<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 ON FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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)
<TABLE>
<S> <C>
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)
</TABLE>
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>
<S> <C>
TITLE OF EACH CLASS OUTSTANDING AT AUGUST 14, 1996
------------------- ------------------------------
Common Stock, $0.0l par value 66,482,300 shares
</TABLE>
<PAGE> 2
WELLPOINT HEALTH NETWORKS INC.
AMENDMENT NO. 1 ON FORM 10-Q/A
SECOND QUARTER 1996
EXPLANATORY NOTE
- ----------------
This Amendment No. 1 on Form 10-Q/A is being filed in order to amend
and restate in their entirety Item Nos. 1 and 2 of "Part I. Financial
Information" of the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1996 (the "Form 10-Q"). This Amendment is being filed, after
discussions with the accounting staff of the Securities and Exchange
Commission, to give effect in the earnings per share computation for all
periods presented to the reduction in number of the Company's outstanding
shares that occurred as a result of the Company's recapitalization transaction
completed on May 20, 1996. A complete description of such transaction is
provided in Note 3 to the Consolidated Financial Statements. Except as
specifically amended by this Amendment, the Form 10-Q shall remain unchanged.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Income Statements for the Three and Six Months
Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
<PAGE> 3
ITEM 1. Financial Statements
WELLPOINT HEALTH NETWORKS INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In thousands, except share data) June 30, December 31,
1996 1995
---------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 480,779 $1,069,631
Investment securities, at market value 1,505,078 1,174,974
Receivables, net 402,102 149,081
Deferred tax assets 61,733 42,969
Other current assets 32,653 25,651
---------- ----------
Total Current Assets 2,482,345 2,462,306
Property and equipment, net 65,929 42,964
Intangible assets 563,931 124,956
Long-term investments 121,709 12,664
Other non-current assets 88,289 36,367
---------- ----------
Total Assets $3,322,203 $2,679,257
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Medical claims payable $ 706,403 $ 362,881
Loss and loss adjustment expense reserves 160,159 66,489
Unearned premiums 154,113 132,298
Accounts payable and accrued expenses 188,595 111,005
Experience rated and other refunds 133,566 93,478
Income taxes payable and other current liabilities 131,954 74,197
---------- ----------
Total Current Liabilities 1,474,790 840,348
Accrued postretirement benefits 64,239 50,158
Loss and loss adjustment expense reserves, non-current 127,128 107,000
Long-term debt 809,870 -
Other non-current liabilities 84,923 11,525
---------- ----------
Total Liabilities 2,560,950 1,009,031
Stockholders' Equity:
Preferred Stock - -
Common Stock
June 30, 1996 - $0.01 par value, 300,000,000 shares
authorized, 66,482,300 issued and outstanding; 665 -
December 31, 1995 - none
Class A Common Stock
June 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
June 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 760,859 1,100,288
Unrealized valuation adjustment (26,063) 1,820
Retained earnings 25,792 567,123
---------- ----------
Total Stockholders' Equity 761,253 1,670,226
---------- ----------
Total Liabilities and Stockholders' Equity $3,322,203 $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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Premium revenue $985,665 $732,606 $1,748,949 $1,458,548
Management services revenue 43,435 15,099 61,663 28,661
Investment income 36,359 40,751 72,429 69,379
---------- -------- ---------- ----------
1,065,459 788,456 1,883,041 1,556,588
Operating Expenses:
Health care services and
other benefits 762,953 560,717 1,334,738 1,091,004
Selling expense 58,261 48,038 107,727 94,999
General and administrative expense 143,491 83,685 235,765 171,554
---------- -------- ---------- ----------
964,705 692,440 1,678,230 1,357,557
---------- -------- ---------- ----------
Operating Income 100,754 96,016 204,811 199,031
Interest expense 10,923 - 10,923 -
Other expense, net 6,169 2,762 9,181 5,883
---------- -------- ---------- ----------
Income before Provision for
Income Taxes 83,662 93,254 184,707 193,148
Provision for income taxes 33,890 37,814 74,822 78,238
---------- -------- ---------- ----------
Net Income $ 49,772 $ 55,440 $ 109,885 $ 114,910
========== ======== ========== ==========
Earnings Per Share $ 0.75 $ 0.84 $ 1.66 $ 1.73
========== ======== ========== ==========
Number of Shares Outstanding 66,396 66,367 66,381 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 115 1
Change in unrealized valuation
adjustment on investment
securities, net of tax
-- ------ ---- ------ ---- ------- ----
Balance as of June 30, 1996 $- 66,482 $665 - - - $ -
== ====== ==== ====== ==== ======= ====
</TABLE>
<TABLE>
