to 33.2% from 34.6% for the same period in the prior year. During 1998, the
Company increased its investment in tax exempt municipal bonds thereby
increasing the amount of tax exempt investment income earned.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Premium and fee revenues increased 6.8% to $1.52 billion in the first nine
months of 1998 from $1.43 billion in the first nine months of 1997. The $97.1
million increase is due to a combination of commercial rate increases and
enrollment growth in the Company's HMO, PPO and Non-Virginia networks, offset by
expected declines in PAR network enrollment. Total commercial HMO revenues grew
to $324.0 million in the first nine months of 1998 from $303.4 million last
year, a 6.8% increase, driven by average revenue per member increases of 4.5%
and a 2.2% increase in member months. Commercial PPO revenues increased 16.3% to
$319.6 million in the first nine months of 1998 from $274.7 million for the same
period last year. The $44.8 million increase in commercial PPO revenues is a
result of increased enrollment attributable to a shift in members from the PAR
network and from enrollment of new PPO members, as well as an increase of 3.8%
in the average revenue per member. Commercial PAR revenues declined to $236.8
million from $269.5 million in the first nine months of 1997 primarily as a
result of the continued transition of members to the more tightly managed HMO
and PPO networks. Non-Virginia revenues increased 54.1% to $89.5 million from
$58.1 million last year. The $31.4 million increase is a result of growth in
enrollment which can be attributed to the positive acceptance of the Company's
product designs by both small group and individual market segments. Overall,
premium revenues on a per member per month basis for the Company's commercial
business increased 3.9% to $133.07 for the first nine months of 1998 from
$128.03 for the first nine months of 1997. FEP revenues increased 6.1% to $303.0
million in the first nine months of 1998 from $285.6 million last year. The
increase is due to increased medical costs to be reimbursed by OPM and 2.6%
increase in enrollment.
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Other revenue decreased by 11.0% to $17.5 million in the first nine months of
1998 from $19.7 million in the first nine months of 1997. The $2.2 million
decrease reflects the Company's strategy of redirecting the health and wellness
subsidiary's efforts toward providing its product offerings and services to the
Company instead of selling these services to third parties. In addition, 1998
revenues are reduced for revenues associated with the Company's network
development subsidiary which ceased operations as of the end of 1997.
Investment income increased 17.0% to $64.7 million for the first nine months of
1998 from $55.3 million for the same period of 1997. Net realized gains
decreased to $34.8 million from $45.9 million over the same period. The increase
in investment income reflects a shift in the portfolio mix from direct equity
securities to fixed income securities, an increase in the percentage of
tax-exempt municipal bonds and duration lengthening for portions of the bond
portfolio during 1998. The equity portfolio was reduced to 5.6% of the total
portfolio as of September 30, 1998 as compared to 11.1% of the total portfolio
as of September 30, 1997. In addition, the Company reduced its investment
management expenses beginning in the first quarter of 1998 by managing a larger
portion of the investment portfolio in-house. Equity-indexing in conjunction
with active portfolio management was the primary component of the net realized
gains for the first nine months of 1998.
Medical costs increased 5.8% to $1.23 billion in the first nine months of 1998
from $1.16 billion in the first nine months of 1997. The $67.9 million increase
is primarily the result of expected levels of medical cost inflation, growth in
commercial enrollment and an increase in FEP medical costs reimbursed by OPM.
The medical cost per member per month for the Company's commercial business
increased 2.9% to $110.29 for the first nine months of 1998 from $107.15 for the
same period last year. Combined with a 3.9% increase in commercial premium
revenues per member per month, the loss ratio on commercial business improved to
82.9% for the first nine months of 1998 from 83.7% for the same period last
year. The loss ratio improvement can be attributed to a combination of factors
including, higher than expected 1997 utilization in Medicare Supplement products
caused by flu-related illnesses; favorable impact on 1998 of a number of medical
cost management initiatives, pricing discipline, improved processing controls
and a change in management during 1997 at one of the Company's HMO subsidiaries
offset by the negative impact on 1998 of certain Mid-South products performing
substantially behind plan. Regarding medical cost management initiatives, the
Company continues to diligently work at negotiating lower reimbursement rates
with facilities and to better manage utilization. By the end of the third
quarter, 85% of acute care facilities in the Company's service area have been
converted to a fixed-fee schedule for outpatient services. Other management
initiative efforts include the January 1998 implementation of national medical
management guidelines, recent pilot programs to improve both quality and costs
by strengthening the Company's pre-certification requirements for hospital
admissions and finalizing contracting efforts in the Eastern portion of Virginia
to improve product marketability and help reduce health care costs.
14
<PAGE>
SG&A increased by 8.3% to $290.5 million in the first nine months of 1998 from
$268.4 million in the first nine months of 1997. The increase is a result of
higher volumes, the incremental cost of certain initiatives and the impact of
general inflationary pressure. SG&A expenses increased by $11.9 million as a
result of increased Non-Virginia volume and as a result of a higher broker
commission scale for business sold in Virginia. Medicare HMO start-up costs,
development of customer service "call center" technology and incremental costs
associated with preparing systems for the Year 2000 have increased expenses by
$4.9 million in the first nine months of 1998 compared to the same period last
year. The first quarter of 1998 adoption of AICPA SOP 98-1, which requires the
capitalization and amortization of certain costs related to internal-use
software, resulted in a $3.2 million reduction in expenses through the first
nine months of 1998. Including the first nine months of 1998, capitalization of
internal-use software is expected to reduce SG&A expenses between $4 and $5
million during 1998. Overall, the SG&A ratio was 12.8% for the first nine months
of 1998 as compared to 12.4% for the same period last year.
Interest expense increased 23.7% to $4.0 million in the first nine months of
1998 from $3.3 million in the first nine months of 1997. The increase is
primarily due to the full nine month impact in 1998 of the outstanding $85
million revolving credit agreement which was initiated in late February 1997.
Income before income taxes increased 2.1% to $112.7 million in the first nine
months of 1998 from $110.4 million in the first nine months of 1997. The
improvement is primarily a result of an increase in investment income of $9.4
million and an increase in operating income of $4.9 million offset by a decrease
in net realized gains of $11.2 million. Operating income increased primarily due
to improving commercial margins resulting from pricing and medical cost
management efforts.
The effective income tax rate decreased to 33.5% in the first nine months of
1997 from 34.3% in the first nine months of 1997. During 1998, the Company
increased its investment in tax exempt municipal bonds thereby increasing the
amount of tax exempt investment income earned.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are 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, income taxes and repayment of long-term debt. 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 fundamentally
believes that concentrations of investments in any one asset class are unwise
due to constantly changing interest rates as well as 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 government and corporate securities, both domestic and
international, with an average quality rating of A as of September 30, 1998. The
portfolio had an average contractual maturity of 8.6 years as of September 30,
1998. A portion of the fixed income portfolio is designated as a short-term
fixed income portfolio and is intended to cover near term cash flow needs and to
serve as a buffer for unanticipated business needs. The equity portfolios
contain readily marketable securities ranging from small growth to
well-established Fortune 500 companies. The international portfolio is
diversified by industry, country and currency-related exposure. As of September
30, 1998, the equity portfolio was 5.6% of the total portfolio, down from 27.8%
as of December 31, 1996 and 10.5% as of December 31, 1997, with the majority of
the shift occurring prior to March 31, 1997. The company has been continuing to
reallocate the portfolio during 1998 with a greater emphasis on domestic,
tax-exempt municipal bonds and a longer duration for certain portions of the
bond portfolio.
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<PAGE>
Cash provided by (used in) operating activities for the nine months ended
September 30, 1998 and 1997 was $114.4 million and $(145.9) million,
respectively. The significant increase in cash provided by operations in 1998 is
primarily due to the $175 million Commonwealth Payment made in the first quarter
of 1997 to the Commonwealth of Virginia in connection with the Demutualization
in February 1997 and the timing of premium receipts and claims and other
operating liability payments between years.
Net cash used in investing activities increased to $106.8 million for the nine
months ended September 30, 1998 from $77.0 million for the same period of 1997.
This increase is primarily due to investment purchases made with cash flows from
operations and reinvestment of investment income.
Cash provided by (used in) financing activities decreased to $(8.7) million for
the first nine months of 1998 from $198.3 million for the same period of 1997
primarily due to the IPO and borrowing under a credit agreement which occurred
in early 1997. The IPO and borrowings under the credit agreement generated
$208.8 million in net cash flows for the Company in 1997.
In connection with the Demutualization and IPO, the Company entered into a $300
million revolving credit agreement which expires in February 2002. The credit
agreement calls for various borrowing options and rates and requires the Company
to pay a facility fee on a quarterly basis. The credit agreement also contains
certain financial covenants and restrictions including minimum net worth
requirements as well as limitations on dividend payments. As of September 30,
1998, $85 million had been borrowed and remained outstanding under this credit
agreement, the proceeds of which were used to pay a portion of the Commonwealth
Payment at the time of the Demutualization and IPO.
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 debt repayment costs 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.
