UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1999
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 Identification No.)
incorporation or organization)
2015 Staples Mill Road, Richmond, VA 23230
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (804) 354-7000
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Title of each class Outstanding at August 11, 1999
------------------- ------------------------------
Class A Common Stock, $0.01 par value 41,582,622 shares
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
SECOND QUARTER 1999 FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 1
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1999 and 1998 2
Consolidated Statements of Changes in Shareholders' Equity for the
Three Months and Six Months Ended June 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 - 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23 - 24
SIGNATURES
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
-------------------- --------------------
<S> <C>
Assets
------
Current assets
Cash $ 8,324 7,500
Investment securities, at estimated fair value 1,600,363 1,582,522
Premiums and other receivables 355,182 378,436
Deferred income taxes 5,799 -
Other 13,546 10,891
-------------------- --------------------
Total current assets 1,983,214 1,979,349
Property and equipment, net 51,070 47,890
Deferred income taxes 58,587 55,841
Goodwill and other intangibles, net 58,870 62,999
Restricted investments, at estimated fair value 9,724 10,347
Other assets 20,703 17,799
-------------------- --------------------
Total assets $ 2,182,168 2,174,225
==================== ====================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities
Medical and other benefits payable $ 495,253 468,455
Unearned premiums 115,723 99,464
Accounts payable and accrued expenses 63,164 67,971
Deferred income taxes - 8,022
Other liabilities 224,873 231,151
-------------------- --------------------
Total current liabilities 899,013 875,063
Obligations for employee benefits, noncurrent 64,300 55,022
Medical and other benefits payable, noncurrent 68,317 75,212
Long-term debt 89,339 89,339
Minority interest in subsidiary 9,233 8,365
-------------------- --------------------
Total liabilities 1,130,202 1,103,001
-------------------- --------------------
Shareholders' equity
Common stock 418 423
Capital in excess of par 837,689 839,187
Retained earnings 212,969 202,554
Unearned compensation (2,492) -
Accumulated other comprehensive income (note 6) 3,382 29,060
-------------------- --------------------
Total shareholders' equity 1,051,966 1,071,224
Commitments and contingencies (note 7)
-------------------- --------------------
Total liabilities and shareholders' equity $ 2,182,168 2,174,225
==================== ====================
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ---------- ----------- ------------
<S> <C>
Revenues
Premium and fee revenues
Commercial $ 416,933 377,912 817,560 751,121
Federal Employee Program 110,325 106,116 214,292 202,345
Amounts attributable to self-funded arrangements 312,402 268,627 595,796 542,231
Less: amounts attributable to claims under
self-funded arrangements (276,862) (242,269) (526,712) (489,684)
---------- --------- ---------- -----------
562,798 510,386 1,100,936 1,006,013
Investment income 23,442 21,399 45,402 42,507
Net realized gains (losses) (4,191) 4,591 (14,109) 34,219
Other revenues 5,843 5,939 12,173 11,317
---------- --------- ---------- -----------
Total revenues 587,892 542,315 1,144,402 1,094,056
Expenses
Medical and other benefit costs
Commercial 341,267 314,571 671,211 625,808
Federal Employee Program 104,514 101,005 204,600 192,874
---------- --------- ---------- -----------
445,781 415,576 875,811 818,682
Selling, general and administrative expenses 112,962 93,920 219,280 189,301
Interest expense 1,177 1,336 2,377 2,673
---------- --------- ---------- -----------
Total expenses 559,920 510,832 1,097,468 1,010,656
---------- --------- ---------- -----------
Income before income taxes and minority interest 27,972 31,483 46,934 83,400
Income tax expense 9,193 10,270 15,541 27,697
---------- --------- ---------- -----------
Income before minority interest 18,779 21,213 31,393 55,703
Minority interest 477 502 1,012 943
---------- --------- ---------- -----------
Net income $ 18,302 20,711 30,381 54,760
========== ========= ========== ===========
Earnings per share (note 5)
Basic $ 0.43 0.49 0.72 1.29
========== ========= ========== ===========
Diluted $ 0.43 0.48 0.71 1.28
========== ========= ========== ===========
Weighted average number of common shares outstanding
Basic 42,178 42,300 42,178 42,300
========== ========= ========== ===========
Diluted 42,827 42,858 42,832 42,735
========== ========= ========== ===========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------------------------- --------------------------
<S> <C>
Balance at April 1 $ 1,069,556 986,542
Net income 18,302 20,711
Net unrealized gains (losses) on investment
securities, net of income taxes (13,386) 4,545
------------------------- --------------------------
Comprehensive income 4,916 25,256
------------------------- --------------------------
Purchase and reissuance of common stock under employee
benefit plans, including tax benefits and net of amortization (2,185) (717)
Change in common stock held by consolidated grantor trusts (350) (176)
Purchase and retirement of common stock (19,971) -
------------------------- --------------------------
Balance at June 30 $ 1,051,966 1,010,905
========================= ==========================
Balance at January 1 $ 1,071,224 958,737
Net income 30,381 54,760
Net unrealized losses on investment
securities, net of income taxes (25,678) (660)
------------------------- --------------------------
Comprehensive income 4,703 54,100
------------------------- --------------------------
Adjustment to cash payments to eligible policyholders in
lieu of common stock in the Demutualization - (705)
Purchase and reissuance of common stock under employee
benefit plans, including tax benefits and net of amortization (3,220) (773)
Change in common stock held by consolidated grantor trusts (770) (454)
Purchase and retirement of common stock (19,971) -
------------------------- --------------------------
Balance at June 30 $ 1,051,966 1,010,905
========================= ==========================
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------
1999 1998
-------------------- --------------------
<S> <C>
Net income $ 30,381 54,760
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 9,929 8,704
Amortization of unearned compensation 465 -
Accretion of discounts and amortization of premiums, net (6,330) (11,513)
Change in allowance for doubtful accounts receivable 1,212 (390)
Decrease in premiums and other receivables 24,152 12,416
Increase in other assets (6,300) (6,691)
Increase in medical and other benefits payable 19,903 38,537
Increase in unearned premiums 16,259 4,982
Increase (decrease) in accounts payable and accrued expenses (3,892) 4,747
Increase (decrease) in other liabilities (8,324) 7,063
Change in deferred income taxes (1,944) 1,654
Increase in minority interest 1,012 943
Increase in obligations for employee benefits 9,278 7,243
(Gain) loss on disposal of property and equipment and other assets 78 (31)
Net realized (gains) losses 14,109 (34,219)
-------------------- --------------------
Net cash provided by operating activities 99,988 88,205
-------------------- --------------------
Cash flows from investing activities
Proceeds from sale of property and equipment and other assets 221 98
Capital expenditures (9,564) (8,001)
Investment securities purchased (1,898,243) (1,818,468)
Proceeds from investment securities sold 1,388,003 1,168,616
Maturities of fixed income securities 441,527 571,670
-------------------- --------------------
Net cash used in investing activities (78,056) (86,085)
-------------------- --------------------
Cash flows from financing activities
Payments to members in lieu of common stock
pursuant to Plan of Demutualization - (705)
Purchase and reissuance of common stock under employee
benefit plans, including tax benefits (3,685) (773)
Change in common stock purchased by consolidated grantor trusts (770) (454)
Purchase and retirement of common stock (19,971) -
Change in outstanding checks in excess of bank balance 3,318 (4,644)
-------------------- --------------------
Net cash used in financing activities (21,108) (6,576)
-------------------- --------------------
Net increase (decrease) in cash 824 (4,456)
Cash - beginning of period 7,500 7,010
-------------------- --------------------
Cash - end of period $ 8,324 2,554
==================== ====================
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements prepared by Trigon
Healthcare, Inc. and its subsidiaries (collectively, "Trigon" or the
"Company") are unaudited, except for the balance sheet information as of
December 31, 1998, which is derived from the Company's audited consolidated
financial statements, pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, the consolidated financial
statements 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,
1998.
