<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ........ to .......
Commission File Number: 001-12617
Trigon Healthcare, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1773225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2015 Staples Mill Road, Richmond, VA 23230
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (804) 354-7000
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Title of each class Outstanding at November 10, 2000
------------------- --------------------------------
Class A Common Stock, $0.01 par value 37,569,024 shares
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TRIGON HEALTHCARE, INC. and SUBSIDIARIES
THIRD QUARTER 2000 FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S><C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 1
Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 2000 and 1999 2
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income for the Three Months and Nine Months Ended September 30, 2000
and 1999 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20 - 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December
2000 1999
----------------- -----------------
<S><C>
Assets
Current assets
Cash $ 5,305 2,530
Investment securities, at estimated fair value 1,784,039 1,738,515
Premiums and other receivables 474,385 397,499
Deferred income taxes 11,201 16,827
Other 15,530 14,099
----------------- -----------------
Total current assets 2,290,460 2,169,470
Property and equipment, net 60,366 51,238
Deferred income taxes 48,916 59,499
Goodwill and other intangibles, net 15,711 14,561
Restricted investments, at estimated fair value 6,883 9,887
Other assets 8,621 9,460
----------------- -----------------
Total assets $ 2,430,957 2,314,115
================= =================
Liabilities and Shareholders' Equity
Current liabilities
Medical and other benefits payable $ 552,621 544,120
Unearned premiums 134,180 120,290
Accounts payable and accrued expenses 78,142 81,867
Other liabilities 272,032 257,231
----------------- -----------------
Total current liabilities 1,036,975 1,003,508
Obligations for employee benefits, noncurrent 45,993 49,287
Medical and other benefits payable, noncurrent 68,730 65,929
Long-term debt 275,199 248,039
Minority interest in subsidiary 12,245 10,395
----------------- -----------------
Total liabilities 1,439,142 1,377,158
----------------- -----------------
Shareholders' equity
Common stock 376 382
Capital in excess of par 808,509 816,517
Retained earnings 185,984 112,896
Unearned compensation (2,588) (1,926)
Accumulated other comprehensive income (loss) (note 6) (466) 9,088
----------------- -----------------
Total shareholders' equity 991,815 936,957
Commitments and contingencies (note 7)
----------------- -----------------
Total liabilities and shareholders' equity $ 2,430,957 2,314,115
================= =================
</TABLE>
See notes to consolidated financial statements
1
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TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months and nine months
ended September 30, 2000 and 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C>
Revenues
Premium and fee revenues
Commercial $ 473,638 429,079 1,378,326 1,246,639
Federal Employee Program 116,688 108,374 344,561 322,666
Amounts attributable to self-funded arrangements 354,211 305,069 1,035,419 900,865
Less: amounts attributable to claims under
self-funded arrangements (311,441) (270,685) (912,720) (797,397)
---------- ---------- ---------- ----------
633,096 571,837 1,845,586 1,672,773
Investment income 29,660 25,457 85,663 70,859
Net realized losses (2,456) (12,872) (7,888) (26,981)
Other revenues 6,179 5,985 17,519 18,158
---------- ---------- ---------- ----------
Total revenues 666,479 590,407 1,940,880 1,734,809
Expenses
Medical and other benefit costs
Commercial 376,233 368,672 1,116,324 1,039,883
Federal Employee Program 111,839 103,615 329,241 308,215
---------- ---------- ---------- ----------
488,072 472,287 1,445,565 1,348,098
Selling, general and administrative expenses 121,197 173,500 347,728 392,780
Interest expense 4,325 2,281 12,393 4,658
---------- ---------- ---------- ----------
Total expenses 613,594 648,068 1,805,686 1,745,536
---------- ---------- ---------- ----------
Income (loss) before income taxes and minority interest 52,885 (57,661) 135,194 (10,727)
Income tax expense (benefit) 17,561 (20,956) 41,289 (5,415)
---------- ---------- ---------- ----------
Income (loss) before minority interest 35,324 (36,705) 93,905 (5,312)
Minority interest 1,326 847 2,925 1,859
---------- ---------- ---------- ----------
Net income (loss) $ 33,998 (37,552) 90,980 (7,171)
========== ========== ========== ==========
Earnings (losses) per share (note 5)
Basic net income (loss) $ 0.91 (0.91) 2.42 (0.17)
========== ========== ========== ==========
Diluted net income (loss) $ 0.88 (0.91) 2.36 (0.17)
========== ========== ========== ==========
Weighted average number of common shares outstanding
Basic 37,521 41,168 37,668 41,691
========== ========== ========== ==========
Diluted 38,723 41,168 38,622 41,691
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
2
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TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)
For the three months and nine months ended September 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C>
Balance as of July 1 $ 964,517 1,051,966
Net income (loss) 33,998 (37,552)
Net unrealized gains (losses) on investment
securities, net of income taxes 74 (11,640)
---------- ----------
Comprehensive income (loss) 34,072 (49,192)
---------- ----------
Purchase and reissuance of common stock under stock
options and other employee benefits plans, including
