<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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 001-13803
WELLPOINT HEALTH NETWORKS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4635504
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
21555 OXNARD STREET, WOODLAND HILLS, CALIFORNIA 91367
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (8L8) 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:
TITLE OF EACH CLASS OUTSTANDING AT NOVEMBER 7, 1997
------------------- -------------------------------
Common Stock, $0.0l par value 69,716,241 shares
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WELLPOINT HEALTH NETWORKS INC.
THIRD QUARTER 1997 FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
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PAGE
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<S> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996.................................................. 1
Consolidated Income Statements for the Three and Nine Months
Ended September 30, 1997 and 1996.................................. 2
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 1997....................... 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996...................... 4
Notes to Consolidated Financial Statements............................. 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 12
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................................... 28
SIGNATURES .......................................................................... 38
</TABLE>
<PAGE> 3
ITEM 1. Financial Statements
WELLPOINT HEALTH NETWORKS INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In thousands, except share data) September 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 284,397 $ 313,256
Investment securities, at market value 2,351,017 1,728,305
Receivables, net 602,495 401,300
Deferred tax assets 61,641 67,147
Other current assets 54,228 28,463
----------- -----------
Total Current Assets 3,353,778 2,538,471
Property and equipment, net 106,286 82,720
Intangible assets 687,256 552,279
Long-term investments 124,937 123,931
Deferred tax assets 81,854 57,830
Other non-current assets 49,855 50,311
----------- -----------
Total Assets $ 4,403,966 $ 3,405,542
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Medical claims payable $ 859,193 $ 667,540
Loss and loss adjustment expense reserves 117,603 102,152
Reserves for future policy benefits 47,524 13,001
Unearned premiums 197,743 160,036
Accounts payable and accrued expenses 318,753 251,480
Experience rated and other refunds 246,729 146,882
Income taxes payable 106,286 99,086
Other current liabilities 317,320 118,303
----------- -----------
Total Current Liabilities 2,211,151 1,558,480
Accrued postretirement benefits 63,525 61,086
Loss and loss adjustment expense reserves, non-current 130,316 131,079
Reserves for future policy benefits, non-current 333,602 91,507
Long-term debt 429,000 625,000
Other non-current liabilities 73,973 67,931
----------- -----------
Total Liabilities 3,241,567 2,535,083
Stockholders' Equity:
Preferred Stock - $0.01 par value, 50,000,000 shares
authorized, none issued and outstanding -- --
Common Stock - $0.01 par value, 300,000,000 shares authorized, 69,706,478
and 66,526,985 issued and outstanding at September 30, 1997 and
December 31, 1996, respectively 697 665
Additional paid-in capital 879,375 761,879
Unrealized valuation adjustment 8,832 (9,994)
Retained earnings 273,495 117,909
----------- -----------
Total Stockholders' Equity 1,162,399 870,459
----------- -----------
Total Liabilities and Stockholders' Equity $ 4,403,966 $ 3,405,542
=========== ===========
</TABLE>
See the accompanying notes to the consolidated financial statements.
1
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WELLPOINT HEALTH NETWORKS INC.
Consolidated Income Statements
(unaudited)
<TABLE>
<CAPTION>
(In thousands, except
earnings per share) Three Months Ended September 30, Nine Months Ended September 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Premium revenue $1,350,405 $1,052,297 $3,849,928 $2,801,246
Management services revenue 108,711 43,810 280,432 105,473
Investment income 52,464 34,579 138,461 107,008
---------- ---------- ---------- ----------
1,511,580 1,130,686 4,268,821 3,013,727
Operating Expenses:
Health care services and
other benefits 1,116,509 824,324 3,120,660 2,159,062
Selling expense 67,271 59,078 191,952 166,805
General and administrative expense 219,385 153,103 631,485 388,868
Nonrecurring costs -- -- 14,535 --
---------- ---------- ---------- ----------
1,403,165 1,036,505 3,958,632 2,714,735
---------- ---------- ---------- ----------
Operating Income 108,415 94,181 310,189 298,992
Interest expense 8,144 12,396 28,757 23,319
Other expense, net 6,888 5,926 19,952 15,107
---------- ---------- ---------- ----------
Income before Provision for
Income Taxes 93,383 75,859 261,480 260,566
Provision for income taxes 37,815 30,758 105,894 105,580
---------- ---------- ---------- ----------
Net Income $ 55,568 $ 45,101 $ 155,586 $ 154,986
========== ========== ========== ==========
Earnings Per Share $ 0.79 $ 0.68 $ 2.25 $ 2.33
========== ========== ========== ==========
Weighted Average Common
Shares Outstanding 70,747 66,484 69,099 66,416
</TABLE>
See the accompanying notes to the consolidated financial statements.
2
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WELLPOINT HEALTH NETWORKS INC.
Consolidated Statement of Changes in Stockholders' Equity
(unaudited)
<TABLE>
<CAPTION>
(In thousands)
Common Stock Additional Unrealized
Preferred ----------------------- Paid-in Valuation Retained
Stock Shares Amount Capital Adjustment Earnings Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1996 $ -- 66,527 $ 665 $ 761,879 $ (9,994) $ 117,909 $ 870,459
Net income 155,586 155,586
Net proceeds from common
stock offering 3,000 30 110,310 110,340
Stock issued under Company's
stock option / award plan 179 2 7,186 7,188
Change in unrealized valuation
adjustment on investment
securities, net of tax 18,826 18,826
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AS OF SEPTEMBER 30, 1997 $ -- 69,706 $ 697 $ 879,375 $ 8,832 $ 273,495 $1,162,399
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See the accompanying notes to the consolidated financial statements.
3
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WELLPOINT HEALTH NETWORKS INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended September 30,
--------------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 155,586 $ 154,986
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net of accretion 40,817 27,340
Gains on sales of assets, net (22,116) (10,144)
Benefit for deferred income taxes (10,111) (43,922)
Amortization of deferred gain on sale of building (3,319) (1,475)
(Increase) decrease in certain assets, net of acquisitions:
Receivables, net (81,925) (27,086)
Other current assets (19,090) 37,913
Other non-current assets 456 (35,538)
Increase (decrease) in certain liabilities, net of acquisitions:
Medical claims payable 107,263 (27,266)
Loss and loss adjustment expense reserves 14,688 32,389
Reserves for future policy benefits (1,689) --
Unearned premiums 3,204 20,809
Accounts payable and accrued expenses 63,307 76,118
Experience rated and other refunds 12,058 6,869
Income taxes payable and other current liabilities 40,226 38,157
Accrued postretirement benefits 2,439 2,544
Other non-current liabilities 9,361 15,363
----------- -----------
Net cash provided by operating activities 311,155 267,057
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased (2,070,258) (755,110)
Proceeds from investments sold and matured 1,496,402 514,763
Property and equipment purchased, net (32,066) (26,545)
Additional investment in subsidiaries (17,597) --
Purchase of subsidiaries, net of cash acquired 361,977 (441,093)
----------- -----------
Net cash used in investing activities (261,542) (707,985)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 150,000 775,000
Repayment of long-term debt (346,000) (90,000)
Net proceeds from common stock offering 110,340 --
Proceeds from issuance of stock under option/award plan 7,188 4,082
Recapitalization (see Note 3) -- (995,000)
----------- -----------
Net cash used in financing activities (78,472) (305,918)
----------- -----------
Net decrease in cash and cash equivalents (28,859) (746,846)
Cash and cash equivalents at beginning of period 313,256 1,069,631
----------- -----------
Cash and cash equivalents at end of period $ 284,397 $ 322,785
=========== ===========
</TABLE>
See the accompanying notes to the consolidated financial statements.
4
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WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
WellPoint Health Networks Inc. (the "Company" or "WellPoint"), one of the
nation's largest publicly traded managed health care companies, is organized
under the laws of Delaware and holds the exclusive license for the right to use
the Blue Cross name and related service marks in California. The Company has
medical members in all 50 states and the District of Columbia.
The Company offers a diversified mix of managed care products, including health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
point-of-service ("POS") plans, other hybrid plans and traditional indemnity
products to the large and small employer, the individual and senior markets. The
Company's managed care plans incorporate a full range of financial incentives
and cost controls for both members and providers. The Company also provides a
broad array of specialty and other products, including pharmacy, dental,
utilization management, life, integrated workers' compensation, preventive care,
disability, behavioral health, COBRA and flexible benefits account
administration. In addition, the Company provides underwriting, actuarial
services, network access, medical cost management, claims processing and
administrative services to self-funded employers under management services
contracts. The Company serves the health care needs of approximately 6.5 million
medical members in HMOs, PPOs, POS, indemnity plans, and management services
plans, and has approximately 12.2 million pharmacy members, 3.2 million dental
members, 2.7 million utilization management members, 1.7 million life members,
1.1 million disability members and 0.7 million behavioral health members as of
September 30, 1997.
On August 4, 1997, the Company completed its plan, which was approved by
shareholders, to reincorporate in Delaware (the "Reincorporation") through the
formation of a new holding company structure. The Reincorporation involved a
merger among the Company, WellPoint Health Networks Inc., a California
corporation ("WellPoint California") and WLP Acquisition Corp. (the "Merger
Subsidiary"), a wholly owned subsidiary of the Company. Merger Subsidiary was
merged with and into WellPoint California, and WellPoint California's
shareholders became shareholders of the Company. As a result of such merger,
WellPoint California became a wholly owned subsidiary of the Company. A
principal purpose of the Reincorporation was to allow a restructuring of the
Company and its various subsidiaries in order to improve the Company's capital
as measured for Blue Cross Blue Shield Association ("BCBSA") purposes.
5
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WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
position as of September 30, 1997, the results of its operations for each of the
three and nine months ended September 30, 1997 and 1996, cash flows for each of
the nine months ended September 30, 1997 and 1996, and its changes in
stockholders' equity for the nine months ended September 30, 1997. The results
of operations for the interim periods presented are not necessarily indicative
of the operating results for the full year.
Reclassifications
Certain amounts in the prior year consolidated financial statements have been
reclassified to conform to the 1997 presentation.
3. ACQUISITIONS AND RECAPITALIZATION
Purchase of Group Benefits Operations of John Hancock Mutual Life Insurance
Company and Life & Health Benefits Management Division of Massachusetts Mutual
Life Insurance Company
On March 1, 1997, the Company completed its acquisition of certain portions of
the health and life related group benefits operations (the "GBO") of John
Hancock Mutual Life Insurance Company for approximately $89.7 million in cash,
subject to adjustment upon completion of a post-closing audit. The GBO, which
now conducts business under the name UNICARE Life & Health Insurance Company,
focuses on the large employer segment (employers with 5,000 or more employees)
and provides medical, life, dental and disability services to some of the
largest employers in the nation.
On March 31, 1996, the Company completed its acquisition of the Life and Health
Benefits Management Division ("MMHD") of Massachusetts Mutual Life Insurance
Company ("MassMutual"), which now conducts business under the name UNICARE Life
& Health Insurance Company, through the acquisition of its parent MassMutual
Holding Company Two, Inc. The purchase price was $402.2 million which was funded
with $340.2 million in cash and a Series A term note for $62.0 million, of which
$20.0 million was outstanding at September 30, 1997. The acquired MMHD
operations provide medical services to members in all 50 states, focusing on the
mid-size employer market (groups of 251 to 5,000 employees). In addition, the
acquired MMHD operations also provide dental, life, pharmacy and disability
services.
The purchase method of accounting has been used to account for both of the above
acquisitions. The acquired operations are included in the Company's results of
operations from their respective date of acquisition. The excess purchase price
over net assets acquired was
6
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WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. ACQUISITIONS AND RECAPITALIZATION, CONTINUED
approximately $133.4 million for the GBO and $251.0 million for MMHD and is
being amortized on a straight-line basis over 35 years for both the GBO and
MMHD.
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 California corporation ("Old
WellPoint"), pursuant to the Amended and Restated Recapitalization Agreement
dated as of March 31, 1995 (the "Amended Recapitalization Agreement"), by and
among Old WellPoint, the company formerly known as Blue Cross of California
("BCC"), the California HealthCare Foundation (the "Foundation") and the
California Endowment (the "Endowment"). In connection with the Recapitalization,
(a) Old WellPoint distributed an aggregate of $995.0 million by means of a
special dividend of $10.00 per share to the record holders of its Class A and
Class B Common Stock as of May 15, 1996, (b) BCC, the sole shareholder of Old
WellPoint's Class B Common Stock, donated its portion of such dividend ($800.0
million) to the Endowment, (c) BCC donated its assets, other than the shares of
the Old WellPoint Class B Common Stock held by BCC and its commercial operations
(the "BCC Commercial Operations"), to the Foundation, (d) BCC changed its status
from a California nonprofit public benefit corporation to a California
for-profit business corporation, in conformity with the terms and orders of the
California Department of Corporations (the "DOC"), immediately following which
BCC issued to the Foundation 53,360,000 shares of its common stock and (e) Old
WellPoint merged with and into BCC (the "Merger"), with the resulting entity
changing its name to WellPoint Health Networks Inc. In connection with the
Merger, (i) each outstanding share of Old WellPoint's Class A Common Stock was
converted into 0.667 shares of the Company's Common Stock, (ii) the outstanding
shares of the Company's common stock issued to the Foundation prior to the
Merger were converted into 53,360,000 shares of the post-merger Company's Common
Stock and a cash payment of $235.0 million was made to the Foundation to reflect
the value of the BCC Commercial Operations and (iii) the outstanding shares of
Old WellPoint's Class B Common Stock were canceled. The BCC Commercial
Operations consisted of, among other things, the health care lines of business
conducted by BCC, substantially all agreements with health care providers that
provided services to enrollees of BCC and all of the cash and securities of BCC
on hand at the time of closing of the Recapitalization. The Company and the
Foundation subsequently amended the terms of the Recapitalization to provide for
the substitution by the Company of $7.0 million in cash for the capital stock of
certain entities owning the real estate parcel surrounding the Company's
headquarters building.
The purchase method of accounting has been used to account for the acquisition
of the BCC Commercial Operations. The excess purchase price over net assets
acquired was approximately $206.7 million and is being amortized on a
straight-line basis over 40 years.
7
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WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. ACQUISITIONS AND RECAPITALIZATION, CONTINUED
Recapitalization and Purchase of BCC Commercial Operations, Continued
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 66.4 million shares of the Company's Common Stock outstanding, of which
53.4 million shares (or approximately 80.4%) were held beneficially by the
Foundation. As a result of the Recapitalization, the Foundation was granted
certain demand and piggyback registration rights with respect to its shares. On
November 21, 1996 and April 10, 1997 the Foundation sold approximately 15.0
million and 8.5 million shares, respectively, of the Company's Common Stock
through public offerings. Upon completion of the April 1997 offering, the
Foundation owned 29.9 million shares (or approximately 43.0%) of the outstanding
shares.
In accordance with the requirements of APB Opinion No. 16, Business
Combinations, the following unaudited pro forma summary presents the results of
operations of WellPoint as if the Recapitalization, and the acquisitions of the
GBO, MMHD and the BCC Commercial Operations had occurred as of the beginning of
each period presented. The pro forma adjustments made include the results of
operations for the GBO, MMHD, and the BCC Commercial Operations for the period
prior to their acquisition, 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 and a portion of the
Recapitalization and the related income tax effect from the beginning of each
period presented through the effective dates of the acquisitions and the
Recapitalization. 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 WellPoint, the GBO, MMHD, and the BCC
Commercial Operations had been a single entity during the three and nine months
ended September 30, 1997 and 1996, nor is it necessarily indicative of the
results of operations which may occur in the future. Pro forma earnings per
share for the three and nine months ended September 30, 1997 is calculated based
on 70.7 million and 69.1 million weighted average shares outstanding,
respectively, and 66.5 million and 66.4 million weighted average shares
outstanding for the three and nine months ended September 30, 1996,
respectively.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
(In millions, except 1997 1996 1997 1996
earnings per share)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 1,511.6 $ 1,314.8 $ 4,395.6 $ 3,952.5
Net Income $ 55.6 $ 45.6 $ 151.9 $ 142.1
Earnings Per Share $ 0.79 $ 0.69 $ 2.20 $ 2.14
</TABLE>
8
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WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. LONG-TERM DEBT
On March 17, 1997, the Company borrowed $150 million under its $200 million
subordinated debt facility, bringing its total debt under this facility to $200
million as of such date. The Company in turn used these proceeds to pay down its
revolving credit facility. The Company paid down $110 million on the
subordinated debt facility in April 1997 from the proceeds of its April 1997
common stock offering (Note 5). The $90 million remaining outstanding under this
facility at June 30, 1997 was repaid on July 1, 1997 with borrowings under the
revolving credit facility.
5. COMMON STOCK
On April 10, 1997, the Company completed a public offering for the sale of 3
million shares of its common stock at $38.00 per share, for which the Company
received net proceeds of $110.3 million. The Foundation sold 8.5 million shares
of WellPoint common stock in such offering, for which the Company received no
proceeds. Under the terms of the Company's $200 million subordinated debt
facility, the Company was required to use the proceeds of this offering to repay
outstanding indebtedness under this facility.
6. EARNINGS PER SHARE
Earnings per share is determined by dividing net income by the weighted average
number of shares outstanding during the period, and for the three and nine
months ended September 30, 1997 include common stock equivalents. For the three
and nine months ended September 30, 1996, common stock equivalents did not have
a dilutive effect on the weighted average number of shares outstanding. Earnings
per share for the three and nine months ended September 30, 1996 has been
calculated using 66.5 million and 66.4 million shares, respectively, the number
of shares outstanding immediately following the Recapitalization, plus the
weighted average number of shares issued since the Recapitalization.
7. NEW PRONOUNCEMENTS
The Financial Accounting Standards Board (the "FASB") recently issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). This Statement is effective for financial statements issued for periods
ending after December 15, 1997; earlier application is not permitted. SFAS No.
128 requires the computation and presentation of basic and diluted earnings per
share ("EPS"). Basic EPS will be computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding.
Diluted EPS will further include the addition of common stock equivalents to
weighted average shares outstanding. As the Company did not have any common
stock equivalents until May 20, 1996, and had no dilutive common stock
equivalents from this date through March 31, 1997, the Company's basic and
diluted EPS calculation for all periods
9
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WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. NEW PRONOUNCEMENTS, CONTINUED
through March 31, 1997 would be the same as the earnings per share amounts
reflected in these and prior financial statements. Beginning with the second
quarter of 1997 and for the remainder of the fiscal year, the Company's common
stock equivalents are expected to have a dilutive impact on shares outstanding.
As a result, the shares used to compute basic EPS under SFAS No. 128 will differ
by the effect of common stock equivalents, and the impact for the three and nine
months ended September 30, 1997 would be an increase in basic EPS of $0.01 and
$0.02, respectively. The diluted EPS under SFAS No. 128 would be the same as the
EPS disclosed in these unaudited consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 will
require all companies to present all non-owner changes in equity, e.g., market
value adjustments to investments and adjustments to the minimum pension
liability, in a full set of financial statements. The new disclosures will be
effective beginning in the first quarter of 1998.
Also in June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 requires that companies disclose "operating
segments" based on the way management disaggregates the company for making
internal operating decisions. The new disclosures will be effective for the
Company's fiscal year ending on December 31, 1998. Abbreviated quarterly
disclosure will be required beginning with the period ending March 31, 1999,
with comparative information required for the corresponding period in the prior
fiscal year.
The Company is presently assessing the effect of SFAS Nos. 130 and 131 on the
financial statements of the Company.
8. CONTINGENCIES
From time to time, the Company and certain of its subsidiaries are parties to
various legal proceedings, many of which involve claims for coverage encountered
in the ordinary course of business. The Company, like HMOs and health insurers
generally, excludes certain health care services from coverage under its HMO,
PPO and other plans. The Company is, in its ordinary course of business, subject
to the claims of its members arising out of decisions to restrict treatment or
reimbursement for certain services. The loss of even one such claim, if it
results in a significant punitive damage award, could have a material adverse
effect on the Company. 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 the Company in particular, is at present
unknown.
10
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WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. CONTINGENCIES, CONTINUED
Certain of such legal proceedings are or may be covered under insurance policies
or indemnification agreements. Based upon information presently available,
management of the Company believes that the final outcome of all such
proceedings should not have a material adverse effect on the Company's results
of operations or financial condition.
11
<PAGE> 14
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors
including, but not limited to, those set forth under "Factors That May Affect
Future Results of Operations."
GENERAL
WellPoint Health Networks Inc. (the "Company" or "WellPoint") is one of the
nation's largest publicly traded managed health care companies, with
approximately 6.5 million medical members, 12.2 million pharmacy members, 3.2
million dental members, 2.7 million utilization management members, 1.7 million
life members, 1.1 million disability members and 0.7 million behavioral health
members as of September 30, 1997. The Company offers a diversified mix of
managed care products, including health maintenance organizations ("HMOs"),
preferred provider organizations ("PPOs"), point-of-service ("POS") plans, other
hybrid plans and traditional indemnity products. The Company also offers a broad
array of specialty and other products, including pharmacy, dental, utilization
management, life, integrated workers' compensation, preventive care, disability,
behavioral health, COBRA and flexible benefits account administration. In
addition, WellPoint offers managed care services for self-funded employers under
management services contracts, including claims processing, actuarial services,
network access, medical cost management and other administrative services.
Delaware Reincorporation
On August 4, 1997, the Company completed its plan to reincorporate in Delaware
(the "Reincorporation") through the formation of a new holding company
structure. The Reincorporation involved a merger among the Company, WellPoint
Health Networks Inc., a California corporation ("WellPoint California") and WLP
Acquisition Corp. (the "Merger Subsidiary"), a wholly owned subsidiary of the
Company. Merger Subsidiary was merged with and into WellPoint California, and
WellPoint California's shareholders became stockholders of the Company. As a
result of such merger, WellPoint California became a wholly owned subsidiary of
the Company. The principal purpose of the Reincorporation was to allow a
restructuring of the Company and its various subsidiaries in order to improve
the Company's capital as measured for Blue Cross Blue Shield Association
("BCBSA") purposes.
12
<PAGE> 15
GENERAL, CONTINUED
Recent Acquisitions and May 1996 Recapitalization
On March 1, 1997, the Company completed its acquisition of certain portions of
the Group Benefits Operations (the "GBO") of John Hancock Mutual Life Insurance
Company. The purchase price was $89.7 million, subject to adjustment upon
completion of a post-closing audit. The purchase method of accounting has been
used to account for the acquisition of the GBO. The GBO, with an associated 1.3
million acquired members targets large employers with 5,000 or more employees
and a majority of the medical members it serves are in health plans that are
self funded by employers. The GBO offers indemnity and PPO plans and also
provides life, dental, pharmacy, utilization management and disability coverage
to a variety of employer groups. The GBO has historically experienced a higher
administrative expense ratio due to its higher percentage of management services
business, which has contributed and may continue to contribute to an increase in
the Company's overall administrative expense ratio in the current and future
periods.
The Company expects to incur approximately $20 to $25 million of costs relating
to this acquisition during the remainder of 1997 and throughout 1998, a portion
of which is expected to be reflected in the Company's results of operations. The
Company expects that it will experience material membership attrition of up to
30% of the GBO members as it implements price increases on certain accounts and
pursues its strategy of motivating traditional indemnity health insurance
members to select managed care products.
On March 31, 1996, the Company acquired the Life and Health Benefits Management
Division ("MMHD") of Massachusetts Mutual Life Insurance Company (the "MMHD
Acquisition"). The acquired MMHD operations focus on employers with 250 to 5,000
employees and provide administrative services, PPO and indemnity insurance
products. The Company has experienced membership attrition of approximately 17%
through September 30, 1997 on acquired membership, a portion of which is the
result of recently instituted premium increases with respect to certain
underpriced accounts. The Company expects that it will experience some level of
further membership attrition of its acquired MMHD members as it continues to
increase prices and pursues its strategy of motivating members to select managed
care products.
On May 20, 1996, the Company completed the Recapitalization, including the
acquisition of the BCC Commercial Operations for $235.0 million in cash. The
Recapitalization included the payment of a $995.0 million special dividend
funded by $775.0 million in revolving debt and the remainder in cash (see Note 3
to the Notes to Consolidated Financial Statements (unaudited) in Item 1 for a
description of the Recapitalization).
As a result of the GBO and MMHD acquisitions, the Company has significantly
expanded its operations outside of California. In order to implement the
Company's regional expansion strategy, the Company will need to develop
satisfactory provider and sales networks and successfully convert these books of
business to the Company's existing information systems, which will require
additional expenditures by the Company.
13
<PAGE> 16
GENERAL, CONTINUED
Prior to their acquisitions by WellPoint, each of the GBO, MMHD, and the BCC
Commercial Operations experienced a higher overall loss ratio than the Company.
Due to the inclusion of these acquisitions, the Company's overall loss ratio has
increased. In order to control the respective loss ratios and reduce the
financial risk of these acquired businesses, the Company has undertaken a
variety of measures, including the imposition of significant premium increases
and changes in product design. The Company has also implemented a series of
price increases for certain of its California managed care businesses in
response to an increased loss ratio in the second and third quarters of 1997.