On September 25, 1998, the Company announced it had suspended its previously
announced stock repurchase program. In June 1998, the Company's Board of
Directors authorized a Stock Repurchase Program under which up to 10 percent of
the Company's outstanding Class A common stock may be repurchased. No shares
were repurchased under the program. The Company suspended the stock repurchase
program because it is working with the Internal Revenue Service (IRS) to resolve
certain tax issues that could result in a substantial favorable settlement to
the Company. The Company hopes to conclude a settlement with the IRS by December
31, 1998, but there can be no assurance that this will occur.
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<PAGE>
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs and infrastructure systems that have date-sensitive software
may recognize a date using "00", for example, as the Year 1900 rather than the
Year 2000. Failure to adequately address this issue could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process claims, prepare invoices, retain
membership data, maintain accounting records, safeguard and manage its invested
assets and operating cash accounts, perform utilization management, provide
adequate customer service and other similar processes. The Company is
approaching the Year 2000 readiness issue from both a technical and business
perspective.
The Company began its Year 2000 initiative in late 1994. The Company has
developed and continues to refine comprehensive plans to prepare the computer
systems and application software for the Year 2000. Those plans address hardware
and software maintained by the Company, software products licensed from external
vendors and functions outsourced to external vendors. The plan also includes
"infrastructure systems", non-IT systems and equipment, that contain
date-sensitive imbedded hardware or software. Due to the Company's reliance on
computer systems, senior management has supported the Year 2000 plan and has
committed significant financial and human resources to the goal of making the
hardware and software Year 2000 ready. The Company anticipates compliant
versions for the majority of its core systems and software will be in production
by the end of 1998, allowing adequate time to complete the Year 2000 testing
effort. The Company is using both external and internal resources for the
project.
The Company's plan to resolve the Year 2000 issue involves four phases:
inventory/assessment, remediation, testing and implementation. Uniform project
management techniques are in place with overall oversight responsibility
residing with the Company's Senior Vice President and Chief Information Officer.
To date, the Company has fully completed the assessment phase, identifying
significant areas that could be affected by the Year 2000. The Company has made
substantial progress on the final three phases as discussed below.
INTERNALLY DEVELOPED APPLICATION SYSTEMS. Changes required to the mainframe
computer for the membership records systems and non-HMO claims processing are
being handled by internal and contract programming resources. This is the
largest and most complex part of the Company's Year 2000 readiness plan. Trigon
has completed approximately 90% of the Year 2000 application remediation and
Year 2000 testing of these applications. The majority of the remaining
remediation and testing efforts for these systems are scheduled to be completed
by December 1998.
EXTERNALLY LICENSED APPLICATION SYSTEMS. Trigon has received many of the Year
2000 compliant releases of these application systems. The Company is tracking
each product and is actively communicating with software vendors to obtain the
compliant versions of their products. Compliant releases received by August 1998
are scheduled to be installed into production by December 1998. The remaining
installations are scheduled based on the vendors' shipments of the compliant
versions of the products, including the processing systems for HMO products. The
Company received the Year 2000 compliant versions of the HMO processing systems
when they were released in August and October 1998. A subsequent release of one
of the systems was received in November 1998 to correct problems found during
the functional testing of the product. Comprehensive functional testing is
currently underway for this latest release. The Company expects to have both of
these systems functionally tested and installed by the end of 1998. Year 2000
testing of the HMO systems will be conducted in 1999.
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<PAGE>
EXTERNALLY LICENSED OPERATING SYSTEM/UTILITY PRODUCTS. These products support
the Company's mainframe, midrange, file server and desktop environments. Trigon
has received most of the Year 2000 compliant releases of these vendor software
products. The Company is tracking each product and is actively communicating
with software vendors to obtain the compliant versions of their products.
Compliant releases received by August 1998 are scheduled to be installed into
production by December 1998. The remaining installations are scheduled based on
the vendors' shipments of the compliant versions of the products.
Trigon is conducting independent Year 2000 testing of vendor software, wherever
possible, to confirm compliance and, if necessary, to assess and address the
Company's potential business exposure if any of the software is non-compliant.
Testing of these products began in early 1998 and will continue throughout 1999.
OUTSOURCED FUNCTIONS. Trigon has outsourced support for some segments of its
business. These include administering certain specialty services such as
pharmacy, dental and vision processing services. The Company is contacting its
outsourcing vendors to determine their state of readiness with regard to the
Year 2000 issue. For certain outsourcing arrangements, the Company has met with
the vendors and conducted several reviews of their plans. The Company will
continue to monitor all critical vendors' progress and review their plans, as
appropriate, in order to assess and address the potential business exposure for
the Company if these parties fail to achieve compliance.
INFRASTRUCTURE SYSTEMS. Telephone, security, HVAC and all other infrastructure
systems are in the process of being upgraded, and tested, wherever possible, to
assure their Year 2000 compliance. Plans are in place to complete much of that
work by December 1998, but as in other efforts where the Company is reliant upon
vendors, the work will be scheduled based on the shipment of the compliant
versions of equipment and software.
CRITICAL BUSINESS PARTNERS. The Company also depends upon other individuals and
entities who must each address their own Year 2000 readiness issues. This
includes, among others, hospitals, other health care providers, third party
benefit administrators, public utilities, communications service providers,
funds transfer networks and customers. The Company is periodically surveying its
critical business partners in an effort to determine whether such third parties
are assessing and correcting any issues relating to the Year 2000 which could
impact their ability to conduct business with the Company. This information will
also assist the Company in developing necessary contingency plans. In addition,
to help health care providers better understand the significance of Year 2000
preparedness, the Company is using a number of communications vehicles to draw
their attention to the issue. Trigon is also conducting face-to-face meetings
and gathering pertinent documentation to evaluate the Year 2000 readiness of
other critical business partners. Lack of appropriate action on the part of
third parties could impact the Company's ability to serve its customers.
18
<PAGE>
The Company has investments in publicly and privately placed securities. The
Company may be exposed to credit risk to the extent that related borrowers are
materially adversely impacted by the Year 2000 issue.
The incremental costs for the Year 2000 project were $13.2 million through
September 30, 1998, including $2.5 million incurred during the third quarter of
1998. Total incremental costs are expected to approximate $16.5 million through
1998, increasing to $22.0 million through 1999. The costs will be expensed as
incurred and will be funded through operating cash flows.
The Company expects to identify and resolve all Year 2000 issues that could
materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 issues affecting the Company will be identified or corrected.
Depending on the volume and duration, the Company's operations could experience
intermittent disruptions or be significantly impacted by incomplete or untimely
resolution of the problem by internal or external parties. Specifically, the
Company's ability to process claims, prepare invoices, retain membership data,
maintain accounting records, safeguard and manage its invested assets and
operating cash accounts, perform utilization management, provide adequate
customer service and other similar processes could be affected. The Company's
plan for completion of this project is partially dependent upon the work of
third parties. In addition, some of the Company's business operations are
provided and maintained by outside vendors. The Company depends upon many other
individuals and entities, for example hospitals, other health care providers,
third party benefit administrators, pharmacies, public utilities, communications
service providers, funds transfer networks, software and hardware vendors and
its customers, who must address their own Year 2000 readiness issues. Lack of
appropriate action on the part of others could affect the Company's ability to
serve its customers. Although the Company is developing plans designed to
mitigate the aforementioned risks, there can be no assurances that all potential
problems will be mitigated by these procedures. The Company cannot determine the
level of financial exposure relating to the possibility that vendors with whom
the Company contracts may be unable to address all pertinent Year 2000 issues.
The Company is scheduled to begin a comprehensive contingency planning effort in
January 1999 to address situations that may result if the Company or its
critical business partners are unable to achieve Year 2000 readiness of specific
products or systems. The plan will outline the procedures to follow for the most
likely areas of risk. The Company expects its contingency plans to include,
among other things, on call staff dedicated to problem response, manual
work-arounds for information systems as well as substitution of systems or
vendors, if necessary and commercially reasonable.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits. The new standard, issued in February 1998, becomes effective for
fiscal years beginning after December 15, 1997. This standard revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition principles of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
considered useful. The new disclosures will be effective for the 1998 fiscal
year.
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<PAGE>
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Statement is effective for fiscal years beginning after June 15, 1999, with
earlier adoption encouraged. The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The Company is presently evaluating the effect
of SFAS No. 133 on its financial statements.
FORWARD-LOOKING INFORMATION
This Item, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and this Form 10-Q contain certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, including among other things statements concerning future earnings,
premium rates, enrollment and medical and administrative costs. Such
forward-looking statements are subject to inherent risks and uncertainties, many
of which are beyond the control of the Company, that may cause actual results to
differ materially from those contemplated by such forward-looking statements.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, but are not limited to,
rising health care costs, business conditions and competition in the managed
care industry, government action and other regulatory issues. Additional
information concerning factors that could cause actual results to differ
materially from those in forward-looking statements is contained in the
Company's Annual Report on Form 10-K under the caption "Forward-Looking
Information".
The discussion of the Company's efforts, and management's expectations, relating
to Year 2000 compliance are forward-looking statements. The costs of the project
and the date on which the Company believes it will complete necessary Year 2000
preparations are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. There can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of programming and testing resources, the ability to
locate and correct all relevant computer codes, the ability of third parties
whose products and services impact the Company to convert their systems and
software and other similar uncertainties.
