<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NUMBER 1-11628
WELLPOINT HEALTH NETWORKS INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3760980
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
21555 OXNARD STREET, WOODLAND HILLS, CALIFORNIA 91367
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 703-4000
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OUTSTANDING AT NOVEMBER 13, 1996
------------------- --------------------------------
<S> <C>
Common Stock, $0.0l par value 66,484,298 shares
</TABLE>
<PAGE> 2
WELLPOINT HEALTH NETWORKS INC.
THIRD QUARTER 1996 FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Income Statements for the Three and Nine Months
Ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>
<PAGE> 3
ITEM 1. Financial Statements
WELLPOINT HEALTH NETWORKS INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In thousands, except share data) September 30, December 31,
1996 1995
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $322,785 $1,069,631
Investment securities, at market value 1,704,150 1,174,974
Receivables, net 443,198 149,081
Deferred tax assets 82,390 42,969
Other current assets 31,669 25,651
---------- ----------
Total Current Assets 2,584,192 2,462,306
Property and equipment, net 71,317 42,964
Intangible assets 552,601 124,956
Long-term investments 118,746 12,664
Other non-current assets 121,027 36,367
---------- ----------
Total Assets $3,447,883 $2,679,257
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Medical claims payable $672,999 $362,881
Loss and loss adjustment expense reserves 146,844 66,489
Unearned premiums 160,463 132,298
Accounts payable and accrued expenses 266,047 111,005
Experience rated and other refunds 151,191 93,478
Income taxes payable and other current liabilities 204,095 74,197
---------- ----------
Total Current Liabilities 1,601,639 840,348
Accrued postretirement benefits 65,230 50,158
Loss and loss adjustment expense reserves, non-current 142,998 107,000
Long-term debt 747,000 -
Other non-current liabilities 78,906 11,525
---------- ----------
Total Liabilities 2,635,773 1,009,031
Stockholders' Equity:
Preferred Stock - -
Common Stock
September 30, 1996 - $0.01 par value, 300,000,000 shares
authorized, 66,484,298 issued and outstanding;
December 31, 1995 - none 665 -
Class A Common Stock
September 30, 1996 - none; December 31, 1995 - $0.01 par
value, 200,000,000 shares authorized, 19,500,000 issued
and outstanding; - 195
Class B Common Stock
September 30, 1996 - none; December 31, 1995 - $0.01 par
value 100,000,000 shares authorized, 80,000,000 issued - 800
and outstanding
Additional paid-in capital 760,917 1,100,288
Unrealized valuation adjustment (20,365) 1,820
Retained earnings 70,893 567,123
---------- ----------
Total Stockholders' Equity 812,110 1,670,226
---------- ----------
Total Liabilities and Stockholders' Equity $3,447,883 $2,679,257
========== ==========
</TABLE>
See the accompanying notes to the consolidated financial statements.
1
<PAGE> 4
WELLPOINT HEALTH NETWORKS INC.
Consolidated Income Statements
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except earnings per share) Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Premium revenue $1,052,297 $722,898 $2,801,246 $2,181,446
Management services revenue 43,810 15,823 105,473 44,484
Investment income 34,579 33,109 107,008 102,488
---------- -------- ---------- ----------
1,130,686 771,830 3,013,727 2,328,418
Operating Expenses:
Health care services and
other benefits 824,324 549,893 2,159,062 1,640,897
Selling expense 59,078 46,933 166,805 141,932
General and administrative expense 153,103 84,556 388,868 256,110
---------- -------- ---------- ----------
1,036,505 681,382 2,714,735 2,038,939
---------- -------- ---------- ----------
Operating Income 94,181 90,448 298,992 289,479
Interest expense 12,396 - 23,319 -
Other expense, net 5,926 2,962 15,107 8,845
---------- -------- ---------- ----------
Income before Provision for
Income Taxes 75,859 87,486 260,566 280,634
Provision for income taxes 30,758 35,686 105,580 113,924
---------- -------- ---------- ----------
Net Income $45,101 $51,800 $154,986 $166,710
========== ======== ========== ==========
Earnings Per Share $0.68 $0.78 $2.33 $2.51
========== ======== ========== ==========
Weighted Average Number of
Shares Outstanding 66,484 66,367 66,416 66,367
</TABLE>
See the accompanying notes to the consolidated financial statements.
2
<PAGE> 5
WELLPOINT HEALTH NETWORKS INC.
Consolidated Statement of Changes in Stockholders' Equity
(unaudited)
<TABLE>
<CAPTION>
(In thousands) CLASS A CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK
PREFERRED ---------------- ----------------- -----------------
STOCK SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------- -------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 $ - - $ - 19,500 $ 195 80,000 $ 800
Net income
Recapitalization (see Note 3)
Dividends
Stock Exchange 66,367 664 (19,500) (195) (80,000) (800)
Stock issued for employee long-term
incentive plan and director compensation 117 1
Change in unrealized valuation adjustment
on investment securities, net of tax
-------- -------- -------- -------- -------- --------- -------
Balance as of September 30, 1996 $ - 66,484 $665 - $ - - $ -
======= ======= ======= ======= ======= ======== ======
<CAPTION>
(In thousands) ADDITIONAL UNREALIZED
PAID-IN VALUATION RETAINED
CAPITAL ADJUSTMENT EARNINGS TOTAL
------------ ---------- --------- ----------
<S> <C> <C> <C> <C>
Balance as of December 31, 1995 $1,100,288 $ 1,820 $567,123 $1,670,226
Net income 154,986 154,986
Recapitalization (see Note 3)
Dividends (343,784) (651,216) (995,000)
Stock Exchange 331 -
Stock issued for employee long-term
incentive plan and director compensation 4,082 4,083
Change in unrealized valuation adjustment
on investment securities, net of tax (22,185) (22,185)
---------- -------- -------- ----------
Balance as of September 30, 1996 $ 760,917 $(20,365) $ 70,893 $ 812,110
========== ======== ======== ==========
</TABLE>
See the accompanying notes to the consolidated financial statements.
3
<PAGE> 6
WELLPOINT HEALTH NETWORKS INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended September 30,
-------------------------------
1996 1995
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 154,986 $166,710
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net of accretion 27,340 13,115
Gains on sales of assets, net (10,144) (13,050)
Provision for deferred income tax benefits (43,922) (1,040)
Amortization of deferred gain on sale of building (1,475) -
Issuance of Common Stock 4,082 -
(Increase) decrease in certain assets, net of acquisitions:
Receivables, net (27,086) (54,033)
Other current assets 37,913 (13,991)
Other non-current assets (35,538) -
Increase (decrease) in certain liabilities, net of acquisitions:
Medical claims payable (27,266) (19,967)
Loss and loss adjustment expense reserves 32,389 14,681
Unearned premiums 20,809 203
Accounts payable and accrued expenses 76,118 (1,862)
Experience rated and other refunds 6,869 (28,599)
Income taxes payable and other current liabilities 38,157 72,024
Accrued postretirement benefits 2,544 2,540
Other non-current liabilities 15,363 -
---------- --------
Net cash provided by operating activities 271,139 136,731
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased (755,110) (549,551)
Proceeds from investments sold 460,538 761,463
Proceeds from matured investments 54,225 246,634
Property and equipment purchased, net (26,545) (16,768)
Purchase of subsidiaries, net of cash acquired (441,093) (13,177)
---------- --------
Net cash provided by (used in) investing activities (707,985) 428,601
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 775,000 -
Repayment of long-term debt (90,000) -
Recapitalization (see Note 3) (995,000) -
---------- --------
Net cash used in financing activities (310,000) -
---------- --------
Net increase (decrease) in cash and cash equivalents (746,846) 565,332
Cash and cash equivalents at beginning of period 1,069,631 163,444
---------- --------
Cash and cash equivalents at end of period $ 322,785 $728,776
========== ========
</TABLE>
See the accompanying notes to the consolidated financial statements.
4
<PAGE> 7
WELLPOINT HEALTH NETWORKS INC.
Notes to Consolidated Financial Statements
(unaudited)
1. ORGANIZATION
WellPoint Health Networks Inc. (the "Company" or "WellPoint"), one of the
nation's largest publicly traded managed health care companies, is
organized under the laws of California and holds the exclusive license for
the right to use the Blue Cross name and related service marks in
California.
The Company offers a diversified mix of managed care products, including
managed health maintenance organizations ("HMO"), preferred provider
organizations ("PPO"), point-of-service ("POS") and other hybrid plans, and
traditional indemnity products. The Company also provides a broad array of
specialty products, including pharmacy, dental, life, workers'
compensation, preventive care, disability, behavioral health, COBRA and
flexible benefits account administration. In addition, WellPoint offers
managed care services for self-funded employers, including actuarial
services, network access, medical cost management, claims processing and
administrative services.
On May 20, 1996, the Company concluded a series of transactions
(collectively, the "Recapitalization") to recapitalize the Company's
predecessor, WellPoint Health Networks Inc., a Delaware corporation ("Old
WellPoint"), and purchased the commercial operations of Blue Cross of
California (the "BCC Commercial Operations"). In connection with the
Recapitalization, Old WellPoint merged with and into the company formerly
known as Blue Cross of California ("BCC"). (See Note 3 - Acquisitions and
Recapitalization.)
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of WellPoint,
in the opinion of management, reflect all material adjustments (which are
of a normal recurring nature) necessary for the fair presentation of its
financial condition as of September 30, 1996, the results of operations for
each of the three and nine months ended September 30, 1996 and 1995, cash
flows for each of the nine months ended September 30, 1996 and 1995, and
the statement of changes in stockholders' equity for the nine months ended
September 30, 1996. The results of operations for the interim periods
presented are not necessarily indicative of the operating results for the
full year. Certain amounts in previously issued financial statements have
been reclassified to conform to the 1996 presentation. The
reclassifications had no effect on net income or stockholders' equity as
previously reported.
5
<PAGE> 8
WELLPOINT HEALTH NETWORKS INC.
Notes to Consolidated Financial Statements
(unaudited)
3. ACQUISITIONS AND RECAPITALIZATION
Purchase of Massachusetts Mutual Life Insurance Company's Life and Health
Benefits Management Division
The Company completed its acquisition of the Life and Health Benefits
Management Division ("MMHD") of Massachusetts Mutual Life Insurance Company
("MassMutual") through the acquisition of MMHD's parent, MassMutual Holding
Company Two, Inc. on March 31, 1996 (the "MMHD Acquisition"). The acquired
MMHD operations now conduct business under the name UNICARE Life & Health
Insurance Company. The $402.2 million purchase price was funded with
$340.2 million in existing cash and a Series A term note for $62.0 million.
The purchase method of accounting has been used to account for the MMHD
Acquisition. The excess purchase price over assets acquired was
approximately $231.9 million and is being amortized on a straight-line basis
over 35 years. The Company has spent approximately $8.5 million on
integration costs through September 30, 1996. Through the end of 1997, the
Company expects to incur a total of $30 million to $40 million of
integration and other restructuring costs related to the MMHD Acquisition, a
portion of which is expected to be reflected in the Company's results of
operations and a portion of which is expected to affect the Company's
intangible assets and property and equipment.
