SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 001-12617
Trigon Healthcare, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1773225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2015 Staples Mill Road, Richmond, VA 23230
(Address of principal executive offices)
Registrant's telephone number, including area code (804) 354-7000
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $.01 Par Value New York Stock Exchange
(Title of Class) (Name of Exchange)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 27, 1998 was approximately $1,245,818,000
(based on the last reported sales price of $29 7/8 per share on March
27, 1998, on the New York Stock Exchange).
As of March 27, 1998, 42,300,022 shares of the registrant's Class A Common
Stock, par value $.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of Trigon Healthcare Inc.'s Annual Report to Shareholders for
the year ended December 31, 1997 into Parts II and IV of this Form 10-K.
Certain portions of Trigon Healthcare Inc.'s definitive Proxy Statement dated
March 27, 1998 for the Annual Meeting of Shareholders into Part III of this
Form 10-K.
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PART I
Item 1. Business.
GENERAL
Trigon Healthcare, Inc. ("Trigon" or the "Company") is the largest managed
health care company in Virginia, serving approximately 1.8 million members
primarily through statewide and regional provider networks. The Company's
membership represents approximately 26% of the Virginia population and 31% of
the Virginia population in those areas where Trigon has the exclusive right to
use the Blue Cross and Blue Shield service marks and tradenames. Within
Virginia, Trigon provides a comprehensive spectrum of managed care products
through three network systems with a range of utilization and cost containment
controls. The Company is pursuing a growth strategy which includes expansion
within Virginia and outside of Virginia into other southeastern and mid-Atlantic
states.
As of December 31, 1997, the Company's network systems consisted of: HMO
networks which, with 293,538 members, are the Company's most tightly managed and
cost efficient networks; the preferred provider organization ("PPO") networks
which, with 904,470 members, offer greater choice of providers than Trigon's HMO
networks and may include a point of service ("POS") feature; and the
participating provider ("PAR") network which, with 411,142 members, is the
Company's broadest and most flexible network. As of December 31, 1997, the
Company served 215,492 additional members through Medicare supplemental plans
(125,686 members), third-party administration of health care claims (25,663
members) and through Mid-South Insurance Company ("Mid-South"), a Fayetteville,
North Carolina-based health and life insurance company, which was acquired by
the Company in 1996 (64,143 members). Within the Company's managed care product
offerings, customers may choose between fully-insured arrangements (in which the
Company bears the cost of providing specified health care services for a fixed
payment) and self-funded arrangements (in which the customer bears all or a
portion of the risk). As of December 31, 1997, 50.9% of members were covered
under fully-insured arrangements and 37.8% were covered under self-funded
arrangements, with the remaining 11.3% covered under the Federal Employee
Program ("FEP"), administered under contract with the Blue Cross Blue Shield
Association ("BCBSA"). Member enrollment information for FEP, Mid-South group
health business and certain national group accounts are not maintained on the
Company's systems. Member enrollment information presented herein for such
groups have been calculated based on policy counts for these groups which have
been converted to a membership number through the use of actuarially determined
conversion factors.
In 1990 the Company began to institute greater managed care controls in all of
its product lines and networks, focusing in particular on its PPO and HMO
networks and, depending on market readiness, designing, pricing and marketing
its products to encourage members to migrate into these more tightly managed
networks where the Company is better able to manage health care costs. While
members decide which network to select, the Company generally offers more
attractive rates in its more tightly managed networks to encourage members to
choose these products. This strategy contributed to accelerated enrollment
growth for the Company's HMO and PPO networks and a decline in enrollment in the
Company's more traditional PAR network. Trigon operates four HMOs which are
licensed to serve most areas of Virginia. Trigon has the largest number of HMO
members in Virginia. Trigon's total HMO enrollment has grown from 60,683 members
at December 31, 1992 to 293,538 members as of December 31, 1997,
representing a compound annual growth rate of 37.1%. The Company's PPO
network system is the largest in Virginia. Trigon's total PPO enrollment
has grown from 561,686 members at December 31, 1992 to 904,470 members
as of December 31, 1997, representing a compound annual growth rate of
10.0%. Membership in the Company's HMOs and PPOs increased from 38.4% of
total enrollment at December 31, 1992 to 65.1% as of December 31, 1997.
Trigon's more traditional products are offered through its PAR network,
which is the Company's largest provider network. As a result of the Company's
strategy of encouraging members to migrate to its more tightly managed networks,
total membership in the PAR network, decreased from 683,982 members at December
31, 1992 to 411,142 members at December 31, 1997. Trigon also offers several
specialty health care and related products, such as dental, wellness, behavioral
health, life and accident and disability insurance coverage.
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Trigon has the largest membership base in Virginia, which generally allows the
Company to negotiate contracts with its Virginia providers that specify
favorable rates and incorporate utilization management and other cost controls.
As a result of its extensive networks, managed care expertise and broad product
offerings, the Company competes favorably in all of its Virginia lines of
business, including the individual, small, mid-sized and large employer groups
and state and federal agency markets. Trigon has exclusive rights to use the
Blue Cross and Blue Shield service marks and tradenames for purposes of doing
business throughout Virginia other than certain northern Virginia suburbs
adjacent to Washington, D.C.
Since 1972, the Company has provided health benefits to employees and retirees
of the Commonwealth of Virginia. In 1997, the Company recorded $398.7 million
for amounts attributable to this self-funded arrangement, which represented 38%
of the Company's self-funded business. The current contract to provide health
benefits to the employees and retirees of the Commonwealth of Virginia will
expire on June 30, 1999. Under the agreement, such services may be terminated by
either party upon twelve months' written notice. The Company believes that it is
well qualified to meet the Commonwealth of Virginia's health care requirements
because of the size and geographic range of the Company's network systems and
its broad offering of PPO and HMO network products.
DEMUTUALIZATION AND INITIAL PUBLIC OFFERING
Effective February 5, 1997, Blue Cross and Blue Shield of Virginia (dba Trigon
Blue Cross Blue Shield) completed its conversion from a mutual insurance company
to a stock insurance company in accordance with a Plan of Demutualization
("Demutualization"). In accordance with the Demutualization, Blue Cross and Blue
Shield of Virginia changed its name to Trigon Insurance Company (dba Trigon Blue
Cross Blue Shield) ("Trigon Insurance") and became a wholly-owned subsidiary of
the Company. The membership interests of Blue Cross and Blue Shield of
Virginia's eligible members were converted into Class A common stock of Trigon
Healthcare, Inc., or, in certain circumstances, cash. The Demutualization also
required the Company to complete an Initial Public Offering ("IPO") of stock
simultaneously with the conversion. Accordingly, Trigon Healthcare, Inc. issued
17.8 million shares of Class A common stock at $13 per share in the IPO,
generating net proceeds of $215.2 million. In connection with the
Demutualization, the Company was required to make a payment of $175 million to
the Commonwealth of Virginia ("Commonwealth Payment") in February 1997. The
Commonwealth Payment was accrued and reflected as an extraordinary charge in the
consolidated financial statements for 1996. The Company used approximately $90
million of the net proceeds and $85 million in borrowings under a revolving
credit agreement to fund this payment. The Company also used approximately $91.1
million of the offering proceeds to pay certain eligible members cash in lieu of
shares of common stock that would otherwise have been issued to such eligible
members pursuant to the Demutualization.
NETWORK SYSTEMS
The Company's extensive managed health care provider networks enable it to offer
a comprehensive array of managed health care programs throughout Virginia. These
networks include its HMO, PPO and PAR networks, as well as specialty managed
care networks. In establishing these networks, the Company enters into contracts
with qualified providers in each geographic area to serve its members. These
contracts are intended to control the cost of health care through both control
of unit cost and utilization management. As a result, the Company reduces the
need to utilize out-of-network providers that are not subject to the Company's
cost controls.
Within the Company's network product offerings, employer groups may choose
various funding options ranging from fully-insured to partially or fully
self-funded financial arrangements. While self-funded customers participate in
Trigon's networks, the claims are not underwritten by Trigon but are funded by
the groups. Self-funded arrangements are typically utilized by large and
mid-size groups. In addition, most self-funded groups purchase aggregate and/or
claim specific stop-loss coverage. In exchange for a premium, the group's
aggregate liability is capped for the year or the group's liability on any one
episode of care is capped. Trigon charges self-funded groups an administrative
fee which is based on the number of members in a group or the group's claims
experience. Under the Company's self-funded arrangements, amounts due are
recognized based on incurred claims plus administrative and other fees and any
stop-loss premiums.
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The following table sets forth the number of members in each of the Company's
product groups for the last five years.
ENROLLMENT BY NETWORK SYSTEM
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1997 1996 1995 1994 1993
-------------- ------------- ------------- ------------- -------------
<S> <C>
Commercial:
HMO.......................................... 291,036 248,172 172,893 85,739 59,353
PPO.......................................... 263,828 230,675 212,322 155,433 131,052
PAR.......................................... 192,825 236,383 296,716 334,800 352,783
Other (1)................................. 189,829 177,266 149,109 158,503 156,737
-------------- ------------- ------------- ------------- -------------
Subtotal..................................... 937,518 892,496 831,040 734,475 699,925
Self-funded:
HMO.......................................... 2,502 9,479 48,255 34,243 24,728
PPO.......................................... 433,185 363,754 336,414 321,863 313,744
PAR.......................................... 218,317 291,629 256,964 253,110 264,776
ASO.......................................... 25,663 35,620 63,826 77,481 78,903
-------------- ------------- ------------- ------------- -------------
Subtotal..................................... 679,667 700,482 705,459 686,697 682,151
FEP (PPO network)............................ 207,457 197,241 198,561 195,314 180,015
Fully insured and self-funded -------------- ------------- ------------- ------------- -------------
enrollment................................... 1,824,642 1,790,219 1,735,060 1,616,486 1,562,091
Processed for other Blue Cross and Blue -------------- ------------- ------------- ------------- -------------
Shield Plans (ASO)........................ 15,728 70,330 64,558 65,187 69,916
-------------- ------------- ------------- ------------- -------------
Total........................................ 1,840,370 1,860,549 1,799,618 1,681,673 1,632,007
-------------- ------------- ------------- ------------- -------------
</TABLE>
(1) "Other" members include enrollment from Medicare supplement plans,
out-of-state student health care coverage (which was discontinued as of December
31, 1995) and Mid-South members beginning in 1996.
HMO NETWORKS
Trigon established its first HMO in 1984 and now operates four separate HMOs.
HealthKeepers, Inc. ("HealthKeepers") is a state qualified HMO that operates
primarily in the central, eastern, and southwestern areas of Virginia.
Physicians Health Plan, Inc. ("PHP") is a federally qualified HMO operating in
Northern Virginia, Washington D.C. and the surrounding Maryland counties.
Peninsula Health Care, Inc. ("PHC"), a joint venture owned 51% by Trigon, is a
state qualified HMO operating primarily on the Peninsula in Eastern Virginia.
The Company owns 80% of Priority Inc. ("Priority") (acquired in 1995), which
owns a federally qualified HMO, Priority Health Care, Inc. (formerly, Health
First, Inc.), operating in the Tidewater area in Eastern Virginia. As of
December 31, 1997, the HMO networks included approximately 2,200 primary care
physicians, 6,600 specialist physicians and 66 hospitals throughout Virginia.
Each of Trigon's HMOs uses the Blue Cross and Blue Shield service mark except
for PHP, which operates outside the area covered by the Company's license to use
the service mark.
The Company's HMOs are able to provide for the delivery of health care services
at lower costs than traditional health insurance plans due to their network
provider arrangements which specify favorable rates and require utilization
management and other cost control measures. Members choose a primary care
physician who is responsible for coordinating health care services for the
member. The HMO product portfolio is presented to customers as a stand-alone HMO
offering, or through "Blue Advantage," a program which includes HMO and PPO
options administered and priced as a single program and which can only be
utilized by groups that contract with Trigon on an exclusive basis.
Most HMO products have a copayment provision under which the member bears a
portion of health care costs. All of the Company's HMOs offer a feature which
permits the member to receive health care services from providers that are not
part of the Company's HMO network or without a primary care physician referral
at additional out-of-
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pocket cost to the member which includes a deductible and
higher copayment obligation. The Company believes that copayment obligations,
out-of-network costs and other obligations of these HMO plans enhance its
ability to control costs by encouraging members to take more responsibility for
their health care decisions.
MEDICAID AND MEDICARE HMO PRODUCTS. PHC and Priority Health Care, Inc. market a
Medicaid HMO product to participants in the Aid to Families with Dependent
Children program and the Aged, Blind and Disabled Individuals programs in the
Peninsula and Tidewater regions of Virginia. HealthKeepers received federal and
state regulatory approval in the first quarter of 1998 to begin selling a
Medicare HMO product within the City of Richmond and five surrounding counties
in central Virginia. The product is available to individuals who are eligible
for Medicare either through age or disability. Health care services will be
provided by a special network comprised of a subset of the HealthKeepers
provider network. The Company is currently beginning its marketing and
enrollment efforts, with enrollment of 5,000 to 7,000 members expected by the
end of 1998.
PPO NETWORKS
The Company's PPO network is a statewide PPO network, which as of December 31,
1997 included approximately 15,900 physicians and 136 hospitals. Approximately
24% of PPO members as of December 31, 1997 were employees of the Commonwealth of
Virginia, whose plan includes the POS feature discussed below.
The Company's PPO products are similar to its HMO products in that they are able
to provide for health care delivery at lower costs than traditional health
insurance due to network provider arrangements which specify favorable rates and
employ utilization management and other cost control measures. Members have
copayment or coinsurance obligations for services rendered by network providers
that are similar to those of the Company's HMO products. Trigon includes as part
of its PPO network the option of including a POS feature in which each member
chooses a primary care physician who is responsible for coordinating all health
care services for the member. Unlike the HMO and PPO products electing the POS
feature, members with the standard PPO products may seek care from any PPO
network physician in the appropriate PPO network depending on services required.
PPO members may also choose to receive health care services from providers that
are not a part of the network, typically at substantial out-of-pocket costs.
Trigon believes that copayments and out-of-network obligations of its PPO
products enhance its ability to control costs by encouraging members to take
more responsibility for their health care decisions.
PAR NETWORK
Trigon's PAR network provides more traditional health coverage and included
approximately 17,400 physicians and 137 hospitals as of December 31, 1997. The
PAR network offers members more providers to choose from, greater customization
of benefit design, and fewer restrictions in the use of non-network providers
than the PPO network. The Company's strategy is to transition members from the
PAR network to the more tightly managed PPO and HMO networks. However, Trigon
expects that its PAR network and products will continue to be an important
offering for groups desiring greater flexibility and choice in networks and
benefits, as well as a source of new PPO and HMO members.
The Company's PAR network and products are able to provide for health care
delivery at lower costs than many other traditional health plans due to network
arrangements which specify favorable rates and encourage utilization management
and other cost control measures. Members may choose any physician from the PAR
network depending on services required, and are generally subject to annual
deductible requirements and coinsurance. Trigon believes that annual deductibles
and higher out-of-network costs of its PAR products enhance its ability to
control costs by encouraging members to take more responsibility for their
health care decisions. In the PAR network, physicians accept payments for
covered services and do not bill the members for the difference between the
provider charges and the Company reimbursements. If a member chooses to receive
out-of-network services under a PAR health plan, the member will be required to
bear a larger portion of the total expenses for such services since the provider
is able to bill the member for the difference between the provider's charge and
the Company payment.
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PROVIDER ARRANGEMENTS
Trigon's HMO networks have contracts with hospitals, physicians and other
professionals at reduced rates, which are typically more favorable than rates
for the Company's PPO and PAR networks. Almost all of the primary care
physicians in the HMO networks are reimbursed on a capitated basis. Specialists
are reimbursed based on a fee schedule or on a capitated basis. Some ancillary
services, lab services, behavioral health and vision services are also
capitated. These arrangements provide the incentive to control utilization and
cost. HMO network hospital provider contracts, typically two years in duration,
are on a nonexclusive basis and are generally paid on the basis of per diems
(fixed fee schedules where the daily rate is based on the type of service), per
case per admission (fixed fee schedules for all services during a member's
hospitalization), or a percentage of covered charges with limits on the
subsequent year increases. The average rate negotiated with hospitals under this
arrangement is lower than the hospital's average standard retail charges.
Services not subject to special per case or per diem payment arrangements are
generally paid according to a fee schedule or as a percentage of billed charges.
Based on these payment arrangements, physicians and hospitals in the HMO
networks have financial incentives to control health care costs.
PPO and PAR network hospital provider contracts are generally based upon per
diem or per case or a percentage of covered charges arrangements that are
typically lower than the hospital's average standard billing rates. The PPO
provider contracts provide for rates that are generally more favorable than
rates for the Company's PAR network. The Company is able to obtain discounted
prices for services because of the volume of business it offers to healthcare
providers that are part of the network. Hospital reimbursement rates are
generally negotiated for terms of two years. Physician provider contracts also
employ attractive fixed fee schedules which are below standard billing rates
with the PPO contracts typically more favorable than the PAR network. Physician
fee schedule payments are set by the Company using Resource Based Relative Value
System methodologies and are generally adjusted annually. When considering
whether to contract with a physician for its PPO or PAR networks, the Company
conducts a credentialing program to evaluate the applicant's professional
experience, including licensure.
UTILIZATION MANAGEMENT
Trigon also manages health care costs in its HMO networks by using utilization
management systems guidelines for the HMO network that are intended to address
quality of care and help to ensure that only appropriate services are rendered,
and that such services are provided in the most cost-effective manner. The
primary care physicians are considered to be the overall manager of the
individual's health care needs. Primary care physicians manage and optimize care
through the use of referrals and by approving all specialty care before it is
rendered. In addition, under a utilization review program, the HMO reviews all
high cost services needed by individual members which are not provided by the
primary care physician. This review program is intended to ensure that all
enrollees receive necessary, appropriate and cost-effective care. Focused case
management techniques are used on all high cost cases. New medical technologies
are reviewed in advance through Trigon's participation in a new technology
evaluation program sponsored by the BCBSA and a large HMO company. Such review
of new medical technologies attempts to ensure that only safe and effective new
medical procedures are covered.
The Company also manages health care costs and quality by reviewing monthly cost
and utilization trends within its HMO networks. Utilization rates and cases are
reviewed in the aggregate and by service type to identify opportunities for
better cost and quality control. In addition, the highest cost services are
studied to determine if costs can be reduced by using new, less expensive
technologies or by creating additional networks or contracts, such as networks
for ambulatory care, to reduce provider costs.
The Company also manages health care costs in its PPO and PAR networks by
adopting utilization management systems that are intended to reduce unnecessary
procedures, admissions and other medical costs. The Company's utilization
management systems guidelines for the PPO and PAR networks help to ensure that
only appropriate services are rendered and that such services are provided in
the most cost-effective manner. Trigon utilizes Milliman & Robertson's
healthcare management guidelines and requires pre-admission approvals of all
hospital and skilled nursing facility stays and concurrent review of length of
stay. Trigon prospectively reviews the medical necessity of home health, private
duty nursing and durable medical equipment. Trigon also retrospectively reviews
physician practice patterns. Review of physician practice patterns may result in
modifications and refinements to the PPO and
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PAR network of providers and network contractual arrangements. Physicians
participating in the PPO network and in the POS program are required to meet
certain economic profiling criteria that indicate cost effective and quality
practice standards. Primary care and specialist providers in the POS program are
periodically given utilization, cost and quality profiles, or "report cards." In
the POS program, utilization management includes an outpatient review program,
with pre-authorization of high-cost outpatient care, in addition to management
of hospital care through precertification, concurrent review, case management
and discharge planning capacity. Outpatient care is further controlled through
claim edits designed to detect and correct inappropriate provider billing
patterns. All new medical technologies are reviewed in advance in an attempt to
ensure that only safe and effective new medical procedures are covered.
Additionally, the Company also employs a comprehensive case management program.
In this program, the Company identifies those members having certain chronic
diseases (such as asthma, hypertension and cancer) and proactively works with
the member and the physician to facilitate appropriate treatment, help to ensure
compliance with recommended therapies and educate members on lifestyle
modifications to manage the disease. The Company believes that the program
promotes the delivery of efficient care and helps to improve the quality of
health care delivered.
As with its HMO network, Trigon further manages health care costs by reviewing
monthly cost and utilization trends within its PPO and PAR networks.
QUALITY MANAGEMENT
Trigon's HMO quality improvement standards are modeled on those of the National
Committee on Quality Assurance ("NCQA"), an independent, nonprofit institution
that reviews and accredits health maintenance and managed care organizations.
The quality improvement program instituted by the Company's HMOs provides for
the review of quality of care service and the initial and ongoing review of the
credentials of all network providers. This credentialing process includes a
review of whether the provider has the necessary licenses, is qualified in the
specialty indicated, and meets standards for safety, sanitation, and
accessibility. The HMO reviews the findings with a quality improvement
committee, which includes practicing physicians from the HMO network. In
addition, quality of care services are monitored through profiling and data
analysis, member satisfaction surveys, and problem case review. During 1997, the
Company obtained one-year accreditation from the NCQA for HealthKeepers, its
largest HMO. The one-year accreditation is granted to companies that have
well-established quality improvement programs and meet most NCQA standards. NCQA
provides companies with specific recommendations and reviews the companies again
after one year to determine if they have reached full accreditation. The
remaining Trigon HMO plans -- PHC, PHP and Priority Health Care, Inc. -- did not
seek accreditation in 1997. PHC is currently undergoing an NCQA-review in 1998.
The Company will not know the results of this review until later this year.
The Company has an active program to evaluate the quality and appropriateness of
care provided by its PPO and PAR networks. Provider credentialing, profiling and
member satisfaction, along with monitoring of outcomes, and clinical studies are
all performed to monitor and manage quality of care. Network physicians and
other providers participate in quality management programs overseen by medical
advisory panels. Using the Company's computerized medical information database,
these programs involve profiles of the tests, types of treatment and procedures
performed for specific diagnoses by these physicians, as well as reviews of
aggregate data.
SPECIALTY MANAGED HEALTH CARE PLANS
Trigon also offers specialty managed health care services through a number of
specialized networks. The Company believes that these specialty networks and
plans complement and facilitate the Company's marketing plans and enable the
Company to attract employer groups and other members that are increasingly
seeking a variety of options and services. These specialty plans include
pharmacy plans, dental plans, behavioral health plans as well as ancillary
networks for certain outpatient services. In addition, Trigon offers numerous
Medicare supplemental plans, which typically pay the difference between the
health care cost incurred and the amount paid by Medicare.
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MARKETING
Trigon markets its products and services to both individuals and groups. The
individual products are marketed principally through a telemarketing unit and
through brokers. The group market includes small, medium and large group
employers. The smaller group employers generally use insurance brokers to assist
in the selection of products and analysis of the actual cost of competing plans.
As the group size grows, employers may use consultants to assist in the
tailoring of benefits and networks. The larger group employers are generally
more sophisticated purchasers, often engaging consultants to work with the
Trigon sales staff to tailor benefit and network design to match their specific
needs more closely. In addition, Trigon has a direct sales staff that markets
the full range of Trigon products and services.
RELATED BUSINESSES
In addition to its core managed care business, the Company engages in several
other health-related businesses including employee benefits administration,
workers' compensation administration and health management services. Together,
these and other health-related benefits businesses generated $25.5 million in
revenues for the year ended December 31, 1997, included in "Other Revenues" in
the Company's consolidated financial statements. These businesses represent
approximately 1% of the Company's total revenues, a trend which is expected to
remain consistent in the next several years. Aside from their direct
contribution to revenue, the Company believes these related businesses also
provide Trigon with competitive advantages from single-source product offerings,
cross-selling, market presence and as avenues into new markets.