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PART II. OTHER INFORMATION
Item 1. 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 an audit and unspecified compensatory, punitive
and other damages. The Company is also presently the subject of three other
claims by self-funded employer groups related to the Company's past practices
regarding provider discounts. The Company is communicating with these groups,
and lawsuits have not been filed in connection with these claims. 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 and certain of its subsidiaries are involved in various other
legal actions occurring in the normal course of their business. While the
ultimate outcome of such litigation cannot be predicted with certainty, in
the opinion of Company management, after consultation with counsel
responsible for such litigation, the outcome of those actions is not expected
to have a material adverse effect on the financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of exhibits filed with the Form 10-Q:
Exhibit
Number Description
- ------ -----------
10.1 -- Form of Executive Continuity Agreement dated as of September 16,
1998 between Trigon Insurance Company and Thomas G. Snead, Jr. and
certain other executive officers.
10.2 -- Form of Executive Continuity Agreement dated as of September 16,
1998 between Trigon Insurance Company and John C. Berry and certain
other executive officers.
10.3 -- Amended and Restated Employment Agreement dated as of September
16, 1998 between Trigon Insurance Company and Norwood H. Davis, Jr.
11 -- Computation of per share earnings for the three months and nine
months ended September 30, 1998. Exhibit omitted as the detail
necessary to determine the computation of per share earnings can be
clearly determined from the material contained in Part I of this
Form 10-Q.
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27 - Financial Data Schedule.
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.
(b) Reports on Form 8-K:
None filed during the three months ended September 30, 1998.
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SIGNATURES
Pursuant to the requirements 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.
TRIGON HEALTHCARE, INC.
Registrant
Dated: November 13, 1998 By: /s/ Thomas R. Byrd
-------------------------------------
THOMAS R. BYRD
SENIOR VICE PRESIDENT & CHIEF
FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND
FINANCIAL OFFICER)
<PAGE>
EXHIBIT INDEX
Exhibit
Number
10.1 -- Form of Executive Continuity Agreement dated as of September 16,
1998 between Trigon Insurance Company and Thomas G. Snead, Jr. and
certain other executive officers.
10.2 -- Form of Executive Continuity Agreement dated as of September 16,
1998 between Trigon Insurance Company and John C. Berry and certain
other executive officers.
10.3 -- Amended and Restated Employment Agreement dated as of September
16, 1998 between Trigon Insurance Company and Norwood H. Davis, Jr.
27 -- Financial Data Schedule.
Exhibit 10.1
[Form of Agreement with Thomas G. Snead, Jr. and certain
other executive officers]
TRIGON INSURANCE COMPANY
EXECUTIVE CONTINUITY AGREEMENT
This Executive Continuity Agreement (the "Agreement") is made as of
September 16, 1998, between TRIGON INSURANCE COMPANY (the "Company") and THOMAS
G. SNEAD, JR. ("Executive").
RECITALS
Executive is currently employed by the Company as President and
Chief Operating Officer. The purpose of this Agreement is to encourage Executive
to continue his employment with the Company both before and after a Change of
Control and to recognize the prior service of Executive if his employment is
terminated under certain circumstances after a Change of Control.
NOW THEREFORE, in consideration of the premises, the parties agree
as follows:
Article I
DEFINITIONS
As used herein, the following terms have the meanings indicated.
1.1 "Affiliate" means any corporation or other legal entity
that directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, the Company.
1.2 "Applicable Compensation" has the meaning set forth in Section
2.3.
1.3 "Beneficial Ownership" has the meaning Rule 13d-3 promulgated
under the Securities Exchange Act of 1934.
1.4 "Change of Control" means any event described in subparagraphs
(a) through (e) below:
(a) The acquisition by any Person of Beneficial Ownership of
20% or more of the Stock or the Voting Power of Trigon Healthcare, but excluding
for this purpose any acquisition by the Company (or an Affiliate) or by an
employee benefit plan sponsored by the Company (or an Affiliate). When two or
more persons act in concert for the purpose of acquiring Stock or Voting Power
of Trigon Healthcare, such Persons shall be deemed to be a single Person.
(b) Individuals who are Incumbent Directors cease to
constitute at least a
<PAGE>
majority of the Board of Directors of Trigon Healthcare.
(c) Approval by the shareholders of Trigon Healthcare of a
reorganization, merger or consolidation, if after such transaction, the Persons
who had Beneficial Ownership of the Stock and Voting Power of Trigon Healthcare
before such transaction will not have Beneficial Ownership of at least 50% of
the Stock and Voting Power of the corporation resulting from such transaction.
(d) A complete liquidation or dissolution of Trigon
Healthcare, or the sale or other disposition of all or substantially all of the
assets of Trigon Healthcare.
(e) The sale or other disposition by Trigon Healthcare of 50%
or more of the Stock of the Company, or any other transaction pursuant to which
Trigon Healthcare ceases to control the Company.
1.5 "Code" shall mean the Internal Revenue Code of 1986.
1.6 "Compensable Termination" means either (i) the termination
of Executive's employment by the Company within three months before or within
three years after a Change of Control for any reason other than for Good Cause,
or (ii) the termination of Executive's employment by Executive within three
years after a Change of Control for Good Reason.
1.7 "Compensation" has the meaning set forth in Section 2.4.
1.8 "Good Cause" means:
(a) fraud, embezzlement or misappropriation by Executive
involving the business or assets of the Company,
(b) the persistent and willful failure by Executive
substantially to perform his duties and responsibilities to the Company, which
failure continues after Executive receives written notice of such failure, or
(c) Executive's conviction of a felony or crime involving
moral turpitude.
1.9 "Good Reason" means any of the following actions or events that
occur after a Change of Control and without Executive's express written consent:
(a) any reduction in Executive's base salary;
(b) any reduction in Executive's opportunity to earn
incentive compensation, unless comparable reductions in incentive opportunities
are shared generally by other executives of the Company;
<PAGE>
(c) any material reduction in Executive's welfare benefits or
perquisites as in effect at the time of the Change of Control;
(d) any material reduction in Executive's duties,
responsibilities or authority, any adverse change in Executive's job title, or
any other action that constitutes a demotion of Executive; or
(e) the Company changes the location of Executive's principal
office to a location that is more than 50 miles distant from Executive's
principal office at the time of the Change of Control.
1.10 "Incumbent Director" means any person who serves on the Board
of Directors of Trigon Healthcare as of the date of this Agreement and any
person who is added to the Board thereafter with the approval of a majority of
the persons who are then Incumbent Directors.
1.11 "Person" means a natural person and any corporation,
partnership, trust, limited liability company or other legal entity.
1.12 "Retirement Plan" means the Company's Non-Contributory
Retirement Plan for Certain Employees of Blue Cross and Blue Shield of Virginia
or any successor plan, including any successor Cash Balance Plan.
1.13 "Salary Continuation Benefit" has the meaning set forth in
Section 2.2.
1.14 "SERP" means the Company's Supplemental Retirement Program for
Certain Employees of Blue Cross and Blue Shield of Virginia or any successor
program.
1.15 "Stock" means the then outstanding Class A Common Stock of
Trigon Healthcare.
1.16 "Trigon Healthcare" means Trigon Healthcare, Inc., a Virginia
corporation that, as of the date of this Agreement, owns all of the issued and
outstanding Stock of the Company.
1.17 "Voting Power" means the combined voting power of all
outstanding voting securities of Trigon Healthcare.
1.18 "Welfare Plan" means any health plan, dental plan, disability
plan, survivor income plan, life insurance plan or other welfare benefit plan as
defined in ss. 3(1) of the Employee Retirement Income Security Act of 1974,
currently or hereafter made available by the Company in which the Executive is
eligible to participate.
<PAGE>
Article II
SALARY CONTINUATION BENEFIT
2.1 If a Compensable Termination occurs, then the Company shall pay
the Salary Continuation Benefit to Executive on or before the tenth business day
following the day on which Executive's employment terminates. The Salary
Continuation Benefit shall be paid in one lump sum, net of all required federal
and state withholding taxes.
2.2 The Salary Continuation Benefit shall be a sum equal to three
times the Applicable Compensation of Executive.
2.3 The Applicable Compensation of Executive shall mean the greater
of (i) the highest amount of Compensation earned by Executive for any one of the
three full calendar years ended immediately before Executive's employment
terminates, or (ii) an amount equal to 155% of Executive's annual base salary
for the year in which Executive's employment terminates.
2.4 The Compensation earned by Executive for any calendar year shall
mean (i) the amount of Executive's annual base salary for such calendar year,
without any reduction for any amounts that Executive may have deferred under the
Company's 401(k) Plan, 401(k) Restoration Plan, Deferred Benefit Plan for
Officers, or otherwise, (ii) the amount of any cash bonus or cash incentive
award (annual, long-term, or otherwise) that is earned for a period of
performance ending in such calendar year, even though such bonus or award may be
paid after such calendar year, and (iii) the fair market value (determined as of
the date of the award) of any bonus or incentive award (annual, long-term, or
otherwise) that is made in property other than cash and that is earned for a
period of performance ending in such calendar year, even though such bonus or
award may be made after such calendar year. For purposes of clause (iii) of the
preceding sentence, (i) the granting or vesting of stock options shall not be
deemed to be a bonus or incentive award, and (ii) in the case of any bonus or
incentive award made in restricted stock of the Company, the fair market value
of such stock shall be determined without regard to the restriction.
