10-K 1 d10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 OR [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Commission file number 001-12617 Trigon Healthcare, Inc. (Exact name of registrant as specified in its charter) Virginia 54-1773225 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2015 Staples Mill Road, Richmond, VA 23230 (Address of principal executive offices) Registrant's telephone number, including area code (804) 354-7000 Securities registered pursuant to Section 12(b) of the Act: Class A Common Stock, $.01 Par Value New York Stock Exchange (Title of Class) (Name of Exchange) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 26, 2002 was approximately $2,599,509,000 (based on the last reported sales price of $72.64 per share on March 26, 2002, on the New York Stock Exchange). As of March 26, 2002, 35,786,194 shares of the registrant's Class A Common Stock, par value $.01 per share, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of Trigon Healthcare Inc.'s Annual Report to Shareholders for the year ended December 31, 2001 into Parts II and IV of this Form 10-K. Certain portions of Trigon Healthcare Inc.'s definitive Proxy Statement dated March 22, 2002 for the Annual Meeting of Shareholders into Part III of this Form 10-K. TRIGON HEALTHCARE, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001
Page ---- PART I Item 1. Business .................................................................................... 1 Item 2. Properties .................................................................................. 18 Item 3. Legal Proceedings ........................................................................... 18 Item 4. Submission of Matters to a Vote of Security Holders ......................................... 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....................... 20 Item 6. Selected Financial Data ..................................................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .................................. 20 Item 8. Financial Statements and Supplementary Data ................................................. 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........ 21 PART III Item 10. Directors and Executive Officers of the Registrant .......................................... 21 Item 11. Executive Compensation ...................................................................... 21 Item 12. Security Ownership of Certain Beneficial Owners and Management .............................. 21 Item 13. Certain Relationships and Related Transactions .............................................. 21 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................ 21
PART I ITEM 1. BUSINESS GENERAL Trigon Healthcare, Inc. through its subsidiaries is the largest managed health care company in Virginia, serving over 2.1 million members primarily through statewide and regional provider networks. (Trigon Healthcare, Inc. and subsidiaries herein collectively referred to as "Trigon" or the "Company"). The Company's membership represents approximately 30% of the Virginia population and 35% of the Virginia population in those areas where Trigon has the exclusive right to use the Blue Cross and Blue Shield service marks and tradenames. The Company divides its business into four segments: health insurance, government programs, investments and all other. The Company's health insurance segment provides a comprehensive spectrum of managed care products primarily through three network systems with a range of utilization and cost containment controls. Within the Company's network product offerings, employer groups may choose various funding options ranging from fully insured to partially or fully self-funded financial arrangements. While self-funded customers participate in Trigon's networks, the claims are not underwritten by Trigon but are funded by the groups. As of December 31, 2001, the fully insured, also referred to as commercial, products made up over one-half of total enrollment. Its components include: three HMO networks which are the Company's most tightly managed and cost efficient networks; the preferred provider organization ("PPO") networks which offer greater choice of providers than Trigon's HMO networks; and the participating provider ("PAR") network which is the Company's broadest and most flexible network. Commercial products also include Medicare supplement plans and Medicaid HMO plans. Self-funded enrollment as of December 31, 2001 represented 36.3% of total enrollment. Self-funded arrangements are available to groups with more than 100 employees and are typically utilized by groups with more than 1,000 employees. Trigon charges self-funded groups administrative fees which are based on the number of members in a group or the group's claims experience. In addition, most self-funded groups purchase aggregate and/or claim specific stop loss coverage. In exchange for a premium, the group's aggregate liability is capped for the year or the group's liability on any one episode of care is capped. The government programs segment includes the Federal Employee Program ("FEP"). Through its participation in the national contract between the Blue Cross and Blue Shield Association ("BCBSA") and the U.S. Office of Personnel Management ("OPM"), the Company provides health benefits to federal employees in Virginia. FEP revenues represent the reimbursement by OPM of medical costs incurred including the actual cost of administering the program, as well as a performance-based share of the national program's overall profit. As of December 31, 2001, FEP enrollment represented 10.4% of total enrollment. The Company discontinued its role as a claims processing intermediary for the federal government with the Medicare Part A program in Virginia and West Virginia effective August 31, 1999. Additionally, the Company discontinued its role as the primary provider of computer processing capabilities for Medicare Part A claims processing to certain other Blue Cross and Blue Shield plans during November 1999. As fiscal intermediary for Medicare, the Company allocated operating expenses to this line of business to 1 determine reimbursement due for services rendered in accordance with the contracts in force. Claims processed under this arrangement, which are subject to audit, were not included in the consolidated statements of operations. The reimbursement of allocated operating expenses, also subject to audit, was recorded as a reduction of the Company's selling, general and administrative expenses. All of the investment portfolios of the consolidated subsidiaries are managed and evaluated collectively within the investment segment. The Company's other health-related business, including disease management programs, benefits administration, health promotions and similar products, is reflected in an "all other" category. 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. Refer to Note 20, "Segment Information" on pages 53 through 55 of the Company's 2001 Annual Report to Shareholders, which are incorporated herein by reference, for financial information relating to reportable segments. The following table sets forth the data by network for the last five years: ENROLLMENT BY NETWORK SYSTEM
As of December 31, 2001 2000 1999 1998 1997 ------------- ------------- ------------- ------------- ------------- Health Insurance Commercial HMO ......................................... 301,231 272,546 274,184 255,879 255,548 PPO ......................................... 540,362 488,645 378,406 297,939 263,828 PAR ......................................... 119,569 134,166 151,673 165,239 192,825 Medicaid/Medicare HMO /(1)/ ................. 61,777 58,021 51,404 31,338 35,488 Medicare supplement ......................... 116,754 119,535 119,050 121,322 125,686 ------------- ------------- ------------- ------------- ------------- Total commercial excluding Mid-South ........... 1,139,693 1,072,913 974,717 871,717 873,375 Self-funded .................................... 776,486 721,361 677,545 645,516 669,732 ------------- ------------- ------------- ------------- ------------- Total health insurance excluding Mid-South ..... 1,916,179 1,794,274 1,652,262 1,517,233 1,543,107 ------------- ------------- ------------- ------------- ------------- Government Federal Employee Program (PPO) ................. 221,757 221,056 216,089 213,017 207,457 ------------- ------------- ------------- ------------- ------------- Total excluding Mid-South ...................... 2,137,936 2,015,330 1,868,351 1,730,250 1,750,564 Mid-South, commercial .......................... - - - 105,056 64,143 Mid-South, ASO ................................. - - - 26,065 25,663 ------------- ------------- ------------- ------------- ------------- Total .......................................... 2,137,936 2,015,330 1,868,351 1,861,371 1,840,370 ============= ============= ============= ============= =============
/(1)/ The Company exited from the Medicare HMO market effective January 1, 2000. SIGNIFICANT CUSTOMERS Trigon's two largest customers are the Commonwealth of Virginia ("COV") and FEP. Since 1972, the Company has provided health benefits to employees and retirees of COV. The current multi-year contract, with an initial contract period through June 2004, to administer the COV statewide, self-funded medical/drug health care benefits programs was effective July 2000. The net self-funded revenues under the contract represent 2.0% of total consolidated revenues during 2 2001 and cover 244,069 COV members as of December 31, 2001. Annually, at open enrollment, COV employees may select Trigon or other health benefit plan choices. FEP represents 17.8% of total consolidated revenues during 2001 and covers 221,757 members as of December 31, 2001. The contract renews automatically for a term of one year each January 1, unless either party gives written notice at least 60 days prior to the date of renewal. Under the program, a special FEP reserve is maintained at the national level as a protection against adverse claims trends. However, if the contract should terminate with a negative balance in the FEP special reserve, the losses would be allocated to participating plans as subcontractors based on a ratio of the Company's past five year claims experience as a percent of the total program's experience. As of September 30, 2001, the national reserve stood at 3.2 months of claims and administrative payments in reserve, which is above the target of a 3.0 month reserve base. The December 31, 2001 calendar year national reserve balance has not been published but is projected to remain at the September 30, 2001 reserve level. NETWORKS Trigon's HMO, PPO and PAR networks provide for the delivery of health care services at generally reduced costs due