GOVERNMENT PROGRAMS
Trigon acts as an intermediary and administrative agent in servicing
approximately 1.2 million Medicare Part A beneficiaries in Virginia and West
Virginia. In 1997, the Company processed over 3.7 million Medicare Part A claims
amounting to $3.3 billion of charges. Claims processed and the reimbursement for
these claims are not included in the Company's consolidated statements of
operations. However, the Company is reimbursed for operating expenses related to
administering this business. In 1997, such expense reimbursements totaled $12.5
million. Trigon's intermediary Medicare program carries no underwriting risk.
Trigon also administers Virginia's portion of the BCBSA's national contract with
the U.S. Office of Personnel Management ("OPM") to provide benefits through its
PPO networks for approximately 207,000 federal employees and their dependents
living in Virginia. The contract renews automatically for a term of one year
each January 1, unless written notice is given by either party at least 60 days
prior to the date of renewal. In 1997, Trigon recorded revenues of $377.7
million under this program, which represented 18% of total revenues. Under the
program, a special FEP reserve is maintained at the national level as protection
against adverse claims trends. However, if the contract should terminate with a
negative balance in the FEP special reserve, the losses would be allocated to
participating plans or subcontractors based on a ratio of the Company's past
five year claims experience as a percent of the total program's experience. As
of December 31, 1997, the national reserve amounted to $3.3 billion or 5.7
months of program income.
INFORMATION SYSTEMS
The Company develops and maintains its own information systems. Information
systems have played and will continue to play a key role in ongoing plans to
continually improve quality, lower costs and increase benefit flexibility for
the Company's customers. Trigon's centralized, common database and analytical
technologies allow for increasingly more sophisticated methods of managing costs
and quality of care. The database includes comprehensive information on
virtually all physicians and hospitals and one third of the population in
Virginia, which assists Trigon in analyzing the medical and economic performance
of providers and the medical and economic experience of specific customer groups
and individuals. The Company believes that its information systems are a
competitive advantage and are sufficient to meet its current needs and future
expansion plans.
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The Company uses an integrated set of applications software to support marketing
and underwriting, eligibility and billing, electronic claims submission, claims
administration, managed care programs and corporate financial management. A
combination of custom developed and licensed systems are used to meet the unique
needs of different products and markets. An overall systems architecture is
maintained to promote consistency of data, processing rules and flexibility.
Different systems serving the unique products or markets feed data to a
corporate information and decision support system. This decision support system
provides a single source of information for all of the Company's data reporting
and analytic needs. This includes operational and financial performance,
underwriting and marketing analysis, utilization management and actuarial
reporting.
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 were
$6.8 million through December 31, 1997 and are expected to approximate $20.0
million through 1999. The costs will be expensed as incurred and will be funded
through operating cash flows.
In addition, the Company is actively working with hospitals, providers and
others depended upon for electronic commerce in an effort 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 these
entities.
COMPETITION
The health care industry is highly competitive both in Virginia and in other
states in the southeastern and mid-Atlantic United States into which the Company
principally intends to expand. Managed care companies, including large,
well-capitalized companies which market managed care products nationwide, have
targeted the southeastern and mid-Atlantic regions of the United States as being
favorable for expansion, and have begun entering Virginia and markets targeted
by Trigon in increasing numbers. In some cases, new market entrants, as well as
existing health care companies, have competed with the Company for business by
offering very favorable pricing terms to customers. The Company is facing this
increased competition in the areas in which it is licensed to use the Blue Cross
and Blue Shield service marks and tradenames, as well as the areas in which it
operates without these service marks and tradenames. In areas outside of its
licensed territory, the Company's ability to successfully compete may be
adversely affected by its inability to use the Blue Cross and Blue Shield
service marks and tradenames, by the presence of competitors that are able to
use such service marks and tradenames in the areas, and by the Company's lack of
substantial market share or established provider networks in these areas. The
Company also faces competition from a trend among health care providers to
combine and form their own networks in order to contract directly with employer
groups and other prospective customers to provide health care services. There is
no assurance that such overall increased competition will not exert strong
pressures upon Trigon's profitability, its ability to increase enrollment or its
ability to successfully pursue growth in areas both within and outside of
Virginia.
The Company believes that it has effectively integrated its managed care
programs into its traditional business, principally through its PPO and HMO
networks and products. The trend in the health care industry is toward both
vertical and horizontal integration coupled with significant levels of managed
care, principally through HMOs. In the Company's principal geographic market
areas, HMOs have a smaller share of the health care market than in other areas
of the country, but the Company believes that HMOs will capture an increasing
share of the health care market. The Company believes that it will be necessary
to expand significantly its market share in the HMO market, in part by
successfully transitioning its PAR and PPO members into HMOs, if it is to
succeed in retaining a high overall market share in its existing geographic
markets. There can be no assurance that the Company will succeed in
significantly expanding its market share in HMOs.
9
<PAGE>
INVESTMENTS
The Company's investment policies are designed to provide liquidity to meet
anticipated payment obligations and preserve capital within acceptable limits of
risk. The Company believes that concentration of investments in any one asset
class is unwise due to constantly changing interest rates, market and economic
conditions. A portion of the portfolio has been designated to meet the operating
and liquidity needs of the Company. The liquidity portfolio is invested in
short- to intermediate-term fixed income instruments with an average portfolio
duration of two and one-half years and an average quality of AA. Additional
funds not required for liquidity needs are invested by internal and external
money managers in fixed income and equity securities with the dual objectives of
generating income and safeguarding principal. The long-term fixed income
portfolio is invested in governmental and corporate securities, both domestic
and international, with an average quality rating of A. The equity portfolio
contains readily marketable investment securities (domestic and international)
ranging from small growth to well-established Fortune 500 companies. During the
first quarter of 1997, the Company reduced its equity allocation from 27.8% of
the total portfolio at December 31, 1996 to approximately 10.5%. The Company
currently plans to maintain the equity allocation at levels generally no greater
than 15%.
Each external manager invests within certain guidelines established by the
Company designed to fit into the overall investment strategy. These guidelines
establish minimum quality and diversification requirements which, among other
things, provide limitations on the allowable investment for a single issuer as
well as currency exposure for those managers investing in international
securities. At December 31, 1997, 13.5% of the portfolio was invested to meet
the liquidity needs of the Company with an additional 76.0% in long-term fixed
income portfolios (including derivative instruments) and 10.5% in equity
portfolios. At December 31, 1997, 4.8% of the fixed income portfolio and 44.1%
of the equity portfolio was invested internationally. The exposure to securities
denominated in any one currency (other than U.S. dollars) was no greater than
1.8% at December 31, 1997.
At December 31, 1997 the investment portfolio was comprised of the following (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED PERCENT OF
FAIR VALUE PORTFOLIO
---------- ----------
<S> <C>
Fixed income:
Domestic:
U.S. Treasury securities and obligations of U.S. government
agencies............................................................... $429,947 31.3%
Mortgage-backed obligations of U.S. government agencies................ 73,453 5.3
States and political subdivisions securities........................... 33,232 2.4
Other mortgage-backed and asset-backed securities...................... 139,916 10.2
Domestic corporate securities.......................................... 398,217 29.0
Short-term debt securities with maturities of less than one
year................................................................... 93,561 6.8
Foreign:
Debt securities issued by foreign governments.......................... 42,872 3.1
Foreign corporate bonds............................................... 6,973 0.5
Short-term debt securities with maturities of less than one year....... 9,182 0.7
---------------- ----------------
Total fixed income..................................................... 1,227,353 89.3
---------------- ----------------
Equities:
Domestic........................................................... 80,635 5.9
Foreign............................................................ 63,697 4.6
---------------- ----------------
Total equities......................................................... 144,332 10.5
Derivative instruments................................................. 2,312 0.2
---------------- ----------------
Total investments...................................................... $ 1,373,997 100.0%
================ ================
</TABLE>
10
<PAGE>
As of December 31, 1997, the composition of the Company's fixed income
investment securities by rating is as follows (in thousands):
ESTIMATED PERCENT OF
RATING (1) FAIR VALUE TOTAL
---------- ----------- ----------
AAA........................... $ 727,932 59.3%
AA............................ 30,283 2.5
A............................. 30,552 2.5
BBB........................... 102,849 8.4
BB............................ 149,476 12.2
B............................. 185,546 15.1
CCC or lower.................. - -
Not rated..................... 715 -
----------- ------
Total......................... $ 1,227,353 100.0%
=========== ======
(1) Ratings are assigned by Standard & Poor's Corporation or Moody's Investor
Service, Inc.
At December 31, 1997, $122.7 million, or 8.9% of the Company's investment
portfolio was invested internationally. This amount includes $8.3 million
invested in U.S. dollar denominated investment funds containing international
investment securities.
Derivative instruments consist of foreign currency forward contracts and foreign
currency options. The Company enters into foreign currency derivative
instruments to hedge exposure to fluctuations in foreign currency exchange
rates. Company policy only permits utilization of these instruments in its
foreign denominated bond and equity portfolios. The counterparties to these
transactions are major financial institutions. The Company may incur a loss with
respect to these transactions to the extent that a counterparty fails to perform
under a contract and exchange rates have changed unfavorably since the inception
of the contract. The Company anticipates that the counterparties will be able to
fully satisfy their obligations under the agreements. The forward contracts
involve the exchange of one currency for another at a future date and typically
have maturities of six months or less. As of December 31, 1997, the Company had
forward contracts outstanding to purchase approximately $3.3 million in foreign
currencies and to sell approximately $35.8 million in foreign currencies
(primarily British Pound, German Mark and Canadian Dollar). The gross unrealized
gains and losses related to these contracts as of December 31, 1997 aggregated
$547,000 and $406,000, 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
December 31, 1997. These options generally expire within twelve months. The
gross unrealized gains related to these options as of December 31, 1997
aggregated $1.7 million. There were no gross unrealized losses as of
December 31, 1997.
The Company enters into financial futures contracts for portfolio strategies
such as minimizing interest rate risk and managing portfolio duration. The
notional amount of the futures, $174.8 million as of December 31, 1997, is
limited to that of the market value of the underlying portfolios.
Other than currently or formerly occupied Company property or through
mortgage-backed securities, the Company has no investment in real estate or
mortgage loans. The company does not enter into any derivative instruments other
than forward currency contracts, foreign currency options and financial futures.
REGULATION
HEALTHCARE REFORM - VIRGINIA. In its 1998 session, the Virginia General Assembly
passed the following legislation which will become effective July 1, 1998,
pending approval by the Governor of Virginia:
11
<PAGE>
* a new small group reform measure which requires all insurers and HMOs doing
business in the small group market (employers with 2-50 employees) to offer
and make available both an essential and a standard benefit plan to small
group employers in addition to other insurance plans which they now market.
Prior law required the offering only to groups of 2-25. Rating requirements
apply to the two benefit plans, which will allow carriers to use the
demographic risk classification factors of age, gender and geographic area.
Variations in premiums charged by a small employer carrier based on claim
experience, health status and duration are limited to a range of 20% above
or 20% below the community rate filed by the carrier, defined as the
average rate charged for the same or similar coverage to all of that
carrier's small employer group business.
* legislation that requires HMOs to offer a point of service option as part
of any plan offered to an employer. However, an HMO is not required to do
so if the employer has a non-HMO option in place. Because Trigon Insurance
offers point of service options to its affiliated HMO customers, this
legislation is not expected to have a material effect on the Company's
operations or financial condition.
* legislation that transfers the responsibility for regulation of utilization
review activities and quality of care in managed care plans from the Bureau
of Insurance to the Department of Health. The law also imposes material
change filing requirements previously imposed on HMOs only to all carriers
offering managed care plans. The legislation establishes a mechanism by
which any carrier offering a managed care plan must apply to the Department
of Health and receive a certificate of quality assurance. The Department
will review the carrier's procedures regarding adequacy of complaint
systems, access to care, provider credentialing, patient privacy, as well
as other factors in determining whether to issue the certificate. Full
implementation of the quality bill does not occur until regulations are
promulgated by the Department of Health, and certificates are not required
to maintain a carrier's insurance license until July 1, 2000, so long as an
application for a certificate is made by December 1, 1999. There is no
indication or expectation that the regulatory process will result in
requirements that will materially affect the Company's operations or
financial condition, however, there can be no assurance of that result at
this time.
HEALTHCARE REFORM - FEDERAL. Effective January 1, 1998, provisions of the Health
Insurance Portability and Accountability Act ("HIPAA") affecting the individual
market took effect. The provisions impose requirements concerning guaranteed
renewability and availability, the waiving of waiting periods for certain
eligible individuals coming from group coverage and limitations on the insurers
ability to terminate policies. Also, new requirements on group insurance plans
concerning maternity length of stay and mental health benefits became effective
for group coverage with the commencement of plan years beginning on or after
January 1, 1998. There is no expectation that any of these new requirements will
materially affect the Company's operations or financial condition.
Currently, at the federal level, there are numerous legislative proposals to
regulate health plans in order to address the issues of health care quality and
patient rights. Many of these proposals are viewed by health plans as adverse to
managed care but it is not clear at present whether any of these federal
proposals will be adopted. Moreover, there can be no assurance that additional
legislative or regulatory initiatives will not be undertaken in the future,
either at the federal or state level, to engage in structural reform of the
health care industry in order to reduce the escalation in health care costs or
to make health care more accessible. Such reform, if it occurs, could adversely
affect Trigon's results of operations or financial condition.
HMO REGULATION. Trigon has four HMO subsidiaries, two of which are federally
qualified HMOs. All of Trigon's HMO subsidiaries are licensed by the
Commonwealth of Virginia and are subject to regulation and review by the State
Corporation Commission, with which they must file periodic reports. In addition,
one of the HMO subsidiaries is licensed by and subject to regulation and review
by the State of Maryland, with which it must file periodic reports. Among the
areas regulated by Virginia and Maryland law are policy forms, market conduct,
quality assurance, covered benefits, contracts between the HMO and its health
care providers, the HMO's financial condition, including net worth requirements,
and the geographic service area of an HMO.
Trigon's federally qualified HMOs are also subject to regulation and review by
the U.S. Department of Health and Human Services and certain other federal
authorities, with which they must file periodic reports. Areas covered by
federal law are similar to those covered by state law and regulation. In
addition, one of the Company's HMOs
12
<PAGE>
offers a Medicare risk product that subjects that HMO to regulation and review
by the U.S. Department of Health and Human Services and certain other federal
authorities as well.
INSURANCE HOLDING COMPANY REGULATION. Trigon Healthcare, Inc. is not regulated
as an insurance company but, as the direct or indirect owner of all the capital
stock of Trigon Insurance, Trigon Health and Life Insurance Company, formerly
Monticello Life Insurance Company ("Trigon Health and Life"), a Virginia-based
group life and disability company, and Mid-South, is regulated as an insurance
holding company and subject to the insurance holding company acts of Virginia
and North Carolina, the states in which the insurance company subsidiaries are
domiciled. Effective July 1, 1998, the Company's HMOs will also be required to
meet the obligations and restrictions under the Virginia Holding Company Act.
These acts contain certain reporting requirements as well as restrictions on
transactions between an insurer and its affiliates. The Virginia insurance
holding company laws and regulations generally require insurance companies
within an insurance holding company system to register with the State
Corporation Commission, and to file with the State Corporation Commission
certain reports describing capital structure, ownership, financial condition,
certain intercompany transactions and general business operations. In addition,
various notice and reporting requirements generally apply to transactions
between insurance companies and their affiliates within an insurance holding
company system, depending on the size and nature of the transactions. Virginia
insurance holding company laws and regulations require prior regulatory approval
or, in certain circumstances, prior notice of, certain material intercompany
transfers of assets as well as certain transactions between insurance companies,
their parent holding companies and affiliates.
Additionally, holding company acts (including those of Virginia and North
Carolina) restrict the ability of any person to obtain control of an insurance
company without prior regulatory approval. Under Virginia insurance holding
company laws and regulations, the acquisition of control of a Virginia insurer
or a person controlling a Virginia insurer, including the Company, requires the
prior approval of the State Corporation Commission. Without such approval (or an
exemption), no person may acquire any voting security of an insurance holding
company which controls a Virginia insurance company, or merge with such a
holding company, if as a result of such transaction such person would "control"
the insurance holding company. "Control" is defined as the direct or indirect
power to direct or cause the direction of the management and policies of a
person and is presumed to exist if a person directly or indirectly owns or
controls 10% or more of the voting securities of another person.
INSURANCE COMPANY REGULATION. Trigon Insurance and its HMO subsidiaries and
Trigon Health and Life are subject to the insurance laws and regulations of the
Commonwealth of Virginia, the domiciliary state of these companies. Mid-South is
domiciled in North Carolina and is subject to the laws and regulations of that
state. In addition, Trigon Insurance and its HMO subsidiaries, Trigon Health and
Life and Mid-South are subject to the insurance laws and regulations of the
other jurisdictions in which they are licensed or authorized to do business.
These insurance laws and regulations generally give state regulatory authorities
broad supervisory, regulatory and administrative powers over insurance companies
and insurance holding companies with respect to most aspects of their insurance
businesses. This regulation is intended primarily for the benefit of the
policyholders and members of insurance companies and not investors. Regulatory
authorities exercise extensive supervisory power over health and life insurance
companies with respect to the licensing of insurance companies; the approval of
forms and insurance policies used; the nature of, and limitations on, an
insurance company's investments; the periodic examination of the operations of
insurance companies; the form and content of annual statements and other reports
required to be filed on the financial condition of insurance companies; and the
establishment of capital requirements for insurance companies. Trigon Insurance,
the HMO subsidiaries, Trigon Health and Life and Mid-South are required to file
periodic statutory financial statements in each jurisdiction in which they are
licensed. Additionally, Trigon Insurance, the HMO subsidiaries, Trigon Health
and Life, and Mid-South are periodically examined by the insurance departments
of the jurisdictions in which they are licensed to do business. Some states
impose surcharges on all insurance companies operating in the state except for
the Blue Cross plan or plans operating there. The Company does not believe that
these surcharges will materially affect its ability to expand outside of
Virginia because the surcharges have generally not been imposed in the states in
which the Company principally intends to expand and, if imposed, would likely
apply equally to all non-Blue Cross companies operating in the state.
RISK-BASED CAPITAL REQUIREMENTS. In 1994, Virginia adopted new statutory
risk-based capital ("RBC") requirements for health and other insurance
companies. Such requirements are intended to assess the capital
13
<PAGE>
adequacy of life and health insurers, taking into account the risk
characteristics of an insurer's investments and products. The formula for
calculating such RBC requirements, set forth in instructions adopted by the
NAIC, is designed to take into account asset risks, insurance risks, interest
rate risks and other relevant risks with respect to an individual insurance
company's business. Under these laws, an insurance company must submit a report
of its RBC level to the State Corporation Commission as of the end of the
previous calendar year.
The Virginia RBC requirements categorize insurance companies according to the
extent to which they meet or exceed certain RBC thresholds. The law requires
increasing degrees of regulatory oversight and intervention as an insurance
company's RBC declines. The level of regulatory oversight ranges from requiring
the insurance company to inform and obtain approval from the Virginia Insurance
Commissioner of a comprehensive financial plan for increasing its RBC to
mandatory regulatory intervention requiring an insurance company to be placed
under regulatory control in a rehabilitation or liquidation proceeding.
As of December 31, 1997, the RBC levels of Trigon Insurance, Trigon Health and
Life, and Mid-South, as calculated in accordance with the NAIC RBC instructions,
exceeded all RBC thresholds.
RESTRICTIONS ON DIVIDENDS. In the event the Company determines to pay dividends,
the principal source of funds to pay dividends to stockholders would be
dividends received by the Company from its subsidiaries, including Trigon
Insurance. Virginia insurance laws and regulations restrict the payment of
extraordinary dividends declared by insurance companies, including health care
insurers such as Trigon Insurance, in a holding company system. An insurance
company is prohibited from paying an extraordinary dividend unless it obtains
the approval of the State Corporation Commission. An extraordinary dividend is
one which, together with the amount of dividends and distributions paid by the
insurance company during the immediately preceding 12 months, exceeds the lesser
of (i) 10% of the insurance company's surplus to policyholders as of the
preceding December 31st or (ii) the insurance company's net income (not
including realized capital gains) for the preceding calendar year. Further, an
insurance company may not pay a dividend unless, after such payment, its surplus
to policyholders is reasonable in relation to its outstanding liabilities and
adequate to meet its financial needs. The State Corporation Commission may bring
an action to enjoin or rescind payment of any dividend or distribution that
would cause the insurance company's statutory surplus to be unreasonable or
inadequate. The maximum amount available after certain dates in 1998 for payment
of dividends by Trigon Insurance to the Company without the prior approval of
the State Corporation Commission is $61.8 million.
North Carolina, Mid-South's domiciliary state, similarly restricts the payment
of dividends by their domiciliary insurance companies.
ASSESSMENTS AGAINST INSURERS. Under insolvency or guaranty association laws in
most states, insurance companies can be assessed for amounts paid by guaranty
funds for policyholder losses incurred by insolvent insurance companies. Most
state insolvency or guaranty association laws, including Virginia's, currently
provide for assessments based upon the amount of premiums received on insurance
underwritten within such state (with a minimum amount payable where Mid-South is
licensed even if no premium is received). Substantially all of Trigon's premiums
are currently derived from insurance underwritten in Virginia.
Under the Virginia Life, Accident and Sickness Insurance Guaranty Association
(the "Association") Act, assessments against insurance companies which issue
policies of accident or sickness insurance, such as Trigon Insurance, are made
retrospectively and are based (up to prescribed limits) upon the ratio of (i)
the insurance company's premiums received in Virginia over the previous three
calendar years on accident and sickness insurance, to (ii) the aggregate amount
of premiums received by all assessed member insurance companies over such three
calendar years on accident and sickness insurance. The guaranty fund and
assessments made under the act are administered by the Association, which has
its own board of directors selected by member insurers with the approval of the
State Corporation Commission. An assessment may be abated or deferred by the
Association if, in the opinion of the board, payment would endanger the ability
of the member to fulfill its contractual obligations, but the other member
insurers may be assessed for the amount of such abatement or deferral. Any such
assessment paid by a member insurance company may be offset against its premium
tax liability to the Commonwealth of Virginia in each succeeding year in an
amount not to exceed 0.05 (one twentieth) of one percent of the member's direct
gross
14
<PAGE>
premium income for the class of insurance for which the insurer is assessed. The
amount and timing of any future assessments, however, cannot be reasonably
estimated and are beyond the control of the Company. During 1997, legislation
was enacted in Virginia that changed the methodology by which these amounts are
offset against the premium tax liability. Any assessments issued after January
1, 1998 will be offset against the premium tax liability over the ten calendar
years following the year of the payment, in amounts equal to ten percent of the
amount paid.
VIRGINIA'S OPEN ENROLLMENT PROGRAM. The Commonwealth of Virginia has an open
enrollment program pursuant to which Trigon Insurance is required to offer
comprehensive accident and sickness insurance contracts to individuals without
imposition of certain underwriting criteria that would deny coverage on the
basis of medical condition, age or employment status. As an incentive for
participating in the open enrollment program, Trigon Insurance pays Virginia
premium tax of three-fourths of one percent (0.75%) on premiums received from
individual accident and sickness insurance rather than the general Virginia
premium tax of two and one fourth percent (2.25%). This general Virginia premium
tax applies to accident and sickness insurance premiums received by Trigon
Insurance from group business. Prior to January 1, 1998, policies issued to
small employers were also part of the open enrollment program. Subsequent to
health care reform legislation in 1997, all carriers offering coverage in the
small group market are required to issue any policy in its small group market
portfolio to any small employer that wants to purchase the product. To withdraw
from the open enrollment program, Trigon Insurance would be required to give 24
months advance notice of withdrawal to the State Corporation Commission.
