UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from .................. to ...............
Commission File Number: 001-12617
Trigon Healthcare, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1773225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2015 Staples Mill Road, Richmond, VA 23230
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (804) 354-7000
Not Applicable
-------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of each class Outstanding at May 11, 1998
------------------- ---------------------------
Class A Common Stock, $0.01 par value 42,300,022 shares
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
FIRST QUARTER 1998 FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997 1
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997 2
Consolidated Statements of Comprehensive Income (Loss) for
the Three Months Ended March 31, 1998 and 1997 3
Consolidated Statements of Changes in Shareholders' Equity
for the Three Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14-15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1997
-------------- --------------
<S> <C>
Assets
Current assets
Cash $ 1,191 $ 7,010
Investment securities, at estimated fair value 1,475,296 1,363,858
Premiums and other receivables 366,865 360,941
Other 12,311 7,607
-------------- --------------
Total current assets 1,855,663 1,739,416
Property and equipment, net 45,052 43,912
Deferred income taxes 45,055 45,185
Goodwill and other intangibles, net 66,623 68,354
Restricted investments, at estimated fair value 10,109 10,139
Other assets 20,918 21,814
-------------- --------------
Total assets $ 2,043,420 $ 1,928,820
============== ==============
Liabilities and Shareholders' Equity
Current liabilities
Medical and other benefits payable $ 431,029 $ 412,710
Unearned premiums 104,580 93,157
Accounts payable and accrued expenses 57,670 57,736
Deferred income taxes 1,952 4,298
Other liabilities 233,452 179,918
-------------- --------------
Total current liabilities 828,683 747,819
Obligations for employee benefits, noncurrent 63,053 59,467
Medical and other benefits payable, noncurrent 68,375 66,541
Long-term debt 90,147 90,147
Minority interest in subsidiaries 6,620 6,109
-------------- --------------
Total liabilities 1,056,878 970,083
-------------- --------------
Shareholders' equity
Common stock 423 423
Capital in excess of par 840,996 842,035
Retained earnings 113,031 78,982
Accumulated other comprehensive income
Net unrealized gain on investment securities,
net of deferred income taxes of $17,260
and $20,083 32,092 37,297
-------------- --------------
Total shareholders' equity 986,542 958,737
Commitments and contingencies (note 7) - -
-------------- --------------
Total liabilities and shareholders' equity $ 2,043,420 $ 1,928,820
============== ==============
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended March 31, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C>
Revenues
Premium and fee revenues
Commercial $ 373,209 $ 346,842
Federal Employee Program 96,229 91,074
Amounts attributable to self-funded arrangements 273,604 246,181
Less: Amounts attributable to claims under
self-funded arrangements (247,415) (222,250)
------------------- -------------------
495,627 461,847
Investment income 21,108 17,682
Net realized gains 29,628 25,312
Other revenues 5,449 6,923
------------------- -------------------
Total revenues 551,812 511,764
Expenses
Medical and other benefit costs
Commercial 311,237 291,841
Federal Employee Program 91,869 86,683
------------------- -------------------
403,106 378,524
Selling, general and administrative expenses 95,893 88,170
Interest expense 1,337 572
------------------- -------------------
Total expenses 500,336 467,266
------------------- -------------------
Income before income taxes 51,476 44,498
Income tax expense 17,427 15,265
------------------- -------------------
Net income $ 34,049 $ 29,233
=================== ===================
Net income after Demutualization and IPO (note 5) $ 34,049 $ 13,162
=================== ===================
Earnings per share (note 5)
Basic and diluted net income after Demutualization and IPO $ 0.80 $ 0.31
=================== ===================
Pro forma earnings per share (note 5)
Basic and diluted pro forma net income $ 0.68
===================
Weighted average number of common shares outstanding
Basic 42,300 42,300
=================== ===================
Diluted 42,611 42,300
=================== ===================
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
For the three months ended March 31, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C>
Net income $ 34,049 $ 29,233
Other comprehensive income (loss)
Net unrealized gains (losses) on investment securities,
net of income taxes
Unrealized holding gains (losses) arising during the
period, net of income taxes of $7,547 and $10,907 14,053 (20,273)
Less reclassification adjustment for gains included
in net income, net of income taxes of $10,370
