<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 1997
REGISTRATION NO. 333-23703
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WELLPOINT HEALTH NETWORKS INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-3760980
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
21555 OXNARD STREET
WOODLAND HILLS, CALIFORNIA 91367
(818) 703-4000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
THOMAS C. GEISER, ESQ.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
WELLPOINT HEALTH NETWORKS INC.
21555 OXNARD STREET
WOODLAND HILLS, CALIFORNIA 91367
(818) 703-4000
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
WILLIAM L. HUDSON, ESQ. GARY OLSON, ESQ.
Brobeck, Phleger & Harrison LLP Latham & Watkins
One Market, Spear Street Tower 633 West Fifth Street, Suite 4000
San Francisco, CA 94105 Los Angeles, CA 90071
(415) 442-0900 (213) 485-1234
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE>
SUBJECT TO COMPLETION
MARCH 26, 1997
PROSPECTUS
[LOGO]
10,000,000 SHARES
WELLPOINT HEALTH NETWORKS INC.
COMMON STOCK
($.01 PAR VALUE)
Of the 10,000,000 shares (the "Shares") of Common Stock of WellPoint Health
Networks Inc. ("WellPoint" or the "Company") offered hereby (the "Offering")
3,000,000 Shares are being sold by the Company and 7,000,000 Shares are being
sold by the California HealthCare Foundation (the "Foundation" or "Selling
Shareholder"). See "Selling Shareholder." The Company will not receive any of
the proceeds from the sale of Shares by the Selling Shareholder.
The Common Stock of the Company is traded on the New York Stock Exchange under
the symbol "WLP." On March 25, 1997, the last sale price of the Common Stock, as
reported on the New York Stock Exchange, was $41.875 per share. See "Price Range
of Common Stock."
As of March 25, 1997 the Foundation owned 38,410,000 shares of the Company's
Common Stock (the "Common Stock"), representing approximately 57.7% of the total
shares of Common Stock outstanding. Following the Offering, the Foundation will
own 31,410,000 shares of the Company's Common Stock, which will represent
approximately 45.2% of the outstanding shares (or, if the over-allotment option
is exercised in full, 29,910,000 shares of the Company's Common Stock, which
will represent approximately 43.0% of the outstanding shares). The Company's
Articles of Incorporation prohibit any person or entity or affiliated persons or
entities (other than the Foundation) from beneficially owning more than one
share less than 5% of the outstanding voting securities of the Company. See
"Recapitalization."
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT COMPANY(1) SHAREHOLDER
Per Share.................. $ $ $ $
<S> <C> <C> <C> <C>
Total(2)................... $ $ $ $
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</TABLE>
(1) Before deducting offering expenses payable by the Company estimated at
$ .
(2) The Selling Shareholder has granted the Underwriters a 30-day option to
purchase 1,500,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discount, Proceeds to Company and
Proceeds to Selling Shareholder will be $ , $ , $ and $ ,
respectively. See "Underwriting."
The Shares are offered subject to receipt and acceptance by the Underwriters, to
prior sale, and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York, or through the facilities of The
Depository Trust Company, on or about , 1997.
SALOMON BROTHERS INC MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
MORGANSTANLEY & CO.
INCORPORATED
The date of this Prospectus is , 1997.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents of the Company filed with the Securities and
Exchange Commission (the "Commission") (File No. 1-14340) are incorporated
herein by reference:
(i) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
(ii) the Company's Current Reports on Form 8-K filed January 2, 1997 and
March 14, 1997; and
(iii) the Company's Registration Statement on Form 8-B filed April 24,
1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
after the date of this Prospectus and prior to the termination of the Offering
shall be deemed to be incorporated in this Prospectus by reference and to be a
part hereof from the date of filing of such documents. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide, without charge to any person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any document incorporated by reference herein, other than exhibits to
such documents unless such exhibits are specifically incorporated by reference
in such document. Requests should be directed to 21555 Oxnard Street, Woodland
Hills, California 91367, Attention: Secretary. The Company's telephone number is
(818) 703-4000.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH
THE OFFERING AND MAY BID FOR AND PURCHASE SHARES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS", APPEARING ELSEWHERE IN THIS PROSPECTUS,
AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO AND OTHER
INFORMATION INCORPORATED HEREIN BY REFERENCE. UNLESS THE CONTEXT OTHERWISE
INDICATES, REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR "WELLPOINT" ARE TO
WELLPOINT HEALTH NETWORKS INC. AND ITS SUBSIDIARIES. EXCEPT AS OTHERWISE NOTED
HEREIN, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THE REDUCTION IN
SHARES OUTSTANDING AS A RESULT OF THE COMPANY'S MAY 1996 RECAPITALIZATION
DESCRIBED UNDER "RECAPITALIZATION."
THE COMPANY
The Company is one of the nation's largest publicly traded managed health
care companies with approximately 4.5 million medical members, 11.5 million
pharmacy members and 1.6 million dental members as of December 31, 1996. The
Company offers a diversified mix of managed care products, including health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
point-of-service ("POS") and other hybrid plans. 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
products, including pharmacy, dental, life, workers' compensation, disability,
behavioral health, COBRA and flexible benefits account administration. In
addition, the Company offers managed care services for self-funded employers,
including underwriting, actuarial services, network access, medical cost
management, claims processing and administrative services. WellPoint's
diversified mix of products and services has been developed to meet the needs of
a broad range of individuals, employer groups and their employees. The Company's
operations, with the exception of specialty products, are organized into two
internal business units with a geographic focus. The Company markets its
products in California primarily under the name Blue Cross of California and
outside of California primarily under the name UNICARE.
BLUE CROSS OF CALIFORNIA. Historically, the Company's primary market for
its managed care products has been California. The Company holds the exclusive
right in California to market its products under the Blue Cross name and mark.
The Company is diversified in its California customer base, with extensive
membership among small employer groups, individuals and large employer groups,
and a growing presence in the Medicare and Medicaid markets. Membership in
WellPoint's HMO plan, CaliforniaCare, has grown to approximately 1,058,000
members as of December 31, 1996 from 123,000 members as of December 31, 1987, a
compound annual growth rate of approximately 27% over such period. For the
two-year period ended December 31, 1996, the compound annual growth rate was
21%. As of December 31, 1996, the HMO network included approximately 24,600
primary care and specialist physicians and approximately 410 hospitals
throughout California. There were approximately 2.5 million members, including
administrative service members, enrolled in WellPoint's California PPO health
care plans as of December 31, 1996, approximately 45% of whom were individuals
or employees of small groups. The PPO network included approximately 40,400
primary care and specialty physicians and 430 hospitals as of such date.
WellPoint's large membership base allows it to provide for the delivery of
health care services at lower cost than traditional health insurance companies,
primarily due to its provider network arrangements that specify favorable rates
and incorporate utilization management and other cost-control measures.
GEOGRAPHIC EXPANSION STRATEGY--UNICARE. The Company believes that its
success in the highly competitive California managed care market is attributable
to its broad range of managed care products that target the differing needs of
specific market segments. An important element of the Company's geographic
expansion strategy is to replicate its success in California in motivating
traditional indemnity members to transition to the Company's broad range of
managed care products. As of December 31, 1996, the Company had approximately
1.0 million members covered under its UNICARE health plans (including
approximately 141,000 members in California). The Company's acquisition strategy
focuses
3
<PAGE>
on large employer group plans which offer indemnity and other health care
products that are less intensively managed than the Company's current products.
In addition, the Company focuses on acquiring businesses that provide
significant concentrations of members in strategic locations outside of
California. The Company believes that such acquisitions will provide it with
sufficient scale to begin development of proprietary provider network systems in
key geographic areas which will enable the Company over time to offer a broad
range of managed care products. The Company intends to use these new networks to
introduce individual, small group and senior products, which have historically
been more profitable for the Company in California than large group products.
On March 1, 1997, the Company completed its acquisition (the "GBO
Acquisition") of certain portions of the Group Benefits Operations (the "GBO")
of John Hancock Mutual Life Insurance Company ("John Hancock") which provides
group health and related life insurance products. The GBO targets employers with
5,000 or more employees and currently provides administrative services, PPO and
indemnity insurance products. See "Business--Recent Development--GBO
Acquisition." The Company acquired the Life and Health Benefits Management
Division ("MMHD") of Massachusetts Mutual Life Insurance Company ("MassMutual")
in March 1996 (the "MMHD Acquisition"). The acquired MMHD operations focus on
employers with 250 to 5,000 employees and provide administrative services, PPO
and indemnity insurance products. Most of the Company's UNICARE members as of
December 31, 1996 were previously MMHD members. As a result of these
acquisitions, the Company has significantly expanded its operations outside of
California.
SPECIALTY MANAGED HEALTH CARE AND OTHER PLANS. The Company offers pharmacy,
dental, workers' compensation, life and disability insurance and other specialty
products. As of December 31, 1996, WellPoint's pharmacy plans served
approximately 11.5 million risk and non-risk members and had approximately
45,500 participating pharmacies. The Company's dental products (which include a
dental HMO and PPO) served approximately 1.6 million members as of December 31,
1996. The Company is expanding its specialty business by marketing these plans
to its existing HMO, PPO and POS members, as well as using these specialty
products to attract new members. WellPoint also markets these specialty products
on a stand-alone basis to other health plans and employers.
In May 1996, the Company completed a recapitalization (the
"Recapitalization") with its former majority shareholder, Blue Cross of
California ("BCC"). See "Recapitalization."
The Company is a corporation organized under the laws of the State of
California. The Company's principal executive offices are located at 21555
Oxnard Street, Woodland Hills, California 91367 and its telephone number is
(818) 703-4000.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
Company........................... 3,000,000 shares
Selling Shareholder............... 7,000,000 shares
Total........................... 10,000,000 shares
Common Stock to be outstanding after
the Offering....................... 69,526,985 shares(1)
Common Stock to be owned by the
Selling Shareholder after the
Offering........................... 31,410,000 shares(2)
Use of Proceeds..................... The Company intends to use the net proceeds from
shares sold by it to repay outstanding subordinated
indebtedness. The Company will not receive any
proceeds from the sale of shares offered hereby by
the Selling Shareholder. See "Use of Proceeds."
New York Stock Exchange symbol...... WLP
</TABLE>
- ------------------------
(1) Excludes approximately 3,164,996 shares of Common Stock subject to
outstanding options granted by the Company under certain stock option plans,
of which approximately 135,548 were exercisable as of December 31, 1996.
(2) Assumes that the over-allotment option of 1,500,000 shares granted by the
Selling Shareholder to the Underwriters is not exercised. Upon completion of
the Offering, the Selling Shareholder will continue to own approximately
45.2% of the Company's outstanding Common Stock. If such over-allotment
option is exercised in full, the Selling Shareholder will own 29,910,000
shares of Common Stock, or 43.0% of the Company's outstanding Common Stock,
after the Offering.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth for the periods indicated selected historical
consolidated financial data and historical operating statistics for the Company.
For the year ended December 31, 1992, WellPoint's business was conducted by BCC.
In accordance with generally accepted accounting principles, the assets and
liabilities of WellPoint's business for such period have been reflected in its
financial statements on the basis of BCC's historical cost. The selected
historical consolidated financial data and operating statistics present
WellPoint's results of operations for such period as if it had been operating as
a separate stand-alone entity. For the years ended December 31, 1992 through
1995 and for the period January 1, 1996 through May 20, 1996 (the effective date
of the Recapitalization), the selected historical consolidated financial data do
not include the commercial operations of BCC (the "BCC Commercial Operations").
Information as of December 31, 1996 and for each of the three years ended
December 31, 1996 has been derived from the Consolidated Financial Statements of
WellPoint incorporated herein by reference, which have been audited by Coopers &
Lybrand L.L.P., independent public accountants for WellPoint, whose report is
incorporated herein by reference. Information for the years ended December 31,
1992 and 1993 has been derived from WellPoint's audited consolidated financial
statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING
STATISTICS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................................. $2,275,155 $2,449,175 $2,791,672 $3,107,079 $4,169,782
Operating expenses:
Operating expenses (excluding nonrecurring
costs)........................................... 1,983,641 2,133,245 2,431,643 2,734,541 3,773,512
Nonrecurring costs................................. -- -- -- 57,074(4) --
Operating income..................................... 291,514 315,930 360,029 315,464 396,270
Interest expense..................................... -- -- -- -- 36,628
Income before cumulative effect of accounting
changes.......................................... 174,758 186,644 213,170 179,989 202,002
Net income........................................... 174,758 165,384 213,170 179,989 202,002
Earnings per share:(1)
Income before cumulative effect of accounting
changes.......................................... $2.63 $2.81 $3.21 $2.71 $3.04
Net income......................................... 2.63 2.49 3.21 2.71(5) 3.04
OPERATING STATISTICS:(2)
Loss ratio........................................... 73.6% 73.0% 72.8% 75.6% 77.4%
Selling expense ratio................................ 5.9 6.2 6.3 6.4 5.6
General and administrative expense ratio............. 12.1 11.2 12.5 11.6 13.6
Net income ratio..................................... 8.0 7.0 7.9 6.1 5.0
Number of medical members at end of period(3)........ 2,162,000 2,322,000 2,617,000 2,797,000 4,485,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------
ACTUAL AS ADJUSTED(6)
-------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.................................................................. $3,405,542 $ 3,405,542
Stockholders' equity.......................................................... 870,459 991,815
</TABLE>
- ------------------------------
(1) Earnings per share for all periods presented prior to 1996 has been
recomputed using 66,366,500 shares, the number of shares outstanding
immediately following completion of the Recapitalization on May 20, 1996.