tax benefits and net of amortization (3,019) 128
Change in common stock held by consolidated grantor trusts (29) (231)
Purchase and retirement of common stock (3,726) (45,817)
---------- ----------
Balance as of September 30 $ 991,815 956,854
========== ==========
Balance as of January 1 $ 936,957 1,071,224
Net income (loss) 90,980 (7,171)
Net unrealized losses on investment
securities, net of income taxes (9,554) (37,318)
---------- ----------
Comprehensive income (loss) 81,426 (44,489)
---------- ----------
Purchase and reissuance of common stock under stock
options and other employee benefit plans,
including tax benefits and net of amortization (9,082) (3,092)
Change in common stock held by consolidated grantor trusts 3,567 (1,001)
Purchase and retirement of common stock (21,053) (65,788)
---------- ----------
Balance as of September 30 $ 991,815 956,854
========== ==========
</TABLE>
See notes to consolidated financial statements
3
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TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
2000 1999
---------------- ----------------
<S><C>
Net income (loss) $ 90,980 (7,171)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 11,139 14,639
Write-off of subsidiary goodwill and other intangibles - 55,927
Amortization of unearned compensation 2,327 706
Accretion of discounts and amortization of premiums, net (12,339) (10,012)
Change in allowance for doubtful accounts receivable (25) 2,087
Increase in premiums and other receivables (48,201) (24,953)
Increase in other assets (620) (8,656)
Increase in medical and other benefits payable 27,069 62,884
Increase in unearned premiums 14,457 21,345
Decrease in accounts payable and accrued expenses (3,892) (581)
Increase (decrease) in other liabilities (51,302) 2,318
Change in deferred income taxes 21,653 (31,211)
Increase in minority interest 2,925 1,857
Increase (decrease) in obligations for employee benefits (3,294) 16,088
Loss on disposal of property and equipment and other assets 44 131
Realized investment losses, net 7,888 26,981
---------------- ----------------
Net cash provided by operating activities 58,809 122,379
---------------- ----------------
Cash flows from investing activities
Proceeds from sale of property and equipment and other assets 12 255
Capital expenditures (20,785) (14,183)
Cash paid for the purchase of minority interest (2,660) -
Cash transferred with the sale of subsidiary, net of cash received (15,337) -
Investment securities purchased (3,359,431) (3,424,223)
Proceeds from investment securities sold 2,722,258 2,370,677
Maturities of fixed income securities 607,379 840,045
---------------- ----------------
Net cash used in investing activities (68,564) (227,429)
---------------- ----------------
Cash flows from financing activities
Payments on long-term debt (248,039) -
Proceeds from long-term debt - 160,000
Change in commercial paper notes 275,199 -
Purchase and reissuance of common stock under employee
benefit plans, including tax benefits (11,708) (3,798)
Change in common stock purchased by consolidated grantor trusts 3,567 (1,001)
Purchase and retirement of common stock (21,053) (65,788)
Change in outstanding checks in excess of bank balance 14,564 19,356
---------------- ----------------
Net cash provided by financing activities 12,530 108,769
---------------- ----------------
Net increase in cash 2,775 3,719
Cash - beginning of period 2,530 7,500
---------------- ----------------
Cash - end of period $ 5,305 11,219
================ ================
</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,
1999, 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, 1999.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments and a 1999 charge related to a subsidiary discussed
in note 8, necessary for a fair presentation of such consolidated financial
statements have been included. The results of operations for the three
months and nine months ended September 30, 2000 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 AND COMMERCIAL PAPER
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. In conjunction
with the issuance of commercial paper notes during the first quarter of
2000, the Company repaid the $245 million outstanding on the revolving
credit agreement. There were no amounts borrowed under this agreement as of
and for the three months ended September 30, 2000. The weighted average
interest rate for the period the borrowings were outstanding during the
three months and nine months ended September 30, 1999 was 5.43% and 5.30%,
respectively.
In March 2000, the Company commenced a private placement commercial paper
program providing for the issuance of up to $300 million in aggregate
maturity value of commercial paper notes. The notes are issued at par less
a discount representing an interest factor. Under the program, they may
also be issued at par as interest bearing notes. The notes may be issued
with varying maturities up to a maximum of one year from issuance. The
Company issued an additional $30 million in commercial paper during the
third quarter of 2000. As of September 30, 2000, outstanding notes under
the commercial paper program totaled approximately $275.2 million with an
average maturity of 18 days. The weighted-average discount yield on the
5
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outstanding commercial paper notes was 6.64% as of September 30, 2000. The
commercial paper is backed by the revolving credit agreement. The
commercial paper notes have been classified as long-term debt in the
accompanying consolidated statements of financial condition based on the
Company's ability and intent to maintain borrowings of at least this amount
for more than one year.