and $8,859 (19,258) (16,453)
----------------- -----------------
Other comprehensive loss (5,205) (36,726)
----------------- -----------------
Comprehensive income (loss) $ 28,844 $ (7,493)
================= =================
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
For the three months ended March 31, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C>
Balance at January 1 $ 958,737 $ 739,780
Net income before Demutualization - 16,071
Net income after Demutualization 34,049 13,162
Other comprehensive loss (5,205) (36,726)
-------------------- --------------------
Comprehensive income (loss) 28,844 (7,493)
-------------------- --------------------
Issuance of 24,475 shares to eligible
policyholders in the Demutualization and
cash payment to eligible policyholders in
lieu of shares of common stock (705) (91,420)
Issuance of 17,825 shares in the Initial
Public Offering, net of expenses - 215,195
Other, principally shares purchased by
consolidated grantor trusts (334) -
-------------------- --------------------
Balance at March 31 $ 986,542 $ 856,062
==================== ====================
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended March 31, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C>
Net income $ 34,049 $ 29,233
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 5,070 4,047
Accretion of discounts and amortization of premiums, net (5,486) (2,410)
Change in allowance for doubtful accounts receivable 600 105
Decrease in premiums and other receivables 850 18,265
Increase in other assets (4,375) (3,243)
Increase in medical and other benefits payable 20,153 11,493
Increase in unearned premiums 11,423 9,340
Decrease in accounts payable and accrued expenses (66) (13,482)
Increase in other liabilities 29,542 5,696
Change in deferred income taxes 607 6,238
Decrease in obligation for Commonwealth Payment - (175,000)
Increase in minority interest 511 288
Increase in obligations for employee benefits 3,586 3,439
Loss on disposal of property and equipment and other assets 1 1
Net realized gains (29,628) (25,312)
----------------- -----------------
Net cash provided (used) by operating activities 66,837 (131,302)
----------------- -----------------
Cash flows from investing activities:
Proceeds from sale of property and equipment and other assets 17 68
Capital expenditures (4,443) (2,175)
Investment securities purchased (967,352) (1,620,402)
Proceeds from investment securities sold 382,467 1,232,984
Maturities of fixed income securities 522,116 317,362
----------------- -----------------
Net cash used by investing activities (67,195) (72,163)
----------------- -----------------
Cash flows from financing activities:
Proceeds from long-term debt - 85,000
Payments to members in lieu of common stock
pursuant to Plan of Demutualization (705) (91,420)
Net proceeds from issuance of common stock - 215,195
Other, principally purchase of Trigon common stock by
consolidated grantor trusts (334) -
Change in outstanding checks in excess of bank balance (4,422) (8,300)
----------------- -----------------
Net cash provided (used) by financing activities (5,461) 200,475
----------------- -----------------
Net decrease in cash (5,819) (2,990)
Cash - beginning of period 7,010 31,482
----------------- -----------------
Cash - end of period $ 1,191 $ 28,492
================= =================
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements prepared by Trigon
Healthcare, Inc. and its subsidiaries (collectively, "Trigon" or the
"Company") are unaudited, except for the balance sheet information as
of December 31, 1997, which is derived from the Company's audited
consolidated financial statements, pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and the footnotes required
by generally accepted accounting principles for complete financial
statements. These consolidated interim financial statements should be
read in conjunction with the audited consolidated financial statements
included in the Company's annual report on Form 10-K for the year ended
December 31, 1997.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
consolidated financial statements have been included. The results of
operations for the three months ended March 31, 1998 are not
necessarily indicative of the results for the full year.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. PROPERTY AND EQUIPMENT
In the first quarter of 1998 the Company adopted AICPA Statement of
Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. The SOP requires that certain
costs related to the development or purchase of internal-use software
be capitalized and amortized over the estimated useful life of the
software. The SOP may not be applied to the costs associated with the
Year 2000 conversion. In accordance with the SOP, no prior year amounts
were restated and no costs incurred prior to January 1, 1998, the
initial application of the SOP, for ongoing projects were capitalized.