Earnings per share for 1996 has been calculated using such 66,366,500
shares, plus the weighted average number of shares issued since the
Recapitalization.
(2) The loss ratio represents health care services and other benefits as a
percentage of premium revenue. All other ratios are shown as a percentage of
premium revenue and management services revenue combined.
(3) Membership numbers are approximate and include some estimates based upon the
number of contracts at the relevant date and an actuarial estimate of the
number of members represented by each contract.
(4) This charge included $29.8 million of costs, primarily professional fees,
associated with the proposed recapitalization of the Company and the
terminated acquisition of Health Systems International, Inc. and $27.3
million for the impairment of the Company's pharmaceutical benefits
management business.
(5) Earnings per share for the year ended December 31, 1995 includes
nonrecurring costs of $0.52 per share.
(6) Adjusted to give effect to the sale of 3,000,000 Shares offered hereby by
the Company at an assumed initial offering price of $41.875 per share, less
underwriting discount and estimated offering expenses payable by the
Company, and application of the net proceeds as described in "Use of
Proceeds."
6
<PAGE>
CAUTIONARY DISCLOSURE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained in "Business" such as those with respect to the
Company's geographic expansion and other business strategies, the effect of
recent health care reform legislation and small group membership growth, and
other statements contained herein regarding matters that are not historical
facts are forward-looking statements (as such term is defined in the Securities
Act). Such statements involve a number of risks and uncertainties which 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 herein under "Risk Factors" and in other documents filed from time to
time by the Company with the Securities and Exchange Commission (including the
Company's Annual Report on Form 10-K). Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update these forward-looking
statements as a result of any events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS AND
INCORPORATED BY REFERENCE HEREIN, THE FOLLOWING RISK FACTORS SHOULD BE
CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING SHARES
OF THE COMMON STOCK OFFERED HEREBY.
HEALTH CARE REGULATIONS; LEGISLATIVE REFORM
WellPoint's operations are subject to substantial regulation by Federal,
state and local agencies. WellPoint offers its managed health care plans in
California principally through subsidiaries whose businesses are subject to
regulation by the California Department of Corporations (the "DOC") under the
Knox-Keene Health Care Service Plan Act of 1975 (the "Knox-Keene Act"). In
addition, due in part to the MMHD and GBO Acquisitions, as well as previously
existing Company operations, the Company is subject to regulation by the
Departments of Insurance (the "DOI") in California, Delaware and the 48 other
states. Finally, as the Company offers a broad range of managed care products in
new geographic locations outside of California, it will be subject to additional
regulation by governmental agencies with respect to the provision of health care
services. There can be no assurance that any future regulatory action by the DOC
or any such other agencies will not have a material adverse effect on the
profitability or marketability of WellPoint's health plans or on its financial
condition or results of operations. Because of the Company's participation in
government-sponsored programs such as Medicaid and Medicare, changes in
government regulations or policy with respect to, among other things,
reimbursement levels, could also adversely affect WellPoint's financial
condition or results of operations.
In August 1996, the President signed into law the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"). The HIPAA contains the
following key provisions: (i) guaranteed access to health insurance for
businesses with 50 or fewer employees; (ii) guaranteed access to health
insurance for individuals who lose group coverage; and (iii) protections for
individuals with pre-existing medical conditions. In September 1996, the
President signed maternity length of stay and mental health parity measures into
law. The maternity length of stay provision requires insurers to cover the cost
of a 48-hour hospital stay following delivery and a 96-hour stay following a
Caesarian section. The mental health parity provision will require insurance
plans that provide mental health benefits to set the same level of yearly and
lifetime coverage for mental health benefits as for physical ones. These
maternity length of stay and mental health parity measures will take effect
January 1, 1998. Various states have passed similar legislation, some providing
for more extensive benefits than those required by HIPAA. In addition, numerous
proposals have been introduced in, or are being considered by, the United States
Congress and state legislatures relating to health care reform, in particular,
relating to the scope of health care benefits. There can be no assurance that
compliance with recently enacted or future legislation will not
7
<PAGE>
have a material adverse impact on WellPoint's claims expense, its financial
condition or results of operations.
HEALTH CARE COSTS AND PREMIUM PRICING PRESSURES
WellPoint's profitability will depend in large part on accurately predicting
health care costs and on its ability to control future health care costs through
underwriting criteria, utilization management, product design and negotiation of
favorable provider and hospital contracts. The aging of the population and other
demographic characteristics and advances in medical technology continue to
contribute to rising health care costs. Government-imposed limitations on
Medicare and Medicaid reimbursement have also caused the private sector to bear
a greater share of increasing health care costs. Changes in health care
practices, inflation, new technologies, clusters of high-cost cases, changes in
the regulatory environment and numerous other factors affecting the cost of
health care are beyond any health plan's control and may adversely affect
WellPoint's ability to predict and control health care costs as well as its
financial condition or results of operations.
In addition to the challenge of controlling health care costs, the Company
faces pressure to contain premium prices. Employer-sponsored and
government-sponsored programs are subject to renegotiation as payors seek to
control their costs. Fiscal concerns regarding the continued viability of
programs such as Medicare and Medicaid may cause decreasing reimbursement rates
for government-sponsored programs. WellPoint's financial condition or results of
operations would be adversely affected by any limitation on the Company's
ability to increase or maintain its premium levels.
INTEGRATION OF RECENT ACQUISITIONS; GEOGRAPHIC EXPANSION STRATEGY
A significant component of the Company's business strategy is to diversify
into new geographic markets, particularly through strategic acquisitions. The
Company completed the MMHD Acquisition in March 1996 and the GBO Acquisition in
March 1997. The integration of the acquired MMHD operations and the GBO into the
operations of the Company will require considerable expenditures (estimated at
approximately $65 million for 1997 and 1998), a significant amount of management
time and could result in a diversion of management resources from other matters.
The success of these acquisitions will also require the integration of a
significant number of employees into the Company's existing operations as well
as the integration of separate information systems. No assurances can be given
regarding the ultimate success of the integration of these acquisitions into the
Company's business, due in part to the large size and multi-state nature of
their businesses.
Both the acquired MMHD operations and the GBO have some indemnity-based
insurance operations, with a significant number of members outside of
California. Each of these operations experienced varying profitability or losses
in recent periods. Each of these operations has also experienced a higher
overall loss ratio and administrative expense ratio than the Company and
accordingly may contribute to increases in these ratios in future periods. In
addition, the Company expects that it will experience material membership
attrition as it pursues its strategy of motivating traditional indemnity health
insurance members to select managed care products. A significant percentage of
the members of the acquired MMHD operations and the GBO are in geographic areas
where managed care health plans are less prevalent and have not gained as great
acceptance as in California. There can be no assurances that a sufficient number
of these members will accept managed care health plans or that the Company will
be able to continue existing relationships with provider networks currently
serving those members or develop satisfactory proprietary provider networks in
these geographic areas. The development of such networks, as well as networks to
support other aspects of the Company's geographic expansion strategy, will
require considerable expenditures by the Company in excess of the amount
estimated in connection with the integration of the MMHD operations and the GBO
into the operations of the Company. The availability of funds for these
expenditures will be dependent upon, among other things, the continued
profitability of the Company.
8
<PAGE>
As the Company pursues its geographic expansion strategy, the Company's
market share in the new markets will not be as significant, and its provider
networks not as extensive, as in California, and the Company will not have the
benefit of the Blue Cross mark, which are important components of its success in
California. After an initial transition period, the Company will also no longer
have the benefit of the MassMutual or John Hancock trade names under which these
operations were previously conducted. There can be no assurance that the absence
of one or more of these elements will not adversely affect the success of the
Company's geographic expansion strategy.
COMPETITION
Managed health care organizations, such as the Company, operate in a highly
competitive environment and in an industry that is currently subject to
significant changes from business consolidations, new strategic alliances,
legislative reform, aggressive marketing practices by other managed health care
organizations and market pressures brought about by a better informed and better
organized customer base, particularly among large employers. This environment
has produced and will likely continue to produce significant pressures on the
profitability of managed health care companies. The Company believes that
factors affecting the selection of a managed health care plan include price,
size of provider networks, quality of service and reputation (which may be
affected by accreditation by voluntary organizations such as the National
Committee on Quality Assurance ("NCQA")).
Despite its recent acquisitions, the Company's current operations remain
heavily concentrated in California, where the managed health care industry is
highly competitive on both a regional and statewide basis. In addition, the
managed health care industry in California has undergone significant changes in
recent years, including substantial consolidation as a result of completed and
pending transactions. Outside of California, the Company faces substantial
competition in all markets in which it operates from other regional and national
companies, many of whom have (or due to future consolidation, may have)
significantly greater financial and other resources and market share than the
Company. If competition were to further increase in such markets, WellPoint's
financial condition or results of operations could be materially adversely
affected. See "Business--Competition."
A substantial portion of WellPoint's California business is in the
individual and small employer group market, where the loss ratio is
significantly lower than in the large employer group market. The individual and
small employer group business constituted approximately 45% of WellPoint's total
premium revenue for the year ended December 31, 1996. WellPoint has experienced
increasing competition in the individual and small employer group market over
the past several years, which could adversely affect its medical loss ratio and
future financial condition and results of operations.
BLUE CROSS MARK
The Company is party to a license agreement (the "License Agreement") with
the BlueCross BlueShield Association ("BCBSA") which entitles WellPoint and
certain of its subsidiaries to use the Blue Cross mark in California. The
License Agreement contains certain requirements and restrictions regarding
ownership of the Company's Common Stock and compliance with certain financial
ratios and operating requirements. Upon the occurrence of any event causing
termination of the License Agreement, WellPoint would cease to have the right to
use the Blue Cross mark in California and the BCBSA could thereafter issue a
license to use the Blue Cross mark in California to another entity, which would
adversely affect WellPoint's financial condition or results of operations. See
"Business--Service Marks."
MINIMUM BCBSA CAPITAL REQUIREMENTS
The Company is required to maintain minimum tangible net equity ("TNE") by
the Company's primary regulator, the DOC, and is required to meet minimum
capital requirements prescribed by the BCBSA. In measuring its capital for the
BCBSA, the Company is required by the BCBSA to use the
9
<PAGE>
method prescribed by the DOC regulations. The failure to meet a specified level
(the "Minimum BCBSA Capital") of the BCBSA's base capital requirement can
subject the Company to certain corrective actions, while the failure to meet a
lower specified level of capital can result in termination of the License
Agreement. The Minimum BCBSA Capital requirement, which is more restrictive than
the DOC's capital requirements, increased as of December 31, 1996. In order to
address an anticipated shortfall in the Company's capital under the BCBSA's more
stringent requirements, on December 30, 1996 the Company borrowed $50 million
under its $200 million subordinated debt facility (the "Subordinated Credit
Agreement"). As of December 31, 1996, the Company's TNE (and thus its capital
for BCBSA purposes) was approximately $388 million and the Minimum BCBSA Capital
was approximately $364 million. The Company's required TNE for DOC purposes was
approximately $17 million as of such date. The DOC regulations permit the
Company to include in TNE the amount of any indebtedness which is subordinated
to the Company's obligation to maintain the DOC's required TNE. The Company's
borrowings under the Subordinated Credit Agreement have been subordinated in a
fashion that the Company believes is acceptable to the DOC to include such
borrowings in its TNE. On March 17, 1997, the Company borrowed an additional
$150 million under the Subordinated Credit Agreement in part to meet increased
capital needs as a result of the GBO Acquisition. The Company intends to present
a proposal at its 1997 Annual Meeting of Shareholders to form a new Delaware
holding company structure (the "Reincorporation"), which would have the effect
of greatly increasing the Company's capital for BCBSA purposes. However, there
can be no assurances that such a proposal will be adopted or that, whether or
not such proposal is adopted, the Company's net income in future periods will be
sufficient to continue to satisfy the Minimum BCBSA Capital requirement or that,
if necessary, the Company will be able to obtain additional subordinated
indebtedness to meet this requirement. See "Description of Capital
Stock--Reincorporation Proposal."
EVOLVING THEORIES OF RECOVERY
WellPoint, like HMOs and health insurers generally, excludes certain health
care services from coverage under its HMO, PPO and other plans. In the ordinary
course of its business, WellPoint is subject to the claims of its members
arising out of decisions to restrict reimbursement for certain treatments. The
loss of even one such claim, if it were to result in a significant punitive
damage award, could have a material adverse effect on WellPoint's financial
condition or results of operations. In addition, the risk of potential liability
under punitive damage theories may significantly increase the difficulty of
obtaining reasonable settlements of coverage claims. However, the financial and
operational impact that such evolving theories of recovery will have on the
managed care industry generally, or WellPoint in particular, is presently
unknown.