BANKRUPTCY AND INSOLVENCY. In the event of a default on any debt incurred by the
Company or the bankruptcy of the Company, the creditors and stockholders of the
Company would have no right to proceed against the assets of Trigon Insurance or
any other subsidiary of the Company. If Trigon Insurance were subject to a
rehabilitation or liquidation proceeding, such proceeding would be brought by
the State Corporation Commission which would act as the receiver with respect to
such insurance company's property and business. All creditors of Trigon
Insurance, including, without limitation, members and, if applicable, the
various state guaranty associations, would be entitled to payment in full from
such assets before the Company, as a stockholder, would be entitled to receive
any distributions therefrom.
THE BLUE CROSS BLUE SHIELD LICENSE
The Company and its subsidiaries have the exclusive right to use certain Blue
Cross and Blue Shield service marks and tradenames for all of their plans and
products throughout Virginia other than a small portion of the northern Virginia
suburbs adjacent to Washington, D.C. The license requires a fee to be paid to
BCBSA equal to total association expenses allocated to members based upon
enrollment and premium. BCBSA is a national trade association of Blue Cross and
Blue Shield licensees, the primary function of which is to promote and preserve
the integrity of the Blue Cross and Blue Shield name and service marks as well
as provide certain coordination among plan and provider services. BCBSA has 55
primary licensee members, each of which holds exclusive rights to use the Blue
Cross and/or Blue Shield name and service mark in specific geographic areas,
subject to annual licensing fees and certain other guidelines. Each BCBSA
licensee is an independent legal organization and is not responsible for
obligations of other BCBSA member organizations.
The Company has no right to use the Blue Cross and Blue Shield service marks and
tradenames outside of its designated territory within the Commonwealth of
Virginia. The Company and its subsidiaries intend to conduct their businesses
outside of Virginia under the name "Trigon" without reference to the Blue Cross
and Blue Shield service marks and tradenames.
Under the Company's license agreement with BCBSA, an institutional investor
(generally defined as an entity identified in Rule 13d-1(b) (1) (ii) of the
rules and regulations under the Securities Exchange Act of 1934 and which makes
certifications required by item 10 of SEC Schedule 13G) may own up to 10% of the
outstanding voting securities of the Company. All other stockholders are subject
to a 5% ownership limitation. Ownership by any stockholder of voting securities
in excess of such limits would subject the Company to automatic termination of
its license.
15
<PAGE>
The Company's Articles of Incorporation contain certain provisions which are
intended to prevent any holder from acquiring shares in excess of the limits set
forth in the Company's license agreement. However, there can be no assurance
that a court would enforce these provisions, or that if these provisions were
not enforced that the Company would retain the license from BCBSA. If the BCBSA
license were to be terminated, there would be a material adverse effect on the
Company's business and operations, which the Company does not believe it can
meaningfully quantify.
The license agreements between BCBSA and its licensees prohibit a licensee from
entering into certain transactions which would result in an unlicensed entity
obtaining control of the licensee or acquiring a substantial portion of the
licensee's assets related to services provided under the Blue Cross or Blue
Shield service marks. The license agreements also require that a licensee pay to
BCBSA a specific amount upon termination of the license agreement, subject to
certain limited exceptions. The amount payable upon termination of the license
agreement is equal to $25 multiplied by the number of the licensee's members
receiving products or services sold or administered under the Blue Cross or Blue
Shield service marks, subject to reduction to the extent the payment of such fee
would cause such licensee to fall below certain capital requirements established
by the BCBSA.
RATING
Trigon Insurance, HealthKeepers and PHP are each presently assigned a rating of
"A" (Excellent) by A.M. Best Company. Mid-South, Trigon Health and Life, PHC and
Priority Health Care, Inc. are each presently assigned an A.M. Best rating of
"A-" (Excellent). A.M. Best's ratings of "A" and "A-" are assigned to companies
which have, on balance, excellent financial strength, operating performance and
market profile when compared to the standards established by the A.M. Best
Company. It is the opinion of A.M. Best Company that such companies have a
strong ability to meet their ongoing obligations. Such ratings are not directed
to the protection of investors and are subject to review and change over time.
EMPLOYEES
As of December 31, 1997, the Company had 3,583 full-time employees. The
employees are primarily located in Richmond and Roanoke, Virginia, with
employees also located in Illinois, Maryland, Georgia, New Jersey, North
Carolina, Pennsylvania, South Carolina, Texas, Washington D.C. and West
Virginia. The Company believes that its relationship with its employees is good.
No employees are subject to collective bargaining agreements.
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C>
Norwood H. Davis, Jr. 58 Chairman of the Board and Chief Executive Officer
Thomas G. Snead, Jr. 44 President and Chief Operating Officer
John C. Berry 60 Executive Vice President and Chief Operating
Officer, Government and Individual Business Unit
Thomas R. Byrd 40 Senior Vice President and Chief Financial Officer
Paul F. Nezi 50 Senior Vice President, Marketing and Sales
J. Christopher Wiltshire 43 Senior Vice President, General Counsel and
Corporate Secretary
</TABLE>
Norwood H. Davis, Jr. joined Trigon Insurance in 1968, and was elected to the
Board of Directors in 1975. Since 1989, he has served as Chairman of the Board
and Chief Executive Officer. He also became Chairman of the Company in June
1995. Mr. Davis is a director of Altris Software, Inc. and Hilb, Rogal &
Hamilton Co.
16
<PAGE>
Thomas G. Snead, Jr. joined Trigon Insurance in 1985. He served as Group
Financial Officer from 1989 to 1990 and as Senior Vice President and Chief
Financial Officer from 1990 to 1997. He became Treasurer of the Company in June
1995. He was elected to his current position of President and Chief Operating
Officer of the Company in October 1997.
John C. Berry joined Trigon Insurance in 1987. He served as Chief Operating
Officer of Government and Individual Business from 1987 through 1989 and as
Senior Vice President and Chief Operating Officer of Government and Individual
Business during 1990. In 1991, he was appointed to his current position of
Executive Vice President and Chief Operating Officer of Government and
Individual Business.
Thomas R. Byrd joined Trigon Insurance in 1991 as Director, Financial Analysis.
In 1992, he was named Vice President and Controller, a position he held until
1995 when he became Vice President, Financial Planning and Analysis. He was
appointed to his current position of Senior Vice President and Chief Financial
Officer of the Company in November 1997.
Paul F. Nezi joined Trigon Insurance in October 1996 as Senior Vice President,
Marketing and Underwriting. In 1997, he was named Senior Vice President,
Marketing and Sales. Prior to joining the Company, he served as Executive Vice
President, Marketing, Sales and Product Development of ChoiceCare in
Cincinnati, Ohio since 1993. Beginning in November 1995, he also served as
President of ChoiceCare's Development Division. From 1991 through 1992, he
served as Vice President and General Manager for the Advanced Imaging Products
group of AM Graphics, a division of AM International in Dayton, Ohio.
J. Christopher Wiltshire joined Trigon Insurance in October 1996 as Senior Vice
President, General Counsel and Corporate Secretary. He also became Secretary of
the Company in October 1996. Prior to joining the Company, he was employed by
the law firm, McGuire, Woods, Battle & Boothe, L.L.P. for 17 years, the last
nine years as partner.
SERVICE MARKS
The Company has registered and maintains several service marks, trademarks and
tradenames at the federal level, in the Commonwealth of Virginia and in certain
other states. "Trigon," "Keycare" and "HealthKeepers" are included among these
marks. Although the Company considers its registered service marks, trademarks
and tradenames important in the operation of its business, the business of the
Company is not dependent on any individual service mark, trademark or tradename.
For a discussion of the Company's license to use certain Blue Cross and Blue
Shield service marks and tradenames, see "The Blue Cross Blue Shield License."
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of these safe harbor provisions. Certain information contained in
this Form 10-K is forward-looking within the meaning of the Act or Securities
and Exchange Commission rules. Words such as expects, anticipates, intends,
plans, believes, seeks or estimates, or variations of such words and similar
expressions are also intended to identify forward-looking statements. These
forward-looking statements are subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company. Set forth
below are certain important factors that, in addition to general economic
conditions and other factors, some of which are discussed elsewhere in this Form
10-K, may affect these forward-looking statements and the Company's business
generally.
ESCALATING HEALTH CARE COSTS AND THE HEALTH CARE INDUSTRY. The Company's
profitability depends in large part on accurately predicting and effectively
managing health care costs. Predicting medical costs is difficult partially due
to the variability of medical inflation. Trigon continually reviews and adjusts
its premium
17
<PAGE>
and benefit structure to reflect its underlying claims experience and
revised actuarial data; however, several factors could adversely affect
the medical loss ratios. Certain of these factors, which include
changes in health care practices, inflation, new technologies, major
epidemics, natural disasters and malpractice litigation, are beyond
any health plan's control and could adversely affect the Company's
ability to accurately predict and effectively control health care costs.
Competitive price pressures in the health insurance and managed care industry,
which generally result from the entry and exit of health care companies in the
marketplace, historically have resulted in, or contributed to, pricing and
profitability cycles. The extent to which recent structural changes in the
managed health care and health insurance industry have altered cyclical patterns
is uncertain. There can be no assurance, however, that a continuation of the
typical cyclical pattern will not adversely affect the profitability of the
Company in the next few years.
COMPETITION. The health care industry is highly competitive both in Virginia and
in other states in the southeastern and mid-Atlantic United States into which
the Company principally intends to expand. See "Competition". There is no
assurance that the overall increased competition will not exert strong pressures
upon Trigon's profitability, its ability to increase enrollment, or its ability
to successfully pursue growth in areas both within and outside of Virginia.
The trend in the health care industry is toward both vertical and horizontal
integration coupled with significant levels of managed care, principally through
HMOs. In the Company's principal geographic market areas, HMOs have a smaller
share of the health care market than in other areas of the country, but the
Company believes that HMOs will capture an increasing share of the health care
market. The Company believes that it will be necessary to significantly expand
its market share in the HMO market, in part by successfully transitioning its
PAR and PPO members into HMOs, if it is to succeed in retaining a high overall
market share in its existing geographic markets. There can be no assurance that
the Company will succeed in significantly expanding its market share in HMOs.
GOVERNMENT REGULATION. The Company and its subsidiaries are subject to federal
and state regulation. See "Regulation". Regulatory initiatives may be undertaken
in the future, either as the federal or state level, to engage in structural
reform of the health care industry in order to reduce the escalation in health
care costs or to make health care more accessible. Such reform, if it occurs,
could adversely affect Trigon's results of operations or financial condition.
POTENTIAL RISKS ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS. As a result of the
expansion of managed care companies into Virginia and the southeastern and
mid-Atlantic regions of the United States, the competition to purchase health
care companies has intensified, which in many instances has resulted in
significant increases in the costs of acquiring such companies, and which could
affect the availability of attractive acquisition opportunities. In addition,
the Company has no significant experience in expanding its managed health care
business outside Virginia. There can be no assurance that the Company will
successfully identify or complete acquisitions or that any acquisitions, if
completed, will perform as expected or will contribute significant revenues or
profits to the Company.
The Company's ability to expand successfully outside of Virginia through
acquisitions or otherwise may be adversely affected by its inability to use the
Blue Cross and Blue Shield service marks and trademarks outside of the Company's
licensed territory in Virginia, by the Company's lack of substantial market
share or established provider networks outside of Virginia and by the presence
of competitors with strong market positions in these areas.
CONCENTRATION OF BUSINESS IN VIRGINIA. While the Company's growth strategy
includes expansion outside Virginia, for the foreseeable future a significant
portion of the Company's revenues may be subject to economic factors specific to
Virginia. Therefore, there can be no assurance that a downturn in the Virginia
economy would not adversely affect the Company.
POTENTIAL LOSS OF BLUE CROSS AND BLUE SHIELD SERVICE MARKS AND TRADENAMES.
Trigon and the BCBSA are parties to a license agreement pursuant to which the
Company and its subsidiaries have the
18
<PAGE>
exclusive right to use certain Blue Cross and Blue Shield service marks
and tradenames for their products throughout Virginia other than
certain northern Virginia suburbs adjacent to Washington, D.C. See
"The Blue Cross Blue Shield License". If the BCBSA license were to be
terminated, there would be a material adverse effect on the Company's
business and operations, which the Company does not believe it can
meaningfully quantify.
To the extent that the Company continues to use the Blue Cross and Blue Shield
service marks and tradenames in marketing its managed care products, there can
be no assurance that any negative publicity concerning BCBSA and other BCBSA
licenses will not adversely affect the sales of the Company's managed care
products and the Company's operations.
Item 2. Properties.
The Company is headquartered in Richmond, Virginia, where it owns a four-story
building with 265,000 square feet. The Company also owns an office facility and
warehouse in Roanoke, Virginia with 201,000 square feet and an office facility
in Fayetteville, North Carolina with 71,000 square feet. The Company leases an
additional 428,000 square feet at various other locations in Richmond, Virginia.
The Company also leases space at two other facilities in Roanoke, Virginia
comprising 52,000 square feet.
The Company leases 73,000 square feet for regional offices throughout Virginia
and 22,000 square feet for office space in Maryland, North Carolina, West
Virginia, Pennsylvania, Texas and South Carolina.
Item 3. Legal Proceedings.
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 $1.3 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 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
consolidated financial condition of the Company.
The Company and certain of its subsidiaries are involved in other various legal
actions occurring in the normal course of 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 consolidated financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Refer to page 30, "Market Prices of Common Stock and Dividend Data", of Trigon
Healthcare Inc.'s Annual Report to Shareholders, which is incorporated herein by
reference.
Refer to "Part 1 - Business -- Regulation -- Insurance Holding Company
Regulation" and "Part 1 - Business -- Regulation -- Restriction on Dividends"
for discussion of insurance holding company regulations and dividend
19
<PAGE>
restrictions. In addition, under the terms of the Company's $300 million
revolving credit agreement, the Company may not pay dividends on the Common
Stock unless the aggregate of all dividends paid by the Company plus payments
to purchase, redeem or otherwise acquire capital stock of the Company
(other than the Commonwealth Payment) does not exceed the sum of (i)
$10,000,000 plus (ii) 50% of the consolidated net income (or minus 100% of
consolidated net loss) of the Company for the period from the effectiveness of
the Demutualization through the end of the most recently completed fiscal
quarter, plus (iii) an amount (not to exceed $50,000,000) equal to 50% of the
cumulative cash dividends paid out of income of certain subsidiaries of
the Company earned prior to January 1, 1997 and received by the Company after
the date of the revolving credit agreement and before December 31, 1997.
Item 6. Selected Financial Data.
Refer to pages 22 and 23 of Trigon Healthcare Inc.'s Annual Report to
Shareholders, which are incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Refer to pages 24 through 30, "Management's Analysis of Operating Results", of
Trigon Healthcare Inc.'s Annual Report to Shareholders, which are incorporated
herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable for 1997.
Item 8. Financial Statements and Supplementary Data.
Refer to pages 31 through 55, the Consolidated Financial Statements, page
56, "Independent Auditors' Report", and page 21, "Quarterly Financial
Data", of Trigon Healthcare Inc.'s Annual Report to Shareholders, which are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Refer to pages 1 through 3, "Election of Directors", and page 6,
"Section 16(a) Beneficial Ownership Reporting Compliance", of the Company's
definitive Proxy Statement dated March 27, 1998, which are incorporated
herein by reference solely as they relate to the Directors of the Company.
Pursuant to General Instruction G(3) to Form 10-K, information as to executive
officers of the Company is set forth in Part I of this Form 10-K. See "Part 1 -
Business -- Executive Officers."
Item 11. Executive Compensation.
Refer to pages 7 through 12, "Compensation of Executive Officers", of the
Company's definitive Proxy Statement dated March 27, 1998, which are
incorporated herein by reference solely as they relate to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Refer to pages 3 and 4, "Beneficial Ownership of Securities", of the
Company's definitive Proxy Statement dated March 27, 1998, which are
incorporated herein by reference solely as they relate to this item.
Item 13. Certain Relationships and Related Transactions.
R. Gordon Smith, a director of the Company, is a partner of McGuire, Woods,
Battle & Boothe, L.L.P., a law firm which regularly provides legal services
to the Company and its subsidiaries.
20
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report.
1. Consolidated Financial Statements from Trigon Healthcare Inc.'s
Annual Report to Shareholders are incorporated herein by
reference in Item 8:
-- Consolidated Balance Sheets as of December 31, 1997 and 1996
(page 31)
-- Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 (page 32)
-- Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1997, 1996 and 1995 (page 33)
-- Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 (page 34)
-- Summary of Significant Accounting Policies (pages 35
through 38)
-- Notes to Consolidated Financial Statements (pages 39 through
55)
-- Independent Auditors' Report (page 56)
2. Financial statement schedules
Independent Auditors' Report on Financial
Statement Schedule.......................(filed herein on page S-1)
Schedule I - Condensed Financial Information of Registrant (parent
only) as of December 31, 1997 and for the period February 5, 1997
through December 31, 1997 (filed herein on pages S-2 - S-6)
3. Exhibits. The following is a list of exhibits to this Form 10-K.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2 -- Amended and Restated Plan of Demutualization. (1)
3.1 -- Amended and Restated Articles of Incorporation of Trigon Healthcare, Inc. (1)
3.2 -- Amended and Restated Bylaws of Trigon Healthcare, Inc. (2)
3.3 -- Articles of Amendment to Amended and Restated Articles of Incorporation setting forth the designation,
preferences and rights of Series A Junior Participating
Preferred Stock of Trigon Healthcare, Inc. dated July 16,
1997. (4)
4 -- Form of Stock Certificate (other Instruments Defining the Rights of Security-Holders). (1)
4.1 -- Rights Agreement dated as of July 16, 1997 between Trigon Healthcare, Inc. and
First Chicago Trust Company of New York, as Rights Agent. (4)
4.2 -- Form of Rights Certificate. (4)
10.1 -- License Agreement by and between the Blue Cross Blue Shield Association and the Company. (2)
(a) Blue Cross license
(b) Blue Shield license
10.2 -- Limited Fixed Return Plan for Certain Officers and Directors of the Company. (1) *
10.4 -- Non-Contributory Retirement Program for Certain Employees of the Company. (1) *
10.5 -- Supplemental Executive Retirement Program for Certain Employees of the Company. (1) *
10.6 -- Salary Deferral Plan for Norwood H. Davis, Jr.. (1) *
10.7 -- Amended and Restated Employment Agreement dated January 2, 1998 by and between the Company and
Norwood H. Davis, Jr.. *
10.9 -- Employee Thrift Plan of the Company. (1)*
10.10 -- 401(k) Restoration Plan of the Company . (1) *
10.11 -- First Amendment to the Employee Thrift Plan of the Company, dated as of February 19, 1997. (2) *
10.12 -- Form of Employment Agreement dated as of December 12, 1990 by and between the Company and
John C. Berry and certain other executive officers. (1) *
21
<PAGE>
10.14 -- Credit Agreement dated as of February 5, 1997 among Trigon Healthcare, Inc.,
the banks party thereto and Morgan Guaranty Trust Company of
New York, as Agent. (2)
10.15 -- 1997 Stock Incentive Plan (6).*
10.16 -- Employee Stock Purchase Plan (6).*
10.17 -- Non-Employee Directors Stock Incentive Plan (6).*
10.18 -- Amendment to the License Agreement by and between the Blue Cross Blue Shield Association and the Company. (5)
10.19 -- Amendment to the Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company. *
10.20 -- Form of Executive Continuity Agreement dated as of April 29, 1997 between Trigon Insurance Company
and certain executive officers. (3) *
10.21 -- Form of Executive Continuity Agreement dated as of April 29, 1997 between Trigon Insurance Company and
John C. Berry and certain other executive officers. (3) *
11 -- Computation of per share earnings. Refer to pages 50 and 51,
"Note 14. Net Income and Pro Forma Net Income Per Share", of
Trigon Healthcare Inc.'s Annual Report to Shareholders, which
are incorporated herein by reference.
13 -- Excerpts from the Company's Annual Report to Shareholders for the year ended December 31, 1997.
21 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP.
27 -- Financial Data Schedule
(1) Incorporated by reference to exhibits filed with the Company's Registration Statement on
Form S-1 (registration number 333-09773).
(2) Incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1997.
(3) Incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended March 31, 1997.
(4) Incorporated by reference to exhibits filed with the Company's Form 8-A/A filed on July 16, 1997.
(5) Incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended September 30, 1997.
(6) Incorporated by reference to exhibits filed with the Company's Proxy Statement dated March 13, 1997.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this
Form 10-k pursuant to Item 14(c) of this Form 10-K.
</TABLE>
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.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the County of Henrico,
Commonwealth of Virginia, on March 30, 1998.
TRIGON HEALTHCARE, INC.
By: /s/ THOMAS R. BYRD
------------------
THOMAS R. BYRD
Title: SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C>
/s/ NORWOOD H. DAVIS, JR. Chairman (Principal Executive Officer) March 24, 1998
- ----------------------------
NORWOOD H. DAVIS, JR.
/s/ THOMAS R. BYRD Senior Vice President and Chief
- ---------------------------- Financial Officer (Principal Financial
THOMAS R. BYRD and Accounting Officer)
March 30, 1998
/s/ LENOX D. BAKER, JR. Director March 21, 1998
- ----------------------------
LENOX D. BAKER, JR., M.D.
/s/ JAMES K. CANDLER Director March 23, 1998
- ----------------------------
JAMES K. CANDLER
/s/ JOHN COLE, JR. Director March 23, 1998
- ----------------------------
JOHN COLE, JR., M.D.
/s/ ROBERT M. FREEMAN Director March 25, 1998
- ----------------------------
ROBERT M. FREEMAN
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM R. HARVEY Director March 26, 1998
- ----------------------------
WILLIAM R. HARVEY, Ph.D.
/s/ ELIZABETH G. HELM Director March 25, 1998
- ----------------------------
ELIZABETH G. HELM
/s/ GARY A. JOBSON Director March 20, 1998
- ----------------------------
GARY A. JOBSON
/s/ FRANK C. MARTIN, JR. Director March 23, 1998
- ----------------------------
FRANK C. MARTIN, JR.
/s/ DONALD B. NOLAN Director March 27, 1998
- ----------------------------
DONALD B. NOLAN, M.D.
/s/ WILLIAM N. POWELL Director March 20, 1998
- ----------------------------
WILLIAM N. POWELL
/s/ J. CARSON QUARLES Director March 25, 1998
- ----------------------------
J. CARSON QUARLES
/s/ R. GORDON SMITH Director March 25, 1998
- ----------------------------
R. GORDON SMITH
/s/ HUBERT R. STALLARD Director March 24, 1998
- ----------------------------
HUBERT R. STALLARD
/s/ JACKIE M. WARD Director March 23, 1998
- ----------------------------
JACKIE M. WARD
/s/ STIRLING L. WILLIAMSON, JR. Director March 20, 1998
- ----------------------------
STIRLING L. WILLIAMSON, JR.
</TABLE>
<PAGE>
Independent Auditors' Report on
Financial Statement Schedule
The Board of Directors
Trigon Healthcare, Inc.:
Over date of February 4, 1998, we reported on the consolidated balance sheets of
Trigon Healthcare, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule included in this annual report on Form 10-K. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Richmond, Virginia
February 4, 1998
S-1
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
Balance Sheet
December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Assets 1997
------ ----------------
<S> <C>
Current assets
Cash $ 1
Investment securities, at estimated fair value 81,364
Premiums and other receivables 2,569
----------------
Total current assets 83,934
----------------
Investment in subsidiaries 960,418
Other assets 425
----------------
Total assets $ 1,044,777
================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities
Accounts payable and accrued expenses $ 562
Deferred income taxes 389
Payable to affiliates 89
----------------
Total current liabilities 1,040
----------------
Long-term debt 85,000
----------------
Total liabilities 86,040
----------------
Shareholders' equity
Common stock,$0.01 par; 42,300 shares issued and outstanding 423
Capital in excess of par 842,035
Retained earnings 78,982
Net unrealized gain on investment securities,
net of deferred income taxes of $20,083 in 1997 37,297
----------------
Total shareholders' equity 958,737
Commitments and contingencies -
----------------
Total liabilities and shareholders' equity $ 1,044,777
================
</TABLE>
See accompanying independent auditors' report and notes to condensed
financial information.
