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 March 31, 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 May 7, 1997
------------------- --------------------------
Class A Common Stock, $0.01 par value 42,300,022 shares
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
FIRST QUARTER 1997 FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1996
and March 31, 1997 1
Consolidated Statements of Operations for the Three
Months Ended March 31, 1996 and 1997 2
Consolidated Statements of Changes in Stockholders'
Equity for the Three Months Ended
March 31, 1996 and 1997 3
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1996 and 1997 4
Notes to Consolidated Financial Statements 5-8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURES
<PAGE>
ITEM 1. Financial Statements
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
Assets 1996 1997
------ ------------ ------------
(Unaudited)
<S> <C>
Current assets
Cash $ 31,482 $ 28,492
Investment securities, at estimated fair value 1,182,420 1,225,598
Premiums and other receivables 390,997 372,571
Deferred income taxes 16,572 35,094
Other assets 10,035 12,557
----------- -----------
Total current assets 1,631,506 1,674,312
Property and equipment, net 49,545 48,297
Deferred income taxes 48,170 43,177
Goodwill and other intangibles, net 76,043 74,707
Restricted investments, at estimated fair value 11,019 9,181
Other assets 16,865 17,314
---------- -----------
Total assets $ 1,833,148 $ 1,866,988
========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities
Medical and other benefits payable $ 421,440 $ 425,111
Unearned premiums 91,164 100,504
Accounts payable and accrued expenses 86,966 73,484
Other liabilities 198,893 195,775
Obligation for Commonwealth Payment 87,500 -
-------- --------
Total current liabilities 885,963 794,874
Obligation for Commonwealth Payment, noncurrent 87,500 -
Obligations for employee benefits, noncurrent 57,679 61,118
Medical and other benefits payable, noncurrent 53,107 60,527
Long-term debt 4,880 89,880
Minority interest in subsidiaries 4,239 4,527
---------- ---------
Total liabilities 1,093,368 1,010,926
---------- ---------
Stockholders' Equity
Common stock - 423
Capital in excess of par - 845,682
Retained earnings 706,259 13,162
Net unrealized gain (loss) on investment securities,
net of deferred income taxes of $18,032 in 1996
and ($1,734) in 1997 33,521 (3,205)
--------- ---------
Total stockholders' equity 739,780 856,062
Commitments and contingencies (Note 5) - -
----------- -----------
Total liabilities and stockholders' equity $ 1,833,148 $ 1,866,988
=========== ===========
</TABLE>
See Notes to consolidated financial statements
1
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three-months ended March 31, 1996 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------
1996 1997
-------------------- -------------------
<S> <C>
Revenues
Premium and fee revenues
Commercial $ 319,589 $ 346,842
Federal Employee Program 86,736 91,074
Amounts attributable to self-funded arrangements 248,866 246,181
Less: Amounts attributable to claims under self-
funded arrangements (224,105) (222,250)
------------------- ---------------------
431,086 461,847
Investment income 11,193 17,682
Net realized gains 15,214 25,312
Other revenues 12,714 6,923
-------------------- ---------------------
Total revenues 470,207 511,764
-------------------- ---------------------
Medical and other benefit costs
Commercial 265,792 291,841
Federal Employee Program 82,277 86,683
------------------- --------------------
348,069 378,524
Selling, general and administrative expenses 91,324 88,170
Interest expense - 572
------------------- --------------------
Total expenses 439,393 467,266
-------------------- -------------------
Income before income taxes and extraordinary item 30,814 44,498
Income tax expense (benefit) 5,425 15,265
--------------------- -------------------
Income before extraordinary item 25,389 29,233
Extraordinary item - costs of demutualization,
net of income taxes (2,239) -
--------------------- ------------------
Net income $ 23,150 $ 29,233
===================== ===================
Net income after Demutualization and IPO $ 13,162
===================
Net income per share after Demutualization and IPO $ 0.31
===================
Weighted average common shares outstanding 42,300
===================
Pro forma Information (note 4)
As reported
Income before income taxes and extraordinary item $ 30,814 $ 44,498
Income tax expense (5,425) (15,265)
Pro forma adjustments
Pro forma interest expense (1,206) (634)
Pro forma income tax (expense) benefit (4,938) 217
---------------------- -------------------
Pro forma income before extraordinary item 19,245 28,816
Extraordinary item, net of income tax, as reported (2,239) -
---------------------- -------------------
Pro forma net income $ 17,006 $ 28,816
======================== =================
Pro forma income before extraordinary item per share $ 0.45 $ 0.68
======================== =================
Pro forma net income per share $ 0.40 $ 0.68
======================== =================
Pro forma weighted average common shares outstanding 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 ended March 31, 1996 and 1997
(in thousands)
<TABLE>
<CAPTION>
Unrealized
gains (losses)
Common Capital in Retained on investment
stock excess of par earnings securities, net Total
-------- ------------- --------- --------------- -----------
<S> <C>
Balance at January 1, 1996 $ - $ - $ 700,565 $ 39,506 $ 740,071
Net income 23,150 23,150
Change in unrealized gains (losses)
on investment securities, net (3,080) (3,080)
-------- ------------- --------- ----------- -----------
Balance at March 31, 1996 $ - $ - $ 723,715 $ 36,426 $ 760,141
======== ============= ========= =========== ===========
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
lieu of shares of common stock 245 630,665 (722,330) (91,420)
Issuance of 17,825,000 shares in the Initial
Public Offering, net of expenses 178 215,017 215,195