EFFECT OF OWNERSHIP AND TRANSFER RESTRICTIONS ON FUTURE CHANGES OF CONTROL
The ownership and transfer restrictions contained in the WellPoint Articles
of Incorporation provide that no person or entity or affiliated group of persons
or entities (other than the Foundation) may beneficially own more than one share
less than 5% of the outstanding voting securities of the Company (the "Ownership
Limit"). See "Recapitalization." The ownership and transfer restrictions can
generally not be amended without the affirmative vote of at least 75% of each
class of the outstanding shares of voting capital stock represented and voting
at a duly held meeting of the shareholders at which a quorum is present.
Accordingly, the ownership and transfer restrictions, as well as requirements
under the License Agreement, may have the effect of discouraging or even
preventing a merger or business combination, a tender offer or similar
extraordinary transaction involving WellPoint. See "--Future Sales of Common
Stock; Principal Shareholder."
10
<PAGE>
FUTURE SALES OF COMMON STOCK; PRINCIPAL SHAREHOLDER
As of December 31, 1996, the Foundation owned 38,410,000 shares of the
Company's Common Stock, representing approximately 57.7% of the total
outstanding shares. Following the Offering, the Foundation will own 31,410,000
shares of the Company's Common Stock, which will represent approximately 45.2%
of the total outstanding shares (or, if the over-allotment option is exercised
in full, 29,910,000 shares of the Company's Common Stock, which will represent
approximately 43.0% of the total outstanding shares). Such ownership, however,
is subject to the provisions of a voting trust agreement (the "Voting Trust
Agreement") and a voting agreement (the "Voting Agreement"), which may inhibit
or delay changes of control or other significant corporate events. See
"Recapitalization." The Foundation, while not being entitled to exercise a
majority of the outstanding voting power of WellPoint, will by virtue of the
voting power under its control have the ability to exert influence over
shareholder actions, including the sale or merger of WellPoint. In exercising
this voting power, the Foundation may have interests that diverge from those of
WellPoint's other shareholders.
The Company has entered into a registration rights agreement with the
Foundation (the "Registration Rights Agreement"), granting the Foundation
certain demand and "piggyback" registration rights. Sales of WellPoint Common
Stock pursuant to any exercise of such rights may adversely affect the market
price of WellPoint Common Stock. The shares being sold in the Offering by the
Foundation are being sold pursuant to the exercise of its "piggyback"
registration rights.
Sales of substantial amounts of Common Stock in the public market by the
Foundation could adversely affect the market price of the Common Stock. Pursuant
to the undertakings made by BCC in connection with the DOC's approval of the
Recapitalization, the Foundation is required to make certain minimum annual
distributions beginning in 1997. In order to fund required distributions, the
Foundation may periodically sell shares of its WellPoint Common Stock. In
addition, pursuant to the requirements of the BCBSA, the Foundation has agreed
to reduce its voting power in WellPoint to less than 20% within three years of
May 20, 1996 and to less than 5% within five years of such date, either through
sales of shares or by deposit of such shares into the voting trust.
CERTAIN TAX ISSUES RELATING TO THE RECAPITALIZATION
In connection with the Recapitalization, BCC received a ruling from the
Internal Revenue Service ("IRS") that, among other things, the conversion of BCC
from non-profit to for-profit status as part of the Recapitalization (the "BCC
Conversion") qualified as a tax-free transaction and that no gain or loss was
recognized by BCC for Federal income tax purposes.
If the ruling were subsequently revoked, modified or not honored by the IRS
(due to a change in law or for any other reason), WellPoint, as the successor to
BCC, could be subject to Federal income tax on the difference between the value
of BCC at the time of the BCC Conversion and BCC's tax basis in its assets at
the time of the BCC Conversion. The potential tax liability to WellPoint if the
BCC Conversion is treated as a taxable transaction is currently estimated to be
approximately $696 million, plus interest (and possibly penalties). BCC and the
Foundation entered into an indemnification agreement (the "Indemnification
Agreement") that provides, with certain exceptions, that the Foundation will
indemnify WellPoint against the net tax liability as a result of a revocation or
modification, in whole or in part, of the ruling by the IRS or a determination
by the IRS that the BCC Conversion constitutes a taxable transaction for Federal
income tax purposes. In the event a tax liability should arise against which the
Foundation has agreed to indemnify WellPoint, there can be no assurance that the
Foundation will have sufficient assets to satisfy the liability in full, in
which case WellPoint would bear all or a portion of the cost of the liability,
which could have a material adverse effect on WellPoint's financial condition.
See "Recapitalization."
11
<PAGE>
RECAPITALIZATION
On May 20, 1996, BCC and the Company's predecessor, WellPoint Health
Networks Inc., a Delaware corporation ("Old WellPoint"), concluded the
Recapitalization pursuant to which, (a) Old WellPoint distributed an aggregate
of $995.0 million by means of a special dividend of $10.00 per share of its
common stock, and BCC, as a California nonprofit public benefit corporation,
thereupon immediately donated its portion thereof ($800 million) to the
California Endowment (the "Endowment"), a newly created foundation; (b) BCC
donated its assets, other than BCC's Old WellPoint Class B Common Stock and the
BCC Commercial Operations to the Foundation; (c) BCC changed its status to a
California for-profit business corporation and issued to the Foundation
53,360,000 shares of its common stock; and (d) Old WellPoint merged with and
into BCC (the "Merger") and the surviving entity changed its name to WellPoint
Health Networks Inc. In the Merger, (i) each outstanding share of Old WellPoint
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 held by 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 to
reflect the value of the BCC Commercial Operations and the value of the Blue
Cross mark and (iii) the outstanding shares of Old WellPoint Class B Common
Stock were canceled. 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 of certain entities owning the real estate
surrounding the Company's headquarters building.
In connection with the Recapitalization, BCC received a ruling from the IRS
that, among other things, the BCC Conversion qualified as a tax-free transaction
and that no gain or loss was recognized by BCC for Federal income tax purposes.
The Foundation and the Company have entered into the Indemnification Agreement
which provides, with certain exceptions, that the Foundation will indemnify
WellPoint against the net tax liability as a result of a revocation or
modification, in whole or in part, of the ruling by the IRS or a determination
by the IRS that the BCC Conversion constitutes a taxable transaction for Federal
income tax purposes.
In connection with the Recapitalization, BCC relinquished its rights under
the Blue Cross License Agreement dated January 1, 1991, between Blue Cross of
California and the BCBSA. The BCBSA and the Company entered into the License
Agreement, pursuant to which the Company has become the exclusive licensee for
the right to use the Blue Cross name and related service marks in California and
has become a member of the BCBSA. See "Business--Service Marks."
The License Agreement required that the Foundation enter into the Voting
Trust Agreement, pursuant to which the Foundation deposited into a voting trust
(the "Voting Trust") the number of shares of the Company's Common Stock
sufficient to reduce the Foundation's holdings outside such Voting Trust to a
level not in excess of 50% of the voting power of the outstanding shares of the
Company's Common Stock. The shares held by the trustee under the Voting Trust
Agreement (the "Voting Trust Shares") generally will be voted (i) with respect
to elections and removal of directors, calling of shareholder meetings and
amendment of the Company's Articles of Incorporation and Bylaws, where such
actions are opposed by the Board of Directors, to support the position of the
Board of Directors, (ii) with certain exceptions, on matters requiring a vote of
at least an absolute majority of all outstanding shares of Common Stock, as the
majority of non-Voting Trust Shares vote, and (iii) on all other matters,
including with respect to the reincorporation of the Company in Delaware, in the
identical proportion in favor of or in opposition to such matters as non-Voting
Trust Shares vote. See "Description of Capital Stock-- Reincorporation
Proposal." In addition, the Voting Trust Agreement requires that the Foundation,
through sales (which may involve additional exercises of its registration rights
discussed below) or additional deposits into the Voting Trust, reduce its
holdings outside the Voting Trust to 20% and 5% of the outstanding Common Stock
on and after three and five years, respectively, from May 20, 1996.
12
<PAGE>
With respect to those shares held by the Foundation in excess of the
Ownership Limit that are not subject to the Voting Trust Agreement, the
Foundation has also entered into the Voting Agreement. The Voting Agreement
provides among other things, that the Foundation, during the period that it
continues to own in excess of the Ownership Limit, will vote all shares of the
Company's Common Stock owned by it in excess of 5% of the outstanding shares
(except those shares held pursuant to the Voting Trust Agreement) in favor of
each nominee to the Board of Directors of the Company, or under certain
circumstances, other subsets of the board, all as set forth in the Company's
Bylaws. With respect to the removal of directors, calling of shareholder
meetings and amendment of the Company's Articles of Incorporation and Bylaws,
where such actions are opposed by the Board of Directors, the Foundation has
also agreed under the Voting Agreement to support the position of the Board of
Directors. The Foundation has further agreed to vote all of the shares of the
Company's Common Stock owned by it which are subject to the Voting Agreement
with respect to the reincorporation of the Company in Delaware in the identical
proportion in favor or in opposition as all shareholders other than the
Foundation vote.
In connection with the Recapitalization, the Company and the Foundation also
entered into the Registration Rights Agreements with respect to the shares of
the Company held by the Foundation. The Registration Rights Agreement grants the
Foundation (and certain transferees of the shares covered by the Registration
Rights Agreement) certain demand and "piggyback" registration rights. The sale
of Common Stock offered hereby by the Foundation is being made pursuant to the
exercise of "piggyback" registration rights.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 3,000,000 Shares offered
hereby by the Company are estimated to be $121,356,250, based upon an assumed
offering price of $41.875 per share and after deducting estimated underwriting
discounts and offering expenses payable by the Company. The Company will be
required to use the net proceeds from the sale of Common Stock offered by the
Company hereby to repay a portion of the outstanding indebtedness under the
Company's Subordinated Credit Agreement (which does not allow for the
reborrowing of any amounts repaid). As of March 17, 1997, the Company had
incurred indebtedness of $200 million under the Subordinated Credit Agreement,
which had been used to meet the BCBSA capital requirements, fund the GBO
Acquisition and for general corporate purposes. As of such date, borrowings
under the Subordinated Credit Agreement incurred interest at a rate of 6.12% per
annum. All outstanding indebtedness under the Subordinated Credit Agreement will
become due on December 31, 1998. See "Risk Factors--Minimum BCBSA Capital
Requirements" and "Business--Service Marks."
The Company will not receive any proceeds from the sale of shares of Common
Stock being offered hereby by the Selling Shareholder.
DIVIDEND POLICY
The Company currently intends to retain all of its current and future
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future. The Board of Directors has determined to
retain its net earnings during 1997. In connection with the Recapitalization,
Old WellPoint paid a special dividend of $10.00 per share to the holders of its
Class A and Class B Common Stock. See "Recapitalization." The payment of any
future dividends will be at the discretion of the Company's Board of Directors.
13
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the New York Stock Exchange
under the symbol "WLP" since the Company's initial public offering on January
27, 1993. The following table sets forth for the periods indicated the high and
low sale prices for the Common Stock. For periods prior to the consummation of
the Recapitalization on May 20, 1996 the information given below is with respect
to Old WellPoint Class A Common Stock without adjustment for the two-for-three
exchange occurring as part of the Recapitalization. In connection with the
Recapitalization, Old WellPoint paid a special dividend of $10.00 per share to
its stockholders of record as of May 15, 1996. See "Recapitalization."