to favorable network arrangements with health care providers and by including members in health care decisions. The Company has the largest membership base in Virginia, which generally allows it to negotiate contracts with its Virginia providers that specify favorable rates and incorporate utilization management and other cost controls. Members assume responsibility for a portion of health care costs through copayments, coinsurance and annual deductible contract provisions. Members may choose to receive health care services from providers not part of the network at an additional cost to the member. Trigon believes that the copayment, coinsurance, annual deductible provisions and out of network costs enhance its ability to control costs by encouraging members to take more responsibility for their health care decisions. Trigon established its first Health Maintenance Organization ("HMO") in 1984 and now operates three separate HMOs. HealthKeepers, Inc. ("HealthKeepers") is a state qualified HMO that operates primarily in the central, eastern and southwestern areas of Virginia. Priority Health Care, Inc. ("Priority") is a federally qualified HMO operating in the Tidewater area in Eastern Virginia. Peninsula Health Care, Inc. ("Peninsula"), a joint venture owned 51% by Trigon, is a state qualified HMO operating primarily on the Peninsula in Eastern Virginia. As of December 31, 2001, the HMO networks included approximately 2,300 primary care physicians, 5,200 specialist physicians and 53 acute care hospitals throughout Virginia. Members choose a primary care physician who is responsible for coordinating health care services for the member. The HMO product portfolio is presented to customers as a stand-alone HMO offering, or through "Blue Advantage," a program which includes HMO and PPO options administered and priced as a single program and which can only be utilized by groups that contract with Trigon on an exclusive basis. The Company's PPO network is a statewide PPO network which, as of December 31, 2001, included approximately 11,800 physicians and 89 acute care hospitals within Virginia. Members may seek care from any PPO network physician depending on services required. Trigon's PAR network provides more traditional health coverage and included approximately 12,200 physicians and 89 acute care hospitals. The PAR network offers members greater customization of benefit design and fewer restrictions in the use of non-network 3 providers than the PPO network. Trigon expects that its PAR network and products will continue to be an important offering for groups desiring greater flexibility and choice in networks and benefits, as well as a source of new PPO and HMO members. Trigon also offers HMO products to Medicaid and State Children's Health Insurance Program participants in the Peninsula, Tidewater and Central Virginia regions. The Medicaid HMO products are provided under an annual contract with the Commonwealth of Virginia that may be terminated with 90 days notice. Trigon's networks have contracts with hospitals, physicians and other professionals at generally reduced rates due to the volume of business it offers to health care providers that are a part of the network. Hospital provider contracts, typically three to five years in duration, are generally paid on the basis of per diems (i.e., fixed fee schedules where the daily rate is based on the type of service; primary method of in-patient reimbursement), per case per admission (i.e., fixed fee schedules for all services during a member's hospitalization), or a percentage of covered charges with limits on the subsequent year increases. The average rate negotiated with hospitals under this arrangement is lower than the hospital's average standard retail charges. Services not subject to special per case or per diem payment arrangements are generally paid according to a fee schedule or as a percentage of billed charges. In 1999, the Company completed a three year process to convert its facility outpatient contracts from a percent of covered charges to a fixed fee reimbursement schedule for 6,500 procedures which lead to a substantial reduction in unit cost as well as improved certainty on unit cost increases. When considering whether to contract with a physician, the Company conducts a credentialing program to evaluate the applicant's professional experience, including licensure. The Company's HMO network provides reimbursement to almost all of the primary care physicians in the HMO network on a capitated basis. Specialists are reimbursed based on a fee schedule or, in some cases, on a capitated basis. Some ancillary services, lab services, behavioral health and vision services are also capitated. PPO and PAR physician provider contracts employ fixed fee schedules, which are below standard billing rates. The Company uses three basic components to establish physician fee schedule payments: Medicare's Resource Based Relative Value System methodologies, competitor reimbursement rates and ongoing reviews of specific allowances to determine if suitable payment levels are in place. Physician fee schedule payments are adjusted when considered appropriate to do so in accordance with the Fair Business Practices Act. The Company provides 120 days notice for standard contract changes. These changes are automatically effective unless the provider informs the Company within 15 business days from receipt of the notice of the provider's intention to cancel the contract. UTILIZATION MANAGEMENT Trigon also manages health care costs in its networks by using utilization management guidelines that are intended to address quality of care and help to ensure that only appropriate services are rendered and that such services are provided in a cost-effective manner. Trigon recognizes that the right care in the right setting at the right time using the right provider for the right price equates to quality medical care. In the HMO network, the primary care physicians are considered to be the overall manager of the individual's health care needs and manage and optimize care through the use of referrals and by approving all specialty care before it is rendered. In addition, the HMO reviews all high cost services needed by individual members 4 that are not provided by the primary care physician. The Company also manages health care costs and quality by reviewing monthly cost and utilization trends within all networks. Utilization rates and cases are reviewed in the aggregate and by service type to identify opportunities for better quality and cost control. In addition, the highest cost services are studied to determine if costs can be reduced by using new, less expensive technologies or by creating additional networks or contracts, such as networks for ambulatory care, to reduce provider costs. The Company requires prospective approval of all hospital and skilled nursing facility stays and concurrent review of length of stay. Trigon uses the Milliman & Robertson Healthcare Management Guidelines (M&R), InterQual(R) and other nationally recognized guidelines for its medical necessity decision support criteria. M&R guidelines were developed based on nationwide best practices benchmarks that maximize efficiency in health care delivery. InterQual(R) is a nationally recognized, evidence-based criteria set developed through peer review of medical literature. The Company also modifies the decision support guidelines based on input from its regional physician panels, thus enhancing the support of the guidelines by network providers. Trigon prospectively reviews the medical necessity of home health, private duty nursing and durable medical equipment. Also, the Company retrospectively reviews physician practice patterns. Trigon conducts physician profiles that indicate quality and cost effective standards. All new medical technologies are reviewed in advance in an attempt to ensure that only safe and effective new medical procedures are covered. Additionally, the Company also employs a comprehensive disease management program. In this program, the Company identifies those members having certain chronic diseases, such as asthma and diabetes, and proactively works with the member and the physician to facilitate appropriate treatment, help to ensure compliance with recommended therapies and educate members on lifestyle modifications to manage the disease. The Company believes that the program promotes the delivery of efficient care and helps to improve the quality of health care delivered. QUALITY Trigon's HMO and PPO quality improvement standards are modeled on those of the National Committee for Quality Assurance ("NCQA"), an independent, nonprofit institution that reviews and accredits health maintenance and managed care organizations. The quality improvement program instituted by the Company provides for review of the quality of care and the quality of service as well as the initial and ongoing review of the credentials of all network providers. The credentialing process includes a review of whether a provider has the necessary licenses, is qualified in the specialty indicated and whether his/her office meets standards for safety, sanitation and accessibility. The Company reviews the findings with a quality improvement committee, which includes practicing physicians from the Company's networks. In addition, quality of care and quality of service activities are monitored through profiling and data analysis, member satisfaction surveys and problem case review. Included in these activities are profiles of the tests, types of treatment and procedures performed for specific diagnoses by physicians, as well as reviews of aggregate data. Network physicians and other providers participate in these quality improvement activities. In March 2000, Trigon's Peninsula and Priority HMOs received an accreditation status of Excellent from the NCQA for their commercial and Medicaid products. HealthKeepers earned an accreditation status of Excellent for its commercial product. A score of Excellent is the highest level of accreditation awarded to health plans. This accreditation level is reserved for those managed care organization product lines that deliver the highest levels of care 5 and service, and whose clinical and administrative systems exceed NCQA's rigorous requirements for consumer protection and quality improvement. The NCQA awarded Trigon Insurance Company (dba Trigon Blue Cross Blue Shield) ("Trigon Insurance") Full Accreditation, the highest level of PPO accreditation, for its PPO commercial products including, KeyCare, KeyAdvantage and the Federal Employee Program, in 2001. NCQA grants Full Accreditation to those PPO plans that have excellent programs for continuous quality improvement and meet NCQA's demanding standards. In addition, the American