UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 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 May 11, 2000
------------------- ---------------------------
Class A Common Stock, $0.01 par value 37,663,024 shares
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TRIGON HEALTHCARE, INC. and SUBSIDIARIES
FIRST QUARTER 2000 FORM 10-Q
TABLE OF CONTENTS
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 1
Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and 1999 2
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income for the Three Months Ended March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES
</TABLE>
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
(Unaudited)
March 31, December
2000 1999
-------------- --------------
Assets
<S> <C> <C>
Current assets
Cash $ 6,243 2,530
Investment securities, at estimated fair value 1,764,896 1,738,515
Premiums and other receivables 414,909 397,499
Deferred income taxes 19,319 16,827
Other 16,602 14,099
-------------- --------------
Total current assets 2,221,969 2,169,470
Property and equipment, net 53,559 51,238
Deferred income taxes 53,556 59,499
Goodwill and other intangibles, net 14,210 14,561
Restricted investments, at estimated fair value 9,812 9,887
Other assets 8,999 9,460
-------------- --------------
Total assets $ 2,362,105 2,314,115
============== ==============
Liabilities and Shareholders' Equity
Current liabilities
Medical and other benefits payable $ 558,362 544,120
Unearned premiums 132,949 120,290
Accounts payable and accrued expenses 65,106 81,867
Deferred income taxes - -
Other liabilities 293,662 257,231
-------------- --------------
Total current liabilities 1,050,079 1,003,508
Obligations for employee benefits, noncurrent 43,583 49,287
Medical and other benefits payable, noncurrent 67,967 65,929
Long-term debt 248,264 248,039
Minority interest in subsidiary 10,747 10,395
-------------- --------------
Total liabilities 1,420,640 1,377,158
-------------- --------------
Shareholders' equity
Common stock 377 382
Capital in excess of par 813,084 816,517
Retained earnings 127,405 112,896
Unearned compensation (3,646) (1,926)
Accumulated other comprehensive income (note 6 ) 4,245 9,088
-------------- --------------
Total shareholders' equity 941,465 936,957
Commitments and contingencies (note 7 )
-------------- --------------
Total liabilities and shareholders' equity $ 2,362,105 2,314,115
============== ==============
</TABLE>
See notes to consolidated financial statements
1
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<TABLE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended March 31, 2000 and 1999
(in thousands, except per share data)
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Revenues
Premium and fee revenues
Commercial $ 442,286 400,627
Federal Employee Program 111,250 103,967
Amounts attributable to self-funded arrangements 334,087 283,394
Less: amounts attributable to claims under
self-funded arrangements (293,956) (249,850)
--------------- --------------
593,667 538,138
Investment income 27,983 21,960
Net realized gains (losses) 1,889 (9,918)
Other revenues 5,623 6,330
--------------- --------------
Total revenues 629,162 556,510
Expenses
Medical and other benefit costs
Commercial 365,079 329,944
Federal Employee Program 106,877 100,086
--------------- --------------
471,956 430,030
Selling, general and administrative expenses 110,509 106,318
Interest expense 3,972 1,200
--------------- --------------
Total expenses 586,437 537,548
--------------- --------------
Income before income taxes and minority interest 42,725 18,962
Income tax expense 13,998 6,348
--------------- --------------
Income before minority interest 28,727 12,614
Minority interest 509 535
--------------- --------------
Net income $ 28,218 12,079
============== ==============
Earnings per share (note 5)
Basic net income $ 0.74 0.29
============== ==============
Diluted net income $ 0.73 0.28
============== ==============
Weighted average number of common shares outstanding
Basic 37,939 42,289
============== ==============
Diluted 38,520 42,911
============== ==============
</TABLE>
See notes to consolidated financial statements
2
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<TABLE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (UNAUDITED)
For the three months ended March 31, 2000 and 1999
(in thousands)
<CAPTION>
Three Months Ended March 31,
--------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
Balance at January 1, $ 936,957 1,071,224
Net income 28,218 12,079
Net unrealized losses on investment
securities, net of income taxes (4,843) (12,292)
-------------- ---------------
Comprehensive income (loss) 23,375 (213)
-------------- ---------------
Purchase and reissuance of common stock under stock option
