<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 JUNE 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 AUGUST 13, 1997
------------------- ------------------------------
Common Stock, $0.0l par value 69,623,169 shares
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WELLPOINT HEALTH NETWORKS INC.
SECOND QUARTER 1997 FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
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<S> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996.................................................................. 1
Consolidated Income Statements for the Three and Six Months
Ended June 30, 1997 and 1996....................................................... 2
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1997............................................. 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 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..................................... 11
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities.................................................................. 27
ITEM 4. Submission of Matters to a Vote of Securityholders..................................... 28
ITEM 5. Other Information...................................................................... 29
ITEM 6. Exhibits and Reports on Form 8-K....................................................... 30
SIGNATURES............................................................................................... 40
</TABLE>
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ITEM 1. Financial Statements
WELLPOINT HEALTH NETWORKS INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In thousands, except share data) June 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 381,685 $ 313,256
Investment securities, at market value 2,180,456 1,728,305
Receivables, net 548,774 401,300
Deferred tax assets 68,227 67,147
Other current assets 40,206 28,463
------------- -------------
Total Current Assets 3,219,348 2,538,471
Property and equipment, net 98,363 82,720
Intangible assets 692,071 552,279
Long-term investments 125,711 123,931
Deferred tax assets 73,364 57,830
Other non-current assets 50,191 50,311
------------- -------------
Total Assets $ 4,259,048 $ 3,405,542
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Medical claims payable $ 731,165 $ 667,540
Loss and loss adjustment expense reserves 106,402 102,152
Reserves for future policy benefits 43,848 13,001
Unearned premiums 181,908 160,036
Accounts payable and accrued expenses 319,232 251,480
Experience rated and other refunds 237,687 146,882
Income taxes payable 99,729 99,086
Other current liabilities 308,466 118,303
------------- -------------
Total Current Liabilities 2,028,437 1,558,480
Accrued postretirement benefits 62,800 61,086
Loss and loss adjustment expense reserves, non-current 137,642 131,079
Reserves for future policy benefits, non-current 405,402 91,507
Long-term debt 464,000 625,000
Other non-current liabilities 75,096 67,931
------------- -------------
Total Liabilities 3,173,377 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, 69,622,953
and 66,526,985 issued and outstanding at June 30, 1997 and
December 31, 1996, respectively 696 665
Additional paid-in capital 875,973 761,879
Unrealized valuation adjustment (8,925) (9,994)
Retained earnings 217,927 117,909
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Total Stockholders' Equity 1,085,671 870,459
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Total Liabilities and Stockholders' Equity $ 4,259,048 $ 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 June 30, Six Months Ended June 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Premium revenue $1,330,685 $ 985,665 $2,499,523 $1,748,949
Management services revenue 109,276 43,435 171,721 61,663
Investment income 45,648 36,359 85,997 72,429
---------- ---------- ---------- ----------
1,485,609 1,065,459 2,757,241 1,883,041
Operating Expenses:
Health care services and
other benefits 1,083,279 762,953 2,004,151 1,334,738
Selling expense 64,911 58,261 124,681 107,727
General and administrative expense 231,533 143,491 412,100 235,765
Nonrecurring costs 8,028 -- 14,535 --
---------- ---------- ---------- ----------
1,387,751 964,705 2,555,467 1,678,230
---------- ---------- ---------- ----------
Operating Income 97,858 100,754 201,774 204,811
Interest expense 9,845 10,923 20,613 10,923
Other expense, net 5,195 6,169 13,064 9,181
---------- ---------- ---------- ----------
Income before Provision for
Income Taxes 82,818 83,662 168,097 184,707
Provision for income taxes 33,555 33,890 68,079 74,822
---------- ---------- ---------- ----------
Net Income $ 49,263 $ 49,772 $ 100,018 $ 109,885
========== ========== ========== ==========
Earnings Per Share $ 0.70 $ 0.75 $ 1.46 1.66
========== ========== ========== ==========
Weighted Average Common
Shares Outstanding 70,007 66,396 68,276 66,381
</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 100,018 100,018
Net proceeds from common
stock offering 3,000 30 110,310 110,340
Stock issued under Company's
stock option / award plan 96 1 3,784 3,785
Change in unrealized valuation
adjustment on investment
securities, net of tax 1,069 1,069
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance as of June 30, 1997 $ -- 69,623 $ 696 $ 875,973 $ (8,925) $ 217,927 $1,085,671
========== ========== ========== ========== ========== ========== ==========
</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) Six Months Ended June 30,
-----------------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 100,018 $ 109,885
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net of accretion 28,473 16,895
Gains on sales of assets, net (14,199) (9,153)
(Provision) benefit for deferred income taxes (2,304) 3,008
Amortization of deferred gain on sale of building (2,213) (369)
(Increase) decrease in certain assets, net of acquisitions:
Receivables, net (28,204) 14,010
Other current assets (5,068) 25,474
Other non-current assets 120 (52,860)
Increase (decrease) in certain liabilities, net of acquisitions:
Medical claims payable (20,765) 6,138
Loss and loss adjustment expense reserves 10,813 29,834
Reserves for future policy benefits 66,435 --
Unearned premiums (12,631) 14,459
Accounts payable and accrued expenses 64,517 (1,334)
Experience rated and other refunds 3,016 (8,756)
Income taxes payable and other current liabilities 24,815 (13,989)
Accrued postretirement benefits 1,714 1,553
Other non-current liabilities 9,378 17,905
----------- -----------
Net cash provided by operating activities 223,915 152,700
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased (1,258,433) (395,054)
Proceeds from investments sold 767,251 308,750
Proceeds from matured investments 55,445 33,714
Property and equipment purchased, net (17,267) (15,673)
Additional investment in subsidiaries (17,584) --
Purchase of subsidiaries, net of cash acquired 361,977 (412,314)
----------- -----------
Net cash used in investing activities (108,611) (480,577)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 150,000 775,000
Repayment of long-term debt (311,000) (45,000)
Net proceeds from common stock offering 110,340 --
Proceeds from issuance of stock under option/award plan 3,785 4,025
Recapitalization (see Note 3) -- (995,000)
----------- -----------
Net cash used in financing activities (46,875) (260,975)
----------- -----------
Net increase (decrease) in cash and cash equivalents 68,429 (588,852)
Cash and cash equivalents at beginning of period 313,256 1,069,631
----------- -----------
Cash and cash equivalents at end of period $ 381,685 $ 480,779
=========== ===========
</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.
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
shareholders of the Company. As a result of such merger, WellPoint
California became a wholly owned subsidiary of the Company.
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. The Company serves the health care needs of
approximately 6.1 million medical members in HMOs, PPOs, POS, indemnity
plans, and management services plans, and has approximately 13.4 million
pharmacy members, 3.1 million dental members, 2.8 million utilization
management members, 1.6 million life members, 1.1 million disability
members and 664,000 behavioral health members as of June 30, 1997.
