Business Context and Reporting Period
This Form 8-K, filed on August 2, 2002, by Anthem, Inc., reports the consummation of the merger of Trigon Healthcare, Inc. ("Trigon") into a wholly-owned subsidiary of Anthem on July 31, 2002. Trigon, the largest managed health care company in Virginia, served approximately 2.1 million members. Following the merger, the surviving entity was renamed Anthem Southeast, Inc. The filing includes Trigon's audited financial statements for the years ended December 31, 2001, 2000, and 1999, and unaudited statements for the three months ended March 31, 2002.
Key Financial Metrics (Trigon Healthcare, Inc.)
Year Ended December 31, 2001 (in thousands, except per share data):
- Total Revenues: $2,974,967
- Net Income: $116,060
- Earnings Per Share (Basic): $3.20
- Net Cash Provided by Operating Activities: $243,999
- Total Assets: $2,582,464
- Total Liabilities: $1,562,044
- Shareholders' Equity: $1,020,420
- Debt: Commercial paper outstanding totaled $299,660 ($99,660 current; $200,000 noncurrent).
Three Months Ended March 31, 2002 (Unaudited, in thousands):
- Total Revenues: $825,675
- Net Income: $35,237
- Earnings Per Share (Basic): $0.99
- Net Cash Provided by Operating Activities: $90,316
Material Changes Versus Prior Period
Comparing the year ended December 31, 2001, to 2000:
- Revenue Growth: Total revenues increased by approximately 14% from $2.61 billion in 2000 to $2.97 billion in 2001.
- Profitability: Net income rose from $112.0 million in 2000 to $116.1 million in 2001.
- Cash Flow: Net cash provided by operating activities more than doubled, increasing from $109.8 million in 2000 to $244.0 million in 2001.
- Debt Structure: Trigon initiated a commercial paper program in 2000. By year-end 2001, outstanding commercial paper totaled approximately $299.7 million, compared to $275.4 million in 2000.
- Investment Portfolio: Investment securities at fair value increased from $1.78 billion in 2000 to $1.82 billion in 2001.
Guidance, Outlook, Risks, and Unusual Items
Merger Consideration: Trigon shareholders received $30.00 in cash and 1.062 shares of Anthem common stock for each share of Trigon Class A common stock. The transaction was accounted for using the purchase method, resulting in significant goodwill.
Pro Forma Impact: Unaudited pro forma combined financial information indicates that for the year ended December 31, 2001, the combined entity would have reported net income of $384.7 million and basic earnings per share of $2.70.
Risks and Contingencies:
- Tax Litigation: Trigon is involved in significant litigation with the federal government regarding the deductibility of a $175 million "Commonwealth Payment" made during demutualization and losses on terminated contracts. A favorable resolution could result in approximately $35 million in cash refunds and $26 million in tax credits, plus interest. The IRS had withdrawn a prior Technical Advice Memorandum supporting Trigon's position as of March 2002.
- Health Care Costs: Profitability depends on accurately predicting health care costs. Factors such as inflation, new technologies, and regulatory changes could adversely affect medical cost ratios.
- Mid-South Exit: Trigon exited the health insurance market in North Carolina in 1999. As of March 31, 2002, remaining liabilities for claim reserves and exit costs were approximately $9.6 million and $1.9 million, respectively.
Important Facts for Investor Verification
- Verify the final purchase price allocation and the amount of goodwill recorded for the Trigon acquisition in Anthem's subsequent filings.
- Monitor the status of the federal tax litigation regarding the $175 million Commonwealth Payment and contract termination losses, as the outcome could materially impact future cash flows.
- Review the integration progress of Trigon's 2.1 million members into Anthem's Southeast operations.
- Confirm the repayment schedule of Trigon's commercial paper, which was being reduced in anticipation of the merger completion.
- Assess the impact of the adoption of SFAS No. 142 (Goodwill and Intangible Assets) on future earnings, which eliminated approximately $1.6 million in annual goodwill amortization for Trigon.