and other employee benefit plans, including tax benefits
and net of amortization (2,067) (1,035)
Change in common stock held by consolidated grantor trusts (402) (420)
Purchase and retirement of common stock (16,398) -
-------------- ---------------
Balance at March 31 $ 941,465 1,069,556
============== ===============
</TABLE>
See notes to consolidated financial statements
3
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<TABLE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended March 31, 2000 and 1999
(in thousands)
<CAPTION>
Three Months Ended March 31,
--------------------------------
2000 1999
------------- ------------
<S> <C> <C>
Net income $ 28,218 12,079
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 3,615 5,839
Amortization of unearned compensation 1,269 165
Accretion of discounts and amortization of premiums, net (3,940) (3,709)
Change in allowance for doubtful accounts receivable 80 1,573
(Increase) decrease in premiums and other receivables (2,823) 9,032
Increase in other assets (2,196) (2,836)
Increase in medical and other benefits payable 16,280 24,072
Increase in unearned premiums 12,659 16,189
Decrease in accounts payable and accrued expenses (16,761) (5,235)
Increase (decrease) in other liabilities (10,301) 1,789
Change in deferred income taxes 6,139 (260)
Increase in minority interest 1,032 535
Increase (decrease) in obligations for employee benefits (5,704) 4,755
Loss on disposal of property and equipment and other assets 18 -
Realized investment (gains) losses, net (1,889) 9,918
------------- ------------
Net cash provided by operating activities 25,696 73,906
------------- ------------
Cash flows from investing activities
Proceeds from sale of property and equipment and other assets 5 37
Capital expenditures (5,969) (4,460)
Investment securities purchased (1,207,221) (1,060,398)
Proceeds from investment securities sold 1,049,342 758,855
Maturities of fixed income securities 151,994 237,139
------------- ------------
Net cash used in investing activities (11,849) (68,827)
------------- ------------
Cash flows from financing activities
Payments on long-term debt (245,000) -
Issuance of commercial paper notes 245,225 -
Purchase and reissuance of common stock under employee
benefit and stock option plans (3,416) (1,200)
Common stock purchased by consolidated grantor trusts (402) (420)
Purchase and retirement of common stock (16,398) -
Change in outstanding checks in excess of bank balance 9,857 (5,413)
------------- ------------
Net cash used in financing activities (10,134) (7,033)
------------- ------------
Net increase (decrease) in cash 3,713 (1,954)
Cash - beginning of period 2,530 7,500
------------- ------------
Cash - end of period $ 6,243 5,546
============= ============
</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, necessary for a fair presentation of such
consolidated financial statements have been included. The results of
operations for the three months ended March 31, 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 during the first quarter of 2000, leaving no amounts
outstanding under this agreement as of March 31, 2000. The weighted-average
interest rate on the outstanding borrowings during the three months ended
March 31, 2000 and 1999 was 6.21% and 5.32%, 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 were 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. As of
March 31, 2000, outstanding notes under the commercial paper program
totaled approximately $245.2 million with an average maturity of 18 days.
The weighted-average discount yield on the outstanding commercial paper
notes was 6.17% as of March 31, 2000. The commercial paper is backed by the
5
<PAGE>
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 before income taxes and minority interest
for the three months ended March 31, 2000 and 1999 was 32.8% and 33.5%,
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 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. 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 is pursuing another claim for deductions over a 10-year period. If
the Company is successful on this claim, the amount recovered will be
substantial and material in relation to the Company's financial condition
and results of operations. Favorable resolution of the claims is subject to
various uncertainties, including whether the courts will recognize the
deductions and how long it will take to resolve the claims. 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 after completing its first stock repurchase
program during the first quarter of 2000. During the first quarter of 2000,
the Company purchased 536,906 shares of its common stock at a cost of
approximately $16.4 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
158,811 restricted shares were outstanding as of March 31, 2000.