Accreditation Health Care Commission/URAC has awarded Trigon Insurance a full, two-year accreditation for health utilization management services effective through May 2002. MARKETING Trigon sells its products and services to both individuals and groups. The individual products are marketed principally through direct marketing initiatives and through brokers. The group market includes small, medium and large group employers. The smaller group employers generally use insurance brokers to assist in the selection of products and analysis of the actual cost of competing plans. As the group size grows, employers may use consultants to assist them in the tailoring of benefits and networks. The larger group employers are generally more sophisticated purchasers, often engaging consultants to work with the Trigon sales staff to tailor benefit and network design to match their specific needs more closely. In addition, Trigon has a direct sales staff that markets the full range of Trigon products and services. COMPETITION The health care industry is highly competitive both in Virginia and nationally. In some cases, market entrants, as well as existing health care companies, have competed with the Company for business by offering very favorable pricing terms to customers. The Company faces this competition in the areas in which it is licensed to use the Blue Cross and Blue Shield service marks and tradenames. In areas outside of its licensed territory, the Company's ability to successfully compete may be adversely affected by its inability to use the Blue Cross and Blue Shield service marks and tradenames, by the presence of competitors that are able to use such service marks and tradenames in the areas and by the Company's lack of substantial market share or established provider networks in these areas. The Company also faces competition from health care providers that combine and form their own networks in order to contract directly with employer groups and other prospective customers to provide health care services. INVESTMENTS The Company's investment policies are designed to provide liquidity to meet anticipated payment obligations and preserve capital. Trigon fundamentally believes that concentrations of investments in any one asset class are unwise due to constantly changing interest rates as well as market and economic conditions. Accordingly, the Company maintains a diversified investment portfolio consisting both of fixed income and equity securities, with the objective of producing a consistently growing income stream and maximizing risk-adjusted total return. The fixed income portfolio includes government and corporate securities, both domestic and international, with an average quality rating of "A1" as of December 31, 2001. The portfolio had an average 6 contractual maturity of 7.2 years as of December 31, 2001. A portion of the fixed income portfolio is designated as a short-term fixed income portfolio and is intended to cover near-term cash flow needs and to serve as a buffer for unanticipated business needs. The equity portfolios contain readily marketable securities ranging from small growth to well-established Fortune 500 companies. The international portfolio is diversified by industry, country and currency-related exposure. As of December 31, 2001, the Company's equity exposure, comprised of direct equity as well as equity-indexed investments, was 12.8% of the total portfolio, as compared to 14.0% as of December 31, 2000. The Company utilizes internal and external investment managers. Both the internal and external managers invest within guidelines established by the Company designed to fit into the overall investment strategy. These guidelines establish minimum quality and diversification requirements that, among other things, provide limitations on the allowable investment for a single issuer as well as currency exposure for those managers investing in international securities. As of December 31, 2001, the composition of the Company's fixed income investment securities by rating is as follows (in thousands):
Estimated Percent of Rating /(1)/ Fair Value Total ------------ ----------------------- Aaa ..................................................................... $ 889,782 53.7% Aa1, Aa2, Aa3 ........................................................... 47,595 2.9 A1, A2, A3 .............................................................. 131,286 7.9 Baa1, Baa2, Baa3 ........................................................ 174,271 10.5 Ba1, Ba2, Ba3 ........................................................... 364,616 22.0 B1, B2, B3 .............................................................. 46,605 2.8 Caa1 or lower ........................................................... 260 0.0 Not rated (principally, other fixed income investment funds) ............ 3,045 0.2 ----------------------- Total ................................................................... $1,657,460 100.0% =======================
/(1)/ Ratings are assigned by Moody's Investor Service, Inc., Standard & Poor's Corporation or Fitch Investors Service, L.P. Refer to Note 3, "Investment Securities," on pages 37 through 40 of the Company's 2001 Annual Report to Shareholders, which are incorporated herein by reference, for additional financial information relating to the Company's investment securities. Other than currently or formerly occupied Company property or through mortgage-backed securities, the Company has no investment in real estate or mortgage loans. INFORMATION SYSTEMS The Company develops and maintains its own information systems. Information systems have played and will continue to play a key role in ongoing plans to continually improve quality, lower costs and improve service for the Company's customers. Trigon's centralized common database and analytical technologies allow for increasingly more sophisticated methods of managing costs and quality of care. The database includes comprehensive information on 7 virtually all physicians and hospitals and approximately one third of the population in Virginia, which assists Trigon in analyzing the medical and economic performance of providers and the medical and economic experience of specific customer groups and individuals. The Company uses an integrated set of applications software to support marketing and underwriting, eligibility and billing, electronic claims submission, claims administration, managed care programs and corporate financial management. A combination of custom developed and licensed systems is used to meet the unique needs of different products and markets. An overall systems architecture is maintained to promote consistency of data, processing rules and flexibility. Different systems serving the unique products or markets feed data to a corporate information and decision support system. This decision support system provides a single source of information for all of the Company's data reporting and analytic needs. This includes operational and financial performance, underwriting and marketing analysis, utilization management and actuarial reporting. REGULATION HEALTH CARE REGULATION - FEDERAL and VIRGINIA. The Company's business is subject to a changing legal, legislative and regulatory environment. Some of the more significant current issues that may affect the Company's business include: . efforts to expand tort liability of health plans; . initiatives to increase health care regulation; . proposed class action lawsuits targeting the health care industry's efforts to deliver quality care at affordable costs; and . proposed physician antitrust waivers. Current initiatives to increase health care regulation at the federal level include new legislative proposals for a "patients' bill of rights." Such legislation was passed by the Senate in June 2001 (S. 1052) and would expand tort liability for health plans and change the practices for deciding medical necessity. In early August 2001, similar legislation was passed by the House (H.R. 2563) with efforts to resolve differences between the two bills continuing. Other initiatives include legislative proposals to substitute minimal federal standards for state regulation of Association Health Plans, to expand prohibitions against using genetic information and to expand the mandate for mental health parity. Given the general uncertainty of the political process, it is not possible to determine what, if any, legislation will ultimately be enacted or what the effect on the Company of any such legislation would be. Several major companies in the health care industry have had proposed class action lawsuits filed against them by a coalition of plaintiffs' attorneys. Given that no such lawsuits are currently pending against the Company and given the uncertainties of predicting the outcome of litigation, it is not possible to determine at this time what the ultimate effect, if any, on the Company of any such litigation would be. The Department of Labor issued its final regulation specifying new requirements for claims and appeal procedures for ERISA regulated group health and disability plans during 2000. The 8 regulation is applicable only to ERISA regulated plans, whether they are fully-insured or self-insured. While the requirements were to be effective for claims filed on or after January 1, 2002, the effective date has been delayed until plan years beginning after July 2002. The Company does not believe that the regulation will have a material adverse impact on the consolidated financial condition or results of operations. In 2000, the Department of Health and Human Services issued two significant sets of final regulations resulting from the Health Insurance Portability and Accountability Act of 1996 ("HIPAA")--one dealing with standardization of electronic transactions and the other dealing with privacy of individually identifiable health information. The final regulation governing security standards for the maintenance and transmission of health information (first proposed in 1998) is expected during 2002. The original compliance date for the regulation on standard transactions was October 2002, but the President signed legislation in late 2001 providing the opportunity for covered entities to apply for a one year extension. The Company plans to file for that extension. While the compliance date for the privacy regulation is currently April 2003, a revised regulation is expected to be issued in 2002. A new Virginia law governing disclosure of privacy practices was effective July 1, 2001. That law was enacted pursuant to federal requirements established by the Gramm-Leach-Bliley Act. The Company has assessed the impact of the HIPAA regulation on standard transactions on the Company's practices and operations and does not believe that it will have a material adverse impact