<TABLE>
<CAPTION>
HIGH LOW
----- ---
<S> <C> <C>
PRE-RECAPITALIZATION:
Year Ended December 31, 1995
First Quarter............................................................................... $ 37 $ 27
Second Quarter.............................................................................. 343/8 273/8
Third Quarter............................................................................... 31 277/8
Fourth Quarter.............................................................................. 333/8 291/8
Year Ended December 31, 1996
First Quarter............................................................................... $ 36 $ 317/8
Second Quarter (through May 20, 1996)....................................................... 365/8 26
POST-RECAPITALIZATION:
Second Quarter (May 21, 1996 to June 30, 1996).............................................. $ 391/8 $ 311/8
Third Quarter............................................................................... 333/4 233/8
Fourth Quarter.............................................................................. 351/2 281/4
Year Ending December 31, 1997
First Quarter (through March 25, 1997)...................................................... 457/8 321/2
--- ---
--- ---
</TABLE>
On March 25, 1997 the closing price on the New York Stock Exchange for the
Company's Common Stock was $41.875 per share. As of March 14, 1997, there were
approximately 1,200 holders of record of Common Stock.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 (i) on an actual basis and (ii) as adjusted to reflect the
repayment of subordinated long-term indebtedness with the net proceeds of the
sale of Common Stock offered hereby by the Company (at an assumed offering price
of $41.875 per share). See "Use of Proceeds." This table should be read in
conjunction with the Company's Consolidated Financial Statements, which are
incorporated herein by reference.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
ACTUAL AS ADJUSTED
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (1).................................................................. $ 625,000 $ 503,644
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, 66,526,985 issued
and outstanding, actual, 69,526,985 shares issued and outstanding, as
adjusted........................................................................ 665 695
Additional paid-in capital........................................................ 761,879 883,205
Unrealized valuation adjustment................................................... (9,994) (9,994)
Retained earnings................................................................. 117,909 117,909
---------- ------------
Total stockholders' equity...................................................... 870,459 991,815
---------- ------------
Total capitalization.......................................................... $1,495,459 $1,495,459
---------- ------------
---------- ------------
</TABLE>
- ------------------------------
(1) Does not include net repayments of long-term debt of approximately $31
million from January 1, 1997 through March 15, 1997.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth for the periods indicated selected
consolidated financial data and operating statistics for the Company. For the
year ended December 31, 1992, WellPoint's business was conducted by BCC. In
accordance with generally accepted accounting principles, the assets and
liabilities of WellPoint's business for such periods have been reflected in its
financial statements on the basis of BCC's historical cost. The selected
historical consolidated financial data and operating statistics present
WellPoint's financial position and results of operations for such periods as if
it had been operating as a separate stand-alone entity. For the years ended and
as of December 31, 1992 through December 31, 1995 and the period January 1, 1996
through May 20, 1996 (the effective date of the Recapitalization), the selected
historical consolidated financial data do not include the BCC Commercial
Operations. Information as of December 31, 1995 and 1996 and for each of the
three years ended December 31, 1996 has been derived from the Consolidated
Financial Statements of WellPoint incorporated herein by reference, which have
been audited by Coopers & Lybrand L.L.P., independent public accountants for
WellPoint, whose report is incorporated herein by reference. Information as of
December 31, 1992, 1993 and 1994 and for the years ended December 31, 1992 and
1993 have been derived from WellPoint's audited consolidated financial
statements. The following data should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto that are
incorporated herein by reference.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Premium revenue................... $ 2,161,216 $ 2,355,980 $ 2,647,951 $ 2,910,622 $ 3,879,806
Management services revenue....... 17,952 18,121 36,274 61,151 147,948
Investment income................. 95,987 75,074 107,447 135,306 142,028
------------- ------------- ------------- ------------- -------------
2,275,155 2,449,175 2,791,672 3,107,079 4,169,782
Operating expenses:
Health care services and other
benefits........................ 1,591,725 1,719,853 1,927,954 2,199,953 3,003,117
Selling expense................... 128,653 147,097 169,483 190,161 224,453
General and administrative
expense......................... 263,263 266,295 334,206 344,427 545,942
Nonrecurring costs................ -- -- -- 57,074(1) --
------------- ------------- ------------- ------------- -------------
1,983,641 2,133,245 2,431,643 2,791,615 3,773,512
------------- ------------- ------------- ------------- -------------
Operating income.................... 291,514 315,930 360,029 315,464 396,270
Interest expense................ -- -- -- -- 36,628
Other expense, net.............. 2,419 2,901 8,008 12,677 20,134
------------- ------------- ------------- ------------- -------------
Income before provision for income
taxes and cumulative effect of
accounting changes................ 289,095 313,029 352,021 302,787 339,508
Provision for income taxes........ 114,337 126,385 138,851 122,798 137,506
------------- ------------- ------------- ------------- -------------
Income before cumulative effect of
accounting changes................ 174,758 186,644 213,170 179,989 202,002
Cumulative effect of accounting
changes-- adoption of SFAS Nos.
106 and 109....................... -- (21,260) -- -- --
------------- ------------- ------------- ------------- -------------
Net income.......................... $ 174,758 $ 165,384 $ 213,170 $ 179,989 $ 202,002
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING STATISTICS)
<S> <C> <C> <C> <C> <C>
EARNINGS PER SHARE(2):
Income before cumulative effect of
accounting changes................ $2.63 $2.81 $3.21 $2.71 $3.04
Cumulative effect of accounting
changes........................... -- (0.32) -- -- --
------------- ------------- ------------- ------------- -------------
Net income.......................... $2.63 $2.49 $3.21 $2.71(5) $3.04
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
OPERATING STATISTICS(3):
Loss ratio.......................... 73.6% 73.0% 72.8% 75.6% 77.4%
Selling expense ratio............... 5.9 6.2 6.3 6.4 5.6
General and administrative expense
ratio............................. 12.1 11.2 12.5 11.6 13.6
Net income ratio.................... 8.0 7.0 7.9 6.1 5.0
Number of medical members at end of
period(4)......................... 2,162,000 2,322,000 2,617,000 2,797,000 4,485,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
DECEMBER 31, ----------------------------
---------------------------------------------------------- AS
1992 1993 1994 1995 ACTUAL ADJUSTED(6)
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investment
securities................... $ 1,039,106 $ 1,779,495 $ 1,973,388 $ 2,257,269 $ 2,165,492 $ 2,165,492
Total assets................... 1,155,883 1,921,832 2,385,636 2,679,257 3,405,542 3,405,542
Long-term debt................. -- -- -- -- 625,000 503,644
Stockholders' equity........... 507,483 1,233,190 1,418,919 1,670,226 870,459 991,815
</TABLE>
- ------------------------
(1) This charge included $29.8 million of costs, primarily professional fees,
associated with the proposed recapitalization of the Company and the
terminated acquisition of Health Systems International, Inc. and $27.3
million for the impairment of the Company's pharmaceutical benefits
management business.
(2) Earnings per share for all periods presented prior to 1996 has been
recomputed using 66,366,500 shares, the number of shares outstanding
immediately following completion of the Recapitalization. Earnings per share
for 1996 has been calculated using such 66,366,500 shares, plus the weighted
average number of shares issued since the Recapitalization.
(3) The loss ratio represents health care services and other benefits as a
percentage of premium revenue. All other ratios are shown as a percentage of
premium revenue and management services revenue.
(4) Membership numbers are approximate and include some estimates based upon the
number of contracts at the relevant date and an actuarial estimate of the
number of members represented by each contract.
(5) Earnings per share for the year ended December 31, 1995 includes
nonrecurring costs of $0.52 per share.
(6) Adjusted to give effect to the sale of 3,000,000 Shares offered hereby by
the Company at an assumed initial offering price of $41.875 per share, less
underwriting discount and estimated offering expenses payable by the
Company, and application of the net proceeds as described in "Use of
Proceeds."
16
<PAGE>
BUSINESS
GENERAL
The Company is one of the nation's largest publicly traded managed health
care companies with approximately 4.5 million medical members, 11.5 million
pharmacy members and 1.6 million dental members as of December 31, 1996. The
Company offers a diversified mix of managed care products, including HMOs, PPOs,
POS and other hybrid plans. 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 products, including
pharmacy, dental, life, workers' compensation, disability, behavioral health,
COBRA and flexible benefits account administration. In addition, the Company
offers managed care services for self-funded employers, including underwriting,
actuarial services, network access, medical cost management, claims processing
and administrative services. WellPoint's diversified mix of products and
services has been developed to meet the needs of a broad range of individuals,
employer groups and their employees. The Company's operations, with the
exception of specialty products, are organized into two internal business units
with a geographic focus.
The Company markets its products in California primarily under the name Blue
Cross of California and outside of California primarily under the name UNICARE.
Historically, the Company's primary market for managed care products has been
California. The Company holds the exclusive right in California to market its
products under the Blue Cross name and mark. The Company is diversified in its
California customer base, with extensive membership among small employer groups,
individuals and large employer groups, and a growing presence in the Medicare
and Medicaid markets.
Over the past decade, the Company has successfully transitioned
substantially all of its California indemnity health insurance customers to
managed care products. An important element of the Company's geographic
expansion strategy is to replicate its experience in California in motivating
traditional indemnity members to transition to the Company's broad range of
managed care products. The Company's acquisition strategy focuses on large
employer group plans which offer indemnity and other health care products that
are less intensively managed than the Company's current products. In addition,
the Company focuses on acquiring businesses that provide significant
concentrations of members in strategic locations outside of California. The
Company believes that such acquisitions will provide it with sufficient scale to
begin development of proprietary provider network systems in key geographic
areas which will enable the Company over time to offer a broad range of managed
care products. The Company intends to use these new networks to introduce
individual, small group and senior products, which have historically been more
profitable for the Company in California than large group products.
RECENT DEVELOPMENT--GBO ACQUISITION
On March 1, 1997, the Company completed the GBO Acquisition. The purchase
price for the acquisition was $86.7 million, subject to adjustment upon
completion of a post-closing audit.
As of December 31, 1996, the GBO provided benefits to approximately 1.3
million medical members, most of which were in health plans that are self-funded
by employers. The GBO offers indemnity and PPO plans, and also provides life,
dental and disability coverage to a variety of employer groups. The GBO focuses
on the largest employer groups, accounts with greater than 5,000 employees. A
majority of the GBO members are located in California, Texas, Georgia, the
Mid-Atlantic/Washington, D.C. area, Massachusetts, the New York/Tri-State area,
Ohio, Illinois and Michigan. In addition to the medical members, as of December
31, 1996, the GBO served approximately 270,000 pharmacy members, approximately
1.5 million dental members, approximately 1.0 million life insurance members and
covered approximately 940,000 members through disability products. The GBO
Acquisition also included Cost Care, Inc. ("CCI"), a wholly owned subsidiary of
John Hancock, which provides medical
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management services. The Company believes that the GBO, when integrated into its
UNICARE business, will give the Company increased membership concentration in
key geographic areas and create a base for expanding its network models.
The closing of the GBO Acquisition was postponed from January 31, 1997, due
to the granting of an injunction on January 30, 1997 in favor of SelectCare Inc.
("SelectCare"), a network manager in Michigan used by John Hancock to serve
certain GBO members. In its complaint for an injunction, SelectCare had alleged,
among other things, that the completion of the acquisition would violate the
confidentiality provisions of John Hancock's agreements with SelectCare. The
case was brought by SelectCare in the federal District Court in Michigan. The
acquisition was completed on March 1, 1997 in a manner the Company believes
complies with the terms of the injunction.
STRATEGY
Over the past decade, the Company has established a leading position in the
California managed care market by developing a full range of managed care
products, implementing a proprietary provider network system and successfully
motivating its indemnity members to transition to the Company's managed care
products. The Company intends to address the future growth of its business by
continuing its successful strategy in California and replicating this strategy
in other states with a focus on the following key elements:
OFFERING A BROAD LINE OF INNOVATIVE PRODUCTS. The Company offers its
California customers a full range of managed care health plans, including HMO,
PPO and POS plans, and a broad array of specialty products. The Company's
product offerings and organizational structure are targeted to address the
differing needs of specific market segments. Management believes that WellPoint
has been an innovator in the design of new products, such as its Prudent Buyer
Co-Pay product, which replaces traditional PPO deductibles with HMO-like
co-payment obligations while retaining the member choice typical of PPO plans,
and its CaliforniaCare Saver HMO product, which introduces deductible
obligations for certain hospital and outpatient benefits. In 1997, the Company
began offering high-deductible health plans for use in connection with
tax-advantaged Medical Savings Accounts ("MSAs"). As customers demand more
flexibility in their managed care plans, WellPoint believes its broad product
line and product innovation will continue to provide the Company with a
competitive advantage in attracting new members.
MOTIVATING MEMBERSHIP TO SELECT MORE INTENSIVELY MANAGED PLANS. The Company
markets a continuum of managed health care plans while providing incentives to
members and employers to select more intensively managed plans. Such plans are
typically offered at a lower cost to members in exchange for additional
cost-control measures, such as limited flexibility in choosing non-network
providers. For example, the Company's Prudent Buyer Classic plans incorporate
highly credentialed provider networks that are more exclusive than typical PPO
networks, while allowing members to select specialists without preauthorization
from a primary care physician. The Company believes that it is better able to
predict and control its health care costs as members select more intensively
managed health care plans.
PURSUING GROWTH IN SPECIFIC CUSTOMER SEGMENTS. The Company focuses on
pursuing the most favorable opportunities for membership expansion. The Company
remains a leader in California in serving individuals and small employer groups
despite increased competition, and serves the large employer group market. The
Company is also pursuing growth opportunities in the Medicare market, which
includes converting Medigap insurance members to Medicare risk products and
introducing its Medicare Select PPO products to the senior community. In
addition, WellPoint has been awarded Medicaid contracts in nine California
counties. The Company intends to continue development of start-up operations,
while selectively evaluating attractive acquisition candidates, as it expands
its national business among all customer segments.
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EXPANDING GEOGRAPHICALLY THROUGH ACQUISITIONS IN SELECTED MARKETS. An
important element of the Company's geographic expansion strategy is to replicate
its success in California in motivating traditional indemnity members to
transition to the Company's broad range of managed care products. The Company's
acquisition strategy focuses on large employer group plans which offer indemnity
and other health care products that are less intensively managed than the
Company's current products. In addition, the Company focuses on acquiring
businesses that provide significant concentrations of members in strategic
locations outside of California. The Company believes that such newly acquired
members will provide it with sufficient scale to begin development of
proprietary provider network systems in key geographic areas which will enable
the Company over time to offer a broad range of managed care products. The
Company intends to use these networks to introduce individual, small group and
senior products, which have historically been more profitable for the Company in
California than large group products. With the acquisition in March 1996 of the
MMHD large employer group business and in March 1997 of the GBO, the Company has
significantly expanded its operations outside of California. The Company
believes that its experience in California in motivating its indemnity members
to select managed care products will enhance its ability to introduce managed
products to its acquired businesses, including those of MMHD and the GBO.