Article III
WELFARE BENEFITS
3.1 If a Compensable Termination occurs, then the Company will,
subject to the provisions of Section 3.2, continue the coverage of Executive and
his dependents under all Welfare Plans in which they participated immediately
before the termination of Executive's employment for a period of three years
following the termination of Executive's employment.
<PAGE>
3.2 Notwithstanding Section 3.1, (i) if the Company amends or
terminates any Welfare Plan in which Executive is participating in a manner that
is generally applicable to all executives of the Company, then such amendment or
termination shall also be applicable to Executive, (ii) Executive shall continue
to contribute to the cost of the Welfare Plans on substantially the same basis
as he did before the termination of his employment, (iii) if Executive's
continued participation in any Welfare Plan is not possible because of the terms
of the plan or any provision of law, then the Company will at its expense
provide Executive with an alternative benefit of substantially equal value and
utility through cash payments, an alternative insurance arrangement, or
otherwise, and (iv) the obligation of the Company to continue Executive's
coverage under any Welfare Plan shall cease if Executive becomes covered under a
welfare plan sponsored by a subsequent employer that provides substantially
equal or greater benefits.
3.3 In lieu of the welfare benefits provided for in Section 3.1,
Executive may, at his option, elect to receive a lump sum amount in cash such
that, after Executive pays any taxes on such lump sum amount, Executive will
retain on an after-tax basis an amount equal to the present value of such
benefits. Any such election must be made by Executive by written notice provided
to the Company within 60 days of the date that a Compensable Termination occurs.
Present value shall be determined using a discount rate equal to the Federal
mid-term rate under Section 1274(d) of the Code.
3.4 If a Compensable Termination occurs, then for the purpose of
determining Executive's eligibility for retiree benefits under any Welfare Plan,
(i) Executive's age shall be deemed to be Executive's actual age plus three
years, and (ii) Executive's years of service with the Company shall be deemed to
be the actual number of years of service plus three years.
Article IV
SUPPLEMENTAL RETIREMENT BENEFITS
4.1 If a Compensable Termination occurs, then the Company will
provide Executive with the supplemental retirement benefits described in this
Article 4.
4.2 The Company will pay to Executive within ten business days after
the termination of Executive's employment in one lump sum an amount equal to the
difference between the (i) actuarial equivalent of the amount that Executive
would have received under the Retirement Plan and SERP if (a) Executive's
employment with the Company had continued for an additional five years (with
five additional years of age and service credit, if applicable) and (b)
Executive had received annual Compensation in each such year equal to
Executive's Compensation during the last calendar year before Executive's
employment terminated, and (iii) the actuarial equivalent of the amount that
Executive will actually receive under the Retirement Plan and SERP.
<PAGE>
4.3 The Company will pay to Executive within ten business days after
the termination of Executive's employment in one lump sum the actuarial
equivalent of Executive's accrued benefit under the SERP.
4.4 For purposes of Section 4.2 and 4.3, actuarial equivalents shall
be determined as follows. If Executive's benefit under the Retirement plan is
based on a defined benefit formula, then actuarial equivalents shall be
determined in accordance with the provisions of such plan relating to lump sum
payments. If Executive's benefit under the Retirement Plan is based on a cash
balance formula, then actuarial equivalents shall be determined by assuming that
the interest rates that would be applicable to contribution credits in future
years would be equal to the discount rates used to compute the present value of
such future contribution credits.
4.5 Immediately upon the termination of Executive's employment, (i)
Executive shall, if not already full vested, become fully vested in the Trigon
Blue Cross Blue Shield 401(k) Restoration Plan, (ii) if Executive is not already
full vested in the Employees' Thrift Plan of Trigon Blue Cross Blue Shield, the
Company will make an additional contribution to the 401(k) Restoration Plan
equal to the amount that was forfeited from Executive's account in the Thrift
Plan, and (iii) the Company will make an additional contribution to the 401(k)
Restoration Plan equal to three times the contributions that the Company made to
the Thrift Plan and to the 401(k) Restoration Plan for Executive for the
calendar year immediately before the termination of Executive's employment.
Within 10 business days after the termination of Executive's employment, the
Company will pay to Executive in one lump sum his account balance in the 401(k)
Restoration Plan (including the additional contributions described in the
preceding sentence).
<PAGE>
Article V
INCENTIVE COMPENSATION
5.1 If a Change of Control occurs, then for the calendar year in
which the Change of Control occurs, the Company will pay Executive an award
under each of the Company's Annual Incentive Plan and Long-Term Performance Plan
equal to the greater of (i) the award computed in accordance with the terms of
such plan or (ii) the award computed as if the Company and the Executive had
achieved the target level of performance with respect to each performance
criterion under such plan.
5.2 If Executive is not employed by the Company at the end of the
calendar year in which a Change of Control occurs, then, notwithstanding any
provision to the contrary in the Annual Incentive Plan or the Long-Term
Performance Plan, the Company will pay to Executive the pro rata portions of the
awards computed in accordance with Section 5.1 that correspond to the portion of
the calendar year that Executive was employed by the Company.
5.3 If a Change of Control occurs, Executive shall immediately
become fully vested in any outstanding stock options, restricted stock, stock
rights or other stock-based compensation programs.
Article VI
OUTPLACEMENT SERVICES
6.1 If a Compensable Termination occurs, then the Company will
provide Executive with complete outplacement services, including job search and
interview skill services. Such services shall be provided by a nationally
recognized outplacement organization selected by Executive and shall continue
until the earlier of (i) the date on which Executive finds other suitable
employment or (ii) two years after the termination of Executive's employment.
Article VII
ADDITIONAL PAYMENT FOR EXCISE TAXES
7.1 If Executive receives any amount from the Company, pursuant to
this Agreement or otherwise, that is determined to be an "excess parachute
payment" subject to the excise tax imposed by ss. 4999 of the Code, then the
Company will pay to Executive an additional amount (herein referred to as a
"Gross-Up Payment") such that, after Executive has paid all federal and state
income and excise taxes imposed on such excess parachute payment and on such
Gross-Up Payment, Executive will retain an after-tax amount equal to the amount
that Executive would have retained if such excise tax had not been imposed.
<PAGE>
7.2 When Executive's employment with the Company terminates, the
amount of any Gross-Up Payment that the Company is required to pay under Section
7.1 shall be determined by the independent certified public accounting firm then
regularly employed by the Company. Within 15 business days following the
termination of Executive's employment, or earlier if requested by the Company
the accounting firm shall deliver to the Company and Executive a report
calculating in reasonable detail the amount of any Gross-Up Payment required by
Section 7.1. The amount of the required Gross-Up payment as so determined by the
accounting firm shall be binding on the Company and Executive, and within 10
business days following receipt of the report from the accounting firm, the
Company will pay the required Gross-Up Payment to Executive. If the accounting
firm determines that no Gross-Up Payment is required because no excise tax is
payable by Executive, it shall furnish Executive a written opinion to that
effect. All fees and expenses of the accounting firm shall be paid by the
Company.
7.3 Because of uncertainties in the application of ss. 4999 of the
Code, it is possible that the amount of the Gross-Up Payment as initially
determined by the accounting firm pursuant to Section 7.2 may be inadequate to
comply with the requirements of Section 7.1. If at any time Executive is
required to pay any additional excise tax not covered by the initial Gross-Up
Payment, then the Company will immediately pay to Executive an additional
Gross-Up Payment so that the requirements of Section 7.1 are complied with.
Article VIII
MISCELLANEOUS
8.1 Termination of Prior Executive Continuity Agreement. This
Agreement supercedes and replaces the Executive Continuity Agreement between the
Company and Executive dated April 30, 1997, and such Agreement is hereby
terminated and canceled.
8.2 Coordination with Prior Employment Agreement. Executive and the
Company are parties to an Employment Agreement dated as of December 12, 1990
(the "Prior Agreement"). If a Compensable Termination occurs, then the Prior
Agreement shall be terminated and canceled effective as of the date on which
Executive's employment terminates, and neither party to the Prior Agreement
shall have any obligation thereunder to the other. If Executive's employment
terminates under circumstances that do not constitute a Compensable Termination,
then the Prior Agreement shall remain in full force and effect.
<PAGE>
8.3 No Setoff. Executive is entitled to all of the benefits of this
Agreement whether or not Executive obtains subsequent employment and
irrespective of any compensation that Executive may receive from such subsequent
employment. The Company shall have no right to set off against any sum owed to
Executive hereunder any amount that Executive may owe the Company. If the
Company effects any setoff in violation of the preceding sentence, then the
Company and Executive agree that as reasonable liquidated damages therefor, the
Executive will be entitled to recover from the Company an amount equal to twice
the amount of such setoff.
8.4 Legal Fees. If any dispute arises in connection with this
Agreement or the enforcement or interpretation of Executive's rights under this
Agreement, the Company shall pay all reasonable legal fees and expenses incurred
by Executive in connection with such dispute, irrespective of the outcome of
such dispute.