S-2
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statement of Operations
For the Period February 5, 1997 through December 31, 1997
(In thousands)
1997
----
Revenues
Investment income $ 4,358
Net realized losses (105)
Cash dividends from subsidiaries 50,000
-----------
Total revenues 54,253
Expenses
Selling, general and administrative expenses 1,742
Interest expense 4,601
----------
Total expenses 6,343
----------
Income before income taxes and equity in undistributed 47,910
net income of subsidiaries
Income tax benefit (868)
----------
Income before equity in undistributed net income
of subsidiaries 48,778
Equity in undistributed net income of subsidiaries 30,204
----------
Net income $ 78,982
===========
See accompanying independent auditors' report and notes to condensed
financial information.
S-3
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statement of Changes in Shareholders' Equity
For the Period February 5, 1997 through December 31, 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, 1997 $ - $ - $ - $ - $ -
Undistributed earning of subsidiaries
before Demutualization and IPO - - 722,330 33,521 755,851
Issuance of 24,475,022 shares to eligible
policyholders in the Demutualization and
cash payment to eligible policyholders in
lieu of shares of common stock 245 630,941 (722,330) - (91,144)
Issuance of 17,825,000 shares in the Initial
Public Offerings, net of expenses 178 215,027 - - 215,205
Other, principally shares held by
consolidated grantor trusts - (3,933) - (3,933)
Net income after Demutualization 78,982 - 78,982
Change in unrealized gains (losses)
on investment securities, net - - - 3,776 3,776
-------- -------------- -------------- -------------- -------------
Balance at December 31, 1997 $ 423 $ 842,035 $ 78,982 $ 37,297 $ 958,737
======= ============== ============== ============== =============
</TABLE>
See accompanying independent auditors' report and notes to condensed
financial information.
S-4
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statement of Cash Flows
For the Period February 5, 1997 through December 31, 1997
(in thousands)
1997
-------------
Net income $ 78,982
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Accretion of discounts and amortization of premiums, net (129)
Undistributed earnings of subsidiaries (30,204)
Increase in accounts receivable (2,569)
Increase in other assets (425)
Increase in accounts payable and accrued expenses 562
Payment of obligation for commonwealth payment (175,000)
Change in deferred income taxes 53
Increase in payable to affiliates 89
Realized investment losses (net) 105
-------------
Net cash provided by operating activities (128,536)
Cash flows from investing activities:
Investment securities purchased (214,562)
Proceeds from investment securities sold 77,002
Maturities of fixed income securities 57,180
-------------
Net cash used by investing activities (80,380)
Cash flows from financing activities:
Proceeds from long-term debt 85,000
Net proceeds from issuance of common stock 215,205
Net payments from issuance of common stock under
employee benefit plans (144)
Payments to members in lieu of common stock
pursuant to Plan of Demutualization (91,144)
-------------
Net cash provided by financing activities 208,917
-------------
Net increase in cash 1
Cash - beginning of year -
=============
Cash - end of year $ 1
=============
Cash paid during the year for
=============
Interest $ 4,344
=============
See accompanying independent auditors' report and notes to condensed
financial information.
S-5
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT ONLY), CONTINUED
Notes to Condensed Financial Information of Registrant (Parent Only)
The condensed financial information provided should be read in conjunction with
the Consolidated Financial Statements incorporated by reference in Part II,
Section 8 of this Form 10-K and the following notes:
(a) Basis of Presentation
The accompanying condensed financial information reflects the financial
position as of December 31, 1997 and the results of operations, changes in
shareholders' equity and cash flows for the period after the
Demutualization and Initial Public Offering, February 5, 1997 through
December 31, 1997. The Registrant had no operations prior to February 5,
1997, the date it became the holding company. Refer to note 1 to the
consolidated financial statements for details regarding the
Demutualization and Initial Public Offering.
(b) Long-Term Debt
The information about long-term debt contained in Note 11 of the
notes to the consolidated financial statements is incorporated
herein by reference.
(c) Cash and Stock Dividends
During 1997, a subsidiary of the Registrant, Trigon Insurance Company,
received permission from the Virginia Bureau of Insurance to pay a
$238.7 million dividend to the Registrant, consisting of $188.7 million
in stock of a wholly-owned subsidiary and $50 million in cash. This
dividend was effected on July 31, 1997.
S-6
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
10.7 -- Amended and Restated Employment Agreement dated January 2,
1998 by and between the Company and Norwood H. Davis, Jr.
10.19 -- Amendment to the Non-Contributory Retirement Program for
Certain Employees of Trigon Insurance Company
13 -- Excerpts from the Company's Annual Report to Shareholders for
the year ended December 31, 1997.
21 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP.
27 -- Financial Data Schedule.
EXHIBIT 10.7
NORWOOD H. DAVIS, JR.
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
(As amended and restated January 2, 1998)
This Agreement is made as of the 2nd day of January, 1998,
between TRIGON INSURANCE COMPANY, a Virginia corporation (the "Company"), and
NORWOOD H. DAVIS, JR., of Richmond, Virginia ("Executive").
RECITALS
Executive has been employed by the Company or its affiliates
since April 1, 1968. Since April 1, 1981, Executive has served as Chief
Executive Officer of the Company or of its affiliate, Consolidated Healthcare,
Inc. The Company and Executive are parties to an agreement dated March 13, 1996
(the "Prior Agreement"). The parties desire to amend and restate the Prior
Agreement in the manner herein set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual promises herein contained, the parties agree as follows:
ARTICLE I
EMPLOYMENT
1.1 Employment. The Company hereby employs Executive as
Chairman of the Board and Chief Executive Officer of the Company. Executive
shall have the powers, duties, and responsibilities that are customary to the
position of Chief Executive Officer and shall preside at all meetings of the
Board of Directors of the Company. Subject to approval by the Board, Executive
shall select the officers of the Company and each of its affiliates. Executive
shall devote his full business time and efforts to the business and affairs of
the Company and its affiliates; provided, however, that this provision shall not
preclude Executive from serving as a director of any other corporation or other
-1-
<PAGE>
organization involving no conflict of interest with the interests of the
Company. All such directorships shall be disclosed to and reviewed by the
Executive Committee of the Company.
1.2 At Will Employment. Executive's employment hereunder is at
will. Executive may resign at any time and the Company may discharge Executive
at any time, with or without cause.
ARTICLE II
COMPENSATION AND BENEFITS
2.1 Base Salary Executive's base salary for 1998 has been
determined by the Board of Directors upon recommendation from the Chair of the
Human Resources Committee.
2.2 Incentive Compensation. Executive shall also be
eligible for an award of incentive compensation each year.
2.3 Annual Reviews. Effective each January 1 during the term
of this Agreement, the Chairmen of the Executive and Human Resources,
Compensation and Employee Benefits Committees will review Executive's
performance as Chief Executive Officer and will recommend to the Board (i) such
annual increase in base salary as may be appropriate and in accordance with the
Company's regular salary administration program and (ii) such award of incentive
compensation for the prior year as may be appropriate. The Board will determine
such annual increase in base salary and such award of incentive compensation.
2.4 Participation in Employee Benefit Plans. While employed by
the Company, Executive shall be entitled to participate in the Company's
Non-Contributory Retirement Program, the Employees' Thrift Plan, the
split-dollar life insurance program, the group health insurance program, the
group term life insurance program, and the disability insurance program. In
addition, the Company shall provide to Executive an automobile and gasoline
allowance, tax and financial planning services, and reimbursement for club dues
and other business expenses.
ARTICLE III
DISABILITY
3.1 Supplemental Disability Payment. If Executive becomes
disabled while employed by the Company and is entitled to receive benefits under
the Company's Long-Term Disability Program, then the Company will pay to
Executive a Monthly Supplemental Disability Benefit (as hereinafter defined) for
so long as Executive is entitled to receive disability payments under the
- 2 -
<PAGE>
Company's Long-Term Disability Program (or under any similar disability program
maintained by the Company). The amount of the Monthly Supplemental Disability
Benefit shall be equal to the difference between (i) one-twelfth (1/12) of sixty
percent (60%) of Executive's annual base salary for the year in which Executive
becomes disabled and (ii) the amount of the monthly disability benefit payable
to Executive under the Company's Long-Term Disability Program.
ARTICLE IV
SEVERANCE PAYMENT AND EMPLOYMENT BENEFIT TRUST
4.1 Severance Payment.
(a) Upon a Termination Event, as defined in Section
4.1(b) below, the Company will pay the Severance Payment, as defined in Section
4.1(c) below, to Executive.
(b) The term Termination Event shall mean the
following: (i) the termination of Executive's employment with the Company for
any reason other than by reason of Executive's resignation; and (ii) the
termination of Executive's employment with the Company by reason of Executive's
resignation but only if Executive shall have given the Company at least six (6)
months prior written notice of such resignation. The term Termination Event
shall not include the termination of Executive's employment with the Company by
reason of Executive's resignation if Executive shall not have given the Company
at least six (6) months prior written notice of such resignation.
(c) The term Severance Payment shall mean a payment
equal to four times the Annual Compensation of Executive as defined in Section
4.1(d) below.
(d) The term Annual Compensation of Executive shall
mean the highest amount of cash compensation (including, without limitation,
salary and bonus) earned by Executive with respect to one of the three calendar
years immediately preceding the Termination Event. The Annual Compensation of
Executive for a calendar year shall include (i) Executive's annual base salary
for the calendar year in question, without any reduction for any amounts that
Executive may have deferred under the Company's 401(k) Plan, 401(k) Restoration
Plan, Deferred Benefit Plan for Officers, or otherwise, and (ii) any cash bonus
or incentive payments (annual and long term) that are earned for a period of
performance ending in the calendar year in question, but which are paid after
the calendar year in question.
4.2 Establishment of Employment Benefit Trust. The Company
has established an Employment Benefit Trust (the "Trust") for the benefit of
Executive and other key executives of the
- 3 -
<PAGE>
Company. The form of Trust Agreement is attached as Exhibit A. In order to
provide benefits to Executive, the Company has transferred to the Trust the
assets and amounts specified in paragraph 4.3 and has instructed the trustee of
the Trust to maintain such assets and amounts in a separate account for the
benefit of Executive (the "Account").
4.3 Assets and Amounts Transferred to the Trust.
(a) Prior to the execution of the Prior Agreement,
the Company transferred to the Trust all of the assets held in the account
established for Executive under the Agreement between the Company and Executive
dated December 12, 1990, and certain additional amounts that were authorized by
the Board of Directors on December 9, 1992, and were transferred to the Trust on
or about June 22, 1993.
(b) The strategy of the Company is to expand by
acquiring, merging, or affiliating with other Blue Cross and Blue Shield plans,
insurance companies, and managed care companies. If the Executive Committee or
the Board of Directors determines that Executive's duties have expanded because
of such acquisitions, mergers or affiliations or for other reasons, then the
Executive Committee or the Board of Directors may make additional contributions
to the Trust in recognition of such expanded duties.
4.4 Investment of Amounts Transferred to the Trust. The
Company shall from time to time appoint an investment manager (the "Investment
Manager") to invest and manage the assets of the Trust. The initial Investment
Manager will be James W. Copley, Jr., President, Consolidated Investment
Corporation. The Company, acting through the Investment Manager, shall have sole
discretion to select investments for the Trust. Annually, the Investment Manager
will report the investments made in the Trust to the Chairman of the Executive
Committee and will confer with him about the investment policy for the Trust.
Executive shall have no right to have any particular investment made in the
Trust. The Company shall bear all risk of gain or loss with respect to the
investments made in the Trust. Such gains or losses shall not affect the amount
of the Severance Payment.
4.5 Fees, Expenses, and Taxes. The Company shall pay the fees
and expenses of the Investment Manager for its services and the fees and
expenses of the trustee of the Trust for its services. All fees, commissions,
and expenses resulting from transactions made in the Trust shall be paid from
assets held in the Trust to the extent such assets are available, but if such
assets are insufficient to pay
- 4 -
<PAGE>
such sums, such sums shall be paid by the Company from its other funds. Income
taxes incurred by the Company as the result of transactions made in the Trust
shall be paid by the Company and shall not be charged to the Trust.
4.6 Distribution of the Assets in the Trust.
(a) Upon the happening of a Termination Event, the
trustee of the Trust may either (i) transfer assets held in the Trust for
Executive's Benefit to Executive in kind to the extent of the Severance Payment;
or (ii) sell all or any part of such assets and distribute the sales proceeds to
Executive to the extent of the Severance Payment. If any asset distributed to
Executive in kind does not have a readily ascertainable fair market value, the
Company may at its expense have such asset appraised by an independent
appraiser, and the Company and Executive agree to be bound by such appraisal for
all purposes under this Agreement (including federal and state income tax
filings). To the extent the value of such assets transferred to Executive in
kind or such proceeds distributed to Executive (as the case may be) is
insufficient to fund the Severance Payment, the Company shall pay the balance of
the Severance Payment to Executive in immediately available funds. To the extent
that the value of such assets or such proceeds distributed to Executive or such
proceeds (as the case may be) exceeds the Severance Payment, such assets or such
proceeds (as the case may be) shall be distributed to the Company. If the
Termination Event is the result of the death of Executive, then the distribution
under this paragraph shall be made to Executive's personal representative.
(b) In consideration of the Severance Payment to
Executive, Executive agrees that he will not, prior to the expiration of four
(4) years following the termination of his employment, become an officer,
director, or employee of, or consultant to, or 10% or more owner of, any entity
that competes with the Company in any business in which the Company is engaged
as of the date of the termination of Executive's employment; provided, however,
that if the Company terminates Executive's employment without cause, then this
covenant not to compete shall not be applicable. For purposes of this Agreement,
termination without cause means termination for any reason other than continued
neglect by Executive of his duties hereunder or willful misconduct by Executive
in the performance of his duties hereunder. Executive agrees that in the event
of a breach by Executive of this covenant not to compete, the Company's remedies
at law will be inadequate and that the Company will be entitled to appropriate
equitable relief, including an injunction restraining such breach. If Executive
so requests, the Executive Committee is authorized to determine, by written
communication to Executive, that a
- 5 -
<PAGE>
particular activity that Executive proposes to engage in does not constitute
competition with the Company within the meaning of this paragraph and such
determination shall be conclusive and binding on the parties to this Agreement.
4.7 Beneficial Ownership. Unless and until the assets held in
the Account are distributed to Executive pursuant to Section 4.6(a) of this
Agreement, beneficial ownership of all assets in the Account shall remain with
the Company, and Executive shall have no property interest in any such assets.
ARTICLE V
RETIREMENT AND SUPPLEMENTAL RETIREMENT BENEFITS
5.1 Normal Retirement. If Executive's employment with the
Company has not sooner terminated, then he shall retire as of the end of the
month in which he attains the age of 61 (that is to say, on March 31, 2001).
5.2 Early Retirement. Executive may at his option elect early
retirement effective as of the end of any month following the date on which he
attains the age of 56 (that is to say, beginning March 31, 1996) by giving the
Company written notice of such election at least one hundred twenty (120) days
before the effective date of such retirement.
5.3 Participation in Existing Retirement Programs. Executive
is a participant in the Company's Non-Contributory Retirement Program (herein
referred to as the "Retirement Program") and in the Company's Supplemental
Retirement Program for Certain Employees (herein referred to as the
"Supplemental Retirement Program").
5.4 Enhanced Supplemental Retirement Benefit at Normal
Retirement. If Executive's continuous employment with the Company continues
until March 10, 2001, then in addition to the benefit that Executive receives
under the Supplemental Retirement Program, the Company shall pay to Executive a
nonqualified unfunded supplemental retirement benefit (the "Enhanced
Supplemental Retirement Benefit") in the amount described below. The amount of
the Enhanced Supplemental Retirement Benefit shall be equal to the difference
between (i) the retirement benefit that Executive would have received under the
Retirement Program if (a) earnings used in computing benefits under the
Retirement Program included nonqualified deferred compensation in the year in
which the amounts were deferred, (b) the limitations of Sections 401(a)(17) and
415 of the Internal Revenue Code did not apply to the calculation and amount of
such benefit, (c) Executive had remained in the employ of the Company
- 6 -
<PAGE>
and received credited service until March 31, 2005, and (d) Executive had
received earnings from the Company from the date of termination of employment
until March 31, 2005 at an annual rate equal to the Annual Compensation of
Executive as defined in Section 4.1(d) above, and (ii) the sum of the retirement
benefits that Executive actually receives under the Retirement Program and under
the Supplemental Retirement Program.
5.5 Reduced Enhanced Supplemental Retirement Benefit at Early
Retirement. If Executive's continuous employment with the Company terminates at
any time on or after March 10, 1996 but before March 10, 2001, then the Company
shall pay Executive that percentage of the Enhanced Supplemental Retirement
Benefit reflected in the following schedule:
Percentage of
Enhanced Supplemental
Retirement Date Retirement Benefit
March 10, 1996 - March 9, 1997 80%
March 10, 1997 - March 9, 1998 84%
March 10, 1998 - March 9, 1999 88%
March 10, 1999 - March 9, 2000 92%
March 10, 2000 - March 9, 2001 96%
March 10, 2001 - or thereafter 100%
5.6 Calculation and Payment of Enhanced Supplemental
Retirement Benefits. The enhanced supplemental retirement benefits payable to
Executive pursuant to Sections 5.4 and 5.5 of this Agreement shall be calculated
and paid to Executive at the same time and in the same manner that benefits are
calculated and paid to Executive under the Supplemental Retirement Program.
5.7 Other Retirement Benefits. If Executive retires from the
Company, then irrespective of when such retirement occurs, Executive shall be
entitled to all retirement benefits that are made generally available to retired
executive officers of the Company, including health care coverage and group term
life insurance benefits.
ARTICLE VI
MISCELLANEOUS
6.1 Termination of Prior Agreements. This Agreement supersedes
all prior agreements respecting the subject matter of Executive's employment,
written or oral; provided, however, that nothing herein shall affect the Salary
Deferral Agreement between the Company and Executive dated December 13, 1989.
- 7 -
<PAGE>
6.2 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.
6.3 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.
6.4 Applicable Law. This Agreement shall be governed by
and construed and enforced in accordance with the laws of Virginia.
6.5 Amendment. This Agreement may be amended only by a
written instrument signed by the parties hereto.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
TRIGON INSURANCE COMPANY
By: ______________________________________
Jackie M. Ward, Chairperson
Human Resources, Compensation and
Employee Benefits Committee
--------------------------------------
Norwood H. Davis, Jr.
- 8 -
Exhibit 10.19
THE NON-CONTRIBUTORY RETIREMENT PROGRAM
FOR CERTAIN EMPLOYEES OF
TRIGON INSURANCE COMPANY
AMENDMENT ADOPTING NEW DEFINITION OF EARNINGS
AND
ADDING A DEFINITION OF HIGHLY COMPENSATED EMPLOYEE
WHEREAS, Trigon Insurance Company (herein referred to as the
"Employer") maintains a non-contributory retirement program, the
Non-Contributory Retirement Program for Certain Employees of Trigon Insurance
Company (herein referred to as the "Retirement Program") pursuant to the
provisions of the National Retirement Program;
WHEREAS, pursuant to Section 7.01 of the Retirement Program, the
Employer has reserved the right to amend or modify the Retirement Program;
WHEREAS, it is desirable to modify the Retirement Program to clarify
that Earnings do not include the value of taxable income derived from stock
options granted by the Employer for purposes of determining either the benefits
accrued under the Retirement Program, the limitation on benefits imposed by
Section 415 of the Internal Revenue Code, or each Participant's status as a
Highly Compensated Employee;
WHEREAS, it is also desirable to modify the Retirement Program to add a
definition of "Highly Compensated Employee;"
NOW, THEREFORE, the Employer hereby amends the Retirement Program,
effective January 1, 1998, as follows with respect to those Participants who on
or after such date are employees of the Employer or any other entity that has
adopted the Retirement Program with the approval of the Employer:
1. The introductory sentence under Section 1.06, Earnings, is modified
to read as follows:
"1.06 "Earnings" shall mean the following, for the purposes of
determining both benefits accrued under the Program and, for Program Years
beginning on or after January 1, 1998, a Participant's status as a Highly
Compensated Employee:"
2. Subsection (c) of Section 1.06, Earnings, is renumbered
(c)(1), subsections (c)(1) and (2) are renumbered (c)(1)(i) and (ii),
respectively, and any cites to such subsections are modified accordingly.
3. The first sentence of Section 1.06(c )(1), Earnings, is
modified to read as follows:
-1-
<PAGE>
"For a Program Year beginning on or after January 1, 1988 and before
January 1, 1998, (i) or (ii) as checked below:"
4. Subsection (c) of Section 1.06, Earnings, is modified to
add a new subsection (c)(2) to read as follows:
"(c)(2) For a Program Year beginning on or after January 1, 1998: Compensation
paid or made available in such Program Year, including the following -
"(i) the Participant's earned income, wages, salaries, fees for
professional services and other amounts received (without regard to whether or
not an amount is paid in cash) for personal services actually rendered in the
course of employment with the Employer to the extent that the amounts are
includible in gross income (including, but not limited to, commissions paid to
sales people, compensation for services on the basis of a percentage of profits,
commissions on insurance premiums, tips, bonuses, fringe benefits,
reimbursements, expense allowances under a nonaccountable plan (as described in
Treas. Reg. Section 1.62-2(c));
"(ii) elective deferrals (as defined in Section 402(g)(3) of the
Internal Revenue Code), and any amount which is contributed or deferred by the
Employer at the election of the Participant and which is not includible in the
gross income of the Participant by reason of Section 125 or 457 of the Internal
Revenue Code;
"(iii) amounts described in Sections 104(a)(3), 105(a), and 105(h) of
the Internal Revenue Code, but only to the extent that these amounts are
includible in the gross income of the Participant;
"(iv) amounts paid or reimbursed by the Employer for moving expenses
incurred by the Participant, but only to the extent that at the time of the
payment it is reasonable to believe that these amounts are not deductible by the
Participant under Section 217 of the Internal Revenue Code;
"(v) the value of a non-qualified stock option granted to a Participant
by the Employer, but only to the extent that the value of the option is
includible in the gross income of the Participant for the taxable year in which
granted; and
"(vi) the amount includible in the gross income of a Participant upon
making the election described in Section 83(b) of the Internal Revenue Code.
"Earnings shall not include the following items:
"(vii) (Except as described in (ii) above) Employer contributions to a
program of deferred compensation to the extent that, before the application of
the limitations imposed by Section 415 of the Internal Revenue Code, the
contributions are not included in the gross income
- 2 -
<PAGE>
of the Participant for the taxable year in which contributed; Employer
contributions made on behalf of the Participant to a simplified employee pension
plan described in Section 408(k) of the Internal Revenue Code; and any
distributions from a plan of deferred compensation, whether or not included in
the gross income of the Participant when distributed;
"(viii) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by a Participant either
becomes freely transferable or is no longer subject to a substantial risk of
forfeiture;
"(ix) Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option (or under an option described in
Section 422 or 423 of the Internal Revenue Code);
"(x) Other amounts which receive special tax benefits, such as premiums
for group-term life insurance (but only to the extent that the premiums are not
includible in the gross income of the Participant), or (except as provided in
(ii) above) contributions made by an Employer (whether or not under a salary
reduction agreement) towards the purchase of a Section 403(b) annuity contract
(whether or not the contributions are excluded from the gross income of the
Participant).
"However, such amounts earned after the last complete calendar year
prior to the earlier of the Employee's Early Retirement Date or last date of
Employment shall be disregarded."
5. Section 1.12A, Maximum Annual Social Security Covered Compensation,
is renumbered as Section 1.12B, and a new Section 1.12A, Highly Compensated
Employee, is added to read as follows:
"1.12A "Highly Compensated Employee" shall mean a Participant who was
either:
(a) a 5-percent owner at any time during the Program Year or
the preceding Program Year, or
(b) for the preceding Program Year (i) had Earnings (as
defined in Section 1.06(c)(2)) from the Employer in excess
of $80,000 (as adjusted to reflect cost-of-living
increases).