on operations. Given that the HIPAA security regulation has not been finalized and that further changes to the privacy regulation are expected, the Company has not yet fully determined what the effect of these HIPAA regulations may be on the Company. However, compliance with the currently issued regulations would require significant systems enhancements, training and administration efforts. At the state level, the Virginia General Assembly, in its 2002 Session, did not pass legislation that would substantially increase health care costs, restrict choice or drive up the number of uninsured Virginians. At this time, the health care legislation that did pass is not expected to have a material effect on the Company's consolidated financial condition or results of operations. INSURANCE COMPANY AND HMO REGULATION. Trigon Insurance, Trigon Health and Life Insurance Company ("Trigon Health and Life"), a health and life company, and the three HMO subsidiaries are subject to the insurance laws and regulations of the Commonwealth of Virginia, the domiciliary state of these companies. In addition, Trigon Health and Life is also subject to the insurance laws and regulations of the other jurisdictions in which it is licensed or authorized to do business. These insurance laws and regulations generally give state regulatory authorities broad supervisory, regulatory and administrative powers over insurance companies and insurance holding companies with respect to most aspects of their businesses. Such regulation is intended primarily for the benefit of the policyholders and enrollees and not investors. Regulatory authorities exercise extensive supervisory power over health and life insurance companies and HMOs with respect to licensing; the approval of policy forms and policies used; the nature of, and limitations on, a company's investments; the periodic examination of the operations of the companies; the form and content of annual statements and other reports required to be filed on the financial condition of the companies; the establishment 9 of minimum capital or net worth requirements for these companies and other requirements. Additionally, the HMOs are subject to regulation regarding quality assurance, covered benefits, contracts between the HMO and its health care providers, the accessibility of providers in the service area of an HMO and other requirements. State regulatory authorities require the insurance companies and the HMOs to maintain restricted investments represented by interest-bearing investment securities, which are held by trustees or the state regulatory agencies as a special fund for the policyholders and enrollees if the company fails to meet its obligations in that state. Trigon Insurance, the HMO subsidiaries and Trigon Health and Life are required to file periodic statutory financial statements in each jurisdiction in which they are licensed. The HMOs are subject to specific regulation and review for the Medicaid HMO products by the Virginia Department of Medical Assistance Services and other regulatory agencies. Trigon has one federally qualified HMO that is also subject to regulation and review by the OPM and certain other federal authorities, with which it must file periodic reports. Areas covered by federal law are similar to those covered by state law and regulation. In addition, one of the Company's HMOs offered a Medicare risk product through December 31, 1999 that subjected that HMO to regulation and review by the U.S. Department of Health and Human Services and certain other federal authorities as well. Trigon Insurance, the HMO subsidiaries and Trigon Health and Life are periodically examined by the insurance departments of the jurisdictions in which they are licensed to do business. INSURANCE HOLDING COMPANY REGULATION. Trigon Healthcare, Inc. is not regulated as an insurance company but, as the direct or indirect owner of all the capital stock of Trigon Insurance, the three HMOs and Trigon Health and Life, is regulated as an insurance holding company and subject to the insurance holding company act of Virginia, the state in which the subsidiaries are domiciled. The act contains certain reporting requirements as well as restrictions on transactions between an insurer or HMO and its affiliates. The Virginia insurance holding company laws and regulations generally require insurance companies and HMOs within an insurance holding company system to register with the State Corporation Commission and to file with the State Corporation Commission certain reports describing capital structure, ownership, financial condition, certain intercompany transactions and general business operations. In addition, various notice and reporting requirements generally apply to transactions between insurance companies and HMOs and their affiliates within an insurance holding company system, depending on the size and nature of the transactions. Virginia insurance holding company laws and regulations require prior regulatory approval or, in certain circumstances, prior notice of, certain material intercompany transfers of assets as well as certain transactions between insurance companies, HMOs, their parent holding companies and affiliates. Additionally, Virginia insurance holding company acts restrict the ability of any person to obtain control of an insurance company or HMO without prior regulatory approval. Without such approval (or an exemption), no person may acquire any voting security of an insurance holding company which controls a Virginia insurance company or HMO, or merge with such a holding company, if as a result of such transaction such person would "control" the insurance holding company. "Control" is defined as the direct or indirect power to direct or cause the direction of 10 the management and policies of a person and is presumed to exist if a person directly or indirectly owns or controls 10% or more of the voting securities of another person. RISK-BASED CAPITAL REQUIREMENTS. Virginia has statutory risk-based capital ("RBC") requirements for life, health and other insurance companies. Such requirements are intended to assess the capital adequacy of life and health insurers, taking into account the risk characteristics of an insurer's investments and products. The formula for calculating such RBC requirements, set forth in instructions adopted by the NAIC, is designed to take into account asset risks, insurance risks, interest rate risks and other relevant risks with respect to an individual insurance company's business. Under these laws, an insurance company must submit a report of its RBC level to the Virginia State Corporation Commission as of the end of the previous calendar year. The RBC requirements categorize insurance companies according to the extent to which they meet or exceed certain RBC thresholds. The law requires increasing degrees of regulatory oversight and intervention as an insurance company's RBC declines. The level of regulatory oversight ranges from requiring the insurance company to inform and obtain approval from the domiciliary Insurance Commissioner of a comprehensive financial plan for increasing its RBC to mandatory regulatory intervention requiring an insurance company to be placed under regulatory control in a rehabilitation or liquidation proceeding. As of December 31, 2001, the RBC levels of Trigon Insurance, Trigon Health and Life and each of the Company's HMOs, as calculated in accordance with the NAIC RBC instructions, exceeded all RBC thresholds. RESTRICTIONS ON DIVIDENDS. In the event the Company determines to pay dividends, the principal source of funds to pay dividends to stockholders would be dividends received by the Company from its subsidiaries. Virginia insurance laws and regulations restrict the payment of extraordinary dividends declared by insurance companies, including health care insurers such as Trigon Insurance, in a holding company system. An insurance company is prohibited from paying an extraordinary dividend unless it obtains the approval of the State Corporation Commission. An extraordinary dividend is one which, together with the amount of dividends and distributions paid by the insurance company during the immediately preceding 12 months, exceeds the lesser of (i) 10% of the insurance company's statutory surplus to policyholders as of the preceding December 31 or (ii) the insurance company's statutory net income (excluding realized capital gains) for the preceding calendar year. Further, an insurance company may not pay a dividend unless, after such payment, its surplus to policyholders is reasonable in relation to its outstanding liabilities and adequate to meet its financial needs. The State Corporation Commission may bring an action to enjoin or rescind payment of any dividend or distribution that would cause the insurance company's statutory surplus to be unreasonable or inadequate. Trigon Insurance may pay the Company $46.6 million in cash dividends during 2002 without prior approval. During 2001, 2000 and 1999, Trigon Insurance paid cash dividends to its parent, Trigon Healthcare, Inc., of $125 million, $125 million and $48.9 million, respectively. During 2001, Peninsula Healthcare, Inc. paid a cash dividend of $2 million. The payment was distributed to its parent companies in proportion to their respective ownership interests as follows: $1 million to Trigon Healthcare, Inc. and $991,000 to Riverside Healthcare Association. 