UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period ended
June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from .................. to .........
Commission File Number: 001-12617
Trigon Healthcare, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1773225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2015 Staples Mill Road, Richmond, VA 23230
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (804) 354-7000
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of each class Outstanding at August 11, 1997
------------------- ------------------------------
Class A Common Stock, $0.01 par value 42,300,022 shares
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TRIGON HEALTHCARE, INC. and SUBSIDIARIES
SECOND QUARTER 1997 FORM 10-Q
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1996
and June 30, 1997 1
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1996 and 1997 2
Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended
June 30, 1996 and 1997 3
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1996 and 1997 4
Notes to Consolidated Financial Statements 5-10
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18-19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES
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ITEM 1. Financial Statements
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
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December 31, June 30,
Assets 1996 1997
-------------- --------------
(Unaudited)
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Current assets
Cash $ 31,482 $ 8,000
Investment securities, at estimated fair value 1,182,420 1,270,811
Premiums and other receivables 390,997 365,289
Deferred income taxes 16,572 17,946
Other assets 10,035 10,623
-------------- -----------------
Total current assets 1,631,506 1,672,669
Property and equipment, net 49,545 47,997
Deferred income taxes 48,170 42,341
Goodwill and other intangibles, net 76,043 73,272
Restricted investments, at estimated fair value 11,019 10,393
Other assets 16,865 19,408
-------------- -----------------
Total assets $ 1,833,148 $ 1,866,080
============== =================
Liabilities and Stockholders' Equity
Current liabilities
Medical and other benefits payable $ 421,440 $ 421,087
Unearned premiums 91,164 95,065
Accounts payable and accrued expenses 86,966 50,350
Other liabilities 198,893 182,074
Obligation for Commonwealth Payment 87,500 -
------------------- --------------
Total current liabilities 885,963 748,576
Obligation for Commonwealth Payment, noncurrent 87,500 -
Obligations for employee benefits, noncurrent 57,679 60,045
Medical and other benefits payable, noncurrent 53,107 62,349
Long-term debt 4,880 90,319
Minority interest in subsidiaries 4,239 4,989
------------------- --------------
Total liabilities 1,093,368 966,278
------------------- --------------
Stockholders' Equity
Common stock - 423
Capital in excess of par - 845,968
Retained earnings 706,259 28,504
Net unrealized gain on investment securities,
net of deferred income taxes of $18,032 in 1996
and $13,412 in 1997 33,521 24,907
------------------- --------------
Total stockholders' equity 739,780 899,802
Commitments and contingencies (Notes 3,4 and 7) - -
------------------- --------------
Total liabilities and stockholders' equity $ 1,833,148 $ 1,866,080
=================== ==============
</TABLE>
See notes to consolidated financial statements
1
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TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months and six months ended
June 30, 1996 and 1997
(in thousands, except per share data)
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<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- -----------------------------------
1996 1997 1996 1997
---------------- --------------- ------------------ ---------------
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Revenues
Premium and fee revenues
Commercial $ 332,452 $ 357,908 $ 652,041 $ 704,750
Federal Employee Program 90,622 99,411 177,358 190,485
Amounts attributable to self-funded arrangements 272,447 269,775 521,313 515,956
Less: Amounts attributable to claims under self-
funded arrangements (251,913) (244,199) (476,018) (466,449)
---------------- --------------- ------------------ ---------------
443,608 482,895 874,694 944,742
Investment income 11,726 17,903 22,919 35,585
Net realized gains 19,020 2,505 34,234 27,817
Other revenues 12,664 6,738 25,378 13,661
---------------- --------------- ------------------ ---------------
Total revenues 487,018 510,041 957,225 1,021,805
Expenses
Medical and other benefit costs
Commercial 268,783 300,741 534,575 592,582
Federal Employee Program 86,486 94,380 168,763 181,063
---------------- --------------- ------------------ ---------------
355,269 395,121 703,338 773,645
Selling, general and administrative expenses 97,420 90,428 188,744 178,598
Interest expense - 1,337 - 1,909
---------------- --------------- ------------------ ---------------
Total expenses 452,689 486,886 892,082 954,152
---------------- --------------- ------------------ ---------------
Income before income taxes and extraordinary item 34,329 23,155 65,143 67,653
Income tax expense 5,938 7,813 11,363 23,078
-------------- --------------- ---------------- ---------------
Income before extraordinary item 28,391 15,342 53,780 44,575
Extraordinary item - costs of demutualization,
net of income taxes (4,349) - (6,588) -
-------------- --------------- ---------------- ---------------
Net income $ 24,042 $ 15,342 $ 47,192 $ 44,575
============== =============== ================ ===============
Net income after Demutualization and IPO $ 15,342 $ 28,504
=============== ===============
Net income per share after Demutualization and IPO $ 0.36 $ 0.67
=============== ===============
Weighted average common shares outstanding 42,300 42,300
=============== ===============
Pro forma Information (Note 5)
As reported
Income before income taxes and extraordinary item $ 34,329 $ 23,155 $ 65,143 $ 67,653
Income tax expense (5,938) (7,813) (11,363) (23,078)
Pro forma adjustments
Pro forma interest expense (1,244) - (2,450) (634)
Pro forma income tax (expense) benefit (5,642) - (10,580) 217
-------------- -------------- ---------------- ---------------
Pro forma income before extraordinary item 21,505 15,342 40,750 44,158
Extraordinary item, net of income tax, as reported (4,349) - (6,588) -
-------------- -------------- ---------------- ---------------
Pro forma net income $ 17,156 $ 15,342 $ 34,162 $ 44,158
============== ============== ================ ===============
Pro forma income before extraordinary item per share $ 0.51 $ 0.36 $ 0.96 $ 1.04
============== ============== ================ ===============
Pro forma net income per share $ 0.41 $ 0.36 $ 0.81 $ 1.04
============== ============== ================ ===============