"An employee shall be treated as a 5-percent owner for any Program Year, if at
any time during such Program Year, such employee owns (or is considered as
owning within the meaning of Section 318 of the Internal Revenue Code) more than
5% of the outstanding stock of the Employer or stock possessing more than 5% of
the total combined voting power of all stock of the Employer.
- 3 -
<PAGE>
"A former employee shall be considered a Highly Compensated Employee if such
employee was a Highly Compensated Employee (i) when he terminated employment, or
(ii) during any Program Year following his attainment of age 55."
6. Subsection (a) of Section 4.12, Limitations on Benefits, is hereby
modified by inserting the following in lieu of the last paragraph:
"Notwithstanding anything in this paragraph to the contrary, with
respect to Program Years beginning on or after January 1, 1998, for purposes of
this Section, the term "annual benefit" means the benefit that is payable
annually to a Participant in the form of a straight lifetime benefit with no
ancillary benefits, and the term "compensation" has the same meaning as
Earnings, as defined in Section 1.06(c)(2) (without regard to the last paragraph
under Section 1.06(c)(2))."
TRIGON INSURANCE COMPANY
By: ________________________
Authorized Officer
- ------------------------ ----------------------------
Attest Title
- ------------------------ ----------------------------
Title Date
APPROVED:
NATIONAL EMPLOYEE
BENEFITS COMMITTEE
By: _________________________
Secretary
- 4 -
Exhibit 13
QUARTERLY FINANCIAL INFORMATION
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Quarters ended
(In thousands, except per share data) March 31 June 30 September 30 December 31
===========================================================================================================================
<S> <C>
1997
Total revenues $511,764 510,041 524,115 517,700
Operating income (1) 2,076 4,084 6,260 8,105
Income before income taxes 44,498 23,155 42,747 34,270
Net income 29,233 15,342 27,966 22,512
Net income after Demutualization
and IPO (2) 13,162 15,342 27,966 22,512
Earnings per share (2)
Basic and diluted net income after
Demutualization and IPO 0.31 0.36 0.66 0.53
Pro forma earnings per share (3)
Basic and diluted pro forma net income 0.68 0.36 0.66 0.53
Basic pro forma net income, excluding
realized gains and extraordinary
items (4) 0.29 0.32 0.38 0.41
Diluted pro forma net income, excluding
realized gains and extraordinary
items (4) 0.29 0.32 0.38 0.40
1996
Total revenues $470,207 487,018 483,217 482,098
Operating income (1) 4,407 3,583 2,160 3,763
Income before gain on sale of
subsidiary, income taxes and
extraordinary items 30,814 34,329 29,773 25,719
Income before extraordinary items 25,389 28,391 87,887 54,847
Net income (loss) 23,150 24,042 (91,805) 50,307
Pro forma earnings per share (3)
Basic and diluted pro forma income
before extraordinary items 0.45 0.51 0.44 1.33
Basic and diluted pro forma net income
(loss) 0.40 0.41 (3.81) 1.23
Basic and diluted pro forma net income,
excluding realized gains and
extraordinary items (4) 0.22 0.22 0.19 0.24
</TABLE>
(1) Operating income is defined as premium and fee revenues and other revenues
less medical and other benefit costs and selling, general and administrative
expenses.
(2) Reflects net income and net income per share for the period after February
5, 1997, the effective date of the Demutualization and Initial Public Offering
(IPO).
(3) Pro forma per share data gives effect to the Demutualization and IPO as if
they had taken place on January 1, 1996. See note 1 to the consolidated
financial statements for the pro forma assumptions used. In addition, the 1997
and 1996 pro forma per share data has been restated to comply with Statement of
Financial Accounting Standards No. 128, Earnings Per Share.
(4) Pro forma net income excluding realized gains and extraordinary items per
share is calculated as pro forma net income per share excluding the pro forma
after-tax amounts for net realized gains, extraordinary items and the gain on
sale of a subsidiary in 1996.
TRIGON 21 1997
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands, except per share data
and operating statistics) 1997 1996 1995 1994 1993
===========================================================================================================================
<S> <C>
STATEMENT OF OPERATIONS DATA
Revenues
Premium and fee revenues
Commercial $1,431,114 1,320,596 1,157,899 1,081,820 1,050,157
Federal Employee Program 377,722 356,741 329,243 303,250 279,058
Amounts attributable
to self-funded
arrangements 1,062,101 1,077,478 981,741 908,234 905,529
Less: amounts attributable
to claims under
self-funded
arrangements (961,588) (988,353) (897,954) (827,869) (815,488)
- ---------------------------------------------------------------------------------------------------------------------------
1,909,349 1,766,462 1,570,929 1,465,435 1,419,256
Investment income 74,684 47,312 45,861 39,962 34,279
Net realized gains 54,063 59,410 52,976 12,793 26,199
Other revenues 25,524 49,356 55,176 45,467 30,555
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 2,063,620 1,922,540 1,724,942 1,563,657 1,510,289
- ---------------------------------------------------------------------------------------------------------------------------
Expenses
Medical and other
benefit costs
Commercial 1,194,641 1,086,388 959,328 802,666 795,921
Federal Employee Program 359,915 339,143 312,222 283,645 262,295
- ---------------------------------------------------------------------------------------------------------------------------
1,554,556 1,425,531 1,271,550 1,086,311 1,058,216
Selling, general and
administrative expenses 359,792 376,374 346,353 322,391 308,412
Interest expense 4,602 -- -- -- --
Copayment refund program -- -- 47,073 36,432 --
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 1,918,950 1,801,905 1,664,976 1,445,134 1,366,628
- ---------------------------------------------------------------------------------------------------------------------------
Income before gain on sale of subsidiary, income taxes, cumulative effects of
changes in accounting principles and extraordinary
items 144,670 120,635 59,966 118,523 143,661
Gain on sale of subsidiary -- 62,253 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes,
cumulative effects of
changes in accounting
principles and
extraordinary items 144,670 182,888 59,966 118,523 143,661
Income tax expense (benefit) 49,617 (13,626) 8,264 24,564 35,803
- ---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effects
of changes in accounting
principles and extraordinary
items 95,053 196,514 51,702 93,959 107,858
Cumulative effects of changes
in accounting principles,
net of income taxes -- -- -- -- 8,126
Extraordinary items, net of
income taxes -- (190,820) (4,707) (644) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 95,053 5,694 46,995 93,315 115,984
===========================================================================================================================
</TABLE>
TRIGON 22 1997
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995 1994 1993
===========================================================================================================================
<S> <C>
Net income after Demutualization
and IPO (1) $ 78,982 -- -- -- --
Earnings per share (1)
Basic net income after
Demutualization and IPO $ 1.87 -- -- -- --
Diluted net income
after Demutualization
and IPO $ 1.86 -- -- -- --
Pro forma earnings per share (2)
Basic and diluted pro forma
income before
extraordinary items $ 2.23 2.73 0.84 -- --
Basic and diluted pro
forma net income (loss) $ 2.23 (1.77) 0.73 -- --
Basic and diluted pro forma
net income, excluding
realized gains and
extraordinary items (3) $ 1.40 0.87 0.75 -- --
OPERATING STATISTICS
Medical loss ratio
Commercial 83.5% 82.3% 82.9% 74.2% 75.8%
Federal Employee Program 95.3% 95.1% 94.8% 93.5% 94.0%
Selling, general and administrative
expense ratio (4) 12.4% 13.4% 13.7% 13.8% 13.6%
Operating margin (5) 1.1% 0.8% 0.5% 7.0% 5.9%
December 31, 1997 1996 1995 1994 1993
===========================================================================================================================
BALANCE SHEET DATA
Cash and investments $1,370,868 1,213,902 1,119,652 1,001,571 940,914
Total assets 1,928,820 1,833,148 1,565,331 1,403,104 1,266,952
Obligation for Commonwealth
Payment -- 175,000 -- -- --
Long-term debt 90,147 4,880 4,145 -- --
Total surplus -- 739,780 740,071 655,875 606,146
Total shareholders' equity 958,737 -- -- -- --
</TABLE>
(1) Reflects net income and net income per share for the period after February
5, 1997, the effective date of the Demutualization and Initial Public Offering
(IPO).
(2) The pro forma per share data gives effect to the Demutualization and IPO as
if they had taken place on January 1, 1995. See note 1 to the consolidated
financial statements for the pro forma assumptions used. In addition, the 1996
and 1995 pro forma per share data has been restated to comply with Statement of
Financial Accounting Standards No. 128, Earnings Per Share.
(3) Pro forma net income excluding realized gains and extraordinary items per
share is calculated as pro forma net income per share excluding the pro forma
after-tax amounts for net realized gains, extraordinary items, the gain on sale
of a subsidiary in 1996 and the costs incurred under the 1995 Copayment Program.
(4) The selling, general and administrative expense ratio is calculated as a
percentage of total revenues excluding amounts attributable to claims under
self-funded arrangements, investment income and net realized gains.
(5) The operating margin ratio is calculated by dividing operating income by
premium and fee revenues. Operating income is defined as premium and fee
revenues and other revenues less medical and other benefit costs and selling,
general and administrative expenses.
TRIGON 23 1997
<PAGE>
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
GENERAL
Substantially all of the revenues of Trigon Healthcare, Inc. and subsidiaries
(collectively, Trigon or the Company) are generated from premiums and fees
received for health care services provided to its members and from investment
income. Trigon's expenses are primarily related to health care services provided
which consist of payments to physicians, hospitals and other providers. A
portion of medical costs expense for each period consists of an actuarial
estimate of claims incurred but not reported to Trigon during the period. The
Company's results of operations depend in large part on its ability to
accurately predict and effectively manage health care costs.
The Company offers a diversified mix of managed care products, including
health maintenance organizations (HMO), preferred provider organizations (PPO),
point-of-service (POS) and traditional indemnity products with access to the
Company's participating provider network (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 207,000 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.
ENROLLMENT
The following table sets forth the Company's enrollment data by network:
<TABLE>
<CAPTION>
As of December 31, 1997 1996 1995
========================================================================
<S> <C>
Commercial:
HMO 255,548 219,866 166,536
PPO 263,828 230,675 212,322
PAR 192,825 236,383 296,716
Medicaid HMO 35,488 28,306 6,357
Medicare Supplement 125,686 128,015 129,252
Non-Virginia 64,143 49,251 19,857
- ------------------------------------------------------------------------
Subtotal 937,518 892,496 831,040
Self-funded/ASO 679,667 700,482 705,459
Federal Employee
Program 207,457 197,241 198,561
- ------------------------------------------------------------------------
Fully insured and self-
funded enrollment 1,824,642 1,790,219 1,735,060
Processed for other
Blue Cross and Blue
Shield Plans (ASO) 15,728 70,330 64,558
- ------------------------------------------------------------------------
Total 1,840,370 1,860,549 1,799,618
========================================================================
</TABLE>
PREMIUM AND PREMIUM EQUIVALENTS BY
NETWORK SYSTEM
The following table sets forth the Company's premium and premium equivalents by
network (in thousands):
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
=============================================================================
<S> <C>
Commercial:
HMO $ 410,723 320,217 181,052
PPO 374,514 328,291 271,252
PAR 352,630 410,074 485,412
Medicare
Supplement 212,516 204,438 204,668
Non-Virginia 80,731 57,576 15,515
- -----------------------------------------------------------------------------
Subtotal 1,431,114 1,320,596 1,157,899
Self-funded/ASO 1,062,101 1,077,478 981,741
Federal Employee
Program 377,722 356,741 329,243
- -----------------------------------------------------------------------------
Total $2,870,937 2,754,815 2,468,883
=============================================================================
</TABLE>
TRIGON 24 1997
<PAGE>
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS CONTINUED
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Premium and fee revenues increased 8.1% to $1,909.3 million in 1997 from
$1,766.5 million in 1996. The increase is due to a combination of commercial
rate increases and enrollment growth in the Company's HMO and PPO networks,
offset by expected declines in PAR network enrollment. Commercial HMO revenues
increased 28.3% to $410.7 million in 1997 from $320.2 million in 1996. The $90.5
million increase in commercial HMO revenues is a result of increased enrollment
attributable to a shift in members from PAR and PPO networks into the HMO
networks and from enrollment of new HMO members as well as an increase of 4.3%
in the average revenue per member. Commercial PPO revenues grew to $374.5
million in 1997 from $328.3 million in 1996, an increase of 14.1%, driven by
enrollment growth. Commercial PAR revenues declined to $352.6 million in 1997
from $410.1 million in 1996 primarily as a result of the transition of members
to the more tightly managed HMO and PPO networks. The full year impact of the
Mid-South acquisition increased premium and fee revenues $21.8 million, with
Mid-South revenues increasing to $74.7 million in 1997 from $52.9 million for
the period from February 29, 1996 (the date of the acquisition) through December
31, 1996. Overall, premium revenues on a per member per month basis for the
Company's commercial business increased 2.8% to $128.84 for 1997 from $125.33
for 1996. FEP revenues increased 5.9% to $377.7 million in 1997 from $356.7
million in 1996 primarily as a result of increased medical costs reimbursed by
OPM and a 5.2% increase in enrollment. Net revenues from self-funded
arrangements increased 12.8% to $100.5 million in 1997 from $89.1 million in
1996. The improvement is a result of higher administrative fees and favorable
stop loss settlements.
Total enrollment declined to 1,840,370 as of December 31, 1997 from 1,860,549
as of December 31, 1996. The 20,179 decline was the net result of an increase of
45,022 members in commercial business mainly from HMO and PPO network growth,
FEP enrollment growth of 10,216 members offset by a decline of 75,417
self-funded/ASO members. Specifically, commercial enrollment increased 5.0% to
937,518 members as of December 31, 1997 from 892,496 members as of December 31,
1996. Enrollment in the HMO networks as of December 31, 1997 increased 17.3%
over the prior year and accounts for 31.0% of the Company's commercial
enrollment. Enrollment in the PPO networks increased 14.4% over the prior year
and accounts for 28.1% of the Company's commercial enrollment. The increases in
the HMO and PPO networks were offset by an expected decline of 18.4% for the
Company's PAR network as members migrate into more tightly managed networks and
partially as a result of ceding all student business with approximately 7,900
members. The PAR network enrollment represents 20.6% of the Company's total
commercial enrollment. FEP enrollment increased 5.2% to 207,457 as of December
31, 1997 from 197,241 as of December 31, 1996. The commercial and FEP enrollment
increases were offset by a 75,417 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 55,000
national account members from the Company's systems to a new interplan system
where the Company continues to process claims for other Blue Cross and Blue
Shield Plans (ASO).
Investment income increased 57.9% to $74.7 million in 1997 from
$47.3 million in 1996. Net realized gains decreased 9.0% to $54.1 million
in 1997 from $59.4 million in 1996. The increase in investment income
reflects the continued increase in the overall size of the investment
portfolio over the past year and the Company's strategy to shift a
larger portion of the investment portfolio to fixed income securities. This
portfolio shift is also the primary factor for the net realized gains activity
in 1997.
Other revenues decreased by 48.3% to $25.5 million in 1997 from $49.4 million
in 1996. The decrease is primarily a result of the sale of the Company's
electronic communication services subsidiary, Health Communication Services,
Inc. (HCS), on December 31, 1996. During 1996, HCS contributed $21.5 million in
other revenues.
TRIGON 25 1997
<PAGE>
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS CONTINUED
Medical costs increased 9.1% to $1,554.6 million in 1997 from $1,425.5
million in 1996. The $129.0 million increase is primarily the result of overall
commercial enrollment growth, 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 year impact of the Mid-South
acquisition. The medical cost per member per month for the Company's commercial
business increased 4.3% to $107.55 in 1997 from $103.10 in 1996. Combined with a
2.8% increase in commercial premium revenues per member per month, the loss
ratio on commercial business increased to 83.5% in 1997 from 82.3% in 1996. The
increase can be attributed partly to issues at one of the Company's HMO plans
where, during 1997, the Company implemented extensive cost containment actions,
pricing initiatives and processing controls, as well as a change in management,
all aimed at bringing the plan's results to acceptable levels. The 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 second half of 1997. The commercial loss ratio
averaged 84.1% for the first half of 1997 as compared to 82.9% for the last half
of the year. The improvement reflected improved medical cost levels for the
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 the network-based PAR, PPO and HMO businesses. The
Company expects the cost containment initiatives to continue to have a positive
impact on the commercial loss ratio in 1998.
Selling, general and administrative expenses (SG&A) declined by 4.4% to
$359.8 million in 1997 from $376.4 million in 1996. The SG&A ratio was 12.4% in
1997 as compared to 13.4% in 1996. The decrease is a result of the sale of HCS
on December 31, 1996 which contributed $21.3 million in SG&A expenses in 1996,
along with the impact of Company-wide streamlining and cost
containment activities, including a 10.5% reduction in headcount.
In addition, the Company eliminated the postretirement medical benefit program
for a substantial portion of its employees in the fourth quarter of 1997. The
elimination of this benefit resulted in a one-time curtailment gain of nearly
$4.0 million which was recorded as a reduction to SG&A expenses. The Company
expects that this change will reduce the Company's future annual expenses by
approximately $2.0 million. The decrease in expenses was partially offset by the
full year impact of the Mid-South acquisition, $5.4 million in incremental costs
related to modifying computer software for the year 2000 and other employee
benefit-related accruals.
Interest expense in 1997 was $4.6 million. There was no interest expense in
1996. Interest expense for 1997 is the result of the $85 million outstanding on
the revolving credit agreement 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 (Demutualization) and the Initial Public Offering
(IPO).
Income before income taxes and extraordinary items decreased 20.9% to $144.7
million in 1997 from $182.9 million in 1996. The decrease is primarily
attributable to the sale of HCS resulting in a pretax gain of $62.3 million in
1996. The decrease also reflects a $5.3 million decline in net realized gains
and interest expense of $4.6 million, offset by a $27.4 million increase in
investment income and a $6.6 million improvement in operating income (defined as
income before income taxes and extraordinary items excluding investment income,
net realized gains, gain on sale of subsidiary and interest expense).
TRIGON 26 1997
<PAGE>
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS CONTINUED
The Company's effective tax rate was 34.3% in 1997 compared to an effective
tax rate benefit of 7.5% in 1996. The effective tax rate benefit for 1996 is
primarily due to a reduction in the valuation allowance on deferred tax assets
caused by the realization of alternative minimum tax credits during 1996 and the
elimination as of September 30, 1996 of the remaining $63.9 million valuation
allowance. Excluding the effects of the elimination of the valuation allowance,
the effective tax rate in 1996 was 27.5% due to the realization of alternative
minimum tax credits during the year.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO
YEAR ENDED DECEMBER 31, 1995
Premium and fee revenues increased 12.4% to $1,766.5 million in 1996 from
$1,570.9 million in 1995 primarily due to the growth in the Company's HMO and
PPO networks, which was partially offset by declines in PAR network enrollment,
and as a result of the Mid-South acquisition in February 1996. Commercial HMO
revenues grew 76.9% to $320.2 million in 1996 from $181.1 million in 1995. The
$139.1 million increase in commercial HMO revenues is attributable to a shift in
members from PAR and PPO networks into the HMO networks and from enrollment of
new HMO members, the conversion of 38,540 members from self-funded products to
commercial products and a 3.9% increase in the average revenue per member. In
addition, the Priority, Inc. HMO acquisition in May 1995 accounted for
approximately $28.0 million of the increased HMO revenues. Commercial PPO
revenues grew 21.0% to $328.3 million in 1996 from $271.3 million in 1995.
Commercial PAR revenues declined to $410.1 million in 1996 from $485.4 million
in 1995 as a result of groups transitioning into more tightly managed networks.
Commercial revenues for 1996 also include $52.9 million of revenues from
Mid-South, which was acquired on February 29, 1996. Total commercial premium per
member per month increased 1.5% to $125.33 in 1996 from $123.48 in 1995. FEP
revenues increased 8.4% to $356.7 million in 1996 from $329.2 million in 1995 as
a result of increased medical costs reimbursed by OPM.
Total enrollment increased 3.4% to 1,860,549 as of December 31, 1996 from
1,799,618 as of December 31, 1995. Commercial enrollment increased 7.4% to
892,496 members as of December 31, 1996 from 831,040 members as of December 31,
1995. The increase in commercial enrollment is a result of growth in the HMO
networks of 75,279 members, the Mid-South acquisition which added 49,251 members
and continued growth in the PPO network of 18,353 members, offset by a decrease
of 80,190 members in the PAR network and out of state student and individual
products due to declining enrollment.
Investment income increased 3.2% to $47.3 million in 1996 from $45.9 million
in 1995. Net realized gains increased 12.1% to $59.4 million in 1996 from $53.0
million in 1995. The increase in investment income is attributable to the
increased size of the investment portfolio. The increase in net realized gains
is due primarily to the sale of investment securities to fund the Mid-South
acquisition as well as the sale of investment securities in an effort to shorten
bond maturity levels.
Other revenues decreased by 10.5% to $49.4 million in 1996 from $55.2 million
in 1995. Increased revenues generated from health management services were
offset by declining revenues from third party administration of health care
claims. Prior year results also include nonrecurring gains of $5.4 million
related to the sale of joint venture interests and other assets to unrelated
parties. The Company sold its electronic communication services subsidiary, HCS,
on December 31, 1996 and recognized an after tax gain of approximately $40
million as a result of this sale. In 1996, HCS contributed $21.5 million in
other revenues.
Medical costs increased 12.1% to $1,425.5 million in 1996 from $1,271.6
million in 1995. This increase is primarily the result of enrollment growth in
the HMO's and the Priority and Mid-South acquisitions. The Company's medical
loss ratio on commercial business improved to 82.3% in 1996 from 82.9% in 1995.
The medical cost per member per month for the Company's commercial business
increased 0.8% to $103.10 in 1996 from $102.31 in 1995.
TRIGON 27 1997
<PAGE>
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS CONTINUED
Selling, general and administrative expenses increased 8.7% to $376.4 million
in 1996 from $346.4 million in 1995. The SG&A expense ratio was 13.4% in 1996 as
compared to 13.7% in 1995. The Company incurred $14.4 million of additional
costs related to increased HMO enrollment including the impact of the Priority
acquisition in 1995. The acquisitions of Mid-South in 1996 and Healthy
Homecomings, Inc. and Healthcare Ventures Associates in 1995 resulted in a $16.9
million increase in 1996. The Company continued to invest in managed care
infrastructure and technology, increasing SG&A $8.5 million, for improved
medical cost data analysis, internally developed managed mental health
capabilities, expansion of appropriateness review, costs associated with
obtaining NCQA accreditation and upgrading systems software for the century date
change. In 1996, the Company incurred one-time charges of $6.1 million for
severance costs, signing bonuses, relocation and employment agreement
adjustments.
Income before gain on sale of subsidiary, income taxes and extraordinary
items, excluding the effect of the Copayment Program in 1995, increased by 12.7%
to $120.6 million in 1996 from $107.0 million in 1995. The increase is a result
of the effects of the improved medical loss ratio and increased investment
income and net realized gains, partially offset by the decline in other
revenues.
The Company's effective tax rate for 1996 was a tax benefit of 7.5%. This
rate differs from the 35% statutory federal rate primarily due to a reduction in
the valuation allowance on deferred tax assets caused by the realization of
alternative minimum tax credits during 1996 and the elimination 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
effects of the elimination of the valuation allowance, the effective tax rate
would have been 27.5% for 1996. These items are not recurring and the Company
believes that in the future its effective tax rate reflected in its consolidated
financial statements should approximate the 35% federal statutory rate.
In 1996, the Company reflected the $175 million obligation to the
Commonwealth of Virginia as required by the Plan of Demutuali-zation as an
extraordinary charge in the consolidated financial statements. The other
extraordinary items represent administrative costs associated with the
Demutualization.