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 and six months ended June 30,1999 are not
necessarily indicative of the results for the full year.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. LONG TERM DEBT
The Company has 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 June 30,
1999, $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 June 30, 1999 and
1998 was 5.15% and 5.89%, respectively and 5.23% and 5.92% for the six
months ended June 30, 1999 and 1998, respectively.
The Company borrowed an additional $80 million under the revolving credit
agreement in July 1999 increasing the total outstanding under this
agreement to $165 million as of July 31, 1999. The additional borrowings
will be used primarily to fund the stock repurchase program (note 4).
3. INCOME TAXES
The effective tax rate on income before income taxes and minority interest
for the three months ended June 30, 1999 and 1998 was 32.9% and 32.6%,
respectively. The effective tax rate on income before income taxes and
minority interest for the six months ended June 30, 1999 and 1998 was 33.1%
5
<PAGE>
and 33.2%, respectively. The effective tax rate differs from the statutory
tax rate of 35% primarily due to the Company's investments in tax-exempt
municipal bonds which reduces the effective tax rate by the effect of the
tax-exempt investment income earned.
In conjunction with the Demutualization, the Company was required to make a
payment of $175 million to the Commonwealth of Virginia (Commonwealth
Payment) which was expensed and paid in prior years. During 1998, the
Company amended its 1996 federal tax return to claim the $175 million
Commonwealth Payment as a deduction. The Internal Revenue Service (IRS) has
denied this deduction during the course of its audit of the Company. The
Company continues to pursue the deduction. In addition, the Company is
working with the IRS to resolve certain other tax issues that could result
in a substantial favorable settlement to the Company. The Company cannot
predict how long the settlement process will take or whether favorable
settlements will be achieved. The Company has not recognized the impact of
the settlements, if any, in the consolidated financial statements.
4. CAPITAL STOCK
The Company commenced its previously suspended stock repurchase program in
June 1999. Under the program, up to ten percent of the Company's common
stock may be repurchased. The purchases may be made from time to time at
prevailing prices in the open market, by block purchase or in private
transactions and may be discontinued at any time. The repurchases are
subject to restrictions relating to volume, price and timing. Pursuant to
the stock repurchase program, the Company purchased and retired 538,200
shares of its common stock during the second quarter of 1999 for
approximately $20.0 million. The excess of the cost of the acquired shares
over par value is charged to retained earnings.
On February 17, 1999, the Board of Directors granted 89,939 shares of the
Company's common stock as restricted stock awards in accordance with the
provisions of the 1997 Stock Incentive Plan (Incentive Plan). The shares
vest on a pro-rata basis over three years. The recipients of the restricted
stock awards generally may not dispose or otherwise transfer the restricted
stock until vested. For grants of restricted stock, unearned compensation
equivalent to the fair market value of the shares at the date of grant is
recorded as a separate component of shareholders' equity and subsequently
amortized to compensation expense over the vesting period. Amortization was
$300,975 and $465,275 for the three months and six months ended June 30,
1999, respectively.
6
<PAGE>
5. NET INCOME AND NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months and six months ended June 30, 1999
and June 30, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C>
Numerator for basic and diluted earnings per
share - net income $ 18,302 20,711 30,381 54,760
=================================================================================================================
Denominator
Denominator for basic earnings per share -
weighted average shares 42,178 42,300 42,178 42,300
Effect of dilutive securities
Employee and director stock options 604 558 609 435
Restricted stock awards 45 - 45 -
-----------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per
share 42,827 42,858 42,832 42,735
-----------------------------------------------------------------------------------------------------------------
Basic net income per share $ 0.43 0.49 .72 1.29
=================================================================================================================
Diluted net income per share $ 0.43 0.48 .71 1.28
=================================================================================================================
</TABLE>
Shares of nonvested restricted stock are not considered outstanding in
computing the weighted average number of common shares for basic earnings
per share.
6. COMPREHENSIVE INCOME
The reclassification entries under SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, for the three months ended June 30, 1999 and 1998 were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C>
Net unrealized gains (losses) on investment securities, net of income taxes
Net unrealized holding gains (losses) arising during the period, net
of income taxes (benefit) of $(9,472) and $4,074 $ (16,110) 7,529
Less: reclassification adjustment for net gains (losses) included
in net income, net of income taxes (benefit) of $(1,467) and (2,724) 2,984
$1,607
---------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on investment securities, net of income taxes $ (13,386) 4,545
=========================================================================================================
</TABLE>
7
<PAGE>
The reclassification entries under SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, for the six months ended June 30, 1999 and 1998 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C>
Net unrealized losses on investment securities, net of income taxes
Net unrealized holding gains (losses) arising during the period,
net of income taxes (benefit) of $(19,561) and $11,621 $ (34,849) 21,582
Less: reclassification adjustment for net gains (losses) included
in net income, net of income taxes (benefit) of $(4,938) and (9,171) 22,242
$11,977
---------------------------------------------------------------------------------------------------------
Net unrealized losses on investment securities, net of income taxes $ (25,678) (660)
=========================================================================================================
</TABLE>
The components of accumulated other comprehensive income as of June 30,
1999 and December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------------------------------------------------------------------------------------------------
<S> <C>
Net unrealized gain on investment securities, net of deferred income
taxes of $1,643 and $16,265 $ 4,531 30,209
Minimum pension liability, net of deferred income taxes of $619 (1,149) (1,149)
--------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income $ 3,382 29,060
========================================================================================================
</TABLE>
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 four 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>
8. SEGMENT INFORMATION
The following table presents information by reportable segment for the
three months and six months ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Health Government All
Insurance Programs Investments Other Total
----------------------------------------------------------------------------------------------------------------------
<S> <C>
Three months ended June 30,
1999
Revenues from external customers $ 452,684 110,325 - 5,213 568,222
Investment income and net realized losses - - 19,251 - 19,251
Intersegment revenues 3,221 - - 1,527 4,748
Depreciation and amortization expense 3,848 67 5 369 4,289
Income (loss) before income taxes and
minority interest 18,029 (620) 19,251 207 36,867
1998
Revenues from external customers $ 404,555 106,116 - 5,235 515,906
Investment income and net realized gains - - 25,990 - 25,990
Intersegment revenues 2,979 - - 1,355 4,334
Depreciation and amortization expense 3,756 57 6 287 4,106
Income before income taxes and minority
interest 13,051 1,457 25,990 367 40,865
Six months ended June 30,
1999
Revenues from external customers $ 887,119 214,292 - 10,861 1,112,272
Investment income and net realized losses - - 31,293 - 31,293
Intersegment revenues 6,012 - - 2,981 8,993
Depreciation and amortization expense 9,534 135 9 712 10,390
Income before income taxes and minority
interest 32,738 87 31,293 864 64,982
1998
Revenues from external customers $ 803,868 202,345 - 10,580 1,016,793
Investment income and net realized gains - - 76,726 - 76,726
Intersegment revenues 5,352 - - 2,950 8,302
Depreciation and amortization expense 7,790 116 9 1,062 8,977
Income before income taxes and minority
interest 23,428 2,175 76,726 135 102,464
----------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of reportable segment total revenues, income before income
taxes and minority interest, and depreciation and amortization expense to
the corresponding amounts included in the consolidated statements of
operations for the three months and six months ended June 30, 1999 and 1998
is as follows (in thousands):
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June Six Months Ended
30, June 30,
----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C>
Revenues
Reportable segments
External revenues $ 568,222 515,906 1,112,272 1,016,793
Investment revenues 19,251 25,990 31,293 76,726
Intersegment revenues 4,748 4,334 8,993 8,302
Other corporate revenues 419 419 837 537
Elimination of intersegment revenues (4,748) (4,334) (8,993) (8,302)
-----------------------------------------------------------------------------------------------------------------
Total revenues $ 587,892 542,315 1,144,402 1,094,056
=================================================================================================================
Profit or Loss
Reportable segments $ 36,867 40,865 64,982 102,464
Corporate expenses not allocated to segments (7,718) (8,046) (15,671) (16,391)
Unallocated amount - interest expense (1,177) (1,336) (2,377) (2,673)
-----------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest $ 27,972 31,483 46,934 83,400
=================================================================================================================
Depreciation and amortization expense
Reportable segments $ 4,289 4,106 10,390 8,977
Not allocated to segments (199) (472) (461) (273)
-----------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense $ 4,090 3,634 9,929 8,704
=================================================================================================================
</TABLE>
On May 7, 1999, the Company announced that it would discontinue its role as
a claims processing intermediary for the federal government with the
Medicare Part A program in Virginia and West Virginia, effective August 31,
1999. The Medicare Part A benefits for individuals in those states will
remain the same; a different intermediary will process the claims.