8.5 Rights Not Exclusive. Executive's rights under this Agreement
are not exclusive, and, except as provided in Sections 8.1 and 8.2, nothing in
this Agreement shall limit any rights that Executive may have under any other
plan, contract, arrangement, custom, policy, practice or program of the Company.
8.6 Notices. Any notice required or permitted hereunder shall be in
writing and shall be deemed given if delivered personally or mailed, registered
or certified mail, as follows:
(a) If to the Company, to:
Chairman of the Executive Committee
Blue Cross and Blue Shield of Virginia
2015 Staples Mill Road
Post Office Box 27401
Richmond, Virginia 23279
(b) If to Executive, to his last address shown on the records
of the Company.
<PAGE>
8.7 Successors. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, representatives,
and successors, including, without limitation, any person acquiring directly or
indirectly all or substantially all of the assets of the Company, whether by
merger, consolidation, sale, or otherwise, but neither this Agreement nor any
right hereunder may be otherwise assigned or transferred by either party hereto.
8.8 Severability. If any provision of this Agreement is held to be
invalid or unenforceable, the remaining provisions shall not be affected
thereby.
8.9 Applicable Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of Virginia.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first above written.
TRIGON INSURANCE COMPANY
By: ____________________________________________
____________________________________________
Executive
Exhibit 10.2
[Form of Agreement with John C. Berry and certain other executive officers]
TRIGON INSURANCE COMPANY
EXECUTIVE CONTINUITY AGREEMENT
This Executive Continuity Agreement (the "Agreement") is made as of
September 16, 1998, between TRIGON INSURANCE COMPANY (the "Company") and JOHN C.
BERRY ("Executive").
RECITALS
Executive is currently employed by the Company as Executive Vice
President & Chief Operating Officer, Government and Individual Business. The
purpose of this Agreement is to encourage Executive to continue his employment
with the Company both before and after a Change of Control and to recognize the
prior service of Executive if his employment is terminated under certain
circumstances after a Change of Control.
NOW THEREFORE, in consideration of the premises, the parties agree
as follows:
Article I
DEFINITIONS
As used herein, the following terms have the meanings indicated.
1.1 "Affiliate" means any corporation or other legal entity that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, the Company.
1.2 "Applicable Compensation" has the meaning set forth in Section
2.3.
1.3 "Beneficial Ownership" has the meaning Rule 13d-3 promulgated
under the Securities Exchange Act of 1934.
1.4 "Change of Control" means any event described in subparagraphs
(a) through (e) below:
(a) The acquisition by any Person of Beneficial Ownership of
20% or more of the Stock or the Voting Power of Trigon Healthcare, but excluding
for this purpose any acquisition by the Company (or an Affiliate) or by an
employee benefit plan sponsored by the Company (or an Affiliate). When two or
more persons act in concert for the purpose of acquiring Stock or Voting Power
of Trigon Healthcare, such Persons shall be deemed to be a single Person.
<PAGE>
(b) Individuals who are Incumbent Directors cease to
constitute at least a majority of the Board of Directors of Trigon Healthcare.
(c) Approval by the shareholders of Trigon Healthcare of a
reorganization, merger or consolidation, if after such transaction, the Persons
who had Beneficial Ownership of the Stock and Voting Power of Trigon Healthcare
before such transaction will not have Beneficial Ownership of at least 50% of
the Stock and Voting Power of the corporation resulting from such transaction.
(d) A complete liquidation or dissolution of Trigon
Healthcare, or the sale or other disposition of all or substantially all of the
assets of Trigon Healthcare.
(e) The sale or other disposition by Trigon Healthcare of 50%
or more of the Stock of the Company, or any other transaction pursuant to which
Trigon Healthcare ceases to control the Company.
1.5 "Code" shall mean the Internal Revenue Code of 1986.
1.6 "Compensable Termination" means either (i) the termination of
Executive's employment by the Company within three months before or within three
years after a Change of Control for any reason other than for Good Cause, or
(ii) the termination of Executive's employment by Executive within three years
after a Change of Control for Good Reason.
1.7 "Compensation" has the meaning set forth in Section 2.4.
1.8 "Good Cause" means:
(a) fraud, embezzlement or misappropriation by Executive
involving the business or assets of the Company,
(b) the persistent and willful failure by Executive
substantially to perform his duties and responsibilities to the Company, which
failure continues after Executive receives written notice of such failure, or
(c) Executive's conviction of a felony or crime involving
moral turpitude.
1.9 "Good Reason" means any of the following actions or events that
occur after a Change of Control and without Executive's express written consent:
(a) any reduction in Executive's base salary;
(b) any reduction in Executive's opportunity to earn
incentive compensation, unless comparable reductions in incentive opportunities
are shared generally by other executives of the Company;
<PAGE>
(c) any material reduction in Executive's welfare benefits or
perquisites as in effect at the time of the Change of Control;
(d) any material reduction in Executive's duties,
responsibilities or authority, any adverse change in Executive's job title, or
any other action that constitutes a demotion of Executive; or
(e) the Company changes the location of Executive's principal
office to a location that is more than 50 miles distant from Executive's
principal office at the time of the Change of Control.
1.10 "Incumbent Director" means any person who serves on the Board
of Directors of Trigon Healthcare as of the date of this Agreement and any
person who is added to the Board thereafter with the approval of a majority of
the persons who are then Incumbent Directors.
1.11 "Person" means a natural person and any corporation,
partnership, trust, limited liability company or other legal entity.
1.12 "Salary Continuation Benefit" has the meaning set forth in
Section 2.2.
1.13 "Stock" means the then outstanding Class A Common Stock of
Trigon Healthcare.
1.14 "Trigon Healthcare" means Trigon Healthcare, Inc., a Virginia
corporation that, as of the date of this Agreement, owns all of the issued and
outstanding Stock of the Company.
1.15 "Voting Power" means the combined voting power of all
outstanding voting securities of Trigon Healthcare.
1.16 "Welfare Plan" means any health plan, dental plan, disability
plan, survivor income plan, life insurance plan or other welfare benefit plan as
defined in ss. 3(1) of the Employee Retirement Income Security Act of 1974,
currently or hereafter made available by the Company in which the Executive is
eligible to participate.
Article II
SALARY CONTINUATION BENEFIT
2.1 If a Compensable Termination occurs, then the Company shall pay
the Salary Continuation Benefit to Executive on or before the tenth business day
following the day on which Executive's employment terminates. The Salary
Continuation Benefit shall be paid in one lump sum, net of all required federal
and state withholding taxes.
<PAGE>
2.2 The Salary Continuation Benefit shall be a sum equal to two
times the Applicable Compensation of Executive.
2.3 The Applicable Compensation of Executive shall mean the greater
of (i) the highest amount of Compensation earned by Executive for any one of the
three full calendar years ended immediately before Executive's employment
terminates, or (ii) an amount equal to 155% of Executive's annual base salary
for the year in which Executive's employment terminates.
2.4 The Compensation earned by Executive for any calendar year shall
mean (i) the amount of Executive's annual base salary for such calendar year,
without any reduction for any amounts that Executive may have deferred under the
Company's 401(k) Plan, 401(k) Restoration Plan, Deferred Benefit Plan for
Officers, or otherwise, (ii) the amount of any cash bonus or cash incentive
award (annual, long-term, or otherwise) that is earned for a period of
performance ending in such calendar year, even though such bonus or award may be
paid after such calendar year, and (iii) the fair market value (determined as of
the date of the award) of any bonus or incentive award (annual, long-term, or
otherwise) that is made in property other than cash and that is earned for a
period of performance ending in such calendar year, even though such bonus or
award may be made after such calendar year. For purposes of clause (iii) of the
preceding sentence, (i) the granting or vesting of stock options shall not be
deemed to be a bonus or incentive award, and (ii) in the case of any bonus or
incentive award made in restricted stock of the Company, the fair market value
of such stock shall be determined without regard to the restriction.
Article III
WELFARE BENEFITS
3.1 If a Compensable Termination occurs, then the Company will,
subject to the provisions of Section 3.2, continue the coverage of Executive and
his dependents under all Welfare Plans in which they participated immediately
before the termination of Executive's employment for a period of two years
following the termination of Executive's employment.
<PAGE>
3.2 Notwithstanding Section 3.1, (i) if the Company amends or
terminates any Welfare Plan in which Executive is participating in a manner that
is generally applicable to all executives of the Company, then such amendment or
termination shall also be applicable to Executive, (ii) Executive shall continue
to contribute to the cost of the Welfare Plans on substantially the same basis
as he did before the termination of his employment, (iii) if Executive's
continued participation in any Welfare Plan is not possible because of the terms
of the plan or any provision of law, then the Company will at its expense
provide Executive with an alternative benefit of substantially equal value and
utility through cash payments, an alternative insurance arrangement, or
otherwise, and (iv) the obligation of the Company to continue Executive's
coverage under any Welfare Plan shall cease if Executive becomes covered under a
welfare plan sponsored by a subsequent employer that provides substantially
equal or greater benefits.
3.3 In lieu of the welfare benefits provided for in Section 3.1,
Executive may, at his option, elect to receive a lump sum amount in cash such
that, after Executive pays any taxes on such lump sum amount, Executive will
retain on an after-tax basis an amount equal to the present value of such
benefits. Any such election must be made by Executive by written notice provided
to the Company within 60 days of the date that a Compensable Termination occurs.
