<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------
AMENDMENT NO. 1
ON
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) 3/1/97
------
WellPoint Health Networks Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
California 1-14340 95-3760980
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
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 or Former Address, if Changed Since Last Report)
<PAGE> 2
EXPLANATORY NOTE
On March 14, 1997, the Company filed its Current Report on 8-K (the
"Form 8-K") with respect to the consummation on March 1, 1997 of its acquisition
of certain portions of the group health and related life businesses (the "GBO
Operations") of John Hancock Mutual Life Insurance Company. On April 10, 1997,
the Company and one of its shareholders consummated a public offering of an
aggregate of 11,500,000 shares of the Company's Common Stock pursuant to a
Registration Statement on Form S-3. Pursuant to Rule 3-05 of Regulation S-X
promulgated under the Securities Exchange Act of 1934, this Amendment No. 1 on
Form 8-K/A is being submitted in order to file (i) the audited financial
statements of the GBO Operations as of and for the years ended December 31, 1996
and 1995, (ii) the unaudited pro forma financial statements as of and for the
year ended December 31, 1996 and (iii) the consent of Ernst & Young, LLP with
respect to its report on the audited financial statements of the GBO Operations
for the years ended December 31, 1996, 1995 and 1994. Except as specifically
amended by this Amendment No. 1 on Form 8-K/A, the Form 8-K shall remain
unchanged.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED:
All of the following financial statements were previously
filed as part of the Company's Current Report on Form 8-K filed October 25,
1996 or Amendment No. 1 on Form 8-K/A filed November 18, 1996.
Audited Combined Financial Statements
Report of Independent Auditors
Combined Statements of Assets and Liabilities as of December
31, 1995 and 1994
Combined Statements of Operations and Changes in Net Asset
Balance for the years ended December 31, 1995
and 1994
Combined Statements of Cash Flows for the years ended December
31, 1995 and 1994
Notes to Combined Financial Statements
Unaudited Combined Financial Statements
Combined Statement of Assets and Liabilities as of September
30, 1996
Combined Statement of Operations and Changes in Net Asset
Balance for the nine months ended September 30, 1996
Combined Statement of Cash Flows for the nine months ended
September 30, 1996
Notes to Combined Financial Statements (Unaudited)
The following financial statements are attached hereto as
pages F-1 through F-12.
Audited Combined Financial Statements
Report of Independent Auditors
Combined Statements of Assets and Liabilities as of
December 31, 1996 and 1995
2
<PAGE> 3
Combined Statements of Operations and Changes in Net Asset
Balance for the years ended December 31, 1996 and
1995
Combined Statements of Cash Flows for the years ended
December 31, 1996 and 1995
Notes to Combined Financial Statements
(B) PRO FORMA FINANCIAL INFORMATION:
All of the following unaudited pro forma financial statements
were previously filed as part of the Company's Current Report on Form 8-K filed
October 25, 1996 or Amendment No. 1 on Form 8-K/A filed November 18, 1996.
Pro Forma Combined Condensed Balance Sheet as of September
30, 1996
Pro Forma Combined Condensed Income Statement for the nine
months ended September 30, 1996
Pro Forma Combined Condensed Income Statement for the year
ended December 31, 1995
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
The following unaudited pro forma financial statements are
attached hereto as pages F-13 through F-18.
Pro Forma Combined Condensed Balance Sheet as of
December 31, 1996
Pro Forma Combined Condensed Income Statement for the year
ended December 31, 1996
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
(C) EXHIBITS
Exhibit No. Exhibit
----------- -------
2.1 Purchase and Sale Agreement dated as of October 10, 1996
entered into between Hancock and the Company (Included as
Exhibit 2.1 to the Company's Current Report on Form 8-K filed
October 25, 1996 and incorporated by reference herein).
23.1 Consents of Ernst & Young, LLP.
99.1 Definitions (Annex A to Purchase Agreement) (Included as
Exhibit 99.1 to the Company's Current Report on Form 8-K filed
October 25, 1996 and incorporated by reference herein).
99.2 Coinsurance Agreement dated as of March 1, 1997 between
Hancock and UNICARE Life & Health Insurance Company, a stock
life insurance company organized under the laws of Delaware
("UNICARE") (Included as Exhibit 99.2 to the Form 8-K and
incorporated by reference herein).
3
<PAGE> 4
99.3 Administration Agreement dated as of March 1, 1997 by and
between Hancock and UNICARE (Included as Exhibit 99.3 to the
Form 8-K and incorporated by reference herein).
99.4 Summary of Accounting Principles and Procedures (Included as
Exhibit 99.8 to the Company's Current Report on Form 8-K filed
October 25, 1996 and incorporated by reference herein).
4
<PAGE> 5
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Amendment No. 1 on Form 8-K/A to be signed
on its behalf by the undersigned hereunto duly authorized.
Dated: May 13, 1997
WELLPOINT HEALTH NETWORKS INC.