Pro forma weighted average common shares outstanding 42,300 42,300 42,300 42,300
============== ============== ================ ===============
</TABLE>
See notes to consolidated financial statements
2
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TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
For the six months ended
June 30, 1996 and 1997
(in thousands)
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Unrealized
gains (losses)
Common Capital in Retained on investment
stock excess of par earnings securities, net Total
---------- ------------- ------------ --------------- ------------
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Balance at January 1, 1996 $ - $ - $ 700,565 $ 39,506 $ 740,071
Net income 47,192 47,192
Change in unrealized gains (losses)
on investment securities, net (7,477) (7,477)
---------- ------------ ------------ ------------- ------------
Balance at June 30, 1996 $ - $ - $ 747,757 $ 32,029 $ 779,786
========== ============ ============ ============= ============
Balance at January 1, 1997 $ - $ - $ 706,259 $ 33,521 $ 739,780
Net income before Demutualization 16,071 16,071
Issuance of 24,475,022 shares to eligible
policyholders in the Demutualization and
cash payment to eligible policyholders in
lieu of shares of common stock 245 630,941 (722,330) (91,144)
Issuance of 17,825,000 shares in the Initial
Public Offerings, net of expenses 178 215,027 215,205
Net income after Demutualization 28,504 28,504
Change in unrealized gains (losses)
on investment securities, net (8,614) (8,614)
---------- ------------ ------------ ------------- ------------
Balance at June 30, 1997 $ 423 $ 845,968 $ 28,504 $ 24,907 $ 899,802
========== ============ ============ ============= ============
</TABLE>
See notes to consolidated financial statements.
3
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TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30, 1996 and 1997
(in thousands)
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Six Months Ended June 30,
------------------------------------------
1996 1997
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Net income $ 47,192 $ 44,575
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 8,707 8,425
Accretion of discounts and amortization of premiums, net 569 (4,994)
Change in allowance for doubtful accounts receivable (297) 96
Decrease in accounts receivable 33,477 25,621
Increase in other assets (2,755) (4,096)
Increase in medical costs payable 29,521 7,094
Increase in unearned premiums 471 3,901
Increase (decrease) in accounts payable and accrued
expenses 5,998 (34,120)
Decrease in other liabilities (31,555) (10,498)
Change in deferred income taxes (2,677) 9,075
Decrease in obligation for commonwealth payment - (175,000)
Increase (decrease) in minority interest (107) 750
Increase in obligations for employee benefits 4,681 2,366
Loss on disposal of fixed assets 17 59
Realized investment gains, net (34,234) (27,817)
--------------- -------------------
Net cash provided (used) by operating activities 59,008 (154,563)
--------------- -------------------
Cash flows from investing activities:
Proceeds from sale of property and equipment and other assets 23 496
Capital expenditures (7,299) (5,369)
Investment securities purchased (1,898,756) (2,707,454)
Proceeds from investment securities sold 1,434,685 2,160,734
Maturities of fixed income securities 507,848 478,467
Cash paid for purchase of subsidiaries, net of cash acquired (82,527) -
--------------- -------------------
Net cash used by investing activities (46,026) (73,126)
--------------- -------------------
Cash flow from financing activities:
Proceeds from long-term debt - 85,439
Payments to members in lieu of common stock
pursuant to Plan of Demutualization - (91,144)
Net proceeds from issuance of common stock - 215,205
Change in outstanding checks in excess of bank balance (8,531) (5,293)
--------------- -------------------
Net cash provided (used) by financing activities (8,531) 204,207
--------------- -------------------
Net increase (decrease) in cash 4,451 (23,482)
Cash - beginning of period 29,263 31,482
--------------- -------------------
Cash - end of period $ 33,714 $ 8,000
=============== ===================
</TABLE>
See notes to consolidated financial statements
4
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TRIGON HEALTHCARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements prepared by Trigon
Healthcare, Inc. and its subsidiaries (collectively, "Trigon" or the
"Company") are unaudited, except for the balance sheet information as
of December 31, 1996, which is derived from the Company's audited
consolidated financial statements, pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and the footnotes required
by generally accepted accounting principles for complete financial
statements. These consolidated interim financial statements should be
read in conjunction with the audited consolidated financial statements
included in the Company's annual report on Form 10-K for the year ended
December 31, 1996.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
financial statements have been included. The results of operations for
the three months and six months ended June 30, 1997 are not necessarily
indicative of the results for the full year.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. DERIVATIVE INVESTMENTS
Foreign Currency Forward Contracts and Foreign Currency Options
The Company enters into these 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 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
six months or less. At June 30, 1997, the Company had forward exchange
contracts outstanding to purchase approximately $13.6 million in
foreign currencies and to sell approximately $38.0 million in foreign
currencies (primarily Canadian Dollar and British Pound). The gross
unrealized gains and losses related to these contracts at June 30, 1997
aggregated $45,440 and $302,288, respectively. 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. Foreign currency options to
sell approximately $19.7 million of foreign currencies (Japanese Yen
and German Mark) at set prices were outstanding at June 30, 1997. These
options generally expire within twelve months. The gross unrealized
gains and losses related to these options at June 30, 1997 aggregated
$15,845 and $24,810, respectively. The forward contracts and options
are reflected as Investment Securities on the Consolidated Balance
Sheet at fair value. Unrealized gains and losses on these contracts are
5
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recorded as a separate component of stockholders' equity along with the
unrealized gains and losses on the securities being hedged. When the
securities hedged by these contracts are sold, realized gains or losses
are reflected in the Consolidated Statements of Operations as Net
Realized Gains.
