SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 001-12617
Trigon Healthcare, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1773225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2015 Staples Mill Road, Richmond, VA 23230
(Address of principal executive offices)
Registrant's telephone number, including area code (804) 354-7000
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $.01 Par Value New York Stock Exchange
(Title of Class) (Name of Exchange)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 25, 1999 was approximately $1,448,776,000 (based on the
last reported sales price of $34 1/4 per share on March 25, 1999, on the New
York Stock Exchange).
As of March 25, 1999, 42,300,022 shares of the registrant's Class A Common
Stock, par value $.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of Trigon Healthcare Inc.'s Annual Report to Shareholders for
the year ended December 31, 1998 into Parts II and IV of this Form 10-K.
Certain portions of Trigon Healthcare Inc.'s definitive Proxy Statement dated
March 29, 1999 for the Annual Meeting of Shareholders into Part III of this Form
10-K.
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TRIGON HEALTHCARE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
Page
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 14
Item 3. Legal Proceedings............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders........... 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 15
Item 6. Selected Financial Data....................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 16
Item 8. Financial Statements and Supplementary Data................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant............ 16
Item 11. Executive Compensation........................................ 16
Item 12. Security Ownership of Certain Beneficial Owners and Management 16
Item 13. Certain Relationships and Related Transactions................ 16
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 16
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PART I
Item 1. Business
DEMUTUALIZATION AND INITIAL PUBLIC OFFERING
Effective February 5, 1997, Blue Cross and Blue Shield of Virginia (dba Trigon
Blue Cross Blue Shield) completed its conversion from a mutual insurance company
to a stock insurance company in accordance with a Plan of Demutualization
("Demutualization"). In accordance with the Demutualization, Blue Cross and Blue
Shield of Virginia changed its name to Trigon Insurance Company (dba Trigon Blue
Cross Blue Shield) ("Trigon Insurance") and became a wholly owned subsidiary of
Trigon Healthcare, Inc. (Trigon Healthcare, Inc. and subsidiaries herein
collectively referred to as "Trigon" or the "Company"). The membership interests
of Blue Cross and Blue Shield of Virginia's eligible members were converted into
Class A common stock of Trigon Healthcare, Inc., or, in certain circumstances,
cash. The Demutualization also required the Company to complete an Initial
Public Offering ("IPO") of stock simultaneously with the conversion.
Accordingly, Trigon Healthcare, Inc. issued 17.8 million shares of Class A
common stock at $13 per share in the IPO, generating net proceeds of $215.2
million. In connection with the Demutualization, the Company was required to
make a payment of $175 million to the Commonwealth of Virginia ("Commonwealth
Payment") in February 1997. The Commonwealth Payment was accrued and reflected
as an extraordinary charge in the consolidated financial statements for 1996.
The Company used approximately $90 million of the net proceeds and $85 million
in borrowings under a revolving credit agreement to fund this payment. The
Company also used approximately $91.1 million of the offering proceeds to pay
certain eligible members cash in lieu of shares of common stock that would
otherwise have been issued to such eligible members pursuant to the
Demutualization.
GENERAL
The Company is the largest managed health care company in Virginia, serving
nearly 1.9 million members primarily through statewide and regional provider
networks. The Company's membership represents approximately 26% of the Virginia
population and 30% of the Virginia population in those areas where Trigon has
the exclusive right to use the Blue Cross and Blue Shield service marks and
tradenames.
The Company divides its business into four segments: health insurance,
government programs, investments and all other. The Company's health insurance
segment provides a comprehensive spectrum of managed care products primarily
through three network systems with a range of utilization and cost containment
controls. 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 claims are not underwritten by Trigon but are funded by
the groups. As of December 31, 1998, fully insured, also referred to as
commercial, products made up 52.5% of total enrollment. Its components include:
three HMO networks which, with 255,879 members, are the Company's most tightly
managed and cost efficient networks; the preferred provider organization ("PPO")
networks which, with 297,939 members, offer greater choice of providers than
Trigon's HMO networks; and the participating provider ("PAR") network which,
with 165,239 members, is the Company's broadest and most flexible network.
Commercial products also include Medicare supplement plans with 121,322 members,
the Medicaid/Medicare HMO plans with 31,338 members and the Southeast network
through Mid-South Insurance Company ("Mid-South"), a Fayetteville, North
Carolina-based health and life insurance company which was acquired by the
Company in 1996, with 105,056 members. Self-funded enrollment as of December 31,
1998 was 666,036 members and represents 35.8% of total enrollment. Self-funded
arrangements are available to groups with more than 100 employees and are
typically utilized by groups with more than 1,000 employees. Trigon charges
self-funded groups an administrative fee based on the number of members in a
group or the group's claims experience. In addition, most self-funded groups
purchase aggregate and/or claim specific stop loss coverage. In exchange for a
premium, the group's aggregate liability is capped for the year or the group's
liability on any one episode of care is capped.
The government programs segment includes the Federal Employee Program ("FEP")
and claims processing for Medicare. Through its participation in the national
contract between the Blue Cross Blue Shield Association ("BCBSA") and the U.S.
Office of Personnel Management ("OPM"), the Company provides health benefits to
federal employees in Virginia. FEP revenues represent the reimbursement by OPM
of medical costs incurred
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including the actual cost of administering the program, as well as a performance
based share of the national program's overall profit. As of December 31, 1998
FEP enrollment stood at 213,017 members and represents 11.4% of total
enrollment. The FEP is the Company's largest customer, representing 18.2% of
total consolidated revenues during 1998. The Company processes Medicare Part A
claims for beneficiaries in Virginia and West Virginia. Additionally, the
Company provides computer processing capabilities for Medicare Part A claims
processing for certain other Blue Cross Blue Shield plans. As an administrative
agent for Medicare, the Company allocates operating expenses to determine
reimbursement due for services rendered in accordance with the contract.
Medicare claims processed are not included in the consolidated statements of
operations and the reimbursement of allocated operating expenses is recorded as
a reduction of the Company's selling, general and administrative expenses.
All of the investment portfolios of the consolidated subsidiaries are managed
and evaluated collectively within the investment segment. The Company's other
health related business, third party administration for medical and workers
compensation, life and disability insurance, health promotions and similar
products are reflected in an "all other" category.
Refer to "Note 23. Segment Information" on pages 55 and 56 of the Company's
Annual Report to Shareholders, which are incorporated by reference, for
financial information relating to reportable segments.
The following table sets forth the data by network for the last five years:
ENROLLMENT BY NETWORK SYSTEM
As of December 31,
1998 1997 1996 1995 1994
------------------------------------------------
Health Insurance
Commercial
HMO......................... 255,879 255,548 219,866 166,536 85,739
PPO......................... 297,939 263,828 230,675 212,322 155,433
PAR......................... 165,239 192,825 236,383 296,716 334,800
Medicaid/Medicare HMO....... 31,338 35,488 28,306 6,357 -
Medicare supplement......... 121,322 125,686 128,015 129,252 131,864
Non-Virginia (1)............ 105,056 64,143 49,251 19,857 26,639
------------------------------------------------
Total commercial............... 976,773 937,518 892,496 831,040 734,475
Self-funded.................... 666,036 679,667 700,482 705,459 686,697
Processed for other Blue Cross
and Blue Shield Plans (ASO).... 5,545 15,728 70,330 64,558 65,187
------------------------------------------------
Total health insurance.........1,648,354 1,632,913 1,663,308 1,601,057 1,486,359
Government
Federal Employee Program (PPO). 213,017 207,457 197,241 198,561 195,314
------------------------------------------------
Total .........................1,861,371 1,840,370 1,860,549 1,799,618 1,681,673
================================================
(1) "Non-Virginia" enrollment includes Mid-South members beginning in 1996 and
out-of-state student health care coverage (which was discontinued as of December
31, 1995).
SIGNIFICANT CUSTOMERS
Trigon's two largest customers are the FEP and the Commonwealth of Virginia
("COV"). FEP represents 18.2% of total consolidated revenues. The contract
renews automatically for a term of one year each January 1, unless either party
gives written notice at least 60 days prior to the date of renewal. Under the
program, a special FEP reserve is maintained at the national level as a
protection against adverse claims trends. However, if the contract should
terminate with a negative balance in the FEP special reserve, the losses would
be allocated to participating plans as subcontractors based on a ratio of the
Company's past five year claims experience as a percent of the total program's
experience. As of December 31, 1998, the national reserve stood at 4.7 months of
claims and administrative payments in reserve, which is above the target of a
3.0 month reserve base. Since 1972, the Company has provided health benefits to
employees and retirees of COV. The contract represents 14.0% of premium and
premium
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equivalents. During 1998, the COV exercised its option to extend the current
contract to June 30, 2000. The Company expects the COV to issue a "Request For
Proposal" to administer health benefits in May 1999. The Company believes it is
well qualified to continue to meet the COV's health care requirements because of
its proven ability to service the account and its broad offering of PPO and HMO
network products.
NETWORKS
Trigon's HMO, PPO and PAR networks provide for the delivery of health care
services at reduced costs due to favorable network arrangements with health care
providers and by including members in health care decisions. The Company has the
largest membership base in Virginia, which generally allows it to negotiate
contracts with its Virginia providers that specify favorable rates and
incorporate utilization management and other cost controls. Members assume
responsibility for a portion of health care costs through copayments,
coinsurance and annual deductible contract provisions. Members may choose to
receive health care services from providers not part of the network at an
additional cost to the member. Trigon believes that the copayment, coinsurance,
annual deductible provisions and out of network costs enhance its ability to
control costs by encouraging members to take more responsibility for their
health care decisions.
Trigon established its first HMO in 1984 and now operates three separate HMOs.
HealthKeepers, Inc. ("HealthKeepers") is a state qualified HMO that operates
primarily in the central, eastern and southwestern areas of Virginia. Peninsula
Health Care, Inc. ("PHC"), a joint venture owned 51% by Trigon, is a state
qualified HMO operating primarily on the Peninsula in Eastern Virginia. The
Company owns 80% of Priority Inc. (acquired in 1995), which owns a federally
qualified HMO, Priority Health Care, Inc. ("Priority"), operating in the
Tidewater area in Eastern Virginia. As of December 31, 1998, the HMO networks
included approximately 2,200 primary care physicians, 7,200 specialist
physicians and 56 acute care hospitals throughout Virginia. Members choose a
primary care physician who is responsible for coordinating health care services
for the member. The HMO product portfolio is presented to customers as a
stand-alone HMO offering, or through "Blue Advantage," a program which includes
HMO and PPO options administered and priced as a single program and which can
only be utilized by groups that contract with Trigon on an exclusive basis. The
Company's PPO network is a statewide PPO network, which as of December 31, 1998
included approximately 16,600 physicians and 88 acute care hospitals within
Virginia. Members may seek care from any PPO network physician depending on
services required. Trigon's PAR network provides more traditional health
coverage and included approximately 17,700 physicians and 91 acute care
hospitals. The PAR network offers members more providers to choose from, greater
customization of benefit design and fewer restrictions in the use of non-network
providers than the PPO network. Trigon expects that its PAR network and products
will continue to be an important offering for groups desiring greater
flexibility and choice in networks and benefits, as well as a source of new PPO
and HMO members. Trigon also offers Medicaid and Medicare HMO products. PHC and
Priority market a Medicaid HMO product to participants in the Aid to Families
with Dependent Children program and the Aged, Blind and Disabled Individuals
programs in the Peninsula and Tidewater regions of Virginia. HealthKeepers
received federal and state regulatory approval in the first quarter of 1998 to
begin selling a Medicare HMO product within the City of Richmond and five
surrounding counties in central Virginia. The product is available to
individuals who are eligible for Medicare either through age or disability.
Health care services are provided by a special network comprised of a subset of
the HealthKeepers provider network. The Company had 1,300 members enrolled in
the Medicare HMO as of December 31, 1998. The Company is being disciplined and
cautious with its entry into the Medicare HMO market and is closely monitoring
the direction of government rules and regulations.
Trigon's networks have contracts with hospitals, physicians and other
professionals at reduced rates due to the volume of business it offers to
healthcare providers that are a part of the network. Hospital provider
contracts, typically three to five years in duration, are generally paid on the
basis of per diems (i.e., fixed fee schedules where the daily rate is based on
the type of service; primary method of in-patient reimbursement), per case per
admission (i.e., fixed fee schedules for all services during a member's
hospitalization), or a percentage of covered charges with limits on the
subsequent year increases. The average rate negotiated with hospitals under this
arrangement is lower than the hospital's average standard retail charges.
Services not subject to special per case or per diem payment arrangements are
generally paid according to a fee schedule or as a percentage of billed charges.
When considering whether to contract with a physician, the Company conducts a
credentialing program to evaluate the applicant's professional experience,
including licensure. The Company's HMO network provides reimbursement to almost
all of the primary care physicians in the HMO network on a capitated basis.
Specialists are reimbursed based on a fee
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schedule or, in some cases, on a capitated basis. Some ancillary services, lab
services, behavioral health and vision services are also capitated. Based on
these payment arrangements, physicians and hospitals in the HMO networks have
financial incentives to control health care costs. PPO and PAR physician
provider contracts employ fixed fee schedules, which are below standard billing
rates. Physician fee schedule payments are set by the Company using Medicare's
Resource Based Relative Value System methodologies and are generally adjusted
annually.
UTILIZATION MANAGEMENT
Trigon also manages health care costs in its networks by using utilization
management system guidelines for the networks that are intended to address
quality of care and help to ensure that only appropriate services are rendered
and that such services are provided in the most cost-effective manner. Trigon
recognizes that the right care in the right setting for the right price at the
right time using the right provider equates to quality medical care. In the HMO
network, the primary care physicians are considered to be the overall manager of
the individual's health care needs and manage and optimize care through the use
of referrals and by approving all specialty care before it is rendered. In
addition, the HMO reviews all high cost services needed by individual members
that are not provided by the primary care physician. The Company also manages
health care costs and quality by reviewing monthly cost and utilization trends
within all networks. Utilization rates and cases are reviewed in the aggregate
and by service type to identify opportunities for better cost and quality
control. In addition, the highest cost services are studied to determine if
costs can be reduced by using new, less expensive technologies or by creating
additional networks or contracts, such as networks for ambulatory care, to
reduce provider costs. Trigon utilizes Milliman & Robertson's healthcare
management guidelines and requires pre-admission approvals of all hospital and
skilled nursing facility stays and concurrent review of length of stay. Trigon
prospectively reviews the medical necessity of home health, private duty nursing
and durable medical equipment. Also, the Company retrospectively reviews
physician practice patterns. Physicians are required to meet certain profiling
criteria that indicate cost effective and quality practice standards. All new
medical technologies are reviewed in advance in an attempt to ensure that only
safe and effective new medical procedures are covered. Additionally, the Company
also employs a comprehensive disease management program. In this program, the
Company identifies those members having certain chronic diseases, such as
asthma, hypertension and diabetes, and proactively works with the member and the
physician to facilitate appropriate treatment, help to ensure compliance with
recommended therapies and educate members on lifestyle modifications to manage
the disease. The Company believes that the program promotes the delivery of
efficient care and helps to improve the quality of health care delivered.
QUALITY
Trigon's HMO quality improvement standards are modeled on those of the National
Committee on Quality Assurance ("NCQA"), an independent, nonprofit institution
that reviews and accredits health maintenance and managed care organizations.
The quality improvement program instituted by the Company's HMOs provides for
the review of quality of care service and the initial and ongoing review of the
credentials of all network providers. This credentialing process includes a
review of whether the provider has the necessary licenses, is qualified in the
specialty indicated and meets standards for safety, sanitation and
accessibility. The HMO reviews the findings with a quality improvement
committee, which includes practicing physicians from the HMO network. In
addition, quality of care services are monitored through profiling and data
analysis, member satisfaction surveys and problem case review. During 1998, the
Company obtained three-year full accreditation from the NCQA for HealthKeepers,
its largest HMO. The three-year full accreditation is granted to companies that
have excellent programs for continuous quality improvement and meet NCQA's
rigorous standards. Also during 1998, PHC received a one-year accreditation. A
one-year accreditation is provided to companies that have well established
quality improvement programs and meet most NCQA standards. The remaining Trigon
HMO plan, Priority, did not seek accreditation in 1998.
The Company has an active program to evaluate the quality and appropriateness of
care provided by its PPO and PAR networks. Provider credentialing, profiling and
member satisfaction, along with monitoring of outcomes and clinical studies are
all performed to monitor and manage quality of care. Network physicians and
other providers participate in quality management programs overseen by medical
advisory panels. Using the Company's computerized medical information database,
these programs involve profiles of the tests, types of treatment and procedures
performed for specific diagnoses by these physicians, as well as reviews of
aggregate data. The
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American Accreditation Health Care Commission/URAC has awarded Trigon Insurance
a full, two-year accreditation for health utilization management services.
Trigon Insurance has been certified since 1992.
MARKETING
Trigon markets its products and services to both individuals and groups. The
individual products are marketed principally through direct marketing
initiatives and through brokers. The group market includes small, medium and
large group employers. The smaller group employers generally use insurance
brokers to assist in the selection of products and analysis of the actual cost
of competing plans. As the group size grows, employers may use consultants to
assist them in the tailoring of benefits and networks. The larger group
employers are generally more sophisticated purchasers, often engaging
consultants to work with the Trigon sales staff to tailor benefit and network
design to match their specific needs more closely. In addition, Trigon has a
direct sales staff that markets the full range of Trigon products and services.
COMPETITION
The health care industry is highly competitive both in Virginia and in other
states in the southeastern and mid-Atlantic United States into which the Company
principally intends to expand. Managed care companies, including large,
well-capitalized companies which market managed care products nationwide, have
targeted the southeastern and mid-Atlantic regions of the United States as being
favorable for expansion and have begun entering Virginia and markets targeted by
Trigon in increasing numbers. In some cases, new market entrants, as well as
existing health care companies, have competed with the Company for business by
offering very favorable pricing terms to customers. The Company is facing this
increased competition in the areas in which it is licensed to use the Blue Cross
and Blue Shield service marks and tradenames, as well as the areas in which it
operates without these service marks and tradenames. In areas outside of its
licensed territory, the Company's ability to successfully compete may be
adversely affected by its inability to use the Blue Cross and Blue Shield
service marks and tradenames, by the presence of competitors that are able to
use such service marks and tradenames in the areas and by the Company's lack of
substantial market share or established provider networks in these areas. The
Company also faces competition from a trend among health care providers to
combine and form their own networks in order to contract directly with employer
groups and other prospective customers to provide health care services. It is
possible that such overall increased competition will exert strong pressures
upon Trigon's profitability, its ability to increase enrollment and its ability
to successfully pursue growth in areas both within and outside of Virginia.
INVESTMENTS
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 producing a consistently growing income stream and maximizing
risk-adjusted total return. The fixed income portfolio includes government and
corporate securities, both domestic and international, with an average quality
rating of A as of December 31, 1998. The portfolio had an average contractual
maturity of 8.4 years as of December 31, 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 December 31, 1998, the Company's equity exposure, comprised of
direct equity as well as equity-indexed investments, was 14.0% of the total
portfolio, as compared to 13.9% as of December 31, 1997 and 27.8% as of December
31, 1996. During 1998, emphasis in the fixed income portion of the portfolio was
on high quality, long duration securities. Later in the year, corporate and
tax-exempt municipal bonds were given greater weight.
The Company utilizes internal and external investment managers. Both the
internal and external managers invest within guidelines established by the
Company designed to fit into the overall investment strategy. These guidelines
establish minimum quality and diversification requirements which, among other
things, provide limitations on the allowable investment for a single issuer as
well as currency exposure for those managers investing in international
securities.
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As of December 31, 1998 the investment portfolio was comprised of the following
(in thousands):
ESTIMATED PERCENT
FAIR OF
VALUE PORTFOLIO
-----------------------
Fixed income
Domestic
U.S. Treasury securities and obligations of
U.S. government agencies................. $ 514,292 32.3 %
Mortgage-backed obligations of U.S. 19,405 1.2
government agencies......................
States and political subdivision securities 246,407 15.5
Other mortgage-backed and asset-backed 122,084 7.7
securities...............................
Domestic corporate bonds................... 451,501 28.4
Short-term debt securities with maturities 83,018 5.2
of less than one year....................
Foreign:
Debt securities issued by foreign
governments.............................. 18,092 1.1
Foreign corporate bonds.................... 25,790 1.6
Short-term debt securities with maturities
of less than one year...................... 30 -
-----------------------
Total fixed income............................. 1,480,619 93.0
-----------------------
Equities
Domestic..................................... 61,156 3.8
Foreign...................................... 51,106 3.2
-----------------------
Total equities................................. 112,262 7.0
Derivative instruments......................... (12) -
-----------------------
Total investments.............................. $ 1,592,869 100.0 %
=======================
As of December 31, 1998, the composition of the Company's fixed income
investment securities by rating is as follows (in thousands):
Estimated
Fair Percent
Rating (1) Value of Total
-----------------------
AAA............................................ $ 890,063 60.1 %
AA............................................. 36,201 2.4
A.............................................. 40,722 2.8
BBB............................................ 131,425 8.9
BB............................................. 210,538 14.2
B.............................................. 169,465 11.4
CCC or lower................................... 2,205 0.2
-----------------------
Total.......................................... $ 1,480,619 100.0 %
========================
(1) Ratings are assigned by Standard & Poor's Corporation, Moody's Investor
Service, Inc. or Fitch Investors Service, L.P.
Derivative instruments consist of foreign currency forward contracts and foreign
currency options. The Company enters into foreign currency derivative
instruments to hedge exposure to fluctuations in foreign currency exchange
rates. Company policy only permits utilization of these instruments in its
foreign denominated bond and equity portfolios. The counterparties to these
transactions are major financial institutions. The Company may incur a loss with
respect to these transactions to the extent that a counterparty fails to perform
under a contract and exchange rates have changed unfavorably since the inception
of the contract. The Company anticipates that the counterparties will be able to
fully satisfy their obligations under the agreements. The forward contracts
involve the exchange of one currency for another at a future date and typically
have maturities of one year or less. As of December 31, 1998, the Company had
forward contracts outstanding to purchase approximately $600,000 in foreign
currencies and to sell approximately $3.1 million in foreign currencies
(primarily Japanese Yen, British Pound and German Mark (which was redenominated
to the Euro on January 1, 1999)). The gross unrealized losses related to these
contracts
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as of December 31, 1998 aggregated $12,000. There were no gross unrealized gains
related to these contracts as of December 31, 1998. Foreign currency options are
contracts that give the option purchaser the right, but not the obligation, to
buy or sell, within a specific period of time, a financial instrument at a
specified price. These options generally expire within twelve months. There were
no foreign currency options outstanding as of December 31, 1998.
The Company enters into financial futures contracts for portfolio strategies
such as minimizing interest rate risk and managing portfolio duration. The
notional amount of the futures contracts, $210.9 million as of December 31,
1998, is limited to that of the market value of the underlying portfolios.
Other than currently or formerly occupied Company property or through
mortgage-backed securities, the Company has no investment in real estate or
mortgage loans.
INFORMATION SYSTEMS
The Company develops and maintains its own information systems. Information
systems have played and will continue to play a key role in ongoing plans to
continually improve quality, lower costs and improve service for the Company's
customers. Trigon's centralized, common database and analytical technologies
allow for increasingly more sophisticated methods of managing costs and quality
of care. The database includes comprehensive information on virtually all
physicians and hospitals and one third of the population in Virginia, which
assists Trigon in analyzing the medical and economic performance of providers
and the medical and economic experience of specific customer groups and
individuals. The Company believes that its information systems are a competitive
advantage and are sufficient to meet its current needs and future expansion
plans.
The Company uses an integrated set of applications software to support marketing
and underwriting, eligibility and billing, electronic claims submission, claims
administration, managed care programs and corporate financial management. A
combination of custom developed and licensed systems are used to meet the unique
needs of different products and markets. An overall systems architecture is
maintained to promote consistency of data, processing rules and flexibility.
Different systems serving the unique products or markets feed data to a
corporate information and decision support system. This decision support system
provides a single source of information for all of the Company's data reporting
and analytic needs. This includes operational and financial performance,
underwriting and marketing analysis, utilization management and actuarial
reporting.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Readiness Disclosure" included in the Company's Annual
Report to Shareholders, which is incorporated herein by reference, for a
comprehensive discussion of the Year 2000 issue, the steps being taken by the
Company to address it and the potential effects on the Company.
REGULATION
HEALTHCARE REFORM - VIRGINIA. In its 1999 Session, the Virginia General Assembly
passed a number of bills affecting health care, most of which will become
effective July 1, 1999, if approved by the Governor of Virginia. At this time,
the Company does not believe that the legislation described below will have a
material effect on the Company's operational results.
o Comprehensive reforms in managed care health insurance plans, including: (i)
an independent external review of adverse utilization review decisions; (ii)
a managed care ombudsman under the offices of the State Corporation
Commission, Bureau of Insurance to assist consumers enrolled in managed care
programs and to gather and report certain data to the General Assembly; (iii)
a provision requiring insurers and HMOs to allow patients with terminal or
disabling conditions to have a "standing referral" to specialists; (iv) new
rules for allowing patients to access non-formulary drugs in certain
circumstances; and (v) 24-hour availability of personnel to provide
pre-authorization for proposed medical treatments.
o Mandates implementing coverage for diabetes management, minimum hospital
stays for hysterectomy, coverage for Phase II, Phase III and Phase IV
clinical trials for treatment studies on cancer, mental health parity,
certain pap smears and hospice care.
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o Fair business practices standards applicable to the claims reimbursement
practices of health insurers and HMOs that contract with providers in the
establishment of networks. In general, the standards require carriers to (i)
pay claims within 40 days of claim receipt, unless the claim is not a clean
claim, is disputed in good faith, or there is otherwise no obligation to pay,
(ii) contact health care providers within 30 days of receiving claims if they
desire further claim information or documentation, and (iii) establish
reasonable policies giving providers notice of and detailed information
concerning carriers' required administrative claims processing procedures.
In 1998, the Virginia General Assembly passed legislation that transferred the
responsibility for regulation of utilization review activities and quality of
care in managed care plans from the State Corporation Commission to the
Department of Health. Full implementation of the quality bill does not occur
until regulations are promulgated by the Department of Health. Certificates of
quality are not required to maintain a carrier's insurance license until July 1,
2000, so long as an application for a certificate is made by December 1, 1999.
There is no indication or expectation that the regulatory process will result in
requirements that will materially affect the Company's operations or financial
condition, however, there can be no assurance of that result at this time.
HEALTHCARE REFORM - FEDERAL. Effective January 1, 1998, provisions of the Health
Insurance Portability and Accountability Act ("HIPAA") affecting the individual
market took effect. The provisions impose requirements concerning guaranteed
renewability and availability, the waiving of waiting periods for certain
eligible individuals coming from group coverage and limitations on the insurers
ability to terminate policies. Also, new requirements on group insurance plans
concerning maternity length of stay and mental health benefits became effective
for group coverage with the commencement of plan years beginning on or after
January 1, 1998. There is no expectation that any of these requirements will
materially affect the Company's operations or financial condition.
Also in 1998, significant new federal regulations were proposed including
regulations to implement the Medicare + Choice provisions of the Balanced Budget
Act of 1997 ("BBA"), as well as the BBA provisions that allow states greater
flexibility to bring managed care techniques into the Medicaid program. In
addition, regulations were proposed requiring expedited appeals for ERISA plans
and making other changes to claims processing requirements. Based on comments on
this proposed ERISA regulation from the public and industry, both in the form of
written comments and public hearings, changes to the proposed regulation
limiting its scope are anticipated.
In 1999, it is anticipated that federal legislative proposals focusing on such
issues as "patient protection," health plan liability, confidentiality of health
information, Medicare reform and the uninsured will likely be considered by
Congress. While many of these proposals are viewed by health plans as adverse to
managed care, it is not clear at present whether any of these federal proposals
will be adopted. Moreover, there can be no assurance that additional legislative
and regulatory initiatives will not be undertaken in the future, to address
"patient protection," to engage in structural reform of the health care industry
in order to reduce the escalation in health care costs or to make health care
more accessible. Such reform, if it occurs, could adversely affect Trigon's
results of operations or financial condition.
HMO REGULATION. Trigon has three HMO subsidiaries, one of which is a federally
qualified HMO. All of Trigon's HMO subsidiaries are licensed by the Commonwealth
of Virginia and are subject to regulation and review by the State Corporation
Commission and certain other state authorities, with which they must file
periodic reports. Among the areas regulated by Virginia law are policy forms,
market conduct, quality assurance, covered benefits, contracts between the HMO
and its health care providers, the HMO's financial condition, including net
worth requirements, and the accessibility of providers in the service area of an
HMO.
Trigon's federally qualified HMO is also subject to regulation and review by the
OPM and certain other federal authorities, with which they must file periodic
reports. Areas covered by federal law are similar to those covered by state law
and regulation. In addition, one of the Company's HMOs offers a Medicare risk
product that subjects that HMO to regulation and review by the U.S. Department
of Health and Human Services and certain other federal authorities as well.
INSURANCE HOLDING COMPANY REGULATION. Trigon Healthcare, Inc. is not regulated
as an insurance company but, as the direct or indirect owner of all the capital
stock of Trigon Insurance, Trigon Health and Life Insurance Company ("Trigon
Health and Life"), a Virginia-based health and life company, and Mid-South, is
regulated as an insurance holding company and subject to the insurance holding
company acts of Virginia and North
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Carolina, the states in which the insurance company subsidiaries are domiciled.
Effective July 1, 1998, the Company's HMOs, HealthKeepers, PHC and Priority,
became subject to the obligations and restrictions under the Virginia Holding
Company Act. These acts contain certain reporting requirements as well as
restrictions on transactions between an insurer or HMO and its affiliates. The
Virginia insurance holding company laws and regulations generally require
insurance companies and HMOs within an insurance holding company system to
register with the State Corporation Commission and to file with the State
Corporation Commission certain reports describing capital structure, ownership,
financial condition, certain intercompany transactions and general business
operations. In addition, various notice and reporting requirements generally
apply to transactions between insurance companies and HMOs and their affiliates
within an insurance holding company system, depending on the size and nature of
the transactions. Virginia insurance holding company laws and regulations
require prior regulatory approval or, in certain circumstances, prior notice of,
certain material intercompany transfers of assets as well as certain
transactions between insurance companies, HMOs, their parent holding companies
and affiliates.
Additionally, holding company acts (including those of Virginia and North
Carolina) restrict the ability of any person to obtain control of an insurance
company or HMO without prior regulatory approval. Without such approval (or an
exemption), no person may acquire any voting security of an insurance holding
company which controls a Virginia insurance company or HMO, or merge with such a
holding company, if as a result of such transaction such person would "control"
the insurance holding company. "Control" is defined as the direct or indirect
power to direct or cause the direction of the management and policies of a
person and is presumed to exist if a person directly or indirectly owns or
controls 10% or more of the voting securities of another person.
INSURANCE COMPANY REGULATION. Trigon Insurance, the HMO subsidiaries and Trigon
Health and Life are subject to the insurance laws and regulations of the
Commonwealth of Virginia, the domiciliary state of these companies. Mid-South is
domiciled in North Carolina and is subject to the laws and regulations of that
state. In addition, Trigon Insurance, the HMO subsidiaries, Trigon Health and
Life and Mid-South are subject to the insurance laws and regulations of the
other jurisdictions in which they are licensed or authorized to do business.
These insurance laws and regulations generally give state regulatory authorities
broad supervisory, regulatory and administrative powers over insurance companies
and insurance holding companies with respect to most aspects of their insurance
businesses. This regulation is intended primarily for the benefit of the
policyholders and members of insurance companies and not investors. Regulatory
authorities exercise extensive supervisory power over health and life insurance
companies with respect to the licensing of insurance companies; the approval of
forms and insurance policies used; the nature of, and limitations on, an
insurance company's investments; the periodic examination of the operations of
insurance companies; the form and content of annual statements and other reports
required to be filed on the financial condition of insurance companies; and the
establishment of capital requirements for insurance companies. Trigon Insurance,
the HMO subsidiaries, Trigon Health and Life and Mid-South are required to file
periodic statutory financial statements in each jurisdiction in which they are
licensed. Additionally, Trigon Insurance, the HMO subsidiaries, Trigon Health
and Life and Mid-South are periodically examined by the insurance departments of
the jurisdictions in which they are licensed to do business.
RISK-BASED CAPITAL REQUIREMENTS. Virginia and North Carolina have statutory
risk-based capital ("RBC") requirements for health and other insurance
companies. Such requirements are intended to assess the capital adequacy of life
and health insurers, taking into account the risk characteristics of an
insurer's investments and products. The formula for calculating such RBC
requirements, set forth in instructions adopted by the NAIC, is designed to take
into account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to an individual insurance company's business. Under
these laws, an insurance company must submit a report of its RBC level to the
Virginia State Corporation Commission or Insurance Commissioner of North
Carolina, as appropriate, as of the end of the previous calendar year.
The RBC requirements categorize insurance companies according to the extent to
which they meet or exceed certain RBC thresholds. The law requires increasing
degrees of regulatory oversight and intervention as an insurance company's RBC
declines. The level of regulatory oversight ranges from requiring the insurance
company to inform and obtain approval from the domiciliary Insurance
Commissioner of a comprehensive financial plan for increasing its RBC to
mandatory regulatory intervention requiring an insurance company to be placed
under regulatory control in a rehabilitation or liquidation proceeding.
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As of December 31, 1998, the RBC levels of Trigon Insurance, Trigon Health and
Life and Mid-South, as calculated in accordance with the NAIC RBC instructions,
exceeded all RBC thresholds.
The NAIC has proposed that states adopt RBC standards for HMOs. To date,
Virginia has not adopted these standards. The Company does not expect that RBC
standards for HMOs if adopted by Virginia would have a material effect on the
consolidated financial position of the Company.
RESTRICTIONS ON DIVIDENDS. In the event the Company determines to pay dividends,
the principal source of funds to pay dividends to stockholders would be
dividends received by the Company from its subsidiaries, including Trigon
Insurance. Virginia insurance laws and regulations restrict the payment of
extraordinary dividends declared by insurance companies, including health care
insurers such as Trigon Insurance, in a holding company system. An insurance
company is prohibited from paying an extraordinary dividend unless it obtains
the approval of the State Corporation Commission. An extraordinary dividend is
one which, together with the amount of dividends and distributions paid by the
insurance company during the immediately preceding 12 months, exceeds the lesser
of (i) 10% of the insurance company's surplus to policyholders as of the
preceding December 31 or (ii) the insurance company's net income (not including
realized capital gains) for the preceding calendar year. Further, an insurance
company may not pay a dividend unless, after such payment, its surplus to
policyholders is reasonable in relation to its outstanding liabilities and
adequate to meet its financial needs. The State Corporation Commission may bring
an action to enjoin or rescind payment of any dividend or distribution that
would cause the insurance company's statutory surplus to be unreasonable or
inadequate. The maximum amount available after certain dates in 1999 for payment
of dividends by Trigon Insurance to the Company without the prior approval of
the State Corporation Commission is $48.9 million. During 1998 and 1997, Trigon
Insurance Company received permission from the State Corporation Commission to
pay dividends to its parent, Trigon Healthcare, Inc., of $227.5 million and
$238.7 million, respectively. The 1998 dividend was effected July 1, 1998 and
included $200.0 million of cash and $27.5 million of stock of a wholly-owned
subsidiary. The 1997 dividend was effected July 31, 1997 and consisted of $188.7
million of stock of a wholly-owned subsidiary and $50.0 million of cash.
North Carolina, Mid-South's domiciliary state, similarly restricts the payment
of dividends by their domiciliary insurance companies.
ASSESSMENTS AGAINST INSURERS. Under insolvency or guaranty association laws in
most states, insurance companies can be assessed for amounts paid by guaranty
funds for policyholder losses incurred by insolvent insurance companies. Most
state insolvency or guaranty association laws, including Virginia's, currently
provide for assessments based upon the amount of premiums received on insurance
underwritten within such state (with a minimum amount payable where Mid-South is
licensed even if no premium is received). Substantially all of Trigon's premiums
are currently derived from insurance underwritten in Virginia.
Under the Virginia Life, Accident and Sickness Insurance Guaranty Association
(the "Association") Act, assessments against insurance companies which issue
policies of accident or sickness insurance, such as Trigon Insurance, are made
retrospectively and are based (up to prescribed limits) upon the ratio of (i)
the insurance company's premiums received in Virginia over the previous three
calendar years on accident and sickness insurance, to (ii) the aggregate amount
of premiums received by all assessed member insurance companies over such three
calendar years on accident and sickness insurance. The guaranty fund and
assessments made under the act are administered by the Association, which has
its own board of directors selected by member insurers with the approval of the
State Corporation Commission. An assessment may be abated or deferred by the
Association if, in the opinion of the board, payment would endanger the ability
of the member to fulfill its contractual obligations, but the other member
insurers may be assessed for the amount of such abatement or deferral. Any such
assessment paid by a member insurance company may be offset against its premium
tax liability to the Commonwealth of Virginia in each succeeding year in an
amount not to exceed 0.05 (one twentieth) of one percent of the member's direct
gross premium income for the class of insurance for which the insurer is
assessed. The amount and timing of any future assessments, however, cannot be
reasonably estimated and are beyond the control of the Company. During 1997,
legislation was enacted in Virginia that changed the methodology by which these
amounts are offset against the premium tax liability. Any assessments issued
after January 1, 1998 will be offset against the premium tax liability over the
ten calendar years following the year of the payment, in amounts equal to ten
percent of the amount paid.
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VIRGINIA'S OPEN ENROLLMENT PROGRAM. The Commonwealth of Virginia has an open
enrollment program pursuant to which Trigon Insurance is required to offer
comprehensive accident and sickness insurance contracts to individuals without
imposition of certain underwriting criteria that would deny coverage on the
basis of medical condition, age or employment status. As an incentive for
participating in the open enrollment program, Trigon Insurance pays Virginia
premium tax of three-fourths of one percent (0.75%) on premiums received from
individual accident and sickness insurance rather than the general Virginia
premium tax of two and one fourth percent (2.25%). This general Virginia premium
tax applies to accident and sickness insurance premiums received by Trigon
Insurance from group business. Prior to January 1, 1998, policies issued to
small employers were also part of the open enrollment program. Subsequent to
health care reform legislation in 1997, all carriers offering coverage in the
small group market are required to issue any policy in its small group market
portfolio to any small employer that wants to purchase the product. To withdraw
from the open enrollment program, Trigon Insurance would be required to give 24
months advance notice of withdrawal to the State Corporation Commission.
BANKRUPTCY AND INSOLVENCY. In the event of a default on any debt incurred by the
Company or the bankruptcy of the Company, the creditors and stockholders of the
Company would have no right to proceed against the assets of Trigon Insurance or
any other subsidiary of the Company. If Trigon Insurance were subject to a
rehabilitation or liquidation proceeding, such proceeding would be brought by
the State Corporation Commission which would act as the receiver with respect to
such insurance company's property and business. All creditors of Trigon
Insurance, including, without limitation, members and, if applicable, the
various state guaranty associations, would be entitled to payment in full from
such assets before the Company, as a stockholder, would be entitled to receive
any distributions therefrom.
THE BLUE CROSS BLUE SHIELD LICENSE
The Company and certain of its subsidiaries have the exclusive right to use
certain Blue Cross and Blue Shield service marks and tradenames for all of their
plans and products throughout Virginia other than a small portion of the
northern Virginia suburbs adjacent to Washington, D.C. The license requires a
fee to be paid to BCBSA equal to total association expenses allocated to members
based upon enrollment and premium. BCBSA is a national trade association of Blue
Cross and Blue Shield licensees, the primary function of which is to promote and
preserve the integrity of the Blue Cross and Blue Shield name and service marks
as well as provide certain coordination among plan and provider services. BCBSA
has 52 primary licensee members, each of which holds exclusive rights to use the
Blue Cross and/or Blue Shield name and service mark in specific geographic
areas, subject to annual licensing fees and certain other guidelines. Each BCBSA
licensee is an independent legal organization and is not responsible for
obligations of other BCBSA member organizations. The Company has no right to use
the Blue Cross and Blue Shield service marks and tradenames outside of its
designated territory within the Commonwealth of Virginia.
Under the Company's license agreement with BCBSA, an institutional investor
(generally defined as an entity identified in Rule 13d-1(b) (1) (ii) of the
rules and regulations under the Securities Exchange Act of 1934 and which makes
certifications required by item 10 of SEC Schedule 13G) may own up to 10% of the
outstanding voting securities of the Company. All other stockholders are subject
to a 5% ownership limitation. Ownership by any stockholder of voting securities
in excess of such limits would subject the Company to automatic termination of
its license.
The Company's Articles of Incorporation contain certain provisions which are
intended to prevent any holder from acquiring shares in excess of the limits set
forth in the Company's license agreement. However, there can be no assurance
that a court would enforce these provisions or that if these provisions were not
enforced that the Company would retain the license from BCBSA. If the BCBSA
license were to be terminated, there would be a material adverse effect on the
Company's business and operations, which the Company does not believe it can
meaningfully quantify.
The license agreements between BCBSA and its licensees prohibit a licensee from
entering into certain transactions which would result in an unlicensed entity
obtaining control of the licensee or acquiring a substantial portion of the
licensee's assets related to services provided under the Blue Cross or Blue
Shield service marks. The license agreements also require that a licensee pay to
BCBSA a specific amount upon termination of the license agreement, subject to
certain limited exceptions. The amount payable upon termination of the license
agreement is equal to $25 multiplied by the number of the licensee's members
receiving products or services sold or administered under the
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Blue Cross or Blue Shield service marks, subject to reduction to the extent the
payment of such fee would cause such licensee to fall below certain capital
requirements established by the BCBSA.
RATING
Trigon Insurance and HealthKeepers are each presently assigned a rating of "A"
(Excellent) by A.M. Best Company. Mid-South, Trigon Health and Life, PHC and
Priority are each presently assigned an A.M. Best rating of "A-" (Excellent).
A.M. Best's ratings of "A" and "A-" are assigned to companies which have, on
balance, excellent financial strength, operating performance and market profile
when compared to the standards established by the A.M. Best Company. It is the
opinion of A.M. Best Company that such companies have a strong ability to meet
their ongoing obligations. Such ratings are not directed to the protection of
investors and are subject to review and change over time.
EMPLOYEES
As of December 31, 1998, the Company had 3,740 full-time employees. The
employees are primarily located in Virginia, with the majority of the Virginia
employees in the cities of Richmond and Roanoke. Employees are also located in
Illinois, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina,
Tennessee, Washington D.C. and West Virginia. The Company believes that its
relationship with its employees is good. No employees are subject to collective
bargaining agreements.
EXECUTIVE OFFICERS
Age as of
Name December 31, 1998 Position
---- ----------------- --------
Norwood H. Davis, Jr. 58 Chairman of the Board and Chief
Executive Officer
Thomas G. Snead, Jr. 45 President and Chief Operating
Officer
John C. Berry 61 Senior Vice President,
Government and Individual
Business Unit
William P. Bracciodieta, M.D. 53 Senior Vice President and Chief
Medical Officer
Ralph T. Bullock, Jr. 50 Senior Vice President and Chief
Information Officer
Thomas R. Byrd 41 Senior Vice President and Chief
Financial Officer
James W. Copley, Jr. 46 Senior Vice President and Chief
Investment Officer, Investment
Division, Trigon Services, Inc.
Ellen C. Harrison 40 Senior Vice President, Health
Maintenance Organization
Operations
Kathy Ashby Merry 36 Senior Vice President, Member
Services
Ronald M. Nash 61 Senior Vice President,
Corporate Services
Paul F. Nezi 51 Senior Vice President,
Marketing and Sales
Timothy P. Nolan 37 Senior Vice President, Business
Integration
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Age as of
Name December 31, 1998 Position
---- ----------------- --------
Thomas A. Payne 54 Senior Vice President,
Corporate Audit
Peter L. Perkins 41 Senior Vice President and Chief
Actuary
J. Christopher Wiltshire 44 Senior Vice President, General
Counsel and Corporate Secretary
For a listing of the positions held with the Company by each executive officer
and other information, refer to page 58, "Officers," of Trigon Healthcare Inc.'s
Annual Report to Shareholders, which is incorporated herein by reference.
SERVICE MARKS
The Company has registered and maintains several service marks, trademarks and
tradenames at the federal level, in the Commonwealth of Virginia and in certain
other states. "Trigon," "Keycare" and "HealthKeepers" are included among these
marks. Although the Company considers its registered service marks, trademarks
and tradenames important in the operation of its business, the business of the
Company is not dependent on any individual service mark, trademark or tradename.
For a discussion of the Company's license to use certain Blue Cross and Blue
Shield service marks and tradenames, see "The Blue Cross Blue Shield License."
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of these safe harbor provisions. Certain information contained in
this Form 10-K is forward-looking within the meaning of the Act or Securities
and Exchange Commission rules. Words such as expects, anticipates, intends,
plans, believes, seeks or estimates, or variations of such words and similar
expressions are also intended to identify forward-looking statements. These
forward-looking statements are subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company. Set forth
below are certain important factors that, in addition to general economic
conditions and other factors, some of which are discussed elsewhere in this Form
10-K, may affect these forward-looking statements and the Company's business
generally.
ESCALATING HEALTH CARE COSTS AND THE HEALTH CARE INDUSTRY. The Company's
profitability depends in large part on accurately predicting and effectively
managing health care costs. Predicting medical costs is difficult partially due
to the variability of medical inflation. Trigon continually reviews and adjusts
its premium and benefit structure to reflect its underlying claims experience
and revised actuarial data; however, several factors could adversely affect the
medical loss ratios. Certain of these factors, which include changes in health
care practices, inflation, new technologies, major epidemics, natural disasters
and malpractice litigation, are beyond any health plan's control and could
adversely affect the Company's ability to accurately predict and effectively
control health care costs.
Competitive price pressures in the health insurance and managed care industry,
which generally result from the entry and exit of health care companies in the
marketplace, historically have resulted in, or contributed to, pricing and
profitability cycles. The extent to which recent structural changes in the
managed health care and health insurance industry have altered cyclical patterns
is uncertain. There can be no assurance, however, that a continuation of the
typical cyclical pattern will not adversely affect the profitability of the
Company in the next few years.
COMPETITION. The health care industry is highly competitive both in Virginia and
in other states in the southeastern and mid-Atlantic United States into which
the Company principally intends to expand. See "Competition." There is no
assurance that the overall increased competition will not exert strong pressures
upon
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Trigon's profitability, its ability to increase enrollment, or its ability to
successfully pursue growth in areas both within and outside of Virginia.
GOVERNMENT REGULATION. The Company and its subsidiaries are subject to federal
and state regulation. See "Regulation." Regulatory initiatives may be undertaken
in the future, either at the federal or state level, to engage in structural
reform of the health care industry in order to reduce the escalation in health
care costs or to make health care more accessible. Such reform, if it occurs,
could adversely affect Trigon's results of operations or financial condition.
POTENTIAL RISKS ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS. As a result of the
expansion of managed care companies into Virginia and the southeastern and
mid-Atlantic regions of the United States, the competition to purchase health
care companies has intensified, which in many instances has resulted in
significant increases in the costs of acquiring such companies, and which could
affect the availability of attractive acquisition opportunities. In addition,
the Company has no significant experience in expanding its managed health care
business outside Virginia. There can be no assurance that the Company will
successfully identify or complete acquisitions or that any acquisitions, if
completed, will perform as expected or will contribute significant revenues or
profits to the Company. The Company's ability to expand successfully outside of
Virginia through acquisitions or otherwise may be adversely affected by its
inability to use the Blue Cross and Blue Shield service marks and trademarks
outside of the Company's licensed territory in Virginia, by the Company's lack
of substantial market share or established provider networks outside of Virginia
and by the presence of competitors with strong market positions in these areas.
CONCENTRATION OF BUSINESS IN VIRGINIA. While the Company's growth strategy
includes expansion outside Virginia, for the foreseeable future a significant
portion of the Company's revenues may be subject to economic factors specific to
Virginia. Therefore, there can be no assurance that a downturn in the Virginia
economy would not adversely affect the Company.
POTENTIAL LOSS OF BLUE CROSS AND BLUE SHIELD SERVICE MARKS AND TRADENAMES.
Trigon and the BCBSA are parties to a license agreement pursuant to which the
Company and certain of its subsidiaries have the exclusive right to use certain
Blue Cross and Blue Shield service marks and tradenames for their products
throughout Virginia other than certain northern Virginia suburbs adjacent to
Washington, D.C. See "The Blue Cross Blue Shield License." If the BCBSA license
were to be terminated, there would be a material adverse effect on the Company's
business and operations, which the Company does not believe it can meaningfully
quantify. To the extent that the Company continues to use the Blue Cross and
Blue Shield service marks and tradenames in marketing its managed care products,
there can be no assurance that any negative publicity concerning BCBSA and other
BCBSA licenses will not adversely affect the sales of the Company's managed care
products and the Company's operations.
Item 2. Properties
The Company is headquartered in Richmond, Virginia, where it owns a four-story
building with 265,000 square feet. The Company also owns an office facility and
warehouse in Roanoke, Virginia with 201,000 square feet and an office facility
in Fayetteville, North Carolina with 71,000 square feet. The Company leases an
additional 428,000 square feet at various other locations in Richmond, Virginia.
The Company also leases space at two other facilities in Roanoke, Virginia
comprising 52,000 square feet. These properties are primarily used by the health
insurance segment for operations and for corporate administration.
The Company leases 73,000 square feet for regional offices throughout Virginia
and 22,000 square feet for office space in Maryland, North Carolina, West
Virginia, Pennsylvania and South Carolina.
Square footage utilized by segment as of December 31, 1998 was as follows:
health insurance, 896,500; government programs, 60,900; investments, 3,700; and
other reportable segments, 39,800. The remaining 111,100 square feet was used
for corporate administration.
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Item 3. Legal Proceedings
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 four 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 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Refer to page 30, "Market Prices of Common Stock and Dividend Data," of Trigon
Healthcare Inc.'s Annual Report to Shareholders, which is incorporated herein by
reference.
Refer to "Part 1 - Business -- Regulation -- Insurance Holding Company
Regulation" and "Part 1 - Business -- Regulation -- Restrictions on Dividends"
for discussion of insurance holding company regulations and dividend
restrictions. In addition, under the terms of the Company's $300 million
revolving credit agreement, the Company may not pay dividends on the Company's
common stock unless the aggregate of all dividends paid by the Company plus
payments to purchase, redeem or otherwise acquire capital stock of the Company
(other than the Commonwealth Payment) does not exceed the sum of (i) $10,000,000
plus (ii) 50% of the consolidated net income (or minus 100% of consolidated net
loss) of the Company for the period from the effectiveness of the
Demutualization through the end of the most recently completed fiscal quarter,
plus (iii) an amount (not to exceed $50,000,000) equal to 50% of the cumulative
cash dividends paid out of income of certain subsidiaries of the Company earned
prior to January 1, 1997 and received by the Company after the date of the
revolving credit agreement and before December 31, 1997.
Item 6. Selected Financial Data
Refer to pages 18 through 19, "Selected Consolidated Financial and Operating
Data," of Trigon Healthcare Inc.'s Annual Report to Shareholders, which are
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Refer to pages 20 through 30, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," of Trigon Healthcare Inc.'s Annual Report
to Shareholders, which are incorporated herein by reference.
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<PAGE>
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Refer to pages 29 through 30, "Quantitative And Qualitative Disclosures About
Market Risk," included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," of Trigon Healthcare Inc.'s Annual Report
to Shareholders, which are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Refer to pages 31 through 56, the Consolidated Financial Statements, page 57,
"Independent Auditors' Report," and page 17, "Quarterly Financial Information,"
of Trigon Healthcare Inc.'s Annual Report to Shareholders, which are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Refer to pages 1 through 3, "Election of Directors," and page 6, "Section 16(a)
Beneficial Ownership Reporting Compliance," of the Company's definitive Proxy
Statement dated March 29, 1999, which are incorporated herein by reference
solely as they relate to the Directors of the Company.
Pursuant to General Instruction G(3) to Form 10-K, information as to executive
officers of the Company is set forth in Part I of this Form 10-K. See "Part 1
- - Business -- Executive Officers."
Item 11. Executive Compensation
Refer to pages 6 through 11, "Compensation of Executive Officers," of the
Company's definitive Proxy Statement dated March 29, 1999, which are
incorporated herein by reference solely as they relate to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Refer to pages 3 and 4, "Beneficial Ownership of Securities," of the Company's
definitive Proxy Statement dated March 29, 1999, which are incorporated herein
by reference solely as they relate to this item.
Item 13. Certain Relationships and Related Transactions
R. Gordon Smith, a director of the Company, is a partner of McGuire, Woods,
Battle & Boothe, LLP, a law firm which serves as counsel to the Company and its
subsidiaries.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)
The following documents are filed as part of this report.
1. Consolidated Financial Statements from Trigon Healthcare Inc.'s
Annual Report to Shareholders are incorporated herein by reference
in Item 8:
-- Consolidated Balance Sheets as of December 31, 1998 and 1997 (page
31)
-- Consolidated Statements of Operations for the years ended December
31, 1998, 1997 and 1996 (page 32)
-- Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996 (page 33)
-- Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996 (page 34)
16
<PAGE>
-- Notes to Consolidated Financial Statements (pages 35 through 56)
-- Independent Auditors' Report (page 57)
2. Financial statement schedules
Independent Auditors' Report on Financial
Statement Schedule ......................(filed herein on page S-1)
Schedule I - Condensed Financial Information
of Registrant (parent only) as of December
31, 1998 and 1997 and for the year ended
December 31, 1998 and for the period
February 5, 1997 through
December 31, 1997 ....................(filed herein on pages S-2 - S-6)
3. Exhibits. The following is a list of exhibits to this Form 10-K.
Exhibit
Number Description
2 -- Amended and Restated Plan of Demutualization. (1)
3.1 -- Amended and Restated Articles of Incorporation of Trigon
Healthcare, Inc. (1)
3.2 -- Amended and Restated Bylaws of Trigon Healthcare, Inc. (2)
3.3 -- Articles of Amendment to Amended and Restated Articles of
Incorporation setting forth the designation, preferences and
rights of Series A Junior Participating Preferred Stock of Trigon
Healthcare, Inc. dated July 16, 1997. (4)
3.4 -- Amendment to the Amended and Restated Bylaws of Trigon Healthcare,
Inc.
4 -- Form of Stock Certificate (other Instruments Defining the Rights
of Security-Holders). (1)
4.1 -- Rights Agreement dated as of July 16, 1997 between Trigon
Healthcare, Inc. and First Chicago Trust Company of New York, as
Rights Agent. (4)
4.2 -- Form of Rights Certificate. (4)
10.1 -- License Agreement by and between the Blue Cross Blue Shield
Association and the Company. (2)
(a) Blue Cross license
(b) Blue Shield license
10.2 -- Limited Fixed Return Plan for Certain Officers and Directors of
Trigon Insurance Company. (1) *
10.4 -- Non-Contributory Retirement Program for Certain Employees of
Trigon Insurance Company. (1) *
10.5 -- Amended and Restated Supplemental Executive Retirement Program for
Certain Employees of Trigon Insurance Company dated as of October
1, 1998. *
10.6 -- Salary Deferral Plan for Norwood H. Davis, Jr. (1) *
10.7 -- Amended and Restated Employment Agreement dated September 16, 1998
by and between Trigon Insurance Company and Norwood H. Davis, Jr.
(7) *
10.9 -- Amended and Restated Employees' Thrift Plan of Trigon Insurance
Company dated as of October 1, 1998. *
10.10 -- Amended and Restated Trigon Insurance Company 401(k) Restoration
Plan dated as of October 1, 1998. *
10.12 -- Form of Employment Agreement dated as of December 12, 1990 by and
between Trigon Insurance Company and John C. Berry and certain
other executive officers. (1) *
10.14 -- Credit Agreement dated as of February 5, 1997 among Trigon
Healthcare, Inc., the banks party thereto and Morgan Guaranty
Trust Company of New York, as Agent. (2)
10.15 -- 1997 Stock Incentive Plan. (6) *
10.16 -- Employee Stock Purchase Plan. (6) *
10.17 -- Non-Employee Directors Stock Incentive Plan. (6) *
10.18 -- Amendment to the License Agreement by and between the Blue Cross
Blue Shield Association and the Company. (5)
10.19 -- Amendment to the Non-Contributory Retirement Program for Certain
Employees of Trigon Insurance Company. (3) *
10.20 -- 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. (7) *
17
<PAGE>
10.21 -- Form of Executive Continuity Agreement dated as of September 16,
1998 between Trigon Insurance Company and John C. Berry and
certain other executive officers. (7) *
10.22 -- Amendment to the Non-Contributory Retirement Program for Certain
Employees of Trigon Insurance Company (now to be known as) The
Trigon Insurance Company Retirement Program dated as of October 1,
1998. *
10.23 -- Clarifying Amendment to the Non-Contributory Retirement Program
for Certain Employees of Trigon Insurance Company (now to be known
as) The Trigon Insurance Company Retirement Program dated as of
October 1, 1998. *
11 -- Computation of per share earnings. Refer to page 51, "Note 15.
"Net Income and Pro Forma Net Income Per Share," of Trigon
Healthcare Inc.'s Annual Report to Shareholders, which is
incorporated herein by reference.
13 -- Excerpts from the Company's Annual Report to Shareholders for the
year ended December 31, 1998.
21 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG LLP.
27 -- Financial Data Schedule.
(1)Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-1 (registration number 333-09773).
(2)Incorporated by reference to exhibits filed with the Company's Form 10-K for
the year ended December 31, 1996.
(3)Incorporated by reference to exhibits filed with the Company's Form 10-K for
the year ended December 31, 1997.
(4)Incorporated by reference to exhibits filed with the Company's Form 8-A/A
filed on July 16, 1997.
(5)Incorporated by reference to exhibits filed with the Company's Form 10-Q for
the period ended September 30, 1997.
(6)Incorporated by reference to exhibits filed with the Company's Proxy
Statement dated March 13, 1997.
(7)Incorporated by reference to exhibits filed with the Company's Form 10-Q for
the period ended September 30, 1998.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c) of this Form 10-K.
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.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRIGON HEALTHCARE, INC.
Registrant
By: /s/ THOMAS R. BYRD
------------------
THOMAS R. BYRD
Title: SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ NORWOOD H. DAVIS, JR. Chairman (Principal Executive March 29, 1999
- ------------------------- Officer)
NORWOOD H. DAVIS, JR.
