As filed with the Securities and Exchange Commission on August 2, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 31, 2002
ANTHEM, INC.
(Exact name of registrant as specified in its charter)
Indiana 001-16751 35-2145715
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification
incorporation) No.)
120 Monument Circle 46204
Indianapolis, Indiana
(Address of principal executive
offices) (Zip Code)
Registrant's telephone number, including area code: (317) 488-6000
N/A
(Former Name or Former Address, if Changed Since Last Report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On July 31, 2002, the merger of Trigon Healthcare, Inc., a Virginia
corporation ("Trigon"), with and into AI Sub Acquisition Corp., an Indiana
corporation ("Merger Sub") and a direct wholly owned subsidiary of Anthem,
Inc., an Indiana corporation ( "Anthem"), as contemplated by the Agreement
and Plan of Merger, dated as of April 28, 2002 (the "Merger Agreement"),
among Anthem, Merger Sub and Trigon, was consummated.
The preceding is qualified in its entirety by reference to the Merger
Agreement and a press release, which are attached hereto as Exhibits 2.1 and
99.1, respectively, and are incorporated herein by reference.
ITEM 5. OTHER EVENTS.
Trigon was merged with and into Merger Sub which was renamed Trigon
Healthcare, Inc. pursuant to the Merger Agreement, and then subsequently
amended its Articles of Incorporation to change its name to Anthem Southeast,
Inc. Pursuant to the terms of the Merger Agreement, Thomas G. Snead, Jr. has
been appointed President of Anthem Southeast, Inc.
Lenox D. Baker, Jr., M.D., John Sherman, Jr. and Jackie M. Ward, former
members of Trigon's board of directors were elected to Anthem's board of
directors, effective August 1, 2002.
The preceding is qualified in its entirety by reference to the Merger
Agreement and a press release, which are attached hereto as Exhibits 2.1 and
99.1, respectively, and are incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
(i) The Audited Consolidated Financial Statements of Trigon.
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2001
and 2000
Consolidated Statements of Operations for the Years
Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Shareholders'
Equity and Comprehensive Income for the Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(ii) The Unaudited Consolidated Financial Statements of Trigon.
Consolidated Balance Sheet as of March 31, 2002
Consolidated Statements of Operations for the Three
Months Ended March 31, 2002 and 2001
Consolidated Statements of Changes in Shareholders'
Equity and Comprehensive Income for the Three Months Ended
March 31, 2002 and 2001
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information
(i) Unaudited Pro Forma Combined Balance Sheet as
of March 31, 2002.
(ii) Unaudited Pro Forma Combined Statement of
Income for the three months ended March 31, 2002.
(iii) Unaudited Pro Forma Combined Statement of
Income for the year ended December 31, 2001.
2
(a) Financial Statements of Business Acquired
(i) The Audited Consolidated Financial Statements of Trigon.
INDEPENDENT AUDITORS' REPORT
The Board of Directors Trigon Healthcare, Inc.:
We have audited the accompanying consolidated balance sheets of Trigon
Healthcare, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, changes in shareholders' equity
and comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Trigon
Healthcare, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Richmond, Virginia
February 6, 2002
3
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(in thousands, except per share data)
2001 2000
---------- ----------
ASSETS
Current Assets
Cash...................................................... $ 17,995 6,345
Investment securities, at estimated fair value (note 3)... 1,820,529 1,775,307
Premiums and other receivables (note 4)................... 560,310 499,921
Deferred income taxes (note 10)........................... 8,473 3,525
Other..................................................... 13,735 14,676
---------- ----------
Total current assets........................................ 2,421,042 2,299,774
---------- ----------
Property and equipment, net (note 5)........................ 87,723 69,757
Deferred income taxes (note 10)............................. 42,194 48,207
Goodwill, net............................................... 13,670 15,303
Restricted investments, at estimated fair value (note 3).... 7,251 7,331
Other assets................................................ 10,584 8,120
---------- ----------
Total assets................................................ $2,582,464 2,448,492
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical and other benefits payable (note 6)............... $ 635,452 563,398
Unearned premiums......................................... 149,347 130,502
Accounts payable and accrued expenses..................... 85,992 85,993
Other liabilities (note 8)................................ 260,681 246,069
Commercial paper (note 11)................................ 99,660 --
---------- ----------
Total current liabilities................................... 1,231,132 1,025,962
---------- ----------
Obligations for employee benefits, noncurrent (note 12)..... 43,141 47,136
Medical and other benefits payable, noncurrent (note 6)..... 74,304 72,108
Commercial paper, noncurrent (note 11)...................... 200,000 275,448
Minority interest........................................... 13,467 12,976
---------- ----------
Total liabilities........................................... 1,562,044 1,433,630
---------- ----------
Shareholders' Equity
Common stock, $0.01 par; shares issued and outstanding:
35,786, 2001; 37,539, 2000 (note 13).................... 358 375
Capital in excess of par (note 13)........................ 784,514 802,584
Retained earnings (note 13)............................... 234,364 205,045
Unearned compensation--restricted stock (note 13)......... (1,817) (2,234)
Accumulated other comprehensive income (note 15).......... 3,001 9,092
---------- ----------
Total shareholders' equity.................................. 1,020,420 1,014,862
Commitments and contingencies (notes 7 and 19)..............
---------- ----------
Total liabilities and shareholders' equity.................. $2,582,464 2,448,492
========== ==========
See accompanying notes to consolidated financial statements.
4
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2001, 2000 and 1999
(in thousands, except per share data)
2001 2000 1999
----------- ---------- ----------
REVENUES
Premium and fee revenues
Commercial........................................... $ 2,166,173 1,871,533 1,664,261
Federal Employee Program............................. 529,491 464,303 448,676
Amounts attributable to self-funded arrangements..... 1,629,506 1,392,998 1,216,427
Less: amounts attributable to claims under
self-funded arrangements........................... (1,419,225) (1,228,306) (1,082,328)
----------- ---------- ----------
2,905,945 2,500,528 2,247,036
Investment income (note 3)............................. 105,247 114,453 97,131
Net realized losses (note 3)........................... (56,330) (27,023) (21,957)
Other revenues (note 9)................................ 20,105 23,637 24,218
----------- ---------- ----------
Total revenues........................................... 2,974,967 2,611,595 2,346,428
----------- ---------- ----------
EXPENSES
Medical and other benefit costs (notes 6 and 17)
Commercial........................................... 1,758,010 1,507,553 1,374,843
Federal Employee Program............................. 505,781 444,230 429,519
----------- ---------- ----------
2,263,791 1,951,783 1,804,362
Selling, general and administrative expenses (notes 12
and 17).............................................. 522,743 476,809 502,189
Interest expense (note 11)............................. 12,695 17,249 8,359
----------- ---------- ----------
Total expenses........................................... 2,799,229 2,445,841 2,314,910
----------- ---------- ----------
Income before income taxes and minority interest......... 175,738 165,754 31,518
Income tax expense (note 10)............................. 58,196 50,088 8,345
----------- ---------- ----------
Income before minority interest.......................... 117,542 115,666 23,173
Minority interest........................................ 1,482 3,657 2,710
----------- ---------- ----------
Net income............................................... $ 116,060 112,009 20,463
=========== ========== ==========
Earnings per share (note 14)
Basic net income....................................... $ 3.20 2.98 0.50
=========== ========== ==========
Diluted net income..................................... $ 3.11 2.90 0.49
=========== ========== ==========
See accompanying notes to consolidated financial statements.
5
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Years ended December 31, 2001, 2000 and 1999
(in thousands)
ACCUMULATED
CAPITAL OTHER TOTAL
COMMON IN EXCESS RETAINED UNEARNED COMPREHENSIVE SHAREHOLDERS'
STOCK OF PAR EARNINGS COMPENSATION INCOME EQUITY
-------- --------- -------- ------------ ------------- -------------
BALANCE AS OF JANUARY 1, 1999.................... $423 839,187 202,554 -- 29,060 1,071,224
Net income....................................... -- -- 20,463 -- -- 20,463
Change in minimum pension liability, net of
income taxes (notes 12 and 15)................. -- -- -- -- 834 834
Net unrealized losses on investment securities,
net of income taxes (notes 3 and 15)........... -- -- -- -- (20,806) (20,806)
---------
Comprehensive income............................. 491
Repurchase and retirement of common stock (note
13)............................................ (41) (20,500) (110,121) -- -- (130,662)
Purchase and reissuance of common stock under
stock option and other employee benefit plans,
including tax benefits and net of
amortization................................... -- (767) -- (1,926) -- (2,693)
Change in common stock held by consolidated
grantor trusts (note 13)....................... -- (1,403) -- -- -- (1,403)
---- ------- -------- ------ ------- ---------
BALANCE AS OF DECEMBER 31, 1999.................. 382 816,517 112,896 (1,926) 9,088 936,957
Net income....................................... -- -- 112,009 -- -- 112,009
Change in minimum pension liability, net of
income taxes (notes 12 and 15)................. -- -- -- -- 293 293
Net unrealized losses on investment securities,
net of income taxes (notes 3 and 15)........... -- -- -- -- (289) (289)
---------
Comprehensive income............................. 112,013
Repurchase and retirement of common stock (note
13)............................................ (7) (3,305) (19,860) -- -- (23,172)
Purchase and reissuance of common stock under
stock option and other employee benefit plans,
including tax benefits and net of
amortization................................... -- (14,002) -- (308) -- (14,310)
Change in common stock held by consolidated
grantor trusts (note 13)....................... -- 3,374 -- -- -- 3,374
---- ------- -------- ------ ------- ---------
BALANCE AS OF DECEMBER 31, 2000.................. 375 802,584 205,045 (2,234) 9,092 1,014,862
Net income....................................... -- -- 116,060 -- -- 116,060
Change in minimum pension liability, net of
income taxes (notes 12 and 15)................. -- -- -- -- 22 22
Net unrealized losses on investment securities,
net of income taxes (notes 3 and 15)........... -- -- -- -- (6,113) (6,113)
---------
Comprehensive income............................. 109,969
Repurchase and retirement of common stock (note
13)............................................ (17) (8,764) (86,741) -- -- (95,522)
Purchase and reissuance of common stock under
stock option and other employee benefit plans,
including tax benefits and net of
amortization................................... -- (8,858) -- 417 -- (8,441)
Change in common stock held by consolidated
grantor trusts (note 13)....................... -- (448) -- -- -- (448)
---- ------- -------- ------ ------- ---------
BALANCE AS OF DECEMBER 31, 2001.................. $358 784,514 234,364 (1,817) 3,001 1,020,420
==== ======= ======== ====== ======= =========
See accompanying notes to consolidated financial statements.
6
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
----------- ---------- ----------
Cash flows from operating activities
Net income.................................................. $ 116,060 112,009 20,463
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization........................... 23,419 15,282 18,655
Write-off of subsidiary goodwill and other intangibles
(note 17)............................................. -- -- 55,927
Amortization of unearned compensation................... 1,842 2,681 1,031
Accretion of discounts and amortization of premiums,
net................................................... (2,054) (15,959) (13,267)
Change in allowance for doubtful accounts receivable.... (2,345) (685) 2,839
Increase in premiums and other receivables.............. (90,893) (69,224) (22,238)
(Increase) decrease in other assets..................... 670 1,449 (9,208)
Increase in medical and other benefits payable.......... 74,250 41,224 66,382
Increase in unearned premiums........................... 18,845 10,644 20,826
Increase (decrease) in accounts payable and accrued
expenses.............................................. (1) 4,094 13,896
Increase (decrease) in other liabilities................ 52,407 (46,075) 30,807
Change in deferred income taxes......................... 4,678 25,267 (17,784)
Increase in minority interest........................... 491 3,657 2,710
Decrease in obligations for employee benefits........... (9,962) (1,701) (4,450)
Loss on disposal of property and equipment and other
assets................................................ 262 84 277
Realized investment losses, net......................... 56,330 27,023 21,957
----------- ---------- ----------
Net cash provided by operating activities................... 243,999 109,770 188,823
----------- ---------- ----------
Cash flows from investing activities
Proceeds from sale of property and equipment and other
assets................................................ 250 339 342
Capital expenditures.................................... (42,208) (35,501) (17,827)
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......................... (5,069,888) (4,844,862) (4,293,560)
Proceeds from investment securities sold................ 3,809,125 4,061,899 3,347,933
Maturities of fixed income securities................... 1,150,914 736,870 749,828
----------- ---------- ----------
Net cash used in investing activities....................... (151,807) (99,252) (213,284)
----------- ---------- ----------
Cash flows from financing activities
Proceeds from long-term debt............................ -- -- 160,000
Payments on long-term debt.............................. -- (248,039) --
Change in commercial paper notes........................ 24,212 275,448 --
Purchase and reissuance of common stock under employee
benefit and stock option plans........................ (10,594) (17,666) (3,694)
Common stock (purchased) distributed by consolidated
grantor trusts........................................ (448) 3,374 (1,403)
Purchase and retirement of common stock................. (95,522) (23,172) (130,662)
Change in outstanding checks in excess of bank
balance............................................... 1,810 3,352 (4,750)
----------- ---------- ----------
Net cash provided by (used in) financing activities......... (80,542) (6,703) 19,491
----------- ---------- ----------
Increase (decrease) in cash................................. 11,650 3,815 (4,970)
Cash--beginning of year..................................... 6,345 2,530 7,500
----------- ---------- ----------
Cash--end of year........................................... $ 17,995 6,345 2,530
=========== ========== ==========
Cash paid during the year for
Interest................................................ $ 14,814 22,224 12,847
Income taxes............................................ 20,858 69,947 25,855
See accompanying notes to consolidated financial statements.