Present value shall be determined using a discount rate equal to the Federal
mid-term rate under Section 1274(d) of the Code.
3.4 If a Compensable Termination occurs, then for the purpose of
determining Executive's eligibility for retiree benefits under any Welfare Plan,
(i) Executive's age shall be deemed to be Executive's actual age plus two years,
and (ii) Executive's years of service with the Company shall be deemed to be the
actual number of years of service plus two years.
Article IV
SUPPLEMENTAL RETIREMENT BENEFITS
4.1 If a Compensable Termination occurs, then the Company will
provide Executive with the supplemental retirement benefits described in this
Article 4.
4.2 The Company will pay to Executive within ten business days after
the termination of Executive's employment in one lump sum the actuarial
equivalent of Executive's accrued benefit under the SERP.
4.3 Immediately upon the termination of Executive's employment, (i)
Executive shall, if not already full vested, become fully vested in the Trigon
Blue Cross Blue Shield 401(k) Restoration Plan, (ii) if Executive is not already
full vested in the Employees' Thrift Plan of Trigon Blue Cross Blue Shield, the
Company will make an additional contribution to the 401(k) Restoration Plan
equal to the amount that was forfeited from Executive's account in the Thrift
Plan, and (iii) the Company will make an additional contribution to the 401(k)
Restoration Plan equal to three times the contributions that the Company made to
the Thrift Plan and to the 401(k) Restoration Plan for Executive for the
calendar year immediately before the termination of Executive's employment.
Within 10 business days after the termination of Executive's employment, the
Company will pay to Executive in one lump sum his account balance in the 401(k)
Restoration Plan (including the additional contributions described in the
preceding sentence).
<PAGE>
Article V
INCENTIVE COMPENSATION
5.1 If a Change of Control occurs, then for the calendar year in
which the Change of Control occurs, the Company will pay Executive an award
under each of the Company's Annual Incentive Plan and Long-Term Performance Plan
equal to the greater of (i) the award computed in accordance with the terms of
such plan or (ii) the award computed as if the Company and the Executive had
achieved the target level of performance with respect to each performance
criterion under such plan.
5.2 If Executive is not employed by the Company at the end of the
calendar year in which a Change of Control occurs, then, notwithstanding any
provision to the contrary in the Annual Incentive Plan or the Long-Term
Performance Plan, the Company will pay to Executive the pro rata portions of the
awards computed in accordance with Section 5.1 that correspond to the portion of
the calendar year that Executive was employed by the Company.
5.3 If a Change of Control occurs, Executive shall immediately
become fully vested in any outstanding stock options, restricted stock, stock
rights or other stock-based compensation programs.
Article VI
OUTPLACEMENT SERVICES
6.1 If a Compensable Termination occurs, then the Company will
provide Executive with complete outplacement services, including job search and
interview skill services. Such services shall be provided by a nationally
recognized outplacement organization selected by Executive and shall continue
until the earlier of (i) the date on which Executive finds other suitable
employment or (ii) two years after the termination of Executive's employment.
<PAGE>
Article VII
ADDITIONAL PAYMENT FOR EXCISE TAXES
7.1 If Executive receives any amount from the Company, pursuant to
this Agreement or otherwise, that is determined to be an "excess parachute
payment" subject to the excise tax imposed by ss. 4999 of the Code, then the
Company will pay to Executive an additional amount (herein referred to as a
"Gross-Up Payment") such that, after Executive has paid all federal and state
income and excise taxes imposed on such excess parachute payment and on such
Gross-Up Payment, Executive will retain an after-tax amount equal to the amount
that Executive would have retained if such excise tax had not been imposed.
7.2 When Executive's employment with the Company terminates, the
amount of any Gross-Up Payment that the Company is required to pay under Section
7.1 shall be determined by the independent certified public accounting firm then
regularly employed by the Company. Within 15 business days following the
termination of Executive's employment, or earlier if requested by the Company
the accounting firm shall deliver to the Company and Executive a report
calculating in reasonable detail the amount of any Gross-Up Payment required by
Section 7.1. The amount of the required Gross-Up payment as so determined by the
accounting firm shall be binding on the Company and Executive, and within 10
business days following receipt of the report from the accounting firm, the
Company will pay the required Gross-Up Payment to Executive. If the accounting
firm determines that no Gross-Up Payment is required because no excise tax is
payable by Executive, it shall furnish Executive a written opinion to that
effect. All fees and expenses of the accounting firm shall be paid by the
Company.
7.3 Because of uncertainties in the application of ss. 4999 of the
Code, it is possible that the amount of the Gross-Up Payment as initially
determined by the accounting firm pursuant to Section 7.2 may be inadequate to
comply with the requirements of Section 7.1. If at any time Executive is
required to pay any additional excise tax not covered by the initial Gross-Up
Payment, then the Company will immediately pay to Executive an additional
Gross-Up Payment so that the requirements of Section 7.1 are complied with.
<PAGE>
Article VIII
MISCELLANEOUS
8.1 Termination of Prior Executive Continuity Agreement. This
Agreement supercedes and replaces the Executive Continuity Agreement between the
Company and Executive dated April 29, 1997, and such Agreement is hereby
terminated and canceled.
8.2 Coordination with Prior Employment Agreement. Executive and the
Company are parties to an Employment Agreement dated as of December 12, 1990
(the "Prior Agreement"). If a Compensable Termination occurs, then the Prior
Agreement shall be terminated and canceled effective as of the date on which
Executive's employment terminates, and neither party to the Prior Agreement
shall have any obligation thereunder to the other. If Executive's employment
terminates under circumstances that do not constitute a Compensable Termination,
then the Prior Agreement shall remain in full force and effect.
8.3 No Setoff. Executive is entitled to all of the benefits of this
Agreement whether or not Executive obtains subsequent employment and
irrespective of any compensation that Executive may receive from such subsequent
employment. The Company shall have no right to set off against any sum owed to
Executive hereunder any amount that Executive may owe the Company. If the
Company effects any setoff in violation of the preceding sentence, then the
Company and Executive agree that as reasonable liquidated damages therefor, the
Executive will be entitled to recover from the Company an amount equal to twice
the amount of such setoff.
8.4 Legal Fees. If any dispute arises in connection with this
Agreement or the enforcement or interpretation of Executive's rights under this
Agreement, the Company shall pay all reasonable legal fees and expenses incurred
by Executive in connection with such dispute, irrespective of the outcome of
such dispute.
8.5 Rights Not Exclusive. Executive's rights under this Agreement
are not exclusive, and, except as provided in Sections 8.1 and 8.2, nothing in
this Agreement shall limit any rights that Executive may have under any other
plan, contract, arrangement, custom, policy, practice or program of the Company.
8.6 Notices. Any notice required or permitted hereunder shall be in
writing and shall be deemed given if delivered personally or mailed, registered
or certified mail, as follows:
<PAGE>
(a) If to the Company, to:
Chairman of the Executive Committee
Blue Cross and Blue Shield of Virginia
2015 Staples Mill Road
Post Office Box 27401
Richmond, Virginia 23279
(b) If to Executive, to his last address shown on the records
of the Company.
8.7 Successors. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, representatives,
and successors, including, without limitation, any person acquiring directly or
indirectly all or substantially all of the assets of the Company, whether by
merger, consolidation, sale, or otherwise, but neither this Agreement nor any
right hereunder may be otherwise assigned or transferred by either party hereto.
8.8 Severability. If any provision of this Agreement is held to be
invalid or unenforceable, the remaining provisions shall not be affected
thereby.
8.9 Applicable Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of Virginia.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first above written.
TRIGON INSURANCE COMPANY
By: ____________________________________________
____________________________________________
Executive
Exhibit 10.3
NORWOOD H. DAVIS, JR.
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
(As amended and restated September 16, 1998)
This Agreement is made as of the 16th day of September, 1998,
between TRIGON INSURANCE COMPANY, a Virginia corporation (the "Company"), and
NORWOOD H. DAVIS, JR., of Richmond, Virginia ("Executive").
R E C I T A L S
Executive has been employed by the Company or its affiliates since
April 1, 1968. Since April 1, 1981, Executive has served as Chief Executive
Officer of the Company or of its affiliate, Consolidated Healthcare, Inc. The
Company and Executive are parties to an agreement dated January 2, 1998 (the
"Prior Agreement"). The parties desire to amend and restate the Prior Agreement
in the manner herein set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties agree as follows:
ARTICLE 1
EMPLOYMENT
1.1 Employment. The Company hereby employs Executive as Chairman of
the Board and Chief Executive Officer of the Company. Executive shall have the
powers, duties, and responsibilities that are customary to the position of Chief
Executive Officer and shall preside at all meetings of the Board of Directors of
the Company. Subject to approval by the Board, Executive shall select the
officers of the Company and each of its affiliates. Executive shall devote his
full business time and efforts to the business and affairs of the Company and
its affiliates; provided, however, that this provision shall not preclude
Executive from serving as a director of any other corporation or other
organization involving no conflict of interest with the interests of the
Company. All such directorships shall be disclosed to and reviewed by the
Executive Committee of the Company.
1.2 At Will Employment. Executive's employment hereunder is at will.
Executive may resign at any time, and the Company may discharge Executive at any
time, with or without cause.