Expenses incurred related to internal-use software of $0.7 million were
capitalized in the first quarter of 1998.
3. LONG TERM DEBT
In February 1997, the Company entered into a $300 million revolving
credit agreement with a syndicate of banks, which expires February
2002. The credit agreement provides for various borrowing options and
rates and requires the Company to pay a facility fee on a quarterly
basis. The credit agreement also contains certain financial covenants
and restrictions including minimum net worth requirements as well as
limitations on dividend payments. As of March 31, 1998, $85 million had
been borrowed and remained outstanding under the credit agreement. The
weighted average interest rate for the period the borrowings were
outstanding during the three months ended March 31, 1998 and 1997 was
5.956% and 5.675%, respectively.
6
<PAGE>
4. INCOME TAXES
The effective tax rates for the three months ended March 31, 1998 and
1997 were 33.9% and 34.3%, respectively. During 1998, the Company
increased its investment in tax exempt municipal bonds. Accordingly,
the effective tax rate was reduced by the effect of the increased tax
exempt investment income earned.
5. PRO FORMA FINANCIAL INFORMATION AND NET INCOME AND PRO FORMA NET INCOME
PER SHARE
Net income and net income per share after Demutualization and IPO
reflect net income and net income per share for the period after
February 5, 1997, the effective date of the Demutualization and IPO.
The following pro forma information for the three months ended March
31, 1997 gives effect to the Demutualization and IPO as if they had
occurred on January 1, 1997, consistent with the company's pro forma
presentation in its Form S-1 filed on January 29, 1997 in connection
with its IPO (in thousands):
1997
---- ----------------------------------------------- -----------
As reported
Income before income taxes $ 44,498
Income tax expense 15,265
Pro forma adjustments
Pro forma interest expense 634
Pro forma income tax expense (benefit) (217)
---------------------------------------------------- ----------
Pro forma net income $ 28,816
---------------------------------------------------- -----------
The difference between the pro forma net income and actual net income
in 1997 is due to interest expense, net of income taxes, assumed for
the period prior to the actual borrowing of funds using the actual
weighted average rate of 5.675% per annum in effect during the first
quarter of 1997. Actual interest expense for the periods subsequent to
the borrowings is included in income before income taxes. 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.
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 three months ended March 31, 1998 and for
the period after the Demutualization and IPO, February 5, 1997 through
March 31, 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C>
Numerator for basic and diluted earnings per share - net
income $ 34,049 13,162
------------ -------------
Denominator
Denominator for basic earnings per share - weighted
average shares 42,300 42,300
Effect of dilutive securities - employee and director
stock options 311 -
------------ -------------
Denominator for diluted earnings per share 42,611 42,300
------------ -------------
Basic and diluted net income per share $ 0.80 0.31
------------ -------------
</TABLE>
7
<PAGE>
The following table sets forth the computation of basic and diluted pro
forma earnings per share for the three months ended March 31, 1997 (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
Numerator for basic and diluted pro forma earnings
per share - pro forma net income $ 28,816
-------------
Denominator for basic and diluted pro forma earnings per
share -pro forma weighted average shares 42,300
-------------
Basic and diluted pro forma net income per share $ 0.68
-------------
</TABLE>
The pro forma weighted average shares outstanding gives effect to the
Demutualization and IPO as if they had occurred on January 1, 1997,
consistent with the Company's pro forma presentation in its Form S-1
filed on January 29, 1997, in connection with its IPO.
6. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, for all periods presented. This statement
establishes standards for the reporting and display of comprehensive
income and its components. The purpose of comprehensive income is to
report all changes in equity resulting from recognized transactions and
other economic events of the period. Other comprehensive income refers
to revenues, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but are
excluded from net income, such as unrealized gains and losses on
certain investments in debt and equity securities and foreign currency
items.