As of September 30, 1996, the acquired MMHD operations provide medical
services to approximately 1.1 million members, focusing on the large
employer market (groups of 251 to 3,000), and have medical members in all
50 states. In addition, the acquired MMHD operations also have
approximately 0.9 million dental members, 0.4 million life insurance
members, 0.5 million pharmacy members and 0.1 million disability members.
Recapitalization and Purchase of BCC Commercial Operations
On May 20, 1996, the Company concluded a series of transactions
(collectively, the "Recapitalization") to recapitalize its publicly traded,
majority-owned subsidiary, WellPoint Health Networks Inc., a Delaware
corporation ("Old WellPoint"), pursuant to the Amended and Restated
Recapitalization Agreement dated as of March 31, 1995 (the "Amended
Recapitalization Agreement"), by and among Old WellPoint, the company
formerly known as Blue Cross of California ("BCC"), the California
HealthCare Foundation (the "Foundation") and the California Endowment Fund
(the "Endowment"). In connection with the Recapitalization, (a) Old
WellPoint distributed an aggregate of $995.0 million by means of a special
dividend of $10.00 per share to the record holders of its Class A and Class
B Common Stock as of May
6
<PAGE> 9
WELLPOINT HEALTH NETWORKS INC.
Notes to Consolidated Financial Statements
(unaudited)
3. ACQUISITIONS AND RECAPITALIZATION (CONTINUED)
Recapitalization and Purchase of BCC Commercial Operations (continued)
15, 1996, (b) BCC, the sole shareholder of Old WellPoint's Class B Common
Stock, donated its portion of such dividend ($800.0 million) to the
Endowment, (c) BCC donated its assets, other than the shares of the Old
WellPoint Class B Common Stock held by BCC and the BCC Commercial
Operations, to the Foundation, (d) BCC changed its status from a California
nonprofit public benefit corporation to a California for-profit business
corporation, in conformity with the terms and orders of the California
Department of Corporations, by means of filing amended and restated articles
of incorporation with the California Secretary of State, immediately
following which BCC issued to the Foundation 53,360,000 shares of its common
stock and (e) Old WellPoint merged with and into BCC (the "Merger"), with
the resulting entity changing its name to WellPoint Health Networks Inc.
In connection with the Merger, (i) each outstanding share of Old
WellPoint's Class A Common Stock was converted into 0.667 shares of the
Company's Common Stock, (ii) the outstanding shares of the Company's common
stock issued to the Foundation prior to the Merger were converted into
53,360,000 shares of the post-merger Company's Common Stock and a cash
payment of $235.0 million was made to the Foundation to reflect the value
of the BCC Commercial Operations and (iii) the outstanding shares of Old
WellPoint's Class B Common Stock were canceled. The BCC Commercial
Operations consisted of, among other things, the health care lines of
business conducted by Blue Cross of California, substantially all
agreements with health care providers that provided services to enrollees
of Blue Cross of California and all of the cash and securities of Blue
Cross of California on hand at the time of closing of the Recapitalization.
By virtue of the Merger and the exchange of shares of Old WellPoint for
those of the Company, as of May 20, 1996 (the effective date of the
Merger), there were a total of 66,366,500 shares of the Company's Common
Stock outstanding, of which 53,360,000 shares (or approximately 80.4%) were
held beneficially by the Foundation.
The purchase method of accounting has been used to account for the
acquisition of the BCC Commercial Operations. The excess purchase price
over assets acquired was approximately $204.5 million and is being
amortized on a straight-line basis over 40 years.
7
<PAGE> 10
WELLPOINT HEALTH NETWORKS INC.
Notes to Consolidated Financial Statements
(unaudited)
3. ACQUISITIONS AND RECAPITALIZATION (CONTINUED)
Recapitalization and Purchase of BCC Commercial Operations (continued)
In accordance with the requirements of Accounting Principles Bulletin No.
16, Business Combinations, the following unaudited pro forma summary
combines the consolidated results of operations of the Company, MMHD and the
BCC Commercial Operations as if the acquisitions had occurred as of the
beginning of each period presented after giving effect to pro forma
adjustments. The pro forma adjustments represent interest expense on
long-term debt incurred to fund the acquisitions and the Recapitalization,
amortization of intangible assets, foregone interest on the net cash used
for the purchases and the related income tax effect from the beginning of
each period presented through the effective dates of the acquisitions. The
pro forma financial information is presented for informational purposes only
and may not be indicative of the results of operations as they would have
been if the Company, MMHD and the BCC Commercial Operations had been a
single entity during the three and nine months ended September 30, 1996 and
1995, nor is it necessarily indicative of the results of operations which
may occur in the future. Pro forma earnings per share is calculated based
on 66.4 million shares of common stock outstanding during all periods
presented.
(In millions, except earnings per share)
<TABLE>
<CAPTION>
Pro Forma
Three Months Ended September 30, 1996
------------------------------------------------------------------------------------------
WellPoint BCC MMHD Adjustments Total
--------- --- ---- ----------- -----
<S> <C> <C> <C> <C> <C>
Revenues $834.1 $106.9 $189.7 -- $1,130.7
Net Income $ 41.2 $ 0.1 $ 3.8 -- $ 45.1
Earnings Per Share $ 0.68
</TABLE>
(In millions, except earnings per share)
<TABLE>
<CAPTION>
Pro Forma
Three Months Ended September 30, 1995
------------------------------------------------------------------------------------------
WellPoint BCC MMHD Adjustments Total
--------- --- ---- ----------- -----
<S> <C> <C> <C> <C> <C>
Revenues $771.8 $106.9 $211.7 ($10.9) $1,079.5
Net Income $ 51.8 $ 2.3 $ 14.5 ($18.1) $ 50.5
Earnings Per Share $ 0.76
</TABLE>
Lower MMHD net income for the 1996 third quarter compared to the 1995 third
quarter was primarily caused by a decrease in investment income, a decrease
in the gross underwriting margin from a lower volume of premiums and claims,
goodwill amortization and interest expense in 1996.
8
<PAGE> 11
WELLPOINT HEALTH NETWORKS INC.
Notes to Consolidated Financial Statements
(unaudited)
3. ACQUISITIONS AND RECAPITALIZATION (CONTINUED)
Recapitalization and Purchase of BCC Commercial Operations (continued)
(In millions, except earnings per share)
<TABLE>
<CAPTION>
Pro Forma
Nine Months Ended September 30, 1996
------------------------------------------------------------------------------------------
WellPoint BCC MMHD Adjustments Total
--------- --- ---- ----------- -----
<S> <C> <C> <C> <C> <C>
Revenues $2,485.2 $ 319.9 $592.4 ($14.9) $3,382.6
Net Income $ 152.6 $ 1.0 $ 11.8 ($24.9) $ 140.5
Earnings Per Share $ 2.11
</TABLE>
(In millions, except earnings per share)
<TABLE>
<CAPTION>
Pro Forma
Nine Months Ended September 30, 1995
------------------------------------------------------------------------------------------
WellPoint BCC MMHD Adjustments Total
--------- --- ---- ----------- -----
<S> <C> <C> <C> <C> <C>
Revenues $2,328.4 $337. 9 $680.0 ($32.8) $3,313.5
Net Income $ 166.7 $ 5.7 $ 34.0 ($53.3) $ 153.1
Earnings Per Share $ 2.31
</TABLE>
Lower MMHD net income for the nine months ended September 30, 1996 compared
to September 30, 1995 was primarily due to a decrease in the gross
underwriting margin from a lower volume of premiums and claims, a
decrease in realized gains on investments, goodwill amortization and
interest expense in 1996.
4. LONG-TERM DEBT
Notes Payable
In connection with the MMHD Acquisition, the Company issued a Series A term
note for $62.0 million during the first quarter of 1996. The Series A note
will mature on March 31, 1999. Interest is paid quarterly and is equal to
the Company's average cost on the revolving credit facility, as described
below. The weighted average interest rate from March 31, 1996, the issue
date, through September 30, 1996 was 5.82%.
Revolving Credit Facility
In May 1996, the Company entered into an agreement with a consortium of
financial institutions for a five-year unsecured revolving credit facility
which provides a line of credit up to $1.25 billion through May 2001 with
extension options through May 2003. The agreement provides for interest on
committed advances at a rate equal to the London Interbank Offered Rate
("LIBOR") plus the applicable margin determined by the long-term unsecured
debt ratings or the leverage ratio as outlined in the
9
<PAGE> 12
WELLPOINT HEALTH NETWORKS INC.
Notes to Consolidated Financial Statements
(unaudited)
4. LONG-TERM DEBT (CONTINUED)
Revolving Credit Facility (continued)
agreement, a reference rate or through a bid auction with the bank
syndicate. Interest is determined using whichever of these methods is the
most favorable to the Company. A facility fee based on the facility amount,
regardless of utilization, is payable quarterly. The facility fee rate is
also determined by the unsecured debt ratings or the leverage ratio of the
Company. The agreement requires maintenance of certain financial ratios and
contains other restrictive covenants. At September 30, 1996, $685.0 million
was outstanding under this facility which was used for the payment of a
special dividend to Old WellPoint stockholders in connection with the
Recapitalization. At September 30, 1996, the Company was in compliance with
the restrictive covenants outlined in the agreement. The weighted average
interest rate from May 15, 1996, the initial draw date, through September
30, 1996 was 5.84%. (See Note 3. Acquisitions and Recapitalization.)
5. EARNINGS PER SHARE
Earnings per share is determined by dividing net income by the weighted
average number of shares outstanding during the period. The average number
of shares outstanding for the periods prior to the Recapitalization have
been recomputed to 66.4 million, the number of shares outstanding
immediately following the Recapitalization, to give effect to the share
exchange that occurred as part of the Recapitalization. Earnings per share
for the three and nine months ended September 30, 1996 has been calculated
using such 66.4 million shares, plus the weighted average number of shares
issued since the Recapitalization. (See Note 3. Acquisitions and
Recapitalization.) The weighted average number of shares outstanding for
the three and nine month periods ended September 30, 1996 is 66.5 million
and 66.4 million, respectively.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and the BCC Commercial Operations as if the
Recapitalization had occurred at the beginning of each period presented,
after giving effect to pro forma adjustments, which represent interest
expense on long-term debt incurred to pay the special dividend, foregone
interest on net cash used for the purchase of BCC Commercial Operations and
payment of the special dividend and the related income tax effect.
10
<PAGE> 13
WELLPOINT HEALTH NETWORKS INC.
Notes to Consolidated Financial Statements
(unaudited)
5. EARNINGS PER SHARE (CONTINUED)
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Pro Forma
------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $45,101 $41,642 $139,290 $136,236
Earnings per Share $ 0.68 $ 0.63 $ 2.09 $ 2.06
</TABLE>
Fully diluted earnings per share are equivalent to the earnings per share
indicated.
6. COMMITMENTS AND CONTINGENCIES
WellPoint has had lawsuits filed against it on behalf of its stockholders
pertaining to an alleged breach by its Board of Directors of fiduciary
duties by pursuing a merger with Health Systems International ("HSI") and
allegedly rejecting certain alternative proposals without due
consideration. All class action claims asserted on behalf of WellPoint's
public stockholders were dismissed on August 10, 1995, leaving only claims
asserted derivatively on behalf of WellPoint.