Net income after Demutualization 13,162 13,162
Change in unrealized gains (losses)
on investment securities, net (36,726) (36,726)
-------- ------------- --------- ----------- -----------
Balance at March 31, 1997 $ 423 $ 845,682 $ 13,162 $ (3,205) $ 856,062
======== ============= ========= =========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three-months ended March 31, 1996 and 1997
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------
1996 1997
------------------- --------------------
<S> <C>
Net income $ 23,150 $ 29,233
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,949 4,047
Accretion of discounts and amortization of premiums, net 375 (2,410)
Decrease in allowance for doubtful accounts receivable 382 105
Decrease in accounts receivable 17,819 18,265
Increase in other assets (1,514) (3,243)
Increase in medical costs payable 19,028 11,493
Increase in unearned premiums 7,780 9,340
Increase (decrease) in accounts payable and accrued
expenses 2,070 (13,482)
Increase in other liabilities 7,178 5,696
Change in deferred income taxes (1,398) 6,238
Decrease in obligation for commonwealth payment - (175,000)
Increase (decrease) in minority interest (183) 288
Increase in obligations for employee benefits 6,355 3,439
Loss on disposal of fixed assets 13 1
Realized investment gains, net (15,214) (25,312)
-------------- --------------------
Net cash provided (used) by operating activities 69,790 (131,302)
-------------- --------------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 7 68
Capital expenditures (3,420) (2,175)
Investment securities purchased (957,206) (1,620,402)
Proceeds from investment securities sold 743,165 1,232,984
Maturities of fixed income securities 260,368 317,362
Cash paid for purchase of subsidiaries, net of cash acquired (82,389) -
-------------- --------------------
Net cash used by investing activities (39,475) (72,163)
-------------- --------------------
Cash flow from financing activities:
Proceeds from long-term debt - 85,000
Payments to members in lieu of common stock
pursuant to Plan of Demutualization - (91,420)
Net proceeds from issuance of common stock - 215,195
Change in outstanding checks in excess of bank balance (19,781) (8,300)
-------------- --------------------
Net cash provided (used) by financing activities (19,781) 200,475
-------------- --------------------
Net increase (decrease) in cash 10,534 (2,990)
Cash - beginning of period 29,263 31,482
-------------- --------------------
Cash - end of period $ 39,797 $ 28,492
============== ====================
</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 ended March 31, 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. 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 March
31, 1997, $85 million had been borrowed and remained outstanding
under the credit agreement, the proceeds of which were used to make
a payment to the Commonwealth of Virginia in accordance with a Plan
of Demutualization and Initial Public Offering ("IPO"). The weighted
average interest rate during the period the borrowings were
outstanding during the first quarter of 1997 was 5.675%.
3. INCOME TAXES
The effective tax rate for the quarter ended March 31, 1997
approximates the statutory federal rate of 35%. The effective tax
rate for the quarter ended March 31, 1996 is 17.6%. The 1996 rate
was reduced by the realization of alternative minimum tax credits
during that quarter.
5
<PAGE>
4. 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 the
effective date of the Demutualization and IPO (February 5, 1997
through March 31, 1997). 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 percent per annum for 1996 and
1997 on borrowings used to fund a portion of the
Commonwealth Payment. The interest rate used reflects the
actual weighted average rate in effect during the period the
borrowings were outstanding during the first quarter 1997.
The pro forma interest expense reflected for 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 period 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 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.
5. 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.
6
<PAGE>
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. In general, the
Company believes that the increase in the managed care content of
its products has not materially affected its exposure to litigation
relating to health care coverage provided to its members.
Since November 1993, the Company has been in discussions with the
United States Department of Labor (the "DOL") regarding the manner
in which the Company handled provider discounts for self-funded
health benefit plans. In September 1995, the DOL notified the
Company that it viewed the Company's retention of provider discounts
during the period from 1990 through 1993 and its failure to disclose
the amounts of those discounts as violations of certain provisions
of the Employee Retirement Income Security Act ("ERISA"). In March
1997, the DOL notified the Company that it had concluded its
investigation, and that it contemplated no further action at that
time regarding the Company's role as a service provider to ERISA
covered self-funded health benefit plans.
6. SUBSEQUENT EVENT
At the Company's Annual Meeting of Shareholders on April 16, 1997,
the Company's shareholders approved the 1997 Stock Incentive Plan,
the Employee Stock Purchase Plan and the Non-Employee Directors
Stock Incentive Plan. In accordance with the terms of the
Non-Employee Directors Stock Incentive 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.
7. RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings per Share. 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
7
<PAGE>
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, effective
for December 31, 1997 financial statements, 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.
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 supplemental 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 (the "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.