7. LITIGATION
The Company is the defendant in one lawsuit that has been filed by a
self-funded employer group in connection with the Company's past
practices regarding provider discounts. The suit claims that the
Company was obligated to credit the self-funded plan with the full
amount of the discounts that the Company negotiated with facilities
providing health care to members covered by the plan. The suit seeks an
audit and unspecified compensatory, punitive and other damages. The
Company is also presently the subject of three other claims by
self-funded employer groups related to the Company's past practices
regarding provider discounts. The Company is communicating with these
groups, and lawsuits have not been filed in connection with these
claims. Although the ultimate outcome of such claims and litigation
cannot be estimated, the Company believes that the discount-related
claims and litigation brought by these self-funded employer groups will
not have a material adverse effect on the financial condition of the
Company.
The Company and certain of its subsidiaries are involved in various
other legal actions occurring in the normal course of their business.
While the ultimate outcome of such litigation cannot be predicted with
certainty, in the opinion of Company management, after consultation
with counsel responsible for such litigation, the outcome of those
actions is not expected to have a material adverse effect on the
financial condition of the Company.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
Substantially all of the revenues of Trigon Healthcare, Inc. and 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 214,000 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 fully-insured 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:
As of March 31,
1998 1997
---------------- ----------------
Commercial:
HMO 254,320 248,267
PPO 268,194 235,172
PAR 186,009 227,085
Medicaid HMO 31,224 33,861
Medicare Supplement 124,324 127,671
Non-Virginia 79,116 54,165
---------------- ----------------
Subtotal 943,187 926,221
Self-funded/ASO 670,249 692,103
Federal Employee Program 214,235 208,249
---------------- ----------------
Fully-Insured and Self-Funded Enrollment 1,827,671 1,826,573
Processed for other Blue Cross and Blue
Shield Plans (ASO) 11,891 39,378
---------------- ----------------
Total 1,839,562 1,865,951
---------------- ----------------
9
<PAGE>
PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM
The following table sets forth the Company's premium and premium equivalents by
network (in thousands):
Three Months ended March 31,
1998 1997
----------- ------------
Commercial:
HMO $ 92,921 84,327
PPO 103,670 86,972
PAR 80,940 92,229
Medicaid HMO 14,254 12,737
Medicare Supplement 55,247 52,848
Non-Virginia 26,177 17,729
----------- ------------
Subtotal 373,209 346,842
Self-funded/ASO 273,604 246,181
Federal Employee Program 96,229 91,074
----------- ------------
Total $ 743,042 684,097
----------- ------------
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Premium and fee revenues increased 7.3% to $495.6 million in the first quarter
of 1998 from $461.8 million in the first quarter of 1997. The $33.8 million
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 grew to $107.2 million in the first
quarter of 1998 from $97.1 million for the same period last year, a 10.4%
increase, driven by average revenue per member increases of 6.7% and a 3.5%
increase in member months. Commercial PPO revenues increased 19.2% to $103.7
million in the first quarter of 1998 from $87.0 million for the same period last
year. The $16.7 million increase in commercial PPO revenues is a result of
increased enrollment attributable to a shift in members from the PAR network and
from the enrollment of new PPO members as well as an increase of 5.0% in the
average revenue per member. Commercial PAR revenues declined to $80.9 million in
the first quarter of 1998 from $92.2 million for the same period last year
primarily as a result of the continued transition of members to the more tightly
managed HMO and PPO networks. Non-Virginia revenues increased 47.7% to $26.2
million in the first quarter of 1998 from $17.7 million for the same period last
year. The $8.4 million increase in Non-Virginia commercial revenues is a result
of growth in enrollment which can be attributed to the positive acceptance of
the Company's product designs by both small group and individual market
segments. Overall, premium revenues on a per member per month basis for the
Company's commercial business increased 5.4% to $132.59 for the first quarter of
1998 from $125.82 for the first quarter of 1997. FEP revenues increased 5.7% to
$96.2 million in the first quarter of 1998 from $91.1 million last year. The
increase is due to increased medical costs to be reimbursed by OPM and an
increase in enrollment. Net revenues from self-funded arrangements (revenues
less amounts attributed to claims under self-funded arrangements) increased 9.4%
to $26.2 million in the first quarter of 1998 from $23.9 million last year. The
improvement is a result of an increase in administrative fees as the Company
focuses it efforts to increase fees to levels that appropriately reflect the
value delivered to self-funded groups through the Company's network design and
medical management techniques.