EXPANDING GEOGRAPHICALLY THROUGH START-UP OPERATIONS OR STRATEGIC ALLIANCES
IN SELECTED MARKETS. The Company intends to commence start-up operations where
it can cost-effectively develop individual and small-group operations in new
geographic markets and where it can draw upon its acquired membership as a
platform to develop complementary provider network systems. The Company has
commenced start-up activities in Texas, Georgia and the greater Washington, D.C.
metropolitan area. The Company also believes that the development of new
proprietary provider networks will enhance the profitability of its acquired
businesses by facilitating the transition of large group segments into more
intensively managed health care products. From time to time, the Company may
address the expansion of its business through investments in strategic
alliances.
EXPANDING SPECIALTY MANAGED HEALTH CARE AND OTHER PLANS. The Company
continues to develop its specialty businesses, including dental, pharmacy,
integrated workers' compensation, life and disability insurance and mental
health services. One of the key elements of the Company's strategy is to
continue marketing these plans to its existing HMO, PPO and POS members, as well
as using these specialty products to attract new members. WellPoint also markets
these specialty products on a stand-alone basis to other health plans and
employers.
CAPITALIZING ON THE BLUE CROSS BRAND NAME. In California, the Company
operates under the Blue Cross trade name, a well-recognized brand for marketing
health care coverage. The brand name has been particularly useful in the
individual and small employer group markets, and is expected to assist in
marketing the Company's California Medicare products to seniors. In addition,
the Company currently provides pharmacy benefit management services to other
BlueCross BlueShield entities and intends to market additional specialty
products to and pursue other relationships with BlueCross BlueShield plans in
the future.
THE BLUE CROSS OF CALIFORNIA BUSINESS
Due in part to the MMHD and GBO Acquisitions, the Company's operations, with
the exception of stand-alone specialty products, are organized into two internal
business units with a geographic focus. Most of the Company's California
operations are conducted through the Blue Cross of California Business.
MARKETING AND PRODUCTS
WellPoint's products are marketed in California primarily under the Blue
Cross mark through four major business units focusing on specific customer
segments: Group Services ("GS"), Individual and
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Small Group Services ("ISG"), Senior Services and Medi-Cal. GS provides products
to large employers with 51 or more employees, educational and public entities,
federal employee health and benefit programs and national employers; ISG
provides products to individual purchasers and small groups and products for
state-run programs including high risk and underserved markets. Senior Services
provides the Company's Medicare risk products and supplemental coverage for
Medicare recipients. The Medi-Cal division provides products for Medicaid
recipients. Each business unit is responsible for enrolling, underwriting and
servicing its respective customers. Sales representatives are generally assigned
to a specific geographic region of California to allow WellPoint to tailor its
marketing efforts to the particular health care needs of each regional market.
Each business unit also uses advertising, public relations, promotion and
marketing research to support its efforts. Consistent with the Company's focus
on providing a continuum of products, the Company believes that having distinct
business units segmented by employer size and geographic region better enables
it to develop benefit plans and services to meet the needs of specific markets.
The GS sales staff markets WellPoint's managed health care plans to large
employers in California by working with a broker or consultant to develop a
package of managed health care benefits specifically tailored to meet the
employer's needs. ISG markets WellPoint's managed health care plans in
California primarily through sales managers in both Comprehensive Integrated
Marketing Services, Inc. ("CIMS"), a wholly owned subsidiary of the Company, and
ISG's sales department, who oversee independent agents and brokers.
HMO/POS PLANS. The Company offers a variety of HMO products to its
CaliforniaCare members. CaliforniaCare members are generally charged periodic,
prepaid premiums that do not vary based on the amount of services rendered, as
well as modest copayments (small per-visit charges). Members choose a primary
care physician from the HMO network who is responsible for coordinating health
care services for the member. Certain plans permit members to receive health
care services from providers that are not a part of WellPoint's HMO network at a
substantial out-of-pocket cost to members which includes a deductible and higher
copayment obligations. To enhance the marketability of its plans, in 1996 the
Company introduced its CaliforniaCare Saver HMO product, which introduces
deductible obligations for certain hospital and outpatient benefits. The
Company's hybrid plans, such as POS plans, typically involve the selection of a
primary care physician similar to HMOs, but allow members to choose non-network
providers at higher out-of-pocket costs, similar to PPOs.
PPO PLANS. The Company's PPO products, which are marketed under the name
"Prudent Buyer," are designed to address the specific needs of different
customer segments. The Company's PPO plans require periodic, prepaid premiums
and have copayment obligations for services rendered by network providers that
are often similar to the copayment obligations of its HMO plans. Unlike
WellPoint's HMO plans, members are not required to select a primary care
physician who is responsible for coordinating their care and may be subject to
annual deductible requirements. PPO members have the option to receive health
care services from non-network providers, typically at substantially higher
out-of-pocket costs to members. To improve the attractiveness of its PPO Plans
to small groups and individual buyers, in 1996 the Company introduced its
Prudent Buyer Co-Pay product, which replaces annual deductible obligations with
HMO-like co-payments while maintaining the member choice typical of PPO plans.
In March 1997, the Company introduced new high-deductible health plans intended
for use with MSAs.
SENIOR PLANS. WellPoint offers numerous Medicare supplemental plans, which
typically pay the difference between health care costs incurred and amounts paid
by Medicare, using existing PPO and HMO provider networks. One such product is
Medicare Select, a PPO-based product that offers supplemental Medicare coverage.
WellPoint also offers Medicare Select II, a hybrid product which allows seniors
over the age of 65 to maintain their full Medicare benefits for any
out-of-network benefits while enrolled in a supplemental plan that allows them
to choose their own physician with a copayment. As of December 31, 1996, the
Medicare supplemental plans served approximately 162,000 members. WellPoint also
offers Senior CaliforniaCare, an HMO plan operating in defined geographic areas,
under a Medicare risk contract with the Health Care Financing Administration
("HCFA"). This contract entitles
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WellPoint to a fixed per-member premium from HCFA which is subject to adjustment
annually by HCFA based on certain demographic information relating to the
Medicare population and the cost of providing health care in a particular
geographic area. In addition to physician care, hospitalization and other
benefits covered by Medicare, the benefits under this plan include prescription
drugs, routine physical exams, hearing tests, immunizations, eye examinations,
counseling and health education services.
MEDICAID PLANS. The California Department of Health Services ("DHS")
administers Medi-Cal, California's Medicaid program. WellPoint has been awarded
contracts to administer Medi-Cal managed care programs in several California
counties. Under these programs, WellPoint provides health care coverage to
Medi-Cal program members and DHS pays WellPoint a fixed payment per member per
month. As of December 31, 1996, approximately 111,029 members were enrolled in
WellPoint's Medi-Cal managed care programs in Sacramento, Orange, Riverside, San
Bernardino, San Francisco, Alameda, Santa Clara, Fresno and Kern counties.
WellPoint is a participating plan partner with the Local Initiative Health
Authority for Los Angeles County, although no enrollment had begun as of
December 31, 1996.
MANAGED HEALTH CARE NETWORKS AND PROVIDER RELATIONS
WellPoint's extensive managed health care provider networks include its HMO,
PPO and specialty managed care networks. These provider relationships are
monitored regularly in order to control the cost of health care while providing
access to quality providers. As a result of this network monitoring process as
well as member and provider financial incentives, WellPoint reduces or
eliminates the need to use out-of-network providers that are not subject to
WellPoint's cost and performance controls.
WellPoint uses its large California membership to negotiate provider
contracts at favorable rates that require utilization management and other
cost-control measures. Pursuant to these contracts, physician providers are paid
either a fixed per member monthly amount (known as a capitation payment) or on
the basis of a fixed fee schedule. In selecting providers for its networks,
WellPoint uses its credentialing programs to evaluate the applicant's
professional qualifications and experience, including license status,
malpractice claims history and hospital affiliations.
The following is a more detailed description of the principal features of
WellPoint's California HMO and PPO networks.
HMO NETWORK. Membership in CaliforniaCare has grown to approximately
1,058,000 members as of December 31, 1996 from 123,000 members as of December
31, 1987, a compound annual growth rate of approximately 27% over such period.
For the two-year period ended December 31, 1996 the compound annual growth rate
was 21%. As of December 31, 1996, the HMO network included approximately 24,600
primary care and specialist physicians and approximately 410 hospitals
throughout California. The physician network of participating medical groups
("PMGs") is comprised of both multi-specialty medical group practices and
individual practice associations.
Substantially all primary care physicians or PMGs in the HMO network are
reimbursed on a capitated basis and have financial incentives to control health
care costs. These arrangements specify fixed per member per month payments to
providers and may result in a marginally higher medical loss ratio than a
non-capitated arrangement, but significantly reduced risk to WellPoint.
Generally, HMO network hospital provider contracts are on a nonexclusive basis
and provide for a per diem (a fixed fee schedule where the daily rate is based
on the type of service), which is substantially below the hospitals' standard
billing rates.
Contractual arrangements with PMGs typically include provisions under which
WellPoint provides limited stop-loss protection. If the PMG's actual charges for
medical services provided to a member exceed an agreed-upon threshold amount,
WellPoint will pay the group a portion of the excess amount. Provider rates are
generally negotiated annually with PMGs and hospitals. To encourage PMGs to
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contain costs for claims for non-capitated services such as inpatient hospital,
outpatient surgery, hemodialysis, emergency room, skilled nursing facility,
ambulance, home health and alternative birthing center services, WellPoint's PMG
agreements provide for a settlement payment to the PMG based upon the PMG's
effective utilization of such non-capitated services. Amounts that remain in the
pool after payment of such claims are shared between WellPoint and the PMGs.
PMGs are also eligible for additional incentive payments based upon satisfaction
of quality criteria.
PPO NETWORK. The PPO network, WellPoint's largest network, included
approximately 40,400 physicians and 430 hospitals throughout California as of
December 31, 1996. There were approximately 2.5 million members (including
administrative services members) enrolled in WellPoint's California PPO health
care plans as of such date, approximately 45% of whom were individuals or
employees of small groups.
WellPoint endeavors to manage and control costs for its PPO plans by
negotiating favorable arrangements with physicians, hospitals and other
providers, which include utilization management and other cost control measures.
In addition, WellPoint controls costs through pricing and product design
decisions intended to influence the behavior of both providers and members.
Like WellPoint's HMO plans, WellPoint's PPO plans provide for the delivery
of specified health care services to members by contracting with physicians,
hospitals and other providers. Hospital provider contracts are on a nonexclusive
basis and are generally paid per diem amounts that provide for rates that are
substantially below the hospitals' standard billing rates. Physician provider
contracts are also on a nonexclusive basis and specify fixed fee schedules that
are significantly below standard billing rates. WellPoint is able to obtain
prices for hospitals and physician services significantly below standard billing
rates because of the volume of business it offers to health care providers that
are part of its network. Provider rates are generally negotiated on an annual or
multi-year basis with hospitals. In 1996, the Company concluded an extensive
recontracting process with hospitals in its provider network, whereby certain
hospitals that demonstrated designated quality and other criteria were given a
preferred status in exchange for, among other things, lower negotiated rates.
Provider rates for physicians in the Company's PPO network are set from time to
time by the Company.
UTILIZATION MANAGEMENT. WellPoint also manages health care costs in its
provider networks by adopting utilization management systems and guidelines that
are intended to reduce unnecessary procedures, admissions and other medical
costs. The utilization management systems seek to ensure that medical services
provided are based on medical necessity and that all final decisions are made by
physicians. In its HMO, WellPoint permits PMGs to oversee most utilization
management for their particular medical group under these guidelines. Currently,
substantially all of the PMGs in WellPoint's HMO network have established
committees to oversee utilization management. For its PPO network, WellPoint
uses treatment guidelines, requires pre-admission approvals of hospital stays
and concurrent review of all admissions and retrospectively reviews physician
practice patterns. Utilization management also includes an outpatient program,
with pre-authorization and retrospective review, ongoing supervision of
inpatient and outpatient care of members, case management and discharge planning
capacity. Review of practice patterns may result in modifications and
refinements to the PPO plan offerings, treatment guidelines and network
contractual arrangements. In addition, WellPoint manages health care costs by
periodically reviewing cost and utilization trends within its provider networks.
Cases are reviewed in the aggregate to identify a high volume of a particular
type of service to determine whether costs for these treatments can be more
effectively managed. In addition, the highest cost services are identified to
determine if costs in the aggregate can be reduced by using new, cost-effective
technologies or by creating additional networks, such as networks of home health
agencies.
UNDERWRITING. In establishing premium rates for its health care plans,
WellPoint uses underwriting criteria based upon its accumulated actuarial data,
with adjustments for factors such as claims experience, member mix and industry
differences to evaluate anticipated health care costs. WellPoint's
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underwriting practices in the individual and small group market are subject to
California legislation affecting the individual and small employer group market.
QUALITY MANAGEMENT. Quality management for most of the Company's California
business is overseen by the Company's Quality Management Department and is
designed to ensure that necessary care is provided by qualified personnel.
Quality management encompasses plan level quality performance, physician
credentialing, provider and member grievance monitoring and resolution, medical
group auditing, monitoring medical group compliance with Blue Cross of
California standards for medical records and medical offices, physician peer
review and an active quality management committee.