3. INCOME TAXES
The effective tax rate on income (loss) before income taxes and minority
interest for the three months ended September 30, 2000 and 1999 was 33.2%
and 36.3%, respectively. The effective tax rate on income (loss) before
income taxes and minority interest for the nine months ended September 30,
2000 and 1999 was 30.5% and 50.5%, respectively. The effective tax rates
for 2000 differ from the statutory tax rate of 35% primarily due to the
Company's investments in tax-exempt municipal bonds which reduce the
effective tax rate by the effect of the tax-exempt investment income
earned. In addition, the effective tax rate for the nine months ended
September 30, 2000 includes a $2.7 million tax benefit realized during the
second quarter of 2000 related to the sale of its Mid-South subsidiary
(note 8). Excluding this tax benefit, the effective tax rate for the nine
months ended September 30, 2000 was 32.6%. The effective tax rates for 1999
differ from the statutory tax rate of 35% primarily due to the Company's
third quarter 1999 Mid-South charge (note 8) and investments in tax-exempt
municipal bonds which reduce the effective tax rate by the effect of the
tax-exempt investment income earned. Excluding the effect of the Company's
Mid-South charge, the effective tax rate on income before income taxes and
minority interest for the three months and nine months ended September 30,
1999 was 31.5% and 32.6%, respectively.
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. The Company claimed the
$175 million Commonwealth Payment as a deduction. The Internal Revenue
Service has denied this deduction during the course of its audit of the
Company. The Company continues to pursue the deduction. In addition, the
Company has filed a lawsuit claiming deductions for losses incurred on the
termination of certain customer and provider contracts. See note 7.
Favorable resolution of these claims is subject to various uncertainties,
including whether the deductions will be allowed at all and, in the case of
the claim for losses on the termination of customer and provider contracts,
the amount of the deductions, if any, that will be allowed. While the
Company believes that its claims have merit, it cannot predict the ultimate
outcome of the claims. The Company has not recognized the impact of the
claims, if any, in the consolidated financial statements.
4. CAPITAL STOCK
The Company commenced its previously announced second stock repurchase
program in February 2000 following completion of its first stock repurchase
program. During the third quarter of 2000, the Company purchased and
6
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retired 75,000 shares of its common stock at a cost of approximately $3.7
million bringing the total shares purchased during 2000 to 630,906 at a
cost of approximately $21 million. The excess of the cost of the acquired
shares over par value is charged on a pro rata basis to capital in excess
of par and retained earnings.
In February 2000, the Board of Directors granted 87,681 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. A total of
104,644 restricted shares were outstanding as of September 30, 2000.
Amortization for the three months ended September 30, 2000 and 1999 was
$349,998 and $241,114, respectively and $2.3 million and $706,353 for the
nine months, respectively.
5. NET INCOME AND NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
earnings (losses) per share for the three months and nine months ended
September 30, 2000 and 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S><C>
Numerator for basic and diluted earnings
(losses) per share - net income (loss) $ 33,998 (37,552) 90,980 (7,171)
=================================================================================================================
Denominator
Denominator for basic earnings (losses) per
share - weighted average shares 37,521 41,168 37,668 41,691
Effect of dilutive securities
Employee and director stock options and
nonvested restricted stock awards 1,202 - 954 -
-----------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings (losses)
per share 38,723 41,168 38,622 41,691
-----------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share $ 0.91 (0.91) 2.42 (0.17)
=================================================================================================================
Diluted net income (loss) per share $ 0.88 (0.91) 2.36 (0.17)
=================================================================================================================
</TABLE>
Shares of nonvested restricted stock are not considered outstanding in
computing the weighted-average number of common shares for basic earnings
(losses) per share. Additionally, the computation of diluted losses per
share for the three months and nine months ended September 30, 1999 does
not consider the common share equivalents of stock options and restricted
stock awards as the effects of assumed conversion would be antidilutive.
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6. COMPREHENSIVE INCOME
The reclassification entries under SFAS No. 130, Reporting Comprehensive
Income, for the three months ended September 30, 2000 and 1999 were as
follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------------------
<S><C>
Net unrealized gains (losses) on investment securities, net of income
taxes
Net unrealized holding losses arising during the period, net of
income tax benefit of $821 and $9,975 $ (1,522) (20,007)
Less: reclassification adjustment for net losses included in net
income, net of income tax benefit of $860 and $4,505 (1,596) (8,367)
---------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on investment securities, net of income
taxes $ 74 (11,640)
=========================================================================================================
</TABLE>
The reclassification entries under SFAS No. 130, Reporting Comprehensive
Income, for the nine months ended September 30, 2000 and 1999 were as
follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------------------
<S><C>
Net unrealized losses on investment securities, net of income taxes
Net unrealized holding losses arising during the period, net of
income tax benefit of $7,906 and $29,536 $ (14,681) (54,856)
Less: reclassification adjustment for net losses included in net
income, net of income tax benefit of $2,761 and $9,443 (5,127) (17,538)
---------------------------------------------------------------------------------------------------------
Net unrealized losses on investment securities, net of income taxes $ (9,554) (37,318)
=========================================================================================================
</TABLE>
The components of accumulated other comprehensive income as of September
30, 2000 and December 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------------------------------
<S><C>
Net unrealized gains (losses) on investment securities, net of income
tax expense (benefit) of $(82) and $5,063 $ (151) 9,403
Minimum pension liability, net of income taxes of $169 (315) (315)
--------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $ (466) 9,088
========================================================================================================
</TABLE>
7. LITIGATION
On June 9, 2000, the Company's subsidiary, Trigon Insurance Company, filed
a lawsuit against the federal government for the recovery of federal income
tax overpayments for the years 1989 through 1995. If successful, the
Company expects to recover approximately $50 million in cash refunds plus
interest of about $30 million and to receive tax refunds for the years 1996
through 1999 of about $8 million. In addition, if the Company is successful
it could receive substantial additional tax credits that could lower
federal income tax liability in future years.