Total enrollment declined to 1,839,562 as of March 31, 1998 from 1,865,951 as of
March 31, 1997. The 26,389 decline was the net result of a decline of 49,341
self-funded/ASO members offset by
10
<PAGE>
an increase of 16,966 members in commercial business mainly from PPO network and
Non-Virginia growth and FEP enrollment growth of 5,986 members. Specifically,
total commercial enrollment increased 1.8% to 943,187 members as of March 31,
1998 from 926,221 members as of March 31, 1997. Enrollment in the HMO networks
increased by 1.2% over the prior year and accounts for 30.3% of total commercial
enrollment. HMO enrollment growth was partially impacted by the decision to
withdraw from the Medicaid HMO program in the Richmond, Virginia area effective
December 31, 1997. The Company took the action because HMO enrollment is not
mandatory in the Richmond area and business volumes were considered insufficient
to sustain the HMO as a viable, competitive program. As of March 31, 1997, the
Company had approximately 4,700 Medicaid HMO members in the Richmond area.
Enrollment in the PPO networks as of March 31, 1998 increased 14.0% over the
same period last year and accounts for 28.4% of the Company's commercial
enrollment. Non-Virginia enrollment increased 46.1% over the prior year and now
accounts for 8.4% of total commercial enrollment. Growth in PPO and Non-Virginia
enrollment was offset by an expected decline of 18.1% in the Company's PAR
network as members migrate into more tightly managed networks and as a result of
ceding all student business with approximately 8,400 members. The PAR network
enrollment represents 19.7% of the Company's total commercial enrollment. FEP
enrollment increased 2.9% to 214,235 as of March 31, 1998 from 208,249 as of
March 31, 1997. The decline in self-funded/ASO enrollment of 49,341 members
partially reflects the Company's efforts to increase fees to levels that
appropriately reflect the value delivered through the Company's network design
and medical management techniques. The decline also reflects the migration of
approximately 27,500 national account members (ASO only) from the Company's
systems to an interplan system where the Company continues to process claims for
other Blue Cross and Blue Shield Plans.
Investment income increased 19.4% to $21.1 million in the first quarter of 1998
from $17.7 million in the first quarter of 1997. Net realized gains increased to
$29.6 million in the first quarter of 1998, a 17.1% increase, from $25.3 million
for the same period in 1997. The increase in investment income reflects a
continued shift in the portfolio mix from equity securities to fixed income
securities in the first quarter of 1998. The equity portfolio was reduced to
less than 8% of the total portfolio as of March 31, 1998 as compared to
approximately 15% of the total portfolio as of March 31, 1997. In addition, the
Company reduced its investment management expenses during the first quarter of
1998 by managing a larger portion of the fixed income portfolio in-house and
renegotiating certain investment management contracts. The sale of equity
securities in conjunction with the portfolio shift in the first quarter of 1998
is the primary factor for the net realized gains for the first quarter of 1998.
Other revenue decreased by 21.3% to $5.4 million in the first quarter of 1998
from $6.9 million in the first quarter of 1997. The decrease reflects the
Company's strategy of redirecting the health and wellness subsidiary's efforts
toward providing services for the Company and its product offerings instead of
selling these services to third parties. In addition, 1998 revenues are reduced
for revenues associated with the Company's network development subsidiary which
ceased operations as of the end of 1997. The decline in these revenues has had a
negligible impact on operating income.
Medical costs increased 6.5% to $403.1 million in the first quarter of 1998 from
$378.5 million in the first quarter of 1997. The $24.6 million increase is
primarily the result of expected levels of medical cost inflation, growth in
commercial enrollment and an increase in FEP medical costs reimbursed by OPM.
The medical cost per member per month for the Company's commercial business
increased 4.4% to $110.57 through March 31, 1998 from $105.87 for the same
period last year. Combined with a 5.4% increase in commercial premium revenues
per member per month, the loss ratio on commercial business improved to 83.4%
through the first quarter of 1998 from 84.1% for the same period last year. The
improvement can be partially attributed to two significant events occurring in
the first quarter of 1997. First, the Company experienced much higher than
expected Medicare
11
<PAGE>
supplement product expenses. Second, the Company recognized unfavorable prior
period claims adjustments in 1997 at one of its HMO subsidiaries. Actions taken
by management during 1997 to address these two events are expected to continue
to have a positive impact on the commercial loss ratio.