The Company will continue to evaluate the need for further price increases, plan
design changes and other appropriate actions in the future. There can be no
assurances, however, that the Company will be able to take subsequent pricing
or other actions or that any actions previously taken or implemented in the
future will be successful.
A variety of health care reform measures are currently pending or have been
recently enacted at the Federal, state and local levels. Recent Federal
legislation seeks, among other things, to insure the portability of health
coverage and mandates minimum maternity hospital stays. These and other proposed
measures may have the effect of dramatically altering the regulation of health
care and of increasing the Company's loss ratio or decrease the affordability of
the Company's products. In May 1997, the Texas Legislature adopted Senate Bill
No. 386 ("SB 386"). Among other things, this legislation purports to make
managed care organizations ("MCOs") such as the Company liable for the failure
by the MCO, its employees or agents to exercise ordinary care when making
"health care treatment decisions" (as defined in SB 386). The legislation was
effective as of September 1, 1997. It is too early to determine what effect, if
any, this legislation may have on the Company. However, to the extent that this
legislation (or similar legislation that may be subsequently adopted at the
Federal or state level) effectively expands the scope of liability of MCOs such
as the Company, it may have a material adverse effect on the Company's results
of operations and financial condition.
14
<PAGE> 17
RESULTS OF OPERATIONS
WellPoint's revenues are primarily generated from premiums earned for risk-based
health care and specialty services provided to its members, fees for
administrative services, including claims processing and access to provider
networks for self-insured employers, and investment income. WellPoint's
operating expenses include health care services and other benefits expenses,
consisting primarily of payments for physicians, hospitals and other providers
for health care and specialty products claims; selling expenses for broker and
agent commissions; general and administrative expenses; interest expense;
depreciation and amortization expense; and income taxes.
The Company's consolidated results of operations for the three months ended
September 30, 1997 and 1996 include a full quarter of earnings for its acquired
operations, MMHD, BCC Commercial Operations and, for 1997 only, the GBO. The
Company's consolidated results of operations for the nine months ended September
30, 1997 include a full nine months of earnings for MMHD and BCC Commercial
Operations, and seven months of earnings for the GBO. The results of operations
for the nine months ended September 30, 1996 include the results of MMHD for the
period from April 1, 1996 (its date of acquisition) to September 30, 1996 and
BCC Commercial Operations for the period from May 20, 1996 (its date of
acquisition) to September 30, 1996.
The following table sets forth selected operating ratios. The loss ratio for
health care services and other benefits is shown as a percentage of premium
revenue. All other ratios are shown as a percentage of premium revenue and
management services revenue combined.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- --------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Operating Revenues:
Premium revenue 92.6% 96.0% 93.2% 96.4%
Management services revenue 7.4 4.0 6.8 3.6
----- ----- ----- -----
100.0 100.0 100.0 100.0
Operating Expenses:
Health care services and other
benefits (loss ratio) 82.7 78.3 81.1 77.1
Selling expense 4.6 5.4 4.6 5.7
General and administrative expense 15.0 14.0 15.3 13.4
</TABLE>
15
<PAGE> 18
MEMBERSHIP
The following table sets forth membership data and the percent change in
membership:
<TABLE>
<CAPTION>
MEDICAL MEMBERSHIP: As of September 30,
--------------------- ------
Percent
1997 1996 Change
--------- --------- ------
<S> <C> <C> <C>
CALIFORNIA
Group Services:
HMO 787,125 663,271 18.7%
PPO and Other 1,457,052 1,284,245 13.5%
--------- ---------
Total 2,244,177 1,947,516 15.2%
--------- ---------
Individual, Small Group and Senior:
HMO 302,867 258,582 17.1%
PPO and Other 1,269,714 1,198,677 5.9%
--------- ---------
Total 1,572,581 1,457,259 7.9%
--------- ---------
Medi-Cal HMO Programs 264,218 59,454 344.4%
--------- ---------
Total California Medical Membership 4,080,976 3,464,229 17.8%
--------- ---------
TEXAS
Group Services 170,727 78,955 116.2%
Individual, Small Group and Senior 62,914 21,016 199.4%
--------- ---------
Total 233,641 99,971 133.7%
--------- ---------
GEORGIA
Group Services 92,651 52,683 75.9%
Individual, Small Group and Senior 7,177 -- N/A
--------- ---------
Total 99,828 52,683 89.5%
--------- ---------
OTHER STATES
Group Services 2,054,217 770,627 166.6%
Individual, Small Group and Senior 4,805 -- N/A
--------- ---------
Total 2,059,022 770,627 167.2%
--------- ---------
Total National Medical Membership 2,392,491 923,281 159.1%
--------- ---------
TOTAL MEDICAL MEMBERSHIP (a)(b) 6,473,467 4,387,510 47.5%
========= =========
NETWORKS (b) (c)
Proprietary Networks 3,906,529 3,253,887 20.1%
Other Networks 1,444,966 735,291 96.5%
Non-Network 1,121,972 398,332 181.7%
--------- ---------
TOTAL MEDICAL MEMBERSHIP 6,473,467 4,387,510 47.5%
========= =========
</TABLE>
(a) Medical membership includes 2,675,337 and 1,215,883 management services
members as of September 30, 1997 and 1996, respectively, of which those
management services members outside of California were 1,781,303 and
492,026, as of September 30, 1997 and 1996, respectively.
(b) Includes 1.3 million acquired GBO medical members.
(c) Proprietary networks consist of California, Texas and other
WellPoint-developed networks. Other networks consist of third-party
networks and networks owned by the Company as a result of its recent
acquisitions that incorporate provider discounts and some basic managed
care elements. Non-network consists of fee for service and
percentage-of-billed charges contracts with providers.
16
<PAGE> 19
MEMBERSHIP, CONTINUED
<TABLE>
<CAPTION>
As of September 30,
---------------------- -----
Percent
1997 1996 Change
--------- ------- -----
SPECIALTY MEMBERSHIP:
<S> <C> <C> <C>
Pharmacy 12,150,533 12,218,839 (0.5%)
Dental 3,189,111 1,512,740 110.8%
Utilization Management 2,708,469 -- N/A
Life 1,729,228 724,295 138.7%
Disability 1,140,422 108,231 953.7%
Behavioral Health 691,721 472,235 46.5%
</TABLE>
The specialty membership as of September 30, 1997 includes the acquired GBO
operations, which had approximately 0.3 million pharmacy members, 1.5 million
dental members, 2.7 million utilization management members, 0.9 million life
members and 1.0 million disability members at the date of acquisition.
COMPARISON OF RESULTS FOR THE THIRD QUARTER 1997 TO THE THIRD QUARTER 1996
Premium revenue increased 28.3%, or $298.1 million, to $1,350.4 million for the
quarter ended September 30, 1997 from $1,052.3 million for the quarter ended
September 30, 1996. The acquisition of the GBO contributed 42.0% of the overall
premium revenue increase and accounted for $125.1 million. Also contributing to
increased premium revenue in 1997 was an increase in insured member months of
14.5%, excluding the GBO. Additionally, there was an increase in the per member
per month premiums associated with several of the Company's medical products.
Management services revenue increased 148.2%, or $64.9 million, to $108.7
million for the quarter ended September 30, 1997 from $43.8 million for the
quarter ended September 30, 1996. The increase was primarily due to $57.8
million of management services revenue from the GBO acquisition, representing
89.1% of the increase and the addition of a management services contract with
the state of Illinois on July 1, 1997.
Investment income increased $17.8 million to $52.5 million for the quarter ended
September 30, 1997 compared to $34.6 million for the quarter ended September 30,
1996. Net realized gains from equity securities increased $11.3 million to $12.8
million for the quarter ended September 30, 1997 in comparison to $1.5 million
for the quarter ended September 30, 1996. Net interest and dividend income
increased $9.0 million to $40.1 million for the quarter ended September 30, 1997
in comparison to $31.4 million for the quarter ended September 30, 1996,
primarily due to increased interest income on the portfolios of acquired
businesses and slightly higher yields in 1997 over 1996, partially offset by the
foregone interest from cash and investments used to finance the GBO and cash
used for repayment of indebtedness under the Company's senior credit facility.
17
<PAGE> 20
COMPARISON OF RESULTS FOR THE THIRD QUARTER 1997 TO THE THIRD QUARTER 1996,
CONTINUED
Health care services and other benefits expense increased 35.4% or $292.2
million to $1,116.5 million for the quarter ended September 30, 1997 from $824.3
million for the quarter ended September 30, 1996. The acquisition of the GBO
contributed 42.6% of the increase and accounted for $124.6 million.
Additionally, the aforementioned increase in insured member months of 14.5%
resulted in increased claims expense.
The loss ratio for the quarter ended September 30, 1997 increased to 82.7%
compared to 78.3% for the quarter ended September 30, 1996, due to the
incremental effect of the GBO acquisition on the Company's overall results. The
acquired GBO has traditionally experienced a higher loss ratio than the
Company's managed care products. Additionally, the MMHD operations experienced
an increase in loss ratio in the third quarter of 1997 in comparison to the
third quarter of 1996 due to higher actual claims incurred as a result of higher
cost trends. Excluding all of the acquired operations of the GBO, MMHD and the
BCC Commercial Operations for the quarters ended September 30, 1997 and 1996,
the loss ratios would have been 80.0% and 77.9%, respectively. The increase in
loss ratios excluding acquired operations is due to a loss ratio increase in the
Company's California businesses, primarily due to increased membership in lower
margin products, slightly higher medical utilization for certain managed care
products principally in the individual and small group markets, and increased
pharmacy costs.
Selling expense for the quarter ended September 30, 1997 increased 13.9% to
$67.3 million compared to $59.1 million for the quarter ended September 30,
1996, corresponding with continued overall premium revenue growth. The selling
expense ratio for the quarter ended September 30, 1997 decreased to 4.6% from
5.4% for the quarter ended September 30, 1996, largely due to the acquisition of
the GBO, which has a lower selling expense ratio than the Company's existing
business due to utilization of an internal sales force. Excluding all of the
acquired operations of the GBO, MMHD and the BCC Commercial Operations for the
quarters ended September 30, 1997 and 1996, the selling expense ratio would have
been 5.9% and 6.2%, respectively. The Company's growth in Medi-Cal and large
employer group medical products had a significant impact on lowering the selling
expense ratio as a result of the lower selling costs associated with these
products in comparison to the Company's other products. The Company also
experienced slight decreases in the current quarter's selling expense as a
percentage of revenue for certain medical products in comparison to the same
quarter in the prior year.
General and administrative expense for the quarter ended September 30, 1997
increased 43.3% or $66.3 million to $219.4 million for the quarter ended
September 30, 1997 from $153.1 million for the quarter ended September 30, 1996.
The acquisition of the GBO accounted for 87.9% of the increase and contributed
$58.3 million. Additional increases resulted from costs associated with
increased membership growth, primarily related to medical products, including
Medi-Cal business, and the national expansion efforts. Corresponding with the
national expansion efforts, the Company also incurred additional information
systems and service costs which are anticipated to continue as the Company
expands its national business.
The administrative expense ratio increased to 15.0% for the quarter ended
September 30, 1997, compared to 14.0% for the quarter ended September 30, 1996,
primarily due to the increased
18
<PAGE> 21
COMPARISON OF RESULTS FOR THE THIRD QUARTER 1997 TO THE THIRD QUARTER 1996,
CONTINUED
administrative expense associated with the GBO acquisition and with the
Company's continued investment in national expansion, including network
development costs. The GBO has historically had higher administrative expense
ratios than the Company's California-based businesses, due to its higher
percentage of management services business. The administrative expense ratio,
excluding the GBO, was 12.7% and 14.0% for the quarters ended September 30, 1997
and 1996, respectively. The decline in the administrative expense ratio
excluding the GBO is primarily due to a reduction in personnel costs related to
the Company's integration of the MMHD acquisition.
Interest expense was $8.1 million for the quarter ended September 30, 1997 and
$12.4 million for the quarter ended September 30, 1996. The decrease in interest
expense related to debt paydowns as the effective interest rate paid by the
Company remained relatively stable. The Company's long-term indebtedness at
September 30, 1997 was $429.0 million compared to $747.0 million outstanding at
September 30, 1996. The weighted average interest rate for all debt for the
quarter ended September 30, 1997, including the fees associated with the
borrowings and interest rate swaps, was 7.4%.
WellPoint's net income for the quarter ended September 30, 1997 was $55.6
million, or $0.79 per share, compared to $45.1 million, or $0.68 per share, for
the quarter ended September 30, 1996. Earnings per share for the quarters ended
September 30, 1997 and 1996 is based on 70.7 million shares and 66.5 million
shares, respectively. Earnings per share is determined by dividing net income by
the weighted average number of shares outstanding during the period and, for the
three months ended September 30, 1997, includes common stock equivalents. For
the three months ended September 30, 1996, common stock equivalents did not have
a dilutive effect on the weighted average number of shares outstanding. Earnings
per share for the three months ended September 30, 1996 has been calculated
using 66.5 million shares, the number of shares outstanding immediately
following the Recapitalization, plus the weighted average number of shares
issued since the Recapitalization. Weighted average common shares outstanding
increased for the quarter ended September 30, 1997, primarily due to the public
offering in April 1997 of three million shares of the Company's common stock and
the inclusion of 1.1 million common stock equivalents related to the Company's
stock option plans.
19
<PAGE> 22
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1996
Premium revenue increased 37.4%, or $1,048.7 million, to $3,849.9 million for
the nine months ended September 30, 1997 from $2,801.2 million for the nine
months ended September 30, 1996. The acquisitions of the GBO, MMHD, and the BCC
Commercial Operations contributed 54.3% of the overall premium revenue increase
in 1997 and accounted for $293.4 million, $163.0 million and $112.7 million,
respectively. Also, contributing to increased premium revenue in 1997 was an
increase in insured member months of 14.2%, excluding the GBO from both periods,
MMHD from the first quarter of 1997, and excluding the BCC Commercial Operations
for the period prior to May 20 (its date of acquisition) in both periods.
Additionally, there was an increase in the per member per month revenues
associated with several of the Company's medical products.
Management services revenue increased 165.8%, or $174.9 million, to $280.4
million for the nine months ended September 30, 1997 from $105.5 million for the
nine months ended September 30, 1996. The increase was primarily due to $135.1
million, $18.9 million and $1.1 million of management services revenue related
to the acquisitions of the GBO, MMHD and the BCC Commercial Operations,
respectively, representing 88.7% of the increase. Also contributing to the
increase was an increase in the California large group management services
membership and the addition of a management services contract with the state of
Illinois on July 1, 1997.
Investment income increased $31.4 million to $138.5 million for the nine months
ended September 30, 1997 compared to $107.0 million for the nine months ended
September 30, 1996. Net realized gains from equity securities increased $18.0
million to $27.8 million for the nine months ended September 30, 1997 in
comparison to $9.8 million for the nine months ended September 30, 1996. Net
interest and dividend income increased $17.6 million to $112.6 million for the
nine months ended September 30, 1997 in comparison to $95.3 million for the nine
months ended September 30, 1996, primarily due to increased interest income on
the portfolios of acquired businesses and slightly higher yields in 1997 over
1996, partially offset by the foregone interest from cash and investments used
to finance the GBO, MMHD and BCC Commercial Operations acquisitions, the
Recapitalization, and cash used for repayment of indebtedness under the
Company's senior credit facility.
Health care services and other benefits expense increased 44.5% or $961.6
million to $3,120.7 million for the first nine months of 1997 from $2,159.1
million for the nine months ended September 30, 1996. The acquisitions of the
GBO, MMHD and the BCC Commercial Operations accounted for 54.3% of the increase
and totaled $284.1 million, $133.9 million and $104.0 million, respectively.
Additionally, the Company's health care benefits and other expenses in the nine
months ended September 30, 1997 increased in comparison to the prior nine month
period as a result of the aforementioned increase in insured member months of
14.2%.
20
<PAGE> 23
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1996, CONTINUED
The loss ratio for the first nine months of 1997 increased to 81.1% compared to
77.1% in 1996. The acquired MMHD operations, the GBO and the BCC Commercial
Operations have traditionally experienced a higher loss ratio than the Company.
Additionally, the MMHD operations experienced an increase in loss ratio for the
nine months ending September 30, 1997 in comparison to the third quarter of 1996
due to higher actual claims incurred as a result of higher cost trends.
Excluding all of the acquired operations of MMHD, the GBO and the BCC Commercial
Operations for the nine months ended September 30, 1997 and 1996, the loss
ratios would have been 77.8% and 76.6%, respectively. The increase in loss
ratios excluding acquired operations is due to a loss ratio increase in the
Company's California businesses, primarily due to increased membership in lower
margin products, slightly higher medical utilization for certain managed care
products and increased pharmacy costs.
Selling expense for the nine months ended September 30, 1997 increased 15.1% to
$192.0 million compared to $166.8 million for the nine months ended September
30, 1996, corresponding with continued overall premium revenue growth and an
additional $7.0 million in selling expense attributable to the MMHD operations
and the GBO. The selling expense ratio for the nine months ended September 30,
1997 decreased to 4.6% from 5.7% for the nine months ended September 30, 1996,
largely due to the acquisition of the GBO and MMHD, which have lower selling
expense ratios than the Company's existing business, and the BCC Commercial
Operations, which has no selling expense. Excluding the acquisitions for the
nine months ended September 30, 1997 and 1996, the selling expense ratio would
have been 5.9% and 6.3%, respectively. The Company's growth in Medi-Cal and
large employer group medical products had a significant impact on lowering the
selling expense ratio as a result of the lower selling costs associated with
these products in comparison to the Company's other products. The Company also
experienced a slight decrease in selling expense in 1997 as a percentage of
revenue for certain medical products in comparison to the prior nine months
ended September 30, 1996.
General and administrative expense for the nine months ended September 30, 1997
increased 62.4%, or $242.6 million, to $631.5 million from $388.9 million for
the same period in 1996. The acquisitions of the GBO, MMHD, and the BCC
Commercial Operations accounted for 77.3% of the increase and contributed $135.1
million, $46.0 million and $6.5 million, respectively. The administrative
expense ratio increased to 15.3% for the first nine months of 1997 compared to
13.4% for the comparable period in 1996, primarily due to the increased
administrative expense associated with the Company's continued investment in
national expansion and the acquisitions of the GBO and MMHD. The GBO and MMHD
have historically had higher administrative expense ratios than the Company's
traditional California-based businesses due to their higher percentage of
management services business. The increase was partially offset by the BCC
Commercial Operations' lower administrative expense ratio. The administrative
expense ratio, excluding the GBO for both periods, MMHD for the first quarter of
1997, and excluding the BCC Commercial Operations for the period
21
<PAGE> 24
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1996, CONTINUED
prior to May 20 in both periods, was 13.0% and 13.4% for the nine months ended
September 30, 1997 and 1996, respectively.
The Company recorded $14.5 million of nonrecurring costs for the nine months
ended September 30, 1997, of which $8.0 million recorded in the second quarter
of 1997 related primarily to the write-down of the dental service organization
business based upon an impairment in its value and discontinuance of the
Company's medical services organization in Santa Barbara and San Luis Obispo. In
addition, $6.5 million incurred in the first quarter of 1997 consisted of
severance and retention payments associated with the GBO acquisition.
Interest expense increased 23.6% to $28.8 million for the nine months ended
September 30, 1997 in comparison to $23.3 million for the comparable period in
the prior year. The increase is primarily due to interest on debt incurred as a
result of the MMHD acquisition in March 1996 and the Recapitalization in May
1996 being included in the results of operations for the entire nine months
ended September 30, 1997 in comparison to a shorter period of time in the nine
months ended September 30, 1996. The weighted average interest rate for all debt
for the nine months ended September 30, 1997, including the fees associated with
the borrowings and interest rate swaps, was 7.4%.
WellPoint's net income for the nine months ended September 30, 1997 was $155.6
million, or $2.25 per share, compared to $155.0 million, or $2.33 per share, for
the nine months ended September 30, 1996. Earnings per share for the nine months
ended September 30, 1997 and 1996 is based on 69.1 million shares and 66.4
million shares, respectively. Earnings per share is determined by dividing net
income by the weighted average number of shares outstanding during the period
and, for the nine months ended September 30, 1997, includes common stock
equivalents. For the nine months ended September 30, 1996, common stock
equivalents did not have a dilutive effect on the weighted average number of
shares outstanding. Earnings per share for the nine months ended September 30,
1996 has been calculated using 66.4 million shares, the number of shares
outstanding immediately following the Recapitalization, plus the weighted
average number of shares issued since the Recapitalization. For the nine months
ended September 30, 1997 the increase in shares outstanding primarily relates to
the public offering of 3 million shares of the Company's common stock in April
1997 and the inclusion of 592,000 common stock equivalents related to the
Company's stock option plans.
22
<PAGE> 25
FINANCIAL CONDITION
The Company's consolidated assets increased by $998.5 million from $3,405.5
million as of December 31, 1996 to $4,404.0 million as of September 30, 1997.
This represents a 29.3% increase and resulted primarily from the GBO acquisition
as well as cash flows generated from operations. Cash and investments were $2.8
billion as of September 30, 1997, or 62.7% of total assets.
As of September 30, 1997, $429.0 million was outstanding under the Company's
long-term debt facilities, compared to $625.0 million at December 31 1996. The
decrease is primarily due to the repayments of $200.0 million of debt under the
Subordinated Credit Agreement partially from the proceeds of the Company's April
1997 public stock offering and from cash flows from operations.
Equity totaled $1,162.4 million as of September 30, 1997, an increase of $291.9
million from $870.5 million as of December 31, 1996. The increase resulted
primarily from net income of $155.6 million for the nine months ended September
30, 1997, $110.3 million and $7.2 million in additional capital from the
Company's public offering of 3 million shares and stock issuances under the
Company's stock option/award plan, respectively, and $18.8 million change in net
unrealized valuation gain adjustments on investment securities, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are premium and management services
revenues received and investment income. The primary uses of cash include health
care claims and other benefits, capitation payments, income taxes, repayment of
long-term debt, interest expense, broker and agent commissions, administrative
expenses and capital expenditures. In addition, to the foregoing, other uses of
cash include costs of provider networks and systems development, and costs
associated with the integration of acquired businesses. The Company receives
premium revenue in advance of anticipated claims for related health care
services and other benefits. The Company's investment policies are designed to
provide liquidity, preserve capital and maximize yield. Cash and investment
balances maintained by the Company are sufficient to meet applicable regulatory
financial stability and net worth requirements. As of September 30, 1997, 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 $311.2 million for the nine
months ended September 30, 1997, compared with $267.1 million for the nine
months ended September 30, 1996. The positive cash flow from operations is due
primarily to net income of $155.6 million, adjusted for certain operating
liabilities such as increased medical claims payable of $107.3 million and
accounts payable and accrued expenses of $63.3 million.
Net cash used in investing activities for the nine months ended September 30,
1997 totaled $261.5 million, compared with net cash used in investing activities
of $708.0 million for the
23
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
nine months ended September 30, 1996. The cash used in 1997 was attributable
primarily to the purchase of investments for $2,070.2 million, partially offset
by the proceeds from investments sold and matured of $1,496.4 million and the
net cash acquired from the GBO purchase of $362.0 million.
Net cash used in financing activities totaled $78.5 million for the nine months
ended September 30, 1997, compared to net cash used in financing activities of
$305.9 million for the nine months ended September 30, 1996. Borrowings and
repayments on long-term debt totaled $150.0 million and $346.0 million,
respectively, for the nine months ended September 30, 1997, compared to
borrowings and repayments of long-term debt of $775.0 million and $90.0 million,
respectively, and dividend payments associated with the Recapitalization of
$995.0 million for the nine months ended September 30, 1996.
In connection with the Recapitalization, the Company entered into a $1.25
billion unsecured revolving credit facility. In April 1997, the Company amended
this facility to decrease the maximum amount which could be borrowed to $1.0
billion. Borrowings under the credit facility bear interest at rates determined
by reference to the bank's base rate or to the London Interbank Offered Rate
("LIBOR") plus a margin determined by reference to the Company's leverage ratio
(as defined in the credit agreement) or the then-current rating of the Company's
unsecured long-term debt by specified rating agencies. Borrowings under the
credit facility are made on a committed basis or pursuant to an auction-bid
process. The credit facility expires as of May 15, 2002, although it may be
extended for an additional one-year period under certain circumstances. The
credit agreement requires the Company to maintain certain financial ratios and
contains restrictive covenants, including restrictions on the occurrence of
additional indebtedness and the granting of certain liens, limitations on
acquisitions and investments and limitations on changes in control. The total
amount outstanding under the credit facility was $409.0 million as of September
30, 1997. The weighted average interest rate, including the facility and other
fees and including the swap agreements, for the quarter and nine months ended
September 30, 1997 was 7.4%.
In order to limit its exposure to interest rate increases, in August 1996 the
Company entered into a swap agreement for a notional amount of $100.0 million
bearing a fixed interest rate of 6.45% and having a maturity date of August 17,
1999. In September 1996, the Company entered into two additional swap agreements
for notional amounts of $150.0 million each, bearing fixed interest rates of
6.99% and 7.05%, respectively, and having maturity dates of October 17, 2003 and
October 17, 2006, respectively.