<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 109,885 109,885
Recapitalization (see Note 3):
Dividends (343,784) (651,216) (995,000)
Stock exchange 331
Stock issued for employee long-term
incentive plan 4,024 4,025
Change in unrealized valuation
adjustment on investment
securities, net of tax (27,883) (27,883)
---------- -------- -------- ----------
Balance as of June 30, 1996 $ 760,859 ($26,063) $ 25,792 $ 761,253
========== ======== ======== ==========
</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) Six Months Ended June 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 109,885 $ 114,910
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net of accretion 16,526 8,801
Gains on sales of assets, net (9,153) (10,163)
Provision for deferred income tax bene 3,008 0
(Increase) decrease in certain assets, net of acquisitions:
Receivables, net 14,010 (57,291)
Other current assets 25,474 (8,756)
Other non-current assets (52,860) 0
Increase (decrease) in certain liabilities, net of acquisitions:
Medical claims payable 6,138 (16,061)
Loss and loss adjustment expense reserves 29,834 6,616
Unearned premiums 14,459 7,057
Accounts payable and accrued expenses (1,334) (22,683)
Experience rated and other refunds (8,756) (22,155)
Income taxes payable and other current liabilities (13,989) 49,383
Accrued postretirement benefits 1,553 1,719
Other non-current liabilities 17,905 (119)
---------- ----------
Net cash provided by operating activities 152,700 51,258
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased (395,054) (416,054)
Proceeds from investments sold 308,750 731,777
Proceeds from matured investments 33,714 1,205
Property and equipment purchased, net (15,673) (10,538)
Purchase of subsidiaries, net of cash acquired (412,314) (13,177)
---------- ----------
Net cash provided by (used in) investing activities (480,577) 293,213
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 775,000 0
Repayment of long-term debt (45,000) 0
Stock issued for long-term incentive plan 4,025 0
Dividends (see Note 3) (995,000) 0
---------- ----------
Net cash used in financing activities (260,975) 0
---------- ----------
Net increase (decrease) in cash and cash equivalents (588,852) 344,471
Cash and cash equivalents at beginning of period 1,069,631 163,444
---------- ----------
Cash and cash equivalents at end of period $ 480,779 $ 507,915
========== ==========
</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") is a publicly
traded managed health care company organized under the laws of California
and the exclusive licensee for the right to use the Blue Cross name and
related service marks in California.
On May 20, 1996, the Company concluded a series of transactions
(collectively, the "Recapitalization") to recapitalize the predecessor
WellPoint Health Networks Inc., a Delaware corporation, and purchase the
Commercial Operations of Blue Cross of California. In connection with the
Recapitalization, the predecessor WellPoint Health Networks Inc. merged
with and into the Company, which was formerly known as Blue Cross of
California. (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 June 30, 1996, the results of operations for each
of the three and six months ended June 30, 1996 and 1995, cash flows for
each of the six months ended June 30, 1996 and 1995, and the statement of
changes in stockholders' equity for the six months ended June 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.
3. ACQUISITIONS AND RECAPITALIZATION
Purchase of Massachusetts Mutual Life Insurance Company's Life and Health
Benefits Management Division
On March 31, 1996, the Company completed its acquisition of the Life and
Health Benefits Management Division of Massachusetts Mutual Life Insurance
Company, which will do business under the name UniCARE Life and Health
Insurance Company ("UL&H"), through the acquisition of its parent MassMutual
Holding Company Two, Inc. The purchase price was $380.0 million plus an
estimated $18.0 million purchase price adjustment. The $380.0 million was
funded with $318.0 million in existing cash and a Series A term note for
$62.0 million. In addition, the Company will issue a Series B term note, to
the seller, based on closing equity for an estimated $18.0 million. The
exact amount of the Series B term note is subject to the results of a final
audit and discussion between the parties. The purchase method of accounting
has
5
<PAGE> 8
WELLPOINT HEALTH NETWORKS, INC.
Notes to Consolidated Financial Statements
(unaudited)
3. ACQUISITIONS AND RECAPITALIZATION (CONTINUED)
Purchase of Massachusetts Mutual Life Insurance Company's Life and Health
Benefits Management Division (continued)
been used to account for the acquisition. The excess purchase price over
assets acquired was approximately $232.1 million and is being amortized on a
straight-line basis over 30 years. The Company expects to incur
approximately $30 - $40 million of restructuring costs related to this
acquisition, a portion of which is expected to be reflected in the Company's
results of operations.