<PAGE>
ARTICLE 2
COMPENSATION AND BENEFITS
2.1 Base Salary. Executive's base salary for 1998 has been
determined by the Board of Directors upon recommendation from the Chair of the
Human Resources Committee.
2.2 Incentive Compensation. Executive shall also be eligible for
an award of incentive compensation each year.
2.3 Annual Reviews. Effective each January 1 during the term of this
Agreement, the Chairmen of the Executive and Human Resources, Compensation and
Employee Benefits Committees will review Executive's performance as Chief
Executive Officer and will recommend to the Board (i) such annual increase in
base salary as may be appropriate and in accordance with the Company's regular
salary administration program and (ii) such award of incentive compensation for
the prior year as may be appropriate. The Board will determine such annual
increase in base salary and such award of incentive compensation.
2.4 Participation in Employee Benefit Plans. While employed by the
Company, Executive shall be entitled to participate in the Company's
Non-Contributory Retirement Program, the Employees' Thrift Plan, the
split-dollar life insurance program, the group health insurance program, the
group term life insurance program, and the disability insurance program. In
addition, the Company shall provide to Executive an automobile and gasoline
allowance, tax and financial planning services, and reimbursement for club dues
and other business expenses.
<PAGE>
ARTICLE 3
DISABILITY
3.1 Supplemental Disability Payment. If Executive becomes disabled
while employed by the Company and is entitled to receive benefits under the
Company's Long-Term Disability Program, then the Company will pay to Executive a
Monthly Supplemental Disability Benefit (as hereinafter defined) for so long as
Executive is entitled to receive disability payments under the Company's
Long-Term Disability Program (or under any similar disability program maintained
by the Company). The amount of the Monthly Supplemental Disability Benefit shall
be equal to the difference between (i) one-twelfth (1/12) of sixty percent (60%)
of Executive's annual base salary for the year in which Executive becomes
disabled and (ii) the amount of the monthly disability benefit payable to
Executive under the Company's Long-Term Disability Program.
ARTICLE 4
SEVERANCE PAYMENT AND EMPLOYMENT BENEFIT TRUST
4.1 Severance Payment.
(a) Upon a Termination Event, as defined in Section 4.1(b)
below, the Company will pay the Severance Payment, as defined in Section 4.1(c)
below, to Executive.
(b) The term Termination Event shall mean the following: (i)
the termination of Executive's employment with the Company for any reason other
than by reason of Executive's resignation; and (ii) the termination of
Executive's employment with the Company by reason of Executive's resignation but
only if Executive shall have given the Company at least six (6) months prior
written notice of such resignation. The term Termination Event shall not include
the termination of Executive's employment with the Company by reason of
Executive's resignation if Executive shall not have given the Company at least
six (6) months prior written notice of such resignation.
(c) The term Severance Payment shall mean a payment in cash
equal to four times the Applicable Compensation of Executive as defined in
Section 4.1(d) below.
<PAGE>
(d) The term Applicable Compensation of Executive shall mean
the highest amount of compensation (as defined in Section 4.1(e) below) earned
by Executive for any one of the three full calendar years ended immediately
preceding the Termination Event.
(e) The Compensation earned by Executive for any calendar year
shall mean (i) the amount of Executive's annual base salary for such calendar
year, without any reduction for any amounts that Executive may have deferred
under the Company's 401(k) Plan, 401(k) Restoration Plan, Deferred Benefit Plan
for Officers, or otherwise, (ii) the amount of any cash bonus or cash incentive
award (annual, long-term, or otherwise) that is earned for a period of
performance ending in such calendar year, even though such bonus or award may be
paid after such calendar year, and (iii) the fair market value (determined as of
the date of the award) of any bonus or incentive award (annual, long-term, or
otherwise) that is made in property other than cash and that is earned for a
period of performance ending in such calendar year, even though such bonus or
award may be made after such calendar year. For purposes of clause (iii) of the
preceding sentence, (i) the granting or vesting of stock options shall not be
deemed to be a bonus or incentive award, and (ii) in the case of any bonus or
incentive award made in restricted stock of the Company, the fair market value
of such stock shall be determined without regard to the restriction.
4.2 Establishment of Employment Benefit Trust. The Company has
established an Employment Benefit Trust (the "Trust") for the benefit of
Executive and other key executives of the Company. The form of Trust Agreement
is attached as Exhibit A. In order to provide benefits to Executive, the Company
has transferred to the Trust the assets and amounts specified in paragraph 4.3
and has instructed the trustee of the Trust to maintain such assets and amounts
in a separate account for the benefit of Executive (the "Account").
<PAGE>
4.3 Assets and Amounts Transferred to the Trust.
(a) Prior to the execution of the Prior Agreement, the
Company transferred to the Trust all of the assets held in the account
established for Executive under the Agreement between the Company and Executive
dated December 12, 1990, and certain additional amounts that were authorized by
the Board of Directors on December 9, 1992, and were transferred to the Trust on
or about June 22, 1993.
(b) The strategy of the Company is to expand by acquiring,
merging, or affiliating with other Blue Cross and Blue Shield plans, insurance
companies, and managed care companies. If the Executive Committee or the Board
of Directors determines that Executive's duties have expanded because of such
acquisitions, mergers or affiliations or for other reasons, then the Executive
Committee or the Board of Directors may make additional contributions to the
Trust in recognition of such expanded duties.
4.4 Investment of Amounts Transferred to the Trust. The Company
shall from time to time appoint an investment manager (the "Investment Manager")
to invest and manage the assets of the Trust. The initial Investment Manager
will be James W. Copley, Jr., President, Consolidated Investment Corporation.
The Company, acting through the Investment Manager, shall have sole discretion
to select investments for the Trust. Annually, the Investment Manager will
report the investments made in the Trust to the Chairman of the Executive
Committee and will confer with him about the investment policy for the Trust.
Executive shall have no right to have any particular investment made in the
Trust. The Company shall bear all risk of gain or loss with respect to the
investments made in the Trust. Such gains or losses shall not affect the amount
of the Severance Payment.
4.5 Fees, Expenses, and Taxes. The Company shall pay the fees and
expenses of the Investment Manager for its services and the fees and expenses of
the trustee of the Trust for its services. All fees, commissions, and expenses
resulting from transactions made in the Trust shall be paid from assets held in
the Trust to the extent such assets are available, but if such assets are
insufficient to pay such sums, such sums shall be paid by the Company from its
other funds. Income taxes incurred by the Company as the result of transactions
made in the Trust shall be paid by the Company and shall not be charged to the
Trust.
<PAGE>
4.6 Distribution of the Assets in the Trust.
(a) Upon the happening of a Termination Event, the trustee of
the Trust may either (i) transfer assets held in the Trust for Executive's
Benefit to Executive in kind to the extent of the Severance Payment; or (ii)
sell all or any part of such assets and distribute the sales proceeds to
Executive to the extent of the Severance Payment. If any asset distributed to
Executive in kind does not have a readily ascertainable fair market value, the
Company may at its expense have such asset appraised by an independent
appraiser, and the Company and Executive agree to be bound by such appraisal for
all purposes under this Agreement (including federal and state income tax
filings). To the extent the value of such assets transferred to Executive in
kind or such proceeds distributed to Executive (as the case may be) is
insufficient to fund the Severance Payment, the Company shall pay the balance of
the Severance Payment to Executive in immediately available funds. To the extent
that the value of such assets or such proceeds distributed to Executive or such
proceeds (as the case may be) exceeds the Severance Payment, such assets or such
proceeds (as the case may be) shall be distributed to the Company. If the
Termination Event is the result of the death of Executive, then the distribution
under this paragraph shall be made to Executive's personal representative.
(b) In consideration of the Severance Payment to Executive,
Executive agrees that he will not, prior to the expiration of four (4) years
following the termination of his employment, become an officer, director, or
employee of, or consultant to, or 10% or more owner of, any entity that competes
with the Company in any business in which the Company is engaged as of the date
of the termination of Executive's employment; provided, however, that if the
Company terminates Executive's employment without cause, then this covenant not
to compete shall not be applicable. For purposes of this Agreement, termination
without cause means termination for any reason other than continued neglect by
Executive of his duties hereunder or willful misconduct by Executive in the
performance of his duties hereunder. Executive agrees that in the event of a
breach by Executive of this covenant not to compete, the Company's remedies at
law will be inadequate and that the Company will be entitled to appropriate
equitable relief, including an injunction restraining such breach. If Executive
so requests, the Executive Committee is authorized to determine, by written
communication to Executive, that a particular activity that Executive proposes
to engage in does not constitute competition with the Company within the meaning
of this paragraph and such determination shall be conclusive and binding on the
parties to this Agreement.
<PAGE>
4.7 Beneficial Ownership. Unless and until the assets held in the
Account are distributed to Executive pursuant to Section 4.6(a) of this
Agreement, beneficial ownership of all assets in the Account shall remain with
the Company, and Executive shall have no property interest in any such assets.
ARTICLE 5
RETIREMENT AND SUPPLEMENTAL RETIREMENT BENEFITS
5.1 Normal Retirement. If Executive's employment with the Company
has not sooner terminated, then he shall retire as of the end of the month in
which he attains the age of 61 (that is to say, on March 31, 2001).