/s/ THOMAS R. BYRD Senior Vice President and Chief March 29, 1999
- ------------------------- Financial Officer
THOMAS R. BYRD (Principal Financial
and Accounting Officer)
/s/ HUNTER B. ANDREWS Director March 25, 1999
- -------------------------
HUNTER B. ANDREWS, ESQ.
/s/ LENOX D. BAKER, JR., M.D. Director March 28, 1999
- -----------------------------
LENOX D. BAKER, JR., M.D.
/s/ JAMES. K. CANDLER Director March 24, 1999
- ------------------------------
JAMES K. CANDLER
/s/ ROBERT M. FREEMAN Director March 25, 1999
- ------------------------------
ROBERT M. FREEMAN
/s/ WILLIAM R. HARVEY Director March 30, 1999
- ------------------------------
WILLIAM R. HARVEY, Ph.D.
/s/ GARY A. JOBSON Director March 26, 1999
- ------------------------------
GARY A. JOBSON
<PAGE>
SIGNATURE TITLE DATE
/s/ DONALD B. NOLAN Director March 24, 1999
- -------------------------------
DONALD B. NOLAN, M.D.
/s/ WILLIAM N. POWELL Director March 26, 1999
- -------------------------------
WILLIAM N. POWELL
/s/ J. CARSON QUARLES Director March 24, 1999
- -------------------------------
J. CARSON QUARLES
/s/ R. GORDON SMITH Director March 30, 1999
- -------------------------------
R. GORDON SMITH, ESQ.
/s/ HUBERT R. STALLARD Director March 25, 1999
- -------------------------------
HUBERT R. STALLARD
/s/ JACKIE M. WARD Director March 26, 1999
- -------------------------------
JACKIE M. WARD
/s/ STIRLING L. WILLIAMSON, JR. Director March 27, 1999
- -------------------------------
STIRLING L. WILLIAMSON, JR.
<PAGE>
Independent Auditors' Report on
Financial Statement Schedule
The Board of Directors
Trigon Healthcare, Inc.:
Over date of February 16, 1999, we reported on the consolidated balance sheets
of Trigon Healthcare, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule included in this annual report on Form 10-K. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Richmond, Virginia
February 16, 1999
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
Balance Sheets
December 31, 1998 and 1997
(in thousands)
1998 1997
------------ ------------
ASSETS
Current assets
Cash $ 12 1
Investment securities, at estimated
fair value 259,514 81,364
Other receivables 3,873 2,569
Other 29 -
------------ ------------
Total current assets 263,428 83,934
------------ ------------
Investment in subsidiaries 895,690 960,677
Deferred income taxes 1,240 -
Other assets 126 166
------------ ------------
Total assets $ 1,160,484 1,044,777
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,296 562
Deferred income taxes 512 389
Income taxes payable 1,701 -
Payable for investment securities 672 -
Payable to affiliates 79 89
------------ ------------
Total current liabilities 4,260 1,040
------------ ------------
Long-term debt 85,000 85,000
------------ ------------
Total liabilities 89,260 86,040
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par, 42,300 shares
issued and outstanding 423 423
Capital in excess of par 839,187 842,035
Retained earnings 202,554 78,982
Accumulated other comprehensive income 29,060 37,297
------------ ------------
Total shareholders' equity 1,071,224 958,737
Commitments and contingencies
------------ ------------
Total liabilities and shareholders' equity $ 1,160,484 1,044,777
============ ============
See accompanying independent auditors' report and notes to condensed financial
information.
S-2
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statements of Operations
For the year ended December 31, 1998 and
for the period February 5, 1997 through December 31, 1997
(in thousands)
1998 1997
------------ ------------
REVENUES
Investment Income $ 12,590 4,358
Net realized gains (losses) 614 (105)
Cash dividends from subsidiaries 200,000 50,000
------------ ------------
Total revenues 213,204 54,253
EXPENSES
Selling, general and administrative expenses 2,359 1,742
Interest expense 5,291 4,601
------------ ------------
Total expenses 7,650 6,343
------------ ------------
Income before income taxes and equity in
undistributed net income of subsidiaries 205,554 47,910
Income tax expenses (benefit) 941 (868)
------------ ------------
Income before equity in undistributed net
income of subsidiaries 204,613 48,778
Equity in undistributed net income of
subsidiaries after cash dividends (81,041) 30,204
------------ ------------
Net income $ 123,572 78,982
============ ============
See accompanying independent auditors' report and notes to condensed financial
information.
S-3
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statements of Changes in Shareholders' Equity
For the year ended December 31, 1998 and
for the period February 5, 1997 through December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Capital Other
Common in Retained Comprehensive
Stock Excess Earnings Income Total
of Par
--------- -----------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ - - - - -
Net income after - - 78,982 - 78,982
Demutualization
Net unrealized gains on
investment securities, net - - - 3,776 3,776
of income taxes
----------
Comprehensive income 82,758
Undistributed earnings of
subsidiaries before - - 722,330 33,521 755,851
Demutualization and IPO
Issuance of 24,475 shares to
eligible policyholders in
the Demutualization and
cash payments to eligible 245 630,941 (722,330) - (91,144)
policyholders in lieu of
shares of common stock
Issuance of 17,825 shares in
the Initial Public 178 215,027 - - 215,205
Offering, net of expenses
Purchase and reissuance of
common stock under employee - (144) - - (144)
benefit plans
Common stock held by
consolidated grantor trusts - (3,789) - - (3,789)
--------- -----------------------------------------
Balance at December 31, 1997 423 842,035 78,982 37,297 958,737
Net income - - 123,572 - 123,572
Minimum pension liability
adjustment, net of income - - - (1,149) (1,149)
taxes
Net unrealized losses on
investment securities, net - - - (7,088) (7,088)
of income taxes
----------
Comprehensive income 115,335
Adjustment to cash payments
to eligible policyholders
in lieu of shares of common - (690) - - (690)
stock in the Demutualization
Purchase and reissuance of
common stock under
Employee benefit plans - (344) - - (344)
Stock option plans, net
of income taxes of $525 - (963) - - (963)
Common stock held by
consolidated grantor trusts - (851) - - (851)
--------- -----------------------------------------
Balance at December 31, 1998 $ 423 839,187 202,554 29,060 1,071,224
========= =========================================
</TABLE>
See accompanying independent auditors' report and notes to condensed financial
information.
S-4
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statements of Cash Flows
For the year ended December 31, 1998 and
for the period February 5, 1997 through December 31, 1997
(in thousands)
1998 1997
------------ ------------
Net income $ 123,572 78,982
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities
Accretion of discounts and amortization
of premiums, net (845) (129)
Undistributed earnings of subsidiaries 81,041 (30,204)
Increase in other receivables (1,254) (2,569)
(Increase) decrease in other assets 11 (166)
Increase in accounts payable and accrued
expenses 734 562
Increase in income taxes payable 1,701 -
Change in deferred income taxes (1,293) 53
Increase (decrease) in obligation for
Commonwealth Payment - (175,000)
Increase (decrease) in payable to
affiliates (10) 89
Realized investment (gains) losses, net (614) 105
------------ ------------
Net cash provided by (used in) operating
activities 203,043 (128,277)
------------ ------------
Cash flows from investing activities
Investment securities purchased (492,562) (214,562)
Proceeds from investment securities sold 227,515 77,002
Maturities of fixed income securities 89,481 57,180
Investment in subsidiary (25,000) -
------------ ------------
Net cash used by investing activities (200,566) (80,380)
------------ ------------
Cash flows from financing activities
Proceeds from long-term debt - 85,000
Payments to members in lieu of common
stock pursuant to Plan of Demutualization (690) (91,144)
Net proceeds from issuance of common stock - 215,205
Purchase and reissuance of common stock
under employee benefit and stock option
plans (1,307) (144)
Common stock purchased by grantor trusts (469) (259)
------------ ------------
Net cash provided by (used in) financing
activities (2,466) 208,658
------------ ------------
Increase in cash 11 1
Cash - beginning of year 1 -
------------ ------------
Cash - end of year $ 12 1
============ ============
Cash paid during the year for
Interest $ 5,006 4,344
============ ============
Income taxes 525 -
============ ============
See accompanying independent auditors' report and notes to condensed financial
information.
S-5
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT ONLY), CONTINUED
Notes to Condensed Financial Information of Registrant (Parent Only)
The condensed financial information provided should be read in conjunction with
the Consolidated Financial Statements of Trigon Healthcare, Inc. ("Registrant")
incorporated by reference in Part II, Section 8 of this Form 10-K and the
following notes:
(a) Basis of Presentation
The accompanying condensed financial information reflects the financial
position as of December 31, 1998 and 1997 and the results of operations,
changes in shareholders' equity and cash flows for the year ended December
31, 1998 and for the period after the Demutualization and Initial Public
Offering, February 5, 1997 through December 31, 1997. The Registrant had no
operations prior to February 5, 1997, the date it became the holding
company. Refer to note 2 to the consolidated financial statements of the
Registrant for details regarding the Demutualization and Initial Public
Offering.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(b) Long-Term Debt
The information about long-term debt contained in note 12 of the notes to
the consolidated financial statements of the Registrant is incorporated
herein by reference.
(c) Cash and Stock Dividends
During 1998 and 1997, a subsidiary of the Registrant, Trigon Insurance
Company, received permission from the Virginia Bureau of Insurance to pay
dividends to the Registrant of $227.5 million and $238.7 million,
respectively. The 1998 dividend was effected July 1, 1998 and included
$200.0 million of cash and $27.5 million of stock of a wholly owned
subsidiary. The 1997 dividend was effected July 31, 1997 and consisted of
$50.0 million in cash and $188.7 million in stock of a wholly owned
subsidiary.
(d) Investment in Subsidiary
The Registrant made a $25,000,000 capital contribution to its subsidiary,
Monticello Service Agency, Inc. (MSA) during 1998. MSA immediately made a
$25,000,000 capital contribution to its subsidiary, Trigon Health and Life
Insurance Company.
(e) Comprehensive Income
The information about comprehensive income contained in note 16 of the
notes to the consolidated financial statements of the Registrant is
incorporated herein by reference.
S-6
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.4 -- Amendment to the Amended and Restated Bylaws of Trigon
Healthcare, Inc.
10.5 -- Amended and Restated Supplemental Executive Retirement Program for
Certain Employees of Trigon Insurance Company dated as of
October 1, 1998.
10.9 -- Amended and Restated Employees' Thrift Plan of Trigon Insurance
Company dated as of October 1, 1998.
10.10 -- Amended and Restated Trigon Insurance Company 401(k) Restoration
Plan dated as of October 1, 1998.
10.22 -- Amendment to the Non-Contributory Retirement Program for Certain
Employees of Trigon Insurance Company (now to be known as) The
Trigon Insurance Company Retirement Program dated as of October
1, 1998.
10.23 -- Clarifying Amendment to the Non-Contributory Retirement Program
for Certain Employees of Trigon Insurance Company (now to be known
as) The Trigon Insurance Company Retirement Program dated as of
October 1, 1998.
13 -- Excerpts from the Company's Annual Report to Shareholders for the
year ended December 31, 1998.
21 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG LLP.
27 -- Financial Data Schedule.
EXHIBIT 3.4
TRIGON HEALTHCARE, INC.
AMENDMENT TO THE AMENDED AND RESTATED
BYLAWS OF TRIGON HEALTHCARE, INC.
RESOLVED, that the Bylaws of Trigon Healthcare, Inc. are amended by
substituting the following for Paragraph 1.10 Proxies:
1.10 Proxies. A stockholder may vote his or her shares in person or by
proxy. A stockholder may appoint a proxy to vote or otherwise act for him
or her by (i) executing a writing authorizing a person or persons to act
for him or her as proxy or (ii) transmitting or authorizing the
transmission of a telegram, cablegram or other means of electronic
transmission to the person who will be the holder of the proxy. An
appointment of a proxy is effective when received by the Secretary or
other officer or agent authorized to tabulate votes and is valid for
eleven (11) months unless a longer period is expressly provided in the
appointment form. An appointment of a proxy is revocable by the
stockholder unless the appointment form conspicuously states that it is
irrevocable and the appointment is coupled with an interest.
The death or incapacity of the stockholder appointing a proxy does not
affect the right of the Corporation to accept the proxy's authority unless
notice of the death or incapacity is received by the Secretary or other
officer or agent authorized to tabulate votes before the proxy exercises
his or her authority under the appointment. An irrevocable appointment is
revoked when the interest with which it is coupled is extinguished. A
transferee for value of shares subject to an irrevocable appointment may
revoke the appointment if he or she did not know of its existence when he
or she acquired the shares and the existence of the irrevocable
appointment was not noted conspicuously on the certificate representing
the shares. Subject to any legal limitations on the right of the
Corporation to accept the vote or other action of a proxy and to any
express limitation on the proxy's authority (i) appearing on the face of
the written authorization or (ii) evident from the electronic
transmission, the Corporation is entitled to accept the proxy's vote or
other action as that of the stockholder making the appointment. Any
fiduciary who is entitled to vote any shares may vote such shares by
proxy.
EXHIBIT 10.5
THE SUPPLEMENTAL RETIREMENT PROGRAM
FOR CERTAIN EMPLOYEES OF
BLUE CROSS AND BLUE SHIELD OF VIRGINIA
(NOW TO BE KNOWN AS)
THE SUPPLEMENTAL RETIREMENT PROGRAM
FOR CERTAIN EMPLOYEES OF
TRIGON INSURANCE COMPANY
AS AMENDED AND RESTATED
EFFECTIVE OCTOBER 1, 1998
INTRODUCTION
TRIGON INSURANCE COMPANY, formerly known as Blue Cross and Blue Shield of
Virginia, (the "Employer") established the Supplemental Retirement Program for
Certain Employees of Blue Cross and Blue Shield of Virginia (the "Supplemental
Program") for the benefit of its employees participating in the Non-Contributory
Retirement Program for Certain Employees of Trigon Insurance Company
("Retirement Program"). Effective October 1, 1998, the name of the Retirement
Program was changed to the Trigon Insurance Company Retirement Program, and the
Retirement Program was amended to incorporate a cash balance feature.
The Employer hereby adopts this amendment and restatement of the Supplemental
Program effective as of October 1, 1998, with respect to employees of the
Employer who are employed by the Employer on or after such date, in order to (1)
conform the Supplemental Program to the changes made to the Retirement Program
as of such date, (2) provide that a participant's earnings for purposes of
determining the benefit under the Supplemental Program will be deemed to include
the cash equivalent of any long-term incentive award granted in restricted
stock, and (3) to expand the eligibility of the Supplemental Program to include
designated officers of the Employer whose benefits are not otherwise restricted
by the limitations of the Internal Revenue Code ("Code").
The primary purpose of the Supplemental Program as amended and restated is to
provide benefits for employees of the Employer whose benefits under the
Retirement Program are restricted by the limitations of sections 401(a)(17) and
415 of the Code. That part of the Supplemental Program that provides benefits in
excess of the limitations on benefits in Code section 415 shall constitute an
"Excess Benefit Plan," as defined by section 3(36) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and that part of the
Supplemental Program that provides benefits based on compensation in excess of
the compensation limitation in Code
<PAGE>
section 401(a)(17) and that provides benefits for designated officers not
subject to such Code limits based on restricted stock awards or on nonqualified
deferred compensation shall constitute a plan that is maintained primarily for
the purpose of providing deferred compensation for a select group of management
or highly compensated employees of the Employer within the meaning of sections
201(2), 301(a)(3) and 401(a)(1) of Title I of ERISA (referred to herein as a
"Top-Hat Group"). It is intended that the Supplemental Program remain at all
times an unfunded program.
ARTICLE I
DEFINITIONS
1.1 General. Except as otherwise indicated in this Article, or as may be
clearly required otherwise by the context, capitalized terms that are used in
this Supplemental Program shall have the meaning assigned to them in Article 1
of the Retirement Program. Feminine or neuter pronouns shall be substituted for
those of the masculine form, and the plural shall be substituted for the
singular, in any place or places herein where the context may require such
substitution or substitutions.
1.2 "Actuarial Equivalent" shall mean a benefit of equal value, based on
the relevant conversion factors specified in the Retirement Program.
1.3 "Administrator" shall mean the person or entity designated as the
administrator of the Supplemental Program in Section 3.1.
1.4 "Death Benefit" shall mean the benefit payable under Section 2.3.
1.5 "Death Benefit Beneficiary" shall mean the person or persons (natural,
trust, or estate) properly treated as the surviving beneficiary or beneficiaries
of the Participant's Pre-Retirement Death Benefit under the Retirement Program.
1.6 "Employer" shall mean the employer organization specified in the
Introduction.
1.7 "Excess Benefit" shall mean the benefit payable under Section 2.2.
1.8 "Form of Benefit"
(a) "Normal Form" shall mean a single sum payment.
(b) "Optional Form" shall mean one of the benefit forms described in
Section 2.5(b).
1.9 "Participant" shall mean an employee of the Employer who is a
participant in the
2
<PAGE>
Retirement Program and either
(a) whose benefits under the Retirement Program are restricted by the
limitations of either Code section 401(a)(17) or Code section 415 or both,
or
(b) who (i) is an officer of the Employer and a member of a Top-Hat
Group, (ii) has been designated by the Employer as a participant in the
Supplemental Program, and (iii) has received a long-term incentive award in
restricted stock or has elected to defer compensation (other than in the
form of stock) under a nonqualified deferred compensation arrangement of
the Employer.
The term "Participant" shall include a former employee of the Employer who is
entitled to a benefit under the terms of this Supplemental Program.
1.10 "Retirement Program" shall mean the funded retirement program
specified in the Introduction.
1.11 "Supplemental Program" shall mean the Supplemental Retirement Program
for Certain Employees of the Trigon Insurance Company.
ARTICLE II
BENEFITS
2.1 Eligibility for Benefits. Any Participant who is entitled to a benefit
under the Retirement Program and who is living as of the applicable calculation
date under Section 2.4(a), shall be eligible for an Excess Benefit as provided
in Section 2.2. If a Participant dies before benefits under the Supplemental
Program are calculated under Section 2.4(a), then the Participant's Death
Benefit Beneficiary shall be eligible for a Death Benefit as provided in Section
2.3.
2.2 Amount of Excess Benefit.
(a) The amount of Excess Benefit payable under the Program shall be a
benefit that is payable at such time and in such form as provided in
subsection (d), and is equal to the excess, if any, of (i) over (ii);
(i) The amount of lump sum benefit that would be payable to the
Participant under the Retirement Program if the limitations of Code
section 401(a)(17) and 415 did not apply to the calculation and amount
of such benefit; provided, however, that for these purposes, in the
case of a Participant who receives a long-term incentive award in
restricted stock, the Participant's Earnings shall include, solely for
purposes of
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determining the Pay Credits to his Retirement Account and his
Transition Benefit, the cash amount of such incentive award that would
have otherwise been paid to the Participant in such pay period and
shall exclude any amounts attributable to such award in the year of
its vesting or payment; and provided further that in the case of a
Participant who elects to defer compensation (other than in the form
of stock) under a nonqualified deferred compensation arrangement, the
Participant's Earnings shall include in the year of the deferral the
amount of deferred compensation that would have otherwise been paid in
such year to the Participant and shall exclude any amounts
attributable to such deferral in the year of payment.
(ii) The amount of lump sum benefit actually payable to the
Participant under the Retirement Program at such time.
(b) If the Participant receives the Participant's Retirement Program
benefit at a time later than the calculation date prescribed in Section
2.4(a), or in a form other than a lump sum, no adjustment shall be made to
the amount of the Excess Benefit payable hereunder. In such case, the
amount of the Participant's Excess Benefit shall be determined as if both
the Participant's Excess Benefit and Retirement Benefit were payable in a
lump sum as of the calculation date specified in Section 2.4(a).
(c) The Participant's Excess Benefit shall be reduced by the Actuarial
Equivalent (using for these purposes the Actuarial Equivalent factors
specified in the last paragraph of Section 1.01 of the Retirement Program)
of the amount of any Excess Benefit previously paid to the Participant
under the Supplemental Program to the extent such Excess Benefit is based
on service that was taken into account in determining the Excess Benefit
previously paid to the Participant. In addition, while benefits may be
provided under the terms of this Supplemental Program and the Retirement
Program for prior service with other Plans, it is the intent of this
Supplemental Program to avoid duplication of benefits provided under this
Supplemental Program (and the related Retirement Program) and the
supplemental pension programs (and related pension programs) of such Plans
with respect to such prior service. The term "supplemental pension program"
refers to a program or individual arrangement (or that portion of a program
or individual arrangement) that is designed to provide employees of a Plan
with benefits that cannot be paid under the Plan's tax-qualified pension
program because of the limitations of sections 401(a)(17) and 415 of the
Internal Revenue Code. An Excess Benefit payable under the Supplemental
Program shall be offset by the amount of employer-provided benefits earned
under the supplemental pension program of a prior Plan for a period of
service for which credit is given under this Supplemental Program and the
Retirement Program. Such offset shall be applied by making the following
adjustment in the calculation of the amount specified in subsection (a)(i).
In determining such amount, the employer-provided benefit payable under the
other Plan's supplemental pension program shall be treated as being payable
under the other Plan's tax-qualified pension program for purposes of the
Retirement Program's nonduplication provision. The Administrator shall make
such other adjustments as the Administrator in its sole discretion shall
determine to be necessary or appropriate to carry out the intent of this
nonduplication provision.
4
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(d) Payment of the Excess Benefit shall be made at the time determined
pursuant to Section 2.4, and in the form specified in Section 2.5.
2.3 Amount of Death Benefit. The amount of any Death Benefit payable under
the Program shall be determined as follows:
(a) If a Participant dies before the calculation date for his Excess
Benefit under Section 2.4(a) of the Supplemental Program, the Death Benefit
hereunder shall be payable at such time and in such form as provided in
subsection (d), and shall be equal to the excess, if any, of (i) the
Pre-Retirement Death Benefit that would then be payable under the
Retirement Program, if the limitations of Code section 401(a)(17) and 415
did not apply to the Retirement Program and if the adjustments to Earnings
described in Section 2.2(a)(i) above were made over (ii) the Pre-Retirement
Death Benefit that would actually then be payable under the Retirement
Program. If the Pre-Retirement Death Benefit payable under the Retirement
Program is received at a time later than the calculation date prescribed in
Section 2.4(b), or in a form other than a lump sum, no adjustment shall be
made to the amount of the Death Benefit payable hereunder. In such case,
the amount of the Death Benefit shall be determined as if both the
Pre-Retirement Death Benefit under the Retirement Program and the Death
Benefit hereunder were payable in a lump sum as of the calculation date
specified in Section 2.4(b).
(b) If a Participant dies on or after the calculation date for his
Excess Benefit under Section 2.4(a) of the Supplemental Program, no Death
Benefit shall be payable under the Supplemental Program. In such case,
benefits, if any, shall be payable in accordance with the form of payment
of the Participant's Excess Benefit under Section 2.5(a) or (b), as
applicable.
(c) The Administrator shall adjust the amount of a Participant's Death
Benefit in a manner comparable to that prescribed in Section 2.2(c) to
avoid duplication of benefits. The Administrator shall make such other
adjustments as the Administrator in its sole discretion shall determine to
be necessary or appropriate to carry out the intent of this nonduplication
provision.
(d) Payment of a Participant's Death Benefit shall be made at the time
determined pursuant to Section 2.4, and in the form specified in Section
2.5(c).
2.4 Time of Payment.
(a) A Participant's Excess Benefit shall be calculated as of the first
day of the first month coincident with or next following the date the
Participant terminates Employment with the Employer and paid as soon as
administratively feasible thereafter.
(b) A Participant's Death Benefit shall be calculated as of the first
day of the first month coincident with or next following the date of death
of the Participant and paid as soon as administratively feasible
thereafter.
5
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2.5 Form of Benefit. The Excess Benefit shall be payable in the form set
out in subsection (a) below unless the Participant properly elects payment in a
permitted Optional Form as described in subsection (b). In all instances, the
Excess Benefit payable under this Section 2.5 shall be the Actuarial Equivalent
of the Excess Benefit determined under Section 2.2. The Death Benefit shall be
payable as provided in subsection (c). If the Participant dies before the
calculation date for his Excess Benefit under Section 2.4(a), no Excess Benefit
shall be payable hereunder and, in lieu thereof, to the extent the requirements
of Section 2.3 are satisfied, a Death Benefit shall be payable to the
Participant's Death Benefit Beneficiary. The Participant's election of an
Optional Form (and designation of a Beneficiary, if applicable) shall be made in
the manner prescribed by the Administrator and in accordance with the rules
provided in subsection (d).
(a) The Normal Form for the payment of the Participant's Excess
Benefit shall be a lump sum.
(b) The Optional Forms of payment under the Supplemental Program are
as follows:
(i) Life Benefit. This form of benefit is payable monthly to the
Participant for life.
(ii) Joint and 50% Spouse's Annuity. This form of benefit is
payable monthly to the Participant for life, with 50% of the amount
payable to the Participant continued thereafter to the person married
to the Participant on the calculation date for the Excess Benefit
under Section 2.4(a), if that person survives the Participant, for
that person's life.
(iii) Life Annuity with Retirement Account Guaranteed. This form
of benefit is payable monthly to the Participant for life, with the
total of such payments guaranteed to be no less than the amount of
lump sum payment that could have been paid to the Participant under
the Normal Form. If, at the Participant's death, the amount of total
payments actually made to the Participant is less than the amount of
the lump sum payment that could have been paid to the Participant
under the Normal Form, an amount equal to the difference between such
lump sum amount and the total payments actually made to the
Participant shall be paid in a lump sum to the Participant's
Beneficiary, or if there is no surviving Beneficiary, to the estate of
said Participant.
(iv) Joint and 50% Contingent Benefit with Retirement Account
Guaranteed. This form of benefit is payable monthly to the Participant
for life and 50% of such amount shall continue after his death to his
surviving Beneficiary for life, with the total of such payments
guaranteed to be no less than the amount of the lump sum payment that
could have been paid to the Participant under the Normal Form. If at
the later to die of the Participant and the Participant's Beneficiary,
the total payments made to the Participant and the Beneficiary is less
than the amount of lump sum payment that could have been paid to the
Participant under the Normal Form, an amount equal to the difference
between such lump sum amount and the total payments actually made to
the Participant and the Beneficiary shall be paid in a lump sum to the
6
<PAGE>
estate of the Participant or the estate of the Participant's
Beneficiary, whichever is the last to die.
(v) Life Benefit with 120 or 240 Payments Guaranteed. This form
of benefit is payable monthly to the Participant for life with the
first 120 or 240 monthly payments guaranteed, as elected by the
Participant. Any guaranteed payments due after the death of the
Participant shall be payable to his Beneficiary, if any, who survives
the Participant, or if there is no surviving Beneficiary, the commuted
value of any remaining guaranteed payment shall be payable to the
estate of the Participant. Such commuted value shall be determined by
the Administrator on the basis of an interest rate described in the
last paragraph of Section 1.01 of the Retirement Program.
Notwithstanding the foregoing, this form of payment shall be available
as an Optional Form only if at the calculation date for the Excess
Benefit under Section 2.4(a), the Participant could have also elected,
in accordance with Section 5.02(b) of the Retirement Program, to have
the Participant's benefits under the Retirement Program paid at that
time in the form of Option B.
(vi) Joint and Contingent Benefit. This optional benefit is
payable monthly to the Participant for life and a percentage (50%,
66-2/3%, or 100%) of such amount, as elected by the Participant, shall
continue after his death to his surviving Beneficiary for life.
Notwithstanding the foregoing, this form of payment shall be available
as an Optional Form only if at the time of the calculation date for
the Excess Benefit under Section 2.4(a), the Participant could have
also elected, in accordance with Section 5.02(b) of the Retirement
Program, to have the Participant's benefits under the Retirement
Program paid at that time in the form of Option C.
(c) A Death Benefit shall be payable solely in a lump sum.
(d) The election of an Optional Form of payment for the Excess Benefit
is subject to the approval of the Employer, and must be submitted to the
Employer for its consideration in a calendar year prior to the year in
which the Excess Benefit is calculated under Section 2.4(a), at least 6
months prior to such calculation date. If the Employer does not approve the
election within 60 days, it shall be deemed denied. If the Employer does
approve the election, such election shall be irrevocable if the benefit
commences in the immediately following calendar year, except that the
Participant may again change the form of benefit so long as the new
election is submitted to the Employer for its consideration in a calendar
year prior to the year in which the Excess Benefit is calculated under
Section 2.4(a), at least 6 months prior to such calculation date.
2.6 Payment of Benefits. Benefits payable under the Supplemental Program
shall be paid directly to the Participant, the Participant's Beneficiary, the
Participant's Death Benefit Beneficiary, or an alternate payee, as applicable,
from the general assets of the Employer. Nothing contained herein shall be
deemed to create a trust of any kind or create any fiduciary relationship. To
the extent that any person acquires a right to receive payments from the
Employer under this Supplemental Program, such right shall be no greater than
the right of any unsecured general creditor of the Employer. In the event that
the Employer establishes an advance accrual reserve on its books against its
future liability under the Supplemental Program,
7
<PAGE>
such reserve shall not constitute an asset of the Supplemental Program but shall
at all times remain part of the general assets of the Employer subject to the
claims of the Employer's creditors.
2.7 No Other Benefit. Benefits shall be paid to a Participant, a
Participant's Beneficiary, or a Participant's Death Benefit Beneficiary only to
the extent provided in Article II. Benefits to an alternate payee shall be paid
only to the extent provided in Section 5.3.
2.8 Forfeiture of Benefit. Notwithstanding anything herein to the contrary,
any amounts to which a Participant, a Participant's Beneficiary, a Participant's
Death Benefit Beneficiary, or an alternate payee would be entitled under this
Supplemental Program shall be forfeited if (i) the Participant is discharged
from Employment with the Employer for acts which, in the sole judgment of the
Administrator, constitute embezzlement of funds, or (ii) the Participant's
Employment terminates by dismissal for cause and the circumstances surrounding
such dismissal are such that the Administrator, in its sole discretion,
determines that forfeiture of the benefit otherwise payable under the
Supplemental Program is warranted.
ARTICLE III
ADMINISTRATION
3.1 Administrator. The Senior Vice President, Corporate Services shall be
the Administrator of the Supplemental Program.
3.2 Duties of the Administrator. The Administrator shall administer the
Supplemental Program in accordance with its terms and purposes and shall have
authority to interpret the Supplemental Program, to make any necessary rules and
regulations, and to determine benefits under the Supplemental Program. The
Administrator shall also be responsible for complying with statutory reporting
and disclosure requirements. The Administrator shall not be subject to liability
with respect to the administration of the Supplemental Program.
3.3 Claims Procedures/Decision of Administrator. In general, distributions
under this Supplemental Program are automatic and no claim for benefits need be
filed. However, a Participant (or the Participant's Beneficiary, Death Benefit
Beneficiary, or alternate payee) may submit a claim for benefits under this
Supplemental Program in writing to the Administrator. The following procedure
shall apply in such case:
(a) If such claim for benefits is wholly or partially denied, the
Administrator shall notify the claimant of the denial of the claim within a
reasonable period of time, but no later than 90 days after receipt of the
written claim, unless special circumstances require an extension of time
for processing the claim. In such event, written notice of the extension
shall be furnished to the claimant prior to the end of the 90 day period
and shall indicate the special circumstances requiring the extension and
the date by which a final decision is expected. In no event shall the
extension period exceed 90 days from the end of the initial 90 day period.
The notice of denial:
8
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(i) shall be in writing; (ii) shall be written in a manner calculated to be
understood by the claimant; and (iii) shall contain (A) the specific reason
or reasons for denial of the claim; (B) a specific reference to the
pertinent Supplemental Program provisions upon which the denial is based;
(C) a description of any additional material or information necessary for
the claimant to perfect the claim; and (D) an explanation of the
Supplemental Program's claims review procedure.
(b) Within 60 days of the receipt by the claimant of the written
notice of denial of the claim, or if the claim has not been granted within
the applicable time period, the claimant may file a written request with
the Administrator that it conduct a full and fair review of the denial of
the claimant's claim for benefits. In connection with the claimant's appeal
of the denial of his benefit, the claimant may review pertinent documents
and may submit issues and comments in writing.
(c) The Administrator shall deliver to the claimant a written decision
on the claim promptly, but not later than 60 days after the receipt of the
claimant's request for review, except that if there are special
circumstances which require an extension of time for processing, the 60-day
period shall be extended to a maximum of 120 days, in which case written
notice of the extension shall be furnished to the claimant prior to the end
of the 60-day period. The Administrator's decision shall: (i) be written in
a manner calculated to be understood by the claimant, (ii) include specific
reasons for the decision; and (iii) contain specific references to the
pertinent Supplemental Program provisions upon which the decision is based.
If a written decision on review is not furnished to the claimant within the
applicable time period, the claim shall be deemed denied on review.
ARTICLE IV
AMENDMENT AND TERMINATION
4.1 Amendment and Termination of the Program. Although the Employer intends
to maintain the Supplemental Program for as long as necessary, the Employer
reserves the right to amend or terminate the Supplemental Program at any time
for whatever purposes it may deem appropriate.
4.2 Contractual Obligation. Notwithstanding Section 4.1, the Employer
hereby makes a contractual commitment to pay the benefits accrued under the
Supplemental Program as of the date of amendment or termination, but subject to
the terms of the Supplemental Program (including Section 2.8).
9
<PAGE>
ARTICLE V
MISCELLANEOUS
5.1 Employment Rights. Nothing contained in the Supplemental Program shall
be construed as a contract of employment between the Employer and the
Participant, or as a right of any employee to be continued in the employment of
the Employer, or as a limitation of the right of the Employer to discharge any
of its employees, with or without cause.
5.2 Assignment. The benefits payable under the Supplemental Program may not
be assigned or alienated.
5.3 Domestic Relations Order/Alternate Payee. Notwithstanding Section 5.2,
an alternate payee shall be entitled to receive a benefit under the Supplemental
Program, computed by reference to the Participant's benefit, in accordance with
the terms of an eligible domestic relations order. Such alternate payee's rights
under this provision shall be subject to the terms and conditions set forth
below, and to such other limitations or restrictions, as may be imposed under
applicable law.
(a) The Administrator shall, in its sole discretion, determine whether
a domestic relations order is eligible. The Employer shall have no
obligation under the Supplemental Program to make any distribution pursuant
to a domestic relations order until the Administrator has determined that
the domestic relations order is eligible. Distributions may be delayed for
a reasonable period if necessary to determine whether the domestic
relations order is eligible. The Administrator shall establish reasonable
procedures to determine whether a domestic relations order is eligible and
to administer distributions under such eligible orders, and such procedures
shall be binding on the Participant, the Participant's Beneficiary, the
Participant's Death Beneficiary, and any alternate payee.
(b) The alternate payee's benefit under an eligible domestic relations
order shall be paid at the time and in the manner the benefits begin to be
paid or are paid to the Participant, the Participant's Beneficiary, or the
Participant's Death Benefit Beneficiary, as the case may be, unless the
eligible domestic specifies an earlier time of payment, or a different
manner of payment, or both.
(c) For these purposes an "alternate payee" shall mean a person
described in Code section 414(p)(8), and a "domestic relations order" shall
mean any judgment, decree, or order (including approval of a property
settlement agreement) that would meet the definition of Code section
414(p)(1)(B) if such provision were applicable to the Supplemental Program.
An "eligible domestic relations order" shall mean any domestic relations
order that would meet the criteria set forth in Code section 414(p)(2)-(4).
A domestic relations order shall not be deemed to meet the criteria set
forth in Code section 414(p)(2) unless the domestic relations order
addresses what the consequences under the order will be if either the
alternate payee or the Participant dies prior to the time the alternate
payee's benefit is scheduled to begin.
10
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(d) If an alternate payee cannot be located after a diligent search
has been conducted, the interest of the alternate payee may be forfeited at
the direction of the Employer at any time after a two-year period and
restored to the Participant on such conditions and terms as the Employer
shall determine.
(e) In no event shall the Employer or the Administrator have any
liability to the Participant for paying benefits in accordance with this
Section 5.3. The Participant shall be responsible for any federal or state
income taxes that may arise in connection with the acceptance of, and
compliance with, an eligible domestic relations order hereunder. Payments
made to an alternate payee pursuant to an eligible domestic relations order
shall be subject to applicable federal and state income tax withholding. To
the extent required by law, payments made to an alternate payee under the
Supplemental Program shall be reported as taxable wages of the Participant.
The rights of an alternate payee under an eligible domestic relations order
shall be subject to forfeiture in the event the interest of the relevant
Participant is forfeited pursuant to Section 2.8.
5.4 Applicable Law. The Supplemental Program shall be governed by the laws
of the Commonwealth of Virginia.
5.5 Effective Date. This amendment and restatement is effective as of
October 1, 1998, with respect to employees of the Employer who are employed by
the Employer on or after such date.
IN WITNESS WHEREOF, this document has been executed by the Employer by its
duly authorized officer on the ___ day of __________, 1998.
TRIGON INSURANCE COMPANY
By:
-----------------------------------
ATTEST:
- ----------------------------------
11
EXHIBIT 10.9
EMPLOYEES' THRIFT PLAN
OF
TRIGON INSURANCE COMPANY
Effective Date
July 1, 1980
As Amended and Restated
October 1, 1998
<PAGE>
TABLE OF CONTENTS
ARTICLE PAGE
INTRODUCTION...................................................................1
ARTICLE I......................................................................2
DEFINITIONS.................................................................2
1.01 Administrative Committee...........................................2
1.02 Affiliate..........................................................2
1.03 After-Tax Contribution Account.....................................2
1.04 Annual Additions...................................................2
1.05 Beneficiary........................................................3
1.06 Board..............................................................3
1.07 Compensation.......................................................3
1.08 Contributions......................................................4
1.09 Corporation........................................................4
1.10 Current Balance....................................................4
1.11 Deductible Account.................................................4
1.12 Deductible Current Balance.........................................5
1.13 Defined Benefit Plan...............................................5
1.14 Defined Contribution Plan..........................................5
1.15 Delayed Retirement Date............................................5
1.16 Disability Retirement Date.........................................5
1.17 Early Retirement Date..............................................5
1.18 Effective Date.....................................................5
1.19 Employee...........................................................5
1.20 Employer...........................................................6
1.21 Employer Contributions.............................................6
1.22 Employer Matching Contributions...................................6
1.23 Employer Matching Contributions Account............................6
1.24 Employment Date....................................................7
1.25 Entry Date.........................................................7
1.26 ERISA..............................................................7
1.27 Fiduciary..........................................................7
1.28 Forfeiture.........................................................7
1.29 Fund...............................................................7
1.30 Hardship...........................................................7
1.31 Highly Compensated Employee........................................9
1.32 Hour of Service...................................................11
1.33 Individual Account................................................12
1.34 IRC...............................................................13
1.35 Investment Committee..............................................13
1.36 Investment Manager................................................13
1.37 Limited Participant...............................................13
1.38 Limitation Year...................................................13
1.39 Maximum Compensation..............................................13
1.40 Non-Highly Compensated Employee...................................14
1.41 Normal Retirement Age.............................................14
1.42 Normal Retirement Date............................................14
1.43 Parent............................................................14
1.44 Participant.......................................................14
1.45 Plan..............................................................14
1.46 Plan Year.........................................................14
1.47 Pre-Tax Contribution Account......................................14
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1.48 Pre-Tax Contributions.............................................15
1.49 Profit SharingMatching Contribution...............................15
1.50 Profit SharingMatching Contributions Account......................15
1.51 Reemployment Date.................................................15
1.52 Rollover Account..................................................15
1.53 Rollover Contributions............................................15
1.54 Service...........................................................15
1.55 Severance from Service Date.......................................18
1.56 Severance Period..................................................20
1.57 Total and Permanent Disability....................................20
1.58 Transfer Account..................................................21
1.59 Trigon Stock......................................................21
1.60 Trigon Stock Fund.................................................21
1.61 Trust Agreement...................................................21
1.62 Trustee...........................................................22
1.63 Valuation Date....................................................22
ARTICLE II....................................................................23
ELIGIBILITY AND PARTICIPATION..............................................23
2.01 Eligibility.......................................................23
2.02 Participation.....................................................23
2.03 Limited Participants..............................................24
2.04 Designation of Beneficiary........................................24
ARTICLE III...................................................................26
CONTRIBUTIONS..............................................................26
3.01 Pre-Tax Contributions.............................................26
3.02 Employer Matching Contributions...................................27
3.03 Rollover Contributions............................................27
3.04 Testing of Pre-Tax Contributions..................................28
3.05 Testing of Employer Contributions.................................32
3.06 Multiple Use Limitation...........................................36
3.07 Maximum Pre-Tax Contributions.....................................38
3.08 Profit Sharing Matching Contributio...............................39
ARTICLE IV....................................................................40
INVESTMENT OPTIONS AND FUNDS...............................................40
4.01 Investment Options................................................41
4.02 Election Procedure................................................42
4.03 Investment Accounts...............................................42
4.04 Investment Information............................................42
4.05 Limitations on Directed Investments...............................42
4.06 Application to Beneficiaries and Alternate Payees.................43
4.07 Voting, Tender and Exercise of Similar Rights with
Respect to Trigon Stock.........................................43
4.08 Management of the Trigon Stock Fund...............................44
ARTICLE V.....................................................................46
ALLOCATIONS TO INDIVIDUAL ACCOUNTS.........................................46
5.01 Individual Accounts...............................................46
5.02 Allocation of After-Tax Contributions.............................46
5.03 Allocation of Pre-Tax Contributions...............................46
5.04 Allocation of Employer Contributions..............................46
5.05 Allocation of Deductible Contributions............................46
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5.06 Allocation of Rollover Contributions..............................46
5.07 Allocation of Income, Gains and Losses............................47
5.08 Forfeitures.......................................................47
5.09 Maximum Additions.................................................47
5.10 Multiple Plan Participation.......................................48
5.11 Allocation of Profit Sharing Matching Contributions...............50
ARTICLE VI....................................................................51
VESTING AND DISTRIBUTIONS..................................................51
6.01 Vesting...........................................................51
6.02 Normal Retirement.................................................56
6.03 Delayed Retirement................................................57
6.04 Early Retirement..................................................57
6.05 Disability Retirement.............................................57
6.06 Death Prior to the Commencement of Benefits.......................58
6.07 Death After the Commencement of Benefits..........................60
6.08 Method of Payment.................................................60
6.09 Maximum Option Payable............................................65
6.10 Benefits to Minors and Incompetents...............................66
6.11 Payment of Benefits...............................................66
6.12 Restriction on Distribution of Pre-Tax Contributions..............67
6.13 Special Retirement Opportunity....................................68
ARTICLE VII...................................................................69
WITHDRAWALS, REINSTATEMENTS AND LOANS......................................69
7.01 Withdrawals Generally.............................................69
7.02 Withdrawal of After-Tax Contributions.............................69
7.03 Withdrawal of Rollover Account, Transfer Account and Vested
Employer Contribution Account...................................70
7.04 Withdrawal of Deductible Account..................................72
7.05 Withdrawal at Age 59..............................................72
7.06 Hardship Withdrawal...............................................73
7.07 Loans.............................................................74
ARTICLE VIII..................................................................81
FUNDING....................................................................81
8.01 Contributions.....................................................81
8.02 Trustee...........................................................81
8.03 Exclusive Benefit.................................................82
ARTICLE IX....................................................................83
FIDUCIARIES................................................................83
9.01 General...........................................................83
9.02 Corporation.......................................................83
9.03 Trustee...........................................................84
9.04 Administrative Committee..........................................84
9.05 Investment Committee..............................................86
9.06 Claims Procedures.................................................86
9.07 Records...........................................................87
9.08 Missing Persons...................................................88
9.09 Maintenance of Individual Accounts, Deductible Accounts
and Plan Operations.............................................88
9.10 Disclosure........................................................89
9.11 Annual Accountings................................................90
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9.12 Funding Policy....................................................90
9.13 Indemnification of Fiduciaries....................................91
9.14 Equitable Allocations.............................................91
ARTICLE X.....................................................................92
AMENDMENT AND TERMINATION OF THE PLAN......................................92
10.01 Amendment of The Plan.............................................92
10.02 Termination of The Plan...........................................92
10.03 Allocation of Funds...............................................93
10.04 Application of Assets.............................................93
10.05 Automatic Termination.............................................94
10.06 Merger, Consolidation and Transfers of Assets or Liabilities......94
ARTICLE XI....................................................................95
PROVISIONS RELATIVE TO EMPLOYERS INCLUDED IN PLAN..........................95
11.01 Method of Participation...........................................95
11.02 Withdrawal........................................................95
ARTICLE XII...................................................................97
TOP HEAVY PLAN PROVISIONS..................................................97
12.01 General...........................................................97
12.02 Definitions.......................................................97
12.03 Minimum Top Heavy Contribution...................................100
12.04 Defined Benefit Plan Minimum Accrued Benefit.....................101
12.05 Multiple Plan Participation......................................101
12.06 No Duplication of Minimum Benefit................................101
12.07 Top Heavy Assumptions............................................101
12.08 Minimum Vesting..................................................102
ARTICLE XIII.................................................................103
MISCELLANEOUS.............................................................103
13.01 Governing Law....................................................103
13.02 Construction.....................................................103
13.03 Expenses.........................................................103
13.04 Participant's Rights; Acquittance................................103
13.05 Spendthrift Clause...............................................103
13.06 Mistake of Fact..................................................108
13.07 Counterparts.....................................................109
ADOPTION OF THE PLAN.........................................................110
APPENDIX A...................................................................111
PROVISIONS APPLICABLE TO CONSOLIDATED RISK MANAGEMENT SERVICES............111
APPENDIX B...................................................................115
PROVISIONS APPLICABLE TO PRIORITY HEALTH CARE, INC........................115
<PAGE>
INTRODUCTION
The Employees' Thrift Plan of Trigon Insurance Company originally became
effective July 1, 1980, and was subsequently amended with the most recent
amendment and restatement being effective October 1, 1998.
The amended and restated Thrift Plan herein contained constitutes an
amendment effective October 1, 1998, to the earlier plan provisions, rather than
a replacement of such plan. The plan provisions as in effect immediately prior
to this October 1, 1998 amendment, modified by Section 10.02 of this amended and
restated Plan, shall remain in effect for those Participants who are not
actively employed by the participating Employers at any time after such date.
The assets held under the trust will continue to be held pursuant to the Plan as
herein amended. Any special provisions applicable to funds transferred to the
Plan from another qualified retirement plan in a plan-to-plan transfer shall be
contained in the appropriate adoption agreement or in an Appendix attached to
and made a part of the Plan.
It is intended that this Plan, together with the Trust Agreement, be
considered a profit sharing plan as defined in IRC Section 404(a)(3) and
regulations issued pursuant thereto, and meet all the requirements of the
Internal Revenue Code of 1986 ("IRC"), to the extent applicable, and the Plan
shall be interpreted, wherever possible, to comply with the terms of the IRC and
all formal regulations and rulings issued under the IRC and amendments thereto.
Effective October 1, 1998, the Plan as amended and restated has the terms
and provisions hereinafter set forth.
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ARTICLE I
DEFINITIONS
As used herein and in the Trust Agreement entered into pursuant hereto,
unless otherwise required by the context, the following words and phrases shall
have the meanings indicated:
1.01 Administrative Committee means the Administrative Committee provided
for in Section 9.04.
1.02 Affiliate means an organization which is a member of the same
controlled group of organizations as the Employer as determined
pursuant to IRC Sections 414(b), 414(c), 414(m) and 414(o) but which
is not an Employer.
1.03 After-Tax Contribution Account means that portion of a Participant's
Individual Account attributable to his After-Tax Basic Contributions
and After-Tax Additional Contributions made to the Plan for periods
through December 31, 1987, and the proportionate share of the
adjustment of the Fund determined in accordance with Section 5.07.
1.04 Annual Additions means for any Employee in any Limitation Year the sum
of (a) Employer Contributions including excess Pre-Tax Contributions
returned pursuant to Sections 3.04 and 3.07 and any Employer
Contributions which are forfeited and used to reduce Contributions of
the Employer or distributed under the provisions of Sections 3.04,
3.05 and 3.07, (b) Contributions made by the Participant, (c) any
Forfeitures allocated to his account in a given Limitation Year, (d)
amounts allocated after March 31, 1984, to an individual medical
account, as defined in IRC Section 415(l)(2), which is part of a
pension or annuity plan maintained by the Employer and (e) amounts
derived from contributions paid or accrued in taxable years after
December 31, 1985, which are attributable to post-retirement medical
benefits allocated to the separate account of a Key Employee under a
welfare benefit fund, as defined in IRC Section 419(e) maintained by
the Employer.
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1.05 Beneficiary means any person (including a trust or estate) designated
by a Participant to receive such benefits as may become payable after
the death of such Participant.
1.06 Board means the Board of Directors of the Corporation.
1.07 Compensation means, for a Participant, total earnings, prior to
withholding, paid to him by his Employer during a Plan Year, including
bonuses, extra compensation, overtime payments, Pre-Tax Contributions
and any other amounts which the Employee could have elected to receive
as cash in the current year as taxable income in lieu of a non-taxable
benefit under a plan which is maintained by the Employer pursuant to
IRC Section 125. Compensation shall exclude flex dollars, tax gross
ups, relocation expenses, referral bonuses, tuition reimbursement, the
imputed value of group life insurance, the economic value attributable
to the Employee under split dollar life insurance, car allowances,
contest earnings (other than marketing or sales incentives), cash
payments for unused paid time off (PTO) made upon the Employee's
termination of service with the Employer, income recognized with
respect to stock of an Employer (including income arising from stock
purchases, the exercise of stock options, restricted stock,
performance stock or other form of stock-based compensation), and any
Contributions by the Employer (other than Pre-Tax Contributions) to
this or any other employee benefit programs. Reference herein to
Compensation with respect to any period of time shall mean the
Compensation, as defined in the preceding sentences, of a Participant
for such period.
For purposes of determining Employer Matching Contributions under
Section 3.02, Compensation shall mean the Compensation as defined in
the preceding sentences, of a Participant during the applicable pay
period.
Notwithstanding the preceding, in no event shall Compensation
during a Plan Year exceed one hundred fifty thousand dollars
($150,000) or such legislated amount as may be determined pursuant to
IRC Section 401(a)(17), provided that the increase
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determined as of any January 1 of a calendar year by the Secretary of
the Treasury shall be effective for Plan Years beginning in such
calendar year.
For Plan Years beginning before January 1, 1997, in determining
the Compensation of a Participant for purposes of this limit, the
rules of IRC Section 414(q)(6) shall apply, except in applying such
rules, the term "family" shall include only the spouse of the
Participant and any lineal descendants of the Participant who have not
attained age nineteen (19) before the close of the year. If, as a
result of the application of such rules, the adjusted one hundred
fifty thousand dollar ($150,000) limit is exceeded, then the
limitation shall be prorated among the affected individuals in
proportion to each such individual's Compensation as determined under
this Section prior to the application of the limit.
1.08 Contributions means payments made to the Plan which are provided for
herein by the Employer and/or by Participants and Employees pursuant
to Article III for the purpose of providing the benefits under this
Plan.
1.09 Corporation means Trigon Insurance Company and any successor thereto.
The Corporation is the sponsor, named fiduciary and administrator of
the plan as it relates to the Employees of participating Employers.
Before March 7, 1997, the Corporation was Blue Cross and Blue Shield
of Virginia, a Virginia corporation doing business as Trigon Blue
Cross Blue Shield.
1.10 Current Balance as used in regard to a Participant's Individual
Account or stipulated portion thereof, means, as of any date, the
market value of the Participant's Individual Account or portion
thereof determined as of the next following Valuation Date.
1.11 Deductible Account means the account established for a Participant to
hold voluntary Deductible Contributions made to the Plan for periods
prior to January 1, 1987, and the proportionate share of the
adjustment of the Fund determined in accordance with
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Section 5.07. All amounts held in a Participant's Deductible Account
shall at all times be one hundred percent (100%) vested.
1.12 Deductible Current Balance as used in regard to a Participant's
Deductible Account or stipulated portion thereof means, as of any
date, the market value of the Participant's Deductible Account as of
the next following Valuation Date.
1.13 Defined Benefit Plan means a plan established and qualified under IRC
Section 401 or 403, except to the extent it is, or is treated as, a
Defined Contribution Plan.
1.14 Defined Contribution Plan means a plan established and qualified under
IRC Section 401 or 403, which provides for individual accounts for
each participant therein and for benefits based solely on the amount
contributed to each participant's account and any income and expenses
or gains or losses (both realized and unrealized) which may be
allocated to such accounts.
1.15 Delayed Retirement Date means the date of the Participant's
termination of employment after his Normal Retirement Date.
1.16 Disability Retirement Date means the date the Administrative Committee
determines that a Participant has a Total and Permanent Disability.
1.17 Early Retirement Date means the date of the Participant's termination
of employment prior to his Normal Retirement Date provided that the
Participant has attained the age of fifty-five (55).
1.18 Effective Date means July 1, 1980, or such later date as of which an
Employer adopts the Plan for its Employees. The effective date of this
amended and restated Plan shall be October 1, 1998.
1.19 Employee means any person employed by the Employer excluding any
person (a) considered a leased employee within the meaning of IRC
Section 414(n); (b) who is represented by a collective bargaining unit
for purposes of bargaining with the Employer with respect to wages,
hours of employment or other conditions of employment unless
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<PAGE>
the resulting bargaining agreement provides for participation in the
Plan; and (c) any employee holding the job "Homemaker", job number
0068.
A leased employee is a person other than an employee of the
Employer who pursuant to an agreement between the Employer and any
other person (leasing organization) has performed services for the
Employer or for the Employer and related persons, determined in
accordance with IRC Section 414(n)(6), on a substantially full time
basis for a period of at least one year, and such services are
performed under primary direction or control of the Employer or
related persons. Contributions or benefits provided a leased employee
by the leasing organization which are attributable to services
performed for the Employer shall be treated as provided by the
Employer.
1.20 Employer means, collectively or individually as the context may
indicate, the Corporation and any other corporation which (a) is a
member of the same controlled group of corporations as the Corporation
[as determined pursuant to IRC Sections 414(b), 414(c), 414(m) and
414(o)], (b) the Board has authorized to adopt the Plan and (c) by
taking appropriate action has adopted the Plan and become signatory to
the Trust Agreement, or any successor to one or more of such entities.
1.21 Employer Contributions means Employer Matching Contributions made by
an Employer pursuant to Section 3.02 and Profit Sharing Matching
Contributions made by an Employer pursuant to Section 3.08.
1.22 Employer Matching Contributions means matching Contributions made by
an Employer pursuant to Section 3.02.
1.23 Employer Matching Contributions Account means that portion of a
Participant's Individual Account attributable to the Employer Matching
Contribution allocated to such Participant pursuant to Section 5.04
and the proportionate share of the adjustment of the Fund determined
in accordance with Section 5.07 attributable to his Employer Matching
Contributions Account. The Employer Matching Contributions Account may
6
<PAGE>
include amounts transferred to this Plan in a plan-to-plan transfer as
specified in an Appendix and/or in an appropriate adoption agreement.
1.24 Employment Date means the date an Employee first performs an Hour of
Service for the Employer, except that with respect to an Employee who
was in the employ of the Employer on January 1, 1987, the term
"Employment Date" shall mean the most recent date coincident with or
immediately preceding January 1, 1987, on which such Employee first
performed an Hour of Service either for the first time or after being
reemployed.
1.25 Entry Date means the first day of any month coinciding with or next
following the date on which the eligibility requirements of Section
2.01 are met.
1.26 ERISA means the Employee Retirement Income Security Act of 1974, as
amended. Any reference to any Section of ERISA shall be deemed to
include any applicable regulations pertaining to such Section.
1.27 Fiduciary means the Corporation, Employer, Trustee, Administrative
Committee, Investment Committee and any individual, corporation, firm
or other entity which assumes, in accordance with Article IX,
responsibilities of the Corporation, Employer, Trustee, Administrative
Committee or Investment Committee respecting management of the Plan or
the disposition of its assets.
1.28 Forfeiture means any amount held upon termination of employment of a
Participant which he is not entitled to receive as a distribution in
accordance with the terms of Article VI.
1.29 Fund means the trust fund created in accordance with Article VIII.
1.30 Hardship means, with respect to the determination of certain
withdrawal rights hereunder, a withdrawal authorized by the
Administrative Committee based upon a finding that the following rules
are satisfied.
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1.30(a) The withdrawal is necessary to enable the Participant to
meet unusual or special situations in his financial affairs
which result in an immediate and heavy financial need.
1.30(b) The amount of the withdrawal is not available from other
resources of the Participant.
1.30(c) The amount distributed does not exceed the amount required
to meet the immediate financial need created.
1.30(d) In furtherance of Section 1.30(a), a financial Hardship
shall be deemed to be present if the withdrawal request is
on account of:
(i) Medical expenses described in IRC Section 213(d)
incurred by the Participant, the Participant's
spouse or any dependents of the Participant (as
defined in IRC Section 152);
(ii) Purchase (excluding mortgage payments) of a
principal residence for the Participant;
(iii) Payment of tuition and related fees for the next
twelve (12) months of post-secondary education for
the Participant, his spouse, children or
dependents (as defined in IRC Section 152);
(iv) The need to prevent the eviction of the
Participant from his principal residence or
foreclosure on the mortgage on the Participant's
principal residence;
(v) Payment of funeral expenses and unreimbursed
medical expenses related to the last illness of a
member of the Participant's immediate family;
(vi) Loss by the Participant or his spouse of more than
fifty percent (50%) of normal income;
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<PAGE>
(vii) Payment of an outstanding court ordered judgment
greater than five hundred dollars ($500); or
(viii) Such other events as may be determined by the
Internal Revenue Service.
1.30(e) The Administrative Committee shall make a determination of
Hardship on the basis of all relevant facts and
circumstances that the distribution is of an amount
necessary to satisfy the financial need and that it is not
available from other resources of the Participant. The
Administrative Committee may rely upon reasonable
representations by the Participant that the need cannot
otherwise be satisfied by:
(i) Reimbursement or compensation by insurance or
otherwise;
(ii) Reasonable liquidation of the Participant's assets
to the extent the liquidation would not itself
cause an immediate and heavy financial need;
(iii) The cessation of Pre-Tax Contributions under this
Plan or other plans maintained by the Employer;
(iv) By other distributions or nontaxable (at the time
of the loan) loans from this Plan and any other
plans maintained by the Employer or any other
employer; or
(v) By borrowing from commercial sources on reasonable
commercial terms.
