UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period ended
September 30, 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 November 10, 1997
------------------- --------------------------------
Class A Common Stock, $0.01 par value 42,300,022 shares
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
THIRD QUARTER 1997 FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 1
Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 1997 and 1996 2
Consolidated Statements of Changes in Stockholders'
Equity for the Three Months and Nine Months Ended
September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996 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 18-19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1997 1996
------
----------------- --------------
(Unaudited)
<S> <C>
Current assets
Cash $ 6,853 $ 31,482
Investment securities, at estimated fair value 1,310,575 1,182,420
Premiums and other receivables 386,430 390,997
Deferred income taxes 6,982 16,572
Other assets 10,022 10,035
--------------- ----------------
Total current assets 1,720,862 1,631,506
Property and equipment, net 45,426 49,545
Deferred income taxes 42,491 48,170
Goodwill and other intangibles, net 71,957 76,043
Restricted investments, at estimated fair value 9,717 11,019
Other assets 20,242 16,865
--------------- ----------------
Total assets $ 1,910,695 $ 1,833,148
=============== ================
Liabilities and Stockholders' Equity
Current liabilities
Medical and other benefits payable $ 427,993 $ 417,797
Unearned premiums 92,067 91,164
Accounts payable and accrued expenses 52,927 84,470
Other liabilities 184,286 198,893
Obligation for Commonwealth Payment - 87,500
-------------- -----------------
Total current liabilities 757,273 879,824
Obligation for Commonwealth Payment, noncurrent - 87,500
Obligations for employee benefits, noncurrent 60,025 57,679
Medical and other benefits payable, noncurrent 63,970 59,246
Long-term debt 90,319 4,880
Minority interest in subsidiaries 5,519 4,239
-------------- -----------------
Total liabilities 977,106 1,093,368
-------------- -----------------
Stockholders' Equity
Common stock 423 -
Capital in excess of par 842,284 -
Retained earnings 56,470 706,259
Net unrealized gain on investment securities,
net of deferred income taxes of $18,529 in 1997
and $18,032 in 1996 34,412 33,521
-------------- -----------------
Total stockholders' equity 933,589 739,780
Commitments and contingencies (Notes 3,4 and 8) - -
-------------- -----------------
Total liabilities and stockholders' equity $ 1,910,695 $ 1,833,148
============== =================
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITIED)
For the three months and nine months ended September 30, 1997 and 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- --------------------------------
1997 1996 1997 1996
-------------------------------- --------------------------------
<S> <C>
Revenues
Premium and fee revenues
Commercial $ 360,071 333,086 $ 1,064,821 $ 985,127
Federal Employee Program 95,153 88,229 285,638 265,587
Amounts attributable to self-funded arrangements 270,811 277,045 786,767 798,358
Less: Amounts attributable to claims under self-
funded arrangements (245,774) (255,044) (712,223) (731,062)
------------- ----------- -------------- ---------------
480,261 443,316 1,425,003 1,318,010
Investment income 19,717 11,162 55,302 34,081
Net realized gains 18,112 16,451 45,929 50,685
Other revenues 6,025 12,288 19,686 37,666
------------- ----------- -------------- ---------------
Total revenues 524,115 483,217 1,545,920 1,440,442
Expenses
Medical and other benefit costs
Commercial 298,633 274,769 891,215 809,344
Federal Employee Program 91,617 83,715 272,680 252,478
------------- ----------- ------------- ----------------
390,250 358,484 1,163,895 1,061,822
Selling, general and administrative expenses 89,776 94,960 268,374 283,704
Interest expense 1,342 - 3,251 -
------------- ----------- ------------- ----------------
Total expenses 481,368 453,444 1,435,520 1,345,526
------------- ----------- ------------- ----------------
Income before income taxes and extraordinary items 42,747 29,773 110,400 94,916
Income tax expense (benefit) 14,781 (58,114) 37,859 (46,751)
------------- ----------- ------------- ----------------
Income before extraordinary items 27,966 87,887 72,541 141,667
Extraordinary items - costs of demutualization and
Commonwealth Payment, net of income taxes - (179,692) - (186,280)
------------- ----------- ------------- ---------------
Net income (loss) $ 27,966 $ (91,805) $ 72,541 (44,613)
============== =========== ============= ==============
Net income after Demutualization and IPO $ 27,966 $ 56,470
============== ==============
Net income per share after Demutualization and IPO $ 0.66 $ 1.33
============== ==============
Weighted average common shares outstanding 42,300 42,300
============== ==============
Pro forma Information (Note 5)
As reported
Income before income taxes and extraordinary items $ 42,747 $ 29,773 $ 110,400 $ 94,916
Income tax (expense) benefit (14,781) 58,114 (37,859) 46,751
Pro forma adjustments
Pro forma interest expense - (1,244) (634) (3,692)
Pro forma income tax (expense) benefit - (68,099) 217 (78,679)
--------------- ----------- ------------- --------------