UL&H provides medical services to approximately 1.1 million members,
focusing on the large employer market (groups of 251 to 3,000), and has
medical members in all 50 states. In addition, UL&H also has 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), Western Health Partnerships
(the "Health Foundation") and Western Foundation for Health Improvement (the
"Western Foundation"). In connection with the Recapitalization, (a) Old
WellPoint distributed an aggregate of $995.0 million by means of an
extraordinary dividend of $10.00 per share to the record holders of its
Class A and Class B Common Stock as of May 15, 1996, (b) the Company, the
sole shareholder of Old WellPoint's Class B Common Stock, donated its
portion of such dividend ($800.0 million) to the Western Foundation, (c) the
Company donated its assets, other than the shares of the Old WellPoint Class
B Common Stock held by the Company and the Company's commercial operations
(the "BCC Commercial Operations"), to the Health Foundation, (d) the Company
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 the Company issued to the Health
Foundation 53,360,000 shares of its common stock and (e) Old WellPoint
merged with and into the Company (the "Merger"), with the resulting entity
changing its name to WellPoint Health Networks Inc.
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)
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 Health 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
$235,000,000 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 Health Foundation.
The purchase method of accounting has been used to account for the
acquisition of the BCC Commercial Operations. At the acquisition date, the
excess purchase price over assets acquired was approximately $211.4 million
and is being amortized on a straight-line basis over 40 years.
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, UL&H 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 columns entitled WellPoint, BCC and UL&H represent
results of operations for these entities as if the acquisitions and the
Recapitalization had not occurred. 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 acquisitions, administration expenses related
to investment into national expansion of managed care networks and the
related income tax effect. 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, UL&H and the
BCC Commercial Operations had been a single entity during the three and
six months ended June 30, 1996 and 1995, nor is it necessarily indicative
of the results of
7
<PAGE> 10
WELLPOINT HEALTH NETWORKS INC.
Notes to Consolidated Financial Statements
(unaudited)
3. ACQUISITIONS AND RECAPITALIZATION (CONTINUED)
operations which may occur in the future. Pro forma earnings per share is
calculated based on 66.4 million share of common stock outstanding during all
periods presented.
(In millions, except earnings per share)
<TABLE>
<CAPTION>
Pro Forma
Three Months Ended June 30, 1996
-----------------------------------------------------------------------------
WellPoint BCC UL&H Adjustments Total
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 840.6 $ 92.4 $ 205.2 ($ 10.6) $ 1,127.6
Net Income $ 54.8 $ 2.3 $ 7.7 ($ 19.7) $ 45.1
Earnings Per Share $ 0.68
</TABLE>
(In millions, except earnings per share)
<TABLE>
<CAPTION>
Pro Forma
Three Months Ended June 30, 1995
-----------------------------------------------------------------------------
WellPoint BCC UL&H Adjustments Total
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 788.5 $ 116.6 $ 223.4 ($ 10.7) $ 1,117.8
Net Income $ 55.4 $ 1.3 $ 12.9 ($ 21.5) $ 48.1
Earnings Per Share $ 0.72
</TABLE>
Lower UL&H net income for the 1996 second quarter compared to the 1995
second quarter was primarily caused by a $4.2 million decrease in pre-tax
realized gains on investments.
(In millions, except earnings per share)
<TABLE>
<CAPTION>
Pro Forma
Six Months Ended June 30, 1996
-----------------------------------------------------------------------------
WellPoint BCC UL&H Adjustments Total
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,658.2 $ 208.4 $ 407.2 ($ 21.2) $ 2,252.6
Net Income $ 114.9 $ 5.0 $ 11.4 ($ 39.4) $ 91.9
Earnings Per Share $ 1.38
</TABLE>
(In millions, except earnings per share)
<TABLE>
<CAPTION>
Pro Forma
Six Months Ended June 30, 1995
-----------------------------------------------------------------------------
WellPoint BCC UL&H Adjustments Total
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,556.6 $ 231.0 $ 468.3 ($ 21.2) $ 2,234.7
Net Income $ 114.9 $ 3.4 $ 21.3 ($ 42.7) $ 96.9
Earnings Per Share $ 1.46
</TABLE>
Lower UL&H net income for the six months ended June 30, 1996 compared to
June 30, 1995 was primarily due to a decrease of $9.0 million in the gross
underwriting
8
<PAGE> 11
WELLPOINT HEALTH NETWORKS, INC.
Notes to Consolidated Financial Statements
(unaudited)
3. ACQUISITIONS AND RECAPITALIZATION (CONTINUED)
margin from a lower volume of premiums and claims and a decrease of $9.6
million in pre-tax realized gains on investments in 1996.
4. LONG-TERM DEBT
Notes Payable
During the first quarter of 1996 in connection with the acquisition of
UL&H, the Company issued a Series A term note for $62.0 million. In
addition, the Company has accrued a Series B term note for an estimated
$18.0 million which will be issued in connection with the acquisition of
UL&H. The amount of the Series B term note is subject to possible
adjustment under certain circumstances. Both notes will mature on March
31, 1999. From March 31, 1996 through June 30, 1996, the interest rate was
set at 5.72%. Thereafter, the interest rate will be equal to the Company's
average interest cost by reason of the availability of the revolving credit
facility, as described below. Interest will be paid quarterly.