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 December 31, 1997. The
portfolio had an average contractual maturity of 8.9 years as of December 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 forward contracts and foreign currency options to
manage its exposure to fluctuations in foreign currency exchange rates on its
international debt and equity investments. The Company also enters into
financial futures contracts for portfolio strategies such as minimizing interest
rate risk and managing portfolio duration. As of December 31, 1997, the equity
portfolio was
TRIGON 28 1997
<PAGE>
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS CONTINUED
10.5% 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 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 years ended December 31,
1997 and 1996 was $(117.0) million and $21.8 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.
Cash used by investing activities increased to $116.3 million for the year
ended December 31, 1997 from $10.1 million for 1996. This increase is primarily
due to investment purchases made with cash flows from net proceeds from the IPO
in February 1997.
Cash provided (used) by financing activities increased to $208.9 million in
1997 from $(9.5) million in 1996 primarily due to the IPO 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. In accordance with the
Demutualization, Blue Cross and Blue Shield of Virginia (Virginia BCBS) changed
its name to Trigon Insurance Company (dba Trigon Blue Cross Blue Shield) and
became a wholly owned subsidiary of Trigon Healthcare, Inc., a holding company.
The membership interests of Virginia BCBS's eligible members were converted into
Class A common stock of Trigon Healthcare, Inc., or, in certain circumstances,
cash. The Plan of Demutualization also required the Company to complete an IPO
of stock simultaneously with the conversion. Accordingly, Trigon Healthcare,
Inc. issued 17.8 million shares of Class A common stock at $13 per share in the
IPO generating net proceeds of $215.2 million. In connection with the
Demutualization, the Company was required to make the $175 million Commonwealth
Payment. The Company used approximately $90 million of the net proceeds and $85
million in borrowings under a revolving credit agreement to fund this payment.
The Company also used approximately $91.1 million of the offering proceeds to
pay certain eligible members cash in lieu of shares of common stock that would
otherwise be issued to such eligible members pursuant to the Demutualization.
In connection with the Demutualization and IPO, the Company entered into a
$300 million five-year revolving credit agreement with a syndicate of banks. 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 December
31, 1997, $85 million had been borrowed and remained outstanding under this
credit agreement, the proceeds of which were used to make 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.
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 were
$6.8 million through December 31, 1997 and are expected to approximate $20.0
million through 1999. The costs will be expensed as incurred and will be funded
through operating cash flows.
TRIGON 29 1997
<PAGE>
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS CONTINUED
In addition, the Company is actively working with hospitals, providers and
others depended upon for electronic commerce in an effort 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 these
entities.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, 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.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, becomes effective for fiscal years 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.
FORWARD-LOOKING STATEMENTS
Certain statements in this discussion contain forward-looking statements with
respect to the financial condition, results of operations and business of the
Company and its subsidiaries within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
inherent risks and uncertainties, many of which are beyond the control of the
Company, that may cause actual results to differ materially from those
contemplated by such forward-looking statements. Factors that may cause actual
results to differ materially from those contemplated by such forward-looking
statements include, but are not limited to, rising health care costs, business
conditions and competition in the managed care industry, development in health
care reform and other regulatory issues.
MARKET PRICES OF COMMON STOCK AND DIVIDEND DATA
The Class A common stock, par value $0.01 per share, is traded on the New York
Stock Exchange under the symbol TGH. The reported high and low closing prices by
quarter from January 31, 1997, the first trading day after the Demutualization
and IPO, to December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1997 High Low
=======================================================================
=======================================================================
<S> <C>
First quarter $19 1/2 16
Second quarter 24 1/4 17 3/4
Third quarter 25 5/16 21
Fourth quarter 26 13/16 23 1/8
=======================================================================
</TABLE>
The Company has never paid any dividends on its common stock and anticipates
that all earnings in the foreseeable future will be retained to finance the
continuing development of its business. The payment of any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon
the Company's earnings, financial condition, capital requirements, the revolving
credit agreement restrictions on dividends and such other factors as the
Company's Board of Directors deems relevant.
To the extent that the Company determines to pay dividends in the future, the
principal source of funds to pay dividends to shareholders would be dividends
received by the Company from its subsidiaries. The Company is a holding company
and insurance laws and regulations restrict the payment of dividends by health
care insurance companies, such as Trigon Insurance Company, in a holding company
structure.
As of February 18, 1998, there were 105,841 shareholders of record of the
Company's Class A common stock.
TRIGON 30 1997
<PAGE>
CONSOLIDATED BALANCE SHEETS
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31, 1997 and 1996
(In thousands, except per share data) 1997 1996
===================================================================================================================
<S> <C>
ASSETS
Current assets
Cash $ 7,010 31,482
Investment securities, at estimated fair value (note 3) 1,363,858 1,182,420
Premiums and other receivables (note 4) 360,941 390,997
Deferred income taxes (note 10) -- 16,572
Other 7,607 10,035
- -------------------------------------------------------------------------------------------------------------------
Total current assets 1,739,416 1,631,506
- -------------------------------------------------------------------------------------------------------------------
Property and equipment, net (note 5) 43,912 49,545
Deferred income taxes (note 10) 45,185 48,170
Goodwill and other intangibles, net (note 18) 68,354 76,043
Restricted investments, at estimated fair value (note 3) 10,139 11,019
Other assets 21,814 16,865
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,928,820 1,833,148
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Medical and other benefits payable (note 6) $ 412,710 417,797
Unearned premiums 93,157 91,164
Accounts payable and accrued expenses 57,736 84,470
Deferred income taxes (note 10) 4,298 --
Other liabilities (note 8) 179,918 198,893
Obligation for Commonwealth Payment (note 1) -- 87,500
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 747,819 879,824
- -------------------------------------------------------------------------------------------------------------------
Obligation for Commonwealth Payment, noncurrent (note 1) -- 87,500
Obligations for employee benefits, noncurrent (note 12) 59,467 57,679
Medical and other benefits payable, noncurrent (note 6) 66,541 59,246
Long-term debt (note 11) 90,147 4,880
Minority interest in subsidiary 6,109 4,239
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 970,083 1,093,368
- -------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock, $0.01 par; 42,300 shares issued and
outstanding (notes 1 and 13) 423 --
Capital in excess of par (note 1) 842,035 --
Retained earnings (note 1) 78,982 706,259
Net unrealized gain on investment securities, net of deferred
income taxes of $20,083 and $18,032 (note 3) 37,297 33,521
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 958,737 739,780
Commitments and contingencies (notes 7 and 21)
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,928,820 1,833,148
===================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
TRIGON 31 1997
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years ended December 31, 1997, 1996 and 1995
(In thousands, except per share data) 1997 1996 1995
===========================================================================================================================
<S> <C>
REVENUES
Premium and fee revenues
Commercial $1,431,114 1,320,596 1,157,899
Federal Employee Program 377,722 356,741 329,243
Amounts attributable to self-funded arrangements 1,062,101 1,077,478 981,741
Less: amounts attributable to claims under
self-funded arrangements (961,588) (988,353) (897,954)
- ---------------------------------------------------------------------------------------------------------------------------
1,909,349 1,766,462 1,570,929
Investment income (note 3) 74,684 47,312 45,861
Net realized gains (note 3) 54,063 59,410 52,976
Other revenues (note 9) 25,524 49,356 55,176
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 2,063,620 1,922,540 1,724,942
===========================================================================================================================
EXPENSES
Medical and other benefit costs (note 6)
Commercial 1,194,641 1,086,388 959,328
Federal Employee Program 359,915 339,143 312,222
- ---------------------------------------------------------------------------------------------------------------------------
1,554,556 1,425,531 1,271,550
Selling, general and administrative expenses
(notes 2 and 12) 359,792 376,374 346,353
Interest expense (note 11) 4,602 -- --
Copayment refund program (note 19) -- -- 47,073
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 1,918,950 1,801,905 1,664,976
- ---------------------------------------------------------------------------------------------------------------------------
Income before gain on sale of subsidiary, income taxes
and extraordinary items 144,670 120,635 59,966
Gain on sale of subsidiary (note 18) -- 62,253 --
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary items 144,670 182,888 59,966
Income tax expense (benefit) (note 10) 49,617 (13,626) 8,264
- ---------------------------------------------------------------------------------------------------------------------------
Income before extraordinary items 95,053 196,514 51,702
Extraordinary items - demutualization costs and
Commonwealth Payment, net of income taxes of
$833 and $2,535 (note 1) -- (190,820) (4,707)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 95,053 5,694 46,995
===========================================================================================================================
Net income after Demutualization and IPO (notes 1 and 14) $ 78,982
===========================================================================================================================
Earnings per share (notes 1 and 14)
Basic net income after Demutualization and IPO $1.87
===========================================================================================================================
Diluted net income after Demutualization and IPO $1.86
===========================================================================================================================
Proforma earnings per share (notes 1 and 14) Basic and diluted
pro forma income before extraordinary items $2.23 2.73 0.84
===========================================================================================================================
Basic and diluted pro forma net income (loss) $2.23 (1.77) 0.73
===========================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
TRIGON 32 1997
<PAGE>
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Unrealized
Capital gains (losses) Total
Years ended December 31, 1997, 1996 and 1995 Common in excess Retained on investment shareholders'
(In thousands) stock of par earnings securities, net equity
===========================================================================================================================
<S> <C>
BALANCE AT JANUARY 1, 1995 $-- -- 653,570 2,305 655,875
Net income -- -- 46,995 -- 46,995
Change in unrealized gains (losses) on
investment securities, net (note 3) -- -- -- 37,201 37,201
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 -- -- 700,565 39,506 740,071
Net income -- -- 5,694 -- 5,694
Change in unrealized gains (losses) on
investment securities, net (note 3) -- -- -- (5,985) (5,985)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 -- -- 706,259 33,521 739,780
Net income before Demutualization -- -- 16,071 -- 16,071
Issuance of 24,475 shares to eligible
policyholders in the Demutualization
and cash payments to eligible policyholders
in lieu of shares of common stock 245 630,941 (722,330) -- (91,144)
Issuance of 17,825 shares in the
Initial Public Offering, net of expenses 178 215,027 -- -- 215,205
Other, principally Trigon shares purchased by
consolidated grantor trusts -- (3,933) -- -- (3,933)
Net income after Demutualization -- -- 78,982 -- 78,982
Change in unrealized gains (losses) on
investment securities, net (note 3) -- -- -- 3,776 3,776
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $423 842,035 78,982 37,297 958,737
===========================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
TRIGON 33 1997
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years ended December 31, 1997, 1996 and 1995
(In thousands) 1997 1996 1995
===========================================================================================================================
<S> <C>
Net cash provided (used) by operating activities
(note 17) $ (116,982) 21,819 29,973
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from sale of property and equipment
and other assets 790 45 25
Capital expenditures (8,226) (14,147) (13,293)
Investment securities purchased (4,784,150) (2,759,974) (2,694,188)
Proceeds from investment securities sold 3,897,611 2,585,033 1,531,862
Maturities of fixed income securities 777,626 186,420 1,178,232
Cash paid for purchase of subsidiaries,
net of cash acquired -- (84,497) (26,762)
Proceeds from sale of subsidiary -- 76,979 --
Cash paid for other investments -- -- (7,500)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (116,349) (10,141) (31,624)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from long-term debt 85,439 735 4,145
Payments on long-term debt (172) -- --
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 (3,933) -- --
Change in outstanding checks in excess of bank balance 3,464 (10,194) 15,667
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 208,859 (9,459) 19,812
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (24,472) 2,219 18,161
Cash - beginning of year 31,482 29,263 11,102
- ---------------------------------------------------------------------------------------------------------------------------
Cash - end of year $ 7,010 31,482 29,263
===========================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
TRIGON 34 1997
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
December 31, 1997 and 1996
ORGANIZATION
Trigon Healthcare, Inc. is a stock holding
company formed in 1996 as a wholly owned subsidiary of Blue Cross and Blue
Shield of Virginia (dba Trigon Blue Cross Blue Shield) (Virginia BCBS) for the
purpose of becoming the parent company of Virginia BCBS under a Plan of
Demutualization (Demutualization). In accordance with the Demutualization,
effective February 5, 1997, Virginia BCBS completed its conversion from a mutual
insurance company to a stock insurance company, changed its name to Trigon
Insurance Company (dba Trigon Blue Cross Blue Shield) and became a wholly-owned
subsidiary of Trigon Healthcare, Inc. (Trigon Healthcare, Inc. and subsidiaries
herein collectively referred to as the Company) (note 1).
Trigon Healthcare, Inc. owns 100% of Trigon Insurance Company, HealthKeepers,
Inc., Physicians Health Plan, Inc., Mid-South Insurance Company, Trigon Health
and Life Insurance Company (formerly Monticello Life Insurance Company),
Healthcare Support Corporation, Trigon Services, Inc., Consolidated Holdings
Corporation, Trigon Administrators, Inc., Health Management Corporation,
Monticello Service Agency, Inc., and Trigon Health Ventures, Inc. Additionally,
Trigon Healthcare, Inc. owns 80% of Priority, Inc. and 51% of Peninsula Health
Care, Inc. Through its subsidiary, Trigon Insurance Company, and other health
maintenance organization (HMO) subsidiaries, the Company is the largest managed
health care company in Virginia, providing approximately 1.8 million customers
with a comprehensive spectrum of managed care products and services provided
primarily through three provider network systems. Trigon Insurance Company also
processes claims for Medicare and participates in a national contract with the
U.S. Office of Personnel Management to provide benefits to Federal employees
within Virginia through the Federal Employee Program (FEP). The various
subsidiaries provide complementary products and services to customers and
non-customers of Trigon Insurance Company including third-party administration
for medical and workers' compensation, life and disability insurance, health
promotion and other products.
The significant accounting policies and practices followed by the Company are
as follows:
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The Company follows
Statement of Financial Accounting Standards (SFAS) No. 60, Accounting and
Reporting by Insurance Enterprises, as it relates to its insurance business and
Statement of Position 89-5, Financial Accounting and Reporting by Providers of
Prepaid Healthcare Services, as it relates to its HMO business. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes, including
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
The consolidated financial statements include the accounts of Trigon
Healthcare, Inc. and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Investments in other companies in which less than a majority interest is held
and where the Company has significant influence over the operating and financial
policies of the investee are accounted for under the equity method.
RISKS AND UNCERTAINTIES
The Company's profitability depends in large part on accurately predicting and
effectively managing health care costs. The Company continually reviews its
premium and benefit structure to reflect its underlying claims experience and
revised actuarial data; however, several factors could adversely affect the
medical loss ratios. Certain of these factors, which include changes in health
care practices, inflation, new technologies, major epidemics, natural disasters
and malpractice litigation, are beyond any health plan's control and could
adversely affect the Company's ability to accurately predict and effectively
control health care costs. Costs in excess of those anticipated could have a
material adverse effect on the Company's results of operations.
TRIGON 35 1997
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
In addition, the managed care industry is highly competitive in both Virginia
and in other states in the Southeastern and Mid-Atlantic United States where the
Company principally intends to expand. There is no assurance that such
competition will not exert strong pressures on the Company's profitability, its
ability to increase enrollment, or its ability to successfully attain its
expansion plans. Also, there can be no assurance that regulatory initiatives
will not be undertaken at the state or federal level to reform the health care
industry in order to reduce the escalation in health care costs or to make
health care more accessible. Such reform could adversely affect the Company's
profitability.
INVESTMENT SECURITIES
Investment securities are accounted for in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. All investment
securities are considered available for sale and are recorded at estimated fair
value, based on quoted market prices. The net unrealized gain or loss on
investment securities, net of deferred income taxes, is included as a separate
component of shareholders' equity. A decline in the fair value of any investment
security below cost, that is deemed other than temporary, is recorded as a
realized loss resulting in a new cost basis for the security. Costs of
investments sold are determined on the first in, first out basis.
Certain of the Company's investment securities are denominated in foreign
currencies. The Company utilizes forward currency contracts and foreign currency
options to hedge exposure to fluctuations in foreign currency exchange rates.
The forward contracts and options are reflected as investment securities on the
consolidated balance sheets at fair value. Unrealized gains and losses on these
contracts are recorded as a separate component of shareholders' 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.
The Company enters into financial futures contracts for portfolio strategies
such as minimizing interest rate risk and managing portfolio duration. The
notional amount of the futures 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 fair value of financial futures, determined on a daily
basis, are recorded as realized gains or losses in the consolidated statements
of operations. Terminations of contracts are accounted for in a similar manner.
SOFTWARE DEVELOPMENT COSTS
The Company expenses as incurred substantially all costs associated with the
development of computer software for internal use, other than the initial
purchase price of software packages.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets, which are 40 to 50 years
for buildings and 3 to 10 years for furniture and equipment. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or estimated useful life of the asset. Any gain or loss realized
upon retirement or disposal is reflected in selling, general and administrative
expenses.
GOODWILL AND OTHER INTANGIBLES
Costs in excess of fair value of net tangible and identified intangible assets
of businesses acquired are amortized using the straight-line method over periods
from 15 to 25 years. Recoverability is reviewed annually or sooner if events or
changes in circumstances indicate that the carrying amount may exceed fair
value. Recoverability is then determined by comparing the undiscounted net cash
flows of the assets to which the goodwill applies to the net book value
including goodwill of those assets.
TRIGON 36 1997
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Amortization was $7,689,000, $4,633,000 and $1,399,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Accumulated amortization as of
December 31, 1997 and 1996 was $13,721,000 and $6,032,000, respectively.
MEDICAL AND OTHER BENEFITS PAYABLE
The Company establishes liabilities for claims in process of review and claims
incurred but not reported. These liabilities are based on historical payment
patterns using actuarial techniques. In addition, processing costs are accrued
as operating expenses based on an estimate of the costs necessary to process
these claims. The methods for making these estimates and for establishing the
resulting liabilities are continually reviewed and updated, and any adjustments
resulting therefrom are reflected in current operations. While the ultimate
amount of claims and the related expenses paid are dependent on future
developments, management is of the opinion that the liabilities for claims and
claims processing costs are adequate to cover such claims and expenses.
REVENUES
All of the Company's individual and certain of the Company's group contracts
provide for the individual or the group to be fully insured. Premiums for these
contracts are billed in advance of the respective coverage periods and are
initially recorded as premiums receivable and as unearned income. Unearned
premiums are recognized as earned in the period of coverage.
Certain other groups have contracts that provide for the group to be at risk
for all or a portion of their claims experience. Most of these self-funded
groups purchase aggregate and/or specific stop-loss coverage. In exchange for a
premium, the group's aggregate liability or the group's liability on any one
participant is capped for the year. The Company charges self-funded groups an
administrative fee which is based on the number of members in a group or the
group's claims experience. Under the Company's self-funded arrangements, amounts
due are recognized based on incurred claims plus administrative and other fees
and any stop-loss premiums. In addition, accounts for certain self-funded groups
are charged or credited with interest expense or income as provided by the
groups' contracts.
AGENCY CONTRACTS
As fiscal intermediary and administrative agent for Medicare and other plans,
the Company allocates operating expenses to these lines of business to determine
reimbursement due for services rendered in accordance with the contracts in
force. Claims processed under these arrangements are not included in the
accompanying consolidated statements of operations and the reimbursement of
allocated operating expenses is recorded as a reduction of the Company's
selling, general and administrative expenses.
POSTRETIREMENT/POSTEMPLOYMENT BENEFITS
Pension costs are accrued in accordance with SFAS No. 87, Employers' Accounting
for Pensions, and are funded based on the minimum contribution requirements of
the Employee Retirement Income Security Act of 1974. The actuarial cost method
used is the projected unit credit method.
The Company provides certain health and life insurance benefits to retired
employees. These benefits are accrued in accordance with SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
The Company also provides certain
disability related postemployment benefits. These benefits are accrued in
accordance with SFAS No. 112, Employers' Accounting for Postemployment Benefits.
The Company accrues the benefits when it becomes probable that such benefits
will be paid and when sufficient information exists to make reasonable estimates
of the amounts to be paid.
TRIGON 37 1997
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
recognized for the stock options granted and employee stock purchases. The
Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting
for Stock Based Compensation.
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings per
Share. This statement replaces 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. All net income per share amounts for
all periods have been presented and, where appropriate, restated to conform to
SFAS No. 128 requirements.
RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.
TRIGON 38 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
December 31, 1997 and 1996
Consistent with the financial statement presentation, the following notes
include information related to the consolidated balance sheets as of December
31, 1997 and 1996 and information related to the consolidated statements of
operations and cash flows for each of the years in the three-year period ended
December 31, 1997.
NOTE 1. DEMUTUALIZATION AND IPO AND PRO FORMA FINANCIAL INFORMATION
Effective February 5, 1997, Virginia BCBS (dba Trigon Blue Cross Blue Shield)
completed its conversion from a mutual insurance company to a stock insurance
company in accordance with a Plan of Demutualization (Demutualization). In
accordance with the Demutualization, Virginia BCBS changed its name to Trigon
Insurance Company (dba Trigon Blue Cross Blue Shield) and became a wholly-owned
subsidiary of Trigon Healthcare, Inc. The membership interests of Virginia
BCBS's eligible members were converted into Class A common stock of Trigon
Healthcare, Inc., or, in certain circumstances, cash. The Demutualization also
required the Company to complete an Initial Public Offering (IPO) of stock
simultaneously with the conversion. Accordingly, Trigon Healthcare, Inc. issued
17.8 million shares of Class A common stock at $13 per share in the IPO,
generating net proceeds of $215.2 million. In connection with the
Demutualization, the Company was required to make a payment of $175 million to
the Commonwealth of Virginia (Commonwealth Payment) in February 1997. The
Commonwealth Payment was accrued and reflected as an extraordinary charge in the
consolidated financial statements for 1996. The Company used approximately $90
million of the net proceeds and $85 million in borrowings under a revolving
credit agreement to fund this payment (note 11). The Company also used
approximately $91.1 million of the offering proceeds to pay certain eligible
members cash in lieu of shares of common stock that would otherwise be issued to
such eligible members pursuant to the Demutualization. The statements of changes
in shareholders' equity and the statements of cash flows reflect the
consolidated capitalization effects of the Demutualization and IPO for 1997.
The following pro forma information for the years ended December 31, 1997, 1996
and 1995 gives effect to the Demutualization and IPO as if they had occurred on
January 1, 1995, consistent with the Company's pro forma presentation in its
Form S-1 filed on January 29, 1997 in connection with its IPO (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
=====================================================================
<S> <C>
As reported
Income before income
taxes and
extraordinary items $144,670 182,888 59,966
Income tax expense
(benefit) 49,617 (13,626) 8,264
Pro forma adjustments
Pro forma interest
expense 634 4,943 4,943
Pro forma income
tax expense (benefit) (217) 75,907 10,994
- ---------------------------------------------------------------------
Pro forma income before
extraordinary items 94,636 115,664 35,765
Extraordinary items,
net of income tax,
as reported -- (190,820) (4,707)
- ---------------------------------------------------------------------
Pro forma net income
(loss) $ 94,636 (75,156) 31,058
=====================================================================
</TABLE>
The pro forma information assumes:
o interest expense at 5.675% per annum for
the year ended December 31, 1997 and 5.815% per annum for the years ended
December 31, 1996 and 1995 on borrowings used to fund a portion of the
Commonwealth Payment. The interest rate used for 1996 and 1995 reflects the
weighted average rate in effect for the period the borrowings were
outstanding during 1997. The pro forma interest expense reflected for the
year ended December 31, 1997 represents interest expense for the period prior
to the actual borrowing of funds used to make a portion of the Commonwealth
Payment. Actual interest expense for the period subsequent to the borrowings
is included in income before income taxes and extraordinary items. Actual
interest rates can vary on the current borrowing. A 1/8 percent change in the
interest rate of the current outstanding borrowings would have changed
interest expense by approximately $106,000 per annum.