Pro forma income before extraordinary items 27,966 18,544 72,124 59,296
Extraordinary items, net of income tax, as reported (179,692) - (186,280)
--------------- ----------- ------------- --------------
Pro forma net income (loss) $ 27,966 $(161,148) $ 72,124 $ (126,984)
=============== =========== ============= ==============
Pro forma income before extraordinary items per share $ 0.66 $ 0.44 $ 1.70 $ 1.40
=============== =========== ============= ==============
Pro forma net income (loss) per share $ 0.66 $ (3.81) $ 1.70 $ (3.00)
=============== =========== ============= ==============
Pro forma weighted average common shares outstanding 42,300 42,300 42,300 42,300
=============== ============ ============= ==============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
For the three months and nine months ended September 30, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C>
Balance, July 1 $ 899,802 $ 779,786
Net income (loss) 27,966 (91,805)
Change in unrealized gains (losses)
on investment securities, net 9,505 (1,331)
Other, principally shares held by
consolidated grantor trusts (3,684)
----------- ------------
Balance at September 30 $ 933,589 $ 686,650
=========== ============
Balance, January 1 $ 739,780 $ 740,071
Net income before Demutualization 16,071 (44,613)
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 (91,144)
Issuance of 17,825,000 shares in the Initial
Public Offerings, net of expenses 215,205
Net income after Demutualization 56,470
Change in unrealized gains (losses)
on investment securities, net 891 (8,808)
Other, principally shares held by
consolidated grantor trusts (3,684)
----------- -----------
Balance at September 30 $ 933,589 $ 686,650
=========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
------------ ------------
<S> <C>
Net income (loss) $ 72,541 $ (44,613)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 12,524 12,970
Accretion of discounts and amortization of premiums, net (8,279) 21
Change in allowance for doubtful accounts receivable 614 (1,018)
(Increase) decrease in accounts receivable 3,961 (31,652)
Increase in other assets (4,543) (1,745)
Increase in medical costs payable 15,921 40,669
Increase (decrease) in unearned premiums 903 (3,484)
Decrease in accounts payable and accrued expenses (31,543) (5,347)
Increase (decrease) in other liabilities (5,531) 6,623
Change in deferred income taxes 14,772 (70,597)
Increase (decrease) in obligation for Commonwealth Payment (175,000) 175,000
Increase in minority interest 1,280 103
Increase in obligations for employee benefits 2,346 5,991
Loss on disposal of fixed assets 100 16
Realized investment gains, net (45,929) (50,685)
------------- ------------
Net cash provided (used) by operating activities (145,863) 32,252
------------- ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment and other assets 575 35
Capital expenditures (6,303) (10,819)
Investment securities purchased (3,815,252) (2,180,759)
Proceeds from investment securities sold 2,986,885 2,133,101
Maturities of fixed income securities 757,047 136,853
Cash paid for purchase of subsidiaries, net of cash acquired - (82,496)
------------- ------------
Net cash used by investing activities (77,048) (4,085)
------------- ------------
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 -
Other, principally purchase of Trigon common stock by
consolidated grantor trusts (3,684) -
Change in outstanding checks in excess of bank balance (7,535) (24,127)
------------- ------------
Net cash provided (used) by financing activities 198,281 (24,127)
------------- ------------
Net increase (decrease) in cash (24,629) 4,040
Cash - beginning of period 31,482 29,263
------------- ------------
Cash - end of period $ 6,853 $ 33,303
============= ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements prepared by Trigon
Healthcare, Inc. and its subsidiaries (collectively, "Trigon" or the
"Company") are unaudited, except for the balance sheet information as
of December 31, 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 nine months ended September 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 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. As of September 30, 1997, the Company had forward
contracts outstanding to purchase approximately $11.8 million in
foreign currencies and to sell approximately $38.0 million in foreign
currencies (primarily German Mark and British Pound). The gross
unrealized gains and losses related to these contracts as of September
30, 1997 aggregated $267,396 and $321,295, 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 $20.6 million of foreign currencies
(Japanese Yen and German Mark) at set prices were outstanding as of
September 30, 1997. These options generally expire within twelve
months. The gross unrealized gains related to these options as of
September 30, 1997 aggregated $580,634. There were no gross unrealized
5
<PAGE>
losses as of September 30, 1997. 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 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
on these contracts 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, $159.7
million as of September 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. As of September 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
nine months ended September 30, 1997 was 5.843% and 5.821%,
respectively.