8
<PAGE>
MEMBERSHIP
The following table sets forth the Company's membership data by network:
As of March 31,
1996 1997
---- ----
Commercial:
HMO 198,929 248,267
PPO 213,167 235,172
PAR 274,191 227,085
Medicaid HMO 24,111 33,861
Medicare Supplement 128,122 127,671
Non-Virginia 51,321 54,165
--------- ---------
Subtotal 889,841 926,221
Self-Funded/ASO 707,809 692,103
Federal Employee Program 199,266 208,249
--------- ---------
At Risk and Self-Funded Enrollment 1,796,916 1,826,573
Processed for other Blue Cross and Blue
Shield Plans (ASO) 66,434 39,378
--------- ---------
Total Members 1,863,350 1,865,951
========= =========
PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM
The following table sets forth the premium and premium equivalents by network:
For the Three Months Ended March 31,
1996 1997
---- ----
Commercial:
HMO $ 74,224 $ 97,064
PPO 79,791 86,972
PAR 107,571 92,229
Medicare Supplement 51,135 52,848
Non-Virginia 6,868 17,729
--------- ---------
Subtotal 319,589 346,842
Self-funded/ASO 248,866 246,181
Federal Employee Program 86,736 91,074
--------- ---------
Total Premium and Premium Equivalents
$ 655,191 $ 684,097
========== ==========
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Premium and fee revenues increased 7.1% from $431.1 million in the first quarter
of 1996 to $461.8 million in the first quarter of 1997, primarily due to
membership growth in the Company's PPO and HMO networks offset by expected
declines in PAR network enrollment and the full quarter impact of the February
1996 acquisition of Mid-South Insurance Company ("Mid-South"). Commercial HMO
revenues grew from $74.2 million in the first quarter of 1996 to $97.0 million
in the first quarter of 1997, a growth rate of 30.8%. The $22.8 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
9
<PAGE>
enrollment of new HMO members (collectively accounting for $19.0 million of the
increase) and an increase of 4.2% in the average revenue per member (accounting
for $3.8 million of the increase). Commercial PPO revenues grew from $79.8
million for the first quarter of 1996 to $87.0 million for the first quarter of
1997, an increase of 9.0%, driven primarily by enrollment growth. Commercial PAR
revenues declined from $107.6 million for the first quarter of 1996 to $92.2
million for the first 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 1.5%
from $123.99 for the first quarter of 1996 to $125.82 for the same period in
1997. First quarter of 1997 per member per month premiums for Virginia
commercial business grew approximately 3% from the corresponding period in
1996, excluding the effects of the introduction of a PPO product for indivi-
duals. This growth consisted of individual increases of approximately 4% for
PAR and Medicare supplement business, nearly 5% for the HMOs and approximately
2.5% for PPO business. The full quarter impact of the Mid-South acquisition
increased Non-Virginia revenues $11.0 million, with Mid-South revenues increas-
ing from $5.6 million for the period from February 29, 1996 (the date of the
acquisition) through March 31, 1996 to $16.6 million for the first quarter of
1997. FEP revenues increased 5.0% from $86.7 million in the first quarter of
1996 to $91.1 million in the first quarter of 1997 as a result of increased
medical costs reimbursed by OPM.
The total number of members served by the Company remained nearly constant,
increasing 0.1% over the first quarter of 1996. Commercial enrollment grew by
4.1% to 926,221 members from the first quarter of 1996. Enrollment in the HMO
networks increased 26.5% over the first quarter of 1996 and, at March 31, 1997,
accounted for 15.1% of the Company's total enrollment and 30.5% of the Company's
commercial enrollment. Enrollment in the PPO networks increased 10.3% over the
prior year and, at March 31, 1997, represented 25.4% of the Company's commercial
enrollment. The increases in the HMO and PPO networks were offset by an expected
decline of 17.2% in the Company's PAR network as members migrated into more
tightly managed networks. The PAR network enrollment represented 24.5% of the
Company's total commercial enrollment at March 31, 1997.
Investment income increased 58% from $11.2 million in the first quarter of 1996
to $17.7 million in the first quarter of 1997. In addition, net realized gains
increased from $15.2 million in the first quarter of 1996 to $25.3 million for
the same period in 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. This
shift is also the primary factor for the increase in net realized gains in 1997.
As of March 31, 1997, net unrealized losses totaled $4.9 million compared to
$51.6 million in net unrealized gains at December 31, 1996. The significant
decrease is attributable to the realization of gains as a result of reducing the
equity portfolio in early 1997.
Other revenues decreased by 45.5% from $12.7 million in the first quarter of
1996 to $6.9 million in the first quarter of 1997. The decrease in other
revenues is a largely the result of the sale of the Company's electronic
communication services subsidiary, Health Communication Services, Inc. (HCS), on
10
<PAGE>
December 31, 1996. Through the first quarter of 1996, HCS contributed $5.5
million in third-party revenues.
Medical costs increased 8.7% from $348.1 million in the first quarter of 1996 to
$378.5 million for the same period in 1997. The $30.5 million increase is
primarily the result of enrollment growth of 26% in the HMOs ($16.3 million),
the full quarter impact of the Mid-South acquisition ($7.6 million) and an
increase in FEP medical costs to be reimbursed by OPM ($4.4 million). The
medical cost per member per month for the Company's commercial business
increased 2.7% from $103.12 for the first quarter of 1996 to $105.87 for the
same period in 1997. Combined with a 1.5% increase in commercial premiums, the
loss ratio on commercial business deteriorated from 83.2% in the first quarter
of 1996 to 84.1% in the first quarter of 1987. The deterioration was
attributable to several factors. The primary impact came from a $1.5 million
unfavorable adjustment for one of the company's HMOs to recognize the
understatement of the year-end 1996 medical cost liability. In addition, the
claims expense for the Company's Medicare supplement product serving the elderly
was higher than anticipated, coming primarily in early January and believed to
be associated with lingering effects of the flu epidemic late in 1996.
Outpatient and pharmacy costs also continued to increase at somewhat higher than
anticipated rates, primarily in the HMOs, and both are targets of aggressive
cost-containment initiatives by the Company.
Selling, general and administrative expenses declined by 3.5% from $91.3 million
in the first quarter of 1996 to $88.2 million in the first quarter of 1997. The
decrease is a result of the sale of HCS on December 31, 1996 ($5.0 million
reduction) offset by the full quarter impact of the Mid-South acquisition ($3.0
million increase) and Company-wide streamlining and cost-containment activities
including a nearly 6% reduction in headcount, excluding HCS. The Company will
continue to build on its efforts to reduce administrative expenses through
increasing electronic claims submissions, the centralization of customer service
functions, streamlining the business acquisition and renewal process and
consolidating certain internal operations.
Income before income taxes and extraordinary item increased 44.4% from $30.8
million in the first quarter of 1996 to $44.5 million in the first quarter of
1997. The net increase is attributable to a $10.1 million increase in net
realized gains, a $6.5 million improvement in investment income, and a $2.3
million decrease in operating income (defined as total revenues excluding
investment income and net realized gains less total expenses excluding interest
expense). As discussed above, the increase in net realized gains and investment
income is primarily due to the shift of a larger portion of the Company's
investment portfolio to fixed income securities in early 1997. The decrease in
operating income is due to higher medical costs due to a $1.5 million
unfavorable 1996 claims liability adjustment, increased medical costs for the
Medicare supplement product and higher outpatient and pharmacy costs.