Additionally, the Company will discontinue its role as the primary provider
of computer processing capabilities for Medicare Part A claims processing
to certain other Blue Cross Blue Shield plans after November 1999. This
decision does not affect the Company's medicare supplement product.
Individuals with this type of coverage have private contracts with the
Company and their benefits remain unchanged.
This decision to discontinue as an intermediary reflects the Company's
sharpened focus on its commercial managed health care business. As a
result, 145 employee positions will be eliminated in the Company's Medicare
Part A division. The Company expects that the decision will not have a
material impact on the financial condition and results of operations of the
Company.
9. SUBSEQUENT EVENT
On July 2, 1999, the Company announced that it would withdraw its
Medicare+Choice HMO product effective January 1, 2000 due to concerns about
reduced government reimbursements for Medicare+Choice plans. The
approximately 2,700 members, all in the Richmond, Virginia area, that are
affected will continue to be covered through December 31, 1999. The
decision will not have a material impact on the financial condition and
results of operations of the Company.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Substantially all of the revenues of Trigon Healthcare, Inc. and 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 divides its business into four reportable segments: health
insurance, government programs, investments and all other. Its health insurance
segment offers several network products, including health maintenance
organizations (HMO), preferred provider organizations (PPO) and traditional
indemnity products with access to the Company's participating provider network
(PAR) as well as medicare supplement plans. The government programs segment
includes the Federal Employee Program (FEP) and claims processing for Medicare.
Through its participation in the national contract between the Blue Cross and
Blue Shield Association and the U.S. Office of Personnel Management (OPM), the
Company provides health benefits to federal employees 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. The Company currently processes
Medicare Part A claims for beneficiaries in Virginia and West Virginia.
Additionally, the Company currently provides computer processing capabilities
for Medicare Part A claims processing to certain other Blue Cross Blue Shield
plans. As an administrative agent for Medicare, the Company allocates operating
expenses to determine reimbursement due for services rendered in accordance with
the contract. Medicare claims processed are not included in the 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. All of the investment portfolios of the consolidated subsidiaries are
managed and evaluated collectively within the investment segment. The Company's
other health-related business including third-party administration for medical
and workers compensation, life and disability insurance, disease management,
health promotion and similar products, are reflected in an "all other" category.
Within the Company's health insurance 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 portions of the
claims risk.
11
<PAGE>
ENROLLMENT
The following table sets forth the Company's enrollment data by network:
As of June 30,
----------------------------------
1999 1998
- -------------------------------------------------------------------------------
HEALTH INSURANCE
Commercial
HMO 260,853 257,384
PPO 325,202 276,155
PAR 157,348 180,535
Medicaid / Medicare HMO 52,250 31,583
Medicare supplement 119,558 123,658
Non-Virginia 104,057 93,044
- -------------------------------------------------------------------------------
Total commercial 1,019,268 962,359
Self-funded 693,834 669,754
Processed for other Blue Cross and Blue
Shield Plans (ASO) 4,731 9,318
- -------------------------------------------------------------------------------
Total health insurance 1,717,833 1,641,431
GOVERNMENT
Federal Employee Program (PPO) 216,468 213,793
===============================================================================
Total 1,934,301 1,855,224
===============================================================================
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>
Three months ended Six months ended
June 30, June 30,
------------------------------- ------------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
HEALTH INSURANCE
Commercial
HMO $ 98,409 93,083 193,482 186,004
PPO 127,292 106,917 249,255 210,587
PAR 71,278 79,480 142,943 160,420
Medicaid / Medicare HMO 27,917 13,985 46,017 28,239
Medicare supplement 57,397 55,922 114,415 111,169
Non-Virginia 34,640 28,525 71,448 54,702
- ---------------------------------------------------------------------------------------------------------------
Total commercial 416,933 377,912 817,560 751,121
Self-funded 312,402 268,627 595,796 542,231
- ---------------------------------------------------------------------------------------------------------------
Total health insurance 729,335 646,539 1,413,356 1,293,352
GOVERNMENT
Federal Employee Program (PPO) 110,325 106,116 214,292 202,345
===============================================================================================================
Total $ 839,660 752,655 1,627,648 1,495,697
===============================================================================================================
</TABLE>
12
<PAGE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Premium and fee revenues increased 10.3% to $562.8 million in the second quarter
of 1999 from $510.4 million in the second quarter of 1998. The $52.4 million
increase is due to a combination of rate increases and enrollment growth in the
Company's health insurance segment. Commercial revenue from the Virginia HMO,
PPO and PAR networks increased 10.7% to $324.9 million in 1999 from $293.5
million in 1998. This increase is attributed to a 6.3% increase in member months
and a 4.0% increase in average revenue per member. Non-Virginia revenues
increased 21.4% to $34.6 million up from $28.5 million last year. The $6.1
million increase is a result of growth in enrollment, which can be attributed to
the positive acceptance of the Company's product designs by individual health
care purchasers. Overall, premium revenues on a per member per month basis for
the Company's commercial business increased 3.7% to $137.19 for the second
quarter of 1999 from $132.30 for the second quarter of 1998. Excluding the
impact of a changing mix of business resulting from higher than average growth
in individual PPO business in-state and growth in out-of-state markets, premiums
on a per member per month basis increased 5.2% quarter to quarter. Self-funded
net revenues increased $9.2 million as a result of improving margins, the impact
of lower medical costs creating favorable stop loss settlements and increased
enrollment. The government segment's FEP revenues increased 4.0% to $110.3
million from $106.1 million in the second quarter of last year. The increase is
due to increased medical costs to be reimbursed by OPM and a 1.3% increase in
enrollment.