Financial Futures
The Company engages in financial futures to hedge certain U.S. dollar
denominated portfolios. The notional value of the futures, $93.3
million at June 30, 1997, 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 transactions. Changes in market value
of financial futures, as determined on a daily basis, are recorded as a
realized gain or loss in the Consolidated Statements of Operations.
Terminations of contracts are accounted for in a similar manner.
3. LONG TERM DEBT
In February 1997, the Company entered into a $300 million revolving
credit agreement with a syndicate of banks, which expires February
2002. The credit agreement provides for various borrowing options and
rates and requires the Company to pay a facility fee on a quarterly
basis. The credit agreement also contains certain financial covenants
and restrictions including minimum net worth requirements as well as
limitations on dividend payments. At June 30, 1997, $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 a Plan of Demutualization
and Initial Public Offering ("IPO"). The weighted average interest rate
for the period the borrowings were outstanding during the quarter and
six months ended June 30, 1997 was 5.856% and 5.806%, respectively.
4. INCOME TAXES
The effective tax rate for the quarter and six months ended June 30,
1997 is 33.7% and 34.1%, respectively. The effective tax rate for the
quarter and six months ended June 30, 1996 is 17.3% and 17.4%,
respectively. The 1996 rates were reduced as a result of a reduction in
the valuation allowance on deferred tax assets primarily related to the
realization of alternative minimum tax credits during the periods
presented.
5. NET INCOME PER SHARE AND PRO FORMA INFORMATION
Net income and net income per share after Demutualization and IPO
reflect net income and net income per share for the period after
February 5, 1997, the effective date of the Demutualization and IPO.
Pro forma information 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. The pro forma information assumes:
6
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o interest expense at 5.675% per annum for the six months ended
June 30, 1997, and 5.856% and 5.765% per annum for the three
months and six months ended June 30, 1996 on borrowings used to
fund a portion of the Commonwealth Payment. The interest rate
used reflects the actual weighted average rate in effect for the
periods the borrowings were outstanding during the first quarter
1997. The pro forma interest expense reflected for the six months
ended June 30, 1997 represents interest expense prior to the
actual borrowing of funds used to make a portion of the
Commonwealth Payment. Actual interest expense for the periods
subsequent to the borrowings is included in income before income
taxes and extraordinary item. 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 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.
o the actual effective income tax rate of 34.3% for 1997. The pro
forma income tax benefit for the six months ended June 30, 1997
represents the income tax benefit associated with the pro forma
interest expense adjustment.
All per share amounts presented are calculated based on 42,300,022
weighted average shares outstanding and presumed outstanding for the
periods.
6. BENEFIT PLANS
Stock Option Plans
The Company grants stock options for a fixed number of shares to
employees and non-employee directors with an exercise price equal to or
greater than the fair market value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and
accordingly, recognizes no compensation expense for the stock options
granted.
At the Company's Annual Meeting of Shareholders on April 16, 1997, the
Company's shareholders approved the 1997 Stock Incentive Plan (the
"Incentive Plan"). The Incentive Plan 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 1,907,982 shares at an amount equal
to the fair market value of the stock at the date of grant were granted
to eligible employees on June 11, 1997. These options generally vest
over a period of one or three years, with certain grants vesting on a
pro-rata basis over three years, depending on an employees' years of
service, and in all cases expire 10 years from date of grant.
In addition, on April 16, 1997, the shareholders of the Company
approved the Non-Employee Directors Stock Incentive Plan ("Non-Employee
Plan"). Under the Non-Employee Plan, non-employee directors are granted
nonqualified stock options to purchase 10,000 shares of common stock on
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the date of the first annual meeting of shareholders 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
exercisable on a pro-rata basis over a three-year period. The Company
has reserved 550,000 shares of its common stock for issuance under the
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 at the date of grant were granted to each of the Company's 16
non-employee directors on April 16, 1997. The total shares under option
are 160,000.
Stock Purchase Plan
At the Company's Annual Meeting of Shareholders on April 16, 1997, the
Company's shareholders approved the Company's 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 1
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 market value
annually of the Company's common stock at 85% of the lower of the fair
market value on the first or last trading day of each calendar quarter.
Employee contributions to the Stock Purchase Plan were $156,794 for the
six months ended June 30, 1997. No shares were issued as of June 30,
1997.
7. LITIGATION
The Company is the defendant in three lawsuits that have been filed by
self-funded employer groups in connection with the Company's past
practices regarding provider discounts. The suits claim that the
Company was obligated to credit each self-funded plan with the full
amount of the discounts that the Company negotiated with facilities
providing health care to members covered by the plans. Collectively,
the suits seek $2.5 million in compensatory damages plus unspecified
punitive 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, some of which involve
larger amounts of withheld discounts. The Company is communicating with
these groups, and lawsuits have not been filed in connection with these
claims. The Company believes it is still possible that additional
discount-related claims may be made against it. Although the ultimate
outcome of such claims and litigation cannot be estimated, the Company
believes that the discount-related claims and litigation brought by
these self-funded employer groups will not have a material adverse
effect on the financial condition of the Company. The Company cannot
make an estimate of loss, if any, or predict whether or not such claims
and litigation will result in a material adverse effect on the
Company's results of operations in any particular period.
The Company and certain of its subsidiaries are involved in various
other legal actions occurring in the normal course of its business.