By: /s/ THOMAS C. GEISER
-------------------------------
Name: Thomas C. Geiser
Title: Executive Vice President
5
<PAGE> 6
Audited Combined Financial Statements
THE GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND
SUBSIDIARIES
December 31, 1996
<TABLE>
<S> <C>
Audited Combined Financial Statements
Report of Independent Auditors............................................ F-1
Combined Statements of Assets and Liabilities............................. F-2
Combined Statements of Operations and Changes in Net Asset Balance........ F-3
Combined Statements of Cash Flows......................................... F-4
Notes to Combined Financial Statements.................................... F-5
</TABLE>
<PAGE> 7
REPORT OF INDEPENDENT AUDITORS
To the Boards of Directors
John Hancock Mutual Life Insurance Company and
WellPoint Health Networks, Inc.
We have audited the accompanying combined statements of assets and liabilities
of the Group Benefits Operations of John Hancock Mutual Life Insurance Company
and subsidiaries (the Company) as of December 31, 1996 and 1995, and the related
combined statements of operations and changes in net asset balance and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Group Benefits
Operations of John Hancock Mutual Life Insurance Company and subsidiaries at
December 31, 1996 and 1995, and the combined results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
May 12, 1997
F-1
<PAGE> 8
COMBINED STATEMENTS OF ASSETS AND LIABILITIES
THE GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND
SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
ASSETS
Receivable from John Hancock $436,835 $462,875
Reinsurance recoverable from reinsurers 88,877 80,350
Premiums and accounts receivable 142,407 95,455
Property and equipment, net of accumulated
depreciation (1996--$41,329; 1995--$45,413) 16,724 23,024
Intangible assets 9,864 12,132
Other assets 7,553 6,187
-------- --------
TOTAL ASSETS $702,260 $680,023
======== ========
LIABILITIES
Future policy benefits $296,440 $300,382
Policyholders' and beneficiaries' funds 99,152 80,254
Unpaid claims and claim expense reserves 197,667 186,209
Amounts due to reinsurers 57,690 58,810
Dividends payable to policyholders 23,613 24,982
Debt 0 257
Payable to affiliate 17,668 14,423
Other liabilities 10,030 14,706
-------- --------
TOTAL LIABILITIES $702,260 $680,023
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 9
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSET BALANCE
THE GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND
SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
--------- ---------
(In thousands)
<S> <C> <C>
Revenues:
Premiums $ 495,572 $ 481,340
Service fees 162,681 168,335
Investment income 43,447 35,374
Other income 48,250 54,677
--------- ---------
TOTAL REVENUES 749,950 739,726
Benefits and expenses:
Benefits to policyholders and provision for future benefits 444,667 441,693
Operating expenses 271,253 296,914
Deferred development costs 9,597 9,597
Commissions 1,690 2,334
Adjustments to intangibles 0 1,549
Dividends to policyholders 15,226 353
--------- ---------
TOTAL BENEFITS AND EXPENSES 742,433 752,440
--------- ---------
INCOME (LOSS) FROM OPERATIONS BEFORE
INCOME TAXES 7,517 (12,714)
INCOME TAXES (BENEFIT) 2,631 (4,450)
--------- ---------
NET INCOME (LOSS) 4,886 (8,264)
NET ASSET BALANCE AT JANUARY 1 0 0
TRANSFER (TO) FROM JOHN HANCOCK (4,886) 8,264
--------- ---------
NET ASSET BALANCE AT DECEMBER 31 $ 0 $ 0
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 10
COMBINED STATEMENTS OF CASH FLOWS
THE GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND
SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,886 $ (8,264)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 14,071 16,049
(Increase) decrease in certain assets:
Reinsurance recoverable from reinsurers (8,527) (25,472)
Premiums and accounts receivable (46,952) (18,518)
Other assets (1,366) (515)
Increase (decrease) in certain liabilities:
Future policy benefits (3,942) (15,324)
Policyholders' and beneficiaries' funds 18,898 25,846
Unpaid claims and claim expense reserves 11,458 18,854
Amounts due to reinsurers (1,120) 24,867
Dividends payable to policyholders (1,369) (19,708)
Payable to affiliate 3,245 4,101
Other liabilities (4,676) 2,715
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (15,394) 4,631
-------- --------
Cash flows from investing activities:
Change in receivable from John Hancock 26,040 (6,499)
Property and equipment purchased (4,771) (5,071)
Increase in intangible assets (732) (320)
Transfer (to) from John Hancock (4,886) 8,264
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 15,651 (3,626)
-------- --------
Cash flows from financing activities:
Principal repayments of long term debt (257) (1,005)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (257) (1,005)
-------- --------
Net increase in cash and cash equivalents 0 0
Cash and cash equivalents at beginning of year 0 0
-------- --------
Cash and cash equivalents at end of year $ 0 $ 0
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 11
NOTES TO COMBINED FINANCIAL STATEMENTS
THE GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND
SUBSIDIARIES
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements include certain operations of the
group life and accident and health insurance business of John Hancock Mutual
Life Insurance Company (John Hancock) and Cost Care, Inc., Hancock Association
Services Group and Tri-State, Inc. (the Group Benefits Operations or GBO). Cost
Care, Inc., Hancock Association Services Group and Tri-State, Inc. were
wholly-owned, indirect subsidiaries of John Hancock through February 28, 1997.