Amortization for the three months ended March 31, 2000 and 1999 was $1.3
million and $165,000, respectively.
6
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<TABLE>
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 ended March 31, 2000 and 1999 (in
thousands, except per share data):
<CAPTION>
Three Months Ended March 31,
----------------------------------
2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Numerator for basic and diluted earnings per share - net income $ 28,218 12,079
------------------------------------------------------------------------------------------------------------
Denominator
Denominator for basic earnings per share - weighted average shares 37,939 42,289
Effect of dilutive securities - employee and director stock
options and nonvested restricted stock awards 581 622
------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share 38,520 42,911
============================================================================================================
Basic net income per share $ 0.74 0.29
============================================================================================================
Diluted net income per share $ 0.73 0.28
============================================================================================================
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 March 31, 2000 and 1999 were as follows
(in thousands):
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------------------
Net unrealized losses on investment securities, net of income taxes
Net unrealized holding losses arising during the period, net of
income tax benefits of $1,947 and $10,089 $ (3,614) (18,739)
Less: reclassification adjustment for net gains (losses) included
in net income, net of income taxes (benefit) of $660 and $(3,471) (1,229) 6,447
---------------------------------------------------------------------------------------------------------
Net unrealized losses on investment securities, net of income taxes $ (4,843) (12,292)
=========================================================================================================
The components of accumulated other comprehensive income as of March 31,
2000 and December 31, 1999 were as follows (in thousands):
<CAPTION>
March 31, December 31,
2000 1999
--------------------------------------------------------------------------------------------------------
Net unrealized gain on investment securities, net of deferred income
taxes of $2,455 and $5,063 $ 4,560 9,403
Minimum pension liability, net of deferred income taxes of $169 (315) (315)
--------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income $ 4,245 9,088
========================================================================================================
</TABLE>
7
<PAGE>
7. LITIGATION
The Company and certain of its subsidiaries are involved in various 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
During the first quarter of 2000, the Company charged $5.7 million against
the claim reserves for future losses and charged $0.7 million against the
accrual of certain other exit costs for payments related to the Mid-South
exit accrual. No other adjustments were made to these accruals in the first
quarter of 2000.
9. SEGMENT INFORMATION
The following table presents information by reportable segment for the
three months ended March 31, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Health Government All
Insurance Programs Investments Other Total
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Revenues from external customers $ 482,417 111,250 - 5,205 598,872
Investment income and net realized gains - - 29,872 - 29,872
Intersegment revenues 3,080 - - 1,767 4,847
Depreciation and amortization expense 3,404 59 5 368 3,836
Income (loss) before income taxes and
minority interest 24,088 (347) 29,872 886 54,499
1999
Revenues from external customers $ 434,435 103,967 - 5,648 544,050
Investment income and net realized - - 12,042 - 12,042
losses
Intersegment revenues 2,791 - - 1,454 4,245
Depreciation and amortization expense 5,686 68 4 343 6,101
Income before income taxes and minority
interest 14,709 707 12,042 657 28,115
-------------------------------------------------------------------------------------------------------------------
</TABLE>
8
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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 ended March 31, 2000 and 1999 is as follows
(in thousands):
2000 1999
---------------------------------------------------------------------------
Revenues
Reportable segments
External revenues $ 598,872 544,050
Investment revenues 29,872 12,042
Intersegment revenues 4,847 4,245
Other corporate revenues 418 418
Elimination of intersegment revenues (4,847) (4,245)
---------------------------------------------------------------------------
Total revenues $ 629,162 556,510
===========================================================================
Profit or Loss
Reportable segments $ 54,499 28,115
Corporate expenses not allocated to segments (7,802) (7,953)
Unallocated amount - interest expense (3,972) (1,200)
---------------------------------------------------------------------------
Income before income taxes and minority interest $ 42,725 18,962
===========================================================================
Depreciation and amortization expense
Reportable segments $ 3,836 6,101
Not allocated to segments (221) (262)
---------------------------------------------------------------------------
Depreciation and amortization expense $ 3,615 5,839
===========================================================================
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
9
<PAGE>
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 plans 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.