While the ultimate outcome of such litigation cannot be predicted with
8
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certainty, in the opinion of Company management, after consultation
with counsel responsible for such litigation, the outcome of those
actions is not expected to have a material adverse effect on the
financial condition of the Company.
8. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share. The new standard, issued in February 1997, becomes effective
for December 31, 1997 financial statements. This statement provides new
accounting and reporting standards for earnings per share. It will
replace the currently used primary and fully diluted earnings per share
with basic and diluted 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. This statement requires that prior
period earnings per share data be restated. The Company does not expect
adoption of this statement to have a material impact on earnings per
share amounts.
SFAS No. 130, Reporting Comprehensive Income. The new standard, issued
in June 1997, becomes effective for fiscal years beginning after
December 15, 1997, and establishes standards for the reporting and
display of comprehensive income. Comprehensive income includes all
changes in equity resulting from transactions and economic events from
nonowner sources. The standard does not require a specific format for
the financial statement but does require equal prominence with other
financial statements and reclassification of prior year comparative
financial statements. The Company plans to adopt this statement as of
January 1, 1998.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. The new standard, issued in June 1997, becomes effective
for periods beginning after December 15, 1997. This standard supersedes
the current SFAS No. 14 and establishes new disclosure requirements
about products and services, geographic areas and major customers on an
annual and quarterly basis. The standard requires companies to disclose
qualitative and quantitative segment data on the basis that is used by
management for evaluating segment performance and deciding how to
allocate resources. The Company plans to adopt this statement as of
January 1, 1998.
9. SUBSEQUENT EVENTS
Shareholder Rights Plan
On July 16, 1997, the Board of Directors adopted a Shareholder Rights
Plan ("Rights Plan"). Under the Plan, the Board of Directors created a
class of 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 Shares.
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 rights
will be exercisable only if a person or group acquires 10% or more of
the Company's Common Shares or announces a tender offer for 10% or more
of the Company's Common Shares. 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 Trigon Common
9
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Shares 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 the acquiring company's common shares
having a market value of twice the Right's exercise price.
The date of record for the dividend distribution is 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 their
becoming exercisable.
10
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ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL
Substantially all of the revenues of Trigon Healthcare, Inc. and its
Subsidiaries (collectively, "Trigon" or the "Company") are generated from
premium and fees received for health care services provided to its members and
from net investment income. Trigon's expenses are primarily related to health
care services provided which consist of payments to physicians, hospitals, and
other providers. A portion of medical costs expense for each period consists of
an actuarial estimate of claims incurred but not reported to Trigon during the
period. The Company's results of operations depend in large part on its ability
to accurately predict and effectively manage health care costs.
The Company offers a diversified mix of managed care products, including managed
health maintenance organizations ("HMO"), preferred provider organizations
("PPO"), point-of-service ("POS") and traditional indemnity products with access
to the Company's participating provider networks ("PAR"). The Company also
provides a broad array of Medicare supplement plans as well as specialty
products including pharmacy, dental, life, worker's compensation, preventive
care, disability, behavioral health, COBRA and flexible benefits account
administration.
The Company participates in the Federal Employee Program ("FEP"), a national
contract with the U. S. Office of Personnel Management ("OPM"), to provide
benefits through its PPO network for approximately 208,000 federal employees and
their dependents living in Virginia. FEP revenues represent the reimbursement by
OPM of medical costs incurred including the actual cost of administering the
program, as well as a performance based share of the national program's overall
profit.
Within the Company's network product offerings, employer groups may choose
various funding options ranging from at-risk to partially or fully self-funded
financial arrangements. While self-funded customers participate in Trigon's
networks, the customers bear all or a portion of the underwriting risk.
MEMBERSHIP
The following table sets forth the Company's membership data by network:
As of June 30,
1996 1997
---- ----
Commercial:
HMO 200,454 250,136
PPO 217,636 245,867
PAR 266,936 220,157
Medicaid HMO 27,690 33,505
Medicare Supplement 128,283 127,314
Non-Virginia 51,442 57,821
--------- ---------
Subtotal 892,441 934,800
Self-Funded/ASO 701,472 675,990
Federal Employee Program 198,516 207,800
--------- ---------
At Risk and Self-Funded Enrollment 1,792,429 1,818,590
Processed for other Blue Cross and Blue
Shield Plans (ASO) 65,989 38,438
--------- ---------
Total Members 1,858,418 1,857,028
========= =========
11
<PAGE>
PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM
The following table sets forth the premium and premium equivalents by network:
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C>
Commercial:
HMO $ 76,644 $ 102,978 $ 150,868 $ 200,042
PPO 79,567 91,346 159,358 178,318
PAR 107,171 91,624 214,742 183,853
Medicare Supplement 51,384 52,709 102,519 105,557
Non-Virginia 17,686 19,251 24,554 36,980
--------- --------- --------- ---------
Subtotal 332,452 357,908 652,041 704,750
Self-funded/ASO 272,447 269,775 521,313 515,956
Federal Employee Program 90,622 99,411 177,358 190,485
--------- -------- --------- ---------
Total Premium and Premium
Equivalents $ 695,521 $ 727,094 $1,350,712 $1,411,191
=========== ========== ========== ==========
</TABLE>
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Premium and fee revenues increased 8.9% from $443.6 million for the quarter
ended June 30, 1996 to $482.9 million for the quarter ended June 30, 1997,
primarily due to membership growth in the Company's HMO and PPO networks offset
by expected declines in PAR network enrollment. Commercial HMO revenues
increased 34.4%, from $76.6 million in the second quarter of 1996 to $103.0
million in the second quarter of 1997. The $26.4 million increase in commercial
HMO revenues is attributable to increased enrollment as a result of a shift in
members from PAR and PPO networks into the HMO networks and enrollment of new
HMO members combined with an increase of 7.0% in the average revenue per member.