4. INCOME TAXES
The effective tax rates for the quarter and nine months ended September
30, 1997 were 34.6% and 34.3%, respectively. The effective tax rate
benefits for the quarter and nine months ended September 30, 1996 is
195.2% and 49.3%, respectively. The 1996 rates were due to a reduction
in the valuation allowance on deferred tax assets caused by the
realization of alternative minimum tax credits during the periods
presented and the elimination as of September 30, 1996 of the remaining
$63.9 million valuation allowance because the Demutualization and IPO
made it more likely than not that the assets would be realized.
Excluding the effects of the elimination of the valuation allowance,
the effective tax rates would have been 19.4% and 18.1% for the quarter
and nine months ended September 30, 1996.
6
<PAGE>
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:
o interest expense at 5.675% per annum for the nine months ended
September 30, 1997, and 5.843% and 5.791% per annum for the three
months and nine months ended September 30, 1996 on borrowings
used to fund a portion of the Commonwealth Payment. The interest
rates used for 1996 reflect the weighted average rates in effect
for the periods the borrowings were outstanding during 1997. The
pro forma interest expense reflected for the nine months ended
September 30, 1997 represents interest expense for the period
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 nine months ended September 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
("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
7
<PAGE>
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 at
the end of one or three years, with certain grants vesting on a
pro-rata basis over three years, depending on an employee's 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"). 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. 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
exercisable 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. 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 approximately
$273,600 and $430,400 for the three months and nine months ended
September 30, 1997, respectively. Pursuant to the Stock Purchase Plan,
9,971 shares of the Company's stock were purchased on the open market
and issued to employees for the three months ended September 30, 1997.
7. STOCKHOLDERS' EQUITY
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
8
<PAGE>
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 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 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 their
becoming exercisable.
Common Stock
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. During the third quarter of 1997, shares of the Company's
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.
8. LITIGATION
The Company is the defendant in four 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 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, 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 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.
9
<PAGE>
9. 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.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Substantially all of the revenues of Trigon Healthcare, Inc. and its
subsidiaries (collectively, "Trigon" or the "Company") are generated from
premiums and fees received for health care services provided to its members and
from investment income. Trigon's expenses are primarily related to health care
services provided which consist of payments to physicians, hospitals and other
providers. A portion of medical costs expense for each period consists of an
actuarial estimate of claims incurred but not reported to Trigon during the
period. The Company's results of operations depend in large part on its ability
to accurately predict and effectively manage health care costs.
The Company offers a diversified mix of managed care products, including 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 September 30,
1997 1996
---- ----
Commercial:
HMO 251,066 207,149
PPO 255,131 224,454
PAR 201,161 245,257
Medicaid HMO 32,956 28,928
Medicare Supplement 126,800 128,006
Non-Virginia 58,894 50,425
------ ------
Subtotal 925,508 884,269
Self-Funded/ASO 677,643 708,289
Federal Employee Program 207,709 197,835
------- -------
At Risk and Self-Funded Enrollment 1,810,860 1,790,393
Processed for other Blue Cross and Blue
Shield Plans (ASO) 25,911 69,948
------ ------
Total Members 1,836,771 1,860,341
========= =========
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<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 September For the Nine Months Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C>
Commercial:
HMO $ 103,375 $ 82,258 $ 303,417 $ 233,126
PPO 96,401 82,674 274,719 242,032
PAR 85,654 100,269 269,507 315,011
Medicare Supplement 53,910 51,047 159,467 153,566
Non-Virginia 20,731 16,838 57,711 41,392
-------- -------- -------- --------
Subtotal 360,071 333,086 1,064,821 985,127
Self-funded/ASO 270,811 277,045 786,767 798,358
Federal Employee Program 95,153 88,229 285,638 265,587
--------- -------- --------- ---------
Total Premium and Premium
Equivalents $ 726,035 $ 698,360 $2,137,226 $2,049,072
=========== ========== ========== ==========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Premium and fee revenues increased 8.3% to $480.3 million for the quarter ended
September 30, 1997 from $443.3 million for the quarter ended September 30, 1996.
The increase is due to a combination of commercial rate increases of 3.8% and
membership growth in the Company's HMO and PPO networks offset by expected
declines in PAR network enrollment. Commercial HMO revenues increased 25.7%, to
$103.4 million for the third quarter of 1997 from $82.3 million for the third
quarter of 1996. The $21.1 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 enrollment of new HMO members. Commercial
PPO revenues grew to $96.4 million for the third quarter of 1997 from $82.7
million for the third quarter of 1996, an increase of 16.6%, driven by 13.7%
enrollment growth and a 5.7% increase in the average revenue per member.