1.31 Highly Compensated Employee means, effective as of January 1, 1997:
1.31(a) An Employee who:
(i) Was a 5% Owner of the Employer at any time during
the Plan Year or the preceding Plan Year, or
(ii) Received Compensation from the Employer in excess
of $80,000 during the preceding Plan Year and, to
the extent elected by the Committee pursuant to
applicable Treasury Regulations, was in the top
20% of Employees when ranked on the basis of
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<PAGE>
Compensation (the "top-paid group") paid during
such preceding Plan Year. The $80,000 limit shall
be adjusted pursuant to IRC Sections 414(q) and
415(d).
For purposes of determining Highly Compensated Employees,
Compensation shall mean Maximum Compensation but including
Pre-Tax Contributions and any elective contributions under a
cafeteria plan or under any other arrangements permitted
under IRC Section 414(s) and any imputed income from
group-term life insurance.
1.31(b) Any former employee shall be treated as a Highly Compensated
Employee if such employee was a Highly Compensated Employee
(i) when he terminated employment, or (ii) in any year
following attainment of age fifty-five (55). In addition, an
employee who works only a de minimis amount of service may
be considered a Highly Compensated Employee.
1.31(c) The following employees shall be excluded for purposes of
determining who is in the top-paid group under Section
1.31(a)(ii):
(i) employees who have not completed six (6) months of
service;
(ii) employees who normally work less than seventeen
and one-half (17 1/2) hours per week;
(iii) employees who normally work not more than six (6)
months during any year;
(iv) employees who have not attained age twenty-one
(21);
(v) except to the extent provided in regulations,
employees who are included in a collective
bargaining agreement between employee
representatives and an Employer or Affiliate; and
(vi) employees who are nonresident aliens and who
receive no earned income [within the meaning of
IRC Section 911(d)(2)] from an Employer or
Affiliate which constitutes income from sources
within the United States [within the meaning of
IRC Section 861(a) (3)].
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<PAGE>
1.31(d) For purposes of this Section 1.31, the term "5% Owner" shall
have the same meaning as specified in IRC Section 416(i).
1.32 Hour of Service means the sum of Section 1.32(a), Section 1.32(b),
Section 1.32(c) and Section 1.32(d) following:
1.32(a) Each hour for which an Employee is paid, or entitled to
payment for the performance of duties for the Employer.
These hours shall be credited to the Employee for the
computation period in which the duties are performed.
1.32(b) Each hour for which an Employee is paid, or entitled to
payment, by the Employer on account of a period of time
during which no duties are performed (irrespective of
whether the employment relationship has terminated) due to
vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, or leave of absence. No more
than five hundred one (501) Hours of Service shall be
credited under this Section 1.32(b) for any single
continuous period (whether or not such period occurs in a
single computation period). Hours of Service under this
paragraph shall be calculated and credited pursuant to
Department of Labor Regulations Section 2530.200b-2 which
are incorporated herein by this reference; and
1.32(c) Each hour for which an Employee presumably would have
performed services for and been compensated by the Employer
but for the fact that the Employee was on a military leave
of absence for service in the armed forces of the United
States of America, provided that the Employee entered such
service directly from the employ of the Employer and was
discharged from such service and reemployed by the Employer
within the period during which his employment rights as a
veteran are protected by law.
1.32(d) Each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the Employer. The
same Hours of Service shall not
11
<PAGE>
be credited both under Section 1.32(a) or Section 1.32(b),
as the case may be, and under this Section 1.32(d). These
hours shall be credited to the Employee for the computation
period or periods to which the award or agreement pertains
rather than the computation period in which the award,
agreement or payment is made; and
1.32(e) Hours of Service to be credited under the Plan shall be
determined on the basis of the actual hours for which an
Employee is paid or entitled to payment. However, any
Employee for whom no hourly employment records are kept by
the Employer shall be credited with ninety-five (95) Hours
of Service for each semi-monthly payroll period in which he
would have been credited with at least one (1) Hour of
Service under the foregoing provisions if hourly records
were available.
1.32(f) Notwithstanding any provisions of this Plan to the contrary,
contributions, benefits and service credit with respect to
qualified military service shall be provided in accordance
with the Uniformed Services Employment and Reemployment
Rights Act of 1994 ("USERRA") and the special rules relating
to veterans' reemployment rights under USERRA pursuant to
IRC Section 414(u).
1.33 Individual Account means the detailed record kept of the amounts
credited or charged to each Participant in accordance with the terms
of this Plan. The Individual Account is comprised of a Pre-Tax
Contribution Account, an After-Tax Contribution Account, an Employer
Matching Contributions Account, a Profit Sharing Matching
Contributions Account, a Rollover Account and a Transfer Account, if
applicable. The Participant's Individual Account may include any
subaccounts deemed necessary to provide appropriate recordkeeping as
determined by the Administrative Committee.
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1.34 IRC means the Internal Revenue Code of 1986, as amended. Any reference
to any section of the IRC shall be deemed to include any applicable
regulations and rulings pertaining to such section and shall also be
deemed a reference to comparable provisions of future laws.
1.35 Investment Committee means the Investment Committee provided for in
Section 9.05.
1.36 Investment Manager means a person or entity, as defined in ERISA
Section 3(38), which has the power to manage, acquire, or dispose of
Plan assets and which is either:
1.36(a) an investment advisor registered under the Investment
Advisors Act of 1940; or
1.36(b) a bank as defined in the Investment Advisors Act of 1940; or
1.36(c) an insurance company qualified to manage assets of
retirement plans or perform similar functions under the laws
of more than one state; and which acknowledges in writing
that it is a Fiduciary with respect to the Plan.
1.37 Limited Participant means a Participant whose participation in the
Plan has ceased as a result of (i) his transfer of employment from a
participating Employer to the employment of an Affiliate or (ii) whose
employment status changes to "Homemaker", job number 0068 or a
collective bargaining employee as specified in Section 1.19.
1.38 Limitation Year means the twelve (12) month period commencing on
January 1 and ending on December 31.
1.39 Maximum Compensation means, effective January 1, 1998, a Participant's
total earnings, prior to withholding, paid to him by his Employer
during a Program Year, including bonuses, extra compensation, overtime
payments, Pre-Tax Contributions under this Plan, and any other amounts
which the Participant could have elected to receive as cash in the
current year as taxable income in lieu of a non-taxable benefit under
a plan which is maintained by the Employer pursuant to Internal
Revenue Code Section 125.
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Maximum Compensation for any Limitation Year is the compensation
actually paid or included in gross income during such year. Maximum
Compensation shall be limited to one hundred fifty thousand dollars
($150,000) or such legislated amount as may be determined by the
Secretary of the Treasury pursuant to IRC Section 401(a)(17).
This definition shall be interpreted consistent with IRC Section
415. Further, such law and regulations shall be controlling in all
determinations under this definition, inclusive of any provisions and
requirements stated thereunder but hereinabove absent.
1.40 Non-Highly Compensated Employee means any Employee who is not a Highly
Compensated Employee.
1.41 Normal Retirement Age means the date a Participant attains the age of
sixty-five (65).
1.42 Normal Retirement Date means the date on which a Participant attains
his Normal Retirement Age.
1.43 Parent means Trigon Healthcare, Inc., the parent corporation of the
Corporation.
1.44 Participant means any Employee who becomes a Participant as provided
in Article II.
1.45 Plan means the "Employees' Thrift Plan of Trigon Insurance Company."
Before March 7, 1997, the name of the Plan was "Employees' Thrift Plan
of Trigon Blue Cross Blue Shield."
1.46 Plan Year means initially the six (6) month period beginning July 1,
1980, and ending on December 31, 1980. Thereafter, Plan Year shall
mean the twelve (12) month period beginning on each January 1 and
ending on each December 31.
1.47 Pre-Tax Contribution Account means that portion of a Participant's
Individual Account attributable to Pre-Tax Contributions allocated to
such Participant pursuant to Section 5.03 and the proportionate share
of the adjustment of the Fund determined in accordance with Section
5.07 attributable to his Pre-Tax Contribution Account. The Pre-Tax
Contribution Account may include amounts transferred to this Plan in a
plan-to-plan transfer as specified in an Appendix and/or in an
applicable adoption agreement.
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1.48 Pre-Tax Contributions means Contributions made by an Employer on the
Participant's behalf pursuant to Section 3.01.
1.49 Profit Sharing Matching Contribution means Contributions made by an
Employer pursuant to Section 3.08.
1.50 Profit Sharing Matching Contributions Account means that portion of a
Participant's Individual Account attributable to the Profit Sharing
Matching Contribution allocated to such Participant pursuant to
Section 5.11 and the proportionate share of the adjustment of the Fund
determined in accordance with Section 5.07 attributable to his Profit
Sharing Matching Contributions Account.
1.51 Reemployment Date means the date, following a Severance Period, on
which an Employee again performs an Hour of Service.
1.52 Rollover Account means the portion of the Individual Account
established on behalf of an Employee to hold the amount he elects to
rollover into this Plan pursuant to IRC Section 402(c)(4) and the
Participant's proportionate share of the adjustment of the Fund
determined in accordance with Section 5.07 attributable to his
Rollover Account. The Administrative Committee may establish
subaccounts within the Rollover Account as it deems applicable. All
amounts held in a Participant's Rollover Account shall at all times be
one hundred percent (100%) vested.
1.53 Rollover Contributions means Rollover Contributions made to the Fund
pursuant to Section 3.03.
1.54 Service means, as of any date, the aggregate of an Employee's periods
of Service required to be recognized under this Plan commencing on the
Employee's Employment Date or any Reemployment Date subsequent thereto
and ending on a Severance from Service Date. For purposes of this
Section 1.54, each completed month shall be counted as Service
hereunder.
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1.54(a) For purposes of determining Service for vesting under
Section 6.01, the following provisions shall be applicable.
(i) For purposes of determining Service under Section
6.01(c) only, periods of employment with any
Affiliate shall be included as if the Employee had
been employed by the Employer for such time.
(ii) For purposes of determining Service under Section
6.01(c) only, periods of employment with any other
Blue Cross and/or Blue Shield organization shall
be included as if the Employee had been employed
by the Employer for such time if:
(A) the Employee was vested in a Defined Benefit
Plan sponsored by the other organization, or
(B) the period between the Employee's termination
with the other organization and his employment with an
Employer is not greater than the lesser of five years
or the Employee's period of employment with the other
organization.
In addition, the Employee's period of employment
with another Blue Cross and/or Blue Shield organization
is not counted as part of an Employee's Severance
Period for purposes of Section 6.01(c) only.
(iii) If the Employee was not a Participant and his
Reemployment Date is before his Severance from
Service Date, the Employee shall be credited with
Service as if the Employee had not terminated
employment, subject to Section 1.55(e) relating to
service crediting during a maternity or paternity
absence.
(iv) If the Employee was not a Participant and his
Reemployment Date is after his Severance from
Service Date, the Employee shall be credited with
the Service prior to his Severance from Service
Date if the
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Employee's Severance Period is greater than the
lesser of five years or the Employee's period of
Service prior to the Severance Period.
(v) The following rule shall be applicable to
Employees employed by Blue Cross and Blue Shield
of Virginia on and/or before December 31, 1986. If
an Employee was a Participant in the Employees'
Thrift Plan of Blue Cross and Blue Shield of
Virginia on and/or before such date and is
subsequently eligible for a reinstatement of his
Individual Account applicable to Forfeitures
occurring prior to January 1, 1987, and elects to
reinstate said amount pursuant to Section 6.01,
Service for purposes of Section 6.01 shall be
applied to such reinstated Employer Contributions
by crediting twelve (12) months of Service for
each prior class year of forfeiture.
(vi) The following rule shall be applicable to
Employees participating in the Blue Cross and Blue
Shield of Southwestern Virginia Employee
Appreciation Savings Plan on and/or before
December 31, 1986. If a Participant is
subsequently eligible for a reinstatement of his
Individual Account applicable to Forfeitures
occurring prior to January 1, 1987, and elects to
reinstate said amount pursuant to Section 6.01,
Service for purposes of Section 6.01 shall be
applied to such reinstated Employer Contributions
by crediting service as determined under the Blue
Cross and Blue Shield of Southwestern Virginia
Employee Appreciation Savings Plan through
December 31, 1986. To this end, if a Participant
has a Plan Year of Service under the Employee
Appreciation Savings Plan, each such period shall
be deemed to be twelve (12) months of Service
hereunder.
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1.54(b) For purposes of determining Service for eligibility under
Section 2.01, the following provisions shall be applicable.
(i) Periods of employment with an Affiliate which
would have constituted Service had the Participant
been employed by the Employer shall be included as
if such periods had been performed for the
Employer.
(ii) Periods of employment with the Employer other than
as an Employee which would have constituted
Service had the Participant been employed as an
Employee shall be included as if such periods had
been performed as an Employee.
(iii) For purposes of determining Service for
eligibility under Section 2.01, periods of
employment with any Affiliate shall be included as
if the Employee had been employed with the
Employer for such time. Periods of employment with
any other Blue Cross and/or Blue Shield
organization shall not be included for such
determination.
(iv) If the Employee was not a Participant and his
Reemployment Date is before his Severance from
Service Date, the Employee shall be credited with
Service as if the Employee had not terminated
employment.
(v) If the Employee was not a Participant and his
Reemployment Date is after his Severance from
Service Date, the Employee shall be credited with
the Service prior to his Severance from Service
Date if the Employee's Severance Period is greater
than the lesser of five years or the Employee's
period of Service prior to the Severance Period.
1.55 Severance from Service Date means the earlier of the following:
1.55(a) The date on which an Employee quits, retires, is discharged
or dies, provided he is not credited with an Hour of Service
within twelve (12) months of such date with an Employer or
Affiliate; or
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1.55(b) The first anniversary date of the beginning of a period in
which an Employee remains absent from service (with or
without pay) with the Employer or Affiliate for any reason
other than quitting, retiring, being discharged or dying.
Such absence includes, by way of example without limitation:
vacation, holiday, sickness, leave of absence or a period of
paid or unpaid leave taken pursuant to the Family and
Medical Leave Act of 1993, or layoff or service in the armed
forces of the United States of America required by law or
during a period of war or national emergency, provided that
the Employee entered such service directly from the employ
of the Employer, and was discharged from such service and
reemployed by the Employer within the period during which
his employment rights as a veteran are protected by law.
1.55(c) Notwithstanding anything in this Section 1.55 to the
contrary, effective for periods prior to January 1, 1985, no
Severance from Service Date shall occur and all completed
years and months of service shall be aggregated if the
Employee is rehired by the Employer prior to the expiration
of twelve (12) complete months following the date the
Employee quits, retires or is discharged. Effective for
periods on and after January 1, 1985, no Severance from
Service Date shall occur and all completed years and months
of service shall be aggregated if the Employee is rehired by
the Employer prior to the expiration of five (5) consecutive
Plan Years, beginning with the Plan Year in which the
Employee separates from service.
1.55(d) For periods commencing on or after January 1, 1985, and to
the extent not already credited, Service shall be credited
solely for purposes of determining whether a Severance from
Service Date has occurred with respect to an Employee who is
absent from work regardless of whether the Employee is paid
for such absence:
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(i) By reason of the pregnancy of the Employee,
(ii) By reason of the birth of a child of the Employee,
(iii) By reason of the placement of a child with the
Employee in connection with the adoption of such
child by such Employee, or
(iv) For purposes of caring for such child for a period
beginning immediately following such birth or
placement.
1.55(e) For purposes of determining a Severance from Service Date of
an Employee who is absent from service beyond the first
anniversary of the first day of absence by reason of a
maternity or paternity absence described in Section 1.55(d),
such Severance from Service Date shall be the second (2nd)
anniversary of the date of such absence. The period between
the first and second anniversaries of the first day of
absence from work is neither a period of Service nor a
Severance Period.
1.55(f) Further, the Administrative Committee may request that the
Employee furnish any information the Administrative
Committee may require to establish that the absence is for
the reasons hereinbefore provided and the number of days for
which there was such an absence. If such information is not
submitted in a timely manner, no Hours of Service shall be
credited pursuant to this paragraph.
1.56 Severance Period means a period of time commencing on an Employee's
Severance from Service Date and ending on his subsequent Reemployment
Date.
1.57 Total and Permanent Disability means the incapacity of a Participant
by reason of bodily injury or physical or mental disease which
prevents the Participant from performing his customary duties with the
Employer and which, in the opinion of the Administrative Committee,
will continue to prevent the Participant from performing his customary
duties for the remainder of his lifetime. Total and Permanent
Disability shall be determined by
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the Administrative Committee in accordance with uniform principles
consistently. Total and Permanent Disability is determined by the
Administrative Committee in accordance with uniform principles
consistently applied on the basis of competent medical evidence or
such other evidence as the Administrative Committee may deem
sufficient or on the basis that the Participant is eligible for
disability benefits under the long term disability plan sponsored by
the Employer.
The date when a Participant's disability occurred shall be
determined by the Administrative Committee. A Participant shall not,
however, be considered disabled if the Administrative Committee
determines that his disability resulted from or arose as a result of:
1.57(a) service in the armed forces of any country;
1.57(b) intentionally self-inflicted injury;
1.57(c) participation in a felonious criminal act which results in
the Participant's conviction in a court of law.
1.58 Transfer Account means the account established for a Participant to
hold the value of funds directly transferred to the Plan from another
qualified retirement plan that is not considered a Rollover
Contribution. The Administrative Committee may establish subaccounts
within the Transfer Account as it deems appropriate. The Participant
shall be vested in his Transfer Account as provided in an appropriate
adoption agreement or an Appendix to the Plan.
1.59 Trigon Stock means common stock issued by Trigon Healthcare, Inc.
1.60 Trigon Stock Fund means the invest fund maintained under the Plan for
the investment of Participants' Individual Accounts in Trigon Stock.
1.61 Trust Agreement means the agreement entered into between the Employer
and the Trustee pursuant to Article VIII.
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1.62 Trustee means such individual, individuals or financial institution,
or a combination of them as shall be designated in the Trust Agreement
to hold in trust any assets of the Plan for the purpose of providing
benefits under the Plan, and shall include any successor trustee to
the trustee initially designated thereunder.
1.63 Valuation Date means each business day in which the New York Stock
Exchange is open as of which the Fund shall be valued at fair market
value.
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ARTICLE II
ELIGIBILITY AND PARTICIPATION
2.01 Eligibility - Each person who was a Participant on September 30, 1998,
shall continue as a Participant after such date, subject to the
provisions hereinafter contained.
Each person, other than a temporary employee, who was not a
Participant on September 30, 1998, and each person who becomes an
Employee after such date and who is not already a Participant shall be
eligible to become a Participant on the Entry Date coinciding with or
next following the completion of three (3) months of Service,
subsequent to the date on which he completed his first Hour of
Service. A temporary employee shall be eligible to become a
Participant on the Entry Date coinciding with or next following the
date on which he has completed 12 months of Service in which he has at
least 1,000 Hours of Service. For a temporary employee, the first 12
months of Service will commence on his Employment Date. For purposes
of this section, a temporary employee is any person deemed to be a
temporary employee in accordance with the Employer's established human
resources policy. Subsequent periods shall be calculated on the basis
of Plan Years beginning with the first Plan Year beginning after the
Employment Date.
Employees of an Affiliate who have otherwise met the eligibility
requirements hereunder shall be eligible to participate on the Entry
Date coincident with or next following the date they are employed by
an Employer.
If an Employee ceases to be a Participant due to his termination
of employment and is later reemployed, he shall be eligible to
participate on his Reemployment Date.
2.02 Participation - Participation in the Plan is voluntary. In order to
become a Participant, an Employee must complete an application form
prior to the Entry Date as of which it is to be effective and as of
which he is eligible. Each eligible Employee, in order to become a
Participant, must have Pre-Tax Contributions contributed on his behalf
to the Plan in
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accordance with Section 3.01. If an Employee does not participate when
initially eligible, he may elect to participate effective as of any
subsequent pay period. For periods prior to January 1, 1987, any
Employee meeting the eligibility requirements of Section 2.01 was also
a Participant by electing to make Deductible Contributions pursuant to
Section 5.05.
Once a Participant, an Employee shall remain a Participant until
such time that he has no balance in his Individual Account.
2.03 Limited Participants - A Participant whose employment status changes
to that of a Limited Participant shall be treated as a Limited
Participant as of the date of the change in employment status. A
Limited Participant shall continue to earn Service under Section 6.01
for each month he is a Limited Participant. A Limited Participant may
not make Pre-Tax Contributions and is not eligible to receive Employer
Matching Contributions or Profit Sharing Matching Contributions. A
Limited Participant shall continue to be eligible for withdrawals
pursuant to the provisions of Sections 7.01, 7.02, 7.03, 7.04, 7.05
and 7.06 but shall not be eligible for loans pursuant to Section 7.07.
A Limited Participant who had a loan outstanding at the time he became
a Limited Participant shall be required to continue repaying such loan
under the provisions of Section 7.07. A Limited Participant shall
continue to be eligible to make investment option elections pursuant
to the provisions of Sections 4.01 and 4.02. If a Limited Participant
subsequently transfers to the employment of an Employer or changes
employment status to that of an Employee, he shall be eligible to
participate in the Plan as of the date he becomes an Employee of an
Employer at which time he shall have all the rights provided in
accordance with this Plan.
2.04 Designation of Beneficiary - Upon commencing participation, each
Employee shall designate a Beneficiary on forms furnished by the
Administrative Committee. A Participant from time to time may change
his designated Beneficiary by written notice to
24
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the Administrative Committee, and upon such change, the rights of all
previously designated Beneficiaries to receive any benefits under this
Plan shall cease. If, at the date of death of the Participant, no duly
designated Beneficiary exists, or if the Beneficiary designated had
died prior to the death of the Participant, or if the Participant has
revoked a prior designation by a writing filed with the Administrative
Committee without having filed a new designation, then any death
benefits which would have been payable to the Beneficiary shall be
payable to the Participant's spouse, if living at the time of the
Participant's death. If his spouse is not living, such death benefits
shall be payable per stirpes to the Participant's then living lawful
issue, or if there is no living lawful issue, then to the
Participant's estate.
If a Beneficiary designated by a Participant is not the
Participant's spouse, then the spouse's written consent shall be
required for the designation of the alternate Beneficiary to become
effective and such consent must acknowledge the effect of the consent.
The Spouse's consent shall be witnessed by a representative of the
Administrative Committee or a notary public. Any change in the
designation of an alternate Beneficiary shall also require the written
consent of the spouse for such change to become effective. The
Administrative Committee may accept an election other than that
provided hereunder without the written consent of the spouse if there
is no spouse, the spouse cannot be located, or such other
circumstances exist as may be prescribed by regulations. Any spousal
consent shall be applicable only to the spouse granting such consent.
25
<PAGE>
ARTICLE III
CONTRIBUTIONS
3.01 Pre-Tax Contributions - Commencing July 1, 1984, a Participant may
elect to have Pre-Tax Contributions made to the Plan on his behalf. A
Participant shall make such an election by entering into a salary
reduction agreement with his Employer in which it is agreed that the
Participant's Employer will reduce the Participant's Compensation
during each pay period by a designated percentage and contribute the
amount so determined, expressed as a percentage of Compensation, to
the Plan on behalf of the Participant. The designated percentage
elected by the Participant to be contributed on his behalf may be any
whole percentage from two percent (2%) to not more than sixteen
percent (16%) of his Compensation otherwise payable to the Participant
during the pay period.
All Pre-Tax Contribution elections shall be made prior to the
Entry Date as of which they are to be effective on appropriate forms
provided by the Administrative Committee or through interactive voice
response. Such forms shall authorize the Employer to deduct from the
Compensation thereafter payable to the Participant the Pre-Tax
Contribution amount so elected. A Participant's Pre-Tax Contributions
shall be made only by withholding from his paychecks and no
Participant may contribute cash to the Plan (other than pursuant to a
repayment under Section 6.01). Pre-Tax Contributions shall commence
for Participants on the first regular payday falling on or after July
1, 1984, and thereafter, the payday falling on or after the Entry Date
subsequent to the acceptance of such salary reduction agreement by the
Employer. In the absence of an election to enter into a salary
reduction agreement by the Participant, an eligible Employee shall
nevertheless be considered a Participant hereunder for purposes of
Section 3.04.
A Participant's designation of Pre-Tax Contributions shall
continue in force for future Plan Years. Under procedures established
by the Administrative Committee, a
26
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Participant may change his Pre-Tax Contribution percentage to any
percentage prescribed in this Section 3.01 to become effective as of
any subsequent pay day, but not retroactively.
Under procedures established by the Administrative Committee, a
Participant may elect to cease future Pre-Tax Contributions to the
Plan. A Participant who has suspended Pre-Tax Contributions may once
again elect to have Pre-Tax Contributions made on his behalf as of any
subsequent pay day by making a timely and proper application to the
Administrative Committee or through interactive voice response. A
Participant may not make Pre-Tax Contributions after his termination
of employment with the Employer.
3.02 Employer Matching Contributions - Concurrently with Pre-Tax
Contributions, each Employer shall contribute to the Plan for the
account of each Participant an amount equal to fifty percent (50%) of
the Pre-Tax Contributions made for a pay period up to a maximum
Pre-Tax Contribution of six percent (6%) of Compensation for such pay
period made to the Plan on the Participant's behalf. No Employer
Matching Contribution shall be made for any pay period during which
the Participant did not make a Pre-Tax Contribution.
If an Employee does not receive an Employer Matching Contribution
due to the absence of an election to make Pre-Tax Contributions, he
shall nevertheless be considered a Participant hereunder for purposes
of Section 3.05.
3.03 Rollover Contributions - An Employee may transfer to the Fund assets
initially distributed as a qualifying total distribution [determined
pursuant to IRC Section 402(c)(4)] within sixty (60) days of the date
the assets were distributed to the Employee. Nothing in this Section
3.03 shall be construed as requiring the transfer of the entire
qualifying total distribution and to that end an amount less than the
entire qualifying total distribution may be accepted as a Rollover
Contribution. The transfer of such assets
27
<PAGE>
shall not include (a) any assets attributable to contributions made on
his behalf under a qualified retirement plan while he was an employee
within the meaning of IRC Section 401(c)(1), (b) any assets
representing after-tax employee contributions or (c) any assets which
would cause this Plan to become a transferee plan pursuant to IRC
Section 401(a)(11)(B). The Plan may accept rollover funds transferred
from a rollover individual retirement account and transfers from other
qualified plans not excluded in the preceding sentence. The
Administrative Committee shall determine the rules under which such
distribution shall be accepted and the procedures to be followed.
Any subsequent distribution of a Rollover Contribution shall be
subject to the terms of Article VI, Section 7.03, Section 7.05,
Section 7.06, or Section 7.07.
3.04 Testing of Pre-Tax Contributions -
3.04(a) Notwithstanding anything herein to the contrary, in each
Plan Year commencing on and after January 1, 1987, in which
Pre-Tax Contributions not in excess of the maximum additions
set forth in IRC Section 415 are made to the Plan, such
Pre-Tax Contributions shall be subject to the following
tests. For purposes of these tests, all Pre-Tax
Contributions made under any plans that are aggregated for
purposes of IRC Section 410(b) [without regard to IRC
Section 410(b)(2)(A)(ii)] shall be treated as made under a
single plan of the Employer and such aggregated plans must
satisfy IRC Section 401(k) as though they were a single
plan. Effective for Plan Years commencing on and after
January 1, 1990, plans may be aggregated only if they have
the same plan year.
3.04(b) Pre-Tax Contributions under this Plan and pre-tax
contributions under all other cash or deferred arrangements
of the Employer or Affiliate with plan years ending with or
within the same calendar year made on behalf of Highly
Compensated Employees shall be combined for purposes of
these tests.
28
<PAGE>
These tests shall apply to the Pre-Tax Contributions made
for the Plan Year as determined as of the end of the Plan
Year. The Employer, however, may apply these tests at any
other time during the Plan Year.
Upon the application of the tests prior to the end of
the Plan Year if neither test is met, the Administrative
Committee may adjust the Highly Compensated Employee's
election to the extent necessary to meet either test. The
adjustment of Pre-Tax Contributions shall be done in a
uniform and nondiscriminatory manner.
Upon the application of the tests at the end of the
Plan Year if neither test is met, the Administrative
Committee shall adjust the Highly Compensated Employees'
Pre-Tax Contributions to the extent necessary to meet one of
the tests. The adjustment of Pre-Tax Contributions shall be
done using the method of reducing the excess Pre-tax
Contributions of Highly Compensated Employees as described
in IRC Section 401(k)(8)(C), and the Treasury regulations,
and guidance promulgated thereunder.
3.04(c) The amount of the adjustment of Pre-Tax Contributions,
inclusive of earnings or losses, necessary to meet either
test shall be returned to the Highly Compensated Employee,
within twelve (12) months after the end of the Plan Year. If
amounts are returned after two and one-half (2 1/2) months
after the end of the Plan Year, a ten percent (10%) excise
tax under IRC Section 4979 shall be imposed on the Employer
maintaining the Plan with respect to such amounts. For
purposes of determining the earnings or losses on Pre-Tax
Contributions which will be returned to the Highly
Compensated Employee, such earnings or losses shall include
the earnings or losses of the Fund determined in accordance
with Section 5.07 attributable to such Pre-Tax
29
<PAGE>
Contributions for the Plan Year during which the excess
Pre-Tax Contributions were made.
The amount of excess Pre-Tax Contributions that may be
distributed shall be reduced by the amount of any excess
Pre-Tax Contributions previously distributed in the
Participant's taxable year ending with or within the
applicable Plan Year.
3.04(d) It is specifically provided hereunder that any Employer
Matching Contributions and Profit Sharing Matching
Contributions shall be conditioned upon permissible Pre-Tax
Contributions. Pre-Tax Contributions shall only be
permissible to the extent that they meet the
nondiscrimination tests provided herein. If such
nondiscrimination tests require the return of excess Pre-Tax
Contributions, the corresponding Employer Matching
Contribution and Profit Sharing Matching Contribution shall
not be made to the Plan. If Employer Matching Contributions
or Profit Sharing Matching Contributions have already been
made to the Plan prior to the time the following tests are
performed, such Employer Matching Contribution or Profit
Sharing Matching Contribution, inclusive of earnings or
losses, shall be forfeited and used to reduce the Employer
Contributions to the Plan. For purposes of determining the
earnings or losses on Employer Contributions which are
forfeited hereunder and used to reduce Employer
Contributions, such earnings or losses shall include the
earnings or losses of the Fund determined in accordance with
Section 5.07 attributable to such Employer Contributions for
the Plan Year in which the Employer Contributions were made.
The determination of which test shall be met shall be
based upon the test which requires the adjustment of the
smallest amount of Pre-Tax Contributions.
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<PAGE>
The Administrative Committee shall establish rules and
procedures for modifying the election with respect to the
Highly Compensated Employees to ensure, to the extent
possible, that either of the tests will be met.
3.04(e) As of the last day of each Plan Year or more frequently as
determined by the Administrative Committee, all eligible
Employees shall be separated into two (2) groups -- the
Highly Compensated Employee group and the Non-Highly
Compensated Employee group.
Only one (1) of the following two (2) tests needs to be
satisfied for there not to be an adjustment to Pre-Tax
Contributions as provided in this Section 3.04.
Test I The actual deferral percentage for the eligible
Highly Compensated Employee group is not more than the
actual deferral percentage of the Non-Highly Compensated
Employee group multiplied by 1.25.
Test II The excess of the actual deferral percentage for the
Highly Compensated Employee group over the Non-Highly
Compensated Employee group is not more than two (2)
percentage points, and the actual deferral percentage for
the Highly Compensated Employee group is not more than the
actual deferral percentage of the Non-Highly Compensated
Employee group multiplied by 2.0.
3.04(f) For purpose of this Section, the actual deferral percentage
is the average of the ratios, calculated separately for each
Employee who is eligible to participate in the Plan, of (i)
the amount of Pre-Tax Contributions that are credited under
the Plan on behalf of the eligible Employee for the Plan
Year (including excess Pre-Tax Contributions returned to the
Employee and excluding Pre-Tax Contributions taken into
account in the actual contribution percentage test, provided
that the actual deferral percentage test is satisfied
31
<PAGE>
both with and without the exclusion of the Pre-Tax
Contributions allocated to each Employee) to (ii) the
Employee's Compensation as determined pursuant to IRC
Regulation 1.401(k)-1(g)(2)(i), uniformly applied for a
given Plan Year.
For any Plan Year beginning before January 1, 1997 in
which an eligible Highly Compensated Employee is considered
a Five Percent (5%) Owner or is one (1) of the ten (10)
Highly Compensated Employees paid the greatest Maximum
Compensation during the current or preceding Plan Year, the
actual deferral percentage must be determined in aggregation
with eligible "Family Member" Employees. A Family Member of
a Highly Compensated Employee is the Employee's spouse,
lineal ascendants or descendants, and the spouses of such
lineal ascendants or descendants who in the aggregate shall
be referred to as a "Family Group". For Plan Years beginning
after December 31, 1988, in calculating the combined
percentage for the Family Group, the Compensation of the
Employee, the Employee's spouse, and any lineal descendants
under the age of nineteen (19) shall be limited to one
hundred fifty thousand dollars ($150,000) as adjusted by the
Secretary of the Treasury.
3.04(g) All rules of application with reference to Test I and Test
II in Section 3.04(e) shall be governed by IRC Section
401(k) and any rules or regulations issued pursuant thereto.
3.05 Testing of Employer Contributions -
3.05(a) In each Plan Year in which Employer Contributions are made
to the Plan, such Employer Contributions shall be subject to
the following tests. For purposes of these tests, all
Employer Contributions made under this Plan and all matching
employer contributions made under any plans that are
32
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aggregated for purposes of IRC Section 410(b) [without
regard to IRC Section 410(b)(2)(A)(ii)] shall be treated as
made under a single plan of the Employer, and such
aggregated plans must satisfy IRC Section 401(m) as though
they were a single plan. Effective for Plan Years commencing
on and after January 1, 1990, plans may be aggregated only
if they have the same plan year.
3.05(b) The Employer Contributions under this Plan and matching
employer contributions under all other plans of the Employer
or Affiliate with plan years ending with or within the same
calendar year made on behalf of Highly Compensated Employees
shall be combined for purposes of these tests. These tests
shall apply to the Employer Contributions made for the Plan
Year as determined as of the end of the Plan Year. The
Employer, however, may apply these tests at any other time
during the Plan Year.
Upon the application of the tests prior to the end of
the Plan Year if neither test is met, the Administrative
Committee may adjust the Highly Compensated Employee's
Employer Contribution to the extent necessary to meet either
test. The adjustment of Employer Contributions shall be done
in a uniform and nondiscriminatory manner.
3.05(c) Upon the application of the tests at the end of the Plan
Year if neither test is met, Employer Contributions made on
behalf of Highly Compensated Employees shall be reduced. The
adjustment of Employer Contributions shall be done using the
method of reducing the excess Employer Contributions as
described in IRC Section 401(m)(6)(C), and the Treasury
regulations, and guidance promulgated thereunder. To the
extent that excess Employer Contributions were not vested,
then the excess Employer Contributions, inclusive of
earnings or losses, shall be forfeited and used to
33
<PAGE>
reduce Employer Contributions to the Plan. To the extent
that excess Employer Contributions would have been
considered vested under Section 6.01, then the excess
Employer Contributions inclusive of earnings or losses shall
be distributed to the Highly Compensated Employee within
twelve (12) months after the end of the Plan Year. If
amounts are distributed after two and one-half (2 1/2)
months after the close of the Plan Year, a ten percent (10%)
excise tax under IRC Section 4979 shall be imposed on the
Employer maintaining the Plan with respect to such amounts.
For purposes of determining the earnings or losses on
Employer Contributions which will be forfeited and used to
reduce Employer Contributions or distributed to the Highly
Compensated Employee, such earnings or losses shall include
the earnings of the Fund determined in accordance with
Section 5.07 attributable to such Employer Contributions for
the Plan Year during which the excess Employer Contributions
were made.
3.05(d) The determination of which test shall be met shall be based
upon the test which requires the adjustment of the smallest
amount of Employer Contributions.
The Administrative Committee shall establish rules and
procedures for modifying the election with respect to the
Highly Compensated Employees to ensure, to the extent
possible, that either of the tests will be met.
3.05(e) As of the last day of each Plan Year or more frequently as
determined by the Administrative Committee, all eligible
Employees shall be separated into two (2) groups -- the
Highly Compensated Employee group and the Non-Highly
Compensated Employee group.
Only one (1) of the following two (2) tests needs to be
satisfied for there not to be an adjustment as hereinabove
provided in this Section 3.05.
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Test I The actual contribution percentage for the eligible
Highly Compensated Employee group is not more than the
actual contribution percentage of the Non-Highly Compensated
Employee group multiplied by 1.25.
Test II The excess of the actual contribution percentage for
the Highly Compensated Employee group over the Non-Highly
Compensated Employee group is not more than two (2)
percentage points, and the actual contribution percentage
for the Highly Compensated Employee group is not more than
the actual deferral percentage of the Non-Highly Compensated
Employee group multiplied by 2.0.
3.05(f) For purposes of this Section, actual contribution percentage
means, with respect to the Highly Compensated Employee group
and Non-Highly Compensated Employee group for a Plan Year,
the average of the ratios, calculated separately for each
Employee in such group of (i) the amount of Employer
Contributions (to the extent not taken into account in the
actual deferral percentage test) and including, at the
election of the Employer, Pre-Tax Contributions provided the
actual deferral percentage test is met before the Pre-Tax
Contributions are used in the actual contribution percentage
test and continues to be met following the exclusion of the
Pre-Tax Contributions that are used to meet the actual
contribution percentage test allocated to each Employee) to
(ii) the Employee's Compensation as determined pursuant to
IRC Regulation 1.401(m)-1(f)(2), uniformly applied for a
given Plan Year.
For any Plan Year beginning before January 1, 1997 in
which an eligible Highly Compensated Employee is considered
a Five Percent (5%) Owner or is one (1) of the ten (10)
Highly Compensated Employees paid the greatest
35
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Maximum Compensation during the current or preceding Plan
Year, the actual contribution percentage must be determined
in aggregation with eligible "Family Member" Employees. A
Family Member of a Highly Compensated Employee is the
Employee's spouse, lineal ascendants or descendants, and the
spouses of such lineal ascendants or descendants who in the
aggregate shall be referred to as a "Family Group." In
calculating the combined percentage for the Family Group,
the Compensation of the Employee, the Employee's spouse, and
any lineal descendants under the age of nineteen (19) shall
be limited to one hundred fifty thousand dollars ($150,000)
as adjusted by the Secretary of the Treasury.
3.05(g) All rules of application with reference to Test I and Test
II in Section 3.05(e) shall be governed by IRC Section
401(m) and any rules or regulations issued pursuant thereto.
3.06 Multiple Use Limitation - If the Employer or an Affiliate sponsors one
(1) or more qualified plan(s) to which IRC Sections 401(k) and 401(m)
apply, additional rules shall be applicable to prevent the multiple
use of the alternative tests described in IRC Sections
401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii) with respect to any
Participant.
The multiple use of the alternative tests occurs if (i) one or
more Highly Compensated Employees are eligible to participate in a
plan subject to IRC Sections 401(k) and 401(m) and (ii) the sum of the
actual deferral percentage of the entire group of eligible Highly
Compensated Employees subject to IRC Section 401(k) and the actual
contribution percentage of the entire group of eligible Highly
Compensated Employees under the plan subject to IRC Section 401(m)
exceeds the "Aggregate Limit".
The Aggregate Limit is the sum of:
3.06(a) One hundred twenty-five percent (125%) of the greater of (i)
the actual deferral percentage of the group of Non-Highly
Compensated Employees
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<PAGE>
eligible under the plan subject to IRC Section 401(k) for
the plan year or (ii) the actual contribution percentage of
the group of Non-Highly Compensated Employees eligible under
the plan subject to IRC Section 401(m) for the plan year
beginning with or within the plan year of the plan subject
to IRC Section 401(k).
3.06(b) Two (2) plus the lesser of Section 3.06(a)(i) or
3.06(a)(ii). However, in no event shall this amount exceed
two hundred percent (200%) of the lesser of Section
3.06(a)(i) or 3.06(a)(ii).
Notwithstanding the preceding, the Aggregate Limit shall be the
sum of the following alternate Aggregate Limit if such alternate
Aggregate Limit is greater than the Aggregate Limit set forth above.
The alternate Aggregate Limit is the sum of:
3.06(c) One hundred twenty-five percent (125%) of the lesser of (i)
the actual deferral percentage of the group of Non-Highly
Compensated Employees eligible under the plan subject to IRC
Section 401(k) for the plan year, or (ii) the actual
contribution percentage of the group of Non-Highly
Compensated Employees eligible under the plan subject to IRC
Section 401(m) for the plan year beginning with or within
the plan year of the plan subject to IRC Section 401(k).
3.06(d) Two (2) plus the greater of Section 3.06(c)(i) or
3.06(c)(ii). However, in no event shall this amount exceed
two hundred percent (200%) of the greater of Section
3.06(c)(i) or 3.06(c)(ii).
If the Aggregate Limit is exceeded, the Employer may elect to
reduce the actual deferral ratios or the actual contribution ratios
either for all Highly Compensated Employees under the plan(s) or only
for those Highly Compensated Employees who are eligible in both
arrangements.
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3.07 Maximum Pre-Tax Contributions - Notwithstanding anything herein to the
contrary, Pre-Tax Contributions contributed pursuant to this Plan
shall not exceed seven thousand dollars ($7,000) or such larger amount
as may be determined by the Secretary of Treasury for any Participant
in any calendar year.
If Pre-Tax Contributions are made to the Plan in excess of this
limit, the excess, inclusive of earnings or losses, shall be returned
to the Participant by April 15 of the calendar year following the
calendar year in which the Pre-Tax Contributions were made. Further,
if the Participant notifies the Administrative Committee by March 1 of
the calendar year following the calendar year in which he made Pre-Tax
Contributions, that he contributed in excess of the seven thousand
dollar ($7,000) limit (as adjusted) to all plans to which the seven
thousand dollar ($7,000) limit (as adjusted) applies and requests a
return of such excess, the Administrative Committee shall return the
excess inclusive earnings or losses by April 15.
In the event the return of excess Pre-Tax Contributions pursuant
to this Section 3.07 causes a reduction of Pre-Tax Contributions, the
corresponding Employer Contributions shall be forfeited and used to
reduce Employer Contributions. To this end, the vesting provisions of
this Plan applicable to Employer Contributions are conditioned on
Pre-Tax Contributions being permissible Pre-Tax Contributions. Pre-Tax
Contributions in excess of the seven thousand dollar ($7,000) all
source limit (as adjusted) provided for in IRC Section 402(g)(5) are
specifically prohibited hereunder and, as a result, the Employer
reserves the right for up to one (1) Plan Year following the Plan Year
in which Employer Contributions were made to recapture any Employer
Contributions, inclusive of earnings or losses, mistakenly made to the
Plan due to the Employee exceeding the IRC Section 402(g) limit.
For purposes of determining the earnings or losses on Pre-Tax
Contributions which will be returned to the Participant or Employer
Contributions which are forfeited and
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used to reduce Employer Contributions, such earnings or losses shall
include the earnings or losses of the Fund determined in accordance
with Section 5.07 attributable to such Pre-Tax Contributions and
Employer Contributions for the calendar year during which the excess
Pre-Tax Contributions and Employer Contributions were made.
3.08 Profit Sharing Matching Contributions - The Corporation, in its
complete discretion, may declare a Profit Sharing Matching
Contribution. The Corporation may establish annual performance
criteria for when a Profit Sharing Matching Contribution shall be
made. The Profit Sharing Matching Contribution would be a contribution
equal to a fixed percentage of the Participant's Pre-Tax Contributions
for which an Employer Matching Contribution was made under Section
3.02. The Corporation shall determine the percentage when the Profit
Sharing Matching Contribution is declared.
A Participant shall be eligible to receive the Profit Sharing
Matching Contribution only if he is an Employee of an Employer on the
last day of the Plan Year for which the Profit Sharing Matching
Contribution is made. The Corporation or each Employer shall
contribute to the Plan for the Profit Sharing Matching Contributions
for its Employees. All Profit Sharing Matching Contributions shall be
allocated as provided in Section 5.11.
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INVESTMENT OPTIONS AND FUNDS
4.01 Investment Options -
4.01(a) The following investment funds shall be established for
purposes of the Plan:
(i) Trigon Stock Fund: The Trigon Stock Fund shall be
invested primarily in Trigon Stock and such additional
assets as directed by the Investment Committee from time to
time. The Trustee may purchase and sell Trigon Stock on the
open market, from and to the Parent, and in any other manner
as the Trustee deems appropriate, consistent with applicable
securities laws, ERISA and the IRC.
(ii) Other Investment Funds: The Investment Committee shall
designate other investment funds from time to time for
investment of Participants' Individual Accounts. The
Investment Committee shall select the investment funds in
accordance with Section 404(c) of ERISA and the regulations
thereunder. Special investment funds with respect to assets
of plans that are merged into the Plan may be designated
pursuant to an applicable Appendix.
4.01(b) All Contributions credited to a Participant's Individual
Accounts, except for Profit Sharing Matching Contributions,
shall be invested in the investment funds elected by the
Participant on forms or other means provided for that
purpose by the Administrative Committee. If a Participant
fails to designate an investment fund, all Contributions
except Profit Sharing Matching Contributions shall be
invested in the Treasury Money Market Fund or such other
investment fund as designated by the Investment Committee.
4.01(c) Plan assets may be invested in a short term investment fund
or in any other manner deemed appropriate by the Trustee,
pending investment in the appropriate investment fund.
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4.01(d) If investments are to be made among the investment funds,
investments shall be made in increments of no less than one
percent (1%) in each investment fund.
4.01(e) The Investment Committee may impose upon any investment fund
such restrictions as may be necessary or appropriate. For
example, the Investment Committee may restrict transfers to
or from an investment fund, and the Investment Committee may
limit the amount of a Participant's Individual Account that
may be transferred to or from an investment fund during a
specified period of time.
4.10(f) If a Participant obtains a loan pursuant to Section 7.07,
the Administrative Committee shall establish a segregated
account for that Participant. Interest and principal
payments by the Participant shall be invested pursuant to
the Participant's election.
4.01(g) Notwithstanding any provision to the contrary, a
Participant's Profit Sharing Matching Contributions Account
shall be invested solely in the Trigon Stock Fund.
4.02 Election Procedure - Upon commencing participation, each Participant
shall make an election before his initial Entry Date regarding the
investment options in Section 4.01. Further, an Employee electing to
make a Rollover Contribution or Transfer Contribution prior to the
time he is eligible to become a Participant shall make an election
regarding the investment options in Section 4.01 at the time the
Rollover Contribution or Transfer Contribution is made. Any such
election shall continue in effect until amended or revoked.
Any election may be amended or revoked with regard to future
Contributions as of any payday based on processing schedules and
procedures as adopted by the Administrative Committee and communicated
to Participants.
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A Participant may change an investment election applicable to his
existing Individual Account as of any business day, based on
processing schedules and procedures as adopted by the Administrative
Committee and communicated to Participants.
4.03 Investment Accounts -
4.03(a) All net income that is earned on investments in an
investment fund described in Section 4.01 shall be
reinvested by the Trustee in that investment fund. As of
each Valuation Date, the Trustee shall determine the current
fair market value of each investment fund. As of each
Valuation Date, before making adjustments for withdrawals,
loans and transfers, the Administrative Committee shall
adjust the Individual Accounts invested in that investment
fund to reflect the unit value of the investment fund as of
that date. The adjustments shall be based on each
Participant's closing Individual Account balance invested in
the investment fund as of the preceding Valuation Date. The
outstanding balance of a Participant's loans described in
Section 7.07 will not be included as part of his Account
balance for purposes of allocations under this Section 4.03.
4.03(b) Separate records for each investment fund shall be
maintained for accounting purposes only. A segregation of
assets shall not be required, nor shall any Participant have
title to any specific assets of investment funds.
4.04 Investment Information To the extent required by applicable law, each
Participant shall be provided information for each investment fund in
accordance with Section 404(c) of ERISA and the corresponding
regulations. With respect to the Trigon Stock Fund, Participants shall
be provided with all information generally required to be provided to
shareholders of the Parent.
4.05 Limitations on Directed Investments The Trustee may decline to
implement a Participant's investment directions if such directions
would:
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4.05(a) Result in a prohibited transaction as described in ERISA
section 406 or Internal Revenue Code section 4975;
4.05(b) Generate taxable income to the Plan or jeopardize its tax
qualified status;
4.05(c) Not be in accordance with the documents and instruments
governing the Plan;
4.05(d) Cause a fiduciary to maintain the indicia of ownership in an
asset outside jurisdiction of the United States district
courts;
4.05(e) Result in a loss greater than the balance in the
Participant's Individual Account; or
4.05(f) Result in certain transactions between the Plan and the
Employer or an affiliate of the Employer as designated by
the Corporation.
4.06 Application to Beneficiaries and Alternate Payees All Beneficiaries of
deceased Participants who have Individual Account balances in the Plan
may direct the investment of their Individual Accounts into any one or
more of the investment funds offered pursuant to Section 4.01. After
an Alternate Payee's interest in a Participant's Individual Accounts
has been finally determined pursuant to Section 13.05, the Alternate
Payee may direct the investment of the Alternate Payee's Accounts into
one or more of the investment funds offered pursuant to Section 4.01,
to the same extent that the Participant could have directed the
investment of the Individual Accounts.
4.07 Voting, Tender and Exercise of Similar Rights with Respect to Trigon
Stock
4.07(a) A Participant may instruct the Trustee (or its agent) how to
vote, tender, or exercise similar rights with respect to the
shares of Trigon Stock allocable to the Participant's
Individual Account. The Trustee (or its agent) shall hold
any voting, tender, or similar instructions it receives from
a Participant in the strictest confidence and shall
implement and follow procedures sufficient to
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safeguard the confidentiality of such instructions, except
to the extent necessary to comply with Federal or state laws
not preempted by ERISA.
4.07(b) The Trustee shall vote, tender or exercise similar rights
with respect to Trigon Stock for which timely instructions
are received according to the Participants' instructions.
The Trustee shall vote with respect to shares of Trigon
Stock for which timely instructions are not received from
Participants in the same proportion as the Trigon Stock for
which it has received timely instructions. The Trustee shall
not tender or exercise similar rights with respect to shares
of Trigon Stock for which timely instructions are not
received from Participants, provided that Participants have
been instructed that failure to respond shall be deemed to
be a direction not to tender or exercise similar rights. In
all other circumstances, the Administrative Committee (or
its agent) shall direct the Trustee to tender or exercise
similar rights with respect to shares of Trigon Stock for
which timely instructions are not received from Participants
in such manner as the Administrative Committee (or its
agent) deems appropriate.
4.07(c) The Administrative Committee (or its agent) may assist the
Trustee to ensure that all notices, forms, and other
information regarding the exercise of voting, tender, or
similar rights are distributed to Participants within a
reasonable time before voting, tender, or similar rights are
to be exercised. Instructions from a Participant must be
received by the Trustee in time for the Trustee to act with
respect to them.
4.08 Management of the Trigon Stock Fund
4.08(a) The Administrative Committee shall implement and follow
procedures sufficient to safeguard the confidentiality of
information relating to the purchase, holding, and sale of
Trigon Stock by Participants, except to the
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extent necessary to comply with Federal or state laws not
preempted by ERISA.
4.08(b) If required by law, the Administrative Committee shall
appoint an independent fiduciary (within the meaning of
applicable Department of Labor regulations) to perform
certain functions with respect to the Trigon Stock Fund if
the Administrative Committee determines that appointment of
an independent fiduciary is necessary because of a potential
for undue Employer influence upon Participants with regard
to the indirect exercise of shareholder rights with respect
to the Trigon Stock Fund.
4.08(c) The Trustee shall manage the Trigon Stock Fund in a manner
consistent with ERISA, the IRC and applicable securities
laws. Consistent with these laws, the Administrative
Committee (or its agent) shall implement appropriate
procedures, restrictions and limitations with respect to the
purchase and sale of Trigon Stock. If the Administrative
Committee (or its agent) is not able to execute fully
Participants' investment directions at a particular time,
the Administrative Committee (or its agent) shall execute
the instructions, to the extent possible, in a pro rata
manner.
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ARTICLE V
ALLOCATIONS TO INDIVIDUAL ACCOUNTS
5.01 Individual Accounts - The Administrative Committee shall establish and
maintain an Individual Account in the name of each Participant to
which the Administrative Committee shall credit all amounts
contributed by or on behalf of each such Participant pursuant to
Article III and shall credit or debit the unit value for income,
gains, losses or distributions pursuant to Articles IV, V, VI and VII.
5.02 Allocation of After-Tax Contributions - A Participant's After-Tax
Contributions made to the Plan prior to July 1, 1984, were credited to
a Participant's After-Tax Contribution Account and shall not be
subject to withdrawal except as provided in Article VII.
5.03 Allocation of Pre-Tax Contributions - Pre-Tax Contributions, as
provided in Section 3.01, shall be credited to the Participant's
Pre-Tax Contribution Account as of the date received by the Trust and
shall not be subject to withdrawal except as provided in Article VII.
5.04 Allocation of Employer Contributions - The Employer Matching
Contributions Account of each Participant shall be credited as of the
date received by the Trust with his allocable share of the Employer
Matching Contribution made pursuant to Section 3.02.
5.05 Allocation of Deductible Contributions - Deductible Contributions made
to the Plan prior to January 1, 1987 were credited to the
Participant's Deductible Account and shall not be subject to
withdrawal except as provided in Section 7.04.
5.06 Allocation of Rollover Contributions - Rollover Contributions, as
provided in Section 3.03, shall be credited at fair market value to
the Participant's Rollover Account as of the date received by the
Trust and shall be fully vested at all times. Rollover Contributions
shall share in the investment experience of the Funds pursuant to
Section 5.07.
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5.07 Allocation of Income, Gains and Losses - Each Participant's account
shall be adjusted as of each Valuation Date to reflect the investment
experience of the Funds pursuant to Section 4.03.
5.08 Forfeitures - The Administrative Committee shall determine the amount
of Forfeitures applicable for Participants of each Employer as of each
Valuation Date by adding together all amounts relinquished through
terminations of employment pursuant to Section 6.01 since the last
preceding Valuation Date. From such Forfeitures shall then be
subtracted an amount necessary (to the extent Forfeitures are
sufficient) to reinstate a Participant's Employer Matching
Contributions Account or Profit Sharing Matching Contributions Account
in accordance with Section 6.01. The balance shall then be held in a
suspense account until the Plan Year following the Valuation Date on
which the Forfeiture occurred and be used to reduce the applicable
Employer's Contribution to the Plan for such Plan Year.
Notwithstanding the application of Forfeitures as hereinabove
provided, a Forfeiture, if any, shall be deemed to occur as of the
last day of the Plan Year following the Plan Year in which the
Participant's Severance from Service Date occurs.
5.09 Maximum Additions - Notwithstanding any other provisions of the Plan,
for Plan Years beginning after January 1, 1996, the Total Annual
Additions made to the Individual Account of a Participant for any
Limitation Year, when combined with any similar Annual Additions
credited to the participant for the same period from another qualified
Deferred Contribution Plan maintained by the Employer or an Affiliate,
shall not exceed the lesser of:
(i) $30,000, or
(ii) 25% of the Participant's compensation (as defined in Code
section 415(c)(3)).
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If a Participant is covered by one or more Defined Contribution
Plans maintained by the Employer or an Affiliate, the maximum Annual
Additions as noted above shall be decreased as determined necessary by
the Employer, prior to the reduction of such other Defined
Contribution Plans, to ensure that all such plans will remain
qualified under the IRC.
If as of any December 31 Valuation Date corrective adjustments in
the Annual Additions to any Individual Account are required under this
Section 5.09, then the following adjustments shall be made. For
Participants who are employed on the December 31 Valuation Date, the
Pre-Tax Contribution Account and the Employer Matching Contributions
Account and Profit Sharing Matching Contributions Account shall be
reduced on a pro-rata basis. For Participants who are not employed on
the December 31 Valuation Date, the Employer Matching Contributions
Account and Profit Sharing Matching Contributions Account shall be
reduced first and then the Pre-Tax Contribution Account.
If, (a) as a result of the allocation of forfeitures, (b) a
reasonable error is made in estimating a Participant's annual Maximum
Compensation, or (c) under other facts and circumstances which the
Internal Revenue Service finds justify the availability of these
rules, any amount withheld or taken from a Participant's Individual
Account pursuant to the above shall be segregated in the Fund in a
separate account and applied toward Contributions by the Employer for
the next Limitation Year in accordance with Section 1.415-6(b)(6)(ii)
of the regulations under IRC Section 415. Notwithstanding the above,
any reduction of a Participant's Pre-Tax Contribution Account shall be
returned to the Participant. Further, the Employer shall reimburse the
Employee for any reduction in the Employee's After-Tax Contribution
Account pursuant to this Section 5.09.
5.10 Multiple Plan Participation - For Plan Years beginning before January
1, 2000, if a Participant is a participant of a Defined Benefit Plan
maintained by the Employer or an
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Affiliate, the sum of his defined benefit plan fraction and his
defined contribution plan fraction for any Limitation Year may not
exceed 1.0.
For purposes of maximum Annual Additions to Defined Contribution
Plans, all Defined Contribution Plans, whether or not terminated,
shall be combined and treated as one (1) plan and all Defined Benefit
Plans, whether or not terminated, shall be combined and treated as one
(1) plan.
For purposes of this Section 5.10, the term "defined contribution
plan fraction" shall mean a fraction the numerator of which is the sum
of all of the Annual Additions to the Participant's Individual Account
under this Plan as of the close of the Limitation Year and the
denominator of which is the sum of the lesser of the following amounts
determined for such Limitation Year and for each prior Limitation Year
of employment with the Employer:
5.10(a) the product of 1.25 multiplied by the dollar limitation in
effect in Section 5.10(a) for such year determined without
regard to IRC Section 415(c)(6); or
5.10(b) the product of 1.4 multiplied by an amount determined
pursuant to Section 5.09(b) with respect to each individual
under the Plan for such Limitation Year.
For purposes of this Section 5.10, the term, "defined benefit
plan fraction" shall mean a fraction the numerator of which is the
Participant's projected annual benefit (as defined in the said defined
benefit plan) determined as of the close of the Limitation Year and
the denominator of which is the lesser of:
5.10(c) the product of 1.25 multiplied by the dollar limitation in
effect pursuant to IRC Section 415(b)(1)(A) for such
Limitation Year; or
5.10(d) the product of 1.4 multiplied by the amount which may be
taken into account pursuant to IRC Section 415(b)(1)(B) with
respect to each individual under the Plan for such
Limitation Year.