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
plus the applicable margin determined by the long-term unsecured debt
ratings or the leverage ratio as outlined in the agreement, a reference
rate or via 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, will
be payable quarterly. The facility fee rate will also be 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 June 30, 1996, $730.0 million was outstanding
under this facility which was used for the payment of a dividend to
WellPoint stockholders in connection with the Recapitalization. (See
Note 3. Acquisitions and Recapitalization.) Also, at June 30, 1996, the
Company was in compliance with the restrictive covenants outlined in the
agreement.
9
<PAGE> 12
WELLPOINT HEALTH NETWORKS, INC.
Notes to Consolidated Financial Statements
(unaudited)
5. EARNINGS PER SHARE
Earnings per share is determined by dividing net income by the number of
shares outstanding. The number of shares outstanding for the three and six
month periods ended June 30, 1996 is 66.4 million. The number of shares
outstanding for the three and six month periods ended June 30, 1995 have
been recomputed to 66.4 million, the number of shares outstanding
immediately following the Recapitalization to give effect to the stock
exchange that occurred as part of the Recapitalization. (See Note 3.
Acquisitions and Recapitalization.)
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, amortization
of intangible assets, foregone interest on net cash used for the purchase
of the BCC Commercial Operations and payment of the special dividend and
the related income tax effect.
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Pro Forma
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $45,120 $43,746 $95,001 $92,240
Earnings per Share $ 0.68 $ 0.66 $ 1.43 $ 1.39
</TABLE>
Fully diluted earnings per share is 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 the Health Systems International ("HSI") transaction and
allegedly rejecting certain other proposals without due consideration.
WellPoint believes that its directors acted in good faith and in an
independent, informed and appropriate manner in all aspects of their
decision to approve the HSI transaction and not to approve alternative
proposals. Based upon the foregoing, WellPoint believes that these
lawsuits are without merit and intends to vigorously defend such actions.
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 enrollees arising out of
decisions to restrict treatment or to restrict 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 is of the opinion that the final outcome
of all such proceedings should not have a material adverse effect on
WellPoint's results of operations or financial condition.
10
<PAGE> 13
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
WellPoint Health Networks Inc. ("WellPoint" or the "Company") is one of the
nation's largest publicly traded managed health care companies with
approximately 4.2 million medical members, 12.0 million pharmacy members, 1.5
million dental members and 0.7 million life members. The Company offers a
comprehensive array of managed care health plans through a health maintenance
organization ("HMO"), a preferred provider organization ("PPO") and specialty
managed care networks. WellPoint also provides claims processing,
administrative and cost containment services to self- funded employers.
Additionally, the Company offers workers' compensation and life insurance
products.
The Company's primary market for the products it offers, excluding pharmacy
managed care services, is the state of California. The Company is also
actively pursuing expansion into new markets outside of California. With the
acquisition of UniCARE Life and Health Insurance Company ("UL&H"), formally the
Life and Health Benefits Management Division of Massachusetts Mutual Life
Insurance Company, WellPoint serves medical members in 50 states.
Approximately 50% of UL&H's medical membership is concentrated in seven states:
California, New York, Texas, Georgia, Illinois, Massachusetts and Virginia.
Due in part to this acquisition, the Company's internal business units are now
organized on a geographic basis, California and National. 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.
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,
which includes claims processing and access to provider networks provided to
self-insured employers, and investment income. WellPoint's operating expenses
include: health care services and other benefits expenses consisting of
payments for physicians, hospitals and other
11
<PAGE> 14
RESULTS OF OPERATIONS (CONTINUED)
providers for health care and specialty products claims; selling expenses for
broker and agent commissions; and general and administrative expenses.
The Company's consolidated results of operations for the three and six months
ended June 30, 1996 include the results of operations of UL&H and the BCC
Commercial Operations from March 31, 1996 and May 20, 1996, respectively, the
effective dates of acquisition.
In connection with the UL&H acquisition, the Company expects to incur certain
pre-tax restructuring costs during the remainder of 1996. These restructuring
costs are currently anticipated to be $30 - $40 million, a portion of which is
expected to be reflected in the Company's results of operations.