Prior to the Company's Delaware reincorporation, the Company held a license as a
health care service plan under the California Knox-Keene Health Care Service
Plan Act of 1975 (the "Knox-Keene Act"). As such, the Company was required to
maintain minimum tangible net equity ("TNE") by the Company's primary regulator,
the California Department of Corporations (the "DOC"), in addition to meeting
minimum capital requirements prescribed by the Blue Cross Blue Shield
Association (the "BCBSA"). As a DOC licensee, the Company used TNE in measuring
capital for the BCBSA. The failure to meet a specified level (the "BCBSA Minimum
Capital") of the BCBSA's base capital requirement can subject the
24
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
Company to certain corrective actions, while the failure to meet a lower
specified level can result in the termination of the Company's license agreement
with the BCBSA. Upon completion of the Delaware reincorporation, the Company is
no longer licensed under the Knox-Keene Act (WellPoint California remains as a
DOC licensee) and, as a result, its capital for BCBSA purposes will be measured
based on GAAP equity. As of September 30, 1997, the Company's GAAP equity was in
excess of the BCBSA's Minimum Capital requirement. A principal purpose of the
Company's Delaware reincorporation was to allow a restructuring of the Company
and its various subsidiaries in order to improve the Company's capital as
measured for BCBSA purposes.
Certain of the Company's subsidiaries are required to maintain minimum capital
requirements prescribed by various regulatory agencies, including the California
Department of Corporations, and the Departments of Insurance in various states.
As of September 30, 1997, those subsidiaries of the Company were in compliance
with all minimum capital requirements.
On March 17, 1997, the Company borrowed $150.0 million under its subordinated
debt agreement to ensure compliance with the Company's BCBSA capital
requirements. As of March 31, 1997 the Company's total debt under this facility
was $200 million. On April 10, 1997, the Company completed a public offering of
3 million shares of its common stock, receiving net proceeds of $110.3 million
which were used to pay down outstanding indebtedness under the Company's
subordinated debt agreement. Additionally, as part of this offering, the
Foundation (See Note 3 to the Notes to Consolidated Financial Statements
(unaudited) in Item 1) sold 8.5 million shares of WellPoint common stock, for
which the Company received no proceeds. On July 1, 1997, the Company repaid its
remaining $90.0 million outstanding under the subordinated debt agreement with
borrowings under the revolving credit facility.
In July 1996, the Company filed a registration statement relating to the
issuance of $1.0 billion of senior or subordinated unsecured indebtedness. As of
September 30, 1997, no indebtedness had been issued pursuant to this
registration statement.
The Company believes that cash flow generated by operations, its cash and
investment balances, supplemented by the Company's ability to borrow under its
existing revolving credit facility or to conduct a public offering under its
debt registration statement will be sufficient to fund continuing operations and
expected capital requirements for the foreseeable future.
25
<PAGE> 28
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Certain statements contained herein, such as statements concerning potential or
future loss ratios, expected membership attrition as the Company continues to
integrate its recently acquired operations and other statements regarding
matters that are not historical facts, are forward-looking statements (as such
term is defined in the Securities Exchange Act of 1934). Such statements involve
a number of risks and uncertainties that may cause actual results to differ from
those projected. Factors that can cause actual results to differ materially
include, but are not limited to, those discussed below and those discussed from
time to time in the Company's various filings with the Securities and Exchange
Commission, including the Company's Annual Report on Form 10-K.
As part of the Company's business strategy, the Company has recently acquired
substantial operations in new geographic markets. These businesses, which
include substantial indemnity-based insurance operations, have experienced
varying profitability or losses in recent periods. While the integration of
these businesses into the Company is continuing, there can be no assurances
regarding the ultimate success of the Company's integration efforts or regarding
the ability of the Company to maintain or improve the results of operations of
these businesses as the Company pursues its strategy of motivating the acquired
members to select managed care products. In order to implement this strategy,
the Company has and will, among other things, need to continue to incur
considerable expenditures for provider networks and information systems in
addition to the costs associated with the integration of these acquisitions. The
Company's results of operations could be adversely affected in the event that
the Company is unable to implement fully its expansion strategy.
The Company's operations are subject to substantial regulation by Federal, state
and local agencies in all jurisdictions in which the Company now operates. Many
of these agencies have increased their scrutiny of managed health care companies
in recent periods. Future regulatory actions by any such agencies may have a
material adverse affect on the Company's business.
The Company's future results will depend in large part on accurately predicting
health care costs and upon the Company's ability to control future health care
costs through underwriting criteria, utilization management and negotiation of
favorable provider contracts. Changes in utilization rates, demographic
characteristics, health care practices, provider consolidation, inflation, new
technologies, clusters of high-cost, the regulatory environment and numerous
other factors are beyond the control of any health plan and may adversely affect
the Company's ability to predict and control health care costs and claims, as
well as the Company's financial condition or results of operations.
Additionally, the Company faces competitive pressure to contain premium prices.
Fiscal concerns regarding the continued viability of government sponsored
programs such as Medicare and Medicaid may cause decreasing reimbursement rates
for these programs. Any limitation on the Company's ability to increase or
maintain its premium levels, design products, or select underwriting criteria
may adversely affect the Company's financial condition or results of operations.
26
<PAGE> 29
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
Managed care organizations, both inside and outside California, operate in a
highly competitive environment that has undergone significant change in recent
periods as a result of business consolidations, new strategic alliances,
aggressive marketing practices by competitors and other market pressures.
Additional increases in competition could adversely affect the Company's
financial condition or results of operations.
As a result of the Company's recent acquisitions, the Company now operates on a
national basis and offers a spectrum of health care and specialty products
through various risk sharing arrangements. The Company's health care products
include a variety of managed care offerings as well as traditional
fee-for-service coverage. With respect to product type, fee-for-service products
are generally less profitable than managed care products. A critical component
of the Company's expansion strategy is to transition over time the traditional
insurance members of the Company's acquired businesses to more managed care
products. With respect to the risk-sharing nature of products, managed care
products that involve greater potential risk to the Company generally tend to be
more profitable than those managed care and management services products where
the Company is able to shift risks to employer groups. Over the past few years,
the Company has experienced greater margin erosion in the higher risk managed
care products more typical in its individual and small group market than in its
lower-risk managed care and non-risk management services products offered in the
large employer group market. This margin erosion is attributable to product mix
change, competitive pressure and greater regulatory restrictions applicable to
the small employer group market. The spread between the profitability of the
individual and small group business and the large group business in California
was 4.9% and 6.8% for the nine months ended September 30, 1997 and 1996,
respectively. The Company has implemented price increases in certain of its
managed care businesses. While these price increases are intended to improve
profitability, there can be no assurance that this will occur. Subsequent
unfavorable changes in the relative profitability between the Company's various
products could have a material adverse effect on the Company's results of
operations and on the continued feasibility of the Company's geographic
expansion strategy.
27
<PAGE> 30
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
2.01 Amended and Restated Recapitalization Agreement dated as of
March 31, 1995 by and among the Registrant, Blue Cross of
California, Western Health Partnerships and Western
Foundation for Health Improvement, incorporated by reference
to Exhibit 2.1 of Registrant's Form S-4 dated April 8, 1996
2.02 Purchase and Sale Agreement, dated as of January 5, 1996, by
and among the Registrant and Massachusetts Mutual Life
Insurance Company, incorporated by reference to Exhibit 2.1
of Registrant's 8-K dated January 5, 1996
2.03 Purchase and Sale Agreement, dated as of October 10, 1996, by
and between the Registrant and John Hancock Mutual Life
Insurance Company ("John Hancock"), incorporated by reference
to Exhibit 2.1 of Registrant's Current Report on Form 8-K
dated October 9, 1996
2.04 Agreement and Plan of Reorganization dated as of July 22,
1997 by and among the Registrant, WellPoint Health Networks
Inc., a California corporation ("WellPoint California") and
WLP Acquisition Corp., incorporated by reference to Exhibit
99.1 of Registrant's Form 8-K filed on August 5, 1997
3.01 Restated Certificate of Incorporation of the Registrant's
incorporated by reference to Exhibit 3.1 of Registrant's Form
8-K filed on August 5, 1997.
3.02 Bylaws of the Registrant, incorporated by reference to
Appendix B to WellPoint California's Schedule 14A filed on
May 8, 1997, File No. 333-03292-01
3.03 Agreement of Merger dated as of July 22, 1997 by and among
WellPoint California and WLP Acquisition Corp., incorporated
by reference to Exhibit 3.3 of Registrant's Form 8-K filed on
August 5, 1997.
4.01 Specimen of common stock certificate of WellPoint Health
Networks Inc., incorporated by reference to Exhibit 4.4 of
Registrant's Registration Statement on Form 8-B, Registration
No. 001-13083
9.01 Voting Trust Agreement dated as of May 20, 1996, by and
between the Registrant, Western Health Partnerships and
Wilmington Trust Company, incorporated by reference to
Exhibit 99.2 of Registrant's Form 8-K dated May 20, 1996
</TABLE>
28
<PAGE> 31
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
9.02 Amended and Restated Voting Trust Agreement dated as of
August 4, 1997 by and among the California HealthCare
Foundation (the "Foundation") and Wilmington Trust Company,
incorporated by reference to Exhibit 99.2 of Registrant's
Form 8-K filed on August 5, 1997 (superseding Exhibit 9.01)
10.01 Line of Business Assignment and Assumption Agreement dated as
of February 1, 1993 among the Registrant, its subsidiaries
and BCC, incorporated by reference to exhibit 10.01 of
Registrant's Form 10-K for the fiscal year ended December 31,
1992
10.02 Administrative Services and Product Marketing Agreement dated
as of February 1, 1993 among the Registrant, its subsidiaries
and BCC, incorporated by reference to Exhibit 10.02 of
Registrant's Form 10-K for the fiscal year ended December 31,
1992
10.03 Master Subscriber Agreements dated as of January 27, 1993
between the Registrant's subsidiaries and BCC, incorporate by
reference to Exhibit 10.03 of Registrant's Form 10-K for the
fiscal year ended December 31, 1992
10.04 Tax Allocation Agreement dated as of February 1, 1993 among
the Registrant, its subsidiaries and BCC and its
subsidiaries, incorporated by reference to Exhibit 10.04 of
Registrant's Form 10-K for the fiscal year ended December 31,
1992
10.05 Office Space Lease for Oakland, CA offices, dated December
10, 1985, between BCC and Webster Street Partners, Ltd.,
incorporated by reference to Exhibit 10.06 of the
Registrant's Form S-1 Registration Statement No. 33-54898
10.06 Office Space Lease for Westlake, CA offices, dated October
29, 1986, between BCC and Westlake Business Park, Ltd.,
incorporated by reference to Exhibit 10.07 of the
Registrant's Form S-1 Registration Statement No. 33-54898
10.07 Administrative Agreement, dated as of June 1, 1988, between
BCC and INSURx, Inc., incorporated by reference to Exhibit
10.08 of the Registrant's Form S-1 Registration Statement No.
33-54898
10.08 Undertakings dated January 7, 1993 by BCC, the Registrant and
the Registrant's subsidiaries to the California Department of
Corporations, incorporated by reference to Exhibit 10.24 of
Registrant's Form S-1 Registration Statement No. 33-54898
</TABLE>
29
<PAGE> 32
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.09 Office Space Lease for Newbury Park, CA offices, dated
January 13, 1993 between BCC and Metropolitan Life Insurance
Company, incorporated by reference to Exhibit 10.12 of
Registrant's Form 10-K for the fiscal year ended December 31,
1992
10.10 Office Space Lease for Calabasas, CA offices, dated August
26, 1992 between BCC and Lost Hills Office Partners, First
Amendment to Office Lease between Lost Hills Office Partners
and BCC, dated November 1, 1992, and Subordination,
Non-Disturbance and Attornment Agreement, dated January 7,
1993, between BCC and DAG Management, incorporated by
reference to Exhibit 10.13 of Registrant's Form 10-K for the
fiscal year ended December 31, 1992
10.11 WellPoint Health Networks Inc. Officer Change in Control
Plan, incorporated by reference to Exhibit 10.14 of
Registrant's Form 10-K for the fiscal year ended December
31, 1993
10.12 Supplemental Pension Plan of Blue Cross of California,
incorporated by reference to Exhibit 10.15 of Registrant's
Form 10-K for the fiscal year ended December 31, 1992
10.13 Blue Cross of California Deferred Compensation Plan,
incorporated by reference to Exhibit 10.13 of the
Registrant's Form S-1 Registration Statement No. 33-54898
10.14 Form of Supplemental Life and Disability Insurance Policy,
incorporated by reference to Exhibit 10.14 of the
Registrant's Form S-1 Registration Statement No. 33-54898
10.15 Special Executive Retirement Plan dated as of March 29, 1993
among BCC, the Registrant and Leonard D. Schaeffer,
incorporated by reference to Exhibit 10.19 of Registrant's
Form 10-K for the fiscal year ended December 31, 1992
10.16 Form of Indemnification Agreement between the Registrant and
its Directors and Officers, incorporated by reference to
Exhibit 10.17 of the Registrant's Form S-1 Registration
Statement No. 33-54898
10.17 Officer Severance Agreement, dated as of July 1, 1993,
between the Registrant and Thomas C. Geiser, incorporated by
reference to Exhibit 10.24 of Registrant's Form 10-K for the
fiscal year ended December 31, 1993
</TABLE>
30
<PAGE> 33
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.18 First Amendment to Special Executive Retirement Plan dated as
of March 29, 1993 among BCC, the Registrant and Leonard D.
Schaeffer (Exhibit 10.19), effective January 1, 1993,
incorporated by reference to Exhibit 10.25 of Registrant's
Form 10-K for the fiscal year ended December 31, 1993
10.19 Executive Benefiting You Highlights Brochure, incorporated by
reference to Exhibit 10.29 of Registrant's Form 10-K for the
fiscal year ended December 31, 1993
10.20 WellPoint Health Networks Inc. Officer Change in Control Plan
as amended January 5, 1995, incorporated by reference to
Exhibit 10.33 of Registrant's Form 10-K for the fiscal year
ended December 31, 1994
10.21 Form of Officer Severance Agreement of the Registrant,
incorporated by reference to Exhibit 10.32 of Registrant's
Form 10-K for the fiscal year ended December 31, 1994
10.22 WellPoint Health Networks Inc. Management Retention Agreement
between the Registrant and Ronald A. Williams, amended and
restated effective as of January 5, 1995, incorporated by
reference to Exhibit 10.35 of Registrant's Form 10-K for the
fiscal year ended December 31, 1994
10.23 WellPoint Health Networks Inc. Management Retention Agreement
between the Registrant and D. Mark Weinberg, amended and
restated effective as of January 5, 1995, incorporated by
reference to Exhibit 10.36 of Registrant's Form 10-K for the
fiscal year ended December 31, 1994
10.24 Amendment to Administrative Services and Product Marketing
Agreement dated as of February 1, 1993 among the Registrant,
its subsidiaries and BCC (Exhibit 10.02), amended as of
January 1, 1995, incorporated by reference to Exhibit 10.39
of Registrant's Form 10-K for the fiscal year ended December
31, 1994
10.25 Amendment to Administrative Services and Product Marketing
Agreement dated as of February 1, 1993 among the Registrant,
its subsidiaries and BCC (Exhibit 10.02), amended as of
February 1, 1995, incorporated by reference to Exhibit 10.40
of Registrant's Form 10-K for the fiscal year ended December
31, 1994
10.26 Agreement of Purchase and Sale and Escrow Instructions, dated
as of December 16, 1994, between Registrant and Pardee
Construction Company, incorporated by reference to Exhibit
10.41 of Registrant's Form 10-K for the fiscal year ended
December 31, 1994
</TABLE>
31
<PAGE> 34
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.27 Credit Agreement, dated as of October 19, 1994, among the
Registrant, Bank of America, National Trust and Savings
Association, Chemical Bank and Other Financial Institutions,
incorporated by reference to Exhibit 10.43 of Registrant's
Form 10-K for the fiscal year ended December 31, 1994
10.28 First Amendment to Credit Agreement, dated as of March 7,
1995, among the Registrant, Bank of America National Trust and
Savings Association, and other Financial Institutions,
incorporated by reference to Exhibit 10.44 of Registrant's
Form 10-K for the fiscal year ended December 31, 1994
10.29 Orders Approving Notice of Material Modification and
Undertakings dated September 7, 1995 by BCC, the Registrant
and the Registrant's subsidiaries to the California Department
of Corporations, incorporated by reference to Exhibit 10.47 of
Registrant's Form 10-Q for the quarter ended September 30,
1995
10.30 Second Amendment to Credit Agreement, dated as of October 16,
1995, among the Registrant, Bank of America National Trust and
Savings Association and other Financial Institutions,
incorporated by reference to Exhibit 10.48 of Registrant's
Form 10-Q for the quarter ended September 30, 1995
10.31 WellPoint Health Networks Inc. Stock Option/Award Plan, incorporated
by reference to Exhibit 10.45 of Registrant's Form 10-K for the fiscal
year ended December 31, 1995
10.32 Lease Agreement, dated as of January 1, 1996, by and between
TA/Warner Center Associates II, L.P., and the Registrant
(supersedes Exhibit 10.05 and Exhibit 10.42), incorporated by
reference to Exhibit 10.46 of Registrant's Form 10-K for the
fiscal year ended December 31, 1995
10.33 Letter, dated November 13, 1995, from the Registrant to Ronald
A. Williams regarding severance benefits, together with
underlying Officer Severance Agreement, incorporated by
reference to Exhibit 10.47 of Registrant's Form 10-K for the
fiscal year ended December 31, 1995
10.34 Letter, dated November 13, 1995 from the Registrant to D. Mark
Weinberg regarding severance benefits, together with
underlying Officer Severance Agreement, incorporated by
reference to Exhibit 10.48 of Registrant's Form 10-K for the
fiscal year ended December 31, 1995
10.35 Letter, dated November 13, 1995, from the Registrant to Thomas
C. Geiser regarding severance benefits, incorporated by
reference to Exhibit 10.49 of Registrant's Form 10-K for the
fiscal year ended December 31, 1995
</TABLE>
32
<PAGE> 35
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.36 Amended and Restated Undertakings dated March 5, 1996 by BCC,
the Registrant and the Registrant's Subsidiaries to the
California Department of Corporations, incorporated by
reference to Exhibit 99.1 of the Registrant's Current Report
on Form 8-K dated March 5, 1996
10.37 Senior Series A Term Note dated March 31, 1996 between the
Registrant and Massachusetts Mutual Life Insurance Company,
incorporated by reference to Exhibit 10.53 of the Registrant's
Form 10-Q for the Quarter ended March 31, 1996
10.38 Voting Agreement dated as of May 8, 1996 by and among the
Registrant and Western Health Partnerships, incorporated by
reference to Exhibit 99.3 of Registrant's Form 8-K dated May
20, 1996
10.39 Share Escrow Agent Agreement dated as of May 20, 1996 by and
between the Registrant and U.S. Trust Company of California,
N.A., incorporated by reference to Exhibit 99.4 of
Registrant's Form 8-K dated May 20, 1996
10.40 Registration Rights Agreement dated as of May 20, 1996 by and
between the Registrant and Western Health Partnerships,
incorporated by reference to Exhibit 99.5 of Registrant's Form
8-K dated May 20, 1996
10.41 Blue Cross License Agreement effective as of May 20, 1996 by
and among the Blue Cross and Blue Shield Association and the
Registrant (supersedes Exhibit 10.09), incorporated by
reference to Exhibit 99.6 of Registrant's Form 8-K dated May
20, 1996
10.42 California Blue Cross License Addendum effective as of May 20,
1996 by and between the Blue Cross and Blue Shield Association
and the Registrant, incorporated by reference to Exhibit 99.7
of Registrant's Form 8-K dated May 20, 1996
10.43 Blue Cross Affiliated License Agreement effective as of May
20, 1996 by and between the Blue Cross and Blue Shield
Association and CaliforniaCare Health Plans, incorporated by
reference to Exhibit 99.8 of Registrant's Form 8-K dated May
20, 1996
10.44 Indemnification Agreement dated as of May 17, 1996 by and
among the Registrant, WellPoint Health Networks Inc., a
Delaware corporation, and Western Health Partnerships,
incorporated by reference to Exhibit 99.9 of Registrant's Form
8-K dated May 20, 1996
</TABLE>
33
<PAGE> 36
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.45 Credit Agreement dated as of May 15, 1996 by and among the
Registrant, Bank of America National Trust and Savings
Association, as Administrative Agent, NationsBank of Texas,
N.A., as Syndication Agent, Chemical Bank, as Documentation
Agent, and the Other Financial Institutions named therein,
incorporated by reference to Exhibit 99.10 of Registrant's
Form 8-K dated May 20, 1996
10.46 WellPoint Health Networks Inc. Employee Stock Option Plan,
incorporated by reference to the Registrant's Registration
Statement on Form S-8 (Registration No. 333-05111)
10.47 WellPoint Health Networks Inc. Employee Stock Purchase
Plan, incorporated by reference to the Registrant's
Registration Statement on Form S-8 (Registration No.
333-05111)
10.48 Amendment No. 1 dated as of June 28, 1996 to the Registrant's
Credit Agreement dated as of May 15, 1996, incorporated by
reference to Exhibit 10.65 of Registrant's Form 10-Q for the
quarter ended September 30, 1996
10.49 Subordinated Term Loan Agreement dated as of November 21,
1996, by and among the Registrant, Bank of America and the
other parties named therein, incorporated by reference to
Exhibit 99.1 to the Registrant's Current Report on Form 8-K
filed December 12, 1996
10.50 Employment Agreement dated as of January 22, 1997, by and
between the Registrant and Leonard D. Schaeffer, incorporated
by reference to Exhibit 10.50 of Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996
10.51 Modification Agreement dated as of November 26, 1996 by and
between the Registrant California HealthCare Foundation,
incorporated by reference to Exhibit 10.51 of Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996
10.52 Coinsurance Agreement dated as of March 1, 1997 between John
Hancock and UNICARE Life & Health Insurance Company
("UNICARE"), incorporated by reference to Exhibit 99.2 of
Registrant's Current Report on Form 8-K filed March 14, 1997
10.53 Administration Agreement dated as of March 1, 1997 between
John Hancock and UNICARE, incorporated by reference to Exhibit
99.3 of Registrant's Current Report on Form 8-K filed March
14, 1997
</TABLE>
34
<PAGE> 37
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.54 Amendment No. 1 dated as of February 11, 1997 to Registrant's
Subordinated Term Loan Agreement dated as of November 21,
1996, incorporated by reference to Exhibit 10.54 of
Registrant's Annual Report for the fiscal year ended December
31, 1996
10.55 Blue Cross Affiliate License Agreement by and between BC Life
& Health Insurance Company and the BCBSA, incorporated by
reference to Exhibit 10.55 of Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996
10.56 Blue Cross Affiliate License Agreement Applicable to Life
Insurance Companies by and between BC Life & Health Insurance
Company and the BCBSA, incorporated by reference to Exhibit
10.56 of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996
10.57 Second Amendment dated as of April 21, 1997 to Registrant's
Credit Agreement dated as of May 15, 1996, incorporated by
reference to Exhibit 10.55 of Registrant's Form 10-Q for the
Quarter ended March 31, 1997
10.58 Third Amendment dated as of April 21, 1997 to Registrant's
Credit Agreement dated as of May 15, 1996, incorporated by
reference to Exhibit 10.56 of Registrant's Form 10-Q for the
Quarter ended March 31, 1997
10.59 Second Amendment dated as of April 21, 1997 to Registrant's
Subordinated Term Loan Agreement dated as of November 21,
1996, incorporated by reference to Exhibit 10.57 of
Registrant's Form 10-Q for the Quarter ended March 31, 1997
10.60 Amended and Restated Voting Agreement dated as of August 4,
1997 by and among the Registrant, WellPoint California and the
Foundation incorporated by reference to Exhibit 99.3 of
Registrant's Form 8-K filed on August 5, 1997 (superseding
Exhibit 10.38)
10.61 Amended and Restated Share Escrow Agent Agreement dated as of
August 4, 1997 by and between the Registrant and U.S. Trust
Company of California, N.A., incorporated by reference to
Exhibit 99.4 of Registrant's Form 8-K filed on August 5, 1997
(superseding Exhibit 10.39)
10.62 Amended and Restated Registration Rights Agreement dated as of
August 4, 1997 by and among the Registrant, WellPoint
California and the Foundation incorporated by reference to
Exhibit 99.5 of Registrant's Form 8-K filed on August 5, 1997
(superseding Exhibit 10.40)
</TABLE>
35
<PAGE> 38
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.63 Blue Cross License Agreement effective as of August 4, 1997 by
and among the Registrant and the Blue Cross Blue Shield
Association (the "BCBSA"), incorporated by reference to
Exhibit 99.6 of Registrant's Form 8-K filed on August 5, 1997
(superseding Exhibit 10.41)
10.64 California Blue Cross License Addendum effective as of August
4, 1997 by and between the Registrant, Blue Cross of
California and the BCBSA, incorporated by reference to Exhibit
99.7 of Registrant's Form 8-K filed on August 5, 1997
(superseding Exhibit 10.42)
10.65 Blue Cross Controlled Affiliate License Agreement effective as
of August 4, 1997 by and between the BCBSA and Blue Cross of
California, incorporated by reference to Exhibit 99.8 of
Registrant's Form 8-K filed on August 5, 1997 (superseding
Exhibit 10.43)
10.66 Blue Cross Affiliate License Agreement effective as of August
4, 1997 by and between the BCBSA and BC Life & Health
Insurance Company, incorporated by reference to Exhibit 99.9
of Registrant's Form 8-K filed on August 5, 1997 (superseding
Exhibit 10.55)
10.67 Blue Cross Controlled Affiliate License Agreement Applicable
to Life Insurance Companies effective as of August 4, 1997 by
and between the BCBSA and BC Life & Health Insurance Company,
incorporated by reference to Exhibit 99.10 of Registrant's
Form 8-K filed on August 5, 1997 (superseding Exhibit 10.56)
10.68 Fourth Amendment to Credit Agreement and Consent dated as of
July 21, 1997 by and among the Registrant, WellPoint
California, Bank of America National Trust and Savings
Association, as Administrative Agent, NationsBank of Texas,
N.A., as Syndication Agent, and Chase Manhattan Bank, as
Documentation Agent, and the other financial institutions
named therein, incorporated by reference to Exhibit 99.11 to
Registrant's Form 8-K filed on August 5, 1997
10.69 Undertakings dated July 31, 1997 by the Registrant, WellPoint
California and WellPoint California Services, Inc. to the
California Department of Corporations, incorporated by
reference to Exhibit 99.12 to Registrant's Form 8-K filed on
August 5, 1997
10.70 WellPoint Health Networks Inc. Stock Option/Award Plan, as
amended through January 15, 1997 (incorporated by reference to
Exhibit 99.1 to the Registrant's Registration Statement on
Form S-8), File No. 333-33013 (superseding Exhibit 10.31)
</TABLE>
36
<PAGE> 39
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.71 WellPoint Health Networks Inc. Employee Stock Purchase Plan
(as amended and restated effective January 1, 1998)
(incorporated by reference to Exhibit 10.71 of Registrant's
Form 10-Q for the Quarter ended June 30, 1997) (superseding
Exhibit 10.47)
10.72 Amendment No. 1 to Employment Agreement by and between the
Registrant and Leonard D. Schaffer.