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The limitation on aggregate benefits from a Defined Benefit Plan
and a Defined Contribution Plan which is contained in IRC Section
415(e) shall be complied with by a reduction (if necessary) in the
Participant's benefits under the Defined Benefit Plan(s) [in
accordance with the provisions of such plan(s)] before a reduction of
any such Defined Contribution Plan.
5.11 Allocation of Profit Sharing Matching Contributions - The Profit
Sharing Matching Contributions Account of each Participant shall be
credited as of the date received by the Trust with his allocable share
of the Profit Sharing Matching Contribution as determined in Section
3.08. Profit Sharing Matching Contributions are only allocable to
Participants who are Employees of an Employer on the last day of the
Plan Year for which the Profit Sharing Matching Contribution is made.
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ARTICLE VI
VESTING AND DISTRIBUTIONS
6.01 Vesting - A Participant shall at all times be fully vested in his
After-Tax Contribution Account, Pre-Tax Contribution Account, Rollover
Account, Deductible Account, and Transfer Account if provided in the
adoption agreement or Appendix to the Plan.
6.01(a) Any Participant maintaining a credit balance in his Employer
Matching Contributions Account, who was actively employed by
an Employer or an Affiliate on December 31, 1986, shall
hereafter be one hundred percent (100%) vested in his
Employer Matching Contributions Account. An Employee
initially becoming a Participant on and after January 1,
1987, shall have the vested percentage of his Employer
Matching Contributions Account or Profit Sharing Matching
Contributions Account determined as hereinafter provided in
this Section 6.01.
6.01(b) A Participant shall be fully vested in his Employer Matching
Contributions Account and his Profit Sharing Matching
Contributions Account when he dies, incurs a Total and
Permanent Disability, is eligible to retire pursuant to the
terms of the Plan or attains his Normal Retirement Age.
6.01(c) Except as provided in Section 6.01(b), a Participant shall
be fully vested in his Employer Matching Contributions
Account and his Profit Sharing Matching Contributions
Account upon the completion of thirty-six (36) months of
Service.
6.01(d) Notwithstanding anything contained herein to the contrary,
if a Participant's termination of employment occurs because
the Employer has eliminated his job function and no
alternative job function for which the Participant is
reasonably suited by education, training and experience has
been offered to such Participant within ninety (90) days
thereafter, such Participant shall be
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deemed one hundred percent (100%) vested in his Employer
Matching Contributions Account and Profit Sharing Matching
Contributions Account.
6.01(e) For purposes of this Section 6.01, employment with any
participating Employer shall be deemed employment with any
other participating Employer. The transfer of an Employee
from one participating Employer to another participating
Employer or to an Affiliate shall not constitute a Severance
from Service Date and such Participant's Individual Account
and Deductible Account shall be maintained until he is
thereafter eligible for a distribution in accordance with
the terms of the Plan.
6.01(f) Upon termination of employment if the vested portion of the
Current Balance of the Participant's Individual Account and
the Deductible Current Balance of the Deductible Account
does not exceed five thousand dollars ($5,000) (including
any previous distributions made to the Participant), the
Administrative Committee shall direct the Trustee to
distribute to the Participant the vested portion of the
Current Balance of his Individual Account and the Deductible
Current Balance of his Deductible Account in a lump sum as
soon as reasonably possible following his termination of
employment. If the Current Balance of the Participant's
Individual Account and Deductible Current Balance of the
Participant's Deductible Account exceeds five thousand
dollars ($5,000) (including any previous distributions made
to the Participant), the Participant's consent shall be
required for any distribution to be made due to his
termination of employment. If the Current Balance of a
Participant's Individual Account and the Deductible Current
Balance of the Participant's Deductible Account at the time
of any distribution exceeds five thousand dollars ($5,000)
(including any previous distributions made to the
Participant), then the Current Balance of his Individual
Account
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and the Deductible Current Balance of his Deductible Account
at any time thereafter shall be deemed to exceed five
thousand dollars ($5,000) and the Participant's consent
shall be required for any distribution to be made due to his
termination of employment. If the Participant does not
consent to a distribution being made upon his termination of
employment, the vested portion of the Current Balance of his
Individual Account and the Deductible Current Balance of his
Deductible Account shall continue to be held as a part of
the Fund until the calendar year in which the Participant
attains age 70 1/2, at which time the Administrative
Committee shall direct the Trustee to distribute to the
Participant the Current Balance held in the Participant's
Individual Account and the Deductible Current Balance held
in his Deductible Account in accordance with Section 6.08.
The Participant shall have the right at any time on or after
his termination of employment to elect to have the Current
Balance held in his Individual Account and the Deductible
Current Balance held in his Deductible Account paid to him
in accordance with Section 6.08; provided that any payment
of the Deductible Current Balance of the Participant's
Deductible Account on or after his Disability Retirement
Date shall be subject to the provision of Section 6.05
related to such payment. Further, if a terminated
Participant dies prior to otherwise electing to commence his
benefit hereunder, his Beneficiary shall have the right at
any time after the Participant's death to have the Current
Balance held in the Participant's Individual Account and the
Deductible Current Balance held in the Participant's
Deductible Account paid to him in accordance with Section
6.08(b).
6.01(g) Notwithstanding anything contained in Section 6.01(f) to the
contrary, upon termination of employment, a Participant may
request the Administrative
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Committee to transfer the Deductible Current Balance of his
Deductible Account to a successor depository. In such event,
the Administrative Committee shall notify the Trustee to
transfer the Deductible Current Balance of the Participant's
Deductible Account to such successor depository as soon as
reasonably possible following receipt of such request from
the Participant.
6.01(h) The vested portion of the Current Balance of the
Participant's Individual Account and the Deductible Current
Balance of his Deductible Account held on termination of
employment shall be subject to the same investment option
elections as specified in Article IV. Amounts held upon a
Participant's termination of employment as hereinbefore
provided shall not be subject to withdrawals or loans in
accordance with Article VII. While such amount is being
held, it shall share in the adjustment of the unit value as
provided in Section 5.07.
6.01(i) If the Participant is reemployed prior to receiving payment
of his Individual Account and Deductible Account being held
hereunder and again becomes a Participant, he shall not be
entitled to a distribution hereunder but shall be entitled
to a distribution as determined under this Article VI at his
subsequent termination of employment for any reason.
Further, such a Participant shall once again be eligible for
withdrawals and loans as provided in Article VII and
investment elections in accordance with Section 4.02.
6.01(j) The non-vested portion of the Current Balance of the
Participant's Employer Matching Contributions Account and
Profit Sharing Matching Contributions Account shall be held
in the Participant's Individual Account until the last day
of the Plan Year following the Plan Year in which the
Participant's Severance from Service Date occurred and shall
then be forfeited. The Forfeitures shall
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be used to reduce the applicable Employer's Contribution to
the Plan for such Plan Year or the following Plan Year in
accordance with Section 5.08.
6.01(k) If a Participant who received a distribution under this
Section 6.01 was less than one hundred percent (100%) vested
in his Individual Account at his termination of employment,
is reemployed prior to incurring five (5) consecutive
Severance Periods of twelve (12) consecutive months, and
repays the amount of the distribution previously paid to him
as a result of his termination of employment prior to the
earlier of the completion of five (5) years subsequent to
the Employee's Reemployment Date or the close of the first
period of five (5) consecutive Severance Periods of twelve
(12) consecutive months commencing after the distribution,
the amount previously treated as a Forfeiture shall be
reinstated by the Employer to his Individual Account. The
amount previously treated as a Forfeiture shall be restored,
at the Employer's discretion, from the income or gains of
the Fund, Forfeitures or from Employer Contributions. A
distribution of the entire value of a Participant's
Individual Account that is one hundred percent (100%) vested
shall not be subject to repayment.
6.01(l) If a Participant who did not consent to receive a
distribution as a result of his termination of employment
pursuant to this Section 6.01 is reemployed prior to
incurring five (5) consecutive Severance Periods of twelve
(12) consecutive months, the amount previously treated as a
Forfeiture shall be reinstated by the Employer to his
Employer Matching Contributions Account and Profit Sharing
Matching Contributions Account. The amount previously
treated as a Forfeiture shall be restored, at the Employer's
discretion, from the income or gains of the Fund,
Forfeitures or from Employer Contributions.
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6.01(m) If the vested portion of the Current Balance of a
Participant's Individual Account is zero at his date of
termination, the Participant shall be deemed to have
received a distribution of the vested portion of the Current
Balance of his Individual Account and the non-vested portion
shall be treated as a Forfeiture as of the Valuation Date
coinciding with or next following the date of the deemed
distribution. If a Participant who was deemed to receive a
distribution is reemployed prior to the occurrence of five
(5) consecutive Severance Periods of twelve (12) consecutive
months, the amount previously treated as a Forfeiture shall
be reinstated by the Employer. The amount previously treated
as a Forfeiture shall be restored, at the Employer's
discretion, from the income or gains of the Fund,
Forfeitures or from Employer Contributions.
6.01(n) If a Participant terminated his employment and the
non-vested portion of his Employer Matching Contributions
Account or Profit Sharing Matching Contributions Account was
transferred to a suspense account is reemployed prior to
such amount being used to reduce Employer Contributions,
then the amount previously transferred to the suspense
account as a result of his termination of employment shall
be transferred back to the Participant's Employer Matching
Contributions Account or Profit Sharing Matching
Contributions Account as of the Valuation Date following his
reemployment.
6.02 Normal Retirement - Upon the retirement of a Participant at his Normal
Retirement Date, the Participant shall be eligible to receive the
Current Balance of his Individual Account and the Deductible Current
Balance of his Deductible Account. The Administrative Committee shall
direct the Trustee to distribute to such Participant such amount in
accordance with Section 6.08 when the Participant elects a
distribution. Payment shall be made no later than when required under
Section 6.11.
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6.03 Delayed Retirement - Upon the retirement of a Participant at his
Delayed Retirement Date, the Participant shall be eligible to receive
the Current Balance of his Individual Account and the Deductible
Current Balance of his Deductible Account. The Administrative
Committee shall direct the Trustee to distribute to such Participant
such amount in accordance with Section 6.08 when the Participant
elects a distribution. Payment shall be made no later than when
required under Section 6.11.
6.04 Early Retirement - Upon the retirement of a Participant at his Early
Retirement Date, the Current Balance of his Individual Account and the
Deductible Current Balance of his Deductible Account shall continue to
be held as a part of the Fund. A Participant who retires at his Early
Retirement Date shall have the right at any time to elect to have the
Current Balance held in his Individual Account and the Deductible
Current Balance held in his Deductible Account paid as of his Early
Retirement Date or any later date, subject to Section 6.11. If the
Participant makes such an election, the Administrative Committee shall
direct the Trustee to distribute to such Participant the Current
Balance held in the Participant's Individual Account and the
Deductible Current Balance held in his Deductible Account in
accordance with Section 6.08.
All assets held on behalf of a Participant pursuant to this
Section shall continue to be invested pursuant to Article IV and shall
continue to share in the adjustment of the unit value of the Funds in
accordance with Section 5.07.
6.05 Disability Retirement - Upon the retirement of a Participant at his
Disability Retirement Date, the Current Balance of his Individual
Account and the Deductible Current Balance of his Deductible Account
shall continue to be held as a part of the Fund. A Participant who
retires at his Disability Retirement Date shall have the right to
elect to have the Current Balance held in his Individual Account and
the Deductible Current Balance of his Deductible Account paid as of
his Disability Retirement Date or any later date, subject to Section
6.11. If the Participant makes such an election, the Administrative
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Committee shall direct the Trustee to distribute to such Participant
the Current Balance held in the Participant's Individual Account and
the Deductible Current Balance held in his Deductible Account in
accordance with Section 6.08.
Notwithstanding anything contained herein to the contrary, for
purposes of this Section 6.05 as it relates to distribution of a
Participant's Deductible Account, the term "disability" means an
incapacity which leaves the Participant unable to engage in any
substantially gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death
or to be of long-continued and indefinite duration. If the Participant
does not meet the definition of disability as provided in this
paragraph, his Deductible Account shall continue to be held until the
time determined under Section 6.11 at which time the Administrative
Committee shall direct the Trustee to distribute to the Participant
the Deductible Current Balance held in his Deductible Account in
accordance with Section 6.08.
All assets held on behalf of a Participant pursuant to this
Section shall continue to be invested pursuant to Article IV and shall
continue to share in the adjustment of the unit value of the Funds in
accordance with Section 5.07.
6.06 Death Prior to the Commencement of Benefits - Upon the death of (a) a
Participant on or after attaining his Normal Retirement Age but prior
to the commencement of his benefit, (b) an active Participant, or (c)
a vested terminated Participant or retired Participant prior to the
commencement of his benefit, a death benefit shall be paid and the
Administrative Committee shall direct the Trustee to distribute the
benefit in accordance with the following provisions of this Section
6.06.
6.06(a) If the designated Beneficiary is the spouse of the
Participant, the Beneficiary may elect to commence the
benefit within a reasonable period of time after the
Participant's death. In no event may such election be made
later than the later of (i) or (ii) following:
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(i) December 31 of the calendar year immediately
following the calendar year in which the
Participant died, or
(ii) December 31 of the calendar year in which the
Participant would have attained age seventy and
one-half (70 1/2).
The benefit may be paid over the life of the Beneficiary or
over a period certain not extending beyond the life expectancy of
the designated Beneficiary. At the time the election is made, the
Administrative Committee shall direct the Trustee to distribute
the Current Balance of the Participant's Individual Account and
the Deductible Current Balance of his Deductible Account in
accordance with Section 6.08. If the spouse dies before the
distribution begins, then the five (5) year distribution
requirement of Section 6.06(c) shall apply as if the Beneficiary
were the Participant.
6.06(b) If the benefit is paid to a designated Beneficiary, as
defined in IRC Section 401(a)(9)(E) inclusive of Section
1.401(a)(9)-1 D-1 and D-2 of the regulations, other than the
Participant's spouse, the distribution shall commence no
later than December 31 of the calendar year immediately
following the calendar year in which the Participant died.
The benefit may be paid over the life of the Beneficiary or
over a period certain not extending beyond the life
expectancy of the designated Beneficiary. The Beneficiary
may elect that the benefit be paid at an earlier date. At
the time the election is made or the benefit is required to
commence, the Administrative Committee shall direct the
Trustee to distribute the Current Balance of the
Participant's Individual Account and the Deductible Current
Balance of his Deductible Account to his Beneficiary in
accordance with Section 6.08.
6.06(c) If there is no designated Beneficiary, as defined in IRC
Section 401(a)(9) inclusive of Section 1.401(a)(9)-1 D-1 and
D-2 of the regulations, at the death
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of the Participant, then distribution of the Participant's
entire interest shall be completed by December 31 of the
calendar year containing the fifth (5th) anniversary of the
Participant's death. The Beneficiary may elect that the
benefit be paid at an earlier date. At the time the election
is made or the benefit is required to be distributed, the
Administrative Committee shall direct the Trustee to
distribute the Current Balance of the Participant's
Individual Account and the Deductible Current Balance of his
Deductible Account to the Beneficiary in accordance with
Section 6.08; provided, that the benefit may not be paid in
any manner or form which would violate the required
distribution requirements of this Section 6.06(c).
6.06(d) The benefit payable under the provisions of this Section
6.06 may not be paid in any form which would violate the
required distribution requirements of Sections 6.06(a),
6.06(b) or 6.06(c).
6.06(e) Any amount held on a Participant's behalf under this Section
6.06 shall continue to be invested pursuant to Article IV
and shall continue to share in the adjustment of the unit
value of the Funds in accordance with Section 5.07.
6.07 Death After the Commencement of Benefits - Upon the death of a
Participant who is receiving benefit payments in accordance with
Section 6.08(c) the provisions of Section 6.08(c) shall control
concerning any payments upon the death of such Participant. The
Beneficiary, however, shall have the right to elect that any remaining
benefit payments be paid under Section 6.08(b). Upon the death of a
Participant who is receiving benefits, the remaining portion of such
interest must be distributed at least as rapidly as under the method
of distribution being used at the date of the Participant's death.
6.08 Method of Payment
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6.08(a) Application for Benefits - In order to receive a benefit
under the Plan, a Participant, his Beneficiary, committee,
or next of kin, must make written application therefor on a
form or forms provided by the Administrative Committee or
through interactive voice response. The Administrative
Committee may require that there be furnished to it in
connection with such application all information pertinent
to any question of eligibility and the amount of any
benefit. Benefit payment shall commence as soon as
reasonably possible following approval by the Administrative
Committee of the Participant's claim for benefits, based on
processing schedules and procedures adopted by the
Administrative Committee.
Each Participant who has attained his Normal Retirement
Date, Early Retirement Date or Disability Retirement Date or
who has terminated employment and met the age and service
requirements for Early Retirement, either prior to or after
his termination of employment, shall have the right to
request to have his benefit paid under the option
hereinafter set forth in Section 6.08(c) in lieu of the
benefit otherwise provided for in Section 6.08(b).
A Participant who desires to have his benefits paid
under the optional form provided in Section 6.08(c) shall
make such an election in writing to the Administrative
Committee on forms provided by the Administrative Committee
or through interactive voice response. An election by a
Participant to receive his benefit under Section 6.08(c) may
be revoked by such Participant and a new election made in
writing to the Administrative Committee or through
interactive voice response at any time prior to the
commencement of benefits.
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6.08(b) Normal Form - In the absence of the election of the optional
method of payment provided in Section 6.08(c), the benefit
shall be paid in a lump sum.
6.08(c) Optional Form - In lieu of receiving payment in accordance
with Section 6.08(b), a Participant may elect that his
benefit be paid in approximately equal monthly, quarterly,
semi-annual, or annual installments from the Fund, over a
period of years not to exceed the lesser of (i) ten (10)
years or (ii) the life expectancy of the Participant and his
Beneficiary.
6.08(d) If the optional form of payment under this Section 6.08(c)
is elected by the Participant, the Current Balance of the
Participant's Individual Account and Deductible Current
Balance of his Deductible Account from which such
installments are to be paid shall be invested pursuant to an
investment option as described in Article IV as elected by
the Participant to be applicable to such Individual Account
and Deductible Account and the Current Balance of his
Individual Account and Deductible Current Balance of his
Deductible Account shall be invested accordingly. All assets
held on behalf of a Participant pursuant to this Section
6.08(c) shall continue to share in the adjustment of the
unit value of the Funds in accordance with Section 5.07.
Notwithstanding the preceding, if the optional form of
payment provided in Section 6.08(c) is elected, the
Participant may invest in the investment Funds as provided
in Section 4.02.
Notwithstanding anything contained herein to the
contrary, a Participant may elect at any time after the
commencement of benefit payments under Section 6.08(c) that
any remaining payments be paid to him in a lump sum. If a
Participant makes this election, the lump sum payment shall
be made to the Participant as soon as reasonably possible
following such election.
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6.08(e) A Participant may elect to have the portion of his
Individual Account that is invested in the Trigon Stock Fund
paid in whole shares of Trigon Stock, with the value of
fractional shares paid in cash, or entirely in cash. For
purposes of determining the amount of a cash distribution,
Trigon Stock will be valued as of the Valuation Date as of
which the distribution is made. If a Participant fails to
make an election to be paid in Trigon Stock or cash, the
Participant shall be paid in cash. If part or all of a
Participant's Account is invested in any investment fund
other than the Trigon Stock Fund, that portion of the
Account shall be paid in cash and shall be valued as of the
Valuation Date as of which the distribution is made.
6.08(f) The Corporation does not guarantee that the market value of
the Trigon Stock when it is distributed will be equal to its
purchase price or that the total amount distributable or
withdrawable under the Plan will be equal to or greater than
the amount of the Participant's contributions and loans.
Each Participant assumes all risk of any decrease in the
market value of the Trigon Stock and other assets allocable
to his Individual Account in accordance with the provisions
of the Plan.
6.08(g) Direct Rollover - Notwithstanding any provision of the Plan
to the contrary that would otherwise limit a Distributee's
election under this Section 6.08(g), a Distributee may
elect, at the time and in the manner prescribed by the
Committee, to have any portion of an Eligible Rollover
Distribution paid directly to an Eligible Retirement Plan
specified by the Distributee in a Direct Rollover. Such
distribution may commence less than thirty (30) days after
the notice required under Section 1.411(a)-11(c) of the
Income Tax Regulations is given, provided that (a) the
Committee clearly informs the Participant that the
Participant has a right to a period of at least thirty (30)
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days after receiving the notice to consider the decision of
whether or not to elect a distribution (and, if applicable,
a particular distribution option), and (b) the Participant,
after receiving the notice, affirmatively elects a
distribution.
The Account of a Participant who has been provided the
notice specified in IRC Section 402(f) but who makes no
election with regard to an Eligible Rollover Distribution
within thirty (30) days of receiving such notice shall be
distributed directly to the Participant as soon thereafter
as is practicable, assuming that the value of the vested
Account of such Participant has never exceeded five thousand
dollars ($5,000) at any time after it was first
distributable.
For purposes of this Section 6.08(g), the following
definitions shall apply:
(i) Eligible Rollover Distribution - An Eligible
Rollover Distribution is any distribution of all or
any portion of the balance to the credit of the
Distributee, except that an Eligible Rollover
Distribution does not include:
(A) any distribution that is one of a series
of substantially equal periodic payments
(not less frequently than annually) made
for the life (or life expectancy) of the
distributee or the joint lives (or joint
life expectancies) of the Distributee
and the Distributee's designated
Beneficiary, or for a specified period
of ten (10) years or more;
(B) any distribution to the extent such
distribution is required under IRC
Section 401(a)(9); and
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(C) the portion of any distribution that is
not includible in gross income
(determined without regard to the
exclusion for net unrealized
appreciation with respect to employer
securities).
(ii) Eligible Retirement Plan - An Eligible Retirement
Plan is an individual retirement account described
in IRC Section 408(a), an individual retirement
annuity described in IRC Section 408(b), an
annuity plan described in IRC Section 403(a), or a
qualified trust described in IRC Section 401(a),
that accepts the Distributee's Eligible Rollover
Distribution. However, in the case of an Eligible
Rollover Distribution to the surviving spouse, an
Eligible Retirement Plan is an individual
retirement account or individual retirement
annuity.
(iii) Distributee - A Distributee includes an Employee
or former Employee. In addition, the Employee's or
former Employee's surviving spouse and the
Employee's or former Employee's spouse or former
spouse who is the alternate payee under a
qualified domestic relations order, as defined in
IRC Section 414(p), are Distributees with regard
to the interest of the spouse or former spouse.
(iv) Direct Rollover - A Direct Rollover is a payment
by the Plan to the Eligible Retirement Plan
specified by the Distributee.
6.09 Maximum Option Payable - If a Participant elects to have his benefit
paid under Section 6.08(c) and the designated Beneficiary is not the
spouse of the Participant, the option elected shall be restricted so
that the minimum distribution incidental benefit requirements of IRC
Section 401(a)(9) and Treasury Regulation 1.401(a)(9)-2 are met.
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6.10 Benefits to Minors and Incompetents - If any person entitled to
receive payment under the Plan shall be a minor, the Administrative
Committee, in its discretion, may dispose of such amount in any one or
more of the following ways:
(a) by payment thereof directly to such minor;
(b) by application thereof for benefit of such minor;
(c) by payment thereof to either parent of such minor or to any
adult person with whom such minor may at the time be living
or to any person who shall be legally qualified and acting
as guardian of the person or the property of such minor;
provided only that the parent or adult person to whom any
amount is paid has advised the Administrative Committee in
writing that he will hold or use such amount for the benefit
of such minor.
If a person entitled to receive payment under the Plan is
physically or mentally incapable of personally receiving and giving a
valid receipt for any payment due (unless prior claim therefor shall
have been made by a duly qualified committee or other legal
representative), such payment may be made to the spouse, son,
daughter, parent, brother, sister or other person deemed by the
Administrative Committee to have incurred expense for such person
otherwise entitled to payment.
6.11 Payment of Benefits -
6.11(a) If a portion of a Participant's Individual Account and
Deductible Account which is due and payable under this
Article VI, and the Participant has not elected otherwise in
accordance with the provisions of the Plan, any payment of
benefits or commencement thereof to the Participant shall
begin not later than sixty (60) days after the close of the
Plan Year in which occurs the later of:
(i) the Participant's having attained his Normal
Retirement Age; and
(ii) the termination of service of the Participant
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6.11(b) Notwithstanding any provision to the contrary, in all
events, the payment of benefits shall commence no later than
the Participant's required beginning date. A Participant's
required beginning date shall be the April 1 of the calendar
year following the later of the calendar year in which the
Participant attains 70 1/2 or the calendar year in which the
Participant terminates employment with an Employer. Life
expectancy of the Participant and the Participant's spouse
(other than for a life annuity) may be redetermined annually
if the Participant so elects for calculation of the amount
to be distributed. All payments shall be made to comply with
the requirements of IRC Section 401(a)(9).
6.12 Restriction on Distribution of Pre-Tax Contributions - Amounts
attributable to Pre-Tax Contributions shall not be distributed prior
to the earliest of one of the following events:
6.12(a) The Participant's retirement, death, Total and Permanent
Disability, or separation from service;
6.12(b) The termination of the Plan without establishment or
maintenance of a successor Defined Contribution Plan;
6.12(c) The date of the sale or disposition of substantially all of
the assets sale of eighty-five percent (85%) of the assets
shall be deemed to be substantially all) used by the
Employer in its trade or business to an unrelated
corporation provided the Employer continues to maintain this
Plan and the Participant continues employment with the
corporation acquiring such assets;
6.12(d) The date of sale or other disposition of the Employer of its
interest in a subsidiary to an unrelated entity provided the
Employer continues to maintain this Plan and the Participant
continues employment with the unrelated entity;
6.12(e) The Participant's attainment of age fifty-nine and one-half
(591/2); or
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6.12(f) The Participant's Hardship.
All distributions shall be subject to the Participant (and
spousal, if applicable) consent requirements pursuant to IRC Section
401(a)(11) and 417.
6.13 Special Retirement Opportunity - Notwithstanding the provisions of
Section 6.04, the following individuals shall be subject to the
provisions of Section 6.04 as if they had attained the age of
fifty-five (55) prior to retirement:
Wallace D. Brooks
Roderick D. Brown
Ann L. Burks
Joyce W. Davis
Mary D. Davis
Mary M. Duty
James L. Gore
A. Wayne Harris
John D. Kepliger
Peggy K. Mawyer
Floydie M. Peeples
Leon H. Shelton
Delores S. Thomas
Richard T. Willis
Lettie M. Cooke
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ARTICLE VII
WITHDRAWALS, REINSTATEMENTS AND LOANS
7.01 Withdrawals Generally - Subject to the terms and conditions set forth
below, a Participant may withdraw all or a part of the vested interest
in the Current Balance in his Individual Account. Withdrawal requests
are considered by the Administrative Committee once a week based on
processing schedules and procedures adopted by the Administrative
Committee. Payment of withdrawals shall be made in a lump sum as soon
as reasonably possible after the Administrative Committee's approval
of the withdrawal request. Amounts withdrawn may not be repaid. The
provisions of this Article VII are applicable to withdrawals from a
Participant's Individual Account. Withdrawals from a Participant's
Deductible Account are permitted pursuant to Section 7.04.
Notwithstanding anything in the Plan to the contrary, the
following provisions shall apply for any withdrawal made pursuant to
Article VII by an Insider (as defined below). The Insider's Individual
Account shall be reduced by sub-account in the order provided in the
applicable section and the investment funds within each sub-account
shall be reduced pro-rata, except to the extent of amounts invested in
the Trigon Stock Fund. To the extent amounts are invested in the
Trigon Stock Fund in any sub-account, all investment funds other than
the Trigon Stock Fund shall be reduced in full from all such
sub-accounts prior to the reduction of any amounts from the Trigon
Stock Fund. For purposes of this section, Insider means a Participant
who is subject to the reporting and liability provisions of Section 16
of the Securities Exchange Act of 1934, as amended.
7.02 Withdrawal of After-Tax Contributions - A Participant may withdraw all
or a portion of his After-Tax Contribution Account attributable to
After-Tax Contributions by requesting such withdrawal on forms
provided by the Administrative Committee.
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If a Participant's Individual Account attributable to his After-Tax
Contribution Account is invested in more than one of the Funds, any partial
withdrawal hereunder shall be taken from each such Fund(s) in the same
proportion that the total amount to be withdrawn pursuant to this Section 7.02
bears to the total Current Balance of the Participant's After Tax Contribution
Account. Amounts withdrawn pursuant to this Section 7.02 may not be repaid to
the Fund.
A Participant may elect to have the portion of his Individual Account
withdrawn hereunder that is invested in the Trigon Stock Fund paid in whole
shares of Trigon Stock, with the value of fractional shares paid in cash, or
entirely in cash. For purposes of determining the amount of a cash distribution,
Trigon Stock will be valued as of the Valuation Date as of which the
distribution is made. If a Participant fails to make an election to be paid in
Trigon Stock or cash, the Participant shall be paid in cash. If part or all of a
Participant's Individual Account is invested in any investment fund other than
the Trigon Stock Fund, that portion of the Account shall be paid in cash and
shall be valued as of the Valuation Date as of which the distribution is made.
7.03 Withdrawal of Rollover Account, Transfer Account and Vested Employer
Contribution Accounts -
7.03(a) A Participant may request a withdrawal of all or a portion
of his Rollover Account or the vested portion of his
Employer Matching Contributions Account or Profit Sharing
Matching Contributions Account held on his behalf. A
withdrawal from the Participant's Transfer Account shall be
allowed as provided in an adoption agreement or an Appendix
to the Plan. A Participant's withdrawal request must
identify the desired amount of the Current Balance in such
accounts that he wishes to withdraw. A Participant must
first exhaust his Rollover Account and then his Transfer
Account, if applicable, before making a withdrawal from his
Employer Matching
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Contributions Account. A Participant must exhaust his
Employer Matching Contributions Account before making a
withdrawal from his Profit Sharing Matching Contributions
Account. Further, withdrawals from a Participant's Transfer
Account, Employer Matching Contributions Account or Profit
Sharing Matching Contributions Account shall not include
those employer contributions under the transfer plan or
Employer Contributions which have been deposited in the Fund
in the current Plan Year and the two (2) previous Plan
Years.
7.03(b) Any withdrawal under this Section 7.03 shall not be
available until the Participant has first exhausted by
withdrawal the balance of his entire account under the
provisions of Section 7.02.
7.03(c) If a Participant's Individual Account attributable to his
Rollover Account, Transfer Account and Employer Matching
Contributions Account is invested in more than one of the
Funds as provided in Article IV, any partial withdrawal
hereunder shall be taken from each such Fund in the same
proportion that the total amount to be withdrawn pursuant to
this Section 7.03 bears to the total Current Balance of the
Participant's Rollover Account, Transfer Account and/or
Employer Matching Contributions Account.
7.03(d) Amounts withdrawn pursuant to this Section 7.03 may not be
repaid to the Fund.
7.03(e) A Participant may elect to have the portion of his
Individual Account withdrawn hereunder that is invested in
the Trigon Stock Fund paid in whole shares of Trigon Stock,
with the value of fractional shares paid in cash, or
entirely in cash. For purposes of determining the amount of
a cash distribution, Trigon Stock will be valued as of the
Valuation Date as of which the distribution is made. If a
Participant fails to make an election to be paid
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in Trigon Stock or cash, the Participant shall be paid in
cash. If part or all of a Participant's Individual Account
is invested in any investment fund other than the Trigon
Stock Fund, that portion of the Account shall be paid in
cash and shall be valued as of the Valuation Date as of
which the distribution is made.
7.04 Withdrawal of Deductible Account - A Participant may request a
withdrawal of all of the Deductible Current Balance of his Deductible
Account. A withdrawal from a Participant's Deductible Account may be
made independent of and without interrupting a Participant's
participation in other aspects of the Plan. Payment of such amount
shall be in a lump sum and shall be made as soon as reasonably
possible after the Administrative Committee receives the withdrawal
request.
7.05 Withdrawals at Age 59 1/2 Effective March 7, 1997, a Participant who
has attained the age of fifty-nine and one-half (59 1/2) may request a
withdrawal of all or a portion of his vested Individual Account.
7.05(a) Any withdrawal under this Section 7.05 shall be made so that
the withdrawal reduces the Current Balance of the
Participant's sub-accounts in the following order:
(1) After-Tax Contribution Account;
(2) Rollover Account;
(3) vested portion of the Participant's Transfer
Account;
(4) vested portion of the Participant's Employer
Matching Contributions Account;
(5) Pre-tax Contribution Account; and
(6) vested portion of the Participant's Profit Sharing
Matching Account.
7.05(c) If a Participant's Individual Account is invested in more
than one of the investment funds, any partial withdrawal
under this Section 7.05 from the
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Participant's After-Tax Contribution Account, Rollover
Account, Transfer Account, Employer Matching Contributions
Account, and Pre-Tax Contribution Account shall be taken
from each such investment fund in the same proportion that
the total amount to be withdrawn from such accounts bears to
the total Current Balance in the account from which the
withdrawal is taken.
7.05(d) A Participant may elect to have the portion of his
Individual Account withdrawn hereunder that is invested in
the Trigon Stock Fund paid in whole shares of Trigon Stock,
with the value of fractional shares paid in cash, or
entirely in cash. For purposes of determining the amount of
a cash distribution, Trigon Stock will be valued as of the
Valuation Date as of which the distribution is made. If a
Participant fails to make an election to be paid in Trigon
Stock or cash, the Participant shall be paid in cash. If
part or all of a Participant's Individual Account is
invested in any investment fund other than the Trigon Stock
Fund, that portion of the Account shall be paid in cash and
shall be valued as of the Valuation Date as of which the
distribution is made.
7.05(e) Amounts withdrawn pursuant to this Section 7.05 may not be
repaid to the Trust Fund.
7.06 Hardship Withdrawal - Upon the written request of a Participant with
proof of Hardship as determined by the Administrative Committee, a
Participant shall be allowed to withdraw all or a portion of the
Current Balance of his After-Tax Contribution Account, Pre-Tax
Contribution Account, Rollover Account, and the vested portions of his
Employer Matching Contributions Account, Profit Sharing Matching
Contributions Account and Transfer Account.
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Withdrawals made pursuant to this Section 7.06 shall be made so
that any distribution will reduce, in the following order, a
Participant's After-Tax Contribution Account, Rollover Account, the
vested portion of his Transfer Account, if applicable, the vested
portion of his Employer Matching Contributions Account, his Pre-Tax
Contribution Account, inclusive of the investment gains on Pre-Tax
Contributions earned through December 31, 1988, and lastly, his Profit
Sharing Matching Contributions Account. Notwithstanding the preceding,
effective January 1, 1989, any withdrawal hereunder from Pre-Tax
Contribution Accounts shall be limited to Employee deferrals
attributable to such Pre-Tax Contribution Accounts and not be
available from investment gains earned on and after January 1, 1989,
on such Pre-Tax Contributions. Withdrawals occasioned pursuant to this
Section 7.06 shall not invoke a forfeiture of a Participant's Employer
Matching Contributions Account or Profit Sharing Matching
Contributions Account or bar a Participant from future Pre-Tax
Contributions hereunder. If a Participant's Individual Account is
invested in more than one investment Fund as provided in Article IV,
any partial withdrawal hereunder from a Participant's After-Tax
Contribution Account, Rollover Account, the vested portion of his
Employer Matching Contributions Account, the vested portion of his
Profit Sharing Matching Contributions Account, Transfer Account, or
his Pre-Tax Contribution Account shall be taken from each such Fund in
the same proportion that the total amount to be withdrawn from such
accounts bears to the total Current Balance in the account from which
the withdrawal arises. Amounts withdrawn for Hardship from the portion
of the Participant's Individual Account that is invested in the Trigon
Stock Fund shall be paid in cash.
Amounts withdrawn pursuant to this Section 7.06 may not be repaid
to the Fund.
7.07 Loans - Upon written application of a Participant, the Administrative
Committee may direct that a loan from the Fund be made to the
Participant. Loan requests shall be processed once a week based on
processing schedules and procedures as adopted by
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the Administrative Committee and communicated to Participants. In
order to apply for a loan, a Participant shall complete a loan
application form provided by the Administrative Committee and provide
any additional documentation or financial information which the loan
request form or Administrative Committee requests. The application for
a loan, approval or denial of the loan and the resulting loan must be
made in accordance with the following requirements:
7.07(a) Loans shall be made available to Participants who are
parties in interest, as such term is defined in ERISA
Section 3(14), and who are Employees in a uniform and
nondiscriminatory manner with all Participants in similar
circumstances being treated alike. In no event shall any
discretionary power in granting or refusing a loan be
applied so as to discriminate in favor of any Highly
Compensated Employee or former Highly Compensated Employee.
7.07(b) In approving or denying a loan request by a Participant,
consideration shall only be given to the factors which would
be considered in a normal commercial setting by an entity in
the business of making similar types of loans based on the
Participant's creditworthiness determined on the basis that
the semi-monthly repayment amount on any loan may not exceed
fifteen percent (15%) of the Participant's semi-monthly
gross pay.
7.07(c) Upon receipt of a completed loan application, the
Administrative Committee shall review the application and
notify the Participant in a reasonable period of time
whether the loan has been approved or denied.
7.07(d) The amount of any such loan from the Fund shall be limited
to no more than the amount the Participant would be entitled
to receive from his Pre-Tax Contribution Account, Rollover
Account, and vested Employer Matching Contributions Account
and Transfer Account pursuant to the provisions of Section
6.01 if he terminated his employment as of such date. A
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Participant's Profit Sharing Matching Contributions Account
is not available for a Loan.
7.07(e) The maximum permissible loan available in any Plan Year from
all qualified plans of the Employer shall not exceed the
lesser of:
(i) fifty thousand dollars ($50,000) reduced by the
excess (if any) of:
(A) the highest outstanding balance of loans
from the Plan during the one (1) year
period ending on the day before the date
on which the loan was made, over
(B) the outstanding balance of loans from
the Plan on the date on which such loan
was made, or
(ii) fifty percent (50%) of the vested portion of the
Current Balance of the Participant's Individual
Account which he would have been entitled to
pursuant to the provisions of Section 6.01,
assuming the Participant terminated on the day the
loan was approved by the Administrative Committee.
7.07(f) Any loan made pursuant to this Section must generally be
repaid within a period not to exceed (5) years. However, the
Administrative Committee, in its discretion, may grant a
loan, the purpose of which is the acquisition of the primary
residence of the Participant. In such event, the repayment
period may be up to ten (10) years. The period of repayment
for any loan shall be arrived at by mutual agreement between
the Administrative Committee and the Participant. Except as
may be provided in regulations, each loan to which this
Section applies must provide for a substantially level
amortization of the loan with payments being made not less
frequently than quarterly.
7.07(g) The method of timing for repayment of any loan hereunder
shall be determined at the time the loan is made and a copy
shall be kept with the
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promissory note. Repayment of any loan shall be by payroll
deduction or by a lump sum payment. Notwithstanding the
preceding, if a Participant is on a leave of absence and is
not receiving Compensation from the Employer, he shall be
permitted to make loan payments by personal check on the
dates the loan payments otherwise would be due. A
Participant who is on a leave of absence from the Employer,
not longer than one (1) year, either without compensation or
with compensation (after income and employment tax
withholding) that is less than the amount of his loan
payment, does not have to make loan payments while on the
leave of absence. At the end of the leave of absence (or, if
earlier, after the first year of leave), the Participant
must make arrangements with the Administrative Committee to
repay the loan in full, including accrued interest for the
period during which loan payments were not made, by the
latest date permitted in Section 7.07(f). Also, each loan
payment due after the end of the leave (or, if earlier,
after the first year of leave) must be at least equal to the
amount of each loan payment required under the terms of the
original loan.
7.07(h) Interest on any loan hereunder shall be based on a
reasonable rate of interest being charged in Richmond,
Virginia, which shall be deemed to be one hundred (100)
basis points above the prime rate listed in the Wall Street
Journal, as determined by the Administrative Committee as of
the second to last business day of the month preceding the
month in which the loan application is made. The interest
rate, once fixed, shall remain in effect for the duration of
the loan.
7.07(i) All loans shall be evidenced by a promissory note and such
note shall be held as an asset of the Fund in a segregated
account applicable to the Participant to whom the loan is
granted. The loan shall be collateralized with
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the vested portion of the Current Balance of the
Participant's Individual Account; however, in no event shall
more than fifty percent (50%) of the vested portion of the
Participant's Individual Account be used as collateral.
7.07(j) The Administrative Committee shall have the discretion to
establish a fair and equitable policy regarding the
administration of loan within the Plan. In establishing this
policy, to the extent practicable, the Participant's
Individual Account will be reduced in the following order,
with such account balances thereafter reflected in the form
of a promissory note held by the Trustee on behalf of the
Participant:
Order of Individual Account Reduction
-------------------------------------
Pre-Tax Contribution Account
Rollover Account
Transfer Account
Employer Matching Contributions Account
The Participant's Individual Account shall be reduced
in the order shown above, and the investment funds within
each sub-account shall be reduced on a pro-rata basis.
7.07(k) All payments by a Participant representing interest shall be
considered as investment income of the Fund applicable to
the Participant.
7.07(l) All payments by a Participant representing principal shall
be used to reduce the outstanding balance of the loan and
principal and interest payments shall be credited to the
other investment accounts as may be chosen by the
Participant with respect to future Contributions to the
Plan.
7.07(m) No distribution shall be made to or by any Participant or
Beneficiary of a Participant unless and until all unpaid
loans, including accrued interest thereon, have been
liquidated. In the event of the death, retirement or
termination of employment of a Participant prior to the time
the loan is repaid,
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or failure to comply with any terms of the loan, the loan
shall be considered to be in default and the balance of such
loan shall become due and payable with such repayment being
satisfied (i) by satisfying the indebtedness from the amount
held in the Participant's Individual Account before making
payments to the Participant or his Beneficiary, (ii) by an
adjustment to any outstanding payroll due to the
Participant, and, lastly, (iii) from any other assets of the
Participant.
A loan shall be deemed to be in default as of the end
of a calendar year if at that time loan payments have not
been made on the scheduled due dates for a period of three
(3) or more consecutive calendar months. At the time the
loan is considered to be in default, the outstanding loan
balance and the interest thereon shall be treated as a
taxable distribution to the Participant and reported to the
Participant and the Internal Revenue Service for such
calendar year.
A loan shall be deemed to be in default if, at the end
of a calendar quarter, loan repayments are three (3) or more
months in arrears. The outstanding balance and accrued
interest thereon of a defaulted loan shall be a "deemed
distribution" to the Participant and reported as taxable
income to the Participant and the Internal Revenue Service
for such calendar year.
7.07(n) No loan shall be granted to a Participant unless the
Participant consents, in writing, that in the event of
default of the loan, the outstanding loan balance and any
interest credited pursuant to the loan thereafter shall be
deemed a taxable distribution to the Participant. Such
written consent shall be of the type and manner intended to
satisfy the requirements of IRC Section 411(a)(11) and shall
be specified in the promissory note.
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7.07(o) No more than one (1) Plan loan per Participant may be
outstanding at any time.
7.07(p) No loan shall be granted for less than one thousand dollars
($1,000.00).
7.07(q) Loan repayments will be suspended under this Plan to the
extent required under the Uniformed Services Employment and
Reemployment Rights Act of 1994 ("USERRA") and the special
rules relating to veterans' reemployment rights under USERRA
pursuant to Code section 414 (u)(4).
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ARTICLE VIII
FUNDING
8.01 Contributions - Contributions as provided for in Article III shall be
paid over to the Trustee within a reasonable time following the time
such Contributions were withheld from the Participant's Compensation
or made by the Employer and, in no event, later than the time required
under ERISA. All Contributions by the Employer shall be irrevocable,
except as herein provided. On receipt of Contributions, the Trustee
shall manage and administer the funds so received in accordance with
the provisions of the Plan.
8.02 Trustee - The Corporation will enter into an agreement with the
Trustee whereunder the Trustee will receive, invest and administer as
a trust fund Contributions made under this Plan in accordance with the
Trust Agreement. The Trustee shall, in accordance with the terms of
the Trust Agreement, accept and receive all sums of money paid to it
from time to time by the Employer.
The Trust Agreement is attached hereto and incorporated by
reference as a part of the Plan, and the rights of all persons
hereunder are subject to the terms of the Trust Agreement. The Trust
Agreement specifically provides, among other things, for the
investment and reinvestment of the Fund and the income thereof, the
management of the Fund, the responsibilities and immunities of the
Trustee, removal of the Trustee and appointment of a successor,
accounting by the Trustee and the disbursement of the Fund.
The Trustee shall establish and maintain investment funds in
accordance with the provisions of Article IV. Contributions shall be
allocated to and invested as part of the appropriate investment funds
as directed by the Investment Committee. Assets shall be transferred
from one investment fund to another as directed by the Investment
Committee to maintain the investment division desired by the
Participants.
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8.03 Exclusive Benefit - No part of the corpus or income of the Fund shall
be used for or diverted to purposes other than for the exclusive
benefit of Participants and their Beneficiaries or for payment of
expenses of operating the Plan and Fund as provided in Section 13.03,
nor shall any part thereof be recoverable to the Employee except as
provided in Section 13.06.
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ARTICLE IX
FIDUCIARIES
9.01 General - Each Fiduciary who is allocated specific duties or
responsibilities under the Plan or any Fiduciary who assumes such a
position with respect to the Plan shall discharge his duties solely in
the interest of Participants and Beneficiaries and for the purpose of
providing such benefits as stipulated herein to such Participants and
Beneficiaries, or defraying the operating expenses of the Plan and
Fund as provided in Section 13.03. Each Fiduciary in carrying out such
duties and responsibilities shall act with the care, skill, prudence,
and diligence under the circumstances then prevailing that a prudent
man acting in a like capacity and familiar with such matters would use
in exercising such authority or duties.
A Fiduciary may serve in more than one Fiduciary capacity and may
employ one or more persons to render advice with regard to his
Fiduciary responsibilities. All expenses reasonably incurred by a
Fiduciary on behalf of the Plan and Trust shall be reimbursed by the
Corporation or, at the Corporation's direction in accordance with
Section 13.03, from the Fund by the Trustee.
A Fiduciary may allocate any of his responsibilities for the
operation and administration of the Plan. In limitation of this right,
a Fiduciary may not allocate any responsibilities as contained herein
relating to the management or control of the Fund except through the
employment of an Investment Manager as provided in Section 9.03 and in
the Trust Agreement relating to the Fund.
9.02 Corporation - The Corporation established and maintains the Plan for
the benefit of its Employees and of necessity retains control of the
operation and administration of the Plan. The Corporation in
accordance with specific provisions of the Plan has, as herein
indicated, delegated certain of these rights and obligations to the
Trustee the
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Administrative Committee and the Investment Committee and these
parties shall be solely responsible for these, and only these,
delegated rights and obligations.
The Corporation shall supply such full and timely information for
all matters relating to the Plan as (a) the Investment Committee, (b)
the Administrative Committee, (c) the Trustee, and (d) the accountant
engaged on behalf of the Plan by the Corporation may require for the
effective discharge of their respective duties.
9.03 Trustee - The Trustee, in accordance with the Trust Agreement, shall
have exclusive authority and discretion to manage and control the
Fund, except that the Corporation may in its discretion direct the
Trustee with regard to investments to be made or employ at any time
and from time to time an Investment Manager, with respect to all or a
designated portion of the assets comprising the Fund, in which case
the Corporation or Investment Manager, as may be applicable, shall
have complete control and responsibility over all matters pertaining
to the investment of such assets as so directed.
9.04 Administrative Committee - The Corporation shall appoint a committee
of not less than three (3) persons to hold office during the pleasure
of the Corporation, such committee to be known as the Administrative
Committee. The Administrative Committee shall choose from among its
members a chairman and a secretary. Any action of the Administrative
Committee shall be determined by the vote of a majority of its
members. Either the chairman or the secretary may execute any
certificate or other written direction on behalf of the Administrative
Committee.
The Administrative Committee shall hold meetings upon such
notice, at such place or places and at such time or times as the
Administrative Committee may from time to time determine. The chairman
or any two (2) members may call meetings. A majority of the members of
the Administrative Committee at the time in office shall constitute a
quorum for the transaction of business.
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In accordance with the provisions hereof, the Administrative
Committee has been delegated certain administrative functions relating
to the Plan with all powers necessary to enable it to properly carry
out such duties. The Administrative Committee shall have no power in
any way to modify, alter, add to or subtract from, any provisions of
the Plan. The Administrative Committee shall have the duty and
discretionary authority to construe the Plan and to determine all
questions that may arise thereunder relating to (a) the eligibility of
individuals to participate in the Plan, (b) the amount of benefits to
which any Participant or Beneficiary may become entitled hereunder and
(c) any situation not specifically covered by the provisions of the
Plan. All disbursements by the Trustee, except for the payment of
operating expenses of the Plan and Fund at the direction of the
Corporation as provided in Section 13.03, shall be made upon, and in
accordance with, the written directions of the Administrative
Committee. When the Administrative Committee is required in the
performance of its duties hereunder to administer or construe, or to
reach a determination, under any of the provisions of the Plan, it
shall do so in a uniform, equitable and nondiscriminatory basis. The
Administrative Committee may delegate certain duties as specified
herein as provided in Section 9.01.
After the close of each calendar quarter in the Plan Year or more
frequently as determined by the Administrative Committee, the
Administrative Committee shall distribute to each Participant a
statement setting forth a summary of his and his Employer's
Contributions and the Current Balance in his Individual Account and
Deductible Current Balance of his Deductible Account.
The Administrative Committee shall establish rules and procedures
to be followed by Participants and Beneficiaries in filing
applications for benefits and for furnishing and verifying proofs
necessary to establish age, Service, Years of Service and any other
matters required in order to establish their rights to benefits in
accordance with the Plan.
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9.05 Investment Committee - Investment Committee means the committee, as
specified in the Trust Agreement, as constituted from the time to time
which has the responsibility for allocating the assets of the Fund
among the separate accounts and any Trustee investment accounts, for
monitoring the diversification of the investment of the Fund in
foreign securities and of maintaining the custody of foreign
investments abroad, for assuring that the Plan does not violate any
provisions of ERISA limiting the acquisition or holding of "employer
securities" or "employer real property" and for the appointment and
removal of Investment Managers.
9.06 Claims Procedures - The Administrative Committee shall receive all
applications for benefits. Upon receipt by the Administrative
Committee of such an application, it shall determine all facts that
are necessary to establish the right of an applicant to benefits under
the provisions of the Plan and the amount thereof as herein provided.
Upon request, the Administrative Committee will afford the applicant
the right of a hearing with respect to any finding of fact or
determination. The applicant shall be notified in writing of any
adverse decision with respect to his claim within ninety (90) days
after its submission. The notice shall be written in a manner
calculated to be understood by the applicant and shall include:
9.06(a) the specific reason or reasons for the denial;
9.06(b) specific references to the pertinent Plan provisions on
which the denial is based;
9.06(c) a description of any additional material or information
necessary for the applicant to perfect the claim and an
explanation why such material or information is necessary;
and
9.06(d) an explanation of the Plan's claim review procedures.
If special circumstances require an extension of time for
processing the initial claim, a written notice of the extension and
the reason therefor shall be furnished to the
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claimant before the end of the initial ninety (90) day period. In no
event shall such extension exceed ninety (90) days.
In the event a claim for benefits is denied or if the applicant
has had no response to such claim within ninety (90) days of its
submission (in which case the claim for benefits shall be deemed to
have been denied), the applicant or his duly authorized
representative, at the applicant's sole expense, may appeal the denial
to the Administrative Committee within sixty (60) days of the receipt
of written notice of denial or sixty (60) days from the date such
claim is deemed to be denied. In pursuing such appeal the applicant or
his duly authorized representative:
9.06(e) may request in writing that the Administrative Committee
review the denial;
9.06(f) may review pertinent documents; and
9.06(g) may submit issues and comments in writing.
The decision on review shall be made within sixty (60) days of
receipt of the request for review, unless special circumstances
require an extension of time for processing, in which case a decision
shall be rendered as soon as possible, but not later than one hundred
twenty (120) days after receipt of a request for review. If such an
extension of time is required, written notice of the extension shall
be furnished to the claimant before the end of the original sixty (60)
day period. The decision on review shall be made in writing, shall be
written in a manner calculated to be understood by the claimant, and
shall include specific references to the provisions of the Plan on
which such denial is based. If the decision on review is not furnished
within the time specified above, the claim shall be deemed denied on
review.
9.07 Records - All acts and determinations of the Administrative Committee
shall be duly recorded by the secretary thereof and all such records,
together with such other documents as may be necessary in exercising
its duties under the Plan shall be preserved in the custody of such
secretary. Such records and documents shall at all
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times be open for inspection and for the purpose of making copies by
any person designated by the Corporation. The Administrative Committee
shall provide such timely information, resulting from the application
of its responsibilities under the Plan, as needed by the Trustee and
the accountant engaged on behalf of the Plan by the Corporation, for
the effective discharge of their respective duties.
9.08 Missing Persons - The Administrative Committee shall direct the
Trustee to make a reasonable effort to locate all persons entitled to
benefits under the Plan; however, notwithstanding any provision in the
Plan to the contrary, if, after a period of five (5) years from the
date such benefit shall be due, any such persons entitled to benefits
have not been located, their rights under the Plan shall be construed
as if the Participant had died. Before this provision becomes
operative, the Trustee shall send a certified letter to all such
persons at their last known address advising them that their interest
or benefits under the Plan shall be so construed. Any such amounts
shall be held by the Trustee for a period of three (3) additional
years (or a total of eight (8) years from the time the benefits first
become payable). If no distributee can be found, then any unclaimed
benefits shall be dealt with according to the laws of the Commonwealth
of Virginia pertaining to abandoned intangible personal property held
in a fiduciary capacity.
9.09 Maintenance of Individual Accounts, Deductible Accounts and Plan
Operations - It shall be the duty of the Administrative Committee or
such person as it may designate to maintain an up-to-date record of
all transactions pursuant to each Participant's Individual Account and
Deductible Account and to process all other day-to-day operations of
the Plan including: the enrollment of Participants; the distribution
of booklets, notices and other information regarding the Plan;
maintaining Beneficiary designation forms; explaining the optional
forms of benefit payouts which may be elected by a Participant under
the Plan; and communicating all other matters relating to
participation and entitlement to benefits to the Participants, the
accountant and
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other entities performing services for the Plan as may be necessary to
enable them to discharge their duties in a uniform, equitable and
nondiscriminatory manner with regard to all Participants or
Beneficiaries under similar circumstances.
9.10 Disclosure - The Administrative Committee shall see that descriptions
of the Plan are prepared for filing with the Department of Labor and
shall make available to Participants and Beneficiaries receiving
benefits under the Plan a summary of the Plan at such place and at
such times as may be required by federal statutes and regulations
issued thereunder.
The Administrative Committee shall arrange for the preparation
and filing of such annual reports, including financial statements of
the Plan's assets and liabilities, schedules, receipts and
disbursements and changes in financial position in such form, at such
place and at such times as may be required by federal statutes and
regulations.
The Administrative Committee shall furnish annually to all
Participants and Beneficiaries receiving benefits under the Plan a
copy of a summary of the financial statement of the Plan's assets and
liabilities and schedules of receipts and disbursements and such other
material as is necessary to fairly summarize the latest annual report
at such times and to the extent required by federal statutes and
regulations.
The Administrative Committee shall also make available, at its
principal office, copies of the Plan, the Trust Agreement, copies of
any contracts relating to the Plan, descriptions of the Plan, and
annual reports for examination by any Participant or Beneficiary. Upon
written request of any Participant or Beneficiary receiving benefits
under the Plan, the Administrative Committee shall furnish him a copy
of the latest Plan description, summary plan description, latest
annual report and a copy of the Plan and
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Trust Agreement. The Administrative Committee may make a reasonable
charge for the costs of furnishing copies of such documents.
9.11 Annual Accountings - The Corporation shall engage, on behalf of all
Participants, an independent qualified public accountant to certify
and render an opinion that the financial statements and schedules
prepared in conjunction with the Plan are presented fairly and are in
conformity with generally accepted accounting principles consistently
applied. Where assets of the Plan are held by a bank, supervised and
subject to periodic examination by a state or federal agency, which
bank prepares information concerning the assets of the Plan and
certifies that such information is accurate and the information is
made a part of the annual report, the accountant may rely on such
statements as accurate. If the assets are held by a bank, the
Corporation may delegate the responsibility for preparation of such
statements to the bank and may delegate the responsibility for the
preparation of such other forms and reports to such entity as it shall
select.
9.12 Funding Policy - The Corporation in consultation with the Investment
Committee, Trustee and Investment Manager, where applicable, shall
establish a funding policy and method to carry out the objectives of
the Plan. To formulate and maintain such policy, the Corporation, the
Trustee, the Investment Committee, the Investment Manager, where
applicable, and such other persons as may be designated by the
Corporation shall consult at least annually and more frequently if
necessary, to review the short- and long-range financial needs of the
Plan, the anticipated level of annual contributions and any material
changes thereto occurring during the year. The results of such annual
consultations shall be documented by the Corporation or its designee.
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9.13 Indemnification of Fiduciaries - Each member of the Board, and each
other employee of the Corporation who is determined to be a Fiduciary
under the terms of ERISA with respect to the Plan, shall be
indemnified by the Corporation against liability imposed on him and
against all expenses and costs which may be reasonably incurred by him
in connection with or resulting from any action, suit or proceeding,
or any claim against him, if he shall have been made a party to such
action, suit or proceeding, or such claim shall have been made by
reason of his being or having been a Fiduciary with respect to the
Plan. In the case of a settlement of any such action, proceeding or
claim before a final adjudication thereof, the right of
indemnification shall exist only to the extent that the Corporation
shall have consented to the settlement.
9.14 Equitable Allocations - The Administrative Committee shall establish
accounting procedures for the purpose of making allocations,
valuations and adjustments to Individual Accounts and Deductible
Accounts. Should the Administrative Committee determine that the
strict application of its accounting procedures will not result in an
equitable and nondiscriminatory allocation among Individual Accounts
and Deductible Accounts, or other circumstances arise which are not
covered hereunder, it may modify its procedures for the purposes of
achieving an equitable and nondiscriminatory allocation in accordance
with the general concepts of the Plan.
Further, notwithstanding anything contained herein to the
contrary, in order to administer the Plan in an equitable and
nondiscriminatory manner, the Administrative Committee may choose an
alternate date to value Individual Accounts and Deductible Accounts
for all purposes including distributions from the Plan, transfers
among funds within the plan, loans and any other transactions needing
a specific Valuation Date, provided such alternate Valuation Date is
within sixty (60) days after the date the Plan would otherwise value
Individual Accounts and Deductible Accounts.