On October 9, 1996, the settlement of the remaining claims asserted in the
actions relating to the HSI transaction was approved by the court as fair,
reasonable and adequate to WellPoint and its stockholders after notice to
stockholders and the opportunity to object to its terms. On October 21,
1996, the court issued an order (i) extending the period for objections to
the settlement to be filed until November 8, 1996 and (ii) setting a status
conference regarding the proposed judgment for November 26, 1996.
The management of WellPoint believe that its directors acted in good faith
and in an independent, informed and appropriate manner in all aspects of
the decision to approve the BCC/WellPoint transaction and the business
combination with HSI, and to not approve the alternative proposals. Based
upon the foregoing, the management of WellPoint believes that these
lawsuits are without merit and intends to continue to defend those actions
vigorously if the settlement does not receive final approval from the
Court.
In addition, WellPoint and certain of its subsidiaries are also parties to
various other legal proceedings, many of which involve claims for coverage
encountered in the ordinary course of business. WellPoint, like HMOs and
health insurers generally, excludes certain health care services from
coverage under its HMO, PPO and other plans. WellPoint is, in its ordinary
course of business, subject to the claims of its
11
<PAGE> 14
WELLPOINT HEALTH NETWORKS INC.
Notes to Consolidated Financial Statements
(unaudited)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
enrollees arising out of decisions to restrict treatment or reimbursement
for certain services. The loss of even one such claim, if it results in a
significant punitive damage award, could have a material adverse affect on
WellPoint. In addition, the risk of potential liability under punitive
damage theories may increase significantly the difficulty of obtaining
reasonable settlements of coverage claims. However, the financial and
operational impact that such evolving theories of recovery will have on the
managed care industry generally, or WellPoint in particular, is at present
unknown.
Certain of such legal proceedings are or may be covered under insurance
policies or indemnification agreements. Based upon information presently
available, management of WellPoint believes that the final outcome of all
such proceedings should not have a material adverse effect on WellPoint's
results of operations or financial condition.
7. SUBSEQUENT EVENTS
Purchase of Group Benefits Operations of John Hancock Mutual Life Insurance
Company
On October 10, 1996, the Company signed a definitive agreement to acquire
certain portions of the Group Benefits Operations ("GBO") of John Hancock
Mutual Life Insurance Company for approximately $86.7 million. GBO focuses
on the "jumbo" employer segment (employers with 3,000 or more employees)
and provides medical, life, dental, as well as disability services to some
of the largest employers in the nation. The acquisition, which is subject
to regulatory approvals, is expected to be completed in January 1997. The
Company intends to finance the acquisition of GBO through the incurrence of
subordinated debt.
Sale of 13,000,000 Shares of Stock by the Foundation
On October 25, 1996, the Company filed a registration statement with the
Securities and Exchange Commission with respect to a proposed public
offering of 13.0 million shares of its Common Stock currently held by the
Foundation. The Foundation has also granted the underwriters of this
offering an over-allotment option of up to 1,950,000 shares. The Company
currently expects that this offering will be completed in November 1996.
12
<PAGE> 15
WELLPOINT HEALTH NETWORKS INC.
Notes to Consolidated Financial Statements
(unaudited)
7. SUBSEQUENT EVENTS (CONTINUED)
Subordinated Debt
In October 1996, the Company entered into a commitment letter with the Bank
of America National Trust and Savings Association for a two-year unsecured
subordinated term loan facility for $200.0 million which would mature on
December 31, 1998. The Company expects that the loan will be available
between December 15, 1996 and February 15, 1997. The Company has not yet
signed definitive documentation with respect to this facility. It is
anticipated that the definitive agreement will provide for interest at
rates determined by reference to the Bank of America base rate or to the
LIBOR plus a margin determined by reference to the Company's leverage ratio
or the then-current rating of the Company's unsecured long-term debt by
specified rating agencies. Interest will be paid quarterly.
13
<PAGE> 16
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
WellPoint Health Networks Inc. ("WellPoint" or the "Company") is one of the
nation's largest publicly traded managed health care companies with
approximately 4.4 million medical members, 12.2 million pharmacy members and
1.5 million dental members as of September 30, 1996. The Company offers a
diversified mix of managed care products, including HMO, PPO, POS and other
hybrid plans, and traditional indemnity products. The Company also offers a
broad array of specialty products, including pharmacy, dental, life, workers'
compensation, preventive care, disability, behavioral health, COBRA and
flexible benefits account administration. In addition, WellPoint offers
managed care services for self-funded employers, including claims processing,
actuarial services, network access, medical cost management and administrative
services. The Company's primary market for its managed care products is
California.
The Company is also actively pursuing expansion into new markets outside of
California. In March 1996, the Company completed its acquisition of the Life and
Health Benefits Management Division ("MMHD") of Massachusetts Mutual Life
Insurance Company ("MassMutual") through the acquisition of MMHD's parent,
MassMutual Holding Company Two, Inc. (the "MMHD Acquisition"). The acquired
MMHD operations now conduct business under the name UNICARE Life & Health
Insurance Company. Through the end of 1997, the Company expects to incur a total
of $30 million to $40 million of restructuring costs related to the MMHD
Acquisition, a portion of which is expected to be reflected in the Company's
results of operations and a portion of which is expected to affect intangible
assets and property and equipment. (See Note 3. Acquisitions and
Recapitalization.) As a result of the MMHD Acquisition, WellPoint serves
medical members in 50 states. Approximately 50% of MMHD's medical membership is
concentrated in seven states: California, New York, Texas, Georgia,
Massachusetts, Illinois and Virginia. The acquired MMHD operations also provide
specialty products, including dental, life, pharmacy and disability, to members
throughout the United States. Due in part to this acquisition, the Company's
internal business units are now organized on a geographic basis, Blue Cross of
California serving California, and UNICARE serving all other states. These
business units target both individual and small business purchasers with up to
50 employees and large employers with 51 or more employees. The Company's
networks and broad range of specialty managed care products allow it to pursue
growth with individual, small business and large business purchasers.
Prior to its acquisition by WellPoint, the MMHD large employer group operations
(as well as the BCC Commercial Operations) experienced a higher loss ratio than
the Company. As a result, the Company may experience a higher overall loss
ratio in future periods. In addition, there
14
<PAGE> 17
OVERVIEW (CONTINUED)
can be no assurance that the Company will be able to successfully integrate MMHD
into its business or take appropriate measures to control its associated loss
ratio.
In October 1996, the Company signed a definitive agreement to purchase certain
portions of the Group Benefits Operations ("GBO") of John Hancock Mutual Life
Insurance Company. The GBO targets the "jumbo" employer segment (employers
with 3,000 or more employees) and currently provides administrative services
and PPO and indemnity insurance products. The transaction, which is subject to
regulatory approvals and other closing conditions, is currently expected to
close in January 1997. Although a majority of the GBO involves the provision
of administrative services to self-funded employer plans, the indemnity-based
portions of the GBO have experienced a higher overall loss ratio than the
Company's core business. If the acquisition of the GBO is completed, the
Company may experience a higher overall loss ratio. In addition, the
integration of its operations may have an adverse effect on the Company's
financial condition or results of operations. The Company expects to incur
approximately $35 million to $45 million of restructuring costs relating to this
acquisition during 1997, a portion of which is expected to be reflected in the
Company's results of operations. The Company expects that it will experience
material membership attrition as it pursues its strategy of motivating
traditional indemnity health insurance members to select managed care products.
A variety of health care reform measures have been recently enacted at the
Federal and state levels. Recent federal legislation seeks, among other
things, to insure the portability of health coverage and mandates minimum
maternity hospital stays. These and other proposed measures may have the
effect of dramatically altering the regulation of the provision of health care
and altering the Company's loss ratio.
Certain of the statements contained in this Quarterly Report on Form 10-Q are
of a forward-looking nature and involve a number of risks and uncertainties
which could cause actual results to differ from those projected and which are
described in the section of this report entitled "External Influences Which May
Impact Future Operations," the Company's 1995 Annual Report to Stockholders and
in other documents filed from time to time with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
RESULTS OF OPERATIONS
WellPoint's revenues are generated from premiums earned for health care and
specialty services provided to its members, fees for administrative services,
including claims processing and access to provider networks for self-insured
employers, and investment income. WellPoint's operating expenses include
health care services and other benefits expenses, consisting primarily of
payments for physicians, hospitals and other providers
15
<PAGE> 18
RESULTS OF OPERATIONS (CONTINUED)
for health care and specialty products claims; selling expenses for broker and
agent commissions; general and administrative expenses; interest expense and
income taxes.
The Company's consolidated results of operations for the three and nine months
ended September 30, 1996 include the results of MMHD and the BCC Commercial
Operations from March 31, 1996 and May 20, 1996, respectively, the effective
dates of acquisition.
The following table sets forth selected operating ratios. The loss ratio for
health care services and other benefits is shown as a percentage of premium
revenue. All other ratios are shown as a percentage of premium revenue and
management services revenue combined.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues:
Premium revenue ratio 96.0% 97.9% 96.4% 98.0%
Management services revenue ratio 4.0 2.1 3.6 2.0
------ ------ ------ ------
100.0 100.0 100.0 100.0
Operating Expenses:
Health care services and other
benefits (loss ratio) 78.3 76.1 77.1 75.2
Selling expense ratio 5.4 6.4 5.7 6.4
General and administrative expense
ratio 14.0 11.4 13.4 11.5
</TABLE>
16
<PAGE> 19
MEMBERSHIP
The following table sets forth membership data and the percent change in
membership:
<TABLE>
<CAPTION>
As of September 30,
----------------------- Percent
1996 1995 Change
---- ---- -------
<S> <C> <C> <C>
MEDICAL MEMBERSHIP:
CALIFORNIA
Group Services:
HMO 663,271 615,623 7.7%
PPO and Other (a) 1,284,245 765,744 67.7%
--------- ---------
Total (b) 1,947,516 1,381,367 41.0%
--------- ---------
Individual, Small Group and Senior:
HMO 258,582 167,171 54.7%
PPO and Other 1,198,677 1,194,415 0.4%
--------- ---------
Total 1,457,259 1,361,586 7.0%
--------- ---------
Medi-Cal HMO Programs 59,454 35,177 69.0%
--------- ---------
Total California Medical Membership (c) 3,464,229 2,778,130 24.7%
--------- ---------
OUT-OF-STATE
Group Services:
HMO 2,506 - N/A
PPO and Other (a) 899,759 - N/A
--------- ---------
Total (b) 902,265 - N/A
--------- ---------
Individual, Small Group and Senior:
PPO and Other 21,016 - N/A
--------- ---------
Total Out-of-State Medical Membership 923,281 - N/A
--------- ---------
TOTAL MEDICAL MEMBERSHIP 4,387,510 2,778,130 57.9%
========= =========
HMO 983,813 817,971 20.3%
PPO and Other 3,403,697 1,960,159 73.6%
--------- ---------
TOTAL MEDICAL MEMBERSHIP 4,387,510 2,778,130 57.9%
========= =========
</TABLE>
(a) California and Out-of-State include 723,857 and
492,026 management services members,
respectively, as of September 30, 1996. Of the
723,857 California management services members,
81,056 are from the acquired MMHD operations.
California includes 476,401 management services
members as of September 30, 1995.
(b) As of September 30, 1996, total MMHD medical
membership was approximately 1,051,000, of
which approximately 149,000 were California
members and approximately 902,000 were Out-of-
State members.
(c) As of September 30, 1996, total BCC Commercial
Operations membership was approximately
264,100, of which all were California members.