ENROLLMENT
The following table sets forth the Company's enrollment data by network:
As of March 31,
------------------------------
2000 1999
- ------------------------------------------------------------- ----------------
Health Insurance
Commercial
HMO 278,911 253,992
PPO 420,030 317,239
PAR 149,192 160,024
Medicaid / Medicare HMO 49,669 32,600
Medicare supplement 120,091 120,204
- ------------------------------------------------------------- ----------------
Total commercial excluding Mid-South 1,017,893 884,059
Self-funded 684,822 664,950
Processed for other Blue Cross and Blue
Shield Plans (ASO) 5,162 4,659
- ------------------------------------------------------------- ----------------
Total health insurance excluding Mid-South 1,707,877 1,553,668
- ------------------------------------------------------------- ----------------
Government
Federal Employee Program (PPO) 222,219 217,101
- ------------------------------------------------------------- ----------------
Total government 222,219 217,101
- ------------------------------------------------------------- ----------------
Total excluding Mid-South 1,930,096 1,770,769
Mid-South, commercial - 109,977
Mid-South, ASO - 22,077
- ------------------------------------------------------------- ----------------
Total 1,930,096 1,902,823
============================================================= ================
10
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PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM
The following table sets forth the Company's premium and premium equivalents by
network (in thousands):
Quarter ended March 31,
- -----------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------- ---------------
Health Insurance
Commercial
HMO $ 108,572 95,073
PPO 176,787 123,756
PAR 70,062 71,665
Medicaid / Medicare HMO 26,155 18,100
Medicare supplement 60,710 57,018
- ------------------------------------------------------------- ---------------
Total commercial excluding Mid-South 442,286 365,612
Self-funded 334,087 283,394
- ------------------------------------------------------------- ---------------
Total health insurance excluding Mid-South 776,373 649,006
Government
Federal Employee Program (PPO) 111,250 103,967
- ------------------------------------------------------------- ---------------
Total government 111,250 103,967
- ------------------------------------------------------------- ---------------
Total excluding Mid-South 887,623 752,973
Mid-South, commercial - 35,015
- ------------------------------------------------------------- ---------------
Total $ 887,623 787,988
============================================================= ===============
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Premium and fee revenues increased 10.3% to $593.7 million in the first quarter
of 2000 from $538.1 in the first quarter of 1999. The $55.6 million increase is
due to a combination of rate increases and enrollment growth 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
21.0% to $442.3 million in the first quarter of 2000 from $365.6 million in the
first quarter of 1999. This increase is attributed to a 14.6% increase in member
months and a 5.6% increase in revenue per member. The Mid-South market exit
resulted in a $35.0 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 $146.48 for the first quarter of 2000 from $134.88 for the
first quarter of 1999. Self-funded margins increased $6.6 million or 19.6% due
to a 16.8% increase in margin per member per month. The government segment's FEP
revenues increased 7.0% to $111.3 million from $104.0 million in the first
quarter of last year. The increase is due to increased medical costs to be
reimbursed by OPM and a 2.4% increase in enrollment.
Total enrollment increased to 1,930,096 as of March 31, 2000 from 1,902,823 as
of March 31, 1999. The increase was a result of a 22,155 increase in the
Company's health insurance segment, reflecting an increase of 154,209 members in
the Virginia enrollment offset by a decrease of 132,054 members due to
Mid-South, and a 5,118 increase in the government segment. The Virginia
enrollment increase was the result of a 133,834 increase in commercial
enrollment, a 15.1% increase, and a 20,375 increase in self-funded enrollment.