The Company's effective tax rate was 17.6% for the first quarter of 1996
compared to 34.3% for the first quarter of 1997. The effective rate for the
first quarter of 1996 was reduced primarily by the realization of alternative
minimum tax credits during the quarter. The 1997 rate approximated the 35%
statutory federal rate. The Company believes that in the future its effective
tax rate as reflected in its financial statements should continue to approximate
35%.
11
<PAGE>
Income before extraordinary item increased from $25.4 million in the first
quarter of 1996 to $29.2 million for the same period in 1997, due primarily
to improved investment income and net realized gains, offset by lower
operating income and a higher 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, 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 March 31, 1997. The portfolio had an average
contractual maturity of 7.7 years as of March 31, 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 quarter of 1997, the Company reduced its equity
portfolio from 27.8% at December 31, 1996 to approximately 15% of the total
portfolio. 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 quarter of 1997 and
expects 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 three months ended March
31, 1996 and 1997 was $69.8 million and $(131.3) 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 $32.7 million, from $39.5
million in the first quarter of 1996 to $72.2 million in the first quarter 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.
12
<PAGE>
Cash provided (used) by financing activities increased $220.3 million over the
first quarter of 1996 from $(19.8) million to $200.5 million in the first
quarter 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
(the "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 $91.4 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 March 31, 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.
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
13
<PAGE>
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. In general, the
Company believes that the increase in the managed care content of its products
has not materially affected its exposure to litigation relating to health care
coverage provided to its members.
(b) Termination of Proceedings. Since November 1993, the Company has been in
discussions with the United States Department of Labor (the "DOL") regarding the
manner in which the Company handled provider discounts for self-funded health
benefit plans. In September 1995, the DOL notified the Company that it viewed
the Company's retention of provider discounts during the period from 1990
through 1993 and its failure to disclose the amounts of those discounts as
violations of certain provisions of the Employee Retirement Income Security Act
("ERISA"). In March 1997, the DOL notified the Company that it had concluded its
investigation, and that it contemplated no further action at this time regarding
the Company's role as a service provider to ERISA covered self-funded health
benefit plans.
14
<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
- ------ -----------
10.1 -- Form of Executive Continuity Agreement between Trigon Insurance
Company and Ronald H. Bargatze and certain other executive officers.
10.2 -- Form of Executive Continuity Agreement between Trigon Insurance
Company and John C. Berry and certain other executive officers.
11 -- Computation of per share earnings for the three months ended March 31,
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 ended March 31, 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 March 31, 1997.
15
<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: May 13, 1997 By: /s/ THOMAS G. SNEAD, JR.
________________________
THOMAS G. SNEAD, JR.
TREASURER
(PRINCIPAL ACCOUNTING AND
FINANCIAL OFFICER)
<PAGE>
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER
10.1 -- Form of Executive Continuity Agreement between Trigon
Insurance Company and Ronald H. Bargatze and certain other
executive officers.
10.2 -- Form of Executive Continuity Agreement between Trigon
Insurance Company and John C. Berry and certain other
executive officers.
27 -- Financial Data Schedule.
EXHIBIT 10.1
[Form of Agreement with Ronald H. Bargatze
and certain other executive officers]
TRIGON INSURANCE COMPANY
EXECUTIVE CONTINUITY AGREEMENT
This Executive Continuity Agreement (the "Agreement") is made
as of April 29, 1997, between TRIGON INSURANCE COMPANY (the "Company") and
______________________("Executive").
RECITALS
Executive is currently employed by the Company as an Executive
Officer. The purpose of this Agreement is to encourage Executive to continue his
employment with the Company both before and after a Change of Control and to
recognize the prior service of Executive if his employment is terminated under
certain circumstances after a Change of Control.
NOW THEREFORE, in consideration of the premises, the parties
agree as follows:
ARTICLE I
DEFINITIONS
As used herein, the following terms have the meanings
indicated.
1.1 "Affiliate" means any corporation or other legal entity
that directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, the Company.
1.2 "Applicable Compensation" has the meaning set forth in
Section 2.3.
1.3 "Beneficial Ownership" has the meaning in Rule 13d-3
promulgated under the Securities Exchange Act of 1934.
1.4 "Change of Control" means any event described in
subparagraphs (i) through (v) below:
(i) The acquisition by any Person of Beneficial
Ownership of 20% or more of the Stock or the Voting Power of Trigon Healthcare,
but excluding for this purpose any acquisition by the Company (or an Affiliate)
or by an employee benefit plan sponsored by the Company (or an Affiliate). When
two or more persons act in concert for the purpose of acquiring Stock or Voting
Power of Trigon Healthcare, such Persons shall be deemed to be a single Person;
(ii) Individuals who are Incumbent Directors
cease to constitute at least a majority of the Board of Directors of Trigon
Healthcare;
(iii) Approval by the shareholders of Trigon
Healthcare of a reorganization, merger or consolidation, if after such
transaction, the Persons who had Beneficial Ownership of the Stock and Voting
Power of Trigon Healthcare before such transaction will not have Beneficial
Ownership of at least 50% of the Stock and Voting Power of the corporation
resulting from such transaction;
(iv) A complete liquidation or dissolution of
Trigon Healthcare, or the sale or other disposition of all or substantially
all of the assets of Trigon Healthcare; or
(v) The sale or other disposition by Trigon
Healthcare of 50% or more of the Stock of the Company, or any other transaction
pursuant to which Trigon Healthcare ceases to control the Company.
1.5 "Code" shall mean the Internal Revenue Code of 1986.