7
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Trigon Healthcare, Inc., a stock holding company, through its subsidiaries
is the largest managed health care company in Virginia. (Trigon
Healthcare, Inc. and subsidiaries are herein collectively referred to as the
Company.) The Company serves 2.1 million members primarily through a
comprehensive spectrum of managed care products provided through three network
systems with a range of utilization and cost containment controls. The Company
provides health insurance for multi-state employer groups, large and small
businesses in Virginia, individuals, Medicare and Medicaid beneficiaries and
federal employees. The Company's portfolio of benefit designs is purposely
diverse to allow members and group administrators to choose the degree of
management and premium structure that is right for them. Larger 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. Certain of the Company's subsidiaries have the exclusive right to
use the Blue Cross and Blue Shield service marks and trademarks in their service
areas. The Company also owns and operates subsidiaries in the areas of wellness
and disease management and similar products.
Trigon Healthcare, Inc. owns 100% of Trigon Insurance Company,
HealthKeepers, Inc., Priority, Inc., Trigon Health and Life Insurance Company,
Trigon Services, Inc., Consolidated Holdings Corporation, Health Management
Corporation and Monticello Service Agency, Inc. Additionally, Trigon
Healthcare, Inc. owns 51% of Peninsula Health Care, Inc. Trigon Insurance
Company participates in a national contract between the Blue Cross and Blue
Shield Association and the U.S. Office of Personnel Management to provide
benefits to Federal employees within Virginia through the Federal Employee
Program (FEP).
The significant accounting policies and practices followed by the Company
are as follows:
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America. The Company follows Statement of Financial Accounting Standards (SFAS)
No. 60, Accounting and Reporting by Insurance Enterprises, as it relates to its
insurance business and the AICPA Auditing and Accounting Guide, Health Care
Organizations, as it relates to its HMO business. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Management continually reviews its estimates and assumptions, including those
related to claims expense and claims liabilities, income taxes and litigation.
Actual results could differ from those estimates.
The consolidated financial statements include the accounts of Trigon
Healthcare, Inc. and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Investments in other companies in which less than a majority interest is held
and where the Company has significant influence over the operating and financial
policies of the investee are accounted for under the equity method.
8
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
RISKS AND UNCERTAINTIES
The Company's profitability depends in large part on accurately predicting
and effectively managing health care costs. The Company continually reviews its
premium and benefit structure to reflect its underlying claims experience and
revised actuarial data; however, several factors could adversely affect the
medical cost ratios. Certain of these factors, which include changes in health
care practices, inflation, new technologies, major epidemics, natural disasters
and malpractice litigation, are beyond any health plan's control and could
adversely affect the Company's ability to accurately predict and effectively
control health care costs. Costs in excess of those anticipated could have a
material adverse effect on the Company's results of operations.
In addition, the managed care industry is highly competitive in both
Virginia and in other states in the Southeastern and Mid-Atlantic regions where
the Company principally intends to expand. There is no assurance that such
competition will not exert strong pressures on the Company's profitability, its
ability to increase enrollment or its ability to successfully attain its
expansion plans. The Company's growth may be affected by any changes in its
ability to negotiate favorable rates with providers. Also, there can be no
assurance that regulatory initiatives will not be undertaken at the state or
federal level to reform the health care industry in order to reduce the
escalation in health care costs or to make health care more accessible. Such
action could adversely affect the Company's profitability.
INVESTMENT SECURITIES
Investment securities are accounted for in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. All investment
securities are considered available-for-sale and are recorded at estimated fair
value, based on quoted market prices. The net unrealized gain or loss on
investment securities, net of deferred income taxes, is included in accumulated
other comprehensive income in shareholders' equity. A decline in the fair value
of any investment security below cost, that is deemed other than temporary, is
recorded as a realized loss resulting in a new cost basis for the security.
Costs of investments sold are determined on the first in, first out basis.
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS Nos. 137 and 138, effective January 1,
2001. The Company enters into foreign currency forward contracts (forward
contracts) to minimize exposure to fluctuations in foreign currency exchange
rates. Company policy only permits utilization of these instruments in its
foreign denominated bond and equity portfolios. The counterparties to these
transactions are major financial institutions. The Company may incur a loss with
respect to these transactions to the extent that the counterparty fails to
perform under a contract and exchange rates have changed unfavorably for the
counterparty since the inception of the contract. The Company anticipates that
the counterparties will be able to fully satisfy their obligations under the
agreements. The forward contracts involve the exchange of one currency for
another at a future date and typically have maturities of one year or less. The
forward contracts do not qualify for hedge accounting under SFAS No. 133, as
amended. Accordingly, upon adoption, the forward contracts were recorded at fair
value with changes in fair value recorded as realized gains or losses in the
consolidated statements of operations. The fair value of forward contracts held
by the Company as of January 1, 2001 was not material.
The Company also enters into financial futures contracts for portfolio
strategies such as minimizing interest rate risk and managing portfolio
duration. The notional amount of the futures contracts is limited to that of the
market value of the underlying portfolios. Should this limitation be exceeded,
futures contracts are immediately terminated in order to comply with this
restriction. Initial margins in
9
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
the form of securities are maintained with the counterparties for these
transactions. Changes in fair value of financial futures, determined and settled
with the counterparties on a daily basis, are recorded as realized gains or
losses in the consolidated statements of operations. Terminations of contracts
are accounted for in the same manner. The adoption of SFAS No. 133, as amended,
did not change the accounting for these contracts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets, which are 40 years for
buildings and 3 to 10 years for furniture and equipment. Leasehold improvements
are amortized using the straight-line method over the shorter of the lease term
or estimated useful life of the asset. Any gain or loss realized upon retirement
or disposal is reflected in selling, general and administrative expenses.
The Company is capitalizing interest during the active construction period
of its headquarters expansion project. The project is being funded using
internal cash and investments. Capitalized interest is added to the cost of the
underlying assets and will be amortized over the useful lives of the assets.
Certain costs related to the development or purchase of internal-use
software are capitalized and amortized over the estimated useful life of the
software in accordance with AICPA Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use.
GOODWILL
Costs in excess of fair value of net tangible and identified intangible
assets of businesses acquired are amortized using the straight-line method over
periods from 15 to 25 years. Recoverability is reviewed annually or sooner if
events or changes in circumstances indicate that the carrying amount may exceed
fair value. Recoverability is then determined by comparing the undiscounted net
cash flows of the assets to which the goodwill applies to the net book value
including goodwill of those assets.
Amortization was $1.6 million, $1.2 million, and $5.9 million for the years
ended December 31, 2001, 2000 and 1999, respectively. Accumulated amortization
as of December 31, 2001 and 2000 was $9.6 million and $9.0 million,
respectively. During 2001, $1.0 million of accumulated amortization related to
previously fully amortized goodwill was removed. In connection with the purchase
of Priority, Inc.'s minority interest in September 2000 (note 17), goodwill
increased $2.2 million. Goodwill and other intangibles related to Mid-South
Insurance Company (Mid-South), in the amount of $42.6 million were written-off
during 1999 (note 17).
The Company will adopt SFAS No. 142, Goodwill and Intangible Assets,
effective January 1, 2002. Under Statement 142, goodwill determined to have
indefinite useful lives will not be amortized but will be tested at least
annually for impairment. As of the date of adoption, the Company has unamortized
goodwill in the amount of $13.7 million that will be subject to the transitional
impairment provisions of Statement 142. In addition, adoption will eliminate
approximately $1.6 million in annual goodwill amortization beginning in 2002
from the consolidated statements of operations. The Company expects no
transitional impairment loss upon adoption.
10
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
MEDICAL AND OTHER BENEFITS PAYABLE
The Company establishes liabilities for claims in process of review and
claims incurred but not reported. These liabilities are based on historical
payment patterns using actuarial techniques. In addition, processing costs are
accrued as operating expenses based on an estimate of the costs necessary to
process these claims. The methods for making these estimates and for
establishing the resulting liabilities are continually reviewed and updated, and
any adjustments resulting therefrom are reflected in current operations. While
the ultimate amount of claims and the related expenses paid are dependent on
future developments, management is of the opinion that the liabilities for
claims and claims processing costs are adequate to cover such claims and
expenses.
REVENUES
All of the Company's individual and certain of the Company's group contracts
provide for the individual or the group to be fully insured. Premiums for these
contracts are billed in advance of the respective coverage periods and are
initially recorded as premiums receivable and as unearned income. Unearned
premiums are recognized as earned in the period of coverage.
Certain other groups have contracts that provide for the group to be at risk
for all or a portion of their claims experience. Most of these self-funded
groups purchase aggregate and/or specific stop-loss coverage. In exchange for a
premium, the group's aggregate liability or the group's liability on any one
episode of care is capped for the year. The Company charges self-funded groups
administrative fees which are based on the number of members in a group or the
group's claims experience. Under the Company's self-funded arrangements, amounts
due are recognized based on incurred claims plus administrative and other fees
and any stop-loss premiums. In addition, accounts for certain self-funded groups
are charged or credited with interest expense or income as provided by the
groups' contracts.
POSTRETIREMENT/POSTEMPLOYMENT BENEFITS
Pension costs are accrued in accordance with SFAS No. 87, Employers'
Accounting for Pensions, and are funded based on the minimum contribution
requirements of the Employee Retirement Income Security Act of 1974. The
actuarial cost method used is the projected unit credit method.
The Company provides certain health and life insurance benefits to retired
employees. These benefits are accrued in accordance with SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
The Company also provides certain disability related postemployment
benefits. These benefits are accrued in accordance with SFAS No. 112, Employers'
Accounting for Postemployment Benefits. The Company accrues the benefits when it
becomes probable that such benefits will be paid and when sufficient information
exists to make reasonable estimates of the amounts to be paid.
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
recognized for the stock options granted and employee stock purchases. The
Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting
for Stock-Based Compensation.
11
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109, Accounting
for Income Taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS PER SHARE
The Company calculates and presents earnings per share in accordance with
SFAS No. 128, Earnings per Share. Basic earnings per share excludes dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if all stock options and
nonvested restricted stock awards were exercised and converted into common
stock.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 2. AGENCY CONTRACTS
As fiscal intermediary for Medicare through August 31, 1999, the Company
allocated operating expenses to this line of business to determine reimbursement
due for services rendered in accordance with the contracts in force. Claims
processed under this arrangement were not included in the accompanying
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.
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, in August 1999. The Company also 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 after
November 1999.
Claims processed for Medicare and the related reimbursed operating expenses,
which are subject to audit, for the year ended December 31, 1999 were
$2.1 billion and $18.3 million, respectively. There were no amounts for the
years ended December 31, 2001 and 2000.
NOTE 3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of investment securities as of December 31 were as follows (in thousands):
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
2001 COST GAINS LOSSES VALUE
---- ---------- ---------- ---------- ---------
Fixed maturities
Domestic
U.S. Treasury securities and obligations of U.S.
government agencies................................... $ 273,325 742 1,482 272,585
Mortgage-backed obligations of U.S. government
agencies.............................................. 264,954 1,899 2,130 264,723
States and political subdivision securities............. 252,017 5,044 2,077 254,984
12
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
2001 COST GAINS LOSSES VALUE
---- ---------- ---------- ---------- ---------
Other mortgage-backed and asset-backed securities....... 153,434 2,393 270 155,557
Corporate bonds......................................... 640,280 13,361 4,772 648,869
Foreign
Debt securities issued by foreign governments........... 4,621 90 -- 4,711
Corporate bonds......................................... 57,561 1,115 2,645 56,031
---------- ------ ------ ---------
Total fixed maturities...................................... 1,646,192 24,644 13,376 1,657,460
---------- ------ ------ ---------
Equities
Domestic.................................................. 12,294 1,246 2,658 10,882
Foreign................................................... 69,091 5,482 10,720 63,853
---------- ------ ------ ---------
Total equities.............................................. 81,385 6,728 13,378 74,735
---------- ------ ------ ---------
Short-term investments
Domestic.................................................. 82,418 -- -- 82,418
Foreign................................................... 11,959 -- 23 11,936
---------- ------ ------ ---------
Total short-term investments................................ 94,377 -- 23 94,354
---------- ------ ------ ---------
Derivative instruments...................................... 1,231 -- -- 1,231
---------- ------ ------ ---------
Total....................................................... $1,823,185 31,372 26,777 1,827,780
========== ====== ====== =========
Unrestricted................................................ $1,816,433 30,873 26,777 1,820,529
Restricted.................................................. 6,752 499 -- 7,251
---------- ------ ------ ---------
Total....................................................... $1,823,185 31,372 26,777 1,827,780
========== ====== ====== =========
13
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
2000 COST GAINS LOSSES VALUE
---- ---------- ---------- ---------- ---------
Fixed maturities
Domestic
U.S. Treasury securities and obligations of U.S.
government agencies................................... $ 342,715 3,817 36 346,496
Mortgage-backed obligations of U.S. government
agencies.............................................. 134,263 3,125 95 137,293
States and political subdivision securities............. 269,914 10,022 617 279,319
Other mortgage-backed and asset-backed securities....... 94,347 1,358 613 95,092
Corporate bonds......................................... 534,244 9,327 17,668 525,903
Foreign
Debt securities issued by foreign governments........... 9,011 473 -- 9,484
Corporate bonds......................................... 45,555 289 983 44,861
---------- ------ ------ ---------
Total fixed maturities...................................... 1,430,049 28,411 20,012 1,438,448
---------- ------ ------ ---------
Equities
Domestic.................................................. 16,156 1,243 1,133 16,266
Foreign................................................... 70,865 16,535 11,779 75,621
---------- ------ ------ ---------
Total equities.............................................. 87,021 17,778 12,912 91,887
---------- ------ ------ ---------
Short-term investments
Domestic.................................................. 239,187 -- -- 239,187
Foreign................................................... 12,360 -- 4 12,356
---------- ------ ------ ---------
Total short-term investments................................ 251,547 -- 4 251,543
---------- ------ ------ ---------
Derivative instruments...................................... -- 760 -- 760
---------- ------ ------ ---------
Total....................................................... $1,768,617 46,949 32,928 1,782,638
========== ====== ====== =========
Unrestricted................................................ $1,761,606 46,629 32,928 1,775,307
Restricted.................................................. 7,011 320 -- 7,331
---------- ------ ------ ---------
Total....................................................... $1,768,617 46,949 32,928 1,782,638
========== ====== ====== =========
Short-term investments consist principally of investments with maturity
dates of one year or less at the time of purchase, including, money market
investments, commercial paper and other fixed maturities.