The lawsuit, filed in the United States District Court for the Eastern
District of Virginia, relates to the initial valuation and deductibility of
the Company's assets when, along with other Blue Cross or Blue Shield
organizations, it became subject to federal income taxation in 1987. As
part of this change in tax status, Congress provided that if a Blue Cross
8
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or Blue Shield organization disposed of an asset that it had acquired while
tax-exempt, its taxable gain or loss would be computed by reference to the
asset's fair market value at the time the organization became subject to
tax. The Company is seeking deductions for losses incurred on the
termination of certain customer and provider contracts that were held by it
on January 1, 1987, based on the fair market value of the contracts on that
date.
The Internal Revenue Service asserts that the Company is not entitled to
deduct losses incurred on the termination of these contracts. The
resolution of the Company's refund claim is subject to uncertainties,
including whether the court will allow the deductions and, if so, the
amount of the deductions that will be allowed. While the Company believes
that its claim is meritorious, it cannot predict the ultimate outcome of
the claim.
On August 22, 2000, the American Chiropractic Association, the Virginia
Chiropractic Association and several chiropractors and their patients filed
suit against the Company and the Blue Cross and Blue Shield Association in
the United States District Court for the Western District of Virginia. The
Complaint alleged that the Company has discriminated against chiropractors
in its reimbursement policies and in its coverage for chiropractic services
in violation of the federal antitrust laws, the Racketeer Influenced and
Corrupt Organizations Act, and state law. Plaintiffs seek an injunction
against the alleged discriminatory practices and unspecified compensatory,
treble and punitive damages, as well as attorneys' fees and costs. The
Company does not believe that these claims have merit and intends to defend
the case vigorously.
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 and
results of operations of the Company.
8. MID-SOUTH EXIT OF HEALTH INSURANCE MARKET AND SALE OF COMPANY
During the third quarter of 2000, the Company charged $0.5 million against
the claim reserves for future losses and charged $0.2 million against the
accrual of certain other exit costs for payments related to the third
quarter 1999 Mid-South exit accrual, bringing the year-to-date charges
against the claim reserves for future losses and accrual of certain other
exit costs to $12.7 million and $1.3 million, respectively.
On June 1, 2000, the sale of all of the issued and outstanding shares of
Mid-South was completed. The purchase price approximated net book value.
The Company retained responsibility for certain medical claims and other
exit costs incurred prior to the sale on June 1, 2000. The stock purchase
agreement also included a purchase price adjustment provision tied to the
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financial performance of the Mid-South individual business for the period
from June 1, 2000 through December 31, 2002. The remaining accrual for
future losses on this business is expected to be sufficient to satisfy any
potential payments under this provision of the stock purchase agreement.
9. PURCHASE OF MINORITY INTEREST OF PRIORITY, INC.
On September 29, 2000, the Company's subsidiary, Priority, Inc., (Priority)
purchased and retired the 20% of its outstanding shares held by the
minority shareholder in accordance with the provisions of the Shareholders
Agreement for Priority between the Company and the minority shareholder for
a purchase price of approximately $2.7 million. The acquisition of the 20%
minority interest was accounted for as a purchase and goodwill arising from
the purchase amounted to $2.2 million. The goodwill will be amortized over
10 years, the remaining period of the existing goodwill associated with the
Company's original purchase of its 80% interest.
In conjunction with the purchase and retirement of the 20% outstanding
common stock, Priority also repaid and retired all outstanding debt and
accrued interest held by the minority shareholder totaling approximately
$4.2 million.