Total enrollment grew to 1,934,301 as of June 30, 1999 from 1,855,224 as of June
30, 1998. The growth was a result of a 76,402 increase in the Company's health
insurance segment enrollment and a 2,675 increase in the government segment.
Total commercial enrollment increased 5.9% to 1,019,268 members as of June 30,
1999 from 962,359 members last year as a result of favorable retention rates and
improved sales reflecting favorable customer reaction to moderate rate increases
and focused efforts on sales training, geographical and segment targeting and
ongoing enhancement to broker sales programs. The majority of the increase has
come from growth in the profitable small group and individual Virginia business,
up over 13.2% year over year. Non-Virginia enrollment increased 11.8% over the
prior year and accounts for 10.2% of total commercial enrollment. Growth in PPO
and Non-Virginia enrollment was offset by an expected decline of 12.8% in the
Company's PAR network as members migrate into more tightly managed networks. The
PAR network enrollment represents 15.4% of the Company's total commercial
enrollment. The increase in self-funded enrollment of 24,080 members is a result
of efforts to intensify sales efforts, target certain large groups that
recognize the value of Trigon's provider networks and the Company's ability to
effectively service multi-state accounts.
Investment income increased 9.5% to $23.4 million in the second quarter of 1999
from $21.4 million in the second quarter of 1998. Net realized losses were $4.2
million in the second quarter of 1999, compared to net realized gains of $4.6
million for the same period in 1998. The second quarter 1999 net realized losses
reflected continued repositioning of the investment portfolio resulting in
increased investments in higher-yielding corporate bonds and shorter maturity
instruments.
Medical costs increased 7.3% to $445.8 million in the second quarter of 1999
from $415.6 million in the second quarter of 1998. The $30.2 million increase is
13
<PAGE>
the result of expected levels of medical cost inflation, growth in the health
insurance segment's commercial enrollment and an increase in the government
segment's FEP medical costs reimbursed by OPM. The medical cost per member per
month for the Company's commercial business increased 2.0% to $112.29 in 1999
from $110.13 in the second quarter of 1998. Combined with a 3.7% increase in
commercial premium revenues per member per month, the loss ratio on commercial
business improved to 81.9% in 1999 from 83.2% for the same period last year. The
loss ratio improvement can be attributed to a combination of factors including
the favorable impact of a number of medical cost management initiatives and
pricing discipline. Regarding medical cost management initiatives, the Company
continues to diligently work at negotiating lower reimbursement rates with
facilities and to better manage utilization. During the twelve month period
ended June 30, 1999, commercial Virginia inpatient days per thousand were down
3.4% as compared to the same period last year. Outpatient cost per member
declined by 2.7% for the same period due to the Company's conversion to a fixed
fee schedule for services from percentage of charge type arrangements. In
addition, the Company is taking a more active role in working with physicians
and specialists to manage medical costs and to continue implementing national
medical management guidelines. To address the under-performing Mid-South
business unit, the Company has implemented stricter underwriting and pricing
standards and has taken a number of steps to improve operational efficiency.
These steps include placing all individual business on Virginia operating
systems and systematically bringing the group membership and claims processing
functions in-house from various third party administrators. In addition,
Mid-South has served six-month notices that it is exiting the unprofitable group
markets in Tennessee, Georgia and Alabama. Efforts are also underway to develop
proprietary provider networks within North Carolina as well as other actions.
Selling, general and administrative expenses (SG&A) increased by 20.3% to $113.0
million in the second quarter of 1999 from $93.9 million in the second quarter
of 1998. The increase is primarily due to three factors: costs associated with a
continued reconfiguration of the southeast business, strong growth in
commission-based individual and small group business and additional investments
being made given continued favorable medical cost trends. Overall, the SG&A
ratio was 13.4% for the second quarter of 1999 compared to 12.4% for the same
period last year.
Interest expense declined to $1.2 million in the second quarter of 1999 from
$1.3 million in the second quarter of 1998 as a result of favorable changes in
the weighted-average interest rate during the periods on the $85 million debt
outstanding.
Income before income taxes and minority interest decreased $3.5 million to $28.0
million in the second quarter of 1999 from $31.5 million in the second quarter
of 1998. The decrease is primarily a result of lower net realized gains (losses)
on the sale of investments of $8.8 million offset by a $3.1 million increase in
operating income and a $2.0 million increase in investment income. Operating
income increased primarily due to improving margins in the health insurance
segment resulting from pricing and medical cost management efforts.
The effective tax rate on income before income taxes and minority interest for
the three months ended June 30, 1999 and 1998 was 32.9% and 32.6%, respectively.
The effective tax rate differs from the statutory tax rate of 35% primarily due
to the Company's investments in tax-exempt municipal bonds.
14
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Premium and fee revenues increased 9.4% to $1.1 billion in the first six months
of 1999 from $1.0 billion in the first six months of 1998. The $94.9 million
increase is due to a combination of rate increases and enrollment growth in the
Company's health insurance segment. Commercial revenue from the Virginia HMO,
PPO and PAR networks increased 7.9% to $631.7 million in 1999 from $585.3
million in 1998. This increase is attributed to a 4.5% increase in member months
and a 3.3% increase in average revenue per member. Non-Virginia revenues
increased 30.6% to $71.4 million up from $54.7 million last year. The $16.7
million increase is a result of growth in enrollment, which can be attributed to
the positive acceptance of the Company's product designs by individual health
care purchasers. Overall, premium revenues on a per member per month basis for
the Company's commercial business increased 2.7% to $136.05 for the first six
months of 1999 from $132.44 for the first six months of 1998. Excluding the
impact of a changing mix of business resulting from higher than average growth
in individual PPO business in-state and growth in out-of-state markets, premiums
on a per member per month basis increased 4.6% year to year. Self-funded net
revenues increased $16.5 million as a result of improving margins, the impact of
lower medical costs creating favorable stop loss settlements and increased
enrollment. The government segment's FEP revenues increased 5.9% to $214.3
million from $202.3 million in the first six months of last year. The increase
is due to increased medical costs to be reimbursed by OPM and a 1.3% increase in
enrollment.
Investment income increased 6.8% to $45.4 million in the first six months of
1999 from $42.5 million in the first six months of 1998. Net realized losses
were $14.1 million in the first six months of 1999, compared to net realized
gains of $34.2 million for the same period in 1998. The net realized losses for
the first six months of 1999 reflected the Company's repositioning of the
investment portfolio by replacing treasury securities with municipal bonds,
higher-yielding corporate bonds and shorter maturity instruments.