17
<PAGE> 20
MEMBERSHIP (CONTINUED)
<TABLE>
<CAPTION>
As of September 30,
----------------------- Percent
1996 1995 Change
---- ---- -------
<S> <C> <C> <C>
SPECIALTY MEMBERSHIP:
Pharmacy 12,218,839 8,726,438 40.0%
Dental 1,512,740 513,889 194.4%
Disability 108,231 - N/A
Behavioral Health 472,235 372,648 26.7%
Life 724,295 326,130 122.1%
</TABLE>
The 1996 specialty membership includes MMHD which has approximately 0.5 million
pharmacy members, 0.9 million dental members, 0.1 million disability members
and 0.4 million life members as of September 30, 1996.
COMPARISON OF RESULTS FOR THIRD QUARTER 1996 TO THIRD QUARTER 1995
Premium revenue increased 45.6% to $1,052.3 million for the quarter ended
September 30, 1996 from $722.9 million for the quarter ended September 30, 1995.
Of the $329.4 million increase, $166.6 million and $97.5 million were
attributable to the MMHD Acquisition and the BCC Commercial Operations,
respectively. Also contributing to the increase was a 5.6% increase in medical
membership from September 30, 1995 to September 30, 1996, excluding MMHD and the
BCC Commercial Operations. Workers' compensation premium revenue increased
25.7% from the 1995 third quarter to the 1996 third quarter due to a large
increase in the number of insured employer groups, primarily in the small
employer and California school districts workers' compensation markets. In
addition, an increase in premium revenue resulted from moderate increases in the
medical premiums per member in the individual, small group and senior markets
and increases in dental premium revenue, largely due to membership growth as a
result of the introduction of a new dental PPO product.
Management services revenue increased $28.0 million, or 176.9%, to $43.8
million for the quarter ended September 30, 1996 from $15.8 million in 1995.
The increase was primarily due to $20.0 million of management services revenue
from MMHD. Also contributing to the increase were new pharmacy and clinical
management accounts and revenue from BCC Commercial Operations. Excluding MMHD
and the BCC Commercial Operations, management services medical membership
increased 28.9%.
Investment income increased to $34.6 million for the quarter ended September
30, 1996 as compared to $33.1 million for the same period in 1995. Interest
and dividend income increased from $30.6 million to $31.4 million for the
quarters ended September 30, 1995 and 1996, respectively. This increase was
due to MMHD interest income of $7.2 million, partially offset by lower interest
income as a result of cash and investments used in the acquisitions of MMHD and
the BCC Commercial Operations. Excluding MMHD, interest
18
<PAGE> 21
COMPARISON OF RESULTS FOR THIRD QUARTER 1996 TO THIRD QUARTER 1995 (CONTINUED)
and dividend income would have decreased to $24.3 million as a result of cash
and investments used in the acquisitions of MMHD and the BCC Commercial
Operations. Net gains on the sales of investment securities increased to $3.2
million for the quarter ended September 30, 1996 from $3.0 million for the
prior year. This increase was a result of MMHD realized gains on sales of
$0.4 million. Finally, net financing and investment expense decreased by $0.4
million.
Health care services and other benefits expense increased 49.9% to $824.3
million for the quarter ended September 30, 1996 from $549.9 million for the
same period in 1995. Of the $274.4 million increase, $123.6 was attributable
to MMHD and $92.3 million was attributable to the BCC Commercial Operations.
Excluding MMHD and the BCC Commercial Operations, increased health care
services also resulted from medical membership growth, especially in the
individual HMO business. Mix and product design changes, such as benefits
design changes which eliminated deductibles for some pharmacy products, and
growth in the workers' compensation business also contributed to the increase.
These increases were partially offset by savings from hospital recontracting,
which was implemented in January 1996.
The loss ratio for the third quarter of 1996 increased to 78.3% compared to
76.1% in 1995 due partially to membership growth in the individual HMO, which
carries a lower margin and less risk than the Company's other individual
products. The increase in the loss ratio was also attributable to an increase
in the loss and loss adjustment expense reserves related to a portion of the
Company's workers' compensation business and the incremental effect of the BCC
Commercial Operations on the Company's overall results. The BCC Commercial
Operations have traditionally experienced a higher loss ratio than the Company.
The Company may experience higher loss ratios during the remainder of 1996 and
in future periods due to the incremental effect of the BCC Commercial Operations
and MMHD (which have also historically experienced a higher medical loss ratio
than the Company). The increase in the loss ratio was partially offset by the
Company's continuing cost containment efforts, such as the hospital
recontracting program implemented in 1996. The program provides incentives to
those hospitals that are successful at controlling costs. Excluding the
Company's workers' compensation business and the acquisitions of MMHD and the
BCC Commercial Operations, the loss ratio for the quarter ended September 30,
1996 was 75.8%. The loss ratio for the third quarter in 1995, also excluding
the workers' compensation business, was 75.7%.
19
<PAGE> 22
COMPARISON OF RESULTS FOR THIRD QUARTER 1996 TO THIRD QUARTER 1995 (CONTINUED)
Selling expense consists of commissions paid to outside brokers and agents
representing the Company. Selling expense for the third quarter of 1996
increased 25.9% to $59.1 million compared to $46.9 million for the third
quarter of 1995. Of the $12.2 million increase, $7.0 million was attributable
to MMHD. In addition, the increase corresponded with continued overall premium
revenue growth. However, the selling expense ratio decreased for the quarter
ended September 30, 1996 to 5.4% from 6.4%, largely due to the acquisitions of
MMHD and the BCC Commercial Operations which both have a lower selling expense
ratio than the Company has historically experienced. Excluding the
acquisitions, the selling expense ratio would have remained constant at 6.4%.
General and administrative expense for the quarter ended September 30, 1996
increased 81.1% to $153.1 million from $84.6 million for the comparable quarter
in 1995, largely due to the MMHD Acquisition, which contributed $49.7 million
to general and administrative expense. The administrative expense ratio
increased to 14.0% for the quarter ended September 30, 1996 compared to 11.4%
for the quarter ended September 30, 1995, primarily due to the MMHD Acquisition
and the Company's continued investment in geographic expansion. The increase
was partially offset by the BCC Commercial Operations' lower administrative
expense ratio. Excluding MMHD and the BCC Commercial Operations, the
administrative expense ratio was 12.4% for the third quarter of 1996. MMHD has
historically had a higher administrative expense ratio due to its higher
percentage of management services business. The increased administrative
ratio in 1996, excluding acquisitions, was due in part to additional expenses
related to Los Angeles city business taxes.
Interest expense was $12.4 million for the quarter ended September 30, 1996.
The Company had no interest expense during the comparable period in 1995. The
interest expense in the current period related to $775.0 million drawn under
the Company's revolving credit facility on May 15, 1996 to fund a special
dividend paid in connection with the Recapitalization, as well as interest on
amounts payable to MassMutual, including the Series A term note of $62.0
million issued in connection with the MMHD Acquisition. During the third
quarter of 1996, the outstanding balance drawn under the credit facility was
reduced from $730.0 million to $685.0 million. The weighted average rate of
interest during the third quarter of 1996 on all long-term debt was 5.91%.
WellPoint's net income for the quarter ended September 30, 1996 was $45.1
million or $0.68 per share compared to $51.8 million or $0.78 per share for the
quarter ended September 30, 1995. The weighted average number of shares of
common stock outstanding for the quarter ended September 30, 1996 was 66.5
million. Earnings per share for the quarter ended September 30, 1995 has been
recomputed using 66.4 million shares, the number of shares outstanding
immediately following the Recapitalization, to give effect to the share
exchange that occurred in connection with the Recapitalization. Earnings per
share is determined by dividing net income by the weighted average number of
common shares outstanding. (See Note 3 to the Consolidated Financial
Statements for a fuller description of the actions taken in connection with the
Recapitalization.)
20
<PAGE> 23
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1995
Premium revenue increased 28.4% to $2,801.2 million for the nine months ended
September 30, 1996 from $2,181.4 million for the nine months ended September 30,
1995. Premium revenue of $341.1 million and $122.4 million were attributable to
MMHD and the BCC Commercial Operations, respectively. Also contributing to
increased premium revenue was a 5.6% increase in medical membership from
September 30, 1995 to September 30, 1996, excluding MMHD and the BCC Commercial
Operations. Workers' compensation premium revenues increased 47.4% from the
first nine months of 1995 to the first nine months of 1996, due to a large
increase in the number of insured employer groups, primarily in the small
employer and California school districts workers' compensation markets. In
addition, an increase in premium revenue resulted from moderate increases in the
premiums per member in the individual, small group and senior markets and
increases in dental premium revenue, largely due to membership growth as a
result of the introduction of a new dental PPO product.
Management services revenue increased $61.0 million to $105.5 million for the
nine months ended September 30, 1996 from $44.5 million for the nine months
ended September 30, 1995. The increase was primarily due to $43.3 million of
management services revenue from MMHD. Also contributing to the increase were
new pharmacy and clinical management accounts and revenue from the BCC
Commercial Operations. Excluding MMHD and the BCC Commercial Operations,
management services medical membership increased 28.9% from September 30, 1995
to September 30, 1996.
Investment income increased to $107.0 million for the nine months ended
September 30, 1996 as compared to $102.5 million for the same period in 1995.
Interest and dividend income increased from $90.9 million to $95.3 million for
the nine months ended September 30, 1995 and 1996, respectively. This increase
was due to MMHD interest income of $14.3 million and a decrease in net
financing and investment expense of $0.4 million. Offsetting these increases
was a decrease in net gains on the sales of investment securities from $13.1
million for the nine months ended September 30, 1995 to $12.7 million for the
current period. Excluding MMHD, interest and dividend income would have
decreased to $81.1 million as a result of cash and investments used in the
acquisitions of MMHD and the BCC Commercial Operations. Excluding MMHD net
gains on the disposal of assets of $0.7 million, net gains would have decreased
to $12.0 million.
Health care services and other benefits expense increased 31.6% to $2,159.1
million for the first nine months of 1996 from $1,640.9 million for the same
period in 1995. Of the
21
<PAGE> 24
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1995 (CONTINUED)
$518.2 million increase, $260.9 million was attributable to MMHD and $115.6
million was attributable to the BCC Commercial Operations. Excluding MMHD and
the BCC Commercial Operations, increased health care services also resulted
from medical membership growth. In addition, mix and product design changes,
such as the introduction of the Company's new Prudent Buyer Co-pay product
(which replaced deductibles with co- payments), benefits design changes which
eliminated deductibles for some pharmacy products, and growth in the workers'
compensation business also contributed to the increase. These increases were
partially offset by savings from hospital recontracting, which was implemented
January 1, 1996. Additional savings were realized by savings from specialist
and laboratory recontracting, which was implemented during the third quarter of
1995.
The loss ratio for the first nine months of 1996 increased to 77.1% compared to
75.2% in 1995 due to the PPO benefits changes described above, an increase in
the loss and loss adjustment expense reserves related to a portion of the
Company's workers' compensation business and the incremental effect of the BCC
Commercial Operations on the Company's overall results. The BCC Commercial
Operations has traditionally experienced a higher loss ratio than the Company.