10
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10. SEGMENT INFORMATION
The following table presents information by reportable segment for the
three months and nine months ended September 30, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
Health Government All
Insurance Programs Investments Other Total
-----------------------------------------------------------------------------------------------------------------------
<S><C>
Three months ended September 30,
2000
Revenues from external customers $ 516,408 116,688 - 5,535 638,631
Investment income and net realized losses - - 27,204 - 27,204
Intersegment revenues 3,300 - - 2,098 5,398
Depreciation and amortization expense 3,443 60 6 523 4,032
Income (loss) before income taxes and
minority interest 39,234 (28) 27,204 1,572 67,982
1999
Revenues from external customers $ 463,584 108,374 - 5,446 577,404
Investment income and net realized losses - - 12,585 - 12,585
Intersegment revenues 2,881 - - 1,791 4,672
Depreciation and amortization expense 4,546 63 5 382 4,996
Income (loss) before income taxes and
minority interest (59,867) (1,283) 12,585 827 (47,738)
Nine months ended September 30,
2000
Revenues from external customers $ 1,501,025 344,561 - 15,863 1,861,449
Investment income and net realized losses - - 77,775 - 77,775
Intersegment revenues 9,903 - - 5,766 15,669
Depreciation and amortization expense 10,188 181 16 1,286 11,671
Income (loss) before income taxes and
minority interest 91,954 1,290 77,775 2,878 173,897
1999
Revenues from external customers $ 1,350,703 322,666 - 16,307 1,689,676
Investment income and net realized losses - - 43,878 - 43,878
Intersegment revenues 8,893 - - 4,772 13,665
Depreciation and amortization expense 14,080 198 14 1,094 15,386
Income (loss) before income taxes and
minority interest (27,129) (1,196) 43,878 1,691 17,244
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
11
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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 nine months ended September 30, 2000
and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S><C>
Revenues
Reportable segments
External revenues $ 638,631 577,404 1,861,449 1,689,676
Investment revenues 27,204 12,585 77,775 43,878
Intersegment revenues 5,398 4,672 15,669 13,665
Other corporate revenues 644 418 1,656 1,255
Elimination of intersegment revenues (5,398) (4,672) (15,669) (13,665)
-----------------------------------------------------------------------------------------------------------------
Total revenues $ 666,479 590,407 1,940,880 1,734,809
=================================================================================================================
Profit or Loss
Reportable segments $ 67,982 (47,738) 173,897 17,244
Corporate expenses not allocated to segments (10,772) (7,642) (26,310) (23,313)
Unallocated amount - interest expense (4,325) (2,281) (12,393) (4,658)
-----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and minority interest $ 52,885 (57,661) 135,194 (10,727)
=================================================================================================================
Depreciation and amortization expense
Reportable segments $ 4,032 4,996 11,671 15,386
Not allocated to segments (126) (286) (531) (747)
-----------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense $ 3,906 4,710 11,139 14,639
=================================================================================================================
</TABLE>
12
<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 discontinued 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 discontinued its role as the primary provider of
computer processing capabilities for Medicare Part A claims processing to
certain other Blue Cross and Blue Shield organizations during November 1999. As
an administrative agent for Medicare, the Company allocated operating expenses
to determine reimbursement due for services rendered in accordance with the
contract. Medicare claims processed were not included in the consolidated
statements of operations and the reimbursement of allocated operating expenses
was 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 disease management programs,
third-party administration for medical and workers' compensation, health
promotion and similar products, is 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.
13
<PAGE>
ENROLLMENT
The following table sets forth the Company's enrollment data by network:
<TABLE>
<CAPTION>
As of September 30,
----------------------
2000 1999
-----------------------------------------------------------------------
<S><C>
Health Insurance
Commercial
HMO 268,112 267,486
PPO 467,529 355,931
PAR 140,008 155,933
Medicaid / Medicare HMO 55,054 51,513
Medicare supplement 119,773 119,074
-----------------------------------------------------------------------
Total commercial excluding Mid-South 1,050,476 949,937
Self-funded 715,052 672,785
Processed for other Blue Cross and Blue
Shield organizations (ASO) 5,314 4,663
-----------------------------------------------------------------------
Total health insurance excluding Mid-South 1,770,842 1,627,385
-----------------------------------------------------------------------
Government
Federal Employee Program (PPO) 221,196 216,347
-----------------------------------------------------------------------
Total government 221,196 216,347
-----------------------------------------------------------------------
Total excluding Mid-South 1,992,038 1,843,732
Mid-South, commercial - 93,341
Mid-South, ASO - 21,475
-----------------------------------------------------------------------
Total 1,992,038 1,958,548
=======================================================================
</TABLE>
PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM
The following table sets forth the Company's premium and premium equivalents by
network (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
<S><C>
Health Insurance
Commercial
HMO $ 104,882 100,650 325,946 294,132
PPO 206,417 140,663 573,090 393,416
PAR 68,050 71,241 207,316 214,184
Medicaid / Medicare HMO 32,138 29,771 87,341 75,788
Medicare supplement 62,151 57,580 184,633 171,995
------------------------------------------------------------------------------------------------------
Total commercial excluding Mid-South 473,638 399,905 1,378,326 1,149,515
Self-funded 354,211 305,069 1,035,419 900,865
------------------------------------------------------------------------------------------------------
Total health insurance excluding Mid-South 827,849 704,974 2,413,745 2,050,380
Government
Federal Employee Program (PPO) 116,688 108,374 344,561 322,666
------------------------------------------------------------------------------------------------------
Total government 116,688 108,374 344,561 322,666
------------------------------------------------------------------------------------------------------
Total excluding Mid-South 944,537 813,348 2,758,306 2,373,046
Mid-South, commercial - 29,174 - 97,124
------------------------------------------------------------------------------------------------------
Total $ 944,537 842,522 2,758,306 2,470,170
======================================================================================================
</TABLE>
14
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Premium and fee revenues increased 10.7% to $633.1 million in the third quarter
of 2000 from $571.8 in the third quarter of 1999. The $61.3 million increase is
due to a combination of enrollment growth and rate increases in the Company's
health insurance segment's HMO and PPO networks, offset by expected declines in
the segment's PAR network enrollment and the third quarter 1999 Mid-South market
exit. Commercial revenue from the Virginia HMO, PPO and PAR networks increased
18.4% to $473.6 million in the third quarter of 2000 from $399.9 million in the
third quarter of 1999, driven by a 10.6% increase in members. The Mid-South
market exit resulted in a $29.2 million decrease in commercial revenue. Overall,
premium revenues on a per member per month basis for the Company's commercial
business increased 8.7% to $151.53 for the third quarter of 2000 from $139.40
for the third quarter of 1999. Self-funded margins increased $8.4 million or
24.4% due to a 17.0% increase in margin per member per month. The government
segment's FEP revenues increased 7.7% to $116.7 million from $108.4 million in
the third quarter of last year. The increase is due to increased medical costs
to be reimbursed by OPM and a 2.2% increase in enrollment.