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 condition as of June 30, 1997, the results of its operations for
each of the three and six months ended June 30, 1997 and 1996, cash flows
for each of the six months ended June 30, 1997 and 1996, and its statement
of changes in stockholders' equity for the six months ended June 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 focuses on the large employer segment (employers with 5,000 or more
employees) and provides medical, life, dental as well as 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 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 June 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). 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 $132.7 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 Delaware
corporation ("Old WellPoint"), pursuant to the Amended and Restated
Recapitalization Agreement dated as of March 31, 1995 (the "Amended
Recapitalization Agreement"), by and among Old WellPoint, the company
formerly known as Blue Cross of California ("BCC"), the California
HealthCare Foundation (the "Foundation") and the California Endowment (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 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 66,366,500 shares of the Company's Common
Stock outstanding, of which 53,360,000 shares (or approximately 80.4%) were
held beneficially by the Foundation. On November 21, 1996 and April 10,
1997 the Foundation sold approximately 15 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 29,910,000
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 six
months ended June 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 six months ended June 30, 1997 is calculated
based on 70.0 million and 68.3 million shares outstanding, respectively,
and 66.4 million shares outstanding for the three and six months ended June
30, 1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
(In millions, except
earnings per share) June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $1,485.6 $1,310.1 $2,884.0 $2,638.5
Net Income $49.3 $44.4 $96.3 $95.5
Earnings Per Share $0.70 $0.67 $1.41 $1.44
</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 six months ended June 30, 1997 include common stock equivalents. For
the three and six months ended June 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 six months ended June 30,
1996 has been calculated using 66.4 million shares, the number of shares
outstanding immediately following the Recapitalization, to give effect to
the two-for-three share exchange that occurred as part of the
Recapitalization, plus the weighted average number of shares issued since
the Recapitalization.
7. NEW PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." 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. Common stock equivalents are not considered in the basic EPS.
As the Company did not have any common stock equivalents until May 20,
1996, and had no dilutive common stock equivalents from this
9
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WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. NEW PRONOUNCEMENTS, CONTINUED
date through March 31, 1997, the Company's basic and diluted EPS
calculation for all periods 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 1997 and for the remainder of
the fiscal year, the Company anticipates that common stock equivalents will
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 each of the three and six months
ended June 30, 1997 would be an increase in basic EPS of $0.01. The diluted
EPS under SFAS No. 128 would be the same as the EPS disclosed in these
financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". The standard 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 rules will be effective beginning first quarter of 1998
and companies will only be required to report total comprehensive income
for interim periods.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". The standard requires
that companies disclose "operating segments" based on the way management
disaggregates the company for making internal operating decisions. The new
rules will be effective for the 1998 fiscal year. Abbreviated quarterly
disclosure will be required beginning first quarter of 1999, with both 1999
and 1998 information.
At this time, the Company is assessing the effect of SFAS. No. 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.
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.
10
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WELLPOINT HEALTH NETWORKS INC.
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 or 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 6.1 million medical members, 13.4 million pharmacy members, 3.1
million dental members, 2.8 million utilization management members, 1.6 million
life members, 1.1 million disability members and 664,000 behavioral health
members as of June 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 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, 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 such 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.
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 targets large employers
with 5,000 or more employees and currently provides benefits to approximately
1.3 million medical members, of which most are in health plans that
11
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GENERAL, CONTINUED
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 $20.0 to $25.0 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 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 5000
employees and provide administrative services, PPO and indemnity insurance
products. The Company has experienced some membership attrition and expects that
it will experience further membership attrition on a combined basis of 10% or
greater of its acquired MMHD members as it 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 Quarterly Financial Statements 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 information systems, which will
require additional expenditures by the Company. A portion of these
expenditures will be reflected in the Company's results of operations.
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
will increase. The Company intends to consider a variety of measures aimed at
controlling the respective loss ratios and reducing the financial risk of these
acquired businesses, including the imposition of premium increases and changes
in product design. There can be no assurances that the Company will be able to
take such measures or, if such actions are taken, that they will be successful.
12
<PAGE> 15
GENERAL, CONTINUED
In recent periods, the Company has gained increased membership in its California
large group and Medicaid businesses. The Company's overall loss ratio may
increase as the Company expands these businesses, both of which have generally
higher loss ratios than the Company's individual and small group businesses.
A variety of health care reform measures are currently pending or have been
recently enacted at the Federal and state levels. Recent Federal legislation
seeks, among other things, to insure the portability of health coverage and
mandates minimum maternity hospital stays. These and other proposed measures may
have the effect of dramatically altering the regulation of the provision of
health care and of increasing the Company's loss ratio. 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 is 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 the legislation (or similar legislation that may be
subsequently adopted in other states) 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.
13
<PAGE> 16
RESULTS OF OPERATIONS
WellPoint's revenues are generated from premiums earned for health care and
specialty services provided to its members, fees for administrative services,
including claims processing and access to provider networks for self-insured
employers, and investment income. WellPoint's operating expenses include health
care services and other benefits expenses, consisting primarily of payments for
physicians, hospitals and other providers for health care and specialty products
claims; selling expenses for broker and agent commissions; general and
administrative expenses; interest expense; and income taxes.
The Company's consolidated results of operations for the three months ended June
30, 1997 include a full quarter of earnings for its acquired operations, GBO,
MMHD and the BCC Commercial Operations. The Company's consolidated results of
operations for the six months ended June 30, 1997 include a full six months of
earnings for MMHD and BCC Commercial Operations, and four months of earnings for
the GBO. The results of operations for the three and six months ended June 30,
1996 include the results of MMHD for the period from April 1, 1996 to June 30,
1996 and BCC Commercial Operations for the period from May 20, 1996 to June 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 Six Months Ended
June 30, June 30,
----------------- -----------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Operating Revenues:
Premium revenue 92.4% 95.8% 93.6% 96.6%
Management services revenue 7.6 4.2 6.4 3.4
----- ----- ----- -----
100.0 100.0 100.0 100.0
Operating Expenses:
Health care services and other
benefits (loss ratio) 81.4 77.4 80.2 76.3
Selling expense 4.5 5.7 4.7 6.0
General and administrative expense 16.1 13.9 15.4 13.0
</TABLE>
14
<PAGE> 17
MEMBERSHIP
The following table sets forth membership data and the percent change in
membership:
<TABLE>
<CAPTION>
MEDICAL MEMBERSHIP: As of June 30,
------------------------
Percent
GEOGRAPHY 1997 1996 Change
--------- --------- ------
<S> <C> <C> <C>
CALIFORNIA
Group Services:
HMO 738,656 643,554 14.8%
PPO and Other 1,336,703 1,190,155 12.3%
--------- ---------
Total 2,075,359 1,833,709 13.2%
--------- ---------
Individual, Small Group and Senior:
HMO 290,694 246,384 18.0%
PPO and Other 1,234,549 1,192,525 3.5%
--------- ---------
Total 1,525,243 1,438,909 6.0%
--------- ---------
Medi-Cal HMO Programs 267,939 49,717 438.9%
--------- ---------
Total California Medical Membership 3,868,541 3,322,335 16.4%
--------- ---------
TEXAS
Group Services 164,802 74,063 122.5%
Individual, Small Group and Senior 50,423 12,948 289.4%
--------- ---------
Total 215,225 87,011 147.4%
--------- ---------
GEORGIA
Group Services 92,960 51,724 79.7%
Individual, Small Group and Senior 5,437 -- N/A
--------- ---------
Total 98,397 51,724 90.2%
--------- ---------
OTHER STATES
Group Services 1,884,281 782,603 140.8%
Individual, Small Group and Senior 1,522 -- N/A
--------- ---------
Total 1,885,803 782,603 141.0 %
--------- ---------
TOTAL MEDICAL MEMBERSHIP (a)(b) 6,067,966 4,243,673 43.0%
========= =========
NETWORKS (c)
Proprietary Networks 3,674,522 3,154,376 16.5%
Other Networks 1,315,147 664,841 97.8%
Non-Network 1,078,297 424,456 154.0%
--------- ---------
TOTAL MEDICAL MEMBERSHIP 6,067,966 4,243,673 43.0%
========= =========
</TABLE>
(a) Medical membership includes 2,352,000 and 1,130,000 management services
members as of June 30, 1997 and 1996, respectively, of which those
management services members outside of California were 1,582,000 and
566,000, as of June 30, 1997 and 1996, respectively.