Commercial PAR revenues declined to $85.7 million for the third quarter of 1997
from $100.3 million for the third quarter of 1996 as a result of the transition
of members to more tightly managed HMO and PPO networks. Premium revenues on a
per member per month basis for the Company's commercial business increased 3.8%
to $129.76 for the third quarter of 1997 from $125.01 for the same period of
1996. FEP revenues increased 7.8% to $95.2 million for the third quarter of 1997
from $88.2 million for the third quarter of 1996 due to increased medical costs
reimbursed by OPM and a 5.0% increase in enrollment.
Total enrollment declined to 1,836,771 as of September 30, 1997 from 1,860,341
as of September 30, 1996. The 23,570 decline was the net result of an increase
of 41,239 members in commercial business mainly from HMO and PPO network growth,
FEP enrollment growth of 9,874 members offset by a decline of 74,683
self-funded/ASO members reflecting the Company's shift in emphasis away from low
margin ASO type relationships. Specifically, commercial enrollment increased
4.7% to 925,508 members as of September 30, 1997 from 884,269 members as of
September 30, 1996. Enrollment in the HMO networks as of September 30, 1997
increased 20.3% over the prior year and accounts for 30.7% of the Company's
commercial enrollment. Enrollment in the PPO networks increased 13.7% over the
prior year and accounts for 27.6% of the Company's commercial enrollment. The
increases in the HMO and PPO networks were offset by an expected decline of
18.0% 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 7,800 members. The PAR network enrollment represents 21.7% of the
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<PAGE>
Company's total commercial enrollment. FEP enrollment increased 5.0% to 207,709
as of September 30, 1997 from 197,835 as of September 30, 1996. The commercial
and FEP enrollment increases were offset by a 74,683 member decrease for
self-funded/ASO business. The decline in self-funded/ASO enrollment reflects the
Company's shift away from no risk, low margin ASO business and the migration of
approximately 44,000 national account members from the Company's systems to a
new interplan system where we continue to process claims for other Blue Cross
and Blue Shield Plans (ASO).
Investment income increased 76.6% to $19.7 million for the third quarter of 1997
from $11.2 million for the third quarter of 1996. Net realized gains increased
10.1% to $18.1 million for the third quarter of 1997 from $16.5 million for the
third quarter of 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 during the first quarter of 1997. The increase in net
realized gains is due to normal portfolio turnover during the quarter in a
period of favorable equity and bond market advances.
Other revenues decreased by 51.0% to $6.0 million for the third quarter of 1997
from $12.3 million for the third quarter of 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. For
the third quarter of 1996, HCS contributed $5.3 million in third-party revenues.
Medical costs increased 8.9% to $390.3 million for the quarter ended September
30, 1997 from $358.5 million for the quarter ended September 30, 1996. The $31.8
million increase is the result of enrollment growth of 20.3% in the HMO
networks, an increase in FEP medical costs reimbursed by OPM and from general
medical inflation. Medical costs for the quarter ended September 30, 1997 were
in line with expectations. The commercial loss ratio for the third quarter of
1997 was 82.9% as compared to 84.1% and 84.0% for the first and second quarters
of 1997, respectively. The commercial loss ratio for the third quarter of 1996
was 82.5%. While the commercial loss ratio is up slightly over 1996, the
improvement in the third quarter of 1997 over earlier 1997 quarters reflected
improved medical cost levels for the Company's Medicare supplement products and
the growing impact of cost-containment initiatives on core network-based PAR,
PPO and HMO business.
Selling, general and administrative expenses ("SG&A") declined 5.5% to $89.8
million for the third quarter of 1997 from $95.0 million for the third quarter
of 1996. The decrease is a result of the sale of HCS on December 31, 1996 along
with company-wide streamlining and cost-containment activities, partially offset
by $1.8 million in incremental costs related to modifying computer software for
the year 2000 during the third quarter of 1997. Cost containment activities have
reduced head count by 390 positions, or by 9.7%, to 3,615 positions as of
September 30, 1997 from 4,005 positions as of September 30, 1996. The Company
will continue to build on its efforts to reduce administrative expenses by
providing dependable products and low cost, high quality service.
Interest expense was $1.3 million for the third quarter of 1997. There was no
interest expense for the same period of 1996. Interest expense for 1997 is the
result of the $85 million outstanding on the revolving credit agreement
initiated in February 1997 to fund a portion of the payment made to the
Commonwealth of Virginia in February 1997 ("Commonwealth Payment") in accordance
with a Plan of Demutualization and IPO.