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ARTICLE X
AMENDMENT AND TERMINATION OF THE PLAN
10.01 Amendment of The Plan - The Corporation shall have the right to
modify, alter or amend the Plan in whole or in part; provided,
however, (a) that any such action which affects Employer Contributions
to the Plan shall require approval of the Board of Directors and (b)
that the duties, powers and liabilities of any Trustee hereunder shall
not be increased without its written consent; and provided, further,
that any such action shall not, in any way, affect adversely the
benefits of persons who have retired under the Plan prior to the
effective date of such action, or of their Beneficiaries, nor shall it
adversely affect benefits accrued prior to the effective date of such
action. No amendment, modification or alteration shall have the effect
of causing a reversion to the Employer of any part of the principal or
income of the Fund. Notwithstanding anything contained herein to the
contrary, no amendment to the Plan shall decrease a Participant's
Individual Account and Deductible Account balance or eliminate an
optional form of distribution, except as permitted by law.
If the Plan's vesting schedule is amended or the Plan is amended
in any way that directly or indirectly affects the computation of a
Participant's vested benefit, each Participant with at least three (3)
years of Service may elect within a reasonable period of time after
the adoption of the amendment or change to have his vested percentage
computed under the Plan without regard to such amendment or change.
The period during which the election may be made shall commence with
the date the amendment is adopted or deemed to be made and shall end
on the latest of sixty (60) days after (a) the amendment is adopted,
(b) the amendment is effective or (c) the Participant is issued
written notice of the amendment by the Employer or Administrative
Committee.
10.02 Termination of The Plan - While the Employer expects to continue the
Plan indefinitely, continuance of the Plan is not assumed as a
contractual obligation. Each Employer
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reserves the right to discontinue its Contributions and to terminate
the Plan as it relates to its Employees without terminating the Plan
with respect to any other Employer by action of the Employer's Board
of Directors. Any Employer desiring to terminate the Plan as it
relates to its Employees shall give notice of such termination to the
Corporation and the Trustee at least six (6) months prior to the
effective date thereof (unless a shorter notice shall be agreed to by
the Corporation). On termination of the Plan or in the event of a
partial termination or curtailment), or discontinuance of
Contributions, the rights of present Participants (to the extent
affected by such action) in their account balances held pursuant to
the Plan as of the date of such event shall be nonforfeitable and the
Trustee shall continue to administer the Fund in accordance with the
provisions of the Plan and the Trust Agreement for the sole benefit of
the then Participants or Beneficiaries then receiving or entitled to
receive future benefits. In the event of a termination no further
Contributions will be made to the Plan.
10.03 Allocation of Funds - In the event of termination of the Plan, the
Administrative Committee shall allocate to the terminating Employer's
Employees as of the date of termination any previously unallocated
Contributions, such Employer's share of the Forfeitures, realized and
unrealized appreciation or depreciation, income or loss of the Fund to
the accounts of the Participants of the Plan affected by the
termination and any income, losses, realized and unrealized
appreciation or depreciation to Participants of the Plan who have not
received their benefits under the Plan.
10.04 Application of Assets - After assets of the Fund pertaining to the
terminating Employer have been allocated as provided in Section 10.03,
such assets shall be applied to whichever of the following options is
specified by the terminating Employer:
10.04(a) Transfer to a separate trust and held therein to provide
benefits, to the extent such assets have been allocated, to
the persons entitled to benefits under the Plan as it
applies to the terminating Employer.
10.04(b) Distribution in a single lump sum, in cash or as a rollover
to each individual pursuant to Section 10.03, provided such
distribution is permitted in accordance with IRC Section
401(k) and the regulations issued thereunder.
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10.05 Automatic Termination - Unless otherwise provided for, the Plan shall
be deemed to have automatically terminated with respect to any
Employer who becomes insolvent, is adjudged bankrupt, or is dissolved.
In the event of such automatic termination, the provisions of Sections
10.03 and 10.04 shall govern.
10.06 Merger, Consolidation and Transfers of Assets or Liabilities - No
merger or consolidation with, or transfer of assets or liabilities to
this Plan or from this Plan to any other plan shall be made, unless
each Participant would receive immediately after such event, a benefit
(determined as if the Plan had terminated at that time) which is equal
to or greater than the benefit he would have been entitled to receive
under the Plan immediately before such event had the Plan terminated
at that time.
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ARTICLE XI
PROVISIONS RELATIVE TO EMPLOYERS INCLUDED IN PLAN
11.01 Method of Participation - Any organization which is a member of the
same controlled group of organizations as determined pursuant to IRC
Sections 414(b), 414(c), 414(m) and 414(o) as the Corporation which
the Corporation shall have authorized to adopt the Plan may, by taking
appropriate action, become a party to the Plan by adopting the Plan as
a thrift plan for its Employees. Any corporation which becomes a party
to the Plan shall thereafter promptly deliver to the Trustee provided
for in Article VIII a certified copy of the resolutions or other
documents evidencing its adoption of the Plan and also a written
instrument showing the Corporation's approval of such organization
becoming party to the Plan. The Plan shall be maintained as a single
Plan for all participating Employers.
11.02 Withdrawal - Any one or more of the Employers included in the Plan may
withdraw from the Plan at any time by giving six (6) months advance
notice in writing of its or their intention to withdraw to the
Corporation and the Administrative Committee (unless a shorter notice
shall be agreed to by the Corporation).
Upon receipt of notice of any such withdrawal, the Administrative
Committee shall certify to the Trustee the equitable share of such
withdrawing Employer in the Fund as applicable to be determined by the
Administrative Committee. The Trustee shall thereupon set aside from
the Fund then held by it such securities and other property as it
shall, in its sole discretion, deem to be equal in value to such
equitable share. If the Plan is to be terminated with respect to such
Employer, the amount set aside shall be dealt with in accordance with
the provisions of Article X. If the Plan is not to be terminated with
respect to such Employer, the Trustee shall turn over such amount to
such trustee as may be designated by such withdrawing Employer, and
such securities and other property shall thereafter be held and
invested as a separate trust of the Employer which has so withdrawn,
and shall be used and applied according to the terms of a new
agreement and declaration of trust between the Employer so withdrawing
and the trustee so designated.
95
Neither the segregation of the Fund assets upon the withdrawal of
an Employer, nor the execution of a new agreement and declaration of
trust pursuant to any of the provisions of this Section 11.02, shall
operate to permit any part of the corpus or income of the Fund to be
used for or diverted to purposes other than for the exclusive benefit
of Participants and Beneficiaries except as may be otherwise provided
in Section 13.03 and Section 13.06.
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ARTICLE XII
TOP HEAVY PLAN PROVISIONS
12.01 General - Notwithstanding anything contained herein to the contrary,
in the event that this Plan when combined with all other plans
required to be aggregated pursuant to IRC Section 416(g) is deemed to
be a Top Heavy Plan for any Plan Year, the following conditions shall
become operative.
12.02 Definitions - For purposes of this Article, the following definitions
shall be applicable:
12.02(a) Determination Date means the last day of the Plan Year
preceding the Plan Year in which the determination is being
made. In the case of the first Plan Year, Determination Date
means the last day of such Plan Year.
12.02(b) Key Employee means any employee, former employee or
beneficiary of a former employee in an Employer plan who, at
any time during the Plan Year or any of the four (4)
preceding Plan Years is:
(i) An officer of the Employer having annual Maximum
Compensation greater than fifty percent (50%) of
the amount in effect under IRC Section
415(b)(1)(A) for any such Plan Year;
(ii) One (1) of the ten (10) employees having annual
Maximum Compensation from the Employer of more
than the limitation in effect under IRC Section
415(c)(1)(A) and owning (or considered as owning
within the meaning of IRC Section 318) more than a
one-half percent (1/2%) interest and the largest
interest in the Employer;
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(iii) A Five Percent (5%) Owner of the Employer; or
(iv) A one percent (1%) owner of the Employer having
annual Maximum Compensation from the Employer of
more than one hundred fifty thousand dollars
($150,000).
For purposes of Section 12.02(b)(i), no more than fifty
(50) employees or, if lesser, the greater of three (3) or
ten percent (10%) of employees shall be treated as officers.
Further, for purposes of determining the number of officers
taken into account under Section 12.02(b)(i), employees
described in IRC Section 414(q)(8) shall be excluded.
With respect to Section 12.02(b)(ii), if two (2)
employees have the same ownership interest in the Employer,
the employee having the greater annual Maximum Compensation
shall be treated as having a larger interest.
12.02(c) Non-Key Employee means an employee, former employee or
beneficiary of a former employee who is not a Key Employee.
12.02(d) Top Heavy Plan generally means on or after January 1, 1984,
any plan under which, as of any Determination Date, the
present value of the cumulative accrued benefits (inclusive
of Pre-Tax Contributions) under the plan for Key Employees
exceeds sixty percent (60%) of the present value of the
cumulative accrued benefits under the plan for all
employees.
For purposes of this definition:
(i) If such plan is a Defined Contribution Plan, the
present value of cumulative accrued benefits shall
be deemed to be the market value of all employee
accounts under the plan as of the Top Heavy
Valuation Date plus contributions to the plan as
of the Determination Date. If the plan is a
Defined Benefit Plan, the present value of
cumulative accrued benefits shall be deemed to be
the lump sum present value of a participant's
accrued benefit under such plan calculated on the
basis of interest and mortality as set forth in
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said plan as of the Top Heavy Valuation Date plus
contributions due under the plan as of the
Determination Date. Notwithstanding the above, for
purposes of determining the present value of the
cumulative accrued benefits, distributions made
within a five (5) year period ending on the
Determination Date must be included. The account
balances and accrued benefits of a Non-Key
Employee who was previously a Key Employee shall
be excluded from the computation hereunder.
(ii) Each plan of the Employer required to be included
in an "aggregation group" shall be treated as a
Top Heavy Plan if such group is a top heavy group.
(iii) The term "aggregation group" means
(A) each plan of the Employer which is
currently effective or which has
terminated within the five (5) year
period ending on the Determination Date
in which a Key Employee is a participant
in the Plan Year containing the
Determination Date or any of the four
(4) preceding Plan Years; and
(B) each other plan of the Employer which
enables any plan in (A) to meet the
requirements of IRC Sections 401(a)(4)
or 410.
A permissive aggregation group consists of
plans of the Employer that are required to be
aggregated, plus one (1) or more plans of the
Employer that are not part of a required
aggregation group but that satisfy the
requirements of IRC Sections 401(a)(4) and 410
when considered together with the required
aggregation group.
(iv) If any individual has not performed any service
for the Employer at any time during the five (5)
year period ending on the
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Determination Date, any accrued benefit for such
individual shall not be taken into account in the
testing procedure herein described.
12.02(e) Top Heavy Valuation Date means the most recent Valuation
Date occurring within a twelve (12) month period ending on
the Determination Date.
These definitions shall be interpreted consistent with IRC
Section 416 and rules and regulations issued thereunder. Further, such
law and regulations shall be controlling in all determinations under
these definitions inclusive of any provisions and requirements stated
thereunder but hereinabove absent.
12.03 Minimum Top Heavy Contribution - In a Plan Year in which the Plan
becomes a Top Heavy Plan, inclusive of a Plan Year in which the Plan
is considered a Top Heavy Plan pursuant to the provisions of Section
1.416-1 T-5 of the regulations under IRC Section 416 but has not
terminated, and the aggregate Contributions by the Employer to all
Non-Key Employees allocated to their Individual Accounts are less than
three percent (3%) of Maximum Compensation (exclusive of Pre-Tax
Contributions for Plan Years beginning after December 31, 1988), then
the Employer shall contribute to the Plan an amount necessary to
provide a minimum Contribution including Forfeitures of at least three
percent (3%) of Maximum Compensation to such Non-Key Employees who are
employed as of the last day of the Plan Year regardless of (a) whether
such Non-Key Employee has completed one thousand (1,000) Hours of
Service, (b) whether such Non-Key Employee has made Pre-Tax
Contributions to the Plan, or (c) the level of the Non-Key Employee's
Compensation. The minimum Contribution required herein shall not be
forfeited in the event the Participant withdraws his Pre-Tax
Contributions. In no event, however, shall the allocation of the
minimum Contribution to the Individual Accounts of Non-Key Employees
be greater than the total allocation of Contributions by the Employer
(inclusive of Pre-Tax Contributions) to the Individual Accounts for
Key Employees. Any special Contribution or reallocation as herein
provided shall be made
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to the Employer Matching Contributions Account on the basis of the
ratio that the Non-Key Employees' Maximum Compensation bears to the
total Maximum Compensation of all Non-Key Employees.
A Top Heavy Contribution of less than three percent (3%) shall
not be permissible if the Employer maintains a Defined Benefit Plan,
which designates this Plan to satisfy IRC Section 401(a).
12.04 Defined Benefit Plan Minimum Accrued Benefit - If the Employer also
maintains a Defined Benefit Plan and the Defined Benefit Plan provides
the minimum accrued benefit determined pursuant to IRC Section
416(c)(1), then the adjustment provided in Section 12.03 shall not be
required.
12.05 Multiple Plan Participation - If Section 12.03 or Section 12.04 is
applicable, then the multiplier of 1.25 in Sections 5.10(a) and
5.10(c) shall be reduced to 1.0.
12.06 No Duplication of Minimum Benefit - These Top Heavy Plan provisions
shall not require that the entire defined benefit minimum benefit and
the defined contribution minimum contribution be provided. To the
extent that there is a defined benefit accrued benefit, it shall be
controlling. To the extent that there shall be a contribution by the
Employer to a Defined Contribution Plan, then there shall be a
determination as to whether the defined contribution amount is
comparable to the difference between the defined benefit minimum
benefit and the minimum defined benefit accrued benefit required under
IRC Section 416. If the defined contribution amount is not comparable,
then the difference shall be provided in the Defined Benefit Plan.
12.07 Top Heavy Assumptions - For purposes of determining whether a Defined
Benefit Plan is a Top Heavy Plan, calculations shall be based upon
actuarial assumptions stipulated in such plan for this purpose. If no
assumptions are provided, the calculation shall be based upon The
UP-1984 Table of Mortality at six percent (6%) interest with such
determination being made on the Determination Date.
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12.08 Minimum Vesting - If the vesting schedule provided in Section 6.01 is
less liberal than the vesting schedule hereinafter provided, then such
vesting schedule shall be substituted with the following for each
Participant with an Hour of Service after the Plan becomes a Top Heavy
Plan, and such schedule shall remain in effect in all future Plan
Years.
Vested
Service Percentage
------- ----------
Less than 3 year 0%
3 years or more 100%
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ARTICLE XIII
MISCELLANEOUS
13.01 Governing Law - The Plan shall be construed, regulated and
administered according to the laws of the Commonwealth of Virginia
except in those areas preempted by the laws of the United States of
America.
13.02 Construction - The headings and subheadings in the Plan have been
inserted for convenience of reference only and shall not affect the
construction of the provisions hereof. In any necessary construction
the masculine shall include the feminine and the singular the plural,
and vice versa.
13.03 Expenses - The operating expenses of the Plan and Fund shall be paid
by the Employer or, upon the direction of the Corporation from the
Fund to the extent such expenses are permitted to be paid from the
Fund. The determination of whether expenses may be charged against the
Fund shall be made by the Corporation. No Employee shall be entitled
to compensation for his services with respect to the Plan other than
his normal compensation received as an Employee.
13.04 Participant's Rights; Acquittance - No Participant in the Plan shall
acquire any right to be retained in the Employer's employ by virtue of
the Plan, nor, upon his dismissal, or upon his voluntary termination
of employment, shall he have any right or interest in and to the Fund
other than as specifically provided herein. The Employer shall not be
liable for the payment of any benefit provided for herein; all
benefits hereunder shall be payable only from the Fund.
13.05 Spendthrift Clause - Except as provided in IRC Section 401(a)(13)(B)
relating to qualified domestic relations orders as defined in IRC
Section 414(p), none of the benefits, payments, proceeds or
distributions under this Plan shall be subject to the claim of any
creditor of the Participant or to the claim of any creditor of any
Beneficiary hereunder or to any legal process by any creditor of such
Participant of any such
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Beneficiary; and neither such Participant or any such Beneficiary
shall have any right to alienate, commute, anticipate, or assign any
of the benefits, payments, proceeds or distributions under this Plan.
Notwithstanding anything contained herein to the contrary, upon
the receipt by the Plan of a Domestic Relations Order, the following
provisions of this Section 13.05 shall become effective.
13.05(a) Determination of Qualified Domestic Relations Order - Upon
receipt by the Plan of a Domestic Relations Order, the
Administrative Committee shall promptly notify the
Participant and any Alternate Payee of such receipt and the
Plan's procedures for determining if such order is a
Qualified Domestic Relations Order. In accordance with
reasonable procedures established by the Administrative
Committee, the Administrative Committee shall determine
whether such order is a Qualified Domestic Relations Order
and shall notify the Participant and Alternate Payee of such
determination within a reasonable time thereafter.
Notwithstanding anything contained herein to the contrary,
if a benefit is being paid pursuant to a Domestic Relations
Order on January 1, 1985, such order shall be considered to
be a Qualified Domestic Relations Order. During the period
of time in which the Administrative Committee is making the
determination of whether the Domestic Relations Order is a
Qualified Domestic Relations Order, the Administrative
Committee shall segregate in a separate account in the Plan
or in an escrow account the amounts which would have been
payable to the Alternate Payee during such period if the
order had been determined to be a Qualified Domestic
Relations Order.
In the case of any payment before a Participant has
separated from service with the Employer, a Domestic
Relations Order shall be a Qualified
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Domestic Relations Order regardless of the fact that such
order requires that payment of benefits be made to an
Alternate Payee
(i) on or after the date on which the Participant
attains or first would have attained his Early
Retirement Date,
(ii) as if the Participant had retired on the date on
which such payment is to begin under such order
taking into account only the present value of the
benefits actually accrued and not taking into
account the present value of any Employer subsidy
for early retirement based on the interest rate
specified in the Plan or, if no rate is specified,
five percent (5%), and
(iii) in any form in which such benefits may be paid
under the Plan to the Participant (other than in
the form of a joint and survivor annuity with
respect to the Alternate Payee and his or her
subsequent spouse).
In the event a Qualified Domestic Relations Order
specifies that benefits commence immediately to the
Alternate Payee in one of the forms of payment provided
hereunder, payment from the Plan shall commence in
accordance with such Qualified Domestic Relations Order.
13.05(b) Payment to Alternate Payee - If the Domestic Relations Order
is determined to be a Qualified Domestic Relations Order
within eighteen (18) months, the Administrative Committee
shall pay the segregated amounts to the person or persons
entitled thereto.
If it is determined that the order is not a Qualified
Domestic Relations Order or the issue as to whether such
order is a Qualified Domestic Relations Order is not
resolved within eighteen (18) months, then the
Administrative Committee shall pay the segregated amount to
the person who would have been entitled to such amounts as
if there had been no order.
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Any determination that an order is a Qualified Domestic
Relations Order which is made after the close of the
eighteen (18) month period shall be applied prospectively
only.
13.05(c) Definitions - For purposes of this Section 13.05, the
following definitions shall be applicable:
(i) Alternate Payee means any spouse, child or other
dependent of a Participant who is recognized by a
Domestic Relations Order as having a right to
receive all, or a portion of, the benefits payable
under a Plan with respect to such Participant.
(ii) Domestic Relations Order - Any judgment, decree or
order (including approval of a property settlement
agreement) which
(A) relates to the provisions of child
support, alimony payments, or marital
property rights to a spouse, child or
other dependent of a Participant, and
(B) is made pursuant to a state domestic
relations law (including a community
property law).
(iii) Qualified Domestic Relations Order - A Domestic
Relations Order which creates or recognizes the
existence of an Alternate Payee's right to, or
assigns to an Alternate Payee the right to,
receive all or a portion of the benefits payable
with respect to a Participant under the Plan;
provided that such Domestic Relations Order
clearly specifies
(A) the name and last known mailing address
(if any) of the Participant and the name
and mailing address of each Alternate
Payee covered by the order,
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<PAGE>
(B) the amount or percentage of the
Participant's benefit to be paid by the
Plan to each Alternate Payee or the
manner in which such amount or
percentage is to be determined,
(C) the number of payments or period to
which such order applies, and
(D) each plan to which such order applies.
A Domestic Relations Order meets
the requirements of this subsection only
if such order does not require the Plan
(E) to provide any type or form of benefits,
or any optional payment form, not
otherwise provided under the Plan,
(F) to provide increased benefits
(determined on the basis of Actuarial
Equivalent value), or
(G) to make payment of benefits to an
Alternate Payee which are required to be
paid to another Alternate Payee under
another order previously determined to
be a Qualified Domestic Relations Order.
13.05(d) Establishment of Plan Procedures - For purposes of this
Section 13.05, reasonable procedures shall be established
under the Plan to determine the qualified status of Domestic
Relations Orders and to administer distributions under
Qualified Domestic Relations Orders. The procedures
established by the Plan shall:
(i) be set forth in writing,
(ii) provide for the notification of each person
specified in a Domestic Relations Order as
entitled to payment of benefits under the Plan (at
the address included in the Domestic Relations
Order) of such procedures promptly upon receipt by
the Plan of the Domestic Relations Order, and
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(iii) permit an Alternate Payee to designate a
representative for receipt of copies of notices
that are sent to the Alternate Payee with respect
to a Domestic Relations Order.
13.06 Mistake of Fact - Notwithstanding anything herein to the contrary,
there shall be returned to the Employer any Contribution which was
made as follows:
13.06(a) By mistake of fact, as determined by the Internal Revenue
Service or in such other manner as the Internal Revenue
Service may permit;
13.06(b) Prior to the receipt of initial qualification; provided that
such Contribution was conditioned on initial qualification
of the Plan, the Plan received an adverse determination with
respect to its initial qualification, and the application
for determination of initial qualification was made by the
time prescribed by law for filing the Employer's tax return
for the taxable year in which the Plan was adopted, or such
later date as the Secretary of Treasury may prescribe; or
13.06(c) In an amount that exceeded the deductible limits on such
Contribution as set forth under IRC Section 404, as
determined by the Internal Revenue Service or in such other
manner as the Internal Revenue Service may permit, provided
such Contribution was conditioned on its deductibility.
The return of any Contribution as hereinbefore provided shall be made
within one (1) year after the payment of the Contribution, denial of
the initial qualification of disallowance of the deduction (to the
extent disallowed, whichever is applicable. Any Contribution returned
due to mistake of fact under Section 13.06(a) or disallowance of a tax
deduction under Section 13.06(c) shall be reduced by its share of the
losses and expenses of the Fund but shall not be increased by income
or gains of the Fund, provided that the return of such Contribution
shall not be permitted to cause the balance of the Individual Account
of any Participant to be less than the balance that would have been in
his Individual Account had such Contribution not been made. Any
Contribution
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returned to the Employer due to denial of initial
qualification under Section 13.06(b) shall be equal to the entire
assets of the Plan attributable to Contributions by the Employer.
13.07 Counterparts - The Plan and the Trust Agreement may be executed in any
number of counterparts, each of which shall constitute but one and the
same instrument and may be sufficiently evidenced by any one
counterpart.
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ADOPTION OF THE PLAN
Anything herein to the contrary notwithstanding, this Plan is amended and
maintained under the condition that it shall continue to be approved and
qualified by the Internal Revenue Service under IRC Section 401(a) and that the
Trust hereunder is exempt under IRC Section 501(a), or under any comparable
sections of any future legislation which amends, supplements or supersedes such
sections. If it should be found by the Internal Revenue Service that the Plan as
amended and restated hereby is not qualified, the Corporation may modify the
Plan to meet Internal Revenue Service requirements.
As evidence of its adoption of the Plan, Trigon Insurance Company has
caused this instrument to be signed by its duly authorized officers, and its
corporate seal to be affixed hereto this day _________ of __________, 19__.
TRIGON INSURANCE COMPANY
By:
-----------------------------------------
Senior Vice President, Corporate Services
ATTEST:
By:
--------------------------
Secretary
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<PAGE>
APPENDIX A
PROVISIONS APPLICABLE TO CONSOLIDATED RISK MANAGEMENT SERVICES
Introduction - Effective as of December 31, 1990, Consolidated Risk Management
Services ("CRMS"), a subsidiary of Blue Cross and Blue Shield of Virginia became
a participating Employer by adoption of the Employees' Thrift Plan of Blue Cross
and Blue Shield of Virginia. CRMS had previously maintained the Consolidated
Risk Management Services Employee Retirement Plan ("CRMS Plan") and effective as
of December 31, 1990, the CRMS Plan was merged into the Employee Thrift Plan of
Blue Cross and Blue Shield of Virginia and assets of the CRMS Plan were
transferred to the Fund held pursuant to this Plan.
CRMS Employer Account means the account established for a Participant to hold
the value of discretionary and matching contributions made under the provisions
of the CRMS Plan through December 31, 1990, and the proportionate share of the
adjustment of the Fund determined in accordance with Section 5.07. All amounts
held in a Participant's CRMS Employer Account shall at all times be one hundred
percent (100%) vested.
CRMS Plan means the Consolidated Risk Management Services Employee Retirement
Plan as in effect through December 31, 1990, and which was merged into this Plan
as of December 31, 1990.
Rollover Account - The value of rollover contributions made pursuant to the
provisions of the CRMS Plan for periods through December 31, 1990 shall be
credited to the Participant's Rollover Account.
Pre-Tax Contribution Account - The value of pre-tax contributions made under the
provisions of the CRMS Plan through December 31, 1990 shall be credited to the
Participant's Pre-Tax Contribution Account.
CRMS Employer Account - Effective as of December 31, 1990, a CRMS Employer
Account shall be established for discretionary and matching contributions of
Participants who were participants of the CRMS Plan on December 31, 1990. A
Participant shall at all times be fully vested in his CRMS Employer Account.
Withdrawal of CRMS Employer Account - A Participant may request a withdrawal of
all or a portion of his CRMS Employer Account held on his behalf. A
Participant's withdrawal request
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must identify the desired amount of the Current Balance in his CRMS Employer
Account that he wishes to withdraw. A Participant must first exhaust his
Rollover Account, and then his CRMS Employer Account, if applicable, before
making a withdrawal from his Employer Matching Contributions Account. Further,
withdrawals from a Participant's CRMS Employer Account shall not include those
employer contributions under the CRMS Plan which have been deposited in the Fund
in the current Plan Year and the two (2) previous Plan Years.
Any withdrawal under this Appendix A shall not be available until the
Participant has first exhausted by withdrawal the balance of his entire account
under the provisions of Section 7.02.
If a Participant's Individual Account attributable to his CRMS Employer
Account is invested in more than one of the Funds as provided in Article IV, any
partial withdrawal hereunder shall be taken from each such Fund in the same
proportion that the total amount to be withdrawn pursuant to this Appendix bears
to the total Current Balance of the CRMS Employer Account. Amounts withdrawn
pursuant to this Appendix A may not be repaid to the Fund.
Hardship Withdrawal - Upon the written request of a Participant with proof
of Hardship as determined by the Administrative Committee, a Participant shall
be allowed to withdraw all or a portion of the Current Balance of his CRMS
Employer Account.
Withdrawals made pursuant to this Appendix A shall be made so that any
distribution will first reduce a Participant's After-Tax Contribution Account
and then his Rollover Account, inclusive of the investment gains on Pre-Tax
Contributions earned through December 31, 1988. Further any withdrawal from
Pre-Tax Contribution Accounts shall first be made from pre-tax contributions
made under the provisions of the CRMS Plan, if any, which are held in Pre-Tax
Contribution Accounts. Notwithstanding the preceding, effective January 1, 1989,
any withdrawal hereunder from Pre-Tax Contribution Accounts shall be limited to
Employee deferrals attributable to such Pre-Tax Contribution Accounts and not be
available from investment gains earned on and after January 1, 1989, on such
Pre-Tax Contributions. Withdrawals occasioned pursuant to this Appendix A shall
not invoke a forfeiture of a Participant's Employer Matching Contributions
Account or bar a Participant from future Pre-Tax
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Contributions hereunder. If a Participant's CRMS Account is invested in more
than one Investment Fund, any partial withdrawal hereunder from a Participant's
CRMS Employer Account shall be taken from each such Fund in the same proportion
that the total amount to be withdrawn from such account bears to the total
Current Balance in the account from which the withdrawal arises. Amounts
withdrawn pursuant to this Appendix A may not be repaid to the Fund.
Withdrawals While Employed - Applicable to CRMS Plan Participants - A
Participant who participated in the CRMS Plan may request a withdrawal of all or
a portion of the lesser of Section (a) or (b) at any time after attaining age
fifty-nine and one-half (59 1/2).
(a) The value as of December 31, 1990 of:
(i) his CRMS Employer account;
(ii) his pre-tax contributions made under the CRMS Plan which are held
in his Pre-Tax Contribution Account; and
(iii) his rollover contributions under the CRMS Plan which are held in
his Rollover Account.
(b) The balance held in:
(i) his CRMS Employer Account;
(ii) his Pre-Tax Contribution Account attributable to pre-tax
contributions made under the CRMS Plan; and
(iii) his Rollover Account attributable to rollover contributions made
under the CRMS Plan.
Withdrawals shall be made in a manner that the distribution will first
reduce the amount that is available from his Pre-Tax Contribution Account, then
his CRMS Employer Account and lastly, the amount available from his Rollover
Account.
Effective January 1, 1996, amounts withdrawn under this Appendix come from
investment funds on a pro-rata basis.
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The Administrative Committee shall direct the Trustee to make the
distribution in a lump sum as soon as reasonably possible following the date the
withdrawal request is received. Amounts withdrawn under this Section may not be
repaid to the Fund.
Loans - The amount of any loan from the Fund shall be limited to no more
than the amount the Participant would be entitled to receive from his CRMS
Employer Account pursuant to the provisions of Section 6.01 if he terminated his
employment as of such date.
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APPENDIX B
PROVISIONS APPLICABLE TO PRIORITY HEALTH CARE, INC.
Introduction - Effective as of July 1, 1995, employees of Priority Health Care,
Inc. and its following subsidiaries - Priority Health Plan, Inc., Priority
Insurance Agency, Inc. and Health First, Inc., (hereinafter referred to as
Priority Employees) became employees of HealthKeepers, Inc. Prior to July 1,
1995, Priority Employees participated in the Tidewater Medical Group, Inc.
401(k) Plan (hereinafter referred to as the Tidewater Plan). Effective July 1,
1995, the value of the account balances of the Priority Employees were
transferred from the Tidewater Plan into the Transfer Account in the Plan.
Vesting - A Participant who was a Priority Employee shall be fully vested in his
Transfer Account attributable to funds transferred from the Tidewater Plan.
115
EXHIBIT 10.10
TRIGON INSURANCE COMPANY
401(k) RESTORATION PLAN
Amended and Restated Effective October 1, 1998
<PAGE>
TRIGON INSURANCE COMPANY
401(k) RESTORATION PLAN
TABLE OF CONTENTS
Page
ARTICLE I PURPOSE AND EFFECTIVE DATE..........................................1
1.1 Title..................................................................1
1.2 Purpose................................................................1
1.3 Effective Date.........................................................1
ARTICLE II DEFINITIONS AND CONSTRUCTION OF THE PLAN DOCUMENT..................2
2.1 Alternate Payee........................................................2
2.2 Beneficiary............................................................2
2.3 Board..................................................................2
2.4 Bookkeeping Account....................................................2
2.5 Change of Control......................................................2
2.6 Committee..............................................................3
2.7 Company................................................................3
2.8 Compensation...........................................................3
2.9 Deferred Compensation..................................................3
2.10 Disability............................................................3
2.11 Domestic Relations Order..............................................3
2.12 Early Retirement......................................................3
2.13 Election Date.........................................................3
2.14 Employee..............................................................4
2.15 Enrollment/Change Form................................................4
2.16 LTIP..................................................................4
2.17 Participant...........................................................4
2.18 Plan..................................................................4
2.19 Plan Administrator....................................................4
2.20 Plan Year.............................................................4
2.21 Qualified Plan........................................................4
2.22 Restricted Stock Award................................................4
2.23 Restricted Stock Election.............................................4
2.24 Stock Election Form...................................................4
2.25 Termination of Service................................................5
2.26 Trigon Stock..........................................................5
2.27 Valuation Date........................................................5
2.28 Value.................................................................5
2.29 Gender and Number.....................................................5
2.30 Titles................................................................5
-i-
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ARTICLE III ELIGIBILITY AND PARTICIPATION.....................................6
3.1 Eligibility............................................................6
3.2 Participation..........................................................6
ARTICLE IV PARTICIPANT DEFERRALS OF COMPENSATION AND COMPANY
MATCHING CONTRIBUTIONS........................................................7
4.1 Compensation Deferral..................................................7
4.2 Restricted Stock Election..............................................7
4.3 Matching Contribution..................................................7
4.4 Election to Participate, Modify, or Terminate Future Contributions.....7
4.5 No Deferral Without Completion of Enrollment/Change Form...............8
4.6 Duration of Enrollment/Change Forms....................................8
4.7 Change in Status.......................................................8
4.8 Deferrals on Change of Status of Participation.........................8
4.9 Special Company Contribution...........................................8
ARTICLE V DEFERRAL ACCOUNT AND EARNINGS CREDITING RATE........................9
5.1 Bookkeeping Account....................................................9
5.2 Deemed Investment of the Bookkeeping Account...........................9
5.3 Earnings Crediting Rate................................................9
ARTICLE VI DISTRIBUTION......................................................10
6.1 Distribution of Account Balance.......................................10
6.2 Change in Distribution Method.........................................10
6.3 Payment Upon Change of Control........................................10
6.4 Nonforfeitable Right to Contributions.................................10
6.5 Form of Distribution..................................................10
6.6 Timing of Distribution................................................11
ARTICLE VII HARDSHIP DISTRIBUTIONS...........................................12
7.1 Hardship..............................................................12
ARTICLE VIII BENEFICIARY.....................................................13
8.1 Beneficiary Designation...............................................13
8.2 Proper Beneficiary....................................................13
8.3 Minor or Incompetent Beneficiary......................................13
ARTICLE IX ADMINISTRATION OF THE PLAN........................................14
9.1 Majority Vote.........................................................14
9.2 Finality of Determination.............................................14
9.3 Certificates and Reports..............................................14
9.4 Indemnification and Exculpation.......................................14
9.5 Expenses..............................................................14
ARTICLE X CLAIMS PROCEDURE...................................................15
10.1 Written Claim........................................................15
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10.2 Denied Claim.........................................................15
10.3 Review Procedure.....................................................15
10.4 Committee Review.....................................................15
ARTICLE XI GENERAL PROVISIONS................................................16
11.1 No Funding...........................................................16
11.2 No Contract of Employment............................................16
11.3 Withholding Taxes....................................................16
11.4 Restrictions on Transfer.............................................16
11.5 Domestic Relations Order/Alternate Payee.............................16
11.6 Construction.........................................................17
11.7 Binding Upon Successors and Assigns..................................17
11.8 Life Insurance and Funding...........................................17
11.9 Form of Communication................................................17
11.10 Right to Terminate..................................................18
11.11 Right to Amend......................................................18
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ARTICLE I
PURPOSE AND EFFECTIVE DATE
1.1 TITLE This Plan shall be known as Trigon Insurance Company 401(k)
Restoration Plan (hereinafter referred to as the "Plan"). The Plan was formerly
known as the Trigon Blue Cross Blue Shield 401(k) Restoration Plan.
1.2 PURPOSE The purpose of the Plan is to permit a select group of
management or highly compensated employees of Trigon Insurance Company to defer
the receipt of compensation without regard to the limits imposed by the Internal
Revenue Code on tax-qualified plans that include a cash or deferred arrangement.
The Plan constitutes an unfunded "top hat" arrangement under Title I of ERISA.
1.3 EFFECTIVE DATE The effective date of the amendment and restatement of
this Plan is October 1, 1998. The original effective date of this Plan was
January 1, 1995.
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ARTICLE II
DEFINITIONS AND CONSTRUCTION OF THE PLAN DOCUMENT
2.1 ALTERNATE PAYEE "Alternate Payee" means any spouse, former spouse,
child or other dependent of a Participant who is recognized by a Domestic
Relations Order as having a right to receive all or a portion of the benefits
payable under the Plan with respect to such Participant.
2.2 BENEFICIARY "Beneficiary" means the person or persons or the estate of
a Participant entitled to receive any benefits under this Plan in the event of
the Participant's death.
2.3 BOARD "Board" means the Board of Directors of Trigon Insurance Company.
Before March 7, 1997, the Board was the Board of Directors of Blue Cross and
Blue Shield of Virginia.
2.4 BOOKKEEPING ACCOUNT "Bookkeeping Account" means the bookkeeping record
established by the Company for each Participant who elects to defer Compensation
under this Plan.
2.5 CHANGE OF CONTROL "Change of Control" means:
(a) The acquisition by a Group of Beneficial Ownership of 20% or more
of the Stock of Trigon Healthcare, Inc. ("Healthcare"), but
excluding for this purpose any acquisition by Healthcare (or a
subsidiary) or an employee benefit plan of Healthcare. "Group"
means any individual, entity or group within the meaning of
Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Act"), "Beneficial Ownership" has the
meaning in Rule 13d-3 promulgated under the Act, and "Stock"
means the then outstanding shares of Class A common stock of
Healthcare; or
(b) Individuals who constitute the Board of Healthcare on the Date of
this Agreement (the "Incumbent Board") cease to constitute at
least a majority of the Board of Healthcare, provided that any
director whose nomination was approved by a majority of the
Incumbent Board shall be considered a member of the Incumbent
Board; or
(c) Approval by the shareholders of Healthcare of a reorganization,
merger or consolidation, in each case, in which the owners of the
Stock of Healthcare do not, following such reorganization, merger
or consolidation, beneficially own, directly or indirectly, more
than 50% of the Stock of the corporation resulting from such
reorganization, merger or consolidation; or
(d) A complete liquidation or dissolution of Healthcare, or the sale
or other disposition of all or substantially all of the assets of
Healthcare.
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2.6 COMMITTEE "Committee" means the Human Resources, Compensation and
Employee Benefits Committee of the Board of Directors.
2.7 COMPANY "Company" means Trigon Insurance Company. Before March 7, 1997,
the Company was Blue Cross and Blue Shield of Virginia, a Virginia corporation
doing business as Trigon Blue Cross Blue Shield.
2.8 COMPENSATION "Compensation" shall have the same meaning as provided in
the Qualified Plan without regard to any limitations imposed by Sections
401(a)(17), 402(g) and 415 of the Internal Revenue Code and without regard to
any deferrals made under the terms of this Plan, adjusted as follows:
(a) If the Participant has made a Restricted Stock Election,
Compensation shall be increased by the Value of any Restricted
Stock Award made to the Participant under the LTIP.
(b) As provided in the Qualified Plan, Compensation does not include
income recognized with respect to Trigon Stock, including income
arising from the lapse of restrictions on restricted stock paid
under a Restricted Stock Award.
2.9 DEFERRED COMPENSATION "Deferred Compensation" means the portion of a
Participant's Compensation earned after the effective date of the Participant's
Enrollment/Change Form for any calendar year, or part thereof, that has been
deferred pursuant to the Plan.
2.10 DISABILITY "Disability" means Total and Permanent Disability for
purposes of and determined under the terms of the Company's long-term disability
plan in effect at the time of such determination of Disability.
2.11 DOMESTIC RELATIONS ORDER "Domestic Relations Order" means any
judgement, decree or order (including approval of a property settlement
agreement) which relates to the provision of child support, alimony payments or
marital property rights to a spouse, former spouse, child or other dependent of
a Participant made pursuant to a State domestic relations law (including a
community property law).
2.12 EARLY RETIREMENT "Early Retirement" means Termination of Service after
a Participant is age 55 and is eligible for a benefit under the Non-Contributory
Retirement Program for Certain Employees of Trigon Insurance Company.
2.13 ELECTION DATE "Election Date" means the date established by this Plan
as the date before which an Employee must submit a valid Enrollment/Change Form
to the Committee. The applicable Election Dates are as follows: (a) 15 days
after adoption of the Plan for Employees who are eligible to participate at the
time the Plan is adopted, or (b) 15 days after a newly eligible Employee is
notified of the right to participate in the Plan.
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2.14 EMPLOYEE "Employee" means any member of management or highly
compensated employee employed by the Company or subsidiary or affiliated company
who is selected for participation by the Committee.
2.15 ENROLLMENT/CHANGE FORM "Enrollment/Change Form" means the written form
submitted to the Plan Administrator prior to the applicable Election Date. Each
Enrollment/Change Form shall indicate (a) whether the Employee wishes to defer a
portion of Compensation and, (b) the percentage of compensation to be deferred.
No Enrollment/Change Form shall be effective until acknowledged by the Company.
2.16 LTIP "LTIP" means the Officer Long-Term Incentive Plan or any similar
plan or program that is established under the Trigon Healthcare, Inc. 1997 Stock
Incentive Plan as amended from time to time or any successor plan.
2.17 PARTICIPANT "Participant" means an Employee who has Deferred
Compensation pursuant to the terms of this Plan, and whose Bookkeeping Account
balance has not yet been fully distributed.
2.18 PLAN "Plan" means Trigon Insurance Company 401(k) Restoration Plan as
amended from time to time.
2.19 PLAN ADMINISTRATOR "Plan Administrator" means the Senior Vice
President, Corporate Services of the Company.
2.20 PLAN YEAR "Plan Year" means the twelve month period commencing January
1 and ending December 31.
2.21 QUALIFIED PLAN "Qualified Plan" means the Employees Thrift Plan of
Trigon Insurance Company, as in effect at the date of the adoption of this Plan
and as amended from time to time.
2.22 RESTRICTED STOCK AWARD "Restricted Stock Award" means the portion of
an award of restricted shares of Trigon Stock that is equal to the cash value of
an award under the LTIP. The Restricted Stock Award will not include any
additional restricted shares that are granted due to the Participant's election
to receive restricted shares. In addition, the Restricted Stock Award will not
include the additional 30% of restricted shares granted under LTIP awards for
the 1998 and 1999 years for all LTIP awards.
2.23 RESTRICTED STOCK ELECTION "Restricted Stock Election" means an
election to have the Value of a Restricted Stock Award included as Compensation
for purposes of the Plan.
2.24 STOCK ELECTION FORM "Stock Election Form" means an election by a
Participant to receive a distribution in the form of Trigon Stock.
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2.25 TERMINATION OF SERVICE "Termination of Service" or similar expression
means the last day of active work performed by the Participant as a common-law
employee of the Company or any subsidiary or affiliate thereof.
2.26 TRIGON STOCK "Trigon Stock" means common stock of Trigon Healthcare,
Inc.
2.27 VALUATION DATE "Valuation Date" means the date on which Deferred
Compensation would otherwise be credited with interest or earnings pursuant to
the Qualified Plan.
2.28 VALUE "Value" means the fair market value of a share of Trigon Stock
on the date that a Restricted Stock Award is made multiplied by the number of
shares of Trigon Stock covered by the Restricted Stock Award. As provided in
Section 2.21, the Restricted Stock Award will not include any additional
restricted shares that are granted due to the Participant's election to receive
restricted shares, and will not include the additional 30% of restricted shares
granted under LTIP awards for the 1998 and 1999 years.
2.29 GENDER AND NUMBER Wherever the context so requires, masculine pronouns
include the feminine and singular words shall include the plural.
2.30 TITLES Titles of the Articles of this Plan are included for ease of
reference only and are not to be used for the purpose of construing any portion
or provision of this Plan document.
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ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 ELIGIBILITY Officers of the Company who are Vice Presidents or above
shall be eligible for participation in this Plan, unless otherwise determined by
the Committee, in its sole discretion. All Participants must be a member of a
select group of management or highly-compensated employees of the Company and
must be eligible participants in the Qualified Plan.
3.2 PARTICIPATION In order to become a Participant, an Employee selected
for participation by the Committee shall complete and return to the Plan
Administrator a duly executed Enrollment/Change Form. A Bookkeeping Account will
be established by the Company for each Participant as provided in Section 5.1.
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ARTICLE IV
PARTICIPANT DEFERRALS OF COMPENSATION AND COMPANY MATCHING
CONTRIBUTIONS
4.1 COMPENSATION DEFERRAL Each Participant in the Plan may elect to have a
percentage of Compensation deferred in accordance with the terms and conditions
of this Plan. The percentage of such Compensation to be deferred each pay period
shall be any whole percentage from 2% to 16% of Compensation, offset by amounts
actually deferred in the applicable pay period to the Company's Qualified Plan.
4.2 RESTRICTED STOCK ELECTION A Participant shall make a Restricted Stock
Election at such times and in such manner as provided by the Plan Administrator,
subject to the following provisions:
(a) A Restricted Stock Election must be made at least six months
before the end of a performance period under the LTIP. A
Restricted Stock Election may be modified or terminated if the
modification or termination is made at least six months before
the end of a performance period under the LTIP.
(b) If a Restricted Stock Election is made, a Restricted Stock Award
will be deemed as Compensation in the pay period in which the
award is made under the LTIP. A Participant shall make a deferral
of the deferred portion of the Restricted Stock Award either by a
check to the Company or by an increase in payroll deductions
under a method approved by the Plan Administrator.
4.3 MATCHING CONTRIBUTION The Company shall add to each Participant's
Bookkeeping Account as of the last day of each pay period with respect to
amounts deferred by a Participant under Sections 4.1 and 4.2, an amount equal to
the difference between the amounts described in (a) and (b) as follows:
(a) The amount equal to the matching contribution the Company would
have made to the Qualified Plan based on the Participant's
Compensation for such pay period if the Participant had made a
contribution to the Qualified Plan in the amount of the
contributions under Sections 4.1 and 4.2 without regard to the
offset for amounts actually deferred during the applicable pay
period under the Company's Qualified Plan.
(b) The amount equal to the Company's actual matching contribution to
the Qualified Plan for such pay period.
4.4 ELECTION TO PARTICIPATE, MODIFY, OR TERMINATE FUTURE CONTRIBUTIONS
Except as otherwise provided by the Plan Administrator, an eligible Employee
desiring to participate in the Plan, or a Participant who desires to modify or
terminate the amount of future Compensation being deferred under the Plan, must
notify the Plan Administrator at least 15 days before the
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payroll date (or such other time as is established by the Plan Administrator)
for which the deferral is effective in writing on an Enrollment/Change Form
provided by the Plan Administrator.
4.5 NO DEFERRAL WITHOUT COMPLETION OF ENROLLMENT/CHANGE FORM A Participant
who has not submitted a valid Enrollment/Change Form to the Plan Administrator
before the relevant Election Date may not defer any Compensation under this Plan
for the applicable pay period.
4.6 DURATION OF ENROLLMENT/CHANGE FORMS Enrollment/Change Forms shall
remain in effect until modified or terminated as provided in Section 4.3. Future
deferrals will be terminated automatically for any Participant who is deemed (by
the Plan Administrator) to no longer be eligible for participation in the Plan.
4.7 CHANGE IN STATUS If a Participant ceases to be eligible to participate
or elects not to be an active Participant but continues to be employed by the
Company, deferrals shall be suspended as provided in Section 4.7. All other
provisions of the Plan shall remain in effect, and the Participant shall
continue to be entitled to credits under Section 5.2 of the Plan until the
Participant's Bookkeeping Account is fully distributed as provided in Article
VI.
4.8 DEFERRALS ON CHANGE OF STATUS OF PARTICIPATION Deferral credits
pursuant to Sections 4.1 and 4.2 for a Participant whose status changes will be
governed by the following provisions:
(a) A Participant who elects not to participate in the Plan will be
credited with deferrals through and ending with the payroll
period within which the Participant's Election/Change Form is
received by the Plan Administrator.
(b) A Participant who becomes an ineligible Participant because he
ceases to be within the group of employees determined by the
Committee to be eligible to participate in the Plan will be
entitled to Participant credits and Employer matching credits
pursuant to Sections 4.1 and 4.2 through the end of the pay
period within which the Participant ceases to be eligible.
4.9 SPECIAL COMPANY CONTRIBUTION Effective as of end of the first quarter
of 1998 and of each successive quarter each Plan Year, the Company, in its sole
discretion, shall add to a Participant's Bookkeeping Account an amount equal to
the sum of (a) and (b) as follows, as determined for the immediately prior Plan
Year of the Qualified Plan:
(a) excess Pre-Tax contributions, inclusive of earnings or losses,
returned to the Participant under Section 3.04 of the Qualified
Plan; and
(b) excess Matching Contributions, inclusive of earnings or losses,
forfeited or distributed under Section 3.04 or 3.05 of the
Qualified Plan.
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ARTICLE V
DEFERRAL ACCOUNT AND EARNINGS CREDITING RATE
5.1 BOOKKEEPING ACCOUNT Compensation deferred by a Participant under
Section 4.1 and matching contributions under Section 4.2, and earnings credited
pursuant to Section 5.2, shall be credited to a separate Bookkeeping Account for
each Participant. Distributions pursuant to Articles VI and VII shall be debited
against the Participant's Bookkeeping Account.
5.2 DEEMED INVESTMENT OF THE BOOKKEEPING ACCOUNT Each Participant's
Bookkeeping Account, and Deferred Compensation and Matching Contributions
credited to his or her Bookkeeping Account for each pay period, shall be deemed
to be invested as the Participant directs from time to time the investment of
his account balance and future contributions to the Qualified Plan. No separate
election by the Participant with respect to deemed investments in the Plan is
permitted or required. Notwithstanding the foregoing, if the Participant has
received a distribution of his or her entire account balance in the Qualified
Plan, the Participant shall be eligible to direct from time to time the
investment of his or her Bookkeeping Account under procedures established by the
Plan Administrator.
5.3 EARNINGS CREDITING RATE The amount in the Participants Bookkeeping
Account shall be credited or debited with earnings based on the adjustment of
the unit value of the Participant's deemed investment funds on the date the
amounts are credited to the Participant's account balance in the Qualified Plan.
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ARTICLE VI
DISTRIBUTION
6.1 DISTRIBUTION OF ACCOUNT BALANCE Distribution of the value of a
Participant's Bookkeeping Account balance shall be in a lump sum or in up to 10
annual installments as specified by the Participant on the Participant's initial
Enrollment/Change Form. If the lump sum method has been specified by the
Participant, payment shall be made as soon as practicable after Termination of
Service for any reason following a Participant's election relative to whether or
not he or she will receive Trigon Stock ("Stock Election Form"). If the annual
installment method has been selected and the Participant has a Termination of
Service prior to becoming eligible for early retirement (other than Termination
of Service due to death or Disability), the Participant's Bookkeeping Account
balance will nonetheless be distributed in a lump sum. Annual installments may
be selected in the event of death, Disability, or Early Retirement. If a payment
form is not specified on an Enrollment/Change Form, a Participant's Bookkeeping
Account balance shall be distributed as a lump sum.
6.2 CHANGE IN DISTRIBUTION METHOD A Participant may change the method of
distribution under Section 6.1 by filing a new Enrollment/Change Form. The
change shall become effective on a date that is twelve months after the date
such form is filed with the Plan Administrator. If the Participant becomes
entitled to a distribution from the Plan before such twelve-month period has
expired, the election shall be of no effect.
6.3 PAYMENT UPON CHANGE OF CONTROL Notwithstanding any other provision of
the Plan to the contrary, and unless the Participant made and filed with the
Plan Administrator as soon as practicable after becoming a Participant, but in
any event not later than six months before the occurrence of a Change of
Control, an irrevocable election to defer receipt of payment to the date of his
or her retirement or earlier termination of employment, upon a Change of
Control, the Company shall pay to such Participant, Beneficiary or Alternate
Payee of the Participant, within 30 days of a Change of Control a lump sum in
cash in an amount equal to the amount credited to his or her Bookkeeping Account
as of the Change of Control.
6.4 NONFORFEITABLE RIGHT TO CONTRIBUTIONS The Participant shall have a
nonforfeitable right to the value of the Bookkeeping Account attributable to the
Participant's contributions plus deemed earnings on the Participant's
contributions under the terms of this Plan. The Participant shall have a
nonforfeitable right to the value of the Bookkeeping Account attributable to the
Matching Contributions plus deemed earnings on the Matching Contributions at the
same time he or she becomes vested in the Qualified Plan.
6.5 FORM OF DISTRIBUTION All distributions of a Participant's Bookkeeping
Account shall be made in cash or in Trigon Stock in accordance with a
Participant's election. The Participant shall be required to make an affirmative
election in order to receive Trigon Stock. In the event the Participant has
selected a form of payment other than an immediate lump sum and the Participant
has elected to receive the portion of his or her Bookkeeping Account invested in
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Trigon Stock in the form of stock, the Participant shall receive the shares of
Trigon Stock as a pro-rata portion of each distribution.
6.6 TIMING OF DISTRIBUTION Distributions shall commence, or be paid in a
lump sum if so elected, as soon as administratively feasible after the
Participant's last day of employment.
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ARTICLE VII
HARDSHIP DISTRIBUTIONS
7.1 HARDSHIP At the request of a Participant or at the request of any of
the Participant's Beneficiaries after the Participant's death, the Committee
may, in its sole discretion, accelerate and pay all or part of the value of a
Participant's Bookkeeping Account due under this Plan. Accelerated distributions
at the request of the Participant or a Participant's Beneficiary may be allowed
only in the event of a financial emergency beyond the Participant's or
Beneficiary's control due to unforeseeable circumstances and only if
disallowance of a distribution would create a severe hardship for the
Participant or Beneficiary. An accelerated distribution must be limited to only
that amount necessary to relieve the financial emergency. The determination of
hardship and the amount of the hardship distribution by the Committee shall be
final and conclusive and binding on the Participant or Beneficiary making the
request.
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ARTICLE VIII
BENEFICIARY
8.1 BENEFICIARY DESIGNATION A Participant shall designate a Beneficiary to
receive benefits under the Plan on appropriate forms provided by and filed with
the Plan Administrator. If more than one Beneficiary is named, the shares and/or
precedence of each Beneficiary shall be indicated. A Participant shall have the
right to change the Beneficiary by submitting to the Plan Administrator a change
of Beneficiary form. However, no change of Beneficiary shall be effective until
acknowledged in writing by the Plan Administrator.
8.2 PROPER BENEFICIARY If the Plan Administrator has any doubt as to the
proper Beneficiary to receive payments hereunder, the Plan Administrator shall
have the right to withhold such payments until the matter is finally
adjudicated. However, any payment made by the Plan Administrator, in good faith
and in accordance with this Plan, shall fully discharge the Company from all
further obligations with respect to that payment.
8.3 MINOR OR INCOMPETENT BENEFICIARY In making any payments to or for the
benefit of any minor or an incompetent Beneficiary, the Plan Administrator, in
its sole and absolute discretion may make a distribution to a legal or natural
guardian or other relative of a minor or court appointed representative of such
incompetent. Or, it may make a payment to any adult with whom the minor or
incompetent temporarily or permanently resides. The receipt by a guardian,
representative, relative or other person shall be a complete discharge to the
Company. Neither the Company nor the Plan Administrator shall have any
responsibility to see to the proper application of any payments so made.
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ARTICLE IX
ADMINISTRATION OF THE PLAN
9.1 MAJORITY VOTE All resolutions or other actions taken by the Committee
shall be by vote of a majority of those present at a meeting at which a majority
of the members are present, or in writing by all the members at the time in
office if they act without a meeting.
9.2 FINALITY OF DETERMINATION Subject to the Plan, the Committee in
administering the Plan shall, from time to time, establish rules, forms and
procedures for the administration of the Plan. Except as herein otherwise
expressly provided, the Committee shall have the exclusive right to interpret
the Plan and to decide any and all matters arising thereunder or in connection
with the administration of the Plan, and it shall endeavor to act, whether by
general rules or by particular decisions, so as not to discriminate in favor of
or against any person. The decisions, actions and records of the Committee shall
be conclusive and binding upon the Company and all persons having or claiming to
have any right or interest in or under the Plan, and cannot be overruled by a
court of law unless arbitrary or capricious.
9.3 CERTIFICATES AND REPORTS The members of the Committee, the Plan
Administrator and the officers and directors of the Company shall be entitled to
rely on all certificates and reports made by any duly appointed accountants, and
on all opinions given by any duly appointed legal counsel, which legal counsel
may be counsel for the Company.
9.4 INDEMNIFICATION AND EXCULPATION The Company shall indemnify and hold
harmless persons serving from time to time as Plan Administrator and each
current and former member of the Committee and each current and former member of
the Board ("Indemnitees") against any and all expenses and liabilities (to the
extent not indemnified under any liability insurance contract or other
indemnification agreement) which the person incurs on account of any act or
failure to act in connection with the good faith administration of the Plan.
Expenses against which an Indemnitee shall be indemnified hereunder shall
include, without limitation, the amount of any settlement or judgment, costs,
counsel fees, and related charges reasonably incurred in connection with a claim
asserted, or a proceeding brought or settlement thereof. The foregoing right of
indemnification shall be in addition to any other rights to which any such
Indemnitee may be entitled as a matter of law, but shall be conditioned upon the
person's notifying the Company of the claim of liability within 60 days of the
notice of that claim and offering the Company the right to participate in and
control the settlement and defense of the claim.
9.5 EXPENSES The expenses of administering the Plan shall be borne by the
Company.
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ARTICLE X
CLAIMS PROCEDURE
10.1 WRITTEN CLAIM Benefits shall be paid in accordance with the provisions
of this Plan. The Participant, or a designated recipient or any other person
claiming through the Participant shall make a written request for benefits under
this Plan. This written claim shall be mailed or delivered to the Plan
Administrator. Such claim shall be reviewed by the Plan Administrator or a
delegate.
10.2 DENIED CLAIM If the claim is denied, in full or in part, the Plan
Administrator shall provide a written notice within ninety (90) days setting
forth the specific reasons for denial, and any additional material or
information necessary to perfect the claim, and an explanation of why such
material or information is necessary, and appropriate information and
explanation of the steps to be taken if a review of the denial is desired.
10.3 REVIEW PROCEDURE If the claim is denied and a review is desired, the
Participant (or Beneficiary) shall notify the Plan Administrator in writing
within sixty (60) days after receipt of the written notice of denial. In
requesting a review, the Participant or Beneficiary may request a review of the
Plan Document or other pertinent documents with regard to the employee benefit
Plan created under this agreement, may submit any written issues and comments,
may request an extension of time for such written submission of issues and
comments, and may request that a hearing be held, but the decision to hold a
hearing shall be within the sole discretion of the Committee.