THE UNICARE BUSINESS
The Company believes that its success in the highly competitive California
managed care market is attributable to its broad range of managed care products
that target the differing needs of specific market segments. The Company's
acquisition strategy has focused on large employer group plans which offer
indemnity and other health care products that are less intensively managed than
the Company's current products. In addition, the Company focuses on acquiring
businesses that provide significant concentrations of members in strategic
locations outside of California. The Company believes that such newly acquired
members will provide it with sufficient scale to begin development of
proprietary provider network systems in key geographic areas which will enable
the Company over time to offer a broad range of managed care products. The
Company intends to use these new networks to introduce individual, small group
and senior products, which have historically been more profitable for the
Company in California than large group products. As of December 31, 1996, the
Company had approximately 1.0 million members covered under its UNICARE health
plans (including approximately 141,000 members in California). Approximately 50%
of UNICARE medical membership as of such date was concentrated in seven states:
California, New York, Texas, Georgia, Massachusetts, Illinois and Virginia. The
acquired MMHD operations, as well as the GBO, are now conducted by the Company's
indirect wholly owned subsidiary UNICARE Life & Health Insurance Company.
The Company believes that it possesses a competency with respect to the
management and migration of indemnity-based business to managed care products.
Starting in 1986, and led by the Company's current management team, the
Company's predecessor converted substantially all of its California indemnity
business to managed care. The Company believes that its success in California in
motivating its indemnity members to select its managed care products will
enhance its ability to introduce similar products to acquired businesses.
MARKETING AND PRODUCTS
WellPoint's products are marketed outside of California under the UNICARE
brand name through business units which are organized on a customer-segment
basis. The large employer group businesses acquired in the MMHD and GBO
Acquisitions have a national focus as a result of the multi-state needs of
employers in those customer segments. Other business units, such as those
focusing on the individual and small employer group, senior and Medicaid
markets, have a more regional focus as a result of the more localized nature of
customers in these segments. Similar to the Company's Blue Cross of California
business units, each UNICARE business unit is responsible for marketing,
enrolling, underwriting and servicing its specific customers.
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Outside of California, the Company offers PPO products that use third-party
provider networks as well as traditional fee-for-service products. As WellPoint
develops proprietary provider network systems in these key geographic areas, the
Company intends to offer more intensively managed products to the existing
members of acquired businesses and to new individual, small group and senior
customers outside of California.
MANAGED HEALTH CARE NETWORKS AND PROVIDER RELATIONS
Due to the recent development of the Company's national operations, the
Company's relations with health care providers outside of California are more
varied than in California. The Company currently contracts with a number of
third-party provider networks, which generally lack the provider selectivity and
discounts typical of the Company's California networks. One of the Company's
strategies for the expansion of its UNICARE operations is to build proprietary
provider network systems similar to the Company's networks in California, which
provide a continuum of managed-care products to various customer segments. As
the Company expands its out-of-state operations, it intends to build or acquire
such network operations and, as appropriate, to replace or supplement the
current third-party network arrangements.
The Company offers managed health care products and services in Texas
through certain subsidiaries. One of the Company's indirect subsidiaries,
UNICARE of Texas Health Plans, Inc., is currently licensed as an HMO in the
Houston area. This HMO began marketing operations to large employer groups in
October 1996. The Company expects to begin marketing the HMO product in the
individual and small group markets in the second half of 1997. The Company has
developed an HMO network of approximately 3,000 primary care and specialist
physicians and 20 hospitals in the Houston area as of December 31, 1996. The
Company intends to seek approval to extend this HMO product to the Dallas,
Austin, San Antonio, Corpus Christi and Beaumont metropolitan areas. The Company
has commenced start-up activities in Georgia and intends to begin building HMO
and PPO networks in the greater Atlanta and Savannah areas. The Company
currently expects that it will begin commercial marketing operations in Georgia
in the second half of 1997.
As part of the MMHD Acquisition, the Company also acquired majority
ownership interests in a start-up HMO, National Capital Health Plan ("NCHP"),
and an existing PPO, National Capital Preferred Provider Organization ("NCPPO").
Both entities operate in the greater Washington, D.C. metropolitan area and are
joint ventures with local health care providers. The NCPPO network included
approximately 5,800 primary care and specialist physicians and 47 hospitals as
of December 31, 1996. WellPoint anticipates that NCHP will commence commercial
operations in the second half of 1997.
UTILIZATION MANAGEMENT. For the Company's UNICARE managed care health
plans, utilization management is provided both by UNICARE and third-party
provider networks. As part of the GBO Acquisition, the Company also acquired
CCI, which provides medical management services. The Company expects that over
time CCI will become the primary platform for the provision of utilization
review services to UNICARE members.
UNDERWRITING. As with the Company's Blue Cross of California operations,
the UNICARE underwriting activities use criteria based upon accumulated
actuarial data, with adjustments for factors such as claims experience, member
mix and industry differences to evaluate anticipated health care costs. Due to
the administrative services only component of the Company's national membership,
most of the UNICARE business involves no underwriting risk to the Company.
Because UNICARE's members are in every state, the Company's underwriting
practices, especially in the individual and small group market, are subject to a
variety of legislative and regulatory requirements and restrictions.
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SPECIALTY MANAGED HEALTH CARE AND OTHER PLANS
WellPoint offers a variety of specialty managed health care and other
services. WellPoint believes that these specialty networks and plans complement
and facilitate WellPoint's marketing of its HMO, PPO and POS plans and give it a
competitive advantage in attracting employer groups and other members that are
increasingly seeking a wider variety of options and services. One of WellPoint's
strategies is to expand its specialty business by marketing these plans to the
approximately 4.5 million members of its medical plans, as well as using these
specialty products to attract new members. WellPoint also markets these
specialty products on a stand-alone basis to other health plans and other
payors.
PHARMACY PRODUCTS
WellPoint offers pharmacy services to its California members through its
subsidiary WellPoint Pharmacy Plan and offers pharmacy benefit management
services nationwide through its subsidiary, Professional Claim Services, Inc.
("Pro-Serv"). WellPoint Pharmacy Plan and Pro-Serv incorporate features such as
drug formularies (a WellPoint-developed listing of preferred, cost-effective
drugs), a pharmacy network and maintenance of a prescription drug database and
mail order capabilities. Moreover, pharmacy benefit management services provided
by WellPoint Pharmacy Plan and Pro-Serv include management of drug utilization
through outpatient prescription drug formularies, retrospective review and drug
education for physicians, pharmacists and members. As of December 31, 1996,
WellPoint Pharmacy Plan and Pro-Serv had more than 11.5 million risk and
non-risk members and approximately 45,500 participating pharmacies.
DENTAL PLANS
WellPoint's dental plans include Dental Net, its California dental HMO, with
a provider network of approximately 2,000 dentists reimbursed on a capitated
basis, a dental PPO, with a network of approximately 9,600 dentists, and
traditional indemnity plans. The dental plans provide primary and specialty
dental services, including orthodontic services, and as of December 31, 1996,
served approximately 1.6 million dental members.
LIFE INSURANCE
The Company also offers primarily term-life insurance to employers,
generally in conjunction with the Company's health plans. As of December 31,
1996, the Company had approximately 723,000 life insurance members.
MENTAL HEALTH PLANS
WellPoint offers a specialized mental health and substance abuse program.
The plan covers mental health and substance abuse treatment services on both an
inpatient and an outpatient basis, through a network of approximately 3,300
contracting providers. In addition, approximately 257 employee assistance and
behavioral managed care programs have been implemented for a wide variety of
businesses throughout the United States. As of December 31, 1996, there were
approximately 502,000 members covered under WellPoint's mental health plans.
WORKERS' COMPENSATION
One of the Company's indirect operating subsidiaries, UNICARE Insurance
Company ("UIC"), underwrites workers' compensation insurance primarily in
California and is also licensed in 33 other states. UIC historically focused on
insuring large accounts, working with a select group of large property and
casualty insurance brokers. In August 1994, the Company introduced "UNICARE
Integrated," an integrated managed care product for workers' compensation and
medical benefits. Under UNICARE
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Integrated, WellPoint has combined its existing HMO and PPO networks with a
workers' compensation occupational medical network of physicians and clinics.
UNICARE Integrated offers single point-of-service and account management for the
employer and provides employees access to existing HMO and PPO networks.
WellPoint believes that, by integrating managed care and workers' compensation,
medical treatment costs and workers' compensation costs can be reduced.
DISABILITY PLANS
As a result of the MMHD Acquisition, the Company now provides long-term and
short-term disability coverage. As of December 31, 1996, the Company provided
disability coverage to approximately 107,000 individuals.
ANCILLARY NETWORKS
WellPoint evaluates current and emerging high volume or high cost services
to determine whether developing an ancillary service network will yield cost
control benefits. In establishing these ancillary service networks, WellPoint
seeks to enter into capitation or fixed fee arrangements with providers of these
services. WellPoint regularly collects and analyzes industry data on high cost
or high volume unmanaged services to identify the need for specialty managed
care networks. For example, WellPoint has created Centers of Expertise for
certain transplant services.
MANAGED CARE SERVICES
WellPoint provides administrative services to large group employers that
maintain self-funded health plans. In California, the Company often has been
able to transition these customers into other lines of business by subsequently
introducing WellPoint's underwritten managed care products. WellPoint offers
managed care services, including underwriting, actuarial services, medical cost
management, claims processing and administrative services for self-funded
employers. WellPoint also enables employers with self-funded health plans to
access WellPoint's California PPO, POS and HMO provider networks and to realize
savings through WellPoint's favorable provider arrangements, while allowing
employers the ability to design certain health benefit plans in accordance with
their own requirements and objectives. As of December 31, 1996, WellPoint
serviced self-insured health plans covering approximately 1.2 million medical
members, of which approximately 640,000 were attributable to the large employer
group operations acquired in the MMHD Acquisition. Management services revenue
for these services was $147.9 million, $61.2 million and $36.3 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
MARKET RESEARCH AND ADVERTISING
WellPoint conducts market research and advertising programs to develop
products and marketing techniques tailored to customer segments. WellPoint uses
print and broadcast advertising to promote its health care plans. In addition,
the Company engages in promotional activities with agents, brokers and
consultants. WellPoint incurred costs of approximately $34.8 million, $21.2
million, and $17.7 million on advertising for the years ended December 31, 1996,
1995, and 1994, respectively.
COMPETITION
The managed health care industry in California is competitive on both a
regional and statewide basis. In addition, in recent years there has been a
trend of increasing consolidation among both national and California-based
health care companies, which may further increase competitive pressures.
WellPoint competes with other companies that offer similar managed health care
plans, some of which have greater resources than WellPoint. The large employer
group market is especially competitive, as employers continue to demand
increasing variety and flexibility from their health plans while
26
<PAGE>
trying to limit increases in premiums. Currently, WellPoint is a market leader
in offering managed health care plans to individuals and small employer groups
in California. The medical loss ratio attributable to WellPoint's individual and
small group business is lower than that for its large employer group business.
As a result, a larger portion of WellPoint's profitability is due to the
individual and small group business. WellPoint has experienced increased
competition in this market over the last several years, which could adversely
affect its medical loss ratio and future financial condition or results of
operations.
The markets in which the Company operates outside of California are also
highly competitive. Because of the many different markets in which the Company
now serves members, the Company faces unique competitive pressures in regional
markets as well as on a national basis. The Company competes with other
companies that offer similar managed health care plans as well as traditional
indemnity insurance products. Many of these companies have greater financial and
other resources than the Company and greater market share on either a regional
or national basis. As the Company continues to geographically expand its
operations, it will be subject to national competitive factors as well as unique
competitive conditions that may affect the more localized markets in which the
Company operates.
WellPoint believes that significant factors in the selection of a managed
health care plan by employers and individual members include price, the extent
and depth of provider networks, flexibility and scope of benefits, quality of
services, market presence, reputation (which may be affected by public rankings
or accreditation by voluntary organizations such as the NCQA) and financial
stability. WellPoint believes that it competes effectively against other health
care industry participants.
SERVICE MARKS
"CaliforniaCare," "Prudent Buyer Plan" and "UNICARE" are registered service
marks of WellPoint. In addition to these marks, WellPoint has filed for
registration of and maintains several other service marks, trademarks and trade
names at the Federal level and in California. WellPoint and Blue Cross of
California are currently parties to license agreements with the BCBSA which
allow them to use the Blue Cross name and mark in California with respect to
WellPoint's HMO and PPO network-based plans. The BCBSA is a national trade
association of Blue Cross and Blue Shield licensees, the primary function of
which is to promote the Blue Cross and Blue Shield names. Each licensee is an
independent legal organization and is not responsible for the obligations of
other BCBSA member organizations. A Blue Cross license requires payment of a fee
to the BCBSA and compliance with various requirements established by the BCBSA,
including the maintenance of Minimum BCBSA Capital. The failure to meet the
Minimum BCBSA Capital requirements can subject the Company to certain corrective
action, while the failure to meet a lower specified level of capital can result
in termination of the License Agreement. See "Risk Factors--Minimum BCBSA
Capital Requirements." WellPoint considers the licensed Blue Cross name and its
registered service marks, trademarks and trade names important in the operation
of its business.