10.73 Amendment and Restated Special Executive Retirement Plan
effective as of September 1, 1997 by and between the
Registrant and Leonard D. Schaffer (superseding Exhibit 10.15)
10.74 Salary Deferral Savings Program of WellPoint Health Networks
Inc., as amended through October 1, 1997.
11 Statement Re: Computation of Earnings Per Share
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
A current report on Form 8-K was filed on August 5, 1997, which reported
that the Company has completed the formation of a new Delaware holding
company structure.
A current report on Form 8-K was filed on September 19, 1997, regarding
recent changes to BCBSA ownership guidelines.
37
<PAGE> 40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WELLPOINT HEALTH NETWORKS INC.
Registrant
Date: November 14, 1997 By: /s/ LEONARD D. SCHAEFFER
-----------------------------
Leonard D. Schaeffer
Chairman of the Board of Directors
and Chief Executive Officer
Date: November 14, 1997 By: /s/ DAVID C. COLBY
-----------------------------
David C. Colby
Executive Vice President
and Chief Financial Officer
Date: November 14, 1997 By: /s/ S. LOUISE McCRARY
-----------------------------
S. Louise McCrary
Senior Vice President and
Chief Accounting Officer
38
<PAGE> 1
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
The Employment Agreement entered into by and between WELLPOINT HEALTH
NETWORKS INC. ("the Company") and LEONARD D. SCHAEFFER ("Executive") effective
January 22, 1997 (the "Employment Agreement") is hereby amended September 1,
1997, as follows:
Subsections 5.c., 5.d. and 5.e. are hereby amended to read in
full as follows:
"c. Life Insurance. The Company will provide to Executive
for the term of this Agreement and any extensions life insurance in an
amount totaling three times Executive's then current Base Salary, which
obligation may be satisfied in whole or in part by life insurance
coverage provided through one or more individual policies of insurance
or through Company-paid coverage under the Company's life insurance
programs for employees or executives generally;
d. Long-Term Disability. The Company shall provide to
Executive for the term of this Agreement and any extensions long-term
disability benefits at an annual level equal to Executive's then current
Base Salary, which obligation may be satisfied in whole or in part by
payment of salary continuation, disability insurance coverage under one
or more individual disability insurance policies the premiums of which
are paid by the Company, through Company-paid coverage under the
Company's disability insurance programs for employees or executives
generally and\or, if necessary self-insurance. Such benefits shall begin
upon disability (that prevents Executive from performing his duties as
Chairman and Chief Executive Officer) and shall continue until at least
age 65 (or if earlier, the date that such disability ceases). However,
if Executive begins to receive retirement benefits under the Special
Executive Retirement Plan (formerly known as the Excess Benefit Plan for
Leonard D. Schaeffer), as amended and restated effective September 1,
1997 and as hereafter amended (the "SERP"), any long-term disability
benefits provided under this subsection (d) thereafter shall be in
satisfaction on a dollar-for-dollar basis of the Company's obligation to
provide retirement benefits under the SERP.
<PAGE> 2
e. Retirement and Deferred Compensation Programs.
Executive shall be entitled to participate in any existing retirement or
deferred compensation programs or other existing employee benefit
programs (other than severance pay programs, including the Company's
Change of Control Severance Plan) of the Company on the Effective Date
and shall also be entitled to participate in any such programs
established in the future. For this purpose any split-dollar life
insurance arrangement maintained for Executive shall not be deemed to be
a severance benefit. The Company shall continue to perform its
obligations, including funding obligations, under the SERP (as defined
in (d) above)."
Except as amended above all terms of the Employment Agreement
shall remain in full force and effect.
The parties hereto have duly executed or caused their authorized agent
to execute this Amendment No. 1 to Employment Agreement on their behalf as of
the date shown below.
Executive Company
/s/ Leonard D. Schaeffer By /s/ Stephen L. Davenport
- -------------------------------- ---------------------------
Stephen L. Davenport
Chair, Compensation
Committee
- ------------------------------- ------------------------------
Date Date
<PAGE> 1
SPECIAL EXECUTIVE RETIREMENT PLAN
This Special Executive Retirement Plan ("Plan"), formerly known as the
Excess Benefit Plan for Leonard D. Schaeffer, was adopted effective as of
December 30, 1986 and was amended and restated effective as of July 24, 1989 and
as of January 1, 1993. This document constitutes a complete amendment and
restatement of the Plan effective September 1, 1997.
1. Purpose
The Plan is established and maintained by WellPoint Health Networks Inc.
("the Company") as part of a program to provide supplemental retirement benefits
for Leonard D. Schaeffer ("Executive") as partial consideration for his services
to the Company and its predecessors, including Blue Cross of California ("Blue
Cross"), and their Affiliates. Benefits under the Plan are designed to
supplement benefits payable to Executive under the Company's Pension
Accumulation Plan and the Noncontributory Retirement Program for Certain
Employees of Blue Cross of California, including each predecessor, successor or
replacement to each plan (collectively, "Qualified Plan") and under the
Company's Supplemental Pension Plan, including each successor or replacement to
that plan ("Supplemental Plan"), as those plans may be amended from time to
time. All terms used herein shall have the meanings assigned to them under the
provisions of the Pension Accumulation Plan unless otherwise qualified by the
context or specifically defined in a different manner. Executive, a highly
compensated, management employee of the Company, shall be the sole participant
in the Plan.
2. Normal Retirement Benefit
(a) Eligibility. If Executive's employment with the Company and all
other Affiliated Companies (as defined in the Qualified Plan) terminates on or
after the date that Executive has attained age 65 (other than due to Executive's
death), Executive will be entitled to a monthly retirement benefit ("Normal
Retirement Benefit") under the Plan for Executive's lifetime. The Normal
Retirement Benefit will become payable in monthly installments commencing on
Executive's "Normal Retirement Beginning Date," which will not be later than
thirty (30) days after Executive's employment with the Company and all other
Affiliated Companies terminates.
<PAGE> 2
Such monthly installments shall continue to be paid on the first day of each
month thereafter until the date of payment of the last installment.
(b) Calculation. Each monthly installment payment of the Normal
Retirement Benefit will equal the monthly Base Amount calculated in (i) below,
reduced by the Offset Amount calculated in (ii) below; provided, however, that
in no event will the aggregate Normal Retirement Benefit payable under the Plan,
the Supplemental Plan and the Qualified Plan be less than Executive's accrued
benefit under the Plan, the Supplemental Plan and the Qualified Plan on December
31, 1992.
(i) "Base Amount." The Base Amount will be two-thirds (2/3rds) of
Executive's Targeted Annual Compensation. "Targeted Annual Compensation" means
the sum of the following:
(A) Base Salary. An amount equal to Executive's average monthly base
salary from the Company and all other Affiliated Companies (including
base salary paid or reimbursed by Blue Cross or its then subsidiary
WellPoint Health Networks Inc. ("Old WellPoint") before their merger to
from the Company) for the 12 consecutive month period of Executive's
employment with the Company (or Blue Cross or Old WellPoint) and any
other Affiliated Company (whether occurring before or after June 1,
1997) for which such average is the highest. For purposes of computing
this average, Executive's base salary for any calendar month beginning
after December 31, 1997 shall be deemed to be as follows: (i) on each
January 1 through January 1, 2001, Executive's monthly base salary,
starting with Executive's actual monthly base salary as of December 31,
1997, shall be increased by five percent (5%), (ii) on any date after
December 31, 1997 and before January 2, 2001 that Executive's actual
monthly base salary is increased so that the cumulative increase in such
actual monthly base salary since the most recent December 31 is more
than five percent (5%), Executive's monthly base salary shall be
increased by the percentage increase in actual monthly base salary, but
only to the extent that such increase when added to earlier actual
increases since the most recent December 31 exceeds five percent (5%),
and (iii) on any date after January 1, 2001, Executive's monthly base
salary shall be increased in the same percentage amount and at the same
time that Executive's actual monthly base salary is increased after that
date.
(B) Annual Bonus. An amount equal to one-twelfth (1/12th) of the largest
annual target incentive bonus established at any time for Executive by
the board of directors or the compensation committee of the Board of
Directors of the
<PAGE> 3
Company (including the board of directors and the compensation
committees of Blue Cross and Old WellPoint) and, if applicable, any
other Affiliated Company.
(ii) "Offset Amount." The Offset Amount will be the sum of the following
amounts:
(A) Qualified Plan. The monthly benefit that would be payable over
Executive's lifetime as a single life annuity with payments guaranteed
for a period of ten years under the terms of the Qualified Plan if all
benefit payments under the Qualified Plan were to begin on the Normal
Retirement Beginning Date.
(B) Supplemental Plan. The monthly benefit that would be payable over
Executive's lifetime as a single life annuity with payments guaranteed
for a period of ten years under the terms of the Supplemental Plan if
all benefit payments under the Supplemental Plan were to begin on the
Normal Retirement Beginning Date.
3. Early Retirement Benefit
(a) Eligibility. If Executive's employment with the Company and all
other Affiliated Companies (as defined in the Qualified Plan) terminates (other
than due to Executive's death) before Executive has attained age 65, Executive
will be entitled to a monthly retirement benefit ("Early Retirement Benefit")
under the Plan for Executive's lifetime. The Early Retirement Benefit will
become payable in monthly installments commencing on Executive's "Early
Retirement Beginning Date," which will not be later than thirty (30) days after
Executive's employment with the Company and all other Affiliated Companies
terminates; provided that if Executive terminates employment by reason of
disability and is entitled to disability benefits in accordance with his
employment agreement with the Company or under an employee benefit plan
maintained by the company, Executive may delay his Early Retirement Beginning
Date to the first day of any month after termination of employment and before
the earlier of the date that he attains age 65 or the date that such disability
benefits cease. Such monthly installments shall continue to be paid on the first
day of each month thereafter until the date of payment of the last installment.
(b) Calculation. Each monthly installment payment of the Early
Retirement Benefit will equal the monthly Base Amount calculated under Section
2(b)(i) above, reduced by one-twelfth of 6.25% for each month (prorated for a
fraction of a month) by which the Early Retirement Beginning Date is earlier
than the date Executive would attain age 60, and reduced further by the sum of
the following:
<PAGE> 4
(i) Qualified Plan. The monthly benefit that would be payable over
Executive's lifetime as a single life annuity with payments guaranteed
for a period of ten years under the terms of the Qualified Plan if all
benefit payments under the Qualified Plan were to begin on the Early
Retirement Beginning Date.
(ii) Supplemental Plan. The monthly benefit that would be payable over
Executive's lifetime as a single life annuity with payments guaranteed
for a period of ten years under the terms of the Supplemental Plan if
all benefit payments under the Supplemental Plan were to begin on the
Early Retirement Beginning Date.
4. Death Benefit for Designated Beneficiary
(a) Death Before Beginning Date. If Executive terminates employment by
reason of death before commencement of Normal or Early Retirement Benefits,
Executive's Designated Beneficiary will be entitled to a monthly death benefit
that will be payable for 120 months. Each such monthly payment will equal 100%
of the monthly Normal Retirement Benefit. This monthly benefit will become
payable commencing within thirty (30) days after the date of Executive's death.
(b) Death After Beginning Date. If Executive dies after his Normal or
his Early Retirement Benefits commence, but before Executive has received 120
monthly payments under the Plan, Executive's Designated Beneficiary will be
entitled to a monthly death benefit payable for the balance of this 120 month
period. Each such monthly payment will equal 100% of the monthly amount that
Executive was receiving under the Plan. This death benefit will become payable
commencing within thirty (30) days of the date of Executive's death.
(c) "Designated Beneficiary." The initial Designated Beneficiary shall
be the person or trustee so designated by Executive by the latest written
instrument delivered to the Company before his death. Upon the death of any
Designated Beneficiary, the Designated Beneficiary shall be the contingent
Designated Beneficiary so designated by Executive by the latest written
instrument delivered to the Company before his death. If no Designated
Beneficiary is designated by Executive, or is living at the date of death of
Executive or of any Designated Beneficiary, the Designated Beneficiary shall be
the duly appointed executor or administrator of Executive's estate. If the
Designated Beneficiary is not Executive's Spouse (defined below), his Spouse
must consent to such designation by Executive, prior to the date of Executive's
death, in writing, to the extent required by the community property laws, if
any, of the state in which Executive is domiciled at the date of designation.
<PAGE> 5
5. Spousal Death Benefit
(a) Death Before Beginning Date. If Executive terminates employment by
reason of death before his Normal or Early Retirement Benefits commence,
Executive's Spouse will be entitled to a monthly Spousal Death Benefit equal to
50% of the Normal Retirement Benefit. The first such monthly installment will be
paid not later than thirty (30) days after the date that the last payment of a
death benefit to a Designated Beneficiary is made pursuant to Section 4(a) and
will continue for the remainder of the Spouse's life.
(b) Death After Beginning Date. If Executive dies after his Normal or
his Early Retirement Benefits commence, Executive's Spouse will be entitled to a
monthly Spousal Death Benefit for the remainder of her lifetime. This Spousal
Death Benefit will equal 50% of the monthly amount that Executive was receiving
under the Plan. Benefits will become payable commencing within thirty (30) days
after Executive's death, unless Executive dies before receiving one hundred
twenty (120) monthly benefit payments, in which cases the Spousal Death Benefit
will commence within thirty (30) days after the last monthly payment to a
Designated Beneficiary under Section 4(b).
(c) "Spouse." For purposes of the Plan, Spouse means a spouse who
survives Executive and to whom Executive is legally married on the date of his
death. For purposes of the Plan, the term Spouse does not include any successor
in interest to a Spouse, including but not limited to a Spouse's estate or a
Spouse's beneficiaries.
6. Actuarial Equivalents
The actuarial assumptions specified in the Company's Pension
Accumulation Plan as of the date of termination of Executive's employment with
the Company and all other Affiliated Companies, used for purposes of determining
the form of a benefit or the adjustment of a benefit to reflect the timing of
commencement of the benefit thereunder, shall also be used for such purposes
with respect to a benefit under the Plan. All actuarial adjustments required
under the Plan shall be made by the enrolled actuary or firm of enrolled
actuaries acting for the Pension Accumulation Plan at the date of adjustment.
7. Trust Funding and Obligations
<PAGE> 6
(a) Trust Funding and Investment. The Company shall, no later than
February 15 of each calendar year after 1992 (or, in the case of 1993, as soon
as practicable after execution of the Plan) make such contributions to the Trust
as shall be necessary, together with prior contributions, to fund the Early
Retirement Benefit payable hereunder upon Executive's retirement at age 60
(assumed, for this purpose, to be payable in the form of a joint and survivor
annuity that pays 100% of the original monthly amount of Early Retirement
Benefit until the later of (A) the month of Executive's death or (B) the month
in which the 120th monthly payment is made and, thereafter, 50% of the original
monthly amount to Executive's Spouse for her life) under a generally accepted
funding method and reasonable actuarial assumptions determined by the Company,
in its sole discretion, which will result in full funding of such benefits no
later than the date Executive attains age 60. Contributions shall be invested by
the Trustees in their sole discretion.
(b) Actuarial Adjustments. All actuarial assumptions utilized in making
the actuarial adjustments called for in this Section 7 shall be reasonable
assumptions agreed to by the Company and Executive.
8. Change in Control
(a) Effect. In the event of a Change in Control (as defined below), any
benefit to which Executive or his beneficiary becomes entitled hereunder shall
be computed as if Executive had remained employed by the Company through January
2, 2001 or, if later, the date of Executive's actual termination of employment.
(b) Defined. For purposes of this Plan, a "Change in Control" means:
(i) the acquisition, directly or indirectly by any person
or related group of persons (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act", but
other than the Company or a person that directly or indirectly controls,
is controlled by, or is under common control with the Company) of
beneficial ownership (as defined in Rule 13d-3 of the Exchange Act) of
securities of the Company that result in such person or related group of
persons beneficially owning securities representing 40% or more of the
combined voting power of the Company's then outstanding securities;
provided that this provision shall not apply to an acquisition by the
California HealthCare Foundation that either -
(A) is on or before May 20, 1996, or
<PAGE> 7
(B) is both (I) after May 20, 1996 but before the
first date thereafter, if any, that California HealthCare
Foundation's beneficial ownership is less than 35% and (II)
involves securities representing less than 50% (or, if lower, the
lowest percentage of beneficial ownership by the California
Healthcare Foundation on or after May 20, 1996 plus 10%) of the
combined voting power of the Company's then outstanding
securities.
(ii) a merger or consolidation to which the Company is a
party but is not the surviving entity, if the beneficial owners of the
Company's securities immediately before the transaction do not,
immediately after the transaction have beneficial ownership of
securities of the surviving entity or parent thereof representing at
least 60% of the combined voting power of the then outstanding
securities of the surviving entity or parent;
(iii) a change in the composition of the Board of
Directors of the Company ("the "Board") over a period of thirty-six (36)
consecutive months or less such that a majority of the Board members
ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B)
have been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause
(A) who were still in office at the time the Board approved such
election or nomination; or
(iv) the sale, transfer or other disposition of all or
substantially all of the Company's assets in complete liquidation or
dissolution of the Company unless the beneficial owners of the Company's
securities immediately before the transaction have, immediately after
the transaction, beneficial ownership of securities representing at
least 60% of the combined voting power of the then outstanding
securities of the entity acquiring the Company's assets.
9. Administration
The Retirement Committee that administers the Company's Pension
Accumulation Plan has full discretionary authority, exercised in a reasonable
manner, to administer and interpret the Plan, including discretionary authority,
exercised in a reasonable manner, to determine eligibility for benefits and the
amount of benefits under the terms of the Plan. The Retirement Committee may
delegate its discretionary authority and such duties and responsibilities as it
deems appropriate to facilitate the day-to-day administration of the Plan. No
member of the Retirement Committee and no delegate of the Retirement
<PAGE> 8
Committee acting within his or her delegated authority will be liable to any
person for any action taken or omitted in connection with the interpretation and
administration of the Plan unless attributable to willful misconduct or lack of
good faith.
10. Amendment and Discontinuance
The Company reserves the right, with the consent of Executive or, if he
is deceased, with the consent of Executive's Spouse, or if there is no Spouse,
with the consent of the Designated Beneficiary, to amend or terminate the Plan
at any time.
11. Right to Benefits
(a) Limits. Benefits payable under the Plan shall be payable by the
Company from its own assets and from assets of the Trust and shall not (i)
impose any obligation upon the Trust Fund under the Qualified Plan; (ii) be paid
from the Trust Fund under the Qualified Plan; or (iii) have any effect
whatsoever on the Qualified Plan or the payment of benefits from the Trust Fund
under the Qualified Plan. No person shall have any right to a benefit under the
Plan except in accordance with the terms of the Plan.
(b) General Creditor Status. The Plan and the Company's obligations
hereunder are intended to be unfunded for purposes of the Internal Revenue Code
of 1986 and the Employee Retirement Income Security Act of 1974, each as
amended. The Plan represents a mere promise to pay benefits in the future, as
detailed herein. Any right of Executive, Executive's Spouse, or Executive's
Designated Beneficiary to receive a benefit under the Plan or from the Trust is
the right of an unsecured general creditor against the Company and neither
Executive nor Executive's Spouse nor Executive's Designated Beneficiary shall
have any preferred rights in or against any specific assets of the Company any
other Affiliated Company or the Trust. All amounts credited to the Trust shall
constitute general assets of the Company and may be disposed of by the Company
pursuant to the terms of the Trust. The Trust established by the Company to
assist it in providing benefits under the Plan and the assets held thereunder
shall conform to the terms of the model trust described in Revenue Procedure
92-64, issued by the Internal Revenue Service.
(c) Premature Taxation. Notwithstanding anything to the contrary
contained herein; (i) in the event that the Internal Revenue Service prevails in
its claim that amounts contributed to and held in the Trust, and/or earnings
thereon, constitute taxable income to the Executive or his
<PAGE> 9
Spouse or Designated Beneficiary for any taxable year of such person, prior to
the taxable year in which such contributions or earnings are distributed to such
person; or (ii) in the event that legal counsel satisfactory to Company and the
Executive or his Spouse or Designated Beneficiary renders an opinion that the
Internal Revenue Service would likely prevail in such a claim, there shall be
distributed from the Trust to the Executive, his Spouse or Designated
Beneficiary (as the case may be), as soon as practicable, as an advance payment
of benefits under the Plan, an amount necessary to satisfy, after taxes on such
amount, the Executive's or his Spouse or Designated Beneficiary's federal, state
and local income and employment tax liability on the amount of the Trust held to
be taxable. Benefits otherwise payable thereafter to Executive, and, to the
extent necessary, his Spouse and\or Beneficiary under the Plan shall be reduced
by the amount of any such distribution.
The Internal Revenue Service shall be deemed to have prevailed in a
claim if such claim is upheld by a court of final jurisdiction, or if Executive
or his Spouse or Designated Beneficiary (as the case may be), based upon an
opinion of legal counsel satisfactory to Company and the Executive or his Spouse
or Designated Beneficiary (as the case may be), fails to appeal a decision of
the Internal Revenue Service, or a court of applicable jurisdiction, with
respect to such claim, to an appropriate Internal Revenue Service appeals
authority or to a court of higher jurisdiction within the appropriate time
period.
12. Restrictions on Assignment
No interest of any person or entity in, or right to receive a benefit
under, the Plan shall be subject in any manner to sale, transfer, assignment,
pledge, attachment, garnishment, or other alienation or encumbrance of any kind;
nor may such interest or right to receive a benefit be taken, either voluntarily
or involuntarily, for the satisfaction of the debts of, or other obligations or
claims against, such person or entity, including claims for alimony, support,
separate maintenance and claims in bankruptcy proceedings.
13. Continued Employment
Nothing contained in this document shall be construed as conferring on
Executive the right to continue in the employ of the Company or any other
Affiliated Company in any capacity.
<PAGE> 10
14. Binding
The Plan shall be binding on and inure to the benefit of the Company and
its respective successors and assigns and Executive, his heirs, executors,
administrators and legal representatives. In the event of the merger or
consolidation of the Company with or into any other corporation, or in the event
substantially all of the assets of the Company are transferred to another
corporation (other than any direct or indirect subsidiary of the Company in
connection with its formation), the successor corporation resulting from the
merger or consolidation, or the transferee of such assets, as the case may be,
shall, as a condition to the consummation of the merger, consolidation or sale,
assume the obligations of the Company under the Plan and shall be substituted
for the Company under this document.
<PAGE> 11
15. Claims
If the Executive or the Executive's Spouse or Designated Beneficiary
believes that he or she is entitled to a greater benefit or a different form of
benefit under the Plan, he or she may file a signed, written application with
the Retirement Committee. The Executive or the Executive's Spouse or Designated
Beneficiary will generally be notified of the approval or denial of this
application within ninety (90) days of the date that the Retirement Committee
receives the application. If no such notice is received within such time period,
the claim shall be deemed denied. If the claim is denied, the notification will
state specific reasons for the denial and the Executive or the Executive's
Spouse or Designated Beneficiary will have sixty (60) days to file a signed,
written request for a review of the denial with the Retirement Committee.