1.6 "Compensable Termination" means either (i) the
termination of Executive's employment by the Company within three months before
or within three years after a Change of Control for any reason other than for
Good Cause, or (ii) the termination of Executive's employment by Executive
within three years after a Change of Control for Good Reason.
1.7 "Compensation" has the meaning set forth in Section 2.4.
1.8 "Good Cause" means:
(i) fraud, embezzlement or misappropriation by
Executive involving the business or assets of the Company,
(ii) the persistent and willful failure by Executive
substantially to perform his duties and responsibilities to the Company,
which failure continues after Executive receives written notice of such
failure, or
(iii) Executive's conviction of a felony or crime
involving moral turpitude.
1.9 "Good Reason" means any of the following actions or
events that occur after a Change of Control and without Executive's express
written consent:
(i) any reduction in Executive's base salary;
(ii) any reduction in Executive's opportunity to
earn incentive compensation, unless comparable reductions in incentive
opportunities are shared generally by other executives of the Company;
(iii) any material reduction in Executive's welfare
benefits or perquisites as in effect at the time of the Change of Control;
(iv) any material reduction in Executive's duties,
responsibilities or authority, any adverse change in Executive's job title, or
any other action that constitutes a demotion of Executive; or
(v) the Company changes the location of Executive's
principal office to a location that is more than 50 miles distant from
Executive's principal office at the time of the Change of Control.
1.10 "Incumbent Director" means any person who serves on the
Board of Directors of Trigon Healthcare as of the date of this Agreement and
any person who is added to the Board thereafter with the approval of a majority
of the persons who are then Incumbent Directors.
1.11 "Person" means a natural person and any corporation,
partnership, trust, limited liability company or other legal entity.
1.12 "Retirement Plan" means the Company's Non-Contributory
Retirement Plan for Certain Employees of Blue Cross and Blue Shield of Virginia
or any successor plan.
1.13 "Salary Continuation Benefit" has the meaning set forth
in Section 2.2.
1.14 "SERP" means the Company's Supplemental Retirement
Program for Certain Employees of Blue Cross and Blue Shield of Virginia or any
successor program.
1.15 "Stock" means the then outstanding Class A Common Stock
of Trigon Healthcare.
1.16 "Trigon Healthcare" means Trigon Healthcare, Inc., a
Virginia corporation that, as of the date of this Agreement, owns all of the
issued and outstanding Stock of the Company.
1.17 "Voting Power" means the combined voting power of all
outstanding voting securities of Trigon Healthcare.
1.18 "Welfare Plan" means any health plan, dental plan,
disability plan, survivor income plan, life insurance plan or other welfare
benefit plan as defined in ss.3(1) of the Employee Retirement Income Security
Act of 1974, currently or hereafter made available by the Company in which the
Executive is eligible to participate.
ARTICLE II
SALARY CONTINUATION BENEFIT
2.1 If a Compensable Termination occurs, then the Company
shall pay the Salary Continuation Benefit to Executive on or before the tenth
business day following the day on which Executive's employment terminates. The
Salary Continuation Benefit shall be paid in one lump sum, net of all required
federal and state withholding taxes.
2.2 The Salary Continuation Benefit shall be a sum
equal to three times the Applicable Compensation of Executive.
2.3 The Applicable Compensation of Executive shall mean the
greater of (i) the highest amount of Compensation received by Executive during
any one of the three full calendar years ended immediately before the
Executive's employment terminates, or (ii) an amount equal to 155% of
Executive's annual base salary for the year in which Executive's employment
terminates.
2.4 The Compensation of Executive for any calendar year shall
mean (i) the total amount of compensation paid to Executive by the Company as
reported on Internal Revenue Form W-2 for such year, plus (ii) any amount of
compensation deferred by Executive in such year pursuant to a salary deferral
agreement that is not included in gross income for such year under the Code,
minus (iii) any income reported on Form W-2 for such year that is attributable
to the receipt or exercise of any stock option, restricted stock, stock right or
other stock based compensation. Notwithstanding the preceding sentence, if
Executive began his employment with the Company after December 31, 1995, then
for purposes of this Agreement only, Executive's Compensation for 1996 shall be
deemed to be an amount equal to 135% of Executive's annual base salary for 1997.
ARTICLE III
WELFARE BENEFITS
3.1 If a Compensable Termination occurs, then the Company
will, subject to the provisions of Section 3.2, continue the coverage of
Executive and his dependents under all Welfare Plans in which they participated
immediately before the termination of Executive's employment for a period of
three years following the termination of Executive's employment.
3.2 Notwithstanding Section 3.2, (i) if the Company amends or
terminates any Welfare Plan in which Executive is participating in a manner that
is generally applicable to all executives of the Company, then such amendment or
termination shall also be applicable to Executive, (ii) Executive shall continue
to contribute to the cost of the Welfare Plans on substantially the same basis
as he did before the termination of his employment, (iii) if Executive's
continued participation in any Welfare Plan is not possible because of the terms
of the plan or any provision of law, then the Company will, at its expense,
provide Executive with an alternative benefit of substantially equal value and
utility through cash payments, an alternative insurance arrangement, or
otherwise, and (iv) the obligation of the Company to continue Executive's
coverage under any Welfare Plan shall cease if Executive becomes covered under a
welfare plan sponsored by a subsequent employer that provides substantially
equal or greater benefits.
ARTICLE IV
SUPPLEMENTAL RETIREMENT BENEFITS
4.1 If a Compensable Termination occurs, then the Company will
provide Executive with the supplemental retirement benefits described in this
Article IV.
4.2 For the purpose of calculating the benefits to which
Executive is entitled under the Retirement Plan, (i) Executive's age shall be
deemed to be Executive's actual age plus five years, (ii) Executive's years of
credited service shall be deemed to be the actual number of years of credited
service plus five years, and (iii) Executive's years of vesting service shall be
deemed to be at least five years.