Total enrollment increased to 1,992,038 as of September 30, 2000 from 1,958,548
as of September 30, 1999. The increase of 33,490 was a result of a 28,641
increase in the Company's health insurance segment, reflecting an increase of
143,457 members in the Virginia enrollment offset by a decrease of 114,816
members due to the Mid-South market exit, and 4,849 increase in the government
segment. The Virginia enrollment increase was the result of a 100,539 increase
in commercial enrollment, a 10.6% increase, and a 42,267 increase in self-funded
enrollment. Enrollment in the HMO network increased by 1.3% over the prior year,
reflecting the network's decision to not rebid the underperforming HMO contract
with the Commonwealth of Virginia involving 23,000 members, and accounts for
30.8% of the total commercial enrollment. Enrollment in the PPO network as of
September 30, 2000 increased 31.4% over September 30, 1999 and accounts for
44.5% of the Company's commercial enrollment. Growth in PPO was offset by an
expected decline of 10.2% in the Company's PAR network as members migrate into
more tightly managed networks. The PAR network enrollment represents 13.3% of
the Company's commercial enrollment. Self-funded enrollment increased 6.3% as of
September 30, 2000.
Investment income increased 16.5% to $29.7 million in the third quarter of 2000
from $25.5 million in the third quarter of 1999. Net realized losses were $2.5
million in the third quarter of 2000 as compared to $12.9 million in the third
quarter of 1999. The increase in investment income is due to growth in
investment assets caused by positive operating cash flow, favorable total return
on investments and from the investment of incremental long-term debt. The
decrease in net realized losses for the third quarter of 2000 is due to more
favorable market conditions for fixed income securities this quarter as compared
to the same quarter last year.
Medical costs increased 3.3% to $488.1 million in the third quarter of 2000 from
$472.3 million in the third quarter of 1999. The $15.8 million increase is a
result of growth in the Virginia health insurance segment's commercial
enrollment offset by Mid-South's market exit in the third quarter of 1999,
expected levels of medical cost inflation and an increase in the government
segment's FEP medical costs reimbursed by OPM. The medical cost per member per
15
<PAGE>
month for the Company's commercial business, excluding the MSI exit charge of
$20.6 million in the third quarter of 1999, increased 6.5% to $120.37 in the
third quarter of 2000 from $113.08 in the third quarter of 1999. Combined with
an 8.7% increase in commercial premium revenues per member per month, the loss
ratio on commercial business, excluding the MSI exit charge, decreased to 79.4%
in the third quarter of 2000 from 81.1% in the third quarter of 1999. As a
result of medical cost management initiatives, cost and utilization trends have
been maintained at levels consistent with current pricing and margin objectives.
The implementation of the "three-tier" drug benefit co-pay program continues to
provide benefits as the pharmacy cost trend has remained constant at 7.8% for
the twelve months ended September 30, 2000 compared to 7.7% for the twelve
months ended September 30, 1999. The Company has negotiated a new pharmacy
contract to be effective January 1, 2001 that will improve the existing
contractual arrangement. Inpatient days continue to trend downward while being
offset by increased outpatient utilization producing anticipated overall medical
cost trends that are incorporated within the pricing and rate setting policies.
The Company continues to take an active role in working with physicians through
peer-to-peer communication and implementation of national medical management
guidelines.
Selling, general and administrative expenses (SG&A) decreased to $121.2 million
in the third quarter of 2000 from $173.5 million in the third quarter of 1999.
This decrease is attributed to the Mid-South exit charge of $59.3 million in the
third quarter of 1999. Excluding this charge, SG&A increased 6.1% or $7.0
million in the third quarter of 2000 compared to the third quarter of 1999. This
increase is attributed to the incremental commissions and operating costs
resulting from the enrollment increase and investments in technology. The SG&A
ratio, excluding the Mid-South exit charge in the third quarter of 1999,
decreased to 12.8% in the third quarter of 2000 from 13.5% in the third quarter
of 1999. The decrease in the SG&A ratio, due to the increased enrollment and
revenue, provides the opportunity to leverage the increased revenue with
long-range investments including e-commerce technology, systems infrastructure
and customer service enhancements. These investments, while impacting the SG&A
ratio, will contribute operational improvements and efficiencies. The Company
expects the SG&A ratio to increase throughout the remainder of the year as these
investments occur.
Interest expense in the third quarter of 2000 was $4.3 million compared to $2.3
million in the third quarter of 1999. The increase is primarily the result of a
net increase in long-term debt of approximately $160 million beginning in the
third quarter of 1999 and the issuance of an additional $30 million of
commercial paper in the third quarter of 2000.