EMPLOYEES
At December 31, 1996, WellPoint and its subsidiaries employed approximately
6,600 people (not including the approximately 2,900 employees of the GBO).
Approximately 120 of the Company's employees are presently covered by a
collective bargaining agreement with the Office and Professional Employees
International Union, Local 29. As a result of the GBO Acquisition, approximately
225 of the Company's office clerical employeees in the greater Detroit area are
presently covered by a collective bargaining agreement with the International
Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America, Local
No. 614. WellPoint believes that its relations with its employees are good, and
it has not experienced any work stoppages.
27
<PAGE>
SELLING SHAREHOLDER
As of December 31, 1996, the Foundation owned 38,410,000 shares of the
Company's Common Stock, representing approximately 57.7% of the total 66,526,985
shares of Common Stock outstanding. Following the Offering, the Foundation will
own 31,410,000 shares of WellPoint Common Stock, which will represent
approximately 45.2% of the outstanding shares (or, if the over-allotment option
is exercised in full, 29,910,000 shares of WellPoint Common Stock, which will
represent approximately 43.0% of the outstanding shares).
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Under the Company's Amended and Restated Articles of Incorporation (the
"Articles of Incorporation"), the Company is authorized to issue up to
300,000,000 shares of Common Stock, $0.01 par value ("Common Stock"). As of
December 31, 1996, there were 66,526,985 shares of Common Stock issued and
outstanding. In addition, up to 5,000,000 shares have been reserved for issuance
upon the exercise of options and awards or upon purchase under the Company's
1994 Stock Option/Award Plan, Employee Stock Purchase Plan and Employee Stock
Option Plan. ChaseMellon Shareholder Services, L.L.C. is the transfer agent and
registrar of the shares of Common Stock.
The Common Stock is not redeemable, does not have any conversion rights and
is not subject to call. Holders of shares of Common Stock have no preemptive
rights to maintain their percentage of ownership in future offerings or sales of
stock of the Company. Holders of shares of Common Stock have one vote per share
on all matters submitted to a vote of shareholders of the Company, except with
respect to shares of Common Stock owned by the Selling Shareholder pursuant to
the Voting Agreement and the Voting Trust Agreement as described under the
caption "Recapitalization." Subject to the restrictions on shares owned in
excess of the Ownership Limit as described below, the holders of Common Stock
are entitled to receive dividends, if any, as and when declared from time to
time by the Board of Directors of the Company out of assets or funds legally
available therefor. See "--Certain Charter Provisions That May Limit Changes in
Control--Restrictions on Ownership and Transfer." The holders of Common Stock do
not have cumulative voting rights. Upon liquidation, dissolution or winding up
of the affairs of the Company, the holders of Common Stock will be entitled to
participate ratably, in proportion to the number of shares held, in the net
assets of the Company available for distribution to holders of Common Stock. The
shares of Common Stock currently outstanding (including the shares offered
hereby by the Selling Shareholder) are fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 50,000,000 shares of Preferred
Stock, $0.01 par value ("Preferred Stock"), none of which is outstanding as of
the date hereof. The Board of Directors has the authority to issue Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions, including dividend rights, voting rights, conversion rights, terms
of redemption and liquidation preferences, without any further vote or action by
the Company's shareholders, unless action is required by applicable laws or
regulations or by the terms of other outstanding preferred stock. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company.
28
<PAGE>
CERTAIN CHARTER PROVISIONS THAT MAY LIMIT CHANGES IN CONTROL
The License Agreement requires as a condition to the Company's retention of
the Blue Cross license that the Company's Articles of Incorporation contain the
following provisions:
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Company's Articles of Incorporation provide that no person other than
the Foundation may Beneficially Own (as defined) shares of voting capital stock
of the Company in excess of the Ownership Limit. Any transfer of stock that
would result in any person Beneficially Owning shares of voting capital stock in
excess of the Ownership Limit will result in such intended transferee acquiring
no rights in such shares (with certain exceptions) and such shares will be
deemed transferred to an escrow agent to be held until such time as such shares
are transferred to a person whose acquisition thereof will not violate the
Ownership Limit. These provisions prevent a third party from obtaining control
of the Company without obtaining the vote required to amend the Company's
Articles of Incorporation.
SHAREHOLDERS' MEETINGS
The Company's Articles of Incorporation provide that special meetings of the
shareholders may be called at any time only by a majority of the Board of
Directors, the Chairman of the Board, the President or the holders of shares
entitled to cast not less than 10% of the votes at the meeting. This provision
will make it more difficult for shareholders to take actions opposed by the
Board of Directors.
NO ACTION BY SHAREHOLDER CONSENT
The Company's Articles of Incorporation prohibit action that is required or
permitted to be taken at any annual or special meeting of shareholders of the
Company from being taken by the written consent of shareholders without a
meeting.
CLASSIFIED BOARD OF DIRECTORS
The Company's Articles of Incorporation and Bylaws provide that the
Company's Board of Directors is divided into three classes, with each class
consisting, as nearly as possible, of one-third of the total number of directors
constituting the entire Board of Directors. These classes (after an interim
period) will serve for staggered three-year terms. The classified Board
provisions could have the effect of discouraging a third party from making a
tender offer or otherwise attempting to obtain control of the Company, even
though such an attempt might be beneficial to the Company and its shareholders.
In addition, these provisions could delay shareholders who do not like the
policies of the Board of Directors from removing a majority of the members of
the Board for two years unless such shareholders can show cause and obtain the
requisite vote.
SUPERMAJORITY PROVISIONS
Under the Company's Articles of Incorporation, the affirmative vote of the
holders of at least 75% of each class of the shares of voting capital stock
represented and voting at a duly held meeting of shareholders at which a quorum
is present, voting by class, is required to amend certain provisions of the
Articles of Incorporation, including the provisions concerning (i) the number of
directors, (ii) the classified board provision, (iii) the filling of vacancies
on the Board of Directors, (iv) the power of directors to amend the Company's
Articles of Incorporation, (v) the prohibition on shareholder action by written
consent, (vi) the ownership and transfer restrictions, (vii) the prohibition on
cumulative voting by shareholders and (viii) the requirement for supermajority
shareholder approval to amend such provisions. In addition, any amendment of the
Company's Articles of Incorporation, and amendment of certain provisions of the
Company's bylaws, requires the approval of the greater of two-thirds or seven of
the Company's directors.
29
<PAGE>
LISTING
The Company's Common Stock is listed on the New York Stock Exchange under
the trading symbol "WLP."
REINCORPORATION PROPOSAL
The Board of Directors of the Company has approved a resolution to
effectively reincorporate the Company in Delaware (the "Reincorporation"). The
Reincorporation proposal is subject to the approval of the shareholders of the
Company and will be submitted to a vote at the 1997 Annual Meeting of
Shareholders, currently contemplated to occur in June 1997. The Shares offered
pursuant to this Prospectus will be sold prior to the record date for
determining eligibility to vote at the 1997 Annual Meeting and therefore
purchasers of such Shares will have the opportunity to vote regarding the
Reincorporation proposal.
As currently contemplated, the Reincorporation would occur via a merger (the
"Merger") involving the Company, a new Delaware corporation which will be a
wholly owned subsidiary of the Company prior to such merger ("WellPoint
Delaware"), and a wholly owned subsidiary of WellPoint Delaware, organized
solely for purposes of effecting the Merger ("Merger Subsidiary"). As a result
of the Merger, Merger Subsidiary will be merged into the Company, Merger
Subsidiary will disappear and the Company will be the surviving entity and a
wholly owned subsidiary of WellPoint Delaware. Upon the consummation of the
Merger, shareholders of the Company will become stockholders of WellPoint
Delaware and will receive one share of Common Stock of WellPoint Delaware in
exchange for each share of Common Stock of the Company held by them. The
directors and executive officers of the Company (including any directors elected
at the 1997 Annual Meeting) will become the directors and executive officers of
WellPoint Delaware.
REASONS FOR REINCORPORATION IN DELAWARE
The formation of a new holding company structure as part of the
Reincorporation proposal would allow the Company to significantly reduce capital
requirements currently imposed because the Company is licensed as an independent
member of the BCBSA and is a state-regulated entity. See "Risk Factors--Minimum
BCBSA Capital Requirement." In addition, by reincorporating in the State of
Delaware, the Company will be able to take advantage of Delaware corporation
laws, which are more conducive to the operational needs and independence of
corporations domiciled in that state. These laws include the ability to
eliminate the liability of directors for certain breaches of their fiduciary
duty.
CERTAIN DIFFERENCES BETWEEN CALIFORNIA AND DELAWARE CORPORATION LAW
Shareholders of the Company will become stockholders of WellPoint Delaware
and their rights as stockholders will be governed by the Delaware General
Corporation Law (the "DGCL"). While stockholder rights under DGCL differ in many
respects from shareholder rights under the California Corporations Code (the
"CCC"), the Company expects that WellPoint Delaware's Certificate of
Incorporation and Bylaws will include various features, essentially identical to
provisions in the Company's current charter documents, which have the effect of
rendering more difficult certain unsolicited attempts to take over WellPoint
Delaware. These features are intended to ensure that stockholders of WellPoint
Delaware receive a fair price for their shares by encouraging any person who
might seek to acquire control of WellPoint Delaware first to consult with
WellPoint Delaware's Board of Directors and to negotiate the terms of any tender
offer or proposed business combination, but may also discourage hostile takeover
attempts or tender offers for control of WellPoint Delaware that might be
approved by many or even a majority of WellPoint Delaware stockholders. Certain
of these provisions have been included at the insistence of the BCBSA in order
to preserve diversity of ownership of BCBSA licensees. The retention of
30
<PAGE>
these charter provisions will have the effect of reducing the differences
between the rights of shareholders under the CCC from those of stockholders
under the DGCL. Significant differences in shareholder rights that will exist
after the Reincorporation are highlighted below.
CERTAIN BUSINESS COMBINATIONS. Unless certain requirements are met, a
Delaware corporation is prohibited under the DGCL from engaging in a "business
combination" with an "interested stockholder" (a 15% or more stockholder of
voting stock, including rights to acquire voting stock) for three years after a
person or entity becomes an "interested stockholder." The DGCL allows a
corporation to opt out of these business combination restrictions in its charter
documents. It is currently anticipated that WellPoint Delaware will not make
such an election and will be subject to the "interested stockholder"
restrictions under the DGCL. While containing no comparable restrictions on
business combinations, the CCC sets forth certain requirements for a tender
offer, proposed reorganization or proposal for the sale of assets by an
"interested party" (defined as a party to the transaction who (i) controls or is
an officer or director of the corporation or (ii) is a person or entity which an
officer or director of the corporation controls or has a material financial
interest in). Specifically, the CCC requires the delivery (to the shareholders
or the board of directors, as the case may be) of a written, affirmative
fairness opinion regarding the consideration offered by the "interested party"
and affords stockholders certain rights to reject "interested party" proposals
when certain later proposals are offered. Upon completion of the
Reincorporation, the stockholders of WellPoint Delaware will no longer be
entitled to such protections under the CCC.
INTERESTED DIRECTOR TRANSACTIONS. Under both California and Delaware law,
contracts or transactions between a corporation and one or more of its directors
or between a corporation and any other entity in which one or more of its
directors are directors or have a financial interest, are not void or voidable
because of such interest or because such director is present at a meeting of the
board which authorized or approved the contract or transaction, provided that
certain conditions, including obtaining the required approval of either the
board of directors or the stockholders of the corporation and fulfilling the
requirements of good faith and full disclosures, are met. Under California law,
the Board of Directors of the Company may not be able to approve certain
transactions that could be approved by a majority of disinterested directors of
a Delaware corporation, although less than a majority of a quorum, because the
number of interested directors prevents the existence of a disinterested
majority of a quorum required by California law.
SHAREHOLDER VOTING. With certain exceptions, California law requires that
mergers, reorganizations, certain sales of assets and similar transactions be
approved by a majority vote of each class of shares outstanding. Delaware law
generally requires approval of a majority of outstanding stock for such
transactions, but does not require class voting in such transactions, except in
certain situations involving an amendment to the certificate of incorporation
which affects a specific class of shares.
The CCC also generally requires that holders of nonredeemable common shares
receive nonredeemable common shares of a surviving corporation or parent
corporation in a merger, if one of the constituent corporations or its parent
owns more than fifty percent (50%) of the voting power of the other constituent
corporation and all of the shareholders of that nonredeemable class do not
otherwise consent. Although the DGCL does not provide parallel protection from
such a cash-out merger by a majority shareholder, the "interested stockholder"
provisions discussed above provide some protection against stockholders being
treated unequally in a business combination.
STOCKHOLDER DERIVATIVE RIGHTS. Under Delaware law, a person may only bring
a derivative action on behalf of the corporation if the person was a stockholder
of the corporation at the time of the transaction in question or his or her
stock thereafter devolved upon him or her by operation of law. California law
provides that a shareholder bringing a derivative action on behalf of a
corporation need not have been a shareholder at the time of the transaction in
question, provided that certain criteria are met. California law also provides
that the corporation or the defendant in a derivative suit may, under certain
circumstances,
31
<PAGE>
make a motion to the court for an order requiring the plaintiff shareholder to
furnish a security bond. Delaware does not have a similar bonding provision.