Commercial PPO revenues grew from $79.6 million for the second quarter of 1996
to $91.3 million for the second quarter of 1997, an increase of 14.8%, driven
primarily by a 13% enrollment growth and a 2.5% increase in the average revenue
per member. Commercial PAR revenues declined from $107.2 million for the second
quarter of 1996 to $91.6 million for the second quarter of 1997 as a result of
the transition of members to the more tightly managed HMO and PPO networks.
Premium revenues on a per member per month basis for the Company's commercial
business increased 3.0%, in line with expectations, from $124.70 for the second
quarter of 1996 to $128.48 for the same period of 1997. Second quarter of 1997
per member per month premiums for Virginia commercial business grew
approximately 3.9% from the corresponding period of 1996, excluding the effects
of the introduction of a PPO product for individuals. FEP revenues increased
9.7% from $90.6 million in the second quarter of 1996 to $99.4 million in the
second quarter of 1997 primarily as a result of increased medical costs
reimbursed by OPM and a 4.7% increase in enrollment. FEP revenues also increased
$0.8 million in the second quarter of 1997 primarily from the net benefit of a
performance incentive bonus awarded by the OPM for being the top performing Blue
Cross plan participating in the national FEP contract.
Total enrollment declined slightly from 1,858,418 as of June 30, 1996 to
1,857,028 as of June 30, 1997. Commercial enrollment increased 4.7% from 892,441
members at June 30, 1996 to 934,800 members at June 30, 1997. Enrollment in the
HMO networks at June 30, 1997 increased 24.3% over the prior year and, at June
30, 1997, accounted for 30.3% of the Company's commercial enrollment. Enrollment
in the PPO networks increased 13.0% over the prior year and accounted for 26.3%
of the Company's commercial enrollment at June 30, 1997. The increases in the
12
<PAGE>
HMO and PPO networks were offset by an expected decline of 17.5% in the
Company's PAR network as members migrated into more tightly managed networks.
The PAR network enrollment represented 23.6% of the Company's total commercial
enrollment at June 30, 1997. FEP enrollment also increased 4.7% from 198,516 at
June 30, 1996 to 207,800 at June 30, 1997. The commercial and FEP enrollment
increases were offset by a 53,033 member decrease in self-funded/ASO business.
The decline in self-funded/ASO enrollment reflects the Company's shift away from
no risk, low margin ASO business.
Investment income increased 52.7% from $11.7 million in the second quarter of
1996 to $17.9 million in the second quarter of 1997. In addition, net realized
gains decreased from $19.0 million in the second quarter of 1996 to $2.5 million
for the same period of 1997. 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 investments. The majority of this shift took place in
early 1997, as the equity portfolio was reduced from 27.8% of the total
portfolio at December 31, 1996 to approximately 15% at March 31, 1997. The
equity portfolio was 13.1% of the total portfolio at June 30, 1997. This shift
is also the primary factor for the decrease in net realized gains from the
second quarter 1996 to the same period of 1997. As of June 30, 1997, net
unrealized gains totaled $38.3 million as compared to $51.6 million in net
unrealized gains at December 31, 1996. The decrease is attributable to the
realization of gains as a result of reducing the equity portfolio in early 1997.
Other revenues decreased by 46.8% from $12.7 million in the second quarter of
1996 to $6.7 million in the second quarter of 1997. 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. For
the second quarter of 1996, HCS contributed $5.3 million in third-party
revenues.
Medical costs increased 11.2% from $355.3 million for the quarter ended June 30,
1996 to $395.1 million for the quarter ended June 30, 1997. The $39.8 million
increase is primarily the result of enrollment growth of 24.3% in the HMO
networks, an increase in FEP medical costs to be reimbursed by OPM, higher
utilization in the Medicare supplement products in April 1997, higher than
expected utilization and cost per member in one of the Company's HMO plans and
general medical inflation. The increase in Medicare supplement costs was
primarily due to higher than normal physician outpatient claims and pharmacy
utilization in April 1997. The Company believes Medicare supplement claims in
May and June were in line with historical utilization patterns. Of the Company's
HMOs, all but one network is tracking close to plan. Within this network the
Company has implemented extensive cost-containment actions, pricing initiatives
and processing controls, as well as a change in management, all aimed at
bringing this plan's results to acceptable levels. Partially offsetting the
increased medical costs was the reversal of a $3 million liability for hospital
settlements. Historically, the Company's hospital contracts have contained
provisions for annual settlements and, therefore, a liability has been
maintained for supplemental payments typically made at settlement. The Company
has been making operational and contractual changes such that this liability
could be reduced.
Selling, general and administrative expenses declined 7.2% from $97.4 million in
the second quarter of 1996 to $90.4 million in the second quarter of 1997. The
decrease is a result of the sale of HCS on December 31, 1996 along with
company-wide streamlining and cost-containment activities. Cost containment
activities have reduced headcount by 291 positions, or by 7.2%, from 4,036
positions at June 30, 1996 to 3,745 positions at June 30, 1997. The Company will
13
<PAGE>
continue to build on its efforts to reduce administrative expenses through
increasing electronic claims submissions, centralization of customer service
functions, streamlining the business acquisition and renewal process and
consolidating certain internal operations.
Interest expense for the second quarter of 1997 was $1.3 million. There was no
interest expense for the second quarter of 1996. Interest expense in 1997 was a
result of the $85 million outstanding on the revolving credit agreement
initiated in February, 1997 to fund a portion of the payment ("Commonwealth
Payment") made to the Commonwealth of Virginia in February, 1997 in accordance
with a Plan of Demutualization and IPO.
