-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GE9HSllec6fSpVg6ItCJqCmbcS1V4B0cKdb5M9h93DoJKJo8g3Sj4dyedpV0ExC1 lu02JKrv6Tax0VyVCrLWWg== 0000916641-99-000268.txt : 19990331 0000916641-99-000268.hdr.sgml : 19990331 ACCESSION NUMBER: 0000916641-99-000268 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRIGON HEALTHCARE INC CENTRAL INDEX KEY: 0001017747 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 541773225 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12617 FILM NUMBER: 99579041 BUSINESS ADDRESS: STREET 1: 2015 STAPLES MILL RD CITY: RICHMOND STATE: VA ZIP: 23230 BUSINESS PHONE: 8043547000 MAIL ADDRESS: STREET 1: 2221 EDWARD HOLLAND DR STREET 2: SUITE 42B CITY: RICHMOND STATE: VA ZIP: 23230 10-K405 1 TRIGON 10-K405 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. 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 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 1 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 2 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 3 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 4 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. 5 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 6 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. 7 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 8 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. 9 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. 10 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 11 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 12 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 13 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. 14 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. 15 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 -- 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 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 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 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. 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 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 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 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)
Accumulated Capital Other Common in Retained Comprehensive Stock Excess Earnings Income Total of Par --------- ----------------------------------------- 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 ========= =========================================
See accompanying independent auditors' report and notes to condensed financial information. S-4 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 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 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. EX-3 2 EXHIBIT 3.4 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. EX-10 3 EXHIBIT 10.5 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 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 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 3 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 (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 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 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 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 (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 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 (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 EX-10.9 4 EXHIBIT 10.9 EXHIBIT 10.9 EMPLOYEES' THRIFT PLAN OF TRIGON INSURANCE COMPANY Effective Date July 1, 1980 As Amended and Restated October 1, 1998 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 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 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 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 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. 1 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. 2 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 3 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 4 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 5 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 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. 7 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; 8 (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 9 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)]. 10 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 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. 12 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. 13 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. 14 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. 15 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 16 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. 17 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 18 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: 19 (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 20 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. 21 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. 22 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 23 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 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 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 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 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 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 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. 30 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 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 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 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. 34 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 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 36 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. 37 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 38 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. 39 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. 40 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. 41 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: 42 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 43 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 44 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. 45 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. 46 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)). 47 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 48 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. 49 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. 50 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 51 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 52 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 53 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 54 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. 55 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. 56 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 57 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: 58 (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 59 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 60 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. 61 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. 62 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) 63 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 64 (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. 65 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 66 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 67 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 68 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. 69 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 70 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 71 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 72 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. 73 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 74 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 75 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 76 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 77 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, 78 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. 79 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). 80 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. 81 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. 82 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 83 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. 84 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. 85 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 86 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 87 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 88 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 89 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. 90 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. 91 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 92 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. 93 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. 94 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. 96 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; 97 (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 98 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 99 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 100 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. 101 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% 102 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 103 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 104 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. 105 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, 106 (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 107 (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 108 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. 109 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 110 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 111 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 112 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. 113 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. 114 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 EX-10.10 5 EXHIBIT 10.10 EXHIBIT 10.10 TRIGON INSURANCE COMPANY 401(k) RESTORATION PLAN Amended and Restated Effective October 1, 1998 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- 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 -ii- 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 -iii- 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. -1- 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. -2- 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. -3- 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. -4- 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. -5- 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. -6- 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 -7- 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. -8- 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. -9- 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 -10- 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. -11- ARTICLE VII HARDSHIP DISTRIBUTIONS 7.1 HARDSHIP At the request of a Participant or at the request of any of the Participant's Beneficiaries after the Participant's death, the Committee may, in its sole discretion, accelerate and pay all or part of the value of a Participant's Bookkeeping Account due under this Plan. Accelerated distributions at the request of the Participant or a Participant's Beneficiary may be allowed only in the event of a financial emergency beyond the Participant's or Beneficiary's control due to unforeseeable circumstances and only if disallowance of a distribution would create a severe hardship for the Participant or Beneficiary. An accelerated distribution must be limited to only that amount necessary to relieve the financial emergency. The determination of hardship and the amount of the hardship distribution by the Committee shall be final and conclusive and binding on the Participant or Beneficiary making the request. -12- 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. -13- ARTICLE IX ADMINISTRATION OF THE PLAN 9.1 MAJORITY VOTE All resolutions or other actions taken by the Committee shall be by vote of a majority of those present at a meeting at which a majority of the members are present, or in writing by all the members at the time in office if they act without a meeting. 