DISSENTERS' AND APPRAISAL RIGHTS. Under both California law and Delaware
law, a shareholder of a corporation participating in certain mergers and
reorganizations may be entitled to receive cash in the amount of the "fair
value" (Delaware) or "fair market value" (California) of its shares, as
determined by a court, in lieu of the consideration it would otherwise receive
in the transaction. The limitations on such dissenters' appraisal rights are
somewhat different in California and Delaware.
Shareholders of a California corporation, the shares of which are listed on
a national securities exchange, generally do not have appraisal rights unless
the holders of at least 5% of the class of outstanding shares assert the
appraisal right. In any reorganization in which one corporation or the
shareholders of one corporation own more than five-sixths of the voting power of
the surviving or acquiring corporation, shareholders are generally denied
dissenters' rights under California law. In addition, California law denies
appraisal rights in connection with the exchange of shares similar to that
occurring in the Reincorporation.
Under Delaware law appraisal rights are not available to shareholders with
respect to a merger or consolidation by a corporation, the shares of which are
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc., or are held of record by more than
2,000 holders if the shareholders receive shares of the surviving corporation or
shares of any other corporation which are similarly listed or dispersed, and the
shareholders do not receive any other property in exchange for their shares
except cash for fractional shares. Appraisal rights are also unavailable under
Delaware law to shareholders of a corporation surviving a merger if, as a result
of certain specified circumstances, no vote of those shareholders is required to
approve the merger.
The foregoing discussion of certain differences between the CCC and the DGCL
is only a summary of certain provisions, does not purport to be a complete
description and is qualified in its entirety by reference to the CCC and the
DGCL.
32
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company and Salomon Brothers Inc, Merrill Lynch & Co., Bear, Stearns &
Co. Inc. and Morgan Stanley & Co. Incorporated, as representatives of the
several underwriters (the "Representatives"), the Company and the Selling
Shareholder have agreed to sell to the entities named below (the
"Underwriters"), and each of the Underwriters has severally agreed to purchase
from the Company and the Selling Shareholder, the aggregate number of shares of
Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------- -------------
<S> <C>
Salomon Brothers Inc...........................................................
Merrill Lynch, Pierce Fenner & Smith
Incorporated.........................................................
Bear, Stearns & Co. Inc. ......................................................
Morgan Stanley & Co. Incorporated..............................................
-------------
Total...................................................................... 10,000,000
-------------
-------------
</TABLE>
The Underwriting Agreement provides that the several Underwriters will be
obligated to purchase all the shares of Common Stock being offered (other than
the shares covered by the over-allotment option described below), if any are
purchased.
The Representatives have advised the Company and the Selling Shareholder
that they propose initially to offer the Common Stock directly to the public at
the public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of per share.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of per share on sales to certain other dealers. After the initial
offering, the price to the public and concessions to dealers may be changed.
The Selling Shareholder has granted to the Underwriters an option to
purchase up to an additional aggregate of 1,500,000 shares of Common Stock, at
the price to public less the underwriting discount set forth on the cover page
of this Prospectus, solely to cover over-allotments, if any, incurred in the
sale of shares of Common Stock being offered hereby. Such option may be
exercised at any time up to 30 days after the date of this Prospectus. If the
Underwriters exercise such option, each of the Underwriters will be obligated,
subject to certain conditions, to purchase a number of additional shares
proportionate to such Underwriter's initial commitment.
The Company, the Selling Shareholder and Leonard Schaeffer have agreed not
to sell, offer to sell, grant any options for the sale of or otherwise dispose
of any shares of Common Stock (other than pursuant to the Company's 1994 Stock
Option/Award Plan, Employee Stock Option Plan and Employee Stock Purchase Plan)
or securities convertible into or exchangeable or exercisable for Common Stock
(except for the shares offered hereby) for a period of 180 days after the date
of this Prospectus without the prior written consent of Salomon Brothers Inc and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, subject to certain limited
exceptions included in the Underwriting Agreement. Certain other executive
officers of the Company have agreed to similar restrictions for a period of 90
days after the date of this Prospectus.
No action has been taken or will be taken in any jurisdiction by the
Company, the Selling Shareholder or the Underwriters that would permit a public
offering of the shares offered hereby in any jurisdiction where action for that
purpose is required, other than the United States. Persons who come into
possession of this Prospectus are required by the Company, the Selling
Shareholder and the Underwriters to inform themselves about and to observe any
restriction as to the Offering of the Shares offered hereby and the distribution
of this Prospectus.
33
<PAGE>
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain civil liabilities, including certain liabilities
under the Securities Act, or contribute to payments the Underwriters may be
required to make in respect thereof.
Certain of the Underwriters have been engaged from time to time, and may in
the future be engaged, to perform investment banking and other advisory-related
services to the Company and its affiliates, including the Selling Shareholder,
in the ordinary course of business. In connection with rendering such services
in the past, such Underwriters have received customary compensation, including
reimbursement of related expenses.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may overallot the Offering, creating a syndicate
short position. In addition, the Underwriters may bid for and purchase shares of
Common Stock in the open market to cover syndicate short positions or to
stabilize the price of the Common Stock. Finally, the underwriting syndicate may
reclaim selling concessions from syndicate members in the Offering, if the
syndicate repurchases previously distributed Common Stock in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock, above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
LEGAL MATTERS
The validity of WellPoint Common Stock to be offered in the Offering will be
passed upon for the Company by Brobeck, Phleger & Harrison LLP, San Francisco,
California. Certain legal matters in connection with the Offering will be passed
upon for the Selling Shareholder by Munger, Tolles & Olson LLP, Los Angeles,
California and for the Underwriters by Latham & Watkins, Los Angeles,
California. Latham & Watkins has from time to time represented the independent
directors of WellPoint in various matters, including their consideration and
approval of the Recapitalization.
EXPERTS
The audited consolidated financial statements of WellPoint Health Networks
Inc. and subsidiaries as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996, incorporated herein by reference,
have been audited by Coopers & Lybrand L.L.P., independent accountants, as
stated in their report with respect thereto incorporated herein by reference in
reliance upon the authority of such firm as experts in accounting and auditing.
The combined financial statements of the Group Benefits Operations of John
Hancock Mutual Life Insurance Company and subsidiaries at December 31, 1995 and
1994 and for the years then ended, incorporated herein by reference, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such combined
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
34
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy and information statements
and other information with the Commission. Reports, proxy and information
statements and other information filed by the Company with the Commission
pursuant to the Exchange Act may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material also can be obtained from the Public Reference Branch of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Company is required to file electronic versions of such material with the
Commission through the Commission's Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Electronic
filings are publicly available at http://www.sec.gov within 24 hours of
acceptance. The Company's stock is listed on the New York Stock Exchange.
Reports, proxy and information statements and other information filed by the
Company can also be inspected at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005, the Chicago Stock Exchange, 440
South LaSalle Street, Chicago, Illinois 60605, and the Pacific Stock Exchange,
Inc., 301 Pine Street, San Francisco, California 94104, or 233 South Beaudry
Avenue, Los Angeles, California 90012.
The Company has filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement.
35
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
SHAREHOLDER, OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Documents Incorporated by Reference....................................... 2
Prospectus Summary........................................................ 3
Cautionary Disclosure Regarding Forward-Looking Statements................ 7
Risk Factors.............................................................. 7
Recapitalization.......................................................... 12
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Price Range of Common Stock............................................... 14
Capitalization............................................................ 14
Selected Consolidated Financial and Operating Data........................ 15
Business.................................................................. 17
Selling Shareholder....................................................... 28
Description of Capital Stock.............................................. 28
Underwriting.............................................................. 33
Legal Matters............................................................. 34
Experts................................................................... 34
Additional Information.................................................... 35
</TABLE>
10,000,000 SHARES
WELLPOINT HEALTH NETWORKS INC.
COMMON STOCK
($.01 PAR VALUE)
[LOGO]
SALOMON BROTHERS INC
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
MORGANSTANLEY & CO.
INCORPORATED
PROSPECTUS
DATED , 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the Company
in connection with the sale of Common Stock being registered. All amounts are
estimates except the registration fee, New York Stock Exchange listing fee and
the NASD fee.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID
-------------
<S> <C>
Registration fee............................................................... $ 153,769
NASD fee....................................................................... 30,500
New York Stock Exchange listing fee............................................ 36,900
Printing and engraving......................................................... 50,000
Legal fees and expenses........................................................ 75,000
Accounting fees and expenses................................................... 100,000
Blue sky fees and expenses..................................................... 10,000
Transfer agent fees............................................................ 5,000
Miscellaneous.................................................................. 38,831
-------------
Total...................................................................... $ 500,000
-------------
-------------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is a California corporation. Reference is made to Section 317 of
the California Corporations Code, which specifies the circumstances under which
a California corporation may indemnify a director, officer, employee or agent,
but further provides that a corporation's Articles of Incorporation may
authorize additional rights to indemnification. Article V of the Company's
Articles of Incorporation provides for such additional indemnification. Section
204 of the California Corporations Code generally limits the corporation's
ability to provide for indemnification rights for intentional misconduct, a
knowing and culpable violation of law, acts or omissions that involve the
absence of good faith, an unexecused pattern of inattention or reckless
disregard for duty, transactions from which the director or other indemnitee
derives an improper personal benefit, or improper shareholder distributions.
Article VI of the Bylaws of the Company provides that the Company shall
indemnify its directors and officers to the maximum extent permitted by the
California Corporations Code. In addition, the Company has entered into
indemnification agreements with its directors and certain officers that provide
for the maximum indemnification permitted by law.
Under the terms of the Underwriting Agreement filed as an exhibit hereto,
directors, certain officers and controlling persons of the Company are entitled
to indemnification under certain circumstances, including proceedings under the
Securities Act of 1933 and the Securities Exchange Act of 1934.
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<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------------ ---------------------------------------------------------------------------------------------------
<S> <C>
1.1* Underwriting Agreement.
4.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference from
Exhibit 3.1 to the Company's Current Report on Form 8-K filed on June 3, 1996).
4.2 Bylaws of the Company (incorporated by reference from Exhibit 3.2 to the Company's Current Report
on Form 8-K filed on June 3, 1996).
4.3 Agreement of Merger dated as of May 20, 1996 by and among the Company, WellPoint Health Networks,
Inc., a Delaware corporation, Western Health Partnership and Western Foundation for Health
Improvement (incorporated by reference from Exhibit 3.3 to the Company's Current Report on Form 8-K
filed on June 3, 1996).
4.4 Specimen of Common Stock Certificate (incorporated by reference from Exhibit 4.4 to the Company's
Registration Statement on Form S-3 (Registration No. 33-14885)).
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
9.1 Voting Agreement (incorporated by reference from Exhibit 99.3 to the Company's Current Report on
Form 8-K filed on June 3, 1996).
9.2 Voting Trust Agreement (incorporated by reference from Exhibit 99.2 to the Company's Current Report
on Form 8-K filed on June 3, 1996).
23.1* Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Ernst & Young LLP
23.3* Consent of Brobeck, Phleger & Harrison LLP (included in its Opinion filed as Exhibit 5.1).
24.1* Powers of Attorney (see signature page included in Registration Statement).
</TABLE>
- ------------------------
* Previously filed.
(b) Financial Statement Schedules.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes that, for purposed of determining any
liability under the Securities Act of 1933, each filing of the Company's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described in Item 15 or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the
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<PAGE>
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles, California, on the 25th
day of March, 1997.
WELLPOINT HEALTH NETWORKS INC.
By: /s/ THOMAS C. GEISER
-----------------------------------------
Thomas C. Geiser
EXECUTIVE VICE PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on the 25th day of March, 1997.
Chairman of the Board and
/s/ LEONARD D. SCHAEFFER* Chief Executive Officer
- ------------------------------ (Principal Executive
Leonard D. Schaeffer Officer)
Executive Vice President,
/s/ HOWARD G. PHANSTIEL* Finance and Information
- ------------------------------ Services (Principal
Howard G. Phanstiel Financial Officer)
Vice President, Chief
/s/ S. LOUISE MCCRARY* Accounting Officer and
- ------------------------------ Controller (Principal
S. Louise McCrary Accounting Officer)
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<PAGE>
<TABLE>
<C> <S> <C>
/s/ DAVID R. BANKS*
- ------------------------------ Director
David R. Banks
/s/ W. TOLIVER BESSON*
- ------------------------------ Director
W. Toliver Besson
/s/ ROGER E. BIRK*
- ------------------------------ Director
Roger E. Birk
/s/ STEPHEN L. DAVENPORT*
- ------------------------------ Director
Stephen L. Davenport
/s/ JULIE A. HILL*
- ------------------------------ Director
Julie A. Hill
/s/ ROBERT T. KNIGHT*
- ------------------------------ Director
Robert T. Knight
/s/ ELIZABETH A. SANDERS*
- ------------------------------ Director
Elizabeth A. Sanders
</TABLE>
*By: /s/ THOMAS C. GEISER
----------------------------------
THOMAS C. GEISER, ATTORNEY-IN-FACT
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