10.4 COMMITTEE REVIEW The decision on the review of the denied claim shall
be rendered by the Committee within sixty (60) days after the receipt of the
request for review (if no hearing is held) or within sixty (60) days after the
hearing if one is held. The decision shall be written and shall state the
specific reasons for the decision including reference to specific provisions of
this Plan on which the decision is based.
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ARTICLE XI
GENERAL PROVISIONS
11.1 NO FUNDING Nothing contained in this Plan shall require the Company or
any subsidiary or affiliate to segregate any assets from its general funds, or
to create any trusts, or to make any special deposits for any amounts to be paid
to any Participant, former Participant, Beneficiary or Alternate Payee.
Participants, former Participants and any Beneficiary of a Participant or
Alternate Payee shall not have any right, title or interest in or to any
specific funds or property of the Company or any subsidiary or affiliate, and
their interest shall be those of a general creditor.
11.2 NO CONTRACT OF EMPLOYMENT The existence of this Plan does not
constitute a contract for continued employment between a Participant and the
Company or any subsidiary or affiliate.
11.3 WITHHOLDING TAXES All payments under the Plan shall be subject to and
net of an amount sufficient to satisfy all federal, state or local withholding
tax requirements.
11.4 RESTRICTIONS ON TRANSFER Any benefits to which a Participant, his
Beneficiary or Alternate Payee may become entitled under this Plan are not
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, or encumbrance, and any attempt to do so is void. Benefits are not
subject to attachment or legal process for the debts, contracts, liabilities,
engagements or torts of a Participant, his Beneficiary or Alternate Payee. This
Plan does not give a Participant, his Beneficiary or Alternate Payee any
interest, lien, or claim against any specific assets of the Company or any
subsidiary or affiliate. Participants and their Beneficiaries have only the
rights of general creditors of the Company or any subsidiary or affiliate.
11.5 DOMESTIC RELATIONS ORDER/ALTERNATE PAYEE.
(a) Notwithstanding the provisions of Section 11.4, an Alternate
Payee shall be entitled to receive a benefit under the Plan,
computed by reference to the Participant's benefit in accordance
with the terms of the Domestic Relations Order. Benefits shall be
paid at the time and in the manner benefits begin to be paid or
are paid to the Participant unless the Domestic Relations Order
requires an earlier and/or different manner of payment. If the
Alternate Payee predeceases the Participant before payments begin
to be paid or are paid to the Participant, the Alternate Payee's
interest in the Plan shall begin to be paid or shall be paid (i)
at the time and in the manner the Alternate Payee would have
received or began to receive payment had the Alternate Payee
survived, and (ii) if not inconsistent with the terms of the
Domestic Relations Order, to the person or persons designated by
the Alternate Payee in a writing filed with and acknowledged by
the Company, or, if no writing has been filed or if the person or
persons designated predecease the Alternate Payee, to the legal
representative of the Alternate Payee.
-16-
<PAGE>
(b) The Domestic Relations Order shall clearly specify (i) the name
and last known mailing address of the Participant and the name
and mailing address of each Alternate Payee covered by the order,
(ii) the amount or percentage of the Participant's benefit to be
paid by the Plan to each Alternate Payee, or the manner in which
such amount or percentage is to be determined, and (iii) any
limitation on the number of payments or period to which such
order applies. The Company shall not be required to make payments
to an Alternate Payee pursuant to a Domestic Relations Order that
requires the Plan to (i) provide any type or form of benefit, or
payment option, not otherwise provided under the Plan, (ii)
provide increased benefits (determined on the basis of actuarial
value), or (iii) pay benefits to an Alternate Payee otherwise
required to be paid to another Alternate Payee under an order
previously determined to be a Domestic Relations Order.
(c) The Company shall have the right to delay any payment of a
benefit under the Plan to an Alternate Payee for up to 180 days
if necessary to determine whether the Domestic Relations Order
complies with the provisions of this section.
(d) If an Alternate Payee cannot be located after a diligent search
has been conducted, the interest of the Alternate Payee can be
forfeited at the direction of the Company at any time after a
two-year period and restored to the Participant on such
conditions and terms as the Company shall determine.
11.6 CONSTRUCTION For construction, one gender includes the other, and the
singular and plural include each other where the meaning would be appropriate.
This Plan is construed in accordance with the laws of the Commonwealth of
Virginia, except to the extent that the laws of the United States of America
have superseded those laws. The headings in this Plan have been inserted for
convenience of reference only and are to be ignored in any construction of the
provision. If a provision of this Plan is not valid, that invalidity does not
affect the remaining provisions.
11.7 BINDING UPON SUCCESSORS AND ASSIGNS The provisions of the Plan shall
be binding upon the Participant and the Company and their successors, assigns,
heirs, executors and beneficiaries.
11.8 LIFE INSURANCE AND FUNDING The Company in its discretion may apply for
and procure as owner and for its own benefit insurance on the life of the
Participant, in such amounts and in such forms as the Company may choose. The
Participant shall have no interest whatsoever in any such policy or policies,
but, as a condition of participation and at the request of the Company, the
Participant shall submit to medical examinations and supply such information and
execute such documents as may be required by the insurance company or companies
to whom the Company has applied for insurance.
11.9 FORM OF COMMUNICATION Any election, application, claim, notice or
other communication required or permitted to be made by a Participant shall be
in writing and in such form as the Committee shall prescribe. Such communication
shall be effective upon mailing, if
-17-
<PAGE>
sent by first class mail, postage pre-paid, and addressed to the Company's
office at 2015 Staples Mill Road, Richmond, Virginia 23230.
11.10 RIGHT TO TERMINATE The Board may, in its sole discretion, terminate
this Plan at any time. If the Plan is terminated, each Participant, former
Participant or Beneficiary whose benefits are not in pay status shall be
entitled to (a) begin to receive installment payments as provided, in Section
6.1, or (b) receive a single lump sum payment equal to the balance in his
Bookkeeping Account (including the unpaid balance of the Bookkeeping Account of
a Participant whose benefits are in pay status), as determined by the Company.
The single lump sum payment shall be made as soon as practicable (but not later
than 60 days) following the date the Plan is terminated and shall be in lieu of
any other benefit which may be payable to the Participant, former Participant or
Beneficiary under the Plan.
11.11 RIGHT TO AMEND The Board may, in its sole discretion, amend this Plan
in any way, provided no amendment shall adversely affect the rights of a
Participant, former Participant or Beneficiary with respect to amounts credited
to a Participant's, former Participant's or Beneficiary's Bookkeeping Account as
of the date of the amendment.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed
by its duly authorized officer on March 19, 1999 effective as of October 1,
1998.
TRIGON INSURANCE COMPANY
BY
-----------------------------------------
RONALD M. NASH
SENIOR VICE PRESIDENT, CORPORATE SERVICES
-18-
EXHIBIT 10.22
THE NON-CONTRIBUTORY RETIREMENT PROGRAM
FOR CERTAIN EMPLOYEES OF
TRIGON INSURANCE COMPANY
(now to be known as)
THE TRIGON INSURANCE COMPANY RETIREMENT PROGRAM
AMENDMENT ADOPTING CASH BALANCE ACCOUNT BENEFIT FORMULA
WHEREAS, Trigon Insurance Company (herein referred to as the "Employer")
maintains a non-contributory retirement program, the Non-Contributory Retirement
Program for Certain Employees of Trigon Insurance Company (herein referred to as
the "Retirement Program") pursuant to the provisions of the National Retirement
Program;
WHEREAS, pursuant to Section 7.01 of the Retirement Program, the Employer
has reserved the right to amend or modify the Retirement Program;
WHEREAS, it is desirable to modify the Retirement Program to adopt a new
cash balance account benefit formula for the Retirement Program, to provide for
appropriate transition for Participants who previously participated in the
Retirement Program, and to change the name of the Retirement Program to the
Trigon Insurance Company Retirement Program;
NOW, THEREFORE, the Employer hereby changes the name of the Retirement
Program to the Trigon Insurance Company Retirement Program effective October 1,
1998, and also hereby amends the terms of the Retirement Program as set forth
below. Except as otherwise specifically provided herein, this amendment shall
take effect October 1, 1998, and shall apply only with respect to those
Participants who on or after such date are employees of the Employer or any
other entity that has adopted the Retirement Program with the approval of the
Employer.
1. Section 1.01 ("Actuarial Equivalent") is modified to add the following
paragraphs at the end of such Section:
"This paragraph shall apply in lieu of the forgoing for purposes of
determining certain equivalencies with respect to the Retirement Account,
and in certain instances, the Transition Benefit and Minimum Benefit
described in Section 4.02(b)(2) and (3). For purposes of determining the
Normal Retirement Benefit in
<PAGE>
Section 4.02(b)(1), the Early Retirement Benefit in Section 4.04(b)(2)(i)
and (ii)(cc), the Pre-Retirement Death Benefit in Section 4.05(d), and the
lump sum benefit in Section 5.03(b)(1)(ii) and 5.03(b)(3), the interest
rate shall be the Applicable Interest Rate and the mortality table shall be
the Applicable Mortality Table.
"For these purposes, "Applicable Mortality Table" shall mean the
mortality table that is prescribed by the IRS based on the prevailing
commissioners' standard table (described in ss. 807(d)(5)(A) of the
Internal Revenue Code) used to determine reserves for group annuity
contracts issued on the date as of which present value is being determined
(without regard to any other subparagraph of ss. 807(d)(5)). "Applicable
Interest Rate" shall mean, for any date within a calendar quarter, the
annual interest rate on 30-year Treasury securities as specified by the IRS
for the fifth full calendar month preceding the first day of such calendar
quarter."
2. Section 1.02 ("Beneficiary") is modified to read as follows:
"1.02 "Beneficiary" shall mean, except as provided below with respect
to the Pre-Retirement Death Benefit, the person or persons last designated
by a Participant in writing on forms of the Committee provided by the
Employer to receive benefits (if any) payable under the Program upon his
death; provided that any such designation shall be subject to the spousal
consent rules of Section 5.02(b), if applicable. If no such designation of
Beneficiary has been received by the Employer prior to the date of death of
the Participant or if there is no surviving Beneficiary and a benefit is
due and payable that is a lump sum or may, under the terms of the Program,
be computed and payable as a lump sum, such benefit shall be payable to the
estate of the Participant.
"For purposes of the Pre-Retirement Death Benefit in Section 4.05, the
following rules shall apply: For these purposes "Beneficiary" shall mean
the person or persons (natural, trust, or estate) last designated by a
Participant, in writing on forms of the Committee provided by the Employer,
to receive the Pre-Retirement Death Benefit payable under Section 4.05 upon
the death of the Participant. A Beneficiary may be designated as a primary
Beneficiary, or as a contingent Beneficiary who shall receive the
Pre-Retirement Death Benefit payable under Section 4.05 only in the event
there is no properly designated primary Beneficiary who is deemed to
survive the Participant under Section 4.05. Subject to the consent
requirements in Section 4.05(e) below, the Participant may from time to
time change his designation by filing a new written designation with the
Employer. Such
-2-
<PAGE>
designation becomes effective only upon receipt by the Employer. If at the
time of the Participant's death, there is no surviving Spouse and no
properly designated surviving Beneficiary, any Pre-Retirement Death Benefit
which is payable under Section 4.05 shall be payable as follows:
"(a) The Participant's surviving issue, per stirpes, or if none;
"(b) The Participant's surviving parents, or if none;
"(c) The Participant's estate.
"Such default Beneficiaries shall be treated as designated Beneficiaries
under the Program."
3. Section 1.06 ("Earnings") is modified to read as follows:
"1.06 "Earnings" shall mean, for a Participant, total earnings, prior
to withholding, paid to him by his Employer during a Program Year,
including bonuses, extra compensation, overtime payments, Pre-Tax
Contributions under the Employees' Thrift Plan of Trigon Insurance Company,
and any other amounts which the Participant could have elected to receive
as cash in the current year as taxable income in lieu of a non-taxable
benefit under a plan which is maintained by the Employer pursuant to
Internal Revenue Code Section 125. Earnings shall exclude flex dollars, tax
gross ups, relocation expenses, referral bonuses, tuition reimbursement,
the imputed value of group life insurance, the economic value attributable
to the Participant under split dollar life insurance, car allowances,
contest earnings (other than marketing or sales incentives), income
recognized with respect to stock of the Employer or any related company
(including income arising from stock purchases, the exercise of stock
options, restricted stock, performance stock, or other form of stock-based
compensation), and any contributions by the Employer (other than Pre-Tax
Contributions under the Employees' Thrift Plan of Trigon Insurance Company)
to this or any other employee benefit programs. Reference herein to
Earnings with respect to any period of time shall mean the Earnings, as
defined in the preceding sentences, received by a Participant in such
period. For purposes of determining the pay credit under Section
4.02(b)(1)(ii), Earnings shall mean the Earnings, as defined in the
preceding sentences, received by a Participant during the applicable pay
period.
-3-
<PAGE>
"Notwithstanding the foregoing, for purposes of calculating benefits
in Program Years beginning on or after January 1, 1994, the amount of
Earnings taken into account for any Program Year shall not exceed $150,000,
as adjusted by the Secretary of the Treasury to reflect cost of living
increases. Any cost of living increase in effect for a particular Program
Year applies only with respect to Earnings for that Program Year taken into
account in determining benefits.
"For purposes of computing the Initial Balance in Section
4.02(b)(1)(i), the Transition Benefit in Section 4.02(b)(2), and the
Minimum Benefit in Section 4.02(b)(3), Earnings shall mean (a) for a
Program Year beginning on or after January 1, 1998, except as specifically
provided herein, compensation paid to the Employee by the Employer which is
required to be reported on the Employee's IRS Form W-2 for such Program
Year as taxable income for federal income tax purposes, plus any elective
deferrals as defined in Section 402(g)(3) of the Internal Revenue Code,
plus any amount which is contributed or deferred by the Employer at the
election of the Employee and which is not includible in the gross income of
the Employee by reason of Section 125 or 457 of the Internal Revenue Code,
and (b) for Program Years prior to January 1, 1998, Earnings as defined in
Section 1.06 of the prior Program as of December 31, 1997; provided,
however, that in determining the amount of the Participant's compensation
which is subject to Federal Income Tax Withholding under Section 1.06 of
the prior Program, there shall be included any compensation in the form of
group-term life insurance coverage that the Employer subjected to Federal
Income Tax Withholding. In addition, for purposes of determining the prior
Program benefits of a Participant who terminated Employment with the
Employer prior to October 1, 1998, under the prior Program, the
modifications prescribed in the preceding sentence shall also be applied,
effective retroactive to the date of the Participant's termination of
Employment with the Employer. Notwithstanding the foregoing, for purposes
of this paragraph, amounts that would otherwise count as Earnings but that
are earned after the last complete calendar year prior to the earlier of
Employee's Early Retirement Date or last date of Employment shall be
disregarded, and further, amounts that would otherwise count as Earnings
under clause (a) shall be disregarded to the extent such amounts constitute
income recognized with respect to stock of the Employer or any related
company (including income arising from stock purchases, the exercise of
stock options, restricted stock, performance stock, or other form of
stock-based compensation). The determination of Earnings shall be subject
to the dollar limitation set forth in the immediately preceding paragraph."
-4-
<PAGE>
4. Section 1.10 ("Employment") is modified by inserting the phrase "his pay
credit percentage under Section 4.02(b)(1)(ii)," immediately after the phrase
"Solely for purposes of determining an Employee's level of vesting" in the first
sentence of the third paragraph of such Section.
5. Section 1.11 ("Entry Date") is modified to read as follows:
"1.11 "Entry Date" shall mean the first day of the month following the
completion of the relevant service requirement specified in Section 2.01
for the employee's job category, provided, however, that "Entry Date" shall
mean the date of Employment by the Employer in the case of an Employee who
satisfies the Conditions of Participation set forth in Section 2.01 on the
date of his Employment by the Employer, and shall mean the first day of the
month following the completion of the relevant service requirement
specified in Section 2.01 for the employee's job category in the case of an
Employee who satisfies the Conditions of Participation set forth in Section
2.01 and whose prior service was disregarded because of a Break in Service
described in Section 2.01."
6. Paragraph (b) of Section 1.12A ("Highly Compensated Employee") is
modified to read as follows:
"(b) for the preceding Program Year had Earnings (as defined in clause
(a) of the last paragraph of Section 1.06, but without regard to the
next-to-the-last sentence of such paragraph) from the Employer in excess of
$80,000 (as adjusted to reflect cost-of-living increases)."
7. The third sentence of Section 1.17 ("Primary Social Security Benefit")
is modified by inserting the following in lieu thereof:
"It also will be assumed that after the Participant's termination of
Employment with the Employer he will not receive any wages subject to the
Federal Insurance Contribution Act, except that in the case of a
Participant who terminates Employment with the Employer prior to attaining
Early Retirement Age it will be assumed that wages after such termination
will be equal to the final rate of Earnings on an annual basis."
8. Section 1.18 ("Program") is modified to read as follows:
"1.18 "Program" shall mean the Trigon Insurance Company Retirement
Program, as amended from time to time."
-5-
<PAGE>
9. Section 1.27 ("Year of Plans and Association Service") is modified by
deleting the phrase "and provided further that "Year of Plans and Association
Service" shall not include service prior to a Break in Service unless the
Employee has a Year of Participation Service subsequent to said Break in
Service" at the end of the first sentence, and by inserting the following
sentence at the end of such Section:
"Notwithstanding anything in this section to the contrary, in the
event that a Participant terminates Employment, receives a distribution of
his or her entire accrued benefit in the form of a lump sum, and is
subsequently rehired by the Employer, such Participant will not be
credited, for purposes of computing the Initial Balance in Section
4.02(b)(1)(i), the Transition Benefit in Section 4.02(b)(2), and the
Minimum Benefit in Section 4.02(b)(3), with the Years of Plans and
Association Service which were taken into account in such prior lump sum
distribution."
10. Section 1.28 ("Year of Vesting Service") is modified by deleting the
phrase "provided, however, that Years of Vesting Service prior to a Break in
Service shall be disregarded until the Employee has completed a Year of Vesting
Service after a Break in Service," where such words appear in the first sentence
of such Section.
11. Section 1.28 ("Year of Vesting Service") is modified by inserting the
following sentences at the end thereof:
"Notwithstanding the foregoing, an Employee's Years of Vesting Service
prior to a Break in Service shall be disregarded if the Employee previously
terminated Employment with a Plan prior to acquiring a right to a vested
benefit under the Program, and if the Employee's subsequent period of
consecutive Breaks in Service exceeded the greater of five or the
Employee's prior Years of Vesting Service. The preceding sentence shall not
apply to a Participant who had an accrued benefit under the prior Program
as of September 30, 1998."
12. Section 2.01, Conditions of Participation, is modified to read as
follows:
"2.01 Conditions of Participation.
-6-
<PAGE>
"(a) Each Employee on October 1, 1998, who was a Participant in the
Program on September 30, 1998, is a Participant on October 1, 1998.
"(b) Each other individual who is an Employee on or after September
30, 1998 --
"(i) who is not classified as a temporary employee of the
Employer shall become a Participant on the first Entry Date on or
after the completion of three months of Employment with the Employer,
provided he is in the Employment of the Employer on said Entry Date,
or
"(ii) who is classified as a temporary employee but who completes
1,000 Hours of Service with the Employer during the Employee's Initial
Computation Period or Subsequent Computation Period shall become a
Participant on the first Entry Date on or after the completion of said
Computation Period, provided he is in the Employment of the Employer
on said Entry Date.
"In general, for these purposes, a rehired Employee shall be credited with
any prior service with the Employer; provided, however, that such service
shall be disregarded if the Employee previously terminated Employment with
the Employer prior to acquiring a right to a vested benefit under the
Program, and if the Employee's subsequent period of consecutive Breaks in
Service exceeded the greater of five or the period of the Employee's prior
Employment with the Employer."
13. Section 4.02(b), Normal Retirement Benefit, is modified to read as
follows:
"(b) Normal Retirement Benefit. The Normal Retirement Benefit payable
to a Participant who satisfies the condition in Section 4.02(a) shall be in
a form permitted under the Program as provided in Article 5, determined on
the basis of a benefit which shall commence on the Participant's Normal
Retirement Date and which shall be payable on the first day of each month
thereafter during his lifetime, provided, however, that commencement shall
be subject to the restrictions of Section 4.01(b), if applicable. Such
benefit is equal to one-twelfth of the annual benefit specified in (1),
(2), or (3), whichever is greatest:
"(1) Retirement Account Benefit Formula. The annual benefit is an
amount equal to the Actuarial Equivalent of the value of the
Participant's
-7-
<PAGE>
Retirement Account determined as of the benefit commencement date. The
Retirement Account is a nominal account maintained on behalf of each
Participant. The value of a Participant's Retirement Account is sum of
the following credits --
"(i) Initial Balance. The Retirement Account of a
Participant who was an active Participant in the prior Program on
September 30, 1998, or who terminated from the Employer's
Employment prior to September 30, 1998, had an accrued benefit
under the Program as of September 30, 1998, and was subsequently
reemployed by the Employer prior to any payment of such benefit,
shall be credited with an initial balance as described below.
Participants who are employed by the Employer after September 30,
1998, but who are not described below shall have an initial
balance of zero.
"(aa) The Retirement Account of a Participant who was
an active Participant in the prior Program on September 30,
1998, shall be credited, as of October 1, 1998, with an
amount equal to the present value of the Participant's
benefit accrued as of September 30, 1998 under the terms of
the Program in effect as of September 30, 1998 (taking into
account the modifications to Earnings prescribed in the last
paragraph of Section 1.06). For purposes of this clause
(aa), the present value shall be determined by reference to
the Actuarial Equivalent interest and mortality factors in
effect on October 1, 1998, under the last paragraph of
Section 1.01 of the Program, and the accrued benefit shall
be determined by reference to the Participant's accrued
benefit calculated as of September 30, 1998, expressed in
the form of a single life annuity payable commencing on the
first day of the month coincident with or next following the
Participant's Normal Retirement Age, or on October 1, 1998,
if the Participant has already attained his Normal
Retirement Age on October 1, 1998. Notwithstanding the
foregoing, if the Participant meets the eligibility
requirements set forth below for an enhanced initial
balance, the Participant's accrued benefit shall be
determined by reference to a single life annuity payable
commencing on first day of the month coincident with or next
following the Participant's 60th birthdate, or on October 1,
1998, if the Participant has already attained his 60th
birthdate on October 1, 1998, assuming solely for purposes
of determining the applicable early retirement reduction
factors for this calculation that the Participant had
continued Employment with the Employer until such date. For
these purposes, a Participant meets the eligibility
requirements for an enhanced initial balance
-8-
<PAGE>
if as of October 1, 1998, the Participant has 15 or more
Years of Vesting Service and the sum of the Participant's
attained age and completed Years of Vesting Service also
equals 55. For purposes of determining whether a Participant
meets the eligibility requirements for an enhanced initial
balance, the Participant's attained age shall be determined
on the basis of years and days, with the days expressed in
the form of a decimal fraction, and the Participant's Years
of Vesting Service shall be determined, in accordance with
Section 1.28, by taking into account periods of Employment
of less than a full Program Year, with any partial year
being expressed in the form of a decimal fraction.
"(bb) The Retirement Account of a Participant who
terminated from the Employer's Employment prior to September
30, 1998, had an accrued benefit under the prior Program as
of September 30, 1998, and was subsequently reemployed by
the Employer prior to any payment of such benefit, shall be
credited, as of the date of reemployment, with an amount
equal to the present value of the Participant's benefit
accrued as of the date of the Participant's prior
termination of Employment with the Employer under the terms
of the prior Program in effect as of such date (taking into
account the modifications to Earnings prescribed in the last
paragraph of Section 1.06). For purposes of this clause
(bb), the present value shall be determined by reference to
the Actuarial Equivalent interest and mortality factors in
effect on the date of the Participant's reemployment under
the last paragraph of Section 1.01 of the Program, and the
accrued benefit shall be determined by reference to the
Participant's accrued benefit calculated as of the date of
the Participant's prior termination of Employment with the
Employer, expressed in the form of a single life annuity
payable commencing on the first day of the month coincident
with or next following the Participant's Normal Retirement
Age.
-9-
<PAGE>
"(ii) Pay Credits. For each calendar quarter ending on or
after December 31, 1998, a pay credit shall be allocated to the
Retirement Account of the Participant as of the last day of such
quarter, or if the Participant receives a distribution prior to
the end of the calendar quarter, as of the first of the month in
which the distribution occurs, equal to the pay credit percentage
applicable to the Participant for pay periods ending in the
Program Year under the table set forth below, multiplied by the
Participant's Earnings for the pay periods ending in such
quarter.
<TABLE>
<CAPTION>
Participant's Points as of Pay Credit Percentage for
January 1 of Program Year Earnings in Program Year
----------------------------- -------------------------
<S> <C>
Less than 40 3%
At least 40, but less than 50 4%
At least 50, but less than 60 5%
At least 60, but less than 70 6%
At least 70, but less than 80 8%
At least 80 10%
</TABLE>
"For these purposes, the Participant's points shall be determined
as of January 1 of each Program Year by adding together the
Participant's attained age and Years of Vesting Service as of
such date. For purposes of determining the Participant's points,
the Participant's attained age shall be determined on the basis
of years and days, with the days expressed in the form of a
decimal fraction, and the Participant's Years of Vesting Service
shall be determined, in accordance with Section 1.28, by taking
into account periods of Employment of less than a full Program
Year, with any partial year being expressed in the form of a
decimal fraction. Notwithstanding the foregoing, in no event
shall a pay credit be allocated to the Participant's Retirement
Account with respect to any pay period that ends either before
the Participant's Entry Date, or after the pay period that
includes the date the Participant's Employment with the Employer
terminates.
"(iii) Interest Credits. For each calendar quarter ending on
or after December 31, 1998, interest shall be credited as of the
last day of such quarter in an amount equal to 25 percent of the
average current yield on 30-year Treasury Constant Maturities (as
stated in the Federal Reserve Statistical Release H.15) for the
second calendar month that precedes the calendar quarter for
which interest is credited, times--
"(aa) the value of the Participant's Retirement Account
as of the last day of the prior calendar quarter, or
"(bb) in the case of the calendar quarter ending
December 31, 1998, for those Participants described in
subparagraph (i)(aa), the Participant's initial balance
credited under subparagraph (i)(aa), or
"(cc) in the case of the calendar quarter ending
December 31, 2003, with respect to a Participant whose
Retirement Account is credited with an additional amount as
of October 1, 2003, so that it equals the present value of
the Participant's accrued benefit under
-10-
<PAGE>
paragraph (2), the Participant's Retirement Account as of October
1, 2003.
"Notwithstanding the foregoing, if a Participant receives a
distribution prior to the end of a calendar quarter, the
Participant's Retirement Account shall be credited with interest
as of the first of the month in which the distribution occurs, in
accordance with the method described above, but such interest
credit shall be prorated based on the number of full months in
such calendar quarter that has elapsed. Interest credits under
this subparagraph shall cease upon the first of the month in
which the Participant's benefits commence distribution under the
Program.
"For these purposes, the fresh-start rule in Section 4.01(d)
shall not apply. Notwithstanding the foregoing, in the case of an
eligible Participant as described in the last sentence of this
paragraph, if the present value of the Participant's accrued
benefit under paragraph (2) as of October 1, 2003, is greater
than the Participant's Retirement Account under this paragraph
(1) as of such date, the Participant's Retirement Account shall
be credited with an additional amount so that as of such date it
equals the present value of the Participant's accrued benefit
under paragraph (2). For these purposes, the present value of the
Participant's accrued benefit under paragraph (2) shall be
determined by reference to the Actuarial Equivalent interest and
mortality factors in effect on October 1, 2003 under the last
paragraph of Section 1.01 of the Program, and the accrued benefit
shall be determined by reference to the benefit payable to the
Participant under paragraph (2) as if the Participant had retired
on October 1, 2003, expressed in the form of a single life
annuity payable commencing on October 1, 2003. A Participant
shall be eligible for such an adjustment if the Participant is
eligible for the transition benefit described below in paragraph
(2), and has not terminated Employment with the Employer prior to
October 1, 2003, but continues as an active Participant in the
Program on such date,
"(2) Transition Benefit for Active Participants on September 30,
1998, Meeting Age and Service Conditions. This paragraph (2) shall
apply in the case of a Participant who was an active Participant in
the prior Program on September 30, 1998, and as of October 1, 1998,
-11-
<PAGE>
had completed 5 Years of Vesting Service and attained age 50. If such
Participant terminates Employment with the Employer on or before
October 1, 2003, the Participant shall be entitled to an annual
benefit equal to the Participant's accrued benefit determined under
the benefit formula in Section 4.02(b) of the prior Program as in
effect on September 30, 1998, using for these purposes the
Participant's Years of Employer Service, Years of Plans and
Association Service, and Final Average Earnings (based on the
definition of Earnings in the last paragraph of Section 1.06) as of
the date of determination. If such Participant does not terminate
Employment with the Employer on or before October 1, 2003, the
Participant shall be entitled to an annual benefit equal to the
Participant's accrued benefit determined in accordance with the prior
sentence as of October 1, 2003. In addition, if a Participant eligible
for a benefit under this paragraph terminates Employment with the
Employer and is subsequently rehired before October 1, 2003, the
Participant shall accrue no further benefits under this paragraph
during such subsequent period of reemployment. A Participant who does
not meet the age and service requirements of this paragraph (2) shall
be deemed to have a benefit of zero under this paragraph
"If otherwise applicable, the fresh-start rule in Section 4.01(d)
shall be applied in determining a Participant's benefit hereunder.
"(3) Minimum Benefit for Participants on September 30, 1998. This
paragraph (3) shall apply in the case of a Participant who was an
active Participant in the prior Program as of September 30, 1998, or
was a terminated vested Participant under the prior Program as of
September 30, 1998, and was subsequently reemployed by the Employer
prior to any payment of such benefit. The Participant who was an
active Participant in the prior Program on September 30, 1998, shall
be entitled to an annual benefit equal to the amount of the
Participant's benefit, determined as of September 30, 1998, pursuant
to the terms of the prior Program in effect on that date (but taking
into account the last paragraph of Section 1.06 herein, if applicable)
and based on the Participant's compensation and service as of such
date. The Participant who was a terminated vested Participant under
the prior
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Program on September 30, 1998, shall be entitled to an annual benefit
equal to the amount of the Participant's benefit determined under the
terms of the prior Program in effect as of Participant's prior
termination of Employment (but taking into account the last paragraph
of Section 1.06 herein, if applicable). If otherwise applicable, the
fresh-start rule in Section 4.01(d) shall be applied in determining a
Participant's benefit hereunder. A Participant who does not meet the
eligibility requirements of the first sentence of this paragraph (3)
shall be deemed to have a benefit of zero under this paragraph."
14. Section 4.02(c), Computation of Normal Retirement Benefit, is deleted,
and subsection (d) of Section 4.02 is relettered subsection (c).
15. Section 4.04, Early Retirement, is modified to read as follows:
"(a) Condition. A Participant whose Employment with the Employer is
terminated for reasons other than death prior to his Normal Retirement Date
shall be entitled to receive an Early Retirement Benefit if --
"(1) he completes 3 Years of Vesting Service which may include
service subsequent to said termination of Employment as provided in
Section 1.28, or
"(2) he terminates Employment with the Employer as a result of a
Total and Permanent Disability, or
"(3) his termination of Employment with the Employer occurs
because the Employer has eliminated his job function and no
alternative job function for which the Participant is reasonable
suited by education, training, and experience, has been offered to
such Participant within (90) days thereafter.
"The Participant's Early Retirement Date shall be the first day of the
month coincident with or next following the date on which occurs the later
of (i) the termination of said Employment or (ii) the date the Participant
becomes vested hereunder.
"(b) Early Retirement Benefit. The Early Retirement Benefit payable to
a Participant who satisfies the condition in Section 4.04(a) shall be in a
form
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permitted under the Program as provided in Article 5, equal to either (1)
or (2) below.
"(1) An Early Retirement Benefit which is computed in accordance
with Section 4.02(b) and which shall commence on the Participant's
Normal Retirement Date; or
"(2) An Early Retirement Benefit, if requested in writing to the
Employer by the Participant, which shall commence on the Participant's
Early Retirement Date, or commencing on the first day of a month
specified by the Participant which is subsequent to his Early
Retirement Date and prior to his Normal Retirement Date, and which is
equal to the greater of the amounts determined in subparagraph (i) or
(ii), below:
"(i) The Actuarial Equivalent of the Participant's
Retirement Account under Section 4.02(b)(1) determined as of the
benefit commencement date;
"(ii) In the case of a Participant who is eligible for a
benefit under Section 4.02(b)(2) or (3), the greater of the
Participant's Normal Retirement Benefit under Section 4.02(b)(2)
or (3), reduced and payable in accordance with the following
provisions:
"(aa) In the case of a Participant whose Employment
with the Employer is terminated after his attaining age 62,
there will be no reduction.
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"(bb) In the case of a Participant not described in
clause (aa) whose Employment with the Employer is terminated
after attaining the Early Retirement Age, the following
shall apply. If the benefit commences on or after the date
on which the Participant attains age 62, there will be no
reduction. If the benefit commences prior to the
Participant's 62nd birthday, and if the Participant has at
least 20 Years of Plans and Association Service, the benefit
will be reduced by 1/3 of 1% for each calendar month (which
is 4% per year), if any, by which the commencement of the
benefit precedes the first of the month coincident with or
next following the date the Participant would attain age 62.
If the benefit commences prior to the Participant's 62nd
birthday, and if the Participant has less than 20 Years of
Plans and Association Service, the benefit will be reduced
by .5% for each calendar month (which is 6% per year), if
any, by which the commencement of the benefit precedes the
first of the month coincident with or next following the
date the Participant would attain age 62.
"(cc) In the case of a Participant whose Employment
with the Employer is terminated before attaining the Early
Retirement Age, the following shall apply. If the benefit
commences on or after the date the Participant attains the
Early Retirement Age, the benefit will be the benefit will
be reduced by .5% for each calendar month (which is 6% per
year), if any, by which the commencement of the benefit
precedes the first of the month coincident with or next
following the date the Participant's Normal Retirement Age.
If the benefit commences before the date the Participant
attains the Early Retirement Age, the benefit will be the
present value of the benefit that would be payable to the
Participant under paragraph (1) above. For these purposes
the present value shall be determined by reference to the
Actuarial Equivalent interest and mortality factors in
effect on that date under the last paragraph of Section 1.01
of the Program.
"A Participant whose benefits under the Program have not
commenced may change the date elected under (1) or (2) above
prospectively on a request in writing to the Employer.
Commencement of the Early Retirement Benefit shall be subject to
the restrictions of Section 4.01(b) if applicable."
16. Sections 4.05, Special Early Retirement Benefit, 4.08, Vesting, and
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4.16, Disability Benefit, are deleted. Section 4.06 is renumbered to be Section
4.05, Section 4.07 is renumbered to be Section 4.06, and Sections 4.09 through
4.15 are renumbered to be Sections 4.07 through 4.13, respectively. References
to these Sections in the Program shall be revised accordingly.
17. New Section 4.05 (old Section 4.06), Pre-Retirement Death Benefit, is
modified to read as follows:
"4.05 Pre-Retirement Death Benefit.
"(a) Condition. A Pre-Retirement Death Benefit shall be payable under
this Section 4.05 if the Participant is an active Participant in the
Program (without regard to the Participant's Years of Vesting Service) and
dies before termination of Employment and his Annuity Starting Date, or if
the Participant is a terminated Participant with a nonforfeitable right to
a benefit under the Program and dies before his Annuity Starting Date. This
Section 4.05 shall only apply to Participants who are Employees of the
Employer on or after October 1, 1998. Participants who terminated
Employment with the Employer prior to October 1, 1998, will be subject to
the Pre-Retirement Death Benefit provisions provided under the terms of the
prior Program in effect on the date of their termination of Employment.
"(b) Beneficiary. A Pre-Retirement Death Benefit shall be payable to
the Participant's surviving Spouse, or if the surviving Spouse has waived
such benefit in accordance with subsection (e) below and the Participant's
designated Beneficiary is surviving, to the Participant's designated
Beneficiary. If the Pre-Retirement Death Benefit is payable to the
Participant's surviving Spouse, and the surviving Spouse does not elect to
commence the benefit at the earliest commencement date specified in
subsection (c)(1) below, and dies thereafter before commencing the benefit,
then the lump sum equivalent of the Pre-Retirement Death Benefit that would
have been payable to the surviving Spouse on the date which is the first
day of the month coincident with or next following the surviving Spouse's
date of death, had the surviving Spouse elected to accelerate the
commencement of such benefit and lived to receive it, shall be payable to
the Spouse's estate at that time in a lump sum. If the Pre-Retirement Death
Benefit is payable to the surviving Spouse or to a surviving designated
Beneficiary, and if the surviving Spouse or the surviving designated
Beneficiary dies under circumstances in which it is not possible to
reasonably determine whether the Spouse or the designated Beneficiary
survived
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the Participant, or if such person dies before the earliest commencement
date specified in subsection (c)(1) below, then the surviving Spouse or the
surviving designated Beneficiary shall be deemed to have predeceased the
Participant for these purposes.
"(c) Commencement and Form of Pre-Retirement Death Benefit.
"(1) Commencement. The Pre-Retirement Death Benefit payable to a
surviving Spouse shall commence on the first day of the calendar month
coincident with or next following the later of the Participant's date
of death or the date the Participant attained (or would have attained)
his Normal Retirement Age. If a Participant dies before attaining the
Normal Retirement Age and the Pre-Retirement Death Benefit is payable
to the surviving Spouse, the surviving Spouse may elect to accelerate
the commencement of the benefit to the first day of any month
coincident with or next following the Participant's date of death. A
Pre-Retirement Death Benefit payable to a Participant's surviving
designated Beneficiary shall commence on the first day of the calendar
month coincident with or next following the Participant's date of
death, and may not be deferred by the Beneficiary.
"(2) Form of Payment. A Pre-Retirement Death Benefit payable to a
surviving Spouse or a surviving designated Beneficiary shall be in the
form of a monthly annuity for the life of the recipient, an
actuarially equivalent monthly annuity for the life of the recipient
with Retirement Account guaranteed, or an actuarial equivalent lump
sum, as determined in accordance with subsection (d).
"(i) The surviving Spouse or the surviving designated
Beneficiary, as the case may be, may elect which form of payment
is to be made; provided, however, that the payment to the
surviving Spouse shall be in the form of a lump sum in the event
the mandatory cash-out provisions of Section 4.13 apply; and
provided further that the payment to the surviving designated
Beneficiary shall be in the form of a lump sum in the event that
the Beneficiary's lump sum equivalent is less than or equal to
$5,000, in the event that the dollar amount of the single life
monthly annuity otherwise payable hereunder to that Beneficiary
is less than $100, or in the event the Beneficiary is a trust or
the Participant's estate.
"(ii) Pre-Retirement Death Benefit payments made in the form
of a monthly annuity for the life of the recipient shall be made
on the applicable commencement date and the first day of each
month thereafter, and the last payment
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shall be the payment due in the month in which the recipient's
death occurs.
"(iii) Pre-Retirement Death Benefit payments made in the
form of a monthly annuity for the life of the recipient with
Retirement Account guaranteed shall be made on the applicable
commencement date and the first day of each month thereafter for
the life of the recipient, and if, at the recipient's death, the
amount of the total payments actually made to the recipient is
less than the amount of the lump sum payment that could have been
paid to the recipient under Section 4.05(d)(1), an amount equal
to the difference between such lump sum amount and the total
payments made to the recipient shall be paid in a lump sum to the
estate of the recipient.
"(iv) If a single sum payment of the Pre-Retirement Death
Benefit is made hereunder, no further benefit shall be paid to
the recipient of the lump sum.
"(v) If the surviving Spouse or the surviving designated
Beneficiary, as the case may be, does not elect a form of payment
for the Pre-Retirement Death Benefit, and if the mandatory
cash-out provisions described above do not apply, payment
hereunder shall be made in the form of a single life monthly
annuity for the life of the recipient.
"(d) Amount of Pre-Retirement Death Benefit.
"(1) Lump Sum Benefit. The Pre-Retirement Death Benefit, if paid
in the form of a lump sum benefit, shall be equal to 100 percent of
the lump sum benefit that the Participant would have been eligible to
receive under Section 5.03(b)(1)(i) on the first day of the month
coincident with or next following his date of death, calculated as if
the Participant had terminated Employment on the date of his death
(or, if earlier, the date the Participant actually terminated
Employment), elected the lump sum form of payment, and survived until
such commencement date. Notwithstanding the foregoing, if the
Pre-Retirement Death Benefit is payable to the surviving Spouse, the
amount payable to the surviving Spouse shall not be less than 50
percent of lump sum benefit that the Participant would have been
eligible to receive under Section 5.03(b)(1)(ii) on the first day of
the month coincident with or next following his date of death,
calculated as if the Participant had terminated Employment on the date
of his death (or, if earlier, the date the Participant actually
terminated Employment), elected the lump sum form of payment, and
survived until
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such commencement date. If a surviving Spouse defers commencement of
such benefit pursuant to subsection (c)(1), the amount of such benefit
shall continue to earn interest at the rate specified under Section
4.02(b)(1)(iii).
"(2) Life Benefit. If the Pre-Retirement Death Benefit is paid in
the form of a monthly annuity for the lifetime of the surviving Spouse
or the surviving designated Beneficiary, as the case may be, pursuant
to subsection (c)(2), the amount of such benefit shall equal the
Actuarial Equivalent (based on the recipient's age as of the
commencement date of such benefit) of the amount of lump sum benefit
described in paragraph (1) above, payable as of such date.
"(3) Life Benefit with Retirement Account Guaranteed. If the
Pre-Retirement Death Benefit is paid in the form of a monthly annuity
for the lifetime of the surviving Spouse or the surviving designated
Beneficiary, as the case may be, with Retirement Account guaranteed,
pursuant to subsection (c)(2), the amount of such monthly benefit
shall equal 97% of the amount that otherwise would have been payable
to the recipient under paragraph (2) above. If, at the recipient's
death, the amount of total payments actually made to the recipient is
less than the amount of the lump sum payment that could have been paid
to the recipient under paragraph (1) above, the amount of the
guaranteed payment shall equal the difference between such lump sum
amount and the total payments actually made to the recipient.
"(4) Payments to Designated Beneficiaries. In the event the
Participant designates more than one Beneficiary, the lump sum amount
determined under paragraph (1) shall be divided among the surviving
designated Beneficiaries equally unless otherwise specified. If
payment is to be made to a designated Beneficiary in the form of a
lump sum, the amount of the lump sum shall equal the portion of the
lump sum amount allocated to the designated Beneficiary. If payment is
to be made to a designated Beneficiary in the form of an annuity, the
amount of monthly payments shall be actuarially equivalent to the
portion of the lump sum allocated to the designated Beneficiary,
calculated by reference to paragraph (2) or (3), as the case may be,
taking into account the Beneficiary's life expectancy for these
purposes.
"Each Beneficiary shall be permitted to elect to receive payment in
the form of a lump sum or monthly annuity; provided, however, that the
mandatory cash-out provisions of subsection (c) shall be applied separately
to each Beneficiary
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pursuant to that subsection, based on the value of the benefit payable
to that Beneficiary.
"(5) Minimum Spousal Benefits. Notwithstanding paragraphs (1),
(2) and (3), if the Pre-Retirement Death Benefit is payable to the
surviving Spouse, then in no event will the benefit received by a
surviving Spouse be less than the Actuarial Equivalent of the annuity
benefit the Spouse would have received as the survivor portion of the
Joint and Survivor Benefit payable under the Program if the
Participant had commenced benefits in that form on the day before his
death. In addition, if the Pre-Retirement Death Benefit is payable to
the surviving Spouse, and if a Participant dies, after having made a
valid election of Option C under Section 5.04 and designated his
Spouse as the contingent Beneficiary, but prior to his Annuity
Starting Date, then the benefit that is payable to his surviving
Spouse in accordance with subsection (b) above shall be no less than
what would have been payable to her under Option C if the Participant
had retired and started to receive benefits on the day before his
death.
"(e) Waiver of Pre-Retirement Death Benefit. At any time during the
election period, a Participant may elect to designate a Beneficiary other
than his surviving Spouse to receive the Pre-Retirement Death Benefit or
may revoke such designation. Any designation or revocation shall be made in
writing on a form filed with the Employer in such manner as the Committee
may determine. A married Participant's election to designate a Beneficiary
other than his surviving Spouse shall be ineffective unless the
Participant's Spouse consents in writing to the payment of the
Pre-Retirement Death Benefit to the Beneficiary. This consent must state
the specific non-spouse Beneficiary (or Beneficiaries) being designated by
the Participant, must acknowledge the effect of the waiver, and must be
witnessed by an Employer representative of the Program or a notary public.
The preceding two sentences shall not apply if it is established to the
satisfaction of the Program representative that the Spouse's consent cannot
be obtained because there is no Spouse, because the Spouse cannot be
located, or because of any other circumstances described in regulations
issued under ss.401 and ss.417 of the Internal Revenue Code. The consent of
a Participant's Spouse (or the establishment that such consent cannot be
obtained) shall be effective only with respect to that particular Spouse. A
married Participant may elect to change his prior designation of a
Beneficiary other than the surviving Spouse to another such Beneficiary
only with the consent of his Spouse; provided, however, that the Spouse's
consent shall not be required if the Spouse has expressly permitted
designations by the Participant without any further spousal
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<PAGE>
consent. A consent by such Spouse that permits designations by the
Participant without any requirement of further consent by such Spouse must
acknowledge that the Spouse has the right to limit consent to a specific
Beneficiary, and that the Spouse voluntarily elects to relinquish such
right. Notwithstanding the foregoing, a married Participant may revoke his
designation of a Beneficiary other than the surviving Spouse and reinstate
his Spouse as the recipient of the Pre-Retirement Death Benefit without the
consent of the Spouse.
"For purposes of this subsection (e), the election period shall begin
on the first day of the Program Year in which the Participant attains age
35, or, if earlier, on the date a Participant terminates his Employment
prior to attaining age 35, and shall end on the date of the Participant's
death. If an active Employee becomes a Participant prior to attaining age
35, such an Employee may, with spousal consent, in accordance with this
paragraph (e), make a temporary designation of a Beneficiary other than the
surviving Spouse at any time beginning with the month he first becomes a
Participant and ending on the day before the first day of the Program Year
in which he attains age 35; provided, however, that such temporary
designation, if not revoked earlier, shall become invalid on the first day
of the Program Year in which the Participant attains age 35. The election
period for a Participant who is not married and who is not subject to the
spousal consent requirements of this subsection (e) shall begin with the
month he first becomes a Participant and end on the date of the
Participant's death.
"(f) Notice Requirements. The Employer shall furnish each Participant
with a written explanation of the terms and conditions of the
Pre-Retirement Death Benefit and the rights of the Participant and his
Spouse with respect thereto. Such explanation shall be provided in a manner
consistent with the regulations prescribed under ss.401 and ss.417 of the
Internal Revenue Code. In the case of an Employee who becomes a Participant
on or before the first day of the Program Year in which he attains age 32,
the notice period shall begin on the first day of the Program Year in which
the Participant attains age 32, and shall end on the last day of the
Program Year preceding the Program Year in which the Participant attains
age 35. In the case of an Employee who becomes a Participant after the
first day of the Program Year in which he attains age 32, the notice period
shall begin on the day he becomes a Participant and shall end twelve months
later. In the case of an Employee who terminates his Employment prior to
attaining age 35, the notice period shall begin one year prior to such date
of termination and shall end one year after such date. Should such
Participant return to the Employment of the Employer,
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the applicable notice requirements of this paragraph shall be observed.
Additionally, in the case of an Employee who becomes a Participant before
the first day of the Plan Year in which he attains age 32, the notice
period with respect to the Participant's ability to make a temporary
designation of a non-spouse Beneficiary shall begin on the day he first
becomes a Participant."
18. New Section 4.09 (old Section 4.11), Non-duplication of Benefits, is
modified by inserting the following in lieu of the introduction and subsection
(a):
"4.09 Non-duplication of Benefits. Prior to October 1, 1998, benefits
were provided under this Program for prior service with the Employer and
other Plans. Beginning on October 1, 1998, benefits are provided under this
Program for prior service with the Employer and other Plans only in
accordance with Section 4.02(b)(2) and (3). Under Section 4.02(b)(1),
benefits provided for prior service with the Employer and other Plans are
considered only for the purpose of determining the initial account balance
and the pay credit applicable to the Participant. It is the intent of this
Program to avoid duplication of benefits provided under this Program and
the pension programs of other Plans with respect to such prior service. The
term "pension program" refers to a program which satisfies the requirements
of ss. 401(a) of the Internal Revenue Code of 1986. The following rules
apply for the purpose of eliminating duplication of benefits under Sections
4.02(b)(2) and (3), as well as for determining the initial balance of the
Retirement Account described in Section 4.02(b)(1):
"(a) A benefit payable under this Program, including a
pre-retirement death benefit, shall be offset by the amount of
employer-paid benefits earned under a pension program of a Plan for a
period of service for which credit is given under this Program.
Generally the offset shall be applied by reducing the benefit payable
to the Participant under the Program for the life of the Participant
commencing at age 65 by the benefit payable under the pension program
of the other Plan in the same form and commencing at the same time;
the resulting benefit shall be paid at the time and in the form
determined under the provisions of the Program. If the other Plan was
merged with the Employer, or if the Employer and the other Plan
conducted joint operations at the same principal place of business,
the offset shall be applied by reducing the benefit payable to the
Participant under this Program at the time of commencement by the
Actuarial Equivalent of the benefit payable under the pension program
of the other Plan if the benefit under this Program commences prior to
the Participant's Normal Retirement Age. Under all circumstances, the
offset shall be made if the Participant's benefit under the other
program is or was nonforfeitable, regardless of whether the
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Participant has taken his prior benefit in a form other than the form
in which benefits are payable under this Program or, in the case of an
offset applied to a pre-retirement death benefit, has failed to elect,
or has waived, an optional form of benefit which would have provided a
death benefit to his spouse. Further, the offset shall be made if this
Program is terminated based on the benefit credited to the Participant
under the other Plan's pension program at the time of this Program's
termination if the Participant has vested in that benefit, regardless
of whether that benefit is ultimately paid to the Participant.
However, a Participant's benefit under this Program shall not be less
than the benefit would have been if credit had not been given for the
prior service with the other Plan."
19. New Section 4.09 (old Section 4.11), Non-duplication of Benefits, is
modified by revising subsection (b) to read as follows:
"(b) A benefit payable under this Program shall be offset by any
benefit previously earned and payable to the Participant or his Beneficiary
under this Program. The offset shall be applied by reducing the current
benefit payable to the Participant under this Program by the prior benefit,
including the value of any applicable cost of living adjustment and
excluding any special early retirement supplement, payable under the
Program. Notwithstanding the foregoing, the following rules shall apply:
"(1) In the event a Participant terminates Employment, receives a
distribution of his or her entire accrued benefit, and is subsequently
rehired by the Employer, the Participant's Retirement Account shall
not be credited with an initial balance and shall not be reduced by
any benefit previously earned and payable under the Program, but
future benefits accrued under Section 4.02(b)(1)(ii) shall take into
account Participant's Years of Vesting Service prior to the date of
rehire.
"(2) In the event a Participant terminates Employment, commences
to receive his or her accrued benefit in the form of an annuity, and
is subsequently rehired by the Employer, the annuity payments shall
continue to be paid to the Participant during Employment. In addition
upon reemployment, the Participant's Retirement Account shall not be
credited with an initial balance and shall not be reduced by any
benefit previously earned and payable under the Program, but future
benefits accrued under Section 4.02(b)(1)(ii) shall take into account
Participant's Years of Vesting Service prior to the date of rehire.
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"(3) In the event a Participant terminated from the Employer's
Employment prior to September 30, 1998, had an accrued benefit under
the prior Program as of September 30, 1998, and was subsequently
reemployed by the Employer prior to any payment of such benefit, the
Participant shall be credited, as of the date of reemployment, with an
initial balance as described in Section 4.02(b)(1)(i)(bb).
"(4) A rehired Employee's accrued benefit prior to a Break in
Service shall be disregarded if the Employee previously terminated
Employment with the Employer prior to acquiring a right to a vested
benefit under the Program, and if the Employee's subsequent period of
consecutive Breaks in Service exceeded the greater of five or the
Employee's prior Years of Vesting Service. The preceding sentence
shall not apply, however, to the benefit accrued under the prior
Program as of September 30, 1998 by a Participant described in the
last sentence of Section 1.28."
20. New Section 4.10 (old Section 4.12), Limitation of Benefit, is modified
by amending subsection (a), Basic Limitations, by inserting the following in
lieu of the last paragraph:
"For purposes of this Section, the term "annual benefit" means the
benefit that is payable annually to a Participant in the form of a straight
lifetime benefit with no ancillary benefits. With respect to Program Years
beginning on or after January 1, 1998, the term "compensation" has the same
meaning as Earnings, as defined in clause (a) of the last paragraph of
Section 1.06 (without regard to the next-to-the-last sentence of such
paragraph), and with respect to Program Years beginning prior to January 1,
1998, the term "compensation" has the meaning prescribed for these purposes
in the prior Program in effect as of December 31, 1997. The term "Defined
Benefit Dollar Limit" shall mean the dollar limit specified in ss.
415(b)(1)(A) of the Internal Revenue Code."
21. New Section 4.11 (old Section 4.13), Suspension of Benefits, is
modified by amending subsection (a)(1), Conditions for Suspension, to insert the
following sentence at the end thereof:
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"Notwithstanding the foregoing, in the case of a Participant described
in Section 4.09(b)(2), payment of benefits under the Program shall not be
suspended."
22. New Section 4.11 (old Section 4.13), Suspension of Benefits, is
modified by deleting subsection (b), Employment with a Participating Plan, and
subsection (c), Other Employment, and by relettering the remaining subsections
(d), (e), and (f) to be subsections (b), (c), and (d), respectively. References
to these subsections in the Retirement Program shall be revised accordingly.
23. Subsection (a)(1)(ii) of Section 5.01, Joint and Survivor Benefit, is
modified by inserting the following at the end thereof:
"If the Participant's age is less than age 55, and the amount that
otherwise would have been payable to the Participant under the preceding
provisions of this paragraph (1)(ii) is less than 99% of the benefit that
would have been payable only for the lifetime of the Participant, then the
amount payable under this paragraph (1)(ii) shall be further adjusted by
increasing such amount by .24 of 1 percentage point for each year by which
the Participant's age is less than age 55; but in no event shall such
further adjustment cause the amount payable to the Participant under
subparagraph (ii) to exceed 99% of the benefit that would have been payable
to him for his life only."
24. Section 5.02(b), Election of Optional Retirement Benefits, is modified
by inserting the following after the first sentence of such provision:
"Notwithstanding the foregoing, effective October 1, 1998, Options B,
C, and D described in Section 5.04 shall not be available as distribution
options under the Program; provided, however, that a Participant who was a
Participant in the Program as of September 30, 1998, may elect to have his
benefit paid in a form described in Option B, C, or D as in effect on
September 30, 1998, but only at a time permitted under the applicable terms
of the Program in effect on September 30, 1998."
25. Section 5.03(a), For Options A, B, C or D, is modified by revising the
caption and the first sentence to read as follows:
"(a) For Options A, B, C, D, F, or G. Subject to the second sentence
of Section 5.02(b), any benefit payable in accordance with Options A, B, C,
D, F, or G provided in Section 5.04 shall be determined as of the date
benefits are to commence and in an amount determined pursuant to one of the
following (check one):"
-25-
<PAGE>
26. Section 5.03(a)(2) is modified by adding the following subparagraphs
(v) and (vi) before the last paragraph of such provision:
"(v) Under Option F, Life Annuity with Retirement Account Guaranteed:
(aa) with respect to the monthly amount payable hereunder, 97% of the
amount that otherwise would have been payable to the Participant under
Section 5.01(a)(2) above, and (bb) with respect to the guaranteed payment,
if, at the Participant's death, the amount of total payments actually made
to the Participant is less than the amount of the lump sum payment that
could have been paid to the Participant under Option E below, the amount of
the guaranteed payment shall equal the difference between such lump sum
amount and the total payments actually made to the Participant.
"(vi) Under Option G, Joint and 50% Contingent Benefit with Retirement
Account Guaranteed: (aa) with respect to the monthly amount payable
hereunder, 98% of the amount that otherwise would have been payable to the
Participant or the Beneficiary under subparagraph (iii)(aa) above;
provided, however, that if the Participant's age is less than age 55, and
the amount that otherwise would have been payable to the Participant under
subparagraph (iii)(aa) above is less than 99% of the benefit that would
have been payable only for the lifetime of the Participant, then the amount
that would otherwise have been payable under subparagraph (iii)(aa) above
shall be further adjusted by increasing such amount by .24 of 1 percentage
point for each year by which the Participant's age is less than age 55; but
in no event shall such further adjustment cause the amount payable to the
Participant under subparagraph (iii)(aa) to exceed 99% of the benefit that
would have been payable to him for his life only; and (bb) with respect to
the guaranteed payment, if, at the later to die of the Participant and the
Participant's Beneficiary, the amount of total payments actually made to
the Participant and the Beneficiary is less than the amount of the lump sum
payment that could have been paid to the Participant under Option E below,
the amount of the guaranteed payment shall equal the difference between
such lump sum amount and the total payments actually made to the
Participant and the Beneficiary."
27. Section 5.03(b), For Option E, Lump Sum, is modified to read as
follows:
"(b) For Option E, Lump Sum.
"(1) In General. Any benefit payable in accordance with Option E
provided in Section 5.04 shall be determined as of the date benefits
are to commence as the greater of:
-26-
<PAGE>
"(i) the value of the Participant's Retirement Account; or
"(ii) the Actuarial Equivalent value, using the Actuarial
Equivalent factors described in the last paragraph of Section
1.01, of the benefit that otherwise would be payable to the
Participant for his life only, based on the greater of the
formula amounts in Section 4.02(b)(2) or (3), or based on Section
4.04(b)(2)(ii), as the case may be.
"The amounts determined under clause (i) and (ii) above shall be
subject to the minimum benefit provisions specified in paragraphs
(2) and (3) below, to the extent they apply.