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 Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Operating Revenues:
Premium revenue 95.8% 98.0% 96.6% 98.1%
Management services revenue 4.2 2.0 3.4 1.9
----- ----- ----- -----
100.0 100.0 100.0 100.0
Operating Expenses:
Health care services and other
benefits (loss ratio) 77.4 76.5 76.3 74.8
Selling expense 5.7 6.4 6.0 6.4
General and administrative expense 13.9 11.2 13.0 11.5
</TABLE>
12
<PAGE> 15
MEMBERSHIP
The following table sets forth membership data and the percent change in
membership:
<TABLE>
<CAPTION>
As of June 30,
--------------------------- Percent
1996 1995 Change
--------- --------- -------
<S> <C> <C> <C>
MEDICAL MEMBERSHIP:
CALIFORNIA
Group Services:
HMO 643,554 624,006 3.1%
PPO and Other (a) 1,190,155 752,636 58.1%
--------- ---------
Total Group Services (b) 1,833,709 1,376,642 33.2%
--------- ---------
Consumer Services:
HMO 246,384 192,199 28.2%
PPO and other 1,192,525 1,169,121 2.0%
--------- ---------
Total Consumer Services 1,438,909 1,361,320 5.7%
--------- ---------
Medi-Cal HMO Programs 49,717 34,103 45.8%
--------- ---------
Total California Medical Membership (c) 3,322,335 2,772,065 19.9%
--------- ---------
NATIONAL
Group Services:
HMO 2,506 - N/A
PPO and Other (a) 905,884 - N/A
--------- ---------
Total Group Services (b) 908,390 - N/A
--------- ---------
Consumer Services:
PPO and Other 12,948 - N/A
--------- ---------
Total National Membership 921,338 - N/A
--------- ---------
TOTAL MEDICAL MEMBERSHIP 4,243,673 2,772,065 53.1%
========= =========
HMO 942,161 850,308 10.8%
PPO and Other 3,301,512 1,921,757 71.8%
--------- ---------
TOTAL MEDICAL MEMBERSHIP 4,243,673 2,772,065 53.1%
========= =========
</TABLE>
(a) California and National include 637,350 and 494,892 management services
members, respectively, as of June 30, 1996. Of the 637,350 California
management services members, 82,437 are from UL&H. California includes
437,204 management services members at June 30, 1995.
(b) At June 30, 1996, total UL&H medical membership was approximately
1,058,000, of which approximately 152,000 were California members and
approximately 906,000 were National members.
(c) At June 30, 1996, total BCC Commercial Operations membership was
approximately 270,300, of which all were California members.
13
<PAGE> 16
MEMBERSHIP (CONTINUED)
<TABLE>
<CAPTION>
As of June 30,
----------------------------- Percent
1996 1995 Change
---------- --------- -------
<S> <C> <C> <C>
SPECIALTY MEMBERSHIP:
Pharmacy 11,942,099 8,517,281 40.2%
Dental 1,466,640 494,729 196.5%
Disability 111,015 - N/A
Behavioral Health 446,789 334,179 33.7%
Life 735,378 334,753 119.7%
</TABLE>
The 1996 specialty membership includes the acquisition of UL&H which had
approximately 0.5 million pharmacy members, 0.9 million dental members, 0.1
million disability members and 0.4 million life members as of June 30, 1996.
COMPARISON OF RESULTS FOR SECOND QUARTER 1996 TO SECOND QUARTER 1995
Premium revenue increased 34.5% to $985.7 million for the quarter ended June
30, 1996 from $732.6 million for the quarter ended June 30, 1995. Of the
$253.1 million increase, $174.5 million and $24.9 million were attributable to
the acquisitions of UL&H and the BCC Commercial Operations, respectively.
Also contributing to the increase were moderate increases in the medical
premiums per member. In addition, workers' compensation premium revenues
increased 55.0% from the 1995 second quarter to the 1996 second 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.
Dental premium revenue increased largely due to an increase in membership as a
result of the introduction of a new Dental PPO. The increase in premium
revenue was partially offset by the conversion of some PPO Cost Plus members
to management services arrangements in 1995. This conversion was principally
due to regulatory actions taken by the California Department of Corporations
("DOC") related to licensure requirements.
Management services revenue increased $28.3 million, or 187.7%, to $43.4
million for the quarter ended June 30, 1996 from $15.1 million in 1995. The
increase was primarily due to $23.3 million of management services revenue from
UL&H. Also contributing to the increase were new pharmacy and clinical
management accounts, revenue from BCC Commercial Operations and the conversion
of PPO Cost Plus members to management services arrangements. The PPO Cost
Plus conversion, which was substantially completed by December 1995, did not
have a material impact on net income.
14
<PAGE> 17
COMPARISON OF RESULTS FOR SECOND QUARTER 1996 TO SECOND QUARTER 1995
(CONTINUED)
Investment income decreased to $36.4 million for the quarter ended June 30,
1996 as compared to $40.8 million for the same period in 1995 due in part to
lower pretax net gains on the sales of investment securities in 1996 of $4.0
million as compared to pretax net gains in 1995 of $10.5 million. Interest
income on the Company's investment portfolio excluding UL&H and the BCC
Commercial Operations decreased $6.9 million, mainly due to foregone interest
income on cash and investment balances used for the purchases of UL&H and the
BCC Commercial Operations as well as the Recapitalization. This decrease was
offset by additional interest income of $8.0 million earned on cash and
investments acquired through the purchases of UL&H and the BCC Commercial
Operations, resulting in an overall net increase to interest income.