As of March 1, 1997, John Hancock sold the GBO operations to UNICARE Life &
Health Insurance Company (UNICARE), a wholly-owned subsidiary of WellPoint
Health Networks, Inc. The insurance business sold was transferred to UNICARE
through a 100% coinsurance agreement. GBO has transactions with affiliated
companies, the terms and conditions of which are determined by GBO and the
members of the affiliated group. GBO operating costs and expenses consist of
direct costs, allocated costs, and allocated corporate overhead. Accordingly,
these financial statements might not be indicative of the financial position and
results of operations that would have occurred had GBO operated as a
nonaffiliated entity.
The combined financial statements of GBO have been prepared in conformity with
generally accepted accounting principles (GAAP), applied on a consistent basis,
for mutual life insurance companies. Prior to 1996, GBO prepared its financial
statements in conformity with generally accepted accounting principles for stock
life insurance companies. In 1996, GBO adopted Financial Accounting Standards
Board Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises," and Statement of
Financial Accounting Standards No. 120, "Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts." The adoption of these pronouncements had no effect on
the accompanying GBO financial statements.
All significant intercompany accounts and transactions have been eliminated.
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts reported and
disclosed herein.
Operations
GBO is not a legal entity but conducts group life and accident and health
insurance business through John Hancock and its subsidiaries. GBO principally
offers group life and accident and health insurance products and administrative
services to its group customers in all fifty states, the District of Columbia
and Puerto Rico. During 1996 and 1995, GBO's largest customer accounted for 33%
and 30%, respectively, of its premiums and service fees.
For fully insured contracts, the policyholder elects either prospectively pooled
experience rated insurance or experience rated refund eligible insurance.
Further, the policyholder is offered fully funded or partially funded payment
options. The partially funded Minimum Premium Contract
F-5
<PAGE> 12
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
THE GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND
SUBSIDIARIES
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
incorporates similar insurance risks to GBO but with employer self-funding of
claims, introducing credit risk relating to employer funding. Administrative
services contracts are provided to self-insured plans whereby GBO provides the
claims management and processing service, and in many cases, excess or stop-loss
insurance. GBO also provides a range of health care cost management services,
including pre-admission review for inpatient hospital admission and preferred
provider management to insurance underwriters and private businesses for a
predetermined, periodic fee and on a fee-for-service basis.
GBO has dedicated sales, underwriting, actuarial, product development, premium
and claims operations, and systems support. Products are distributed through
group representatives, who are John Hancock employees, or through
intermediaries.
Accounting for the Impairment of Long-Lived Assets
Effective January 1, 1996, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was adopted.
This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In those cases where it is determined that the carrying
amount is not recoverable, an impairment loss is recognized (the difference
between the cost and fair value of the asset). The Statement also requires
long-lived assets to be disposed of (e.g., real estate held for sale) to be
carried at the lower of cost or fair value less cost to sell and does not allow
such assets to be depreciated. Impairment losses are reported as part of bad
debt expense. The adoption of SFAS No. 121 did not have a material effect on
GBO's results of operations or financial position.
Receivable from John Hancock
GBO is not a separate legal entity and does not have specifically identifiable
cash or investments. The receivable from John Hancock included in the
accompanying combined statements of assets and liabilities represents the
difference between GBO operating business assets and liabilities. It does not
bear a stated rate of interest. However, investment income is allocated to GBO
based on the portfolio investment income of the underlying general account
assets of John Hancock that support GBO's business.
Revenue Recognition
Insurance premiums on fully insured and partially funded contracts are earned on
a pro-rata basis over the period in which services are obligated to be provided.
The portion of premiums not earned at the end of the period is recorded as
unearned insurance premiums.
Administrative service fees are earned on a pro-rata basis as the services are
performed.
F-6
<PAGE> 13
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
THE GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND
SUBSIDIARIES
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Dividends
Dividends for eligible contracts are based on premiums received in excess of
claims and expenses incurred. The dividend liability for completed policy years
is established based on policy year experience, while dividends for incomplete
policy years are established based on experience through the financial statement
date.