11
<PAGE>
Enrollment in the HMO network increased by 14.7% over the prior year, aided by
the one-time increase of about 17,000 Medicaid members announced in the second
quarter of 1999 and accounts for 32.3% of the total commercial enrollment.
Enrollment in the PPO network as of March 31, 2000 increased 32.4% over March
31, 1999 and accounts for 41.3% of the Company's commercial enrollment. Growth
in PPO was offset by an expected decline of 6.8% in the Company's PAR network as
members migrate into more tightly managed networks. The PAR network enrollment
represents 14.7% of the Company's commercial enrollment. Self-funded enrollment
increased 3.0% as of March 31,2000.
Investment income increased 27.4% to $28.0 million in the first quarter of 2000
from $22.0 million in the first quarter of 1999. Net realized gains and losses
increased to a gain of $1.9 million in the first quarter of 2000 from a loss of
$9.9 million in the first quarter of 1999. The increase in investment income is
due to growth in investment assets, an increase in holdings of fixed income
instruments and a decrease in holdings of equity instruments. The increase in
net realized gains for the first quarter of 2000 is due to normal portfolio
turnover.
Medical costs increased 9.7% to $472.0 million in the first quarter of 2000 from
$430.0 million in the first quarter of 1999. The $41.9 million increase is a
result of growth in the Virginia health insurance segment's commercial
enrollment partially 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 increased 8.9% to $120.91
in the first quarter of 2000 from $111.08 in the first quarter of 1999. Combined
with an 8.6% increase in commercial premium revenues per member per month, the
loss ratio on commercial business increased marginally to 82.5% in the first
quarter of 2000 from 82.4% in the first 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 has reduced the pharmacy cost
trend to 5.7% for the twelve-month period ended March 31, 2000 compared to 11.3%
for the twelve-month period ended March 31, 1999. The Company is currently
negotiating a new pharmacy contract to be effective January 1, 2001 with the
goal of improving the current contractual arrangement. Outpatient cost per
member increased 3.5% for the twelve-month period ended March 31, 2000. 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) increased by 3.9% to $110.5
million in the first quarter of 2000 from $106.3 million in the first quarter of
1999. This increase is attributed to the incremental commissions and operations
costs resulting from the enrollment increase offset by the reduction of expenses
due to Mid-South. The SG&A ratio decreased to 12.4% in the first quarter of 2000
from 13.4% in the first 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.
12
<PAGE>
Interest expense in the first quarter of 2000 was $4.0 million compared to $1.2
million in the first quarter of 1999. The increase is primarily the result of an
increase in long-term debt of approximately $165 million between the first
quarter of 1999 and the same period of 2000.
Income before income taxes and minority interest increased $23.7 million to
$42.7 million in the first quarter of 2000 from $19.0 million in the first
quarter of 1999. The increase is a result of increased net realized gains of
$11.8 million, higher investment income of $6.0 million and a $8.7 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 $2.8 million.
Operating income increased primarily due to growth in the health insurance
segment.
The effective tax rate on income before income taxes and minority interest for
the first quarters of 2000 and 1999 was 32.8% and 33.5%, 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.
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 March 31, 2000. The portfolio had an average contractual
maturity of 7.4 years as of March 31, 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 March 31, 2000, the Company's equity exposure, comprised of
direct equity as well as equity-indexed investments, was 12% of the total
portfolio, as compared to 14% 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, leaving no
amounts outstanding as of March 31, 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 March 31, 2000, outstanding notes under
13
<PAGE>
the commercial paper program totaled approximately $245.2 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 after completing its first stock repurchase program during the
first quarter of 2000. During the first quarter of 2000, the Company purchased
536,906 shares of its common stock at a cost of approximately $16.4 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.