9.2 FINALITY OF DETERMINATION Subject to the Plan, the Committee in administering the Plan shall, from time to time, establish rules, forms and procedures for the administration of the Plan. Except as herein otherwise expressly provided, the Committee shall have the exclusive right to interpret the Plan and to decide any and all matters arising thereunder or in connection with the administration of the Plan, and it shall endeavor to act, whether by general rules or by particular decisions, so as not to discriminate in favor of or against any person. The decisions, actions and records of the Committee shall be conclusive and binding upon the Company and all persons having or claiming to have any right or interest in or under the Plan, and cannot be overruled by a court of law unless arbitrary or capricious. 9.3 CERTIFICATES AND REPORTS The members of the Committee, the Plan Administrator and the officers and directors of the Company shall be entitled to rely on all certificates and reports made by any duly appointed accountants, and on all opinions given by any duly appointed legal counsel, which legal counsel may be counsel for the Company. 9.4 INDEMNIFICATION AND EXCULPATION The Company shall indemnify and hold harmless persons serving from time to time as Plan Administrator and each current and former member of the Committee and each current and former member of the Board ("Indemnitees") against any and all expenses and liabilities (to the extent not indemnified under any liability insurance contract or other indemnification agreement) which the person incurs on account of any act or failure to act in connection with the good faith administration of the Plan. Expenses against which an Indemnitee shall be indemnified hereunder shall include, without limitation, the amount of any settlement or judgment, costs, counsel fees, and related charges reasonably incurred in connection with a claim asserted, or a proceeding brought or settlement thereof. The foregoing right of indemnification shall be in addition to any other rights to which any such Indemnitee may be entitled as a matter of law, but shall be conditioned upon the person's notifying the Company of the claim of liability within 60 days of the notice of that claim and offering the Company the right to participate in and control the settlement and defense of the claim. 9.5 EXPENSES The expenses of administering the Plan shall be borne by the Company. -14- ARTICLE X CLAIMS PROCEDURE 10.1 WRITTEN CLAIM Benefits shall be paid in accordance with the provisions of this Plan. The Participant, or a designated recipient or any other person claiming through the Participant shall make a written request for benefits under this Plan. This written claim shall be mailed or delivered to the Plan Administrator. Such claim shall be reviewed by the Plan Administrator or a delegate. 10.2 DENIED CLAIM If the claim is denied, in full or in part, the Plan Administrator shall provide a written notice within ninety (90) days setting forth the specific reasons for denial, and any additional material or information necessary to perfect the claim, and an explanation of why such material or information is necessary, and appropriate information and explanation of the steps to be taken if a review of the denial is desired. 10.3 REVIEW PROCEDURE If the claim is denied and a review is desired, the Participant (or Beneficiary) shall notify the Plan Administrator in writing within sixty (60) days after receipt of the written notice of denial. In requesting a review, the Participant or Beneficiary may request a review of the Plan Document or other pertinent documents with regard to the employee benefit Plan created under this agreement, may submit any written issues and comments, may request an extension of time for such written submission of issues and comments, and may request that a hearing be held, but the decision to hold a hearing shall be within the sole discretion of the Committee. 10.4 COMMITTEE REVIEW The decision on the review of the denied claim shall be rendered by the Committee within sixty (60) days after the receipt of the request for review (if no hearing is held) or within sixty (60) days after the hearing if one is held. The decision shall be written and shall state the specific reasons for the decision including reference to specific provisions of this Plan on which the decision is based. -15- 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- (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- 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- EX-10.22 6 EXHIBIT 10.22 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 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- 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- "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- 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- 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- "(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- 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- 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- "(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.
Participant's Points as of Pay Credit Percentage for January 1 of Program Year Earnings in Program Year ----------------------------- ------------------------- 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%
"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- 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- 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 -12- 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 -13- 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. -14- "(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 -15- 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 -16- 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 -17- 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 -18- 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 -19- 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 -20- 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, -21- 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 -22- 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. -23- "(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: -24- "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- 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- "(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- "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- TRIGON INSURANCE COMPANY By: ------------------------------------ Authorized Officer - ---------------------------------- --------------------------------------- Attest Title - ---------------------------------- --------------------------------------- Title Date APPROVED: NATIONAL EMPLOYEE BENEFITS COMMITTEE By: ------------------------------------ Secretary -29- EX-10.23 7 EXHIBIT 10.23 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; 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 EX-13 8 EXHIBIT 13 Quarterly Financial Information TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
Quarters Ended (in thousands, except per share data) March 31 June 30 September 30 December 31 - ----------------------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------------------
(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 Selected Consolidated Financial and Operating Data TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
Years ended December 31, (in thousands, except per share data and operating statistics) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------
18
Years ended December 31, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ 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% December 31, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------
(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 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:
As of December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
20 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):
Years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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 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 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 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 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 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 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 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 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 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:
- -------------------------------------------------------------------------------- 1998 High Low - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 1997 High Low - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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 Consolidated Balance Sheets TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
December 31, 1998 and 1997 (In thousands, except per share data) 1998 1997 - ------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 31 Consolidated Statements of Operations TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
Years ended December 31, 1998, 1997 and 1996 (In thousands, except per share data) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 32 Consolidated Statements of Changes in Shareholders' Equity TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 33 Consolidated Statements of Cash Flows TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
Years ended December 31, 1998, 1997 and 1996 (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 34 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 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 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 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 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):
1997 1996 - ------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------
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):
1998 1997 1996 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
39 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):
1998 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value - ------------------------------------------------------------------------------------------------------ Fixed income Domestic U.S. Treasury securities and obligations of U.S. government agencies $ 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 - ------------------------------------------------------------------------------------------------------
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
1997 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value - --------------------------------------------------------------------------------------------------------- Fixed income Domestic U.S. Treasury securities and obligations of U.S. government agencies $ 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 - ---------------------------------------------------------------------------------------------------------
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 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.