Income Taxes
John Hancock and certain of its affiliates, including the GBO operations, file a
consolidated federal income tax return. However, because GBO is not a separate
legal entity, a formal tax allocation agreement between John Hancock and GBO has
not been executed. For purposes of these financial statements, GBO has been
treated as a separate business of a mutual life insurance company for the
determination of the tax provision. Accordingly, income taxes (benefits) are
allocated to GBO at 35% and settled currently through the receivable from John
Hancock. The gross asset and liability balances relating to the future tax
consequences of temporary differences between the financial reporting and tax
basis of assets and liabilities are recorded at the John Hancock consolidated
level. An equity tax, applicable to mutual life insurance companies, has not
been included in the provision.
Intangible Assets
Intangible assets, which include noncompete agreements, long-term employment
contracts, capitalized software and other intangibles, are amortized using the
straight-line method over their estimated useful lives, which range from two to
forty years. Accumulated amortization was $14,558 thousand and $11,901 thousand
at December 31, 1996 and 1995, respectively.
Property, Equipment and Leasehold Improvements
Property and equipment, principally composed of furniture and equipment, are
reported at depreciated cost. Depreciation is computed using the straight-line
method based upon the estimated useful lives of the assets. Leasehold
improvements are depreciated over the shorter of the lease term or the estimated
useful life.
Future Policy Benefits and Expenses
Future policy benefits for group life and accident and health contracts have
been computed using interest rates ranging from 2.5% to 8.42%, and mortality,
morbidity, and withdrawal assumptions based on GBO's experience and industry
standards.
Liabilities for unpaid claims and claim expenses include estimates of payments
to be made on reported life and accident and health insurance claims and
estimates of incurred but not reported claims based on historical claims
development patterns.
F-7
<PAGE> 14
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
THE GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND
SUBSIDIARIES
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Estimates of future policy benefit reserves, claim reserves and expenses are
reviewed continually and adjusted as necessary; such adjustments are reflected
in current operations. Although considerable variability is inherent in such
estimates, management believes that future policy benefit reserves, claim and
expense reserves are adequate.
Payable to Affiliate
Payable to affiliate represents the amount due to John Hancock principally as a
result of intercompany expense allocations.
Reinsurance
All assets and liabilities related to reinsurance ceded contracts are reported
on a gross basis in the accompanying statements of assets and liabilities. The
accompanying statements of operations reflect premiums, benefits and expenses,
net of reinsurance ceded.
GBO assumes and cedes reinsurance and participates in various pools and
associations. The portion of risks that exceeds GBO's retention limits is
reinsured with other insurers. GBO also obtains other reinsurance coverages with
retentions and limits that management believes are appropriate for the
circumstances. Those reinsurance agreements provide for greater diversification
of business, allow management to control exposure to potential losses arising
from large risks and provide additional capacity for growth. Amounts recoverable
from reinsurers are estimated in a manner consistent with the future policy
benefit and claim liabilities associated with the reinsured policies.
Reinsurance premiums, commissions, expense reimbursements, benefits and reserves
related to reinsured business are accounted for on bases consistent with those
used in accounting for original policies issued and the terms of the reinsurance
contracts.
Reclassifications
Certain 1995 amounts have been reclassified to permit comparison with the
corresponding 1996 amounts.
F-8
<PAGE> 15
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
THE GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND
SUBSIDIARIES
NOTE 2--REINSURANCE
The effect of reinsurance on premiums written and earned was as follows:
<TABLE>
<CAPTION>
1996 1995
Premiums Premiums
---------------------- ----------------------
Written Earned Written Earned
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Life and Accident and Health :
Direct $ 577,769 $ 577,769 $ 576,565 $ 576,565
Assumed 66,516 66,516 36,185 36,185
Ceded (148,713) (148,713) (131,410) (131,410)
--------- --------- --------- ---------
Net Life and Accident and
Health Premiums $ 495,572 $ 495,572 $ 481,340 $ 481,340
========= ========= ========= =========
</TABLE>
Benefits to policyholders ceded to reinsurers under life and accident and health
contracts in 1996 and 1995 were $146,896 thousand and $114,307 thousand,
respectively.
The carrying amounts in the statements of assets and liabilities for reinsurance
recoverable and funds held by reinsurers approximate their fair values.
Reinsurance ceded contracts do not relieve the GBO from its obligations to
contractholders. The GBO remains liable to its contractholders for the portion
reinsured to the extent that any reinsurer does not meet its obligations for
reinsurance ceded to it under the reinsurance agreements. Failure of the
reinsurers to honor their obligations could result in losses to GBO;
consequently, estimates are established for amounts deemed or estimated to be
uncollectible. To minimize its exposure to significant losses from reinsurance
insolvencies, GBO evaluates the financial condition of its reinsurers and
monitors concentration of credit risk.