Executive or Executive's Spouse or Designated Beneficiary shall have the right
to review all documents relevant to his or her claim in connection with such
request for review. This request should include the reasons for requesting a
review, facts supporting the request and any other relevant comments. The
Retirement Committee will generally make a final, written determination with
respect to the claim within sixty (60) days of receipt of the request for
review.
16. Arbitration
Any controversy or claim which arises out of or relates to the Plan or
the construction of the Plan (including the denial of a claim for benefits) or
the breach of Plan provisions shall be settled by arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association
("AAA"), then in effect, except as otherwise provided in this Section 16. The
proceeding will be held in Los Angeles, California. The prevailing party to such
arbitration shall be entitled to expenses of arbitration, including reasonable
attorneys' fees, as fixed by the arbitrators or a majority of them. As provided
in Section 1283.05 of the Code of Civil Procedure of the State of California,
depositions may be taken and discovery obtained in any such arbitration
proceedings and the provisions of Section 1283.05 shall be deemed to be made a
part of and applicable to the Plan.
The arbitration proceeding shall be conducted by a single arbitrator
selected as provided in the AAA rules. The arbitrator so appointed shall proceed
to determine the matter in question and the decision or award of said arbitrator
shall be final, conclusive and binding on all persons. Judgement upon the award
of the arbitrator may be entered in any court having jurisdiction thereof.
Should any litigation be commenced between the parties to compel
arbitration under this Section 16 (including proceedings in trial and appellate
courts) or to confirm an award of the
<PAGE> 12
arbitrators (including proceedings in trial and appellate courts), the party
prevailing in such litigation shall be entitled to reimbursement of reasonable
attorneys' fees, expenses and court costs incurred in connection with such
litigation.
17. Law
The Plan shall be construed in accordance with and governed by the laws
of the State of California to the extent not preempted by Federal law.
Agreed to this _____ day of ______, 1997, as of September 1, 1997.
WellPoint Health Networks Inc.
By: /s/ Stephen L. Davenport
--------------------------------
Stephen L. Davenport
Chair, Compensation Committee
Agreed to this _____ day of ______, 1997, as of September 1, 1997.
/s/ Leonard D. Schaeffer
----------------------------------
Leonard D. Schaeffer
<PAGE> 1
EXHIBIT 10.74
SALARY DEFERRAL SAVINGS PROGRAM
OF
WELLPOINT HEALTH NETWORKS INC.
GENERALLY EFFECTIVE JANUARY 1, 1997
(AS AMENDED THROUGH OCTOBER 1, 1997)
<PAGE> 2
Salary Deferral Savings Program
of
WellPoint Health Networks Inc.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I HISTORY.............................................................. 1
ARTICLE II DEFINITIONS.......................................................... 2
ARTICLE III SERVICE.............................................................. 5
ARTICLE IV PARTICIPATION........................................................ 8
ARTICLE V CONTRIBUTIONS........................................................ 8
ARTICLE VI INVESTMENT FUNDS AND WELLPOINT COMMON STOCK.......................... 13
ARTICLE VII VALUATION............................................................ 15
ARTICLE VIII VESTING.............................................................. 15
ARTICLE IX IN-SERVICE WITHDRAWALS............................................... 15
ARTICLE X LOANS................................................................ 17
ARTICLE XI DISTRIBUTION OF BENEFITS............................................. 19
ARTICLE XII BENEFICIARY DESIGNATIONS............................................. 23
ARTICLE XIII CLAIMS PROCEDURE..................................................... 23
ARTICLE XIV ALIENATION AND QUALIFIED DOMESTIC RELATIONS
ORDERS............................................................... 24
ARTICLE XV ADMINISTRATION....................................................... 24
ARTICLE XVI AMENDMENTS........................................................... 25
ARTICLE XVII TERMINATION, MERGER AND TRANSFER..................................... 26
ARTICLE XVIII MISCELLANEOUS........................................................ 27
</TABLE>
i.
<PAGE> 3
<TABLE>
<S> <C> <C>
APPENDIX I: TESTING SALARY DEFERRAL AND MATCHING
CONTRIBUTIONS........................................................ 28
APPENDIX II: LIMITATIONS ON ALLOCATIONS........................................... 31
APPENDIX III: TOP HEAVY PROVISIONS................................................. 34
APPENDIX IV: PARTICIPATION OF UNICARE EMPLOYEES................................... 38
APPENDIX V: PARTICIPATION OF COST CARE INC. EMPLOYEES............................ 42
APPENDIX VI: PARTICIPATION OF JOHN HANCOCK MUTUAL LIFE
INSURANCE EMPLOYEES.................................................. 46
APPENDIX VII: PARTICIPATING COMPANIES.............................................. 47
</TABLE>
ii.
<PAGE> 4
SALARY DEFERRAL SAVINGS PROGRAM
OF WELLPOINT HEALTH NETWORKS INC.
ARTICLE I
HISTORY
Effective July 1, 1992, Blue Cross of California adopted the Salary
Deferral Savings Program of Blue Cross of California. This plan received a
favorable IRS determination letter in November of 1995, and was subsequently
amended. In 1996, the name of the plan was changed to Salary Deferral Savings
Program of WellPoint Health Networks Inc. ("Plan").
Effective January 1, 1997, or as otherwise specifically indicated below,
this document constitutes a complete amendment and restatement of the Plan. The
principal purposes of this amendment and restatement are to update the Plan for
technical and legislative changes, to incorporate changes made to the Plan after
the 1995 IRS determination letter referred to above, and to document the mergers
of the Cost Care Inc. Savings Plan ("Cost Care Plan") and a portion of The
Investment-Incentive Plan for John Hancock Employees (which portion is hereafter
referred to as the "Hancock Plan") into this Plan.
Effective March 31, 1997, (i) assets and liabilities attributable to
certain participants in the Hancock Plan who became Employees on March 1, 1997
due to a corporate transaction, and (ii) all Cost Care Plan assets and
liabilities are merged into this Plan and, together with the assets of this
Plan, constitute a single plan within the meaning of Code Section 414(l), which
is governed by the terms of this Plan document.
The rights and benefits of a Cost Care Plan Participant who ceased to be
an Employee before April 1, 1997 will be determined in accordance with the
provisions of the Cost Care Plan in effect on the date on which that Participant
ceased to be an Employee, and any provisions of this Plan that are specifically
made effective to such date.
The rights and benefits of a Hancock Plan Participant who ceased to be
an Employee before March 1, 1997 will be determined in accordance with the
provisions of the Hancock Plan in effect
1.
<PAGE> 5
on the date on which that Participant ceased to be an Employee, and any
provisions of this Plan that are specifically made effective to such date.
The rights and benefits of a Participant in this Plan who ceased to be
an Employee before January 1, 1997 will be determined in accordance with the
provisions of the Plan in effect on the date on which that Participant ceased to
be an Employee, and any provisions of this Plan that are specifically made
effective to such date.
ARTICLE II
DEFINITIONS
This Plan is subject to technical restrictions that are outlined in
Appendices which, by this reference, are incorporated into the Plan. Terms that
are used in a single Article or Appendix are generally defined in that Article
or Appendix. The following terms are used throughout the Plan.
2.01 "Account" means the value of all Accounts maintained on behalf of a
Participant or Beneficiary. An Account may include a Special Contributions
Account, a Salary Deferral Contributions Account, Matching Contributions
Accounts, a Loan Account, Rollover Accounts, a Profit Sharing Contributions
Account, and a Post-Tax Contributions Account.
2.02 "Affiliated Company" means a Participating Company and, with
respect to a Participating Company, (i) any corporation that, pursuant to
Section 414(b) of the Code, is a member of a controlled group of corporations of
which the Participating Company is a member; (ii) any employer that, pursuant to
Section 414(c) of the Code, is under common control with the Participating
Company; (iii) any employer that, pursuant to Section 414(m) of the Code, is a
member of an affiliated service group of which the Participating Company is a
member and (iv) any employer that, pursuant to Section 414(o) of the Code, is
required to be aggregated with the Participating Company.
2.03 "Annuity Starting Date" means the first date for which an amount is
payable as an annuity or, in the case of a benefit not payable as an annuity,
the first day on which all
2.
<PAGE> 6
events have occurred that entitle a Participant, or Beneficiary, as the case may
be, to a benefit under this Plan.
2.04 "Beneficiary" means the person(s) or entity entitled to receive a
Participant's Account if the Participant dies before distribution of his or her
entire Account.
2.05 "Code" means the Internal Revenue Code of 1986, as amended.
2.06 "Committee" means the entity that, pursuant to Article XV,
administers the Plan.
2.07 "Company" means, effective May 20, 1996, WellPoint Health Networks
Inc. or a successor to all or a major portion of the assets or business of
WellPoint Health Networks Inc. that, by appropriate action, adopts the Plan.
2.08 "Compensation" means all regular base earnings paid by a
Participating Company, which includes vacations, pay in-lieu-of vacation or
floating holidays (if pay in-lieu-of vacation or floating holidays was paid
before January 1, 1998), salary continuance (other than severance), and sick
leave paid by a Participating Company. Compensation also includes sales
commissions, overtime, elective contributions that are not includible in income
under Code Sections 125, 402(e)(3), 402(h) or 403(b), and all bonuses (except
starting bonuses) and incentive payments (except Instabucks).
(a) Exclusions. Compensation does not include severance pay,
imputed income, moving expenses, payments made under any group insurance plan,
or effective January 1, 1998, pay in lieu of vacation or floating holidays.
(b) Limit. With respect to any Plan Year, the annual Compensation
of any Participant taken into account pursuant to this definition will not
exceed $150,000 (indexed).
2.09 "Directors" means the Board of Directors of the Company.
2.10 "Eligible Employee" means an Employee of a Participating Company,
other than (i) an Employee who has not
3.
<PAGE> 7
attained the age of eighteen (18), (ii) a Leased Employee, (iii) a Temporary
Employee, (iv) a non-resident alien who receives no earned income from sources
within the United States, and (iv) an Employee whose employment is governed by
the terms of a collective bargaining agreement, unless a Participating Company
is a party to the agreement and the agreement provides for coverage of the
Employee under this Plan.
An Eligible Employee does not include (and has not at any time included)
any individual during any period that individual is not classified or treated by
an Affiliated Company as a common-law employee of an Affiliated Company, without
regard to whether such individual is subsequently determined to have been a
common-law employee of an Affiliated Company.
2.11 "Employee" means a person who is employed by an Affiliated Company
and any Leased Employee.
2.12 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
2.13 "Highly Compensated Employee", means a Highly Compensated Employee
as defined in Code Section 414(q).
2.14 "Hour of Service" is defined in Article III.
2.15 "Leased Employee" means an individual who is not otherwise an
Employee and who, pursuant to Code Section 414(n), performs services under
primary direction or control of the Participating Company on a substantially
full-time basis. Notwithstanding the foregoing, an individual will not be a
Leased Employee for a Plan Year for nondiscrimination testing or for any
other purpose if either (a) or (b) below is applicable for that
Plan Year:
(a) Safeharbor Plan. The individual is covered by a money purchase
pension plan meeting the requirements of Code Section 414(n)(5)(B) and leased
employees do not constitute more than 20% of all Non-Highly Compensated
Employees of all Affiliated Companies.
(b) Recordkeeping Exception. The Committee has not been notified by
the individual that the individual is a leased
4.
<PAGE> 8
employee, the qualified plans (within the meaning of Code Section 401(a)) that
are maintained by each Affiliated Company exclude leased employees from
participation, none of these plans is top heavy (within the meaning of Code
Section 416), and the number of leased persons who, during that Plan Year,
perform at least 1500 Hours of Service of work described in Code Sections
414(n)(2)(A) and (C) for any Affiliated Company is less than 5% of the number of
Employees (excluding leased persons and Highly Compensated Employees) covered by
the qualified plans (within the meaning of Code Section 401(a)) of all
Affiliated Companies at any time during the Plan Year.
2.16 "Non-Highly Compensated Employee" is an Employee who is not a
Highly Compensated Employee.
2.17 "Participant" means any Eligible Employee who became a Participant
and who retains an Account under the Plan.
2.18 "Participating Company" means the Company and any other company
that is authorized in writing by the Directors or by an officer of the Company
at the level of Senior Vice President or above to participate in the Plan, and
that elects to participate in the Plan on behalf of its Eligible Employees.
Entities that were Participating Companies as of October 1, 1997 are listed in
the Participating Companies Appendix to this Plan.
2.19 "Plan" means, effective May 20, 1996, this Salary
Deferral Savings Program of WellPoint Health Networks Inc. as
amended from time to time.
2.20 "Plan Year" means the calendar year.
2.21 "Regulation" means a federal Income Tax Regulation, as amended.
2.22 "Remuneration" means compensation as defined in Code Section
415(c)(3) and accompanying Regulations. This alternate definition of
compensation is required by law to be used in certain Appendices to this Plan.
For purposes of the Highly Compensated Employee Appendix to this Plan and the
Top Heavy Appendix to this Plan, Remuneration also includes an Employee's
elective deferrals under a qualified cash or deferred arrangement
described in Code Sections 401(k) and 402(e)(3), a simplified
5.
<PAGE> 9
employee pension plan described in Code Section 408(k)(6), and a cafeteria plan
described in Code Section 125.
2.23 "Temporary Employee" means an Employee who is categorized as a
temporary employee by a Participating Company and who performs fewer than 1000
Hours of Service during any consecutive 12-month period.
2.24 "Trust Agreement" means an agreement entered into between the
Company (on behalf of all Participating Companies) and a Trustee to provide for
the investment, management and control of Plan assets.
2.25 "Trustee" means any person or entity appointed by the Company to
hold the Plan's assets.
2.26 "Valuation Date" means the last business day of each Plan Year, and
such other date or dates as may be designated by the Committee for the valuation
of Accounts.
2.27 "WellPoint Common Stock" means the common stock of the Company.
2.28 "WellPoint Common Stock Fund" means the investment fund established
by the Committee to permit investment of Participants' Accounts in WellPoint
Common Stock.
2.29 "Year of Service" is defined in Article III of the Plan.
ARTICLE III
SERVICE
3.01 Hour of Service. An Hour of Service is each hour for which an
Employee is paid or entitled to payment for the performance of services for an
Affiliated Company.
3.02 Year of Service. A Year of Service is a consecutive or
non-consecutive 12-month period beginning on the first date that an Employee
performs an Hour of Service, on a Reemployment Date (as defined below) or on an
anniversary of either of these dates. Any period of less than 12 consecutive
months during
6.
<PAGE> 10
which an Employee does not perform an Hour of Service will be counted when
computing Years of Service. A One Year (or longer) Period of Severance (as
defined below) will not be counted when computing Years of Service.
3.03 One Year Period of Severance. A One Year Period of Severance is a
12 consecutive month period that begins on an individual's Severance from
Service Date, or on an anniversary of that date, during which the individual
does not perform an Hour of Service.
3.04 Severance from Service Date. An Employee's Severance from Service
Date is the earliest of the date on which the Employee quits, retires, is
discharged or dies, or the first anniversary of the first date of an Employee's
absence for any other reason.
(a) Crediting. Solely for the purpose of determining whether a
Participant has incurred a One Year Period of Severance, a Participant will not
incur the first One Year Period of Severance that would otherwise be counted if
severance is due to an Authorized Leave of Absence (as defined below) or a
Maternity or Paternity Leave (as defined below).
(b) Authorized Leave of Absence. Authorized Leave of Absence means
a paid or unpaid, temporary cessation from active employment with an Affiliated
Company for up to 12 months pursuant to an established policy, due to illness,
disability, vacation, a temporary layoff, public service, or any other reason.
(c) Maternity or Paternity Leave. Maternity or Paternity Leave
means an unpaid absence from work for any period by reason of the Employee's
pregnancy, birth of the Employee's child, placement of a child with the Employee
in connection with the adoption of such child, or any absence for the purpose of
caring for such child for a period immediately following such birth or
placement.
7.
<PAGE> 11
(d) Failure to Return. If a Participant fails to return to work
immediately on expiration of an Authorized Leave of Absence or Maternity or
Paternity Leave, no credit shall be given for the Authorized Leave of Absence or
Maternity or Paternity Leave pursuant to this Section.
3.05 Reemployment Date. An Employee's Reemployment Date is the first
date on which the Employee performs an Hour of Service after a One Year Period
of Severance.
3.06 Military Service. Notwithstanding any provision of this Plan to the
contrary, contributions and benefits with respect to qualified military service
will be provided to the extent required by Code Section 414(u).
3.07 One Month of Service. An Employee will be credited with One Month
of Service on the date that the Employee has been on the payroll of an
Affiliated Company, as an Employee, for one full calendar month.
3.08 AHI Healthcare Corporation. Effective for Employees hired on or
after April 1, 1995 and before October 1, 1997, those Employees will have all of
their service with AHI Healthcare Corporation (or any wholly owned subsidiary
thereof) prior to April 1, 1995 treated as service with the Company for all
purposes under this Plan; provided, however, that such Employees will not be
eligible to receive Matching Contributions under this Plan.
3.09 Sharp Hospitals. Individuals who were employed by Sharp Hospitals
on February 4, 1996, and who became Employees due to a corporate transaction on
February 5, 1996, will receive credit under this Plan for all of their service
with Sharp Hospitals; provided, however, that no such service will be credited
for purposes of determining whether an individual is eligible for the
Grandfathered Match that was implemented in 1997.
3.10 Massachusetts Mutual Life & Health Benefits Management. Effective
for Employees hired on or after April 1, 1996 and before October 1, 1997, those
Employees will have all of their service with Massachusetts Mutual Life
Insurance Company prior to April 1, 1996 treated as service with the Company for
8.
<PAGE> 12
all purposes under this Plan except for purposes of the Grandfathered Match that
was implemented in 1997.
3.11 Cost Care, Inc. and John Hancock Mutual Life Insurance Company.
Individuals who were employed by Cost Care, Inc. ("Cost Care") or by John
Hancock Mutual Life Insurance Company ("Hancock") on February 28, 1997, and who
became Employees due to a corporate transaction on March 1, 1997 (each a
"Transferred 1997 Employee") will receive credit under this Plan for all of
their service with Cost Care and/or with Hancock through December 31, 1996;
provided, however, that no such service will be credited for purposes of
determining whether an individual is eligible for the Grandfathered Match that
was implemented in 1997. Effective January 1, 1997, the elapsed time service
crediting rules of this Plan will apply for crediting service to Transferred
1997 Employees. For these purposes, a Participant's service under the Cost Care,
Inc. Savings Plan and/or the Investment-Incentive Plan for John Hancock
Employees, as the case may be, from January 1, 1997 through the date ("Hire
Date") in 1997 that the individual became an Employee of the Company will be
added to the Participant's service under this Plan from the Participant's Hire
Date forward.
3.12 1997 Transition Rule for Service Crediting for Former Cost Care and
Hancock Employees. For the Plan Year ending December 31, 1997, a Transferred
1997 Employee who would not otherwise be credited with one Year of Service under
the service crediting rules of this Plan (other than this rule) will be credited
with one Year of Service under this Plan if the Transferred 1997 Employee was
credited with 1000 Hours of Service under the Cost Care, Inc. Savings Plan or
under the Investment-Incentive Plan for Hancock Employees for the period
beginning January 1, 1997 and ending on his or her Hire Date. Notwithstanding
the foregoing, no such service will be used to determine whether an individual
is eligible for the Grandfathered Match that was implemented in 1997.
ARTICLE IV
PARTICIPATION
4.01 General Rule. An Eligible Employee can elect to become a
Participant on the first day of the first calendar month
9.
<PAGE> 13
coincident with or next following the earliest of the following dates:
(a) One Month of Service. The date on which the Eligible Employee
has been credited with One Month of Service; or
(b) One Year of Service. The date that the Eligible Employee has
been credited with a Year of Service.
4.02 Status. If an Employee is not an Eligible Employee on the date that
he or she has satisfied the applicable participation requirements outlined
above, the Employee can elect to become a Participant on the first day of the
calendar month coincident with or next following the calendar month in which the
Employee performs an Hour of Service as an Eligible Employee.
4.03 Rehire and Reinstatement. A rehired individual or a reinstated
individual who is an Eligible Employee and who previously satisfied the
eligibility requirements in this Section can elect to become a Participant on
the first day of the calendar month following the month in which the individual
is rehired or reinstated, as the case may be.
ARTICLE V
CONTRIBUTIONS
5.01 Salary Deferral Contributions. A Participant may elect to have a
Participating Company reduce the amount of his or her Compensation for each
payroll period by from 2% to 15% and to have that amount contributed to the Plan
as a Salary Deferral Contribution on his or her behalf. A Participant may
initiate or change the percentage of Salary Deferral Contribution (in 1%
increments) by submitting a notice to the Committee that satisfies such
requirements as the Committee shall determine. The Committee will implement the
Participant's Salary Deferral Contribution election as soon as administratively
practicable.
(a) Allocation. A Participant's Salary Deferral Contributions will
be credited to that Participant's Salary Deferral Contributions Account.
10.
<PAGE> 14
(b) Highly Compensated Limit. The Committee or its delegate may
limit the amount of Compensation that Highly Compensated Employees (determined
as of the end of the immediately preceding Plan Year) are authorized to defer
under this Plan as Salary Deferral Contributions.
5.02 Matching Contributions. A Participant's Matching Contributions will
be credited to that Participant's Matching Contributions Account. Unless
provided otherwise in a writing signed by an officer of the Company at the level
of Senior Vice President or above, and subject to the provisos in (b), (d), (e),
(f) and (g) below, for payroll periods ending on or after January 1, 1997, the
schedule outlined in (a) below will be used to determine the amount of Matching
Contributions and the match will be made in units of a WellPoint Common Stock
Fund to the extent provided in (c) below.
(a) General Rule. Except as provided in (b) below, at the beginning
of the first payroll period ending on or after January 1, 1997, Matching
Contributions for a payroll period for each Participant will equal 75% (or a
greater or lesser percentage determined by each Participating Company before the
payroll period) of the Salary Deferral Contribution that the Participant
directed during the payroll period. However, no Matching Contribution will be
made with respect to that portion of the Salary Deferral Participant's Salary
Deferral Contribution that exceeds 6% of the Participant's Compensation in the
Plan Year, or such greater or lesser amount as each Participating Company may
determine before the payroll period.
(b) Grandfathered Match. For Participants with 10 or more but less
than 20 Years of Service at the beginning of the first payroll period ending on
or after January 1, 1997, Matching Contributions will equal 85% of the Salary
Deferral Contribution that the Participant directed during the payroll period.
For Participants with 20 or more Years of Service at the beginning of the first
payroll period ending on or after January 1, 1997, Matching Contributions will
equal 100% of the Salary Deferral Contribution that the Participant directed
during the payroll period. However, no Matching Contribution will be made with
respect to that portion of the Salary Deferral Participant's Salary Deferral
Contribution that exceeds 6% of the Participant's Compensation in the Plan Year.
11.
<PAGE> 15
(c) Match in Units of WellPoint Common Stock Fund. Participants
described in (a) above will receive 33.3% of their Matching Contribution in the
form of units of a WellPoint Common Stock Fund. Participants described in (b)
above who are receiving a Matching Contribution based on 85% of their Salary
Deferral Contribution will receive 29.41% of their Matching Contribution in the
form of units of a WellPoint Common Stock Fund. Participants described in (b)
above who are receiving a Matching Contribution based on 100% of their Salary
Deferral Contribution will receive 25% of their Matching Contribution in the
form of units of a WellPoint Common Stock Fund. Units of such a WellPoint Common
Stock Fund that are received as a Matching Contribution pursuant to this
paragraph (c) will be subject to the liquidation restrictions outlined in
Article VI.
Effective as of the first payroll period ending on or after January 1,
1998, all Participants described in this paragraph (c) will receive 33.33% of
their Matching Contribution in the form of units of a WellPoint Common Stock
Fund.
(d) Collective Bargaining Agreement. The level and the form (e.g.
stock or cash) of Matching Contributions provided to Participants whose
employment is governed by the terms of a collective bargaining agreement will be
governed by the terms of that agreement.
(e) Leave. Notwithstanding anything to the contrary in this Plan, a
Participant's eligibility to receive Matching Contributions will cease as of the
first day of the first full payroll period immediately following 8 consecutive
work days (excluding week-ends and holidays) during which the Participant was
absent from work due to a paid sick leave. Such a Participant will again become
eligible to receive Matching Contributions, as otherwise provided under this
Section, as of the first day of the first full payroll period immediately
following the Participant's return to work after such a leave.
Effective October 1, 1997, the provisions of the preceding paragraph are
deleted from the Plan.
(f) No Match. Notwithstanding anything to the contrary in this
Plan, if WellPoint Practice Management Company,
12.
<PAGE> 16
Inc. (formerly known as WellPoint Dental Services, Inc.), The Professional
Medical Associates of Santa Barbara, Health Management Associates of San Luis
Obispo, Health Management Associates of Santa Barbara, and/or any successor to
any of them become a Participating Company, their Employees will not be eligible
to receive Matching Contributions under this Plan.