Amortized Estimated cost fair value - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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):
1998 1997 1996 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
Gross realized gains and losses for the years ended December 31, 1998, 1997 and 1996 are summarized as follows (in thousands):
1998 1997 1996 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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):
1998 1997 1996 - ------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------
NOTE 5. PREMIUMS AND OTHER RECEIVABLES Premiums and other receivables as of December 31, 1998 and 1997 were as follows (in thousands):
1998 1997 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
42 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):
1998 1997 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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):
1998 1997 - ------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------
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):
1998 1997 1996 - ------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------
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):
Years ending December 31, - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
43 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):
1998 1997 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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):
1998 1997 1996 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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):
1998 1997 1996 - ------------------------------------------------------------------------------- Current $ 65,544 28,074 45,857 Deferred (2,307) 21,543 (59,483) - ------------------------------------------------------------------------------- $ 63,237 49,617 (13,626) - -------------------------------------------------------------------------------
The differences between the statutory federal income tax rate and the actual tax rate applied to income before income taxes and extraordinary items for the years ended December 31, 1998, 1997 and 1996 were as follows:
1998 1997 1996 - ------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------
The components of the deferred tax assets and deferred tax liabilities as of December 31, 1998 and 1997 were as follows (in thousands):
1998 1997 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
44 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):
1998 1997 - -------------------------------------------------------------------------------- Deferred tax assets -- noncurrent $55,841 45,185 Deferred tax liabilities -- current 8,022 4,298 - -------------------------------------------------------------------------------- Net deferred tax asset $47,819 40,887 - --------------------------------------------------------------------------------
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):
1998 1997 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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 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):
Pension Benefits Postretirement Benefits 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------- 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) - ----------------------------------------------------------------------------------------------
46 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):
Pension Benefits Postretirement Benefits 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------- 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) - --------------------------------------------------------------------------------------------------
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):
Pension Benefits Postretirement Benefits 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------
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:
Pension Benefits Postretirement Benefits 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------
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 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):
1% Increase 1% Decrease - --------------------------------------------------------------------------------------- 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) - ---------------------------------------------------------------------------------------
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 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:
Weighted Average Number of Exercise Options Price - -------------------------------------------------------------------------------- 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 -- -- - --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding and exercisable as of December 31, 1998:
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 - ----------------------------------------------------------------------------------------------------- $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 -- -- - -----------------------------------------------------------------------------------------------------
49 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:
1998 1997 - -------------------------------------------------------------------------------- Risk-free interest rate 4.62% 5.54% Volatility factor 38.41% 37.40% Dividend yield -- -- Weighted average expected life 5 years 5 years - --------------------------------------------------------------------------------
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):
1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- As Reported Pro Forma As Reported Pro Forma - ---------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------
50 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):
For the Period February 5, 1997 through 1998 December 31, 1997 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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):
1997 1996 - ------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------
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 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):
1998 1997 1996 - ------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------
The components of accumulated other comprehensive income as of December 31, 1998, 1997 and 1996 were as follows (in thousands):
1998 1997 1996 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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):
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
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 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):
Unaudited 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------- Unaudited 1998 1997 - ---------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------
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 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):
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------
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 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 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):
Health Government All Insurance Programs Investments Other Total - -------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------
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):
1998 1997 1996 - ---------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------
56 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 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 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 EX-21 9 EXHIBIT 21 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 EX-23 10 EXHIBIT 23.1 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 EX-27 11 EXHIBIT 27
5 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. 1,000 YEAR DEC-31-1998 JAN-31-1998 DEC-31-1998 7,500 1,582,522 378,436 0 0 1,979,349 135,880 87,990 2,174,225 875,063 89,339 0 0 423 1,070,801 2,174,225 2,073,305 2,236,352 1,652,278 2,044,252 0 0 5,291 186,809 63,237 123,572 0 0 0 123,572 2.92 2.88
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