Health care services and other benefits expense increased 36.1% to $763.0
million for the quarter ended June 30, 1996 from $560.7 million in 1995. Of
the $202.2 million increase, $137.2 is attributable to UL&H and $23.2 million
is attributable to the BCC Commercial Operations. Increased health care
services expense also resulted from the new PPO co-pay product which replaced
deductibles with modest co-payments causing more costs to be absorbed up front
compared to the prior year, benefit design changes which eliminated deductibles
for some pharmacy products and membership gains in medical and specialty
products. These increases were partially offset by savings from hospital
recontracting and the effect of the PPO Cost Plus transfer to management
services discussed in the premium revenue section above. The loss ratio for
the second quarter of 1996 increased to 77.4% compared to 76.5% in 1995 due to
the PPO benefit 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 UL&H and the BCC
Commercial Operations on the Company's overall results. UL&H and the BCC
Commercial Operations have traditionally experienced higher medical loss ratios
than the Company. Additionally, the Company may experience higher medical loss
ratios during the remainder of 1996 due to the incremental effect of the UL&H
and BCC Commercial Operations businesses. 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 acquisitions, the loss ratio for the quarter ended June 30, 1996
on the Company's existing block of business was 76.6%, consistent with the
prior year.
Selling expense consists of commissions paid to outside brokers and agents
representing the Company. Selling expense for the second quarter of 1996
increased 21.3% to $58.3 million compared to $48.0 million for the second
quarter of 1995, corresponding with continued overall premium revenue growth
and an additional $7.1 million in selling expense attributable to UL&H.
However, the selling expense ratio decreased for the quarter ended June 30,
1996 to 5.7% from 6.4%, largely due to the acquisitions of UL&H and BCC
Commercial Operations which both have a lower selling expense ratio.
15
<PAGE> 18
COMPARISON OF RESULTS FOR SECOND QUARTER 1996 TO SECOND QUARTER 1995
(CONTINUED)
Excluding the acquisitions, the selling expense ratio would have remained
constant at 6.4%.
General and administrative expense for the quarter ended June 30, 1996
increased 71.5% to $143.5 million from $83.7 million for the comparable quarter
in 1995, largely due to the acquisition of UL&H which contributed $51.1 million
to general and administrative expense. The administrative expense ratio
increased to 13.9% for the quarter ended June 30, 1996 compared to 11.2% for
the quarter ended June 30, 1995, primarily due to the acquisition of UL&H and
the Company's continued investments in national expansion. The increase was
partially offset by the BCC Commercial Operations lower administrative expense
ratio. Excluding UL&H the administrative expense ratio would have been 11.1%
for the second quarter of 1996 compared to 11.2% for the second quarter of
1995, due in part to the Company's focus on controlling its administrative
costs. UL&H has historically had a higher administrative expense ratio due
to its higher percentage of management services business.
Interest expense was $10.9 million for the quarter ended June 30, 1996. The
Company had no interest expense during the comparable period in 1995. The
interest expense in the current period related to $775 million drawn under the
Company's revolving credit facility on May 15, 1996 to fund the payment of the
special dividend, as well as interest on the Series A and Series B term notes
issued in connection with the acquisition of UL&H. As of June 30, 1996,
indebtedness under the credit facility and the Series A and Series B term notes
bore interest at a rate of 5.72% per annum.
WellPoint's net income for the quarter ended June 30, 1996 was $49.8 million or
$0.75 per share compared to $55.4 million or $0.84 per share for the quarter
ended June 30, 1995. The number of common shares outstanding for the
quarter ended June 30, 1996 was 66.4 million. The number of shares outstanding
for the quarter ended June 30, 1995 has been recomputed to 66.4 million, the
number of shares outstanding immediately following the Recapitalization.
Earnings per share is determined by dividing net income by the 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.)
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 TO THE SIX MONTHS
ENDED JUNE 30, 1995
Premium revenue increased 19.9% to $1,748.9 million for the six months ended
June 30, 1996 from $1,458.5 million for the six months ended June 30, 1995. As
discussed above, premium revenues of $174.5 million and $24.9 million were
attributable to the acquisitions of UL&H and the BCC Commercial Operations,
respectively. Also contributing to increased premium revenues were moderate
increases in the premiums per member. In addition, workers' compensation
premiums increased 61.0% from the first six months of 1995 to the first six
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. Dental premium revenue increased largely due
to an increase in membership as a result of the introduction of a new Dental
PPO. The increase in premium revenue was partially offset by the conversion
of some PPO Cost Plus members to management services arrangements in 1995.