Additionally, the Company may experience higher loss ratios during the
remainder of 1996 and in future periods due to the incremental effect of the
BCC Commercial Operations and MMHD (which has also historically experienced a
higher loss ratio than the Company). The increase in the loss ratio was
partially offset by the Company's continuing cost containment efforts, such as
the hospital recontracting program. Excluding the Company's workers'
compensation business and the acquisitions of the MMHD operations and the BCC
Commercial Operations, the loss ratio was 75.0% for the nine months ended
September 30, 1996. The loss ratio for the same period in 1995, also excluding
the workers' compensation business, was 74.9%.
Selling expense for the nine months ended September 30, 1996 increased 17.5% to
$166.8 million compared to $141.9 million for the comparable period in 1995,
corresponding with continued overall premium revenue growth and an additional
$14.1 million in selling expense attributable to MMHD. The selling expense
ratio decreased for the first nine months of 1996 to 5.7% from 6.4% for the
prior year, largely due to the acquisitions of MMHD and the BCC Commercial
Operations, which both have a lower selling expense ratio than the Company's
existing business. Excluding the acquisitions, the selling expense ratio would
have been 6.4% for the nine months ended September 30, 1996, consistent with
the comparable period in the prior year.
General and administrative expense for the nine months ended September 30, 1996
increased 51.8% to $388.9 million from $256.1 million for the same period in
1995. Of the $132.8 million increase, $100.7 million resulted from the MMHD
Acquisition. The administrative expense ratio increased to 13.4% for the first
nine months of 1996 compared
22
<PAGE> 25
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1995 (CONTINUED)
to 11.5% in 1995 primarily due to the increased administrative expense
associated with the Company's continued investment in geographic expansion and
the MMHD Acquisition. The increase was partially offset by the BCC Commercial
Operations' lower administrative expense ratio. Excluding MMHD and the BCC
Commercial Operations, the administrative expense ratio would have been 11.8%.
MMHD has historically had a higher administrative expense ratio due to its
higher percentage of management services business.
Interest expense was $23.3 million for the nine months ended September 30,
1996. The Company had no interest expense during the comparable period in
1995. The interest expense in the current period related to $775.0 million
drawn under the Company's revolving credit facility on May 15, 1996 to fund a
special dividend paid in connection with the Recapitalization, as well as
interest on the amounts payable to MassMutual, including a Series A term note
of $62.0 million issued in connection with the MMHD Acquisition. At September
30, 1996, the outstanding balance drawn under the credit facility was $685.0
million. The weighted average interest rate for the nine months ended
September 30, 1996 was 6.00%.
WellPoint's net income for the nine months ended September 30, 1996 was $155.0
million or $2.33 per share compared to $166.7 million or $2.51 per share for
the nine months ended September 30, 1995. Earnings per share for the nine
months ended September 30, 1996 have been recomputed using 66.4 million shares,
the number of shares outstanding immediately following the Recapitalization,
plus the weighted average number of shares issued since the Recapitalization.
The number of shares outstanding for the nine months ended September 30, 1995
has been recomputed to 66.4 million, the number of shares outstanding
immediately following the Recapitalization, to give effect to the share
exchange that occurred in connection with the Recapitalization. Earnings per
share is determined by dividing net income by the weighted average number of
common shares outstanding. (See Note 3 to the Consolidated Financial
Statements for a fuller description of the actions taken in connection with the
Recapitalization.)
FINANCIAL CONDITION
The Company's consolidated assets increased by $768.6 million to $3,447.9
million as of September 30, 1996. This represents a 28.7% increase from
$2,679.3 million as of December 31, 1995 and resulted primarily from the
acquisitions of MMHD and the BCC Commercial Operations as well as cash flow
generated from operations. Cash and investments were $2,145.7 million as of
September 30, 1996 or 62.2% of total assets.
23
<PAGE> 26
FINANCIAL CONDITION (CONTINUED)
The Company issued a Series A term note for $62.0 million during the first
quarter of 1996 for the MMHD Acquisition. Under the terms of the acquisition
agreement, the Company was obligated to issue a Series B term note based upon
the results of a post-closing audit. During the first quarter of 1996, the
Company accrued for the Series B term note in an amount estimated at $18.0
million. In August 1996, WellPoint paid $22.2 million to MassMutual in full
satisfaction of this obligation. Also outstanding at September 30, 1996 was
$685.0 million under the Company's revolving credit facility incurred for
payment of a special dividend to the Old WellPoint stockholders in connection
with the Recapitalization. (See Note 3. Acquisitions and Recapitalization and
Note 4. Long-Term Debt.) The Company had no long-term borrowings outstanding as
of December 31, 1995.
Equity totaled $812.1 million as of September 30, 1996, a decrease of $858.1
million from December 31, 1995. The decrease resulted primarily from the $995.0
million dividend to the Old WellPoint stockholders (see Note 3. Acquisitions and
Recapitalization) and a $22.2 million decrease in the unrealized valuation
adjustment on investment securities, net of deferred taxes, due to an increase
in market interest rates in 1996 compared to 1995. The decrease was partially
offset by net income of $155.0 million for the first nine months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are from premiums and management services
revenues received and investment income. The primary uses of cash include
health care claims, capitation payments, income taxes, repayment of long-term
debt, interest expense, broker and agent commissions and administrative
expenses. The Company receives premium revenue in advance of anticipated
claims for related health care services and other benefits. The Company's
investment policies are designed to provide liquidity, preserve capital and
maximize yield. Cash and investment balances maintained by the Company are
sufficient to meet applicable regulatory financial stability and net worth
requirements. As of September 30, 1996, the Company's investment portfolio
consisted primarily of fixed maturity securities (which are primarily rated "A"
or better by rating agencies) and equity securities.
Net cash flow provided by operating activities was $271.1 million for the nine
months ended September 30, 1996 compared with $136.7 million for the comparable
period in 1995. The increase in positive cash flow from operations is mainly
due to continuing operations as well as additional revenue generated through
the acquisitions of MMHD and the BCC Commercial Operations as well as increased
membership growth in the individual, small group, senior and Medi-Cal segments.
The cash provided by these activities was partially offset by an increase in
the provision for deferred income tax benefits and an increase in other
non-current assets due to a net $23.6 million that the Company paid in the 1996
first quarter in connection with a new lease for the Company's headquarters
building.
24
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash used by investing activities for the first nine months of 1996 totaled
$708.0 million, compared with net cash provided by investing activities of
$428.6 million for the comparable period in 1995. The additional cash used
resulted in part from investment purchases of $755.1 million in 1996. In 1995,
the net proceeds from the sale and maturities of investments were invested in
cash equivalents in anticipation of the cash requirements for the acquisitions
of MMHD and the BCC Commercial Operations as well as the dividend to the Old
WellPoint stockholders in connection with the Recapitalization. Under the terms
of the acquisition agreement, the Company was obligated to issue a Series B term
note based upon the results of a post-closing audit. In August 1996, the
Company paid $22.2 million in full satisfaction of this obligation. The MMHD
operations were acquired for a total purchase price of $402.2 million (including
the payment in satisfaction of the Series B note obligation). MMHD cash
acquired was $28.1 million. The net cash used for the MMHD Acquisition amounted
to $312.1 million. The BCC Commercial Operations were acquired during the
second quarter of 1996 for a purchase price of $235.0 million. Cash acquired
from the BCC Commercial Operations was $122.7 million, resulting in net cash
used for the acquisition of $112.3 million. Additional costs of $16.7 million
were incurred for the acquisitions. (See Note 3. Acquisitions and
Recapitalization.)
In connection with the Recapitalization, the Company entered into a $1.25
billion unsecured credit facility. Borrowings under the credit facility bear
interest at rates determined by reference to the Bank of America base rate or
to the London Interbank Offered Rate ("LIBOR") plus a margin determined by
reference to the Company's leverage ratio or the then-current rating of the
Company's unsecured long-term debt by specified rating agencies. Borrowings
under the credit facility are made on a committed basis or pursuant to an
auction-bid process. The credit facility expires as of May 15, 2001, although
it may be extended for two additional one-year periods under certain
circumstances. The credit agreement requires that the Company comply with
certain minimum net worth, leverage ratio and fixed charge coverage ratio
requirements and contains certain other customary restrictions, including
restrictions on the occurrence of additional indebtedness and the granting of
certain liens, limitations on acquisitions and investments and limitations on
changes in control. The total amount outstanding under the credit facility was
$685.0 million as of September 30, 1996. The indebtedness under the credit
facility had a weighted average interest rate of 5.84% as of September 30,
1996. The weighted average interest rate for the credit facility from
May 15, 1996, the initial draw date, through September 30, 1996 was 5.84%.
In July 1996, the Company filed a registration statement relating to the
issuance of $1.0 billion of senior or subordinated unsecured indebtedness. As
of September 30, 1996, no indebtedness had been issued pursuant to this
registration statement.
In order to limit its exposure to interest rate increases, in August 1996 the
Company entered into a swap agreement for a notional amount of $100.0 million
bearing a fixed interest rate of 6.45% and having a maturity date of August 17,
1999. In September 1996, the Company entered into two additional swap
agreements for notional amounts of $150.0
25
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
million each, bearing fixed interest rates of 6.99% and 7.05%, respectively,
and having maturity dates of October 17, 2003 and October 17, 2006,
respectively.
The Company is required to maintain minimum tangible net equity ("TNE") by the
Company's primary regulator, the California Department of Corporations (the
"DOC"), and is required to meet minimum capital requirements prescribed by the
Blue Cross Blue Shield Association (the "BCBSA"). In measuring capital for the
BCBSA, the Company is required to use the method prescribed by the DOC. The
failure to meet a specified level (the "Minimum BCBSA Capital") of the BCBSA's
base capital requirement can subject the Company to certain corrective actions,
while the failure to meet a lower specified level can result in termination of
the Company's license agreement with the BCBSA. As of September 30, 1996, the
Company's TNE (and its capital for BCBSA purposes) was approximately $284.0
million and the Minimum BCBSA Capital was approximately $247.4 million. The
Minimum BCBSA Capital requirement, which is more restrictive than DOC
requirements, will increase as of December 31, 1996. In addition, the
acquisition of the GBO will cause a decrease in the Company's capital for
purposes of BCBSA requirements, because goodwill must be excluded from TNE (and
thus from BCBSA capital).
In order to address an anticipated shortfall in the Company's capital, in
October 1996, the Company received a commitment letter from the Bank of America
National Trust and Savings Association ("Bank of America NT&SA") for a two-year
unsecured subordinated term loan facility (the "Subordinated Debt Facility") for
$200.0 million which will mature on December 31, 1998. The Company intends to
finance the acquisition of GBO through the incurrence of subordinated
indebtedness. The DOC regulations permit the Company to include in TNE (and
thus in capital for BCBSA purposes) any indebtedness subordinated to the
Company's obligation to maintain the DOC's required minimum TNE (approximately
$20.0 million as of September 30, 1996). Pursuant to the terms of this
commitment letter, the Company will be able to make borrowings under the
Subordinated Debt Facility between December 15, 1996 and February 15, 1997. Such
borrowings will bear interest at interest rates determined by reference to the
Bank of America base rate or to LIBOR plus a margin determined by reference to
the Company's leverage ratio or the then-current rating of the Company's
unsecured long-term debt by specified rating agencies. The applicable margin
will increase with respect to any borrowings outstanding as of July 1, 1997.