(b) As of June 30, 1997, total GBO medical membership was 1,285,842, of which
40,703 members were in California and 1,245,139 members were outside of
California.
(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
members.
15
<PAGE> 18
MEMBERSHIP, CONTINUED
<TABLE>
<CAPTION>
As of June 30,
--------------------------
Percent
1997 1996 Change
---------- ---------- ------
<S> <C> <C> <C>
SPECIALTY MEMBERSHIP:
Pharmacy 13,418,747 11,942,099 12.4%
Dental 3,083,854 1,466,640 110.3%
Utilization Management 2,839,228 -- N/A
Life 1,629,087 735,378 121.5%
Disability 1,147,704 111,015 933.8%
Behavioral Health 664,228 446,789 48.7%
</TABLE>
The specialty membership as of June 30, 1997 includes the acquired GBO
operations, which had approximately 297,000 pharmacy members, 1.4 million dental
members, 1.9 million utilization management members, 919,000 life members and
1.0 million disability members.
COMPARISON OF RESULTS FOR THE SECOND QUARTER 1997 TO THE SECOND QUARTER 1996
Premium revenue increased 35.0% or $345.0 million to $1,330.7 million for the
quarter ended June 30, 1997 from $985.7 million for the quarter ended June 30,
1996. The acquisitions of the GBO and the BCC Commercial Operations together
contributed 53.4% of the overall premium revenue increase and accounted for
$128.6 million and $55.5 million, respectively. Also contributing to increased
premium revenue in 1997 was an increase in insured member months of 13.4%,
excluding the GBO and including the BCC Commercial Operations from May 20, in
both periods. 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 151.8% or $65.9 million to $109.3 million
for the quarter ended June 30, 1997 from $43.4 million for the quarter ended
June 30, 1996. The increase was primarily due to $59.3 million and $1.7 million
of management services revenue from the GBO and BCC Commercial Operations
acquisitions, respectively, representing 92.6% of the increase. Also,
contributing to the increase was a significant increase in the California large
group management services membership and increases in pharmacy clinical fees and
claims processing fees.
Investment income increased to $45.6 million for the quarter ended June 30, 1997
compared to $36.4 million for the quarter ended June 30, 1996. Net realized
gains from equity securities increased $4.4 million to $7.8 million for the
quarter ended June 30, 1997 in comparison to $3.4 million for the quarter ended
June 30, 1996. Net interest and dividend income increased $6.6 million to $38.8
million for the quarter ended June 30, 1997 in comparison to $32.2 million for
the quarter ended June 30, 1996, primarily due to increased interest income on
the portfolios of acquired businesses and slightly higher yields in 1997 over
1996, offset by the foregone interest from cash and investments used to finance
the GBO and BCC Commercial
16
<PAGE> 19
COMPARISON OF RESULTS FOR THE SECOND QUARTER 1997 TO THE SECOND QUARTER 1996,
CONTINUED
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 42.0% or $320.3
million to $1,083.3 million for the quarter ended June 30, 1997 from $763.0
million for the quarter ended June 30, 1996. The acquisitions of the GBO and the
BCC Commercial Operations contributed 53.3% of the increase and accounted for
$118.6 million and $52.2 million, respectively. Additionally, the aforementioned
increase in insured member months of 13.4% resulted in increased claims
expense.
The loss ratio for the quarter ended June 30, 1997 increased to 81.4% compared
to 77.4% for the quarter ended June 30, 1996, primarily due to the incremental
effect of the GBO acquisition and the BCC Commercial Operations on the Company's
overall results. The acquired GBO and the BCC Commercial Operations have
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 second quarter of 1997 in comparison to the second 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 June 30, 1997 and 1996, the loss ratios would
have been 76.8% and 76.6%, respectively.
Selling expense for the quarter ended June 30, 1997 increased 11.3% to $64.9
million compared to $58.3 million for the quarter ended June 30, 1996,
corresponding with continued overall premium revenue growth. The selling expense
ratio for the quarter ended June 30, 1997 decreased to 4.5% from 5.7% for the
quarter ended June 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, and the BCC Commercial Operations, which
has no selling expense. Excluding all of the acquired operations of the GBO,
MMHD and the BCC Commercial Operations for the quarters ended June 30, 1997 and
1996, the selling expense ratio would have been 5.9% and 6.4%, respectively. The
Company 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. The Company's growth in Medi-Cal and large group
medical products had a more significant impact on lowering the selling expense
ratio as a result of its lower associated selling costs in comparison to
individual and small group products.
General and administrative expense for the quarter ended June 30, 1997 increased
61.3% or $88.0 million to $231.5 million for the quarter ended June 30, 1997
from $143.5 million for the quarter ended June 30, 1996. The acquisitions of the
GBO and the BCC Commercial Operations accounted for 68.0% of the increase and
contributed $56.9 million and $2.9 million, respectively. Additional increases
resulted from costs associated with increased membership growth, primarily
related to medical products, including Medi-Cal business, and
17
<PAGE> 20
COMPARISON OF RESULTS FOR THE SECOND QUARTER 1997 TO THE SECOND QUARTER 1996,
CONTINUED
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 16.1% for the quarter ended June
30, 1997, compared to 13.9% for the quarter ended June 30, 1996, primarily due
to the increased 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 traditional California-based businesses, due to its
higher percentage of management services business. The above increases were
partially offset by the BCC Commercial Operations' lower administrative expense
ratio. The administrative expense ratio, excluding the GBO and including the BCC
Commercial Operations from May 20, in both periods, was 14.4% and 13.9% for the
quarters ended June 30, 1997 and 1996, respectively.
The $8.0 million nonrecurring costs for the quarter ended June 30, 1997 related
primarily to the write down of the Dental Service Organization practices and
discontinuance of The Company's Medical Services Organization in Santa Barbara
and San Luis Obispo.
Interest expense was $9.8 million for the quarter ended June 30, 1997 and $10.9
million for the quarter ended June 30, 1996. The interest expense in 1997 and
1996 related to the Company's long-term indebtedness, of which $464 million was
outstanding at June 30, 1997. The weighted average interest rate for all debt
for the quarter ended June 30, 1997, including the fees associated with the
borrowings and interest rate swaps, was 7.5%.