Medical costs increased 7.0% to $875.8 million in the first six months of 1999
from $818.7 million in the first six months of 1998. The $57.1 million increase
is the result of expected levels of medical cost inflation, growth in the health
insurance segment's commercial enrollment and an increase in the government
segment's FEP medical costs reimbursed by OPM. The medical cost per member per
month for the Company's commercial business increased 1.2% to $111.70 in 1999
from $110.35 in the first six months of 1998. Combined with a 2.7% increase in
commercial premium revenues per member per month, the loss ratio on commercial
business improved to 82.1% in 1999 from 83.3% for the same period last year. The
loss ratio improvement can be attributed to a combination of factors including,
the favorable impact of a number of medical cost management initiatives and
pricing discipline. Regarding medical cost management initiatives, the Company
continues to diligently work at negotiating lower reimbursement rates with
facilities and to better manage utilization. In addition, the Company is taking
a more active role in working with physicians and specialists to manage medical
costs and to continue implementing national medical management guidelines. To
address the under-performing Mid-South business unit, the Company has
implemented stricter underwriting and pricing standards and has taken a number
of steps to improve operational efficiency. These steps include placing all
individual business on Virginia operating systems and systematically bringing
the group membership and claims processing functions in-house from various third
party administrators. In addition, Mid-South has served six-month notices that
15
<PAGE>
it is exiting the unprofitable group markets in Tennessee, Georgia and Alabama.
Efforts are also underway to develop proprietary provider networks within North
Carolina as well as other actions.
SG&A expenses increased by 15.8% to $219.3 million in the first six months of
1999 from $189.3 million in the first six months of 1998. The increase is
primarily due to three factors: costs associated with a continued
reconfiguration of the southeast business, strong growth in commission-based
individual and small group business and additional investments being made given
continued favorable medical cost trends. Overall, the SG&A ratio was 13.4% for
the first six months of 1999 compared to 12.6% for the same period last year.
Interest expense declined to $2.4 million in the first six months of 1999 from
$2.7 million in the first six months of 1998 as a result of favorable changes in
the weighted-average interest rate during the periods on the $85 million debt
outstanding.
Income before income taxes and minority interest decreased $36.5 million to
$46.9 million in the first six months of 1999 from $83.4 million in the first
six months of 1998. The decrease is primarily a result of lower net realized
gains (losses) on the sale of investments of $48.3 million offset by an $8.7
million increase in operating income. Operating income increased primarily due
to improving margins in the health insurance segment resulting from pricing and
medical cost management efforts.
The effective tax rate on income before income taxes and minority interest for
the six months ended June 30, 1999 and 1998 was 33.1% and 33.2%, respectively.
The effective tax rate differs from the statutory tax rate of 35% primarily due
to the Company's investments in tax-exempt municipal bonds.
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 producing a consistently growing income stream and maximizing
risk-adjusted total return. The fixed income portfolio includes government and
corporate securities, both domestic and international, with an average quality
rating of "A" as of June 30, 1999. The portfolio had an average contractual
maturity of 5.9 years as of June 30, 1999. 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 portfolio is diversified by industry, country and currency-related
exposure. As of June 30, 1999, the Company's equity exposure, comprised of
16
<PAGE>
direct equity as well as equity-indexed investments, was 13.3% of the total
portfolio, as compared to 14.0% as of December 31, 1998.
The Company has a $300 million revolving credit agreement that expires in
February 2002. As of June 30, 1999, $85 million had been borrowed and remained
outstanding under this credit agreement. The Company borrowed an additional $80
million under the revolving credit agreement in July 1999 increasing the total
outstanding to $165 million as of July 31, 1999. The additional borrowings will
be primarily used to fund the stock repurchase program.
The Company commenced its previously suspended stock repurchase program in June
1999. Under the program, up to ten percent of the Company's common stock may be
repurchased. Pursuant to the stock repurchase program, the Company purchased and
retired 538,200 shares of its common stock during the second quarter of 1999 for
approximately $20.0 million.
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.
On May 7, 1999, the Company announced that it would discontinue its role as a
claims processing intermediary for the federal government with the Medicare Part
A program in Virginia and West Virginia, effective August 31, 1999.
Additionally, the Company will discontinue its role as the primary provider of
computer processing capabilities for Medicare Part A claims processing to
certain other Blue Cross Blue Shield plans after November 1999. Subsequent to
that announcement, the Company announced on July 2, 1999 that it would withdraw
its Medicare+Choice HMO product effective January 1, 2000. The Company's
decision to discontinue as an intermediary reflects the Company's sharpened
focus on its commercial managed health care business and its withdrawal from the
Medicare+Choice plans was due to concerns about reduced government
reimbursements for such plans. The Company expects that the decisions will not
have a material impact on the financial condition and results of operations of
the Company.
YEAR 2000 READINESS DISCLOSURE
NOTE: Statements made throughout the Year 2000 Readiness Disclosure concerning
the Year 2000 readiness of entities other than the Company (i.e., third parties)
are based upon information provided to the Company by the third parties. This
information has not been independently verified.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs and infrastructure systems that have date-sensitive software
may recognize a date using "00", for example, as the Year 1900 rather than the
Year 2000. Failure to adequately address this issue could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process claims, prepare invoices, retain
membership data, maintain accounting records, safeguard and manage its invested
assets and operating cash accounts, perform utilization management, provide
17
<PAGE>
adequate customer service and other similar processes. The Company is
approaching the Year 2000 readiness issue from both a technical and business
perspective.
The Company began its Year 2000 initiative in late 1994. The Company has
developed and continues to refine comprehensive plans to prepare its critical
computer systems and application software and key business functions for the
Year 2000. Those plans address hardware and software maintained by the Company,
software products licensed from external vendors and functions outsourced to
external vendors. The plan also includes "infrastructure systems" and non-IT
systems and equipment, which contain date-sensitive imbedded hardware or
software. Due to the Company's reliance on computer systems, senior management
has supported the Year 2000 plan and has committed significant financial and
human resources to the goal of making the hardware and software Year 2000 ready.
The Company is using both external and internal resources for the project.
Compliant versions of the majority of the Company's core systems and software
were installed in production as of year end 1998. Year 2000 testing has been
completed for most of these systems and products. Year 2000 testing will
continue during 1999.
The Company's plan to resolve the Year 2000 issue involves four phases:
inventory/assessment, remediation, testing and implementation. Uniform project
management techniques are in place with overall oversight responsibility
residing with the Company's Senior Vice President and Chief Information Officer.
To date, the Company has fully completed the assessment and remediation phases
and has made substantial progress on the final two phases as discussed below. In
addition, comprehensive contingency and business resumption planning is underway
for critical systems and functions.
INTERNALLY DEVELOPED APPLICATION SYSTEMS. Changes required to the mainframe
computer for the membership records systems and non-HMO claims processing are
being handled by internal and contract programming resources. This is the
largest and most complex part of the Company's Year 2000 readiness plan. Trigon
has completed 100 percent of the Year 2000 application remediation and
approximately 99 percent of the Year 2000 testing of these applications. The
majority of the remaining testing efforts is scheduled to be completed by
September 1999; however, limited testing will continue throughout the fourth
quarter of 1999.
EXTERNALLY LICENSED APPLICATION SYSTEMS. Trigon has received and installed into
production all vendor-certified Year 2000 compliant releases of these
application systems. In addition, the Company is in the process of replacing two
non-compliant systems that could not be renovated with Year 2000 upgrades or
patches. The Company anticipates that these non-core systems will be in
production and Year 2000 tested by September 1999.
EXTERNALLY LICENSED OPERATING SYSTEM/UTILITY PRODUCTS. These products support
the Company's mainframe, midrange, file server and desktop environments. Trigon
has received 100 percent of the vendor-certified Year 2000 compliant releases of
these vendor software products and all have been installed into production. The
Company continues to receive Year 2000 patches for a small percentage of these
products to correct problems discovered during testing. These patches are being
installed as received.