F-9
<PAGE> 16
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
THE GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND
SUBSIDIARIES
NOTE 3--LIABILITY FOR UNPAID CLAIMS
Activity in the liability for unpaid accident and health claims and loss
adjustment expenses is as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(In thousands)
<S> <C> <C>
Balance at January 1 $ 176,026 $ 191,364
Less reinsurance recoverable 3,885 7,244
--------- ---------
Net balance at January 1 172,141 184,120
--------- ---------
Incurred related to:
Current year 267,524 271,968
Prior years (37,968) (24,967)
--------- ---------
Total incurred 229,556 247,001
--------- ---------
Paid related to:
Current year 172,066 179,994
Prior years 64,224 78,986
--------- ---------
Total paid 236,290 258,980
--------- ---------
Net balance at December 31 165,407 172,141
Plus reinsurance recoverables 3,009 3,885
--------- ---------
Balance at December 31 $ 168,416 $ 176,026
========= =========
</TABLE>
The accident and health liability for unpaid claims is included in the unpaid
claims and claim expense reserves and future policy benefits liabilities in the
accompanying statements of assets and liabilities.
The favorable development of prior year incurred losses relating to the accident
and health business is due to favorable changes in claim estimates.
F-10
<PAGE> 17
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
THE GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND
SUBSIDIARIES
NOTE 4--LEASES
GBO has operating leases for office space and certain computer processing and
other equipment to support the GBO business operations. Rental expense for these
items was approximately $6,905 thousand and $7,349 thousand for 1996 and 1995,
respectively.
Future minimum aggregate rental payments at December 31, 1996 under
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
1997 .............. $6,077
1998 .............. 4,595
1999 .............. 3,409
2000 .............. 3,265
2001 .............. 1,632
2002 and thereafter 8,784
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
The various related party transactions between John Hancock and GBO are
summarized below:
Operating expenses: John Hancock provides GBO with personnel, property and
facilities including certain services such as investment management, legal,
financial and administrative support. GBO is charged for these services
utilizing various methods of expense allocation which are primarily based on
time incurred, ratios of direct and indirect expenses, square footage occupied,
or allocated in pro rata relationship to other business units of John Hancock.
Management believes the methods used to allocate such costs are reasonable.
Operating expenses allocated to GBO amounted to $175,986 thousand and $189,883
thousand in 1996 and 1995, respectively.
Investment Income and Receivable from John Hancock: GBO is not a separate legal
entity and does not have specifically identifiable cash or investments. The
receivable from John Hancock included in the accompanying combined statements of
assets and liabilities represents the difference between GBO operating business
assets and liabilities. The fair value of the receivable from John Hancock
approximates its carrying value at December 31, 1996 and 1995.
GBO is allocated investment income based on the portfolio income of the
underlying general account assets of the John Hancock that support GBO's
business. Investment income allocated to GBO was $43,447 thousand and $35,374
thousand in 1996 and 1995, respectively.
Benefit Plans: Eligible employees of John Hancock participate in various types
of pension plans sponsored by John Hancock, which include defined benefit,
defined contribution and nonqualified
F-11
<PAGE> 18
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
THE GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND
SUBSIDIARIES
NOTE 5--RELATED PARTY TRANSACTIONS --CONTINUED
plans. Pension benefits under the defined benefit plans are based on years of
service and average compensation, generally during the five years prior to
retirement. John Hancock's funding policy for qualified defined benefit plans is
to contribute annually an amount in excess of the minimum annual contribution
required under the Employee Retirement Income Security Act (ERISA). This amount
is limited by the maximum amount that can be deducted for federal income tax
purposes. Plan assets consist principally of listed equity securities, corporate
obligations and U.S. government securities. GBO is allocated its proportionate
share of expense based on John Hancock's intercompany expense allocation
methodology. John Hancock also has various defined contribution plans,
nonqualified plans and additional compensation plans covering its employees and
agents. GBO is allocated a share of the expenses related to the plans pursuant
to John Hancock's intercompany expense allocation methodology. John Hancock also
provides certain life and accident and health insurance benefit plans covering
most of its retired employees and general agency personnel. GBO is allocated its
proportionate share of these expenses.
Total benefit plan expense allocated to GBO was $5,996 thousand and $12,976
thousand for 1996 and 1995, respectively.
GBO has issued certain group life and accident and health insurance contracts to
cover employees of John Hancock. Premiums, benefits (including the provision for
future benefits), and reserves included in the combined statements of operations
and changes in net asset balance and combined statements of assets and
liabilities associated with the coverage approximates $26,695 thousand, $25,589
thousand, and $53,304 thousand, in 1996, respectively. The corresponding amounts
in 1995 were $23,978 thousand, $24,154 thousand, and $53,706 thousand,
respectively.
NOTE 6--CONTINGENCIES
In the normal course of its business operations, GBO is involved in litigation
from time to time with claimants, beneficiaries and others, and a number of
litigation matters were pending as of December 31, 1996. It is the opinion of
management, after consultation with counsel, that the ultimate liability with
respect to these claims, if any, will not materially impact the financial
condition of GBO.