WellPoint's net income for the quarter ended June 30, 1997 was $49.3 million, or
$0.70 per share, compared to $49.8 million, or $0.75 per share, for the quarter
ended June 30, 1996. Earnings per share for the quarters ended June 30, 1997 and
1996 are based on 70.0 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 three months ended
June 30, 1997 include common stock equivalents. For the three months ended June
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 June 30, 1996 have been calculated using 66.4 million shares, the
number of shares outstanding immediately following the Recapitalization, to give
effect to the two-for-three share exchange that occurred as part of the
Recapitalization, plus the weighted average number of shares issued since the
Recapitalization. Weighted average common shares outstanding increased for the
quarter ended June 30, 1997 due to the public offering in April 1997 of 3
million shares of the Company's common stock and the inclusion of 696,000 common
stock equivalents related to the Company's stock option plans.
18
<PAGE> 21
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 TO THE SIX MONTHS
ENDED JUNE 30, 1996
Premium revenue increased 42.9% or $750.6 million to $2,499.5 million for the
six months ended June 30, 1997 from $1,748.9 million for the six months ended
June 30, 1996. The acquisitions of the GBO, MMHD, and the BCC Commercial
Operations contributed 63.8% of the overall premium revenue increase and
accounted for $168.4 million, $163.0 million and $147.7 million, respectively.
Also, contributing to increased premium revenue in 1997 was an increase in
insured member months of 18.2%, excluding the GBO for both periods, MMHD for the
first quarter of 1997, and including the BCC Commercial Operations from 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 178.3% or $110.0 million to $171.7 million
for the six months ended June 30, 1997 from $61.7 million for the six months
ended June 30, 1996. The increase was primarily due to $77.3 million, $18.9
million and $3.8 million of management services revenue related to the
acquisitions of the GBO, MMHD and the BCC Commercial Operations, respectively,
representing 90.9% of the increase. Also, contributing to the increase was an
increase in the California large group management services membership and
increases in pharmacy clinical fees and claims processing fees.
Investment income increased to $86.0 million for the six months ended June 30,
1997 compared to $72.4 million for the six months ended June 30, 1996. Net
realized gains from equity securities increased $6.7 million to $15.0 million
for the six months ended June 30, 1997 in comparison to $8.3 million for the six
months ended June 30, 1996. Net interest and dividend income increased $8.6
million to $72.5 million for the six months ended June 30, 1997 in comparison to
$63.9 million for the six months ended June 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 50.2% or $669.5
million to $2,004.2 million for the first six months of 1997 from $1,334.7
million for the six months ended June 30, 1996. The acquisitions of the GBO,
MMHD and the BCC Commercial Operations accounted for 64.6% of the increase and
totaled $159.5 million, $133.9 million and $139.1 million, respectively.
Additionally, the Company's health care benefits and other expenses in the six
months ended June 30, 1997 increased in comparison to the prior six month period
as a result of the aforementioned increase in insured member months of 18.2%.
The loss ratio for the first six months of 1997 increased to 80.2% compared to
76.3% in 1996. The acquired MMHD operations, the GBO and the BCC Commercial
Operations have traditionally experienced a higher loss ratio than the Company.
Excluding all of the acquired operations of MMHD, the GBO and the BCC Commercial
Operations for the six months ended June 30, 1997 and 1996, the loss ratios
would have been 76.2% and 75.8%, respectively.
19
<PAGE> 22
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 TO THE SIX MONTHS
ENDED JUNE 30, 1996, CONTINUED
Selling expense for the six months ended June 30, 1997 increased 15.8% to $124.7
million compared to $107.7 million for the six months ended June 30, 1996,
corresponding with continued overall premium revenue growth and an additional
$6.2 million in selling expense attributable to the MMHD operations and the GBO.
The selling expense ratio for the six months ended June 30, 1997 decreased to
4.7% from 6.0% for the six months ended June 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 six months ended June 30,
1997 and 1996, the selling expense ratio would have been 5.9% and 6.3%,
respectively. The Company experienced a slight decrease in selling expense in
1997 as a percentage of revenue for certain medical products in comparison to
the prior six months ended June 30, 1996. The Company's growth in Medi-Cal and
large group medical products had a more significant impact on lowering the
selling expense ratio as a result of its lower associated selling costs in
comparison to individual and small group products.
General and administrative expense for the six months ended June 30, 1997
increased 74.8% or $176.3 million to $412.1 million from $235.8 million for the
same period in 1996. The acquisitions of the GBO, MMHD, and the BCC Commercial
Operations accounted for 73.5% of the increase and contributed $76.8 million,
$46.0 million and $6.7 million, respectively. The administrative expense ratio
increased to 15.4% for the first six months of 1997 compared to 13.0% 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
acquisition 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 its 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 including the BCC
Commercial Operations from May 20 in both periods, was 13.5% and 13.0% for the
six months ended June 30, 1997 and 1996, respectively.
The Company recorded $14.5 million of nonrecurring costs for the six months
ended June 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
practices and discontinuance of our 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 stay bonuses associated with the GBO
acquisition.
Interest expense increased 89.0% to $20.6 million for the six months ended June
30, 1997 in comparison to $10.9 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
20
<PAGE> 23
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 TO THE SIX MONTHS
ENDED JUNE 30, 1996, CONTINUED
six months ended June 30, 1997 in comparison to a shorter period of time in the
six months ended June 30, 1996. The weighted average interest rate for all debt
for the six months ended June 30, 1997, including the fees associated with the
borrowings and interest rate swaps, was 7.4%.
WellPoint's net income for the six months ended June 30, 1997 was $100.0 million
or $1.46 per share compared to $109.9 million or $1.66 per share for the six
months ended June 30, 1996. Earnings per share for the six months ended June 30,
1997 and 1996 are based on 68.3 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 six
months ended June 30, 1997 include common stock equivalents. For the six months
ended June 30, 1996, common stock equivalents did not have a dilutive effect on
the weighted average number of shares outstanding. Earnings per share for the
six months ended June 30, 1996 has been calculated using 66.4 million shares,
the number of shares outstanding immediately following the Recapitalization, to
give effect to the two-for-three share exchange that occurred as part of the
Recapitalization, plus the weighted average number of shares issued since the
Recapitalization. For the six months ended June 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 348,000 common stock
equivalents related to the Company's stock option plans.
FINANCIAL CONDITION
The Company's consolidated assets increased by $853.5 million from $3,405.5
million as of December 31, 1996 to $4,259.0 million as of June 30, 1997. This
represents a 25.1% increase and resulted primarily from the GBO acquisition as
well as cash flows generated from operations. Cash and investments were $2.7
billion as of June 30, 1997, or 63.1% of total assets.
As of June 30, 1997, $464.0 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 $110.0 million of debt under the
Subordinated Credit Agreement from the proceeds of the Company's April 1997
public stock offering and from cash flows from operations.
Equity totaled $1,085.7 million as of June 30, 1997, an increase of $215.2
million from December 31, 1996. The increase resulted primarily from net income
of $100.0 million for the six months ended June 30, 1997, $110.3 million and
$3.8 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 $1.1 million in unrealized valuation adjustment on investment
securities, net of tax.