18
<PAGE>
Trigon is conducting independent Year 2000 testing of vendor software, wherever
possible, to confirm compliance and, if necessary, to assess and address the
Company's potential business exposure if any of the software is non-compliant.
Testing of these products began in early 1998 and will continue during 1999.
OUTSOURCED FUNCTIONS. Trigon has outsourced support for some segments of its
business. These include, for example, administering certain specialty services
such as pharmacy and dental. The Company has contacted its critical outsourcing
vendors to determine their state of readiness with regard to the Year 2000
issue. For certain outsourcing arrangements, the Company has met with the
vendors and conducted several reviews of their plans and progress, including
contingency plans. The Company will continue to monitor critical vendors'
progress and review their plans, as appropriate, in order to assess and address
the potential business exposure for the Company if these parties fail to
achieve compliance.
INFRASTRUCTURE SYSTEMS. Telephone, security, HVAC and all other infrastructure
systems that the Company maintains are in the process of being upgraded, and
tested wherever possible, to assure their Year 2000 compliance. Much of this
work was completed during 1998 with the remainder scheduled for completion in
September 1999. But as in other efforts where the Company is reliant upon
vendors, the remaining work will be scheduled based on the shipment of the
compliant versions of equipment and software. In certain circumstances, the
Company relies on third-party service providers for infrastructure systems
maintenance and, accordingly, Year 2000 compliance. The Company has surveyed the
critical third parties to assess and address the potential business exposure if
these systems fail to achieve compliance.
CRITICAL BUSINESS PARTNERS. The Company also depends upon other individuals and
entities who must each address their own Year 2000 readiness issues. This
includes, among others, hospitals, other health care providers, third party
benefit administrators, public utilities, communications service providers,
funds transfer networks and customers. The Company is periodically surveying its
critical business partners in an effort to determine whether such third parties
are assessing and correcting any issues relating to the Year 2000 which could
impact their ability to conduct business with the Company. In addition, to help
health care providers better understand the significance of Year 2000
preparedness, the Company is using a number of communications vehicles to draw
their attention to the issue. Trigon is also conducting face-to-face meetings
and gathering pertinent documentation to evaluate the Year 2000 readiness of
other critical business partners. Although the Company is communicating with its
critical business partners, the Company has not received assurances from all
third parties that their systems will be Year 2000 compliant in a timely manner.
Lack of appropriate action on the part of third parties could impact the
Company's ability to serve its customers.
19
<PAGE>
The Company has investments in publicly and privately placed securities. The
Company may be exposed to credit risk to the extent that the Year 2000 issue
materially adversely impacts the issuers of the securities.
Portfolio diversification should reduce the overall risk.
The incremental costs for the Year 2000 project were $17.9 million through June
30,1999, including $0.9 million incurred during the second quarter of 1999.
Total incremental costs are expected to approximate $20.0 million through 1999,
increasing to nearly $22.0 million through 2000. The costs will be expensed as
incurred and will be funded through operating cash flows.
The Company expects to identify and resolve all Year 2000 issues that could
materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 issues affecting the Company will be identified or corrected.
Depending on the volume and duration, the Company's operations could experience
intermittent disruptions or be significantly impacted by incomplete or untimely
resolution of the problem by internal or external parties. Specifically, without
limitation, the Company's ability to process claims, prepare invoices, retain
membership data, maintain accounting records, safeguard and manage its invested
assets and operating cash accounts, perform utilization management, provide
adequate customer service and other similar processes could be affected. The
Company's plan for completion of this project is partially dependent upon the
work of third parties. In addition, some of the Company's business operations
are provided and maintained by outside vendors. The Company depends upon many
other individuals and entities, for example hospitals, other health care
providers, third party benefit administrators, pharmacies, public utilities,
communications service providers, funds transfer networks, software and hardware
vendors and its customers, who must address their own Year 2000 readiness
issues. A lack of appropriate action on the part of others could affect the
Company's ability to serve its customers. Although the Company is developing
plans designed to mitigate the aforementioned risks, there can be no assurances
that all potential problems will be mitigated by these procedures. The Company
cannot determine the level of financial exposure relating to the possibility
that vendors and other business partners with whom the Company contracts may be
unable to address all pertinent Year 2000 issues.
The Company began a comprehensive contingency planning effort in the fourth
quarter of 1998 to address situations that may result if the Company or its
critical business partners are unable to achieve Year 2000 readiness of specific
products or systems. Contingency plans will outline the procedures to follow for
the most likely areas of risk. The Company's contingency planning methodology
includes three types of planning: contingency planning; business resumption
planning; and crossover planning. Contingency and business resumption plans each
have a methodology, templates, training and facilitated workshops that have been
provided to each business area. Plans outline the procedures to follow for the
most likely areas of risk. The Company is writing plans to cover failures of
critical systems and key business functions. The Company expects its plans to
include, among other things, on call staff dedicated to problem response, manual
work-arounds for information systems as well as substitution of systems or
vendors, if necessary and commercially reasonable. Crossover plans cover the
actions to be executed in the days immediately before and after December 31,
1999. The plans include, among other things, production schedules, data backup,
system checkout processes and communication actions. As of June 30, 1999, the
Company has completed approximately 75 percent of its contingency/business
resumption plans for critical systems and business functions. Current scheduling
20
<PAGE>
calls for contingency and business resumption plans to be completed by September
1999 and crossover planning to be completed by October 1999.
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."
The discussion of the Company's efforts, and management's expectations, relating
to Year 2000 compliance are forward-looking statements. The costs of the project
and the date on which the Company believes it will complete necessary Year 2000
preparations are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. There can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of programming and testing resources, the ability to
locate and correct all relevant computer codes, the ability of third parties
whose products and services impact the Company to convert their systems and
software and other similar uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of its investing and borrowing activities, the Company is exposed to
financial market risks, specifically those resulting from changes in interest
rates, foreign currency exchange rates and marketable equity security prices.
All of the potential changes noted below are based upon sensitivity analyses
performed on the Company's investment holdings as of June 30, 1999. Actual
results may vary materially.
All of the Company's investments are categorized as available-for-sale. The
majority of these are fixed income securities. Market risk is addressed by
actively managing the duration and diversification of the portfolio. The Company
has evaluated the impact on the portfolio's fair value considering a 100 basis
point change in interest rates over the next twelve-month period. A hypothetical
100 basis point increase in interest rates would result in an approximate $54.6
21
<PAGE>
million increase in fair value, whereas a corresponding 100 basis point decrease
in interest rates would result in an approximate $170.2 million increase in fair
value. This analysis includes the assumption that the 100 basis point change
occurs evenly throughout the twelve-month period. The analysis also assumes
investment income earned is reinvested into the portfolio thus mitigating the
effects of change in fair value from an increase in interest rates or enhancing
the effects of change in fair value from a decrease in interest rates over the
twelve-month period. Moreover, the analysis is performed at the individual
portfolio level, with only the sum of these amounts presented herein.