13
<PAGE>
Income before income taxes and extraordinary items increased 43.6% to $42.7
million for the third quarter of 1997 from $29.8 million for the third quarter
of 1996. The net increase of $12.9 million was primarily related to an $8.6
million increase in investment income and a $4.1 million improvement in
operating income (defined as income before income taxes excluding investment
income, net realized gains and interest expense). As discussed above, 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 improvement in operating income is primarily a result of growth
in enrollment and a decrease in SG&A expenses attributed to streamlining and
cost-containment activities, partially offset by the decrease in other revenues
related to the sale of HCS in December 1996.
The 1997 third quarter effective tax rate is 34.6% versus a 1996 third quarter
tax rate benefit of 195.2%. The effective tax rate benefit for the third quarter
of 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
the quarter and the elimination as of September 30, 1996 of the remaining $63.9
million valuation allowance with respect to deferred tax assets because the
Demutualization and IPO made it more likely than not that the tax credits would
be realized. Excluding the elimination of the valuation allowance, the effective
tax rate for the third quarter of 1996 was 19.4% due the realization of
alternative minimum tax credits during the quarter.
Income before extraordinary items decreased 68.2% to $28.0 million for the third
quarter of 1997 from $87.9 million for the same period of 1996. The decrease is
primarily the result of the elimination of a $63.9 million deferred tax
valuation allowance which produced an income tax benefit in the third quarter
1996. The increase in income tax expense between the third quarters of 1997 and
1996 was offset by improved investment income and operating income.
Extraordinary items, net of income taxes, was $179.7 million for the third
quarter of 1996. It reflects the impact of the $175 million Commonwealth Payment
and other demutualization-related expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Premium and fee revenues increased 8.1% to $1,425.0 million for the first nine
months of 1997 from $1,318.0 million for the first nine months of 1996. The
increase is due to a combination of commercial rate increases of 2.8% and
membership growth in the Company's HMO and PPO networks, offset by expected
declines in PAR network enrollment. Commercial HMO revenues increased 30.2% to
$303.4 million for the first nine months of 1997 from $233.1 million for the
same period of 1996. The $70.3 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 and an
increase of 4.6% in the average revenue per member. Commercial PPO revenues grew
to $274.7 million for the first nine months of 1997 from $242.0 million for the
first nine months of 1996, an increase of 13.5%, driven by enrollment growth and
a 2.9% increase in the average revenue per member. Commercial PAR revenues
declined to $269.5 million for the first nine months of 1997 from $315.0 million
for the first nine months of 1996 primarily as a result of the transition of
members to the more tightly managed HMO and PPO networks. The full nine month
impact of the Mid-South acquisition increased revenues $16.7 million, with
Mid-South revenues increasing to $58.1 million for the first nine months of 1997
from $41.4 million for the period from February 29, 1996 (the date of the
14
<PAGE>
acquisition) through September 30, 1996. Premium revenues on a per member per
month basis for the Company's commercial business increased 2.8% to $128.03 for
the first nine months of 1997 from $124.57 for the same period of 1996. FEP
revenues increased 7.5% to $285.6 million for the first nine months of 1997 from
$265.6 million for the same period of 1996 as a result of increased medical
costs reimbursed by OPM and a 5.0% increase in enrollment.
Investment income increased 62.3% to $55.3 million for the first nine months of
1997 from $34.1 million for the same period of 1996. Net realized gains
decreased 9.4% to $45.9 million from $50.7 million over the same period. 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
during the first quarter of 1997. This portfolio shift is also the primary
factor for the decrease in net realized gains for the first nine months of 1997
compared to the same period of 1996.
Other revenues decreased by 47.8% to $19.7 million for the first nine months of
1997 from $37.7 million for the same period of 1996. 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 nine months of 1996,
HCS contributed $16.1 million in third-party revenues.
Medical costs increased 9.6% to $1,163.9 million for the first nine months of
1997 from $1,061.8 million for the first nine months of 1996. The $102.1 million
increase is the result of enrollment growth of 20.3% in the HMO networks, an
increase in FEP medical costs reimbursed by OPM, higher than normal utilization
in the Medicare supplement products during the first half of the year, higher
than expected utilization and cost per member in one of the Company's HMO plans
and the full nine months impact of the Mid-South acquisition. The medical cost
per member per month for the Company's commercial business increased 4.7% to
$107.15 for the first nine months of 1997 from $102.34 for the same period of
1996. Combined with a 2.8% increase in commercial premium revenues per member
per month, the loss ratio on commercial business deteriorated to 83.7% for the
first nine months of 1997 from 82.2% for the first nine months of 1996. The
deterioration can be attributed partly to issues at one of the Company's HMO
plans. 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
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. Management is encouraged by the loss ratio
improvement exhibited in the third quarter of 1997. The improvement reflected
improved medical cost levels for the Company'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 core network-based PAR,
PPO and HMO business.