21
<PAGE> 24
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 and
administrative expenses. In addition, to the foregoing, other uses of cash
include costs of provider network and systems development, costs associated with
the integration of acquired businesses and capital expenditures. The Company
receives premium revenue in advance of anticipated claims for related health
care services and other benefits. The Company's investment policies are designed
to provide liquidity, preserve capital and maximize yield. Cash and investment
balances maintained by the Company are sufficient to meet applicable regulatory
financial stability and net worth requirements. As of June 30, 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 $223.9 million for the six
months ended June 30, 1997, compared with $152.7 million for the six months
ended June 30, 1996. The positive cash flow from operations is due primarily to
net income of $100.0 million, adjusted for certain operating liabilities such as
increased reserves for future policy benefits of $66.4 million and accounts
payable and accrued expenses of $64.5 million.
Net cash used in investing activities for the six months ended June 30, 1997
totaled $108.6 million, compared with net cash used in investing activities of
$480.6 million for the six months ended June 30, 1996. The cash used in 1997 was
attributable primarily to the purchase of investments for $1,258.4 million
partially offset by the proceeds from investments sold and matured of $822.7
million and the net cash acquired from the GBO purchase of $362.0 million.
Net cash used in financing activities totaled $46.9 million for the six months
ended June 30, 1997, compared to net cash used in financing activities of $261.0
million for the six months ended June 30, 1996. Borrowings and repayments on
long-term debt totaled $150.0 million and $311.0 million, respectively, for the
six months ended June 30, 1997, compared to borrowings and repayments of
long-term debt of $775.0 million and $45.0 million, respectively, and dividend
payments associated with the Recapitalization of $995.0 million for the six
months ended June 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
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
22
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
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
$354.0 million as of June 30, 1997. The weighted average interest rate,
including the facility and other fees and excluding the swap agreements, for the
quarter and six months ended June 30, 1997 was 6.3% and 6.1%, respectively.
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
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. As of June 30, 1997, the Company's TNE was in
excess of the BCBSA's Minimum Capital requirement as well as the DOC TNE
requirement. 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
as GAAP equity. The 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 Department of Insurance in various states.
As of June 30, 1997 the Company was in compliance with all minimum capital
requirements.
23
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
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 Quarterly Financial Statements) 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
June 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 and its debt registration will be sufficient
to fund continuing operations and expected capital requirements for the
foreseeable future.
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 has begun, 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 will, among other things, need 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
24
<PAGE> 27
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
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 jurisdiction 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, 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
may adversely affect the Company's financial condition or results of operations.
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.
The Company's two primary products ([a] managed care products and [b] management
services products, including specialty managed care services) are marketed in
California primarily under the name Blue Cross of California and outside of
California primarily under the name UNICARE. Further, the Company's individual
and small group businesses versus larger employers have distinctive differences
in the focus needed in targeting each of these markets. The combined cost ratios
(medical costs and expenses) for the small group and individual businesses and
the large group business vary due primarily to differing product mix between the
managed care and management services products and different distribution costs.
A greater percentage of small group and individual membership is comprised of
higher risk managed care products, which tend to be more profitable than the
lower risk managed care and management services products as a result of higher
deductibles and co-payments and increased profit margins generally associated
with increased underwriting risks. The group services membership is comprised
primarily of capitated managed care products and management services products
which result in lower margins as a result of the lower level underwriting risk
related to the capitated products and the non-risk nature of the management
services products.
25
<PAGE> 28
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
However, over the past three years, margin erosion has been greater in the
individual and small group business than in the large group business primarily
as a result of slower growth in membership, product mix change and greater
competitive pressure on premium increases. The spread between the profitability
of the individual and small group business and large group business in
California was 7.2% and 7.7% for the six months ended June 30, 1997 and 1996,
respectively.
26
<PAGE> 29
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities
On August 4, 1997, the Company completed its formation of a new Delaware holding
company structure (the "Reincorporation"). The Reincorporation was effected
through the merger (the "Merger") of WLP Acquisition Corp., a wholly owned
subsidiary of the Company, with and into WellPoint California. As of result of
the Merger, WellPoint California became a wholly owned subsidiary of the
Company. The outstanding shares of WellPoint California Common Stock were
automatically converted into an equivalent number of shares of WellPoint
Delaware Common Stock in the Merger. Pursuant to Rule 145(a)(2) under the
Securities Act of 1933, as amended (the "Act"), the issuance of WellPoint
Delaware Common Stock in connection with the Merger was exempt from registration
under the Act because the purpose of the Merger was to change the domicile of
the Company from California to Delaware.
27
<PAGE> 30
PART II. OTHER INFORMATION, CONTINUED
ITEM 4. Submission of Matters to a Vote of Securityholders
On June 10, 1997, the annual meeting of shareholders of the Company was held.
The agenda items for such meeting are shown below along with the vote of the
Company's Common Stock with respect to such agenda items.
1. Election of three Class I Directors to serve until the 2000 Annual Meeting
of Shareholders or the election of their successors.
Nominee: Roger E. Birk
Votes FOR: 64,289,564
Votes WITHHELD AUTHORITY: 712,490
Nominee: Elizabeth A. Sanders
Votes FOR: 63,801,283
Votes WITHHELD AUTHORITY: 1,200,771
Nominee: Sheila P. Burke
Votes FOR: 64,576,776
Votes WITHHELD AUTHORITY: 425,278
The terms of Leonard D. Schaeffer, David R. Banks, W. Toliver Besson, Stephen R.
Davenport and Julie A. Hill continued after the meeting.
2. Proposal to approve a reincorporation in the State of Delaware pursuant to
the formation of a Delaware holding company structure.
<TABLE>
<S> <C>
Votes FOR: 50,317,128
Votes AGAINST: 12,991,243
Votes ABSTAIN: 30,733
Broker non-votes: 1,662,950
</TABLE>
3. Proposal to approve an amendment to the Company's 1994 Stock Option/Award
Plan.
<TABLE>
<S> <C>
Votes FOR: 46,144,779
Votes AGAINST: 18,376,589
Votes ABSTAIN: 36,795
Broker non-votes: 443,891
</TABLE>
28
<PAGE> 31
PART II. OTHER INFORMATION, CONTINUED
ITEM 4. Submission of Matters to a Vote of Securityholders, Continued
4. Ratification of the selection of Coopers & Lybrand LLP as the Company's
independent public accountants for the fiscal year ending December 31,
1997.
<TABLE>
<S> <C>
Votes FOR: 64,802,893
Votes AGAINST: 11,169
Votes ABSTAIN: 11,251
Broker non-votes: 176,741
</TABLE>
ITEM 5. OTHER INFORMATION
On August 13, 1997, the Company announced the appointment of David C.
Colby as Executive Vice President and Chief Financial Officer effective as of
September 2, 1997. The Company also announced that Howard G. Phanstiel,
Executive Vice President, Finance and Information Services, would be leaving
the Company in mid-September 1997.