Selling, general and administrative expenses (SG&A) increased by 8.8% to $95.9
million in the first quarter of 1998 from $88.2 million in the first quarter of
1997. The increase is a result of higher volumes and the incremental cost of
certain initiatives. SG&A expenses increased by $3.5 million as a result of
increased Non-Virginia volume and as a result of a higher broker commission
scale for business sold in Virginia. Medicare HMO start-up costs, development of
customer service "call center" technology and incremental costs associated with
preparing systems for the century date change have increased expenses by $1.6
million in the first quarter of 1998 compared to the same period in 1997. In the
first quarter of 1998 the Company adopted AICPA Statement of Position (SOP)
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. The SOP requires the capitalization and amortization of certain
costs related to internal-use software but may not be applied to the costs
associated with the Year 2000 conversion. The adoption of the SOP resulted in a
$0.7 million reduction in expenses in the first quarter of 1998 and, including
the first quarter amount, is expected to reduce SG&A expenses approximately $3
to $4 million during 1998. Overall, the SG&A ratio was 12.8% for the current
quarter, the same as it was for the first quarter of 1997.
Interest expense was $1.3 million for the first quarter of 1998 compared to $0.6
million for the first quarter of 1997. Interest expense is the result of the $85
million outstanding amount on the revolving credit agreement initiated in
February 1997. The increase in 1998 is due to the full quarter impact of the
outstanding revolving credit agreement.
Income before income taxes increased 15.7% to $51.5 million in the first quarter
of 1998 compared to $44.5 million in the first quarter of 1997. The increase is
a result of improved investment income of $3.4 million and an increase in net
realized gains of $4.3 million. Operating income (premium and other revenue less
medical and SG&A expenses) of $2.1 million is the same this year as last. The
1998 results reflect several incremental cost items associated with the Medicare
HMO start-up, development of customer service "call center" technology and
continuing work on the Year 2000 conversion.
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 March 31, 1998. The
portfolio had an average contractual maturity of 9.1 years as of March 31, 1998.
A portion of the fixed income portfolio is designated as a short-term fixed
income portfolio and is intended to cover
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near term cash flow needs and to serve as a buffer for unanticipated business
needs. The equity portfolios contain readily marketable securities ranging from
small growth to well-established Fortune 500 companies. The international equity
portfolio is diversified by industry, country and currency-related exposure. The
Company enters into foreign currency forward contracts and foreign currency
options to manage its exposure to fluctuations in foreign currency exchange
rates on its foreign debt and equity investments. As of March 31, 1998, the
equity portfolio was 7.5% of the total portfolio, down from 27.8% as of December
31, 1996 and 12.5% as of December 31,1997, 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 expects a more consistent contribution to income from the
investment portfolio in the future.
Cash provided (used) by operating activities for the three months ended March
31, 1998 and 1997 was $66.8 million and $(131.3) million, respectively. The
significant increase in cash provided by operations in 1998 is primarily due to
the $175 million Commonwealth Payment made in the first quarter of 1997 to the
Commonwealth of Virginia in connection with the Demutualization in February
1997.
Net cash used by investing activities decreased to $67.2 million for the three
months ended March 31, 1998 from $72.2 million for the same period of 1997. The
decrease is attributed to a slight decrease in investment activity offset by an
increase in capital expenditures.
Cash provided (used) by financing activities decreased to $(5.5) million for the
first quarter of 1998 from $200.5 million for the first quarter of 1997
primarily due to the IPO and borrowing under a credit agreement in early 1997.
The IPO and borrowings under the credit agreement generated $208.8 million in
net cash flows for the Company in 1997.
In connection with the Demutualization and IPO, the Company entered into a $300
million revolving credit agreement which expires in February 2002. The credit
agreement calls for various borrowing options and rates and requires the Company
to pay a facility fee on a quarterly basis. The credit agreement also contains
certain financial covenants and restrictions including minimum net worth
requirements as well as limitations on dividend payments. As of March 31, 1998,
$85 million had been borrowed and remained outstanding under this credit
agreement, the proceeds of which were used to pay a portion of the Commonwealth
Payment at the time of the Demutualization and IPO.