This conversion was
16
<PAGE> 19
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 TO THE SIX MONTHS
ENDED JUNE 30, 1995 (CONTINUED)
principally due to regulatory actions taken by the California Department of
Corporations ("DOC") related to licensure requirements.
Management services revenue increased $33.0 million to $61.7 million for the six
months ended June 30, 1996 from $28.7 million for the six months ended June 30,
1995. The increase was primarily due to $23.3 million of management services
revenue from UL&H. Also contributing to the increase were new pharmacy and
clinical management accounts, revenue from BCC Commercial Operations, and the
conversion of PPO Cost Plus members to management services arrangements. The
PPO Cost Plus conversion, which was substantially completed by December 1995,
did not have a material impact on net income.
Investment income increased to $72.4 million for the six months ended June 30,
1996 as compared to $69.4 million for the same period in 1995 due to increased
interest income of $62.4 million compared to $59.1 million in the prior year.
The increase was primarily due to additional interest of $8.0 million earned on
UL&H and BCC Commercial Operations investments. However, interest income on
the Company's investment portfolio excluding UL&H and the BCC Commercial
Operations decreased from $59.1 million for the first six months of 1995 to
$54.4 million for the first six months of 1996 due to foregone interest income
on cash and investment balances used for the acquisitions and the
Recapitalization. Lower pretax net gains on the sales of investment securities
in 1996 of $8.9 million as compared to pretax net gains of $10.2 million in the
prior year also partially offset the increased interest income.
Health care services and other benefits expense increased 22.3% to $1,334.7
million for the first six months of 1996 from $1,091.0 million in 1995. Of the
$243.7 million increase, $137.2 is attributable to UL&H and $23.2 million is
attributable to the BCC Commercial Operations. Increased health care services
also resulted from the new PPO co-pay product which replaced deductibles with
modest co-payments causing more costs to be absorbed up front compared to the
prior year, benefit design changes which eliminate deductibles for some
pharmacy products and from membership gains in medical and specialty products.
These increases were partially offset by savings from hospital recontracting
and by the effect of the PPO Cost Plus transfer to management services
discussed in the premium revenue section above. The loss ratio for the first
six months of 1996 increased to 76.3% compared to 74.8% 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 UL&H and the BCC Commercial
Operations on the Company's overall results. UL&H and the BCC Commercial
Operations have traditionally experienced higher medical loss ratios than the
Company. Additionally, the Company may experience higher medical loss ratios
during the remainder of 1996 due to the incremental effect of the UL&H and BCC
Commercial Operations. 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 hospital recontracting program
provides
17
<PAGE> 20
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 TO THE SIX MONTHS
ENDED JUNE 30, 1995 (CONTINUED)
incentives to those hospitals that are successfully controlling costs.
Excluding the acquisitions, the loss ratio on the Company's existing block of
business increased to 75.8% for the six months ended June 30, 1996.
Selling expense for the six months ended June 30, 1996 increased 13.4% to
$107.7 million compared to $95.0 million for the comparable period in 1995,
corresponding with continued overall premium revenue growth and an additional
$7.1 million in selling expense attributable to UL&H. The selling expense
ratio decreased slightly for the first six months of 1996 to 6.0% from 6.4% for
the prior year largely due to the acquisitions of UL&H and the BCC Commercial
Operations, which both have a lower selling expense ratio. Excluding the
acquisitions, the selling expense ratio would have decreased to 6.3% for the
six months ended June 30, 1996 from 6.4% for the comparable period in the prior
year.
General and administrative expense for the six months ended June 30, 1996
increased 37.4% to $235.8 million from $171.6 million for the same period in
1995. Of the $64.2 million increase, $51.1 million resulted from the UL&H
acquisition. The administrative expense ratio increased to 13.0% for the first
six months of 1996 compared to 11.5% in 1995 primarily due to the increased
administrative expense associated with the Company's continued investment in
national expansion and the acquisition of UL&H. The increase was partially
offset by the BCC Commercial Operations lower administrative expense ratio.
Excluding UL&H the administrative expense ratio would have been 11.5%, due in
part to the Company's focus on controlling its administrative costs. UL&H
has historically had a higher administrative expense ratio due to its higher
percentage of management services business.
Interest expense was $10.9 million for the six months ended June 30, 1996.
The Company had no interest expense during the comparable period in 1995. The
interest expense in the current period related to $775 million drawn under the
Company's revolving credit facility on May 15, 1996 to fund the payment of the
special dividend, as well as interest on the Series A and Series B term notes
issued in connection with the acquisition of UL&H.