29
<PAGE> 32
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 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 S-3, 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>
30
<PAGE> 33
(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, incorporated by
reference to Exhibit 10.03 of Registrant's Form 10-K for the
fiscal year ended December 31, 1992
10.04 Tax Allocation Agreement dated as of February 1, 1993 among
the Registrant, its subsidiaries and BCC and its subsidiaries,
incorporated by reference to Exhibit 10.04 of Registrant's
Form 10-K for the fiscal year ended December 31, 1992
10.05 Office 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>
31
<PAGE> 34
(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>
32
<PAGE> 35
(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>
33
<PAGE> 36
(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>
34
<PAGE> 37
(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>
35
<PAGE> 38
(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
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 on Form 10-K for the fiscal year
ended December 31, 1996
</TABLE>
36
<PAGE> 39
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
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 Agreement 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)
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)
</TABLE>
37
<PAGE> 40
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
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)
10.71 WellPoint Health Networks Inc. Employee Stock Purchase Plan
(as amended and restated effective January 1, 1998)
(superseding Exhibit 10.47)
11 Statement Re: Computation of Earnings Per Share
27.1 Financial Data Schedule
</TABLE>
38
<PAGE> 41
(b) Reports on Form 8-K
A current report on Form 8-K was filed on March 31, 1997, which
reported that the Company had completed the acquisition of the Group
Benefits Operation of John Hancock Mutual Life Insurance Company on
March 1, 1997.
An Amendment No. 1 on Form 8-K/A was filed on May 14, 1997, which
provided audited historical financial statements for the GBO as of and
for the year ended December 31, 1996 and unaudited pro forma financial
statements for the Company as of and for the year ended December 31,
1996.
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.
39
<PAGE> 42
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: August 13, 1997 By: /s/ LEONARD D. SCHAEFFER
-----------------------------------
Leonard D. Schaeffer
Chairman of the Board of Directors
and Chief Executive Officer
Date: August 13, 1997 By: /s/ HOWARD G. PHANSTIEL
-----------------------------------
Howard G. Phanstiel
Executive Vice President
Finance and Information Services
Date: August 13, 1997 By: /s/ S. LOUISE MCCRARY
-----------------------------------
S. Louise McCrary
Vice President and
Chief Accounting Officer
40
<PAGE> 1
WELLPOINT HEALTH NETWORKS INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1998)
1. Purpose
The WellPoint Health Networks Inc. Employee Stock Purchase Plan (the
"Plan") is intended to provide an opportunity to participate in the ownership of
Wellpoint Health Networks, Inc. (the "Company") for eligible employees of the
Company and such other companies ("Participating Companies") as the Board of
Directors of the Company (the "Board") or the Committee (as defined below) shall
from time to time designate; provided that each such company shall qualify as a
"parent corporation" or "subsidiary corporation" (a "Corporate Affiliate"), as
defined in Section 425(e) and (f) of the Internal Revenue Code of 1986 (the
"Code"), on the first day of the relevant Offering Period. It is further
intended that the Plan shall qualify as an "employee stock purchase plan" as
defined in Section 423 of the Code. The terms of this amendment and restatement
of the Plan shall be effective for Offering Periods beginning on and after
January 1, 1998.
2. Administration
(a) Administrative Body. The Plan shall be administered by a
committee or committees (the "Committee") appointed by the Board. The Committee
shall have full authority to interpret and construe any provision of the Plan
and to adopt such rules and regulations for administering the Plan as it may
deem necessary. Decisions of the Committee shall be final and binding on all
parties who have an interest in the Plan.
(b) Rule 16b-3 Limitations. Notwithstanding the provisions of
Subsection 2(a), in the event that Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended, or any successor provision ("Rule 16b-3")
provides specific requirements for the administrators of plans of this type, the
Plan shall be only administered by such a body and in such a manner as shall
comply with the applicable requirements of Rule 16b-3. Unless permitted by Rule
16b-3, no discretion concerning decisions regarding the Plan shall be afforded
to any committee or person that is not "disinterested" as that term is used in
Rule 16b-3.
3. Effective Date and Term of Plan
(a) Effective Date. Subject to 3(b), the Plan shall become
effective on May 21, 1996.
(b) Escrow Shares. Pending such further approval of the Plan by the
Company's stockholders as the Committee shall deem advisable, all shares issued
under the Plan shall be nontransferable and shall be held in escrow by the
Company. If the Company's stockholders approve the Plan within one year of the
date of adoption of the Plan by the Board, the escrowed shares will thereafter
be subject to the conditions described in Section 7(g) of the Plan. If the
stockholders do
1
<PAGE> 2
not approve the Plan within such one year period, such shares shall be cancelled
and the Company shall refund to participants the amount of payroll deductions
collected with interest thereon at the rate equal to the rate for one-year
Treasury bills immediately before the first day of the first Offering Period.
(c) Termination of Plan. The Plan shall continue in effect until the
date on which all shares available for issuance under the Plan shall have been
issued unless earlier terminated pursuant to Section 9 or 10.
4. Stock Subject to the Plan
(a) Number of Shares. The stock subject to the Plan shall be shares
of the common stock of the Company which are authorized but unissued or which
have been reacquired (the "Common Stock"). In connection with the sale of shares
under the Plan, the Company may repurchase shares of Common Stock in the open
market. The aggregate amount of Common Stock which may be issued pursuant to the
Plan shall not exceed 400,000 shares (subject to further adjustment thereafter
as provided in 4(b)).
(b) Adjustment. If any change is made in the Common Stock subject to
the Plan, or subject to any purchase right granted under the Plan (through
merger, consolidation, reorganization, recapitalization, stock dividend,
split-up, combination of shares, exchange of shares, change in corporate
structure, or otherwise), the Committee shall make appropriate adjustments as to
(i) the class and maximum number of shares subject to the Plan, (ii) the class
and maximum number of shares purchasable by each participant per Offering
Period, and (iii) the class and number of shares and price per share of stock
subject to outstanding purchase rights in order to prevent the dilution or
enlargement of benefits thereunder.
(c) Corporate Affiliate Stock. Subject to such limits, regulatory
approvals and stockholder approvals as the Committee determines to be necessary,
Common Stock issuable under the Plan may include the stock of a Corporate
Affiliate.
5. Offering Periods
(a) Terms of Offering Period. Common Stock shall be offered for
purchase under the Plan through a series of successive Offering Periods until
such time as (i) the maximum number of shares of Common Stock available for
issuance under the Plan shall have been issued pursuant to purchase rights
granted under the Plan or (ii) the Plan shall have been sooner terminated in
accordance with Article 9 or 10. The Committee shall determine, in its
discretion, the length of each Offering Period and may provide for more than one
"Purchase Period" within each Offering Period, in which case the purchase right
for such Offering Period shall be exercised in successive installments on the
last business day of each Purchase Period within the Offering Period, but no
more frequently than quarterly. No Offering Period shall have a term exceeding
27 months.
(b) Initial Offering Periods. The initial Offering Period under the
Plan will begin on such date as the Board or Committee shall specify and end on
December 31, 1996. Unless the Committee
2
<PAGE> 3
otherwise determines, subsequent Offering Periods will begin on the first
business day, and end on the last business day, of each calendar year that
begins thereafter.