4.3 To the extent that any of the supplemental retirement
benefits described in Section 4.2 cannot be provided under the Retirement Plan,
they shall be provided under the SERP.
4.4 The Company will pay to Executive within ten business days
after the termination of Executive's employment in one lump sum the actuarial
equivalent of Executive's accrued benefit under the SERP (including any enhanced
benefit under the SERP required by Section 4.3). The actuarial equivalent of
Executive's accrued benefit under the SERP shall be determined in accordance
with the provisions of the Retirement Plan relating to the calculation of lump
sum payments.
4.5 Immediately upon the termination of Executive's
employment, (i) Executive shall, if not already fully vested, become fully
vested in the Employees' Thrift Plan of Trigon Blue Cross Blue Shield and in the
Trigon Blue Cross Blue Shield 401(k) Restoration Plan, and (ii) the Company
shall make a matching contribution to the 401(k) Restoration Plan equal to three
times the contributions that the Company made to the Thrift Plan and to the
401(k) Restoration Plan for Executive for the calendar year immediately before
the termination of Executive's employment. Within ten business days after the
termination of Executive's employment, the Company will pay to Executive in one
lump sum his account balance in the 401(k) Restoration Plan (including the
matching contribution described in the preceding sentence).
ARTICLE V
INCENTIVE COMPENSATION
5.1 If a Change of Control occurs, then for the calendar year
in which the Change of Control occurs, the Company will pay Executive an award
under each of the Company's Annual Incentive Plan and Long-Term Performance Plan
equal to the greater of (i) the award computed in accordance with the terms of
such plan or (ii) the award computed as if the Company and the Executive had
achieved the target level of performance with respect to each performance
criterion under such plan.
5.2 If Executive is not employed by the Company at the end of
the calendar year in which a Change of Control occurs, then, notwithstanding any
provision to the contrary in the Annual Incentive Plan or the Long-Term
Performance Plan, the Company will pay to Executive the pro rata portions of the
awards computed in accordance with Section 5.1 that correspond to the portion of
the calendar year that Executive was employed by the Company.
5.3 If a Change of Control occurs, Executive shall immediately
become fully vested in any outstanding stock options, restricted stock, stock
rights or other stock-based compensation programs.
ARTICLE VI
OUTPLACEMENT SERVICES
6.1 If a Compensable Termination occurs, then the Company will
provide Executive with complete outplacement services, including job search and
interview skill services. Such services shall be provided by a nationally
recognized outplacement organization selected by Executive and shall continue
until the earlier of (i) the date on which Executive finds other suitable
employment or (ii) one year after the termination of Executive's employment.
ARTICLE VII
ADDITIONAL PAYMENT FOR EXCISE TAXES
7.1 If any amount paid to Executive under this Agreement is
determined to be an "excess parachute payment" subject to the excise tax imposed
by section.4999 of the Code, then the Company will pay to Executive an
additional amount such that, after Executive has paid all federal and state
income and excise taxes imposed on such excess parachute payment and on such
additional amount, Executive shall retain an after-tax amount equal to the
amount that Executive would have retained if such excise tax (and any comparable
state excise tax) had not been imposed. 7.2 Any amount that the Company is
required to pay under Section 7.1 shall be determined by a nationally recognized
accounting firm selected by Executive. Such accounting firm will prepare a
report showing the calculation of such amount in reasonable detail, and the
Company will pay such amount to Executive in one lump sum within ten business
days following the delivery of the report to the Company. The fees and expenses
of the accounting firm shall be paid by the Company.
ARTICLE VIII
MISCELLANEOUS
8.1 Coordination with Prior Employment Agreement. Executive
and the Company are parties to an Employment Agreement dated as of____________
(the "Prior Agreement"). If a Compensable Termination occurs, then the Prior
Agreement shall be terminated and canceled effective as of the date on which
Executive's employment terminates, and neither party to the Prior Agreement
shall have any obligation thereunder to the other. If Executive's employment
terminates under circumstances that do not constitute a Compensable Termination,
then the Prior Agreement shall remain in full force and effect.
8.2 No Setoff. Executive is entitled to all of the benefits of
this Agreement whether or not Executive obtains subsequent employment and
irrespective of any compensation that Executive may receive from such subsequent
employment. The Company shall have no right to set off against any sum owed to
Executive hereunder any amount that Executive may owe the Company. If the
Company effects any setoff in violation of the preceding sentence, then the
Company and Executive agree that as reasonable liquidated damages therefor, the
Executive will be entitled to recover from the Company an amount equal to twice
the amount of such setoff.
8.3 Notices. Any notice required or permitted hereunder shall
be in writing and shall be deemed given if delivered personally or mailed,
registered or certified mail, as follows:
(a) If to the Company, to:
Chairman of the Executive Committee
Trigon Insurance Company
2015 Staples Mill Road
Post Office Box 27401
Richmond, Virginia 23279
(b) If to Executive, to his last address shown
on the records of the Company.
8.4 Successors. This agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective heirs,
representatives, and successors, including, without limitation, any person
acquiring directly or indirectly all or substantially all of the assets of the
Company, whether by merger, consolidation, sale, or otherwise, but neither this
Agreement nor any right hereunder may be otherwise assigned or transferred by
either party hereto.
8.5 Severability. If any provision of this Agreement
is held to be invalid or unenforceable, the remaining provisions shall not
be affected thereby.
8.6 Applicable Law. This Agreement shall be governed by
and construed and enforced in accordance with the laws of Virginia.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the day and year first above written.