The Company enters into foreign currency derivative instruments to minimize
exposure to fluctuations in foreign currency exchange rates. As of December 31,
2001, the Company had forward contracts outstanding with a net fair value of
$1.2 million to purchase approximately $8.1 million in foreign currencies and to
sell approximately $6.9 million in foreign currencies (primarily the Euro and
Japanese Yen).
The Company also enters into financial futures contracts for portfolio
strategies such as minimizing interest rate risk and managing portfolio
duration. The notional amount of the futures contracts, $197.8 million as of
December 31, 2001, is limited to that of the market value of the underlying
portfolios.
14
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
The amortized cost and estimated fair value of fixed income securities as of
December 31, by contractual maturity, were as follows (in thousands):
AMORTIZED ESTIMATED
2001 COST FAIR VALUE
---- ---------- ----------
Due in one year or less............................... $ 22,342 22,695
Due after one year through five years................. 461,474 463,584
Due after five years through ten years................ 480,941 483,891
Due after ten years................................... 263,047 267,010
Mortgage-backed, asset-backed and other securities.... 418,388 420,280
---------- ---------
Total................................................. $1,646,192 1,657,460
========== =========
AMORTIZED ESTIMATED
2000 COST FAIR VALUE
---- ---------- ----------
Due in one year or less............................... $ 52,644 54,868
Due after one year through five years................. 463,324 465,957
Due after five years through ten years................ 421,484 414,949
Due after ten years................................... 263,987 270,289
Mortgage-backed, asset-backed and other securities.... 228,610 232,385
---------- ---------
Total................................................. $1,430,049 1,438,448
========== =========
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Included in investment securities as of December 31, 2001 are $7.3 million,
at estimated fair value, of securities held by various states to meet security
deposit requirements related to Trigon Insurance Company, the HMO subsidiaries
and Trigon Health and Life Insurance Company.
The components of investment income for the years ended December 31 were as
follows (in thousands):
2001 2000 1999
-------- -------- --------
Interest on fixed maturities securities................. $100,326 113,613 95,957
Interest on short-term investments...................... 9,229 8,544 6,703
Dividends............................................... 1,684 1,994 2,884
-------- ------- -------
$111,239 124,151 105,544
Investment expenses..................................... 5,314 6,604 5,758
Group interest credits.................................. 678 3,094 2,655
-------- ------- -------
Investment income....................................... $105,247 114,453 97,131
======== ======= =======
15
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
Gross realized gains and losses for the years ended December 31 were as
follows (in thousands):
2001 2000 1999
-------- -------- --------
Gross realized gains
Fixed income securities............................... $ 46,024 34,194 14,527
Equity securities..................................... 3,589 43,963 13,401
Derivative instruments................................ 264,528 33,916 64,456
Other................................................. 3,534 -- --
-------- ------- -------
Total gross realized gains.............................. 317,675 112,073 92,384
-------- ------- -------
Gross realized losses
Fixed income securities............................... 70,855 74,236 45,740
Equity securities..................................... 10,356 17,784 7,448
Derivative instruments................................ 292,794 47,076 61,153
-------- ------- -------
Total gross realized losses............................. 374,005 139,096 114,341
-------- ------- -------
Net realized losses..................................... $(56,330) (27,023) (21,957)
======== ======= =======
Included in other gross realized gains is the amount realized on the sale of
a subsidiary in March 2001 (note 17).
Proceeds from the sale of investment securities were $3.8 billion,
$4.1 billion and $3.3 billion during 2001, 2000 and 1999, respectively.
Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for fixed income securities or cost for equity
securities. A summary of the change in unrealized gains (losses), net of income
taxes, for the years ended December 31 is as follows (in thousands):
2001 2000 1999
-------- -------- --------
Fixed maturities securities.............................. $ 2,850 55,725 (79,561)
Equity securities........................................ (11,516) (57,131) 47,742
Derivative instruments................................... (760) 961 (189)
Provision for income taxes............................... 3,313 156 11,202
-------- ------- -------
Total.................................................... $ (6,113) (289) (20,806)
======== ======= =======
16
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
NOTE 4. PREMIUMS AND OTHER RECEIVABLES
Premiums and other receivables as of December 31 were as follows (in
thousands):
2001 2000
-------- --------
Premiums................................................. $105,550 77,664
Self-funded group receivables............................ 221,363 194,308
Federal Employee Program................................. 197,954 161,385
Investment income receivable............................. 25,743 22,725
Receivable on investment securities sold................. 207 33,900
Other.................................................... 9,493 9,939
-------- -------
Total.................................................... $560,310 499,921
======== =======
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31 were as follows (in thousands):
2001 2000
-------- --------
Land and improvements.................................... $ 7,227 5,874
Buildings and improvements............................... 40,512 39,843
Furniture and equipment.................................. 85,120 83,982
Computer software........................................ 45,184 35,188
Construction in progress................................. 5,367 --
-------- -------
183,410 164,887
Less accumulated depreciation and amortization........... 95,687 95,130
-------- -------
Total.................................................... $ 87,723 69,757
======== =======
During 2001, the Company began a four-year building project to expand its
headquarters. Interest capitalized and included in construction in progress
during 2001 was less than $0.1 million.
17
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
NOTE 6. MEDICAL AND OTHER BENEFITS PAYABLE
The components of medical and other benefits payable as of December 31 were
as follows (in thousands):
2001 2000 1999
---------- --------- ---------
Net medical and other benefits payable at
beginning of year................................ $ 420,955 417,688 371,312
Incurred related to
Current year..................................... 2,283,983 1,973,500 1,821,681
Prior years...................................... (20,192) (21,717) (17,319)
---------- --------- ---------
Total incurred..................................... 2,263,791 1,951,783 1,804,362
---------- --------- ---------
Paid related to
Current year..................................... 1,939,775 1,696,295 1,517,098
Prior years...................................... 282,720 252,221 240,888
---------- --------- ---------
Total paid......................................... 2,222,495 1,948,516 1,757,986
---------- --------- ---------
Net medical and other benefits payable at end of
year............................................. 462,251 420,955 417,688
Liability for self-funded claims................... 214,081 192,515 169,361
Liability for claims processing costs.............. 21,181 21,553 17,886
Amounts due to providers........................... 12,243 483 5,114
---------- --------- ---------
Total.............................................. $ 709,756 635,506 610,049
========== ========= =========
The Company uses paid claims and completion factors based on historical
payment patterns to estimate incurred claims. Changes in payment patterns and
claims trends can result in increases or decreases to prior years' claims
estimates. Negative amounts reported for incurred claims related to prior years
resulted from claims being settled for less than originally estimated.
NOTE 7. COMMITMENTS & CONTINGENCIES
LEASES
The Company has operating leases covering office space, computer hardware
and software and business equipment expiring at various dates through 2011.
Original non-cancelable leases may contain escalation clauses, along with
options that permit renewals for additional periods and, in some cases, purchase
of the property.
18
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
The following is a schedule of future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 2001 (in thousands):
YEARS ENDING DECEMBER 31,
-------------------------
2002....................................................... $12,682
2003....................................................... 13,082
2004....................................................... 8,186
2005....................................................... 5,407
2006....................................................... 3,839
2007 and later years....................................... 8,835
-------
Total...................................................... $52,031
=======
Rental expense for all operating leases for the years ended December 31,
2001, 2000 and 1999 was $17.3 million, $16.3 million and $17.1 million,
respectively.
GUARANTEES
Trigon Insurance Company guarantees certain liabilities of Primary Care
First, L.L.C., an unconsolidated joint venture affiliate, related to term loans
and equity and working capital lines of credit. The maximum amount of the loan
guarantees is $6.1 million plus accrued interest. As of December 31, 2001 and
2000, the total outstanding loan amounts subject to the guarantees was
$4.7 million and $5.1 million, respectively.
NOTE 8. OTHER LIABILITIES
Other liabilities as of December 31 were as follows (in thousands):
2001 2000
-------- --------
Unearned premium reserve--Federal Employee Program....... $130,787 105,974
Outstanding checks in excess of bank balance............. 41,603 39,793
Self-funded group deposits............................... 13,169 14,474
Current income taxes payable............................. 27,637 354
Payable for investment securities sold................... 3,939 38,637
Other.................................................... 43,546 46,837
-------- -------
Total.................................................... $260,681 246,069
======== =======
The FEP unearned premium reserve represents the Company's share of the FEP
premium stabilization reserve. These funds are actually held by the Blue Cross
and Blue Shield Association on behalf of each Blue Cross and Blue Shield Plan
participating in the Federal Employee Program. A receivable in the same amount
is recorded in premiums and other receivables.
19
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
NOTE 9. OTHER REVENUES
Other revenues include those revenues earned by non-core subsidiaries. A
summary by type of revenue for the years ended December 31 is as follows (in
thousands):
2001 2000 1999
-------- -------- --------
Employee benefits administration........................... $ 1,231 2,336 3,769
Workers' compensation administration....................... 2,455 9,682 9,319
Health management services................................. 11,036 6,645 6,227
Other...................................................... 5,383 4,974 4,903
------- ------ ------
Total...................................................... $20,105 23,637 24,218
======= ====== ======
NOTE 10. INCOME TAXES
Income tax expense (benefit) attributable to income before income taxes and
minority interest, substantially all of which is federal, for the years ended
December 31 consists of (in thousands):
2001 2000 1999
-------- -------- --------
Current................................................... $54,533 24,761 26,129
Deferred.................................................. 3,663 25,327 (17,784)
------- ------ -------
Total..................................................... $58,196 50,088 8,345
======= ====== =======
The differences between the statutory federal income tax rate and the actual
tax rate applied to income before income taxes and minority interest for the
years ended December 31 were as follows:
2001 2000 1999
-------- -------- --------
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
Tax exempt investment income................................ (2.9) (2.5) (13.7)
Non-deductible amortization................................. 0.3 0.3 3.4
Tax adjustment on sale of subsidiary........................ -- (1.5) --
Other, net.................................................. 0.7 (1.1) 1.8
---- ---- -----
Effective tax rate.......................................... 33.1% 30.2% 26.5%
==== ==== =====
20
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
The components of the deferred tax assets and deferred tax liabilities as of
December 31 were as follows (in thousands):
2001 2000
-------- --------
Deferred tax assets
Employee benefit plans................................... $17,851 17,458
Insurance reserves....................................... 34,435 33,914
Property and equipment................................... -- 4,656
Other.................................................... 2,313 1,257
------- ------
Gross deferred tax assets.................................. 54,599 57,285
------- ------
Deferred tax liabilities
Investment securities.................................... 1,594 4,907
Property and equipment................................... 1,700 --
Other.................................................... 638 646
------- ------
Gross deferred tax liabilities............................. 3,932 5,553
------- ------
Net deferred tax asset..................................... $50,667 51,732
======= ======
Deferred taxes as of December 31 are presented on the accompanying
consolidated balance sheets as follows (in thousands):
2001 2000
-------- --------
Deferred tax assets--current............................... $ 8,473 3,525
Deferred tax assets--noncurrent............................ 42,194 48,207
------- ------
Net deferred tax asset..................................... $50,667 51,732
======= ======
Based on the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deferred tax assets.
In conjunction with the Demutualization in 1997, 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
denied this deduction during the course of its audit of the Company. The Company
continued to pursue the deduction and in April 2001 received a Technical Advice
Memorandum from the National Office of the IRS that supports the Company's
position that the payment constitutes a normal business expense, and therefore
should be deductible. The Company will recognize the financial statement impact
of the deduction if and when it receives final approval by the IRS after review
by the Congressional Joint Committee on Taxation. If successful, the Company
expects to recover approximately $35 million in cash refunds and $26 million in
income tax credit carryovers
21
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
plus after-tax interest currently estimated to be $8 million. In addition, the
Company has filed a lawsuit claiming deductions for losses incurred on the
termination of certain customer and provider contracts. See note 19.
Regarding both of these matters, 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 these claims, if any, in the consolidated financial statements.
NOTE 11. BORROWINGS
Commercial paper as of December 31 is summarized as follows (in thousands):
2001 2000
-------- --------
Current.................................................. $ 99,660 --
Noncurrent............................................... 200,000 275,448
-------- -------
Total.................................................... $299,660 275,448
======== =======
In November 2001, Trigon Healthcare, Inc. entered into new revolving credit
facilities with a syndicate of lenders, replacing the existing revolving credit
facility expiring in February 2002. The new credit facilities consist of a
$100 million 364-day revolving credit facility and a $200 million 5-year
revolving credit facility. These credit facilities may be used for general
corporate purposes and are currently being used to back the commercial paper
discussed below. The terms of the credit facilities provide for various
borrowing options and rates and require the Company to pay facility and
administrative fees on a quarterly basis. The credit facilities contain certain
financial covenants and restrictions including minimum net worth requirements
and debt to consolidated net worth ratio limitations. The Company was in
compliance with all such covenants as of December 31, 2001. There were no
amounts borrowed under the former or current credit facilities during 2001. In
conjunction with the issuance of commercial paper notes during the first quarter
of 2000, the Company repaid the $245 million outstanding on the former revolving
credit agreement. The weighted average interest rate for the period the former
revolving credit agreement was outstanding during the years ended December 31,
2000 and 1999 was 6.21% and 5.44%, respectively. Use of the credit facilities to
back the commercial paper reduces the amounts available for borrowing under
these facilities.