(c) Purchase Rights. Each participant shall be granted a separate
purchase right for each Offering Period in which the individual participates.
The purchase right shall be granted on the first day of such Offering Period and
shall be automatically exercised on the last day of the Offering Period or in
installments on the last day of each separate Purchase Period authorized within
such Offering Period.
6. Eligibility and Participation
(a) General Rules. Each employee of the Company or any of the
Participating Companies shall be an eligible employee, provided that an employee
whose terms of employment are subject to the terms of a collective bargaining
agreement shall not be an eligible employee if and for such period of time as
the union representing a collective bargaining unit of which any employee is a
member chooses, on behalf of the members of such unit, not to participate in the
Plan. An employee may participate in an Offering Period if the employee (i) has
become an eligible employee before the first day of the Offering Period, (ii)
has completed any minimum service requirement that may be specified by the
Committee for such Offering Period (or in the case of an employee whose terms of
employment are subject to the terms of a collective bargaining agreement, any
probationary period specified therein for participation in the Plan), not to
exceed two years, and (iii) remains an eligible employee on the first day of the
Offering Period. Eligible employees may become participants with respect to an
Offering Period by executing such instruments as the Committee may specify and
delivering them to such persons and at such time prior to the first day of that
Offering Period as the Committee may specify.
(b) Five Percent Owner. Under no circumstances shall purchase rights
be granted under the Plan to any employee if such individual would, immediately
after the grant, own (within the meaning of Code Section 424(d)), or hold
outstanding options or other rights to purchase, stock possessing five percent
(5%) or more of the total combined voting power or value of all classes of stock
of the Company or any Corporate Affiliate.
7. Purchase Rights
Purchase rights shall be evidenced by instruments in such form as
the Committee may from time to time approve, and shall conform to the following
terms and conditions:
(a) Purchase Price. The Purchase Price per share of each share
purchased on any date within an Offering Period shall be the lower of (i) a
percentage specified by the Committee (but not less than eighty-five percent
(85%)) of the fair market value per share of the Company's Common Stock on the
first day of the Offering Period, or (ii) a percentage specified by the
Committee (but not less than eighty-five percent (85%)) of the fair market value
per share of the Company's Common Stock on the purchase date.
3
<PAGE> 4
(b) Fair Market Value. For purposes of the Plan, the fair market
value per share of the Company's Common Stock on any day shall be the closing
price on that date as recorded by the Wall Street Journal in the New York Stock
Exchange Composite Transactions, or on the next regular business date on which
shares of the Common Stock are traded in the event that no shares of the Common
Stock have been traded on the relevant day. If such exchange shall cease to be
the primary exchange or market for the Company's Common Stock, fair market value
shall be determined based on the closing price (or, if not available, the mean
between the high and low selling or bid and asked prices) as reported for the
exchange or market that the Committee determines to be the primary market for
such Common Stock.
(c) Payroll Deductions. Payment for Common Stock under the Plan
shall be effected by means of the participant's authorized payroll deductions or
such other means as the Committee may authorize. Such deductions shall begin
with the first pay day following the commencement of the Offering Period and
shall (unless sooner terminated by the participant) remain in effect for
successive Offering Periods. The Committee may permit participants to elect
payroll deductions pursuant to one or either of the following methods:
(i) Flat Dollar Amount. A participant may elect a flat
dollar amount per biweekly payroll check, to be contributed to the
Plan. The minimum contribution is $20 per payroll check. The
maximum contribution is $21,250 per year. A participant may also
make a separate election to contribute to the Plan a specified
dollar amount from annual scheduled bonus payments made in the
month of March.
(ii) Percentage of Compensation. A participant may
elect a percentage of the participant's compensation paid during
the Offering Period, in one percent (1%) increments (not to exceed
fifteen percent (15%)), to be contributed to the Plan. Compensation
for this purpose means the participant's total compensation, which
includes regular base earnings paid by a Participating Company,
sales commissions, overtime, bonuses and incentive payments, and
elective contributions that are not includible in income under
Sections 125, 402(a)(8), 401(h) or 403(b) of the Code.
(d) Number of Shares. On the first day of any Offering Period, a
participant shall be granted a purchase right to purchase up to a fixed number
of shares of Common Stock determined as of such date by dividing the total
amount anticipated to be collected pursuant to Section 7(c), together with any
amount carried over from the preceding Offering Period, by one hundred percent
(100%) of the fair market value of the Company's Common Stock on the first day
of the Offering Period and multiplying the result by a constant number, not to
exceed one and one-half (1-1/2), specified by the Committee for such Offering
Period. Any payroll deductions not applied to such purchase because they are not
sufficient to purchase a whole share shall be held for the purchase of Common
Stock on the next purchase date.
(e) Termination of or Changes to Payroll Deductions. Unless a
participant has irrevocably elected otherwise, the participant may terminate
payroll deductions at any time by filing the appropriate form with the
Committee. Such termination will become effective on the first day of the first
full payroll period following the filing of such form. Any payroll deductions
previously
4
<PAGE> 5
collected from the participant and not previously applied to the purchase of
Common Stock during that Offering Period shall, at the participant's election,
immediately be refunded or held for the purchase of shares on the next purchase
date immediately following such termination. If no such election is made, then
such funds shall be refunded as soon as possible after the purchase date. Prior
to the commencement of any new Offering Period, a participant may resume,
increase or decrease payroll deductions by filing the appropriate form with the
Committee. The new payroll deduction shall become effective on the first day of
the first Offering Period following the filing of such form. Distribution of
Common Stock held in a participant's account shall be distributed pursuant to
Section 7(g).
(f) Termination of Employment. If a participant ceases to be
employed by the Company or a Participating Company for any reason, including
death or disability, prior to the end of an Offering Period, the participant's
purchase right shall terminate, and any payroll deductions previously collected
from the participant and not previously applied to the purchase of Common Stock
during that Offering Period shall immediately be paid to the participant or the
participant's personal representative. The Committee may provide, on a uniform
basis with respect to any Offering Period, that an employee who is on a leave of
absence will be deemed to have terminated employment after a specified period.
(g) Transfer Restrictions on Shares.
(i) Restrictions and Escrow. The Committee may determine, in its
discretion, that shares of Common Stock acquired under the Plan during an
Offering Period shall not be transferable by the participant, other than by
reason of death or such other reasons as the Committee may specify, for a period
not to exceed one (1) year following the purchase date. If the Committee does so
determine, shares so acquired shall be held in escrow by the Company until such
transfer restrictions lapse. The Committee may also provide with respect to any
Offering Period, that in the event that a participant attempts to transfer
shares held in escrow on his or her behalf or terminates employment with the
Company or Participating Company while shares are held in escrow on his or her
behalf, the Company shall have an automatic right to repurchase, unless such
repurchase is prohibited or restricted by law, such shares, for an amount equal
to the lesser of (i) the price paid for the shares by the participant, or (ii)
the fair market value (determined in accordance with Section 7(b)) of the shares
on the date of repurchase.