Income before income taxes and minority interest increased $110.5 million to
$52.9 million in the third quarter of 2000 from a loss of $57.7 million in the
third quarter of 1999. The increase is a result of a $98.0 million increase in
operating income (defined as premium and fee revenues and other revenues less
medical and other benefit costs and selling, general and administrative
expenses), higher investment income of $4.2 million, decreased net realized
losses of $10.4 million offset by higher interest expense of $2.0 million.
Operating income increased due to growth in the health insurance segment and the
$79.9 million Mid-South exit charge incurred in the third quarter of 1999.
The effective tax rate on income before income taxes and minority interest for
the third quarter of 2000 and 1999 was 33.2% and 36.3%, 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.
16
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Premium and fee revenues increased 10.3% to $1.85 billion in the first nine
months of 2000 from $1.67 billion in the first nine months of 1999. The $172.8
million increase is due to a combination of enrollment growth and rate increases
in the Company's health insurance segment's HMO and PPO networks, offset by
expected declines in the segment's PAR network enrollment and the third quarter
1999 Mid-South market exit. Commercial revenue from the Virginia HMO, PPO and
PAR networks increased 19.9% to $1.38 billion in the first nine months of 2000
from $1.15 billion in the first nine months of 1999, driven by a 10.6% increase
in members. The Mid-South market exit resulted in a $97.1 million decrease in
commercial revenue. Overall, premium revenues on a per member per month basis
for the Company's commercial business increased 8.6% to $148.94 for the first
nine months of 2000 from $137.18 for the first nine months of 1999. Self-funded
margins increased $19.2 million or 18.6% due to a 14.0% increase in margin per
member per month. The government segment's FEP revenues increased 6.8% to $344.6
million from $322.7 million in the first nine months of last year. The increase
is due to increased medical costs to be reimbursed by OPM and a 2.2% increase in
enrollment.
Investment income increased 20.9% to $85.7 million in the first nine months of
2000 from $70.9 million in the first nine months of 1999. Net realized losses
decreased to $7.9 million in the first nine months of 2000 from $27.0 million in
the first nine months of 1999. The increase in investment income is due to
growth in investment assets caused by positive operating cash flow, favorable
total return on investments and from the investment of incremental long-term
debt. The decline in net realized losses for the first nine months of 2000 is
due to more favorable market conditions for fixed income securities.
Medical costs increased 7.2% to $1.45 billion in the first nine months of 2000
from $1.35 billion in the first nine months of 1999. The $97.5 million increase
is a result of growth in the Virginia health insurance segment's commercial
enrollment offset by Mid-South's market exit in the third quarter of 1999,
expected levels of medical cost inflation 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, excluding the Mid-South exit charge
of $20.6 million, increased 7.5% to $120.63 in the first nine months of 2000
from $112.17 in the first nine months of 1999. Combined with an 8.6% increase in
commercial premium revenues per member per month, the loss ratio on commercial
business, excluding the Mid-South charge, decreased to 81.0% in the first nine
months of 2000 from 81.8% in the first nine months of 1999. As a result of
medical cost management initiatives, cost and utilization trends have been
maintained at levels consistent with current pricing and margin objectives. The
implementation of the "three-tier" drug benefit co-pay program continues to
provide benefits as the pharmacy cost trend has remained constant at 7.8% for
the twelve months ended September 30, 2000 compared to 7.7% for the twelve
months ended September 30, 1999. The Company has negotiated a new pharmacy
contract to be effective January 1, 2001 that will improve the existing
contractual arrangement. Inpatient days continue to trend downward while being
offset by increased outpatient utilization producing anticipated overall medical
cost trends that are incorporated within the pricing and rate setting policies.
The Company continues to take an active role in working with physicians through
peer-to-peer communication and implementation of national medical management
guidelines.
17
<PAGE>
SG&A expenses decreased to $347.7 million in the first nine months of 2000 from
$392.8 million in the first nine months of 1999. This decrease is attributed to
the Mid-South exit charge of $59.3 million in the third quarter of 1999.
Excluding this exit charge, SG&A increased 4.3% or $14.2 million in the first
nine months of 2000 compared to the first nine months of 1999. This increase is
attributed to the incremental commissions and operations costs resulting from
the enrollment increase and investments in technology. The SG&A ratio, excluding
the 1999 Mid-South charge, decreased to 12.5% in the first nine months of 2000
from 13.4% in the first nine months of 1999. The decrease in the SG&A ratio, due
to the increased enrollment and revenue, provides the opportunity to leverage
the increased revenue with long-range investments including e-commerce
technology, systems infrastructure and customer service enhancements. These
investments, while impacting the SG&A ratio, will contribute operational
improvements and efficiencies. The Company expects the SG&A ratio to increase
throughout the remainder of the year as these investments occur.
Interest expense in the first nine months of 2000 was $12.4 million compared to
$4.7 million in the first nine months of 1999. The increase is primarily the
result of a net increase in long-term debt of approximately $160 million
beginning in the third quarter of 1999 and the issuance of an additional $30
million of commercial paper in the third quarter of 2000.