In March 2000, Trigon Healthcare, Inc. 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. As of
December 31, 2001, outstanding notes under the commercial paper program totaled
approximately $299.7 million with an average maturity of 20 days. As of
December 31, 2000, outstanding notes totaled approximately $275.4 million with
an average maturity of 14 days. The weighted average discount yield on the
outstanding commercial paper notes as of December 31, 2001 and December 31, 2000
was 2.19% and 6.83%, respectively. The
22
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
commercial paper is currently backed by the revolving credit facilities. The
Company has the intent to maintain commercial paper borrowings of at least this
amount for more than one year. For financial reporting purposes, the commercial
paper has been classified as a combination of current and noncurrent liabilities
in the accompanying consolidated statements of financial condition based on the
terms of the revolving credit facilities backing these notes.
Peninsula Health Care, Inc. has a line of credit agreement with its minority
shareholder for purposes of maintaining regulatory minimum net worth
requirements. There were no amounts outstanding under this line of credit as of
December 31, 2001 and 2000.
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan which is
qualified under IRC 401(a). The plan is funded through the Blue Cross National
Retirement Trust (the Trust), a collective investment trust for the retirement
programs of its participating employers. Assets in the Trust are primarily
domestic and international equity securities, domestic bonds, real estate funds
and short-term investments. The Company also has a nonqualified supplemental
executive retirement plan (SERP) which provides for pension benefits in excess
of qualified plan limits imposed by IRC limits and restrictions on participation
by highly compensated employees. The plan serves to restore the combined pension
amount to original benefit levels. The plan is unfunded, however, the Company
has established a grantor trust to fund future obligations under the plan. The
grantor trust is consolidated with the Company for financial reporting purposes.
In addition to providing pension benefits, the Company provides certain
health and life insurance benefits for retired employees and for active
employees who had at least 20 years of service and were between the ages of 40
and 45 with age plus years of service equal to 55 or more as of January 1, 1998.
This postretirement benefit plan is also funded through the Trust.
23
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the years ended December 31 and
a statement of the funded status as of December 31 (in thousands):
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Reconciliation of benefit obligation
Obligation as of January 1............................ $130,912 122,613 40,798 28,722
Service cost.......................................... 8,842 7,571 1,515 1,385
Interest cost......................................... 9,684 9,152 3,449 2,761
Participant contributions............................. -- -- -- 91
Benefit payments...................................... (7,423) (15,195) (1,602) (1,112)
Actuarial loss........................................ 5,507 6,771 7,948 8,951
-------- ------- ------- -------
Obligation as of December 31............................ 147,522 130,912 52,108 40,798
-------- ------- ------- -------
Reconciliation of fair value of plan assets
Fair value of plan assets as of January 1............. 136,412 150,871 18,847 18,372
Actual return on plan assets.......................... (7,896) (7,063) (1,046) 1,496
Employer contributions................................ 17,500 -- -- --
Participant contributions............................. -- -- -- 91
Benefit payments...................................... (7,393) (7,396) (1,602) (1,112)
-------- ------- ------- -------
Fair value of plan assets as of December 31............. 138,623 136,412 16,199 18,847
-------- ------- ------- -------
Funded status
Funded status as of December 31....................... (8,899) 5,500 (35,909) (21,951)
Unrecognized transition asset......................... (97) (167) -- --
Unrecognized reduction in prior service cost.......... (7,104) (7,712) (6,252) (8,017)
Unrecognized (gain) loss.............................. 12,507 (13,374) 12,574 2,262
-------- ------- ------- -------
Net amount recognized................................... $ (3,593) (15,753) (29,587) (27,706)
======== ======= ======= =======
The following table provides the amounts recognized in the consolidated
balance sheets as of December 31 (in thousands):
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Prepaid benefit cost (included in other assets).......... $ 2,455 -- -- --
Accrued benefit liability (included in obligations for
employee benefits, noncurrent)......................... (6,048) (16,535) (29,587) (27,706)
Intangible asset (included in other assets).............. -- 748 -- --
Minimum pension liability (included in accumulated other
comprehensive income).................................. -- 34 -- --
------- ------- ------- -------
Net amount recognized.................................... $(3,593) (15,753) (29,587) (27,706)
======= ======= ======= =======
24
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
The pension plans with benefit obligations in excess of plan assets,
principally the unfunded nonqualified SERP, had projected benefit obligations of
$147.5 million and $7.4 million as of December 31, 2001 and 2000, respectively.
The accumulated benefit obligations related to these plans were $143.1 million
and $5.9 million, while the fair value of assets was $138.6 million and $0 as of
December 31, 2001 and 2000, respectively. Both the qualified pension plan and
nonqualified SERP plan were included in this disclosure for 2001.
The following table provides the components of net periodic expense for the
plans for the years ended December 31 (in thousands):
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ ------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
Service cost..................................... $ 8,842 7,571 7,842 1,514 1,385 1,412
Interest cost.................................... 9,684 9,152 8,725 3,449 2,761 2,200
Expected return on plan assets................... (12,374) (11,851) (11,224) (1,624) (1,753) (1,553)
Amortization of transition asset................. (70) (70) (70) -- -- --
Amortization of prior service cost............... (608) (547) (547) (1,765) (1,765) (1,387)
Amortization of net (gain) loss.................. (104) (312) 157 307 -- --
Settlement expense............................... -- 1,550 -- -- -- --
-------- ------- ------- ------ ------ ------
Total............................................ $ 5,370 5,493 4,883 1,881 628 672
======== ======= ======= ====== ====== ======
The gross amount included within other comprehensive income arising from a
decrease in the minimum pension liability was $0.03 million, $0.4 million and
$1.3 million for the years ended December 31, 2001, 2000 and 1999, respectively.
The prior service costs of the pension plans are amortized on a
straight-line basis over the average remaining service period of the active plan
participants. The prior service costs of the postretirement benefit plan are
amortized on a straight-line basis over the average remaining years of service
to full eligibility for benefits of the active plan participants. Gains and
losses for the qualified pension plan and the postretirement benefit plan are
amortized on a straight-line basis over the average remaining service period of
active participants using the minimum basis outlined under SFAS No. 87 and SFAS
No. 106, respectively. Gains and losses for the nonqualified SERP are amortized
on a straight-line basis over the average remaining service period of active
participants based on the entire unrecognized net gain or loss without applying
the applicable corridor that is based on 10% of the greater of the projected
benefit obligation or the market-related value of plan assets.
The weighted average assumptions used in the measurement of the Company's
benefit obligations as of December 31 were as follows:
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------------- ---------------------
2001 2000 2001 2000
---------- ---------- ---------- --------
Discount rate......................................... 7.25% 7.50% 7.25% 7.50%
Expected return on plan assets........................ 9.0 9.0 9.0 9.0
Rate of compensation increases........................ 3.0 to 6.5 3.0 to 6.5 3.0 to 6.5 4.5
---------- ---------- ---------- ----
25
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
NOTE 12. EMPLOYEE BENEFIT PLANS
For measurement purposes, a 7% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2001 and subsequent years.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one percent change in assumed
health care cost trend rates would have the following effects (in thousands):
1% INCREASE 1% DECREASE
----------- -----------
Aggregate of service and interest cost components of net
periodic postretirement health care benefit cost.......... $ 839 (669)
------ ------
Health care component of the accumulated postretirement
benefit obligation........................................ $8,374 (6,738)
------ ------
The Company also has the Employees' Thrift Plan of Trigon Insurance Company
(Thrift Plan) under which substantially all employees who have completed three
months of service may elect to save up to 16% of their annual earnings on a
pretax basis, subject to certain limits, in the plan. Participants have the
option of investing in a variety of domestic and international investment funds
as well as the stock of Trigon Healthcare, Inc. The Company contributes an
amount equal to 50% of the participant's contributions limited to a total of 3%
of the employee's compensation. These Company contributions are invested in the
investment options using the same allocations selected by the participants for
their contributions. Participants are eligible after three months of service and
are fully vested in the Company's contributions after three years of service.
The Company may make discretionary profit sharing contributions to participants
through the Trigon Healthcare, Inc. stock investment option. The Company made
discretionary contributions of $2.8 million, $3.4 million and $0.8 million
during 2001, 2000 and 1999, respectively, for contributions made in the previous
year. For the years ended December 31, 2001, 2000 and 1999, the Company's
matching contribution to the Thrift Plan was $4.3 million, $4.0 million and
$3.6 million, respectively.
NOTE 13. CAPITAL STOCK
The Company has authorized 300 million shares of Class A Common Stock, par
value $0.01 per share (Common Stock). Common Stock shares are entitled to one
vote per share.
The Company has also authorized 300 million shares of Class B non-voting
Common Stock, par value $0.01 per share (Non-Voting Common Stock). No shares of
Non-Voting Common Stock were issued and outstanding as of December 31, 2001 and
2000. The Non-Voting Common Stock has been authorized in connection with certain
ownership and transfer restrictions included in the Company's amended and
restated articles of incorporation. Non-Voting Common Stock shares are not
entitled to vote on any matter except as otherwise required by law.
The Company is authorized to issue up to 50 million shares of preferred
stock, no par value per share, in one or more series and to provide the
designations, preferences, limitations and rights of each series.
26
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
SHAREHOLDER RIGHTS PLAN
The Company has a Shareholder Rights Plan (Rights Plan). Under the Rights
Plan, the Board of Directors authorized three million preferred shares, the
Series A Junior Participating Preferred Shares, and declared a dividend of one
preferred share purchase right (Right) on each outstanding share of Trigon
Class A Common Stock. Each Right entitles shareholders to purchase one
one-hundredth of a Series A Junior Participating Preferred Share at an exercise
price of $100, subject to adjustment. Subject to certain exceptions, the Right
will be exercisable only if a person or group acquires 10% or more of the
Company's Common Stock or announces a tender offer for 10% or more of the
Company's outstanding Common Stock. Each holder of a Right (other than those
held by the acquiring person) will then be entitled to purchase, at the Right's
then current exercise price, a number of shares of Trigon Common Stock having a
market value of twice the Right's exercise price. If the Company is acquired in
a merger or other business combination transaction which has not been approved
by the Board of Directors, each Right will entitle its holder to purchase, at
the Right's then current exercise price, a number of shares of the acquiring
company's Common Stock having a market value of twice the Right's exercise
price.
The date of record for the dividend distribution was July 29, 1997. The
Rights will expire in 2007 and are redeemable by action of the Board of
Directors at a price of $.001 per Right at any time prior to becoming
exercisable.
COMMON STOCK HELD BY GRANTOR TRUSTS
The Company has several grantor trusts which were established to fund future
obligations under certain compensation and benefit plans. These grantor trusts
are consolidated for financial reporting purposes with the Company. The grantor
trusts may purchase shares of the Company's Common Stock in the open market. The
purchase price of the shares purchased and held by the grantor trusts is shown
as a reduction to capital in excess of par in the consolidated balance sheets.
STOCK OPTION PLANS, RESTRICTED STOCK AWARDS AND STOCK PURCHASE PLAN
The 1997 Stock Incentive Plan (Incentive Plan) provides for the granting of
stock options, restricted stock awards, performance stock awards, stock
appreciation rights and cash performance awards to employees. The Company has
reserved 6.3 million shares of its common stock for issuance under the Incentive
Plan. Awards are granted by the Human Resources Compensation and Employee
Benefits Committee of the Board of Directors. Options vest and expire over terms
as set by the committee at the time of grant. In accordance with the Incentive
Plan, options to purchase shares at an amount equal to the fair market value of
the stock at the date of grant were granted to eligible employees during 2001,
2000 and 1999. These options generally vest on a pro-rata basis over three
years, with certain grants vesting at the end of one or three years depending on
an employee's years of service, and in all cases expire 10 years from date of
grant.
The 1997 Non-Employee Directors Stock Incentive Plan (Non-Employee Plan)
provides for granting to newly-elected non-employee directors nonqualified stock
options to purchase 10,000 shares of common stock on the date of the first
annual meeting of shareholders at which the director is elected. In addition,
each eligible director will automatically be granted options to purchase 5,000
shares of common stock as of the date of each subsequent annual meeting of
shareholders. All options are granted at the fair market value on the date of
grant and become exercisable on a pro-rata basis
27
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
over a three-year period. All options expire 10 years from the date of grant.
The Company has reserved 550,000 shares of its common stock for issuance under
the Non-Employee Plan.
A summary of the stock option activity for the years ended December 31 is as
follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
Balance at January 1, 1999.................................. 2,961,025 $23.79
Granted................................................... 509,430 35.80
Exercised................................................. (140,854) 23.72
Forfeited................................................. (82,077) 27.11
--------- ------
Balance at December 31, 1999................................ 3,247,524 25.59
Granted................................................... 559,800 36.49
Exercised................................................. (758,123) 24.10
Forfeited................................................. (73,863) 26.85
--------- ------
Balance at December 31, 2000................................ 2,975,338 27.99
Granted................................................... 588,500 70.27
Exercised................................................. (368,651) 26.37
Forfeited................................................. (10,568) 48.63
--------- ------
Balance at December 31, 2001................................ 3,184,619 $35.92
========= ======
Options exercisable at:
December 31, 2001......................................... 2,201,894 $27.84
December 31, 2000......................................... 1,987,254 24.75
December 31, 1999......................................... 1,590,510 23.42
--------- ------
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
$18.13-25.50.............................. 1,574,187 5.7 years $23.49 1,574,187 $23.49
$27.75-38.63.............................. 1,016,932 7.6 years $35.23 553,285 $34.46
$53.13-73.63.............................. 593,500 9.0 years $70.08 74,422 $70.78
During 2001 and 2000, the Board of Directors granted 24,052 and 87,681
shares, respectively, of the Company's common stock as restricted stock awards
in accordance with the provisions of the Incentive Plan. The shares vest on a
pro-rata basis over three years. The recipients of the restricted stock awards
generally may not dispose or otherwise transfer the restricted stock until
vested. For grants of restricted stock, unearned compensation equivalent to the
fair market value of the shares at the date of grant is recorded as a separate
component of shareholders' equity and subsequently amortized to compensation
expense over the vesting period. Amortization was $1.8 million and $2.6 million
for the years ended December 31, 2001 and 2000, respectively.