(g) Match Eligibility. An Employee is not eligible to receive a
Matching Contribution under this Plan until the first day of the first calendar
month coincident with or next following the Employee's completion of One Year of
Service measured from his or her date of hire (if a new Employee) or date of
rehire (following the Employee's separation from service with all Affiliated
Companies for any reason). For this purpose, a reinstatement is not treated as a
rehire.
Effective for the first payroll period ending on or after October 1,
1997, this paragraph (g) is amended, in its entirety, to read as follows:
An Employee is not eligible to receive a Matching Contribution under
this Plan for Compensation earned prior to the payroll period during
which the Participant is credited with a Year of Service measured from
his or her date of hire (if a new Employee) or date of rehire (following
the Employee's separation from service with all Affiliated Companies for
any reason). For this purpose, a reinstatement is not treated as a
rehire.
(h) Massachusetts Mutual Acquisition. For payroll periods ending
after April 1, 1996 and before January 1, 1997, and subject to the provisos
contained in (d), (e) and (g) above, the following schedule applied to Matching
Contributions for employees of UNICARE LIFE & HEALTH INSURANCE COMPANY who
became Employees due to the Company's acquisition of the Life and Health
Benefits Management Division of Massachusetts Mutual Life Insurance Company.
<TABLE>
<CAPTION>
Years of Service % of Salary Deferral Contribution Matched
---------------- -----------------------------------------
<S> <C>
Less than 5 25%
</TABLE>
13.
<PAGE> 17
<TABLE>
<S> <C>
5 or more 50%
</TABLE>
No Matching Contributions were made on behalf of such a Participant with respect
to the portion of that Participant's Salary Deferral Contribution that exceeded
6% of his or her Compensation.
5.03 Special Contributions. A Participating Company may authorize
qualified nonelective employer contributions to the extent, and only to the
extent, needed to satisfy the tests described in the Testing Salary Deferral and
Matching Contributions Appendix to this Plan. These qualified nonelective
employer contributions will be allocated to Non-Highly Compensated Eligible
Employees from the lowest paid to the highest paid in an amount up to or equal
to their Code Section 415 allocation limit.
5.04 Rollover Contributions. The Committee or its delegate may authorize
a Trustee to accept a Rollover Contribution made in cash and attributable to a
distribution received by an Eligible Employee from another tax-qualified plan.
Rollover Contributions will be held in the Participant's Rollover Account.
Rollover Contributions from conduit IRAs will not be accepted until January 1,
1998.
5.05 Trust-to-Trust Transfers.
(a) Permissible Transfers. The Committee or its delegate may
authorize a Trustee to accept a Trust-to-Trust Transfer of assets from another
tax-qualified plan. Except as specifically provided to the contrary in this Plan
document, securities of other companies and assets that are subject to the
survivor annuity requirements of Code Section 401(a)(11) will not be accepted as
part of a Trust-to-Trust Transfer.
(b) Operational Provisions. Amounts received in a Trust-to-Trust
Transfer will be allocated to corresponding Accounts under this Plan. Amounts
that are subject to the survivor annuity requirements of Code Section 401(a)(11)
will be accounted for separately. Trust-to-Trust Transfers will not be subject
to the Limitations on Allocations Appendix to this Plan.
14.
<PAGE> 18
5.06 Restoration. If a Participant was improperly excluded at any time
from an allocation, an amount computed on the same basis as the allocation will
be added to that Participant's Account, after that amount has been adjusted to
reflect reasonable gain or loss as determined by the Committee.
5.07 Deductibility. To the extent that a Participating Company is not
allowed a current deduction under the Code for any contribution made to the
Plan, the Participating Company may, within one year following a final
determination of the disallowance, whether by agreement with the Internal
Revenue Service or by final decision of a court of competent jurisdiction,
demand repayment of the disallowed contribution, and the Trustee shall return
the contribution within one year following the disallowance. Earnings of the
Plan attributable to such a contribution may not be returned to the
Participating Company, but losses attributable to such a contribution will
reduce the amount returned.
5.08 Mistake of Fact. If, within one year of the making of a
contribution to the Plan, the Committee certifies to the Trustee that the
contribution was made by a Participating Company under a mistake of fact, the
Trustee will, before the expiration of that year, return the contribution to the
Participating Company.
5.09 Limits. As more fully discussed in Appendices to this Plan, Salary
Deferral, Matching and Special Contributions are subject to additional limits.
ARTICLE VI
INVESTMENT FUNDS AND WELLPOINT COMMON STOCK
6.01 Individual Direction of Investments. At the written direction of an
officer of the Company at the level of Senior Vice President or above, the
Trustee will establish separate funds to which Participants may direct the
investment of their
15.
<PAGE> 19
Accounts. Investment in these funds will be subject to such restrictions and
administrative procedures as are imposed by the Committee, pursuant to its
discretionary authority to administer and interpret the Plan, including, but not
limited to, procedures for investment of amounts for which no investment
direction is given by a Participant.
6.02 WellPoint Common Stock Fund. At the discretion of the Committee,
the Plan may acquire and hold WellPoint Common Stock. Participants may elect to
invest amounts held in their Account in units of a WellPoint Common Stock Fund
established by the Trustee pursuant to Section 6.01 of the Plan subject to such
restrictions and administrative procedures as are imposed by the Committee,
pursuant to its discretionary authority to administer and interpret the Plan.
6.03 Purchase Price. All acquisitions and sales of WellPoint Common
Stock by a WellPoint Common Stock Fund will be effected at the prevailing market
price.
6.04 Voting and Tender Offers.
(a) Proxy Votes. A Participant may direct voting of the shares of
WellPoint Common Stock underlying the Participant's interest in a WellPoint
Common Stock Fund. The Trustee will vote such shares in accordance with the
directions of Participants, as communicated in writing to the Trustee.
(i) Notification. A Participant whose Account is invested in a
WellPoint Common Stock Fund will be notified by the Trustee (or by WellPoint
Health Networks Inc., pursuant to its normal communications with shareholders)
of each occasion for the exercise of voting rights, within a reasonable time
before those voting rights are to be exercised. This notification will include
all proxy statements and other information distributed by WellPoint Health
Networks Inc. to shareholders generally, regarding the exercise of voting
rights.
(ii) No Direction. To the extent that a Participant fails to
direct the Trustee, in whole or in part, as to the exercise of voting rights
with respect to any WellPoint Common Stock underlying the Participant's interest
in a WellPoint Common Stock Fund, those shares will be voted by the Trustee
16.
<PAGE> 20
proportionately in the same manner as shares as to which the Trustee has
received voting instructions.
(b) Right to Tender. Subject to (b)(iii) below, if the Trustee
receives a tender offer to buy WellPoint Common Stock held by the Trustee, a
Participant may direct tender of the shares of WellPoint Common Stock underlying
the Participant's interest in a WellPoint Common Stock Fund. The Trustee will
tender such shares in accordance with the directions of Participants, as
communicated in writing to the Trustee.
(i) Notification. All Participants entitled to tender WellPoint
Common Stock held by a WellPoint Common Stock Fund will be so notified by the
Trustee (or by WellPoint Health Networks Inc.) within a reasonable time before
the right to tender is to be exercised. This notification will include
information received by the Trustee as shareholder, or distributed by WellPoint
Health Networks Inc. to shareholders generally, regarding their right to tender.
(ii) No Direction. To the extent that a Participant fails to
direct the Trustee, in whole or in part, to tender WellPoint Common Stock
underlying the Participant's interest in a WellPoint Common Stock Fund, those
shares will not be tendered.
(iii) Non-Cash Tender. The Trustee will not permit Participants
to direct the tender of WellPoint Common Stock, to the extent that the receipt
or holding of the property offered in exchange for the shares would violate any
applicable law, including ERISA. The Committee will make investment decisions
regarding any non-cash property received by a WellPoint Common Stock Fund as a
result of a tender.
(c) Deemed Participant. For purposes of this Article VI, the
Beneficiary of a deceased Participant will be treated as though he or she were a
Participant.
6.05 Restriction on Liquidation of Units in a WellPoint Common Stock
Fund. A Participant may not direct that units in a WellPoint Common Stock Fund
that were required to be credited to his or her Account as a Matching
Contribution ("Required Units")
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be liquidated and invested in another investment fund under the Plan until the
earlier of (a), (b), (c), or (d) below:
(a) Two Years. The date that is 730 days after the date that the
units to be liquidated were credited to the Participant's Account.
(b) Age 55. The date that the Participant attains age 55.
(c) No Longer an Employee. The date that the Participant ceases to
be a common law Employee of all Affiliated Companies.
(d) Changed Restrictions. Effective January 1, 1999, once each
calendar year, a Participant may liquidate any or all Required Units that were
credited to his or her account during any prior Plan Year.
Cash dividends on WellPoint Common Stock will not be subject to the liquidation
restrictions outlined in this Section. Units acquired due to a stock dividend or
a stock split will be subject to the liquidation restrictions outlined in this
Section to the extent that the original shares were subject to these
restrictions. For these purposes, units acquired due to a stock dividend or a
stock split will be considered to have been credited to a Participant's Account
as of the date that units representing the original shares were credited to that
Participant's Account.
6.06 Responsibility. Each Participant is solely responsible for the
investment of his or her Account. No Plan fiduciary and no Employee is
authorized to advise a Participant regarding such investment.
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ARTICLE VII
VALUATION
The value of the Account of a Participant on any date will be deemed to
be the net balance of the Account on the Valuation Date immediately preceding or
coincident with the date as of which such value is to be determined, adjusted by
the Committee, pursuant to its discretionary authority to administer and
interpret the Plan and to determine eligibility for benefits under the Plan.
Adjustments will include increases due to contributions to the Account since the
relevant Valuation Date; decreases due to Plan expenses, distributions, loans,
or withdrawals paid from the Account since the relevant Valuation Date; and
adjustments for income or loss.
ARTICLE VIII
VESTING
All Plan Accounts are vested and nonforfeitable.
ARTICLE IX
IN-SERVICE WITHDRAWALS
Subject to administrative procedures established by the Committee, and
to the provisions governing merged assets contained in Appendices to this Plan,
the following types of in-service withdrawals are available under the Plan.
9.01 Age 59-1/2. A Participant may withdraw up to his or her entire Plan
Account upon attaining age 59-1/2. Only one such withdrawal will be permitted in
any six-month period.
9.02 Rollover Account Withdrawals. A Participant may withdraw up to the
entire balance from his or her Rollover Account.
(a) Permitted Frequency. Only one such withdrawal will be permitted
in any six-month period.
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(b) Two Year/Five Year Requirement. The Participant may only
withdraw funds that have been held in the Plan for at least two full years,
provided, however, if the Participant has been credited with five Years of
Service for an Affiliated Company, the two year rule is inapplicable. This two
year/five year requirement will be removed from the Plan and Participants will
be permitted to make withdrawals from their Rollover Accounts without regard to
their service or their participation under the Plan, as soon as administratively
feasible after the Internal Revenue Service issues a favorable determination
letter with respect to this Plan document, which favorable determination letter
is dated after June 1, 1997
9.03 Post-Tax Contributions. The Plan does not provide for post-tax
contributions. Certain Participants whose benefits were transferred to this Plan
may, however, have a Post-Tax Contributions Account under this Plan. Such a
Participant may withdraw up to the entire balance from his or her Post-Tax
Contributions Account at any time. Unless otherwise requested by the
Participant, pre-1987 contributions (without earnings) will be distributed from
this account before post-1986 contributions (with earnings).
9.04 Hardship Withdrawals. If a Participant has an immediate and heavy
financial need (as defined below), and has no other resources reasonably
available to meet this need (as defined below), the Participant may request a
hardship withdrawal from his or her Salary Deferral Contributions Account, and
Rollover Account. The amount available from the Participant's Salary Deferral
Contributions Account does not include earnings after December 31, 1988.
(a) Immediate and Heavy Financial Need. A Participant's request
for a hardship withdrawal may not exceed the amount immediately required
(including the amount necessary to pay any federal, state or local income taxes
or penalties reasonably anticipated to result from the withdrawal) by the
Participant to (i) purchase the Participant's primary residence (excluding
mortgage payments), (ii) pay expenses incurred within 12 months of the hardship
withdrawal request, by the Participant, the Participant's dependents or the
Participant's spouse, or necessary for those persons to obtain medical care
within the meaning of Code Section 213(d), (iii) prevent eviction from, or
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foreclosure of a mortgage on, the Participant's primary residence, or (iv) pay
for post-high school tuition and related educational fees for the next 12 months
for the Participant, the Participant's spouse, or the Participant's dependents.
(b) No Other Resources Reasonably Available. A Participant who
makes a hardship withdrawal request must represent that his or her immediate and
heavy financial need cannot be relieved (i) through reimbursement or
compensation by insurance or otherwise, (ii) by reasonable liquidation of the
Participant's assets, to the extent the liquidation would not itself cause an
immediate and heavy financial need, (iii) by cessation of Salary Deferral
Contributions to this Plan or of contributions to any other plan of deferred
compensation, (iv) by other distributions or nontaxable (at the time of the
loan) loans from plans maintained by any employer, (v) by requesting a
withdrawal from his or her Rollover Account or Post-Tax Contributions in this
Plan, or (vi) by borrowing from commercial sources on reasonable commercial
terms. For purpose of this Section, the Participant's assets are deemed to
include those assets of the Participant's spouse and minor children that are
reasonably available to the Participant.
(c) Suspension. Any withdrawal from a Participant's Salary Deferral
Contributions Account will result in a suspension of the Participant's right to
direct Salary Deferral Contributions under the Plan. Such a suspension will be
for a period of 12 months following the effective date of the withdrawal. Such a
suspension will expire on the first day of the first payroll period beginning
365 days after the effective date of the withdrawal.
9.05 Form. Except as provided in one or more Appendices to this Plan,
withdrawals from the Plan will be made in the form of a single sum cash payment.
ARTICLE X
LOANS
10.01 Authorization. The Committee may direct the Trustee to make a loan
to a Participant who is employed by a Participating Company and, to the extent
required under ERISA or
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the Code (but only to that extent), to other Participants and to Beneficiaries
(collectively referred to as "Borrowers") of the Plan. Loans will be made from a
Participant's Account and will be limited to the amount specified below. No loan
will be approved unless the Participant's spouse (if any) consents to the loan,
in writing, no more than 90 days from the loan date.
(a) New General Rule. Notwithstanding the foregoing, no spousal
consent will be required for loans made on or after January 1, 1998 unless the
Participant has assets in his or her Account that were transferred from the Cost
Care Inc. Savings Plan or from the UniCARE Financial Corp. Profit Sharing Plan.
(b) UniCARE and Cost Care. As soon as administratively feasible
after the Internal Revenue Service issues a favorable determination letter with
respect to this Plan document, which favorable determination letter is dated
after October 1, 1997, no spousal consent will be required for loans taken out
by Participants with assets in their Account that were transferred from the Cost
Care Inc. Savings Plan or from the UniCARE Financial Corp. Profit Sharing Plan.
10.02 Amount. The amount of any loan will not be less than $1,000.
Immediately after the origination of the loan, the loan may not exceed 50% of
the Borrower's vested benefits under this Plan. Furthermore, the amount of any
loan, when added to the outstanding balance of all other loans to the Borrower
from this Plan and the plans of Affiliated Companies, may not exceed the lesser
of (a) one half of the Borrower's vested benefits under this Plan and the plans
of Affiliated Companies, valued as of each plan's most recent valuation date;
and (b) $50,000 reduced by the excess, if any, of (i) the Borrower's highest
outstanding loan balance under this Plan and the plans of Affiliated Companies
during the 12-month period ending on the day before the loan is made; over (ii)
the Borrower's outstanding loan balance under this Plan and the plans of
Affiliated Companies on the date the loan is made.
10.03 Application and Note. Each loan will be evidenced by the
Borrower's note, payable to the Trustee, for the loan plus interest.
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10.04 Individual Account. All loans will be investments of the
Borrower's Account. Costs charged by the Trustee to establish, process or
collect the loan will be charged to the Borrower's Account.
10.05 Interest. Interest will be charged on Plan loans at a formula rate
based on factors considered by commercial entities that make similar loans. At
the discretion of the Committee, the interest rate will be redetermined as new
loans are made.
10.06 Repayment. The term of any loan will not exceed 5 years; provided,
however, that the term of a loan to purchase a principal residence for the
Borrower must not exceed 30 years. Substantially level amortization of the loan,
with payments not less frequently than quarterly, will be required over the term
of the loan. The Trustee and the Committee may require that the loan be repaid
by payroll deduction. Periodic cash payments may be made when payroll deduction
is not possible.
10.07 Default. If a Borrower fails to repay a loan within the time
prescribed by the Committee, the Trustee may levy on the Borrower's Loan Account
at such time as the Borrower is eligible for a distribution or a withdrawal
under the Plan. In addition, in the event of a failure to repay, the Trustee may
exercise every creditor's right at law or equity available to the Trustee.
10.08 Guidelines. The Committee or its delegate will approve written
guidelines for administration of the Plan's loan program. Loans transferred to
this Plan from another plan will remain subject to the terms and conditions of
the other plan's loan provisions and will count against the Plan's three-loan
limit.
ARTICLE XI
DISTRIBUTION OF BENEFITS
Subject to administrative procedures established by the Committee and to
the provisions governing merged assets contained in Appendices to this Plan, the
following provisions govern distributions available under the Plan.
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11.01 Date Benefits Become Distributable. Plan benefits will become
distributable when (a) the Participant separates from service, including but not
limited to a separation due to death, disability or retirement, (b) subject to
Code Section 401(k)(10), if substantially all the assets of a Participating
Company are sold to an unrelated corporation, if the Participant continues
employment with the unrelated corporation and the Participating Company
continues to maintain this Plan, or (c) subject to Code Section 401(k)(10), if a
Participating Company's interest in a subsidiary is sold to an unrelated entity
and the Participant continues employment with the subsidiary and the
Participating Company continues to maintain this Plan.
11.02 Date Benefits Will Be Distributed. Once Plan benefits become
distributable, they will be distributed as soon as administratively practicable
after the Participant has elected to receive a distribution, and in the case of
a Beneficiary, as soon as administratively practicable after the Participant's
death. Illiquid assets (if any) will be distributed as soon as administratively
practicable after they become liquid.
11.03 No Election. If a Participant, or a Beneficiary, as the case may
be, does not properly elect a distribution, benefits will be distributed
pursuant to the Distribution Provisions Appendix of this Plan. In general, those
provisions provide that a Participant must receive his or her benefits under
this Plan by April 1 of the calendar year following the calendar year in which
the Participant attains age 70-1/2, and that a Beneficiary must receive his or
her benefits under this Plan by December 31 of the calendar year containing the
fifth anniversary of the Participant's death.
11.04 Retroactive Payment. If the amount of a distribution cannot be
determined by the date payment is required, or it is not possible to make
payment because the Committee cannot locate the Participant or Beneficiary after
making reasonable efforts to do so, a payment retroactive to the date payment is
required may be made no later than 60 days after the earliest date on which the
amount of the payment can be determined under the Plan, or the date on which the
recipient is located.
11.05 Inability to Locate Recipient. If a Plan benefit remains unpaid
for 2 years from the date it becomes payable
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because the Committee, exercising due diligence, cannot locate the recipient,
the benefit will be forfeited and used for other Plan purposes, including
reduction of Participating Companies' Matching Contributions. On presentation of
an authenticated claim by the recipient or the recipient's representative,
amounts forfeited will be restored, without earnings, from forfeitures for the
Plan Year in question or from a contribution made by the appropriate
Participating Company(s), as determined by the Committee.
11.06 Distribution to Minor or Incompetent. The Committee may direct
that distributions to be paid to a minor or an incompetent person be paid to the
legal guardian, or if none, to a parent of such person, or to a responsible
adult with whom the person maintains residence, or to the custodian for the
person under a Uniform Transfers to Minors Act or Gift to Minors Act, if
permitted by the laws of the state in which the person resides.
11.07 Small Account. Notwithstanding any provision of this Plan, if the
vested portion of a Participant's Account on the date the Participant ceases to
be an Employee is, and at the time of any earlier distribution or withdrawal
was, $5,000 ($3,500 prior to January 1, 1998) or less, the Participant's Account
will be distributed to the Participant, or Beneficiary, as the case may be, as
soon as practicable, without the consent of the Participant or the Participant's
spouse.
11.08 Form of Distribution. Except as provided in one or more Appendices
to this Plan, amounts held in a Participant's Account will be paid in cash as a
total distribution, unless the Participant (or Beneficiary) elects otherwise
pursuant to Section 11.09. Except as provided in one or more Appendices to this
Plan, distributions will be made in a single sum payment, in accordance with the
above provisions, which satisfy the Regulations under Code Section 401(a)(9). In
any event, distributions will be made in accordance with the Regulations,
including the minimum distribution and minimum distribution incidental benefit
requirement of Code Section 401(a)(9)(G).
11.09 Distributions from the WellPoint Common Stock Fund. When
requesting a distribution under this Article, a Participant (or Beneficiary) may
elect to receive the portion of his or her Account that is invested in a
WellPoint Common Stock Fund in whole shares of WellPoint Common Stock. Any
balance representing fractional shares will be distributed in cash.
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11.10 Direct Rollover. Notwithstanding any provision of this Plan to the
contrary that would otherwise limit a Distributee's election under this Plan, a
Distributee may elect, at the time and in the manner prescribed by the
Committee, to have any portion of an Eligible Rollover Distribution paid
directly to an Eligible Retirement Plan specified by the Distributee in a Direct
Rollover. For these purposes, the following definitions apply:
(a) Eligible Rollover Distribution. An Eligible Rollover
Distribution is any distribution of all or any portion of the balance to the
credit of the Distributee, except that an Eligible Rollover Distribution does
not include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the Distributee or the joint lives (or joint life expectancies)
of the Distributee and the Distributee's designated Beneficiary, or for a
specified period of 10 years or more; any distribution to the extent that
distribution is required under Section 401(a)(9) of the Code; and the portion of
any distribution that is not includible in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to employer
securities.
(b) Eligible Retirement Plan. An Eligible Retirement Plan is an
individual retirement account described in Code Section 408(a), an individual
retirement annuity described in Code Section 408(b), an annuity plan described
in Code Section 403(a), or a qualified trust described in Code Section 401(a),
that accepts the Distributee's Eligible Rollover Distribution. However, in the
case of an Eligible Rollover Distribution to the surviving spouse, an Eligible
Retirement Plan is an individual retirement account or individual retirement
annuity.
(c) Distributee. A Distributee includes an Employee or former
Employee. In addition, the Employee's or former Employee's surviving spouse and
the Employee's or former Employee's spouse or former spouse who is the alternate
payee under a Qualified Domestic Relations Order, as defined in Code
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Section 414(p), are Distributees with regard to the interest of the spouse or
former spouse.
(d) Direct Rollover. A Direct Rollover is a payment by the Plan to
the Eligible Retirement Plan specified by the Distributee.
11.11 General Waiver of 30-Day Requirement. Notwithstanding anything to
the contrary in this Plan, if a distribution is one to which Sections 401(a)(11)
and 417 of the Code do not apply, that distribution may begin less than 30 days
after the notices required under Regulation 1.411(a)-11(c) and Code Section
402(f) are given, provided that (1) the Committee clearly informs the recipient
that the recipient has a right to a period of at least 30 days after receiving
the notices to consider the decision of whether or not to elect a distribution
(and, if applicable, a particular distribution option), and (2) the recipient,
after receiving the notices, affirmatively elects a distribution.
11.12 Special Waiver of 30-Day Requirement. Notwithstanding anything to
the contrary in this Plan, if a distribution is one to which Sections 401(a)(11)
and 417 of the Code do apply (including a distribution of assets subject to
special provisions outlined in Appendices to this Plan), that distribution may
begin less than 30 days after the notices required under Regulation
1.411(a)-11(c) and Code Section 402(f) (collectively referred to as "Notices")
are given provided that:
(1) Affirmative Election. After having received the Notices,
the recipient affirmatively elects a form of distribution and the Participant's
spouse consents to that form of distribution (if necessary).
(2) Election. The recipient was informed that he or she had a
right to at least 30 days to consider whether to waive the normal form of
benefit and to consent to an optional form of benefit.
(3) Revocation. The recipient was informed that he or she could
revoke an affirmative distribution election at any time before the annuity
starting date, or, if later, the
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end of the 7-day period that begins the day after the Notices were provided to
the recipient.
(4) Timing. The Annuity Starting Date is after the date that
the Notices were provided to the recipient. The Annuity Starting Date may,
however, be before the expiration of the 7-day period referred to in the next
paragraph and before the date of the recipient's affirmative distribution
election.
(5) 7-Day Period. Distribution in accordance with a recipient's
affirmative election may not begin before the end of the 7-day period that
begins the day after the Notices are provided to the recipient.