TRIGON INSURANCE COMPANY
By:
--------------- --------------------
Executive
EXHIBIT 10.2
[Form of Agreement with John C. Berry
and certain other executive officers]
TRIGON INSURANCE COMPANY
EXECUTIVE CONTINUITY AGREEMENT
This Executive Continuity Agreement (the "Agreement") is made
as of April 29, 1997, between TRIGON INSURANCE COMPANY (the "Company") and
________________("Executive").
RECITALS
Executive is currently employed by the Company as an Executive
Officer. The purpose of this Agreement is to encourage Executive to continue his
employment with the Company both before and after a Change of Control and to
recognize the prior service of Executive if his employment is terminated under
certain circumstances after a Change of Control.
NOW THEREFORE, in consideration of the premises, the parties
agree as follows:
ARTICLE I
DEFINITIONS
As used herein, the following terms have the meanings
indicated.
1.1 "Affiliate" means any corporation or other legal entity
that directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, the Company.
1.2 "Applicable Compensation" has the meaning set forth in
Section 2.3.
1.3 "Beneficial Ownership" has the meaning in Rule 13d-3
promulgated under the Securities Exchange Act of 1934.
1.4 "Change of Control" means any event described in
subparagraphs (i) through (v) below:
(i) The acquisition by any Person of Beneficial
Ownership of 20% or more of the Stock or the Voting Power of Trigon Healthcare,
but excluding for this purpose any acquisition by the Company (or an Affiliate)
or by an employee benefit plan sponsored by the Company (or an Affiliate). When
two or more persons act in concert for the purpose of acquiring Stock or Voting
Power of Trigon Healthcare, such Persons shall be deemed to be a single Person;
(ii) Individuals who are Incumbent Directors
cease to constitute at least a majority of the Board of Directors of Trigon
Healthcare;
(iii) Approval by the shareholders of Trigon
Healthcare of a reorganization, merger or consolidation, if after such
transaction, the Persons who had Beneficial Ownership of the Stock and Voting
Power of Trigon Healthcare before such transaction will not have Beneficial
Ownership of at least 50% of the Stock and Voting Power of the corporation
resulting from such transaction;
(iv) A complete liquidation or dissolution of
Trigon Healthcare, or the sale or other disposition of all or substantially
all of the assets of Trigon Healthcare; or
(v) The sale or other disposition by Trigon
Healthcare of 50% or more of the Stock of the Company, or any other transaction
pursuant to which Trigon Healthcare ceases to control the Company.
1.5 "Code" shall mean the Internal Revenue Code of 1986.
1.6 "Compensable Termination" means either (i) the
termination of Executive's employment by the Company within three months before
or within three years after a Change of Control for any reason other than for
Good Cause, or (ii) the termination of Executive's employment by Executive
within three years after a Change of Control for Good Reason.
1.7 "Compensation" has the meaning set forth in Section 2.4.
1.8 "Good Cause" means:
(i) fraud, embezzlement or misappropriation by
Executive involving the business or assets of the Company,
(ii) the persistent and willful failure by Executive
substantially to perform his duties and responsibilities to the Company,
which failure continues after Executive receives written notice of such
failure, or
(iii) Executive's conviction of a felony or crime
involving moral turpitude.
1.9 "Good Reason" means any of the following actions or
events that occur after a Change of Control and without Executive's express
written consent:
(i) any reduction in Executive's base salary;
(ii) any reduction in Executive's opportunity to
earn incentive compensation, unless comparable reductions in incentive
opportunities are shared generally by other executives of the Company;
(iii) any material reduction in Executive's welfare
benefits or perquisites as in effect at the time of the Change of Control;
(iv) any material reduction in Executive's duties,
responsibilities or authority, any adverse change in Executive's job title, or
any other action that constitutes a demotion of Executive; or
(v) the Company changes the location of Executive's
principal office to a location that is more than 50 miles distant from
Executive's principal office at the time of the Change of Control.
1.10 "Incumbent Director" means any person who serves on
the Board of Directors of Trigon Healthcare as of the date of this Agreement
and any person who is added to the Board thereafter with the approval of a
majority of the persons who are then Incumbent Directors.
1.11 "Person" means a natural person and any corporation,
partnership, trust, limited liability company or other legal entity.
1.12 "Salary Continuation Benefit" has the meaning set forth
in Section 2.2.
1.13 "Stock" means the then outstanding Class A Common Stock
of Trigon Healthcare.
1.14 "Trigon Healthcare" means Trigon Healthcare, Inc., a
Virginia corporation that, as of the date of this Agreement, owns all of the
issued and outstanding Stock of the Company.
1.15 "Voting Power" means the combined voting power of all
outstanding voting securities of Trigon Healthcare.
1.16 "Welfare Plan" means any health plan, dental plan,
disability plan, survivor income plan, life insurance plan or other welfare
benefit plan as defined in ss.3(1) of the Employee Retirement Income Security
Act of 1974, currently or hereafter made available by the Company in which the
Executive is eligible to participate.
ARTICLE II
SALARY CONTINUATION BENEFIT
2.1 If a Compensable Termination occurs, then the Company
shall pay the Salary Continuation Benefit to Executive on or before the tenth
business day following the day on which Executive's employment terminates. The
Salary Continuation Benefit shall be paid in one lump sum, net of all required
federal and state withholding taxes.
2.2 The Salary Continuation Benefit shall be a sum equal
to two times the Applicable Compensation of Executive.
2.3 The Applicable Compensation of Executive shall mean the
greater of (i) the highest amount of Compensation received by Executive during
any one of the three full calendar years ended immediately before the
Executive's employment terminates, or (ii) an amount equal to 155% of
Executive's annual base salary for the year in which Executive's employment
terminates.
2.4 The Compensation of Executive for any calendar year shall
mean (i) the total amount of compensation paid to Executive by the Company as
reported on Internal Revenue Form W-2 for such year, plus (ii) any amount of
compensation deferred by Executive in such year pursuant to a salary deferral
agreement that is not included in gross income for such year under the Code,
minus (iii) any income reported on Form W-2 for such year that is attributable
to the receipt or exercise of any stock option, restricted stock, stock right or
other stock based compensation. Notwithstanding the preceding sentence, if
Executive began his employment with the Company after December 31, 1995, then
for purposes of this Agreement only, Executive's Compensation for 1996 shall be
deemed to be an amount equal to 135% of Executive's annual base salary for 1997.