11 During 2001, Monticello Service Agency, Inc. paid cash dividends to its parent, Trigon Healthcare, Inc., of $46 million. No regulatory approval was required for this dividend. ASSESSMENTS AGAINST INSURERS. Under insolvency or guaranty association laws in most states, insurance companies can be assessed for amounts paid by guaranty funds for policyholder losses incurred by insolvent insurance companies. Most state insolvency or guaranty association laws, including Virginia's, currently provide for assessments based upon the amount of premiums received on insurance underwritten within such state. Substantially all of Trigon's premiums are currently derived from insurance underwritten in Virginia. Under the Virginia Life, Accident and Sickness Insurance Guaranty Association (the "Association") Act, assessments against insurance companies which issue policies of accident or sickness insurance, such as Trigon Insurance, are made retrospectively and are based (up to prescribed limits) upon the ratio of (i) the insurance company's premiums received in Virginia over the previous three calendar years on accident and sickness insurance, to (ii) the aggregate amount of premiums received by all assessed member insurance companies over such three calendar years on accident and sickness insurance. The guaranty fund assessments made under the act are administered by the Association, which has its own board of directors selected by member insurers with the approval of the State Corporation Commission. An assessment may be abated or deferred by the Association if, in the opinion of the board, payment would endanger the ability of the member to fulfill its contractual obligations, but the other member insurers may be assessed for the amount of such abatement or deferral. Any such assessment paid by a member insurance company may be offset against its premium tax liability to the Commonwealth of Virginia over the ten calendar years following the year of the payment, in amounts equal to ten percent of the amount paid. The amount and timing of any future assessments, however, cannot be reasonably estimated and are beyond the control of the Company. VIRGINIA'S OPEN ENROLLMENT PROGRAM. The Commonwealth of Virginia has an open enrollment program pursuant to which Trigon Insurance is required to offer comprehensive accident and sickness insurance contracts to individuals without imposition of certain underwriting criteria that would deny coverage on the basis of medical condition, age or employment status. As an incentive for participating in the open enrollment program, Trigon Insurance pays Virginia premium tax of three-fourths of one percent (0.75%) on premiums received from individual accident and sickness insurance rather than the general Virginia premium tax of two and one-fourth percent (2.25%). This general Virginia premium tax applies to all accident and sickness insurance premiums received by Trigon Insurance from group business. To withdraw from the open enrollment program, Trigon Insurance is required to give 24 months advance notice of withdrawal to the State Corporation Commission. BANKRUPTCY AND INSOLVENCY. In the event of default on any debt incurred by the Company or the bankruptcy of the Company, the creditors and stockholders of the Company would have no right to proceed against the assets of Trigon Insurance or any other subsidiary of the Company. If Trigon Insurance were subject to a rehabilitation or liquidation proceeding, such proceeding would be brought by the State Corporation Commission which would act as the receiver with respect to such insurance company's property and business. All creditors of Trigon 12 Insurance, including, without limitation, members and, if applicable, the various state guaranty associations, would be entitled to payment in full from such assets before the Company, as a stockholder, would be entitled to receive any distributions therefrom. THE BLUE CROSS BLUE SHIELD LICENSE The Company and certain of its subsidiaries have the exclusive right to use certain Blue Cross and Blue Shield service marks and tradenames for all of their plans and products throughout Virginia other than certain northern Virginia suburbs adjacent to Washington, D.C. The license requires an annual fee to be paid to BCBSA equal to total association expenses allocated to members based upon enrollment and premium and subjects the Company to certain other guidelines. BCBSA is a national trade association of Blue Cross and Blue Shield licensees, the primary function of which is to promote and preserve the integrity of the Blue Cross and Blue Shield name and service marks as well as provide certain coordination among plan and provider services. Each BCBSA licensee is an independent legal organization and is not responsible for obligations of other BCBSA member organizations. The Company has no right to use the Blue Cross and Blue Shield service marks and tradenames outside of its designated territory within the Commonwealth of Virginia. Under the Company's license agreement with BCBSA, an institutional investor (generally defined as an entity identified in Rule 13d-1(b) (1) (ii) of the rules and regulations under the Securities Exchange Act of 1934 and which makes certifications required by item 10 of SEC Schedule 13G) may own up to 10% of the outstanding voting securities of the Company. All other stockholders are subject to a 5% ownership limitation. Ownership by any stockholder of voting securities in excess of such limits would subject the Company to automatic termination of its license. The Company's Articles of Incorporation contain certain provisions which are intended to prevent any holder from acquiring shares in excess of the limits set forth in the Company's license agreement. However, there can be no assurance that a court would enforce these provisions or that if these provisions were not enforced that the Company would retain the license from BCBSA. If the BCBSA license were to be terminated, there would be a material adverse effect on the Company's business and operations, which the Company does not believe it can meaningfully quantify. The license agreements between BCBSA and its licensees prohibit a licensee from entering into certain transactions which would result in an unlicensed entity obtaining control of the licensee or acquiring a substantial portion of the licensee's assets related to services provided under the Blue Cross or Blue Shield service marks. The license agreements also require that a licensee pay to BCBSA a specific amount upon termination of the license agreement, subject to certain limited exceptions. The amount payable upon termination of the license agreement is equal to $25 multiplied by the number of the licensee's members receiving products or services sold or administered under the Blue Cross or Blue Shield service marks, subject to reduction to the extent the payment of such fee would cause such licensee to fall below certain capital requirements established by the BCBSA. 13 RATING Trigon Healthcare, Inc. has been assigned a counterparty credit rating of "A-" (Strong) from Standard & Poor's. The counterparty credit rating reflects Standard and Poor's opinion of the company's overall creditworthiness and financial ability to pay its financial obligations. The rating indicates that the company has a strong capacity to meet its financial commitments. SUBSIDIARIES. Trigon Insurance, HealthKeepers, Peninsula Health Care and Priority Health Care are each presently assigned a rating of "A" (Excellent) by A.M. Best Company. A.M. Best's ratings are divided into two broad categories - Secure and Vulnerable. All of the ratings assigned to the Company's subsidiaries are classified as Secure. The rating of "A" is assigned to companies which have, on balance, excellent balance sheet strength, operating performance and business profile when compared to the standards established by the A.M. Best Company. These companies, in the opinion of A.M. Best, have a strong ability to meet their ongoing obligations to policyholders. Such ratings are not directed to the protection of investors and are subject to review and change over time. Trigon Insurance has been assigned an insurer financial strength rating of "AA-" (Very Strong) from Standard and Poor's. The financial strength rating reflects Standard and Poor's current opinion of the financial security characteristics of the company with respect to its ability to pay under its insurance contracts in accordance with the contract terms. A company is assigned this rating because Standard and Poor's considers the company to have financial security characteristics that outweigh any vulnerabilities and believes the company is highly likely to have the ability to meet financial commitments. In January 2002, Fitch Ratings assigned "AA-" (Very Strong) ratings to HealthKeepers, Peninsula Health Care and Priority Health Care. Companies rated in the "AA" category by Fitch Ratings are typically viewed as possessing very strong capacity to meet policyholder and contract obligations. Risk factors are modest and the impact of any adverse business and economic factors is expected to be very small. COMMERCIAL PAPER. Standard and Poor's affirmed its "A-1" short-term issuer credit rating to the Trigon Healthcare, Inc. $300 million private placement commercial paper program in December 2001. An obligor rated "A-1" by Standard and Poor's has STRONG ability to meet its financial commitments, and is rated in the highest category by Standard & Poor's. In November 2001, Moody's Investors Service affirmed a "Prime-2" short-term debt rating to the Trigon Healthcare, Inc. $300 million private placement commercial paper program. Issuers rated "Prime-2" by Moody's have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by leading market positions in well-established industries, high rates of return on funds employed, conservative capitalization structure, broad margins in earnings coverage of fixed financial charges and high internal cash generation, although to a lesser degree than issuers rated "Prime-1" by Moody's. Earnings trends and coverage ratios, while sound, may be subject to variation. Capitalization characteristics may be more affected by external conditions than issuers rated "Prime-1" by Moody's. Ample adequate liquidity is maintained. 14 In October 2001 Fitch affirmed its "F1" short-term credit rating on the Trigon Healthcare, Inc. $300 million private placement commercial paper program. Issuers rated "F1" by Fitch are considered to have the highest credit quality, with the strongest capacity for timely payment of financial commitments. The "F1" rating may have an added "+" to denote any exceptionally strong credit feature. EMPLOYEES As of December 31, 2001, the Company had 4,122 full-time and 86 part-time employees. The employees are primarily located in Virginia, with the majority of the Virginia employees in the cities of Richmond and Roanoke. Employees are also located in California, Delaware, Illinois, Maryland, New Jersey, North Carolina, Pennsylvania, Tennessee and Washington D.C. The Company believes that its relationship with its employees is good. No employees are subject to collective bargaining agreements. EXECUTIVE OFFICERS Age as of December 31, Name 2001 Position ---- ---- -------- Thomas G. Snead, Jr. 48 Chairman of the Board and Chief Executive Officer John W. Coyle 49 President and Chief Operating Officer William P. Bracciodieta, M.D. 56 Senior Vice President and Chief Medical Officer John J. Brighton 59 Senior Vice President and Chief Information Officer Thomas R. Byrd 44 Senior Vice President and Chief Financial Officer James W. Copley, Jr. 49 Senior Vice President and Chief Investment Officer Kathy Ashby Merry 39 Senior Vice President, Service Operations Ronald M. Nash 64 Senior Vice President, Corporate Services Paul F. Nezi 54 Senior Vice President, Market Growth Timothy P. Nolan 40 Senior Vice President, Corporate Development 15 Age as of December 31, Name 2001 Position ---- ---- -------- Thomas A. Payne 57 Senior Vice President, Corporate Audit Peter L. Perkins 44 Senior Vice President and Chief Actuary David P. Wade 45 Senior Vice