ARTICLE XII
BENEFICIARY DESIGNATIONS
12.01 All Participants. Subject to the special distribution provisions
contained in Appendices to this Plan, a Participant may designate one or more
primary Beneficiaries and one or more secondary Beneficiaries to receive any
benefit payable from the Participant's Account on the Participant's death. A
Participant's Beneficiary designation will be made on a form prepared by, and
delivered to, the Committee before the Participant's death. The Participant may
revoke or change this designation at any time before his or her death by
delivering a subsequent form to the Committee.
12.02 Married Participants. If the Participant is married, and if the
Participant names a Beneficiary other than his or her surviving spouse as a
primary Beneficiary, the Participant's surviving spouse must waive his or her
right to the Participant's Account in a document, delivered to the Committee,
that acknowledges the effect of the waiver, that is witnessed by a notary
public, and that satisfies such other requirements as the Committee may impose.
In the waiver, the Participant's surviving spouse must consent to the specific
non-spouse Beneficiary(s) named by the Participant. The waiver will be effective
only with respect to that spouse. If the Participant is legally separated or
abandoned and the Participant has a court order to that effect (and there is no
qualified domestic relations order that provides otherwise), or the surviving
spouse cannot be located, then a
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waiver need not be filed with the Committee when a married Participant names a
Beneficiary other than his or her spouse.
12.03 Ineffective Designation. If a Participant does not have an
effective Beneficiary designation on file when he or she dies, the Participant's
Account will be distributed to the Participant's spouse if then living or, if
the spouse is not then living, to the Participant's children (in equal shares),
or if no such children are then living, according to the laws of intestate
succession in effect in the State of California on the date of the Participant's
death.
ARTICLE XIII
CLAIMS PROCEDURE
If a Participant or Beneficiary ("Claimant") believes that he or she is
entitled to a greater benefit under the Plan, the Claimant may submit a signed,
written application to the Committee within 90 days of having been denied such a
greater benefit. The Claimant will generally be notified of the approval or
denial of this application within 90 days of the date that the Committee
receives the application. If the claim is denied, the notification will state
specific reasons for the denial and the Claimant will have 60 days to file a
signed, written request for a review of the denial with the Committee. This
request will include the reasons for requesting a review, facts supporting the
request and any other relevant comments. The Committee, operating pursuant to
its discretionary authority to administer and interpret the Plan and to
determine eligibility for benefits under the terms of the Plan, will generally
make a final, written determination of the Claimant's eligibility for benefits
within 60 days of receipt of the request for review.
ARTICLE XIV
ALIENATION AND QUALIFIED DOMESTIC RELATIONS ORDERS
14.01 Prohibition. Plan benefits may not be assigned or alienated and
will not be subject to the claims of creditors. The Plan will, however, honor
properly executed federal tax levies, executions on federal tax judgments,
Qualified Domestic Relations Orders within the meaning of Code Section 414(p), a
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direction to pay third parties pursuant to Regulation 1.401(a)- 13(e), and the
provisions of this Plan regarding loans and distributions to minors and
incompetent persons.
14.02 Qualified Domestic Relations Order. A distribution to an alternate
payee authorized by a Qualified Domestic Relations Order may be made even if the
affected Participant would not be eligible to receive a similar distribution
from the Plan at that time.
ARTICLE XV
ADMINISTRATION
15.01 Committee. The Directors of the Company may appoint a Committee to
administer the Plan. The Committee will hold office at the pleasure of the
Directors and will be a named fiduciary of the Plan. To the extent that the
Company does not appoint a Committee, the Company will administer the Plan and
will be a named fiduciary of the Plan. To the extent that the Company has not
appointed a Committee, the term Committee, as used in this Article, shall be
deemed to refer to the Company.
15.02 Power. The Committee has full discretionary authority to
administer and interpret the Plan, including discretionary authority to
determine eligibility for participation and benefits under the Plan, to appoint
one or more investment managers, to construe ambiguous terms under the Plan, to
correct errors, and to exercise the powers listed in this document. The
Committee may delegate its discretionary authority and such duties and
responsibilities as it deems appropriate to facilitate the day-to-day
administration of the Plan. Determinations by the Committee or the Committee's
delegate will be final and conclusive upon all persons.
15.03 Indemnification. The Participating Companies will indemnify and
hold harmless the Directors, the members of the Committee, and any Employees who
may be deemed fiduciaries of the Plan within the meaning of ERISA, from and
against any and all liabilities, claims, costs and expenses, including
attorneys' fees, arising out of an alleged breach in the performance of their
fiduciary duties under the Plan and under ERISA, other than such liabilities,
claims, costs and expenses as may result from
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the gross negligence or willful misconduct of such persons. The Participating
Companies shall have the right, but not the obligation, to conduct the defense
of such persons in any proceeding to which this Section applies.
15.04 Expenses. All proper expenses incurred in administering the Plan
will be paid by the Participating Companies if not paid from the trust created
to fund the Plan. If expenses are initially paid by a Participating Company, the
Participating Company may be reimbursed from the trust created to fund the Plan.
Committee members will receive no compensation for their services in
administering the Plan.
ARTICLE XVI
AMENDMENTS
16.01 Directors. The Directors or a committee appointed by the
Directors, by written action, may amend the Plan (prospectively or
retroactively).
16.02 Officers. Any officer of the Company at the level of Senior Vice
President or above may amend this Plan to comply with regulatory requirements,
to address administrative concerns, and in any other manner that does not alter
the primary character of the Plan or its eligibility, provided in each case that
the amendment does not have a substantial adverse financial impact on any
Participating Company.
16.03 Effect. Upon adoption, an amendment will become effective in
accordance with its terms. Except as provided elsewhere in this Plan, no
amendment will (a) cause Plan assets to revert to a Participating Company or to
be used for purposes other than the exclusive benefit of Participants and
Beneficiaries and payment of reasonable expenses, (b) deprive any Participant of
a benefit already accrued, or (c) change the duties or liabilities of a Trustee
without written consent of the Trustee.
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ARTICLE XVII
TERMINATION, MERGER AND TRANSFER
17.01 Participating Companies. A Participating Company may, in its sole
discretion, by written action of its board of directors or by a committee
appointed by its board of directors, discontinue contributions to or terminate
the Plan, in whole or in part, at any time with respect to its own Employees
without any liability whatsoever.
17.02 Company. The Directors reserve the right to terminate the Plan, at
any time, in their sole and absolute discretion by written action or by a
written action of a committee appointed by the Directors. If the Plan is
terminated with respect to all Participating Companies, the Trustees will pay to
each Participant affected by the termination, or that Participant's Beneficiary,
within a reasonable time, the net value of the Participant's Account in
accordance with the written directions of the Committee; provided that, if
termination of the Plan does not constitute a distribution event within the
meaning of Code Section 401(k), the Participants' Salary Deferral Contributions
Accounts shall continue to be held in trust for subsequent distribution in
accordance with the requirements of Code Section 401(k).
17.03 Determination of Partial Termination. A partial termination of the
Plan will not be deemed to occur solely by reason of the sale or transfer of all
or substantially all of the assets of a Participating Company, but will be
deemed to occur only if there is a determination, either made or agreed to by
the Committee, or made by the Internal Revenue Service and upheld by a decision
of a court of last resort, that a particular event or transaction constitutes a
partial termination within the meaning of Code Section 411(d)(3)(A).
17.04 Mergers and Transfers. This Plan (including any outstanding loans)
may be merged or consolidated with another tax-qualified retirement Plan and
assets and liabilities (including any outstanding loans) may be transferred from
this Plan to any other retirement plan qualified under Section 401 of the Code
if each Participant is entitled to receive from this
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Plan, or from the surviving or transferee plan, immediately after the merger,
consolidation or transfer, a benefit equal to or greater than the benefit the
Participant would have been entitled to receive under this Plan if this Plan had
been terminated immediately before the merger, consolidation or transfer.
ARTICLE XVIII
MISCELLANEOUS
18.01 Limitation of Rights. Participation in this Plan will not give to
any Employee the right to be retained in the employ of an Affiliated Company,
nor any right or interest in this Plan other than as provided in this Plan
document.
18.02 Satisfaction of Claims. Any payment to a Participant, the
Participant's legal representative or Beneficiary, in accordance with the terms
of this Plan and the appropriate Trust Agreement, will, to the extent thereof,
be in full satisfaction of all claims such person may have against each Trustee,
the Committee and all Participating Companies, any of whom may require the
recipient, as a condition precedent to such payment, to execute a receipt and
release therefor in such form as shall be determined by the Trustee, the
Committee or a Participating Company, as the case may be.
18.03 Construction. Although contributions made by the Participating
Companies are not limited to profits, the Plan is intended to be a profit
sharing plan. The Plan is to be construed and administered in accordance with
ERISA and other pertinent federal laws and in accordance with the laws of the
State of California to the extent not preempted by ERISA; provided, however,
that if any provision is susceptible of more than one interpretation, such
interpretation shall be given thereto as is consistent with the intent that this
Plan and its related trusts be exempt from federal income tax under Code
Sections 401(a) and 501(a), respectively. The headings and subheadings of this
instrument are inserted for convenience of
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reference only and are not to be considered in the construction of this Plan.
18.04 Severability. If a provision of this Plan is held by a court of
competent jurisdiction to be invalid or unenforceable, the remaining provisions
of the Plan will remain fully effective.
18.05 Source of Benefits. All benefits payable under the Plan shall be
paid and provided for solely from the Plan's related trust, and the
Participating Companies assume no liability or responsibility therefor.
IN WITNESS WHEREOF, the Company has caused this Plan to be
executed this 1st day of October, 1997.
WELLPOINT HEALTH NETWORKS INC.
By: /s/ Thomas C. Geiser
__________________________
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APPENDIX I: TESTING SALARY DEFERRAL AND MATCHING CONTRIBUTIONS
1.01 Individual Limit on Elective Deferrals.
(a) Elective Deferrals. "Elective Deferrals" means contributions on
behalf of a Participant under a qualified cash or deferred arrangement described
in Code Section 402(e)(3), under a simplified employee pension plan described in
Code Section 408(k)(6), and under a salary reduction agreement to purchase an
annuity contract described in Code Section 403(b).
(b) Distribution. If the Committee determines that an individual's
Elective Deferrals under this Plan exceed the amount permitted by Code Sections
401(a)(30) or 402(g), the excess amount, together with income earned on the
excess amount during the calendar year will be distributed to the Participant no
later than April 15 following the end of the taxable year in which the excess
contribution was made. Income will be determined in accordance with any
reasonable method used for allocating income to Participants' Accounts during
the Plan Year. Income for the period between the end of the taxable year in
which the excess amount was contributed and the date of distribution will not be
distributed.
1.02 Limit on Salary Deferral Contributions.
(a) Definitions.
(1) Deferral Percentage means, for a group of Eligible
Employees, the average of the ratios (calculated separately for each individual)
of (i) to (ii) where (i) is the amount of the Salary Deferral Contributions
allocated for the Plan Year to the individual, and (ii) is the Code Section
414(s) compensation of the individual for the Plan Year computed only for the
portion of the Plan Year during which the individual was eligible to make 401(k)
elective deferrals under this Plan and, at the option of the Committee or its
delegate, elective deferrals under any other Plan that was merged into this
Plan. The Deferral Percentage for an Eligible Employee who does not elect to
make Salary Deferral Contributions is zero.
(2) $150,000 (indexed) Limit means that, with respect to this
Appendix, the annual Code Section 414(s) compensation of any Participant taken
into account in any Plan Year will not exceed $150,000 (indexed pursuant to Code
Section 401(a)(17)).
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(b) Deferral Percentage Test. Salary Deferral Contributions must
satisfy one of the following tests:
(1) 125%. The Deferral Percentage for Highly Compensated
Employees must not be more than 125% of the Deferral Percentage for Non-Highly
Compensated Employees for the prior Plan Year.
(2) 200%. The Deferral Percentage for Highly Compensated
Employees must not be more than 2 percentage points greater than the Deferral
Percentage for Non-Highly Compensated Employees for the prior Plan Year, and the
Deferral Percentage for Highly Compensated Employees must not be more than 200%
of the Deferral Percentage for Non-Highly Compensated Employees for the prior
Plan Year.
(3) Safe Harbor. Effective for Plan Years beginning after
December 31, 1998, this test can be satisfied by satisfying a design based safe
harbor.
(c) Deferral Percentage Test Operational Rules.
(1) Aggregated Plans. If 2 or more plans that include cash or
deferred arrangements are considered a single plan for purposes of Code Section
401(a)(4) or Code Section 410(b) (other than for purposes of the average
benefits test of Code Section 410(b)), the cash or deferred arrangements
included in those plans will be treated as a single arrangement.
(2) Highly Compensated. If an eligible Highly Compensated
Employee is a participant under two or more cash or deferred arrangements of an
Affiliated Employer, for purposes of determining that Employee's Deferral
Percentage, all such cash or deferred arrangements will be treated as a single
cash or deferred arrangement.
(3) Disregarded Employees. Any Employee who is not, at any time
during the Plan Year, eligible to authorize a Salary Deferral Contribution will
be disregarded.
(4) Election. The Committee or its delegate is authorized to
elect to use the current Plan Year rather than the preceding Plan Year in
performing the Deferral Percentage test.
(d) Satisfaction of Deferral Percentage Test.
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(1) Reduction of Contributions. If, at any time, the Committee
determines that the Deferral Percentage test is not likely to be satisfied, the
Committee may reduce the maximum percentage of Compensation that a Highly
Compensated Employee may elect as a Salary Deferral Contribution for the Plan
Year.
(2) Recalculation. If, after the end of the Plan Year, the Plan
does not satisfy the Deferral Percentage test, the Deferral Percentage for
Highly Compensated Employees who defer the greatest dollar amount will be
reduced.
(3) Excess Contributions. A Highly Compensated Employee's
excess contributions are the amount by which the Salary Deferral Contribution
made on behalf of the Highly Compensated Employees for the Plan Year must be
reduced pursuant to the recalculation provisions of this paragraph in order for
the Plan to satisfy the Deferral Percentage test. Subject to the following
provisions, excess contributions will be distributed to the Participant on whose
behalf these amounts were contributed to the Plan.
(4) Adjustments. Distributions of excess contributions will be
adjusted for income and loss using any reasonable method used for allocating
income to Participants' Accounts during the Plan Year and they will be reduced
by the excess deferrals distributed pursuant to Section 2.01 of this Appendix.
Income for the period between the end of the Plan Year and the date of
distribution will not be distributed. Federal, state or local income tax
withholding obligations attributable to a distribution may be satisfied out of
the distribution, if not satisfied out of other compensation.
(5) Timing. Excess contributions for a Plan Year will be
distributed no later than the last day of the Plan Year immediately following
the Plan Year for which the contributions were made.
1.03 Ordering. If, pursuant to these limits, excess contributions are
required to be distributed, unmatched Salary Deferral Contributions will be
distributed before matched Salary Deferral Contributions. If matched Salary
Deferral Contributions must also be distributed in order to satisfy these
limits, the matched Salary Deferral Contributions will be accompanied by the
distribution of a proportionate share of Matching Contributions.
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1.04 Records. The Committee will maintain records sufficient to
demonstrate the Plan's compliance with Code Section 401(k)(3).
1.05 Deferral Percentage Test. Matching Contributions will be tested
like Salary Deferral Contributions under the Limit on Salary Deferral
Contributions provisions outlined above. Forfeitures will be used to pay Plan
administrative expenses.
1.06 Affiliated Companies. All of this Appendix except Section 2.01 will
be administered separately with regard to Affiliated Companies (if any) that are
unrelated within the meaning of Code Section 414.
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APPENDIX II: LIMITATIONS ON ALLOCATIONS
1.01 Basic Limitation. The total Annual Addition to Participants under
this Plan and under any other defined contribution plan maintained by an
Affiliated Company may not, for any Limitation Year, exceed the lesser of (i)
the dollar limit which is $30,000, or if greater 25% of the dollar limitation in
effect under Code Section 415(b)(1)(A), or (ii) 25% of the Participant's
Remuneration for that Limitation Year, as adjusted for cost of living under
Section 415(d) of the Code.
(a) Employer Contributions. An amount shall be an Annual Addition
under a defined contribution plan for a Limitation Year if, with respect to
employer contributions (including salary deferral contributions), such
contributions are made during the Limitation Year or no later than 30 days
following the end of the taxable year (including extensions) with or within
which the Limitation Year ends.
(b) Participant Contributions. An amount shall be an Annual
Addition under a defined contribution plan for a Limitation Year if, with
respect to the Participant's own contributions, the contributions are made
during the Limitation Year or no later than 30 days following the end of such
Limitation Year.
1.02 Annual Addition. "Annual Addition" means, for any Limitation Year,
the aggregate amount (excluding Rollover Contributions and Trust-to-Trust
Transfers) credited to a Participant's account under this Plan and to a
Participant's accounts under each other defined contribution plan of an
Affiliated Company with respect to such Limitation Year from employer
contributions and forfeitures allocated to a Participant's account (excluding
any amount reinstated to an account pursuant to Code Sections 411(a)(7)(C)
(cash-outs) or 411(a)(3)(D) (mandatory contributions)), a Participant's own
contributions made on behalf of the Participant, and contributions to an
individual medical account (as defined in Section 415(1) of the Code) for a
Participant as part of a defined benefit plan.
(a) Welfare Benefit Fund Contributions. For purposes of the
application of the dollar limit of clause (i) of Section 1.01 of this Appendix
to a Participant who is a Key Employee, as defined in Code Section 416(i), with
respect to a Limitation Year, any amount paid or accrued to that Participant's
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account under a welfare benefit fund pursuant to Section 419A(d) of the Code is
an Annual Addition.
(b) Combined Limit. If a Participant also participates in a
qualified defined benefit plan maintained by an Affiliated Company, the sum of
(i) the Defined Benefit Fraction and (ii) the Defined Contribution Fraction (as
defined below) shall not exceed 1.0 for any Limitation Year.
(c) Defined Benefit Fraction means that fraction, the numerator of
which is the Participant's projected annual benefit, determined as of the close
of the Limitation Year, under all defined benefit plans of all Affiliated
Companies and the denominator of which is the lesser of (i) the product of 1.25
and the dollar limits in effect under Code Section 415(b)(1)(A) for the
Limitation Year or (ii) the product of 1.4 and the Participant's average annual
Remuneration for the 3 consecutive Limitation Years for which such average is
the highest. A Participant's "projected annual benefit" is the annual benefit to
which the Participant would be entitled under all defined benefit plans of all
Affiliated Companies if the Participant were to remain an Employee until normal
retirement age under each such plan and all other relevant factors used to
determine benefits under such plans were to remain constant.
(d) Defined Contribution Fraction means that fraction, the
numerator of which is the sum of the Annual Additions to the Participant's
accounts under each defined contribution plan maintained by an Affiliated
Company for the Limitation Year and all prior Limitation Years (less the amount,
if any, permitted to be subtracted under (i) the transitional rule of Section
235(g)(3) of the Tax Equity and Fiscal Responsibility Act of 1982 or (ii) the
transitional rule of Section 1106(h)(4) of the Tax Reform Act of 1986) and the
denominator of which is the lesser of the following amounts with respect to the
Limitation Year and each prior Limitation Year during which the Participant was
an employee of an Affiliated Company: (1) the product of 1.25 and the dollar
limit in effect under Code Section 415(c)(1)(A) (but without regard to Code
Section 415(c)(6)) for such Limitation Year or (2) the product of 1.4 and 25% of
the Participant's Remuneration for such Limitation Year; provided that the
Committee may calculate the denominator of the Defined Contribution Fraction for
all defined contribution plans of Affiliated Companies using the alternative
method set forth in Code Section 415(e)(6).
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(e) Top Heavy Adjustment. For any Plan Year that the Plan is Top
Heavy, the definitions of Defined Contribution Fraction and Defined Benefit
Fraction are modified by substituting 1.0 for 1.25; provided, however, in no
event, will the accrued benefit or account balance of a Participant be reduced
below the amount of such accrued benefit or account balance immediately before
the Plan became Top Heavy.
1.03 Compliance with Basic Limitation. If the Annual Addition to a
Participant's accounts in this Plan and any other defined contribution plan of
any Affiliated Company would exceed the limits described in 1.01 of this
Appendix, the Annual Addition to this Plan and to each other defined
contribution plan of any Affiliated Company will be reduced but only to the
extent necessary to comply with Section 1.01 of this Appendix, as follows:
(a) Participant Contributions. First, the Participant's own
contributions to each such plan, to the extent that they constitute an Annual
Addition, will be reduced pro rata, and the excess, together with earnings
thereon, returned to the Participant.
(b) Employer Contributions. Then, employer contributions for the
Limitation Year that have not been allocated to such participants will be
reduced pro rata.
(c) Suspense Account. Then, amounts that cannot be allocated to
participants' accounts will be credited to a suspense account that will be used
to reduce future employer contributions. The suspense account will not share in
investment earnings and no employer contributions may be made while amounts
remain unallocated in the suspense account.
1.04 Compliance with Combined Limitation. If for a Limitation Year the
sum of the Defined Benefit Fraction and the Defined Contribution Fraction would
exceed 1.0, then the following actions will be taken in the following order, to
the extent necessary for compliance with Section 1.03 of this Appendix, taking
into account the transition provisions of Section 1106(h)(3) of the Tax Reform
Act of 1986:
(a) Defined Benefit Plan. The Participant's accrued benefits under
each defined benefit plan of an Affiliated Company will be reduced in accordance
with the terms of each such plan.
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(b) Defined Contribution Plan. Annual Additions to the
Participant's accounts in this Plan and each other defined contribution plan of
an Affiliated Company will be reduced.
(c) Years after December 31, 1999. Notwithstanding the
foregoing, the overall limit on annual contributions made on behalf of an
employee who participates in a defined benefit and a defined contribution plan
maintained by the same employer will cease to be in effect for Limitation Years
beginning after December 31, 1999.
1.05 Limitation Year. The Limitation Year is the Plan Year.
1.06 Affiliated Company. For purposes of this Appendix, the
determination of an Affiliated Company will be made with the adjustment required
by Code Section 415(h).
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APPENDIX III: TOP HEAVY PROVISIONS
1.01 Definitions. For purposes of this Appendix, the following terms
shall have the meaning indicated:
(a) Determination Date shall mean, for the Plan's first Plan Year,
the last day of such Plan Year, and for any other Plan Year, the last day of the
preceding Plan Year.
(b) Key Employee shall mean, with respect to any Plan Year, a
Participant or former Participant (and the Beneficiaries of a deceased
Participant) who, at any time during the Plan Year containing the Determination
Date for the Plan Year in question, or any of the four immediately preceding
Plan Years, was:
(i) Officer. An officer, for purposes of this Appendix, is an
officer of an Affiliated Company having annual Remuneration from all Affiliated
Companies for a Plan Year greater than 50% of the maximum dollar limitation in
effect under Code Section 415(b)(1)(A) for the calendar year in which such Plan
Year ended. The individuals actually considered as Key Employees by virtue of
being officers (I) shall not in number exceed the lesser of 50 or that number
not in excess of the greater of three officers or 10% of the total number of
Employees of all the Affiliated Companies, and (II) shall be those individuals
belonging to the group of all Participants determined to be officers for the
Plan Year containing the Determination Date or any of the preceding four Plan
Years, who received the highest annual Remuneration for any Plan Year during
such five-year period.
(ii) Owners of Largest Interests. The owners of the largest
interests are the 10 Employees of any Affiliated Company owning the largest
interests in any Affiliated Company, provided that such Employee owns more than
a 1/2% interest in such Affiliated Company, and that such Employee's aggregate
annual Remuneration from all the Affiliated Companies exceeds the maximum dollar
limitation under Section 415(c)(1)(A) of the Code. Should two Employees own the
same percentage interest in one or more Affiliated Companies, then the Employee
having the greater annual Remuneration shall be deemed to own the larger
percentage interest.
(iii) 5% Owner. A 5% owner is an individual who owns more than
5% of the outstanding stock or stock possessing
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more than 5% of the total combined voting power of all stock of any Affiliated
Company (or, if the Affiliated Company is not a corporation, more than 5% of the
capital or profits interest of the Affiliated Company).
(iv) 1% Owner. A 1% owner is an individual who owns more than
1% of the outstanding stock or stock possessing more than 1% of the total
combined voting power of all stock of any Affiliated Company, (or, if such
Affiliated Company is not a corporation, more than 1% of the capital or profits
interest of the Affiliated Company), and whose annual Remuneration from all the
Affiliated Companies exceeds $150,000.
For purposes of determining ownership in an Affiliated Company under this
subsection, the attribution principles of Code Section 318 shall apply by
substituting "5%" for "50%" in Section 318(a)(2)(C).
(c) Non-Key Employee shall mean, with respect to any Plan Year, any
Employee who is not a Key Employee, including Employees who are former Key
Employees.