Interest will be paid quarterly. The Subordinated Debt Facility will require
compliance with certain financial ratio and other requirements similar to those
in the Company's current credit facility; however, the Company believes that
repayment of borrowings will be subordinated in a manner acceptable to the DOC
Commissioner to allow borrowings to be counted as TNE. The Subordinated Debt
Facility will also require that the proceeds of certain sales of capital stock
or subordinated debt issued by the Company be used to repay outstanding amounts
under the Subordinated Debt Facility. All borrowings under the Subordinated
Debt Facility will become due on December 31, 1998. The Company intends to
promptly negotiate the terms of definitive
26
<PAGE> 29
documentation related to the Subordinated Debt Facility or take other
appropriate actions so that the Company will meet the Minimum BCBSA Capital
requirements as of December 31, 1996 and after acquisition of the GBO.
The Company believes that cash flow generated by operations, its cash and
investment balances, its existing credit facility (see Note 4. Long- Term Debt),
its debt registration statement and the anticipated subordinated indebtedness
will be sufficient to fund continuing operations, the pending acquisition and
other capital requirements for the foreseeable future.
EXTERNAL INFLUENCES WHICH MAY IMPACT FUTURE OPERATIONS
The health care industry is affected by various external factors, including
rising health care costs, intense price competition, health care reform
(including the recently enacted federal health care reform legislation) and
other regulatory issues. As the Company focuses on its future as a leader in
the health care industry, management continues to monitor these and other
factors that contribute to uncertainty in the health care environment.
The Company's future results will depend in large part on accurately predicting
health care costs and upon its ability to control future health care costs
through underwriting criteria, utilization management and negotiation of
favorable provider contracts. The aging of the population and other
demographic characteristics and advances in medical technology continue to
contribute to rising health care costs. Changes in health care practices,
inflation, new technologies and numerous other factors affecting the delivery
and cost of health care, many of which are beyond the control of the Company,
may adversely affect the Company's ability to predict and control health care
costs and claims.
WellPoint operates primarily in a single industry segment, managed health care.
The two primary business activities within the segment ([a] managed care
products and [b] management services products, including specialty managed care
services) are marketed through two internal business units which are organized
on a geographic basis, Blue Cross of California and UNICARE. The geographic
business units are divided further into individual and small group businesses
versus larger employers because of the distinctive differences in the focus
needed in targeting each of these markets. The combined cost ratios (medical
costs and expenses) for the small group and individual businesses and the large
group business vary due primarily to differing product mix between the managed
care and management services products and different distribution costs. A
greater percentage of small group and individual membership is comprised of
higher risk managed care products, which tend to be more profitable than the
lower risk managed care and management services products as a result of higher
deductibles and co-payments and increased profit margins generally associated
with higher underwriting risks. The group services membership is comprised
primarily of capitated managed care products and management services products
which result in lower margins as a result of the lower level of underwriting
risk related to the capitated products and the non-risk nature of the
management services products. However, over the past three years, margin
erosion has been greater in the individual and small group business than in the
large group business
27
<PAGE> 30
EXTERNAL INFLUENCES WHICH MAY IMPACT FUTURE OPERATIONS (CONTINUED)
primarily as a result of slower growth in membership, product mix change and
greater competitive pressure on premium increases. The spread between the
profitability of the individual and small group business and large group
business in California was 6.4% for the nine months ended September 30, 1996
and 7.7% for the nine months ended September 30, 1995.
28
<PAGE> 31
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
See Note 6 - Commitments and Contingencies for information regarding legal
proceedings.
ITEM 5. Other Information
See Note 3 - Acquisitions and Recapitalization.
29
<PAGE> 32
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
2.01 Recapitalization Agreement dated as of March 31, 1995
by and among Blue Cross of California, WellPoint
Health Networks Inc., Western Health Partnerships and
Western Foundation for Health Improvement,
incorporated by reference to Exhibit 2.1 of
Registrant's Form S-4 dated April 8, 1996
2.02 Purchase and Sale Agreement, dated as of January 5,
1996, by and among the Registrant and Massachusetts
Mutual Life Insurance Company, incorporated by
reference to Exhibit 2.1 of Registrant's 8-K dated
January 5, 1996
2.03 Purchase and Sale Agreement, dated as of October 10,
1996, by and between the Registrant and John Hancock
Mutual Life Insurance Company, incorporated by
reference to Exhibit 2.1 of Registrant's Current
Report on Form 8-K dated October 9, 1996
3.01 Amended and Restated Articles of Incorporation of the
Registrant, incorporated by reference to Exhibit 3.1
of Registrant's Form 8-K dated May 20, 1996
3.02 Bylaws of the Registrant, incorporated by reference to
Exhibit 3.2 of Registrant's Form 8-K dated May 20,
1996
3.03 Agreement of Merger dated as of May 20, 1996 by and
among the Registrant, WellPoint Health Networks Inc.,
a Delaware corporation, Western Health Partnerships
and Western Foundation for Health Improvement,
incorporated by reference to Exhibit 3.3 of
Registrant's Form 8-K dated May 20, 1996
4.01 Specimen of common stock certificate of WellPoint
Health Networks Inc., incorporated by reference to
Exhibit 4.1 of Registrant's Form S-4 dated April 8,
1996
10.01 Line of Business Assignment and Assumption Agreement
dated as of February 1, 1993 among the Registrant, its
subsidiaries and BCC, incorporated by reference to
exhibit 10.01 of Registrant's Form 10-K for the fiscal
year ended December 31, 1992
10.02 Administrative Services and Product Marketing
Agreement dated as of February 1, 1993 among the
Registrant, its subsidiaries and BCC, incorporated by
reference to Exhibit 10.02 of Registrant's Form 10-K
for the fiscal year ended December 31, 1992
</TABLE>
30
<PAGE> 33
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.03 Master Subscriber Agreements dated as of January 27,
1993 between the Registrant's subsidiaries and BCC,
incorporated by reference to Exhibit 10.03 of
Registrant's Form 10-K for the fiscal year ended
December 31, 1992
10.04 Tax Allocation Agreement dated as of February 1, 1993
among the Registrant, its subsidiaries and BCC and its
subsidiaries, incorporated by reference to Exhibit
10.04 of Registrant's Form 10-K for the fiscal year
ended December 31, 1992
10.05 Office Building Lease for Corporate Headquarters,
dated December 17, 1987, between BCC and JMB/Warner
Center Associates, incorporated by reference to
Exhibit 10.05 of the Registrant's Form S-1
Registration Statement No. 33-54898
10.06 Office Space Lease for Oakland, CA offices, dated
December 10, 1985, between BCC and Webster Street
Partners, Ltd., incorporated by reference to Exhibit
10.06 of the Registrant's Form S-1 Registration
Statement No. 33-54898
10.07 Office Space Lease for Westlake, CA offices, dated
October 29, 1986, between BCC and Westlake Business
Park, Ltd., incorporated by reference to Exhibit 10.07
of the Registrant's Form S-1 Registration Statement
No. 33-54898
10.08 Administrative Agreement, dated as of June 1, 1988,
between BCC and INSURx, Inc., incorporated by
reference to Exhibit 10.08 of the Registrant's Form
S-1 Registration Statement No. 33-54898
10.09 License Agreement dated January 1, 1991 between the
Blue Cross Blue Shield Association and BCC,
incorporated by reference to Exhibit 10.22 of
Registrant's Form S-1 Registration Statement No.
33-54898
10.10 Controlled Affiliate License Agreement dated January
8, 1993 among the Blue Cross Blue Shield Association,
CaliforniaCare Health Plans and BCC, incorporated by
reference to Exhibit 10.23 of Registrant's Form S-1
Registration Statement No. 33-54898
10.11 Undertakings dated January 7, 1993 by BCC, the
Registrant and the Registrant's subsidiaries to the
California Department of Corporations, incorporated by
reference to Exhibit 10.24 of Registrant's Form S-1
Registration Statement No. 33-54898
</TABLE>
31
<PAGE> 34
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.12 Office Space Lease for Newbury Park, CA offices, dated
January 13, 1993 between BCC and Metropolitan Life
Insurance Company, incorporated by reference to
Exhibit 10.12 of Registrant's Form 10-K for the fiscal
year ended December 31, 1992
10.13 Office Space Lease for Calabasas, CA offices, dated
August 26, 1992 between BCC and Lost Hills Office
Partners, First Amendment to Office Lease between Lost
Hills Office Partners and BCC, dated November 1, 1992,
and Subordination, Non-Disturbance and Attornment
Agreement, dated January 7, 1993, between BCC and DAG
Management, incorporated by reference to Exhibit 10.13
of Registrant's Form 10-K for the fiscal year ended
December 31, 1992
10.14 WellPoint Health Networks Inc. Officer Change in
Control Plan, incorporated by reference to Exhibit
10.14 of Registrant's Form 10-K for the fiscal year
ended December 31, 1993
10.15 Supplemental Pension Plan of Blue Cross of California,
incorporated by reference to Exhibit 10.15 of
Registrant's Form 10-K for the fiscal year ended
December 31, 1992
10.16 Blue Cross of California Deferred Compensation Plan,
incorporated by reference to Exhibit 10.13 of the
Registrant's Form S-1 Registration Statement No.
33-54898
10.17 Form of Supplemental Life and Disability Insurance
Policy, incorporated by reference to Exhibit 10.14 of
the Registrant's Form S-1 Registration Statement No.
33-54898
10.18 Employment Agreement, dated June 6, 1991, between the
Registrant and Leonard D. Schaeffer, incorporated by
reference to Exhibit 10.15 of the Registrant's Form
S-1 Registration Statement No. 33-54898
10.19 Special Executive Retirement Plan dated as of March
29, 1993 among BCC, the Registrant and Leonard D.
Schaeffer, incorporated by reference to Exhibit 10.19
of Registrant's Form 10-K for the fiscal year ended
December 31, 1992
10.20 Form of Indemnification Agreement between the
Registrant and its Directors and Officers,
incorporated by reference to Exhibit 10.17 of the
Registrant's Form S-1 Registration Statement No.