Selling, general and administrative expenses declined by 5.4% to $268.4 million
for the first nine months of 1997 from $283.7 million for the same period of
1996. 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 9.7% reduction in head count. The decrease in expenses was partially
offset by the full nine month impact of the Mid-South acquisition and $4.5
million in incremental costs related to modifying computer software for the year
2000.
Interest expense for the nine months ended September 30, 1997 was $3.3 million.
There was no interest expense for the same period of 1996. The increase relates
to nearly eight months of interest in 1997 for the $85 million outstanding on
15
<PAGE>
the revolving credit agreement initiated in February 1997 to fund a portion of
the Commonwealth Payment made in February 1997.
Income before income taxes and extraordinary items increased 16.3% to $110.4
million for the first nine months of 1997 from $94.9 million for the first nine
months of 1996. The net increase is attributable to a $21.2 million increase in
investment income and a $2.3 million improvement in operating income, offset by
a $4.8 million decline in net realized gains and interest expense of $3.3
million.
The Company's effective tax rate was 34.3% for the first nine months of 1997
compared to an effective tax rate benefit of 49.3% for the same period of 1996.
The 1997 rate is consistent with prior 1997 quarters and current expectations.
The effective tax rate benefit for the nine months ended September 30, 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 the period
and the elimination as of September 30, 1996 of the remaining $63.9 million
valuation allowance because the Demutualization and IPO made it more likely than
not that the tax credits would be realized. Excluding the elimination of the
valuation allowance, the effective tax rate for the first nine months of 1996
was 18.1% due the realization of alternative minimum tax credits during the
period.
Income before extraordinary items decreased 48.8% to $72.5 million in the first
nine months of 1997 from $141.7 million in the first nine months of 1996. The
decrease is primarily the result of the elimination of a $63.9 million deferred
tax valuation allowance as of September 30, 1996, producing an income tax
benefit in 1996. The increase in income tax expense for the first nine months of
1997 compared to the same period in 1996 was mitigated by improved investment
income and operating income, offset by an increase in interest expense and a
decline in net realized gains.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are premiums and fees received and
investment income. The primary uses of cash include health care benefit expenses
and capitation payments, brokers' and agents' commissions, administrative
expenses, income taxes and repayment of long-term debt. Trigon generally
receives premium revenues in advance of anticipated claims for related health
care services.
The Company's investment policies are designed to provide liquidity to meet
anticipated payment obligations and preserve capital. Trigon fundamentally
believes that concentrations of investments in any one asset class are unwise
due to constantly changing interest rates as well as market and economic
conditions. Accordingly, the Company maintains a diversified investment
portfolio consisting both of fixed income and equity securities, with the
objective of reducing risk and maximizing overall return. The fixed income
portfolio includes government and corporate securities, both domestic and
international, with an average quality rating of A as of September 30, 1997. The
portfolio had an average contractual maturity of 8.9 years as of September 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 forward contracts and foreign currency options to
manage its exposure to fluctuations in foreign currency exchange rates on its
foreign debt and equity investments. As of September 30, 1997, the equity
16
<PAGE>
portfolio was 11.1% of the total portfolio, down from 27.8% as of December 31,
1996, 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 lower
realized gains in the first nine months of 1997 and expects generally lower
realized gains and a more consistent contribution to income from the investment
portfolio in the future.
Cash provided (used) by operating activities for the nine months ended September
30, 1997 and 1996 was $(145.9) million and $32.3 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 to $77.0 million for the nine
months ended September 30, 1997 from $4.1 million for the same period of 1996.
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 to $198.3 million for the
first nine months of 1997 from $(24.1) million for the first nine months of 1996
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 ("IPO") of stock simultaneously with the
conversion. Accordingly, Trigon Healthcare, Inc. issued 17.8 million shares of
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). 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 revolving credit agreement which expires in February
2002. The credit agreement calls for various borrowing options and rates and
requires the Company to pay a facility fee on a quarterly basis. The credit
agreement also contains certain financial covenants and restrictions including
minimum net worth requirements as well as limitations on dividend payments. As
of September 30, 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
17
<PAGE>
revenues typically received up to three months prior to the expected cash
payment for related health care services. The Company's operations are not
capital intensive, and there are currently no commitments for major capital
expenditures to support existing business.