28
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
As of December 31, 2001, a total of 1,994,620 shares were available for
future grants under the Incentive Plan and Non-Employee Plan.
The 1997 Employee Stock Purchase Plan (Stock Purchase Plan) provides
employees of the Company an opportunity to purchase the Company's common stock
through payroll deductions. The Company has reserved one million shares of its
common stock for issuance under the Stock Purchase Plan. Shares needed to
satisfy the needs of the Stock Purchase Plan may be newly issued by the Company
or acquired by purchase at the expense of the Company on the open market or in
private transactions. Annually, eligible employees may purchase up to $25,000 in
fair value based on the grant date price of the Company's common stock at 85% of
the lower of the fair value on the first or last trading day of each calendar
quarter. Employee purchases under the Stock Purchase Plan were $1.8 million,
$1.7 million and $1.6 million for the years ended December 31, 2001, 2000 and
1999, respectively. Pursuant to the Stock Purchase Plan, shares of the Company's
stock were purchased on the open market and issued to employees totaling 40,099,
64,387 and 60,735 during 2001, 2000 and 1999, respectively. In addition, 7,282
shares were pending purchase as of December 31, 2001. As of December 31, 2001,
there were 737,656 shares of common stock available for issuance under the Stock
Purchase Plan.
The pro forma information regarding net income and earnings per share as
required by SFAS No. 123 has been determined as if the Company had accounted for
its stock-based compensation under the fair value method of that Statement. The
fair value for the stock options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted average
assumptions for the years ended December 31:
2001 2000 1999
-------- -------- --------
Risk-free interest rate..................................... 4.16% 4.88% 6.78%
Volatility factor........................................... 38.27% 38.67% 42.36%
Dividend yield.............................................. -- -- --
Weighted average expected life.............................. 5 years 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock option grants have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock option grants.
For purposes of pro forma disclosures, compensation expense is increased for
the estimated fair value of the options amortized over the options' vesting
periods and for the difference between the market price of the stock and the
discounted purchase price of the shares on the purchase date for the
29
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
employee stock purchases. The Company's pro forma information is as follows (in
thousands, except per share data and weighted average fair value):
2001 2000 1999
------------------- ------------------- -------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- -------- -------- -------- -------- --------
Net income.................................... $116,060 108,478 112,009 105,175 20,463 12,486
Earnings per share
Basic net income............................ $ 3.20 2.99 2.98 2.80 0.50 0.31
Diluted net income.......................... $ 3.11 2.90 2.90 2.72 0.49 0.30
Weighted average fair value of options granted
during the year............................. $ -- 27.99 -- 15.22 -- 16.87
Weighted average fair value of employee stock
purchases during the year................... $ -- 12.37 -- 15.39 -- 6.30
Weighted average fair value of restricted
stock awards granted during year............ $ -- 58.23 -- 34.10 -- 32.88
STOCK REPURCHASE PROGRAM
The Company completed its first stock repurchase program in February 2000
whereby ten percent of the Company's common stock was repurchased. Also in
February 2000, the Company commenced a second stock repurchase program for the
repurchase of up to ten percent in additional shares. Under both repurchase
programs, the purchases may be made from time to time at prevailing prices in
the open market, by block purchase or in private transactions and may be
discontinued at any time. The repurchases are subject to restrictions relating
to volume, price, timing and debt covenant requirements. During 2001, the
Company purchased and retired 1,752,830 shares of its common stock at a cost of
$95.5 million, bringing the total shares purchased and retired to 6,513,828
shares at a cost of approximately $249.3 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. As of December 31, 2001, the Company may
repurchase an additional 1.5 million shares under the second stock repurchase
program.
NOTE 14. NET INCOME AND NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share for the years ended December 31 (in thousands, except per share data):
2001 2000 1999
-------- -------- --------
Numerator for basic and diluted earnings per share--net
income.................................................... $116,060 112,009 20,463
-------- -------- -------
Denominator
Denominator for basic earnings per share--weighted average
shares.................................................. 36,242 37,615 40,826
Effect of dilutive securities--employee and director stock
options and nonvested restricted stock awards........... 1,130 1,066 594
-------- -------- -------
Denominator for diluted earnings per share.................. 37,372 38,681 41,420
======== ======== =======
Basic net income per share.................................. $ 3.20 2.98 0.50
======== ======== =======
Diluted net income per share................................ $ 3.11 2.90 0.49
======== ======== =======
30
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
NOTE 15. COMPREHENSIVE INCOME
The reclassification entries under SFAS No. 130, Reporting Comprehensive
Income, for the years ended December 31 were as follows (in thousands):
2001 2000 1999
-------- -------- --------
Net unrealized losses on investment securities, net of
income taxes
Net unrealized holding losses arising during the year, net
of income tax benefit of $14,372, $5,008 and $20,043.... $(26,652) (9,300) (37,225)
Less: reclassification adjustment for net losses included
in net income, net of income tax benefit of $11,059,
$4,852 and $8,841....................................... 20,539 9,011 16,419
-------- ------ -------
Net unrealized losses on investment securities, net of
income taxes.............................................. $ (6,113) (289) (20,806)
======== ====== =======
The components of accumulated other comprehensive income as of December 31
were as follows (in thousands):
2001 2000 1999
-------- -------- --------
Net unrealized gain on investment securities, net of income
taxes of $1,594, $4,907 and $5,063........................ $3,001 9,114 9,403
Minimum pension liability, net of income taxes of $12 in
2000 and $169 in 1999..................................... -- (22) (315)
------ ------ -----
Accumulated other comprehensive income...................... $3,001 9,092 9,088
====== ====== =====
NOTE 16. STATUTORY FINANCIAL INFORMATION
Trigon Insurance Company and certain other subsidiaries are required to file
financial statements with, and are subject to audit by, the Commonwealth of
Virginia, Bureau of Insurance (Bureau of Insurance). Such financial statements
are prepared in accordance with statutory accounting practices prescribed or
permitted by the Bureau of Insurance which differ from accounting principles
generally accepted in the United States of America under which the accompanying
consolidated financial statements have been prepared. Effective January 1, 2001,
the Bureau of Insurance adopted in its entirety, as a component of prescribed or
permitted practices by the Commonwealth of Virginia, the National Association of
Insurance Commissioners' (NAIC) Accounting Practices and Procedures
manual--version effective January 1, 2001, (Codification). Codification was
developed by the NAIC in an effort to develop a single uniform and comprehensive
basis of statutory accounting. Codification was approved with a provision
allowing for prescribed or permitted accounting practices to be determined by
each states' insurance commissioner. Accordingly, such discretion will continue
to allow prescribed or permitted accounting practices that may differ from state
to state. The Company has determined that the combined statutory capital and
surplus as of January 1, 2001 of all subsidiaries subject to Codification
increased approximately $38 million as a result of the implementation of
Codification.
Significant differences between accounting principles generally accepted in
the United States of America and statutory accounting practices prescribed or
permitted by the Bureau of Insurance include: (i) certain investment valuation
reserves and certain claim reserves recognized under statutory accounting,
(ii) certain assets (primarily furniture and equipment, leasehold improvements,
employee benefit plan assets) not recognized under statutory accounting, and
(iii) certain assets recognized using
31
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
a different method (primarily deferred tax assets and certain miscellaneous
receivables) under statutory accounting. While the Bureau of Insurance has the
authority to permit insurers to deviate from prescribed statutory accounting
practices, none of the Company's subsidiaries subject to regulatory oversight by
the Bureau of Insurance have received, nor requested, approval to adopt any such
deviations.
Statutory surplus and net income for Trigon Insurance Company were (in
thousands):
Statutory surplus as of:
December 31, 2001 (unaudited)............................. $465,559
December 31, 2000......................................... 490,000
Statutory net income for the years ended:
December 31, 2001 (unaudited)............................. $ 77,603
December 31, 2000......................................... 88,509
December 31, 1999......................................... 93,301
Trigon Insurance Company is required by the Bureau of Insurance to maintain
statutory capital and surplus of at least $4.0 million.
Under the Code of Virginia, an insurance company may pay a dividend without
prior approval of the Bureau of Insurance to the extent that such dividend
together with other dividends or distributions within the preceding 12 months
does not exceed the lesser of: (i) 10% of the insurer's statutory surplus as of
the immediately preceding December 31, or (ii) the net statutory gain from
operations (excluding realized gains on investments) for the 12-month period
ended the immediately preceding December 31. During 2001, 2000 and 1999, Trigon
Insurance Company paid cash dividends to its parent of $125.0 million,
$125.0 million and $48.9 million, respectively. The 2001 and 2000 cash dividends
required and received prior approval from the Bureau of Insurance.
The Commonwealth of Virginia adopted the National Association of Insurance
Commissioners (NAIC) Risk-Based Capital Act in 1995. Under this Act, a company's
risk-based capital (RBC) is calculated by applying certain factors to various
asset, premium and reserve items. If a company's calculated RBC falls below
certain thresholds, regulatory intervention or oversight is required. The RBC
level as calculated in accordance with the NAIC's RBC instructions for all
subsidiaries subject to the Act exceeded all RBC thresholds as of December 31,
2001.
NOTE 17. SUBSIDIARIES
SALE OF TRIGON ADMINISTRATORS, INC.
In March 2001, the Company sold Trigon Administrators, Inc. and its Property
and Casualty Division, which provides workers' compensation, liability and
short-term disability services, and recognized a gain of $3.5 million on the
sale. The gain is included as a component of net realized losses in the
accompanying consolidated statements of operations.
PURCHASE OF MINORITY INTEREST OF PRIORITY, INC.
On September 29, 2000, 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. The purchase price for the minority interest was
32
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
approximately $2.7 million. The acquisition was accounted for as a purchase and
goodwill arising from the purchase amounted to $2.2 million. 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.
MID-SOUTH EXIT OF HEALTH INSURANCE MARKET
On October 5, 1999, the Company announced that Mid-South Insurance Company,
a subsidiary headquartered in Fayetteville, North Carolina, intended to exit the
health insurance market with a targeted effective date of April 30, 2000 for
group business and with targeted or actual effective dates for the exit of
individual business to vary depending upon the regulations of each affected
state. The announcement followed the development and Board of Directors approval
of a comprehensive exit plan in September 1999. After taking a number of steps
to improve the performance of Mid-South and assessing various alternatives, it
was concluded that Mid-South could not bring its financial performance up to
expectations within a reasonable time frame. The exit would permit the Company
to intensify its focus on its successful business in Virginia and pursue more
substantial opportunities for growth in the surrounding regions.
33
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
The announcement in October resulted in a nonrecurring pretax charge to
operations during the third quarter of 1999 of $79.9 million or $51.9 million
net of tax. The charge included costs associated with the write-off of goodwill,
other intangibles and deferred acquisition costs determined not to be
recoverable of $55.9 million, a $20.6 million increase to claim reserves for
anticipated future claims, bringing total claims reserves to $31.3 million, and
maintenance costs in excess of the related premiums and certain other costs
associated with the exit of $3.4 million. The Company recognized the charge for
goodwill, other intangibles and deferred acquisition costs and certain other
costs associated with the exit in selling, general and administrative expenses
and recognized the charge to increase the claim reserves in medical and other
benefit costs in the accompanying statements of operations. Through
December 31, 2001, the Company made payments of $22.6 million against the claim
reserves and $1.5 million against the accrual of certain other exit costs,
including payments during 2001 of $9.7 million against the claim reserves. No
other adjustments have been made to these accruals. The remaining accrual is
expected to be sufficient to satisfy any potential payments related to the 1999
exit.
Cancellation notices were sent on the group business and the exit of this
business was completed by April 30, 2000. The Company pursued options other than
cancellation of the individual business and on June 1, 2000 all of the issued
and outstanding shares of Mid-South were sold to another carrier. 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 financial performance of the Mid-South
individual business for the period from June 1, 2000 through December 31, 2002.
The remaining accrual is expected to be sufficient to satisfy any potential
payments under this provision of the stock purchase agreement.
NOTE 18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND
CONCENTRATIONS OF CREDIT RISK
The carrying amounts of cash, premiums and other receivables, other current
assets, medical and other benefits payable, unearned premiums, accounts payable
and accrued expenses, commercial paper and other current liabilities approximate
fair value because of the short-term nature of these instruments. The fair
values of investment securities are estimated based on quoted market prices.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of investment securities and premiums
receivable. All of the investment securities are managed within established
guidelines which limit the amounts which may be invested with one issuer. The
Company primarily conducts business within the Commonwealth of Virginia;
therefore, premiums receivable are concentrated with companies and individuals
within Virginia.
NOTE 19. LEGAL AND REGULATORY PROCEEDINGS
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. The case was tried in
November 2001, and closing arguments will be made to the court in March 2002. If
successful, the Company expects to recover approximately $33 million in cash
refunds plus after-tax interest of about $18 million and to receive tax refunds
for the years 1996 through 2000 of about $26 million. In addition, if the
Company is successful it could receive substantial additional tax deductions
that could lower federal income tax liability for years after 1995.
34
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
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 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.
If the Company wins this lawsuit and has previously collected refunds for
the Demutualization payment deduction discussed in note 10, a portion of the tax
recoveries for the years after 1995 would most likely be realized in the form of
income tax credit carryovers rather than cash. Regarding both of these matters,
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 these claims, if any,
in the consolidated financial statements.
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 or results of operations of the
Company.