(d) Top Heavy Ratio of a plan or group of plans shall be a
fraction, the numerator of which is the sum of (I) account balances of all Key
Employees under each defined contribution plan (including any simplified
employee pension plan) included in the determination and (II) the present value
of cumulative accrued benefits of all Key Employees under each defined benefit
plan included in the determination, and the denominator of which is the sum of
the account balances for all Participants under each defined contribution plan
(including any simplified employee pension plan) included in the determination
and the present value of cumulative accrued benefits for all Participants under
each defined benefit plan included in the determination. In determining the
Top-Heavy Ratio, the following rules apply:
(i) Valuation. The value of account balances shall be
determined as of the most recent Valuation Date that falls within or ends within
the 12-month period ending on the Determination Date. Present value of accrued
benefits under a defined benefit plan shall be calculated under the method used
for accrual purposes in all defined benefit plans of the Affiliated Companies,
or, if there is no such method, as if such benefit accrued not more rapidly than
the slowest accrual rate permitted under Code Section 411(b)(1)(C). Account
balances and
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accrued benefits so determined shall be adjusted for the amount of any
contributions (I) made after the date of such valuation but on or before the
Determination Date or (II) due but unpaid as of the Determination Date, and,
except as otherwise provided in (2) or (3) below, shall include any amount
distributed during the five-year period ending on the Determination Date.
(ii) Transfers. With respect to a transfer from one qualified
plan to another (by rollover or Trust-to-Trust transfer) which is (A) incident
to a merger or consolidation of two or more plans or a division of a single plan
into two or more plans, (B) made between two plans maintained by the same
employer or by employers required to be aggregated under Section 414(b), (c),
(m) or (o) of the Code, or (C) otherwise not initiated by the Employee, a
Participant's accrued benefit or account balance under a plan shall include any
amount attributable to any such transfer received or accepted by such plan on or
before the Determination Date but shall not include any amount transferred by
such plan to any other plan in such a transfer on or before the Determination
Date. With respect to any rollover or Trust- to-Trust transfer not described in
the preceding sentence, a Participant's accrued benefit or account balance under
a plan (I) shall include any amount distributed or transferred by such plan,
unless the distributed or transferred amount is excludable under paragraph (1),
and (II) shall not include any amount attributable to assets received by such
plan.
(iii) Exclusions. No accrued benefit for any Participant or
Beneficiary shall be taken into account for purposes of calculating the
Top-Heavy Ratio with respect to (I) a Participant who is not a Key Employee with
respect to the Plan Year in question, but who was a Key Employee with respect to
a prior Plan Year, or (II) an Employee who has performed no services for any
Affiliated Company within the five-year period ending with the Determination
Date, unless such Employee becomes re-employed after such 5-year period.
(e) Required Aggregation Group means a group of two or more plans
(including terminated plans) consisting of (1) a qualified plan of an Affiliated
Company (including a simplified employee pension plan) in which at least one Key
Employee participates, and (2) any other qualified plan or plans of the
Affiliated Company which enable the plan described in (1) to meet the
requirements of Code Sections 401(a)(4) and 410 (except Average Benefits).
45.
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(f) Permissive Aggregation Group means a group of plans consisting
of a Required Aggregation Group of plans plus one or more other plan or plans of
an Affiliated Company which, when considered as a group with the Required
Aggregation Group, would continue to satisfy the requirements of Code Sections
401(a)(4) and 410.
1.02 Top-Heavy Status. This Plan shall be considered "Top-Heavy" with
respect to any Plan Year if, as of the Determination Date for such Plan Year,
either:
(a) No Required Aggregation. The Top-Heavy Ratio for this Plan
exceeds 60% and this Plan is not part of any Required Aggregation Group, or
(b) Required Aggregation. This Plan is part of a Required
Aggregation Group of plans and the Top-Heavy Ratio for the group of plans
exceeds 60%; provided that, if this Plan is part of one or more Permissive
Aggregation Groups of plans for which the Top-Heavy Ratio does not exceed 60%,
this Plan shall not be Top-Heavy.
1.03 Minimum Contribution.
(a) Recipients. With respect to any Plan Year for which the Plan is
Top-Heavy, each Participant who is not a Key Employee, and who has not ceased to
be an Employee prior to the end of such Plan Year, shall be entitled to a
contribution under this section. No Participant otherwise entitled to an
allocation under this subsection shall be ineligible for such allocation solely
because he or she has not completed 1,000 Hours of Service for the Plan Year.
(b) Amounts. The benefit of each Participant who meets the
requirements of subsection (a), and who does not participate in any defined
benefit plan of any Affiliated Company, shall be such Participant's Company
Contribution (including forfeitures) under the other provisions of the Plan;
provided that the total employer contribution (including forfeitures) allocated
to the Account of such Participant shall be not less than an amount which, when
added to such Participant's allocable share of employer contributions and
forfeitures under any other defined contribution plan of any of the Affiliated
Companies, equals at least 3% of his or her Remuneration. The benefit described
in this subsection (b) is subject to the following:
46.
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(i) Limit. In the event that the percentage of employer
contributions and forfeitures under the plans in which such Participant
participates for the Plan Year on behalf of the Key Employee for whom such
percentage is greatest is less than 3% of such Key Employee's Remuneration for
the Plan Year, then such Participant shall not be entitled to a contribution
under this subsection (b) for the Plan Year in excess of such percentage of such
Participant's Remuneration, unless this Plan enables a defined benefit plan
included in a Required Aggregation Group with this Plan to satisfy the
requirements of Section 401(a) or 410 of the Code (except the average benefits
test).
(ii) Salary Reduction. Notwithstanding the preceding paragraph,
if the highest rate allocated to a Key Employee is less than 3%, amounts
contributed as a result of a salary reduction agreement will be included when
determining contributions made on behalf of Key Employees.
(iii) Adjustment. If a Participant also participates in a
defined benefit plan of an Affiliated Company, then the minimum contribution
requirement of this Section for that Participant will be fulfilled in accordance
with this subsection, except that "3%" shall be substituted for "5%."
1.04 Affiliated Companies. This Appendix will be administered separately
with regard to Affiliated Companies (if any) that are unrelated within the
meaning of Code Section 414.
47.
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APPENDIX IV: PARTICIPATION OF UNICARE EMPLOYEES
Effective for Compensation paid to Employees of UniCARE Financial Corp.
("UniCARE") on and after March 25, 1994, and subject to the terms and conditions
outlined below, UniCARE will become a Participating Company under this Plan.
1.01 Eligibility. Effective March 25, 1994, notwithstanding anything to
the contrary in this Plan, Employees of UniCARE who are actively at work with
UniCARE on March 25, 1994 and who were participants in the UniCARE Financial
Corp. Profit Sharing Plan ("UniCARE Plan") for the payroll period ending
February 28, 1994 will be eligible to participate in this Plan.
1.02 Service. Effective March 25, 1994, notwithstanding anything to the
contrary in this Plan, hours of service with UniCARE were treated as Hours of
Service with the Company for all purposes under the Plan including, but not
limited to, determinations regarding eligibility to participate in the Plan and
determinations regarding a Participant's level of Matching Contributions (if
any) under the Plan.
1.03 Plan Merger. On June 1, 1994, the UniCARE Plan, which contains
certain annuity and installment options that are generally unavailable under the
terms of this Plan, was merged into this Plan. This Appendix is designed to
preserve withdrawal, distribution, and restoration of forfeiture provisions
contained in the UniCARE Plan to the extent required by the Retirement Equity
Act and by Code Section 411. Consequently, this appendix is applicable only to
assets (adjusted for future gains losses, expenses and restorations of
forfeitures) transferred to this Plan from the UniCARE Plan ("UniCARE Amount").
All references to a Participant's UniCARE Amount in this Appendix are to that
Participant's UniCARE Amount as of the most recent Valuation Date.
1.04 UniCARE Distribution and Withdrawal Options. A Participant may
elect to receive a withdrawal or a distribution (as the case may be) of his or
her UniCARE Amount as provided in (a), (b), or (c) immediately below.
(a) General Plan Provisions. A Participant may elect to receive his
or her UniCARE Amount pursuant to the withdrawal or the distribution provisions
generally applicable to assets held under the Plan.
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(b) Installment Distribution. A Participant may elect to receive
his or her UniCARE Amount in substantially equal annual, or more frequent
installments over a period certain which does not extend beyond the life
expectancy of the Participant or the joint life expectancies of the Participant
and the Participant's Beneficiary. For these purposes, life expectancies will
not be recalculated.
(c) Annuity Option. A Participant may elect to have his or her
UniCARE Amount used to purchase a nontransferable annuity contract that will be
distributed to the Participant in full satisfaction of all Plan obligations to
the Participant and the Participant's Beneficiaries with regard to the
Participant's UniCARE Amount. A Participant who makes such an election will be
subject to the Notice and Waiver Provisions contained in Section 5.05 of this
Appendix and to the following additional requirements.
(i) Normal Form. If the Participant is not married on his or
her Annuity Starting Date, the Participant's Normal Form will be a single life
annuity. If the Participant is married on his or her Annuity Starting Date, the
Participant's Normal Form will be an immediate annuity for the life of the
Participant with a survivor annuity for the life of the Participant's spouse
(determined as of the date of distribution of the contract) which is 50% of the
amount of the annuity which is payable during the joint lives of the Participant
and the Participant's spouse.
(ii) Alternate Form. Subject to the requirements of Code
Section 401(a)(9), a Participant may elect to receive an immediate annuity for
his or her life or a reduced immediate annuity for his or her life with a
survivor annuity for the life of a Beneficiary that is 50% or 100% of the amount
of the annuity that is payable during the joint lives of the Participant and the
Beneficiary. An alternate form of annuity may also provide for an annuity
certain feature for a period not exceeding the life expectancy of the
Participant.
1.05 Notice and Waiver Provisions. Subject to the "Special Waiver of
30-Day Requirement" rules in Article XI of this Plan, the following provisions
are applicable to distributions and withdrawals described in Section 5.04(c) and
Section 5.06(a) of this Appendix.
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(a) Notice. No less than 30 days and no more than 90 days before
the Annuity Starting Date, the Committee will provide the Participant, or the
Participant's surviving spouse, as the case may be, with a written explanation
of the terms and conditions of the Normal Form, the right to make, and the
effect of, an election to waive the Normal Form, the right of the Participant's
spouse (if any) to approve a Participant's waiver, the right to revoke a waiver
and the effect of revoking a waiver.
(b) Procedure. A waiver must be made on a form prepared by, and
delivered to, the Committee no earlier than 90 days before the Annuity Starting
Date. The Participant, or the Participant's surviving spouse, as the case may
be, may revoke or change a waiver at any time before the Annuity Starting Date
by delivering a subsequent form to the Committee that satisfies the Plan's
waiver procedures.
(c) Additional Conditions Applicable to Married Participants.
(i) A Participant's spouse must waive any rights to the
Participant's Normal Form in a document prepared by and delivered to the
Committee, that acknowledges the effect of the waiver, and that is witnessed by
a notary public. In the waiver, the Participant's spouse must either consent to
the specific non-spouse Beneficiary or Beneficiaries named by the Participant,
and the optional form of benefit selected by the Participant, or acknowledge
that the surviving spouse had the right to limit consent only to a specific
non-spouse Beneficiary or Beneficiaries, and to a specific optional form of
benefit, and that the surviving spouse voluntarily elected to relinquish that
right.
(ii) Consent Unnecessary. If the Participant is legally
separated or abandoned (within the meaning of local law) and the Participant has
a court order to that effect (and there are no Qualified Domestic Relations
Orders as defined in Code Section 414(p) that provide otherwise), or the spouse
cannot be located, then the waiver described in the preceding paragraph need not
be filed with the Committee when a married Participant elects an optional form
of benefit.
(iii) Effect of Consent. Any waiver by a spouse obtained
pursuant to these procedures (or establishment
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that the consent of a spouse could not be obtained) is effective only with
respect to that spouse.
1.06 Death Benefits. Subject to the requirements of Code Section
401(a)(9), the following death benefit provisions apply to UniCARE Amounts.
(a) Married Participant Who Elected an Annuity. If a married
Participant properly elects an annuity pursuant to the terms of this Appendix
and dies before his or her Annuity Starting Date, the Participant's UniCARE
Amount will be used to purchase a single life annuity (the Normal Form) for the
Participant's surviving spouse as soon as administratively possible after the
Participant's spouse requests purchase of such an annuity. Pursuant to the
Notice provisions of Sections 5.05(a) and (b) of this Appendix, the
Participant's surviving spouse may elect to receive the Participant's UniCARE
Amount pursuant to the distribution provisions generally applicable to assets
held under the Plan instead of in the Normal Form of a single life annuity.
(b) Unmarried Participant. If an unmarried Participant dies before
his or her Annuity Starting Date, the Participant's UniCARE Amount will be
distributed pursuant to the distribution provisions generally applicable to
assets held under the Plan and neither the annuity nor the installment
provisions of this Appendix will not apply.
(c) Married Participant Who Did Not Elect an Annuity. If a married
Participant who did not properly elect an annuity pursuant to the terms of this
Appendix dies before his or her Annuity Starting Date, the Participant's UniCARE
Amount will be distributed pursuant to the distribution provisions generally
applicable to assets held under the Plan and neither the annuity nor the
installment provisions of this Appendix will apply.
1.07 Restoration of Forfeitures. Under the UniCARE Plan, an individual
who separated from service with UniCARE and who received a distribution (or a
deemed distribution) of the vested portion of his or her account under the
UniCARE Plan forfeited (or was deemed to forfeit) his or her unvested benefits
under the UniCARE Plan.
(a) Return to Service. If such an individual (i) was reemployed by
UniCARE or (ii) became an Employee after January 20, 1994 (when UniCARE became a
wholly owned subsidiary
51.
<PAGE> 55
of WellPoint Health Networks Inc.), the amount forfeited
will be restored (without earnings) as part of the individual's UniCARE Amount
if the individual pays to this Plan (or in the case of a deemed forfeiture, the
Participant is deemed to have repaid the Plan) the full amount of the
distribution before the earlier of (x) 5 years after the applicable event
described in (i) or (ii) above, or (y) the close of the first period of 5
consecutive 1- year breaks in service (as defined in the UniCARE Plan) following
the date of the distribution.
(b) Funds. Funds for restoring forfeitures under this Section
will be drawn from a special contribution to the Plan to be made by the
appropriate Participating Company, as determined by the Committee. This special
contribution will not be subject to the limitations under Internal Revenue Code
Section 415.
52.
<PAGE> 56
APPENDIX V: PARTICIPATION OF COST CARE INC. EMPLOYEES
1.01 Eligibility. Effective March 1, 1997, individuals who were employed
by Cost Care, Inc. ("Cost Care") on February 28, 1997, and who became Employees
due to a corporate transaction on March 1, 1997 will be eligible to participate
in this Plan to the extent they satisfy the Plan's eligibility requirements,
taking into account the applicable service crediting provisions in Article III
of the Plan.
1.02 Plan Merger. Effective March 31, 1997, the Cost Care Inc. Savings
Plan ("Cost Care Plan"), under which certain annuity options were the normal
form of benefit, was merged into this Plan. The following provisions are
applicable only to assets (adjusted for future gains, losses, expenses and
restorations of forfeitures) merged into this Plan from the Cost Care Plan
("Cost Care Amount"). All references to a Participant's Cost Care Amount in this
Appendix are to that Participant's Cost Care Amount as of the most recent
Valuation Date.
1.03 Cost Care Distribution and Withdrawal Options.
(a) General Plan Provisions. A Participant may elect to receive his
or her Cost Care Amount pursuant to the in- service withdrawal provisions or the
distribution provisions generally applicable to assets held under this Plan.
Such a Participant may also elect among the annuity options described below.
(b) Annuity Options. When requesting an in-service withdrawal or a
distribution, a Participant may elect to have his or her Cost Care Amount used
to purchase a nontransferable annuity contract that will be distributed to the
Participant in full satisfaction of all Plan obligations to the Participant and
the Participant's Beneficiaries with regard to the Participant's Cost Care
Amount. A Participant who makes such an election will be subject to the Notice
and Waiver Provisions contained in Section 6.04 of this Appendix and to the
following additional provisions.
(i) Normal Form. If the Participant is not married on his or
her Annuity Starting Date, the Participant's Normal Form will become a single
life annuity. If the Participant is married on his or her Annuity Starting Date,
the Participant's Normal Form will become an immediate annuity for the life of
the Participant with a survivor annuity for the life
53.
<PAGE> 57
of the Participant's spouse (determined as of the date of distribution of the
contract) which is 50% of the amount of the annuity which is payable during the
joint lives of the Participant and the Participant's spouse.
(ii) Alternate Forms. Subject to the requirements of Code
Section 401(a)(9), a Participant may elect to receive an immediate annuity for
his or her life or a reduced immediate annuity for his or her life with a
survivor annuity for the life of a Beneficiary that is 50% or 100% of the amount
of the annuity that is payable during the joint lives of the Participant and a
Beneficiary. An alternate form of annuity may also provide for an annuity
payable for the Participant's lifetime with a minimum guarantee of 10 years of
payments.
1.04 Notice and Waiver Provisions. Subject to the "Special Waiver of
30-Day Requirement" rules in Article XI of this Plan, the following provisions
are applicable to distributions and withdrawals described in Section 6.03(b) and
Section 6.05(a) of this Appendix.
(a) Notice. No less than 30 days and no more than 90 days before
the Annuity Starting Date, the Committee will provide the Participant, or the
Participant's surviving spouse, as the case may be, with an explanation of the
terms and conditions of the Normal Form, the right to make, and the effect of,
an election to waive the Normal Form, the right of the Participant's spouse (if
any) to approve a Participant's waiver, the right to revoke a waiver and the
effect of revoking a waiver.
(b) Procedure. A waiver must be made on a form prepared by, and
delivered to, the Committee no earlier than 90 days before the Annuity Starting
Date. The Participant, or the Participant's surviving spouse, as the case may
be, may revoke or change a waiver at any time before the Annuity Starting Date
by delivering a subsequent form to the Committee that satisfies the Plan's
waiver procedures.
(c) Additional Conditions Applicable to Married Participants.
(i) A Participant's spouse must waive any rights to the
Participant's Normal Form in a document prepared by and delivered to the
Committee, that acknowledges the effect of the waiver, and that is witnessed by
a notary public. In the waiver, the Participant's spouse must either consent to
the
54.
<PAGE> 58
specific non-spouse Beneficiary or Beneficiaries named by the Participant,
and the optional form of benefit selected by the Participant, or acknowledge
that the surviving spouse had the right to limit consent only to a specific
non-spouse Beneficiary or Beneficiaries, and to a specific optional form of
benefit, and that the surviving spouse voluntarily elected to relinquish that
right.
(ii) Consent Unnecessary. If the Participant is legally
separated or abandoned (within the meaning of local law) and the Participant has
a court order to that effect (and there are no Qualified Domestic Relations
Orders as defined in Code Section 414(p) that provide otherwise), or the spouse
cannot be located, then the waiver described in the preceding paragraph need not
be filed with the Committee when a married Participant elects an optional form
of benefit.
(iii) Effect of Consent. Any waiver by a spouse obtained
pursuant to these procedures (or establishment that the consent of a spouse
could not be obtained) is effective only with respect to that spouse.
1.05 Death Benefits. Subject to the requirements of Code Section
401(a)(9), the following death benefit provisions apply to Cost Care Amounts.
(a) Married Participant Who Elected an Annuity. If a married
Participant properly elects an annuity pursuant to the terms of this Appendix
and dies before his or her Annuity Starting Date, the Participant's Cost Care
Amount will be used to purchase a single life annuity (the Normal Form) for the
Participant's surviving spouse as soon as administratively possible after the
Participant's spouse requests purchase of such an annuity. Pursuant to the
Notice provisions of Sections 6.04(a) and (b) of this Appendix, the
Participant's surviving spouse may elect to receive the Participant's Cost Care
Amount pursuant to the distribution provisions generally applicable to assets
held under the Plan instead of in the Normal Form of a single life annuity.
(b) Unmarried Participant. If an unmarried Participant dies
before his or her Annuity Starting Date, the Participant's Cost Care Amount will
be distributed pursuant to the distribution provisions generally applicable to
assets held
55.
<PAGE> 59
under the Plan and the annuity provisions of this Appendix will not
apply.
(c) Married Participant Who Did Not Elect an Annuity. If a
married Participant who did not properly elect an annuity pursuant to the terms
of this Appendix dies before his or her Annuity Starting Date, the Participant's
Cost Care Amount will be distributed pursuant to the distribution provisions
generally applicable to assets held under the Plan and the annuity provisions of
this Appendix will not apply.
1.06 Restoration of Forfeitures. Under the Cost Care Plan, an individual
who separated from service with Cost Care and who received a distribution (or a
deemed distribution) of the vested portion of his or her account under the Cost
Care Plan forfeited (or was deemed to forfeit) his or her unvested benefits
under the Cost Care Plan.
(a) Return to Service. If such an individual (i) was reemployed
by Cost Care or (ii) became an Employee after March 1, 1997, the amount
forfeited will be restored (without earnings) as part of the individual's Cost
Care Amount if the individual pays to this Plan (or in the case of a deemed
forfeiture, the Participant is deemed to have repaid the Plan) the full amount
of the distribution before the earlier of (x) 5 years after the applicable event
described in (i) or (ii) above, or (y) the close of the first period of 5
consecutive 1-year breaks in service (as defined in the Cost Care Plan)
following the date of the distribution.
(b) Funds. Funds for restoring forfeitures under this Section
will be drawn from a special contribution to the Plan to be made by the
appropriate Participating Company, as determined by the Committee. This special
contribution will not be subject to the limitations under Internal Revenue Code
Section 415.
56.
<PAGE> 60
APPENDIX VI: PARTICIPATION OF JOHN HANCOCK MUTUAL LIFE INSURANCE EMPLOYEES
1.01 Eligibility. Effective March 1, 1997, individuals who were employed
by John Hancock Mutual Life Insurance Company ("Hancock") on February 28, 1997,
and who became Employees due to a corporate transaction on March 1, 1997 will be
eligible to participate in this Plan to the extent they satisfy the Plan's
eligibility requirements, taking into account the applicable service crediting
provisions in Article III of the Plan.
1.02 Plan Merger. On March 31, 1997, The Investment- Incentive Plan for
Hancock Employees ("Hancock Plan"), which contains a partial distribution option
that is not generally available under the terms of this Plan, was merged into
this Plan. Consequently, the partial distribution option described below applies
only to assets (adjusted for future gains losses, and expenses) transferred to
this Plan from the Hancock Plan ("Hancock Amount"). All references to a
Participant's Hancock Amount are to that Participant's Hancock Amount as of the
most recent Valuation Date.
1.03 Hancock Distribution and Withdrawal Options.
(a) General Plan Provisions. A Participant or a Beneficiary (as the
case may be) may elect to receive his or her Hancock Amount pursuant to the
withdrawal or the distribution provisions generally applicable to assets held
under the Plan.
(b) Partial Distributions. Subject to the requirements of Code
Section 401(a)(9), a Participant who has attained age 59-1/2 or who is otherwise
eligible for a Plan distribution that is not an in-service withdrawal, an
Alternate Payee of such a Participant, or a Beneficiary who is the surviving
spouse of such a Participant, may elect to receive all or a portion of such a
Participant's Hancock Amount at any time.
57.
<PAGE> 61
APPENDIX VII: PARTICIPATING COMPANIES
As of October 1, 1997, the following entities were Participating
Companies in this Plan:
Blue Cross of California
Comprehensive Integrated Marketing Services
WellPoint Behavioral Health, Inc.
UNICARE Insurance Company
CostCare, Inc.
Professional Claim Services, Inc.
UNICARE of Texas Health Plans, Inc.
WellPoint Development Company, Inc.
UNICARE Life & Health Insurance Company
58.
<PAGE> 1
WELLPOINT HEALTH NETWORKS, INC.
Exhibit 11 - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands, except September 30, September 30,
earnings per share) ------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 55,568 $ 45,101 $155,586 $154,986
Primary:
Average shares outstanding 69,666 66,484 68,507 66,416
Net effect of dilutive stock
options-based on the treasury
stock method using average
market price 1,081 -- 592 --
-------- -------- -------- --------
Totals 70,747 66,484 69,099 66,416
======== ======== ======== ========
Per share amount $ 0.79 $ 0.68 $ 2.25 $ 2.33
======== ======== ======== ========
Fully diluted:
Average shares outstanding 69,666 66,484 68,507 66,416
Net effect of dilutive stock
options-based on the treasury
stock method using quarter-end
market price which is greater
than average market price 1,293 -- 688 --
-------- -------- -------- --------
Totals 70,959 66,484 69,195 66,416
======== ======== ======== ========
Per share amount $ 0.78 $ 0.68 $ 2.25 $ 2.33
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF EARNINGS AND CONSOLIDATED BALANCE SHEETS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 284,397
<SECURITIES> 2,351,017
<RECEIVABLES> 602,495
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,353,778
<PP&E> 106,286
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,403,966
<CURRENT-LIABILITIES> 2,211,151
<BONDS> 429,000
0
0
<COMMON> 697
<OTHER-SE> 1,161,702
<TOTAL-LIABILITY-AND-EQUITY> 4,403,966
<SALES> 0
<TOTAL-REVENUES> 4,268,821
<CGS> 0
<TOTAL-COSTS> 3,958,632
<OTHER-EXPENSES> 19,952
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,757
<INCOME-PRETAX> 261,480
<INCOME-TAX> 105,894
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 155,586
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.25
</TABLE>