F-12
<PAGE> 19
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following sets forth the unaudited pro forma combined condensed
balance sheet for WellPoint Health Networks Inc. (the "Company" or "WellPoint")
as of December 31, 1996, and the unaudited pro forma combined condensed income
statement for the year ended December 31, 1996. The Unaudited Pro Forma Combined
Condensed Financial Statements include historical amounts of Old WellPoint (the
predecessor to WellPoint), the May 20, 1996 Recapitalization (the
"Recapitalization"), including the acquisition of the BCC Commercial Operations,
and the acquisitions of the Life and Health Benefits Management Division
("MMHD") of Massachusetts Mutual Life Insurance Company (the "MMHD Acquisition")
and the GBO Operations, on March 31, 1996 and March 1, 1997, respectively. For
the purpose of presenting the unaudited pro forma combined condensed balance
sheet, the Recapitalization and the MMHD Acquisition are included from their
effective dates (May 20, 1996 and March 31, 1996, respectively), and the
acquisition of the GBO Operations is considered to have occurred as of December
31, 1996, while the unaudited pro forma combined condensed income statement is
presented on the basis that such transactions occurred as of the beginning of
the period presented. Reference is made to the notes to the Unaudited Pro Forma
Combined Condensed Financial Statements for a discussion of such transactions.
As further discussed in the notes to the Unaudited Pro Forma Combined
Condensed Financial Statements, the acquisition of the BCC Commercial
Operations, the MMHD Acquisition and the acquisition of the GBO Operations are
accounted for using the purchase method of accounting, whereby the respective
assets and liabilities of the BCC Commercial Operations, MMHD and the GBO
Operations are recorded at their estimated fair value.
Certain data and notes normally included in financial statements in
accordance with generally accepted accounting principles have been condensed or
omitted. The unaudited pro forma combined condensed income statement is not
necessarily indicative of the results of operations of WellPoint had the
Recapitalization, including the acquisition of the BCC Commercial Operations,
the MMHD Acquisition and the acquisition of the GBO Operations actually been
completed as of January 1, 1996. In addition, the Unaudited Pro Forma Combined
Condensed Financial Statements are not necessarily indicative of the future
financial condition or results of operations of WellPoint. The pro forma
financial information should be read in conjunction with the historical
consolidated financial statements of the Company, and the historical financial
statements of the GBO Operations.
F-13
<PAGE> 20
WELLPOINT HEALTH NETWORKS INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
WellPoint Health GBO Pro Forma Pro Forma
Networks Inc.(a) Operations Adjustments Combined Total
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Cash and current investments $ 2,041,561 $ 436,835 $ (89,700)(1) $ 2,388,696
Other current assets 496,910 231,284 11,015 (2) 739,209
------------- ------------ ----------- ------------
Total Current Assets 2,538,471 668,119 (78,605) 3,127,905
Intangible assets 552,279 9,864 111,915 (2) 674,058
Other non-current assets 314,792 24,277 - 339,069
------------- ------------ ----------- ------------
Total Assets $ 3,405,542 $ 702,260 $ 33,230 $ 4,141,032
============= ============ ============ ============
LIABILITIES
Medical claims payable and loss reserves $ 769,692 $ 197,667 $ 21,000 (2) $ 988,359
Unearned premiums 160,036 15,000 - 175,036
Experience rated and other refunds 146,882 86,595 - 233,477
Other current liabilities 468,869 169,540 12,230 (2) 650,639
------------- ------------ ----------- ------------
Total Current Liabilities 1,545,479 468,802 33,230 2,047,511
Long-term indebtedness 625,000 - - 625,000
Other non-current liabilities 364,604 233,458 - 598,062
------------- ------------ ----------- ------------
Total Liabilities 2,535,083 702,260 33,230 3,270,573
Total Stockholders' Equity 870,459 - - 870,459
------------- ------------ ----------- ------------
Total Liabilities and
Stockholders' Equity $ 3,405,542 $ 702,260 $ 33,230 $ 4,141,032
============= ============ ============ ============
</TABLE>
(a) The WellPoint balances include MMHD which was acquired on March 31, 1996
and the Recapitalization, including the acquisition of the BCC Commercial
Operations, was completed on May 20, 1996.
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
F-14
<PAGE> 21
WELLPOINT HEALTH NETWORKS INC.