President, Marketing J. Christopher Wiltshire 47 Senior Vice President, General Counsel and Corporate Secretary For a listing of the positions held with the Company by each executive officer and other information, refer to "Officers," on page 57 of the Company's 2001 Annual Report to Shareholders, which is incorporated herein by reference. SERVICE MARKS The Company has registered and maintains several service marks, trademarks and tradenames at the federal level, in the Commonwealth of Virginia and in certain other states. "Trigon," "Keycare" and "HealthKeepers" are included among these marks. Although the Company considers its registered service marks, trademarks and tradenames important in the operation of its business, the business of the Company is not dependent on any individual service mark, trademark or tradename. For a discussion of the Company's license to use certain Blue Cross and Blue Shield service marks and tradenames, see "The Blue Cross Blue Shield License." FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the document. The Company desires to take advantage of these safe harbor provisions. Certain information contained in this Form 10-K is forward-looking within the meaning of the Act or Securities and Exchange Commission rules. Words such as expects, anticipates, intends, plans, believes, seeks or estimates, or variations of such words and similar expressions are also intended to identify forward-looking statements. Such forward-looking statements are subject to inherent risks and uncertainties, many of which are beyond the control of the Company. Set forth below are certain important factors that, in addition to general economic conditions and other factors, some of which are discussed elsewhere in this Form 10-K, may affect these forward-looking statements and the Company's business generally. ESCALATING HEALTH CARE COSTS AND THE HEALTH CARE INDUSTRY. The Company's profitability depends in large part on accurately predicting and effectively managing health care costs. Predicting medical costs is difficult partially due to the variability of medical inflation. Trigon continually reviews and adjusts its premium and benefit structure to reflect its 16 underlying claims experience and revised actuarial data; however, several factors could adversely affect the medical loss 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. The potential negative effect of escalating health care costs as well as any changes in the Company's ability to negotiate favorable rates with its providers may produce risks to the Company's market growth due to its impact on the affordability of health care insurance. Competitive price pressures in the health insurance and managed care industry, which generally result from the entry and exit of health care companies in the marketplace, historically have resulted in, or contributed to, pricing and profitability cycles. While we believe structural changes in the managed health care and health insurance industry have altered traditional cyclical patterns, there can be no assurance that a continuation of the typical cyclical pattern will not adversely affect the profitability of the Company in the next few years. COMPETITION. The health care industry is highly competitive both in Virginia and nationally. See "Competition." There is no assurance that the overall competition will not exert strong pressures upon Trigon's profitability, its ability to increase enrollment, or its ability to successfully pursue growth in areas both within and outside of Virginia. GOVERNMENT REGULATION. The Company and its subsidiaries are subject to federal and state regulation. See "Regulation." Regulatory initiatives may be undertaken in the future, either at the federal or state level, to engage in structural reform of the health care industry in order to reduce the escalation in health care costs or to make health care more accessible. Such reform, if it occurs, could adversely affect Trigon's results of operations or financial condition. POTENTIAL RISKS ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS. The competition to purchase health care companies is intense, which may increase the costs of acquiring such companies and may affect the availability of attractive acquisition opportunities. In addition, the Company has no significant experience in expanding its managed health care business outside Virginia. There can be no assurance that the Company will successfully identify or complete acquisitions or that any acquisitions, if completed, will perform as expected or will contribute significant revenues or profits to the Company. The Company's ability to expand successfully outside of Virginia through acquisitions or otherwise may be adversely affected by its inability to use the Blue Cross and Blue Shield service marks and trademarks outside of the Company's licensed territory in Virginia, by the Company's lack of substantial market share or established provider networks outside of Virginia and by the presence of competitors with strong market positions in these areas. CONCENTRATION OF BUSINESS IN VIRGINIA. While the Company's growth strategy includes expansion outside Virginia, for the foreseeable future a significant portion of the Company's revenues may be subject to economic factors specific to Virginia. Therefore, there can be no assurance that a downturn in the Virginia economy would not adversely affect the Company. 17 POTENTIAL LOSS OF BLUE CROSS AND BLUE SHIELD SERVICE MARKS AND TRADENAMES. Trigon and the BCBSA are parties to a license agreement pursuant to which the Company and certain of its subsidiaries have the exclusive right to use certain Blue Cross and Blue Shield service marks and tradenames for their products throughout Virginia other than certain northern Virginia suburbs adjacent to Washington, D.C. See "The Blue Cross Blue Shield License." If the BCBSA license were to be terminated, there would be a material adverse effect on the Company's business and operations, which the Company does not believe it can meaningfully quantify. To the extent that the Company continues to use the Blue Cross and Blue Shield service marks and tradenames in marketing its managed care products, there can be no assurance that any negative publicity concerning BCBSA and other BCBSA licenses will not adversely affect the sales of the Company's managed care products and the Company's operations. Item 2. Properties The Company is headquartered in Richmond, Virginia, where it owns a four-story building with 268,000 square feet of office space. The Company also owns an office facility and warehouse in Roanoke, Virginia with 190,500 square feet. The Company leases additional office space totaling 570,400 square feet in Richmond, 125,500 square feet in Roanoke and other locations in Virginia and 3,300 square feet combined in Maryland, Pennsylvania and Delaware. These properties are primarily used by the health insurance segment for operations and for corporate administration. The Company also owns a 70,800 square foot office facility in Fayetteville, North Carolina that is for sale. Square footage utilized by segment as of December 31, 2001 was as follows: health insurance, 953,700; government programs, 29,000; investments, 3,900; and other reportable segments, 41,100. The remaining 130,000 square feet utilized by the Company was used for corporate administration. In 2001, the Company announced a four-year $84 million building project to expand its headquarters in Richmond, VA. The expansion plan includes construction of a 308,000 square foot building to house the operations center and major renovation to the existing headquarters building. The project will be funded with internal cash and investments. Item 3. Legal Proceedings 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 (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 this date. The Company will continue to pursue this 18 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 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 deductions 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 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 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. 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Refer to page 28, "Market Prices of Common Stock and Dividend Data," of the Company's 2001 Annual Report to Shareholders, which is incorporated herein by reference. Refer to "Part 1 - Business -- Regulation -- Insurance Holding Company Regulation" and "Part 1 - Business -- Regulation -- Restrictions on Dividends" for discussion of insurance holding company regulations and dividend restrictions. In addition, under the terms of the Company's $300 million revolving credit agreements, dividend payments are permitted without limitation if no default has occurred or is continuing; in the event that the Company no longer has an investment grade rating, certification is required that prior to and after certain dividend payments, no default will exist or be continuing. ITEM 6. SELECTED FINANCIAL DATA Refer to pages 18 and 19, "Selected Consolidated Financial and Operating Data," of the Company's 2001 Annual Report to Shareholders, which are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Refer to pages 20 through 27, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of the Company's 2001 Annual Report to Shareholders, which are incorporated herein by reference. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Refer to page 28, "Quantitative and Qualitative Disclosures About Market Risk," of the Company's 2001 Annual Report to Shareholders, which is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Refer to pages 29 through 55, the Consolidated Financial Statements, page 56, "Independent Auditors' Report," and page 17, "Quarterly Financial Information," of the Company's 2001 Annual Report to Shareholders, which are incorporated herein by reference. 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Refer to pages 1 through 3, "Election of Directors," and page 6, "Section 16(a) Beneficial Ownership Reporting Compliance," of the Company's definitive Proxy Statement dated March 22, 2002, which are incorporated herein by reference solely as they relate to the Directors of the Company. Pursuant to General Instruction G(3) to Form 10-K, information as to executive officers of the Company is set forth in Part I of this Form 10-K. See "Item 1 - Business -- Executive Officers." ITEM 11. EXECUTIVE COMPENSATION Refer to pages 7 through 12, "Compensation of Executive Officers," of the Company's definitive Proxy Statement dated March 22, 2002, which are incorporated herein by reference solely as they relate to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Refer to pages 3 and 4, "Beneficial Ownership of Securities," of the Company's definitive Proxy Statement dated March 22, 2002, which are incorporated herein by reference solely as they relate to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Refer to page 4, "Certain Business Relationships," of the Company's definitive Proxy Statement dated March 22, 2002, which are incorporated herein by reference solely as they relate to this item. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report. 1. Consolidated Financial Statements from the Company's 2001 Annual Report to Shareholders are incorporated herein by reference in Item 8: -- Consolidated Balance Sheets as of December 31, 2001 and 2000 (page 29) -- Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 (page 30) 21 -- Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the years ended December 31, 2001, 2000 and 1999 (page 31) -- Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 (page 32) -- Notes to Consolidated Financial Statements (pages 33 through 55) -- Independent Auditors' Report (page 56) 2. Financial statement schedules Independent Auditors' Report...............(filed herein on page S-1) Schedule I - Financial Information of Registrant (parent only) as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999..... (filed herein on pages S-2 - S-7) 3. Exhibits. The following is a list of exhibits to this Form 10-K. Exhibit Number Description ------ ----------- 2 -- Amended and Restated Plan of Demutualization (incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1 (registration number 333-09773)). 3.1 -- Amended and Restated Articles of Incorporation of Trigon Healthcare, Inc. (incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1 (registration number 333-09773)). 3.2 -- Amended and Restated Bylaws of Trigon Healthcare, Inc. dated April 28, 1999 (incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended March 31, 1999). 3.3 -- Articles of Amendment to Amended and Restated Articles of Incorporation setting forth the designation, preferences and rights of Series A Junior Participating Preferred Stock of Trigon Healthcare, Inc. dated July 16, 1997 (Incorporated by reference to exhibits filed with the Company's Form 8-A/A filed on July 16, 1997). 4 -- Form of Stock Certificate (other Instruments Defining the Rights of Security-Holders) (incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1 (registration number 333-09773)). 4.1 -- Rights Agreement dated as of July 16, 1997 between Trigon Healthcare, Inc. and First Chicago Trust Company of New York, as Rights Agent (incorporated by reference to exhibits filed with the Company's Form 8-A/A filed on July 16, 1997). 4.2 -- Form of Rights Certificate (incorporated by reference to exhibits filed with the Company's Form 8-A/A filed on July 16, 1997). 10.1 -- License Agreement by and between the Blue Cross and Blue Shield Association and the Company (incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1996). (a) Blue Cross license (b) Blue Shield license 22 10.2 -- Limited Fixed Return Plan for Certain Officers and Directors of Trigon Insurance Company (incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1 (registration number 333-09773)). * 10.4 -- Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company (incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1 (registration number 333-09773)). * 10.5 -- Amended and Restated Supplemental Executive Retirement Program for Certain Employees of Trigon Insurance Company dated as of October 1, 1998 (incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1998). * 10.6 -- Salary Deferral Plan for Norwood H. Davis, Jr. (incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1 (registration number 333-09773)). * 10.7 -- Amended and Restated Employment Agreement dated September 16, 1998 by and between Trigon Insurance Company and Norwood H. Davis, Jr. (incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended September 30, 1998). * 10.9 -- Amended and Restated Employees' Thrift Plan of Trigon Insurance Company dated as of October 1, 1998 (incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1998). * 10.10 -- Amended and Restated Trigon Insurance Company 401(k) Restoration Plan dated as of October 1, 1998 (Incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1998). * 10.12 -- Form of Employment Agreement dated as of December 12, 1990 by and between Trigon Insurance Company and John C. Berry and certain other executive officers (incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1 (registration number 333-09773)). * 10.15 -- 1997 Stock Incentive Plan (incorporated by reference to exhibits filed with the Company's Proxy Statement dated March 13, 1997). * 10.16 -- Employee Stock Purchase Plan (incorporated by reference to exhibits filed with the Company's Proxy Statement dated March 13, 1997). * 10.17 -- Non-Employee Directors Stock Incentive Plan (incorporated by reference to exhibits filed with the Company's Proxy Statement dated March 13, 1997). * 10.18 -- Amendment to the License Agreement by and between the Blue Cross and Blue Shield Association and the Company (incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended September 30, 1997). 10.19 -- Amendment to the Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company (incorporated by ference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1997). * 10.20 -- Form of Executive Continuity Agreement dated as of September 16, 1998 between Trigon Insurance Company and Thomas G. Snead, Jr. and certain other executive officers (incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended September 30, 1998). * 10.21 -- Form of Executive Continuity Agreement dated as of September 16, 1998 between Trigon Insurance Company and John C. Berry and certain other executive officers 23 (incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended September 30, 1998). * 10.22 -- Amendment to the Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company (now to be known as) The Trigon Insurance Company Retirement Program dated as of October 1, 1998 (incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1998).* 10.23 -- Clarifying Amendment to the Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company (now to be known as) The Trigon Insurance Company Retirement Program dated as of October 1, 1998 (incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1998). * 10.24 -- Thomas G. Snead Employment Agreement dated May 19, 1999 (incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended June 30, 1999). * 10.25 -- Amendment No. 1 to Executive Continuity Agreement Between Trigon Insurance Company and Thomas G. Snead, Jr. dated May 19, 1999 (incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended June 30, 1999).* 10.26 -- Clarifying Amendment No. 2 to the Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company (now to be known as) The Trigon Insurance Company Retirement Program (incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1999). * 10.27 -- Clarifying Amendment No. 3 to the Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company (now to be known as) The Trigon Insurance Company Retirement Program (incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1999). * 10.28 -- Clarifying Amendment No. 4 to The Trigon Insurance Company Retirement Program (incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1999). * 10.30 -- First amendment to the Trigon Healthcare, Inc. 1997 Stock Incentive Plan dated February 15, 2000 (incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended March 31, 2000). * 10.32 -- Form of Executive Continuity Agreement dated as of February 12, 2001 between Trigon Insurance Company and John W. Coyle (incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended March 31, 2001). * 10.33 -- Form of Employment Agreement dated as of February 12, 2001 by and between Trigon Insurance Company and John W. Coyle (incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended March 31, 2001). * 10.34 -- Five-Year Credit Agreement dated as of November 14, 2001 among Trigon Healthcare, Inc., the banks party thereto and JPMorgan Chase Bank, as Administrative Agent. 10.35 -- 364-Day Credit Agreement dated as of November 14, 2001 among Trigon Healthcare, Inc., the banks party thereto and JPMorgan Chase Bank, as Administrative Agent. 24 11 -- Computation of per share earnings. Refer to Note 14, "Net Income and Net Income Per Share," on page 50 of Trigon Healthcare Inc.'s 2001 Annual Report to Shareholders, which is incorporated herein by reference. 13 -- Excerpts from the Company's Annual Report to Shareholders for the year ended December 31, 2001. 21 -- Subsidiaries of the Registrant. 23.1 -- Independent Auditors' Consent. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this Form 10-K. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRIGON HEALTHCARE, INC. Registrant By: /s/ THOMAS R. BYRD ------------------ THOMAS R. BYRD Title: SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Date: March 26, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ THOMAS G. SNEAD, JR. Chairman of the Board and -------------------------------------- Chief Executive Officer THOMAS G. SNEAD, JR. (Principal Executive Officer) March 25, 2002 /s/ THOMAS R. BYRD Senior Vice President and Chief -------------------------------------- Financial Officer (Principal Financial THOMAS R. BYRD and Accounting Officer) March 26, 2002 /s/ LENOX D. BAKER, JR. Director March 24, 2002 -------------------------------------- LENOX D. BAKER, JR., M.D. /s/ A. HUGH EWING, III Director March 24, 2002 -------------------------------------- A. HUGH EWING, III
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM R. HARVEY Director March 22, 2002 -------------------------------------- WILLIAM R. HARVEY, Ph.D. /s/ GARY A. JOBSON Director March 22, 2002 -------------------------------------- GARY A. JOBSON /s/ JOSEPH S. MALLORY Director March 22, 2002 -------------------------------------- JOSEPH S. MALLORY /s/ DONALD B. NOLAN Director March 21, 2002 -------------------------------------- DONALD B. NOLAN, M.D. /s/ WILLIAM N. POWELL Director March 26, 2002 -------------------------------------- WILLIAM N. POWELL /s/ JOHN SHERMAN, JR. Director March 21, 2002 -------------------------------------- JOHN SHERMAN, JR. /s/ R. GORDON SMITH Director March 21, 2002 -------------------------------------- R. GORDON SMITH, ESQ. /s/ JACKIE M. WARD Director March 21, 2002 -------------------------------------- JACKIE M. WARD Independent Auditors' Report The Board of Directors Trigon Healthcare, Inc.: Under date of February 6, 2002, we reported on the 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, as contained in the 2001 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2001. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule included in the annual report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Richmond, Virginia February 6, 2002 S-1 SCHEDULE I TRIGON HEALTHCARE, INC. AND SUBSIDIARIES FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) Balance Sheets December 31, 2001 and 2000 (in thousands, except per share data)