The Company has developed and is currently executing a comprehensive plan to
prepare the computer systems and application software for the year 2000. Project
completion for the Company's systems and software is scheduled for the end of
1998, allowing adequate time for testing. The Company is using both external and
internal resources for the project. The incremental costs for the project are
expected to approximate $18 million through 1998 and will be funded though
operating cash flows.
In addition, the Company is actively working with hospitals, providers and
others depended upon for electronic commerce to ensure they are assessing and
correcting any issues relating to the year 2000 which could impact their ability
to conduct business with the Company. Lack of appropriate action on the part of
these third-parties could impact the Company's ability to serve its customers.
The Company will continue to monitor the progress of all third-parties.
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 four 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 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, 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 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
18
<PAGE>
litigation, the outcome of those actions is not expected to have a material
adverse effect on the financial condition of the Company.
Item 5. Other Events
The Company uses the Blue Cross and Blue Shield service marks and trade names
throughout most of Virginia pursuant to a license agreement (the "License
Agreement") with the Blue Cross and Blue Shield Association ("BCBSA"). The
provisions of the License Agreement regarding equity ownership of the Company
have been amended. Under the amended License Agreement, 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 restrictions on ownership of
capital stock conforming to the requirements of the License Agreement. Under the
terms of the Articles of Incorporation, the ownership restrictions in the
Articles of Incorporation have automatically changed to conform to the
amendments to the License Agreement described above.
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
10 -- Amendment to the license agreement between the Blue Cross and
Blue Shield Association and the Company.
11 -- Computation of per share earnings for the three months and nine
months ended September 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 nine months ended September 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 nine months ended September 30, 1997.
19
<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: November 13, 1997 By: /s/ Thomas R. Byrd
----------------------
THOMAS R. BYRD
SENIOR VICE PRESIDENT & CHIEF
FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND
FINANCIAL OFFICER)
<PAGE>
EXHIBIT INDEX
Exhibit
Number
-------
10 -- Amendment to the license agreement between the Blue Cross and
Blue Shield Association and the Company.
27 -- Financial Data Schedule.
Exhibit 10
AMENDMENT TO LICENSE AGREEMENT WITH
BLUE CROSS AND BLUE SHIELD ASSOCIATION
9 (d). The Plan may operate as a for-profit company on the following
conditions:
(i) The Plan shall discharge all responsibilities which it has to the
Association and to other Plans by virtue of this Agreement and the Plan's
membership in BCBSA.
(ii) The Plan shall not use the licensed Marks and Name, or any derivative
thereof, as part of its legal name or any symbol used to identify the Plan
in any securities market. The Plan shall use the licensed Marks and Name as
part of its trade name within its service area for the sale, marketing and
administration of health care and related services in the service area.
(iii) The Plan's license to use the Licensed Marks and Name shall
automatically terminate effective: (a) thirty days after the Plan knows, or
there is an SEC filing indicating that, any Institutional Investor has
become the Beneficial Owner of securities representing 10% or more of the
voting power of the Plan ("Excess Institutional Voter"), unless such Excess
Institutional Voter shall cease to be an Excess Institutional Voter prior to
such automatic termination becoming effective; (b) thirty days after the
Plan knows, or there is an SEC filing indicating that, any Noninstitutional
Investor has become the Beneficial Owner of securities representing 5% or
more of the voting power of the Plan ("Excess Noninstitutional Voter")
unless such Excess Noninstitutional Voter shall cease to be an Excess
Noninstitutional Voter prior to such automatic termination becoming
effective; (c) thirty days after the Plan knows, or there is an SEC filing
indicating that, any Person has become the Beneficial Owner of 20% or more
of the Plan's then outstanding common stock or other equity securities which
(either by themselves or in combination) represent an ownership interest of
20% or more pursuant to determinations made under paragraph 9(d)(iv) below
("Excess Owner"), unless such Excess Owner shall cease to be an Excess Owner
prior to such automatic termination becoming effective; (d) ten business
days after individuals who at the time the Plan went public constituted the
Board of Directors of the Plan (together with any new directors whose
election to the Board was approved by a vote of 2/3 of the directors then
still in office who were directors at the time the Plan went public or whose
election or nomination was previously so approved) (the "Continuing
Directors") cease for any reason to constitute a majority of the Board of
Directors; or (e) ten business days after the Plan consolidates with or
merges with or into any person or conveys, assigns, transfers or sells all
or substantially all of its assets to any person other than a merger in
which the Plan is the surviving entity and immediately after which merger,
no person is an Excess Institutional Voter, an Excess Noninstitutional Voter
or an Excess Owner: provided that, if requested by the affected Plan in a
writing received by BCBSA prior to such automatic termination becoming
effective, the provisions of this paragraph 9(d)(iii) may be waived, in
whole or in part, upon the affirmative vote of a majority of the
disinterested Plans and a majority of the total then current weighted vote
of the disinterested Plans. Any waiver so granted may be conditioned upon
such additional requirements (including but not limited to imposing new and
independent grounds for termination of this License) as shall be approved by
the affirmative vote of a majority of the disinterested Plans and a majority
<PAGE>
of the total then current weighted vote of the disinterested Plans. If a
timely waiver request is received, no automatic termination shall become
effective until the later of: (1) the conclusion of the applicable time
period specified in paragraphs 9(d)(iii)(a)-(d) above, or (2) the conclusion
of the first Member Plan meeting after receipt of such a waiver request.