TRIGON 39 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
o adjustment of the effective income tax rate for 1996 and 1995 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 year ended December 31, 1997 represents the income tax
benefit associated with the pro forma interest expense adjustment.
The pro forma financial information above is used to present comparative
earnings per share amounts for the years ended December 31, 1997, 1996 and 1995
on the consolidated statements of operations (note 14). Net income and net
income per share after Demutualization and IPO on the consolidated statements of
operations reflect net income and net income per share for the period after
February 5, 1997, the effective date of the Demutualization and IPO. NOTE 2.
AGENCY CONTRACTS The Company acts as an administrative agent for processing
claims for certain agencies and other plans. Claims processed for others and the
related reimbursed operating expenses, which are subject to their audit, were as
follows for the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
===================================================================
<S> <C>
Claims processed for
Medicare $3,257,532 2,873,526 2,654,580
Other plans 106,486 55,480 37,046
- -------------------------------------------------------------------
$3,364,018 2,929,006 2,691,626
===================================================================
Operating expenses
reimbursed by
Medicare $ 12,535 11,634 11,605
Other plans 3,025 1,376 807
- -------------------------------------------------------------------
$ 15,560 13,010 12,412
===================================================================
</TABLE>
NOTE 3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair value
of investment securities as of December 31, 1997 and 1996 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
===========================================================================================================================
<S> <C>
Fixed income
Domestic
U.S. Treasury securities and obligations
of U.S. government agencies $ 406,921 23,040 14 429,947
Mortgage-backed obligations of
U.S. government agencies 72,117 1,429 93 73,453
States and political subdivision securities 31,914 1,325 7 33,232
Other mortgage-backed and asset-backed securities 139,504 791 379 139,916
Domestic corporate bonds 388,697 10,410 890 398,217
Short-term debt securities with maturities of
less than one year 93,561 -- -- 93,561
Foreign
Debt securities issued by foreign governments 41,066 2,296 490 42,872
Foreign corporate bonds 6,678 298 3 6,973
Short-term debt securities with maturities of
less than one year 9,214 -- 32 9,182
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed income 1,189,672 39,589 1,908 1,227,353
- ---------------------------------------------------------------------------------------------------------------------------
Equities
Domestic 68,977 14,922 3,264 80,635
Foreign 57,476 15,034 8,813 63,697
- ---------------------------------------------------------------------------------------------------------------------------
Total equities 126,453 29,956 12,077 144,332
- ---------------------------------------------------------------------------------------------------------------------------
Derivative instruments 492 2,226 406 2,312
$1,316,617 71,771 14,391 1,373,997
===========================================================================================================================
Unrestricted $1,306,727 71,515 14,384 1,363,858
Restricted 9,890 256 7 10,139
- ---------------------------------------------------------------------------------------------------------------------------
$1,316,617 71,771 14,391 1,373,997
===========================================================================================================================
</TABLE>
TRIGON 40 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
===========================================================================================================================
<S> <C>
Fixed income
Domestic
U.S. Treasury securities and obligations
of U.S. government agencies $ 308,205 478 3,667 305,016
Mortgage-backed obligations of U.S. government agencies 70,194 977 415 70,756
Other mortgage-backed and asset-backed securities 156,901 842 231 157,512
Domestic corporate bonds 103,221 1,056 353 103,924
Short-term debt securities with maturities of
less than one year 164,239 26 7 164,258
Foreign
Debt securities issued by foreign governments 38,496 1,941 249 40,188
Foreign corporate bonds 7,082 493 72 7,503
Short-term debt securities with maturities of less
than one year 11,528 9 51 11,486
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed income 859,866 5,822 5,045 860,643
- ---------------------------------------------------------------------------------------------------------------------------
Equities
Domestic 148,111 34,359 2,018 180,452
Foreign 133,366 26,580 8,662 151,284
- ---------------------------------------------------------------------------------------------------------------------------
Total equities 281,477 60,939 10,680 331,736
- ---------------------------------------------------------------------------------------------------------------------------
Derivative instruments 543 965 448 1,060
$1,141,886 67,726 16,173 1,193,439
===========================================================================================================================
Unrestricted $1,130,808 67,718 16,106 1,182,420
Restricted 11,078 8 67 11,019
- ---------------------------------------------------------------------------------------------------------------------------
$1,141,886 67,726 16,173 1,193,439
===========================================================================================================================
</TABLE>
Short-term investments consist principally of commercial paper and money market
investments.
Derivative instruments consist of foreign currency forward contracts and
foreign currency options. The Company enters into foreign currency derivative
instruments to hedge exposure to fluctuations in foreign currency exchange
rates. Company policy only permits utilization of these instruments in its
foreign denominated bond and equity portfolios. The counterparties to these
transactions are major financial institutions. The Company may incur a loss with
respect to these transactions to the extent that a counterparty fails to perform
under a contract and exchange rates have changed unfavorably since the inception
of the contract. The Company anticipates that the counterparties will be able to
fully satisfy their obligations under the agreements. The forward contracts
involve the exchange of one currency for another at a future date and typically
have maturities of six months or less. As of December 31, 1997, the Company had
forward contracts outstanding to purchase approximately $3.3 million in foreign
currencies and to sell approximately $35.8 million in foreign currencies
(primarily British Pound, German Mark and Canadian Dollar). The gross unrealized
gains and losses related to these contracts as of December 31, 1997 aggregated
$547,000 and $406,000, 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
December 31, 1997. These options generally expire within twelve months. The
gross unrealized gains related to these options as of December 31, 1997
aggregated $1.7 million. There were no gross unrealized losses as of December
31, 1997.
TRIGON 41 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The Company enters into financial futures contracts for portfolio strategies
such as minimizing interest rate risk and managing portfolio duration. The
notional amount of the futures, $174.8 million as of December 31, 1997, is
limited to that of the market value of the underlying portfolios.
The amortized cost and estimated fair value of fixed income securities as of
December 31, 1997, by contractual maturity, were as follows (in thousands).
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
====================================================================
<S> <C>
Due in one year or less $ 170,100 170,751
Due after one year
through five years 399,303 402,596
Due after five years
through ten years 147,257 150,568
Due after ten years 261,391 290,069
Mortgage-backed and
asset-backed securities 211,621 213,369
- ---------------------------------------------------------------------
$1,189,672 1,227,353
=====================================================================
</TABLE>
Included in investment securities as of December 31, 1997 are $10.1 million, at
estimated fair value, of U.S. Treasury securities held by various states to meet
security deposit requirements related to Trigon Insurance Company, its HMO
subsidiaries, Trigon Health and Life Insurance Company and Mid-South Insurance
Company.
The major components of investment income for the years ended December 31,
1997, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
====================================================================
<S> <C>
Interest on fixed
income securities $73,940 36,985 37,789
Interest on short-term
investments 4,450 8,654 9,764
Dividends 5,340 10,701 7,652
- --------------------------------------------------------------------
83,730 56,340 55,205
Investment expenses 6,141 5,711 5,757
Group interest credits 2,905 3,317 3,587
- --------------------------------------------------------------------
Investment income $74,684 47,312 45,861
====================================================================
</TABLE>
Gross realized gains and losses for the years ended December 31, 1997, 1996 and
1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
====================================================================
<S> <C>
Gross realized gains
Fixed income
securities $ 21,177 12,697 13,890
Equity securities 65,837 70,421 58,938
Derivative
instruments 14,689 6,659 11,430
- --------------------------------------------------------------------
101,703 89,777 84,258
- --------------------------------------------------------------------
Gross realized losses
Fixed income
securities 20,514 10,365 9,081
Equity securities 20,461 18,834 15,520
Derivative instruments 6,665 1,168 6,681
- --------------------------------------------------------------------
47,640 30,367 31,282
- --------------------------------------------------------------------
Net realized gains $ 54,063 59,410 52,976
====================================================================
</TABLE>
Proceeds from the sale of investment securities were $3.9 billion, $2.6 billion
and $1.5 billion during 1997, 1996 and 1995, respectively.
Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for fixed income securities or cost for equity
securities. A summary of the change in unrealized gains (losses), less deferred
income taxes, for the years ended December 31, 1997, 1996 and 1995 is as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
====================================================================
<S> <C>
Fixed income securities$ 36,904 (12,284) 31,921
Equity securities (32,380) 2,943 25,051
Derivative instruments 1,303 146 371
Provision for deferred
income taxes (2,051) 3,210 (20,142)
- --------------------------------------------------------------------
$ 3,776 (5,985) 37,201
====================================================================
</TABLE>
NOTE 4. PREMIUMS AND OTHER RECEIVABLES
Premiums and other receivables as of
December 31, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
====================================================================
<S> <C>
Premiums $ 75,265 72,687
Self-funded group receivables 133,613 156,076
Federal Employee Program 123,832 138,213
Investment income receivable 13,026 7,886
Other 15,205 16,135
- --------------------------------------------------------------------
$360,941 390,997
====================================================================
</TABLE>
TRIGON 42 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997 and 1996 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
====================================================================
<S> <C>
Land and improvements $ 2,971 2,977
Buildings and improvements 36,565 35,721
Furniture and equipment 70,315 69,703
Computer software 16,247 14,403
====================================================================
126,098 122,804
Less accumulated depreciation
and amortization 82,186 73,259
====================================================================
$ 43,912 49,545
====================================================================
</TABLE>
NOTE 6. MEDICAL AND OTHER BENEFITS PAYABLE
Medical and other benefits payable as of December 31, 1997 and 1996 were as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
====================================================================
<S> <C>
Medical and other benefits
payable - current
Commercial and FEP
Claims reported but not paid $ 29,558 23,715
Claims incurred but not
reported 228,775 226,444
====================================================================
258,333 250,159
Self-funded
Claims reported but not paid 18,578 15,383
Claims incurred but not
reported 129,635 151,465
====================================================================
148,213 166,848
Medical and other benefits payable -
noncurrent (all commercial) 66,541 59,246
====================================================================
473,087 476,253
Liability for claims
processing costs 17,939 17,283
Advances to providers (11,775) (16,493)
====================================================================
479,251 477,043
Less medical and other benefits
payable - noncurrent (66,541) (59,246)
====================================================================
$412,710 417,797
====================================================================
</TABLE>
A summary of the activity for commercial and FEP medical and other benefits
payable for the years ended December 31, 1997, 1996 and 1995 is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
======================================================================
<S> <C>
Medical and other
benefits payable at
beginning of year $ 476,253 402,476 355,836
Self-funded at
beginning of year (166,848) (141,995) (134,659)
======================================================================
Balance at beginning
of year 309,405 260,481 221,177
======================================================================
Liabilities acquired
with Mid-South -- 38,963 --
Incurred related to
Current year 1,559,402 1,427,859 1,275,583
Prior years (4,846) (2,328) (4,033)
======================================================================
Total incurred 1,554,556 1,425,531 1,271,550
======================================================================
Paid related to
Current year 1,333,880 1,225,103 1,083,170
Prior years 205,207 190,467 149,076
======================================================================
Total paid 1,539,087 1,415,570 1,232,246
======================================================================
Balance at end
of year 324,874 309,405 260,481
Self-funded at
end of year 148,213 166,848 141,995
======================================================================
Medical and other
benefits payable at
end of year $ 473,087 476,253 402,476
======================================================================
</TABLE>
The Company uses paid claims and completion factors based on historical payment
patterns to estimate incurred claims. Changes in payment patterns and claims
trends can result in changes to prior years' claims estimates.
TRIGON 43 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 7. LEASES
The Company has noncancelable operating leases for real estate and equipment
that expire over the next nine years and provide for purchase or renewal
options. Future minimum lease payments under noncancelable operating leases as
of December 31, 1997 were (in thousands):
<TABLE>
<CAPTION>
Years ending December 31,
==========================================================================
<S> <C>
1998 $10,101
1999 9,407
2000 7,176
2001 4,271
2002 3,804
Later years through 2006 6,028
==========================================================================
Total minimum lease payments $40,787
==========================================================================
</TABLE>
Total rental expense for operating leases for
the years ended December 31, 1997, 1996 and 1995 was $14,221,000, $13,354,000
and $15,243,000, respectively.
NOTE 8. OTHER LIABILITIES
Other liabilities as of December 31, 1997 and 1996 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
==========================================================================
<S> <C>
Outstanding checks in excess
of bank balance $ 43,815 40,351
Member related liabilities 3,783 4,637
Unearned premium reserve -
Federal Employee Program 74,247 86,841
Self-funded group deposits 17,311 19,244
Current income taxes payable 15,659 29,023
Other 25,103 18,797
==========================================================================
$179,918 198,893
==========================================================================
</TABLE>
The FEP unearned premium reserve represents the Company's share of the FEP
premium stabilization reserve. These funds are actually held by the Blue Cross
Blue Shield Association on behalf of each Blue Cross and Blue Shield Plan
participating in the Federal Employee Program. An offsetting receivable is
recorded in premiums and other receivables.
NOTE 9. OTHER REVENUES
Other revenues include those revenues earned by non-core subsidiaries. A summary
by type of revenue for the years ended December 31, 1997, 1996 and 1995 is
included below (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
==========================================================================
<S> <C>
Electronic communication
services $ -- 21,474 20,583
Employee benefits
administration 4,346 6,957 9,435
Workers' compensation
administration 8,877 9,682 9,707
Health management
services 8,709 9,039 6,970
Other 3,592 2,204 8,481
==========================================================================
$25,524 49,356 55,176
==========================================================================
</TABLE>
Electronic communicaton services revenues relate to Health Communication
Services, Inc. which was sold effective December 31, 1996.
NOTE 10. INCOME TAXES
Income tax expense (benefit) attributable to income before income taxes and
extraordinary items, substantially all of which is federal, for the years ended
December 31, 1997, 1996 and 1995 consists of (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
==========================================================================
<S> <C>
Current $28,074 45,857 19,206
Deferred 21,543 (59,483) (10,942)
==========================================================================
$49,617 (13,626) 8,264
==========================================================================
</TABLE>
The differences between the statutory federal income tax rate and the actual tax
rate applied to income before income taxes and extraordinary items for the years
ended December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
==========================================================================
<S> <C>
Statutory federal
income tax rate 35.0% 35.0 35.0
Tax exempt investment
income (0.6) (0.3) (1.2)
Change in valuation
allowance -- (44.0) (19.4)
Other, net (0.1) 1.8 (0.6)
==========================================================================
Effective tax rate 34.3% (7.5) 13.8
==========================================================================
</TABLE>
TRIGON 44 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The components of the deferred tax assets and deferred tax liabilities as of
December 31, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
==========================================================================
<S> <C>
Deferred tax assets
Employee benefit plans $22,984 22,880
Insurance reserves 26,200 27,492
Alternative minimum tax
credit carryforward 943 21,658
Property and equipment 8,713 6,244
Other 2,933 5,055
==========================================================================
Gross deferred tax assets 61,773 83,329
==========================================================================
Deferred tax liabilities
Investment securities 20,083 18,032
Other 803 555
==========================================================================
Gross deferred tax liabilities 20,886 18,587
==========================================================================
Net deferred tax asset $40,887 64,742
==========================================================================
</TABLE>
Deferred tax assets and liabilities as of December 31, 1997 and 1996 are
presented on the accompanying consolidated balance sheets as follows:
<TABLE>
<CAPTION>
1997 1996
==========================================================================
<S> <C>
Deferred tax assets
Current $ -- 16,572
Noncurrent 45,185 48,170
Deferred tax liabilities - current -- 4,298
==========================================================================
Net deferred tax asset $40,887 64,742
==========================================================================
</TABLE>
The Company, through its subsidiary Trigon Insurance Company, has qualified for
a federal income tax deduction under IRC Section 833. This deduction is equal to
the amount by which 25% of the sum of claims and expenses exceeds tax basis
adjusted surplus. Prior to 1994, the effect of this deduction was to
significantly reduce regular taxable income and subject the Company to
alternative minimum tax. Because it had been unclear whether the Company would
be subject to the regular tax in the future, the Company had maintained a
valuation allowance with respect to its AMT credits and certain other long-term
assets. The valuation allowance on the deferred tax assets was eliminated during
1996 as it was more likely than not that such assets would be realized.
NOTE 11. LONG-TERM DEBT
Long-term debt as of December 31, 1997 and 1996 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
=====================================================================
<S> <C>
Revolving credit agreement $85,000 --
Promissory note, 5%, due
June 30, 2000 1,300 1,300
Notes payable, at prime plus 1% 3,039 2,600
Line of credit, at prime 808 980
=====================================================================
$90,147 4,880
=====================================================================
</TABLE>
Simultaneous with the Demutualization and IPO in February 1997, the Company
entered into a $300 million five-year revolving credit agreement with a
syndicate of banks. The credit agreement provides for various borrowing options
and rates and requires the Company to pay a facility fee on a quarterly basis.
The current borrowing terms require a facility fee of .075% per annum based on
the $300 million commitment and bears interest at LIBOR plus a margin, adjusted
monthly. The credit agreement also contains certain financial covenants and
restrictions including minimum net worth requirements as well as limitations on
dividend payments. As of December 31, 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 the Demutualization. The weighted average interest rate for the period the
borrowings were outstanding during the year ended December 31, 1997 was 5.841%.
The promissory note originated in 1995 in connection with the purchase of a
subsidiary. The promissory note requires payment of the principal on June 30,
2000 and bears interest at 5%, payable annually.
Two HMO subsidiaries entered into notes payable and a line of credit
agreement with their minority shareholders for purposes of maintaining
regulatory minimum net worth requirements. Interest on the notes payable is at
the prime lending rate plus one percent (9.5% as of December 31, 1997). The
notes have no scheduled maturity date and repayment of the notes is subject to
approval by state regulatory authorities. Interest on the line of
TRIGON 45 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
credit is at the prime lending rate (8.5% as of December 31, 1997). The line of
credit has no scheduled maturity date and repayment is subject to approval by
state regulatory authorities.
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan which is funded
through the Blue Cross National Retirement Trust (Trust), a collective
investment trust for the retirement programs of its participating employers. An
employee may become eligible for participation after one year of continuous
service and attainment of age 21.
The Company's funding policy is to annually contribute amounts to the Trust
sufficient to meet the minimum funding requirements outlined in the Employee
Retirement Income Security Act of 1974, plus any additional amounts the Company
may contribute from time to time. For the years ended December 31, 1997, 1996
and 1995, the Company made contributions to the Trust in the amounts of
$6,154,000, $7,933,000 and $7,716,000, respectively. Assets in the Trust are
primarily equity securities, U.S. Treasury bonds and notes, U.S. government
agency securities, domestic corporate bonds, real estate funds and short-term
investments.
The following table sets forth the pension plan's funded status as of
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
===========================================================================
<S> <C>
Accumulated benefit obligation,
including vested benefits of
$74,524 and $59,656 $ 86,852 70,183
===========================================================================
Projected benefit obligation for
service rendered to date 125,579 105,517
Plan assets at fair value (118,344) (99,352)
===========================================================================
Excess of projected benefit
obligation over assets 7,235 6,165
Unrecognized net asset at
January 1, 1987 being
recognized over 17 years 673 783
Unrecognized prior service cost (610) (697)
Unrecognized net gain 3,779 3,988
===========================================================================
Accrued pension liability $ 11,077 10,239
===========================================================================
</TABLE>
Pension expense for the years ended December 31, 1997, 1996 and 1995 included
the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
=======================================================================
<S> <C>
Service cost - benefits
earned during
the year $ 7,159 7,765 6,705
Interest cost on
projected benefit
obligation 8,004 7,595 6,507
Actual return on
plan assets (18,971) (13,714) (12,194)
Net amortization
and deferral 10,800 7,565 6,926
=======================================================================
Net periodic
pension expense $ 6,992 9,211 7,944
=======================================================================
</TABLE>
The weighted average discount rate was 7.25% and 7.75% as of December 31, 1997
and 1996, respectively. The expected long-term rate of return on assets was 9.0%
as of December 31, 1997 and 1996. Age-related rates ranging from 3.5% to 7.0%
were used for the rate of increase in future compensation levels as of December
31, 1997 and 1996.
In addition to providing pension benefits, the Company provides certain
health and life insurance benefits for retired employees. In October 1997, the
Company amended its postretirement benefit plan by terminating benefits for
substantially all future eligible retirees except those employees who will have
at least 20 years of service and those employees between the ages of 40 and 45
with age plus years of service equal to 55 or more as of January 1, 1998. The
changes in this plan resulted in a curtailment gain of $3,997,000 in the fourth
quarter of 1997 which is included in selling, general and administrative
expenses in the Company's consolidated statements of operations. The plan
amendment also reduced the Company's accumulated postretirement benefit
obligation to $4,589,000 which is being amortized as a reduction to net periodic
postretirement benefit expense over approximately 7.5 years. This postretirement
benefit plan is also funded through the Trust. The Company made a $2,500,000
contribution to the Trust in 1995. No contributions were made in 1997 and 1996.
TRIGON 46 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following table presents the funded status of the plan including the
accumulated postretirement benefit obligation by type of participant as of
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
=========================================================================
<S> <C>
Retirees $ 8,331 7,069
Fully eligible active
plan participants 3,699 3,825
Other active plan participants 15,699 18,861
=========================================================================
Accumulated postretirement
benefit obligation 27,729 29,755
Plan assets at fair value (14,134) (12,218)
=========================================================================
Excess of accumulated
postretirement benefit
obligation over plan assets 13,595 17,537
Unrecognized net gain 6,354 5,646
Unrecognized reduction in
prior service cost 5,932 5,772
=========================================================================
Accrued postretirement
benefit liability $ 25,881 28,955
=========================================================================
</TABLE>
Postretirement benefit expense for the years ended December 31, 1997, 1996 and
1995 included the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
=========================================================================
<S> <C>
Service cost - benefits
attributed to service
during the year $ 1,948 2,373 2,128
Interest cost on
accumulated
postretirement
benefit obligation 2,004 2,044 1,843
Expected return on
plan assets (1,167) (1,009) (622)
Amortization of reduction
in prior service cost (697) (661) (661)
Amortization of gains (442) (29) --
=========================================================================
Net periodic
postretirement
benefit expense $ 1,646 2,718 2,688
=========================================================================
</TABLE>
For measurement purposes, a 6% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1997 and subsequent years. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rate by
one percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 1997 by $4,346,000 and the aggregate of the
service and interest cost components of net periodic postretirement benefit
expense would increase by $1,092,000 for the year ended December 31, 1997.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 7.75% as of December 31, 1997
and 1996, respectively. The rate of increase in future compensation levels used
in determining the accumulated postretirement benefit obligation was 4.5% as of
December 31, 1997 and ranged from 3.5% to 7.0% as of December 31, 1996. The
expected long term rate of return on assets was 9.0% as of December 31, 1997 and
1996. The Trust holding the plan assets is not subject to federal income taxes.
The Company also has the Employees' Thrift Plan of Trigon Insurance Company
under which substantially all employees who have completed six months of service
may elect to save up to 16% of their annual earnings on a pretax basis, subject
to certain limits, in the plan. Participants have the option of investing in
stock of Trigon Healthcare, Inc. and several international and domestic
investment funds. The Company contributes an amount equal to 50% of the
participant's contributions limited to 3% of the employee's compensation. The
Company's contributions are fully vested to the participant after three years of
contributing participation. For the years ended December 31, 1997, 1996 and
1995, the Company's contribution to the Employees' Thrift Plan of Trigon
Insurance Company was $3,111,000, $3,418,000 and $3,153,000, respectively.
TRIGON 47 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 13. CAPITAL STOCK
The Company has authorized 300 million shares of Class A Common Stock, par value
$0.01 per share (Common Stock), of which 42,300,022 shares were issued and
outstanding as of December 31, 1997. Common Stock shares are entitled to one
vote per share. These shares were issued in February 1997 when the Company
completed the Demutualization and IPO described in note 1.