NOTE 20. SEGMENT INFORMATION
The Company has four reportable segments: health insurance, government
programs, investments and all other. Its health insurance segment offers several
network products, including HMO, PPO and PAR as well as medicare supplement
plans. The government programs segment includes the FEP and, through
August 1999, claims processing for Medicare (note 2). Through its participation
in the FEP, the Company provides health benefits to federal employees in
Virginia. The FEP is the Company's largest customer, representing 17.8%, 17.8%,
and 19.1% of total consolidated revenues during 2001, 2000 and 1999,
respectively. 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,
benefits administration, health promotion and similar products, is reflected in
an "all other" category.
The reportable segments follow the Company's method of internal reporting by
products and services.
The financial results of the Company's segments are presented consistent
with the accounting policies described in note 1. The Company evaluates the
performance of its segments and allocates
35
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
resources based on income before income taxes and minority interest, except for
the investments segment which is evaluated using investment income and net
realized gains and losses. Intersegment sales and expense transfers are recorded
at cost.
The following table presents information by reportable segment for the years
ended December 31 (in thousands):
HEALTH GOVERNMENT ALL
INSURANCE PROGRAMS INVESTMENTS OTHER TOTAL
---------- ---------- ----------- -------- ---------
2001
Revenues from external customers...... $2,376,454 529,491 -- 16,779 2,922,724
Investment income and net realized
losses.............................. -- -- 48,917 -- 48,917
Intersegment revenues................. 15,129 -- -- 9,170 24,299
Depreciation and amortization
expense............................. 21,860 223 27 2,584 24,694
Income before income taxes and
minority interest................... 178,866 6,160 48,917 4,253 238,196
2000
Revenues from external customers...... $2,036,225 464,303 -- 21,339 2,521,867
Investment income and net realized
losses.............................. -- -- 87,430 -- 87,430
Intersegment revenues................. 12,987 -- -- 7,925 20,912
Depreciation and amortization
expense............................. 14,125 22 23 1,828 15,998
Income before income taxes and
minority interest................... 127,161 1,015 87,430 4,251 219,857
1999
Revenues from external customers...... $1,798,956 448,676 -- 21,657 2,269,289
Investment income and net realized
losses.............................. -- -- 75,174 -- 75,174
Intersegment revenues................. 11,885 -- -- 6,546 18,431
Depreciation and amortization
expense............................. 17,667 261 19 1,681 19,628
Income (loss) before income taxes and
minority interest................... (4,441) (1,731) 75,174 1,791 70,793
Asset information by reportable segment has not been disclosed as it is not
prepared internally by the Company. However, depreciation and amortization
expense for property and equipment purchased is charged to the reportable
segment responsible for the purchase.
36
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001, 2000 and 1999
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 years ended December 31 is as follows (in thousands):
2001 2000 1999
---------- --------- ---------
Revenues
Reportable segments
External revenues...................................... $2,922,724 2,521,867 2,269,289
Investment revenues.................................... 48,917 87,430 75,174
Intersegment revenues.................................. 24,299 20,912 18,431
Other corporate revenues................................. 3,326 2,298 1,965
Elimination of intersegment revenues..................... (24,299) (20,912) (18,431)
---------- --------- ---------
Total revenues............................................. $2,974,967 2,611,595 2,346,428
========== ========= =========
Profit or Loss
Reportable segments...................................... $ 238,196 219,857 70,793
Corporate expenses not allocated to segments............. (49,763) (36,854) (30,916)
Unallocated amounts:
Interest expense....................................... (12,695) (17,249) (8,359)
---------- --------- ---------
Income before income taxes and minority interest........... $ 175,738 165,754 31,518
========== ========= =========
Depreciation and amortization expense
Reportable segments...................................... $ 24,694 15,998 19,628
Not allocated to segments................................ (1,274) (716) (973)
---------- --------- ---------
Total depreciation and amortization expense................ $ 23,420 15,282 18,655
========== ========= =========
37
(ii) The Unaudited Consolidated Financial Statements of Trigon.
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(in thousands)
MARCH 31,
2002
----------
Assets
Current assets
Cash...................................................... $ 8,236
Investment securities, at estimated fair value............ 1,859,038
Premiums and other receivables............................ 667,602
Deferred income taxes..................................... 11,091
Other..................................................... 16,368
----------
Total current assets.................................. 2,562,335
----------
Property and equipment, net................................. 91,958
Deferred income taxes....................................... 42,198
Goodwill, net (note 9)...................................... 13,670
Restricted investments, at estimated fair value............. 7,052
Other assets................................................ 9,229
----------
Total assets.......................................... $2,726,442
==========
Liabilities and Shareholders' Equity
Current liabilities
Medical and other benefits payable...................... $ 663,017
Unearned premiums....................................... 160,934
Accounts payable and accrued expenses................... 76,110
Other liabilities....................................... 346,402
Commercial paper (note 2)............................... 99,721
----------
Total current liabilities............................. 1,346,184
----------
Medical and other benefits payable, noncurrent.............. 75,143
Obligations for employee benefits, noncurrent............... 44,161
Commercial paper, noncurrent (note 2)....................... 200,000
Minority interest........................................... 14,750
----------
Total liabilities..................................... 1,680,238
----------
Shareholders' equity
Common stock............................................ 358
Capital in excess of par................................ 780,927
Retained earnings....................................... 269,601
Unearned compensation-restricted stock.................. (3,699)
Accumulated other comprehensive income (loss) (note
6).................................................... (983)
----------
Total shareholders' equity............................ 1,046,204
Commitments and contingencies (note 7)
----------
Total liabilities and shareholders' equity............ $2,726,442
==========
See notes to consolidated financial statements
38
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended March 31, 2002 and 2001
(in thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
-------------------
2002 2001
-------- --------
Revenues
Premium and fee revenues
Commercial.............................................. $599,611 513,890
Federal Employee Program................................ 144,438 133,741
Amounts attributable to self-funded arrangements........ 459,507 386,289
Less: amounts attributable to claims under self-funded
arrangements.......................................... (398,044) (333,471)
-------- --------
805,512 700,449
Investment income......................................... 24,531 27,744
Net realized losses....................................... (10,579) (6,275)
Other revenues............................................ 6,211 6,245
-------- --------
Total revenues........................................ 825,675 728,163
-------- --------
Expenses
Medical and other benefit costs
Commercial.............................................. 489,253 418,042
Federal Employee Program................................ 138,663 128,748
-------- --------
627,916 546,790
Selling, general and administrative expenses.............. 141,969 128,423
Interest expense.......................................... 1,607 4,180
-------- --------
Total expenses........................................ 771,492 679,393
-------- --------
Income before income taxes and minority interest............ 54,183 48,770
Income tax expense.......................................... 17,663 16,384
-------- --------
Income before minority interest............................. 36,520 32,386
Minority interest........................................... 1,283 (14)
-------- --------
Net income.................................................. $ 35,237 32,400
======== ========
Earnings per share (note 5)
Basic net income.......................................... $ 0.99 0.87
======== ========
Diluted net income........................................ $ 0.96 0.84
======== ========
Weighted average number of common shares outstanding
Basic..................................................... 35,706 37,286
======== ========
Diluted................................................... 36,864 38,419
======== ========
See notes to consolidated financial statements
39
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)
For the three months ended March 31, 2002 and 2001
(in thousands)
2002 2001
---------- ---------
Balance as of January 1..................................... $1,020,420 1,014,862
Net income.................................................. 35,237 32,400
Net unrealized losses on investment securities, net of
income taxes.............................................. (3,984) (5,605)
---------- ---------
Comprehensive income...................................... 31,253 26,795
---------- ---------
Purchase and reissuance of common stock under stock option
and other employee benefit plans, including tax benefits
and net of amortization................................... (4,905) (2,408)
Change in common stock held by consolidated grantor
trusts.................................................... (564) (542)
Repurchase and retirement of common stock................... -- (41,755)
---------- ---------
Balance as of March 31...................................... $1,046,204 996,952
========== =========
See notes to consolidated financial statements
40
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended March 31, 2002 and 2001
(in thousands)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------- -------------
Net income.................................................. $ 35,237 32,400
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization........................... 6,543 5,221
Amortization of unearned compensation................... 502 429
Accretion of discounts and amortization of premiums,
net................................................... 2,628 (2,581)
Change in allowance for doubtful accounts receivable.... (56) (977)
Increase in premiums and other receivables.............. (22,730) (17,401)
(Increase) decrease in other assets..................... (2,920) 2,402
Increase in medical and other benefits payable.......... 28,404 14,625
Increase in unearned premiums........................... 11,587 14,863
Decrease in accounts payable and accrued expenses....... (9,882) (2,595)
Increase in other liabilities........................... 26,910 7,579
Change in deferred income taxes......................... (307) (327)
Increase (decrease) in minority interest................ 1,283 (14)
Increase in obligations for employee benefits........... 2,470 8,039
Loss on disposal of property and equipment and other
assets................................................ 68 37
Realized investment losses, net......................... 10,579 6,275
--------- ----------
Net cash provided by operating activities........... 90,316 67,975
--------- ----------
Cash flows from investing activities
Proceeds from sale of property and equipment and other
assets.................................................. 15 220
Capital expenditures...................................... (11,182) (11,070)
Investment securities purchased........................... (944,114) (1,828,639)
Proceeds from investment securities sold.................. 757,835 1,537,539
Maturities of fixed income securities..................... 87,606 245,193
--------- ----------
Net cash used in investing activities............... (109,840) (56,757)
--------- ----------
Cash flows from financing activities
Change in commercial paper notes.......................... 61 9,976
Purchase and reissuance of common stock under stock option
and employee benefit plans, including tax benefits...... (5,599) (2,794)
Change in common stock purchased by consolidated grantor
trusts.................................................. (564) (542)
Purchase and retirement of common stock................... -- (29,820)
Change in outstanding checks in excess of bank balance.... 15,867 18,141
--------- ----------
Net cash provided by (used in) financing
activities........................................ 9,765 (5,039)
--------- ----------
Increase (decrease) in cash................................. (9,759) 6,179
Cash--beginning of period................................... 17,995 6,345
--------- ----------
Cash--end of period......................................... $ 8,236 12,524
========= ==========
See notes to consolidated financial statements
41
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. Accordingly, the consolidated financial statements do not include all
of the information and the footnotes required by accounting principles generally
accepted in the United States of America 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, 2001.
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, 2002 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. REVOLVING CREDIT FACILITIES AND COMMERCIAL PAPER
In November 2001, the Company entered into new revolving credit facilities
with a syndicate of lenders, replacing the existing revolving credit facility
expiring in February 2002. The new credit facilities consist of a $100 million
364-day revolving credit facility and a $200 million 5-year revolving credit
facility. These credit facilities may be used for general corporate purposes and
are currently being used to back the commercial paper discussed below. The terms
of the credit facilities provide for various borrowing options and rates and
require the Company to pay facility and administrative fees on a quarterly
basis. The credit facilities contain certain financial covenants and
restrictions including minimum consolidated net worth requirements and debt to
consolidated total capitalization ratio limitations. There were no amounts
borrowed under the credit facilities during 2002. Use of the credit facilities
to back the commercial paper reduces the amounts available for borrowing under
these facilities.
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. As of March 31, 2002, outstanding
notes under the commercial paper program totaled approximately $299.7 million
with an average maturity of 17 days. See Note 11. The weighted-average annual
discount yield on the outstanding commercial paper notes as of March 31, 2002
was 1.99%. The commercial paper is currently backed by revolving credit
facilities. For financial reporting purposes, the commercial paper has been
classified as a combination of current and noncurrent liabilities in the
accompanying consolidated statements of financial condition based on the terms
of the revolving credit facilities backing these notes.
3. INCOME TAXES
The effective tax rate on income before income taxes and minority interest
for the three months ended March 31, 2002 and 2001 was 32.6% and 33.6%,
respectively. The effective tax rates for 2002 and 2001 differ from the
statutory tax rate of 35% primarily due to the Company's investments in
42
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
tax-exempt municipal bonds that reduce the effective tax rate by the effect of
the tax-exempt investment income earned.
See note 7 for discussion of the Demutualization payment deduction.
4. CAPITAL STOCK
In February 2002, the Board of Directors granted 31,369 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 67,723 restricted shares were
outstanding as of March 31, 2002. Amortization for the three months ended
March 31, 2002 and 2001 was $0.5 million and $0.4 million, respectively.
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, 2002 and 2001 (in thousands,
except per share data):
2002 2001
-------- --------
Numerator for basic and diluted earnings per share--net
income................................................... $35,237 32,400
Denominator
Denominator for basic earnings per share--weighted
average shares......................................... 35,706 37,286
Effect of dilutive securities--employee and director
stock options and nonvested restricted stock awards.... 1,158 1,133
------- ------
Denominator for diluted earnings per share............... 36,864 38,419
======= ======
Basic net income per share................................. $ 0.99 0.87
======= ======
Diluted net income per share............................... $ 0.96 0.84
======= ======
Shares of nonvested restricted stock are not considered outstanding in
computing the weighted-average number of common shares for basic earnings per
share, but are included in diluted earnings per share using the treasury stock
method.
43
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. COMPREHENSIVE INCOME
The reclassification entries under SFAS No. 130, Reporting Comprehensive
Income, for the three months ended March 31, 2002 and 2001 were as follows (in
thousands):
2002 2001
-------- --------
Net unrealized losses on investment securities, net of
income taxes Net holding gains (losses) arising during
the period, net of income tax expense (benefit) of
$(6,009) and $1,824..................................... $(11,201) 3,387
Less: reclassification adjustment for net gains (losses)
included in net income, net of income tax expense
(benefit) of $(3,886) and $4,842........................ (7,217) 8,992
-------- ------
Net unrealized losses on investment securities, net of
income taxes............................................ $ (3,984) (5,605)
======== ======
Accumulated other comprehensive income (loss) as of March 31, 2002 was as
follows (in thousands):
MARCH 31,
2002
---------
Net unrealized gains (losses) on investment securities, net
of income tax expense (benefit) of $(530)................. $(983)
=====
7. LITIGATION AND OTHER MATTERS
In conjunction with the Demutualization in 1997, the Company made the
$175 million Commonwealth Payment which was expensed and paid in prior years.