Income before income taxes and extraordinary item decreased 32.5% from $34.3
million in the second quarter of 1996 to $23.2 million in the second quarter of
1997. The net decrease of $11.2 million was caused by a $16.5 million decrease
in net realized gains and a $1.3 million increase in interest expense offset by
a $6.2 million increase in investment income and a $0.5 million increase in
operating income. As discussed above, the decrease in net realized gains and the
increase in investment income is primarily due to the shift of a larger portion
of the Company's investment portfolio from equity to fixed income securities in
early 1997.
The Company's effective tax rate was 17.3% for the second quarter of 1996
compared to 33.7% for the second quarter of 1997. The effective rate for the
first quarter of 1996 was reduced as a result of a reduction in the valuation
allowance on deferred tax assets primarily related to the realization of
alternative minimum tax credits during the quarter.
Income before extraordinary item decreased from $28.4 million in the second
quarter of 1996 to $15.3 million for the same period in 1997, due primarily to
lower net realized gains and higher interest expense and effective tax rate,
offset by improved investment income and operating income.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Premium and fee revenues increased 8.0% from $874.7 million in the first six
months of 1996 to $944.7 million in the first six months of 1997, primarily due
to membership growth in the Company's HMO and PPO networks offset by expected
declines in PAR network enrollment and the full six month impact of the February
1996 acquisition of Mid-South Insurance Company ("Mid-South"). Commercial HMO
revenues increased 32.6% from $150.9 million in the first six months of 1996 to
$200.0 million for the same period of 1997. The $49.1 million increase in
commercial HMO revenues is attributable to increased enrollment as a result of a
shift in members from PAR and PPO networks into the HMO networks and from
enrollment of new HMO members and an increase of 5.6% in the average revenue per
member. Commercial PPO revenues grew from $159.4 million for the first six
months of 1996 to $178.3 million for the first six months of 1997, an increase
of 11.9%, driven primarily by enrollment growth. Commercial PAR revenues
declined from $214.7 million for the first six months of 1996 to $183.9 million
for the first six months of 1997 as a result of the transition of members to the
more tightly managed HMO and PPO networks. The full six month impact of the
Mid-South acquisition increased revenues $12.9 million, with Mid-South revenues
increasing from $21.9 million for the period from February 29, 1996 (the date of
the acquisition) through June 30, 1996 to $34.8 million for the first six months
of 1997. FEP revenues increased 7.4% from $177.4 million in the first six months
of 1996 to $190.5 million for the same period of 1997 primarily as a result of
increased medical costs reimbursed by OPM and a 4.7% increase in enrollment.
Premium revenues on a per member per month basis for the Company's commercial
14
<PAGE>
business increased 2.3% from $124.35 for the first six months of 1996 to $127.16
for the same period of 1997.
Investment income increased 55.3% from $22.9 million in the first six months of
1996 to $35.6 million in the first six months of 1997. In addition, net realized
gains decreased from $34.2 million in the first six months of 1996 to $27.8
million for the same period of 1997. 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 investments. The majority of this shift took place in
early 1997, as the equity portfolio was reduced from 27.8% of the total
portfolio at December 31, 1996 to approximately 15% at March 31, 1997. The
equity portfolio was 13.1% of the total portfolio at June 30, 1997. This shift
is also the primary factor for the decrease in net realized gains from the first
six months of 1996 to the same period of 1997. As of June 30, 1997, net
unrealized gains total $38.3 million as compared to $51.6 million in net
unrealized gains at December 31, 1996. The decrease is attributable to the
realization of gains as a result of reducing the equity portfolio in early 1997.
Other revenues decreased by 46.2% from $25.4 million in the first six months of
1996 to $13.7 million in same period of 1997. The decrease is primarily a result
of the sale of the Company's electronic communication services subsidiary, HCS,
on December 31, 1996. Through the first six months of 1996, HCS contributed
$10.8 million in third-party revenues.
Medical costs increased 10.0% from $703.3 million for the first six months of
1996 to $773.6 million for the first six months of 1997. The $70.3 million
increase is primarily the result of enrollment growth of 24.3% in the HMO
networks, an increase in FEP medical costs to be reimbursed by OPM, higher than
normal utilization in the Medicare supplement products in January and April
1997, higher than expected utilization and cost per member in one of the
Company's HMO plans and the full six month impact of the Mid-South acquisition.
The medical cost per member per month for the Company's commercial business
increased 4.9% from $101.95 for the first six months of 1996 to $106.92 for the
same period of 1997. Combined with a 2.3% increase in commercial premium
revenues per member per month, the loss ratio on commercial business
deteriorated from 82.0% in the first six months of 1996 to 84.1% in the first
six months of 1997. The deterioration can be primarily attributed to issues at
one of the Company's HMOs. The Company has 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 Company also experienced higher than expected Medicare supplement
product medical costs in January and April. The increase was caused primarily by
an increase in high-dollar claims and higher medical costs driven by physician
outpatient claims and pharmacy utilization. The Company believes Medicare
supplement medical costs in May and June were in line with lower historical
utilization patterns.
Selling, general and administrative expenses declined by 5.4% from $188.7
million in the first six months of 1996 to $178.6 million for the same period of
1997. The decrease is a result of the sale of HCS on December 31, 1996 along
with the impact of Company-wide streamlining and cost containment activities,
including a 7.2% reduction in headcount. The decrease was partially offset by
the full six month impact of the Mid-South acquisition.