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except earnings per share)
WellPoint Health BCC Commercial MMHD Pro Forma
Networks Inc. Operations(3) (4) Adjustments
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 3,364,841 $ 393,031 $ 795,606 $ (14,345)(5)
Expenses 2,988,362 375,154 779,893 -
----------- ----------- ----------- -----------
Operating Income 376,479 17,877 15,713 (14,345)
Interest expense - 33,918 2,710 21,962 (6)
Other expense, net 12,614 1,489 4,041 3,752 (7)
----------- ----------- ----------- -----------
Income before Provision (Benefit) for Income Taxes 363,865 (17,530) 8,962 (40,059)
Provision (benefit) for income taxes 141,209 (12,183) 3,447 (4,802)(8)
----------- ----------- ----------- -----------
Net Income (loss) $ 222,656 $ (5,347) $ 5,515 $ (35,257)
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
WellPoint Post -
Recap and GBO Pro Forma Pro Forma
MMHD Acq. Operations Adjustments Combined Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 4,539,133 $ 749,950 $ (4,934)(9) $ 5,284,149
Expenses 4,143,409 742,433 - 4,885,842
----------- ----------- ----------- -----------
Operating Income 395,724 7,517 (4,934) 398,307
Interest expense 58,590 - - 58,590
Other expense, net 21,896 - 3,730 (10) 25,626
----------- ----------- ----------- -----------
Income before Provision (Benefit) for Income Taxes 315,238 7,517 (8,664) 314,092
Provision (benefit) for income taxes 127,671 2,631 (3,095)(11) 127,207
----------- ----------- ----------- -----------
Net Income (loss) $ 187,567 $ 4,886 $ (5,569) $ 186,884
=========== =========== =========== ===========
Primary and fully diluted earnings per share $ 2.81
===========
Weighted average number of shares outstanding 66,433 (12)
===========
</TABLE>
Note: The column entitled WellPoint Health Networks Inc. has been adjusted to
represent results of operations as if the BCC Commercial Operations and
MMHD acquisitions and the Recapitalization had not occurred.
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
F-15
<PAGE> 22
WELLPOINT HEALTH NETWORKS INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
On March 31, 1996, the Company completed the MMHD Acquisition for
$402.2 million which was funded with $340.2 million in cash and a Series A term
note for $62.0 million.
On May 20, 1996, the Company, BCC and Old WellPoint completed the
Recapitalization. In connection with the Recapitalization, stockholders of Old
WellPoint received a special cash dividend of $10.00 per share of Old WellPoint
Common Stock ($995.0 million in aggregate), followed by the Merger of Old
WellPoint with and into Converted BCC (thereafter "WellPoint") with each share
of Old WellPoint Common Stock effectively converted into 0.667 of a share of
WellPoint Common Stock. WellPoint paid $235.0 million in cash for the BCC
Commercial Operations, including the value of the Blue Cross name and mark. The
total cash paid in the Recapitalization was $1,230.0 million.
On March 1, 1997, WellPoint acquired the GBO Operations for
approximately $89.7 million.
(1) Reflects the cash payment of $89.7 million for the acquisition of the
GBO Operations.
(2) The net increase in intangible assets is a result of the excess of cost
over the fair market value of the net assets of the GBO Operations
(purchase price of $89.7 million) and certain purchase price
adjustments related to the acquisition of the GBO Operations, net of
a deferred income tax benefit of $11.0 million.
(3) Included in the historical operating results of BCC Commercial
Operations are its operations prior to the acquisition date, January 1,
1996 to May 19, 1996 and the historical operating results of the BCC
Commercial Operations for the period from the date of acquisition by
WellPoint (May 20, 1996) through December 31, 1996 which have been
adjusted in the following manner: (a) WellPoint's revenues have been
increased and the BCC Commercial Operations' revenues have been
decreased by $15.4 million to reflect interest income on cash and
investments used by WellPoint to finance the acquisition of the BCC
Commercial Operations and the payment of the special dividend of $995.0
million; (b) WellPoint's interest expense has been decreased and the
BCC Commercial Operations' interest expense has been increased by $33.9
million to reflect the cost of debt incurred to finance the acquisition
of the BCC Commercial Operations and the payment of the special
dividend; (c) the tax effect of the above items has been reflected; and
(d) amortization of $3.1 million has been included from the date of the
acquisition to December 31, 1996, reflecting amortization of intangible
assets created as a result of the BCC Commercial Operations
acquisition.
F-16
<PAGE> 23
(4) Included in the historical operating results of MMHD are its operations
prior to the acquisition date, January 1, 1996 to March 31, 1996 and
the historical operating results of MMHD for the period from the date
of acquisition (March 31, 1996) through December 31, 1996 which have
been adjusted in the following manner: (a) WellPoint's revenues have
been increased and MMHD's revenues have been decreased by $14.0 million
to reflect the interest income on cash and investments used by
WellPoint to finance the MMHD Acquisition; (b) WellPoint's interest
expense has been decreased and MMHD's interest expense has been
increased by $2.7 million to reflect the cost of debt incurred to
finance the MMHD acquisition; (c) the amortization of $5.0 million has
been included from the date of the acquisition to December 31, 1996,
reflecting amortization of intangible assets created as a result of the
MMHD Acquisition; and (d) the tax effect of the above items has been
reflected.
(5) The reduction in revenues reflect the foregone interest, from January
1, 1996 to May 20, 1996 at 5.5% per annum on the $455.0 million of
cash and investments used to fund the special dividend and the
acquisition of the BCC Commercial Operations and the foregone interest
at 5.5% per annum, from January 1, 1996 through March 31, 1996 on the
$340.2 million of cash and investments used in connection with the MMHD
Acquisition.