ARTICLE III
WELFARE BENEFITS
3.1 If a Compensable Termination occurs, then the Company
will, subject to the provisions of Section 3.2, continue the coverage of
Executive and his dependents under all Welfare Plans in which they participated
immediately before the termination of Executive's employment for a period of two
years following the termination of Executive's employment.
3.2 Notwithstanding Section 3.2, (i) if the Company amends or
terminates any Welfare Plan in which Executive is participating in a manner that
is generally applicable to all executives of the Company, then such amendment or
termination shall also be applicable to Executive, (ii) Executive shall continue
to contribute to the cost of the Welfare Plans on substantially the same basis
as he did before the termination of his employment, (iii) if Executive's
continued participation in any Welfare Plan is not possible because of the terms
of the plan or any provision of law, then the Company will, at its expense,
provide Executive with an alternative benefit of substantially equal value and
utility through cash payments, an alternative insurance arrangement, or
otherwise, and (iv) the obligation of the Company to continue Executive's
coverage under any Welfare Plan shall cease if Executive becomes covered under a
welfare plan sponsored by a subsequent employer that provides substantially
equal or greater benefits.
ARTICLE IV
SUPPLEMENTAL BENEFITS
4.1 If a Compensable Termination occurs, then the Company will
provide Executive with the supplemental benefits described in this Article IV.
4.2 Immediately upon the termination of Executive's
employment, (i) Executive shall, if not already fully vested, become fully
vested in the Employees' Thrift Plan of Trigon Blue Cross Blue Shield and in the
Trigon Blue Cross Blue Shield 401(k) Restoration Plan, and (ii) the Company
shall make a matching contribution to the 401(k) Restoration Plan equal to two
times the contributions that the Company made to the Thrift Plan and to the
401(k) Restoration Plan for Executive for the calendar year immediately before
the termination of Executive's employment. Within ten business days after the
termination of Executive's employment, the Company will pay to Executive in one
lump sum his account balance in the 401(k) Restoration Plan (including the
matching contribution described in the preceding sentence).
ARTICLE V
INCENTIVE COMPENSATION
5.1 If a Change of Control occurs, then for the calendar year
in which the Change of Control occurs, the Company will pay Executive an award
under each of the Company's Annual Incentive Plan and Long-Term Performance Plan
equal to the greater of (i) the award computed in accordance with the terms of
such plan or (ii) the award computed as if the Company and the Executive had
achieved the target level of performance with respect to each performance
criterion under such plan.
5.2 If Executive is not employed by the Company at the end of
the calendar year in which a Change of Control occurs, then, notwithstanding any
provision to the contrary in the Annual Incentive Plan or the Long-Term
Performance Plan, the Company will pay to Executive the pro rata portions of the
awards computed in accordance with Section 5.1 that correspond to the portion of
the calendar year that Executive was employed by the Company.
5.3 If a Change of Control occurs, Executive shall immediately
become fully vested in any outstanding stock options, restricted stock, stock
rights or other stock-based compensation programs.
ARTICLE VI
OUTPLACEMENT SERVICES
6.1 If a Compensable Termination occurs, then the Company will
provide Executive with complete outplacement services, including job search and
interview skill services. Such services shall be provided by a nationally
recognized outplacement organization selected by Executive and shall continue
until the earlier of (i) the date on which Executive finds other suitable
employment or (ii) one year after the termination of Executive's employment.
ARTICLE VII
MISCELLANEOUS
7.1 Coordination with Prior Employment Agreement. Executive
and the Company are parties to an Employment Agreement dated as of______________
(the "Prior Agreement"). If a Compensable Termination occurs, then the Prior
Agreement shall be terminated and canceled effective as of the date on which
Executive's employment terminates, and neither party to the Prior Agreement
shall have any obligation thereunder to the other. If Executive's employment
terminates under circumstances that do not constitute a Compensable Termination,
then the Prior Agreement shall remain in full force and effect.
7.2 No Setoff. Executive is entitled to all of the benefits of
this Agreement whether or not Executive obtains subsequent employment and
irrespective of any compensation that Executive may receive from such subsequent
employment. The Company shall have no right to set off against any sum owed to
Executive hereunder any amount that Executive may owe the Company. If the
Company effects any setoff in violation of the preceding sentence, then the
Company and Executive agree that as reasonable liquidated damages therefor, the
Executive will be entitled to recover from the Company an amount equal to twice
the amount of such setoff.
7.3 Notices. Any notice required or permitted hereunder shall
be in writing and shall be deemed given if delivered personally or mailed,
registered or certified mail, as follows:
(a) If to the Company, to:
Chairman of the Executive Committee
Trigon Insurance Company
2015 Staples Mill Road
Post Office Box 27401
Richmond, Virginia 23279
(b) If to Executive, to his last address shown
on the records of the Company.
7.4 Successors. This agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
representatives, and successors, including, without limitation, any person
acquiring directly or indirectly all or substantially all of the assets of the
Company, whether by merger, consolidation, sale, or otherwise, but neither this
Agreement nor any right hereunder may be otherwise assigned or transferred by
either party hereto.
7.5 Severability. If any provision of this Agreement is
held to be invalid or unenforceable, the remaining provisions shall not be
affected thereby.
7.6 Applicable Law. This Agreement shall be governed by
and construed and enforced in accordance with the laws of Virginia.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the day and year first above written.
TRIGON INSURANCE COMPANY
By:
-------------------------- --------------------
Executive
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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 THREE-MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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