The Company has also authorized 300 million shares of Class B non-voting
Common Stock, par value $0.01 per share (Non-Voting Common Stock). No shares of
Non-Voting Common Stock were issued and outstanding as of December 31, 1997. The
Non-Voting Common Stock has been authorized in connection with certain ownership
and transfer restrictions included in the Company's amended and restated
articles of incorporation. Non-Voting Common Stock shares are not entitled to
vote on any matter except as otherwise required by law.
The Company is authorized to issue up to 50 million shares of preferred
stock, no par value per share, in one or more series and to provide the
designations, preferences, limitations and rights of each series.
Shareholder Rights Plan
On July 16, 1997, the Board of Directors adopted a Shareholder Rights Plan
(Rights Plan). Under the Rights Plan, the Board of Directors authorized three
million preferred shares, the Series A Junior Participating Preferred Shares,
and declared a dividend of one preferred share purchase right (Right) on each
outstanding share of Trigon Class A Common Stock. Each Right entitles
shareholders to purchase one one-hundredth of a Series A Junior Participating
Preferred Share at an exercise price of $100, subject to adjustment. Subject to
certain exceptions, the Right will be exercisable only if a person or group
acquires 10% or more of the Company's Common Stock or announces a tender offer
for 10% or more of the Company's outstanding Common Stock. Each holder of a
Right (other than those held by the acquiring person) will then be entitled to
purchase, at the Right's then current exercise price, a number of shares of
Trigon Common Stock having a market value of twice the Right's exercise price.
If the Company is acquired in a merger or other business combination transaction
which has not been approved by the Board of Directors, each Right will entitle
its holder to purchase, at the Right's then current exercise price, a number of
shares of the acquiring company's Common Stock having a market value of twice
the Right's exercise price.
The date of record for the dividend distribution was July 29, 1997. The
Rights will expire in 2007 and are redeemable by action of the Board of
Directors at a price of $.001 per Right at any time prior to becoming
exercisable.
Common Stock Held by Grantor Trusts
The Company has several grantor trusts which were established to fund future
obligations under certain compensation and benefit plans. These grantor trusts
are consolidated for financial reporting purposes with the Company. Beginning in
the third quarter of 1997, shares of the Company's Common Stock were purchased
in the open market by these grantor trusts. The purchase price of the shares
held by the grantor trusts is shown as a reduction to capital in excess of par
in the consolidated balance sheets.
Stock Option Plans and Stock Purchase Plan
The 1997 Stock Incentive Plan (Incentive Plan), as approved by the Company's
shareholders, provides for the granting of stock options, restricted stock
awards, performance stock awards, stock appreciation rights and cash performance
awards to employees. The Company has reserved 3.55 million shares of its common
stock for issuance under the Incentive Plan. Awards are granted by a committee
appointed by the Board of Directors. Options vest and expire over terms as set
by the committee at the time of grant. In accordance with the Incentive Plan,
options to purchase shares at an amount equal to the fair market value of the
stock at the date of grant were granted to eligible employees during 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.
TRIGON 48 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
In addition, the shareholders of the Company approved the 1997 Non-Employee
Directors Stock Incentive Plan (Non-Employee Plan). In accordance with the terms
of the Non-Employee Plan, options to purchase 10,000 shares at an amount equal
to the fair market value of the stock at the date of grant were granted to each
of the Company's 16 non-employee directors. 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.
A summary of the activity in the stock option plans for the year ended
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
=====================================================================
<S> <C>
Balance at January 1, 1997 -- $ --
Granted 2,180,982 21.96
Exercised -- --
Forfeited 108,628 22.13
=====================================================================
Balance at December 31, 1997 2,072,354 $21.95
=====================================================================
Options exercisable at
December 31, 1997 -- $ --
=====================================================================
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
===========================================================================================================================
<S> <C>
$18.125 - 25.25 2,072,354 9.45 years $21.95 -- --
===========================================================================================================================
</TABLE>
As of December 31, 1997, 2,027,646 shares were available for future grant.
The Company's shareholders approved the Company's 1997 Employee Stock
Purchase Plan (Stock Purchase Plan). The Stock Purchase Plan provides employees
of the Company an opportunity to purchase the Company's common stock through
payroll deductions. The Company has reserved one million shares of its common
stock for issuance under the Stock Purchase Plan. Shares needed to satisfy the
needs of the Stock Purchase Plan may be newly issued by the Company or acquired
by purchase at the expense of the Company on the open market or in private
transactions. Eligible employees may purchase up to $25,000 in fair value
annually of the Company's common stock at 85% of the lower of the fair value on
the first or last trading day of each calendar quarter. Employee contributions
to the Stock Purchase Plan were approximately $749,000 for the year ended
December 31, 1997. Pursuant to the Stock Purchase Plan, 23,971 shares of the
Company's stock were purchased on the open market and issued to employees for
the year ended December 31, 1997 and 15,026 shares were pending purchase as of
December 31,1997.
The pro forma information regarding net income and earnings per share as
required by SFAS No. 123 has been determined as if the Company had accounted for
its stock-based compensation under the fair value method of that Statement. The
fair value for the stock options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997:
<TABLE>
<CAPTION>
======================================================================
<S> <C>
Risk-free interest rate 5.54%
Volatility factor 37.40%
Dividend yield --
Weighted average expected life 5 years
======================================================================
</TABLE>
TRIGON 49 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock option grants have characteristics significantly different
from those traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock option grants.
For purposes of pro forma disclosures,
compensation expense is increased for the
estimated fair value of the options amortized over the options' vesting periods
and for the difference between the market price of the stock and the discounted
purchase price of the shares on the purchase date for the employee stock
purchases. The Company's pro forma information for 1997 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
As Reported Pro Forma
========================================================================
<S> <C>
Net income $95,053 91,372
Net income after
Demutualization and IPO 78,982 75,718
Earnings per share
Basic net income after
Demutualization and IPO 1.87 1.79
Diluted net income after
Demutualization and IPO 1.86 1.79
Pro forma earnings per share
Basic and diluted pro forma
net income 2.23 2.16
Weighted average fair value of
options granted during the year -- 9.16
Weighted average fair value of
employee stock purchases
during the year -- 5.82
========================================================================
</TABLE>
NOTE 14. NET INCOME AND PRO FORMA NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the period after the Demutualization and IPO through December 31, 1997
(in thousands, except per share data):
<TABLE>
<CAPTION>
========================================================================
<S> <C>
Numerator for basic and diluted
earnings per share - net income $78,982
========================================================================
Denominator
Denominator for basic earnings per share -
weighted average shares 42,300
Effect of dilutive securities - employee
and director stock options 80
========================================================================
Denominator for diluted earnings per share 42,380
========================================================================
Basic net income per share $1.87
========================================================================
Diluted net income per share $1.86
========================================================================
</TABLE>
The following table sets forth the computation of basic and diluted pro forma
earnings per share for the years ended December 31, 1997, 1996 and 1995 (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
===========================================================================
<S> <C>
Numerator for basic
and diluted pro forma
earnings per share
(note 1)
Pro forma income
before extraordinary
items $94,636 115,664 35,765
Extraordinary items,
net of income tax,
as reported -- (190,820) (4,707)
- ---------------------------------------------------------------------------
Pro forma net income
(loss) $94,636 (75,156) 31,058
===========================================================================
Denominator
Denominator for basic
pro forma earnings per
share - weighted
average shares 42,300 42,300 42,300
Effect of dilutive
securities - employee
and director stock
options 73 -- --
- ---------------------------------------------------------------------------
Denominator for
diluted pro forma
earnings per share 42,373 42,300 42,300
===========================================================================
Basic and diluted
earnings per share
Pro forma income
before extraordinary
items $2.23 2.73 0.84
Extraordinary items,
net of income tax,
as reported -- (4.50) (0.11)
- ---------------------------------------------------------------------------
Pro forma net income
(loss) $2.23 (1.77) 0.73
===========================================================================
</TABLE>
TRIGON 50 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The pro forma weighted average shares outstanding gives effect to the
Demutualization and IPO as if they had occurred on January 1, 1995, consistent
with the Company's pro forma presentation in its Form S-1 filed on January 29,
1997, in connection with its IPO (note 1).
NOTE 15. STATUTORY FINANCIAL INFORMATION
Trigon Insurance Company is required to file financial statements with, and is
subject to audit by, the Commonwealth of Virginia, Bureau of Insurance. Such
financial statements are prepared in accordance with statutory accounting
practices prescribed or permitted by the Commonwealth of Virginia, Bureau of
Insurance which differ from generally accepted accounting principles under which
the accompanying consolidated financial statements have been prepared.
Significant differences resulting from these accounting practices include
certain investment valuation reserves and certain claims reserves recognized
under statutory accounting as well as certain assets (primarily property and
equipment) and deferred income taxes not recognized under statutory accounting
practices. While the Bureau of Insurance has the authority to permit insurers to
deviate from prescribed statutory accounting practices, Trigon Insurance Company
has not received, nor requested, approval to adopt any such deviations. In
accordance with the Insurance Code of Virginia (Code), Trigon Insurance
Company's statutory surplus may be reduced by Category 2 investments that exceed
a specified threshold. Category 2 investments consist primarily of domestic
equity investments that exceed a specified percentage of admitted assets and
foreign denominated investments. As of December 31, 1995, this reduction in
statutory surplus due to excess Category 2 investments approximated $92.0
million. There were no excess Category 2 investments as of December 31, 1997 and
1996.
Trigon Insurance Company's statutory surplus and net income were (in
thousands):
<TABLE>
<CAPTION>
Statutory surplus at:
<S> <C>
December 31, 1997 (unaudited) $617,578
December 31, 1996 618,999
Statutory net income for the years ended:
December 31, 1997 (unaudited) $123,272
December 31, 1996 97,143
December 31, 1995 82,910
</TABLE>
Trigon Insurance Company is required by
the Commonwealth of Virginia, Bureau of Insurance to maintain statutory capital
and surplus of at least $4.0 million.
Under the Code, an insurance company may pay a dividend without prior
permission of the Commonwealth of Virginia, Bureau of Insurance to the extent
that such dividend together with other dividends or distributions within the
preceding 12 months does not exceed the lesser of: (i) 10% of the insurer's
statutory surplus as of the immediately preceding December 31, or (ii) the net
statutory gain from operations (excluding realized gains on investments) for the
12-month period ended the immediately preceding December 31. Trigon Insurance
Company may pay $61.8 million to the Company in cash dividends after certain
dates during 1998 without prior permission. During 1997, Trigon Insurance
Company received permission from the Bureau ofInsurance to pay a $238.7 million
dividend to its parent company, Trigon Healthcare, Inc., consisting of $188.7
million in stock of a wholly-owned subsidiary and $50 million in cash. This
dividend was effected on July 31, 1997.
In addition, the Commonwealth of Virginia adopted the National Association of
Insurance Commissioners (NAIC) Risk Based Capital Act in 1995. Under this Act, a
company's risk based capital (RBC) is calculated by applying certain factors to
various asset, premium and reserve items. If a company's calculated RBC falls
below certain thresholds, regulatory intervention or oversight is required.
Trigon Insurance Company's RBC level as calculated in accordance with the NAIC
RBC Instructions exceeded all RBC thresholds as of December 31, 1997.
Mid-South Insurance Company, Trigon Health and Life Insurance Company and the
Company's HMO subsidiaries are also required to file statutory financial
statements in each of the states in which they are licensed.
TRIGON 51 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 16. SUPPLEMENTARY FINANCIAL DATA
A reconciliation of net income - statutory basis for the years ended December
31, 1997, 1996 and 1995 and capital and surplus - statutory basis as of December
31, 1997 and 1996 as reported by Trigon Insurance Company to regulatory
authorities to net income and shareholders' equity excluding unrealized
gains/losses as reported in the accompanying consolidated financial statements
follows (in thousands):
<TABLE>
<CAPTION>
Unaudited
1997 1996 1995
===========================================================================================================================
<S> <C>
Trigon Insurance Company net income - statutory basis $123,272 97,143 82,910
Add (deduct)
Parent operations 850 (175,000) --
Differences in investment carrying values (10,808) (3,972) (14,132)
Deferred income taxes (19,155) 58,548 (260)
Adjustments to claim reserves 7,177 22,392 --
Coinsurance refund program, net of taxes -- -- (35,931)
Other (6,283) 6,583 14,408
===========================================================================================================================
Net income -GAAP basis $ 95,053 5,694 46,995
===========================================================================================================================
Unaudited
1997 1996
===========================================================================================================================
Trigon Insurance Company capital and surplus - statutory basis $617,578 618,999
Add (deduct)
Parent equity 177,473 (175,000)
Differences in investment carrying values 8,896 59,130
Employee benefit liabilities (37,974) (39,298)
Asset valuation reserve 43,883 115,395
Deferred income taxes 53,213 72,369
Non-admitted assets 29,996 33,045
Additional claim reserves 19,669 12,492
Other 8,706 9,127
===========================================================================================================================
Shareholders' equity excluding unrealized gains/losses - GAAP basis $921,440 706,259
===========================================================================================================================
</TABLE>
The differences between statutory and GAAP for Mid-South Insurance Company,
Trigon Health and Life Insurance Company and the Company's HMO subsidiaries were
not significant to the consolidated totals above. The differences for these
subsidiaries relate primarily to differences in investment carrying values,
asset valuation reserve, deferred income taxes and non-admitted assets.
TRIGON 52 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 17. ADDITIONAL CASH FLOW INFORMATION
The reconciliation of net income to net cash provided by operating activities
and supplemental disclosures of cash flow information for the years ended
December 31, 1997, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
===========================================================================================================================
<S> <C>
Net income $ 95,053 5,694 46,995
Adjustments to reconcile net income to net cash provided (used) by
operating activities, net of effects from purchase of subsidiaries
Depreciation and amortization 20,242 19,971 14,578
Accretion of discounts and amortization of premiums, net (11,819) (1,315) (3,618)
Change in allowance for doubtful accounts receivable 826 402 468
(Increase) decrease in premiums and other receivables 29,238 (59,999) (5,989)
Increase in other assets (3,882) (3,740) (2,531)
Increase in medical and other benefits payable 2,208 31,147 68,945
Increase (decrease) in unearned premiums 1,993 (6,888) (5,252)
Increase (decrease) in accounts payable and accrued expenses (26,734) (7,672) 4,106
Increase (decrease) in other liabilities (20,384) 44,930 (26,919)
Change in deferred income taxes 21,804 (60,678) (8,030)
Increase (decrease) in obligation for Commonwealth Payment (175,000) 175,000 --
Increase (decrease) in minority interest 1,870 285 (703)
Increase in obligations for employee benefits 1,788 6,131 784
Gain on the sale of subsidiary -- (62,253) --
(Gain) loss on disposal of property and equipment and other assets (122) 214 115
Realized investment gains, net (54,063) (59,410) (52,976)
===========================================================================================================================
Net cash provided (used) by operating activities $(116,982) 21,819 29,973
===========================================================================================================================
Cash paid during the year for
Interest $ 9,014 4,326 15,390
Income taxes 40,137 18,900 20,061
===========================================================================================================================
</TABLE>
NOTE 18. ACQUISITION AND DISPOSITION ACTIVITY
Acquisitions
In February 1996, the Company purchased all of the outstanding shares of
Mid-South Insurance Company (Mid-South) for approximately $85.6 million.
Mid-South is a Fayetteville, North Carolina based life and health insurance
company. The acquisition was accounted for as a purchase and, accordingly, the
results of operations of Mid-South are included in the consolidated financial
statements since the date of acquisition. Goodwill and other intangible assets
arising from the transaction amounted to $56.7 million and are being amortized
over periods not exceeding 25 years. No pro forma information has been provided
since Mid-South's results of operations prior to the Company's acquisition were
not material to the Company.
In November 1995, the Company paid $5.5 million for a 50% interest in Primary
Care First, L.L.C. (PCF) and related assets. PCF was formed for the purpose of
managing and developing primary care physician networks in the Richmond and
South Hampton Roads areas of Virginia. The Company has also committed to provide
up to $3.5 million to PCF for development of additional primary care physician
networks. The Company funded $1,050,000 during 1996 and no amounts during 1997.
This investment is accounted for under the equity method and is included in
other assets. The excess of the Company's cost over its underlying equity in PCF
and related assets amounted to $5.5 million and are being amortized over 15
years.
In May 1995, the Company acquired 80% of the outstanding stock of Priority
Health Care, Inc. (subsequently renamed Priority, Inc.) (Priority) for
approximately $24.2 million including acquisition-related costs. The acquisition
was accounted for as a purchase and, accordingly, the results of operations of
Priority are included in the consolidated financial statements since the date of
acquisition. Goodwill arising from the acquisition amounted to $21.1 million and
is being amortized over 15 years. No pro forma information has been provided
since Priority's results of operations prior to the Company's acquisition were
not material to the Company.
TRIGON 53 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Disposition
Effective December 31, 1996, the Company sold its subsidiary, Health
Communications Services (HCS), for $77.0 million cash. The Company recorded a
pre-tax and after-tax gain on the sale of HCS of $62.3 million and $40.0
million, respectively. The Company's earnings and cash flows reflect the
operations of HCS through December 31, 1996.
NOTE 19. COPAYMENT REFUND PROGRAM
The Company conducted a Copayment Refund Program (Copayment Program) in
accordance with an agreement with the State Corporation Commission dated
September 22, 1994. During the Copayment Program, members who had paid
coinsurance on services rendered at the Company's network facilities from
January 1, 1984 through December 31, 1993 were eligible for a refund. Refunds
represented the difference between the member's original coinsurance payment,
which had been based on the facility's undiscounted charges, and an adjusted
coinsurance payment calculated using the Company's average discount percentage
at the facility. The Company changed its methodology on January 1, 1994, to
calculate coinsurance payments using the average percentage discount. Costs
incurred under the Copayment Program included refunds, interest and
administrative costs associated with the Copayment Program that the Company
would not otherwise have incurred. In addition, the Company agreed to pay a $5
million civil forfeiture to the Commonwealth of Virginia which has been included
in the cost of the Copayment Program. The cost of the Copayment Program in 1994
was $36.4 million or $30.0 million, net of income taxes.
The Virginia General Assembly enacted
legislation, effective July 1, 1994, that requires all insurers and HMOs to
calculate coinsurance payments on the basis of their negotiated reimbursement
rates with facilities.
In accordance with an agreement with the State Corporation Commission dated
November 17, 1995, the Company re-opened the Copayment Program. As part of the
re-opening of the Copayment Program, the Company mailed refunds to approximately
300,000 members who had not filed a claim under the original program and for
whom the Company had an address. In addition, the Company announced that it had
determined that there were approximately 200,000 former members for whom the
Company did not have an address. Any amounts not paid by December 31, 1996 were
escheated to the Commonwealth of Virginia as unclaimed property in April 1997.
The cost of the re-opening of the Copayment Program in 1995 was $47.1 million or
$40.6 million, net of income taxes.
NOTE 20. DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The carrying amounts of cash, premiums and other receivables, other current
assets, medical and other benefits payable, unearned premiums, accounts payable
and accrued expenses and other current liabilities approximate fair value
because of the short-term nature of these instruments. The carrying amount of
long-term debt with variable interest rates approximates fair value. The fair
values of investment securities are estimated based on quoted market prices.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of investment securities and premiums
receivable. All of the investment securities are managed within established
guidelines which limit the amounts which may be invested with one issue. The
Company primarily conducts business within the Commonwealth of Virginia;
therefore premiums receivable are concentrated with companies and individuals
within Virginia.
TRIGON 54 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 21. LEGAL AND REGULATORY PROCEEDINGS
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 $1.3 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 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
consolidated financial condition of the Company or the Company's results of
operations in any particular period.
The Company and certain of its subsidiaries are involved in other various
legal actions occurring in the normal course of 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 consolidated financial condition of the Company.
TRIGON 55 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT AND MANAGEMENT REPORT
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Trigon Healthcare, Inc.:
We have audited the accompanying consolidated balance sheets of Trigon
Healthcare, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trigon
Healthcare, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Richmond, Virginia
February 4, 1998
MANAGEMENT REPORT
The management of Trigon Healthcare, Inc. is responsible for the integrity and
objectivity of the consolidated financial statements. These statements have been
prepared in accordance with generally accepted accounting principles and include
some amounts that are based on management's best estimates and judgment.
The accounting systems and controls of the Company are designed to provide
reasonable assurance that financial records are reliable for use in preparing
financial statements and that assets are safeguarded. Management believes that
the Company's system of internal controls for the year ended December 31, 1997
was effective and adequate to accomplish the above described objectives.
The Board of Directors appoints to the Audit Committee members who are
neither officers nor employees of the Company. The committee meets periodically
with management, the internal auditors and the independent auditors to review
financial reports, internal accounting controls and the scope and results of
audit efforts. Both the internal auditors and the independent auditors have full
and free access to the Audit Committee, with and without management
representation.
/s/ THOMAS G. SNEAD, JR.
Thomas G. Snead, Jr.
President and
Chief Operating Officer
/s/ THOMAS R. BYRD
Thomas R. Byrd
Senior Vice President
and Chief Financial Officer
TRIGON 56 1997
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Company Jurisdiction
<S> <C>
Trigon Insurance Company (dba Trigon Blue Cross Blue Shield)............................Virginia
Healthcare Support Corporation......................................................Virginia
HealthKeepers, Inc...............................................................Virginia
Physicians Health Plan, Inc......................................................Virginia
Trigon Administrators, Inc.......................................................Virginia
Trigon Services, Inc.............................................................Virginia
Peninsula Health Care, Inc. (3).....................................................Virginia
Primary Care First, L.L.C. (2)......................................................Virginia
Priority, Inc. (4)..................................................................Virginia
Priority Health Care, Inc........................................................Virginia
Priority Insurance Agency, Inc...................................................Virginia
Monticello Service Agency, Inc..........................................................Virginia
Capitation Risk Management, Inc.....................................................Virginia
Consolidated Holdings Corporation...................................................Delaware
Health Management Corporation.......................................................Virginia
Healthy Homecomings, Inc.........................................................Missouri
Healthy Homecomings Incorporated of St. Louis...................................Missouri
Mid-South Insurance Company.........................................................North Carolina
Trigon Health and Life Insurance Company (formerly Monticello
Life Insurance Company...........................................................Virginia
Trigon Health Ventures, Inc.........................................................Virginia
</TABLE>
(1) Unless otherwise indicated, subsidiaries are 100% owned by the Registrant
or the indicated parent company.
(2) 50% owned
(3) 51% owned
(4) 80% owned
Exhibit 23.1
Consent of KPMG Peat Marwick LLP
The Board of Directors
Trigon Healthcare, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-22463, 333-26187, 333-26189 and 333-26191) on Form S-8 of Trigon Healthcare,
Inc. of our report dated February 4, 1998, relating to the consolidated balance
sheets of Trigon Healthcare, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997, which report is incorporated by reference in
this Form 10-K. We also consent to the incorporation by reference in the
aforementioned registration statements of our report dated February 4, 1998,
relating to the financial statement schedule of Trigon Healthcare, Inc., which
report appears in this Form 10-K.
/s/KPMG Peat Marwick LLP
Richmond, Virginia
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED
IN THE TRIGON HEALTHCARE, INC. AND SUBSIDIARIES FORM 10-K FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,010
<SECURITIES> 1,363,858
<RECEIVABLES> 360,941
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,739,416
<PP&E> 126,098
<DEPRECIATION> 82,186
<TOTAL-ASSETS> 1,928,820
<CURRENT-LIABILITIES> 747,819
<BONDS> 90,147
0
0
<COMMON> 423
<OTHER-SE> 958,314
<TOTAL-LIABILITY-AND-EQUITY> 1,928,820
<SALES> 1,934,873
<TOTAL-REVENUES> 2,063,620
<CGS> 1,554,556
<TOTAL-COSTS> 1,914,348
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,602
<INCOME-PRETAX> 144,670
<INCOME-TAX> 49,617
<INCOME-CONTINUING> 95,053
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,053
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