Interest expense for the six months ended June 30, 1997 was $1.9 million. There
was no interest expense for the same period of 1996. The increase relates to
nearly five months of interest in 1997 for the $85 million outstanding on the
revolving credit agreement initiated in February, 1997 to fund a portion of the
Commonwealth Payment made in February, 1997.
15
<PAGE>
Income before income taxes and extraordinary item increased 3.9% from $65.1
million in the first six months of 1996 to $67.7 million in the first six months
of 1997. The net increase is attributable to a $12.7 million increase in
investment income offset by a $6.4 million decrease in realized gains, a $1.8
million decrease in operating income and a $1.9 million increase in interest
expense. As discussed above, the decrease in net realized gains and the increase
in investment income is primarily due to the shift of a larger portion of the
Company's investment portfolio from equity to fixed income securities in early
1997.
The Company's effective tax rate was 17.4% for the first six months of 1996
compared to 34.1% for the first six months of 1997. The effective rate for the
six months ended June 30, 1996 was reduced as a result of a reduction in the
valuation allowance on deferred tax assets primarily related to the realization
of alternative minimum tax credits during the period.
Income before extraordinary item decreased from $53.8 million for the six months
ended June 30, 1996 to $44.6 million for the same period of 1997, due primarily
to improved investment income, offset by lower operating income, lower net
realized gains and higher interest expense and effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are premiums and fees received and
investment income. The primary uses of cash include health care benefit expenses
and capitation payments, brokers' and agents' commissions, administrative
expenses, income taxes and repayment of long-term debt. Trigon generally
receives premium revenues in advance of anticipated claims for related health
care services.
The Company's investment policies are designed to provide liquidity to meet
anticipated payment obligations and preserve capital. Trigon fundamentally
believes that concentrations of investments in any one asset class are unwise
due to constantly changing interest rates as well as market and economic
conditions. Accordingly, the Company maintains a diversified investment
portfolio consisting both of fixed income and equity securities, with the
objective of reducing risk and maximizing overall return. The fixed income
portfolio includes government and corporate securities, both domestic and
international, with an average quality rating of A at June 30, 1997. The
portfolio had an average contractual maturity of 6.8 years at June 30, 1997. 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 equity portfolio is diversified by industry,
country and currency-related exposure. The Company enters into foreign currency
exchange forward contracts and foreign currency options to manage its exposure
to fluctuations in foreign currency exchange rates on its foreign debt and
equity investments. During the first six months of 1997, the Company reduced its
equity portfolio from 27.8% at December 31, 1996 to approximately 13.1% of the
total portfolio, with the majority of the shift occurring prior to March 31,
1997. The Company currently plans to maintain the equity portfolio at levels
generally no greater than 15%. As a result of this shift, the Company
experienced greater than normal realized gains in the first six months of 1997
and expects lower realized gains and a more consistent contribution to income
from the investment portfolio in the future.
16
<PAGE>
Cash provided (used) by operating activities for the six months ended June 30,
1996 and 1997 was $59.0 million and $(154.4) million, respectively. The
significant decrease in cash provided by operations in 1997 is primarily due to
the $175 million Commonwealth Payment made in the first quarter of 1997. This
decrease in cash provided by operating activities is offset by increased cash
provided by financing activities, described in detail below.
Net cash used by investing activities increased $27.3 million, from $46.0
million for the six months ended June 30, 1996 to $73.3 million for the same
period of 1997. This increase is primarily due to investment purchases made with
cash flows from net proceeds from the initial public offering in February 1997.
Cash provided (used) by financing activities increased $212.7 million over the
first six months of 1996 from $(8.5) million to $204.2 million in the first six
months of 1997 primarily due to the initial public offering and borrowing under
a credit agreement. Effective February 5, 1997, the Company completed its
conversion from a mutual insurance company to a stock insurance company in
accordance with a Plan of Demutualization (the "Demutualization"). In accordance
with the Demutualization, Blue Cross and Blue Shield of Virginia ("Virginia
BCBS") changed its name to Trigon Insurance Company, Inc. (d/b/a Trigon Blue
Cross Blue Shield) and became a wholly owned subsidiary of Trigon Healthcare,
Inc., a holding company. The membership interests of Virginia BCBS's eligible
members were converted into common stock of Trigon Healthcare, Inc., or, in
certain circumstances, cash. The Plan of Demutualization also required the
Company to complete an Initial Public Offering of stock simultaneously with the
conversion. Accordingly, Trigon Healthcare, Inc. issued 17.8 million shares of
common stock at $13 per share in an IPO generating net proceeds of $215.2
million. In connection with the Demutualization, the Company was required to
make a payment of approximately $175 million to the Commonwealth of Virginia
(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 initial public offering, the Company
entered into a $300 million dollar revolving credit agreement which expires in
February 2002. The credit agreement calls for various borrowing options and
rates and requires the Company to pay a facility fee on a quarterly basis. The
credit agreement also contains certain financial covenants and restrictions
including minimum net worth requirements as well as limitations on dividend
payments. At June 30, 1997, $85 million had been borrowed and remained
outstanding under this credit agreement, the proceeds of which were used to pay
a portion of the Commonwealth Payment at the time of the Demutualization and
IPO.
The Company believes that cash flow generated by operations and its cash and
investment balances will be sufficient to fund continuing operations, capital
expenditures and debt repayment costs for the foreseeable future. The nature of
the Company's operations is such that cash receipts are principally premium
revenues typically received up to three months prior to the expected cash
payment for related health care services. The Company's operations are not
capital intensive, and there are currently no commitments for major capital
expenditures to support existing business.