In the event that the Plan's license to use the Licensed Marks and Name
is terminated pursuant to this Paragraph 9(d)(iii), the license may be
reinstated in BCBSA's sole discretion if, within 30 days of the date of such
termination, the Plan demonstrates that the Person referred to in clause
(a), (b) or (c) of the preceding paragraph is no longer an Excess
Institutional Voter, an Excess Noninstitutional Voter or an Excess Owner.
(iv) The Plan shall not issue any class or series of security other than
(i) shares of common stock having identical terms or options or derivatives
of such common stock, (ii) non-voting, non-convertible debt securities, or
(iii) such other securities as the Plan may approve, provided that BCBSA
receives notice at least thirty days prior to the issuance of such
securities, including a description of the terms for such securities, and
BCBSA shall have the authority to determine how such other securities will
be counted in determining whether any Person is an Excess Institutional
Voter, Excess Noninstitutional Voter or an Excess Owner.
(v)For purposes of paragraph 9(d)(iii), the following definitions shall
apply:
(a) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended and in effect on
November 17, 1993 (the "Exchange Act").
(b) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding, or upon the exercise of conversion rights,
exchange rights, warrants or options, or otherwise; or (B) the right to vote
pursuant to any agreement, arrangement or understanding; provided, however,
that a Person shall not be deemed the Beneficial Owner of, or to
beneficially own, any security if the agreement, arrangement or
understanding to vote such security (1) arises solely from a revocable proxy
or consent given to such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable rules
and regulations promulgated under the Exchange Act and (2) is not also then
reportable on Schedule 13D under the Exchange Act (or any comparable or
successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which such
Person (or any of such Person's Affiliates or Associates) has any agreement,
arrangement or understanding (other than customary agreements with and
between underwriters and selling group members with respect to a bona fide
public offering of securities) relating to the acquisition, holding, voting
(except to the extent contemplated by the proviso to (b)(ii)(B) above) or
disposing of any securities of the Plan.
<PAGE>
Notwithstanding anything in this definition of Beneficial
Ownership to the contrary, the phrase "then outstanding," when used with
reference to a Person's Beneficial Ownership of securities of the Plan,
shall mean the number of such securities then issued and outstanding
together with the number of such securities not then actually issued and
outstanding which such Person would be deemed to own beneficially hereunder.
(c) A Person shall be deemed an "Institutional Investor" if (but only
if) such Person (i) is an entity or group identified in the SEC's Rule
13d-1(b)(1)(ii) as constituted on June 1, 1997, and (ii) every filing made
by such Person with the SEC under Regulation 13D-G (or any successor
Regulation) with respect to such Person's Beneficial Ownership of Plan
securities shall have contained a certification having substantial identical
terms to the ones required by Item 10 of SEC Schedule 13G as constituted on
June 1, 1997.
(d) "Noninstitutional Investor" means any Person who is not an
Institutional Investor.
(e) "Person" shall mean any individual, firm, partnership, corporation,
trust, association, joint venture or other entity, and shall include any
successor (by merger or otherwise) of such entity.
<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 NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,853
<SECURITIES> 1,310,575
<RECEIVABLES> 386,430
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,720,862
<PP&E> 126,850
<DEPRECIATION> 81,424
<TOTAL-ASSETS> 1,910,695
<CURRENT-LIABILITIES> 757,273
<BONDS> 90,319
0
0
<COMMON> 423
<OTHER-SE> 933,166
<TOTAL-LIABILITY-AND-EQUITY> 1,910,695
<SALES> 1,444,689
<TOTAL-REVENUES> 1,545,920
<CGS> 1,163,895
<TOTAL-COSTS> 1,432,269
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,251
<INCOME-PRETAX> 110,400
<INCOME-TAX> 37,859
<INCOME-CONTINUING> 72,541
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,541
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