33-54898
10.21 Management Retention Agreement, dated as of January 8,
1993 between the Registrant and D. Mark Weinberg,
incorporated by reference to Exhibit 10.21 of
Registrant's Form 10-K for the fiscal year ended
December 31, 1992
</TABLE>
32
<PAGE> 35
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.22 Management Retention Agreement, dated as of January 8,
1993 between the Registrant and Ronald Williams,
incorporated by reference to Exhibit 10.22 of
Registrant's Form 10-K for the fiscal year ended
December 31, 1992
10.23 Management Retention Agreement, dated as of January 8,
1993 between the Registrant and Yon Y. Jorden,
incorporated by reference to Exhibit 10.23 of
Registrant's Form 10-K for the fiscal year ended
December 31, 1993
10.24 Officer Severance Agreement, dated as of July 1, 1993,
between the Registrant and Thomas C. Geiser,
incorporated by reference to Exhibit 10.24 of
Registrant's Form 10-K for the fiscal year ended
December 31, 1993
10.25 First Amendment to Special Executive Retirement Plan
dated as of March 29, 1993 among BCC, the Registrant
and Leonard D. Schaeffer (Exhibit 10.19), effective
January 1, 1993, incorporated by reference to Exhibit
10.25 of Registrant's Form 10-K for the fiscal year
ended December 31, 1993
10.26 WellPoint Health Networks Inc. Long-Term Performance
Incentive Plan, effective February 1, 1993,
incorporated by reference to Exhibit 10.26 of
Registrant's Form 10-K for the fiscal year ended
December 31, 1993
10.27 WellPoint Companies Management Incentive Award Plan
1993, incorporated by reference to Exhibit 10.27 of
Registrant's Form 10-K for the fiscal year ended
December 31, 1993
10.28 CaliforniaCare Health Plans Management Incentive Award
Plan 1993, incorporated by reference to Exhibit 10.28
of Registrant's Form 10-K for the fiscal year ended
December 31, 1993
10.29 Executive Benefiting You Highlights Brochure,
incorporated by reference to Exhibit 10.29 of
Registrant's Form 10-K for the fiscal year ended
December 31, 1993
10.30 Employment Agreement, dated November 9, 1994, between
the Registrant and Leonard D. Schaeffer, incorporated
by reference to Exhibit 10.30 of Registrant's Form
10-K for the fiscal year ended December 31, 1994
10.31 Amendment to Employment Agreement dated June 6, 1991
between BCC and Leonard D. Schaeffer (Exhibit 10.18),
effective December 8, 1994, incorporated by reference
to Exhibit 10.31 of Registrant's Form 10-K for the
fiscal year ended December 31, 1994
</TABLE>
33
<PAGE> 36
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.32 WellPoint Health Networks Inc. 1994 Long-Term Incentive
Plan, incorporated by reference to Exhibit 10.32 of
Registrant's Form 10-K for the fiscal year ended December
31, 1994
10.33 WellPoint Health Networks Inc. Officer Change in Control
Plan as amended January 5, 1995, incorporated by reference
to Exhibit 10.33 of Registrant's Form 10-K for the fiscal
year ended December 31, 1994
10.34 Form of Officer Severance Agreement of the Registrant,
incorporated by reference to Exhibit 10.34 of Registrant's
Form 10-K for the fiscal year ended December 31, 1994
10.35 WellPoint Health Networks Inc. Management Retention
Agreement between the Registrant and Ronald A. Williams,
amended and restated effective as of January 5, 1995,
incorporated by reference to Exhibit 10.35 of Registrant's
Form 10-K for the fiscal year ended December 31, 1994
10.36 WellPoint Health Networks Inc. Management Retention
Agreement between the Registrant and D. Mark Weinberg,
amended and restated effective as of January 5, 1995,
incorporated by reference to Exhibit 10.36 of Registrant's
Form 10-K for the fiscal year ended December 31, 1994
10.37 WellPoint Health Networks Inc. Management Retention
Agreement between the Registrant and David S. Helwig,
amended and restated effective as of January 5, 1995,
incorporated by reference to Exhibit 10.37 of Registrant's
Form 10-K for the fiscal year ended December 31, 1994
10.38 WellPoint Health Networks Inc. Management Retention
Agreement between the Registrant and Yon Y. Jorden, amended
and restated January 5, 1995, incorporated by reference to
Exhibit 10.38 of Registrant's Form 10-K for the fiscal year
ended December 31, 1994
10.39 Amendment to Administrative Services and Product Marketing
Agreement dated as of February 1, 1993 among the
Registrant, its subsidiaries and BCC (Exhibit 10.02),
amended as of January 1, 1995, incorporated by reference to
Exhibit 10.39 of Registrant's Form 10-K for the fiscal year
ended December 31, 1994
10.40 Amendment to Administrative Services and Product Marketing
Agreement dated as of February 1, 1993 among the
Registrant, its subsidiaries and BCC (Exhibit 10.02),
amended as of February 1, 1995, incorporated by reference
to Exhibit 10.40 of Registrant's Form 10-K for the fiscal
year ended December 31, 1994
</TABLE>
34
<PAGE> 37
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.41 Agreement of Purchase and Sale and Escrow Instructions,
dated as of December 16, 1994, between Registrant and
Pardee Construction Company, incorporated by reference to
Exhibit 10.41 of Registrant's Form 10-K for the fiscal year
ended December 31, 1994
10.42 First Amendment to Office Building Lease for Corporate
Headquarters dated December 17, 1987 between BCC and
JMB/Warner Center Associates (Exhibit 10.05), dated as of
February 7, 1989, incorporated by reference to Exhibit
10.42 of Registrant's Form 10-K for the fiscal year ended
December 31, 1994
10.43 Credit Agreement, dated as of October 19, 1994, among the
Registrant, Bank of America, National Trust and Savings
Association, Chemical Bank and Other Financial
Institutions, incorporated by reference to Exhibit 10.43 of
Registrant's Form 10-K for the fiscal year ended December
31, 1994
10.44 First Amendment to Credit Agreement, dated as of March 7,
1995, among the Registrant, Bank of America National Trust
and Savings Association, and other Financial Institutions,
incorporated by reference to Exhibit 10.44 of Registrant's
Form 10-K for the fiscal year ended December 31, 1994
10.45 Orders Approving Notice of Material Modification and
Undertakings dated September 7, 1995 by BCC, the Registrant
and the Registrant's subsidiaries to the California
Department of Corporations, incorporated by reference to
Exhibit 10.47 of Registrant's Form 10-Q for the quarter
ended September 30, 1995
10.46 Second Amendment to Credit Agreement, dated as of October
16, 1995, among the Registrant, Bank of America National
Trust and Savings Association and other Financial
Institutions, incorporated by reference to Exhibit 10.48 of
Registrant's Form 10-Q for the quarter ended September 30,
1995
10.47 WellPoint Health Networks Inc. Stock Option/Award Plan,
incorporated by reference to Exhibit 10.45 of Registrant's
Form 10-K for the fiscal year ended December 31, 1995
10.48 Lease Agreement, dated as of January 1, 1996, by and
between TA/Warner Center Associates II, L.P., and the
Registrant (supersedes Exhibit 10.05 and Exhibit 10.42),
incorporated by reference to Exhibit 10.46 of Registrant's
Form 10-K for the fiscal year ended December 31, 1995
10.49 Letter, dated November 13, 1995, from the Registrant to
Ronald A. Williams regarding severance benefits, together
with underlying Officer Severance Agreement, incorporated
by reference to Exhibit 10.47 of Registrant's Form 10-K for
the fiscal year ended December 31, 1995
</TABLE>
35
<PAGE> 38
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.50 Letter, dated November 13, 1995 from the Registrant to D.
Mark Weinberg regarding severance benefits, together with
underlying Officer Severance Agreement, incorporated by
reference to Exhibit 10.48 of Registrant's Form 10-K for
the fiscal year ended December 31, 1995
10.51 Letter, dated November 13, 1995, from the Registrant to
Thomas C. Geiser regarding severance benefits, incorporated
by reference to Exhibit 10.49 of Registrant's Form 10-K for
the fiscal year ended December 31, 1995
10.52 Amended and Restated Undertakings dated March 5, 1996 by
BCC, the Registrant and the Registrant's Subsidiaries to
the California Department of Corporations, incorporated by
reference to Exhibit 99.1 of the Registrant's Current
Report on Form 8-K dated March 5, 1996
10.53 Senior Series A Term Note dated March 31, 1996 between the
Registrant and Massachusetts Mutual Life Insurance Company,
incorporated by reference to Exhibit 10.53 of the
Registrant's Form 10-Q for the Quarter ended March 31, 1996
10.54 Voting Trust Agreement dated as of May 20, 1996 by and
between the Registrant, Western Health Partnerships and
Wilmington Trust Company, incorporated by reference to
Exhibit 99.2 of Registrant's Form 8-K dated May 20, 1996
10.55 Voting Agreement dated as of May 8, 1996 by and among the
Registrant and Western Health Partnerships, incorporated by
reference to Exhibit 99.3 of Registrant's Form 8-K dated
May 20, 1996
10.56 Share Escrow Agent Agreement dated as of May 20, 1996 by
and between the Registrant and U.S. Trust Company of
California, N.A., incorporated by reference to Exhibit 99.4
of Registrant's Form 8-K dated May 20, 1996
10.57 Registration Rights Agreement dated as of May 20, 1996 by
and between the Registrant and Western Health Partnerships,
incorporated by reference to Exhibit 99.5 of Registrant's
Form 8-K dated May 20, 1996
10.58 Blue Cross License Agreement effective as of May 20, 1996
by and among the Blue Cross and Blue Shield Association and
the Registrant (supersedes Exhibit 10.09), incorporated by
reference to Exhibit 99.6 of Registrant's Form 8-K dated
May 20, 1996
10.59 California Blue Cross License Addendum effective as of May
20, 1996 by and between the Blue Cross and Blue Shield
Association and the Registrant, incorporated by reference
to Exhibit 99.7 of Registrant's Form 8-K dated May 20, 1996
</TABLE>
36
<PAGE> 39
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.60 Blue Cross Affiliated License Agreement effective as of May
20, 1996 by and between the Blue Cross and Blue Shield
Association and CaliforniaCare Health Plans, incorporated
by reference to Exhibit 99.8 of Registrant's Form 8-K dated
May 20, 1996
10.61 Indemnification Agreement dated as of May 17, 1996 by and
among the Registrant, WellPoint Health Networks Inc., a
Delaware corporation, and Western Health Partnerships,
incorporated by reference to Exhibit 99.9 of Registrant's
Form 8-K dated May 20, 1996
10.62 Credit Agreement dated as of May 15, 1996 by and among the
Registrant, Bank of America National Trust and Savings
Association, as Administrative Agent, NationsBank of Texas,
N.A., as Syndication Agent, Chemical Bank, as Documentation
Agent, and the Other Financial Institutions named therein,
incorporated by reference to Exhibit 99.10 of Registrant's
Form 8-K dated May 20, 1996
10.63 WellPoint Health Networks Inc. Employee Stock Option Plan,
incorporated by reference to the Registrant's Registration
Statement on Form S-8 (Registration No. 333-05111)
10.64 WellPoint Health Networks Inc. Employee Stock Purchase
Plan, incorporated by reference to the Registrant's
Registration Statement on Form S-8 (Registration No. 333-
05111)
10.65 Amendment No. 1 dated as of June 28, 1996 to the
Registrant's Credit Agreement dated as of May 15, 1996.
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
37
<PAGE> 40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WELLPOINT HEALTH NETWORKS INC.
Registrant
Date: November 12, 1996 By: \s\ LEONARD D. SCHAEFFER
--------------------------------
Leonard D. Schaeffer
Chairman of the Board of Directors
and Chief Executive Officer
Date: November 12, 1996 By: \s\ HOWARD G. PHANSTIEL
--------------------------------
Howard G. Phanstiel
Executive Vice President
Finance and Information Services
Date: November 12, 1996 By: \s\ YON Y. JORDEN
--------------------------------
Yon Y. Jorden
Senior Vice President and
Chief Financial Officer
38
<PAGE> 1
Exhibit 10.65
FIRST-AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated
as of June 28, 1996 and amends the Credit Agreement dated as of May 15, 1996
(the "Credit Agreement"), among WELLPOINT HEALTH NETWORKS INC., a Delaware
corporation (together with its permitted successors, including the
Recapitalized Company, the "Company") each of the financial institutions
that is a signatory to the Credit Agreement identified under the caption
"BANKS" on the signature pages of the Credit Agreement or that, pursuant to
Section 11.08(a) of the Credit Agreement, shall become a "Bank" under the
Credit Agreement (individually, a "Bank" and, collectively, the "Banks"),
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking
association, as administrative and bid agent for the Banks (in such capacity,
and together with any successor administrative and bid loan agent, the
"Administrative Agent"), NATIONSBANK OF TEXAS, N.A., as syndication agent for
the Banks (in such capacity, and together with any successor syndication
agent, the "Syndication Agent"), and CHEMICAL BANK, as documentation agent for
the Banks (in such capacity, and together with any successor documentation
agent, the "Documentation Agent").