"(2) Transition Rule for Active Participants. In the case of a
Participant (i) who was an active Participant as of June 30, 1996,
(ii) who, as of that date, had a vested right to benefits under this
Program, and (iii) who retires on or before December 1, 1998, so that
the Participant's benefit commencement date is prior to January 1,
1999, in no event shall the amount determined under clause (ii) of
Section 5.03(b)(1) be less than the amount determined as of the date
benefits are to commence, but using for these purposes the
Participant's vested accrued benefit as of June 30, 1996, and the
provisions of Section 5.03(b) which were in effect as of June 30, 1996
and then applicable to the Participant.
"(3) Minimum Based on Normal Retirement Benefit. In no event
shall the amount of this Option E, Lump Sum be less than the Actuarial
Equivalent value, using the Actuarial Equivalent factors described in
the last paragraph of Section 1.01, determined as of the date benefits
are to commence on the basis of the greatest of the Participant's
Normal Retirement Benefit under Section 4.02(b)(1), (2),or (3)."
28. Section 5.04, Option B. Life Benefit with 120 or 240 Payments
Guaranteed, is modified by modifying the last sentence to read as follows:
"Such commuted value shall be determined by the Committee on the basis
of the Applicable Interest Rate defined in Section 1.01."
29. Section 5.04, Description of Options, is modified by adding the
following paragraphs to the end thereof:
-27-
<PAGE>
"Option F. Life Annuity with Retirement Account Guaranteed. This
optional form of benefit is payable monthly to the Participant for life,
with the total of such payments guaranteed to equal at least the amount of
lump sum payment that could have been paid to the Participant under Option
E. If, at the Participant's death, the amount of total payments actually
made to the Participant is less than the amount of the lump sum payment
that could have been paid to the Participant under Option E, an amount
equal to the difference between such lump sum amount and the total payments
actually made to the Participant shall be paid in a lump sum to the
Participant's Beneficiary, or if there is no surviving Beneficiary, to the
estate of said Participant.
"Option G. Joint and 50% Contingent Benefit with Retirement Account
Guaranteed. This optional form of benefit is payable monthly to the
Participant for life and 50% of such amount shall continue after his death
to his surviving Beneficiary for life, with the total of such payments
guaranteed to equal at least the amount of the lump sum payment that could
have paid to the Participant under Option E. If at the later to die of the
Participant and the Participant's Beneficiary, the total payments made to
the Participant and the Beneficiary is less than the amount of lump sum
payment that could have been paid to the Participant under Option E, an
amount equal to the difference between such lump sum amount and the total
payments actually made to the Participant and the Beneficiary shall be paid
in a lump sum to the estate of the Participant or the estate of the
Participant's Beneficiary, whichever is the last to die."
-28-
<PAGE>
TRIGON INSURANCE COMPANY
By:
------------------------------------
Authorized Officer
- ---------------------------------- ---------------------------------------
Attest Title
- ---------------------------------- ---------------------------------------
Title Date
APPROVED:
NATIONAL EMPLOYEE
BENEFITS COMMITTEE
By:
------------------------------------
Secretary
-29-
EXHIBIT 10.23
THE NON-CONTRIBUTORY RETIREMENT PROGRAM
FOR CERTAIN EMPLOYEES OF
TRIGON INSURANCE COMPANY
(now to be known as)
THE TRIGON INSURANCE COMPANY RETIREMENT PROGRAM
CLARIFYING AMENDMENT
WHEREAS, Trigon Insurance Company (herein referred to as the "Employer")
maintains a non-contributory retirement program, the Non-Contributory Retirement
Program for Certain Employees of Trigon Insurance Company (herein referred to as
the "Retirement Program") pursuant to the provisions of the National Retirement
Program;
WHEREAS, pursuant to Section 7.01 of the Retirement Program, the Employer
has reserved the right to amend or modify the Retirement Program;
WHEREAS, the Employer adopted an amendment on September 10, 1998, which
becomes effective October 1, 1998, ("Cash Balance Amendment") to modify the
Retirement Program to adopt a new cash balance account benefit formula for the
Retirement Program, to provide for appropriate transition for Participants who
previously participated in the Retirement Program, and to change the name of the
Retirement Program to the Trigon Insurance Company Retirement Program;
WHEREAS, it is desirable to clarify the definition of "Earnings" in the
Cash Balance Amendment to ensure that cash payments for unused paid time off
(PTO) made upon a Participant's termination of service with the Employer are not
included in the Participant's "Earnings" for purposes of the pay credits under
the cash balance formula, regardless of whether such cash payments are made in
the payroll period that includes the Participant's termination of employment, or
are made after such payroll period;
WHEREAS, the exclusion of this item from the definition of "Earnings"
conforms the Retirement Program, as modified by the Cash Balance Amendment, to
the effective treatment of this item under the current version of the Retirement
Program;
<PAGE>
NOW, THEREFORE, the Employer hereby amends the terms of the Retirement
Program, as modified by the Cash Balance Amendment, in the following respects:
1. The first paragraph of Section 1.06 ("Earnings") is modified to read as
follows:
"1.06 "Earnings" shall mean, for a Participant, total earnings, prior
to withholding, paid to him by his Employer during a Program Year,
including bonuses, extra compensation, overtime payments, Pre-Tax
Contributions under the Employees' Thrift Plan of Trigon Insurance Company,
and any other amounts which the Participant could have elected to receive
as cash in the current year as taxable income in lieu of a non-taxable
benefit under a plan which is maintained by the Employer pursuant to
Internal Revenue Code Section 125. Earnings shall exclude flex dollars, tax
gross ups, relocation expenses, referral bonuses, tuition reimbursement,
the imputed value of group life insurance, the economic value attributable
to the Participant under split dollar life insurance, car allowances,
contest earnings (other than marketing or sales incentives), cash payments
for unused paid time off (PTO) made upon the Employee's termination of
service with the Employer, income recognized with respect to stock of the
Employer or any related company (including income arising from stock
purchases, the exercise of stock options, restricted stock, performance
stock, or other form of stock-based compensation), and any contributions by
the Employer (other than Pre-Tax Contributions under the Employees' Thrift
Plan of Trigon Insurance Company) to this or any other employee benefit
programs. Reference herein to Earnings with respect to any period of time
shall mean the Earnings, as defined in the preceding sentences, received by
a Participant in such period. For purposes of determining the pay credit
under Section 4.02(b)(1)(ii), Earnings shall mean the Earnings, as defined
in the preceding sentences, received by a Participant during the applicable
pay period."
2. This amendment shall take effect as if it were included in the Cash
Balance Amendment.
TRIGON INSURANCE COMPANY
By:
------------------------------------
Authorized Officer
- ---------------------------------- ---------------------------------------
Attest Title
- ---------------------------------- ---------------------------------------
Title Date
APPROVED:
NATIONAL EMPLOYEE
BENEFITS COMMITTEE
By:
------------------------------------
Secretary
Quarterly Financial Information
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Quarters Ended
(in thousands, except per share data) March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Total revenues $551,812 542,332 544,918 597,290
Operating income (1) 2,077 6,327 8,905 11,744
Income before income taxes 51,476 30,981 30,279 74,073
Net income 34,049 20,711 20,213 48,599
Earnings per share
Basic net income 0.80 0.49 0.48 1.15
Diluted net income 0.80 0.48 0.47 1.13
Basic net income excluding realized gains (2) 0.35 0.42 0.47 0.49
Diluted net income excluding realized gains (2) 0.35 0.41 0.46 0.49
- -----------------------------------------------------------------------------------------------------------------------
1997
Total revenues $511,764 510,041 524,115 517,700
Operating income (1) 2,076 4,084 6,260 8,105
Income before income taxes 44,498 23,155 42,747 34,270
Net income 29,233 15,342 27,966 22,512
Net income after Demutualization and IPO (3) 13,162 15,342 27,966 22,512
Earnings per share (3)
Basic and diluted net income
after Demutualization and IPO 0.31 0.36 0.66 0.53
Pro forma earnings per share (4)
Basic and diluted pro forma net income 0.68 0.36 0.66 0.53
Basic pro forma net income excluding realized gains (5) 0.29 0.32 0.38 0.41
Diluted pro forma net income excluding realized gains (5) 0.29 0.32 0.38 0.40
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operating income is defined as premium and fee revenues and other revenues
less medical and other benefit costs and selling, general and
administrative expenses.
(2) Net income excluding realized gains per share is calculated as net income
per share excluding the after-tax amounts for net realized gains.
(3) Reflects net income and net income per share for the period after February
5, 1997, the effective date of the Demutualization and Initial Public
Offering (IPO).
(4) Pro forma per share data gives effect to the Demutualization and IPO as if
they had taken place on January 1, 1997. See note 2 to the consolidated
financial statements for the pro forma assumptions used.
(5) Pro forma net income excluding realized gains per share is calculated as
pro forma net income per share excluding the pro forma after-tax amounts
for net realized gains.
17
<PAGE>
Selected Consolidated Financial and Operating Data
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands, except per share data
and operating statistics) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues
Premium and fee revenues
Commercial $ 1,531,107 1,431,114 1,320,596 1,157,899 1,081,820
Federal Employee Program 407,136 377,722 356,741 329,243 303,250
Amounts attributable
to self-funded arrangements 1,090,638 1,062,101 1,077,478 981,741 908,234
Less: amounts attributable
to claims under
self-funded arrangements (979,535) (961,588) (988,353) (897,954) (827,869)
- ------------------------------------------------------------------------------------------------------------------
2,049,346 1,909,349 1,766,462 1,570,929 1,465,435
Investment income 85,540 74,684 47,312 45,861 39,962
Net realized gains 77,507 54,063 59,410 52,976 12,793
Other revenues 23,959 25,524 49,356 55,176 45,467
- ------------------------------------------------------------------------------------------------------------------
Total revenues 2,236,352 2,063,620 1,922,540 1,724,942 1,563,657
- ------------------------------------------------------------------------------------------------------------------
Expenses
Medical and other benefit costs
Commercial 1,263,765 1,194,641 1,086,388 959,328 802,666
Federal Employee Program 388,513 359,915 339,143 312,222 283,645
- ------------------------------------------------------------------------------------------------------------------
1,652,278 1,554,556 1,425,531 1,271,550 1,086,311
Selling, general and
administrative expenses 391,974 359,792 376,374 346,353 322,391
Interest expense 5,291 4,602 -- -- --
Copayment refund program -- -- -- 47,073 36,432
- ------------------------------------------------------------------------------------------------------------------
Total expenses 2,049,543 1,918,950 1,801,905 1,664,976 1,445,134
- ------------------------------------------------------------------------------------------------------------------
Income before gain on sale of
subsidiary, income taxes
and extraordinary items 186,809 144,670 120,635 59,966 118,523
Gain on sale of subsidiary -- -- 62,253 -- --
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes and
extraordinary items 186,809 144,670 182,888 59,966 118,523
Income tax expense (benefit) 63,237 49,617 (13,626) 8,264 24,564
- ------------------------------------------------------------------------------------------------------------------
Income before extraordinary items 123,572 95,053 196,514 51,702 93,959
Extraordinary items, net of income taxes -- -- (190,820) (4,707) (644)
- ------------------------------------------------------------------------------------------------------------------
Net income $ 123,572 95,053 5,694 46,995 93,315
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income after Demutualization
and IPO (1) $ 123,572 78,982 -- -- --
Earnings per share (1)
Basic net income after
Demutualization and IPO $ 2.92 1.87 -- -- --
Diluted net income
after Demutualization and IPO $ 2.88 1.86 -- -- --
Basic net income excluding realized gains $ 1.73 -- -- -- --
Diluted net income excluding realized gains $ 1.71 -- -- -- --
Pro forma earnings per share (2)
Basic and diluted pro forma income
before extraordinary items $ -- 2.23 2.73 0.84 --
Basic and diluted pro forma net income (loss) $ -- 2.23 (1.77) 0.73 --
Basic and diluted pro forma net income
excluding realized gains and
extraordinary items (3) $ -- 1.40 0.87 0.75 --
OPERATING STATISTICS
Medical loss ratio
Commercial 82.5% 83.5% 82.3% 82.9% 74.2%
Federal Employee Program 95.4% 95.3% 95.1% 94.8% 93.5%
Selling, general and administrative
expense ratio (4) 12.8% 12.4% 13.4% 13.7% 13.8%
Operating margin (5) 1.4% 1.1% 0.8% 0.5% 6.8%
<CAPTION>
December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and investments $1,590,022 1,370,868 1,213,902 1,119,652 1,001,571
Total assets 2,174,225 1,928,820 1,833,148 1,565,331 1,403,104
Obligation for Commonwealth Payment -- -- 175,000 -- --
Long-term debt 89,339 90,147 4,880 4,145 --
Total shareholders' equity 1,071,224 958,737 -- -- --
Total surplus -- -- 739,780 740,071 655,875
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects net income and net income per share for the period after February
5, 1997, the effective date of the Demutualization and Initial Public
Offering (IPO). Net income excluding realized gains per share is calculated
as net income per share excluding the after-tax amounts for net realized
gains.
(2) Pro forma per share data gives effect to the Demutualization and IPO as if
they had taken place on January 1, 1995. See note 2 to the consolidated
financial statements for the pro forma assumptions used.
(3) Pro forma net income excluding realized gains and extraordinary items per
share is calculated as pro forma net income per share excluding the pro
forma after-tax amounts for net realized gains, extraordinary items, the
gain on sale of a subsidiary in 1996 and the costs incurred under the 1995
Copayment Program.
(4) The selling, general and administrative expense ratio is calculated as a
percentage of total revenues excluding amounts attributable to claims under
self-funded arrangements, investment income and net realized gains.
(5) The operating margin ratio is calculated by dividing operating income by
premium and fee revenues and other revenues. Operating income is defined as
premium and fee revenues and other revenues less medical and other benefit
costs and selling, general and administrative expenses.
19
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
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 divides its business into four reportable segments: health
insurance, government programs, investments and all other. Its health insurance
segment offers several network products, including health maintenance
organizations (HMO), preferred provider organizations (PPO) and traditional
indemnity products with access to the Company's participating provider network
(PAR) as well as medicare supplement plans. The government programs segment
includes the Federal Employee Program (FEP) and claims processing for Medicare.
Through its participation in the national contract between the Blue Cross Blue
Shield Association and the U.S. Office of Personnel Management (OPM), the
Company provides health benefits to federal employees 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. The Company processes Medicare Part A
claims for beneficiaries in Virginia and West Virginia. Additionally, the
Company provides computer processing capabilities for Medicare Part A claims
processing to certain other Blue Cross Blue Shield plans. As an administrative
agent for Medicare, the Company allocates operating expenses to determine
reimbursement due for services rendered in accordance with the contract.
Medicare claims processed are not included in the consolidated statements of
operations and the reimbursement of allocated operating expenses is recorded as
a reduction of the Company's selling, general and administrative expenses. All
of the investment portfolios of the consolidated subsidiaries are managed and
evaluated collectively within the investment segment. The Company's other
health-related business, third-party administration for medical and workers
compensation, life and disability insurance, health promotion and similar
products, are reflected in an "all other" category.
Within the Company's health insurance 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 portions
of the claims risk.
ENROLLMENT
The following table sets forth the Company's enrollment data by network:
<TABLE>
<CAPTION>
As of December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Health Insurance
Commercial
HMO 255,879 255,548 219,866
PPO 297,939 263,828 230,675
PAR 165,239 192,825 236,383
Medicaid / Medicare HMO 31,338 35,488 28,306
Medicare supplement 121,322 125,686 128,015
Non-Virginia 105,056 64,143 49,251
- --------------------------------------------------------------------------------
Total commercial 976,773 937,518 892,496
Self-funded 666,036 679,667 700,482
Processed for other
Blue Cross and Blue
Shield Plans (ASO) 5,545 15,728 70,330
- --------------------------------------------------------------------------------
Total health insurance 1,648,354 1,632,913 1,663,308
Government
Federal Employee
Program (PPO) 213,017 207,457 197,241
- --------------------------------------------------------------------------------
Total 1,861,371 1,840,370 1,860,549
- --------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM
The following table sets forth the Company's premium and premium equivalents by
network (in thousands):
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Health Insurance
Commercial
HMO $ 383,850 353,059 273,840
PPO 424,756 374,514 328,291
PAR 310,971 352,630 410,074
Medicaid / Medicare HMO 60,696 57,664 46,377
Medicare supplement 222,231 212,516 204,438
Non-Virginia 128,603 80,731 57,576
- --------------------------------------------------------------------------------
Total commercial 1,531,107 1,431,114 1,320,596
Self-funded 1,090,638 1,062,101 1,077,478
- --------------------------------------------------------------------------------
Total health insurance 2,621,745 2,493,215 2,398,074
Government
Federal Employee
Program (PPO) 407,136 377,722 356,741
- --------------------------------------------------------------------------------
Total $3,028,881 2,870,937 2,754,815
- --------------------------------------------------------------------------------
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Premium and fee revenues increased 7.3% to $2.049 billion in 1998 from $1.909
billion in 1997. The $140.0 million increase is due to a combination of rate
increases and enrollment growth in the Company's health insurance segment HMO,
PPO and Non-Virginia networks, offset by expected declines in the segment's PAR
network enrollment. Specifically, commercial HMO revenues increased 8.2% to
$444.5 million in 1998 from $410.7 million in 1997. The $33.8 million increase
in commercial HMO revenues is the result of a 6.1% increase in the average
revenue per member and a 2.0% increase in member months. Total commercial PPO
revenues grew to $424.8 million in 1998 from $374.5 million last year, a 13.4%
increase, driven by average revenue per member increases of 3.1% and a 12.0%
increase in member months. Commercial PAR revenues declined to $311.0 million
from $352.6 million in 1997 as a result of the continued transition of members
to the more tightly managed HMO and PPO networks offset by a 5.9% increase in
the average revenue per member. Finally, non-Virginia revenues increased 59.3%
to $128.6 million up from $80.7 million last year. The $47.9 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
health care purchasers. Overall, premium revenues on a per member per month
basis for the Company's commercial business increased 3.6% to $133.50 for 1998
from $128.84 for 1997. The government segment's FEP revenues increased 7.8% to
$407.1 million from $377.7 million last year. The increase is due to increased
medical costs to be reimbursed by OPM and a 2.7% increase in enrollment.
Total enrollment increased to 1,861,371 as of December 31, 1998 from
1,840,370 as of December 31, 1997. The increase was a result of a 15,441
increase in the Company's health insurance segment and a 5,560 increase in the
government segment. The health insurance segment increase was the result of a
39,255 increase in commercial enrollment offset by a decline in self-funded
members of 23,814. Total commercial enrollment increased 4.2% to 976,773 members
as of December 31, 1998 from 937,518 members as of December 31, 1997. Enrollment
in the HMO network decreased by 1.3% over the prior year and accounts for 29.4%
of total commercial enrollment. The decline in enrollment can be attributed to
the loss of certain large unprofitable groups that left as a result of pricing
increases, groups lost as a result of mergers and the Company's decision to
withdraw from the Medicaid HMO program in the Richmond, Virginia area. Excluding
these events, the HMO enrollment grew more than 10%. Enrollment in the PPO
network as of December 31, 1998 increased 12.9% over December 31, 1997 and
accounts for 30.5% of the Company's commercial enrollment. Non-Virginia
enrollment increased 63.8% over the prior year and now accounts for 10.8% of
total commercial enrollment. Growth in PPO and Non-Virginia enrollment was
offset by an expected decline of 14.3% in the Company's PAR network as members
migrate into more tightly managed networks. The PAR network enrollment
represents 16.9% of the Company's total commercial enrollment. The decline in
self-funded enrollment of 23,814 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 10,200
national account members (ASO only) from the Company's systems to an interplan
system
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
where the Company continues to process claims for other Blue Cross and Blue
Shield Plans.
Investment income increased 14.5% to $85.5 million in 1998 from $74.7
million in 1997. Net realized gains increased to $77.5 million in 1998 from
$54.1 million in 1997. The increase in investment income is due to a shift in
the portfolio mix from direct equity securities to fixed income securities,
increased cash flows from realized gains, positive cash flow from operations,
lengthened duration for portions of the bond portfolio and reduced investment
expenses. The increase in net realized gains was primarily a result of favorable
realized gains on bonds offset by lower gains on equity securities.
Other revenue decreased by 6.1% to $24.0 million in 1998 from $25.5 million
in 1997. The $1.5 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.
Medical costs increased 6.3% to $1.652 billion in 1998 from $1.555 billion
in 1997. The $97.7 million increase is the result of expected levels of medical
cost inflation, growth in the health insurance segment's commercial enrollment
and an increase in the government segment's FEP medical costs reimbursed by OPM.
The medical cost per member per month for the Company's commercial business
increased 2.5% to $110.19 in 1998 from $107.55 in 1997. Combined with a 3.6%
increase in commercial premium revenues per member per month, the loss ratio on
commercial business improved to 82.5% in 1998 from 83.5% 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 deterioration in the loss
ratio 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 1998, commercial Virginia inpatient days per thousand were down 4.9% and
inpatient facility costs per member decreased 3.6% over 1997. By the end of the
fourth quarter, 88% 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. To address the under-performing Mid-South
business unit, stricter underwriting and pricing standards have been applied and
the Company is taking steps to improve product distribution channels and reduce
administrative costs. The Company is also migrating portions of the southeast
business to its Virginia processing systems to improve the quality of management
information and to take advantage of already proven system tools to manage both
care and provider networks. The Company continues to review a variety of options
to address this under-performing book of business.
Selling, general and administrative expenses (SG&A) increased by 8.9% to
$392.0 million in 1998 from $359.8 million in 1997. The increase is a result of
higher volumes and the incremental cost of certain initiatives. SG&A expenses
increased by $22.3 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 $6.2 million in 1998 compared to 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
$4.4 million reduction to SG&A in 1998. In the fourth quarter of 1997, the
Company eliminated the postretirement medical benefit program for a substantial
portion of its employees. The elimination of this benefit resulted in a one-time
curtailment gain of nearly $4.0 million, which was recorded as a reduction to
SG&A expenses.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
Overall, the SG&A ratio was 12.8% for the current year as compared to 12.4% for
1997.
Interest expense in 1998 was $5.3 million compared to $4.6 million in 1997.
Interest expense is the result of the $85 million outstanding on the revolving
credit agreement used to fund a portion of the payment made to the Commonwealth
of Virginia in February 1997 (Commonwealth Payment) in accordance with the Plan
of Demutualization (Demutualization) and the Initial Public Offering (IPO).
Income before income taxes increased $42.1 million to $186.8 million in
1998 from $144.7 million in 1997. The increase is a result of higher net
realized gains on the sale of investments of $23.4 million, higher investment
income of $10.8 million and an $8.5 million increase in operating income
(defined as income before income taxes and extraordinary items excluding
investment income, net realized gains, gain on sale of subsidiary and interest
expense). Operating income increased primarily due to improving margins in the
health insurance segment resulting from pricing and medical cost management
efforts.
The effective tax rate for 1998 decreased to 33.9% from 34.3% in 1997.
During 1998, the Company increased its investment in tax-exempt municipal bonds
thereby increasing the amount of tax-exempt investment income earned.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Premium and fee revenues increased 8.1% to $1.909 billion in 1997 from $1.766
billion in 1996. The increase is due to a combination of rate increases and
enrollment growth in the Company's health insurance segment HMO and PPO
networks, offset by expected declines in the segment's PAR network enrollment.
Specifically, commercial HMO revenues increased 28.3% to $410.7 million in 1997
from $320.2 million in 1996. The $90.5 million increase in commercial HMO
revenues is a result of increased enrollment attributable to a shift in members
from PAR and PPO networks into the HMO networks and from enrollment of new HMO
members as well as an increase of 4.3% in the average revenue per member.
Commercial PPO revenues grew to $374.5 million in 1997 from $328.3 million in
1996, an increase of 14.1%, driven by enrollment growth. Commercial PAR revenues
declined to $352.6 million in 1997 from $410.1 million in 1996 primarily as a
result of the transition of members to the more tightly managed HMO and PPO
networks. The full year impact of the Mid-South acquisition increased premium
and fee revenues $21.8 million, with Mid-South revenues increasing to $74.7
million in 1997 from $52.9 million for the period from February 29, 1996 (the
date of the acquisition) through December 31, 1996. Overall, premium revenues on
a per member per month basis for the Company's commercial business increased
2.8% to $128.84 for 1997 from $125.33 for 1996. Finally, net revenues from
self-funded arrangements increased 12.8% to $100.5 million in 1997 from $89.1
million in 1996. The improvement is a result of higher administrative fees and
favorable stop loss settlements. The government segment's FEP revenues increased
5.9% to $377.7 million in 1997 from $356.7 million in 1996 primarily as a result
of increased medical costs reimbursed by OPM and a 5.2% increase in enrollment.
Total enrollment declined to 1,840,370 as of December 31, 1997 from
1,860,549 as of December 31, 1996. The 20,179 decline was the net result of a
decrease in the Company's health insurance segment of 30,395 offset by
enrollment growth of 10,216 in the government segment. The health insurance
decrease was the result of a 75,417 decline in self-funded enrollment offset by
an increase of 45,022 members in commercial business mainly from HMO and PPO
network growth. Specifically, total commercial enrollment increased 5.0% to
937,518 members as of December 31, 1997 from 892,496 members as of December 31,
1996. Enrollment in the HMO networks as of December 31, 1997 increased 17.3%
over the prior year and accounts for 31.0% of the Company's commercial
enrollment. Enrollment in the PPO networks increased 14.4% over the prior year
and accounts for 28.1% of the Company's commercial enrollment. The increases in
the HMO and PPO networks were offset by an expected decline of 18.4% for the
Company's PAR network as members migrate into more tightly managed networks and
partially as a result of ceding all student business with approximately 7,900
members. The PAR network enrollment represents 20.6% of the Company's total
commercial enrollment. The decline in self-funded enrollment reflected the
Company's de-emphasis of no risk, low margin ASO business and the migration of
approximately 55,000 national account members
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
(ASO only) from the Company's systems to a new interplan system where the
Company continues to process claims for other Blue Cross and Blue Shield Plans.
The government segment's FEP enrollment increased 5.2% to 207,457 as of December
31, 1997 from 197,241 as of December 31, 1996.
Investment income increased 57.9% to $74.7 million in 1997 from $47.3
million in 1996. Net realized gains decreased 9.0% to $54.1 million in 1997 from
$59.4 million in 1996. The increase in investment income reflects the continued
increase in the overall size of the investment portfolio over the past year and
the Company's strategy to shift a larger portion of the investment portfolio to
fixed income securities. This portfolio shift is also the primary factor for the
net realized gains activity in 1997.
Other revenues decreased by 48.3% to $25.5 million in 1997 from $49.4
million in 1996. The decrease is primarily a result of the sale of the Company's
electronic communication services subsidiary, Health Communication Services,
Inc. (HCS), on December 31, 1996. During 1996, HCS contributed $21.5 million in
other revenues.
Medical costs increased 9.1% to $1.555 billion in 1997 from $1.426 billion
in 1996. The $129.0 million increase is the result of overall health insurance
segment commercial enrollment growth, an increase in the government segment's
FEP medical costs reimbursed by OPM, higher than normal utilization in the
health insurance segment Medicare supplement products during the first half of
the year, higher than expected utilization and cost per member in one of the
Company's health insurance segment HMO plans and the full year impact of the
Mid-South acquisition. The medical cost per member per month for the Company's
health insurance segment commercial business increased 4.3% to $107.55 in 1997
from $103.10 in 1996. Combined with a 2.8% increase in commercial premium
revenues per member per month, the loss ratio on commercial business increased
to 83.5% in 1997 from 82.3% in 1996. The increase can be attributed partly to
issues at one of the Company's HMO plans where, during 1997, the Company
implemented extensive cost containment actions, pricing initiatives and
processing controls, as well as a change in management, all aimed at bringing
the plan's results to acceptable levels. The health insurance segment also
experienced higher than expected Medicare supplement product medical costs in
the first half of the year. The increase was caused by a greater number of
high-dollar claims and higher medical costs driven by physician outpatient
claims and pharmacy utilization. The commercial loss ratio averaged 84.1% for
the first half of 1997 as compared to 82.9% for the last half of the year. The
improvement reflected improved medical cost levels for the health insurance
segment's Medicare supplement products, the impact of actions mentioned above
regarding one of the Company's HMO plans and the overall impact of cost
containment initiatives on the network-based PAR, PPO and HMO products.
Selling, general and administrative expenses declined by 4.4% to $359.8
million in 1997 from $376.4 million in 1996. The SG&A ratio was 12.4% in 1997 as
compared to 13.4% in 1996. The decrease is a result of the sale of HCS on
December 31, 1996 which contributed $21.3 million in SG&A expenses in 1996,
along with the impact of Company-wide streamlining and cost containment
activities, including a 10.5% reduction in headcount. In addition, the Company
eliminated the postretirement medical benefit program for a substantial portion
of its employees in the fourth quarter of 1997. The elimination of this benefit
resulted in a one-time curtailment gain of nearly $4.0 million, which was
recorded, as a reduction to SG&A expenses. The decrease in expenses was
partially offset by the full year impact of the Mid-South acquisition, $5.4
million in incremental costs related to modifying computer software for the Year
2000 and other employee benefit-related accruals.
Interest expense in 1997 was $4.6 million. There was no interest expense in
1996. Interest expense for 1997 is the result of the $85 million outstanding on
the revolving credit agreement used to fund a portion of the Commonwealth
Payment.
Income before income taxes and extraordinary items decreased 20.9% to
$144.7 million in 1997 from $182.9 million in 1996. The decrease is primarily
attributable to the sale of HCS resulting in a pretax gain of $62.3 million in
1996. The decrease also reflects a $5.3 million decline in net realized gains
and interest expense of $4.6 million, offset by a $27.4 million increase in
investment income and a $6.6 million improvement in operating income.
The Company's effective tax rate was 34.3% in 1997 compared to an effective
tax rate benefit of 7.5%
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
in 1996. The effective tax rate benefit for 1996 is primarily due to a reduction
in the valuation allowance on deferred tax assets caused by the realization of
alternative minimum tax credits during 1996 and the elimination as of September
30, 1996 of the remaining $63.9 million valuation allowance. Excluding the
effects of the elimination of the valuation allowance, the effective tax rate in
1996 was 27.5% due to the realization of alternative minimum tax credits during
the year.
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 producing a consistently growing income stream and maximizing
risk-adjusted total return. The fixed income portfolio includes government and
corporate securities, both domestic and international, with an average quality
rating of A as of December 31, 1998. The portfolio had an average contractual
maturity of 8.4 years as of December 31, 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 December 31, 1998, the Company's equity exposure, comprised of
direct equity as well as equity-indexed investments, was 14.0% of the total
portfolio, as compared to 13.9% as of December 31, 1997 and 27.8% as of December
31, 1996. 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.
Cash provided by (used in) operating activities for the years ended
December 31, 1998 and 1997 was $151.6 million and $(117.0) 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, improved operating income and the timing of premium receipts and claims
and other operating liability payments between years.
Net cash used in investing activities increased to $144.8 million for the
year ended December 31, 1998 from $116.3 million for 1997. This increase is
primarily due to investment purchases made with cash flows from operations,
reinvestment of investment income and net realized gains. The increase is also
attributed to an $8.6 million increase in capital expenditures of which $4.4
million is attributable to capitalized internal use software due to the adoption
of SOP 98-1 in 1998. The remaining $4.2 million increase is primarily due to
purchases of vendor supplied software.
Cash provided by (used in) financing activities decreased to $(6.3) million
for 1998 from $208.9 million for 1997 primarily due to the IPO and borrowing
under a credit agreement which occurred in early 1997. The IPO and borrowing
under the credit agreement generated $209.5 million in net cash flows for the
Company in 1997.
Effective February 5, 1997, the Company completed its conversion from a
mutual insurance company to a stock insurance company in accordance with a Plan
of Demutualization. In accordance with the Demutualization, Blue Cross and Blue
Shield of Virginia (Virginia BCBS) changed its name to Trigon Insurance Company
(dba Trigon Blue Cross Blue Shield) and became a wholly-owned subsidiary of
Trigon Healthcare, Inc., a stock holding company. The membership interests of
Virginia BCBS's eligible members were converted into Class A common stock of
Trigon Healthcare, Inc. or, in certain circumstances, cash. The Plan of
Demutualization also required the Company to complete an IPO of stock
simultaneously with the conversion. Accordingly, Trigon Healthcare, Inc. issued
17.8 million shares of Class A common
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
stock at $13 per share in the IPO generating net proceeds of $215.2 million. In
connection with the Demutualization, the Company was required to make the $175
million Commonwealth Payment. The Company used approximately $90 million of the
net proceeds and $85 million in borrowings under a revolving credit agreement to
fund this payment. The Company also used approximately $91.1 million of the
offering proceeds to pay certain eligible members cash in lieu of shares of
common stock that would otherwise be issued to such eligible members pursuant to
the Demutualization.
In connection with the Demutualization and IPO, 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 December 31, 1998, $85 million had been borrowed and remained
outstanding under the 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 this settlement with the IRS in the
near term, but there can be no assurance that this will occur.
YEAR 2000 READINESS DISCLOSURE
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 is using both external and
internal resources for the project.
Compliant versions of the majority of the Company's core systems and
software were installed in production at year end 1998. Year 2000 testing has
been completed for many of these systems and products. The Year 2000 testing
will continue during 1999.
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
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
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 99% of the Year 2000 application remediation and
Year 2000 testing of these applications. The remaining remediation and testing
efforts, none of which are critical to the Company's day to day business, are
scheduled to be completed by June 1999.
EXTERNALLY LICENSED APPLICATION SYSTEMS. Trigon has received 99% of the
vendor-certified Year 2000 compliant releases of these application systems.
Compliant releases received by October 1998 were installed into production by
December 1998. The remaining installations are scheduled to be installed by June
1999.
In addition, the Company is in the process of replacing two non-compliant
systems that could not be renovated with Year 2000 upgrades or patches. The
Company anticipates replacement of these non-core systems by September 1999.
EXTERNALLY LICENSED OPERATING SYSTEM/UTILITY PRODUCTS. These products support
the Company's mainframe, midrange, file server and desktop environments. Trigon
has received 98% of the vendor-certified Year 2000 compliant releases (or Year
2000 patches for current 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. Vendor-certified
releases received by October 1998 were 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
during 1999.
OUTSOURCED FUNCTIONS. Trigon has outsourced support for some segments of its
business. These include, for example, administering certain specialty services
such as pharmacy, dental and vision processing services. The Company has
contacted its critical 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
and progress. 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. Much of this work was completed during 1998.
But as in other efforts where the Company is reliant upon vendors, the remaining
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
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
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.
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 $15.5 million through
December 31, 1998, including $8.7 million incurred during 1998. Total
incremental costs are expected to approximate $20.2 million through 1999,
increasing to $22.0 million through 2000. 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 began a comprehensive contingency planning effort in November
1998 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. Contingency plans 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. 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," contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including among
other things statements concerning financial condition, results of operations
and business of the Company and its subsidiaries. Such forward-looking
statements are subject to inherent risks
28
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
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.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of its investing and borrowing activities, the Company is exposed to
financial market risks, specifically those resulting from changes in interest
rates, foreign currency exchange rates and marketable equity security prices.
All of the potential changes noted below are based upon sensitivity analyses
performed on the Company's financial positions as of December 31, 1998. Actual
results may vary materially.
All of the Company's investments are categorized as available-for-sale. The
majority of these are fixed income securities. Market risk is addressed by
actively managing the duration and diversification of the portfolio. The Company
has evaluated the impact on the portfolio's fair value considering a 100 basis
point change in interest rates over the next twelve-month period. A hypothetical
100 basis point increase in interest rates would result in an approximate $7.4
million increase in fair value, whereas a corresponding 100 basis point decrease
in interest rates would result in an approximate $190.5 million increase in fair
value. This analysis includes the assumption that the 100 basis point change
occurs evenly throughout the twelve-month period. The analysis also assumes
investment income earned is reinvested into the portfolio thus mitigating the
effects of change in fair value from an increase in interest rates or enhancing
the effects of change in fair value from a decrease in interest rates over the
twelve-month period. Moreover, the analysis is performed at the individual
portfolio level, with only the sum of these amounts presented herein. As of
December 31, 1998, only $6.0 million of the fixed-income portfolio is invested
in non-U.S. dollar denominated bonds. Therefore, even a significant change in
foreign exchange rates would not materially impact the fixed income portfolio's
fair value.
The Company's equity portfolio is comprised of domestic and international
direct equity investments as well as domestic equity-indexed investments. An
immediate 10% decrease in each equity investment's value, arising from a
combination of market and foreign exchange movement, would result in a fair
value decrease of $22.2 million. Correspondingly, an immediate 10% increase in
each equity investment's value, attributable to the same two factors, would
result in a fair value increase of $22.2 million. The majority of the $51.1
million international equity portfolio is non-U.S. dollar denominated. Foreign
currency forward contracts are utilized to hedge some, but not all, of the
Company's foreign currency exposure.
As of December 31, 1998, the Company has long-term debt outstanding in the
amount of $89.3 million. Of this amount only $1.3 million represents obligations
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
with a fixed interest rate. Therefore, the impact of an interest rate increase
or decrease upon the fair value of the Company's long-term debt would be
diminimus.
MARKET PRICES OF COMMON STOCK AND DIVIDEND DATA
The Class A common stock, par value $0.01 per share, is traded on the New York
Stock Exchange under the symbol TGH. The reported high and low closing prices by
quarter during 1998 and from January 31, 1997, the first trading day after the
Demutualization and IPO, to December 31, 1997 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
First quarter $ 32 23 7/8
Second quarter 36 9/16 28 13/16
Third quarter 35 5/16 26 1/2
Fourth quarter 38 3/16 25 1/4
<CAPTION>
- --------------------------------------------------------------------------------
1997 High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
First quarter $ 19 1/2 16
Second quarter 24 1/4 17 3/4
Third quarter 25 5/16 21
Fourth quarter 26 13/16 23 1/8
- --------------------------------------------------------------------------------
</TABLE>
The Company has never paid dividends on its common stock and anticipates
that all earnings in the foreseeable future will be retained to finance the
continuing development of its business. The payment of any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon
the Company's earnings, financial condition, capital requirements, the revolving
credit agreement restrictions on dividends and such other factors as the
Company's Board of Directors deems relevant.
To the extent that the Company determines to pay dividends in the future,
the principal source of funds to pay dividends to shareholders would be
dividends received by the Company from its subsidiaries. The Company is a
holding company and insurance laws and regulations restrict the payment of
dividends by health care insurance companies, such as Trigon Insurance Company,
in a holding company structure.
As of March 3, 1999, there were 100,415 shareholders of record of the
Company's Class A common stock.
30
<PAGE>
Consolidated Balance Sheets
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31, 1998 and 1997
(In thousands, except per share data) 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 7,500 7,010
Investment securities, at estimated fair value (note 4) 1,582,522 1,363,858
Premiums and other receivables (note 5) 378,436 360,941
Other 10,891 7,607
- ------------------------------------------------------------------------------------------------------------
Total current assets 1,979,349 1,739,416
- ------------------------------------------------------------------------------------------------------------
Property and equipment, net (note 6) 47,890 43,912
Deferred income taxes (note 11) 55,841 45,185
Goodwill and other intangibles, net 62,999 68,354
Restricted investments, at estimated fair value (note 4) 10,347 10,139
Other assets 17,799 21,814
- ------------------------------------------------------------------------------------------------------------
Total assets $2,174,225 1,928,820
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Medical and other benefits payable (note 7) $ 468,455 412,710
Unearned premiums 99,464 93,157
Accounts payable and accrued expenses 67,971 53,240
Deferred income taxes (note 11) 8,022 4,298
Other liabilities (note 9) 231,151 184,414
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 875,063 747,819
- ------------------------------------------------------------------------------------------------------------
Obligations for employee benefits, noncurrent (note 13) 55,022 59,467
Medical and other benefits payable, noncurrent (note 7) 75,212 66,541
Long-term debt (note 12) 89,339 90,147
Minority interest in subsidiary 8,365 6,109
- ------------------------------------------------------------------------------------------------------------
Total liabilities 1,103,001 970,083
- ------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par; 42,300 shares issued and outstanding (notes 2 and 14) 423 423
Capital in excess of par (note 2) 839,187 842,035
Retained earnings (note 2) 202,554 78,982
Accumulated other comprehensive income (note 16) 29,060 37,297
- ------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,071,224 958,737
Commitments and contingencies (notes 8 and 22)
- ------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,174,225 1,928,820
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
Consolidated Statements of Operations
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996
(In thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premium and fee revenues
Commercial $ 1,531,107 1,431,114 1,320,596
Federal Employee Program 407,136 377,722 356,741
Amounts attributable to self-funded arrangements 1,090,638 1,062,101 1,077,478
Less: amounts attributable to claims under
self-funded arrangements (979,535) (961,588) (988,353)
- -------------------------------------------------------------------------------------------------------------
2,049,346 1,909,349 1,766,462
Investment income (note 4) 85,540 74,684 47,312
Net realized gains (note 4) 77,507 54,063 59,410
Other revenues (note 10) 23,959 25,524 49,356
- -------------------------------------------------------------------------------------------------------------
Total revenues 2,236,352 2,063,620 1,922,540
- -------------------------------------------------------------------------------------------------------------
EXPENSES
Medical and other benefit costs (note 7)
Commercial 1,263,765 1,194,641 1,086,388
Federal Employee Program 388,513 359,915 339,143
- -------------------------------------------------------------------------------------------------------------
1,652,278 1,554,556 1,425,531
Selling, general and administrative expenses
(notes 3 and 13) 391,974 359,792 376,374
Interest expense (note 12) 5,291 4,602 --
- -------------------------------------------------------------------------------------------------------------
Total expenses 2,049,543 1,918,950 1,801,905
- -------------------------------------------------------------------------------------------------------------
Income before gain on sale of subsidiary, income taxes
and extraordinary items 186,809 144,670 120,635
Gain on sale of subsidiary (note 20) -- -- 62,253
- -------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary items 186,809 144,670 182,888
Income tax expense (benefit) (note 11) 63,237 49,617 (13,626)
- -------------------------------------------------------------------------------------------------------------
Income before extraordinary items 123,572 95,053 196,514
Extraordinary items-- demutualization costs and
Commonwealth Payment, net of income taxes of $833 (note 2) -- -- (190,820)
- -------------------------------------------------------------------------------------------------------------
Net income $ 123,572 95,053 5,694
- -------------------------------------------------------------------------------------------------------------
Net income after Demutualization and IPO (notes 2 and 15) $ 123,572 78,982
- ----------------------------------------------------------------------------------------------
Earnings per share (notes 2 and 15)
Basic net income after Demutualization and IPO $ 2.92 1.87
- ----------------------------------------------------------------------------------------------
Diluted net income after Demutualization and IPO $ 2.88 1.86
- ----------------------------------------------------------------------------------------------
Pro forma earnings per share (notes 2 and 15)
Basic and diluted pro forma income before extraordinary items $ 2.23 2.73
- -------------------------------------------------------------------------------------------------------------
Basic and diluted pro forma net income (loss) $ 2.23 (1.77)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Accumulated
Capital other Total
Years ended December 31, 1998, 1997 and 1996 Common in excess Retained comprehensive shareholders'
(In thousands) stock of par earnings income equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $ -- -- 700,565 39,506 740,071
Net income -- -- 5,694 -- 5,694
Net unrealized losses on investment securities,
net of income taxes (notes 4 and 16) -- -- -- (5,985) (5,985)
----------
Comprehensive loss (291)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 -- -- 706,259 33,521 739,780
Net income before Demutualization -- -- 16,071 -- 16,071
Net income after Demutualization -- -- 78,982 -- 78,982
Net unrealized gains on investment securities,
net of income taxes (notes 4 and 16) -- -- -- 3,776 3,776
----------
Comprehensive income 98,829
Issuance of 24,475 shares to eligible
policyholders in the Demutualization and
cash payments to eligible policyholders
in lieu of shares of common stock 245 630,941 (722,330) -- (91,144)
Issuance of 17,825 shares in the
Initial Public Offering, net of expenses 178 215,027 -- -- 215,205
Purchase and reissuance of common stock
under employee benefit plans -- (144) -- -- (144)
Common stock held by consolidated grantor trusts (note 14) -- (3,789) -- -- (3,789)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 423 842,035 78,982 37,297 958,737
Net income -- -- 123,572 -- 123,572
Minimum pension liability adjustment,
net of income taxes (notes 13 and 16) -- -- -- (1,149) (1,149)
Net unrealized losses on investment securities,
net of income taxes (notes 4 and 16) -- -- -- (7,088) (7,088)
----------
Comprehensive income 115,335
Adjustment to cash payments to eligible
policyholders in lieu of shares of common
stock in the Demutualization -- (690) -- -- (690)
Purchase and reissuance of common stock under
Employee benefit plans -- (344) -- -- (344)
Stock option plans, net of income taxes of $525 -- (963) -- -- (963)
Common stock held by consolidated grantor trusts (note 14) -- (851) -- -- (851)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 423 839,187 202,554 29,060 1,071,224
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
Consolidated Statements of Cash Flows
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities
(note 19) $ 151,580 (116,982) 21,819
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from sale of property and equipment
and other assets 13 790 45
Capital expenditures (16,857) (8,226) (14,147)
Investment securities purchased (3,797,307) (4,784,150) (2,759,974)
Proceeds from investment securities sold 2,845,399 3,897,611 2,585,033
Maturities of fixed income securities 823,942 777,626 186,420
Cash paid for purchase of subsidiaries,
net of cash acquired -- -- (84,497)
Proceeds from sale of subsidiary -- -- 76,979
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (144,810) (116,349) (10,141)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from long-term debt -- 85,439 735
Payments on long-term debt (808) (172) --
Payments to members in lieu of common stock
pursuant to Plan of Demutualization (690) (91,144) --
Net proceeds from issuance of common stock -- 215,205 --
Purchase and reissuance of common stock under
employee benefit and stock option plans (1,307) (144) --
Common stock purchased by consolidated grantor trusts (851) (3,789) --
Change in outstanding checks in excess of bank balance (2,624) 3,464 (10,194)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (6,280) 208,859 (9,459)
- ------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 490 (24,472) 2,219
Cash-- beginning of year 7,010 31,482 29,263
- ------------------------------------------------------------------------------------------------------
Cash-- end of year $ 7,500 7,010 31,482
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
Notes to Consolidated Financial Statements
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
December 31, 1998, 1997 and 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Trigon Healthcare, Inc., a stock holding company, was formed in 1996 as a
wholly-owned subsidiary of Blue Cross and Blue Shield of Virginia (dba Trigon
Blue Cross Blue Shield) (Virginia BCBS) for the purpose of becoming the parent
company of Virginia BCBS under a Plan of Demutualization (Demutualization). In
accordance with the Demutualization, effective February 5, 1997, Virginia BCBS
completed its conversion from a mutual insurance company to a stock insurance
company, changed its name to Trigon Insurance Company (dba Trigon Blue Cross
Blue Shield) and became a wholly-owned subsidiary of Trigon Healthcare, Inc.
(Trigon Healthcare, Inc. and subsidiaries herein collectively referred to as the
Company) (note 2).
Trigon Healthcare, Inc. owns 100% of Trigon Insurance Company,
HealthKeepers, Inc., Mid-South Insurance Company, Trigon Health and Life
Insurance Company (formerly Monticello Life Insurance Company), Trigon Services,
Inc., Consolidated Holdings Corporation, Trigon Administrators, Inc., Health
Management Corporation and Monticello Service Agency, Inc. Additionally, Trigon
Healthcare, Inc. owns 80% of Priority, Inc. and 51% of Peninsula Health Care,
Inc. Through its subsidiary, Trigon Insurance Company, and its health
maintenance organization (HMO) subsidiaries, the Company is the largest managed
health care company in Virginia, providing more than 1.8 million customers with
a comprehensive spectrum of managed care products and services provided
primarily through three provider network systems. Trigon Insurance Company also
processes claims for Medicare and participates in a national contract between
the Blue Cross Blue Shield Association and the U.S. Office of Personnel
Management to provide benefits to Federal employees within Virginia through the
Federal Employee Program (FEP). The various subsidiaries provide complemen- tary
products and services to customers and non-customers of Trigon Insurance Company
including third-party administration for medical and workers' compensation, life
and disability insurance, health promotion and other products.
The significant accounting policies and practices followed by the Company
are as follows:
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The Company follows
Statement of Financial Accounting Standards (SFAS) No. 60, Accounting and
Reporting by Insurance Enterprises, as it relates to its insurance business and
AICPA Statement of Position 89-5, Financial Accounting and Reporting by
Providers of Prepaid Healthcare Services, as it relates to its HMO business. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The consolidated financial statements include the accounts of Trigon
Healthcare, Inc. and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Investments in other companies in which less than a majority interest is held
and where the Company has significant influence over the operating and financial
policies of the investee are accounted for under the equity method.
RISKS AND UNCERTAINTIES
The Company's profitability depends in large part on accurately predicting and
effectively managing health care costs. The Company continually reviews its
premium and benefit structure to reflect its underlying claims experience and
revised actuarial data; however, several factors could adversely affect the
medical loss ratios. Certain of these factors, which include changes in health
care practices, inflation, new technologies, major epidemics, natural disasters
and malpractice litigation, are beyond any health plan's control and could
adversely affect the Company's ability to accurately predict and effectively
control health care costs. Costs in excess of those anticipated could have a
material adverse effect on the Company's results of operations.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
In addition, the managed care industry is highly competitive in both
Virginia and in other states in the Southeastern and Mid-Atlantic regions where
the Company principally intends to expand. There is no assurance that such
competition will not exert strong pressures on the Company's profitability, its
ability to increase enrollment, or its ability to successfully attain its
expansion plans. Also, there can be no assurance that regulatory initiatives
will not be undertaken at the state or federal level to reform the health care
industry in order to reduce the escalation in health care costs or to make
health care more accessible. Such reform could adversely affect the Company's
profitability.
INVESTMENT SECURITIES
Investment securities are accounted for in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. All investment
securities are considered available-for-sale and are recorded at estimated fair
value, based on quoted market prices. The net unrealized gain or loss on
investment secu- rities, net of deferred income taxes, is included in
accumulated other comprehensive income in share- holders' equity. A decline in
the fair value of any investment security below cost, that is deemed other than
temporary, is recorded as a realized loss resulting in a new cost basis for the
security. Costs of investments sold are determined on the first in, first out
basis.
Certain of the Company's investment securities are denominated in foreign
currencies. The Company utilizes forward currency contracts and foreign currency
options to hedge exposure to fluctuations in foreign currency exchange rates.
The forward contracts and options are reflected as investment securities on the
consolidated balance sheets at fair value. Unrealized gains and losses on these
contracts are recorded in accumulated other comprehensive income in
shareholders' equity along with the unrealized gains and losses on the
securities being hedged. When the securities hedged by these contracts are sold,
gains or losses on these contracts are reflected in the consolidated statements
of operations as net realized gains.
The Company enters into financial futures contracts for portfolio
strategies such as minimizing interest rate risk and managing portfolio
duration. The notional amount of the futures contracts is limited to that of the
market value of the underlying portfolios. Should this limitation be exceeded,
futures contracts are immediately terminated in order to comply with this
restriction. Initial margins in the form of securities are maintained with the
counterparties for these trans- actions. Changes in fair value of financial
futures, determined on a daily basis, are recorded as realized gains or losses
in the consolidated statements of operations. Terminations of contracts are
accounted for in a similar manner.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets, which are 40 to 50 years
for buildings and 3 to 10 years for furniture and equipment. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or estimated useful life of the asset. Any gain or loss realized
upon retirement or disposal is reflected in selling, general and administrative
expenses.
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 soft-ware 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.
GOODWILL AND OTHER INTANGIBLES
Costs in excess of fair value of net tangible and identified intangible assets
of businesses acquired are amortized using the straight-line method over periods
from 15 to 25 years. Recoverability is reviewed annually or sooner if events or
changes in circum- stances indicate that the carrying amount may exceed fair
value. Recoverability is then determined by comparing the undiscounted net cash
flows of the assets to which the goodwill applies to the net book value
including goodwill of those assets.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Amortization was $5,355,000, $7,689,000 and $4,633,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Accumulated amorti- zation as of
December 31, 1998 and 1997 was $19,076,000 and $13,721,000, respectively.
MEDICAL AND OTHER BENEFITS PAYABLE
The Company establishes liabilities for claims in process of review and claims
incurred but not reported. These liabilities are based on historical payment
patterns using actuarial techniques. In addition, processing costs are accrued
as operating expenses based on an estimate of the costs necessary to process
these claims. The methods for making these estimates and for establishing the
resulting liabilities are continually reviewed and updated, and any adjustments
resulting therefrom are reflected in current operations. While the ultimate
amount of claims and the related expenses paid are dependent on future
developments, management is of the opinion that the liabilities for claims and
claims processing costs are adequate to cover such claims and expenses.
REVENUES
All of the Company's individual and certain of the Company's group contracts
provide for the individual or the group to be fully insured. Premiums for these
contracts are billed in advance of the respective cover- age periods and are
initially recorded as premiums receivable and as unearned income. Unearned
premiums are recognized as earned in the period of coverage.
Certain other groups have contracts that provide for the group to be at
risk for all or a portion of their claims experience. Most of these self-funded
groups purchase aggregate and/or specific stop-loss coverage. In exchange for a
premium, the group's aggregate liability or the group's liability on any one
episode of care is capped for the year. The Company charges self-funded groups
an administrative fee which is based on the number of members in a group or the
group's claims experience. Under the Company's self-funded arrangements, amounts
due are recognized based on incurred claims plus admin- istrative and other fees
and any stop-loss premiums. In addition, accounts for certain self-funded groups
are charged or credited with interest expense or income as provided by the
groups' contracts.
AGENCY CONTRACTS
As fiscal intermediary and administrative agent for Medicare and other plans,
the Company allocates operating expenses to these lines of business to determine
reimbursement due for services rendered in accordance with the contracts in
force. Claims processed under these arrangements are not included in the
accompanying consolidated statements of operations and the reimbursement of
allocated operating expenses is recorded as a reduction of the Company's
selling, general and administrative expenses.
POSTRETIREMENT/POSTEMPLOYMENT BENEFITS
Pension costs are accrued in accordance with SFAS No. 87, Employers' Accounting
for Pensions, and are funded based on the minimum contribution requirements of
the Employee Retirement Income Security Act of 1974. The actuarial cost method
used is the projected unit credit method.
The Company provides certain health and life insurance benefits to retired
employees. These benefits are accrued in accordance with SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
The Company also provides certain disability related postemployment
benefits. These benefits are accrued in accordance with SFAS No. 112, Employers'
Accounting for Postemployment Benefits. The Company accrues the benefits when it
becomes probable that such benefits will be paid and when sufficient information
exists to make reasonable estimates of the amounts to be paid.
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
132, Employer's Disclosures About Pensions and Other Postretirement Benefits.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compen- sation expense has been
recognized for the stock options granted and employee stock purchases. The
Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting
for Stock Based Compensation.
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS PER SHARE
The Company calculates and presents earnings per share in acordance with SFAS
No. 128, Earnings Per Share. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if all stock options and
other stock-based awards, as well as convertible securities, were exercised and
converted into common stock.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
NOTE 2. DEMUTUALIZATION AND IPO AND PRO FORMA FINANCIAL INFORMATION
Effective February 5, 1997, Virginia BCBS completed its conversion from a mutual
insurance company to a stock insurance company in accordance with the
Demutualization. In accordance with the Demutualization, Virginia BCBS changed
its name to Trigon Insurance Company (dba Trigon Blue Cross Blue Shield) and
became a wholly-owned subsidiary of Trigon Healthcare, Inc. The membership
interests of Virginia BCBS's eligible members were converted into Class A common
stock of Trigon Healthcare, Inc., or, in certain circumstances, cash. The
Demutualization also required the Company to complete an Initial Public Offering
(IPO) of stock simultaneously with the conversion. Accordingly, Trigon
Healthcare, Inc. issued 17.8 million shares of Class A common stock at $13 per
share in the IPO, generating net proceeds of $215.2 million. In connection with
the Demutualization, the Company was required to make a payment of $175 million
to the Commonwealth of Virginia (Commonwealth Payment) in February 1997. The
Commonwealth Payment was accrued and reflected as an extraordinary charge in the
consolidated financial statements for 1996. The Company used approxi- mately $90
million of the net proceeds and $85 million in borrowings under a revolving
credit agreement to fund this payment (note 12). The Company also used
approximately $91.1 million of the offering proceeds to pay certain eligible
members cash in lieu of shares of common stock that would otherwise be issued to
such eligible members pursuant to the Demutualization. The statements of changes
in shareholders' equity and the statements of cash flows reflect the
consolidated capitalization effects of the Demutualization and IPO for 1997.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following pro forma information for the years ended December 31, 1997
and 1996 gives effect to the Demutualization and IPO as if they had occurred on
January 1, 1996, 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):
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
As reported
Income before income
taxes and extraordinary items $ 144,670 182,888
Income tax expense
(benefit) 49,617 (13,626)
Pro forma adjustments
Pro forma interest
expense 634 4,943
Pro forma income
tax expense (benefit) (217) 75,907
- -------------------------------------------------------------------------------
Pro forma income before
extraordinary items 94,636 115,664
Extraordinary items,
net of income tax,
as reported -- (190,820)
- -------------------------------------------------------------------------------
Pro forma net income
(loss) $ 94,636 (75,156)
- -------------------------------------------------------------------------------
</TABLE>
The pro forma information assumes:
o interest expense at 5.675% and 5.815% per annum for the years ended
December 31, 1997 and 1996, respectively, on borrowings used to fund a
portion of the Commonwealth Payment. The pro forma interest expense
reflected for the year ended December 31, 1997 represents interest expense
for the period prior to the actual borrowing of funds used to make a
portion of the Commonwealth Payment using the actual weighted average rate
in effect during the first quarter of 1997. The interest rate used for 1996
reflects the actual weighted average rate in effect for the period the
borrowings were outstanding during 1997. Actual interest expense for the
period subsequent to the borrowings is included in income before income
taxes and extraordinary items. 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.
o the actual effective income tax rate of 34.3% for 1997. The pro forma
income tax benefit for the year ended December 31, 1997 represents the
income tax benefit associated with the pro forma interest expense
adjustment.
o adjustment of the effective income tax rate for 1996 to the 35 percent
statutory federal rate in conformity with the Company's pro forma
presentation in its Form S-1 filing.
The pro forma financial information above is used to present comparative
earnings per share amounts for the years ended December 31, 1997 and 1996 on the
consolidated statements of operations (note 15). Net income and net income per
share after Demutualiza- tion and IPO on the consolidated statements of
operations reflect net income and net income per share for the period after
February 5, 1997, the effective date of the Demutualization and IPO.