17
<PAGE>
FORWARD-LOOKING INFORMATION
This Item, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and this Form 10-Q contain certain forward-looking
statements, including among other things statements concerning future earnings,
premium rates, enrollment and medical and administrative costs. Actual results
could differ materially from those discussed. Factors that could cause actual
results to differ materially include government action, the effect of
competition on premium rates and increasing medical costs. Additional
information concerning factors that could cause actual results to differ
materially from those in forward-looking statements is contained in the
Company's Annual Report on Form 10-K under the caption "Forward-Looking
Information".
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) The Company is the defendant in three lawsuits that have been filed by
self-funded employer groups in connection with the Company's past practices
regarding provider discounts. The suits claim that the Company was obligated to
credit each self-funded plan with the full amount of the discounts that the
Company negotiated with facilities providing health care to members covered by
the plans. Collectively, the suits seek $2.5 million in compensatory damages
plus unspecified punitive 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, some of which involve larger amounts of
withheld discounts. The Company is communicating with these groups, and lawsuits
have not been filed in connection with these claims. The Company believes it is
still possible that additional discount-related claims may be made against it.
Although the ultimate outcome of such claims and litigation cannot be estimated,
the Company believes that the discount-related claims and litigation brought by
these self-funded employer groups will not have a material adverse effect on the
financial condition of the Company. The Company cannot make an estimate of loss,
if any, or predict whether or not such claims and litigation will result in a
material adverse effect on the Company's results of operations in any particular
period.
The Company and certain of its subsidiaries are involved in various other legal
actions occurring in the normal course of its business. While the ultimate
outcome of such litigation cannot be predicted with certainty, in the opinion of
Company management, after consultation with counsel responsible for such
litigation, the outcome of those actions is not expected to have a material
adverse effect on the financial condition of the Company.
Item 2. Changes in Securities
Shareholder Rights Plan
On July 16, 1997, the Board of Directors adopted a Shareholder Rights Plan
("Rights Plan"). Under the Plan, the Board of Directors created a class of
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 Shares. 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 rights will be exercisable only if a person or group
acquires 10% or more of the Company's Common Shares or announces a
tender offer for 10% or more of the Company's Common Shares. 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 Trigon Common
Shares 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
18
<PAGE>
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 the acquiring
company's common shares having a market value of twice the Right's exercise
price.
The date of record for the dividend distribution is 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 their becoming exercisable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on April 16, 1996, the
following members were elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
Hunter B. Andrews 25,972,281 579,353
Lenox D. Baker, Jr., M.D. 26,013,558 538,076
Frank C. Martin, Jr. 26,028,932 522,702
Donald B. Nolan, M.D. 26,012,444 539,190
Hubert R. Stallard 26,019,157 532,477
The matters voted upon at the Annual Meeting of Shareholders and the results of
the voting were as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstained Nonvotes
--------- ------------- --------------- --------
<S> <C>
1. Approval of the Trigon Healthcare,
Inc. 1997 Stock Incentive Plan
17,253,396 5,010,338 1,730,850 2,557,050
2. Approval of the Trigon Healthcare,
Inc. Employee Stock Purchase Plan
20,729,827 1,546,615 1,718,142 2,557,050
3. Approval of the Trigon Healthcare,
Inc. Non-Employee Directors Stock
Incentive Plan
17,053,942 5,079,760 1,860,882 2,557,050
4. Ratification of KPMG Peat Marwick
LLP as independent auditors of the
Company for 1997
26,137,200 160,834 253,600 --
</TABLE>
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of exhibits filed with this Form 10-Q:
Exhibit
Number Description
- ------- -----------
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 (incorporated by
reference to Exhibit 2 of the Company's Form 8-A/A filed July
16, 1997).
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 (incorporated by reference to Exhibit 1 of the
Company's Form 8-A/A filed July 16, 1997).
4.2 --Form of Rights Certificate (incorporated by reference to
Exhibit 3 of the Company's Form 8-A/A filed July 16, 1997).
11 --Computation of per share earnings for the six months ended
June 30, 1997. Exhibit omitted as the detail necessary to
determine the computation of per share earnings can be clearly
determined from the material contained in part I of this Form
10-Q. There is no difference between primary and
fully-diluted per share earnings for the three months and six
months ended June 30, 1997.
27 --Financial Data Schedule.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been
omitted.
(b) Reports on Form 8-K:
None filed during the three months ended June 30, 1997.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRIGON HEALTHCARE, INC.
Registrant
Dated: August 13, 1997 By: /s/ Thomas G. Snead, Jr.
----------------------------
THOMAS G. SNEAD, JR.
TREASURER
(PRINCIPAL ACCOUNTING AND
FINANCIAL OFFICER)
<PAGE>
EXHIBIT INDEX
Exhibit
Number
-------
27 --Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
INCLUDED IN THE TRIGON HEALTHCARE INC., AND SUBSIDIARIES FORM 10-Q AS
OF AND FOR THE SIX-MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,000
<SECURITIES> 1,270,811
<RECEIVABLES> 365,289
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,672,669
<PP&E> 126,546
<DEPRECIATION> 78,549
<TOTAL-ASSETS> 1,866,080
<CURRENT-LIABILITIES> 748,576
<BONDS> 90,319
0
0
<COMMON> 423
<OTHER-SE> 899,379
<TOTAL-LIABILITY-AND-EQUITY> 1,866,080
<SALES> 958,403
<TOTAL-REVENUES> 1,021,805
<CGS> 773,645
<TOTAL-COSTS> 952,243
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,909
<INCOME-PRETAX> 67,653
<INCOME-TAX> 23,078
<INCOME-CONTINUING> 44,575
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,575
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