5.2 Early Retirement. Executive may at his option elect early
retirement effective as of the end of any month following the date on which he
attains the age of 56 (that is to say, beginning March 31, 1996) by giving the
Company written notice of such election at least one hundred twenty (120) days
before the effective date of such retirement.
5.3 Participation in Existing Retirement Programs. Executive is a
participant in the Company's Non-Contributory Retirement Program (herein
referred to as the "Retirement Program") and in the Company's Supplemental
Retirement Program for Certain Employees (herein referred to as the
"Supplemental Retirement Program").
<PAGE>
5.4 Enhanced Supplemental Retirement Benefit at Normal Retirement.
If Executive's continuous employment with the Company continues until March 10,
2001, then in addition to the benefit that Executive receives under the
Supplemental Retirement Program, the Company shall pay to Executive a
nonqualified unfunded supplemental retirement benefit (the "Enhanced
Supplemental Retirement Benefit") in the amount described below. The amount of
the Enhanced Supplemental Retirement Benefit shall be equal to the difference
between (i) the retirement benefit that Executive would have received under the
Retirement Program if (a) earnings used in computing benefits under the
Retirement Program included nonqualified deferred compensation in the year in
which the amounts were deferred, (b) the limitations of Sections 401(a)(17) and
415 of the Internal Revenue Code did not apply to the calculation and amount of
such benefit, (c) Executive had remained in the employ of the Company and
received credited service until March 31, 2005, and (d) Executive had received
earnings from the Company from the date of termination of employment until March
31, 2005 at an annual rate equal to the Annual Compensation of Executive as
defined in Section 4.1(d) above, and (ii) the sum of the retirement benefits
that Executive actually receives under the Retirement Program and under the
Supplemental Retirement Program.
5.5 Reduced Enhanced Supplemental Retirement Benefit at Early
Retirement. If Executive's continuous employment with the Company terminates at
any time on or after March 10, 1996 but before March 10, 2001, then the Company
shall pay Executive that percentage of the Enhanced Supplemental Retirement
Benefit reflected in the following schedule:
Percentage of
Enhanced Supplemental
Retirement Date Retirement Benefit
--------------- ------------------
March 10, 1996 - March 9, 1997 80%
March 10, 1997 - March 9, 1998 84%
March 10, 1998 - March 9, 1999 88%
March 10, 1999 - March 9, 2000 92%
March 10, 2000 - March 9, 2001 96%
March 10, 2001 - or thereafter 100%
<PAGE>
5.6 Calculation and Payment of Enhanced Supplemental Retirement
Benefits. The enhanced supplemental retirement benefits payable to Executive
pursuant to Sections 5.4 and 5.5 of this Agreement shall be calculated and paid
to Executive at the same time and in the same manner that benefits are
calculated and paid to Executive under the Supplemental Retirement Program.
5.7 Other Retirement Benefits. If Executive retires from the
Company, then irrespective of when such retirement occurs, Executive shall be
entitled to all retirement benefits that are made generally available to retired
executive officers of the Company, including health care coverage and group term
life insurance benefits.
ARTICLE 6
WELFARE BENEFITS
6.1 As used in this Agreement, "Welfare Plan" means any health plan,
dental plan, disability plan, survivor income plan, life insurance plan or other
welfare benefit plan as defined in Section 3(1) of the Employee Retirement
Income Security Act of 1974, currently or hereafter made available by the
Company in which the Executive is eligible to participate.
6.2 If Executive's employment is terminated by the Company, then the
Company will, subject to the provisions of Section 6.3, continue the coverage of
Executive and his dependents under all Welfare Plans in which they participated
immediately before the termination of Executive's employment for a period of
three years following the termination of Executive's employment.
6.3 Notwithstanding Section 6.2, (i) if the Company amends or
terminates any Welfare Plan in which Executive is participating in a manner that
is generally applicable to all executives of the Company, then such amendment or
termination shall also be applicable to Executive, (ii) Executive shall continue
to contribute to the cost of the Welfare Plans on substantially the same basis
as he did before the termination of his employment, (iii) if Executive's
continued participation in any Welfare Plan is not possible because of the terms
of the plan or any provision of law, then the Company will at its expense
provide Executive with an alternative benefit of substantially equal value and
utility through cash payments, an alternative insurance arrangement, or
otherwise, and (iv) the obligation of the Company to continue Executive's
coverage under any Welfare Plan shall cease if Executive becomes covered under a
welfare plan sponsored by a subsequent employer that provides substantially
equal or greater benefits.
<PAGE>
6.4 If Executive's employment is terminated by the Company, then in
lieu of the welfare benefits provided for in Section 6.2, Executive may, at his
option, elect to receive a lump sum amount in cash such that, after Executive
pays any taxes on such lump sum amount, Executive will retain on an after-tax
basis an amount equal to the present value of such benefits. Any such election
must be made by Executive by written notice provided to the Company within 60
days after the date on which Executive's employment is terminated. Present value
shall be determined using a discount rate equal to the Federal mid-term rate
under Section 1274(d) of the Code.
ARTICLE 7
ADDITIONAL PAYMENT FOR EXCISE TAXES
7.1 If Executive receives any amount from the Company, pursuant to
this Agreement or otherwise, that is determined to be an "excess parachute
payment" subject to the excise tax imposed by ss. 4999 of the Internal Revenue
Code, then the Company will pay to Executive an additional amount (herein
referred to as a "Gross-Up Payment") such that, after Executive has paid all
federal and state income and excise taxes imposed on such excess parachute
payment and on such Gross-Up Payment, Executive will retain an after-tax amount
equal to the amount that Executive would have retained if such excise tax had
not been imposed.
7.2 When Executive's employment with the Company terminates, the
amount of any Gross-Up Payment that the Company is required to pay under Section
7.1 shall be determined by the independent certified public accounting firm then
regularly employed by the Company. Within 15 business days following the
termination of Executive's employment, or earlier if requested by the Company,
the accounting firm shall deliver to the Company and Executive a report
calculating in reasonable detail the amount of any Gross-Up Payment required by
Section 7.1. The amount of the required Gross-Up payment as so determined by the
accounting firm shall be binding on the Company and Executive, and within 10
business days following receipt of the report from the accounting firm, the
Company will pay the required Gross-Up Payment to Executive. If the accounting
firm determines that no Gross-Up Payment is required because no excise tax is
payable by Executive, it shall furnish Executive a written opinion to that
effect. All fees and expenses of the accounting firm shall be paid by the
Company.
<PAGE>
7.3 Because of uncertainties in the application of ss. 4999 of the
Internal Revenue Code, it is possible that the amount of the Gross-Up Payment as
initially determined by the accounting firm pursuant to Section 7.2 may be
inadequate to comply with the requirements of Section 7.1. If at any time
Executive is required to pay any additional excise tax not covered by the
initial Gross-Up Payment, then the Company will immediately pay to Executive an
additional Gross-Up Payment so that the requirements of Section 7.1 are complied
with.
ARTICLE 8
MISCELLANEOUS
8.1 Termination of Prior Agreements. This Agreement supersedes all
prior agreements respecting the subject matter of Executive's employment,
written or oral; provided, however, that nothing herein shall affect the Salary
Deferral Agreement between the Company and Executive dated December 13, 1989.
8.2 Legal Fees. If any dispute arises in connection with this
Agreement or the enforcement or interpretation of Executive's rights under this
Agreement, the Company shall pay all reasonable legal fees and expenses incurred
by Executive in connection with such dispute, irrespective of the outcome of
such dispute.
8.3 Rights Not Exclusive. Executive's rights under this Agreement
are not exclusive, and, except as provided in Section 8.1, nothing in this
Agreement shall limit any rights that Executive may have under any other plan,
contract, arrangement, custom, policy, practice or program of the Company.
<PAGE>
8.4 Notices. Any notice required or permitted hereunder shall be in
writing and shall be deemed given if delivered personally or mailed, registered
or certified mail, as follows:
(a) If to the Company, to:
Chairman of the Executive Committee
Trigon Insurance Company
2015 Staples Mill Road
Post Office Box 27401
Richmond, Virginia 23279
(b) If to Executive, to his last address shown on the
records of the Company.
8.5 Successors. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, representatives,
and successors, including, without limitation, any person acquiring directly or
indirectly all or substantially all of the assets of the Company, whether by
merger, consolidation, sale, or otherwise, but neither this Agreement nor any
right hereunder may be otherwise assigned or transferred by either party hereto.
8.6 Applicable Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of Virginia.
8.7 Amendment. This Agreement may be amended only by a written
instrument signed by the parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first above written.
TRIGON INSURANCE COMPANY
By: ______________________________
Jackie M. Ward, Chairperson
Human Resources, Compensation
and Employee Benefits Committee
______________________________
Norwood H. Davis, Jr.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED
IN THE TRIGON HEALTHCARE, INC. AND SUBSIDIARIES FORM 10-Q FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,967
<SECURITIES> 1,529,047
<RECEIVABLES> 399,729
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0
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<COMMON> 423
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<SALES> 1,539,613
<TOTAL-REVENUES> 1,639,062
<CGS> 1,231,764
<TOTAL-COSTS> 1,522,304
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