WellPoint's net income for the six months ended June 30, 1996 was $109.9 million
or $1.66 per share compared to $114.9 million or $1.73 per share for the six
months ended June 30, 1995. The number of common shares outstanding for
the six months ended June 30, 1996 was 66.4 million. The number of shares
outstanding for the six months ended June 30, 1995 has been recomputed to
66.4 million, the number of shares outstanding immediately following the
Recapitalization. Earnings per share is determined by dividing net income by
the 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 $642.9 million to $3,322.2
million as of June 30, 1996. This represents a 24.0% increase from $2,679.3
million as of December 31, 1995 and resulted primarily from the acquisitions of
UL&H and the BCC Commercial Operations as well as cash flow generated from
operations. Cash and investments were $2,107.6 million as of June 30, 1996 or
63.4% of total assets.
18
<PAGE> 21
FINANCIAL CONDITION (CONTINUED)
The Company issued a Series A term note for $62.0 million during the first
quarter of 1996 for the acquisition of UL&H. In addition, the Company accrued
for a Series B term note for an estimated $18.0 million during the first
quarter of 1996. The Series B note is expected to be issued during the third
quarter of 1996. The amount of the Series B term note is subject to possible
adjustment under certain circumstances. Also outstanding at June 30, 1996 was
$730.0 million outstanding under the Company's revolving credit facility for
payment of a dividend to the 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 $761.3 million as of June 30, 1996, a decrease of $909.0 million
from December 31, 1995. The decrease resulted primarily from the $995.0
million dividend to the WellPoint stockholders, the exchange of Old WellPoint
stock in connection with the Recapitalization (see Note 3. Acquisitions and
Recapitalization) and a $27.9 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 $109.9 million for the first six months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are from premiums received, management
services revenues and investment income. The primary uses of cash include
health care claims, capitation payments, 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 June 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 $152.7 million for the six
months ended June 30, 1996 compared with $51.3 million for the comparable
period in 1995. The positive cash flow from operations is mainly due to
additional revenue generated through the acquisitions of UL&H and the BCC
Commercial Operations as well as increased membership growth in the small group
segment with new product introductions. The cash provided by these activities
was partially offset by 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 the new headquarters building lease.
Net cash used by investing activities for the first six months of 1996 totaled
$480.6 million, compared with net cash provided by investing activities of
$293.2 million for the
19
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
comparable period in 1995. The decrease resulted primarily from the
acquisition of UL&H during the first quarter of 1996 for a purchase price of
$380.0 million plus an estimated purchase price adjustment of $18.0 million
based on closing equity. The Company issued, to the seller, a Series A term
note for $62.0 million during the first quarter of 1996 and will issue a Series
B term note for approximately $18.0 million in connection with the acquisition.
UL&H subsidiary cash acquired was $28.1 million. The net cash used for the
acquisition of UL&H amounted to $300.1 million. During the remainder of 1996,
the Company expects to incur approximately $30 - $40 million of restructuring
costs related to this acquisition, a portion of which is expected to be
reflected in the Company's results of operations. In 1995, the net proceeds
from the sale and maturities of investments were invested in highly liquid
securities in anticipation of the cash requirements for the acquisitions of
UL&H and the BCC Commercial Operations as well as the dividend to the WellPoint
stockholders in connection with the Recapitalization. Furthermore, the BCC
Commercial Operations were acquired during the second quarter of 1996 for a
purchase price of $235.0 million. Subsidiary cash acquired was $122.7 million,
resulting in net cash used for the acquisition of $112.3 million. (See Note 3.
Acquisitions and Recapitalization .)
The Company believes that cash flow generated by operations, its cash and
investment balances and its new credit facility (see Note 4. Long- Term Debt)
will be sufficient to fund continuing operations 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, California
20
<PAGE> 23
EXTERNAL INFLUENCES WHICH MAY IMPACT FUTURE OPERATIONS (CONTINUED)
and National. 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 deductible 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 primarily as a result
of higher medical cost trends, 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 7.7% for the six months ended June 30, 1996 and 8.3%
for the six months ended June 30, 1995.
21
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
WELLPOINT HEALTH NETWORKS INC.
Registrant
Date: August 16, 1996 By: \s\ YON Y. JORDEN
-------------------------------------
Yon Y. Jorden
Senior Vice President and
Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED INCOME STATEMENTS AND CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS PRESENTED IN
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 480,779
<SECURITIES> 1,505,078
<RECEIVABLES> 402,102
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,482,345
<PP&E> 65,929
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,322,203
<CURRENT-LIABILITIES> 1,474,790
<BONDS> 809,870
0
0
<COMMON> 665
<OTHER-SE> 760,588
<TOTAL-LIABILITY-AND-EQUITY> 3,322,203
<SALES> 0
<TOTAL-REVENUES> 1,883,041
<CGS> 0
<TOTAL-COSTS> 1,334,738
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,923
<INCOME-PRETAX> 184,707
<INCOME-TAX> 74,822
<INCOME-CONTINUING> 109,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,885
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.66
</TABLE>