The Company's equity portfolio is comprised of domestic and international direct
equity investments as well as domestic equity-indexed investments. An immediate
10% decrease in each equity investment's value, arising from a combination of
market and foreign exchange movement, would result in a fair value decrease of
$18.9 million. Correspondingly, an immediate 10% increase in each equity
investment's value, attributable to the same two factors, would result in a fair
value increase of $18.9 million. The majority of the $63.1 million international
equity portfolio is non-U.S. dollar denominated. Foreign currency forward
contracts are utilized to hedge some, but not all, of the Company's foreign
currency exposure.
As of June 30, 1999, the Company has long-term debt outstanding in the amount of
$89.3 million. Of this amount only $1.3 million represents obligations with a
fixed interest rate. Therefore, the impact of an interest rate increase or
decrease upon the fair value of the Company's long-term debt would be de
minimus.
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 four 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.
22
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on April 28, 1999, the
following members were elected to the Board of Directors:
Votes For Votes Withheld
---------- --------------
Norwood H. Davis, Jr. 29,049,573 260 037
Thomas G. Snead, Jr. 29,057,786 251,824
James K. Candler 20,890,402 8,419,208
Robert M. Freeman 29,058,021 251,589
Jackie M. Ward 29,057,068 252,542
Stirling L. Williamson, Jr. 29,058,083 251,527
The matters voted upon at the Annual Meeting of Shareholders and the results of
the voting were as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstained Nonvotes
--------- ------------- --------------- --------
<S> <C>
Ratification of KPMG LLP as
independent auditors of the Company
for 1999 29,203,783 27,224 78,603 --
</TABLE>
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
- ------- -----------
10.1 -- Thomas G. Snead, Jr. Employment Agreement dated May 19, 1999.
10.2 -- Amendment No.1 to Executive Continuity Agreement Between Trigon
Insurance Company and Thomas G. Snead, Jr. dated May 19, 1999.
11 -- Computation of per share earnings for the three months and
six months ended June 30, 1999. Exhibit has been 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.
23
<PAGE>
(b) REPORTS ON FORM 8-K:
None filed during the three months ended June 30, 1999.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIGON HEALTHCARE, INC.
REGISTRANT
Dated: August 13, 1999 By: /s/Thomas R. Byrd
------------------------
THOMAS R. BYRD
SENIOR VICE PRESIDENT & CHIEF
FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND
FINANCIAL OFFICER)
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER
- -------
10.1 -- Thomas G. Snead, Jr. Employment Agreement dated May 19, 1999.
10.2 -- Amendment No.1 to Executive Continuity Agreement Between Trigon
Insurance Company and Thomas G. Snead, Jr. dated May 19, 1999.
27 -- Financial Data Schedule.
EXHIBIT 10.1
THOMAS G. SNEAD, JR.
EMPLOYMENT AGREEMENT
--------------------
This Agreement is made as of the 19th day of May 1999, between
TRIGON INSURANCE COMPANY, a Virginia corporation (the "Company"), and THOMAS G.
SNEAD, JR., of Richmond, Virginia ("Executive").
R E C I T A L S
The Company and Executive are parties to an Employment Agreement
dated as of December 12, 1990 (the "Prior Agreement") and to an Executive
Continuity Agreement dated as of September 16, 1998 (the "Executive Continuity
Agreement"). Executive was elected Chief Executive Officer of the Company
effective April 28, 1999. The parties desire to enter into this Agreement to
replace the Prior Agreement and to provide for the coordination and integration
of this Agreement with the Executive Continuity Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties agree as follows:
ARTICLE I
EMPLOYMENT
I.1 Employment. The Company hereby employs Executive as President 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. 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 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-
<PAGE>
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 1999 has been determined
by the Board of Directors upon recommendation from the Human Resources
Committee.
2.2 Incentive Compensation. Executive shall also be eligible to
participate in the Company's Annual Incentive Plan, Long Term Performance Plan,
Stock Option Plan, and other incentive plans and programs that may be maintained
by the Company.
2.3 Annual Reviews. Effective each January 1 during the term of this
Agreement, the Chairpersons 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 such annual increase in base
salary as may be appropriate and in accordance with the Company's regular salary
administration program. The Board will determine such annual increase in base
salary.
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, Supplemental 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.
-2-
<PAGE>
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 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
4.1 Severance Payment.
-----------------
(a) If the Company terminates Executive's employment for any
reason (other than termination by reason of Executive's disability), then the
Company will pay to Executive the Severance Payment as defined in Section 4.1(b)
below. If Executive resigns, dies or becomes disabled, then he shall not be
entitled to the Severance Payment.
(b) The term Severance Payment shall mean a payment in cash equal
to three times the Applicable Compensation of Executive as defined in Section
4.1(c) below.
(c) The term Applicable Compensation of Executive shall mean the
highest amount of compensation (as defined in Section 4.1(d) below) earned by
Executive for any one of the three full calendar years ended immediately
preceding the termination of Executive's employment.
-3-
<PAGE>
(d) The Compensation earned by Executive for any calendar year
shall mean (i) the amount of Executive's annual base salary for such calendar
year, 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, (ii) the amount of any cash bonus or cash incentive
award (annual, long-term, or otherwise) that is earned for a period of
performance ending in such calendar year, even though such bonus or award may be
paid after such calendar year, and (iii) the fair market value (determined as of
the date of the award) of any bonus or incentive award (annual, long-term, or
otherwise) that is made in property other than cash and that is earned for a
period of performance ending in such calendar year, even though such bonus or
award may be made after such calendar year. For purposes of clause (iii) of the
preceding sentence, (i) the granting or vesting of stock options shall not be
deemed to be a bonus or incentive award, and (ii) in the case of any bonus or
incentive award made in restricted stock of the Company, the fair market value
of such stock shall be determined without regard to the restriction.
ARTICLE V
NON-COMPETITION
5.1 Covenant Not to Compete. If Executive's employment with the Company
terminates for any reason, Executive agrees that he will not, prior to the
expiration of three (3) 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.
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 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-
<PAGE>
ARTICLE VI
WELFARE BENEFITS
6.1 As used in this Agreement, "Welfare Plan" means any health plan,
dental plan, disability plan, survivor income plan, life insurance plan or other
welfare benefit plan as defined in Section 3(1) of the Employee Retirement
Income Security Act of 1974, currently or hereafter made available by the
Company in which the Executive is eligible to participate.
6.2 If the Company terminates Executive's employment for any reason
(other than termination by reason of Executive's disability), then the Company
will, subject to the provisions of Section 6.3, continue the coverage of
Executive and his dependants under all Welfare Plans in which they participated
immediately before the termination of Executive's employment for a period of
three years following the termination of Executive's employment.
6.3 Notwithstanding Section 6.2, (i) if the Company amends or
terminates any Welfare Plan in which Executive is participating in a manner that
is generally applicable to all executives of the Company, then such amendment or
termination shall also be applicable to Executive, (ii) Executive shall continue
to contribute to the cost of the Welfare Plans on substantially the same basis
as he did before the termination of his employment, (iii) if Executive's
continued participation in any Welfare Plan is not possible because of the terms
of the plan or any provision of law, then the Company will at its expense
provide Executive with an alternative benefit of substantially equal value and
utility through cash payments, an alternative insurance arrangement, or
otherwise, and (iv) the obligation of the Company to continue Executive's
coverage under any Welfare Plan shall cease if Executive becomes covered under a
welfare plan sponsored by a subsequent employer that provides substantially
equal or greater benefits.