The Company claimed the $175 million Commonwealth Payment as a deduction. The
IRS denied this deduction during the course of its audit of the Company. The
Company continued to pursue the deduction and in April 2001 received a Technical
Advice Memorandum (Memorandum) from the National Office of the IRS that supports
the Company's position that the payment constitutes a normal business expense,
and therefore should be deductible. On March 18, 2002, the Company received
notice from the IRS that they are considering revoking this Memorandum and,
accordingly, have withdrawn the Memorandum as of that date. The Company will
continue to pursue this deduction. If successful, the Company expects to recover
approximately $35 million in cash refunds and $26 million in income tax credit
carryovers plus after-tax interest currently estimated to be $8 million.
In addition, the Company's subsidiary, Trigon Insurance Company, filed a
lawsuit against the federal government in June 2000 for the recovery of federal
income tax overpayments for the years 1989 through 1995. The case was tried in
November 2001, and closing arguments were made to the court in March 2002. If
successful, the Company expects to recover approximately $33 million in cash
refunds plus after-tax interest of about $18 million and to receive tax refunds
for the years 1996 through 2000 of about $26 million. In addition, if the
Company is successful it could receive substantial additional tax deductions
that could lower federal income tax liability for years after 1995.
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
44
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
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 IRS 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.
If the Company wins this lawsuit and has previously collected refunds for
the Demutualization payment deduction discussed above, a portion of the tax
recoveries for the years after 1995 would most likely be realized in the form of
income tax credit carryovers rather than cash. Regarding both of these matters,
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
amounts 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 favorable impact of these claims,
if any, in the consolidated financial statements.
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 or results of operations of the
Company.
8. MID-SOUTH EXIT OF HEALTH INSURANCE MARKET AND SALE OF TRIGON ADMINISTRATORS
As of March 31, 2002, the Company had remaining liabilities of $9.6 million
and $1.9 million for claim related reserves and certain other exit costs,
respectively, resulting from the 1999 exit of the health insurance market by its
former subsidiary, Mid-South Insurance Company. Through March 31, 2002, the
Company made net payments of $21.7 million against the claim reserves and
$1.5 million against the accrual of certain other exit costs. No other
adjustments have been made to these accruals. The remaining accruals are
expected to be sufficient to satisfy any potential payments related to the 1999
exit.
In March 2001, the Company sold Trigon Administrators, Inc. and its Property
and Casualty Division, which provides workers compensation, liability and
short-term disability services, and recognized a gain of $3.5 million on the
sale. The gain is included as a component of net realized losses in the
accompanying consolidated statements of operations.
9. GOODWILL
The Company adopted SFAS No. 141, Business Combinations, in 2001 and SFAS
No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. SFAS
No. 141 requires that the
45
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. It also specifies the criteria that intangible assets
acquired in a purchase method business combination must meet to be recognized
and reported apart from goodwill. SFAS No. 142 addresses the accounting and
financial reporting for goodwill and other intangible assets upon acquisition
and in the periods following acquisition. Under SFAS No. 142, goodwill and
intangible assets determined to have indefinite useful lives are not amortized
but rather are tested at least annually for impairment. Intangible assets that
have definite useful lives are amortized over their useful lives to their
estimated residual values. In connection with the transitional goodwill
impairment evaluation, SFAS No. 142 requires the Company to perform an
assessment of whether there is an indication that goodwill is impaired as of the
date of adoption.
As of January 1, 2002, the date of adoption, the Company had unamortized
goodwill in the amount of $13.7 million and has determined there is no
transitional impairment loss related to the goodwill. This goodwill is
associated with the health insurance segment. In addition, the adoption of SFAS
No. 142 eliminated approximately $1.6 million in annual goodwill amortization
beginning in 2002 in the consolidated statements of operations.
The effect of the adoption of SFAS No. 142 on the Company's net income,
basic net income per share and diluted net income per share is as follows (in
thousands, except per share data):
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------- ------------
Reported net income.............................. $35,237 32,400
Add back: Goodwill amortization.................. -- 408
------- ------
Adjusted net income.............................. $35,237 32,808
======= ======
Basic net income per share:
Reported....................................... $ 0.99 0.87
Add back: Goodwill amortization................ -- 0.01
------- ------
Adjusted....................................... $ 0.99 0.88
======= ======
Diluted net income per share:
Reported....................................... $ 0.96 0.84
Add back: Goodwill amortization................ -- 0.01
------- ------
Adjusted....................................... $ 0.96 0.85
======= ======
46
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. SEGMENT INFORMATION
The following table presents information by reportable segment for the three
months ended March 31, 2002 and 2001 (in thousands):
HEALTH GOVERNMENT ALL
INSURANCE PROGRAMS INVESTMENTS OTHER TOTAL
--------- ---------- ----------- -------- --------
2002
Revenues from external customers.......... $661,074 144,438 -- 5,531 811,043
Investment income and net realized
losses.................................. -- -- 13,952 -- 13,952
Intersegment revenues..................... 3,698 -- -- 2,139 5,837
Depreciation and amortization expense..... 6,323 42 7 328 6,700
Income before income taxes and minority
interest................................ 49,606 1,393 13,952 1,621 66,572
2001
Revenues from external customers.......... $566,709 133,741 -- 5,601 706,051
Investment income and net realized
losses.................................. -- -- 21,469 -- 21,469
Intersegment revenues..................... 3,611 -- -- 2,243 5,854
Depreciation and amortization expense..... 4,374 6 6 501 4,887
Income before income taxes and minority
interest................................ 40,000 889 21,469 511 62,869
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
47
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
consolidated statements of operations for the three months ended March 31, 2002
and 2001 is as follows (in thousands):
2002 2001
-------- --------
Revenues
Reportable segments
External revenues....................................... $811,043 706,051
Investment revenues..................................... 13,952 21,469
Intersegment revenues................................... 5,837 5,854
Other corporate revenues.................................. 680 643
Elimination of intersegment revenues...................... (5,837) (5,854)
-------- -------
Total revenues.............................................. $825,675 728,163
======== =======
Profit or Loss
Reportable segments....................................... $ 66,572 62,869
Corporate expenses not allocated to segments.............. (10,782) (9,919)
Unallocated amount--interest expense...................... (1,607) (4,180)
-------- -------
Income before income taxes and minority interest............ $ 54,183 48,770
======== =======
Depreciation and amortization expense
Reportable segments....................................... $ 6,700 4,887
Not allocated to segments................................. (157) 334
-------- -------
Depreciation and amortization expense....................... $ 6,543 5,221
======== =======
11. SUBSEQUENT EVENTS
On April 29, 2002, the Company and Anthem, Inc. (Anthem) announced that they
entered into an agreement and plan of merger pursuant to which the Company will
be merged into a wholly-owned subsidiary of Anthem. Under the agreement, the
Company's shareholders will receive thirty dollars in cash and 1.062 shares of
Anthem common stock for each share of Trigon Class A common stock outstanding
upon completion of the merger. Closing of the merger is subject to customary
closing conditions, including the receipt of regulatory and shareholder
approvals. For more information regarding the proposed merger, please refer to
the Company's Form 8-K filed with the Securities and Exchange Commission on
April 29, 2002.
In accordance with the merger agreement, the Company began in late May 2002
to reduce the amount of outstanding commercial paper notes. As of July 12, 2002,
the Company had repaid and retired $250 million of commercial paper notes,
bringing the total outstanding notes under the commercial paper program to
$50 million. The Company expects that all commercial paper will be repaid and
the commercial paper program will be terminated prior to completion of the
merger with Anthem.
48
(b) Pro Forma Financial Information
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined financial information presented below
gives effect to the issuance of $150.0 million aggregate principal amount of
4.875% notes due 2005 and $800.0 million aggregate principal amount of 6.800%
notes due 2012 (collectively the "notes") and to the merger of Trigon
Healthcare, Inc., a Virginia Corporation ("Trigon") with and into AI Sub
Acquisition Corp., an Indiana Corporation and a direct wholly owned
subsidiary of Anthem Inc., an Indiana corporation ("Anthem"). The unaudited
pro forma combined financial information assumes the notes had been issued and
the merger had occurred on March 31, 2002 for purposes of the unaudited pro
forma balance sheet, and as of January 1, 2001 for purposes of the unaudited
pro forma combined income statements for the three months ended March 31,
2002 and the year ended December 31, 2001. The unaudited pro forma combined
financial information includes the historical amounts of Anthem and Trigon,
adjusted to reclassify Trigon's information to Anthem's presentation format
and to reflect the effects of Anthem's acquisition of Trigon.
Under the terms of the merger agreement, Trigon's shareholders are
entitled to receive $30.00 in cash, without interest, and 1.062 shares of
Anthem common stock for each share of Trigon Class A common stock. The
unaudited pro forma combined financial statements assume that Anthem has
issued 39,007,625 shares in the merger (based on 36,730,344 Trigon shares
outstanding at July 31, 2002 converted at 1.062 per share), with a fair
market value of $2,710.6 million, based on a market price of $69.49. The pro
forma information assumes that Anthem will pay the $1,181.1 million of cash
consideration (including transaction costs, but excluding $30.8 million of
deferred contractual payments) from the aggregate principal amount of the
$950.0 million of notes, less underwriting and issuance discounts and other
estimated offering expenses aggregating $11.7 million, and the remaining
$242.8 million of cash consideration from cash and investments.
We will account for the merger using the purchase method of accounting.
Therefore, we will record the assets (including identifiable intangible
assets) and liabilities of Trigon at their estimated fair value. The
difference between the purchase price and the estimated fair value of the net
assets and liabilities will result in goodwill.
The pro forma information, while helpful in illustrating the financial
characteristics of the combined company under one set of assumptions, should not
be relied upon as being indicative of the results that would actually have been
obtained if the notes had been issued and the merger had been in effect for the
periods described below or the future results of the combined company.
The pro forma information should be read in conjunction with the
historical consolidated financial statements of Anthem and the historical
consolidated financial statements of Trigon.
49
(i) Unaudited Pro Forma Combined Balance Sheet as of
March 31, 2002.
UNAUDITED PRO FORMA COMBINED
BALANCE SHEET
($ IN MILLIONS)
MARCH 31, 2002
--------------------------------------------------------------------
ANTHEM TRIGON RECLASSIFICATION PRO FORMA ANTHEM
HISTORICAL HISTORICAL ADJUSTMENTS(1) ADJUSTMENTS PRO FORMA
---------- ---------- ---------------- ----------- ---------
ASSETS
Current assets:
Investments........................ $3,960.9 $1,859.0 $ (9.2) $ (542.5)(2) $ 5,268.2
Cash and cash equivalents.......... 456.3 8.2 -- -- (2) 464.5
Premium and self funded
receivables...................... 610.6 667.6 (440.3) -- 837.9
Reinsurance receivables............ 77.6 -- -- -- 77.6
Other receivables.................. 275.3 -- 122.5 -- 397.8
Other current assets............... 37.5 27.5 -- -- 65.0
-------- -------- ------- -------- ---------
Total current assets................. 5,418.2 2,562.3 (327.0) (542.5) 7,111.0
Restricted cash and investments...... 39.6 7.1 9.2 -- 55.9
Property and equipment............... 406.6 92.0 -- -- 498.6
Goodwill and other intangible
assets............................. 469.0 13.7 -- 3,193.3 (3) 3,676.0
Other noncurrent assets.............. 69.6 51.3 -- -- 120.9
-------- -------- ------- -------- ---------
TOTAL ASSETS......................... $6,403.0 $2,726.4 $(317.8) $2,650.8 $11,462.4
======== ======== ======= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Total policy liabilities........... $1,835.2 $ 663.0 $(144.9) $ -- $ 2,353.3
Unearned income.................... 328.7 160.9 37.6 -- 527.2
Accounts payable and accrued
expenses......................... 245.8 76.1 -- -- 321.9
Bank overdrafts.................... 360.2 -- 57.5 -- 417.7
Income taxes payable............... 54.1 -- 36.8 -- 90.9
Other current liabilities.......... 184.0 446.1 (229.7) (99.7)(4) 300.7
-------- -------- ------- -------- ---------
Total current liabilities............ 3,008.0 1,346.1 (242.7) (99.7) 4,011.7
Long term debt, less current
portion............................ 818.7 200.0 -- 738.3 (5) 1,757.0
Retirement benefits.................. 97.3 44.2 -- -- 141.5
Other noncurrent liabilities......... 353.0 89.9 (75.1) 153.3 (6) 521.1
-------- -------- ------- -------- ---------
TOTAL LIABILITIES.................... 4,277.0 1,680.2 (317.8) 791.9 6,431.3
SHAREHOLDERS' EQUITY
Common stock......................... 1.1 0.3 -- 0.1 (7) 1.5
Additional paid in capital........... 1,960.9 780.9 -- 2,123.8 (8) 4,865.6
Retained earnings.................... 155.5 269.6 -- (269.6)(9) 155.5
Accumulated other comprehensive
income (loss)...................... 8.5 (4.6) -- 4.6 (10) 8.5
-------- -------- ------- -------- ---------
TOTAL SHAREHOLDERS' EQUITY........... 2,126.0 1,046.2 -- 1,858.9 5,031.1
-------- -------- ------- -------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................. $6,403.0 $2,726.4 $(317.8) $2,650.8 $11,462.4
======== ======== ======= ======== =========
50
(ii) Unaudited Pro Forma Combined Statement of Income for
the three months ended March 31, 2002.