Income before income taxes and minority interest increased $145.9 million to
$135.2 million in the first nine months of 2000 from a loss of $10.7 million in
the first nine months of 1999. The increase is a result of decreased net
realized losses of $19.1 million, higher investment income of $14.8 million and
a $119.8 million increase in operating income (defined as premium and fee
revenues and other revenues less medical and other benefit costs and selling,
general and administrative expenses), offset by higher interest expense of $7.7
million. Operating income increased due to growth in the health insurance
segment and the $79.9 million Mid-South exit charge incurred in the third
quarter of 1999.
The effective tax rate on income before income taxes and minority interest for
the first nine months of 2000 and 1999 was 30.5% and 50.5%, 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 and a $2.7 million tax
benefit recorded during the second quarter of 2000 related to the sale of
Mid-South.
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
18
<PAGE>
rating of "A" as of September 30, 2000. The portfolio had an average contractual
maturity of 8.35 years as of September 30, 2000. 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 September 30, 2000, the Company's equity exposure, comprised of
direct equity as well as equity-indexed investments, was 14% of the total
portfolio, as compared to 11% as of December 31, 1999.
The Company has a $300 million revolving credit agreement with a syndicate of
banks, which expires February 2002. In conjunction with the issuance of
commercial paper notes during the first quarter of 2000, the Company repaid the
outstanding balance of $245 million during the first quarter of 2000. There were
no amounts borrowed under this agreement as of and for the three months ended
September 30, 2000.
In March 2000, the Company commenced a private placement commercial paper
program providing for the issuance of up to $300 million in aggregate maturity
value of commercial paper notes. As of September 30, 2000, outstanding notes
under the commercial paper program totaled approximately $275.2 million with an
average maturity of 18 days. The commercial paper is backed by the revolving
credit agreement. The commercial paper notes have been classified as long-term
debt in the consolidated statements of financial condition based on the
Company's ability and intent to maintain borrowings of at least this amount for
more than one year.
The Company commenced its previously announced second stock repurchase program
in February 2000 following completion of its first stock repurchase program.
During the third quarter of 2000, the Company purchased and retired 75,000
shares of its common stock at a cost of approximately $3.7 million bringing the
total shares purchased during 2000 to 630,906 at a cost of approximately $21
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.
19
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. The Statement requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company does not expect SFAS No. 133 to have a material impact
on its financial position, results of operations or cash flows.
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."
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. No
material changes have occurred in the Company's exposure to financial market
risks since December 31, 1999. A discussion of the Company's market risk is
incorporated by reference in Part II, Item 7A of the Company's Annual Report on
Form 10-K.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) On June 9, 2000, the Company's subsidiary, Trigon Insurance Company, filed
a lawsuit against the federal government for the recovery of federal income
tax overpayments for the years 1989 through 1995. If successful, the
Company expects to recover approximately $50 million in cash refunds plus
interest of about $30 million and to receive tax refunds for the years 1996
through 1999 of about $8 million. In addition, if the Company is successful
it could receive substantial additional tax credits that could lower
federal income tax liability in future years.
The lawsuit, filed in the United States District Court for the Eastern
District of Virginia, relates to the initial valuation and deductibility of
the Company's assets when, along with other Blue Cross or Blue Shield
organizations, it became subject to federal income taxation in 1987. As
part of this change in tax status, Congress provided that if a Blue Cross
or Blue Shield organization disposed of an asset that it had acquired while
20
<PAGE>
tax-exempt, its taxable gain or loss would be computed by reference to the
asset's fair market value at the time the organization became subject to
tax. The Company is seeking deductions for losses incurred on the
termination of certain customer and provider contracts that were held by it
on January 1, 1987, based on the fair market value of the contracts on that
date.
The Internal Revenue Service asserts that the Company is not entitled to
deduct losses incurred on the termination of these contracts. The
resolution of the Company's refund claim is subject to uncertainties,
including whether the court will allow the deductions and, if so, the
amount of the deductions that will be allowed. While the Company believes
that its claim is meritorious, it cannot predict the ultimate outcome of
the claim.
On August 22, 2000, the American Chiropractic Association, the Virginia
Chiropractic Association and several chiropractors and their patients filed
suit against the Company and the Blue Cross and Blue Shield Association in
the United States District Court for the Western District of Virginia. The
Complaint alleged that the Company has discriminated against chiropractors
in its reimbursement policies and in its coverage for chiropractic services
in violation of the federal antitrust laws, the Racketeer Influenced and
Corrupt Organizations Act, and state law. Plaintiffs seek an injunction
against the alleged discriminatory practices and unspecified compensatory,
treble and punitive damages, as well as attorneys' fees and costs. The
Company does not believe that these claims have merit and intends to defend
the case vigorously.
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 and
results of operations of the Company.
21
<PAGE>
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 (losses) for the three
months and nine months ended September 30, 2000. 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.
(b) Reports on Form 8-K:
None filed during the three months ended September 30, 2000.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIGON HEALTHCARE, INC.
Registrant
Dated: November 10, 2000 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.