(ii) Additional Shares and Dividends. In the event of any stock
dividend, stock split, recapitalization, reorganization or other change in
corporate structure effected without receipt of consideration, then any new,
substituted or additional securities or other property (including money paid
other than as a regular cash dividend) which is by reason of such transaction
distributed with respect to any escrowed shares shall be reinvested in shares of
Common Stock under the Plan, and shares purchased pursuant to such reinvestment
shall be immediately subject to the above transfer and escrow provisions to the
same extent the previously escrowed shares are at the time. All regular cash
dividends on shares or other securities at the time held on behalf of a
participant shall be reinvested in shares of Common Stock under the Plan.
5
<PAGE> 6
(h) Proration of Purchase Rights. If the total number of shares of
Common Stock for which purchase rights are to be granted on any date in
accordance with the terms of the Plan exceed the number of shares then remaining
available under the Plan (after deduction of all shares for which purchase
rights have been exercised or are then outstanding), the Committee shall make a
pro rata allocation of the shares remaining available in as near as uniform a
manner as shall be practicable and as it shall deem equitable. The Committee
shall give written notice of such allocation to each participant affected
thereby.
(i) Exercise. Each purchase right shall be exercised automatically
on the purchase date for the full number of purchasable shares, unless the
purchase right has been previously terminated pursuant to Section 7(e) or 7(f).
(j) Assignability. Subject to Section 8, purchase rights under the
Plan shall not be assignable or transferable by the participant other than by
will or by the laws of descent and distribution and during the life of the
participant shall be exercisable only by the participant.
(k) Rights as Stockholder. A participant shall have no rights as a
stockholder with respect to shares covered by any purchase right granted under
the Plan until the purchase right is exercised. No adjustments will be made for
dividends or other rights for which the record date is prior to the date of
exercise.
(l) Accrual Limitations. No purchase right shall permit the rights
of a participant to purchase stock under all "employee stock purchase plans" (as
defined in Section 423 of the Code) of the Company or a Corporate Affiliate to
accrue at a rate that exceeds $25,000 of fair market value of such stock
(determined at the time such purchase right is granted) for each calendar year
in which such purchase right is outstanding at any time.
(m) Regulatory Approval. The implementation of the Plan, the
granting of any purchase right under the Plan, and the issuance of Common Stock
upon the exercise of any such purchase right shall be subject to the Company's
compliance with all applicable requirements of the Securities Act of 1933, all
applicable listing requirements of any securities exchange on which the Common
Stock is listed and all other applicable requirements established by law or
regula tion.
(n) Other Provisions. Instruments evidencing purchase rights may
contain such other provisions, not inconsistent with the Plan, as the Committee
deems advisable.
8. Designation of Beneficiary
A participant may file a written designation of a beneficiary who is
to receive shares and cash, if any, credited on behalf of the participant under
the Plan in the event of such participant's death. Such designation of
beneficiary may be changed by the participant at any time by filing the
appropriate form with the Committee. In the event of the death of a participant
and in the absence of a beneficiary validly designated under the Plan who is
living at the time of such participant's death, the Company shall deliver such
shares and/or cash to the executor or administrator of the estate of the
participant, or if no such executor or administrator has been appointed (to the
6
<PAGE> 7
knowledge of the Company), the Company shall deliver such shares and/or cash to
the participant's spouse or if no spouse is living, to the children of the
participant in equal shares.
9. Corporate Transactions
(a) Termination. In the event of the disposition of all or
substantially all of the assets or outstanding capital stock of the issuer of
the Common Stock by means of a sale, merger, reorganization, or liquidation (a
"Corporate Transaction"), each purchase right under this Plan, unless assumed
pursuant to a written agreement by the successor corporation or a parent or
subsidiary thereof, will automatically be exercised immediately prior to the
consummation of the Corporate Transaction as if such date were the last purchase
date of the Offering Period. Any payroll deductions not applied to such purchase
shall be promptly refunded to the participant.
(b) Corporate Structure. The grant of purchase rights under this
Plan will in no way affect the right of the issuer of Common Stock to adjust,
reclassify, reorganize, or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
10. Amendment and Termination
(a) Amendment. The Board may from time to time alter, amend,
suspend, or discontinue the Plan with respect to any shares at any time not
subject to purchase rights; provided, however, that no such action of the Board
may, without the approval of stockholders of the Company, (i) increase the
number of shares subject to the Plan (unless necessary to effect the adjustments
required under Section 4(b)), or (ii) make any other change with respect to
which the Board determines that stockholder approval is required by applicable
law or regulatory standards.
(b) Termination. The Board shall have the right, exercisable in its
sole discretion, to terminate the Plan immediately following any purchase date.
Should the Board elect to exercise such right, then no further purchase rights
shall thereafter be granted or exercised, and no further payroll deductions
shall thereafter be collected under the Plan.
11. No Employment Obligation
Nothing contained in the Plan (or in any purchase right granted
pursuant to the Plan) shall confer upon any employee any right to continue in
the employ of the Company or any Corporate Affiliate or constitute any contract
or agreement of employment or interfere in any way with the right of the Company
or a Corporate Affiliate to reduce such employee's compensation from the rate in
existence at the time of the granting of a purchase right or to terminate such
employee's employment at any time, with or without cause. However, nothing
contained herein or in any purchase right shall affect any contractual rights of
an employee pursuant to a written employment agreement.
7
<PAGE> 8
12. Governing Law
To the extent not otherwise governed by federal law, the Plan and
its implementation shall be governed by and construed in accordance with the
laws of the State of California.
8
<PAGE> 1
WELLPOINT HEALTH NETWORKS, INC.
Exhibit 11 - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
(In thousands, except earnings per share) Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 49,263 $ 49,772 $100,018 $109,885
Primary:
Average shares outstanding 69,311 66,396 67,928 66,381
Net effect of dilutive stock
options-based on the treasury
stock method using average
market price 696 -- 348 --
-------- -------- -------- --------
Totals 70,007 66,396 68,276 66,381
======== ======== ======== ========
Per share amount $ 0.70 $ 0.75 $ 1.46 $ 1.66
======== ======== ======== ========
Fully diluted:
Average shares outstanding 69,311 66,396 67,928 66,381
Net effect of dilutive stock
options-based on the treasury
stock method using quarter-end
market price which is greater
than average market price 771 -- 385 --
-------- -------- -------- --------
Totals 70,082 66,396 68,313 66,381
======== ======== ======== ========
Per share amount $ 0.70 $ 0.75 $ 1.46 $ 1.66
======== ======== ======== ========
</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 JUNE 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 381,685
<SECURITIES> 2,180,456
<RECEIVABLES> 548,774
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,219,348
<PP&E> 98,363
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,259,048
<CURRENT-LIABILITIES> 2,028,437
<BONDS> 464,000
0
0
<COMMON> 696
<OTHER-SE> 1,084,975
<TOTAL-LIABILITY-AND-EQUITY> 4,259,048
<SALES> 0
<TOTAL-REVENUES> 2,757,241
<CGS> 0
<TOTAL-COSTS> 2,555,467
<OTHER-EXPENSES> 13,064
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,613
<INCOME-PRETAX> 168,097
<INCOME-TAX> 68,079
<INCOME-CONTINUING> 100,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,018
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.46
</TABLE>