UNAUDITED PRO FORMA COMBINED
STATEMENT OF INCOME
($ IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, 2002
-----------------------------------------------------------------------
ANTHEM TRIGON RECLASSIFICATION PRO FORMA ANTHEM
HISTORICAL HISTORICAL ADJUSTMENTS(1) ADJUSTMENTS PRO FORMA
----------- ---------- ---------------- ----------- -----------
REVENUES
Premiums......................... $ 2,529.5 $744.0 $18.0 $ -- $ 3,291.5
Administrative fees.............. 201.0 61.5 (1.4) (1.5)(11) 259.6
Other revenue.................... 18.1 6.2 -- -- 24.3
----------- ------ ----- ------ -----------
Total operating revenue........ 2,748.6 811.7 16.6 (1.5) 3,575.4
Net investment income............ 60.5 24.5 1.0 (7.3)(12) 78.7
Net realized gains (losses) on
investments.................... 3.3 (10.6) -- -- (7.3)
----------- ------ ----- ------ -----------
2,812.4 825.6 17.6 (8.8) 3,646.8
----------- ------ ----- ------ -----------
EXPENSES
Benefit expense.................. 2,136.4 627.9 12.9 -- 2,777.2
Administrative expense........... 505.6 142.0 4.7 (1.5)(11) 650.8
Interest expense................. 17.6 1.6 -- 14.2 (13) 33.4
Amortization of identifiable
intangible assets.............. 3.3 -- -- 8.3 (14) 11.6
----------- ------ ----- ------ -----------
2,662.9 771.5 17.6 21.0 3,473.0
----------- ------ ----- ------ -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST.......... 149.5 54.1 -- (29.8) 173.8
Income taxes (credit)............ 49.2 17.7 -- (10.4)(15) 56.5
Minority interest................ 0.5 1.2 -- -- 1.7
----------- ------ ----- ------ -----------
NET INCOME (LOSS).............. $ 99.8 $ 35.2 $ -- $(19.4) $ 115.6
=========== ====== ===== ====== ===========
NET INCOME PER SHARE:
Basic.......................... $ 0.97 $ 0.81
Diluted........................ $ 0.95 $ 0.79
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic.......................... 103,323,299 142,330,924
Diluted........................ 104,820,572 145,917,884
51
(iii) Unaudited Pro Forma Combined Statement of Income for
the year ended December 31, 2001.
UNAUDITED PRO FORMA COMBINED
STATEMENT OF INCOME
($ IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2001
-------------------------------------------------------------------------
ANTHEM TRIGON RECLASSIFICATION PRO FORMA ANTHEM
HISTORICAL HISTORICAL ADJUSTMENTS(1) ADJUSTMENTS PRO FORMA
------------ ---------- ---------------- ----------- ------------
REVENUES
Premiums....................... $ 9,244.8 $2,695.7 $60.9 $ -- $ 12,001.4
Administrative fees............ 817.3 210.3 3.9 (4.5)(11) 1,027.0
Other revenue.................. 58.2 20.1 -- -- 78.3
------------ -------- ----- ------- ------------
Total operating revenue...... 10,120.3 2,926.1 64.8 (4.5) 13,106.7
Net investment income.......... 238.6 105.2 3.3 (29.0)(12) 318.1
Net realized gains (losses) on
investments.................. 60.8 (56.3) -- -- 4.5
Gain on sale of subsidiary
operations................... 25.0 -- -- -- 25.0
------------ -------- ----- ------- ------------
10,444.7 2,975.0 68.1 (33.5) 13,454.3
------------ -------- ----- ------- ------------
EXPENSES
Benefit expense................ 7,814.7 2,263.8 49.9 -- 10,128.4
Administrative expense......... 1,986.1 522.7 16.6 (4.5)(11) 2,520.9
Interest expense............... 60.2 12.7 -- 50.4 (13) 123.3
Amortization of goodwill and
other intangible assets...... 31.5 -- 1.6 33.8 (14) 66.9
Demutualization expenses....... 27.6 -- -- -- 27.6
------------ -------- ----- ------- ------------
9,920.1 2,799.2 68.1 79.7 12,867.1
------------ -------- ----- ------- ------------
INCOME (LOSS) BEFORE INCOME
TAXES AND MINORITY
INTEREST..................... 524.6 175.8 -- (113.2) 587.2
Income taxes (credit).......... 183.4 58.2 -- (39.6)(15) 202.0
Minority interest (credit)..... (1.0) 1.5 -- -- 0.5
------------ -------- ----- ------- ------------
NET INCOME (LOSS).......... $ 342.2 $ 116.1 $ -- $ (73.6) $ 384.7
============ ======== ===== ======= ============
NET INCOME PER SHARE(16):
Basic........................ $ 3.31 $ 2.70
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic........................ 103,295,675 142,303,300
52
NOTES TO UNAUDITED PROFORMA COMBINED FINANCIAL STATEMENTS
(1) Reclassification of Trigon's historical amounts to conform to Anthem's
historical presentation.
(2) Pursuant to the merger agreement, holders of Trigon Class A common stock
are entitled to receive $30.00 cash, without interest, and 1.062 shares
of Anthem common stock for each share of Trigon Class A common stock.
In addition, it is assumed Trigon will repay its outstanding commercial
paper prior to the merger. The net decrease in cash and investments of
$542.5 million is composed of the following estimated items (in
millions):
Cash consideration of $30.00 per share, without interest,
for 36,730,344 outstanding shares of Trigon Class A common
stock..................................................... $1,101.9
Cash transaction costs of $22.7 million for change in
control and other payments and $56.5 million related to
transaction closing costs................................. 79.2
--------
Total cash consideration.................................... 1,181.1
Net proceeds from the notes to partially fund
the transaction as discussed in Note 5 below.............. (938.3)
--------
Net reduction in cash and investments for Trigon purchase... 242.8
Cash and investments used to repay Trigon commercial paper
as discussed in Note 4 and Note 5 below................... 299.7
--------
$ 542.5
========
(3) Adjustment to goodwill and other intangible assets of $3,194.5 million is
a result of the excess of cost over the estimated fair market value of the
net assets of Trigon (at an assumed purchase price of $4,240.7 million,
including certain estimated purchase price adjustments related to the
merger). The calculation is estimated as follows (in millions):
Cash consideration to Trigon's shareholders discussed
in Note 2 above........................................... $1,101.9
Value of 39,007,625 shares of Anthem common stock issued to
Trigon's shareholders and option holders based on a market
price of $69.49........................................... 2,710.6
Cash transaction costs of $79.2 million discussed in Note 2
plus additional deferred contractual payments of $30.8
million................................................... 110.0
Conversion of options for 2,548,551 shares of Trigon common
stock to options for an estimated 3,806,813 shares of
Anthem common stock at fair value using the Black-Scholes
valuation model........................................... 194.5
Deferred tax liability on identifiable intangible assets.... 122.5
--------
Assumed total purchase price................................ 4,239.5
Fair value of Trigon's net assets as of March 31, 2002...... (1,046.2)
--------
Total increase in goodwill and other intangible assets --
See Note 14 below......................................... $3,193.3
========
(4) Represents $99.7 million payment of current portion of Trigon's commercial
paper program as discussed in Note 2 above. The remaining payment of $200.0
million is discussed in Note 5 below.
(5) Represents the $950.0 million of aggregate principal amount of the notes
less underwriting and issuance discounts and other estimated offering
expenses aggregating $11.7 million. Net proceeds of $938.3 million were
used to partially finance the merger, in addition to the $242.8 million
of cash and investments discussed in Note 2. The $938.3 million of
53
proceeds is offset by repayment of Trigon's commercial paper program in the
amount of $200.0 million as discussed in Note 2 and Note 4 above.
(6) Reflects an increase in other liabilities of $153.3 million, as a result
of the recognition of a deferred tax liability of $122.5 million related to
the estimated identifiable intangible assets of $350.0 million and
$30.8 million of deferred contractual payments as described in Note 3
above.
(7) Represents $(0.3) million elimination of Trigon's Class A common stock
accounts for combination purposes, offset by $0.4 million, representing
the par value of 39,007,625 shares as discussed in Note 3 above.
(8) Reflects the elimination of Trigon's paid in capital of $(780.9) million
for combination purposes, offset by the issuance of $2,710.2 million of new
Anthem common stock (net of par value) and $194.5 million for Trigon stock
options, as discussed in Note 3 above.
(9) Reflects the elimination of Trigon's retained earnings for combination
purposes.
(10) Reflects the elimination of Trigon's accumulated other comprehensive loss
for combination purposes.
(11) Anthem's indirect wholly owned subsidiary, Health Management Services, has
an existing customer relationship with Trigon. As a result, Anthem
administrative revenues include amounts billed to Trigon. Trigon includes
these amounts as administrative expense. For pro forma purposes, the
amounts have been eliminated. The amounts were $1.5 million and
$4.5 million, respectively, for the three months ended March 31, 2002 and
the year ended December 31, 2001.
(12) The $542.5 million of cash requirements as discussed in Note 2 is assumed
to come from the sale of investment securities. The reduction to investment
income in the pro forma consolidated statement of income reflects reduced
investment income on $542.5 million of investment securities yielding
5.35%. The pro forma amounts of reduced investment income are $7.3 million
and $29.0 million for the three months ended March 31, 2002 and year ended
December 31, 2001, respectively.
(13) The interest expense in the pro forma consolidated statement of income
reflects the following charges to interest expense for the notes:
THREE MONTHS ENDED
MARCH 31, 2002 YEAR ENDED DECEMBER 31, 2001
------------------------------------- -------------------------------------
AMORTIZATION OF AMORTIZATION OF
DEBT DISCOUNT DEBT DISCOUNT
INTEREST AND EXPENSE TOTAL INTEREST AND EXPENSE TOTAL
-------- --------------- -------- -------- --------------- --------
$150.0 million 4.875% notes
due 2005.................. $ 1.8 $0.1 $ 1.9 $ 7.3 $0.4 $ 7.7
$800.0 million 6.800% notes
due 2012.................. 13.6 0.3 13.9 54.3 1.1 55.4
----- ---- ----- ----- ---- -----
Total....................... $15.4 $0.4 $15.8 $61.6 $1.5 $63.1
===== ==== ===== ===== ==== =====
These charges to interest expense are offset by reduced interest expense
resulting from the assumed repayment of Trigon's outstanding commercial
paper. The reduced amounts are $1.6 million and $12.7 million for the three
months ended March 31, 2002 and the year ended December 31, 2001,
respectively.
(14) Anthem has estimated the fair value of the net assets of Trigon. The
estimated purchase price is allocated to the fair value of Trigon's net
assets, including identified intangible assets, such as the Blue Cross and
Blue Shield name and service mark, employer groups, company-developed
software and provider contracts.
54
Preliminary values and lives have been assigned to these assets consistent
with the methodology used in Anthem's previous acquisitions. The
preliminary purchase price allocation, for pro forma purposes, resulted in
an estimated $350.0 million of identifiable intangible assets with finite
lives. The amortization of these intangible assets are recognized in the
income statement using a declining balance method over a 20-year life. The
pro forma amortization expense resulting from the $350.0 million of
identifiable intangible assets is $8.3 million for the three months ended
March 31, 2002 and is $33.8 million for the year ended December 31, 2001.
The valuation process and purchase price allocation are not yet complete
and, as a result, amortization amounts and the related useful lives and
method of amortization are preliminary estimates.
(15) The income tax benefit related to all adjustments is projected at a
statutory rate of 35.0%. The income tax benefit is $10.4 million and
$39.6 million for the three months ended March 31, 2002 and the year ended
December 31, 2001, respectively.
(16) We have not presented Anthem diluted net earnings per share for the year
ended December 31, 2001. Such amounts would not be meaningful as no stock
or dilutive securities existed for the majority of the year and a relevant
market price for the entire year does not exist. There were no dilutive
securities outstanding prior to November 2, 2001, the effective date of the
demutualization of Anthem Insurance, a subsidiary of Anthem, and Anthem's
initial public offering. Historical and pro forma basic earnings per share
for the year ended December 31, 2001 were calculated using the weighted
average shares outstanding for the period from November 2, 2001 to
December 31, 2001.
Shares of Trigon Class A common stock outstanding were converted at a rate
of 1.062 shares of Anthem common stock for each share of Trigon Class A
common stock. In addition, it was assumed that the 2,548,551 Trigon
options outstanding were converted into Anthem stock options at a rate
of 1.494 Anthem shares for each of Trigon share, the exchange ratio
resulting from a value of Anthem common stock of $69.49.
55
(c) Exhibits
EXHIBIT NO. EXHIBIT
2.1 Agreement and Plan of Merger, dated as of April 28, 2002,
among Anthem, Inc., AI Sub Acquisition Corp., and Trigon
Healthcare, Inc. The copy of this exhibit filed as exhibit
number 2.1 to Anthem, Inc.'s Current Report on Form 8-K,
as filed with the Commission on April 30, 2002, is
incorporated herein by reference.
23.1 Consent of KPMG LLP.
99.1 Press Release of Anthem, Inc., issued on July 31, 2002.
56
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, Anthem, Inc. has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ANTHEM, INC.
By: /s/ David R. Frick
------------------------------------
Name: David R. Frick
Title: Executive Vice President and Chief
Legal and Administrative Officer
Date: August 2, 2002
57
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT
2.1 Agreement and Plan of Merger, dated as of April 28, 2002,
among Anthem, Inc., AI Sub Acquisition Corp., and Trigon
Healthcare, Inc. The copy of this exhibit filed as exhibit
number 2.1 to Anthem, Inc.'s Current Report on Form 8-K,
as filed with the Commission on April 30, 2002, is
incorporated herein by reference.
23.1 Consent of KPMG LLP.
99.1 Press Release of Anthem, Inc., issued on July 31, 2002.
58