-5-
<PAGE>
6.4 If Executive's employment is terminated by the Company, then in
lieu of the welfare benefits provided for in Section 6.2, Executive may, at his
option, elect to receive a lump sum amount in cash such that, after Executive
pays any taxes on such lump sum amount, Executive will retain on an after-tax
basis an amount equal to the present value of such benefits. Any such election
must be made by Executive by written notice provided to the Company within 60
days after the date on which Executive's employment is terminated. Present value
shall be determined using a discount rate equal to the Federal mid-term rate
under Section 1274(d) of the Code.
ARTICLE VII
ADDITIONAL PAYMENT FOR EXCISE TAXES
7.1 If Executive receives any amount from the Company, pursuant to
this Agreement or otherwise, that is determined to be an "excess parachute
payment" subject to the excise tax imposed by ss. 4999 of the Internal Revenue
Code, then the Company will pay to Executive an additional amount (herein
referred to as a "Gross-Up Payment") such that, after Executive has paid all
federal and state income and excise taxes imposed on such excess parachute
payment and on such Gross-Up Payment, Executive will retain an after-tax amount
equal to the amount that Executive would have retained if such excise tax had
not been imposed.
7.2 When Executive's employment with the Company terminates, the
amount of any Gross-Up Payment that the Company is required to pay under Section
7.1 shall be determined by the independent certified public accounting firm then
regularly employed by the Company. Within 15 business days following the
termination of Executive's employment, or earlier if requested by the Company,
the accounting firm shall deliver to the Company and Executive a report
calculating in reasonable detail the amount of any Gross-Up Payment required by
Section 7.1. The amount of the required Gross-Up payment as so determined by the
accounting firm shall be binding on the Company and Executive, and within 10
business days following receipt of the report from the accounting firm, the
Company will pay the required Gross-Up Payment to Executive. If the accounting
firm determines that no Gross-Up Payment is required because no excise tax is
payable by Executive, it shall furnish Executive a written opinion to that
effect. All fees and expenses of the accounting firm shall be paid by the
Company.
-6-
<PAGE>
7.3 Because of uncertainties in the application of ss. 4999 of the
Internal Revenue Code, it is possible that the amount of the Gross-Up Payment as
initially determined by the accounting firm pursuant to Section 7.2 may be
inadequate to comply with the requirements of Section 7.1. If at any time
Executive is required to pay any additional excise tax not covered by the
initial Gross-Up Payment, then the Company will immediately pay to Executive an
additional Gross-Up Payment so that the requirements of Section 7.1 are complied
with.
ARTICLE VIII
MISCELLANEOUS
8.1 Termination of Prior Agreement. This Agreement supersedes the
Prior Agreement, and the Prior Agreement is hereby terminated effective as of
the date hereof.
8.2 Coordination with Executive Continuity Agreement. If Executive's
employment with the Company terminates under circumstances that constitute a
Compensable Termination within the meaning of the Executive Continuity
Agreement, then this Agreement shall be terminated effective as of the date on
which Executive's employment terminates, neither party to this Agreement shall
have any obligation to the other hereunder, and Executive shall be entitled to
the benefits due to him under the Executive Continuity Agreement. If Executive's
employment terminates under circumstances that do not constitute a Compensable
Termination within the meaning of the Executive Continuity Agreement, then this
Agreement shall remain in full force and effect.
8.3 Legal Fees. If any dispute arises in connection with this
Agreement or the enforcement or interpretation of Executive's rights under this
Agreement, the Company shall pay all reasonable legal fees and expenses incurred
by Executive in connection with such dispute, irrespective of the outcome of
such dispute.
-7-
<PAGE>
8.4 Rights Not Exclusive. Executive's rights under this Agreement
are not exclusive, and nothing in this Agreement shall limit any rights that
Executive may have under any other plan, contract, arrangement, custom, policy,
practice or program of the Company.
8.5 Notices. Any notice required or permitted hereunder shall be in
writing and shall be deemed given if delivered personally or mailed, registered
or certified mail, as follows:
(a) If to the Company, to:
Chairman of the Executive Committee
Trigon Insurance Company
2015 Staples Mill Road
Post Office Box 27401
Richmond, Virginia 23279
(b) If to Executive, to his last address shown
on the records of the Company.
8.6 Successors. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, representatives,
and successors, including, without limitation, any person acquiring directly or
indirectly all or substantially all of the assets of the Company, whether by
merger, consolidation, sale, or otherwise, but neither this Agreement nor any
right hereunder may be otherwise assigned or transferred by either party hereto.
8.7 Applicable Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of Virginia.
8.8 Amendment. This Agreement may be amended only by a written
instrument signed by the parties hereto.
-8-
<PAGE>
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
--------------------------------
THOMAS G. SNEAD, JR.
-9-
EXHIBIT 10.2
AMENDMENT NO. 1 TO EXECUTIVE CONTINUITY AGREEMENT BETWEEN
TRIGON INSURANCE COMPANY AND
THOMAS G. SNEAD, JR.
This Amendment No. 1 to the Executive Continuity Agreement
dated as of September 16, 1998 between Trigon Insurance Company (the
"Company") and Thomas G. Snead, Jr. ("Executive"), is made as of this 19th
day of May 1999.
RECITALS
The Company and Executive are parties to an Executive Continuity
Agreement made as of September 16, 1998 (the "Executive Continuity Agreement")
and desire to amend the Executive Continuity Agreement in the manner
hereinafter set forth.
NOW THEREFORE, in consideration of the premises, the parties
agree as follows:
1. Paragraph 8.2 of the Executive Continuity Agreement is hereby
deleted and the following is substituted in its place:
8.2 Coordination with Employment Agreement. Executive and the
Company are parties to an Employment Agreement dated as of May
19, 1999 as the same may from time to time be amended (the
"Employment Agreement"). If a Compensable Termination occurs,
then the Employment Agreement shall be terminated and
cancelled effective as of the date on which Executive's
employment terminates, and neither party to the Employment
Agreement shall have any obligation thereunder to the other.
If Executive's employment terminates under circumstances that
do not constitute a Compensable Termination, then the Employment
Agreement shall remain in full force and effect.
2. Except to the extent provided in this Amendment No. 1, the
Executive Continuity Agreement shall remain in full force and
effect.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Amendment No. 1 as of the day and year first above written.
TRIGON INSURANCE COMPANY
By: -----------------------------------
Jackie M. Ward, Chairperson
Human Resources, Compensation and
Employee Benefits Committee
-----------------------------------
THOMAS G. SNEAD, JR.
<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 SIX MONTHS
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,324
<SECURITIES> 1,600,363
<RECEIVABLES> 355,182
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,983,214
<PP&E> 142,987
<DEPRECIATION> 91,917
<TOTAL-ASSETS> 2,182,168
<CURRENT-LIABILITIES> 899,013
<BONDS> 89,339
0
0
<COMMON> 418
<OTHER-SE> 1,051,548
<TOTAL-LIABILITY-AND-EQUITY> 2,182,168
<SALES> 1,113,109
<TOTAL-REVENUES> 1,144,402
<CGS> 875,811
<TOTAL-COSTS> 1,095,091
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,377
<INCOME-PRETAX> 46,934
<INCOME-TAX> 15,541
<INCOME-CONTINUING> 30,381
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,381
<EPS-BASIC> 0.72
<EPS-DILUTED> 0.71
</TABLE>