(6) Reflects the adjustment required to account for the interest expense
(at an assumed rate of 7.0% per annum), from January 1, 1996 to
May 20, 1996 on the issuance of $775.0 million of indebtedness
incurred by WellPoint in connection with the payment of the special
dividend in the amount of $995.0 million and from January 1, 1996
through March 31, 1996 on the issuance of $62.0 million of indebtedness
incurred by WellPoint in connection with the MMHD Acquisition.
(7) Reflects the adjustments required to amortize, from January 1, 1996
to May 20, 1996 the intangible assets of $206.7 million created as
a result of the acquisition of the BCC Commercial operations on a
straight-line basis over 40 years and to amortize, from January 1, 1996
through March 31, 1996, the intangible assets of $251.0 million created
as a result of the MMHD Acquisition on a straight-line basis over 35
years.
(8) Reflects the tax effect of the pro forma adjustments related to the
acquisition of the BCC Commercial Operations, payment of the special
dividend of $995.0 million, and the MMHD Acquisition.
(9) The reduction in revenues reflects the foregone interest at 5.5% per
annum from January 1, 1996 through December 31, 1996 on the $89.7
million of cash and investments used in connection with the GBO
Operations acquisition.
(10) Reflects the adjustments required to amortize the intangible assets of
$111.9 million, from January 1, 1996 through December 31, 1996, created
as a result of the acquisition of the GBO Operations on a straight-line
basis over 30 years.
(11) Reflects the tax effect of the pro forma adjustments related to the
acquisition of the GBO Operations.
F-17
<PAGE> 24
(12) Pro forma earnings per share for the year ended December 31, 1996 have
been calculated using 66,433,355 shares, the number of shares
outstanding immediately following completion of the Recapitalization,
plus the weighted average number of shares issued since the
Recapitalization.
F-18
<PAGE> 25
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 Purchase and Sale Agreement dated as of October 10, 1996
entered into between Hancock and the Company (Included as
Exhibit 2.1 to the Company's Current Report on Form 8-K filed
October 25, 1996 and incorporated by reference herein).
23.1 Consents of Ernst & Young, LLP.
99.1 Definitions (Annex A to Purchase Agreement) (Included as
Exhibit 99.1 to the Company's Current Report on Form 8-K filed
October 25, 1996 and incorporated by reference herein).
99.2 Coinsurance Agreement dated as of March 1, 1997 between
Hancock and UNICARE Life & Health Insurance Company, a stock
life insurance company organized under the laws of Delaware
("UNICARE") (Included as Exhibit 99.2 to the Form 8-K and
incorporated by reference herein).
99.3 Administration Agreement dated as of March 1, 1997 by and
between Hancock and UNICARE (Included as Exhibit 99.3 to the
Form 8-K and incorporated by reference herein).
99.4 Summary of Accounting Principles and Procedures (Included as
Exhibit 99.8 to the Company's Current Report on Form 8-K filed
October 25, 1996 and incorporated by reference herein).
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 333-08519) of WellPoint Health Networks Inc. and in the related
Prospectus and in Post-Effective Amendment No. 1 to the Registration Statement
(Form S-8 No. 333-05111) pertaining to the WellPoint Health Networks Inc.
Employee Stock Purchase Plan, WellPoint Health Networks Inc. Stock Option/Award
Plan, WellPoint Health Networks Inc. Employee Stock Option Plan and Salary
Deferral Savings Program of WellPoint Health Networks Inc. of our report dated
September 27, 1996, with respect to the combined financial statements of The
Group Benefits Operations of John Hancock Mutual Life Insurance Company and
subsidiaries included in WellPoint Health Networks Inc.'s Current Report on
Form 8-K dated October 9, 1996, filed with the Securities and Exchange
Commission.
Ernst & Young LLP
Boston, Massachusetts
May 14, 1997
<PAGE> 2
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-08519) of WellPoint Health Networks Inc. and in the related
Prospectus and in Post-Effective Amendment No. 1 to the Registration Statement
(Form S-8 No. 333-05111) pertaining to the WellPoint Health Networks Inc.
Employee Stock Purchase Plan, WellPoint Health Networks Inc. Stock Option/Award
Plan, WellPoint Health Networks Inc. Employee Stock Option Plan and Salary
Deferral Savings Program of WellPoint Health Networks Inc. of our report dated
May 12, 1997, with respect to the combined financial statements of The Group
Benefits Operations of John Hancock Mutual Life Insurance Company and
subsidiaries included in Amendment No. 1 to WellPoint Health Networks Inc.'s
Current Report on Form 8-K/A dated March 1, 1997, filed with the Securities and
Exchange Commission.
Ernst & Young LLP
Boston, Massachusetts
May 14, 1997