2001 2000 -------------- -------------- ASSETS Current assets Cash $ 423 - Investment securities, at estimated fair value 464,179 389,776 Other receivables 7,820 16,701 Income taxes receivable 22,975 14,994 Receivable from subsidiaries * 33 - Other 11 3 -------------- -------------- Total current assets 495,441 421,474 -------------- -------------- Investment in subsidiaries * 825,841 884,321 Deferred income taxes 1,474 688 Other assets 2,457 223 -------------- -------------- Total assets $ 1,325,213 1,306,706 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 3,845 2,326 Payable for investment securities 1,282 13,826 Payable to subsidiaries * 6 244 Commercial paper 99,660 - -------------- -------------- Total current liabilities 104,793 16,396 -------------- -------------- Commercial paper, noncurrent 200,000 275,448 -------------- -------------- Total liabilities 304,793 291,844 -------------- -------------- SHAREHOLDERS' EQUITY Common stock, $0.01 par; shares issued and outstanding: 35,786, 2001; 37,539, 2000 358 375 Capital in excess of par 784,514 802,584 Retained earnings 234,364 205,045 Unearned compensation - restricted stock (1,817) (2,234) Accumulated other comprehensive income 3,001 9,092 -------------- -------------- Total shareholders' equity 1,020,420 1,014,862 Commitments and contingencies -------------- -------------- Total liabilities and shareholders' equity $ 1,325,213 1,306,706 ============== ==============
*Amounts are eliminated in consolidation. See accompanying independent auditors' report and notes to financial information. S-2 SCHEDULE I TRIGON HEALTHCARE, INC. AND SUBSIDIARIES FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED Statements of Operations For the years ended December 31, 2001, 2000 and 1999 (in thousands)
2001 2000 1999 -------------- ------------- -------------- REVENUES Investment income $ 31,505 32,087 19,157 Net realized losses (21,767) (4,431) (8,051) Cash dividends from subsidiaries * 172,032 125,000 48,900 -------------- ------------- -------------- Total revenues 181,770 152,656 60,006 EXPENSES Selling, general and administrative expenses 3,719 4,418 2,095 Interest expense 12,755 17,249 8,359 -------------- ------------- -------------- Total expenses 16,474 21,667 10,454 -------------- ------------- -------------- Income before income taxes and equity in undistributed earnings of subsidiaries 165,296 130,989 49,552 Income tax expense (benefit) (3,291) 554 106 -------------- ------------- -------------- Income before equity in undistributed earnings of subsidiaries 168,587 130,435 49,446 Equity in undistributed earnings of subsidiaries * (52,527) (18,426) (28,983) -------------- ------------- -------------- Net income $ 116,060 112,009 20,463 ============== ============= ==============
*Amounts are eliminated in consolidation. See accompanying independent auditors' report and notes to financial information. S-3 SCHEDULE I TRIGON HEALTHCARE, INC. AND SUBSIDIARIES FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED Statements of Changes in Shareholders' Equity and Comprehensive Income For the years ended December 31, 2001, 2000 and 1999 (in thousands)
Accumulated Capital Other Common in Excess Retained Unearned Comprehensive Stock of Par Earnings Compensation Income Total ----------- ----------- -------- ------------ ------------- ---------- Balance at 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 - - - - 834 834 Net unrealized losses on investment securities, net of income taxes (including consolidated subsidiaries' after-tax net unrealized losses of $26,507) - - - - (20,806) (20,806) ---------- Comprehensive income 491 Repurchase and retirement of common stock (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 - (1,403) - - - (1,403) ----------- ----------- -------- ------------ ------------- ---------- Balance at 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 - - - - 293 293 Net unrealized losses on investment securities, net of income taxes (including consolidated subsidiaries' after-tax net - - - - (289) (289) realized gains of $7,632) ---------- Comprehensive income 112,013 Repurchase and retirement of common stock (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 - 3,374 - - - 3,374 ----------- ----------- -------- ------------ ------------- ---------- Balance at December 31, 2000 $ 375 802,584 205,045 (2,234) 9,092 1,014,862 =========== =========== ======== ============ ============= ==========
S-4 SCHEDULE I TRIGON HEALTHCARE, INC. AND SUBSIDIARIES FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED Statements of Changes in Shareholders' Equity and Comprehensive Income, Continued For the years ended December 31, 2000, 1999 and 1998 (in thousands)
Accumulated Capital Other Common in Excess Retained Unearned Comprehensive Stock of Par Earnings Compensation Income Total --------- --------- -------- ------------ ------------- ----------- Balance at 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 - - - - 22 22 Net unrealized losses on investment securities, net of income taxes (including consolidated subsidiaries' after-tax net unrealized losses of $8,438) - - - - (6,113) (6,113) ----------- Comprehensive income 109,969 Repurchase and retirement of common stock (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 - (448) - - - (448) --------- --------- -------- ------------ ------------- ----------- Balance at December 31, 2001 $ 358 784,514 234,364 (1,817) 3,001 1,020,420 ========= ========= ======== ============ ============= ===========
See accompanying independent auditors' report and notes to financial information. S-5 SCHEDULE I TRIGON HEALTHCARE, INC. AND SUBSIDIARIES FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED Statements of Cash Flows For the years ended December 31, 2001, 2000 and 1999 (in thousands)
2001 2000 1999 ------------- ------------- ------------- Net income $ 116,060 112,009 20,463 Adjustments to reconcile net income to net cash provided by operating activities Accretion of discounts and amortization of premiums, net (872) (3,526) (1,930) Amortization of unearned compensation 1,842 2,681 1,031 Undistributed earnings of subsidiaries * 52,527 18,426 28,983 Increase in other receivables (2,229) (517) (1,205) Increase in income taxes receivable (7,981) (14,994) - Increase in receivable from subsidiaries * (33) - - Decrease (increase) in other assets (1,815) 245 (316) Increase (decrease) in accounts payable and accrued expenses 1,628 (1,432) 2,353 Increase (decrease) in income taxes payable - (5,099) 3,398 Change in deferred income taxes (2,403) 1,616 294 Increase (decrease) in payable to subsidiaries * (238) 244 (79) Realized investment losses, net 21,767 4,431 8,051 ------------- ------------- ------------- Net cash provided by operating activities 178,253 114,084 61,043 ------------- ------------- ------------- Cash flows from investing activities Investment securities purchased (1,216,982) (1,025,962) (972,506) Proceeds from investment securities sold 983,034 782,616 693,938 Maturities of fixed income securities 141,437 158,341 223,340 Investments in subsidiaries * (2,879) (18,500) (31,000) ------------- ------------- ------------- Net cash used in investing activities (95,390) (103,505) (86,228) ------------- ------------- ------------- Cash flows from financing activities Proceeds from long-term debt - - 160,000 Payments on long-term debt - (245,000) - 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) Change in common stock purchased by grantor trusts (427) (280) (489) Purchase and retirement of common stock (95,522) (23,172) (130,662) Change in outstanding checks in excess of bank balance (109) 91 18 ------------- ------------- ------------- Net cash provided by (used in) financing activities (82,440) (10,579) 25,173 ------------- ------------- ------------- Increase (decrease) in cash 423 - (12) Cash - beginning of year - - 12 ------------- ------------- ------------- Cash - end of year $ 423 - - ============= ============= ============= Cash paid during the year for Interest $ 12,977 16,150 7,545 ============= ============= ============= Income taxes 957 2,159 - ============= ============= =============
*Amounts are eliminated in consolidation. See accompanying independent auditors' report and notes to financial information. S-6 SCHEDULE I TRIGON HEALTHCARE, INC. AND SUBSIDIARIES FINANCIAL INFORMATION OF REGISTRANT (PARENT ONLY), CONTINUED Notes to Financial Information of Registrant (Parent Only) The financial information provided should be read in conjunction with the Consolidated Financial Statements of Trigon Healthcare, Inc. ("Registrant") incorporated by reference in Part II, Section 8 of this Form 10-K and the following notes: (a) Basis of Presentation The accompanying condensed financial information reflects the financial position as of December 31, 2001 and 2000 and the results of operations, changes in shareholders' equity and comprehensive income and cash flows for the years ended December 31, 2001, 2000 and 1999. (b) Investment in Subsidiaries The Registrant made capital contributions to its subsidiary, Monticello Service Agency, Inc. of $2.9 million, $18.5 million and $31.0 million during 2001, 2000 and 1999, respectively. (c) Borrowings The information about commercial paper contained in note 11 of the notes to the consolidated financial statements of the Registrant and its subsidiaries is incorporated herein by reference. (d) Capital Stock The information about capital stock contained in note 13 of the notes to the consolidated financial statements of the Registrant and its subsidiaries is incorporated herein by reference. (e) Cash Dividends During 2001, 2000, and 1999, the Registrant received cash dividends from its subsidiaries of $172.0 million, $125.0 million and $48.9 million, respectively. f) Comprehensive Income The information about comprehensive income contained in note 15 of the notes to the consolidated financial statements of the Registrant and its subsidiaries is incorporated herein by reference. S-7 EXHIBIT INDEX Exhibit Number Description ------ ----------- 10.34 -- Five-Year Credit Agreement dated as of November 14, 2001 among Trigon Healthcare, Inc., the banks party thereto and JPMorgan Chase Bank, as Administrative Agent. 10.35 -- 364-Day Credit Agreement dated as of November 14, 2001 among Trigon Healthcare, Inc., the banks party thereto and JPMorgan Chase Bank, as Administrative Agent. 13 -- Excerpts from the Company's Annual Report to Shareholders for the year ended December 31, 2001. 21 -- Subsidiaries of the Registrant. 23.1 -- Independent Auditors' Consent.