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.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) The Company and certain of its subsidiaries are involved in various 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.
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 -- First Amendment to the Trigon Healthcare, Inc. 1997 Stock
Incentive Plan.
11 -- Computation of per share earnings (losses) for the three months
ended March 31, 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 March 31, 2000.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIGON HEALTHCARE, INC.
Registrant
Dated: May 12, 2000 By: /s/ Thomas R. Byrd
------------------------------------------
THOMAS R. BYRD
SENIOR VICE PRESIDENT & CHIEF
FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND
FINANCIAL OFFICER)
16
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- ------
10.1 -- First Amendment to the Trigon Healthcare, Inc. 1997 Stock
Incentive Plan.
27 -- Financial Data Schedule.
EXHIBIT 10.1
FIRST AMENDMENT
TO THE
TRIGON HEALTHCARE, INC. 1997 STOCK INCENTIVE PLAN
FIRST AMENDMENT, dated as of February 15, 2000, to the Trigon
Healthcare, Inc. 1997 Stock Incentive Plan (the "Plan") by Trigon Healthcare,
Inc. (the "Company").
The Company maintains the Plan established effective as of February
19, 1997. The Company has the power to amend the Plan and now wishes to do so.
NOW, THEREFORE, the Plan is amended as follows:
I. Section 2(t) is restated in its entirety with the following:
(t) PERFORMANCE CRITERIA means any of the following areas of performance of
the Company, or any Subsidiary as determined under generally accepted
accounting principles or as publicly reported by the Company: asset
growth; combined net worth; debt to equity ratio; earnings per share;
revenues; investment performance; operating income (with or without
investment income or income taxes); operating cash flow; net income,
before or after taxes; earnings before interest, taxes, depreciation
and/or amortization; return on total capital, equity, revenue or
assets; medical loss ratio; or number of policyholders or insured. Any
Performance Criteria may be used with or without adjustment for
extraordinary items or nonrecurring items.
II. Section 4 is amended by replacing the amount "3,550,000" with the amount
"6,300,000" in the first sentence.
III. Section 4 is further amended by adding the following
sentence to the end:
No more than 750,000 shares may be issued as Restricted Stock after
April 26, 2000, provided that shares of Restricted Stock that are
forfeited or that are granted to a Participant in exchange for the
deferral of an equivalent cash amount shall not be counted against
this limit.
IV. Section 4 is further amended by deleting the following
sentence:
The Committee is expressly authorized to make an Incentive Award to a
Participant conditioned upon the surrender for cancellation of an
option granted under an existing Incentive Award.
<PAGE>
V. Section 9(b) is amended by adding the following sentences to
the end:
Except as provided in Section 15 or with approval of shareholders, a
Participant may not surrender an Option in consideration for the grant
of a new Option with a lower exercise price. If a Participant's Option
is cancelled before its termination date, the Participant may not
receive another Option within 6 months of the cancellation unless the
exercise price of such Option is not less than the exercise price of
the cancelled Option or shareholder approval is received of the grant.
VI. Section 9(c) is amended by restating the portion preceding
(i) as follows:
Options may be exercised in whole or in part at such times as may be
specified by the Committee in the Participant's stock option
agreement; provided that (A) an Option shall not be exercisable more
than 10 years after the Date of Grant, and (B) the exercise provisions
for Incentive Stock Options shall in all events not be more liberal
than the following provisions:
VII. These amendments are contingent on the approval by shareholders of
Amendments I and II above and, if approved, the amendments shall be
effective immediately following the annual meeting of shareholders.
VIII. In all respects not amended, the Plan is ratified and confirmed.
* * * * * *
IN WITNESS WHEREOF, this Amendment to the Plan has been executed on the date
indicated below.
TRIGON HEALTHCARE, INC.
By: _________________________
Date: ________________________
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED
IN THE TRIGON HEALTHCARE, INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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