NOTE 3. AGENCY CONTRACTS
The Company acts as an administrative agent for processing claims for certain
agencies and other plans (note 1). Claims processed for others and the related
reimbursed operating expenses, which are subject to their audit, were as follows
for the years ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Claims processed for
Medicare $3,154,118 3,257,532 2,873,526
Other plans 156,352 106,486 55,480
- --------------------------------------------------------------------------------
$3,310,470 3,364,018 2,929,006
- --------------------------------------------------------------------------------
Operating expenses
reimbursed by
Medicare $ 16,579 12,535 11,634
Other plans 5,243 3,025 1,376
- --------------------------------------------------------------------------------
$ 21,822 15,560 13,010
- --------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 4. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair value
of investment securities as of December 31, 1998 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income
Domestic
U.S. Treasury securities and obligations
of U.S. government agencies $ 485,483 29,331 522 514,292
Mortgage-backed obligations of
U.S. government agencies 19,401 51 47 19,405
States and political subdivision securities 241,945 4,804 342 246,407
Other mortgage-backed and asset-backed securities 122,557 467 940 122,084
Domestic corporate bonds 451,355 8,033 7,887 451,501
Short-term debt securities with maturities of
less than one year 83,018 -- -- 83,018
Foreign
Debt securities issued by foreign governments 18,181 131 220 18,092
Foreign corporate bonds 26,419 138 767 25,790
Short-term debt securities with maturities of
less than one year 29 1 -- 30
- ------------------------------------------------------------------------------------------------------
Total fixed income 1,448,388 42,956 10,725 1,480,619
- ------------------------------------------------------------------------------------------------------
Equities
Domestic 49,456 14,291 2,591 61,156
Foreign 48,551 5,289 2,734 51,106
- ------------------------------------------------------------------------------------------------------
Total equities 98,007 19,580 5,325 112,262
- ------------------------------------------------------------------------------------------------------
Derivative instruments -- -- 12 (12)
- ------------------------------------------------------------------------------------------------------
$1,546,395 62,536 16,062 1,592,869
- ------------------------------------------------------------------------------------------------------
Unrestricted $1,536,689 61,886 16,053 1,582,522
Restricted 9,706 650 9 10,347
- ------------------------------------------------------------------------------------------------------
$1,546,395 62,536 16,062 1,592,869
- ------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income
Domestic
U.S. Treasury securities and obligations
of U.S. government agencies $ 406,921 23,040 14 429,947
Mortgage-backed obligations of
U.S. government agencies 72,117 1,429 93 73,453
States and political subdivision securities 31,914 1,325 7 33,232
Other mortgage-backed and asset-backed securities 139,504 791 379 139,916
Domestic corporate bonds 388,697 10,410 890 398,217
Short-term debt securities with maturities of
less than one year 93,561 -- -- 93,561
Foreign
Debt securities issued by foreign governments 41,066 2,296 490 42,872
Foreign corporate bonds 6,678 298 3 6,973
Short-term debt securities with maturities of
less than one year 9,214 -- 32 9,182
- ---------------------------------------------------------------------------------------------------------
Total fixed income 1,189,672 39,589 1,908 1,227,353
- ---------------------------------------------------------------------------------------------------------
Equities
Domestic 68,977 14,922 3,264 80,635
Foreign 57,476 15,034 8,813 63,697
- ---------------------------------------------------------------------------------------------------------
Total equities 126,453 29,956 12,077 144,332
- ---------------------------------------------------------------------------------------------------------
Derivative instruments 492 2,226 406 2,312
- ---------------------------------------------------------------------------------------------------------
$1,316,617 71,771 14,391 1,373,997
- ---------------------------------------------------------------------------------------------------------
Unrestricted $1,306,727 71,515 14,384 1,363,858
Restricted 9,890 256 7 10,139
- ---------------------------------------------------------------------------------------------------------
$1,316,617 71,771 14,391 1,373,997
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Short-term investments consist principally of commercial paper and money market
investments.
Derivative instruments consist of foreign currency forward contracts and
foreign currency options. The Company enters into foreign currency derivative
instruments to hedge exposure to fluctuations in foreign currency exchange
rates. Company policy only permits utilization of these instruments in its
foreign denominated bond and equity portfolios. The counterparties to these
transactions are major financial institutions. The Company may incur a loss with
respect to these transactions to the extent that a counterparty fails to perform
under a contract and exchange rates have changed unfavorably since the inception
of the contract. The Company anticipates that the counterparties will be able to
fully satisfy their obligations under the agreements. The forward contracts
involve the exchange of one currency for another at a future date and typically
have maturities of one year or less. As of December 31, 1998, the Company had
forward contracts outstanding to purchase approximately $600,000 in foreign
currencies and to sell approximately $3.1 million in foreign currencies
(primarily Japanese Yen, British Pound and German Mark (which was redenominated
to the Euro on January 1, 1999)). The gross unrealized losses related to these
contracts as of December 31, 1998 aggregated $12,000. There were no gross
unrealized gains related to these contracts as of December 31, 1998. Foreign
currency options are contracts that give the option purchaser the right, but not
the obligation, to buy or sell, within a specific period of time, a financial
instrument at a specified price. These options generally expire within twelve
months. There were no foreign currency options outstanding as of December 31,
1998.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The Company enters into financial futures contracts for portfolio
strategies such as minimizing interest rate risk and managing portfolio
duration. The notional amount of the futures contracts, $210.9 million as of
December 31, 1998, is limited to that of the market value of the underlying
portfolios.
The amortized cost and estimated fair value of fixed income securities as
of December 31, 1998, by contractual maturity, were as follows (in thousands).
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 130,356 130,435
Due after one year
through five years 250,984 251,108
Due after five years
through ten years 378,441 380,338
Due after ten years 546,649 577,249
Mortgage-backed and
asset-backed securities 141,958 141,489
- --------------------------------------------------------------------------------
$1,448,388 1,480,619
- --------------------------------------------------------------------------------
</TABLE>
Included in investment securities as of December 31, 1998 are $10.3 million, at
estimated fair value, of U.S. Treasury securities held by various states to meet
security deposit requirements related to Trigon Insurance Company, the HMO
subsidiaries, Trigon Health and Life Insurance Company and Mid-South Insurance
Company.
The major components of investment income for the years ended December 31,
1998, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on fixed
income securities $84,776 73,940 36,985
Interest on short-term
investments 7,573 4,450 8,654
Dividends 2,405 5,340 10,701
- --------------------------------------------------------------------------------
94,754 83,730 56,340
Investment expenses 6,541 6,141 5,711
Group interest credits 2,673 2,905 3,317
- --------------------------------------------------------------------------------
Investment income $85,540 74,684 47,312
- --------------------------------------------------------------------------------
</TABLE>
Gross realized gains and losses for the years ended December 31, 1998, 1997 and
1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains
Fixed income securities $ 48,880 21,177 12,697
Equity securities 29,370 65,837 70,421
Derivative instruments 64,015 14,689 6,659
- --------------------------------------------------------------------------------
142,265 101,703 89,777
- --------------------------------------------------------------------------------
Gross realized losses
Fixed income securities 10,540 20,514 10,365
Equity securities 17,935 20,461 18,834
Derivative instruments 36,283 6,665 1,168
- --------------------------------------------------------------------------------
64,758 47,640 30,367
- --------------------------------------------------------------------------------
Net realized gains $ 77,507 54,063 59,410
- --------------------------------------------------------------------------------
</TABLE>
Proceeds from the sale of investment securities were $2.8 billion, $3.9 billion
and $2.6 billion during 1998, 1997 and 1996, respectively.
Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for fixed income securities or cost for equity
securities. A summary of the change in unrealized gains (losses), less deferred
income taxes, for the years ended December 31, 1998, 1997 and 1996 is as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income securities $(5,450) 36,904 (12,284)
Equity securities (3,624) (32,380) 2,943
Derivative instruments (1,832) 1,303 146
Provision for deferred
income taxes 3,818 (2,051) 3,210
- -------------------------------------------------------------------------------
$(7,088) 3,776 (5,985)
- -------------------------------------------------------------------------------
</TABLE>
NOTE 5. PREMIUMS AND OTHER RECEIVABLES
Premiums and other receivables as of December 31, 1998 and 1997 were as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Premiums $ 74,039 75,265
Self-funded group receivables 136,409 133,613
Federal Employee Program 129,730 123,832
Investment income receivable 17,564 13,026
Other 20,694 15,205
- --------------------------------------------------------------------------------
$378,436 360,941
- --------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 2,971 2,971
Buildings and improvements 35,501 36,565
Furniture and equipment 71,797 70,315
Computer software 25,611 16,247
- --------------------------------------------------------------------------------
135,880 126,098
Less accumulated depreciation
and amortization 87,990 82,186
- --------------------------------------------------------------------------------
$ 47,890 43,912
- --------------------------------------------------------------------------------
</TABLE>
Included in computer software as of December 31, 1998 was $4.4 million in
capitalized expenses related to the adoption of SOP 98-1 (note 1).
NOTE 7. MEDICAL AND OTHER BENEFITS PAYABLE
Medical and other benefits payable as of December 31, 1998 and 1997 were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Medical and other benefits
payable -- current
Commercial and FEP
Claims reported but not paid $ 31,079 29,558
Claims incurred but not reported 265,021 228,775
- -------------------------------------------------------------------------------
296,100 258,333
Self-funded
Claims reported but not paid 15,829 18,578
Claims incurred but not reported 140,879 129,635
- -------------------------------------------------------------------------------
156,708 148,213
Medical and other benefits payable --
noncurrent (all commercial) 75,212 66,541
- -------------------------------------------------------------------------------
528,020 473,087
Liability for claims processing costs 17,729 17,939
Advances to providers (2,082) (11,775)
- -------------------------------------------------------------------------------
543,667 479,251
Less medical and other benefits
payable -- noncurrent (75,212) (66,541)
- -------------------------------------------------------------------------------
$ 468,455 412,710
- -------------------------------------------------------------------------------
</TABLE>
A summary of the activity for commercial and FEP medical and other benefits
payable for the years ended December 31, 1998, 1997 and 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Medical and other
benefits payable at
beginning of year $ 473,087 476,253 402,476
Self-funded at
beginning of year (148,213) (166,848) (141,995)
- -------------------------------------------------------------------------------
Balance at beginning
of year 324,874 309,405 260,481
- -------------------------------------------------------------------------------
Liabilities acquired
with Mid-South -- -- 38,963
Incurred related to
Current year 1,656,713 1,559,402 1,427,859
Prior years (4,435) (4,846) (2,328)
- -------------------------------------------------------------------------------
Total incurred 1,652,278 1,554,556 1,425,531
- -------------------------------------------------------------------------------
Paid related to
Current year 1,381,781 1,333,880 1,225,103
Prior years 224,059 205,207 190,467
- -------------------------------------------------------------------------------
Total paid 1,605,840 1,539,087 1,415,570
- -------------------------------------------------------------------------------
Balance at end
of year 371,312 324,874 309,405
Self-funded at
end of year 156,708 148,213 166,848
- -------------------------------------------------------------------------------
Medical and other
benefits payable at
end of year $ 528,020 473,087 476,253
- -------------------------------------------------------------------------------
</TABLE>
The Company uses paid claims and completion factors based on historical payment
patterns to estimate incurred claims. Changes in payment patterns and claims
trends can result in changes to prior years' claims estimates.
NOTE 8. LEASES
The Company has noncancelable operating leases for real estate and equipment
that expire over the next eight years and provide for purchase or renewal
options. Future minimum lease payments under noncancelable operating leases as
of December 31, 1998 were (in thousands):
<TABLE>
<CAPTION>
Years ending December 31,
- --------------------------------------------------------------------------------
<S> <C>
1999 $11,874
2000 8,657
2001 6,353
2002 5,849
2003 3,603
Later years through 2006 2,859
- --------------------------------------------------------------------------------
Total minimum lease payments $39,195
- --------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Total rental expense for operating leases for the years ended December 31, 1998,
1997 and 1996 was $15,213,000, $14,221,000 and $13,354,000, respectively.
NOTE 9. OTHER LIABILITIES
Other liabilities as of December 31, 1998 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding checks in excess
of bank balance $ 41,191 43,815
Member related liabilities 9,900 8,279
Unearned premium reserve --
Federal Employee Program 79,153 74,247
Self-funded group deposits 18,665 17,311
Current income taxes payable 55,105 15,659
Other 27,137 25,103
- --------------------------------------------------------------------------------
$231,151 184,414
- --------------------------------------------------------------------------------
</TABLE>
The FEP unearned premium reserve represents the Company's share of the FEP
premium stabilization reserve. These funds are actually held by the Blue Cross
Blue Shield Association on behalf of each Blue Cross and Blue Shield Plan
participating in the Federal Employee Program. An offsetting receivable is
recorded in premiums and other receivables.
NOTE 10. OTHER REVENUES
Other revenues include those revenues earned by non-core subsidiaries. A summary
by type of revenue for the years ended December 31, 1998, 1997 and 1996 follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee benefits
administration $ 3,953 4,346 6,957
Workers' compensation
administration 9,108 8,877 9,682
Health management
services 6,093 8,709 9,039
Electronic communication
services -- -- 21,474
Other 4,805 3,592 2,204
- --------------------------------------------------------------------------------
$23,959 25,524 49,356
- --------------------------------------------------------------------------------
</TABLE>
Electronic communication services revenues relate to Health Communication
Services, Inc. which was sold effective December 31, 1996 (note 20).
NOTE 11. INCOME TAXES
Income tax expense (benefit) attributable to income before income taxes and
extraordinary items, substantially all of which is federal, for the years ended
December 31, 1998, 1997 and 1996 consists of (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 65,544 28,074 45,857
Deferred (2,307) 21,543 (59,483)
- -------------------------------------------------------------------------------
$ 63,237 49,617 (13,626)
- -------------------------------------------------------------------------------
</TABLE>
The differences between the statutory federal income tax rate and the actual tax
rate applied to income before income taxes and extraordinary items for the years
ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal
income tax rate 35.0% 35.0 35.0
Tax exempt investment
income (1.3) (0.6) (0.3)
Change in valuation
allowance -- -- (44.0)
Other, net 0.2 (0.1) 1.8
- -------------------------------------------------------------------------------
Effective tax rate 33.9% 34.3 (7.5)
- -------------------------------------------------------------------------------
</TABLE>
The components of the deferred tax assets and deferred tax liabilities as of
December 31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Employee benefit plans $25,995 22,984
Insurance reserves 27,811 26,200
Alternative minimum tax
credit carryforward -- 943
Property and equipment 5,264 8,713
Other 5,614 2,933
- --------------------------------------------------------------------------------
Gross deferred tax assets 64,684 61,773
- --------------------------------------------------------------------------------
Deferred tax liabilities
Investment securities 16,265 20,083
Other 600 803
- --------------------------------------------------------------------------------
Gross deferred tax liabilities 16,865 20,886
- --------------------------------------------------------------------------------
Net deferred tax asset $47,819 40,887
- --------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Deferred tax assets and liabilities as of December 31, 1998 and 1997 are
presented on the accompanying consolidated balance sheets as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets --
noncurrent $55,841 45,185
Deferred tax liabilities --
current 8,022 4,298
- --------------------------------------------------------------------------------
Net deferred tax asset $47,819 40,887
- --------------------------------------------------------------------------------
</TABLE>
The Company, through its subsidiary Trigon Insurance Company, has qualified for
a federal income tax deduction under Internal Revenue Code (IRC) Section 833.
This deduction is equal to the amount by which 25% of the sum of claims and
expenses exceeds tax basis adjusted surplus. Prior to 1994, the effect of this
deduction was to significantly reduce regular taxable income and subject the
Company to alternative minimum tax. Due to the uncertainty as to whether the
Company would be subject to regular tax in the future, the Company had
maintained a valuation allowance with respect to its AMT credits and certain
other long-term assets. The valuation allowance on the deferred assets was
eliminated in 1996, as it was more likely than not that such assets would be
realized.
In conjunction with the Demutualization (note 2), the Company made the $175
million Commonwealth Payment which was expensed and paid in prior years. During
1998, the Company amended its 1996 tax return to claim the Commonwealth Payment
as a deduction. The Internal Revenue Service (IRS) has denied this deduction
during the course of its audit of the Company. The Company continues to pursue
the deduction. In addition, the Company is working with the IRS to resolve
certain other tax issues that could result in a substantial favorable settlement
to the Company. The Company hopes to conclude this settlement with the IRS in
the near term, but there can be no assurance that this will occur. The Company
has not recognized the impact of the settlement, if any, in the consolidated
financial statements.
NOTE 12. LONG-TERM DEBT
Long-term debt as of December 31, 1998 and 1997 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit agreement $85,000 85,000
Promissory note, 5%, due
June 30, 2000 1,300 1,300
Notes payable, at prime plus 1% 3,039 3,039
Line of credit, at prime -- 808
- --------------------------------------------------------------------------------
$89,339 90,147
- --------------------------------------------------------------------------------
</TABLE>
Simultaneous with the Demutualization and IPO 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 current borrowing terms require a facility fee of .075% per
annum based on the $300 million commitment and bears interest at LIBOR plus a
margin, adjusted monthly. The credit agreement also contains certain financial
covenants and restrictions including minimum net worth requirements as well as
limitations on dividend payments. As of December 31, 1998, $85 million had been
borrowed and remained outstanding under the credit agreement, the proceeds of
which were used to make a portion of the payment to the Commonwealth of Virginia
in accordance with the Demutualization. The weighted average interest rate for
the period the borrowings were outstanding during the years ended December 31,
1998 and 1997 was 5.809% and 5.841%, respectively.
The promissory note originated in 1995 in connection with the purchase of
a subsidiary. The promis- sory note requires payment of the principal on June
30, 2000 and bears interest at 5%, payable annually.
Two HMO subsidiaries entered into notes payable and a line of credit
agreement with their minority shareholders for purposes of maintaining
regulatory minimum net worth requirements. Interest on the notes payable is at
the prime lending rate plus one percent (8.75% as of December 31, 1998). The
notes have no scheduled maturity date and repayment of the notes is subject to
approval by state regulatory authorities. Repayment of the line of credit was
approved by state regulatory authorities and paid during the third quarter of
1998.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 13. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan which is
qualified under IRC 401(a). The plan is funded through the Blue Cross National
Retire- ment Trust (Trust), a collective investment trust for the retirement
programs of its participating employers. Assets in the Trust are primarily
equity securities, U.S. Treasury bonds and notes, U.S. government agency
securities, domestic corporate bonds, real estate funds and short-term
investments. The Company also has a nonqualified supplemental executive
retirement plan (SERP) which provides for pension benefits in excess of
qualified plan limits imposed by IRC limits and restrictions on participation by
highly compensated employees. The plan serves to restore the combined pension
amount to original benefit levels. The plan is unfunded, however, the Company
has established a grantor trust to fund future obligations under the plan. The
grantor trust is consolidated with the Company for financial reporting purposes.
Effective October 1, 1998, the Company amended its defined benefit pension
plan. The amendment reduced the Company's projected benefit obligation by
$10,200,000 which is being 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.
In addition to providing pension benefits, the Company provides certain
health and life insurance benefits for retired employees. In October 1997, the
Company amended its postretirement benefit plan by terminating benefits for
substantially all future eligible retirees except those employees who had at
least 20 years of service and those employees between the ages of 40 and 45 with
age plus years of service equal to 55 or more as of January 1, 1998. The changes
in this plan resulted in a curtailment gain of $3,997,000 in the fourth quarter
of 1997 which is included in selling, general and administrative expenses in the
Company's consolidated statements of operations. The plan amendment also reduced
the Company's accumulated postretirement benefit obligation by $4,589,000 which
is being amortized as a reduction to net periodic postretirement benefit expense
over approximately 7.5 years. This postretirement benefit plan is also funded
through the Trust.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the years ended December 31,
1998 and 1997 and a statement of the funded status as of December 31, 1998 and
1997 (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation
Obligation as of January 1 $ 136,825 115,599 27,729 29,755
Service cost 7,505 7,695 1,277 1,948
Interest cost 8,740 8,719 2,113 2,003
Participant contributions -- -- 77 51
Benefit payments (6,625) (5,436) (935) (795)
Actuarial (gain) loss 2,307 10,248 5,712 (399)
Plan amendments (9,490) -- (4,077) (4,834)
- ----------------------------------------------------------------------------------------------
Obligation as of December 31 139,262 136,825 31,896 27,729
- ----------------------------------------------------------------------------------------------
Reconciliation of fair value of plan assets
Fair value of plan assets as of January 1 118,344 98,367 14,134 12,218
Actual return on plan assets 17,810 18,971 2,932 1,916
Participant contributions -- -- 77 51
Employer contributions 12,281 6,154 -- 744
Benefit payments (6,505) (5,148) (935) (795)
- ----------------------------------------------------------------------------------------------
Fair value of plan assets as of December 31 141,930 118,344 16,208 14,134
- ----------------------------------------------------------------------------------------------
Funded status
Funded status as of December 31 2,668 (18,481) (15,688) (13,595)
Unrecognized transition asset (306) (376) -- --
Unrecognized prior service cost (8,806) 611 (9,205) (5,932)
Unrecognized gain (7,056) (1,285) (1,927) (6,354)
- ----------------------------------------------------------------------------------------------
Net amount recognized $ (13,500) (19,531) (26,820) (25,881)
- ----------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following table provides the amounts recognized in the consolidated balance
sheets as of December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accrued benefit liability (Included in Obligations
for Employee Benefits, Noncurrent) $(16,219) (19,531) (26,820) (25,881)
Intangible asset (Included in Other Assets) 951 -- -- --
Accumulated other comprehensive income 1,768 -- -- --
- --------------------------------------------------------------------------------------------------
Net amount recognized $(13,500) (19,531) (26,820) (25,881)
- --------------------------------------------------------------------------------------------------
</TABLE>
The Company's nonqualified SERP was the only pension plan with a benefit
obligation and an accumulated benefit obligation in excess of plan assets. The
plan's benefit obligation was $12,942,000 and $11,246,000 as of December 31,
1998 and 1997, respectively. The plan's accumulated benefit obligation was
$11,425,000 and $5,386,000 as of December 31, 1998 and 1997, respectively. There
are no plan assets in the nonqualified SERP.
The following table provides the components of net periodic benefit expense
for the plans for the years ended December 31, 1998, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 7,505 7,695 8,416 1,277 1,948 2,373
Interest cost 8,740 8,719 8,349 2,113 2,003 2,044
Expected return on plan assets (9,461) (8,147) (6,907) (1,374) (1,167) (1,009)
Amortization of transition asset (70) (70) (70) -- -- --
Amortization of prior service cost (72) 87 87 (804) (697) (661)
Amortization of net (gain) loss (271) 109 1,215 (273) (440) (29)
- -------------------------------------------------------------------------------------------------------
Net periodic benefit cost 6,371 8,393 11,090 939 1,647 2,718
Curtailment gain -- -- -- -- (3,977) --
- -------------------------------------------------------------------------------------------------------
Net periodic benefit expense (benefit)
after curtailment gain $ 6,371 8,393 11,090 939 (2,330) 2,718
- -------------------------------------------------------------------------------------------------------
</TABLE>
The gross amount included within other comprehensive income arising from a
change in the additional minimum pension liability was $1,768,000 for the year
ended December 31, 1998. There were no amounts in 1997 and 1996.
The prior service costs of the pension plans and the postretirement benefit
plan are amortized on a straight-line basis over the average remaining years of
service to full eligibility for benefits of the active plan participants. Gains
and losses for the qualified pension plan are amortized on a straight-line basis
over the average remaining service period of active participants using the
minimum basis outlined under SFAS No. 87. Gains and losses for the non-
qualified SERP are amortized on a straight-line basis over the average remaining
service period of active partici-pants based on the entire unrecognized net gain
or loss without applying the applicable corridor that is based on 10% of the
greater of the projected benefit obligation or the market-related value of plan
assets.
The weighted-average assumptions used in the measurement of the Company's
benefit obligations as of December 31, 1998 and 1997 follow:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets 9.0 9.0 9.0 9.0
Rate of compensation increases 3.0 TO 6.5 3.5 to 7.0 4.5 4.5
- ---------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 5.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998 and subsequent years.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one percent change in assumed
health care cost trend rates would have the following effects (in thousands):
<TABLE>
<CAPTION>
1% Increase 1% Decrease
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Aggregate of service and
interest cost components of
net periodic postretirement
health care benefit cost $ 611 (484)
- ---------------------------------------------------------------------------------------
Health care component of
the accumulated postretirement
benefit obligation $5,172 (4,152)
- ---------------------------------------------------------------------------------------
</TABLE>
The Company also has the Employees' Thrift Plan of Trigon Insurance Company
under which substantially all employees who have completed three months of
service may elect to save up to 16% of their annual earnings on a pretax basis,
subject to certain limits, in the plan. Participants have the option of
investing in stock of Trigon Healthcare, Inc. and several interna- tional and
domestic investment funds. The Company contributes an amount equal to 50% of the
participant's contributions limited to 3% of the employee's compensation. The
Company amended the Employees' Thrift Plan of Trigon Insurance Company in
October 1998. The amendment reduced the eligibility period to three months of
service and made the Company's contributions fully vested to the participant
after three years of service. The amendment also included a provision that
allows the Company to make discretionary profit sharing contributions to
participants through the Trigon Healthcare, Inc. stock investment option. There
were no discretionary contributions during the year ended December 31, 1998. For
the years ended December 31, 1998, 1997 and 1996, the Company's contribution to
the Employees' Thrift Plan of Trigon Insurance Company was $3,253,000,
$3,111,000 and $3,418,000, respectively.
NOTE 14. CAPITAL STOCK
The Company has authorized 300 million shares of Class A Common Stock, par value
$0.01 per share (Common Stock), of which 42,300,022 shares were issued and
outstanding as of December 31, 1998. Common Stock shares are entitled to one
vote per share. These shares were issued in February 1997 when the Company
completed the Demutualization and IPO described in note 2.
The Company has also authorized 300 million shares of Class B non-voting
Common Stock, par value $0.01 per share (Non-Voting Common Stock). No shares of
Non-Voting Common Stock were issued and outstanding as of December 31, 1998. The
Non-Voting Common Stock has been authorized in connection with certain ownership
and transfer restrictions included in the Company's amended and restated
articles of incorporation. Non-Voting Common Stock shares are not entitled to
vote on any matter except as otherwise required by law.
The Company is authorized to issue up to 50 million shares of preferred
stock, no par value per share, in one or more series and to provide the
designations, preferences, limitations and rights of each series.
SHAREHOLDER RIGHTS PLAN
On July 16, 1997, the Board of Directors adopted a Shareholder Rights Plan
(Rights Plan). Under the Rights Plan, the Board of Directors authorized three
million preferred shares, the Series A Junior Participating Preferred Shares,
and declared a dividend of one preferred share purchase right (Right) on each
outstanding share of Trigon Class A Common Stock. Each Right entitles
shareholders to purchase one one-hundredth of a Series A Junior Participating
Preferred Share at an exercise price of $100, subject to adjustment. Subject to
certain exceptions, the Right will be exercisable only if a person or group
acquires 10% or more of the Company's Common Stock or announces a tender offer
for 10% or more of the Company's outstanding Common Stock. Each holder of a
Right (other than those held by the acquiring person) will then be entitled to
purchase, at the Right's then current exercise price, a number of shares of
Trigon Common Stock having a market value of twice the Right's exercise price.
If the Company is acquired in a merger or other business combination transaction
which has not been approved by the Board of Directors, each Right will entitle
its holder to purchase, at the Right's then current exercise price, a number of
shares of the acquiring company's Common Stock having a market value of twice
the Right's exercise price.
The date of record for the dividend distribution was July 29, 1997. The
Rights will expire in 2007 and are redeemable by action of the Board of
Directors at a price of $.001 per Right at any time prior to becoming
exercisable.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
COMMON STOCK HELD BY GRANTOR TRUSTS
The Company has several grantor trusts which were established to fund future
obligations under certain compensation and benefit plans. These grantor trusts
are consolidated for financial reporting purposes with the Company. Beginning in
the third quarter of 1997, shares of the Company's Common Stock were purchased
in the open market by these grantor trusts. The purchase price of the shares
held by the grantor trusts is shown as a reduction to capital in excess of par
in the consolidated balance sheets.
STOCK OPTION PLANS AND STOCK PURCHASE PLAN
The 1997 Stock Incentive Plan (Incentive Plan), as approved by the Company's
shareholders, provides for the granting of stock options, restricted stock
awards, performance stock awards, stock appreciation rights and cash performance
awards to employees. The Company has reserved 3.55 million shares of its common
stock for issuance under the Incentive Plan. Awards are granted by a committee
appointed by the Board of Directors. Options vest and expire over terms as set
by the committee at the time of grant. In accordance with the Incentive Plan,
options to purchase shares at an amount equal to the fair market value of the
stock at the date of grant were granted to eligible employees during 1998 and
1997. These options generally vest on a pro-rata basis over three years, with
certain grants vesting at the end of one or three years depending on an
employee's years of service, and in all cases expire 10 years from date of
grant.
In addition, the shareholders of the Company approved the 1997 Non-Employee
Directors Stock Incentive Plan (Non-Employee Plan). In accordance with the terms
of the Non-Employee Plan, options to purchase 10,000 shares at an amount equal
to the fair market value of the stock on April 16, 1997, the date of grant, were
granted to each of the Company's non-employee directors upon adoption of the
Non-Employee Plan. Under the Non-Employee Plan, newly-elected non-employee
directors are granted nonqualified stock options to purchase 10,000 shares of
common stock on the date of the first annual meeting of shareholders at which
the director is elected. In addition, each eligible director will automatically
be granted options to purchase 5,000 shares of common stock as of the date of
each subsequent annual meeting of shareholders. All options are granted at the
fair market value on the date of grant and become exercis- able on a pro-rata
basis over a three-year period. All options expire 10 years from the date of
grant. The Company has reserved 550,000 shares of its common stock for issuance
under the Non-Employee Plan.
A summary of the activity in the stock option plans for the years ended December
31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance at January 1, 1997 -- --
Granted 2,180,982 $21.96
Exercised -- --
Forfeited (108,628) 22.13
- --------------------------------------------------------------------------------
Balance at December 31, 1997 2,072,354 21.95
Granted 1,184,675 26.70
Exercised (133,228) 22.13
Forfeited (162,776) 22.91
- --------------------------------------------------------------------------------
Balance at December 31, 1998 2,961,025 $23.79
- --------------------------------------------------------------------------------
Options exercisable at:
December 31, 1998 720,655 $21.95
December 31, 1997 -- --
- --------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$18.125 - 25.50 2,640,675 8.6 years $23.06 720,655 $21.95
$27.75 - 36.125 320,350 9.4 years $29.78 -- --
- -----------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
As of December 31, 1998, 979,609 shares were available for future grants.
The Company's shareholders approved the Company's 1997 Employee Stock
Purchase Plan (Stock Purchase Plan). The Stock Purchase Plan provides employees
of the Company an opportunity to purchase the Company's common stock through
payroll deductions. The Company has reserved one million shares of its common
stock for issuance under the Stock Purchase Plan. Shares needed to satisfy the
needs of the Stock Purchase Plan may be newly issued by the Company or acquired
by purchase at the expense of the Company on the open market or in private
transactions. Eligible employees may purchase up to $25,000 in fair value
annually of the Company's common stock at 85% of the lower of the fair value on
the first or last trading day of each calendar quarter. Employee purchases under
the Stock Purchase Plan were approximately $1,511,000 and $749,000 for the years
ended December 31, 1998 and 1997, respectively. Pursuant to the Stock Purchase
Plan, shares of the Company's stock were purchased on the open market and issued
to employees totaling 65,801 during 1998 and 23,971 during 1997. In addition,
12,136 shares were pending purchase as of December 31,1998. As of December 31,
1998, 898,092 shares of common stock were available for issuance under the Stock
Purchase Plan.
The pro forma information regarding net income and earnings per share as
required by SFAS No. 123 has been determined as if the Company had accounted for
its stock-based compensation under the fair value method of that Statement. The
fair value for the stock options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 4.62% 5.54%
Volatility factor 38.41% 37.40%
Dividend yield -- --
Weighted average expected life 5 years 5 years
- --------------------------------------------------------------------------------
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock option grants have characteristics significantly different
from those traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock option grants.
For purposes of pro forma disclosures, compensation expense is increased
for the estimated fair value of the options amortized over the options' vesting
periods and for the difference between the market price of the stock and the
discounted purchase price of the shares on the purchase date for the employee
stock purchases. The Company's pro forma information for 1998 and 1997 is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $123,572 116,193 95,053 91,372
Net income after Demutualization and IPO 123,572 116,193 78,982 75,718
Earnings per share
Basic net income after Demutualization and IPO 2.92 2.75 1.87 1.79
Diluted net income after Demutualization and IPO 2.88 2.73 1.86 1.79
Pro forma earnings per share
Basic and diluted pro forma net income -- -- 2.23 2.16
Weighted average fair value of options granted during the year -- 10.95 -- 9.16
Weighted average fair value of employee stock purchases during the year -- 8.81 -- 5.82
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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 Common Stock
may be repurchased. On September 25, 1998, the Company announced it had
suspended its previously announced Stock Repurchase Program. No shares were
repurchased under the program. The Company suspended the Stock Repurchase
Program because it is working with the IRS to resolve certain tax issues that
could result in a substantial favorable settlement to the Company (note 11).
NOTE 15. 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 year ended December 31, 1998 and for the period after the
Demutualization and IPO, February 5, 1997 through December 31, 1997 (in
thousands, except per share data):
<TABLE>
<CAPTION>
For the Period
February 5, 1997
through
1998 December 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Numerator for basic and diluted
earnings per share --
net income $123,572 78,982
- --------------------------------------------------------------------------------
Denominator
Denominator for basic
earnings per share --
weighted average shares 42,300 42,300
Effect of dilutive securities --
employee and director
stock options 472 80
- --------------------------------------------------------------------------------
Denominator for diluted
earnings per share 42,772 42,380
- --------------------------------------------------------------------------------
Basic net income per share $ 2.92 1.87
- --------------------------------------------------------------------------------
Diluted net income per share $ 2.88 1.86
- --------------------------------------------------------------------------------
</TABLE>
The following table sets forth the computation of basic and diluted pro forma
earnings per share for the years ended December 31, 1997 and 1996 (in thousands,
except per share data):
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Numerator for basic
and diluted pro forma
earnings per share (note 2)
Pro forma income
before extraordinary
items $ 94,636 115,664
Extraordinary items,
net of income tax,
as reported -- (190,820)
- -------------------------------------------------------------------------------
Pro forma net income (loss) $ 94,636 (75,156)
- -------------------------------------------------------------------------------
Denominator
Denominator for basic
pro forma earnings per
share -- weighted
average shares 42,300 42,300
Effect of dilutive
securities -- employee
and director stock options 73 --
- -------------------------------------------------------------------------------
Denominator for
diluted pro forma
earnings per share 42,373 42,300
- -------------------------------------------------------------------------------
Basic and diluted
earnings per share
Pro forma income before
extraordinary items $ 2.23 2.73
Extraordinary items,
net of income tax,
as reported -- (4.50)
- -------------------------------------------------------------------------------
Pro forma net income (loss) $ 2.23 (1.77)
- -------------------------------------------------------------------------------
</TABLE>
The pro forma weighted average shares outstanding gives effect to the
Demutualization and IPO as if they had occurred on January 1, 1996, consistent
with the Company's pro forma presentation in its Form S-1 filed on January 29,
1997, in connection with its IPO (note 2).
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 16. COMPREHENSIVE INCOME
The reclassification entries under SFAS No. 130, Reporting Comprehensive Income,
for the years ended December 31, 1998, 1997 and 1996 were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized gains (losses)
on investment securities,
net of income taxes
Net unrealized holding gains arising
during the year, net of income taxes
of $23,309, $20,973 and $17,584 $ 43,292 38,917 32,632
Less: reclassification adjustment
for net gains included in net income,
net of income taxes of $27,127,
$18,922 and $20,793 (50,380) (35,141) (38,617)
- -------------------------------------------------------------------------------
Net unrealized gains (losses) on
investment securities,
net of income taxes $ (7,088) 3,776 (5,985)
- -------------------------------------------------------------------------------
</TABLE>
The components of accumulated other comprehensive income as of December 31,
1998, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized gain on investment
securities, net of deferred
income taxes of $16,265,
$20,083 and $18,032 $ 30,209 37,297 33,521
Minimum pension liability,
net of deferred income taxes of $619 (1,149) -- --
- --------------------------------------------------------------------------------
Accumulated other
comprehensive income $ 29,060 37,297 33,521
- --------------------------------------------------------------------------------
</TABLE>
NOTE 17. STATUTORY FINANCIAL INFORMATION
Trigon Insurance Company is required to file financial statements with, and is
subject to audit by, the Commonwealth of Virginia, Bureau of Insurance (Bureau
of Insurance). Such financial statements are prepared in accordance with
statutory accounting practices prescribed or permitted by the Bureau of
Insurance which differ from generally accepted accounting principles under which
the accompanying consolidated financial statements have been prepared.
Significant differences resulting from these accounting practices include
certain investment valuation reserves and certain claims reserves recognized
under statutory accounting as well as certain assets (primarily property and
equipment), certain employee benefit liabilities and deferred income taxes not
recognized under statutory accounting practices. While the Bureau of Insurance
has the authority to permit insurers to deviate from prescribed statutory
accounting practices, Trigon Insurance Company has not received, nor requested,
approval to adopt any such deviations.
Trigon Insurance Company's statutory surplus and net income were (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Statutory surplus as of:
December 31, 1998 (unaudited) $489,003
December 31, 1997 617,578
Statutory net income for the years ended:
December 31, 1998 (unaudited) $ 93,125
December 31, 1997 123,272
December 31, 1996 97,143
</TABLE>
Trigon Insurance Company is required by the Bureau of Insurance to maintain
statutory capital and surplus of at least $4.0 million.
Under the Code of Virginia, an insurance company may pay a dividend without
prior permission of the Bureau of Insurance to the extent that such dividend
together with other dividends or distributions within the preceding 12 months
does not exceed the lesser of: (i) 10% of the insurer's statutory surplus as of
the immediately preceding December 31, or (ii) the net statutory gain from
operations (excluding realized gains on investments) for the 12-month period
ended the immediately preceding December 31. Trigon Insurance Company may pay
$48.9 million to the Company in cash dividends after certain dates during 1999
without prior permission. During 1998 and 1997, Trigon Insurance Company
received permission from the Bureau of Insurance to pay dividends to its parent,
Trigon Healthcare, Inc., of $227.5 million and $238.7 million, respectively. The
1998 dividend was effected July 1, 1998 and included $200.0 million of cash and
$27.5 million of stock of a wholly-owned subsidiary. The 1997 dividend was
effected July 31, 1997 and consisted of $188.7 million of stock of a
wholly-owned subsidiary and $50.0 million of cash.
The Commonwealth of Virginia adopted the National Association of Insurance
Commissioners (NAIC) Risk Based Capital Act in 1995. Under this Act, a company's
risk based capital (RBC) is calculated by applying certain factors to various
asset, premium and reserve items. If a company's calculated RBC falls below
certain thresholds, regulatory intervention or oversight is required. Trigon
Insurance Company's RBC level as calculated in accordance with the NAIC's RBC
instructions exceeded all RBC thresholds as of December 31, 1998.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Mid-South Insurance Company, Trigon Health and Life Insurance Company and
the Company's HMO subsidiaries are also required to file statutory financial
statements in each of the states in which they are licensed.
NOTE 18. SUPPLEMENTARY FINANCIAL DATA
A reconciliation of net income -- statutory basis for the years ended December
31, 1998, 1997 and 1996 and capital and surplus -- statutory basis as of
December 31, 1998 and 1997 as reported by Trigon Insurance Company to regulatory
authorities to net income and shareholders' equity as reported in the
accompanying consolidated financial statements follows (in thousands):
<TABLE>
<CAPTION>
Unaudited
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trigon Insurance Company net income-- statutory basis $ 93,125 123,272 97,143
Add (deduct)
Parent operations (3,104) (4,248) (174,912)
Differences in investment carrying values (5,786) (10,808) (3,972)
Interest maintenance reserve 24,164 4,149 3,807
Deferred income taxes 2,927 (19,155) 58,548
Adjustments to claim reserves 2,522 7,177 22,392
Other 9,724 (5,334) 2,688
- ----------------------------------------------------------------------------------------------------
Net income $ 123,572 95,053 5,694
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Trigon Insurance Company capital and surplus-- statutory basis $ 489,003 617,578
Add (deduct)
Parent equity 403,249 181,723
Differences in investment carrying values 43,766 67,884
Interest maintenance reserve 41,767 17,604
Employee benefit liabilities (31,230) (37,974)
Asset valuation reserve 43,472 43,883
Deferred income taxes 40,493 33,131
Non-admitted assets 30,447 28,388
Additional claim reserves 22,192 19,669
Other (11,935) (13,149)
- ----------------------------------------------------------------------------------------------------
Shareholders' equity $1,071,224 958,737
- ----------------------------------------------------------------------------------------------------
</TABLE>
Prior year operations and equity amounts of former Trigon Insurance Company
subsidiaries that were transferred to Trigon Healthcare, Inc. in the July 1998
dividend (note 17) were reclassed from "Other" to "Parent Operations" or "Parent
Equity" in the preceding reconciliations to conform to the current
organizational structure of the Company.
The differences between statutory and GAAP for Mid-South Insurance Company,
Trigon Health and Life Insurance Company and the Company's HMO subsidiaries were
not significant to the consolidated totals above. The differences for these
subsidiaries relate primarily to differences in investment carrying values,
asset valuation reserve, deferred income taxes and non-admitted assets.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 19. ADDITIONAL CASH FLOW INFORMATION
The reconciliation of net income to net cash provided by (used in) operating
activities and supplemental disclosures of cash flow information for the years
ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 123,572 95,053 5,694
Adjustments to reconcile net income to net cash provided by
(used in) operating activities, net of effects from
purchase of subsidiaries
Depreciation and amortization 21,260 20,242 19,971
Accretion of discounts and amortization of premiums, net (20,893) (11,819) (1,315)
Change in allowance for doubtful accounts receivable (1,127) 826 402
(Increase) decrease in premiums and other receivables (14,712) 29,238 (59,999)
Increase in other assets (5,507) (3,882) (3,740)
Increase in medical and other benefits payable 64,416 2,208 31,147
Increase (decrease) in unearned premiums 6,307 1,993 (6,888)
Increase (decrease) in accounts payable and accrued expenses 14,731 (26,734) (7,672)
Increase (decrease) in other liabilities 47,346 (20,384) 44,930
Change in deferred income taxes (2,496) 21,804 (60,678)
Increase (decrease) in obligation for Commonwealth Payment -- (175,000) 175,000
Increase in minority interest 2,256 1,870 285
Increase (decrease) in obligations for employee benefits (6,213) 1,788 6,131
Gain on the sale of subsidiary -- -- (62,253)
(Gain) loss on disposal of property and equipment and other assets 147 (122) 214
Realized investment gains, net (77,507) (54,063) (59,410)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 151,580 (116,982) 21,819
- ------------------------------------------------------------------------------------------------------------
Cash paid during the year for
Interest $ 9,381 9,014 4,326
Income taxes 26,098 40,137 18,900
- ------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 20. ACQUISITION AND DISPOSITION ACTIVITY
ACQUISITION
In February 1996, the Company purchased all of the outstanding shares of
Mid-South Insurance Company (Mid-South) for approximately $85.6 million.
Mid-South is a Fayetteville, North Carolina based life and health insurance
company. The acquisition was accounted for as a purchase and, accordingly, the
results of operations of Mid-South are included in the consolidated financial
statements since the date of acquisition. Goodwill and other intangible assets
arising from the transaction amounted to $56.7 million and are being amortized
over periods not exceeding 25 years. No pro forma information has been provided
since Mid-South's results of operations prior to the Company's acquisition were
not material to the Company.
DISPOSITION
Effective December 31, 1996, the Company sold its subsidiary, Health
Communications Services (HCS), for $77.0 million cash. The Company recorded a
pre-tax and after-tax gain on the sale of HCS of $62.3 million and $40.0
million, respectively. The Company's earnings and cash flows reflect the
operations of HCS through December 31, 1996.
NOTE 21. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND
CONCENTRATIONS OF CREDIT RISK
The carrying amounts of cash, premiums and other receivables, other current
assets, medical and other benefits payable, unearned premiums, accounts payable
and accrued expenses, and other current liabilities approximate fair value
because of the short-term nature of these instruments. The carrying amount of
long-term debt with variable interest rates approximates fair value. The fair
values of investment securities are estimated based on quoted market prices.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of investment securities and
premiums receivable. All of the investment securities are managed within
established guidelines which limit the amounts which may be invested with one
issuer. The Company primarily conducts business within the Commonwealth of
Virginia; therefore, premiums receivable are concentrated with companies and
individuals within Virginia.
NOTE 22. LEGAL AND REGULATORY PROCEEDINGS
The Company is the defendant in one lawsuit that has been filed by a self-funded
employer group in connec- tion 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 four 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.
NOTE 23. SEGMENT INFORMATION
The Company has four reportable segments: health insurance, government programs,
investments and all other. Its health insurance segment offers several network
products, including HMO, PPO and PAR as well as medicare supplement plans. The
government programs segment includes the FEP and claims processing for Medicare.
Through its participation in the FEP, the Company provides health benefits to
federal employees in Virginia. The FEP is the Company's largest customer,
representing 18.2%, 18.3% and 18.6% of total consolidated revenues during 1998,
1997 and 1996, respectively. The Company processes Medicare Part A claims for
beneficiaries in Virginia and West Virginia. Additionally, the Company provides
computer processing capabilities for Medicare Part A claims processing to
certain other Blue Cross Blue Shield plans (notes 1 and 3). All of the
investment portfolios of the consolidated subsidiaries are managed and evaluated
collectively within the investment segment. The Company's other health-related
business, third-party administration for medical and workers compensation, life
and disability insurance, health promotion and similar products, are reflected
in an "all other" category. The reportable segments follow the Company's method
of internal reporting by products and services.
The financial results of the Company's segments are presented consistent
with the accounting policies described in note 1. The Company evaluates the
performance of its segments and allocates resources based on income before
income taxes and extraordinary items, except for the investments segment which
is evaluated using investment income and net realized gains. Intersegment sales
and expense transfers are recorded at cost.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following table presents information by reportable segment for the years
ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
Health Government All
Insurance Programs Investments Other Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Revenues from external customers $1,643,619 407,136 -- 21,735 2,072,490
Investment income and net realized gains -- -- 163,047 -- 163,047
Intersegment revenues 11,017 -- -- 6,057 17,074
Depreciation and amortization expense 15,512 249 18 1,683 17,462
Income before income taxes 59,432 3,174 163,047 2,083 227,736
1997
Revenues from external customers $1,527,271 377,722 -- 27,244 1,932,237
Investment income and net realized gains -- -- 128,747 -- 128,747
Intersegment revenues 1,068 -- -- 3,538 4,606
Depreciation and amortization expense 16,899 244 62 3,382 20,587
Income (loss) before income taxes 46,940 6,700 128,747 (819) 181,568
1996
Revenues from external customers $1,405,959 356,741 -- 53,091 1,815,791
Investment income and net realized gains -- -- 106,722 -- 106,722
Intersegment revenues 1,369 -- -- 5,738 7,107
Depreciation and amortization expense 16,841 222 48 1,916 19,027
Income before income taxes and extraordinary items 38,183 7,153 106,722 1,417 153,475
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Asset information by reportable segment has not been disclosed as it is not
prepared internally by the Company. However, depreciation and amortization
expense for property and equipment purchased is charged to the reportable
segment responsible for the purchase.
A reconciliation of reportable segment total revenues, income before income
taxes and extraordinary items and depreciation and amortization expense to the
corresponding amounts included in the consolidated statements of operations for
the years ended December 31, 1998, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Reportable segments
External revenues $ 2,072,490 1,932,237 1,815,791
Investment revenues 163,047 128,747 106,722
Intersegment revenues 17,074 4,606 7,107
Other corporate revenues 815 2,636 27
Elimination of intersegment revenues (17,074) (4,606) (7,107)
- ----------------------------------------------------------------------------------------------
Total revenues $ 2,236,352 2,063,620 1,922,540
- ----------------------------------------------------------------------------------------------
Profit or Loss
Reportable segments $ 227,736 181,568 153,475
Corporate expenses not allocated to segments (35,636) (32,296) (32,840)
Unallocated amounts:
Gain on sale of subsidiary -- -- 62,253
Interest expense (5,291) (4,602) --
- ----------------------------------------------------------------------------------------------
Income before income taxes and extraordinary items $ 186,809 144,670 182,888
- ----------------------------------------------------------------------------------------------
Depreciation and amortization expense
Reportable segments $ 17,462 20,587 19,027
Not allocated to segments 3,798 (345) 944
- ----------------------------------------------------------------------------------------------
Depreciation and amortization expense $ 21,260 20,242 19,971
- ----------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE>
Independent Auditors' Report and Management Report
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Trigon Healthcare, Inc.:
We have audited the accompanying consolidated balance sheets of Trigon
Healthcare, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trigon
Healthcare, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Richmond, Virginia
February 16, 1999
MANAGEMENT REPORT
The management of Trigon Healthcare, Inc. is responsible for the integrity and
objectivity of the consolidated financial statements. These statements have been
prepared in accordance with generally accepted accounting principles and include
some amounts that are based on management's best estimates and judgment.
The accounting systems and controls of the Company are designed to provide
reasonable assurance that financial records are reliable for use in preparing
financial statements and that assets are safeguarded. Management believes that
the Company's system of internal controls for the year ended December 31, 1998
was effective and adequate to accomplish the above described objectives.
The Board of Directors appoints to the Audit Committee members who are
neither officers nor employees of the Company. The committee meets periodically
with management, the internal auditors and the independent auditors to review
financial reports, internal accounting controls and the scope and results of
audit efforts. Both the internal auditors and the independent auditors have full
and free access to the Audit Committee, with and without management
representation.
/s/ THOMAS G. SNEAD, JR.
Thomas G. Snead, Jr.
President and Chief
Operating Officer
/s/ THOMAS R. BYRD
Thomas R. Byrd
Senior Vice President
and Chief Financial Officer
57
<PAGE>
Officers
- --------------------------------------------------------------------------------
Norwood H. Davis, Jr.
Chairman of the Board and
Chief Executive Officer
Elected current position 1981; joined
TRIGON in 1968; prior, law firm
Mcguire, Woods, Battle & Boothe LLP;
J.D., University of Virginia
Thomas G. Snead, Jr.
President and
Chief Operating Officer
Elected current position 1997; appointed
Senior Vice President and Chief Financial
Officer 1990; joined TRIGON in 1985; prior,
KPMG LLP; BS, Accounting, Virginia
Commonwealth University
John C. Berry
Senior Vice President, Government
and Individual Business Unit
Joined TRIGON in 1987; prior, Director of
the Health Care Financing Administration, Program
Operations, U.S. Department of Health and Human
Services; BS, Management, Northern Illinois
University
William P. Bracciodieta, M.D.
Senior Vice President and
Chief Medical Officer
Joined TRIGON in 1998; prior, Vice President
and Chief Medical Director of Medical Affairs
for the South Florida Market, Humana, Inc.;
M.B.A., Pacific Western University
Ralph T. Bullock, Jr.
Senior Vice President and
Chief Information Officer
Previously, Director, Operations, Information
Systems Division; joined TRIGON in 1989;
prior, Commonwealth of Virginia; Philip Morris USA;
University of Richmond
Thomas R. Byrd
Senior Vice President and
Chief Financial Officer
Elected current position 1997; previously,
Vice President, Financial Planning and Analysis;
Vice President and Controller; Director,
Financial Analysis; joined TRIGON in 1991;
prior, KPMG LLP; BS, Business, Virginia
Polytechnic Institute
James W. Copley, Jr.
Senior Vice President and Chief Investment Officer,
Investment Division, Trigon Services, Inc.
Previously, Coordinator, Director and Vice President,
Funds Management; President, Consolidated Investment
Corporation; joined TRIGON in 1975; M.B.A., University
of Richmond; Chartered Financial Analyst
Ellen C. Harrison
Senior Vice President, Health Maintenance
Organization Operations
Previously, Vice President and General Manager,
Trigon Healthkeepers Gold; joined TRIGON in 1996;
prior, VP and General Manager, CIGNA Health Care of CT;
Registered Nurse; M.B.A., University of Connecticut
Kathy Ashby Merry
Senior Vice President,
Member Services
Previously Assistant to the Chief Operating Officer,
Government and Individual Business Unit; Quality
Programs Director; Vice President and General Manager,
Individual Markets; joined TRIGON in 1991; prior,
Executive Director, Blue Ridge Regional Health Care
Coalition; BS, Consumer Studies, University of Kentucky
Ronald M. Nash
Senior Vice President,
Corporate Services
Previously, Vice President, Corporate
Services and Vice President, Personnel
and Administrative Services; joined
TRIGON in 1971; BS, Psychology, University of
Virginia
Paul F. Nezi
Senior Vice President,
Marketing and Sales
Previously, Senior Vice President of Marketing
and Underwriting; joined TRIGON in 1996;
prior, Choicecare Executive Vice President and
Chief Marketing Officer; Vice President of
Marketing and Sales Lexis-Nexis; Marketing and
Sales IBM and Xerox; M.B.A., Corporate Finance,
Wharton Graduate School, University of Pennsylvania
Timothy P. Nolan
Senior Vice President,
Business Integration
Joined TRIGON in 1996; prior, McKinsey
& Company; venture capital and investment banking;
M.B.A., Harvard University, Graduate School of
Business Administration
Thomas A. Payne
Senior Vice President,
Corporate Audit
Previously, Director and Vice President,
Corporate Audit; joined TRIGON in 1976; M.B.A.,
University of Richmond
Peter L. Perkins
Senior Vice President,
and Chief Actuary
Previously, Director and Chief Actuary; joined
TRIGON in 1983; Fellow, Society of Actuaries; BS,
Actuarial Science, University of Illinois
J. Christopher Wiltshire
Senior Vice President, General Counsel and
Corporate Secretary
Joined TRIGON in 1996; prior, Partner, Mcguire,
Woods, Battle & Boothe LLP;
J.D., University of Virginia
58
<PAGE>
Board of Directors (Age on December 31, 1998) Year Elected to Board
- --------------------------------------------------------------------------------
Norwood H. Davis, Jr. Donald B. Nolan, M.D.
(58) 1981 (58) 1983
Chairman of the Board and Roanoke Neurological Center
Chief Executive Officer, Roanoke
Trigon Healthcare, Inc.
Richmond William N. Powell
(54) 1980
Hunter B. Andrews, Esq. President, Salem Tools, Inc.
(77) 1997 Salem
Attorney at Law, Former Majority
Leader, Senate of Virginia J. Carson Quarles
Hampton (62) 1977
Chairman of the Board
Lenox D. Baker, Jr., M.D. Friendship Manor, Inc.
(57) 1985 Roanoke
Mid-Atlantic Cardiothoracic,
Surgeons, Ltd. R. Gordon Smith, Esq.
Norfolk (60) 1995
Partner, McGuire, Woods, Battle &
James K. Candler Boothe LLP
(63) 1984 Richmond
President, Candler Oil Co.
Lynchburg Hubert R. Stallard
(61) 1997
Robert M. Freeman President and
(57) 1993 Chief Executive Officer
Retired Chairman of the Board and Bell Atlantic of Virginia
Chief Executive Officer, Richmond
Signet Banking Corp.
Richmond Jackie M. Ward
(60) 1993
William R. Harvey, Ph.D. President and
(57) 1992 Chief Executive Officer
President, Hampton University Computer Generation, Incorporated
Hampton Atlanta
Gary A. Jobson Stirling L. Williamson, Jr.
(48) 1987 (63) 1979
President, President,
Maritime Productions, Inc. S.L. Williamson Co., Inc.
Annapolis Charlottesville
59
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Company (1) Jurisdiction
- ----------- ------------
Trigon Insurance Company (dba Trigon Blue Cross Blue Shield).....Virginia
Primary Care First, L.L.C. (2)................................Virginia
Trigon Administrators, Inc.......................................Virginia
HealthKeepers, Inc............................................Virginia
Peninsula Health Care, Inc. (3)...............................Virginia
Trigon Services, Inc..........................................Virginia
Priority, Inc. (4)............................................Virginia
Priority Health Care, Inc..................................Virginia
Priority Insurance Agency, Inc.............................Virginia
Monticello Service Agency, Inc...................................Virginia
Consolidated Holdings Corporation.............................Delaware
Trigon Health and Life Insurance Company......................Virginia
Health Management Corporation.................................Virginia
Healthy Homecomings, Inc...................................Missouri
Healthy Homecomings Incorporated of St. Louis..............Missouri
Mid-South Insurance Company...................................North Carolina
(1) Unless otherwise indicated, subsidiaries are 100% owned by the Registrant
or the indicated parent company.
(2) 50% owned
(3) 51% owned
(4) 80% owned
EXHIBIT 23.1
Consent of KPMG LLP
The Board of Directors
Trigon Healthcare, Inc.:
We consent to incorporation by reference in registration statements (Nos.
333-22463, 333-26187, 333-26189 and 333-26191) on Form S-8 of Trigon Healthcare,
Inc. of our report dated February 16, 1999, relating to the consolidated balance
sheets of Trigon Healthcare, Inc. and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998, which report is incorporated by reference in
this Form 10-K. We also consent to the incorporation by reference in the
aforementioned registration statements of our report dated February 16, 1999,
relating to the financial statement schedule of Trigon Healthcare, Inc., which
report appears in this Form 10-K.
/s/ KPMG LLP
Richmond, Virginia
March 30, 1999
<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-K FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,500
<SECURITIES> 1,582,522
<RECEIVABLES> 378,436
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,979,349
<PP&E> 135,880
<DEPRECIATION> 87,990
<TOTAL-ASSETS> 2,174,225
<CURRENT-LIABILITIES> 875,063
<BONDS> 89,339
0
0
<COMMON> 423
<OTHER-SE> 1,070,801
<TOTAL-LIABILITY-AND-EQUITY> 2,174,225
<SALES> 2,073,305
<TOTAL-REVENUES> 2,236,352
<CGS> 1,652,278
<TOTAL-COSTS> 2,044,252
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,291
<INCOME-PRETAX> 186,809
<INCOME-TAX> 63,237
<INCOME-CONTINUING> 123,572
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123,572
<EPS-PRIMARY> 2.92
<EPS-DILUTED> 2.88
</TABLE>