The Company and the Banks desire to amend the credit Agreement as
provided in this Amendment.
1. Defined Terms. Capitalized terms used but not defined in this
Amendment shall have the meanings assigned to such terms in the Credit
Agreement and the rules of interpretation set forth in Sections 1.02 and 1.03
of the Credit Agreement shall be applicable to this Amendment.
2. Amendment. Section 8.10 of the Credit Agreement is hereby
amended to read in its entirety as follows:
"8.10 Minimum Net Worth. The Company shall not at any time
permit its Net Worth to be less than an amount equal to the sum of (a)
$570,000,000, plus (b) fifty percent (50%) of the Company's positive
net income for each fiscal quarter after March 31, 1996."
3. Company's Representations and Warranties. The Company
represents and warrants to the Agents and each Bank that:
(a) the representations and warranties made by the
Company in the Credit Agreement were true and correct when made;
(b) the representations and warranties made by the
Company in Article VI of the Credit Agreement are true and correct as of the
date of effectiveness of this Amendment as if made on such date (or, if any
such representation and warranty is expressly stated to have been made as of a
specific date, as of such specific date);
<PAGE> 2
(c) upon the date of effectiveness of this Amendment no Default
under the Credit Agreement has occurred and is continuing;
(d) this Amendment constitutes the legal, valid and binding
obligation of the Company enforceable against the Company in accordance with
its terms, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or limiting creditors, rights
generally or by equitable principles relating to enforceability; and
(e) the execution and delivery by the Company of this Amendment,
does not or will not (i) contravene the terms of any of the Company's
organization documents; (ii) conflict with or result in any breach or
contravention of, or the creation of any Lien under, any document evidencing
any Contractual Obligation to which the Company is a party or any order,
injunction, writ or decree of any Governmental Authority to which the Company
or its Property is subject; or (iii) violate any Governmental Rule, except
where such violation would not reasonably be expected to have a material
Adverse Effect.
4. Conditions to Effectiveness. This Amendment shall be and
become effective upon the execution and delivery by the parties of this
Amendment.
5. Reference to and Effect on the Credit Agreement.
(a) Except as specifically amended by this Amendment, the
Credit Agreement shall remain in full force and effect and is hereby ratified
and confirmed.
(b) This Amendment shall be construed as one with the
Credit Agreement, and the Credit Agreement shall, where the context requires,
be read and construed throughout so as to incorporate this Amendment.
6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA PROVIDED THAT THE AGENTS
AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
7. Expenses. Without limiting any provision of the Credit
Agreement, the Company agrees to pay or reimburse the Administrative Agent for
all reasonable out-of-pocket costs and expenses of the Administrative Agent
(including all Attorney Costs incurred by the Administrative Agent) in
connection with the negotiation, preparation, execution and delivery of this
Amendment.
- 2 -
<PAGE> 3
8. Successors and Assigns. This Amendment shall be binding upon
and inure to the benefit of its parties and their respective successors and
permitted assigns.
9. Counterparts. This Amendment may be executed in any number of
counterparts all of which when taken together shall constitute one and the same
instrument and any of the parties to this Amendment may execute this Amendment
by signing any such counterpart.
- 3 -
<PAGE> 4
IN WITNESS WHEREOF, the parties to this Amendment have caused this
Amendment to be duly executed as of the day and year first above written.
"COMPANY"
WELLPOINT HEALTH NETWORK
By: /s/ YON Y. JORDEN
--------------------------------
Name: Yon Y. Jorden
Title: Chief Financial Officer
"AGENTS"
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as
Administrative Agent
By: /s/ CHRISTINE CORDI
--------------------------------
Christine Cordi
Vice President
NATIONSBANK OF TEXAS, N.A., as
Syndication Agent
By: /s/ BRAD W. DeSPAIN
--------------------------------
Brad W. DeSpain
Vice President
CHEMICAL BANK,
as Documentation Agent
By: /s/ DAWN LEE LUM
--------------------------------
Dawn Lee Lum
Vice President
<PAGE> 5
"BANKS"
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ KENNETH J. BECK
------------------------------------
Kenneth J. Beck
Vice President
NATIONSBANK OF TEXAS, N.A.
By: /s/ BRAD W. DeSPAIN
------------------------------------
Brad W. DeSpain
Vice President
CHEMICAL BANK
By: /s/ DAWN LEE LUM
------------------------------------
Dawn Lee Lum
Vice President
ABN AMRO BANK N.V.
Los Angeles International Branch,
as a Bank and as a Co-Agent
By: ABN AMRO North America, Inc.,
as agent
By: /s/ DAVID J. STASSEL
------------------------------------
Name: David J. Stassel
Title: Vice President and Director
By: /s/ JOHN A. MILLER
------------------------------------
Name: John A. Miller
Title: Group Vice President/Director
THE BANK OF NEW YORK,
as a Bank and as a Co-Agent
By: /s/ LISA Y. BROWN
------------------------------------
Name: Lisa Y. Brown
Title: Vice President
<PAGE> 6
THE BANK OF NOVA SCOTIA,
as a Bank and as a Co-Agent
By: /s/ ALAN W. PENDERGAST
--------------------------------
Name: Alan W. Pendergast
Title: Relationship Manager
BANQUE NATIONALE DE PARIS,
as a Bank and as a Co-Agent
By: /s/ CLIVE BETTLES
--------------------------------
Name: Clive Bettles
Title: Senior Vice President & Manager
By: /s/ MITCHELL M. OZAWA
--------------------------------
Name: Mitchell M. Ozawa
Title: Vice President
DEUTSCHE BANK AG
Los Angeles Branch and/or
Cayman Islands Branch;
as a Bank and as a Co-Agent
By: /s/ J. SCOTT JESSUP
--------------------------------
Name: J. Scott Jessup
Title: Vice President
By: /s/ ROSS A. HOWARD
--------------------------------
Name: Ross A. Howard
Title: Director
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK,
as a Bank and as a Co-Agent
By: /s/ ROBERT M. OSIESKI
--------------------------------
Name: Robert M. Osieski
Title: Vice President
<PAGE> 7
THE LONG-TERM CREDIT BANK OF JAPAN,
as a Bank and as a co-Agent
By: /s/ Y. KAMISAWA
--------------------------------
Name: Yutaka Kamisawa
Title: Deputy General Manager
BANCA DI ROMA
By: /s/ CLAUDIO DE LUCA
--------------------------------
Name: Caludio De Luca
Title:
By: /s/ AUGUSTO BIANCHI
--------------------------------
Name: Augusto Bianchi
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ JAY G. SEPANSKI
--------------------------------
Name: Jay G. Sepanski
Title: Corporate Banking Officer
KREDIETBANK NV
By: /s/ ROBERT SPAUFFER
--------------------------------
Name: Robert Spauffer
Title: Vice President
By: /s/ RAYMOND F. MURRAY
--------------------------------
Name: Raymond F. Murray
Title: Vice President
<PAGE> 8
COOPERATIVE CENTRALE RAIFFEISEN
BOERENLEENBANK B.A. "RABOBANK
NEDERLAND" NEW YORK BRANCH
By: /s/ RICHARD J. CERF
--------------------------------
Name: RICHARD CERF
Title: Vice President
By: /s/ IAN REECE
--------------------------------
Name: IAN REECE
Title: Vice President
UNION BANK OF CALIFORNIA
By: /s/ JENNIFER L. BANKS
--------------------------------
Name: Jennifer L. Banks
Title: Vice President
CREDIT SUISSE
By: /s/ MARK A. SAMPSON
--------------------------------
Name: Mark A. Sampson
Title: Associate
By: /s/ MARILOU PALENZUELA
--------------------------------
Name: Marilou Palenzuela
Title: Member of Senior Management
THE SANWA BANK, LIMITED
By: /s/ KAREN WICKS COLEMAN
--------------------------------
Name: Karen Wicks Coleman
Title: Assistant Vice President
and Manager
THE SUMITOMO BANK, LIMITED
By: /s/ GORO HIRAI
--------------------------------
Name: Goro Hirai
Title: Joint General Manager
<PAGE> 9
SWISS BANK CORPORATION
By: /s/ THOMAS R. SALZANO
--------------------------------
Name: Thomas R. Salzano
Title: Banking Finance Support, N.A.
By: /s/ SABINA WU
--------------------------------
Name: Sabina Wu
Title: Director, Credit Risk
Management, N.A.
BANK OF MONTREAL
By: /s/ IRENE M. GELLER
--------------------------------
Name: Irene M. Geller
Title: Director
BANKERS TRUST COMPANY
By: /s/ MARY JO JOLLY
--------------------------------
Name: Mary Jo Jolly
Title: Assistant Vice President
CIBC INC.
By: /s/ STEPHEN D. REYNOLDS
--------------------------------
Name: Stephen D. Reynolds
Title: Authorized Signatory
CREDIT LYONNAIS
New York Branch
By: /s/ FARBOUD TAVANGAR
--------------------------------
Name: Farboud Tavangar
Title: Vice President
<PAGE> 10
THE DAI-ICHI KANGYO BANK, LTD.
Los Angeles Agency
By: /s/ T. NOZAKI
--------------------------------
Name: Tomohiro Nozaki
Title: Sr. Vice President &
Joint General Manager
FLEET NATIONAL BANK
By: /s/ GINGER STOLZENTHALER
--------------------------------
Name: Ginger Stolzenthaler
Title: Vice President
THE FUJI BANK, LIMITED
By: /s/ NOBUHIRO UMEMURA
--------------------------------
Name: Nobuhiro Umemura
Title: Joint General Manager
THE INDUSTRIAL BANK OF JAPAN, LTD.
Los Angeles Agency
By: /s/ TOSHINARI IYODA
--------------------------------
Name: Toshinari Iyoda
Title: Senior Vice President
MELLON BANK, N.A.
By: /s/ ROBERT T. HARKINS
--------------------------------
Name: Robert T. Harkins
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF EARNINGS AND CONSOLIDATED BALANCE SHEETS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
PRESENTED IN THE FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 322,785
<SECURITIES> 1,704,150
<RECEIVABLES> 443,198
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,584,192
<PP&E> 71,317
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,447,883
<CURRENT-LIABILITIES> 1,601,639
<BONDS> 747,000
0
0
<COMMON> 665
<OTHER-SE> 811,445
<TOTAL-LIABILITY-AND-EQUITY> 3,447,883
<SALES> 0
<TOTAL-REVENUES> 3,013,727
<CGS> 0
<TOTAL-COSTS> 2,159,062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,319
<INCOME-PRETAX> 260,566
<INCOME-TAX> 105,580
<INCOME-CONTINUING> 154,986
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 154,986
<EPS-PRIMARY> 2.33
<EPS-DILUTED> 2.33
</TABLE>