The Company believes that cash flow generated by operations and its cash and
investment balances will be sufficient to fund continuing operations, capital
expenditures and debt repayment costs for the foreseeable future. The nature of
the Company's operations is such that cash receipts are principally premium
revenues typically received up to three months prior to the expected cash
payment for related health care services. The Company's operations are not
capital intensive, and there are currently no commitments for major capital
expenditures to support existing business.
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
$7.6 million through March 31,1998, including $1.8 million incurred during the
first quarter of 1998. Total incremental costs are expected to approximate $20.0
million through 1999. The costs will be expensed as incurred and will be funded
through operating cash flows.
13
<PAGE>
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
SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits. The new standard, issued in February 1998, becomes effective for
fiscal years beginning after December 15, 1997. This standard revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition principles of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
considered useful. The new disclosures will be effective for the 1998 fiscal
year.
FORWARD-LOOKING INFORMATION
This Item, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and this Form 10-Q contain certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, including among other things statements concerning future earnings,
premium rates, enrollment and medical and administrative costs. 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, government action and other regulatory issues. Additional
information concerning factors that could cause actual results to differ
materially from those in forward-looking statements is contained in the
Company's Annual Report on Form 10-K under the caption "Forward-Looking
Information".
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) The Company is the defendant in one lawsuit that has been filed by a
self-funded employer group in connection with the Company's past practices
regarding provider discounts. The suit claims that the Company was obligated to
credit the self-funded plan with the full amount of the discounts that the
Company negotiated with facilities providing health care to members covered by
the plan. The suit seeks an audit and unspecified compensatory, punitive and
other damages. The Company is also presently the subject of three other claims
by self-funded employer groups related to the Company's past practices regarding
provider discounts. The Company is communicating with these groups, and lawsuits
have not been filed in connection with these claims. Although the ultimate
outcome of such claims and litigation cannot be estimated, the Company believes
that the discount-related claims and litigation brought by these self-funded
employer groups will not have a material adverse effect on the financial
condition of the Company.
The Company and certain of its subsidiaries are involved in various other legal
actions occurring in the normal course of their business. While the ultimate
outcome of such litigation cannot be predicted with certainty, in the opinion of
Company management, after consultation with counsel responsible for
14
<PAGE>
such litigation, the outcome of those actions is not expected to have a material
adverse effect on the financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of exhibits filed with the Form 10-Q:
Exhibit
Number Description
11 -- Computation of per share earnings for the three months
ended March 31, 1998. Exhibit omitted as the detail necessary
to determine the computation of per share earnings can be
clearly determined from the material contained in Part I of
this Form 10-Q.
27 --Financial Data Schedule.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(b) Reports on Form 8-K:
None filed during the three months ended March 31, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIGON HEALTHCARE, INC.
Registrant
Dated: May 13, 1998 By: /s/ Thomas R. Byrd
----------------------
THOMAS R. BYRD
SENIOR VICE PRESIDENT & CHIEF
FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND
FINANCIAL OFFICER)
<PAGE>
EXHIBIT INDEX
Exhibit
Number
27 --Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED
IN THE TRIGON HEALTHCARE, INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,191
<SECURITIES> 1,475,296
<RECEIVABLES> 366,865
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,855,663
<PP&E> 130,359
<DEPRECIATION> 85,307
<TOTAL-ASSETS> 2,043,420
<CURRENT-LIABILITIES> 828,683
<BONDS> 90,147
0
0
<COMMON> 423
<OTHER-SE> 986,119
<TOTAL-LIABILITY-AND-EQUITY> 2,043,420
<SALES> 501,076
<TOTAL-REVENUES> 551,812
<CGS> 403,106
<TOTAL-COSTS> 498,999
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,337
<INCOME-PRETAX> 51,476
<INCOME-TAX> 17,427
<INCOME-CONTINUING> 34,049
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,049
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.80
</TABLE>